A Market Overshoot?

China's stimulus package and the unexpectedly strong U.S. payrolls report have ignited swift and dramatic market reactions. But do these headlines truly shift the narrative, or are we witnessing an overcorrection? Join Dave Vick, Lin Jing Leong, and Ruben Hovhannisyan as they delve into the data, question its reliability, and explore the potential long-term impact on the world’s two largest economies. 

Creators and Guests

DV

Host

David Vick

LL

Guest

Lin Jing Leong

RH

Guest

Ruben Hovhannisyan

What is TCW Investment Perspectives?

TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.

Financial markets surged recently on the back of two major developments

China's much-anticipated stimulus and a US

payrolls report that was far exceeded expectations

Both fueled investor optimism that the world's two largest economies
might stabilize, and the market reaction to each was dramatic

Were those reactions warranted?

Did either of those announcements fundamentally change the
outlook, or did they not really move the needle much at all?

Welcome to Focus on Fixed Income, the TCW Investment Perspectives
podcast, where we give you an inside look at what's driving the markets

I'm David Vick, and today I'm joined by TCW's China expert Lin Jing Liang

and Fixed Income Generalist Portfolio Manager Ruben Hovhannissian to

discuss investor behavior and our outlook amid all the uncertainty

Let's start with the China data

So Lin Jing, let's start with you

Can you give us a quick summary of the stimulus and maybe some comments on
why this announcement was perceived so differently than previous efforts?

Yeah, so what basically happened was on the 24th of
September, we got three major bullets by China policymakers

So one in monetary policy, a second one in property
easing policies, and a third of fiscal stimulus to come

So why it's different is that this time around,
policymakers announced all of it at the same time

And we got larger than what was usual monetary policy easing, right?

So, you know, what used to be 10 basis
point cuts became a 20, 30 basis points cut

You know, what used to be a 25 basis points,
triple R cut became a 50 basis point, triple R cut

And it all came together alongside housing policies like
mortgage rate cuts, for example, and easing of down payment

So it felt like a concerted effort by the government
to do everything because they had a plan, right?

So on the back of that, markets got really excited because pre-24th

of September, all they used to get was drip feeding of one policy,

you know, every couple of weeks, every couple of months,

and they never looked like they were coordinated at all

Now, I've heard that there was historically China, at least recently,

has focused more on the supply side, and this maybe shifted or

indicated a shift in focus, maybe to more to the demand side

Any thoughts there?

That largely came out from a Reuters report that talked about how China

was going to do a two trillion renminbi worth of fiscal policy stimulus,

with one trillion of it going into local governments and the other one

trillion going into consumption demand spending sort of stimulus policy

It's uncertain, right?

You know, we're not sure yet if China wants to
launch a nationwide consumption cash handout

It's very far from what they're used to doing,
but there is some shift in that thought process

You know, we do think that they are looking to increase consumption somewhat,

but they are constrained by the fact that they only want to do it for

the lower privileged, the low income, and also the elderly group, or

even, you know, sort of baby bonuses, which is not nationwide yet

So it will help boost growth slightly, but not
to the extent of a nationwide fiscal stimulus

Got it

So obviously the market reaction immediately was large, and

then a couple days later we had almost an equally large

negative reaction as there was no further announcements

What do you expect from the Chinese government going forward?

Should we expect more?

How should that, how do you think that's likely to proceed?

So this is, it's actually a continuation of
that fiscal policy I just talked about, right?

It started with this Reuters report saying two trillion renminbi,
and then it went up to five trillion, and then seven trillion

At some point someone even said 10 trillion renminbi, right?

That's where the optimism came from

Now, the NPC press conference at the start of the week
disappointed because market expected them to talk about it

Problem is, it's not in NDRC's purview to actually launch a
fiscal stimulus, or, you know, to increase fiscal deficit targets

They're mainly there for project development or, I guess,
longer term plans around innovation and new policies

So on that front, I do still expect some announcement for a widening of fiscal

deficit targets, but I'm also of the view that this is not a government

that is looking to pivot significantly from their sort of five-year plan

So I expect them to still want to maintain quality
growth and want to prioritise national security

So I'm only expecting about two to three trillion worth of fiscal stimulus

It can come in the form of actual cash

It can come from, in the form of PBOC dividend, for example, or a

facility from them, or even just extra issuances from unallocated

sort of government bond quota, which hasn't been issued

But I'm not expecting a 10 trillion renminbi sort of fiscal stimulus

Got it

So given that, does this work?

Do you think, will this return China to kind of the six to 7% growth rates?

And maybe if it doesn't work, what's the downside?

What happens next?

So I do think that the monetary and property policies will work at the margin

So this will help China achieve its 2024 growth target of 5%

Previously, we were all talking about a 45, 475% growth rate for this year

The second question is how effective the fiscal policy launch will be

And that's more important for next year

Assuming they get that two to three trillion renminbi stimulus, I expect
it should quite safely put 2025's growth at around 475 to 5% as well

Now, if for whatever reason, they're running out of projects,

they might be issuing bonds, but they can't actually use it

effectively, we're looking at about 4% growth for next year

Got it

Thank you

So I guess some reservations about the effectiveness
and the scope of that stimulus moving forward

Ruben, let's pivot to the payroll number, where
your reaction was kind of equally significant

As of yet, we haven't really seen a big reversal

And so first question, obviously, it was a big payroll number

Does this mean the labor market is on the road
to recovery and things are getting better?

