Muzinich Weekly Market Comment: China seeks a spark

September 30, 2024

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In our latest roundup of the key developments in financial markets and economies, we assess China’s latest stimulus package and another week of poor economic data in developed markets.

Following the Federal Reserve’s decision on September 18 to cut US policy rates by 50 basis points^[1] to combat an “uncertain economic environment”, last week seemed to confirm that disinflation trends are firmly in place in advanced economies. This could pave the way for a continued period of monetary policy normalisation.

Disinflation was particularly evident in the Eurozone, where French inflation saw a sharp decline. Consumer prices fell 1.2% month-on-month, driven by lower energy costs and a significant drop in service prices.^[2] As a result, the 12-month increase in consumer prices was just 1.5%, well below the European Central Bank's (ECB) 2% inflation target.

Similarly, Spanish consumer prices unexpectedly fell 0.1% month-on-month, bringing the annual inflation rate down to 1.5%, compared to 2.3% in August.^[3]

Another weak data week

These announcements came on the back of a slew of data releases highlighting poor economic activity in Europe, such as the deteriorating business climate in Germany (as indicated by the IFO survey)^[4] and Eurozone’s flash Purchasing Managers Index for September, which dropped back into economic contraction at 48.5 versus the expected 50.5.^[5]

This all points to an additional 25 basis points (bps) rate cut by the ECB at its upcoming monetary policy meeting on October 17.

In the US, meanwhile, markets received confirmation that the Fed was justified in its "supersized" 50bps rate cut. The central bank’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) deflator, dropped to 0.13% month-on-month, slightly below market expectations of 0.2%.^[6]

Meanwhile, Fed Chair Jerome Powell’s favoured measure of "super core" PCE inflation — which excludes housing from core services — fell to 0.16% month-on-month, demonstrating the US economy is cooling.

China goes big on stimulus

Given the softening global economic picture, you might be forgiven for thinking this would be reflected in investor sentiment. However, asset prices are often driven by unexpected events; last week, that came from China.

In a coordinated move, the People’s Bank of China (PBoC) and China Securities Regulatory Commission (CSRC) announced a significant set of policy easing measures, exceeding investor expectations (see full list of measures in Table of the week).

Additionally, the Politburo of the Chinese Communist Party made an unscheduled announcement on September 26,^[7] an unusual step for a group whose economic discussions are typically held in April, July and December.

The last two times the committee broke protocol was in March 2020, following the COVID-19 outbreak, and in October 2018 during heightened US-China trade tensions, both marking significant shifts in policy. 

This time, the Politburo endorsed the newly announced stimulus measures and emphasised economic growth is its top priority. Notably, the communiqué used the phrase "work to take the lead" instead of the usual "prioritize stability". The committee called for "forceful rate reductions" and, for the first time, made an explicit pledge to "stop the decline of the property market and promote stabilisation”.

On top of these moves, it seems reasonable to expect meaningful fiscal policy measures will be announced in the coming weeks.

EM benefits on China news

US government bonds ended the week flat but underperformed their European counterparts, as weak economic data in Europe pushed yields lower. In corporate credit, emerging market debt was the clear winner, with Chinese and Asian companies pricing in a more optimistic growth outlook following China’s policy announcements. Commodity giants in Latin America, the Middle East, and Africa also benefited, driven by improved demand expectations.

Among commodities, industrial metals saw the biggest boost from China's stimulus, with copper, steel and zinc all gaining over 5% for the week. In equities, Asia saw exceptionally strong performance, with Hong Kong’s Hang Seng Index surging 13%, while in Europe, the luxury goods sector outperformed.

One broader takeaway from China’s efforts to restart its economic engine is that the likelihood of a global economic hard landing has diminished further. However, China's role as an exporter of deflation may have peaked.

Table of the week: China stimulus in detail

Past performance is not a reliable indicator of current or future results.

References

[1] Federal Reserve, ‘FOMC statement,’ September 18, 2024
[2] Insee, ‘Consumer Price Index,’ September 27, 2024
[3] Instituto Nacional de Estadistica, ‘Consumer Price Index,’ September 27, 2024
[4] IFO Institute, ‘Business Climate Index,’ September 24, 2024
[5] S&P Global, ‘HCOB Flash Eurozone PMI,’ September 23, 2024
[6] Bureau of Economic Analysis, ‘Personal Income and Outlays, August 2024,’ September 27, 2024
[7] Reuters, ‘China vows 'necessary spending' to hit economic growth target,’ September 26, 2024

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of September 30, 2024, and may change without notice. All data figures are from Bloomberg, as of September 27, 2024, unless otherwise stated.

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