Morning Bid: China Rate Cuts Looming, US Booming

By Jamie McGeever

The start of the trading week in Asia arrives with a strong global economic outlook, mainly driven by robust performances in U.S. stock markets. However, local sentiment is more cautious due to ongoing worries regarding China's challenging economic landscape.

Analysts anticipate that the People's Bank of China will introduce cuts to its loan prime rates on Monday. This decision is part of a broader strategy to provide monetary, fiscal, and liquidity support amid struggles in the property sector and efforts to stimulate growth and tackle deflation.

PBOC Governor Pan Gongsheng indicated at a recent financial forum that they expect to lower the LPR by 20 to 25 basis points, as reported by Xinhua News Agency. In addition, on Friday, the PBOC disclosed plans to inject over $100 billion into China’s stock market, which resulted in a 3.6% surge in Shanghai's blue-chip equity index, marking its best performance since late September.

The economic data released on Friday from China surpassed many analysts' more pessimistic predictions, reporting an annual GDP growth of 4.6% for the third quarter, which was slightly above expectations. However, economist Phil Suttle pointed out that the past two quarters have shown unusually weak performance, yielding a seasonally-adjusted growth rate of 2.75%—the weakest in recent history, outside of the disruptions caused by COVID-19 lockdowns.

With this backdrop, Beijing has escalated its intervention efforts. Stock markets reacted positively to the news, though bond yields are on another downward trend. Initially, yields rose on hopes that these supportive measures, which include significant bond issuance, would drive economic recovery. However, the yield on 10-year bonds is close to the 2.00% mark once more.

The ongoing tensions surrounding U.S.-Sino trade have re-entered the spotlight. Following statements from Republican presidential candidate Donald Trump about potentially imposing tariffs of "150% to 200%" on China in reaction to any aggressive move towards Taiwan, investor anxiety has increased.

Meanwhile, the U.S. economy shows continuous strength. Economic reports are consistently exceeding expectations, with GDP growth anticipated to stay above 3% and many major companies reporting strong earnings. Wall Street remains on an upward trajectory, reaching new record highs.

Nonetheless, some analysts suggest that this fervent optimism might be overstated. Analysts from Raymond James have commented that current options and technical indicators might be hinting at a market that is due for consolidation or could face a short-term pullback.

Globally, financial conditions are easing as central banks decrease interest rates and stock markets rise. Therefore, Asian investors will closely monitor the U.S. dollar, which has rebounded recently and is currently at its highest level in three months.

The previous edition of the Morning Bid Asia newsletter mistakenly noted that Malaysia would release its GDP data on Friday, which is instead set for Monday, October 21.

Key Developments to Watch

Several significant events may influence market direction on Monday:

• Announcement of China's loan prime rate
• Malaysia’s GDP report for Q3
• Speech by Andrew Hauser, Deputy Governor of the Reserve Bank of Australia

China, US, Economy