China stimulus. Fed rate cuts. Global growth bump?

Will new policy announcements out of China be the boost the global economy needs? In October’s Tactical Take podcast, Jack Janasiewicz and Brian Hess discuss the latest thinking on Chinese stocks, emerging market (EM) equities, and positioning in the Natixis model portfolios.

Key takeaways

• Chinese government announced measures intended to support the property market, stock market, and consumer spending, causing the market to rally
• The Fed started its rate-cutting cycle because inflation is returning to its target, not because labor markets and growth are falling
• Global central banks are easing, which tends to be good for global growth
• Two trades to the Natixis model portfolios; modest increase in equity exposure and reduced fixed income exposure; increased allocation to EM stocks

Tactical Take Q&A

Brian Hess: Do the policy announcements change your outlook for Chinese growth?

Jack Janasiewicz: I think there's plenty of things in that stimulus package that are interesting. They've been attacking this sort of thing in the past through the monetary supply side, the credit channel.

If you look at where rates have been over the past couple of years, rates continue to trend lower. The cost of borrowing certainly hasn't been an issue. 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. It’s a confidence issue.

Are there broader implications for the global economy or emerging markets?

Two major central banks – the Fed and ECB – are easing. Comments over the past couple of weeks from the Bank of England as well as the BOJ, have all been on the dovish side. When you start to have global central banks easing, that tends to be good for global growth.

You also have the Saudis talking about trying to reclaim market share. Historically when they've said reclaim market share, that meant they're trying to push oil prices down so that break-even level gets to a point where a lot of these marginal producers can no longer pump at a profitable level.

Saudis have the lowest breakeven, 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 consumers in the US because that effectively acts as a tax cut. You're paying less at the pump.

You can see how this all continues to weave itself together. You want to probably be overweight risk assets, period.

Were you surprised by the Fed’s move to cut 50 basis points?

I think there’s a legitimate case for them to have gone 50 here. We've seen some decent payroll prints. Maybe it just takes 50 off the table. We're going to look at a consecutive series of 25s. I 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 as we've had in the past.

Where does the recent data, tone, and policy announcements leave you with respect to the soft landing, hard landing, no landing debate?

We’re still in the soft landing camp. 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.

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. Either way that's still, I think, a good backdrop because that means growth is just more resilient than we expected.

How are you feeling about the upcoming presidential election? And are you thinking about any pre-positioning in the models?

I think it's very hard to really get to the heart of a specific theme that can play itself out. I think at this point, the broader picture is still what matters and that's the underlying growth trajectory.

Earnings are still grinding higher. The White House 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. If you're going to have divided government, it's going to be tough to really get anything incrementally stronger through. The market probably likes that backdrop and that's probably the best outcome because it’s status quo.