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China Covid lockdowns threaten to fuel US inflation as economic pessimism grows

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As rising cases in Shanghai threaten further lockdowns in the region, experts are warning that China’s pandemic measures this spring could be the latest headwind for the US economy – fueling rapid inflation the Federal Reserve is trying to combat by it is easing its monetary stimulus measures.

Important facts

The impact of China’s lockdown on the US economy “should become evident in government data to be released next month,” Bank of America’s Aditya Bhave said in a note to clients on Friday morning, noting that the US is primarily feeling the impact from the Supply will be felt – chain breaks and consequent inflation.

While he doesn’t think the lockdowns will trigger a new peak in annual inflation, Bhave expects a “brief burst of upward pressure” on commodity prices that could slow the rate of overall price cooling.

“The lockdowns in China are another headache for the Fed in its fight against inflation,” the economist says of the potential impact, noting that “lasting impact” on inflation should be clear by September, when the Fed is to decide whether if they do so, they will raise rates by another 50 basis points or become less aggressive.

In a separate note on Friday, Bank of America analyst Ethan Harris said he was “getting more pessimistic” on the economy as a spate of indicators continue to point to more sustained inflation, raising the probability of a recession to around 33 percent starting next year % figures to match the 35% ratios forecast by Goldman last week.

The latest warnings come as Shanghai, which recorded record cases in an Omicron variant outbreak this spring, on Friday logged its first new Covid cases outside of quarantine areas in five days – prompting officials to close all supermarkets and street shops in certain Districts to close Metropolis of 26 million nearing eighth week of citywide lockdown.

The shutdowns resulted in plant shutdowns that have been an “epic disaster” for some tech companies, notes Wedbush analyst Dan Ives, who points out that Tesla, which operates its so-called Gigafactory in the region, and Apple are among the hardest-hit.

key background

Although China has largely avoided a major wave of Covid infections since its first outbreak in late 2019, the Omicron variant quickly raced through some regions this spring, leading to record numbers of cases and almost two months of lockdowns. At the peak of the wave in late April, some regional experts estimated that only a third of manufacturing workers in hard-hit Shanghai were able to go to work. Retail sales in the region plunged nearly 50% last month, while industrial production plunged 61.5% — the biggest monthly decline since 2011.

Crucial quote

“Shanghai’s reopening is the single most important development for global markets,” Vital Knowledge Media analyst Adam Crisafulli said in a note Friday morning. “If this city can reopen and stay open again, that would be a huge tailwind for everything.”

TANGENT

Rising inflation and the resulting risk of rising interest rates have plagued the markets in recent weeks, fueling fears of a possible recession. The tech-heavy Nasdaq is down almost 29% this year, while the S&P 500 plunged into the bear market on Friday, down 20%. As the economy grapples with “painfully high inflation” that “has forced the Fed to go on high alert,” Moody’s economist Mark Zandi puts the probability of a recession within the next 24 months at nearly 50%.

Further reading

China faces an Omicron ‘tsunami’ if it abandons controversial zero-Covid policy, researchers warn (Forbes)

Shanghai finds cases ‘zero COVID’ after five days but end of lockdown on track (Reuters)

Stocks continue to fall as a growing number of Wall Street pundits warn of rising recession risks (Forbes)

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