Month: April 2024
China: Xi’s World
4.19.2024
China’s 1Q24 GDP growth clocked in at 5.3%, far ahead of expectations for 4.5%.
It is not party time and things are not excellent.
Real economic strength or a dead-cat bounce? I’m in the dead-cat bounce camp for three key reasons.
1. Increased Authoritarianism
This is a one-way street. Xi continues to consolidate power. It was also announced that China eliminated the annual press conference with its premier. The message is clear: there is no room for any opinion other than Xi Jinping’s. Foreign CEOs are taking note and investment into China is drying up.
2. Real Estate & Population Problems
Real estate is an enormous percentage of Chinese consumer’s balance sheets. China’s real estate bubble continues to weigh on consumer sentiment and the overall economy. Poor demographic trends compound this problem. Major economic imbalances and poor demographics are not fixed by interest rate cuts or fiscal stimulus!
3. Export Strength Not Sustainable
Strong net-exports drove China’s recent GDP ‘beat’. But this flood of exports is just a short-term boost. Dubbed China Shock 2.0 this most recent flood of exports is a result of China’s overcapacity problem. China invested heavily in factories to make stuff for its domestic consumers. With depressed domestic consumers not buying enough China is simply exporting its surpluses.
But pumping underpriced goods into other economies isn’t a good way to make friends. The US and the EU are threatening to raise trade barriers.
Emerging economies including Brazil, India & Mexico are also joining the chorus.
Can China’s economy keep this up? I doubt it.
Disclosure: Unless stated otherwise, views, opinions or forecasts expressed in this blog are those of the author and do not necessarily reflect those of the Adviser and/or its employees. The contents of this blog are distributed for informational purposes, and are not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in these communications is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational, and illustrative purposes.
The Cobblestone Advisor April 2024
Treasury Yields & The Fed
4.5.2024
When the Federal Reserve cuts rates, it lowers the interbank overnight rate. This lowers the short end of the yield curve.
Waiting to buy a house and hoping for a Fed cut? When the Fed does cut, it might not help. Mortgages are priced off the 10-year treasury, not the Fed funds rate.
Treasury supply & demand determines the 10-year yield. When the Fed cuts, the 10-year Treasury yield might go down… it also might go up! The Fed’s policy does not impact the entire curve equally.
source: Bloomberg + my beautiful handwriting
In December, we touched on some key changes to the Treasury market. These issues are starting to get more attention from the press.
Treasury Supply is Up-
+Refinancing maturing bonds and funding the deficit means about $10 trillion will be issued this year.
Treasury Demand is Down or Flat-
-Federal Reserve no longer buying Treasuries
-US Banks are no longer buying Treasuries
-Foreign ownership of US debt isn’t keeping pace with the rise of Treasury supply.
To incent buyers like you and me, the Treasury market must offer attractive yields.
As we go to press, the 10-Year Treasury yields about 4.4%.
It started the year at 3.9%.
We continue to believe that interest rates will remain higher for longer. As part of our robust and diversified portfolio construction, we continue to emphasize equities with strong balance sheets and lower-duration fixed income.
Disclosure: Unless stated otherwise, views, opinions or forecasts expressed in this blog are those of the author and do not necessarily reflect those of the Adviser and/or its employees. The contents of this blog are distributed for informational purposes, and are not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in these communications is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational, and illustrative purposes.
