China PMI Preview: Stocks Hope for a Lifeline as Fed Rate Cut Speculation Fizzles
China PMI Preview: Stocks Hope for a Lifeline as Fed Rate Cut Speculation Fizzles
By:Ilya Spivak
Stocks markets are on the hunt for a new catalyst as the tailwind from Fed rate cut expectations fades. Improving Chinese economic data may be insufficient.
- Global equities stopped rising after this month’s Fed policy announcement.
- Markets with more dovish central banks have outperformed, and vice versa.
- China may not revive risk appetite even as PMI data points to improvement.
The Federal Reserve stopped the global stocks rally in its tracks with this month’s policy announcement.
Since March 21, the day after the U.S. central bank’s conclave, the ACWI ETF tracking the MSCI All-Country World stock index is flat. Emerging market shares (ETF: EEM) have seen outsized losses, down 0.4%. Most of that downdraft came from a 1.9% decline in China (ETF: ASHR).
For developed markets, the U.S. has stood out as a pocket of weakness. The catch-all S&P 500 (ETF: SPY) is trading close to flat, up less than 0.1%. However, the tech-heavy Nasdaq 100 index (ETF: QQQ) has shed a heftier 0.8%. That’s eye-catching: most of the leaders powering the global equities rally since late October are U.S. tech names.
Global stock markets trade on interest rate cut expectations
Despite a dovish tilt relative to market expectations, the Fed’s latest guidance seemed to kill the tailwind for risk appetite from rate cut speculation. That this is behind overall stock market weakness seems to be borne out by the performance of developed markets outside the U.S.
Shares in Japan (ETF: EWJ) are down after the central bank raised interest rates for the first time in 17 years. By contrast, the United Kingdom (ETF: EWU) outperformed, rising 0.8% as the Bank of England (BOE) inched closer to rate cuts (as expected).
Eurozone stocks (ETF: EZU) gained 0.3%. The markets have priced in more rate cuts from the European Central Bank (ECB) than any of its major peers, looking for 87 basis points (bps) this year.
If the upward impetus from hopes for a more dovish Fed has gone (at least for now), the search for fresh fodder has almost certainly commenced. A reassessment of the global economic growth trajectory is a logical starting point. With that in mind, incoming purchasing managers index (PMI) data from China may be instructive.
Searching for good news: China to the rescue?
The China Federation of Logistics and Purchasing (CFLP) is expected to report the fifth-consecutive month of acceleration in the service sector, putting the pace of activity growth at the highest since June 2023. On the manufacturing, another month in the red is nevertheless seen marking the slowest pace of contraction in six months.
Data from Citigroup suggests that Chinese economic data outcomes converged market-watchers’ baseline expectations by mid-October 2023 have remained pinned there since. This argues for broadly in-line results. PMI data from the U.S. and the Eurozone last week was similarly middling. Absent surprises to the upside, a fillip for risk appetite may have to come from elsewhere, if at all.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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