Never underestimate the spendthrift US consumer, but what about the Chinese consumer?

The trading week in Asia kicks off cautiously despite the bullish sentiment riding high in global markets, thanks to a resilient U.S. stock market. While U.S. equities continue their ascent, fueled by firm economic data and the start of Q3 earnings season, Asian investors are firmly keeping one eye on China's deep-rooted economic challenges.

On Wall Street, the S&P 500 rose 0.9% last week, led by gains in utilities and financials. A solid retail sales report for September added fuel to the soft landing narrative, suggesting that the U.S. economy is cruising along without hitting the recessionary bumps many feared. The start of the Q3 earnings season also came with a tailwind, as earnings momentum is finally gaining traction after a post-pandemic slump and the early phase of the Fed’s tightening cycle. Now, companies are reaping the rewards of a robust U.S. economy, improved productivity, and a stable U.S. dollar. Analysts expect S&P 500 earnings to clock double-digit growth in Q3, particularly in sectors like tech, communication services, and health care. All this signals that markets aren’t just benefiting from valuation expansion but from accelerating earnings—a good omen for both Wall Street and the broader economy.

The lesson here? Never underestimate the spending power of the American consumer. Retail sales (excluding gas) jumped by a robust 2.7%, further reinforcing the notion that the U.S. consumer is still very much alive and kicking.

Meanwhile, in Asia, the People's Bank of China (PBOC) is expected to lower its loan prime rates on Monday—Beijing’s latest attempt to rescue its sputtering property sector and inject life into the economy. However, whether this will be enough to change the tide remains to be seen. China’s recent economic data has been lackluster but hasn’t reached full-blown crisis mode just yet. Q3 GDP growth came in at 4.6%, slightly above expectations, though industrial profits tumbled 17.8% in August, underscoring the ongoing struggles in China’s corporate sector.

There’s a palpable sense of skepticism surrounding Beijing’s recent “policy pivot,” which has left many market watchers unimpressed. Sure, the PBOC is expected to lower rates, and Governor Pan Gongsheng has already teased a 20 to 25 basis point cut, but the question remains: Will this be enough to jumpstart a sustainable recovery? On top of that, the PBOC has unveiled measures to pump over $100 billion into the stock market, temporarily lifting the Shanghai index. But whether these moves have staying power is another story altogether.

Despite these efforts, China’s housing market continues to loom large as a ticking time bomb. The problem isn’t just the volume of uncompleted homes, especially in lower-tier cities, but the fact that previous efforts to revitalize the market have largely fallen flat. Beijing has expanded its ‘white list’ of uncompleted projects eligible for bank support, but this program has yet to gain meaningful traction.

Some analysts have floated the idea of a fiscal stimulus package as high as CNY10 trillion—about 8% of 2023 GDP—but the odds of such a massive move seem slim. China’s leadership has shown a reluctance to hand out large-scale cash payments, and with a solid infrastructure pipeline already in place, Beijing appears wary of overextending itself.

China’s economy is still fragile, and turning the ship around will take more than a few rate cuts or short-term liquidity injections. The pressure on Beijing to deliver bolder fiscal reforms and more substantial stimulus measures is intensifying, but whether they’ll answer that call with the force needed remains to be seen.

For now, China’s economy continues to drift, with investors left to wonder when—if ever—the real turnaround will come. As the rest of the world looks on, China’s struggles serve as a reminder that some wounds can’t be healed with quick fixes. Reviving the once-mighty economic engine will take time and possibly far more fiscal firepower.

Nuts and bolts

The narrative on Wall Street and within the Federal Reserve is evolving at breakneck speed. What once looked like a looming hard landing for the U.S. labor market and economy in August has now done a complete 180. The softest of soft landings is being forecast for 2025—some even suggest we’re in a "no-landing" scenario. But hold onto your hats, because there's a growing risk of an acceleration in aggregate demand that could throw a wrench in the Fed's plans for rate cuts next year, potentially sidelining them prematurely if inflation pressures resurface. A lot hinges on the upcoming election and how federal spending and tax policies shake out.

The hard landing fears that dominated headlines started to fade when the September revisions to real personal disposable income growth came in hot, showing that U.S. consumers had stashed away far more savings than originally estimated. Then came the September payroll data, which showed not just solid job growth but an uptick in earnings, alongside a dip in the unemployment rate. These factors have painted a much rosier picture of consumer spending heading into the third quarter, reinforcing the view that the economy is gaining steam.

Stack on top of that the realized and projected Fed rate cuts, a year of robust corporate earnings, and record-high stock market levels, and the case for the bears is looking increasingly shaky. Arguing against continued growth is becoming more complex, with all signs pointing towards resilience.

However, it’s not all smooth sailing. The election is right around the corner, and its outcome could significantly impact fiscal policy, which in turn could shape economic trends in 2025. And while the foundation for growth looks rock solid, the specter of inflation remains lurking in the background. Investors will need to keep a close watch on how inflation evolves, as well as the potential for rising long-term interest rates—both of which could be the party crashers that derail this seemingly unstoppable momentum.