Reaction to Promised Chinese Stimulus Lifts Confidence in Other Markets
September 26, 2024
Equity markets around the Pacific Rim enjoyed a powerful rally Thursday, closing up 4.2% in Hong Kong, 3.6% in China, 2.9% in South Korea, 2.8% in India and Japan, 2.1% in New Zealand and 1.0% in Australia. The upward momentum carried into Europe where the German, French, Italian and Spanish stock markets current show gains between 1.0% and 1.5%. In futures trading, the Nasdaq has risen almost 1.5%.
Chinese officials are promising to hit their growth targets, and building optimism that interest rates at major western central banks will drop more quickly than assumed a month ago is also feeding the optimistic investor mood. Ten-year sovereign debt yields fell overnight by eight basis points in Italy, four basis points in Germany, three basis points in France and Spain, two basis point in the United States and a basis point in Great Britain.
The prices of Bitcoin and Comex gold are 1.9% and 0.8% stronger, while a 2.9% overnight drop in West Texas Intermediate oil has favorable implications for disinflation going forward.
The dollar has declined 0.8% against the Aussie dollar, 0.7% versus the kiwi, 0.4% vis-a-vis the yen and Swissie, 0.3% relative to China’s yuan, and 0.2% against the euro.
The final quarter-on-quarter annualized U.S. GDP growth rate in 2Q was left unrevised at 3.0% despite a 0.9 percentage point drag from net foreign demand. Personal consumption, government spending, and nonresidential business investment each made decent positive contribution to aggregated demand. The PCE price deflator posted a 2.6% increase compared to the second quarter of 2023, marking the eight straight quarter to experience disinflation. The core personal consumption measure of inflation also was lower than 3%.
U.S. durable goods orders flatlined in Augustand posted an average 1.3% year-on-year decline in the first eight months of this year. U.S. new jobless insurance claims fell by 4k to 218k last week.
Another day, another central bank interest rate cut, this time announced at the Swiss National Bank. A reduction of 25 basis points to 1.0% follows similar-sized cuts in June and March (the SNB only reviews policy on a quarterly basis). At 1.0%, the new policy rate level drops to its lowest level since March 2023. As before, officials used this opportunity to remind market participants that the Swiss franc is overvalued and they stand ready to counteract the currency’s excessive strength with forex intervention as necessary. Unlike other reviews, a particularly dovish tone to accompanying statement suggests that intervention, which in the past has been slight if at all, may be much more forceful in the future.
Together with the lower oil price and electricity price cuts announced for the beginning of 2025, the appreciation of the Swiss franc has contributed significantly to reducing inflationary pressure.
Consequently, projected average Swiss inflation for 2025 was dropped to 0.6% from 1.1% indicated in June’s review, and inflation in 2026 was revised to 0.7% from 1.0%. Officials are bracing for second-order downward pressure on inflation from very depressed price expectations, and in their new forecast, year-on-year inflation is seen being lower than forecast in June for every quarter extending into the first half of 2027 when its is shown to be a mere 0.6%.
Published minutes from the Bank of Japan‘s July 29-30th Board meeting reveal broad division between a majority that felt it was time to raise the short-term interest rate to 0.25%, lest undue delay result in a future catching up period requiring much bigger rate hikes, and a minority still doubting that inflation expectations will stay anchored at 2.0% especially in light of the yen’s firmer tone. Japanese financial markets had been confused by the mixed message in the week following this meeting, sharply bidding the yen higher but also including a greater-than-1000 point drop in the Nikkei-225 equity index on August 5.
European data release highlights this Thursday include a 2-month high in German consumer confidence this month, but at -21.2 the mood remained very pessimistic.
Business confidence in Italy‘s factory sector fell to a 15-month high of 86.7. The index has been below 100 since July 2022. Italian consumer sentiment rose 3.2 points, however, and at 98.3 was just 0.6 points lower than July’s 29-month high.
Austria’s manufacturing purchasing managers index fell 1.5 points further below the 50 neutral level to a 6-month low of 42.8.
On-year growth in Euroland M3 money accelerated to 2.9% in August. Lending to households and non-financial companies also picked up but remained still quite low.
Spanish retail sales rose 0.4% in August and recorded their largest 12-month advance (2.3%) since last December.
In Sweden during September, consumer confidence unexpectedly hit a 33-month high. Although lower than expected, business confidence still rose slightly. Despite posting a SEK 5.3 billion deficit in August, Sweden’s year-to-date trade surplus of SEK 53.4 billion was almost twice that of SEK 28 billion a year earlier.
In brief opening remarks at the tenth annual U.S. Treasury Market Conference, Fed Chairman Powell this morning reminded attendees that
When I spoke at this event in 2015, our nation’s entire financial framework has been built around the ability to quickly and efficiently transform Treasury securities into cash liquidity. I said then that “these markets need to keep functioning at a high level, and we all have a stake in making sure that they do.” I remain wholly dedicated to that goal.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: BOJ Board minutes, consumer confidence in Germany and Italy, Swiss National Bank, U.S. second quarter GDP and PCE price deflator
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