Markets
US stocks are trading flattish but remain precariously perched as investors digest a ~11 bps rise in 10-year US Treasury yields on the back of a surprisingly robust September Retail Sales and Industrial Production report. All the while, geopolitical storm clouds billow ominously on the horizon.
Simply put, the US consumer appears unbowed and utterly unaffected by rising interest rates, as indicated by a closely watched update on nominal spending in the world’s largest economy.
The blistering update on spending could be viewed as a hawkish development and contributed to bearish sentiment in the bond market. Contrary to expectations that the US consumer is weakening, recent revisions suggest Americans may still have significant savings.
The steady stream of strong macro data reinforces the view that economic growth in the US remains robust enough to avoid a recession- a view that is admittedly increasingly part of a growing consensus.
According to the latest Wall Street Journal survey of economic forecasters, the consensus probability of a recession occurring within the next 12 months has decreased. This probability stood at 54% in July but has now dropped to 48%. Indeed, this is the first time the probability has fallen below 50% since mid-2022, indicating an improved economic outlook and reduced concerns about a major US economic downturn as more and more go whistling past the recession graveyard.
At the sector level in the S&P 500 today, pro-cyclicals (Industrials, Energy) outperform while rate-sensitive sectors (Tech, Utilities) are lagging — i.e., no surprises given the spike in rates on the back of better growth news.
I think a bit of good news is bad news has temporarily left the picture as soaring US yields could keep the Fed grounded.
But looking at the potential 4Q trajectory, the economic momentum may be about to moderate as we navigate key headwinds, including the end of the student loan moratorium, the UAW strike, higher oil prices, the tightening in financial conditions on the back of a ‘higher for longer’ Fed outlook and an apparent slowdown in consumer spending.
But month after month, Americans continue demonstrating the folly of betting against the US consumer.
Oil markets
Oil prices are rallying in response to a strong increase in retail sales for September-August, which raised expectations for robust economic growth in the fourth quarter.
Strong consumer spending tends to support gasoline consumption because it closely correlates with the labour market and the economy’s overall strength. When consumers are confident and have stable employment, they are more likely to spend on goods and services, including driving and transportation.
In addition, the larger-than-expected oil and product draws should provide an early fillip in Asia trade.
Forex and Gold markets
In addition to Fear of Middle East escalation demand, rallies in gold can maintain momentum if broader macro concerns trigger growth shocks or if inflation lingers. Gold is often seen as a safe-haven asset, and investors tend to flock to it during times of economic uncertainty.
If there are broader concerns about economic growth, such as a global recession or financial instability, investors may turn to gold as a store of value, which can drive up its price. However, the US economy looks to be on solid footing, so gold is likely still anchored by safe have rather than recession demand. This could open up two risks as recession odds fade and the opportunity cost of speculating on gold becomes prohibitive.
The dollar is also influenced by geopolitical events, particularly in regions like the Middle East. Middle East tension contiue to drive safe-haven flows, particularly from Asia currencies, with higher oil prices and soaring US yields compounding matters.
It is hard to give up safe haven dollars amid the high carry, higher oil prices and US economic outperformance. After all, the US dollar is an oil currency for all intents and purposes.
China update
The current state of the Chinese economy is perplexing, and this sentiment is widely shared. On Monday, the People’s Bank of China (PBoC) injected a net CNY 289 billion via the Medium-Term Lending Facility (MLF), maintaining the interest rate unchanged. This move aimed to ensure ample liquidity and support economic growth, especially as concerns about a potential property market crisis continue to cast a shadow over market sentiment, and domestic demand remains sluggish. Notably, it marked the largest monthly cash infusion in nearly three years.
Evergrande, a prominent Chinese property developer, once again took center stage last month, while a minor bank run on a city commercial bank in Hebei province was triggered by rumours linking the bank to significant exposure to the beleaguered property giant. However, the bank stated that it had no liquidity problems. Chinese media reported that “many people” were detained by local authorities in connection with the rumours, which had spread widely online.
Although there has been a temporary lull in a string of bleak economic news, recent Consumer Price Index (CPI) data indicated that the risk of deflation continues to loom over the world’s second-largest economy. The Chinese economic landscape remains uncertain and complicated.
Consumer price growth in China remained stagnant in September, with the Consumer Price Index (CPI) showing no change, while producer prices continued to experience deflation. The Chinese government has employed numerous measures to bolster economic growth, but these fragmented and half-hearted efforts have left many feeling unsure of their impact. Despite the government’s claim of hundreds of counter-cyclical measures to stimulate domestic demand, their specifics often elude casual observers. There are now reports of a potential “plunge protection scheme” involving a state-backed stock-buying fund in the works to support the stock market. These efforts reflect the ongoing challenges the Chinese economy faces, with A-shares still struggling in 2023 and remaining well below their early 2021 levels.
Despite some moderation, China’s export slump continued last month, with shipments abroad falling by 6.2%. This highlights the ongoing challenges in the Chinese economy and its impact on global trade.
Imports dropped by the same amount, a testament to lacklustre domestic demand. It was the seventh import contraction in a row.
The country’s economic outlook is uncertain, and it appears that Beijing may be running out of effective strategies to stimulate robust growth. Moreover, the US continues to impose tighter restrictions on China’s tech sector, adding to the Chinese economy’s challenges. Geopolitical tensions between the US and China could further complicate the global economic landscape. In summary, China’s role as a saviour of the global economy appears to be fading, raising concerns about its overall impact on global growth.
