China’s industrial enterprises’ profits saw a significant decline in August, according to data released by the National Bureau of Statistics on September 27. In August, industrial profits fell by 17.8% year-over-year, a sharp decline from July’s 4.1% increase, marking a 21.9 percentage point decrease and the largest drop so far this year, ending two consecutive months of accelerating growth. From January to August, the cumulative annual growth rate of profits for industrial enterprises above a designated size was 0.5%, down from 3.6% in the January-to-July period, representing a 3.1 percentage point decrease.

National Bureau of Statistics industrial statistics expert Yu Weining stated that the sharp decline was mainly driven by insufficient domestic demand and the impact of extreme weather conditions. High-tech manufacturing, a key profit driver, also experienced a decline in August, with cumulative growth for January to August at 10.9%, down from 12.8% in the January-July period. Additionally, profits in sectors such as mining and consumer goods manufacturing continued to shrink, further exacerbating the downward pressure on overall industrial profits.

Facing Economic Growth Challenges, PBOC Unveils a Series of Solutions：

In response to a series of weak economic data, the People’s Bank of China (PBOC) introduced a range of easing policies on September 24, targeting interest rates, real estate, and the stock market.

Interest rate: The PBOC lowered the reserve requirement ratio for financial institutions by 0.5 percentage points, bringing the weighted average reserve ratio down from 7% to 6.6%. The central bank indicated it would continue to monitor market conditions and could reduce the ratio further by 0.25 to 0.5 percentage points if necessary. Additionally, the PBOC’s main policy rate, the 7-day reverse repurchase rate, will be reduced from 1.7% to 1.5% to guide market lending rates (LPR) lower.

Real Estate: The PBOC will direct commercial banks to lower mortgage rates by 0.5 percentage points and reduce the down payment ratio for second homes from 25% to 15%. Furthermore, for the 300-billion-yuan in affordable housing re-lending established in May, the PBOC will increase its support ratio from 60% to 100%.

Stock Market: The PBOC will allow securities, funds, and Insurance firm to pledge assets to the central bank in exchange for liquidity. Additionally, the PBOC has introduced a share repurchase and equity increase loan facility to provide listed companies with funding for share buybacks and equity increases.

Overall, as global demand weakens and exports hard to sustain the national economy, the PBOC implemented a more aggressive easing policy just days after the U.S. Federal Reserve’s rate cut. This move aims to mitigate the risks of RMB depreciation and capital outflows, while slightly alleviating the pressure to meet economic growth targets.

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The U.S. Consumer Confidence Index for September dropped sharply to 98.7 from 105.6 in the previous month, a decline of 6.5%, marking the largest decline since August 2021, according to data released by the U.S. Conference Board on September 24.

According to the report, the decline primarily reflects concerns among consumers regarding the outlook for the U.S. labor market. The percentage of consumers who believe jobs are currently hard to get increased to 18.3% (from 16.8%), while those expecting fewer job in the future rose to 18.3% (from 17%).

Despite the unemployment rate remaining at historic lows and layoffs being relatively limited, the proportion of consumers who think the economy has already entered a recession increased slightly compared to the previous month.

Inflation remains a critical factor influencing consumer confidence. Although inflation is steadily returning to the Federal Reserve’s target range, the report indicated that consumers’ inflation expectations for the next 12 months rose to 5.2% (from 5.0%). However, the percentage of consumers expecting inflation to decrease saw a slight increase.

Additionally, after the stock market’s volatility in August, the proportion of consumers expecting stock prices to fall over the next year declined to 25% (from 26.7%).

On the family’s financial situation, the survey revealed that consumer purchasing plans have shown a divided trend. There has been a slowdown in plans to purchase electronics, particularly smartphones and laptops/desktops. However, purchasing plans for homes and new vehicles have improved slightly, likely reflecting the Federal Reserve’s recent rate cuts.

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The Reserve Bank of Australia (RBA) announced on September 24 that the cash rate target remain at 4.35%, marking the seventh consecutive month at this level, which is also the highest in nearly 12 years.

In the meeting statement, the RBA noted that restrictive financial conditions continue to suppress consumption, contributing to a slowdown in the economy. However, the unemployment rate remains stable, the labor force participation rate is at a historic high, and job vacancies continue to grow, slightly easing labor market tensions.

The RBA stated that while household consumption is expected to recover in the second half of the year, if the pace is slower than anticipated, it could lead to prolonged weakness in economic output and further softening of the labor market. Moreover, global economic instability and geopolitical risks add to the uncertainty surrounding Australia’s economic outlook.

The RBA also highlighted that recent data reinforces the potential for upside inflation risks. The central bank now expects inflation to return to the target range by the end of 2025 (compared to the previous estimate of mid-2025 in August) and to approach the midpoint of the target range by 2026.

