Morning Bid: Looming Rate Cuts in China, Booming US Economy

By Jamie McGeever

(Reuters) - As the trading week begins in Asia, markets are opening amidst a generally optimistic global sentiment, propelled by strong performance in U.S. stocks. However, the local atmosphere remains cautious due to persistent uncertainties regarding China's significant economic challenges.

The People's Bank of China (PBOC) is anticipated to announce a reduction in its loan prime rates on Monday. This decision is part of a broader effort by Beijing to provide monetary, fiscal, and liquidity support aimed at stabilizing its struggling property sector, rejuvenating economic growth, and combating deflation.

During a financial forum in Beijing on Friday, PBOC Governor Pan Gongsheng indicated that the loan prime rate would likely decrease by 20 to 25 basis points. This information was sourced from the official Xinhua news agency.

In conjunction with this, the PBOC introduced new measures to infuse over $100 billion into China's stock market. This initiative led to a remarkable 3.6% increase in Shanghai's blue-chip index, marking its best performance since September 26 with a daily gain of 1.6%.

While China's recent economic "data dump" was not as alarming as some had projected, the year-on-year GDP growth for the third quarter did surpass expectations, landing at 4.6%. However, as pointed out by economist Phil Suttle, the previous two quarters displayed notably weak performance, achieving just 2.75% growth on a seasonally-adjusted annualized basis, marking "the weakest two-quarter growth rate in modern times" outside of the COVID-era shutdowns. Such figures highlight the need for swift action from Beijing.

Markets have reacted favorably to these developments, but bond yields are also experiencing a decline. Initial hopes that the support measures, which include significant bond issuance, would stimulate the economy caused yields to spike. Still, the 10-year yield is now approaching 2.00% once more.

Investor focus has shifted back to U.S.-China trade tensions. Recent remarks from Republican presidential candidate Donald Trump suggested the possibility of imposing tariffs between 150% and 200% on China if it were to escalate its military activities towards Taiwan, as reported by the Wall Street Journal on Friday.

Meanwhile, the U.S. economy continues to show robust momentum, with economic data consistently exceeding expectations. GDP growth is projected to be well above 3%, corporate earnings appear strong, and Wall Street is reaching new heights. Yet, analysts from Raymond James caution that this bullish sentiment might be overly optimistic. They note that technical indicators and short-term options are becoming skewed, hinting that the market may be due for a consolidation phase or a potential near-term pullback.

Globally, financial conditions are easing as central banks implement rate cuts and stock markets trend upward. Investors in Asia will be particularly vigilant regarding the U.S. dollar, which has recently rebounded to a three-month high.

It’s worth noting a minor error in Friday's Morning Bid Asia newsletter, which incorrectly stated that Malaysia would release GDP data that day. Malaysia's preliminary GDP figures will instead be announced on Monday, October 21.

Key Developments to Watch

Investors should keep an eye on the following key events that could influence market directions on Monday:

• China’s announcement regarding the loan prime rate
• Malaysia’s GDP for Q3
• Speech by Andrew Hauser, deputy governor of the Reserve Bank of Australia

China, US, Economy