Today’s market promises to be one of those nice global central bank-driven rallies that we have become accustomed to seeing in recent years. The Chinese central bank is the main driver today, though positive commentary from Mario Draghi is also adding to bullish sentiment.
The People’s Bank of China has finally jumped onto the easy monetary policy bandwagon, by announcing a surprising rate cut to given the economy’s growth momentum a nudge. In this first rate in more than two years, the PBoC lowered the rate on one-year loans by 0.4% to 5.6% and the deposit rate by 0.25% to 2.75%. The country’s persistently soft economic readings in a backdrop of decelerating inflationary trends appear to have prompted the central bank to play its part in strengthening the growth momentum. The recent aggressive moves by the Bank of Japan and its impact on the country’s exchange rate had started weighing on the Chinese export sector’s competitive positioning.
The strong reaction from the commodity markets, particularly oil and copper, indicates that investors see the move as having a direct beneficial impact on the country’s growth trajectory. Growth momentum has been faltering lately, with Q3’s +7.3% GDP growth the lowest in more than 5 years and many starting to get ready for the country to miss its annual growth target of +7.5% as well. The country’s authorities emphasized that they didn’t envision starting a more aggressive policy posture. That said, this surprise announcement will help shape expectations for the country’s monetary policy even if it doesn’t have an immediate impact on the economy given the customary lag.
[See: China Manufacturing PMI and Output Back in Contraction]
It is debatable whether China needs aggressive monetary policy changes or not, but there is no question that the Euro-Zone needs extraordinary monetary policy measures. The market has been expecting the European Central Bank (ECB) to start doing what the U.S. Fed recently completely and what the Bank of Japan doubled down on. But the ECB has been a lot of talk and not much action. In comments today, Mario Draghi apparently reiterated his resolve to make a move on that front if inflation doesn’t start moving up. But I am not sure why investors will take his today’s comments any more seriously than all his previous ones; he hasn’t really don’t much.
Irrespective of how credibly we should take Mario Draghi’s latest comments, today’s market action will be another example of a central bank-driven market rally. The don’t-fight-the-Fed refrain is even more applicable to the apparently global central bank cartel.
