China's Central Bank Brings the Stimulus, Ours Adds to the Confusion

Traders and investors will notice that Asian and European stocks are higher across the board this morning. As I write this note, U.S. equity index futures are trading higher as well, but there are still many hours until the opening bells ring down at 11 Wall St. and up at Times Square. The big winners on Tuesday morning were Chinese equities, as the Shanghai Composite soared 4.15% and the Hang Seng Index popped for a gain of 4.13%.

The People's Bank of China (PBOC), mainland China's central bank, cut its reserve ratio requirement on Tuesday morning to the lowest level since at least 2018. The central bank also announced plans to cut its main short-term interest rate. This is the first time that the PBOC made reductions to both of these measures on the same day since at least 2015. The fact that we are speaking of levels not seen since prior to the pandemic-era speaks volumes.

The central bank was not done there, however. The PBOC is cutting outstanding mortgage rates for individual borrowers / homeowners by half of one percentage point, while also reducing the minimum down payment on second home purchases from 25% to 15%. The PBOC will also increase its re-lending program for state-owned companies to acquire unsold real estate properties to 100% of principal for bank loans regarding these purchases from the current 60%.

This package is incredibly broad and muscular, as several banks had publicly doubted of late that China could reach its goal of 5% gross domestic product growth for the year. China did not just move to free up bank reserves and support its struggling real estate market, but also freed up the equivalent of $114 billion in equity market liquidity, while permitting funds and brokers to make use of PBOC facilities to buy equities. As much as this sounds and feels like Beijing's "big bazooka" that had been rumored these past couple of weeks on Wall Street, there is talk this morning that more may still be on the way.

... I am no fan of centrally planned anything. That said, we adapt ... we trade the environment provided, not the environment we hope for.

My thoughts? You all know that I am a free market capitalist, and that my thoughts on how to run a large economy and on the soundness of currency are more Austrian in origin than they are Keynesian. You all know that I am no fan of centrally planned anything. That said, we adapt, we improvise, we overcome. We trade the environment provided, not the environment we hope for. That's how we keep on keepin' on.

U.S. Markets: Treasuries, Equities

U.S. Treasury markets have been a little soft overnight. On Monday, the yield for the U.S. Ten Year Note backed up one basis point, rising to 3.75%. I now see that yield trading between 3.79% and 3.8%. I've seen similar action in the belly of the curve as I see the U.S. Two Year Note paying more than 3.61% this morning versus the 3.58% paid late Monday. T-Bills, so far, have held the gains made last week, as this is where the Fed intends to artificially pressure free market prices for short-term credit. Gold is off of its overnight highs but remains a whisker short of its all-time highs.

Equity markets were rather quiet on Monday as was expected. Trading volumes were quite elevated on Friday and the Monday and sometimes even the Tuesday following triple-witching expiration events or significant rebalancings are often simply days of digestion for funds and portfolio managers. On Friday, we had both the triple- witching event and the S&P index rebalancing.

On Monday, the S&P 500 gained 0.28% while the Nasdaq 100 gained 0.31%. Small to mid-cap stocks turned in a mixed performance as the S&P mid-cap 400 gained a relatively impressive 0.52%. But the S&P small-cap 600 gained just 0.05% and the Russell 2000 surrendered 0.34%. Among major to mid-major equity indexes, the Dow Transports were the day's outperformer, scoring a rise of 0.82% led by Alaska Air ALK and Matson MATX. The KBW Bank Index was the underperformer at -0.64%.

Breadth

Eight of the 11 S&P sector SPDR exchange-traded funds managed to close in the green on Monday, with Energy XLE, the Discretionaries XLY and the real estate investment trusts XLRE all gaining at least 1%. Health Care XLV led the losers, but only gave back 0.2%.

Winners beat losers on Monday by a rough 4 to 3 margin at both of New York's exchanges. Advancing volume took a 60.1% share of composite NYSE-listed trade and a 58.9% share of composite Nasdaq-listed activity. How meaningful was Monday's price discovery? Not very. Aggregate trade was cut more than in half for NYSE-listings on a day over day basis and nearly in half for Nasdaq-listings.

