Macro Minute: Week of October 7, 2024
This week I want to dig into markets again. I don’t know what to say other than it has been quite some time since we have had so many macroeconomic players acting to stimulate the global economy. Let me dig in a bit about the new Chinese stimulus that is being rolled out. My friend Chase Taylor did an excellent summary of the announced measures that I am going to pull from. China has announced each of these so far.
- Cut reserve requirement ratios by 50bps
- Cut policy rates (20bps and 30bps)
- Cut mortgage rates and help refi’s and down payments (on 2nd homes)
- Recapitalize banks (via bonds)
- Lighten property buying curbs
- Issue $284B in special sovereign bonds
- Pledged “necessary fiscal spending” but with no number attached
- Jump in M&A
- Jump in buyback announcements
- Swap facility for stocks (purchases/buybacks)
- Possible stabilization fund
- One-time allowances to disadvantaged people (no amount specified)
This is a major policy shift. I think they are able to start some much-needed stimulative policies because the Federal Reserve started easing. I won’t bore you with details, but because of currency pegs and interest rate differentials, the falling dollar from Fed easing allows China to be more aggressive.
The only major reason that I am still hearing to be bearish on markets is the election. I have written about this a lot and I think that it is not a major reason for market concern. Let me try and explain why. In the U.S. we have become super financialized. Because of that, we cannot stomach major market shocks. With the majority of retirement accounts now invested in equities and a large percentage of those being defined contribution plans, it is not in the interest of any politician to want policies that could lower economic growth. If the market drops, the average citizen feels it more than ever before and therefore it basically is not a policy choice that can be sustained.
Let me end with giving a broad look at the current environment. The Atlanta Fed’s GDPNow tool has the economy growing at 3.1%. This is a full percent above what the average has been from 2000-2023 at 2.1%. Above average growth currently. We have an ok jobs market. Even with the recent uptick in unemployment, we are still significantly below long-term averages with the current rate at 4.2%. One of the hardest-hit parts of the economy from the rate hikes has been housing. Mortgages are usually closely tied to the 10-year treasury, and historically mortgage rates range between 1%-2% over the 10-year treasury. Currently that spread is closer to 3%. Even if the 10-year treasury does not move much lower from here, the hope is that the mortgage market will move back into its historical range. If this occurs, it would provide additional relief for housing. Lastly, I would like to point out that inflation volatility has come way down and that it is in a range that is allowing for easier Federal Reserve policy.
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