China Intervenes to Support Stocks

For the week ending 9 February 2024

As of midday Friday, global equities were in record territory. For the week, the yield on the US 10-year Treasury note rose 0.16% to 4.16% while the price of a barrel of West Texas Intermediate crude oil rose $4.25 to $76.40. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 12.9 from 13.9 a week ago. 

MACRO NEWS

China ups market stabilization efforts

China took additional steps to shore up investor confidence this week, including replacing the head of the country’s securities regulator and intervening directly in equity markets via state asset managers. After domestic equity markets ended last week at their lowest level in five years, authorities announced that sovereign funds will increase their ETF holdings. After falling 6.3% in January, the CSI 300 index rose 5.8% this week.

Powell sees fewer cuts than market

US Federal Reserve Chair Jerome Powell told 60 Minutes on Sunday that the central bank is unlikely to reach the level of confidence that inflation is headed sustainably to its 2% target in time for its March meeting. He said he expects the Fed will cut about three times this year, consistent with the December Summary of Economic Projections. The market has dialed back its rate cut expectations but still has almost five quarter-point cuts priced by the end of the year, down from nearly seven a month ago. Newswires were awash in Fedspeak this week, with most officials suggesting the central bank is in no hurry to adjust policy.

CBO projects rising debt ratio

The US Congressional Budget office projects that if the laws presently on the books remain unchanged, the nation’s debt/GDP ratio will rise to 116% in 2034 from 99% in 2024. Annual deficits are forecast to rise from $1.6 to $2.6 trillion over the coming decade due to higher spending on interest and social services. The CBO projects a 5.6%-of-GDP federal budget deficit for 2024.

QUICK HITS

The giant US services sector rebounded in in January, according to the Institute for Supply Management’s nonmanufacturing index. The index rose to 53.4 in January from 50.5 in December, with the new orders subindex rising to 55 from 52.8. However, a jump in the prices-paid index to 64 from 56.7 was somewhat worrying. In the eurozone, the services sector remained underwater while the index in the United Kingdom saw an uptick to 54.3 from 53.4.

The Fed’s quarterly Senior Loan Officers Opinion Survey was released this week and showed that the tightening of credit conditions moderated compared with the October survey with just 14.5% of banks reporting tighter lending standards for commercial and industrial loans to large/medium firms, down from 33.9% three months ago and 18.6% for small firms, down from 30.4%. Tightening in lending for mortgage and commercial real estate loans moderated as well.

Bank of Canada Governor Tiff Macklem said Tuesday that progress toward the BoC’s 2% inflation target is likely to slow. Policymakers would like to see downward momentum on underlying inflation before considering rate cuts. Macklem expects growth in Canada to remain stalled until mid-2024.

The US Treasury auctioned $121 billion in three- and ten-year notes and 30-year bonds this week; the latter two maturities were record-setting in size. All three issues were well received by the market.

Bank of Japan Governor Kazuo Ueda said financial conditions in Japan are likely to remain easy even after the BOJ ends its negative interest rate policy, suggesting a rapid tightening cycle is unlikely.

Testifying on Capitol Hill, US Secretary of the Treasury Janet Yellen said that she has concerns about commercial real estate but that regulators are working to ensure loan loss reserves and liquidity levels are adequate to cope with the stress. Richmond Federal Reserve Bank President Thomas Barkin said Thursday that the commercial real estate problems of regional banks won’t be enough to get the Fed to cut rates early.

European Central Bank Chief Economist Philip Lane said Thursday that the disinflationary trend in the eurozone is accelerating but that the ECB must balance the risk of overtightening with that of moving too soon to lower rates. Like the Fed, Lane said the ECB needs to see further disinflation to be sure that inflation readings are on a path to the central bank’s 2% target.

Deflation in China worsened in January as consumer prices fell 0.8% year over year and producer prices dropped 2.5%.

Industrial production in Germany declined for a seventh-straight month in December, falling 1.6% from the month before.

Total household debt in the United States grew about 1% in the fourth quarter of 2023, to a record $17.5 trillion, the New York Fed reported Tuesday. Fed researchers found that “with the pandemic policy supports in the rearview mirror, delinquency rates for most credit types have been rising after having reached very low levels during 2021. . . . The increasing transition rates merit monitoring in the months ahead, particularly with the amplified distress shown by borrowers in lower-income areas.“

The S&P 500 Index closed at a record high Thursday, surpassing the 5,000 level Thursday afternoon. The Nasdaq 100 and MSCI World Index also closed at a record high Thursday while Germany’s Dax Index hit a new high on Tuesday.

The Canadian economy added 37,300 jobs in January as the unemployment rate fell 0.1% to 5.7%.

Annual revisions to the US Consumer Price Index were released on Friday. While the adjustments were modest overall, the month-over-month reading for December was revised to 0.2% from 0.3%.

A special council found that while US President Joe Biden was careless in his handling of classified materials after his term as vice president ended, his actions did not merit criminal charges.

The Reserve Bank of Australia held rates steady this week at 4.35% but said future rate hikes cannot be ruled out. 

EARNINGS NEWS

With just 67% of the constituents of the S&P 500 Index having reported for Q4 2023, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings rose 2.75% compared with the same quarter a year ago, according to data from FactSet. Sales growth is up 3.8% year over year.