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.
Are recession fears overstated?
By Simon White, Macro Strategist, Bloomberg
The market is now considering a recession as its base case. Secured Overnight Financing Rate (SOFR) options, which assume a hard landing to be likely and a Federal Funds Rate of 3% or below by next June, now see a downturn as having a 50% probability. However, that's too pessimistic a view based on the data, which show a low chance of recession over the next three to four months.
Taylor rule signals potential Fed rate cuts
What the chart shows
The above table illustrates scenarios for the Federal funds rate (FFR) based on the Taylor rule (1993), a traditional monetary policy reaction function that responds to inflation and output gaps, with the unemployment gap serving as a proxy through Okun’s law. The US inflation and unemployment rates analyzed in the chart range from 1.5 to 3.5% and 3.5% to 5.5%, respectively, with the shades of blue and red indicating possible rate adjustments.
Behind the data
With the Federal Reserve's (Fed) dual mandate of stable prices and maximum employment, the Taylor rule provides a valuable framework for justifying potential Fed decisions in the coming months and years under varying economic conditions.
Given the recent Personal Consumption Expenditures (PCE) inflation rate of 2.5-2.6%, and an unemployment rate of 4.2%, the Taylor rule suggests an FFR of 5.0-5.1%, implying the need for one to two 25-basis-point rate cuts. This aligns with market expectations of a 25-basis-point rate cut at the upcoming Federal Open Marketing Committee (FOMC) meeting on 17-18 September, lowering the FFR from 5.25-5.5% to 5.0-5.25%, with additional cuts anticipated in Q4 2024.
If inflation moderates by 0.5 percentage points, the Taylor rule points to a 4.2% FFR. If the jobless rate rises by 0.5 percentage points, the rule indicates a target of 4.5-4.6% FFR. Should inflation decline and unemployment increase by these margins, the rule suggests an FFR of 3.7-3.9%. These scenarios underscore the Fed’s probable paths depending on shifts in economic data, reinforcing the model’s usefulness in projecting policy responses.