Here comes the boom
By Peter Rosenstreich
The prospect of having central banks of the two largest economies at neutral or easing simultaneously will only be positive for equity markets. They continue to benefit from a dovish US Federal Reserve: the S&P 500 printed its best single-month returns singe 2015. Amongst EU-UK Brexit chaos, Fed Chairman Powell said he would shift into neutral, knocking volatility down. Positive corporate earnings reports are coming from tech and industrials, and today’s payroll report should bring additional good news. Now that the Fed has eased, the People’s Bank of China might be next. The PBoC and government have launched numerous stimuli over the past few months, focused on reducing financial costs, injecting liquidly and providing credit to private entities and SME. Should PBoC cut rates, the likelihood of an economic jump is high.
The failure of the PBoC to simulate credit increases the likelihood of a cut in benchmark lending rates. The market forecasts two 0.25% cuts in 2019, with the first coming as early as next week. China is bending to weak domestic demand and a soft external environment. China’s purchasing was slightly higher last month, but from a weak position. Underlying subcategories are discouraging. Any improvement in export orders can be rationalized by the front loading ahead of Lunar New Year. Weak domestic demand suggests a lack of credit to the private sector and elevated public debt.