Disappointment with a capital D – watch out for overconfidence

There is a clear and present danger in trade at the moment – overconfidence. Overconfidence that policy and private capital will align and deliver trader a bullish windfall.

However, from where we sit, this overconfidence should be defined as likely-disappointment. Let us explain.

China 2024 is not China of 1994.

After a week away for Golden Week celebrations, there was a hype ahead of Tuesday’s National Development and Reform Commission (NDRC) briefing. The hype was clearly at disproportionate levels. But the hype was not completely unjustified after broad fiscal intervention several weeks ago that included interest rate reductions and liquidity injections by the People’s Bank of China suggested that China might be returning to policy moves of the 90’s, 00’s and 10’s.

What the market got was anything but. NDRC announced that it would advance 100 billion yuan (about $21 billion) from next year’s budget to enhance local government investment and…that was it. Full stop.

The NDRC then basically reiterated existing policies, such as support for migrant workers and recent graduates. NDRC Chairman Zheng Shanjie expressed confidence in achieving the nation’s economic targets, aiming for a growth rate of “around 5 per cent.”

Disappointment with a capital D.

Beijing had signalled a renewed appetite for bolstering economic growth through monetary interventions in recent weeks, but investors and economists are increasingly looking for fiscal measures to sustain market optimism and address real structural concerns.

One of the biggest structural issues, youth unemployment—which neared 20 per cent in August— which is weighing on China’s economic outlook. While the government has pointed to emerging job opportunities in sectors like electric vehicles (EVs) and drone operations, the broader transition toward a green economy has not been enough to sustain growth. Projections for China’s full-year GDP growth have slipped to 4.8 despite the government suggesting it will be ‘around 5 per cent’

To give more context about the expected stimulus, have a look at some of the market analyst forecasts ahead of Tuesday’s announcement: Morgan Stanley had projected a fiscal package worth around 2 trillion yuan ($952 billion), potentially aimed at infrastructure spending and local government financing.

Citigroup was even more optimistic forecasting a 3 trillion yuan package ($1.4 trillion), with possible allocations for social welfare and banking sector recapitalisation.

Markets reactions were that of confusion – initially Chinese equity markets, including the CSI 300, surged but quickly retreated back to lower levels. The Hang Seng plummeted correcting 10 per cent marking its steepest decline since 2008.

The overconfidence from the market coupled with Beijing raising expectations to fever pitched levels show the trap that is presenting in markets currently.

Interestingly enough without new fiscal stimulus, the world’s second largest economy will face continued challenges, particularly given China’s structural issues such as high youth unemployment.

All this is leaving market participants speculating on how the government plans to address local government debt and financial stability. Because despite hopes for a more aggressive fiscal push, such as direct consumer stimulus, Tuesday’s announcement has now left analysts in a quandary and have start to doubt official channels.

This is now leading traders and investors alike to now dismiss the likelihood of demand-driven stimulus in the near term and have moved to a “wait-and-see” approach regarding Beijing’s commitment to reflation. All of which is seeing Chinese indices and Chinese-exposed sectors giving back significant gains of the past 2 weeks.

China isn’t the only one – RBA is on a collision course to disappoint

We also need to warn about the state of the Reserve bank of Australia. As recently as October 8 economists are forecasting on a consensus basis that the first rate cut of the upcoming cycle will occur in February.

However, how that conclusion is being reached is hard to understand when you look into recent statement and then the minutes from the recent September meeting.

The minutes reflect a moderately more hawkish view of the RBA’s Statement and Press Conference, which is the third time this year this has happened.

We should point out that RBA Governor did not aim for a dovish tone during the press event it was more ‘neutral’. But when pushed on things like ‘considering hikes.’  She suggested it was not which was construed as a more dovish view.

The minutes however revealed a different story with the Bank keeping the option of raising the cash rate on the table, as financial conditions have eased, potentially complicating efforts to bring inflation back to target.

While the second quarter GDP household consumption component was weaker than the banks had forecasted, the Board believes it’s too early to judge whether this will continue. A point backed by the last consumer confidence number that saw confidence back at level now seen since the start of the rate hiking cycle. Thus, the outlook for improving consumption remains unchanged.

Then there is the labour market which remains tight. The Board believes labour conditions are consistent with an economy close to full employment, noting that “the share of unemployed people finding jobs was high and the share of workers losing jobs was very low.” A further positive is the participation rate increasing  is likely due to readily available jobs, demonstrating an “encouraged worker effect” rather than more people falling out of work.

The minutes also show that policy discussions leaned hawkish. Board members felt that “not enough had changed since the last meeting” to alter their view that the current cash rate was the best balance between inflation risks and labour market conditions.

They discussed what kind of data might warrant more restrictive monetary policy, such as stronger consumption or tighter supply combined with weaker productivity.

Additionally, even if the Board’s outlook is correct, if financial conditions aren’t restrictive enough to bring inflation down, “monetary policy may need to be tightened.” Eased financial conditions and rising credit growth over the past few months made this scenario more plausible, and banks appear well-positioned to meet any increase in credit demand.

All this – suggested Australia is facing the same situation the US faced in 2024. That being later than forecasted rate cuts by upwards of 6 months. All growth in indices, risk and currencies is based on rates being cut early. The reactions to ‘disappointment’ are likely to be high and we are mindful that overconfidence in positioning will lead to trading issues. Watch this space.