The recent rally of over 25% in Chinese was something we’ve not seen in over a decade. Beijing’s ‘stimulus blitz’ excited both institutional and retail investors alike. As context, China has struggled with deflationary pressures due to a prolonged real estate downturn and weakening domestic consumer confidence. In addition, a slew of economic data in recent months has missed expectations, raising worries the world’s second largest economy may not achieve its 5% full year growth target. The question is can the central government turn things around with more stimulus? I doubt it….
Debt
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It’s Not Only Falling Inflation & Growth Risks Driving Rate Cuts
As inflation continues to moderate and the employment picture weakens – markets are trying to gauge just how much the central bank will move. A 25 basis point (bps) cut for September is now a 100% probability according to CME Group’s FedWatch tool. There’s a 63.5% chance of a 25 bps cut; and 36.5% of a 50 bps cut. Markets clearly want 50 bps… but they also know that very rarely is there just “only one rate cut”. This post explores the relationship between debt growth (across all sectors) and the overall trend for interest rates. It’s a relationship which is not often discussed – but would be remiss of investors to ignore.
Will the Bond Vigilantes Strike Back?
Last weekend Fed Chair Jay Powell gave a rare interview with TV program ’60 Minutes’. Not only did Powell tell people to expect rates to remain higher for longer – he also sent less than subtle warnings to Congress. I quote: “It’s probably time, or past time, to get back to an adult conversation among elected officials about getting the federal government back on a sustainable fiscal path”. Amen. But good luck with that Jay. When asked if this was an urgent problem – Powell said “You could say that it was urgent, yes.” In short, keep a close eye on bond yields – especially the long-end. The market wants them to head lower – much lower – however fiscal recklessness could prove otherwise.