China focuses on economic transformation

- Why the US consumer is doing better than sentiment suggests # # --------------------------------------------------------------- The key takeaways today: - The surprisingly resilient US consumer - China's currency rises in cross-border trade - Advanced chip making is “harder than rocket science” Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- More (moderate) easing for China's economy Investors' hopes that China's reopening would power the global economic recovery have been short lived. But is that disappointment warranted? While Goldman Sachs Research's Hui Shan, chief China economist, expects further monetary easing, she thinks the massive stimulus employed in previous downturns won't be likely. “In terms of magnitude, we think it's a moderate amount of easing,” Shan says on the latest episode of [Goldman Sachs Exchanges](. “But don't expect too much just given that this year's growth target seems to be within reach and the government is really focusing on transforming, restructuring the economy, [rather] than engineering a short-term sharp increase in growth.” A lack of confidence among businesses, investors, and consumers is likely to be the biggest risk facing China, Shan says. “This is not something we have seen in previous cycles, this entrenched and pervasive lack of confidence playing out in the Chinese economy,” she explains to host Allison Nathan. “Unfortunately, [there] doesn't seem to be an easy fix here.” --------------------------------------------------------------- How fragile is the US consumer? Consumers aren't feeling great about the economy: Sentiment has bounced back from its mid-2022 lows but is still at levels generally seen during recessions, the widely followed University of Michigan survey shows. “This pessimism is probably due to rising rates and persistent inflation,” [explains Kate McShane, GS Research's retail analyst](. But just as Goldman Sachs economist Spencer Hill observed that concrete [measures of manufacturing activity are outperforming]( manufacturing sentiment, McShane points out that more objective readings show signs of consumer strength. Wages are continuing to rise — driving inflation-adjusted disposable personal income higher year-to-date. That means Americans will have more cash to spend. GS Consumer Research forecasts that discretionary cash inflows will rise 3.2% in 2023. To be sure, the picture is not all rosy. “The American consumer is still facing some headwinds, including the impact of higher rates on mortgages and other forms of debt,” McShane adds. However, the U.S. consumer seems to be doing markedly better than survey sentiment would suggest. “If the job market stays strong and inflation keeps falling, consumers might find themselves in a surprisingly good place,” McShane concludes. --------------------------------------------------------------- The Markets: What the Fed's hike means for the S&P 500 This week's 25 basis point rate hike is likely the last we'll see from the Federal Reserve this cycle, according to Goldman Sachs Research economists — a view that, if it plays out, should be positive for U.S. equities. “The idea that the economy can continue to grow and that interest rates will no longer be putting pressure on valuation multiples is a good thing for stocks,” says Ben Snider, senior U.S. equity strategist in GS Research, on the latest episode of The Markets. The corporate earnings season thus far has also reaffirmed confidence for equity investors, he says, with a higher frequency of earnings beats than usual and earnings growth above expectations. Start your Friday mornings with our new podcast, [The Markets from Goldman Sachs Exchanges]( In just 10 minutes or less, we break down the key issues moving markets. Find us wherever you listen to podcasts.  --------------------------------------------------------------- Chips made using EUV will enable the next wave of AI Advances in [extreme ultraviolet lithography (EUV)]( — a technology some experts didn't think would necessarily work in production just a few years ago — are transforming computer chip making. These technological gains are poised to help push today's $600 billion global semiconductor industry to $1 trillion by the end of the decade, [powering artificial intelligence]( high-end computing, and autonomous driving, among other advances, according to Alexander Duval, lead analyst for Europe tech hardware and semiconductors for Goldman Sachs Research.   The engineering challenges to build ever smaller, more potent chips are enormous. Duval points out that the machines capable of creating these semiconductors cost around €300 million ($330 million) or more. The development of the latest iteration of this technology known as High NA, the next step in the evolution of EUV, took over 20 years to perfect. It relies on a lens that is so precisely engineered that, if it were expanded to the size of the Earth, the biggest blemish would be smaller than the size of a fingernail. “I'd say this isn't rocket science; it's harder than rocket science,” Duval says. --------------------------------------------------------------- China's currency rises in cross-border trade but remains limited globally China's renminbi has gained market share in international payments, particularly in the country's cross-border transactions, as policymakers push for the currency to be used more widely. But the renminbi's use remains relatively limited in a global context, especially compared to the size of China's GDP and its influence in trade, [according to Goldman Sachs Research](. The share of renminbi settlement in China's cross-border payments increased materially to 47% in 2021, almost double the share five years earlier. Foreigners' trading of renminbi assets was part of the reason for the uptick: The currency's settlement under the capital and financial accounts contributed the most to the rapid increase in renminbi cross-border payments in China. However, the renminbi's usage is still limited — its global market share of payments increased to 2.5% as of May 2023, from 1.1% by the end of 2013, Goldman Sachs economist Maggie Wei writes in the team's report. --------------------------------------------------------------- Can EU bonds rival the German bund? The EU has become a major player in international debt markets as a steady issuer of safe assets — a [watershed moment for the euro area]( according to Goldman Sachs Research. The EU now has a debt stock of more than €400 billion ($450 billion), up from around €50 billion at the end of 2019, Goldman Sachs Research analyst Simon Freycenet writes in the team's report.  EU bond issuance rose as the bloc implemented programs to cushion the blow from the disruption caused by the Covid pandemic. The European unemployment insurance scheme (the SURE program) started in 2020, and the Next Generation EU (or NGEU) recovery plan was put in place the following year. The EU's public debt stock is now the fifth-largest in the euro area, and EU bonds have a diverse investor base both in terms of institutional sectors and geographies. That said, EU bonds have generally underperformed other high-rated government securities in the area. Although longer-dated EU bonds traded at lower yields than similar-maturity French government bonds, EU debt consistently yielded more at shorter maturities (such as 5-to 10-year debentures) than debt issued by France — despite EU bonds having a higher credit ranking. Ten-year NGEU benchmark bonds trade more closely to KFW German agency debt, in terms of daily changes, rather than on par with German bunds, the euro area's reference asset.  A key question for EU bonds is whether they become a permanent fixture, Freycenet writes. The NGEU is a temporary program, and much may depend on whether it is seen as a one-off answer to a specific situation or an important precedent — thus leading to possible EU debt issuance beyond 2026. --------------------------------------------------------------- Briefings Brainteaser: Where does China stand in international payments? China's renminbi has gained market share but remains relatively limited in a global context. For this week's Brainteaser, which of these currencies had the largest market share in international payments as of May 2023? A) U.K. pound B) Canadian dollar C) Japanese yen D) China renminbi [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( July 24 [Our view is that we will get a soft landing, says Goldman Sachs' Peter Oppenheimer (4:29)]( [CNBC]( July 23 [Goldman Sachs says it expects Brent to rise to $86 per barrel by year-end (2:20)]( [Op-Ed: WealthManagement.com]( July 21 [Key considerations for investing in liquid, semi-liquid alternatives]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. 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