China stimulus. Fed rate cuts. Global growth bump?

JACK JANASIEWICZ: My name is Jack Janasiewicz, Lead Portfolio Strategist and Portfolio Manager for Natixis Investment Advisors.

BRIAN HESS: I'm Brian Hess, Investment Strategist. And this is Tactical Take. Hey, Jack.

JACK JANASIEWICZ: Hey, Brian.

BRIAN HESS: How are you doing? 

JACK JANASIEWICZ: All right.

BRIAN HESS: Another month's gone by, yeah. And we have a few things to talk about. When I set the agenda for today's episode, to me, it was kind of obvious what we had to talk about. So we have a few things. But I think we should start with China, where there's been this big policy announcement about two weeks ago. The government seems to have changed its approach. This government in China has been engineering a slowdown, trying to contain a property market that it felt had overheated in 2021, 2022 time frame.

They basically engineered the bursting of that property bubble. And the economy has been going through a bit of a deleveraging since then. And the policymakers have been OK, just sort of managing the decline and not doing much beyond that. And that's resulted in lackluster asset performance, at least from a stock standpoint. It's been good for the bond market, where yields have come down considerably.

But two weeks ago, after we've seen the weakness in the economy spread to the consumer, consumer confidence down, job growth down, maybe the Chinese government feels like it's time to step up the stimulus. And the property market is perhaps deflated enough to allow them to do that.

And so, we saw announcements aimed at supporting the property market, a direct intervention there, supporting consumption, and also trying to lift the stock market, to an extent, which they had immediate success with on a big rally. So I guess my question for you is, do these announcements change your perception with respect to the Chinese growth outlook?

JACK JANASIEWICZ: Sure.  in your summary you just went through, I think you hit on the key point there, which is consumer confidence. I think there's plenty of things in that stimulus package that are interesting. They've been attacking this sort of thing in past through the monetary supply side, the credit channel.

And if you look at where rates have been over the last couple of years, rates continue to trend lower. So the cost of capital, the cost of borrowing, certainly hasn't been an issue. Loan growth has gone nowhere. And I don't think that's an issue with regard to banks not wanting to lend. It's just that nobody has the confidence to go out and borrow because credit's been there. It's been cheap. Access has been there. It's just, no one wants to use it.

BRIAN HESS: Yeah, it's not a banking crisis.

JACK JANASIEWICZ: Yeah, exactly. And so, this all comes back to a confidence issue. If we look at some of the announcements that came with regard to this policy package, a lot of it was tuned into looking at cutting rates, helping to improve first time homeowner purchases, that sort of thing. And again, I'm not sure that's the problem that we're addressing here. They did do a bunch of stuff that tries to target stimulating the interest in the stock market.

But I think the wealth effect is a little bit different than maybe what you see here in the United States. There is a little bit of a direct correlation here with regard to the wealth effect. Stock market goes up. You've got a little bit of discretionary income that could be spent. I'm not sure that's really the same multiplier effect, if you will, coming out of China.

So as we've been saying over the last couple of weeks with regard to this, it's a confidence issue. Some of the measures they've put forward certainly helps boost the stock market. But I'm not sure this is going to filter its way back into the real economy.

And for us, the big issue for that mechanism to connect the stock market to the real economy, these policy measures back to the real economy, it comes back to, really, on the fiscal side, you need to basically try to stimulate consumption in some form or fashion. The way they've been outlining the policy announcements here, maybe we do have incremental more steps coming. So maybe this was phase 1 of phase 2 and phase 3. And that's one of the things that we're keeping an eye on.

It's funny. My backdrop comes from emerging markets. And we've always said, where there's smoke, there's fire. There's also the adage that basically says, when policymakers begin to panic, the markets stop panicking. Maybe we're at that point where you're finally starting to see a reaction from government officials to try to support the markets, the economies. There's probably something there in terms of potential going forward there.

