China Unchains a Dragon

MONETARY

• Speaking at the National Association for Business Economics Annual Meeting in Nashville, Tennessee – Fed Chairman Jerome Powell offered updated insights on the current state of the U.S. Economy¹
  • Regarding the Labor Market, Chairman Powell largely conveyed that the labor market is now no longer a source of inflationary pressures, and that further cooling of the labor market is no longer a necessary development in the process of getting inflation to remain stable around the 2.0% market¹
    • (Powell) “The ratio of job openings to unemployed workers has moved down steadily but remains just above 1—so that there are still more open positions than there are people seeking work. Prior to 2019, that was rarely the case. Still, labor market conditions have clearly cooled over the past year. Workers now view jobs as somewhat less available than they were in 2019. The moderation in job growth and the increase in labor supply have led the unemployment rate to increase to 4.2 percent, still low by historical standards. We do not believe that we need to see further cooling in labor market conditions to achieve 2 percent inflation.”¹
  • On inflation, Chairman Powell noted that disinflationary trends continue to be exhibited across a broad range of price categories, and that many of the prior factors contributing to higher-than-average inflation levels are now dissapated¹
    • (Powell) “Over the most recent 12 months, headline and core inflation were 2.2 percent and 2.7 percent, respectively. Disinflation has been broad based, and recent data indicate further progress toward a sustained return to 2 percent. Core goods prices have fallen 0.5 percent over the past year, close to their pre-pandemic pace, as supply bottlenecks have eased. Outside of housing, core services inflation is also close to its pre-pandemic pace. Housing services inflation continues to decline, but sluggishly. The growth rate in rents charged to new tenants remains low. As long as that remains the case, housing services inflation will continue to decline. Broader economic conditions also set the table for further disinflation. The labor market is now roughly in balance. Longer-run inflation expectations remain well anchored.”¹
  • Regarding the Fed’s stance on monetary policy decisions, Chairman Powell noted that the recent shift into a Rate Cut Cycle reflects the Fed’s confidence of their ability of maintain a level of stable inflation at reasonably historical levels, while also stimulating productivity growth and an opportunistic labor market environment¹
    • (Powell) “As I mentioned, our decision to reduce our policy rate by 50 basis points reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate economic growth and inflation moving sustainably down to 2 percent. Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course. The risks are two-sided, and we will continue to make our decisions meeting by meeting. As we consider additional policy adjustments, we will carefully assess incoming data, the evolving outlook, and the balance of risks. Overall, the economy is in solid shape; we intend to use our tools to keep it there.”¹

 

FISCAL

• Pursuant to the ongoing student loan relief saga, a federal judge in Missouri temporarily blocked President Joe Biden’s administration from implementing a plan to forgive student loan debt³
  • U.S. District Judge Matthew Schelp issued a preliminary injunction blocking the Biden administration from “mass canceling” student loans and forgiving principal or interest under the plan pending the outcome of the states’ lawsuit³
    • A separate judge on Oct. 2 transferred the litigation from Georgia and removed that state from the case by finding it would not experience any legal harm under the debt relief plan³
  • (Schelp) “Allowing Defendants to eliminate the student loan debt at issue here would prevent this Court, the U.S. Court of Appeals, and the Supreme Court from reviewing this matter on the backend, allowing Defendants’ actions to evade review,”³

 

GEOPOLITICS

• In an effort to combat the lingering and severe effects of the large-scale property bubble collapse, the Chinese Government enacts its largest economic stimulus effort since the COVID-19 pandemic to redirect the course of the Chinese Economy²
  • The stimulus effort contains 3 primary parts, all of which are aimed at kickstarting the economy back into a state of sustained growth²
    • The first element of the stimulus package is that the central bank of China (People’s Bank of China, or PBOC) will cut the Required Reserve Ratio for banks by 0.50%, while also cutting the Main Policy Rate by 0.20%. Moving forward, the PBOC also signaled that additional cuts in these benchmarks are possible by year end pursuant to economic conditions²
    • Additionally, the PBOC will take significant steps to reduce costs of existing and new home buyers. As part of the stimulus package, the PBOC will reduce mortgage rates on existing mortgages by 0.50%, and also reduce the amount of down payment needed for individuals to buy a second home from 25% to 15%. Also, the PBOC will raise its financial support from 60 percent to 100 percent for commercial banks extending loans to locally owned state-backed firms purchasing extra housing inventory who are aiming to convert those into affordable housing units.²
    • The third element of the stimulus package revolves around support for the stock market. Certain institutional investors will now be able to borrow liquid assets such as Treasury bonds and central bank bills from the central bank, using assets like ETF as collateral, and then sell those liquid assets to get the cash they need to invest more heavily in equity markets. Also, the PBOC will provide refinancing loans for banks extending credit to publicly traded companies aiming to buy back their own shares²

 

[See Below for Disclosures & Annotations]

 

DISCLOSURES

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The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

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ANNOTATIONS

1. The Federal Reserve. “Economic Outlook”. September 30, 2024
2. Peterson Institute for International Economics. “China’s stimulus measures to boost troubled economy may fall short”. October 1, 2024
3. Reuters. “Biden student debt relief plan blocked again by different judge”. October 4, 2024