Flash PMIs

S&P Global published that service's September flash PMIs on Monday for both the U.S. Manufacturing and Service sector PMIs. What has become the norm continued on in September. The U.S. Services Flash printed at 55.4, slowing slightly from 55.7 in August, but a smidgen above the 55.3 expected. The U.S. Manufacturing Flash landed at 47.0, slowing rather sharply from 47.9 in August and well below the 48.6 that had been expected. There were some warnings in the material, which is released as one piece in composite fashion.

Future Sentiment...

"Optimism about output in the year ahead deteriorated sharply, the survey's future output index falling to its lowest levels since October 2022 and the second lowest seen this side of the pandemic."

Employment...

"Employment fell for a second month running in September and has now fallen in four of the past six months."

"Manufacturing payrolls were meanwhile cut at a pace not recorded since June 2020. Excluding the pandemic, the decline in factory jobs was the steepest since January 2010 as an increasing number of firms reported the need to reduce operating capacity in line with weak sales."

We heard from three Fed regional district presidents on Monday. Each had their own quirky but very different take on the current state of monetary policy.

"Almost" Thoughtful Reservation ... Atlanta Fed Pres. Raphael Bostic stated: "My residual concern about inflation might have led me to settle on a relatively small first move last week - say 25-basis points. But such a move would belie growing uncertainty about the trajectory of the labor market."

Bostic does vote on policy this year and that comes very close to what would have constituted a second dissent. Instead, Bostic let Bowman dangle out there by herself.

What Should I Say, Jerome?... Minneapolis Fed Pres. Neel Kashkari commented: "After 50-basis points, we're still in a net tight positive position so I was comfortable taking a larger first step. As we go forward, I expect, on balance, we will probably take smaller steps unless the data changes materially." Minneapolis does not vote in 2024 and will not vote in 2025.

Send in the Clown ... Chicago Fed Pres. Austan Goolsbee piped up: "As we gained confidence that we are on the path to 2%, it's appropriate to increase our focus on the other side of the Fed's mandate - to think about risks to employment. That likely means many more rate cuts over the next year." Chicago voted as an alternate in 2024 while Cleveland was in between presidents and Chicago will vote in 2025. Remember, this is the same knucklehead that called 2023 a "Hall of Fame" year for inflation.

On That Note...

Founder of Yardeni Research Ed Yardeni, who I like and has never seen a rally that he didn't like, showed some concern on Monday. Yardeni, in reference to the Fed's recently aggressive shift in policy for reasons the Fed failed to adequately explain, lifted his odds for an "outright melt-up" to 30% from 20%. Yardeni added "If they overheat the economy and create a bubble in the stock market, they're creating some issues."

Meanwhile ...

The latest Hedgeye CPI Nowcast model for inflation, without giving away their store because they are running a business (that I find quite helpful) over there, shows exactly what we have been talking about late 2024 into early 2025. Maybe Smokey Bear should tell Goolsbee that you stamp out a fire before you walk away, or in the case of the Fed, splash some kerosene around. Of course, devaluing the U.S. dollar is in the best interest of the most heavily indebted, is it not?

Economics (All Times Eastern)

08:55 a.m. - Redbook (Weekly): Last 4.6% y/y.

09:00 - Case-Shiller HPI (July): Expecting 5.9% y/y, Last 6.5% y/y.

09:00 - FHFA HPI (July): Expecting -0.1% m/m, Last -0.1% m/m.

10:00 - CB Consumer Confidence (Sep): Expecting 103.1, Last 103.3.

10:00 - Richmond Fed Manufacturing Index (Sep): Expecting -16, Last -19.

4:30 p.m. - API Oil Inventories (Weekly): Last +1.96M.

The Fed (All Times Eastern)

09:00 - Speaker: Reserve Board Gov. Michelle Bowman.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: AZO (53.55), THO (1.31)

After the Close: KBH (2.07), MU (1.11)

At the time of publication, Guilfoyle had no position in any security mentioned.