Morning Bid: Anticipating Rate Cuts in China While the U.S. Economy Thrives

By Jamie McGeever

This week begins in Asian markets with a particularly optimistic global atmosphere, primarily driven by the sustained strength in U.S. equities. However, local sentiment remains cautious due to ongoing uncertainties surrounding China's significant economic issues.

On Monday, the People's Bank of China (PBOC) is anticipated to cut its loan prime rates. This action is part of a broader strategy involving monetary, fiscal, and liquidity measures designed to bolster the struggling property sector, stimulate economic growth, and combat deflation.

The Governor of the PBOC, Pan Gongsheng, indicated at a financial forum in Beijing that the loan prime rate would likely be lowered by about 20 to 25 basis points, according to reports from Xinhua.

In addition, the PBOC announced plans to inject over $100 billion into the stock market, which positively impacted Shanghai's blue-chip index, leading to a 3.6% increase. This marks the index's best performance since late September.

Despite the worries, China's GDP growth for the third quarter was reported at 4.6%, slightly surpassing expectations. However, economist Phil Suttle highlighted that the growth over the past two quarters has been remarkably weak, averaging an annualized rate of just 2.75%, which is the lowest seen outside of pandemic-related shutdowns.

In response to these challenges, Beijing is acting decisively. While the stock market has shown a favorable response, bond yields are now declining again. Initially, they rose on hopes of economic support from the PBOC actions and substantial bond issuance, but the 10-year yield is now moving back towards the 2.00% mark.

Concerns over the U.S.-China trade relations have resurfaced, particularly after comments from Republican presidential candidate Donald Trump suggesting potential tariffs of 150% to 200% on China if tensions escalate over Taiwan, as reported by the Wall Street Journal.

Conversely, the U.S. economy continues to demonstrate impressive growth, with economic data consistently beating forecasts. GDP growth is now expected to exceed 3%, corporate earnings remain robust, and Wall Street is achieving new highs.

Nonetheless, some market analysts caution that this optimism could be overblown. Experts from Raymond James have noted that short-term options and technical signals appear skewed, indicating the market may be approaching a period of consolidation or could face a pullback soon.

Globally, financial conditions are loosening as central banks lower interest rates and stock markets rise. Investors in the Asian markets will be closely monitoring the dollar, which has regained strength recently and is trading at its highest level in three months.

It should be noted that the earlier communication incorrectly reported Malaysia’s GDP data release, which is now set for Monday, October 21.

Key Developments to Watch

Some critical events that could influence market directions on Monday include:

• Announcement of China's loan prime rate changes
• Malaysia's GDP report for the third quarter
• A speech from Andrew Hauser, Deputy Governor of the Reserve Bank of Australia

China, U.S., Economy