This week has seen Chinese and Hong Kong indices suffering some vertigo after the dizzying gains of the past few weeks.
The mood has not been helped by the absence of further details from the Chinese administration on the stimulus package that some have drawn with former European Central Bank President Mario Draghi’s “whatever it takes” moment back in 2012 – this was seen as the turning point in the eurozone debt crisis but we don’t yet know (and won’t for some time) if this is to be an inflection point for the Chinese economy.
The recent policy announcements in China have been light on detail, and this now appears to be testing investors’ patience. The Hang Seng index was down almost 10% on Tuesday for its worst session since 2008 but of course this comes on the back of gains north of 25% in the previous two weeks. Chinese indices reopened earlier this week after the Golden Week holiday, but the gains were subdued as investors await further signals over the size and scope of the stimulus package. To this end, the China’s State Council Information Office issued a statement on Wednesday that Finance Minister Lan Fo’an will hold a briefing on Saturday to introduce moves to strengthen fiscal policy to shore up growth. This followed a statement from Zheng Shanjie, head of the National Development and Reform Commission, who said “we are fully confident of achieving the annual economic and social development targets”, noting the more complex environment China is facing at home and abroad. We are watching closely to see how any policy announcements address the fundamental issue around the property market, which continues to be a huge overhang over the wider economy. China still has 150 million empty properties, and using the property sector as an engine of wealth creation for the wider population has been a huge policy failure, impacting consumer confidence. Hence some sort of bailout or backstop for the sector could be a game changer. China’s authorities now appear to be encouraging consumers to set up brokerage accounts and are reminding people of the huge market gains seen in the mid- 2010s after a stimulus package. If the state sees the equity market as a tool for wealth creation, then how can they allow the stock market to fall? Something to ponder as we await more information on the stimulus package and how far and wide it reaches.
In geopolitics, we continue to await the Israeli response to last week’s ballistic missile attack by Iran. The oil price has remained volatile but remains below the 2024 average level. Earlier in the week, Amir Ohana, speaker of the Knesset said yesterday “discussions are still taking place at the highest levels regarding the outline of the response — but it will be significant, and it will come”. Israeli defence minister Yoav Gallant was meant to be in Washington this week to discuss “ongoing Middle East security developments” with US Defence Secretary Lloyd Austin but his trip was cancelled at the last minute by Israeli Prime Minister Netanyahu. Gallant said Israel’s response will be “deadly, precise and surprising”. Netanyahu called Iran’s attack a “big mistake” and said Iran “will pay for it”. Netanyahu has not shown any willingness to follow US advice on several occasions in recent months, rebuffing calls from Washington for a cease-fire in Lebanon and saying Israel would continue attacking Hezbollah’s leaders. PM Netanyahu spoke with President Biden on Wednesday – Bloomberg reported the White House is pressing Israel to limit retaliation to military targets. The Israeli cabinet met last night to discuss how and when to retaliate, with Israeli media reporting the final decision lies with PM Netanyahu and Defence Minister Gallant.
In the US, the latest employment report has also given us plenty to ponder given it was far stronger than expected. This was interpreted as either further evidence the US economy is in solid health and the labour market, while slowing, is also holding up very well. However, it is worth noting the labour market survey for September saw a far lower response rate than usual, around 60% and changes in the ‘seasonal adjustment’ also skewed the data higher. In fact, the 254,000 job gains reported would have been more like 145,000 using the old methodology, which would have been broadly in line with consensus expectations. The stronger than expected jobs report resulted in a significant shift in expectations for the path of interest rates, bringing the market closer to the existing predictions from the Federal Reserve. Markets no longer see any chance of another 50 basis point rate cut in November, with a 25 basis point cut given an 80% probability. The Fed has predicted a 25 basis point cut in November followed by a further 25 basis point cut in December. The fallout was evident more in bond markets than in equities, with US Treasuries selling off sharply as investors reassessed the state of the US economy and outlook for US rates. We will find out if this labour report was a red herring in early November. Meanwhile, US inflation data was slightly hotter than expected, but failed to disrupt market expectations for the future path of interest rates. CPI year on year was 2.4%, slightly higher than expected but still the lowest level since February 2021.
The minutes from the September Federal Reserve meeting were published this week and showed that a “substantial majority” of participants supported the 50 basis point cut, partly because a large minority on the committee thought they should have cut rates by 25 basis points in July. Some participants “observed that they would have preferred a 25 bps cut” and noted that a “25bps move could signal a more predictable path of policy normalisation”. Indeed, much of the time since the meeting has seen investors pondering if another 50 basis point cut was likely though recent data, and subsequent Fed speakers suggests another 50bps cut is off the agenda for now. This week saw Dallas Fed President Lorie Logan say, “a more gradual path back to a normal policy stance will likely be appropriate from here”. The New York Federal Reserve’s John Williams told the Financial Times the central bank was “well positioned” to pull off a soft landing for the US economy. He said it made sense to “recalibrate policy” in September, to a place that is “still restrictive and putting downward pressure on inflation”. Williams said, “I don’t want to see the economy weaken; I want to maintain the strength that we see in the economy and the labour market” and the 50 basis point cut last month was “not the rule of how we act in the future”. For now, markets appear to be listening.
