By Benjamin Picton, senior macro strategist at Rabobank
Hope Springs Eternal
China’s Politburo yesterday signaled its intent to provide further support to the Chinese economy by adopting a “moderately loose” monetary policy stance next year. That marks a shift from the current setting of “prudent” monetary policy that was adopted fourteen years ago. The shift comes in the face of continued economic weakness in China that has been led by the beleaguered real estate sector and compounded by rising trade restrictions led by the United States.
The Politburo also telegraphed a “more proactive” fiscal policy stance next year, raising hopes that China may be poised to widen its fiscal deficit from the 3% level that prevailed as of March. China has been drip feeding stimulus measures into the economy for months through cuts to key lending rates.
A stimulus ‘mini bazooka’ was fired in late September that included cuts to existing mortgage rates, cuts to bank reserve ratios and new financing facilities for stock purchases and buybacks, prompting a brief selloff in the USDCNH, a bidding up of the CSI300 and a bid for highly-liquid China proxies like the AUD. The price action yesterday followed a similar path, USDCNY fell 0.23% to 7.2675 and AUDUSD rallied 0.77% to 0.6440, but the CSI300 closed slightly lower while the Hang Seng soaked up the buying interest to rise 2.76%. Could the onshore market follow suit today? (spoiler alert: it tried, but no).
Brent crude also found a bit yesterday on renewed China stimulus hopes and perhaps a bit of extra risk premium owing to the fall of the Assad regime in Syria. The active contract closed 1.43% higher at $72.14/bbl. Gold prices also rose, while Bitcoin fell by more than 3% to finish the day just below $97k. The Treasury curve bear steepened as 10-year yields rose by 4.8bps and 2-year yields lifted by 2bps.
US stocks closed lower across the board and European stocks were mixed with gains posted for the FTSE100 and French CAC40, while the DAX fell. South Korea’s KOSPI index sold off another 2.8% as the market continued to digest the political turmoil that has followed President Yoon’s decision to (briefly) impose martial law last week. Yoon has since survived an impeachment vote, but his position is widely seen as untenable and he has now been banned from foreign travel and faces treason charges.
Later today the Reserve Bank of Australia will make its final policy rate announcement for 2024. The RBA has been one of the most hawkish G10 central banks in recent times, and is expected to hold the cash rate unchanged at 4.35% at this meeting. After the release of lacklustre Q3 national accounts last week showed growth of just 0.3% in the quarter (versus expectations of 0.5%) the futures market has been bidding up the probability of an earlier start to an anticipated rate cutting cycle from the RBA.
Previously, the OIS strip had May 2025 as the first meeting where a 25bp cut was fully priced. Implied probability for a cut at the April meeting reached 105% on Friday, but has since pulled back below the 100% level as of this morning. With the domestic final demand deflator in Q3 printing at a benign-looking 0.7% QoQ, and the household savings ratio rising to 3.2%, could the RBA be poised to deliver a dovish pivot today to give themselves some optionality over a potential cut in February? Hope springs eternal.
