Rise and shine everyone.

We’re almost done with what has been a very exciting week. The Fed cut rates by 25bps yesterday, as expected. US Treasury Yields are giving up their gains at the long end, i.e., bond prices are rising again today.

We also received more details on China’s stimulus measures, and it would seem that they have released the first phase of what everyone has wanted - “the bazooka stimulus”.

Chinese Equities are selling off because some of the measures will be implemented in phases and most are directed more towards the local government debt. The market still wants direct measures that affect companies and consumption. (more on the measures below)

US Equities continue to be dominated by the Trump Trade, with S&P 500 futures crossing 6000 in the cash session yesterday. Equity Futures are somewhat muted today, as are commodity futures. The US Dollar is trading flat.

Fed Recap - What to look out for next

While Fed Chair Powell didn’t directly address much of the expected policy changes from the new administration, he did leave room for the possibility of adjustments to policy going forward.

Nothing was explicitly said about the next rate decision, but a seed of doubt was planted, and now there’s a reduced chance of a cut in December.

The only explicit thing he did say was that he was not going anywhere, until his term is over in May 2026.

When discussing the rise in long term interest rates, he attributed the increase more to the “remarkable” strength of the US economy, instead of an increase in inflation expectations. He seemed almost reluctant to acknowledge that inflation could still be a problem.

The things we need to watch over the next few weeks:

• Changes to inflation expectations

• Unemployment rate (the Household Survey)

• Further discussions from the Trump administration on future policies

China’s Bazooka Stimulus

China’s fiscal policy update outlined major upcoming measures as the country prepares for a more forceful fiscal approach in 2025.

The debt proposal includes a CNY6 trillion swap over three years (CNY2 trillion each year) aimed at addressing existing local government debt and a CNY10 trillion allocation to help local governments manage debt burdens. In 2024, the local government debt ceiling will be raised to CNY35.52 trillion.

Finance Minister Lan emphasized that the hidden debt swap will begin immediately, with the goal of reducing hidden debt from CNY14.3 trillion to CNY4.3 trillion over the swap period, potentially saving CNY600 billion in interest. Concurrently, new tax measures to support the property market will be introduced shortly, and efforts to accelerate bank recapitalization are underway. To curb excessive spending, the government plans to ban off-budget spending by local governments, particularly in regions with heavy debt burdens.

The government is committed to supporting these debt management efforts with additional fiscal space, taking advantage of a higher budget deficit if necessary. Lan also highlighted that CNY2.3 trillion in special bond funds remain available for the year, and a one-off quota for hidden debt swaps will soon be provided. Local governments are expected to manage their debts independently, though regulators will closely monitor repayment progress.

Looking ahead, the effects of these policies are expected to manifest by 2025, as China leverages available fiscal tools and borrowing capacity to address economic challenges and stabilize local debt.

Chart of the Day

From MUFG:

“a 60% tariff would REQUIRE a 10%-12% depreciation of CNY against the Dollar to offset the negative impact of tariffs, keeping everything else unchanged.

A potential less strong Dollar in medium term compared with 2018-2019 trade war time, makes the required 10%-12% CNY depreciation much more significant than it appears. During the US-China trade war period (March 2018-September 2019), CNY depreciated about 12% against the US Dollar, however that 12% CNY depreciation happened amid a 10% US Dollar’s appreciation, CNY’s depreciation wasn’t entirely driven by the tariffs.”

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)