China Hits the Gas

• The PBOC rolls out a fresh batch of stimulus measures. CNH and Chinese stocks surge.

• RBA stands pat but is less hawkish. AUD dips.

• The US September consumer confidence index is today’s focus. There are no policy-relevant UK or Eurozone economic data releases.

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USD is a little firmer, stocks in China are surging and US/EU equity futures are up. Greater stimulus measures out of China and market pricing an aggressive Fed easing cycle while the US economy is strong bode well for risk assets. This encouraging risk environment is a drag on USD mostly against growth-sensitive currencies.

Still, heightened risk of a broader regional conflict in the Middle East can trigger a sudden flight to safety in financial markets in favour of USD. So far, the pick-up in crude oil prices has been muted despite Israel escalating its attacks on Hezbollah.

Meanwhile, continued evidence of US economic outperformance offers USD support. In September, the US composite PMI hit 54.4. The Eurozone was at 48.9, the UK at 52.9, and Japan at 52.5.

Yesterday, Minneapolis Fed President Neel Kashkari (non-voter), Atlanta Fed President Raphael Bostic (FOMC voter and a leading hawk), and Chicago Fed President Austan Goolsbee (2025 FOMC voter and staunch dove) explained why they supported a 50 bp rate cut last week.

Kashkari added “as we go forward, I expect, on balance, we will probably take smaller steps unless the data changes materially.” According to Kashkari 25 bp rate cuts at both the November and December meetings are a “reasonable starting point.” Meanwhile, Goolsbee warned that “over the next 12 months, we have a long way to come down to get the interest rate to something like neutral.”

The US September Conference Board consumer confidence index is today’s data highlight (3:00pm London). Headline is expected to improve to 104.0 vs. 103.3 in August and would remain roughly within the same narrow range that’s held throughout the past two years. Positive real wage growth, rising house prices, and encouraging labor demand suggest household spending will remain an important tailwind to GDP growth.

Three regional Fed business surveys are due today: September Philadelphia Fed non-manufacturing activity index (1:30pm London), Richmond Fed manufacturing and services indexes (both at 3:00pm London).

Fed Governor Michelle Bowman speaks on the economic outlook and monetary policy (2:00pm London). Bowman issued a statement Friday to justify why she dissented from the FOMC decision to slash rates by 50 bp and voted in favor of a 25 bp rate reduction. Bowman pointed out the US economy remains strong, inflation remains a concern, and cutting rates at a measured pace “would also avoid unnecessarily stoking demand.” We agree with Bowman.

The People's Bank of China (PBOC) cranked-up stimulus measures and signaled more easing may be in the pipeline. The PBOC announced a broad set of policies to shore-up China’s beleaguered property market. The PBOC will cut the policy-relevant 7-day reverse repurchase rate 20 bp to 1.50%, slash banks’ reserve requirement ratio by 50 bp, reduced the downpayment ratio on second homes to 15% from 25%, lower rates for existing mortgages, and increase central bank support for buying unsold homes.

The PBOC also took steps to support China’s stock market. The PBOC plans to set up swap and relending facilities that would allow securities firms, funds and insurance companies to tap liquidity from the central bank to buy stocks.

The action taken by the PBOC today can further boost financial market risk sentiment in the near-term. Nevertheless, to escape the debt-deflation loop, Chinese policymakers need to scale-up fiscal measures to boost consumption growth. China's consumption-to-GDP ratio is very low at round 30%, in large part due to high household savings.

AUD/USD rallied briefly to new cyclical highs after the RBA policy decision. To no one’s surprise, the RBA left the cash rate target unchanged at 4.35% and stuck to its neutral guidance that “the Board is not ruling anything in or out”. The RBA cautioned again “that it will be some time yet before inflation is sustainably in the target range” and “the need to remain vigilant to upside risks to inflation.”

However, AUD pared back those gains and edged lower after RBA Governor Michele Bullock toned down the hawkish rhetoric. Bullock confirmed during her post-meeting press conference that the Board “didn’t explicitly consider a rate hike this time.” We expect the RBA to join the global easing cycle later this year because Australia underlying economic activity is weak and points to lower inflation pressures. RBA cash rate futures price-in over 50% odds of a 25 bp cut by December.

JPY underperforms. Bank of Japan (BOJ) Governor Kazuo Ueda continued to indicate the BOJ is in no rush to remove policy accommodation. Ueda reiterated plans to tighten policy further if the economic outlook is realized but warned again that financial market is still unstable. Ueda added the BOJ has time to consider policy options.

National Bank of Hungary meets today and is expected to cut rates 25 bp to 6.50%. At the last meeting August 27, the bank kept rates steady at 6.75% as expected but said that “There may be scope for cautiously lowering interest rates further in the coming period…” Deputy Governor Virag added that he continues to see 1-2 more rate cuts this year. The market is pricing in over 100 bp of total easing over the next 12 months.