China announces broad monetary stimulus

In focus today

In Germany, we receive the Ifo growth indicator for September. In August, the assessment of the business situation declined to the lowest level since Covid. We expect another benign print as the German economy continues to struggle with weak activity in the manufacturing sector.

In the afternoon, we expect the Central Bank of Hungary to cut the policy rate by 25bp to 6.50%.

Economic and market news

In China, PBOC and financial regulators this morning unveiled a batch of new stimulus to lift the economy keeping aim at the 5% growth target for this year. At a rare economic briefing today, they announced reductions in both the policy rates as well as the Reserve Requirement Ratios, the first time these have been lowered on the same day. They also took new steps to support the housing market by lowering the requirement for down payment for second time buyers from 25% to 15%. And they announced that funds and brokers can tap PBOC to buy stocks. The measures were bigger than expected and gave a big lift to Chinese stocks, which are up close to 4% in the offshore market. Metal prices also saw a decent lift. This is, in our view, still not the big bazooka needed to finally turn things around. But it may be supplemented with fiscal policy measures and should at least give a short-term lift to Chinese growth. It is probably coming too late, though, for the government to reach its' 5% target. We expect 4.8% growth this year.

Euro area PMIs disappointed markets as both manufacturing and services declined more than expected, resulting in a composite figure that now suggests a contraction at 48.9 (cons: 50.5). The data suggested a softening labour market, likely driven by layoffs in a (very weak) German manufacturing, but also declining price pressure across all subcomponents. Note that French services had a large negative contribution which we attribute to a one-time post-Olympics' effect. Market reaction was for a weaker EUR while markets raised the probability of an October cut from the ECB to about 40%.

US PMIs were more in line with consensus as the composite PMI continued to signal solid growth, especially in services, though there were solid upticks in input prices. Manufacturing appeared much gloomier with firms reporting shrinking order books and growing inventories. On balance, the market reaction was to push up yields slightly with the 10Y treasury up some 5bps during the day.

Equities: Global equities were higher yesterday despite what could be described as less impressive macroeconomic numbers. This was accompanied by a slight cyclical outperformance and another day of higher yields at the long end. Please note the US 10-year yield has increased every single day since the Federal Reserve meeting last week. Yesterday, we observed a modest value outperformance, but more notably, small caps underperformed as yields continued to rise. In the US yesterday, the Dow was up +0.2%, the S&P 500 increased by +0.3%, the Nasdaq rose by +0.1%, and the Russell 2000 decreased by -0.3%. This morning, China unveiled significant fiscal and monetary loosening measures, somewhat akin to launching a little bazooka. These measures are primarily aimed at the property market but are also directly boosting equity markets. It is no surprise to see Chinese stocks reacting positively to the coordinated stimulus, with most neighbouring stock markets also showing gains this morning. European futures are up, while US futures are lower this morning.

FI: European yields tumbled yesterday on weaker than expected PMIs from France and Germany. While the French services PMI was below 50 (as expected, due to the construction of PMIs), a general weakness was observed in the PMIs, not least the employment section. Curves steepened from the front end, with 2s10s German yield spread dis-inverted now standing at 2bp. It is the first positive slope since 2022.

FX: This morning, Chinese authorities announced stimulus measures to try to prop up the economy. Asian stock markets reacted positively, notably Hang Seng rose more than 3%. The announcement sent USD/CNY toward 7.03. The EUR came under pressure vs its G10 peers after soft euro area PMI data. EUR/USD is just above 1.11 and EUR/GBP prints multi-year lows as it approaches 0.83. EUR/SEK moves toward the lower end of the 11.30-11.40 range while the recent positive NOK trend has brought EUR/NOK closer to 11.60. Muted reaction in the AUD immediately after RBA leaves rates unchanged at 4.35%.