Friday Investors Club: Chinese stocks climb on monetary easing (7:44)

CIO equity strategist Summer Xia joins CIO's Wayne Gordon and Daisy Tseng to discuss Beijing's reported stock market rescue plan, China's housing market, and how investors should manage their Chinese equities exposure.

Thought of the day

The US economy grew faster than expected in the final quarter of 2023, suggesting there isn’t an urgent need for the Federal Reserve to start cutting rates. The 3.3% annualized increase in GDP was above the consensus forecast for 2%, exceeding every economist’s estimate from a Bloomberg survey. Growth has now been above the Fed’s estimate for the sustainable trend rate of 1.8% since the third quarter of 2022.

But despite the latest show of strength, we believe the US remains on track for a soft landing, with a combination of resilient growth and moderating inflation—a positive backdrop for markets.

Reassuring data on inflation supports our outlook for Fed rate cuts. The core Personal Consumption Expenditures index, the Fed’s favorite measure of inflation, increased 2% in the final quarter of 2023. This was the same as the third quarter and in line with the Fed’s 2% target.

This data helps explain why markets actually scaled up expectations for the pace of easing from the Fed, despite the strength of economic growth. By the end of trading, the market was pointing to 141 basis points of cuts priced in by the December meeting, up 8.9 basis points on the previous day. While this looks excessive to us—our base case is for 100 basis points this year—this outlook remains supportive for quality bonds and the broader equity market. Such cuts would be especially helpful to small-cap stocks, which are more reliant on floating rate debt than their larger peers.

Economic growth is still on track to cool, without tipping into recession. The fourth quarter GDP data was strong across the board, with consumption, business investment, and residential investment all contributing to growth. Exports and government spending were also positive. A 2.5% quarter-on-quarter rise in disposable income suggests little risk at present that consumer spending is likely to slow abruptly.

Despite this, we do expect consumption growth to moderate this year. Existing headwinds like housing affordability, the end of childcare subsidies, trimming of Medicaid rolls, and the resumption of student loan payments suggest that growth is likely to fall slightly below trend.

US job market data still appears consistent with a soft landing. As with GDP growth, recent employment releases have been relatively robust. The rate of job creation in December topped expectations at 216,000. However, downward revisions to prior months meant the reading was not as strong as it initially appeared. The consensus forecast for January is for job creation to slow to 162,000, with average earnings growth also moderating.

In addition, first-time claims for jobless benefits for the week ending 20 January were higher than expected—a sign of weaker demand for labor—with initial claims rising to 214,000 from 189,000. The release next week of the Employment Cost Index is expected to show a three-month rolling average quarterly increase of 1.1% in the cost of labor, in line with the rate of labor cost increases last quarter and one-year ago.

So, economic data in the US continues to point to a benign backdrop for markets, with resilient growth, moderating inflation, and the prospect of rate cuts. We expect the Fed to feel comfortable cutting rates starting in May, though this will likely require further signs that the economy is cooling off between now and then. Against this backdrop, we continue to recommend a focus on quality, in both fixed income and equities. We also recommend complementing exposure to quality stocks with small-caps, which are likely to do well in our base case for a soft landing but would also benefit more in our upside "Goldilocks" scenario.