Truss’ “mini-budget” anniversary
This week marked the 2-year anniversary of the infamous Liz Truss “mini-budget”, which proposed major unfunded tax cuts, and helped sterling slide to its lowest level in the last 4 years. Since then, the pound has surged by 23%, from $1.09 to $1.33, and has now reached the highest level since early 2022. Sterling’s recent gains have been spurred by the Bank of England’s decision to hold its policy rate steady, following the Federal Reserve’s 50-basis-point rate cut last week.
China’s ‘bazooka’ stimulus
This week also saw China’s central bank reducing a key interest rate as part of a broader effort to stimulate their economy and ensure the country meets its annual growth target.
The People’s Bank of China announced a cut in its main policy rate, the seven-day reverse repo rate, from 1.7% to 1.5%, alongside a 0.5% reduction in the reserve requirement ratio, which determines how much capital banks must hold in reserve. Additionally, the government plans to strengthen a housing destocking program to address the oversupply in China’s debt-laden real estate sector, and to lower mortgage rates for existing homeowners.
The market reacted extremely well to the news, with the Chinese market rising 12% between Monday and Thursday this week:
The US yield curve disinverts
The yield curve is a line that plots the yields or interest rates of bonds with different maturity dates. A yield curve inversion, where short-term interest rates are higher than long-term rates, is typically seen as a precursor to economic downturns or recessions. This happens because investors seek the safety of longer-term bonds when they expect economic instability, pushing long-term yields lower.
When the yield curve begins to dis-invert, as it has done this month for the first time since it inverted in July 2022, it can indicate that investors are becoming more optimistic about future economic growth and stability. Dis-inversion can suggest that concerns over an imminent recession are easing, signalling a more favourable economic outlook.
More all-time highs
This increased optimism around the state of the US economy, helped by the start of the Fed’s easing cycle, propelled the US stock market to new all-time highs this week. Thursday’s all-time high marks the 42nd high this year, which is well above the long-term average of 14:
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