US Tomorrow – Bonds burn as China cuts rate cuts – Today at 12:05 p.m

Mike Dolan’s A Look at the Future in US and Global Markets

Bond burning in the U.S. has barely slowed this month and China has continued to fall short of what markets believe its economy needs to stabilize — making for a tense start to the financial week.

China’s latest widely-expected interest rate cut was surprisingly small, despite being fueled by a deep slump in the real estate sector and an underestimation of economic activity – highlighting concerns that official efforts to lift the economy are still only piecemeal.

The People’s Bank of China cut its one-year rate by just 10 basis points to 3.45% — less than an expected 15 bps cut — and left the five-year rate unchanged.

Disappointment saw the yuan fall again, while the dollar continued its gains against last week’s 2023 offshore renminbi and benchmark shares, falling more than 1% each to new lows for the year.

The yield gap between 10-year yields between the US and China widened to a new 16-year high.

Beijing’s most recent stock market support measures announced on Friday appeared to have little effect and foreign investors sold nearly a billion dollars worth of Chinese stocks through the Stock Connect system on Monday – the 11th straight session of net selling.

Shares in major real estate developer Sunac China fell as much as 13% after it reported a first-half net loss of 16 billion yuan ($2.19 billion) — the latest shock in ongoing industry turmoil. Revenue from government land sales in China fell for the 19th consecutive month in July, official figures showed.

UBS became the latest international bank to cut China’s annual economic growth forecast for this year from 5.2% to 4.8%.

China’s President Xi Jinping, who is heading to South Africa for a summit of BRICS countries including Brazil, Russia, India and the host nation, has a low profile, and Russian President Vladimir Putin is unable to attend due to an arrest warrant. For war crimes during the Russian invasion of Ukraine.

The other major irritant of the moment in global markets continued to cause irritation on Monday: the 30-year US Treasury yield hit a 12-year high of 4.4430%.

While there is some background skepticism about China’s Treasury sales associated with continued support for the yuan, the biggest problem for US bonds is the unexpected strength of US economic growth through July.

The main event of the week is the Federal Reserve’s annual Jackson Hole conference, where markets will be closely watching for clues about the central bank’s assumption of the long-term interest rate path and lending rates now structurally higher since the pandemic.

Still, the 10-year Treasury yield traded below last week’s high on Monday and Wall Street stock futures rallied ahead of the open. European shares also rose, helped by inflation hopes as German producer prices fell year-on-year for the first time in two-and-a-half years.

The dollar index was slightly higher.

But property worries extend beyond China: Germany’s Ifo institute said the housing slump worsened in July and Crest Nicholson’s profit warning hurt UK housebuilders’ shares, sending the housebuilder’s shares down 15%.

Events to watch on Monday: * Chinese President Xi Jinping arrives in South Africa ahead of BRICS summit in Johannesburg * US Treasury 3- and 6-month bills * US corporate earnings: Nordson, Zoom