News Recap • Week 39 2024

China stole the headlines this week with a massive package of economic stimulus initiatives, intended to boost their struggling economy. The US provided us with a couple of important economic data points. Let’s dive in.

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China’s $500 billion stimulus package

Kicking off the week, the People’s Bank of China announced a series of initiativesintended to support the slowing Chinese economy. This happened at a rare press conference held by PBOC Governor, Pan Gongsheng. The press conference was scheduled after the Fed’s rate cut last week and Pan Gongsheng already told reporters in March that there was room for further RRR cuts (after cutting in January).

China continues to show a willingness to support the economy through monetary stimulus (i.e., measures from the central bank) but not through fiscal stimulus (i.e., tax and spending policies of the government).

The initiatives were wide-ranging and more may follow, but here are some of the highlights:

• The reserve requirement ratio (RRR), i.e., the amount of cash banks need to have on hand, will be cut by 50 bps. This simply lets all banks spend or invest some of the cash they’ve so far been required to hold on their balance sheets, thus directly sending some much-needed liquidity into the economy.
• The 7-day repo rate will be cut by 0.2%. Another cut of 25 - 50 bps could happen by the end of the year. A 0.2-0.25% cut in the loan prime rate is also on the table, although it wasn’t specified whether this refers to the one- or five-year LPR. Lynn Song, Chief Economist for Greater China ING, said the repo cut was one of the most important initiatives. Markets had expected a series of 10 bps cuts so 20 signalled a slightly more aggressive approach.
• Interest rates on existing individual mortgages will be reduced by an average of 0.5 bps. The lower down-payment ratio for second home purchases will be reduced to 15% from 25%, making it much easier for citizens to enter the housing market.

Stimulus of this size needs to be taken seriously. Many investors declared their newfound interest in China during the week. And the market reaction was immediate.

The Chinese CSI 300 Index rallied more than 4% on Tuesday and followed through with two more +4% days on Thursday and Friday. The index closed 15.7% higher for its best week since November 2008.

The KWEB ETF, which tracks a basket of Chinese tech stocks, performed even better. It rallied 10% on Tuesday, another 11.6% on Thursday, and ultimately ended almost 27% higher for the week.

Stock markets around the world rallied on the news but certain sectors were particularly favored. The beaten-down luxury stocks soared on hopes that Chinese consumers will have renewed appetite (and money) for luxury. LVMH jumped 10% on the news.

China’s 10-year government bond yield already hit a record low of 2% during the press conference. Furthermore, the Chinese yuan hit its highest level against the US dollar in over a year.

Even crypto also seemed to get a boost from the news, being a highly speculative asset that generally benefits from extra liquidity getting pumped into the economy.

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The US reports positive growth and inflation data

On Thursday, the US reported economic growth for the second quarter. Data showed GDP growing at an annualized pace of 3% in the second quarter, beating economists’ expectations of 2.9%.

The day after, one of the Fed’s favorite measures of inflation came out. The Personal Consumption Expenditures, PCE, rose just 0.1% in August. This put the annualized rate at 2.2%, just barely above the Fed’s 2% target and slightly cooler than expectations of 2.3%.

Core PCE also rose 0.1%, lower than the 0.2% expected. The annualized rate was in line with expectations at 2.7%. Prices of goods actually decreased by 0.2% in August while housing-related costs rose 0.5%.

Both of these data points strengthen the case for a “soft landing”, i.e., the fact that the Fed has managed to bring inflation back to target without sending the US economy into a recession.

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In other news

• US consumer confidence took its largest one-month drop in three years when it fell from 105.6 in August to 98.7 in September. The expectation was for a 104 reading. The biggest drop in confidence happened among those aged 35 to 54 and earning less than $50k. Respondents were mostly concerned about the job market and inflation.
  One important thing to note, however, is that the survey was conducted through September 17, the day before the Fed cut interest rates. It’s fair to assume that the rate cut, along with recent economic data (covered above), could have had a positive effect on consumer confidence.
• The University of Michigan’s consumer sentiment index rose to 70.1 in September. It was up from 67.9 in August and above expectations of 69.3. The positive beat was a pleasant surprise after the massive drop in consumer confidence reported on Tuesday.
• Weekly US jobless claims come in lower than expected at 218,000 versus 225,000 forecasted.
• China’s youth unemployment rate hit 18.8% in August, its highest level since the country changed its record-keeping process in December last year. That’s a staggering increase from 17.1% in July and 13.2% in June.
• Phone sales in China jump 26.7% to 24 million in August while sales of foreignbrands drop by 12.7% to 1.87 million.
• China’s industrial profits drop by 17.8% in August from a year ago. This was the largest decline since a 18.2% decline in April 2023.
• India’s gold imports rose to $10 billion in August, corresponding to roughly 131 tonnes of gold. This was a new all-time high. Demand has soared since import duties were reduced from 9% to 6% by the Indian government in July.
• Shigeru Ishiba won an election to become leader of Japan’s ruling party. This set him up to become Prime Minister in a vote by parliament on October 1. Ishiba recently endorsed the Bank of Japan’s policy of steadily raising interest rates and voiced concerns about depreciation of the yen. His opponent, on the other hand, was in favor of ultra-low rates.
• Tokyo’s core inflation rate fell to 2.0% in September, down from 2.4% in August.
• Inflation in France, measured as harmonized consumer prices, rose just 1.5% annualized in September. This was down from 2.2% in August and below expectations for 2.0%.
  • Preliminary data from Spain showed similar readings with inflation of 1.7% versus 1.9% forecasted. This is down sharply from 2.4% in August. Preliminary CPI came in at 1.5% in September, also down sharply form 2.3% in August.
  • The low inflation readings increase the likelihood of further and more aggressive rate cuts from the ECB.
• Switzerland cut interest rates by 25 bps for the third time this year, bringing the rate down to 1%. The cut was highly anticipated and came on the back of a 1.1% inflation reading in August. Switzerland is struggling with low inflation as the country expects just 1.2% in 2024, 0.6% in 2025, and 0.7% in 2026.
• Novo CEO testified about drug pricing in front of congress.
• Apple drops out of talks to join OpenAI’s next investment round. The company is reportedly seeking to raise $6.5 billion in a $150 billion valuation, set to close next week.
• OpenAI CTO, Mira Murati, announced that she’s leaving the company. This happens as OpenAI is planning a restructuring to become a for-profit company. Mira Murati has been with the company for six and a half years.