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 troubles are far from over, and the government may need to roll out more aggressive stimulus measures than previously anticipated. Jeroen Blokland, the founder and manager of the Blokland Smart Multi-Asset Fund, emphasized this point by stating that China’s continued decline in yields suggests they “will have to drive interest rates down toward zero.”
Moreover, this situation in China also raises questions about Federal Reserve Chairman Jerome Powell’s recent concerns over interest rates.
China, as the world’s factory, has already experienced the longest stretch of falling prices since the late 1990s, which could cap PPI and CPI readings worldwide, including in the US, a major trading partner. Analysts at BNP Paribas pointed out that China has 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 points.
This implies that Powell’s concerns about stubborn inflation may be unwarranted, and it begs the question whether he will really stick to just two rate cuts for 2025 as he implied on Wednesday. Many experts believe there might be more. “Fed concerns on inflation are misguided,” said Dan Tapiero, CEO and CIO of 10T Holdings.
“Interest rates are still too high in the US, and liquidity is about to increase, driving Bitcoin higher.”
However, the current market sentiment seems to contradict this optimism. Cryptocurrencies are experiencing a significant drop, with all top 100 coins 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 environment.
Sentiment may worsen if the core PCE, the Fed’s preferred inflation gauge, comes in hotter than expected later today. To summarize, while the recent developments in China suggest the possibility of increased stimulus measures and a prolonged period of low-interest rates, the current market sentiment appears to be bearish due to concerns around inflation and potential changes in monetary policy.
It remains to be seen how these factors will ultimately impact global financial markets, including cryptocurrencies.
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