Perhaps knowing that any upside in China is a result of catch-up action, market participants in Asia are not overly keen to continue the rally we have seen during the past few sessions. As mentioned in my previous article, October is going to be an interesting month to watch. Interesting because there is going to be plenty of risk events littered throughout the month.
Tonight, we are going to have FOMC and ECB minutes, with the former to be closely watched for any language round the expected close debate on the unchanged rate decision.
The markets want to know just how keenly the discussions are on the subject of the timing of rate normalisation. Clearly, a close call will raise expectations that we may still see a rate hike by end of the year, although that seems increasingly unlikely, with the employment situation seemingly in a worse-than-expected shape.
Although the employment rate maintain at a low, the participation rate fell to the lowest in 38 years! Previously, the lack of inflationary pressure was the major hurdle restraining the Fed from raising rates. Now that incoming payrolls data coming in considerably weaker-than-anticipated, investors will have to rethink their assessment of the US labour market conditions. In particular, was the recent trend carpeting over the true picture of the jobs situation?
Signs of deterioration in the outlook for US growth have led to growing speculations that the US central bank may dust off its quantitative easing tools and unleash another round of bond buying, aka QE4. Already, the US treasuries are on a bit of an up move on all these QE chatter, with yields testing the 2% mark after the non-farm payrolls data. The US dollar was also lower by 0.9% since the start of October.
While none of the Fed officials have raised the topic of additional stimulus, Morgan Stanley has begun discussing the possibility, and recommended stocking up on medium-term treasuries. Apart from QE4 talks, negative interest rates have also came up as another possible easing measure. For now, they are just chatter, and incoming US data may dissuade the proponents.
Without risking sounding like a broken record, I maintain my view that October is almost impossible to be the time for lift-off, while December may still have a sliver of chance, if employment data rebound in October and November. Market pricing of a December move remained below 40%, at 37.4% as of 8 October, according to Bloomberg.
China’s fifth plenum
As the Chinese government stepped up fiscal stimulus in the fourth quarter, we may get more details on the authorities’ plans to boost the domestic economy while working on its reforms at the upcoming fifth plenum of the 18th Communist Party Congress.
The meeting is expected to take place in mid-October. The major themes are expected to revolve round the reform proposals and policy priorities. Of extremely great interest will also be the GDP growth target set out by the 13th five-year plan. Some analysts are expecting the number to be lowered to 6.5% per annum.
Nonetheless, I feel the government will still strive to reach the 7% target this year, although it seemed to be quite difficult at this point. The IMF projected China’s GDP to grow by 6.8% this year, slowing to 6.3% in 2016.
This suggests that fiscal policy should do most of the heavy lifting in Q4, as PBOC is likely to refrain from policy tweaks in order to maintain financial and exchange rate stability. Additionally, they won’t want to risk missing out on being included in the Special Drawing Right (SDR) basket because of a volatile yuan.
At the same time, the Communist Party might also elaborate on the SOE reform proposal. In mid-September, Xinhua noted that the central government released a set of guidelines for SOE reforms, including modernising SOEs, enhancing state assets management and promoting mixed ownership.
It’s worth reminding that the SOE reforms are essential to China’s long-term growth prospects, as they hold the key to improving the efficiency of capital allocation and reduction of debt. However, there are worries that the dismantling of ‘zombie’ SOEs or any consolidation will affect employment.
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