Market Brief: Markets Climb on Chinese Stimulus Hopes

Risk appetite is rebounding across the currency markets after Chinese authorities unveiled a raft of stimulus measures designed to boost growth and reinvigorate market sentiment. In a carefully-choreographed announcement, the People’s Bank of China cut its benchmark seven-day reverse repurchase rate and lowered the amount of cash that banks need to hold in reserve by 50 basis points, freeing up money for lending. It said it would also cut the interest rate payable on existing mortgages and lower down payments on purchases of second homes. And lending facilities equivalent to almost $70 billion dollars will be made available to brokers and insurers - members of the so-called “national team” - to buy Chinese stocks, with another $40 billion used to finance buybacks by listed companies.

Treasury yields are inching upward, equity futures are setting up for a higher open, and in currency markets, the dollar is down, with the pound, euro, Canadian dollar, and Mexican peso all up about a quarter percentage point as risk appetites grow stronger.

But we suspect more will be needed to unleash animal spirits in the real world. After a decades-long run-up in property speculation, authorities are struggling to convince households that still-overvalued real estate markets represent a good investment, and the government continues to pour resources into growing the economy’s production capacity, pushing the factory sector into deflationary spiral. Consumer investment and spending has trended lower since 2017 - when General Secretary Xi Jinping signalled a desire to begin deflating one of history’s biggest property bubbles, saying “houses are for living in, not for speculation” - and sentiment remains weak. According to the central bank’s second-quarter urban depositor survey, the share of households intending to put more money in savings continued to climb, and consumption expectations remained consistent with a population hunkering down for a long period of economic underperformance - 27.1 percent of respondents said they would be spending more on education, 26.6 percent on health care, and 13 percent on insurance.

In a series of appearances yesterday, Federal Reserve officials supported the case for lower rates, but avoided telegraphing a second, jumbo-sized move ahead of their October meeting. Regional presidents Raphael Bostic, Austan Goolsbee, and Neel Kashkari all suggested that policy settings remain deeply in restrictive territory. Chicago’s Goolsbee said “Over the next twelve months, we have a long way to come down to get the interest rate to something like neutral to try to hold the conditions where they are. Atlanta’s Bostic - considered a bellwether for the broader rate-setting committee - warned that another half-point move wasn’t his “baseline” expectation, noting that employment conditions were not flashing “red lights,” but said “any further evidence of material weakening in the labour market over the next month or so will definitely change my view on how aggressive policy adjustment needs to be”.

With the Fed seen normalising policy at a faster pace, financial conditions have eased dramatically in recent weeks, bolstering the likelihood of a recovery in sentiment across the wider economy. With nowcasting models pointing to another quarter of solid growth, and differences between consensus forecasts and realised data - as captured in the Citigroup US Economic Surprise Index - narrowing in the last month, there are good reasons to suspect that the dollar’s recent underperformance may be reaching its conclusion.

The Japanese yen is sliding as safe haven demand evaporates and traders fade the likelihood of an imminent tightening in monetary policy. In comments last night, Governor Ueda acknowledged the need to prevent negative interactions between the Bank of Japan’s policy changes and changes in the US economy, saying “In making policy decisions, the Bank will need to carefully assess factors such as developments in financial and capital markets at home and abroad, and the situation in overseas economies underlying these developments. We have time to do so”. Market-implied odds on another rate hike coming before year ended have plunged to less than 3 percent, down from more than 135 percent in early August.

With oil prices playing a modestly-supportive role and at least one half-percentage point rate cut already baked into markets between now and the end of the year, the Canadian dollar is still struggling to gain momentum. Bank of Canada Governor Tiff Macklem is scheduled to sit down for a “fireside chat*” with members of the Institute of International Finance and Canadian Bankers Association this afternoon. The “fire” may be more metaphorical than real, with market-moving implications likely limited ahead of a series of data releases that could help determine the scale of the next rate cut. With two different jobs reports, a gross domestic product update, consumer price data, and the Bank’s own consumer and business surveys set to land before the October decision, we think Macklem will want to preserve as much optionality as possible for now.

We remain convinced that the US election remains the most likely catalyst for a break out of the Canadian dollar's recent trading range, with trade policies remaining a key differentiator in the candidate's respective economic platforms. A recovery in Donald Trump's polling odds could trigger another selloff in the loonie, but a relief rally could also unfold if Harris emerges triumphant on November 5.

*This is how a “fireside chat” should actually go: Gordon Pinsent reads Bieber

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