A surprise policy rate cut out of China isn’t making investors feel much better. The PBOC decreased by -10bps to 1.8% the 7-day reverse repo rate, and by 15bps to 2.5% the rate on the 1-yr MLF loans. Analysts are concerned about a double-dip risk in the housing market alongside intensifying headwinds for their economy (exports are down the most since early 2020, and industrial output was down) with stagnant private investment and consumers preferring to save their cash. JPM put out a piece talking about how the unemployment figures in China are too low because a lot of migrant workers moved out of the cities and back to rural areas where the data is not being collected. In June, youth unemployment was 21.3%. Imagine that here.
China may execute a stamp duty cut for the first time since 2008 to get investors rallying around Chinese equities. A reduction in the 0.1% duty on stock trades would be a positive for mainland brokerages, per NoSo. Seems like a band-aid, though, given the points above.
Quants drove the action yesterday, per UBS. Decliners led advancers only by a little. Growth performed much better than value and cyclicals. Winners followed Treasuries. UBS makes the case that such correlated buying trends are usually done by quants, and the meaning is low quality—they can quickly switch gears. Any breach of technical supports, and these folks will be out in a heartbeat. For those of us on the sidelines with cash yielding 5.5%, there’s less incentive to jump into the fray, because we know vol will pick up, and it may not go our way. Also, lots of folks are on vacation in August, so volumes have been thin. Picture below per UBS/BBG:
Per Reuters, a BofA fund survey found that investors in August are positioned at the least bearish levels since February 2022.
The money has been made in Japan on a relative basis, with positive sentiment increasing after Japan’s wage growth eased, and real wages fell faster—a storyline of data that supports the BOJ’s forecast that 2% inflation is not around the corner, so the yen could soften. Their GDP growth sped to 6% in 2Q23 on an annualized basis, the fastest since 2020—and better than expected. The growth has been driven by exports, not domestic demand.
Last week, we experienced a UST curve bear flattening; the 2-yr UST increased 13bps to 4.89%, while the 10-yr YST increased 12 bps to 4.15%, furthering 2-10 curve inversion to -74 bps. In terms of auctions, the 3-yr and 10-yr auctions found strong demand, but the 30-yr was not as successful, even though the yield is the highest since 2011 at 4.19%.
Folks in the UK are having a tough time. Mortgage holders are not happy because interest rate forecasts are popping, per Sky. The Telegraph noted that there has been the biggest rise in wages since records began.
Their central bank raised rates to 12% and warned that further tightening could happen in inflation worsens. Imagine Powell taking on that Q&A….