Is the Dollar in Danger?

Kicking off the week, the U.S. dollar encountered challenges in the Asian market due to actions taken by major central banks and experts in the region. Let’s take a look at the details.

After eight strong weeks or demonstrated strength, fueled by robust U.S. economic data, people were expecting to see sustained higher interest rates by the Federal Reserve. Remember folks, the U.S. dollar had appreciated by approximately 5% since mid-July, but the divergence in monetary policies between the U.S., China, and Japan had placed substantial pressure on Asian currencies. The yen depreciated by roughly 7% against the U.S. dollar since mid-July, while the onshore yuan reached a 16-year low against the dollar in that same timeframe. In response to this drop, China defended the yuan by issuing a stern verbal warning shortly after setting its daily reference rate, while Japan hinted they might be around the corner from terminating their negative-interest-rate policy.

Now, to recap, if the U.S. dollar get’s weaker, it can make American stuff cheaper to other countries, which might help U.S. businesses sell more abroad. But it can also make things more expensive for people in the U.S., leading to higher inflation, and affecting what people can buy. When big banks, like the ones in China and Japan, talk about changing their rules, it can make investors worried and affect how much it costs for people and companies to borrow money. So, what’s the financial forecast here? Is the weakening dollar transitory? How will the rest of the global market respond, and how will this affect consumers? Truthfully, I don’t have all of the answers, but remember that all these things are connected globally, so changes in one place can have a big impact on businesses and people all over the world. It's important for policymakers and investors to keep an eye on these changes to make smart decisions.

Economic Insights from Yellen:

So, the U.S. is showing resilience, while China is navigating economic uncertainties, both of which have implications for the global economy and financial markets. With that in mind, let’s move on to the recent statements from Treasury Secretary Janet Yellen, which reflected her growing confidence in the U.S. economy. Specifically, Yellen said she was quote: “feeling good” about the US's ability to curb inflation without significant job market disruptions, citing recent data that showed a steady slowdown in inflation and an increase in job seekers. Further, she iterated that the U.S. appears to be on track to strike that balance between taming consumer-price increases and sustaining economic growth.

Now, she’s not wrong. Inflation has eased to around 3%, albeit still slightly above the Federal Reserve's 2% target, without significantly affecting employment or GDP. Notably also, Goldman Sachs economists have lowered the probability of a U.S. recession from 20% to 15% in light of these positive economic indicators.

Conversely, like I mentioned earlier, China has been facing challenges, with the latest figures hinting at potential growth below its 5% target. On the other hand, Yellen acknowledged that China's currency has depreciated against the dollar due to diverging economic data, signaling that measures to stabilize the currency are reasonable to bolster confidence in the economy and financial system. As far as their recent efforts to expand the BRICS group, the truth is that different countries have different interests in this assembly, and the US still maintains its own international relations when it comes to stabilizing the global markets. So, don’t let this be something that stirs up concerns just yet. Right now, the US needs to focus on the annual federal appropriation bills. What you should know is that, despite rising interest costs contributing to a widening budget deficit, Yellen maintained that she is confident in the sustainability of the country's federal finances.

Growth Forecast for 2024: 

Now, I want to be honest and transparent with you all here. In line with what Yellen has been saying about the state of the States’ financial forecast, it’s important to acknowledge the role of consumers when it comes to the US’s economic growth and overall GDP. Remember, almost 70% of our GDP comes from consumers, and there’s been a lot of discussion about if and how that’s going to change. So, let's take a look at what’s been discussed, and what the next few months might look like.

While the job market has been doing well and has helped sustain consumer spending despite rising prices, there are some signs of trouble ahead. According to researchers at the Federal Reserve Bank of San Francisco, the extra savings that have been helping consumers cope with higher costs might run out soon, possibly in the current quarter. While wealthier Americans have been able to handle the rising prices, lower-income households have been struggling, mainly due to inflation. And as prices keep going up, it's getting tougher for consumers to keep up.

In this post-pandemic economic environment, the usual economic playbooks don't always apply, and things are definitely taking longer to unfold as the Fed tries to adjust their sails-metaphorically-to avoid a recession storm. I’m not saying we’re doomed, but the reality is that consumer spending is a significant factor in keeping the economy growing. If it does slow down, it could have a negative impact on the stock market, which has already been experiencing some ups and downs.

