In today’s briefing:
- China’s Economic Plan: THE MOVING PARTS AND WHAT TO WATCH
- US Treasury Market Questions Fed’s Prospective Policy Path
- Near-Term Volatility Ahead, But Don’t Fret
- A Time for Bullish Patience
China’s Economic Plan: THE MOVING PARTS AND WHAT TO WATCH
- China is not in a 2015 boom/bust period with households under-invested in the stock market.
- It is now time for China to begin fiscal stimulus as discussed at the MOF meeting over the weekend. Central government will relieve local governments’ hidden debt through debt swaps.
- PBOC and MOF will closely watch interest rates and government yields as they roll out fiscal measures. CNY levels will also be considered in future policy decisions.
US Treasury Market Questions Fed’s Prospective Policy Path
- The Fed’s policy pivot to concentrate on the labour market reflects the priorities of politicians who view full employment as the more important mandate compared to price stability.
- Doubts about the wisdom of the Fed’s aggressive policy rate reduction have increased since the release of the September Employment Situation report. Bond investors have demanded a higher term premium.
- Surveys on household and business optimism are sending worrying signals. Fed credibility will face communication challenges as long as forward guidance indicates easier policy but economic outlook risks remain balanced.
Near-Term Volatility Ahead, But Don’t Fret
- Volatility in economic data feeds through to bond market volatility because of the Fed’s increasing focus on data dependency.
- Wobbles in earnings estimate growth at the start of Q3 earnings season is leading to uncertainty in stock prices.
- We believe these sources of volatility will resolve themselves in a benign manner.
A Time for Bullish Patience
- Stock market internals are call for near-term caution but intermediate-term bullishness.
- Election uncertainty, along with cross-currents such as the stronger-than-expected CPI report is creating market volatility.
- But market internals reveal a strong bull trend and a near-oversold condition.
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