This month, central banks surprised investors with a series of policy changes aimed at easing their previously restrictive stances. These measures are fostering bullish sentiment as it appears the Federal Reserve, European Central Bank, People’s Bank of China, and others are aligning toward a more accommodative policy approach to improve global growth prospects.
The Federal Open Market Committee kicked things off by lowering the Fed Funds Rate by half a percent on September 18th, despite one dissenting vote from Fed Governor Bowman, who preferred a smaller 25-basis point cut due to concerns about persistently high inflation. The consensus leading up to the decision was split between a quarter-point and a half-point reduction.
The larger-than-expected cut underscored the Fed's commitment to addressing fears of a hard landing and rising unemployment. Fed Chair Powell stated, “You can take today’s decision as a sign of our commitment not to get behind (the curve)…If the labor market were to weaken or inflation were to fall more quickly than expected, we are prepared to respond.”
Broad-Based Chinese Stimulus
Last week, on Tuesday, the People’s Bank of China announced a reduction of its seven-day reverse repo rate from 1.7% to 1.5%. It also lowered the required reserve ratio for banks by 0.5%, bringing it down to 6.5%. According to the Financial Times, this move will inject $142 billion in liquidity into the banking system for loans. Additionally, the down payment requirement for second-home buyers will be cut from 25% to 15%, and the bank announced 800 billion yuan ($113 billion) in liquidity support for the stock market.
The Shanghai Composite surged 4.2% following this news, with Chinese ADRs like Alibaba (up 7.9%), Li Auto (up 11.4%), and the iShares China Large-Cap ETF (up 9.8%) seeing significant gains. On Wednesday, the central bank further reduced its 1-year Medium-Term Lending Facility rate by 30 basis points to 2.0%.
By Thursday last week, fiscal policy measures were expanded, with the government announcing new stimulus projects aimed at boosting the economy to a 5% annual GDP growth rate. Plans included one-time cash handouts for residents in need, additional benefits for the unemployed, and the issuance of 2 trillion yuan ($284.43 billion) in bonds this year. The government also introduced a 24-point plan to prioritize employment.
The People’s Bank of China has been easing for some time, but it was last week’s steps that finally spurred a short squeeze. Goldman Sachs tracking of fund flows and trading saw the largest 1-day net buying of Chinese equities since March 2021 on September 24th, and it was the second largest in 10 years, almost entirely by long buying. The analyst at Goldman Sachs also noted that mutual fund equity allocations towards Chinese equities were at the lowest it has been in the past decade with hedge fund allocations also at a 5-year low.
The financial market response was nothing short of remarkable. The Shanghai Composite ended last week with a 12.8% gain, its best weekly performance since 2008. Several Chinese ADRs experienced significant gains, and cyclical sectors followed suit. The top-performing sector in the S&P 500 was materials (up 3.5%), while consumer discretionary, communication services, and industrials also saw gains ranging from 1.5% to 2.3%. Copper prices jumped 6.82% over the week. Oil initially spiked on Tuesday due to the stimulus news, concerns over Hurricane Helene, and escalating tensions between Israel and Hezbollah, but later declined after OPEC+ announced it would move forward with planned output increases in December. Chinese stimulus measures also had a positive impact on companies tied to Macau's gaming industry.
Central Banks in Unison
Regarding future rate cuts, the Fed’s Summary of Economic Projections (SEP) now predicts the federal funds rate to average 4.40% in 2024, down from 5.10% in June, and 3.40% in 2025, compared to the previous 4.10%. This signals that more modest cuts could be on the horizon as the year concludes. Last week’s inflation data for both the U.S. and Europe supports the potential for cuts at upcoming meetings, though there are still two months of key economic data—covering manufacturing, services, and employment—before the Fed meets again in November and December.