The positive economic environment we've seen lately, with lower inflation and fewer people out of work, has been boosting optimism in the stock market. Hopes for a "soft landing," where the economy cools off without going into a recession, have been encouraged by things like stabilizing interest rates, a strong U.S. dollar, and steady oil prices. However, if confidence in this scenario fades, it could spell trouble for stocks.

Can AI Replace Our Workforce?

Can Artificial Intelligence replace our workforce? The short answer is: no, but More American workers, especially those with college degrees, are worried that technology might take away their jobs. A Gallup survey from almost 500 full and part-time employed adults, found that 22% of U.S. workers feared that their jobs could be replaced by technology, which-perhaps unsurprisingly- is up from 15% two years ago. It’s worth noting that, amongst workers without college degrees, concerns haven’t really changed much, but with technological advances including the rise of multiple AI platforms, college-educated workers are starting to get a little weary of how automation could affect how they do their jobs.

McKinsey, a consulting firm, estimates that around 70% of global work hours are spent on tasks that could be done by computers, up from about half a few years ago. But Gallup's data shows that less than one in four workers think this will happen soon.

So, exactly what is there to be worried about here? While fears about technology taking jobs have increased, other work-related concerns, like cuts to wages, hours, or benefits, have stayed about the same since 2021. This means that a lot of folks are still confident in the job market. And I think it’s important to consider how potential replacements could shift the labor markets. In short, yes, technology does pose some risk to employment stability, but I encourage you to think about what you can do to adapt to these changing times. My advice? Invest whatever you can in yourself. Acquire new skills that will help you remain competitive in an evolving job landscape. And if you are the business owner, this is a sure sign to take the initiative and support your workforce. Whether that’s training, or re-skilling to mitigate the adverse effects of job displacements, you have the capability to ensure long-term economic resilience.

How The United Auto Workers Strike Could Affect the Economy

Next up, the United Auto Workers (UAW) recently adjusted its pay raise demand from 40% to 36%, aiming to strike a deal with Detroit's major automakers including General Motors, Ford, and Stellantis. The latest proposal from the UAW outlines a series of incremental raises over the next five years, starting with an immediate 18% bump. The reason for these negotiations include adjustments for the increase in cost of living, shorter work weeks, and pension payment plans. The bad news is, if an agreement isn’t reached by the end of this week, we could be looking at several more weeks of strike in the automotive sector.

And beyond that, the outcomes could have far-reaching implications, including impacting labor markets, inflation, and regional economies. Even a brief strike by the UAW could potentially cause billions in economic damage, reducing U.S. GDP by as much as $5.6 billion, which would put areas like Michigan at risk of falling into a recession, as per economic analysts. Such a strike would affect not only automakers but also their suppliers, leading to layoffs and disruptions in critical commodity markets, particularly steel.

Laborers should be entitled to a livable wage, and with corporate profits booming over the last two decades, this doesn’t sound unreasonable. But, the possibility of wage gains resulting from the strike are feared to push up labor costs at the expense of innovation and broader economic growth. Ultimately, I believe there is a sweet spot whereby these companies could increase wages without jeopardizing their financial stability, but it’s a game of give-and-take.

UK Homeowners Feel the Heat

There’s no place like home, and for UK homeowners, they’re starting to see that being able to say that, comes at a price. Over the last twelve months, more and more people are struggling to make their mortgage payments, thanks to unprecedented mortgage rates. Just how bad is it though? Over the past year leading up to June, the number of folks falling behind on their mortgage payments has increased by over 25%. Just in the second quarter, there was a 13% increase compared to the previous year. Now, breaking down the numbers, that's a staggering £16.9 billion or $21.1 billion in late home loan payments, which is the highest level we've seen since 2016.

Now, let’s recap on why this is happening? Well, a lot of homeowners in the UK took out fixed-rate mortgage deals, which sounds great, but it only means they're shielded from interest rate increases until their fixed term ends. Once that deal is finished, they're hit with significantly higher monthly payments. And that's on top of dealing with soaring inflation and tight household budgets, which makes it even tougher to keep up with those mortgage bills.

Now, on the downside, it signifies financial strain on households, making it harder for people to meet mortgage payments and potentially causing stress and market instability. But, on the upside, overall arrears remain relatively low due to post-financial crisis regulations ensuring borrowers can handle rate increases. So, while there are challenges, rest assured that there are also safeguards in place to prevent this from turning into a full-blown crisis.