And maybe what other indicators are you looking at or are important to
consider for investors when you're looking to corroborate the story?

Thanks, David

Definitely, we've seen a lot of excitement and optimism in
the markets as well on the back of the nonfarm payroll number

If you look at rates markets, for example, we've got a bear flattener
with two-year rates about 30 basis points higher than the day before

And equity markets are higher and credit spreads are narrower

So all of that seems to suggest that the markets are
interpreting these as signs of evidence of green shoots

I will tell, we at TCW think there are at least
several reasons to be skeptical of this number

One of the reasons we think this number should be taken with a grain
of salt is that the volatility and the volatile nature of the data

The report itself is known to be very volatile

It's known to be subject to seasonal adjustments and multiple revisions

Some of the revisions come months, if not quarters afterwards

Let's not forget that I believe in August, BLS came out and

they came out with a new estimate for one full year jobs

number ending in March 31, 2024 being lower by 818,000

And to put that in perspective, it's approximately
30% lower than was reported previously

So it's a number that has always been volatile

The COVID has made it more volatile because the response
rates on the surveys have declined significantly

And also because of the sum of irregularities of the job market patterns
during COVID era, they made those seasonal adjustments even more difficult

And just to illustrate the point, if you look at September number, for

example, the unadjusted number was 460,000 jobs and the BLS interpreted

that into, or translated that into 254,000 seasonally adjusted jobs

If you were to use the pre-COVID data to adjust the non-seasonals to

seasonal, it would imply a much, much lower number somewhere along the

lines of 115,000 or 140,000, depending on what adjustments you're using

But just highlights the volatility of the data and the
unreliability of one single data point to extrapolate from

So given that, and that number is historically bumpy, what are the things that
you look at to determine the health and the direction of the labor market?

I think the second reason why, the exactly second reason why we think the number

should be taken with a grain of salt is when you look at the broader set of

labor market indicators, that set of indicators certainly paints a picture

of weak and weakening labor market and not a

super strong number that we got last Friday

So even the same, the very same report that we got on Friday showed that
average weekly hours came down and that's not a sign of a stronger labor market

The report also showed that people who are on temporary jobs continue to decline

Again, this is a sort of forward looking leading indicator, historically
has been at least of labor market, and that continues to decelerate

If you look at alternate other reports, let's say Jolt's report shows
the higher rates are at 33%, which is a level we haven't seen since 2013

Quits rates, which again are historically have been a leading
indicator of jobs market has been decelerating as well

You can look at conference boards labor market indicator,

labor differential indicators, which is sort of the

households or consumers take on the labor market

It shows the difference between number of people who think
jobs are plentiful and those who think jobs are hard to find

That number has been coming down a lot as well

There is a plethora of data points that indicate in
totality indicate that labor market has been weakening

And against that backdrop, again, this NFP number
is really a standout and sort of an outlier

So we think that warrants a lot of caution and
in extrapolating anything from that one number

So I know we've been in the hard landing camp for a while

I'm going to guess this doesn't change that perspective at all

One number is one number, but any comments there?

Precisely

Yeah

I mean, no one number will change our assessment of where we are in the

economy because our assessment is based on holistic, comprehensive assessment

evaluation of where we are in credit cycle, where we are in business cycle

And this number per se, again, especially given the volatility

of the number and the adjustments that have been to the report

and reported numbers previously, it doesn't change anything

I mean, obviously if we continue to see very strong prints

several months in a row, that will be certainly a change in

facts that will lead to a need to re-evaluate and reassess

But just one number doesn't make a trend
and it's not going to change our assessment

So I'll ask you to put on your crystal ball
or look into your crystal ball as well

What do we expect to see from the labor market going forward?

And I know this is a hard question to answer,
but what do we think about in terms of timing?

Like we expect the labor market to weaken or
what timeframe do we expect that to happen?

Yeah, I think if we're right, we think over the coming months and quarters, we
will see more and more convincing evidence that the labor market is weakening

Timing is always difficult to predict, but we think this year, we think we

may have reached a point in labor market or in labor market balance where

the demand has been coming down over the last year, even longer than a year

But because the supply was, demand for labor was still above, higher than
the supply for labor, that was not being registered in unemployment rates

We think that this year we have reached a point where each

subsequent decline in demand for labor will probably also

be accompanied with an increase in unemployment rate

And we think we got an evidence of that in the last
couple of months, this last report not withstanding

So we think that we have reached a point where subsequent declines of labor
or weakening of labor market will be registered in unemployment rate as well

So we think in the next months and quarters, we'll see that

Great

All right

So maybe one final question, just to tie these two things together

Does the data from China, if the stimulus is successful, if it
does end up spurring growth, does that change our view of the US

economy?

Can China sort of be the engine to pull the US

and the global economy out of a potential recession or out of the doldrums?

In theory, it may be, but based on what we're seeing now, we're seeing
sort of, as our colleague mentioned, it's a bigger gun, it's not a bazooka

So can China, if they pull out 10 trillion RMB worth of stimulus,
will that stimulate global economic growth and ignite animal spirits?

Probably yes, but we don't see that in the cards

And given what we have seen so far, we don't think it's
going to be sufficient to pull out other economies

Great

All right

Thanks very much

That's it for this edition of TCW Investment
Perspectives focused on fixed income

I'm David Vick and I want to thank our
guests, Lin Jing and Ruben, for being here

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