The Economy’s Weekly Recap

8/4/23 - 8/11/23

Raymond Lin

This Week’s Prominent Events

S&P Global drops ESG

• Almost as if they read last week’s Phi Fiscal, S&P Global has decided to no longer issue ESG(environmental, social and governance) scores. Since 2021, they have been giving companies scores between 1 and 5. The end of this scoring is likely the result of investor confusion regarding the process and the mixed results ESG can have. S&P Global will still use ESG in their credit rating reports though, but it will only be in text form and an actual numerical scores will not be given.

• As of now, Moody’s and Fitch still take ESG into account when assessing .

• The purpose of ESG is to manage risk management and better invest by taking important non-business factors into account. Essentially, ESG is used to find companies with good practices. Finding and investing in companies with good practices is important, but ESG may not be the best indicator of it. To learn more about ESG, you can go read the second upcoming event in last week’s Phi Fiscal: The First Nuclear Reactor in Years

PayPal's Stablecoin

• Stablecoins and cryptocurrencies are generally still in a gray area legally and in the public eye. It faces extreme optimism and distaste from people, but a major move may have been just made to shift that.

• PayPal is the first major US financial company to launch a US dollar backed stablecoin. A stablecoin is a cryptocurrency that is usually backed by a physical asset so that a minimum/guiding price is set for it. This allows the cryptocurrency, at least in theory, to remain consistent and stable.

• PayPal's stablecoin(PYUSD) is 1 to 1 with the US dollar, meaning that one PYUSD is 1 dollar and vice versa.

• Since PayPal's business largely relies on collecting fees by facilitating transactions, this move into crypto may just be an innovation on their core business model. By creating PYUSD, PayPal may capture a larger audience and expand.

The State of Regional Banks

• Since the collapse of Silicon Valley Bank and Signature Bank, regional banks have been facing a very uphill battle to grow. Very reasonable fears about regional banks have arisen due to high interest rates and the collapse of their peers.

• The concerns around regional banks seem to have recently culminated in Moody’s downgrading 10 small to mid size banks while also putting a number of other ones on potential downgrades.

• Some of the banks being downgraded are M&T Bank, Old National bank, and Fulton Financial corporation.

• Some of the banks that will be potentially downgraded are State Street, Bank of New York Mellon, and U.S. Bancorp.

• Moody’s cited the risk of depositors withdrawing funds, higher interest rates hurting investments made at low interest rates, and corporate real estate as some primary reasons for downgrades.

Wegovy’s Amazing Effects

• Wegovy is a weight loss drug developed by Danish pharmaceutical giant Novo Nordisk. It effectively tricks people into thinking they’re full, leading them to eat less and more healthy. Although It has been out for a few years, it has recently had two major breakthroughs

• Firstly, a study by Novo Nordisk has concluded that the risk of heart attack, stroke, or heart related death is reduced by 20% in a clinical trial that used people with cardiovascular diseases. While this sounds amazing, one should also remember that the adverse effects are not included and that it has not been peer-reviewed or published in a medical journal. Nevertheless, it is another cherry on top of a drug that has generated so much demand that the company’s supply chains are struggling.

• The second breakthrough is in the growth of the company. The company has reported a 43% increase in net profits between January and June this year compared to last year. For the whole of 2023 though, the company projects between 27% and 33% sales growth.

• The fantastic news of the company’s medical and financial success contributed to Novo Nordisk’s stock jumping 15% on Tuesday.

The Status of Global Oil

• In the recent past, OPEC(Organization of the Petroleum Exporting Countries) has consistently cut oil production to keep oil prices high, benefiting their oil dependent economies. Although it has helped them, it has hurt many other nations. High oil prices lead to higher costs all around as oil is used in manufacturing and many processes.

• This leaves OPEC and its members, who together control about 60% of the global petroleum trade, with lots of power to influence and control the world economy. It is able to prolong the effects of inflation and economic suffering through high energy prices due to its immense market share and desire to maintain high oil prices.

