Super Central Bank Week: Global Monetary Policy Enters a New Phase
On the evening of August 2, the U.S. non-farm payrolls data showed a sharper-than-expected decline, and the unemployment rate unexpectedly rose to 4.3%, setting the tone for global capital markets. Last week, global capital markets were in a state of fluctuating decline, with significant drops outside the U.S., notably with the Japanese stock market entering a technical bear market. During the peak of this rally, there was indeed a frenzy of calls to buy the Nasdaq. A month ago, we anticipated that this trend would be unsustainable and a significant correction was imminent. The bad news on Friday confirmed our view, shifting the market sentiment from “bad news is good news” to “bad news is bad news.”
By asset class, the previously booming tech stocks may see a period of adjustment, while manufacturing, buoyed by rate cuts, is likely to remain stable. The rise in tech stocks is still driven by profitability, but as tech companies expand their capital expenditure battles, quarterly reports have shown signs of weakness. The next surge in tech stocks may require tangible demonstrations of profitability, such as the launch of innovative products like AI smartphones, AI personal computers, humanoid robots, and RobotTaxis.
This week, being a super week for global central banks, the capital markets are highly volatile. Following the release of U.S. unemployment data, the global monetary cycle may accelerate to the next stage. This week, the Bank of England is expected to cut rates, Japan to raise rates, and the U.S. to hold steady, but a 25 basis points rate cut by the Fed in September is almost certain. If the U.S. enters an accelerated rate-cutting phase, other major economies will likely follow suit. Consequently, the bond market could become a relatively favorable asset. From the perspective of the four major global assets, a bond bull market is likely on the horizon.
Japan’s rate hike and reduction in asset purchase scale this week suggest that the Bank of Japan believes its monetary policy has entered a new phase. However, this has triggered panic in the capital markets, with the yen appreciating sharply and stocks plummeting. This wealth effect may counteract Japanese residents’ positive expectations for income and consumption, adding pressure to Japan’s future monetary policy. If the U.S. accelerates rate cuts, the yen’s appreciation could be even greater, causing a more significant decline in the stock market. Therefore, the entire Asia-Pacific foreign exchange market may pose challenges for central banks in the region.
Before the Fed’s September FOMC meeting, there are two CPI reports and one unemployment report. The market is already pricing in a 50 basis points rate cut. We need to closely monitor these reports. Additionally, the U.S. election dynamics between Harris and Trump introduce another layer of uncertainty, which could depress asset prices. We believe that bonds and gold are the two best assets moving forward. The Fed’s rate cut in September is likely to be between 25 and 50 basis points, with Powell’s cautious approach suggesting a preference for 25 basis points.
China's Macro Policy: Fiscal and Monetary Tools in Action
In China, the bond bull market continues, with the ten-year government bond yield approaching 2.0%. The stock market remains volatile, still waiting for some news. The July PMI missed expectations, and the Caixin PMI fell below 50 for the first time in several months, indicating that the market’s response to China’s current macro-control measures is not very sensitive. This gradual macro-control lags behind market expectations, as evidenced in the bond market. The central political bureau’s stance is to strengthen macro policies and make good use of fiscal tools, avoiding “involution” competition. This new term refers to the intense price wars in the e-commerce and automotive markets, raising questions about whether this indicates market failure.
Prices should reflect the overall supply and demand conditions to be reasonable. However, if declining prices lead consumers to expect further declines and reduce their purchases, this could be a transmission path for market failure. This effect may also be influenced by residents’ income expectations and the inventory status of consumer goods in the market. Currently, China’s inventory levels are not high, and “involution” competition may have limited impact on macroeconomic contraction. Nonetheless, the central political bureau’s statements could stabilize market sentiment, and whether commodity prices will continue to fall remains to be seen.
This week, the Ministry of Finance and the central bank also held a semi-annual meeting, clearly stating the need to intensify macroeconomic policy regulation. On the monetary side, major commercial banks have significantly lowered deposit rates this week, paving the way for future rate cuts. However, the room for monetary policy is relatively limited, as market interest rates are far below policy rates, and the effectiveness of price-based monetary policy may be limited. Previously, there were concerns that the issuance of special government bonds might lead to rising asset prices and a shortage of money, providing an opportunity for the central bank to purchase government bonds. However, this opportunity no longer seems to exist. The large-scale issuance of government bonds by the Ministry of Finance has not raised bond yields; instead, yields have continued to decline. The next step might involve considering how quantitative monetary policy can be more effective, potentially boosting capital markets.
On the fiscal side, a significant portion of special government bonds has been allocated for equipment renewal and trade-in programs, signaling future subsidies in these areas. There are rumors that the Ministry of Finance may increase the issuance of special government bonds, but the challenge lies in their utilization. We have previously suggested that resolving real estate issues might force the fiscal system to acquire real estate, which could be a good direction if a substantial portion of these funds is used for central real estate reserves. Additionally, investment and consumption are key areas, with automotive consumption being particularly well-utilized. Although there is some experience and international practice in the catering sector, its potential is currently limited. There is also the possibility of supplementing the national social security fund, thereby reducing personal labor income tax temporarily and distributing funds to the public in this way. In 2008, the central government’s 4 trillion yuan stimulus had an immediate effect when combined with tens of trillions from local governments. Now, local governments lack the funds to cooperate, with only a few trillion entering the investment sector, yielding minimal results. Today’s few trillion is not what it used to be, suggesting that a ten-trillion-yuan fiscal policy might be necessary to restore confidence. The exchange rate environment is favorable; it all depends on the central government’s decision.