Market-Boosting Moves in US, China Yet to Convince Economists

A stronger-than-expected pivot to stimulus in the world’s two biggest economies has brightened the market outlook. For economists, the jury is still out.

China’s barrage of monetary, fiscal and regulatory easing to boost the ailing property market, alongside expectations for deeper interest-rate cuts from the Federal Reserve and peers, sent stocks soaring worldwide last week. The bullish mood continued Monday after three of China’s biggest cities eased home-buying curbs, sending shares and iron ore spiking higher.

“This is one of the turning points of the year,” David Kruk, head of trading at La Financiere de L’Echiquier, said of the US and Chinese policy moves. “I have the feeling now that everyone is going to go with the flow.”

Chinese stocks extended one of their most remarkable turnarounds in history, soaring for a ninth day on Monday and pushing the benchmark CSI 300 Index’s gains to 27% from a mid-September low. A Societe Generale SA index tracking cross-asset momentum jumped to the highest in more than a year.

In the bond market, traders are increasingly moving to price in a second 50-basis point rate cut from the Fed in November as well as another reduction in rates from the European Central Bank in October, shifts that were previously not base cases just a few weeks ago.

The bulls could still come unstuck by sudden slumps in demand or hiring, with Friday’s US jobs report a near-term test of their will. A disruptive presidential election that’s now just five weeks away looms as a bigger potential hurdle, while tensions in the Middle East remain a risk to the rosy outlook.

“Markets versus economics could be quite different right now,” said Rob Subbaraman, head of global markets research at Nomura Holdings Inc. While the market outlook has clearly improved over the past two weeks “for the economic outlook, it’s less clear cut. Of course, markets are meant to preempt, but for economists the jury is still out.”

For the US, risks include a deteriorating labor market, potential for labor disputes to widen, a revival in inflation, and an election that could result in expansionary fiscal policies that limit the Fed’s scope to cut rates as much as markets are anticipating. It could also result in stagflation if a victory by Donald Trump leads to steep tariffs on Chinese and other imports, Subbaraman said.

As for China, while the stimulus is clearly buoying the stock market, more fiscal measures will be needed to shift the economic narrative.

Morgan Stanley’s China economist Robin Xing says even after the recent stimulus blitz, “a return to benign inflation and sustainable growth is likely to be a long, drawn-out battle.”

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