Should we be worried about the Chinese economy?

Thoughts of the Day

Economic data from China continues to spook investors and add to fears that the global economy will sink into a recession at some point. Chinese exports for October fell -6.4% year-on-year (expected -3.3%, previous -6.2%). However, imports grew +3% YoY (expected -4.8% and previous -6.2%) and that is a positive sign. 

Deflationary pressures continue to plague the economy with the Inflation rate falling -0.2% (expected -0.1% and previous 0%) YoY. This, however, will give the authorities freedom to add to its measures to boost the economy. The authorities have reiterated a few times that they will continue to implement measures to help the economy and weakness in the shorter term is likely to be bullish in the longer term because that will strengthen their resolve.

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Day Ahead

Federal Reserve Chair Powell is due to participate in a panel discussion titled “Monetary Challenges in a Global Economy” at the Jacques Polak Annual Research Conference. May talk about monetary policy.

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What Happened Yesterday

Market Movements as of New York Close 8 Nov 23
  • The Chinese Consumer Price Index showed a -0.2% decrease in prices on a Year-on-Year basis (vs -0.1% expected), down from 0% last month. The Chinese Producer Price Index showed a -2.5% decrease in prices on a Year-on-Year basis (vs -2.7% expected), down from -2.5% last month. Reaction in the USDCNH was muted.
  • Federal Reserve Chair Powell’s opening remarks at the Division of Research and Statistics Centennial Conference did not mention anything regarding monetary policy but served as a congratulatory and thank you message for the division.
  • The US Treasury Yield curve inversion widened to 0.44% as the US 2-year bond yield rose +0.02% to 4.93% while  the US 10-year bond yield slipped -0.09% to 4.49%.
  • The US stock futures traded lower through the Asian trading session with the S&P 500 futures falling -0.19%. It then bounced from the lows when the London trading session began, rising +0.30% from the lows, effectively gaining +0.10% on the day.
  • The US stock market opened slightly higher from Tuesday. The market then traded lower through the first half of the New York session before making a reversal at midday as the US 10-Year Note Auction came in lower at 4.519% (vs 4.610% previously). Consequently, the S&P 500 closed the day slightly higher at +0.10% (high: +0.29%, low: -0.43%), the Dow eked out a small loss of -0.12% (high: +0.29%, low: -0.46%) while the Nasdaq inched +0.11% higher (high: +0.31%, low: -0.49%).
  • [Earnings] Walt Disney Co (NYSE: DIS, +3.31% in after market trading), Earnings: 82 cents per share vs 70 cents per share expected, Revenue: $21.24 billion vs $21.33 billion expected. Stock performed better as Disney revealed plans to increase its cost-cutting measures by an additional $2 billion.
  • The crypto market did not make much headway as well with Bitcoin up +0.69% and Ether up +0.08%.
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Headlines & Market Impact

Samsung launches generative AI model made for its devices, beating Apple to the punch

Notable Snippet: Samsung Electronics on Wednesday introduced a new generative artificial intelligence model, hinting that the software will be coming to its devices soon.

Generative AI has been popularised by Microsoft-backed OpenAI and ChatGPT, which was launched last year and has sparked a race amongst the world’s technology giants to get ahead. Generative AI is underpinned by so-called large language models, which are trained on large amounts of data.

Samsung said its technology — called Samsung Gauss — is designed for AI applications on devices.

The AI system has a number of features: the first, Samsung Gauss Language, is a generative language model which can help compose emails and translate content, as well as “enhance the consumer experience by enabling smarter device control when integrated into products.”

The second feature allows in-house software developers to write code quickly, while the third, Samsung Gauss Image, can generate or edit images.

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Western miners target China’s rare earth metals grip with premium prices

Notable Snippet: Now, mining companies such as TSX-listed Aclara Resources (ARA.TO) and Australia’s Ionic Rare Earths (IXR.AX) are discussing plans that may loosen China’s grip on the critical minerals market, moving towards market-determined prices, company officials told Reuters.

Canadian miner Neo Performance Materials (NEO.TO) and Germany’s Vacuumschmelze are also discussing similar plans, people familiar with the matter said. The two companies did not offer comment when reached by Reuters.

The previously unreported plans come as the miners seek to benefit from the Group of Seven (G7) countries’ move to incentivize miners and automakers to produce and procure critical metals domestically or from friendly nations.

For instance, the current price of neodymium, used to make the most powerful magnet in the world, varies between $73 to $520 per kg and companies say ex-China prices could be 30% more than the current quoted price.

The miners believe manufacturers will absorb extra costs due to new environmental, social and governance-related legislation and tax incentives like the U.S. Inflation Reduction Act and argue that a premium price is warranted for reliable and sustainably sourced rare earths that are key to the transition to cleaner energy.

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Mortgage rates plunge and demand finally inches back

Notable Snippet: Mortgage rates saw the biggest one-week drop in over a year last week, causing the first increase in mortgage demand in a month.

Total mortgage application volume rose 2.5% last week, compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 7.61% from 7.86%, with points falling to 0.69 from 0.73 (including the origination fee) for loans with a 20% down payment.

Applications to refinance a home loan increased 2% for the week and were 7% lower than the same week one year ago. Mortgage rates are pretty close to where they were at this time last year, so there is not a lot of incentive to refinance. Most homeowners refinanced two years ago when rates were hovering near record lows. The vast majority of current homeowners carry mortgages with rates below 4%.

Applications for a mortgage to purchase a home rose 3% for the week but were 20% lower than the same week a year ago. The decline in interest rates is still not enough to offset sky-high home prices, which are still rising due to the very low supply of houses for sale.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord