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- China's bazooka arrived
China's bazooka arrived
will they achieve 5% growth target?
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Lower PCE and higher growth in the US
Markets price in for another jumbo cut
China’s bazooka measures to revitalize the economy
Chinese equity indexes soar, each jumping over 10% this week
Commodity prices boom but oil dips amid OPEC production hike fears
Let’s dissect
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Markets Snapshot
As of 27/09/2024 market close
Macro and Fixed Income Markets
US: On Friday, the U.S. Federal Reserve’s preferred inflation measure indicated a gradual easing of price pressures. The Personal Consumption Expenditures (PCE) Index published by the Bureau of Economic Analysis increased at an annual rate of 2.2% in August, slightly lower than economists’ consensus forecast and marking the lowest level since February 2021. Meanwhile, the core PCE Index, which excludes energy and food prices, rose by 2.7%, aligning with expectations.
The U.S. government's most recent estimate of second-quarter economic growth revealed that GDP expanded at an annual rate of 3.0%, matching an earlier estimate and exceeding economists' expectations of 2.9%. Additionally, the latest weekly total of new unemployment claims dropped to 218,000, marking the lowest figure in four months.
The yield on the US 10-year Treasury increased marginally by 1bps to 3.75%, as market shifts its focus on the Federal Reserve’s next monetary moves following a 50 basis point rate cut. Lower PCE and unemployment claims increase the likelihood of jumbo cut again, especially with the unemployment rate projections tilted to the upside. Investors are now looking to upcoming economic data and comments from Fed officials for more insight into future policy direction. Atlanta Fed President Raphael Bostic recently hinted at a faster-than-anticipated normalization, with market expectations suggesting further rate cuts. Currently, the probability of another 50 basis point reduction in November is about 53%.
China: On Tuesday, China’s central bank launched its most substantial stimulus package since the pandemic to revitalize its deflationary economy and align with government growth targets. Kicking off the monetary measures, the People’s Bank of China (PBoC) announced a 50 basis point cut to banks’ required reserve ratio (RRR), bringing it to 6.6%—the second cut this year. This RRR reduction is expected to inject approximately RMB 1 trillion ($142 billion) in liquidity into the banking system. The PBoC also lowered its seven-day reverse repo rate by 20 basis points to 1.5% and slashed the medium-term lending facility rate by 30 basis points to 2%, marking the largest cut since the tool was introduced in 2016.
Source: Reuters
To address the struggling housing market, where prices are declining and sales are weak, officials reduced existing home mortgage rates and lowered the down payment ratio for second home purchases from 25% to 15%. Additionally, the PBoC will improve lending terms for state-owned enterprises acquiring unsold inventory from property developers.
While these measures should enhance liquidity in the banking system and potentially support loan activity, businesses and households remain focused on deleveraging amid the fallout from the property market correction. Therefore, these measures are seen as incremental improvements to existing policies that have had limited success in boosting demand. Substantial malinvestment driven by excessive leverage, with private sector debt constituting 200.56% of nominal GDP, presents enduring challenges for balance sheets that can only be resolved through writing off assets and loans. In this context, reducing China’s significant stock of unsold housing is crucial for economic revival as well as more subsidies or debt restructuring efforts. As it was said before, fiddling with the cost of a debt mountain when corporate prices are falling thanks to deflation is like trying to catch a falling knife with bare hands..
Equity Markets
U.S. stocks climbed for the third consecutive week, continuing their recovery from a sharp decline in the first week of September. The S&P 500 gained 0.5% while the Dow index rose by 0.6%, maintaining the record-high levels achieved the previous week. Meanwhile, the NASDAQ increased by 0.7% but remains 2.8% below a record it set over two months ago.
Chinese stocks experienced a significant surge following Beijing's announcement of a series of measures to bolster the economy. The Shanghai Composite Index rose by 12.8% week-on-week, while the blue-chip CSI 300 jumped 15.7%. This rally marked the largest weekly gain for the benchmark CSI 300 since 2008, when Beijing introduced a substantial stimulus package during the global financial crisis. Additionally, the Hang Seng Index in Hong Kong increased by 13%.
Commodity Markets
Oil: Despite China’s stimulus policies, brent crude oil prices decreased more than 3% week-on-week back to 72$ per barrel. Concerns about demand in China and ongoing supply risks related to tensions in the Middle East continue to weigh on the market. Nevertheless, the week’s headline news exerting downward pressure on oil prices came from two OPEC sources, confirming the organization’s decision to move forward with its planned increase in oil production for December. OPEC and Saudi Arabia have mentioned several times that they do not target specific price levels; instead, they base their decisions on market fundamentals to achieve a balance between supply and demand. According to an OPEC+ source, the December output increase is not aimed at regaining market share but reflects a gradual phase-out of voluntary production cuts by a small number of countries. The OPEC+ alliance, which includes OPEC members and allies such as Russia, is set to raise production by 180,000 barrels per day in December. Additionally, Iraq and Kazakhstan have pledged to cut 123,000 barrels per day in September to compensate for earlier overproduction beyond agreed limits.
Other commodities: It was a great week for just about every market whose fortunes are tied to China. Iron ore prices clambered back above $100 a metric ton, copper broke above the key $10,000 a ton mark again, gold hit another record and silver hit a 12-year top.
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