Topline

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

Key Facts

The effects of China’s stay-at-home mandates on the U.S. economy should “become apparent” in government data released next month, Bank of America’s Aditya Bhave said in a Friday morning note to clients, noting the U.S. will primarily feel the impact through supply-chain disruptions and resulting inflation.

Though he doesn’t believe the lockdowns will spur a new peak in yearly inflation, Bhave does expect a “short burst of upward pressure” on the prices of goods that could slow the rate at which overall prices cool.

“The China lockdowns are yet another headache for the Fed in its fight against inflation,” the economist says of the potential implications, noting any “sustained impact” on inflation should be clear by September, when the Fed is slated to decide whether it will raise interest rates by another 50 basis points or become less aggressive.

In a separate note on Friday, Bank of America analyst Ethan Harris said he’s “getting more pessimistic” about the economy as a spate of indicators continue to hint at more persistent inflation, putting the odds of a recession starting next year at 33%—roughly matching the 35% odds Goldman projected last week.

The latest warnings come as Shanghai, which hit record cases in an omicron variant outbreak this spring, on Friday logged its first new Covid cases outside quarantined areas in five days—prompting officials to close all supermarkets and street-side shops in certain districts as the metropolis of 26 million residents nears the eighth week of a city-wide lockdown.

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

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Key Background

Though China largely avoided a vast wave of Covid infections since its initial outbreak in late 2019, the omicron variant quickly tore through some regions this spring—spurring record case counts and nearly two months of lockdowns. At the height of the wave in late April, some regional experts estimated only a third of manufacturing employees were able to go to work in hard-hit Shanghai. Retail sales in the region crashed nearly 50% last month, while industrial output plummeted 61.5%—marking its biggest monthly decline since 2011.

Crucial Quote

“Shanghai reopening is the single most critical development for global markets,” analyst Adam Crisafulli of Vital Knowledge Media said in a Friday morning note. “If this city can reopen and stay reopened, it would be a huge tailwind for everything.”

TANGENT

Spiking inflation and the resulting threat of rising interest rates have pummeled markets in recent weeks and fueled fears of a potential recession. The tech-heavy Nasdaq has tumbled nearly 29% this year, while the S&P 500, down 20%, plunged into bear-market territory on Friday. As the economy struggles to deal with “painfully high inflation,” which has “forced the Fed to go on high alert,” Moody’s economist Mark Zandi puts the odds of a recession at nearly 50% within the next 24 months.

Further Reading

Stocks Keep Tanking As Growing Number Of Wall Street Experts Warn About Rising Recession Risks (Forbes)

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

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