There is a reason why the saying "be careful what you wish for" is said with an ominous underlying tone.
For the last few months as commodity prices continued to make new lows every day, sell-side notes and investor calls pushed the buy case in oil or copper, anything China related, with the justification that more stimulus would come "eventually."
As the months went by, prices kept falling as the China reopening was a nothing done, and all economic growth indicators fell from April onwards after the initial bout of liquidity. People refer to this as the immaculate disinflation but China did not print trillions in Covid related stymies handing it out to its consumers to cushion them from the Covid lockdowns. They did not suffer the same inflation surge as the US and rest of the world did. So, when they reopened, the reopening was not felt as it was seen in the developed world.
China has had a property market crisis since last August 2022, and has since been trying to stem the decline by throwing the market with dribs and drabs of liquidity here and there to help boost consumers to buy more homes and cars. But the Chinese consumer is very fragile right now as they have dipped into their savings and are not willing to spend as the future is not as rosy as before.
This makes it even harder for the PBOC as the activity in the second-hand transaction market is what is needed to keep the property bubble from unravelling. All the investors who are long and waiting for the commodity rebound are waiting for China to come back and do what it has always done without questioning what China really needs to do. It wants its domestic consumers to grow, and has moved away from the traditional urban led growth over the past decade.
The same trades from the past may not work in the future. This morning following the long-awaited Politburo meeting, headlines hit the tape that China is looking to boost measures, to "promote market activity and optimize debt level" as well as "steady the ex-rate at a reasonable level" whilst taking out the main phrase from previous meeting that read "house is for living in, not for speculation".
Once again, a lot of phrases and verbose statements without any actual numbers or plans to boot. But on the onset, the market cheered as the Yuan rallied hard, which is confusing not to say the least, as Yuan strength and boosting stimulus do not usually go hand in hand. Meanwhile, it is important to note that sentiment and positioning is sometimes far more important than real fundamentals. Today the market is quite "underweight" commodities and is being forced to cover their views in anticipation of a Chinese fiscal or monetary boost. Trade first, ask questions later seems to be the order of the day.
As convenient as that may sound, the market has rallied over the past few months, especially in the technology space, where the justification used to buy these names was on the premise the Fed was almost done. The Fed is trying hard to fight its inflation targeting game and is nowhere close to being done. The last thing it needs is another price surge in input prices. Well, one can't price in four rate cuts for next year and at the same time wish for higher commodity prices. The market keeps on defying the Fed but there is another adage that one should adhere to as well, which is "don't fight the Fed".
