In Financial Markets, America First: Morning Brief

Here is the summary of today’s Morning Brief, which you can register to receive in your mailbox every morning accompanied by:

Last week’s market volatility is showing some signs of easing.

But the sudden, wild swings in financial markets that roiled investors on a Sunday night in August have left many experts searching for a clear explanation. The Federal Reserve’s decision to hold its benchmark interest rate steady had been widely reported, and the July jobs report was weak but not alarming.

And for American investors, the answer to domestic problems may lie abroad.

In a client note published Monday, Capital Economics Group chief economist Neil Shearing noted that for all the sturm und drang over the health of the U.S. economy last week, the problems investors think they’re looking for in America can actually be found in China.

“Economic data has weakened, business leaders are sounding the alarm about slowing sales, and policymakers are signaling they will provide more support to the economy. It’s not the US, it’s China,” Shearing wrote.

“Yet growing concerns about the growth prospects of the world’s second-largest economy have gone largely unnoticed by investors. The contrast with the market convulsions triggered by concerns about the outlook for the United States tells us something about the economic hierarchy in a world of intensifying geopolitical competition.”

As investors recalled last week the various August surprises that have rocked markets over the years, many were no doubt reminded of the sharp decline in August 2015, triggered by a surprise weakening of the renminbi by the PBOC and weak economic data from China.

But that market dynamic seems far removed from the themes currently driving the U.S. market: AI investment, Fed rate cuts and the yen carry trade. Meanwhile, behind last week’s recession talk in the U.S., China released consumer and wholesale inflation figures that did little to quell fears of outright deflation in the world’s second-largest economy.

As Shearing writes, “while the signs of economic weakness in China are real, in the United States they are still only temporary.”

The fact that investors are reacting more to what might happen in the U.S. economy – rather than what is happening in China – is consistent on several levels.

For one thing, markets are almost always more interested in the future than the present. Whether a situation is improving or deteriorating is more important to an investment thesis than its current situation.

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More concretely, Shearing highlighted how China’s trade balance and the dollar’s continued international primacy simply make the U.S. economy a more important driver of global financial sentiment.

And it doesn’t seem likely that, in the short term, this…