By Omkar Godbole (All times ET unless indicated otherwise)
Keeping an eye on the Far East has been our mantra lately, and the latest news from the Chinese bond market shows why. Just today, China’s one-year government bond yield dropped below 1% for the first time since the Great Financial Crisis, adding to the year-to-date downturn.
The benchmark 10-year yield slipped to 1.7%. This development suggests that China’s economic troubles are far from over, and the government will likely have to roll out more aggressive stimulus measures than we saw earlier this year. Jeroen Blokland, the founder and manager of the Blokland Smart Multi-Asset Fund, put it succinctly: “This indicates that China’s economic troubles are far from over, and the government will do what aging economies often do: ramp up government spending, allow for larger deficits and higher debt levels, and drive interest rates down toward zero.”
Moreover, the situation in China also raises questions about Federal Reserve Chairman Jerome Powell’s recent alarm over interest rates, which sent bitcoin tumbling to $95,000 from $105,000.
China, the world’s factory, is facing worsening deflation having already experienced the longest stretch of falling prices since the late 1990s. That could cap PPI and CPI readings worldwide, including in the U.S., a major trading partner. BNP Paribas noted this phenomenon earlier this year, with analysts saying that China has already contributed to lowering core inflation in the eurozone and the U.S.
by about 0.1 percentage point and core goods inflation by roughly 0.5 percentage point. What this means is that Powell’s concerns about stubborn inflation may be unfounded, and it begs the question whether he will really stick to just two rate cuts for 2025 as he implied on Wednesday. Cryptocurrencies are not immune to these developments.
As of writing, bitcoin has dropped below $95,000, while ethereum has slipped to $3,200. All the top 100 coins are flashing red. Futures tied to the S&P 500 are down 0.5%, indicating a negative open and continuation of the post-Fed risk-off sentiment. Sentiment may worsen if the core PCE, the Fed’s preferred inflation gauge, comes in hotter than expected later today.
That might see markets price out another rate cut, leaving just one on the table for 2025. Stay alert!
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