• However, OPEC has been increasingly challenged. US oil production via shale is one such challenge. It has recently hit a record of an average of 12.8 million barrels a day this year, up from an average of 11.9 million barrels a day in 2022. This helps alleviate the impact of cuts from OPEC and help weaken inflation related to energy prices. However, strong growth in the shale industry is not expected in the near future. It is likely that the removal or weakening of OPEC may only come from a shift to renewable energy.

Upcoming Events

China’s Daunting Situation

• By many metrics, China is an economic powerhouse that is the equal or even superior of its peers in the west. However, China faces a number of challenges that have recently been exacerbated and made apparent.

• For one, China’s consumer prices are down 0.3% year over year. This means that China is on the edge of experiencing deflation while other economies face strong inflation of several percentages. This reflects a severe vulnerability for the Chinese economy as, if it were to slip into deflation, China’s economy could begin to contract and the government would be forced to spend.

• Compounding this negative reality is the fact that China’s exports and imports have fallen dramatically. Exports are down 14.5% year over year and imports are down 12.4%, which is even worse than analyst expectations of 12.5% and 5% respectively.

• Furthermore, real estate, which is critical to China’s economy, is also falling in value. Manufacturing has also been contracting for four months now.

• These bad economic metrics are not limited to just the country either. Some important Chinese companies are struggling too. One example is Country Garden, China’s largest real estate developer. Country Garden missed bonds payments, which has made some investors nervous about a default and reminded them about the calamitous Evergrande.

• Investors have not reacted well to China’s recent struggles as global funds have moved away from China and towards Japan. Foreign purchasing of Japanese equities has exceeded Chinese equities for the first time since 2017.

US Inflation

• The consumer price index(CPI) rose 3.2% year over year, which was below expectations. Meanwhile, core CPI, which doesn’t include volatile things like food and energy costs, rose 4.7%, which is also below estimates.

• Monthly, CPI and core CPI were up 0.2% from last month. However, almost all of the monthly inflation increase came from higher shelter costs. The BLS said that 90% of the inflation increase came from higher housing costs. Without it, Paul Ashworth of Capital Economics calculated a 0.1% decrease in core CPI from June to July.

• Overall, this month’s inflation provides a good outlook for the future. Driven by this, more than 90% of traders using CME Group’s FedWatch believe there will be no Fed rate hike next month.

US China Trade Deterioration

• In the name of national security and geopolitical interests, the US and China have been in an ongoing trade war for the last few years. They have used tariffs, restrictions, and strategic investment to counter each other's influence and hurt each other’s growth.

• Some past examples are

  • In 2022, American limitations were imposed on semiconductors and chip making machinery to China. This hampers China’s development of its domestic semiconductor industry and hurts some US companies as a lucrative market becomes restricted.

  • In 2023, the Chinese government banned Micron, which is the US’ largest memory chip maker

  • In 2023, China put export controls on gallium and germanium. These are critical to semiconductor and EV production. As the world’s largest producer of both, this will likely cause significant, if not severe, damage to US companies if the Chinese government is harsh with its restrictions.

  • There are a number of other tariffs and restrictions imposed that are equally important. But for the sake of brevity and relevance, only 3 are listed.

• But, after Treasury Secretary Janet L. Yellen’s visit to China a few weeks ago, some hoped these tensions could be lowered and a more amicable relationship may be developed.

• Unfortunately, it appears that the trade war is continuing as the White House has restricted American investment and expertise into certain Chinese fields like semiconductors, quantum computing, and artificial intelligence. This will likely help hamper Chinese development of these industries, which could help American strategic interests by denying China the ability to become more self-sufficient.

• One senior official said “This executive order protects our national security interests in a narrowly targeted manner while maintaining our long-standing commitment to open investment”.

Weekly Question

How many days did it take for Barbie to reach $1 billion in global box office sales?

• A: 8 days

• B: 17 days

• C: 29 days

• D: It hasn’t reached a billion yet

Answer: B. 17 days