Ever since the Fed announced it was cutting interest rates by 50 basis points last week, the markets have been in a pretty good mood. The S&P 500 is up about 2%, while the Nasdaq 100 is up by more than 3%. Utilities have been trailing, as have small-caps, and long-term Treasuries are down more than 2%. Over this brief period, these numbers look pretty risk-on.
Treasury yields rising could be a sign that investors feel good about the soft landing narrative, they’re rotating back out of bonds and into stocks or, more likely, both. There’s a path where, if growth numbers can stay in positive territory and inflation can remain under control, stocks continue on their upward trajectory.
Except that things just got more complicated this week.
After several minor measures to help increase liquidity and re-stimulate growth, China finally dropped a stimulus bomb on its flailing economy. It was the kind of move the markets had been hoping for for quite a while and they finally got it.
Among the changes:
50 basis point cut to the reserve requirement ratio (RRR) with the potential for another cut in the near future.
20 basis point cut to the 7-day reverse repo rate to 1.5%.
Deposit rates and loan prime rate will be guided lower, possibly by 20-30 basis points.
50 basis point cut to existing mortgage rates.
Reducing the required down payment on 2nd home buyers from 25% to 15%.
Additional liquidity measures and a $100+ billion facility to fund stock purchases.
The announcement resulted in the biggest two-day surge for Chinese equities in more than two decades. Since the Fed meeting just last week, Chinese stocks are up 20%, while Hong Kong stocks are up about 12%.
While investor portfolios might be in a state of euphoria over this, it’s important to recognize the broader implications of what the PBoC just did. And it might not be good.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.