The Week in Review: Rate Hike, China Demand, Greece

July 17, 2015Economicsby EW News Desk Team

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Major developments spanned three continents this week as the U.S. looks set to see a rise in interest rates, China’s imports continue to shrink, and European policymakers finally make a deal with Greece.

In the U.S., Federal Reserve Chairperson Janet Yellen clearly affirmed the likelihood of a rise in the central bank’s interest rate target later in 2015, despite several analysts arguing that a hike in 2016 is more likely.

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy,” she said in a statement to Congress on Wednesday.  Yellen added credence to the belief that interest rates are likely to begin rising later in the year.

Despite the rise, which several analysts believed would negatively affect U.S. stocks and bonds, both markets were minimally impacted by the news, with major stock indices ending the day slightly down and U.S. Treasuries ending the day up slightly in value. Many financial analysts believe that a rise in rates will cause conservative investors to sell stocks and move that money into new Treasuries, causing stock prices to fall.

American Economic Improvements

Yellen’s hawkish comments centered around improvements in the labor market and the general American economy, with the Chairperson telling Congress that payroll employment gains were "sufficient to bring the total increase in employment” and helping the unemployment rate fall to 5.3%. While the Fed wants to wait until the labor market is stronger before rising rates, Yellen did say that it was likely that more jobs would come into the market as the economy improved.

On Thursday, weekly initial unemployment claims fell by 15,000 to 281,000, slightly below consensus. This has helped the four-week average of claims fall t0 282,500, the lowest level since early 2000 and historically lower than any point since then and the early 1970s.

China Exports, Imports

In China, exports surprised economists with a strong surge, rising 2.8% year-over-year in June, even as analysts expected a contraction. While this may indicate improving demand for manufactured goods in the rest of the world, domestic demand in China remains weak, as imports fell 6.1% year-over-year.

Some analysts attribute the fall to a weaker appetite for expensive imported goods, with more Chinese buying closer to home as growth slows in an effort to curb spending. Analysts also worry that a slide in imports could affect foreign firms, especially in the U.S. and the European Union, that have targeted China as a new growth catalyst.

Greece Capitulates

In Europe, Greece underwent a sharp reversal as policymakers capitulated to foreign creditor demands, agreeing to reforms and demands for austerity from Germany and creditors. Shortly after the move, the IMF urged creditors to consider offering Greece some form of relief, as further austerity could crimp growth and make debt repayments harder on the country.

For now, the country will remain in the Eurozone and receive additional support funding from the European Central Bank, which the Greek government will immediately use to fulfill debt payments.