So we've actually closed our underweight to emerging markets more recently. I think a lot of that was simply risk management. There's the potential that this actually gets traction. If you look at where we are with sentiment, it's been hollowed out. I mean, P/E single, multiple P/Es, you look at a lot of the surveys. Nobody wants to own it. They've said, it's uninvestable. So you can certainly see that the positioning is way off size and even short. So there could be some legs to this backdrop.

So the point being here is, it's more of a risk management exercise in the interim. There could be something coming on the fiscal side. If that does come – and it has to come in size. And if it does come in size, that could, I think, be a significant pivot here. And that could change the backdrop for China. So, again, risk management, we don't want to be overweight yet because we're still unconvinced until we see those measures. But at the same time, we also don't want to be underweight and really get caught off sides, should this play itself out.

BRIAN HESS: And the Chinese economy has been on holiday for the past week or so. And there was a lot of speculation that we might an announcement of a big fiscal stimulus right before markets reopen. And that just so happened to be last night.

JACK JANASIEWICZ: Correct.

BRIAN HESS: Right before we're recording this. And so, markets opened, locally, the a-share market up 10%. There was a press conference. The press conference started. There really was not a lot of follow-through on the fiscal. And those a-shares pulled back, retracing a large part of their gains. Meanwhile, the off-share market, which had been trading for the past week, was down 10% in some cases.

So do you think policymakers are just looking at the rally that we've had in the past two weeks, where some indices are up 20, 30-plus percent, and feeling like, oh, it's a little bit ahead of itself here. We don't want to add fuel to this fire. Let's just dole out the stimulus, the fiscal stimulus announcements a little bit more slowly, so that we don't bring in too much retail money and end up with a repeat of that bubble and bust scenario from 2015, which I'm sure you remember.

So is that how we're thinking? Is it just probably putting it off? The downside is probably still fairly well protected in Chinese risk assets for now because they'll step in if things retrace too far.

JACK JANASIEWICZ: I mean, if you go back to the press conference, they sort of, I think, were alluding to the fact that they didn't want this to get too much froth, too much of a bubble. Things get ahead of themselves. So they were sort of trying to talk that back. I think the market didn't like that part of it, as well as the idea that some of the fiscal talk that was in the press conference was basically taking things that were outlined for 2025 and just pulling them forward to 2024.

So, nothing new, per se. And so, I think that was a little bit of a disappointment for the market as well. So that's basically what you get for the profit taking session that we just saw.

BRIAN HESS: You mentioned the trades. You mentioned a portfolio adjustment that we made to our models. We really have done two trades in the past month. The first one was before the China stimulus announcement. We merely added the stocks, just a little bit from bonds. So based on our constructive outlook, that was more about the US, really. We just wanted more equity exposure.

The second trade targeted EM more specifically. You got into it. The first piece is that we took profits on India, which has been a fairly long-standing position for us. And that worked out well, took profits there – and then decided to cover that underweight to emerging markets. We did it through a broad EM equity ETF, in part.

But we also did it through an Asia-specific ETF, to get a little bit more of that China exposure. Do you see the policy announcement out of China having a lot of implications for EM more broadly? And how about even beyond Asia? Are there any areas where you think there could be positive knock-on effects if they follow through with the fiscal and if we get a big growth effect?

JACK JANASIEWICZ: I would even take a step back and look at the bigger picture backdrop, right? You've got the Fed easing. We already had the 50 basis points. The markets have done some repricing here. But the fact is that you're easing, whether we get 50 or 25s, bottom line, we're easing. Same thing out of the ECB, ECB, easing now. You've seen some inflation numbers come out of there that have undershot.

So, certainly, inflation continuing to head towards their target there as well. So maybe you get a stepped-up increase in the pace of 25s there. But, again, two major central banks, the Fed, ECB easing. Comments over the last couple of weeks from the Bank of England, as well as the BOJ, have all been on the dovish side. So you put four major central banks together, they're all going in one direction, easing. That's a very powerful tailwind here going forward.

You start to now factor in the potential for something coming out of China here. So, now, you've got the second largest economy in the world that's potentially now trying to, basically, at least put a floor under growth. And I think, again, not to really look at the details here. But it's simply, we're putting a floor under growth so that downside risk, that tail risk, if you will, the left side tail risk, is getting chopped off here. And just by chopping off that downside tail risk, the market has to reprice itself at least back up a little bit just to say, the risks have shifted.

