Letter From Shanghai No 971 - The Policy Drums

The Fed raised rates by the expected 75bps last night to 3.25%, the fifth consecutive rate hike, pushing US borrowing costs to the highest level since the introduction of QE in 2008. However, the Fed also released new “hawkish” projections showing its policy rate reaching 4.4% by the end of this year and rising to 4.6% in 2023. Beyond that, they anticipate cutting interest rates in 2024 and into 2025. The Fed also significantly cut its outlook for 2022 economic growth, expecting just a 0.2% gain in GDP, down from their 1.7% forecast in June. The market had previously expected a high at 4.3% for the whole of 2023 and a far quicker return to lower rates. Bank analysts now expect a 75bps rise in November and a 50bps or 75bps rise in December; consequently, equities sold off, with Dow, S&P and Nasdaq falling around 1.8%. Of course, the opposite happened in the currencies where the Dollar Index surged to trade at 111.65, currently partly encouraged by safe-haven flows as President Putin announced the mobilization of 300,000 reservists in Russia, indicating a significant escalation of the conflict. The off-shore USDCNH has weakened to 7.095 this morning, however, the CNHYEN it is trading at 20.35, a similar level to late June.?

Here in China, we have the September Politburo meeting sometime next week, then directly after that, we have the weeklong National Day holiday starting on 1st October. The markets return on 10th October, and then we have the 20th National Party Congress of the CPC?pencilled in for 16th October.

Overall, the news is not in China, the policy drums are silent and are expected to remain so. On the good side, there were zero new Covid cases in Shanghai yesterday. On the bad side, while I’m not a meteorologist, it does seem the ferocious summer drought continues in major parts of China. As of Monday, Jiangxi has now suffered a “severe” drought for the past 69 days, according to the national meteorological authorities. Similarly, in the neighbouring province of Hunan, the water level of Dongting, China’s second-largest freshwater lake, as measured at the lake’s Chenglingji hydrological station, receded to 19.89 meters at 8 am Wednesday. That figure marks the lowest water level for the same period since the station was built in 1904.

Have a good day,

John