Centerfin Collective Weekly

Weekly Update August 18, 2023

China and Japan's economies diverge, Mortgage rates soar, housing prices rise, Russian ruble loses 25%

China and Japan's economies diverge

This week Japan reported second-quarter GDP came in at 6% on an annualized basis, almost double expectations, as well as the prior quarter. Contrary to this positive surprise, China reported weaker-than-expected economic figures this week. Retail sales, industrial production, and fixed asset investment all came in below expectations. Urban unemployment increased to 5.3%, and China did not break out the percentages across age groups. Many pointed to the June unemployment figure of 21.3% for 16-24 yr olds as the reason they stopped reporting these metrics.

  • China and Japan are the world’s 2nd and 3rd largest economies
  • China is experiencing economic pressure, while Japan’s growth is accelerating
  • In China, the typical government reaction is stimulus, which would be inflationary
  • In Japan, inflation is running at its highest levels in decades, forcing their central bank to tighten monetary policy (raise interest rates)
  • Prospective China stimulus and higher interest rates in Japan both lead to higher interest rates in the US

Mortgage rates soar, house prices rise

On a related note, mortgage rates in the US reached 21-year highs, averaging 7.31% this week. This coincided with long-term interest rates (10 yr and 30 yr treasuries) continuing to rise higher. While higher mortgage rates are normally negative for housing prices, the unexpected outcome of this cycle is that prices are rising.

  • As discussed above, what happens in China and Japan influences our interest rates
  • As interest rates continue to rise, so do mortgage rates
  • Given mortgage rates are high, sellers who are looking to buy another home are unwilling to sell since the cost of a comparable home would be so much higher
  • And with the job market still very tight, few are forced to sell
  • This has created an unintended tightening of housing supply, leading to higher prices
  • Meanwhile, affordability has reached new record lows

Russian ruble loses 25%

The Russian ruble lost 25% of its value so far in 2023. This caused the Russian Central Bank to raise interest rates this week to 12% from 8.5%. After Russia invaded Ukraine last year, the Western world responded with sanctions, causing the ruble to tumble but quickly recover as it became clear that this would become a longer-than-expected war. The current move lower seems to be a longer-term adjustment to Russia’s standing in the global economy.

  • The fall of the currency this year de-stabilizes its economy further
  • It is also a large headwind for the Russian people, as most goods are imported
  • The Central Bank can attempt to bolster the currency (by raising rates), but they are less than typically effective given the sanctions
  • This could put further pressure on the Putin regime after an embarrassing mutiny by the Wagner group a few months ago

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