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Will China Stimulate The 2023 Markets?

Will China Stimulate The 2023 Markets?

Business
Following the November CPI print, the mental image left behind is a shifting multi-way tug of war* for markets.

I.e., several economic or political drivers pulling in different directions with temporary momentum. Market reaction to continued softer/peak inflation this week (CPI 7.1% YoY, 6.0% YoY core) becomes immediately renormalized by more hawkish central bank rhetoric in the US and Europe. While resilient employment still counteracts economic slowdown. It is hard to see how markets can find sustained direction in this environment, and short-term momentum will continue to lead. 

Contrary to the message from western central banks

Moreover, the BoK signaled its intention to pause the hike cycle early next year, which is largely driven by fears of an accelerating credit crunch (This Legoland is a Cautionary Tale as an Era of Easy Money Ends (yahoo.com)).

In this context, it is worth remembering that increasing re-financing costs is not only an issue in South Korea. In North America, BB+ or lower debt maturing in 2023 is ~16% ($170b) of the total outstanding by the end of 2023 and ~34% ($300b) in 2024. This might be manageable in isolation, but for high yield, the average yield is now already as well at 8.5% vs. 4.7% in January.

Nevertheless, a clear directional catalyst is China.

The November economic figures were again unsurprisingly weaker (see top chart below for housing, retail sales, and general economic activity). In a nutshell, strong restrictions on particular economic sectors, large challenges in the real estate market, and a tough Covid policy are too much combined.

Something has to give, and the indications are strong that the latter is being relaxed.

Moreover, to regain traction on its global ambitions, larger stimulus will be on the menu as well (Chinese leaders to signal more stimulus for 2023 as COVID clouds outlook | Reuters). Against this scenario, it is difficult to see how US YoY inflation swaps predict CPI below 3% in six month (see bottom termstructure chart below). 

*to my surprise, this is actually a thing: Multi-Way Tug-of-War Game – HearthSong

Written by : Mika Kastenholz who works for Credit Suisse in Hong Kong serving as a Managing Director and the Global Head of Structured Macro.

Mika wrote the following piece: Is Derivative Trading Profitable?

Buy Mika’s Book! Amazon.com: Trading Derivatives: The Theoretical Minimum: Trading Vanilla, Exotic and Corporate Derivatives eBook : Kastenholz, Mika: Kindle Store

Will China Stimulate The 2023 Markets?