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 highlights that China’s economic struggles are far from over, suggesting that the government may need to implement more aggressive stimulus measures than previously seen this year. Jeroen Blokland, the founder and manager of the Blokland Smart Multi-Asset Fund, summarized this viewpoint by stating, “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 concerns over interest rates, which caused bitcoin to plunge overnight.

China, as the world’s factory, has contributed significantly to global deflation, with its longest stretch of falling prices since the late 1990s. This could potentially cap both PPI and CPI readings worldwide, including in the United States, a major trading partner. Analysts at BNP Paribas pointed out this phenomenon earlier this year, stating that China had already contributed to lowering core inflation in the Eurozone and the US by approximately 0.1 percentage point and core goods inflation by around 0.5 percentage point.

What this implies is that Powell’s worries about persistent inflation might be overstated, and it remains to be seen whether he will adhere strictly to his previous indication of only two rate hikes for 2025. Some experts believe there might be more. According to Dan Tapiero, CEO and CIO of 10T Holdings, “Fed concerns on inflation are misguided.

Interest rates are still too high in the US, and liquidity is about to increase, driving Bitcoin higher.”

However, the current sentiment in the market seems bearish, as all top 100 coins are flashing red, and futures tied to the S&P 500 indicate a negative open, suggesting a continuation of the post-Fed risk-off trend.

Sentiment could worsen if the core PCE, the Fed’s preferred inflation gauge, comes in hotter than expected later today. This might lead markets to price out any additional rate cuts, leaving only one on the table for 2025. To sum up, while the situation in China presents both opportunities and challenges for global markets, investors should stay vigilant and monitor developments closely.

Source