Another step in the right direction…

Thoughts of the Day

China reduced its benchmark 5-year loan interest rate by 0.25% to 3.95%, pleasantly surprising the markets. This move, coupled with recent Reserve Ratio Requirement cut, aims to stimulate lending and support economic recovery. Expect more steps to be taken in the weeks ahead. Eventually, the Chinese economy will respond and the bear market in Chinese stocks will eventually end.

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Day Ahead

The Canadian Consumer Price Index is expected to show that prices rose +3.2% on an annual basis in Canada in January, down from +3.4% in December.

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What Happened Yesterday

Market Movements as of New York Close 19 Feb 24

RBA minutes: During its February monetary policy meeting, the Reserve Bank of Australia (RBA) deliberated on whether to increase interest rates by 25 basis points or maintain them, ultimately deciding that maintaining steady rates was the preferable option. The possibility of another rate increase was not dismissed, with the board emphasising that raising rates wouldn’t hinder the option to cut them if the economy were to weaken. Inflation is expected to return to target by 2025, assuming no further rate hikes. Market reaction in the AUDUSD was muted.

The US Stock and Bond markets were closed due to Presidents’ Day.

The US stock futures traded within a small range on a quiet trading day.

The crypto market continues to see renewed interest with Ether now at levels not seen since 2022. Bitcoin took a breather from the recent rally and weakened less than a percent on the day.
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Headlines & Market Impact

Germany likely in recession, Bundesbank says

Notable Snippet: Germany is likely in recession now as external demand is weak, consumers remain cautious and domestic investment is held back by high borrowing costs, the Bundesbank said in a regular monthly report on Monday about Europe’s biggest economy.

Germany has struggled since Russia’s 2022 invasion of Ukraine pushed up energy costs, and its vast, industry-heavy economy is now in its fourth straight quarter of zero or negative growth, weighing on all of the eurozone.

“There is still no recovery for the German economy,” the Bundesbank said. “Output could decline again slightly in the first quarter of 2024. With the second consecutive decline in economic output, the German economy would be in a technical recession.”

This weak performance has raised questions about the sustainability of the German economic model and critics argue that much of its energy-reliant heavy industry is now being priced out of international markets, warranting an economic transformation.

The government, however, has pushed back on gloomy projections, arguing that it is merely a perfect storm of high energy costs, weak Chinese demand and rapid inflation that temporarily holds back growth but does not fundamentally question economic strategy.

For now the weakness will persist, the Bundesbank argues.

Foreign industrial demand is trending down and the order backlog is dwindling.

Firms are also holding back investment, partly because financing costs have risen sharply since the European Central Bank pushed up interest rates to a record high to combat inflation, the central bank said.

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Goldman Sachs lifts 2024 S&P 500 target to 5,200 on upbeat profit outlook

Notable Snippet: Goldman Sachs raised its year-end target for the benchmark S&P 500 (.SPX) to 5,200, reflecting roughly a 4% upside from current levels, citing an improved earnings outlook for the index companies.

The brokerage had previously projected the index to end 2024 at 5,100, before raising the forecast from 4,700 in December, on cooling inflation and expectations of the U.S. central bank easing rates in the year.

Goldman on Friday forecast an 8% profit increase for S&P 500 companies this year, fuelled by an improved U.S. economic outlook and stronger mega-cap profit margins.

“We expect strong world GDP growth and a slightly weaker dollar will support EPS, while lower rates and lower oil prices will be a slight drag,” said David Kostin, lead strategist at Goldman Sachs.

Kostin expects the earnings strength of mega-cap stocks, especially those in the Magnificent 7, boosting aggregate S&P 500 profits in 2024. The growth in artificial intelligence and consumer strength is expected to propel revenue growth alongside margin expansion, Kostin added.

He expects the Magnificent 7 stocks to post the strongest earnings growth among S&P 500 sectors.

For the rest of the index, operating margins should also improve, but to a “much smaller” degree, as input costs, such as wage growth, continue to moderate alongside robust sales growth and only modest further price disinflation, Kostin said.

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China boosts property funding with first cut in key loan rate since June

Notable Snippet: China’s central bank cut its benchmark five-year loan prime rate for the first time since June, extending Beijing’s efforts to revive the country’s anaemic property market.

The Chinese central bank kept its one-year loan prime rate — the peg for most household and corporate loans in China — unchanged at 3.45%. The benchmark five-year loan rate — the peg for most mortgages — was cut by 25 basis points to 3.95%, according to a statement Tuesday from the People’s Bank of China.

The cut in the five-year rate in the monthly fix for February was larger than expectations for a reduction of between five to 15 basis points in a Reuters poll of economists.

China’s loan prime rates usually move in tandem to its medium-term policy rate, which the PBOC kept unchanged for February on Sunday.

China cut the reserve ratio requirements for its banks by 50 basis points from Feb. 5, providing 1 trillion yuan ($139.8 billion) in long-term capital, while urging banks to support loans for high-quality real estate developers.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord