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16 Oct 2024 | 5 minutes to read
Chinese equities have been on a wild ride over recent weeks, as sentiment around the Chinese economic outlook has seesawed. Initial optimism, in the wake of an extensive range of policy announcements, saw Chinese stocks rally around 40% from the end of August. However, this exuberance gave way somewhat last week, and stocks fell back around 10%, as investors began to question whether Chinese stocks were still cheap and if the stimulus measures would live up to expectations.
However, additional details of policies to support the Chinese economy were announced over the weekend, which has helped bolster confidence further. The Ministry of Finance announced four main policies. Firstly, local government bond debt quotas will increase by RMB400bn, around 0.2% of Gross Domestic Product (GDP). In addition, RMB2.3trn of special local government funding is available for use by the end of the year - though this is not strictly new funding, having already been issued but not yet spent.
Thirdly, the Ministry indicated that there would be a large one-off increase in the debt quotas to address the local government debt challenges, though the size was not confirmed. Judging by previous increases, this is expected to be around RMB3trn by end of 2025, but could even increase to c. RMB10trn over time.
Lastly, the Ministry also increased the flexibility of how local governments use financing to address the property market. Currently, efforts to get local governments to buy unsold housing inventory, thus supporting prices, have been slow, given that funding rates are above the rental yields achievable from the properties being purchased. In addition, local governments have a short timeframe for the funding, meaning that they would have to sell properties soon after purchase. Recent announcements increase the duration of the funding, increasing the flexibility of the scheme for local government, though the challenge of low rental yields remains a problem.
With the policies announced, growth expectations remain below the government’s 5% GDP target, but further policies could boost the growth outlook for 2025.
US economic data and the Federal Reserve’s (Fed) comments around it – “Fed-Speak” – remains very much in focus, and continues to have a big impact on market pricing. The week kicked off with the Fed’s rate setting Federal Open Markets Committee (FOMC) minutes from the September meeting, which revealed that “some participants observed that they would have preferred a 25 basis point reduction” (rather than the 50 basis point cut announced) in order to “assess the degree of policy restrictiveness” and signal a “more predictable” rate normalisation path.
US Consumer Prices Index (CPI) inflation data released this week confirmed that inflation is unlikely to be the main area of concern for the Fed in the short term, with the CPI print easing to 2.4% in September from 2.5% in August. While core inflation was a touch stronger, rising to 3.3% in September from 3.2% in August, and headline inflation was stronger than economists had forecasted, the overall picture was one of moderating price increases. Crucially for the Fed, the shelter component of the CPI print, which is around a third of the inflation calculation basket, continued to slow, falling to 0.2% month-on-month, from 0.5%. In contrast, food prices accelerated modestly, picking up to 0.4% from 0.1%.
Labour market data painted a gloomier picture, with the hurricane season sending unemployment claims higher. Initial jobless claims surged to 258,000 from 225,000 – reaching a one year high. More than half of the increase related to states impacted by Hurricane Helene, including North Carolina and Florida. Auto plant cuts in Michigan also had an impact on the jobless claims.
Combined, the FOMC minutes and the CPI inflation print allowed interest rate cut expectations to moderate somewhat, which the employment data did not reverse. Markets are now pricing in one to two further rate cuts for the remainder of this year, as opposed to two to three, which had been priced in recent weeks.
UK Government Gilt yields continued to rise last week, with various factors possibly to blame. The moderation of US interest rate cut expectations has led to a coordinated dip in bond values across developed markets, while UK-specific factors could also be at play. As speculation mounts ahead of the new Labour government’s Autumn Budget, some investors may be wondering how much additional Gilt issuance will be required to meet additional funding needs. Last week’s economic data releases also painted a picture of continued resilience in the UK economy, further diminishing the need for aggressive interest rate cuts.
At the start of the week, the RICS residential property market survey enjoyed a sharp recovery to its highest level in two years - a level consistent with 5% property price growth in September.
August’s GDP report was more muted, but the economy still delivered 0.2% growth month-on-month, up from 0% in July. Within the print, industrial production bounced back as expected, while the output of the services sector increased at a steady 0.1% pace. The November Monetary Policy Committee meeting will be key, falling after the Budget and coinciding with a new set of forecasts from the Bank of England. An interest rate cut currently looks likely, though guidance is expected to point to a gradual pace of easing.
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