Is China getting serious?

Thoughts of the Day

President Xi’s visit to China’s central bank signaled support for policymakers and possible new economic measures. The market reacted positively, with Hang Seng Index and China A50 stock futures rising over 2%. Expectations for more measures to be announced soon are rising.

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Day Ahead

The Bank of Canada is expected to keep interest rates unchanged at 5% in its monetary policy meeting.

US Federal Reserve Chair Powell is due to deliver opening remarks at the Moynihan Lecture in Social Science and Public Policy but comments on monetary policy is unlikely given the Fed blackout period.

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What Happened Yesterday

Market Movements as of New York Close 24 Oct 23
  • The UK unemployment rate improved slightly to 4.2% in August (vs 4.3% expected) while the number of people claiming unemployment benefits for September rose +20.4k (vs 2.3 k expected), a reversal from August’s -9k (revised from -0.9k) The GBP did not react much to the data release.
  • The Australian monthly consumer price index indicator showed that prices rose +5.6% Year-on-Year in September (vs +5.4% expected), higher than the +5.2% in March. The AUD spiked +0.52% against the USD from the 0.6359 level to the 0.639 level.
  • The US S&P Global Purchasing Managers Index fared better than expected with the Manufacturing PMI coming in at 50 (vs 49.5 expected and 49.8 prev) and Services PMI at 50.9 (vs 49.8 expected and 50.1 prev). This likely pushed back on recessionary fears in the market.
  • The US Treasury Yield curve inversion remained at 0.19% as the US 2-year bond yield and  the US 10-year bond yield both fell -0.03% to 5.02% and 4.83% respectively.
  • The US stock futures drifted higher through the Asia and London trading sessions with the S&P 500 futures up +0.22% before the New York session began.
  • The US stock market opened higher from Monday and pushed further ahead following better than expected Purchasing Managers Index results from the US.  It then had a volatile session as the US stock market oscillated ahead of the earnings reports from the tech giants that were reporting in the after market hours. Consequently, the S&P 500 closed the day higher at +0.73% (high: +1.00%, low: +0.06%), the Dow rose +0.62% (high: +1.02%, low: +0.16%) while the Nasdaq gained +0.97% (high: +1.16%, low: +0.04%).
  • [Earnings] Alphabet (NASDAQ: GOOGL, +1.69% on the day and -6.07% aftermarket) Earnings: $1.55 vs $1.45 expected, Revenue:$76.69 billion vs $75.97 billion expected. The stock sold off because cloud revenue underperformed at $8.41 billion against expectations of $8.64 billion.
  • Microsoft (NASDAQ: MSFT, +0.37% on the day and +3.95% aftermarket) Earnings: $2.99 vs $2.65 expected, Revenue: $56.52 billion vs $54.50 billion expected. Stocks rallied on the report because the management cut back on spending while its cloud business, Azure, jumped 29% during the quarter.
  • Snap (NASDAQ: SNAP, +2.32% on the day and +0.41% aftermarket) Earnings: +2 cents vs -4 cents expected, Revenue: $1.19 billion vs $1.11 billion expected. Snap’s stock price initially soared almost +20% in aftermarket trading on the earnings beat but has since come off following reports that advertisers have paused spending following the war in the Middle East.
  • The Nasdaq futures had an initial spike of +0.69% when the earnings were released but it quickly subsided and the rally was shortlived. Currently, the Nasdaq future is down -0.26% off the New York close.
  • The crypto market continues to trade higher on the Bitcoin ETF optimism with Bitcoin and Ether up +2.63% and +1.07% respectively.
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Headlines & Market Impact

Japan’s price trend gauge hits record, signals broadening inflation

Notable Snippet: A key measure of Japan’s trend inflation accelerated to 2% in September, hitting a record and matching the central bank’s target, data showed on Tuesday, heightening the case for dialling back its massive monetary stimulus.

The data adds to recent growing signs of broadening inflationary pressure in the world’s third-largest economy, which had been mired in decades of price stagnation.

The 2.0% year-on-year increase in the weighted median inflation rate, which is closely watched as an indicator on whether price rises are broadening, compared with a 1.8% gain in August. It marked the fastest pace of rise since comparable data became available in 2001, Bank of Japan (BOJ) data showed.

While the core price gauge has exceeded its target for more than a year, the BOJ has pledged to keep ultra-low interest rates until 2% inflation can be achieved on a sustained manner backed by solid consumption and wage increases.

The weighted median is the inflation rate of items at the middle of the price changes, or around the 50th percentile point of the distribution.

After hovering around zero for the past two decades, it began creeping up last year reflecting a wave of price hikes by companies passing on surging raw material costs.

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Euro zone October PMI at near 3-year low, stirring recession worries

Notable Snippet: Eurozone business activity took a surprise turn for the worse this month as demand fell in a broad-based downturn across the region, a survey showed, entering the fourth quarter on the wrong foot and suggesting the bloc may slip into recession.

HCOB’s flash eurozone Composite Purchasing Managers’ Index (PMI), compiled by S&P Global and seen as a good guide to overall economic health, fell to 46.5 in October from September’s 47.2 and its lowest since November 2020.

Outside of the COVID-19 pandemic months it was the lowest reading since March 2013.

It was well below the 50 level that marks growth in activity and confounded expectations in a Reuters poll for an uptick to 47.4.

Suggesting a recession is well underway in Germany, Europe’s largest economy, business activity contracted there for a fourth straight month as the downturn in manufacturing was matched by a renewed decline in services, its PMI showed.

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China signals more support for struggling local governments

Notable Snippet:  China on Tuesday took steps toward easing financing conditions for local governments, which have been at the crux of recent economic difficulties.

The central government said it formalized a process allowing local governments to borrow funds for the year ahead — starting in the preceding fourth quarter, according to an announcement published by state media.

The State Council, China’s top executive body, would determine the amount a local government could borrow ahead of time, the report said, noting the framework would last for four years, through to the end of 2027.

The measure was adopted at a meeting of the National People’s Congress Standing Committee, according to state media.

Earlier on Tuesday, Bloomberg reported, citing sources, that Chinese President Xi Jinping made his first known visit to the People’s Bank of China since taking the top leadership role. CNBC was not able to independently confirm the report.

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Phan Vee Leung
CIO & Founder, TrackRecord