The European Central Bank (ECB) has already lowered its key rate twice in the past three months. ECB President Christine Lagarde emphasized that the bank has no predetermined path for interest rates and will, like the Fed, remain data-driven in its decisions. Analysts in Europe continue to downplay the region’s growth prospects with analysts at ABN Amro stating that “the eurozone recovery is in danger of stalling” last Friday. Their concerns are warranted given the number of people out of work in Germany was more than expected for September and confidence measures are falling with Nancy Lazar at Piper Sandler calling Germany the “sick man of the Eurozone”. However, with US bond yields falling faster than bund yields, the euro continues to be stable. If our long-term yields stabilize on economic growth prospects, that could change.
The Bank of England (BoE) is facing a tougher challenge with inflation. After peaking at 11.1% in October 2022, inflation has gradually declined, with the BoE expecting rates to settle at 2.4% by the end of 2024. At its last meeting, the BoE held its key rate steady at 5.0%, with only one out of nine policymakers voting for a cut.
In Canada, the central bank has made three 25-basis-point cuts since June, and forecasts suggest a potential 50-basis-point cut in December, followed by another in January, given the recent softness in economic data.
The Swiss National Bank also cut its key rate last week, reducing it to 1% from 1.25%, marking its third consecutive cut. The bank warned that further reductions might be necessary in the coming quarters, as policymakers aim to prevent the Swiss franc from becoming too strong against the euro. While the franc had lost some ground against the euro after the first cut, most of it has been recovered with a flight to safety.
Meanwhile, in China, rates have been on a downward trend for some time, but last week's policy plans, coupled with government-led growth initiatives, are being viewed as a pivotal moment for the Chinese economy. If these efforts successfully revive economic growth and stabilize the property market, future rate cuts may be less aggressive than last week’s discussed measures – which have not yet been implemented.
Market Momentum
In July and August, bullish momentum shifted away from the information technology and communications services sectors and moved into defensive sectors like healthcare, consumer staples, and utilities. At the same time, bond yields declined due to weak economic data and growing expectations for rate cuts. After the Fed’s rate cut, the bond market saw a typical “sell-the-news” reaction.
Time to Talk Tech
September began with a broad market pullback in the first week, as investors anticipated weaker performance given the historical trends for September and October. Job data also disappointed with not much of a rebound from the prior month’s decline – which was blamed on temporary weather. Additionally, negative reactions to Nvidia and Broadcom’s lighter-than-expected earnings guidance contributed to the selling pressure. However, I view these reactions as largely profit-taking, as the long-term prospects for both companies remain strong.
The second week of September, Nvidia’s CEO said demand for their Blackwell chip platform is “so great, and everybody wants to be first,” and later in the week he said the company is starting “full volume production.” These comments led to a big rally for the stock and for the sector.
Micron’s earnings announcement last week was yet another big win for the technology sector and supports bullish views. It said its high-bandwidth memory is fully sold out for 2024 and 2025. The company also said it sees positive sentiment for PC sales in the later half of 2025 and smartphone growth to continue through 2025. Despite volatility in technology stocks that kicked off the month, the sector was the second-best performer in September as of Friday the 27th, with the S&P 500 information technology sector up 7.3%, trailing only the consumer discretionary sector, which gained 9.1%.
New Undercurrents for Housing and Cyclical Stocks
I believe the recent central bank actions by the Federal Reserve and the People’s Bank of China have been two major catalysts driving investment in key sectors this month. Industries that were hurt by rising interest rates should find relief as rates have started to decline due to weak economic data and expectations of further cuts. Housing, a critical component of the economy, plays a significant role, influencing demand for appliances and electronics. The second major catalyst is the tie between the materials sector and China’s growth in addition to investment directly in Chinese companies as a result of stimulus discussion last week.
Housing Relief
Home Depot reached a new all-time high last week, with Oppenheimer highlighting "clearer skies ahead for home improvement" and upgrading Lowe’s as well. Morgan Stanley also upgraded Best Buy, labeling it a “value idea” based on expected sales growth come with an improving existing home sales situation. The SPDR Retail ETF below shows an ongoing consolidation for the index while the relative performance of the industry group versus the S&P 500 continues to be in decline. While it’s been a hot group in the later half of September, the trend is still sideways for the moment for this one.