So you've got all these major central banks now in easing mode. You've got the Chinese potentially stimulating. Let's take a few other things to think about here. You've got the Saudis basically talking about trying to reclaim market share. And in the past, when they've said, reclaim market share, that means they're trying to push oil prices down so that, that break even level, it gets to a point where a lot of these marginal producers can no longer pump at a profitable level.

So they withdraw from the market. And that means Saudi Arabia just steps in and takes over that market share. Saudis got the lowest break even, I think, of all major oil-producing countries. So oil prices heading lower, which probably then means gasoline prices head lower, which is basically going to help the consumer in the US because that effectively acts as a tax cut. You're paying less at the pump.

And on top of the fact that the labor market in the US still remains pretty decent given the most recent payroll print. And, now, you're saying real wages are still rising. And you're going to give them a tax cut with a lower price they're paying at the pump. These are all pretty good tailwinds in aggregate. So, again, why are we starting to think about upping our exposure to equities?

Those tailwinds are huge. Why are we starting to look a little bit stronger at EM? Well, when you start to have global central banks easing, that tends to be good for global growth. That's going to help the emerging market economy. So you can see how this all continues to weave itself together into – you want to probably be overweight risk assets, period.

BRIAN HESS: OK, yeah, and if we get a period of synchronized global growth, that would probably be better for emerging markets than a growth environment that's just led by the US, which is what we have been looking at, not to mention the Fed now cutting rates, which could take some of the upside pressure off the dollar and help EM currencies perform a little better.

JACK JANASIEWICZ: That's the other big one, too, the dollar story. But, again, the big picture, and you sort of alluded to it here, you're basically, I think, clipping off that downside tail risk for growth. And so, that, I think, causes everything to reprice to the upside here.

BRIAN HESS: We had the rate cut, the first one since 2020. They went big with the 50 basis points. And they went pretty big with the dot plot. I mean, that's not coordinated.

But it ended up that the various officials decided to pencil in a pretty aggressive rate-cutting path, which points to the possibility of another 200 basis points of cuts by the end of next year. We felt like 50 was on the table. It was maybe a coin flip. They delivered. Were you surprised at all by the bold move? Did it make sense to you?

JACK JANASIEWICZ: For us, if you think about where core PCE has been, 5.6% – we're down to, whatever, 2.2. I don't remember what the last print was off the top of my head – but 300-plus basis points worth of a drop in core inflation. All the while, the Fed hasn't done anything to raise. So plenty of cover there, just because we're already in restrictive territory. We take 50 off the table for that.

So, now, all of a sudden, we're still restrictive, but less so. So I think, just from that standpoint, there's plenty of room to say, yeah, there is a legitimate case for them to have gone 50 in here. Again, we've seen some decent payroll prints, or the decent payroll print that we had the other day, that changes, I think, the MO form just a bit, where they're still going to cut.

But maybe it just takes 50 off the table. We're going to look at a consecutive series of 25s. But, again, think about where we are with regard to real rates. We're still restrictive. So there is room for them to continue to cut. But you don't have to cut out maybe a size and a pace that's as aggressive, per se, as we've had in the past.

BRIAN HESS: Yeah, if the October employment report ends up being as strong as the September report that we just got, there'll be no need for that kind of boldness at the November meeting.

JACK JANASIEWICZ: And the other takeaway, too, this kind of goes back to what we've been talking about with chopping off that downside risk. I think you're getting that downside risk to growth being chopped from both the Powell put, because if you think about – let's say we do get a softer payroll print or a big miss to the downside. The Fed probably comes back and says, we're happy to either up the pace of increases or maybe do another 50 in here – so, again, putting that floor underneath the growth backdrop.

Or, in this case, you get actually decent payroll numbers, which tells you, hey, maybe the labor conditions are better than we thought – and, again, chops off that downside tail risk for growth. So whether it's the Powell put or it's the data itself, the theme here, not just in the US, but around the world, is we're cutting off that downside tail risk to growth. That's a good thing.

