China’s economy has long faced headwinds. However, the recently announced massive stimulus measures appear to have provided the market with a boost, prompting international investors to turn their attention once again to China.
In recent weeks, interest rates have been rising significantly due to the stronger-than-expected labour market report in the USA. Central banks’ easing monetary policy has also impacted especially short-term interest rates. Normally, the yield curve slopes upwards, i.e. the longer the maturity, the higher the interest paid on the bond. Currently this is not the case, and yield curves are inverted, meaning short-term interest rates are higher than long-term rates due to the tighter monetary policy in 2022 and 2023.
The strong performance in the stock market has continued, albeit a little more calmly than before. The price of oil has remained moderate, and there are no significant changes in the price compared to, for example, the prices prevailing in the summer, despite the increased tension in the Middle East.
China’s economy has long lagged behind the rest of the world. However, China’s central government recently announced a massive stimulus package, which spurred China’s equity market to rise.
The stimulus measures include, in addition to the traditional expansionary monetary policy, reducing banks’ reserve requirement, direct consumer support and lower mortgage rates. The announced measures seem to largely focus on stimulating the housing market, which is in a cycle of falling prices.
After the stimulus began, international capital has also started to flow to China again. For example, almost all international investors have been strongly underweight on China in recent years.
In recent weeks, however, international investors have returned to the Chinese investment market. Local investors’ interest in the market also appears to have increased, with trading volumes rising and the market picking up. The emerging market stock index, which has been underperforming for a long time due to China’s negative impact, has also recovered in recent weeks, led by China.
The labour market report published in September in the USA was better than expected, and the labour market figures also indicate that the labour market is strengthening. In September, around 254,000 new jobs were created, which was clearly more than expected. At the same time, the unemployment rate fell to 4.1 per cent. Average hourly earnings also rose slightly more than expected, and annual average earnings increased 4.0 per cent.
Recently, the labour market has emerged as a central factor guiding the US central bank Fed's interest rate policy. A higher level of earnings in the labour market would result in higher inflation, which could put the brakes on the Fed’s willingness to ease monetary policy.
Lately, the US economy has often been estimated to show subtle signs of cooling off, for example, when the labour market weakens. However, the new labour market report indicates that the economy and labour market are not cooling off to the expected extent.
The European Central Bank’s (ECB) interest rate meeting on Thursday will be the most important market event of the week. The ECB is expected to continue along its rate-cut path initiated in June and lower its policy rate by a quarter-point. The interest rate cut is currently considered almost certain, and almost all players have already discounted the interest rate cut in their prices. No interest rate cut would be a negative surprise to the markets.
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