On Thursday morning, China’s central bank cut lending and deposit rates by 0.25% to help stimulate growth in the country’s manufacturing sector; pushing the new 1 year lending rate to 6.31%. It is important to note that this is China’s first rate cut since 2008.
While US stocks rose on the news, this is certainly not a great sign because it confirms that China is going through a slowdown which could put more pressure to the downside along with the European crisis.
Additionally, it appears that the US economy is softening, as well. Jobs have not been stellar in recent months along with other important economic data, which has started the rumors of another round of easing by the Federal Reserve. Bernanke’s testimony this morning was cautious as always, but the Fed Chairman did say that QE3 is on the table if conditions continue to soften. In addition, Chairman Bernanke also warned lawmakers to be careful of actions which would cause the recovery to stall.
All of this uncertainty and negativity could take a toll on markets this summer, yet again. The past couple of summers have not been kind to the stock market as the world economic recovery appears to be reversing. Last summer was particularly bad with Greece and the US losing its AAA credit rating. This year not only do we have the European crisis continuing to linger, but there are some rumors floating around that we could be getting another credit rating cut.
However, since it is an election year, both sides will not be as unwilling to compromise. Hopefully, Congress and President Obama will be able to come up with a new plan for the Bush Tax Cuts. Obama has already announced that he is against extending the cuts. Republicans want a temporary extension of the cuts. The bottom line here is that if we have a similar gridlock government as we did in August of 2011, voters will not be kind in November.
The stock market skyrocketed on the news out of China, but eventually the market realized the rate cut was a bad sign. It was a bit perplexing to see stocks shoot up on what seemed to be bad news. Sources tell us that the rate cut could also be a sign that upcoming data this weekend from the world’s second largest economy, will be worse than expected. China industrial production, retail sales, and CPI numbers are being reported.
The take away here is that this summer could be bumpy for investors in all areas of the world. The world recovery is very slow and currently backtracking a bit. China is easing rates to help its manufacturing sector regain its footing. Europe is struggling to solve the European debt sovereign crisis. The US has its work cut out as well as we need to help growth along again and get people back to work.