BRIAN HESS: So with global growth potentially improving a bit – and that tends to support US manufacturing, which has probably been the weakest area of the economy. Housing may be a close second. And, now, this employment report hinting at maybe stronger domestic demand. Where does the recent data, tone, and policy announcements leave you with respect to the soft landing, hard landing, no landing debate?

JACK JANASIEWICZ: And maybe this is a good time to think about some of the risks, too, because we're still in the soft landing camp. And if you're thinking about where the market is with regard to pricing in rate cuts between now and the end of next year, to us, maybe the risk is that the market still has to price out some of those rate cuts because you've priced in too many.

And that soft landing scenario may not require quite as much support on the monetary policy side. So to us, the risk is that the market has overpriced rate cuts. Some of that has to come out. We settle in maybe at a little bit of a higher level for that terminal rate. But either way, that's still, I think, a good backdrop, because that means growth is just more resilient than we expected.

BRIAN HESS: Yeah, probably not as stimulative as the housing market, which might drop down to the bottom in terms of growth drivers in this economy. But if manufacturing can improve a bit on Chinese demand and domestic demand in the US, or consumption remains strong on the employment picture, that would be good enough for the overall economy to continue doing well and for earnings to come through. So, last question, because we're in October now. The election is next month. I think we'll probably record our next episode after we know the outcome.

JACK JANASIEWICZ: Hopefully, we'll know it, or –

BRIAN HESS: Yes, good point. So how are you feeling about the election as we head towards November? And are you thinking about any pre-positioning in the models ahead of the first Tuesday of November?

JACK JANASIEWICZ: Yeah, it's funny. Kerry Grant, our political correspondent down in DC, I've talked to her quite a bit over the last couple of weeks about, hey, this is what we're thinking about for policy. What do you think? And her response would be, yeah, but. And everything is, yeah, but. And so the point there is simply that there are so many nuances within the policies, depending on who wins.

Energy, there's certain parts of energy, maybe oil – the producers might fare better under Trump. But under a Harris campaign, or a Harris one, I should say, green energy is going to do well. So you have all these sort of fits and starts within these industries. And I think it's very hard to really get to the heart of a specific theme that can play itself out. So I think at this point, the broader picture is still what matters. And that's the underlying growth trajectory.

And you actually alluded to it before. Earnings are still grinding higher here. And I think that's the key takeaway. The White House, you can only do so much with regard to the economy because any sort of significant policy initiatives that can be significantly impacting the economy have to basically go through Congress. Our base case is that Congress remains divided.

So you're going to have divided government. It's going to be tough to really get anything incrementally stronger through, if you will. So against that backdrop, actually, the market probably likes that. And that's probably the best outcome because – status quo. And status quo right now is growth, decent, earnings, decent. That's good for the stock market.

BRIAN HESS: OK, so we're heading into the election a little bit overweight stocks, still constructive on the US. But we've covered that underweight to emerging markets and basically looking for maybe a bit of a bounce in bond yields here. We've already gotten it. I think the 10 year is already up 30 or 40 basis points from its lows. But I wouldn't be surprised to see a bit more of that. And we'll wait to find out if we get a sweep one way or the other or if it's more divided government.

JACK JANASIEWICZ: I can't wait. It's going to be exciting.

BRIAN HESS: It will be. All right –

JACK JANASIEWICZ: And the last piece I might point to, maybe the best thing for this market right now, is November 6th. We just get past the election, because the one thing I would point to is simply some of the things that we've read in the Beige Book and some of the commentary from the ISM surveys. They're all saying the same thing.

We have this uncertainty. And we're not really going to do much until we get past the election. So once we get past that election uncertainty, we're back to business as usual. So November 6th, that might be the best thing for this market right now.

BRIAN HESS: Yeah, that's a good point. Maybe some of that investment that's been held back will come through. All right, Jack, well, we'll see you next month. Thanks very much.

JACK JANASIEWICZ: Thanks so much. Great, good to chat.