Recent housing data revealed a 0.6% increase in pending home sales, while August housing starts surged by 9.6%. Mortgage refinancing activity is also on the rise. On Wednesday, the 25th, the MBA Mortgage Applications Index jumped 11% week over week, with refinance applications climbing 20%. There is growing optimism that a lower Fed Funds Rate could ease economic pressures and boost lending for housing and businesses. The Dow Jones US Furnishings Index, which had been consolidating for the past couple of years, closed last week at new weekly highs, signaling potential strength ahead. Its relative performance against the S&P 500 has also improved in recent months.
Despite these positive outlooks, analysts at Piper Sandler remain cautious, forecasting that a weak labor market, high consumer interest rates, and inflation’s erosion of excess savings from the Covid period could dampen retail spending. However, investors seem to be betting on avoiding a hard landing, as the S&P 500 consumer discretionary sector was the best performer in September.
China Stimulus Boosts Materials
China’s measures last week are being seen as a bazooka to stimulate growth back to 5% GDP with targeted moves to improve housing and employment. Last week, the financial market response was nothing short of remarkable. The Shanghai Composite ended the week with a 12.8% gain, its best weekly performance since 2008. Several Chinese ADRs experienced significant gains, and cyclical sectors followed suit. The top-performing sector in the S&P 500 for the week was materials, while consumer discretionary, communication services, and industrials also saw gains ranging from 1.5% to 2.3%.
Copper prices jumped 6.82% over the week with Freeport-McMoRan (FCX) up 15.9% for the week. Oil initially spiked on Tuesday due to the stimulus news, concerns over Hurricane Helene, and escalating tensions between Israel and Hezbollah, but later declined after OPEC+ announced it would move forward with planned output increases in December.
Chinese stimulus measures also had a positive impact on companies tied to Macau's gaming industry, bolstered by Morgan Stanley's upgrade of Wynn Resorts (WYNN) to a buy last week. Las Vegas Sands (LVS) and Wynn both rose more than 20% for the week. On the flip side, Morgan Stanley downgraded Ford, General Motors, and Rivian Automotive on concerns about Chinese competition in the EV market and on deteriorating credit quality in the US.
Conclusion
In conclusion, central banks around the world are adopting a more accommodative stance to spur economic growth and keep their currencies in check, with significant policy shifts from the Federal Reserve and the People’s Bank of China leading the way. These moves are providing a much-needed reprieve for industries previously hurt by rising rates, such as housing and retail. Optimism is building that these rate cuts will help avoid a hard landing for the global economy with central banks all easing in unison. Positive comments from Nvidia and Micron have maintained investor optimism in the technology sector, which helped the sector recover after a bad start to the month.
A small allocation to China by investors and hedge funds has caused Chinese stocks and Chinese ADRs to surge ending the month of September. Cyclical sectors have been underperforming over the past couple of months while the S&P 500 materials sector has been underperforming the S&P 500 for close to two years. It will be important to watch prices here to see if the performance gains over the past week are sustainable.
While challenges remain, such as weak labor markets and high consumer interest rates, the financial markets are reacting positively to the potential for sustained growth, particularly in sectors like consumer discretionary and housing. Investors are keenly watching how these developments unfold, especially considering China’s bold moves and the impact it had on basic materials.
In the month ahead for October, investors are running into major resistance for the Nasdaq Composite, which has yet to reach a 52-week high, while the S&P 500 and the Dow Industrial Average have already done so. Economic numbers will be in focus in the first week and then all eyes will turn to the earnings season kicking off on October 11th. Comments from technology giants this month were encouraging, but earnings will need to support the recent multiple expansion for the stock indices. The coming earnings season will be key as investors will either be proven right for discounting rate cuts and economic prospects or not.
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