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Hello fellow Finimizer, here's the news you need to know for July 18th. Reading time is 3:08 minutes.

☕  Finimize'd over a iced tea at The Bluebird Cafe, 4104 Hillsboro Pike, Nashville, Tennessee, USA.

US Is Getting Back In Shape

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What’s Going On Here?

A bunch of US economic reports were released on Friday. They were all pretty positive and it now looks even more likely that the economy has picked up notably after an apparently weak first quarter.

What Does This Mean?

A report on “retail sales” (which are sales from stores to regular people like you and me) showed a healthy 2.7% increase in June versus one year earlier. Retail sales matter because they are an indication of consumer spending, which makes up two-thirds of economic activity in the US.

Other data suggested manufacturing activity (e.g. goods made in factories) hit its strongest level in almost a year. And yet another report suggested that inflation is picking up – and rising prices can themselves be a sign of a stronger economy (e.g. more demand for things leads to higher prices).

Why Should I Care?

For the markets: Stocks hit all-time highs last week – and an improving economy might be the main reason why.
There are lots of factors that influence stock prices so it’s difficult to pinpoint any single thing. But investors’ views of the economy have improved meaningfully in recent weeks and fears of a contracting economy (e.g. a recession) seem to be off the table - and that’s quite possibly been the main factor pushing stock prices higher.

The bigger picture: All this good news could lead to an interest rate increase and a higher US dollar.
A stronger economy gives the US Federal Reserve (“the Fed”) more room to raise interest rates (because the economy can better withstand the tougher conditions that higher interest rates usually create). As it becomes more likely that the Fed will raise interest rates, it’s typical for the US dollar to rise in value and for it to get a little tougher for US stocks to go up (although, of course, a strengthening economy can outweigh the negative effects of higher expected interest rates).

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China’s Economy Is Growing – With A Caveat

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What’s Going On Here?

China reported that its economy grew 6.7% last quarter - slightly more than economists expected (and in line with the government’s target). The caveat: growth was very much supported by government initiatives.

What Does This Mean?

China’s economy is undergoing a transition from one that is heavily reliant on manufacturing and “investment” (things like building big apartment towers) to one where “services” and personal consumption (like going to restaurants and shopping) play a bigger role. This transition has been bumpy and has caused economic growth to slow down.

Earlier this year, the Chinese government took action to provide a boost to the economy by doing things like encouraging state-owned banks to lend more money to companies. That mainly boosted the manufacturing and investment economy - which is probably why growth figures slightly exceeded expectations.

Why Should I Care?

For the markets: China’s economic priorities have a huge impact on many large companies.
One of the biggest impacts from China is on the price of industrial commodities (like copper). For example, earlier this year prices jumped significantly as a result of the Chinese government’s stimulus (and that benefitted mining firms hugely). There are also a host of western companies, from Apple to Yum Brands, which are hoping to benefit from an anticipated big increase in Chinese consumer spending.   

The bigger picture: China’s huge debt is a consequence of its stimulus attempts.
Six weeks ago, we reported that famed investor George Soros was betting on China’s economy crashing as a result of its huge debt burden. The debt within China has been accumulated partly because of government-led stimulus: companies are often encouraged to borrow and spend more and more money – and it’s not clear they’ll be able to afford to pay it all back. Soros may or may not turn out to be correct – but ongoing stimulus has almost certainly made China’s economy more vulnerable.

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#FINIMIZEQUOTE

“I’m kind of comfortable with getting older because it’s better than the other option, which is being dead.”

- George Clooney (an American actor, filmmaker, and activist)

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Q&A

RE: J.P. Morgan’s Results Raise Hopes For Banks

Liam asked:

“Why have the risks of banks being fined dissipated?”

“The 2008 financial crisis led governments around the world to increase their scrutiny of banks and to place new regulations on them. As banks were put under the spotlight, various shortcomings were unearthed and banks were often punished with fines. But as the force of new regulations took hold - and banks started doing a better job of policing themselves - fewer new problems emerged. At the same time, most of the previous shortcomings were addressed.”

👓

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