Will Chinese deflation help cure the West’s inflation problem?

Analysis by Nicole Goodkind, CNN

New York (CNN) — The Chinese economy has hit a rough patch. That might be the catalyst needed to finally cure the West of its inflationary woes.

What’s happening: Chinese consumer spending, factory production and investments in long-term assets like property or machinery all slumped last month. Youth unemployment has hit record highs while an ongoing real estate and debt crisis has investors fearing the worst.

On Monday, the Chinese government surprised investors by deciding not to cut an important interest rate that influences mortgages. Economists say the move will make it tough to revive confidence in the country’s real estate sector, and they’ve been downgrading their forecasts for Chinese growth this year.

The world’s second largest economy, responsible for almost one-fifth of world GDP, is decelerating, and that has serious and direct implications for the rest of the world.

“All else equal, a flagging Chinese economy may be one of several catalysts that could lead to recession later this year or early next,” wrote Jason Pride and Michael Reynolds, strategists at investment management company Glenmede, in a note Monday.

A tale of two central banks: Unprecedented stimulus by both the Federal Reserve and the federal government set the US up for a swift post-Covid economic recovery but also led to the highest inflation rates in 40 years — boosted also last year by soaring energy prices as a result of Russia’s warmongering.

In China, meanwhile, policymakers focused on better managing debt, cracking down on private tech monopolies and eliminating real estate speculation, which set the country up for a disappointing post-Covid recovery and deflation, according to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

But in an interconnected world, these two central banks — seemingly at odds with one another — may each end up being the solution the other seeks. China’s deflation may spill over into Western markets and cool inflation around the globe.

A weaker yuan would make goods produced in China cheaper for countries with stronger currencies to import. That also means less demand from China for goods from the US and Europe, because Chinese consumers will have less buying power.

“It seems China’s disinflation problem is coinciding with the European and US struggle to significantly bring down inflation,” said Edward Moya, senior market analyst at data and analytics firm OANDA. “Overall this is going to lead to a much weaker demand for European and US goods. That will help bring down inflation for a lot of the advanced economies that have been aggressively hiking interest rates.”

Beijing is a major consumer of commodities, and China’s $18 trillion economy has an outsized impact on US and European goods. US-based companies doing business in China stand to lose if the economy there continues on a downward trajectory. Companies like Apple, Intel, Ford, and Tesla have large manufacturing ties to the country. Others, like Starbucks and Nike, rely on Chinese consumers.

Estee Lauder reported an earnings loss in its most recent quarter. Executives cited weakening sales in China as a cause in their earnings release last week. The beauty company is “mindful of the headwinds that have emerged in China’s economy,” said the report. And “the pace of recovery in Asia travel retail and mainland China was slower than anticipated.”

All about oil: Gas prices in the US are very high. As of Monday evening, they were just shy of the 10-month high of $3.88 set last week, and up about 28 cents over the past month. The jump came after Russia and OPEC leader Saudi Arabia extended oil production cuts at least until September.

That could mean higher headline inflation levels in the US for August as gas prices weigh on consumers’ wallets.

But China, the world’s biggest buyer of crude oil, is purchasing less. That might help keep prices steady.

In July, Saudi Arabia sent 30% less oil to China than the month before. Instead, the country appears to be dipping into its reserves. China drew from its reserve supply of crude in July for the first time in nearly three years.

Yes, but: China’s economic problems could quickly snowball into a global economic crisis.

“We don’t want to see the global economy have a major setback,” said Moya. “Things could get very ugly,” he said.

S&P downgrades five US regional banks

S&P Global Ratings downgraded five regional US banks by one notch and signaled a negative outlook for several others on Monday, reports my colleague Elisabeth Buchwald.

The ratings agency said in a research note that the current “tough” lending environment caused it to downgrade the five banks, which include KeyCorp, Comerica Inc., Valley National Bancorp, UMB Financial Corp. and Associated Banc-Corp.

S&P’s actions come just two weeks after Moody’s roiled financial markets after announcing similar downgrades and said it was reviewing its credit ratings of bigger banks — including Bank of New York Mellon, State Street and Northern Trust.

Following the banking turmoil earlier this year that began with Silicon Valley Bank’s collapse, many regional banks have had to pay higher interest rates on deposits to keep customers from pulling their funds. That’s directly eaten into their profitability. And even still, many regional banks have struggled to prevent deposit outflows.

For instance, S&P cited Comerica’s $14 billion decline in average deposits from the second quarter of last year to this year as one of the reasons for its downgrade. It also pointed to its “relatively high proportion of commercial and uninsured deposits,” in a note explaining its decision.

‘Barbie’ unseated from top of the US box office

The reign of “Barbie” is over. At least at the box office anyway, reports Jordan Valinsky.

For the first time since its July 21 release, the Greta Gerwig-directed film wasn’t the country’s top-grossing film for the weekend. Instead, DC’s superhero film “Blue Beetle” took its place and grossed an estimated $25.4 million, while “Barbie” slipped to second and brought in $21.5 million, according to studio estimates.

“Oppenheimer,” which was also released the same weekend as “Barbie,” fell to third place and made $10.6 million, bringing its total US haul to $285 million.

So far, “Barbie” has made $567 million at the US box office, smashing several records.

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