China’s economic challenges, rate cuts, yield curves, and currency valuations

PBoC stimulus counters manufacturing contraction amid mixed PMI signals

What the chart shows

This table provides a detailed breakdown of China’s Purchasing Managers’ Indices (PMIs) from both the National Bureau of Statistics (NBS) and Caixin, covering composite, manufacturing and services sectors. It also includes components of the NBS PMI indices. All are heat-mapped based on their percentile ranks across all available historical data.

Behind the data

The People's Bank of China (PBoC) has announced monetary stimulus that includes cutting the reserve requirement ratio (RRR) by 0.5 percentage points. It also plans to implement further interest rate reductions and inject approximately 1 trillion yuan of long-term liquidity into the economy. This move has helped alleviate concerns about economic activity, as indicated by discrepancies between the NBS and Caixin PMIs and deteriorations in several official PMI components shown in the table.

The Caixin PMI has recently shown expansion. However, the official PMIs reported by the NBS have indicated contractions in manufacturing, despite slight expansions in non-manufacturing. Across various components, contractions can be observed across the board, except for business expectations, which remain in expansion.

China’s growth target at risk

What the chart shows

This chart depicts China’s real GDP growth from 1994 to 2024, along with two measures of potential growth rates: one calculated using the Hodrick-Prescott (HP) filter – which extracts a trend from economic cycles – and another based on a post-global financial crisis (GFC) exponential trend projected into the next 12 months.

Behind the data

Despite the government’s 5% economic growth target, China’s economy has been encountering challenges in real estate, post-COVID activity recovery, the labor market and other areas. These issues suggest that the target may not be attainable.

Additionally, the country’s potential growth rates support this concern: The HP filter indicates a potential growth rate of 4.5%, while the post-GFC exponential trend projects growth falling below 4% in the next 12 months.

Russia and Japan buck trend of global rate cuts

What the chart shows

This table presents the key interest rates of central banks from G10 countries, China and Russia, along with the percentage of inverted spreads for each economy based on term spreads between 1-year to 10-year government bonds. Most central banks have begun their rate-cutting cycles, with exceptions being Australia, Japan and Russia. Notably, Russia and Japan have implemented rate hikes in recent months. Interestingly, while the Russian yield curve is fully inverted – indicating that all spreads between short-term and long-term bonds are negative – Japan's yield curve shows no inversion at all.

Behind the data

The widespread initiation of rate-cutting cycles among central banks reflects a global shift toward monetary easing in response to slowing economic growth amid inflation concerns. The inversion of yield curves in several economies, such as the US (46.7% inverted spreads), the UK (53.3%) and various euro area countries, signals market expectations of future economic slowdowns and potential further rate cuts. Russia's fully inverted yield curve, despite recent rate hikes, may indicate that investors expect future rate reductions or harbor concerns about the country's long-term economic prospects. In contrast, Japan's lack of yield curve inversion, even after rate hikes, suggests that the market anticipates steady economic conditions or aligns with the central bank's optimistic outlook.

US yield curve gradually dis-inverting in 2024

What the chart shows

This chart analyzes the US yield curve from 2015 to 2024, focusing on the percentage of the curve that is inverted. The different colors depict various types of term spreads.

Behind the data

The data reveals that throughout 2024, the US yield curve has been gradually dis-inverting, indicating a shift toward a more normal yield curve structure. In the early part of the year, the proportion of spreads inverted by more than 50 basis points remained steady, suggesting sustained investor concerns about economic slowdown or later rate cuts. However, more recently, even these deeply inverted spreads have begun to decrease. This movement toward upward sloping—where longer-term yields exceed shorter-term yields—reflects growing market optimism about future economic conditions. The dis-inversion across the yield curve may signal expectations of stronger economic growth or a change in monetary policy stance by the Federal Reserve.

Quant Insight data reveals euro’s valuation gaps against global currencies

What the chart shows

This chart showcases Macrobond’s newly integrated Quant Insight dataset, offering a detailed analysis of currency sensitivities against the euro. Macro sensitivities are interpreted such as that a one standard deviation change in a macroeconomic factor will result in an x% change in the currency pair’s exchange rate.

Behind the data

This analysis of the euro's valuation against 22 different currencies reveals that euro vs. Malaysian ringgit is the most undervalued pair, with a -4.5% gap from fair value, suggesting potential appreciation of the euro against the ringgit. Conversely, the euro is most overvalued against currencies like the Russian ruble and Mexican peso, indicating possible future depreciation relative to these currencies.

By using this dataset, we can identify trends and relationships in key drivers such as commodity prices, credit risk indicators and market volatility.  

S&P 500 maintains growth amid moderate volatility

What the chart shows

This chart displays the S&P 500's annual return growth, VIX intra-year highs, and maximum drawdowns, from 1990 to the present.

Behind the data

Although markets have experienced some selloffs and uncertainties due to recurring recessionary fears, the data shows that markets are still far from extreme pessimism.

The S&P 500's year-to-date return growth remains positive. The VIX index, although spiking occasionally, closed highest at 38.6% during this year, notably lower than its significant highs. Meanwhile, the year-to-date maximum drawdown is -8.5%, which seems typical compared to previous norms.