The RBA emphasized that bringing inflation down remains its top priority and stated that it would maintain restrictive monetary policy until there is clear evidence that inflation is steadily returning to the target range. Following this statement, the market now expects the RBA to hold off on cutting rates until February next year.

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The Fed announced a 50-basis-point rate cut last week, sparking expectations of further rate reductions and driving gold prices to new highs. On the 23rd, gold prices surged to an all-time high.

On September 23, gold futures on the COMEX, the world’s largest gold futures exchange, soared to a record high of $2,653 per ounce. This marks a roughly 30% increase in gold prices compared to the start of the year, with prices setting new records throughout the year.

Following the Fed’s announcement of a 50-basis-point cut in the benchmark interest rate last week, both spot and futures gold prices, which were already on an upward trend, reached new historic highs. In addition, rising geopolitical tensions in the Middle East have further fueled gold’s rally.

The decline in interest rates is likely to support continued increases in gold prices, and market expectations that the Fed will maintain its rate-cutting pace suggest that gold prices may continue to grow in the near future.

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The Federal Reserve held its FOMC meeting on September 18, announcing a 50-basis point cut to the federal funds rate, lowering it to a range of 4.75% to 5%. In its post-meeting statement, the Fed noted that the labor market had shifted from moderate growth to a slowdown, and its confidence in inflation returning to the target range had strengthened. Given the uncertainty surrounding the economic outlook and the balance of risks, the Fed decided to initiate a rate-cutting cycle, lowering rates by 50 basis points to support the U.S. job market.

In its Summary of Economic Projections (SEP), the Fed slightly revised down its 2024 economic growth forecast from 2.1% to 2.0%. It also raised the unemployment rate forecast from 4.0% to 4.4%, with unemployment expected to peak in 2025. Core inflation is projected to rise from 2.6% in June to 2.8%, with expectations for it to fall back to the target range by 2026.

The median of the Fed’s dot plot indicates that, assuming the economy develops as expected, interest rates will drop to 4.25% to 4.5% in 2024 (a total of 4 rate cuts) and to 3.25% to 3.5% in 2025 (another 4 rate cuts), with the long-term neutral rate projected to be between 2.75% and 3% (2 more cuts).

Overall, through this decision and economic forecast, the Fed aims to communicate to the market that while it acknowledges the weakening of the labor market, it remains committed to using appropriate rate cuts to support employment, while ensuring inflation stabilizes and economic growth continues.

Post-Meeting Press Conference Q&A Highlights

1. Labor Market

• Q: Historically, when the unemployment rate rises rapidly, it typically doesn’t stabilize quickly. However, the SEP data suggests that the unemployment rate will rise to 4.4% in 2024 and then stabilize. What is the mechanism behind this? What are the risks involved?
• A: Overall, the U.S. economy is growing steadily, inflation is gradually falling, and the labor market is returning to balance. The Fed’s goal is to maintain this status quo.
• Q: Over the past three months, the average monthly job gains were just over 100,000. Are you concerned about further deterioration in the labor market?
• A: This is mainly due to an increase in international migration, but the decline in job vacancies has also reduced overall job gains, which is the primary reason for the recent rise in the unemployment rate. Some FOMC members have considered the changes in the Beveridge Curve, noting that as job vacancies continue to fall, there may be a point where it directly converts to rising unemployment. We are likely approaching that point.

2. Inflation

• Q: With persistent housing inflation, is it still possible for overall inflation to return to 2%?
• A: Housing inflation has indeed been a drag on overall inflation. Although rental prices are falling slower than expected, as long as they remain low over the long term, it will eventually show in the overall inflation figures.

3. Interest Rate Adjustments

• Q: Recent labor market data has been significantly revised downward. Does this suggest that the Fed is behind in adjusting rates? Can we expect the Fed to maintain its current adjustment pace in the future?
• A: I do not believe the Fed is behind in adjusting rates. We have been taking timely, precautionary measures to respond to changes.
• Q: In the coming months, should we expect rate cuts of 25 bps or 50 bps?
• A: The SEP provides a reasonable reference, but the final rate adjustment will depend on economic performance. If the labor market weakens further, we may accelerate the rate cuts, and vice versa.

4. Balance Sheet Reduction

• Q: In 2019, the Fed halted its balance sheet reduction when it adjusted monetary policy. With this 50 bps rate cut, is there any indication that balance sheet reduction might stop as well?
• A: As of now, the Fed’s reserves remain sufficient. The balance sheet reduction has been primarily managed through the ON RRP (overnight reverse repurchase agreements). At this time, we are not considering halting the reduction. If rate cuts and balance sheet reduction are both seen as part of monetary policy normalization, then both can continue simultaneously for a period of time.

Comparison of the September and July FOMC Statements