China vs. Taiwan, Serbia vs. Kosovo – new military conflicts are already around the corner

The US Personal Consumer Expenditures (PCE) inflation rate, closely monitored by the Fed, is at its highest since January 1982. The PCE increased to 6.8% in June. The core PCE (which excludes food and fuel prices) was up 4.8% from a year ago and up 0.1% from May. The Employment Cost Index, another figure that Fed policymakers keep a close eye on, rose by 1.3% in the second quarter. The Index added 5.1% in 12 months, a record for a series of data tracked since 2002. Markets expect the Fed to raise rates another 0.5% in September, according to the FedWatch CME Group tracker. However, the probability of a larger three-quarter-point hike rose to 38% Friday morning.

Inflation in the Eurozone broke another record and rose to 8.9% in July (8.6% in June). The energy price boom continues, and the geopolitical factors behind it show no signs of abating. Analysts expect gas supplies from Russia to remain very limited as winter approaches, putting upward pressure on energy prices. In Germany, the government recently decided to impose an energy tax on consumers starting in October. This means that inflation in Germany could rise above 10%.

Eurozone GDP growth of 0.7% QoQ was unexpectedly strong. Experts had predicted a 0.5% growth, and the consensus was even more pessimistic. The most substantial increase was in Spain (+1.1%), where GDP levels are still below pre-pandemic levels. Analysts expect Spain to benefit from a rebound in foreign tourism this summer and show positive growth numbers in the coming quarters, even if very high inflation hurts households in Spain more than in many other Eurozone countries. Growth was also strong in France (+0.5%) and Italy (+1.0%). Data from France showed that while consumption remained weak, fixed investment and exports supported growth. In Germany, GDP was unchanged from January-March. Germany was one of the countries hit hardest by high energy prices and problems in global supply chains, so the weak growth figures were not a surprise.

The media are reporting on armed clashes on the Serbian-Kosovo border. The Serbian army is on high alert, and the Serbian presidential party is already hinting at “denazification.” Serbia is an ally of Russia, and Kosovo seeks EU and NATO membership. Serbia is behaving very much like Russia before the Russians attacked Ukraine.

Asian markets traded higher last week. Japan’s Nikkei 225 (JP225) added 0.38% for the week (+7.19% for the month), Hong Kong’s Hang Seng (HK50) lost 1.75% last week (-7.67% for the month), and Australia’s S&P/ASX 200 (AU200) was up by 2.26% for the week (monthly result +6.20%).

The situation between Taiwan and China is escalating. Under the guise of exercises, China is redeploying military equipment in the province of Fujian, which is located only 180 kilometers from Taiwan. The transfer of military equipment began just after a Thursday conversation between the US president and China. US Speaker Pelosi’s planned visit to Taiwan provoked an extremely negative reaction from China, which threatened the US with unpredictable consequences, including that the Chinese People’s Liberation Army would shoot down the US speaker’s plane.

The Japanese government will not impose a cap on the defense budget request for the next fiscal year, stressing its determination to increase spending to counter China’s military assertiveness. The government will also allocate about 4.4 trillion yen ($33.12 billion) to Kishida’s “new capitalism” program, which aims to invest in green and digital transformation areas.

After more than two years, New Zealand is fully opening its borders and welcoming all international travelers. According to the New Zealand Ministry of Health, travelers need a rapid antigen test on the day of arrival and a second test on the fifth or sixth day of their trip. Masks are not required outdoors, but they are required indoors.

In the commodities market, natural gas (+27.52%) and palladium (+9.09%) futures showed the biggest gains in July. Gasoline futures (-17.24%), wheat (-12.72%), lumber (-10.06%), Brent oil (-10.55%), WTI oil (-10.46%), corn (-6.85%), sugar (-5.13%), copper (-4.92%), and coffee (-4.69%) showed the biggest drops in July.