by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with disappointment over the Chinese government’s failure to announce more economic stimulus, which has created extreme volatility in Chinese markets. We next review several other international and US developments with the potential to affect the financial markets today, including new Chinese tariffs on European brandy and a statement by the New York FRB leader that suggests US interest rates may continue to fall at a slower pace than some investors expect.

China: At a highly anticipated news conference earlier today, the chief of the National Development and Reform Commission failed to announce the kind of big, new economic stimulus measures investors expected. Instead, he merely summarized the thrust of existing plans, such as issuing more special government bonds to finance targeted sectors and repeated assurances that Chinese economic growth this year will achieve the government’s target of about 5.0%.

• After weeks of new stimulus measures being announced on an almost daily basis, the NDRC announcement was a splash of cold water for investors.
• Chinese equity prices whipsawed throughout the day. At first, prices surged as investors got their first chance to buy following a week-long holiday. Then, however, prices pulled back sharply as investors understood that the package of stimulus measures may not go beyond what has already been announced.
• By day’s end, Chinese stock indexes still posted strong gains, but the increases were only about half as big as their intraday jump. Hong Kong stock indexes plunged more than 9% since that market wasn’t closed for the long holiday and therefore already reflected optimism over the previously announced stimulus measures.
• The lack of new stimulus measures also has implications for the global economy, especially in terms of commodity demand. For example, copper prices, so far today, have fallen 1.9% to $9,758 per ton and aluminum prices are down 2.5% to $2,586.50 per ton. Oil prices are also lower, with WTI down 2.1% to $75.38 per barrel and Brent down 2.2% to $79.20 per barrel.

China-European Union: In retaliation for the EU’s vote on Friday to impose big antidumping tariffs against Chinese electric vehicles, Beijing today said it will impose tariffs against EU brandy. The announcement has already pushed the stock prices of major European distillers and luxury goods producers sharply lower today. More broadly, the Chinese action is being seen as perhaps just the first shot in an EU-China trade war.

• With Chinese economic growth in the doldrums and the government reluctant to offer further stimulus measures, Beijing is leaning heavily on new factory investment and export promotion to goose growth.
• In turn, surging Chinese exports have generated pushback from the US, the EU, and even many emerging countries that fear their domestic industries will be hurt by an onslaught of cheap Chinese goods.

United Kingdom: New data shows that the UK’s population grew to 68.3 million as of mid-2023. The figure was up 1% from mid-2022, marking the country’s fastest population growth since 1971. Notably, however, the number of births was slightly lower than the number of deaths, meaning the entire population increase came from immigration, despite the public’s desire to clamp down on new arrivals and government efforts to restrict them.

• Going forward, the UK’s plunging birth rates mean that population growth will probably continue to depend on migration.
• That will likely create tricky political problems for the government as it tries to maintain economic growth while also responding to popular demands for less immigration.

Mexico: The administration of newly inaugurated President Sheinbaum has reportedly asked major manufacturers to identify foreign-made parts and subcomponents that could be made in Mexico. The government is reportedly focusing on inputs from China that could be made at home to make Mexico’s supply chain more resilient. The government probably also fears that US animosity toward Chinese content could put Mexican sales north of the border at risk.

• The Mexican initiative illustrates how the fracturing of the world into different geopolitical and economic blocs is shortening supply chains.
• The initiative could also address a broader, long-standing problem with Mexico’s economic development. Since the maquiladora system of doing final assembly of US-bound goods at factories close to the border has traditionally relied heavily on parts and subcomponents from abroad, Mexico has a relatively underdeveloped base of parts manufacturers. The Sheinbaum initiative could conceivably lead the government to take steps to build out the country’s supplier base and create more factory jobs.

US Weather: As noted in our Weather section later in this report, Hurricane Milton is traveling northeasterly across the Gulf of Mexico today and is expected to slam into the Florida coast on Thursday. The strong storm is expected to cause extensive damage from wind and flooding and potentially noticeable economic disruptions in the near term. Insured losses are likely to be high.

US Politics: Intelligence officials yesterday warned that China, Russia, and other authoritarian countries intend to unleash covert disinformation campaigns after the November election to undermine US citizens’ faith in the outcome. According to the officials, the covert influence campaigns will be designed to amplify citizens’ own concerns about election integrity and manufacture entirely false narratives about the electoral results. The announcement is a reminder that electoral uncertainty and anger could continue even after the balloting finishes.

US Monetary Policy: In an interview with the Financial Times, New York FRB President Williams said the “very good” jobs report for September confirms that the US economy remains healthy even as inflation eases. According to Williams, that has left the Fed “well positioned” to achieve a soft landing if it pursues something like the two 25-basis point interest-rate cuts before the end of the year implied in the Fed’s latest dot-plot economic projections. The statement suggests Williams is looking for only moderate rate cuts going forward.

US Inflation: Managers of the popular lottery game Mega Millions said they will raise the price of a ticket to $5 in April, compared with $2 today. That will mark the game’s first price hike since 2017, but the managers said the increased ticket price will allow bigger jackpots and improved odds.

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