Glass half-empty or half-full "REVISITED" : More Chinese easing.......

Monday 26th October 2015

 Glass half-empty or half-full "REVISITED"  :  More Chinese easing.......

Ref : General

On Friday the Chinese authorities cut rates by 25 basis points and reduced the reserve-requirement ratio for lenders by 50bp in the latest stimulus package designed to help economic growth and support markets (this was the 6th rate cut this year).

Global equity and bond markets reacted positively on Friday to the news as one would normally expect, though there's little follow-through this morning. That may just be a function of the fact that although the timing of the moves may have come as something of a surprise, action was expected sooner or later and therefore the market effects were to a large degree already priced in. It may also have something to do with a less upbeat take on the measures in certain quarters.

It's always fascinating to hear equally erudite talking heads taking entirely contrasting views about the same event or development. There are plenty around this morning who see the latest rate cut as evidence of China's determination to do what it takes to achieve something at least close to its stated growth target of around 7.0% (official figures released last week put China's Q3 GDP at 6.9%). Others however see the repeated easing measures as tacit admission that the economy is not performing to expectations despite what the official data may say. These would be the same people who believe that the true numbers for China's GDP would be a fair bit lower than those put out by the authorities, by several percentage points according to the more extreme dissenters. The jury is still out as to how inflated official figures might be ..... if they're inflated at all, that is. We heard last week of two respected Asia investors who believe that the switch from a manufacturing-based economy to a consumer-led one means that areas of activity are so far not being included in the data. Not the majority view for sure, but like we said ..... it's interesting how analysts can look at the same conundrum and come out with very different conclusions. To repeat the old cliché, that's what makes a market....

Something else that there's some disagreement about is how much effect the decisions of other central banks will have on the US Federal Reserve. Apart from China, the Bank of Japan (meeting this week) are thought likely to instigate yet more easing at some point, and the European Central Bank have made pretty plain their readiness to extend and/or expand its QE programme, probably in December. So what about the Fed ?

The Fed are actually meeting on Wednesday but any change in policy this week would be a massive shock, and not just because of the rather unconvincing reason that there's no press conference scheduled afterwards. Currently, the probability of a hike in December as defined by futures markets is about 36%, and just over 50% for a move by the end of the March meeting though it has to be said that economists are a bit more hawkish. The question is, if everyone else is easing (apart from the Bank of England), how likely is a Fed hike?

There's little doubt that raising US rates in this scenario would be unusual, to say the least. Not the least problem associated with it would be the unwelcome strength it would impart to an already strong dollar, and the knock-on effects that might have to  emerging markets. On the other hand, the argument goes, if (and it's a big if) easing measures elsewhere are successful in stabilising conditions and squashing volatility, those would be the exact conditions that the Fed has been waiting for in order to raise rates without risking another bout of global turmoil.

As ever, you pay your money, you take your choice......