China Sparks Risk Rally

• China’s Politburo pledged stronger fiscal and monetary support to the economy. Stock markets in Asia surge while US and European equity futures are up.

• The Swiss National Bank is expected to cut the policy rate 25 bp to 1.00%. We have a 50 bp cut pencilled-in.

• Second-tier US and Eurozone economic data are released today.

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USD jumped sharply across the board yesterday and 2-year Treasury yields ticked up. There was no fundamental data trigger behind the moves. USD retraced some of those gains this morning, mostly versus AUD, following China’s pledge for more forceful fiscal and monetary support.

Fed Governor Adriana Kugler stuck to the Fed’s dovish script. Kugler noted “I strongly supported the decision last week by the Federal Open Market Committee (FOMC) to cut the federal funds rate by 50 basis points…If conditions continue to evolve in the direction traveled thus far, then additional cuts will be appropriate.” There are plenty of other Fed speakers today including Collins, Bowman, Powell, Williams, Barr, Cook, and Kashkari.

Second-tier US economic data are released today: The third Q2 GDP figure is expected to print in-line with the second estimate at 3% saar. August durable goods orders, weekly jobless claims, August pending home sales and the Kansas City Fed manufacturing index are the other data highlights.

In our view, 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 backdrop is a drag on USD mostly against growth-sensitive currencies.

CNH and Chinese equity are powering forward. Following an unscheduled meeting today, China’s Politburo pledged stronger fiscal and monetary support to complete the country’s annual economic goals. The Politburo vowed to further stabilize the property sector, strengthen employment support for college graduates, improve the consumption structure, and improve policy to support birth. The announcement comes on the heels of this week’s People’s Bank of China (PBOC) pump-priming measures to shore-up the country’s beleaguered property market and support the stock market.

EUR/CHF is vulnerable to more upside on improving financial market risk sentiment and a more dovish Swiss National Bank (SNB). The SNB is expected to cut the policy rate 25 bp to 1.00% (8:30am London). The swaps market implies 38% odds of a 50 bp cut while one analyst polled by Bloomberg has a jumbo cut pencilled-in. We think the SNB will slash the policy rate 50 bp because inflation is undershooting the SNB’s Q3 projection of 1.5%. In August, headline CPI dipped two ticks to 1.1% y/y (lowest since September 2021) while core CPI printed at 1.1% y/y for a third consecutive month. Moreover, the trade-weighted Swiss franc strengthened in both nominal and real terms since the SNB cut rates in March and June.

EUR/USD clawed back some of yesterday’s losses. The ECB August money supply data is unlikely to generate material financial market volatility (9:00am London). Broad monetary growth (M3) is expected to rise to an 18-month high at 2.5% y/y vs. 2.3% in July. Overall, credit dynamics are improving but remain very weak by historical standards. There are a few ECB speakers today: Lagarde, Luis de Guindos and Schnabel.

USD/JPY is holding on to recent gains. The Bank of Japan (BOJ) minutes of the July 30 and 31 meeting offered more insights behind the surprise hawkish hike. At that meeting, the BOJ decided by a 7-2 majority vote to raise the policy rate 15 bp to 0.25%. Japan’s deeply negative real interest rates and upside risk to inflation were among the reasons cited by many members who argued for raising rates. For the two members (Toyoaki and Asahi) that voted against the decision to raise rates, “weak developments in, for example, the economic growth rate and private consumption” argued for caution.

The BOJ policy outlook has changed since the July BOJ meeting. Governor Kazuo Ueda and other members warned the bank was in no rush to remove policy accommodation in part because financial market is still unstable. The swaps market is only pricing in 18 bp of total tightening over the next 12 months which is a major headwind for JPY.

AUD/USD recovered most of yesterday’s losses supported by China’s stimulus announcement. The RBA semi-annual Financial Stability Review pointed out that financial stability risks from the increase in housing loan arrears, company insolvencies, and commercial real estate (CRE) vacancy rates remain contained. Meanwhile, the quantity and quality of Australia bank capital has continued to improve and bank liquidity has been resilient.

Australia labor market shortage is easing rapidly but is unlikely to convince the RBA to join the global easing cycle in the near-term. Job vacancies decreased by -5.2% in the three months to August following a -3.5% decline the previous period. The level of job vacancies and the vacancies-to-unemployment ratio are near three-year lows but still well above their pre-pandemic February 2020 levels. We expect the RBA to cut the cash rate target by year-year because Australia underlying economic activity is weak and points to lower inflation pressures. RBA cash rate futures price-in about 70% odds of a 25 bp cut by December.

Banco de Mexico meets today and is expected to cut rates 25 bp to 10.50% (8:00pm London). At the last meeting August 8, Banco de Mexico restarted the easing cycle with a 25 bp cut to 10.75%. The vote was 3-2, with the dissents in favor of steady rates. However, the bank believed that the inflation outlook would allow the discussion of more rate cuts. Annual headline CPI inflation (4.99% in August) is tracking a little below the bank’s Q3 forecast (5.2%) while core CPI inflation matched the bank’s Q3 forecast of 4.00% in August. The swaps market is pricing in 75 bp of easing over the next three months and 250 bp of total easing over next 12 months.