Fed rate cuts will push liquidity across the globe, including to China, despite strong US jobs data

ONE news story that grabbed a lot of attention last week was a retrenchment exercise in Singapore by high-end consumer electronics maker Dyson, for which it had given only a day’s notice to the union. This was soon followed by a report that Samsung Electronics is also cutting jobs in Singapore as part of a plan to reduce its global headcount.

These stories naturally raised concerns about the rights of workers when companies decide to downsize. But they were also something of a wake-up call for investors who have been celebrating surging stock prices in Singapore and the region amid a global loosening of monetary policy.

Companies make adjustments to their staff strength for a wide variety of reasons, including to support changes in their long-term growth strategies. Yet, job cuts are often a means for companies to cope with deteriorating profitability in the face of softening demand.

Should investors continue piling into the market to ride the trend of falling interest rates? Or should they be wary of an imminent decline in economic growth and corporate profitability?

This seems to be the big question investors around the world are trying to answer.

Big China rally

China stocks, for instance, have staged a strong rally over the past fortnight following the Sep 24 announcement of a major stimulus package that included interest rate cuts and a reduction in the reserve requirement ratio for banks.

Over the past two weeks, the Hang Seng China Enterprises Index soared more than 27.8 per cent, while the Hang Seng Index climbed more than 24.5 per cent.

By some accounts, the stimulus is already having a positive effect on home sales in China. Yet some market watchers think the rally in China stocks will end in tears.

One concern is that the stimulus measures are simply insufficient to pull China’s property sector out of its deep and protracted slump.

Another worry is that trade tensions between China and the West have not abated. Last week, the European Union voted to impose tariffs of as high as 45 per cent on electric vehicles from China.

Perhaps the biggest problem with China is that it has repeatedly disappointed investors over the last few years.

China was, for instance, slow to lift its pandemic restrictions despite the obvious economic advantages of moving more quickly.

Investors have also been unnerved by recent crackdowns on the activities of some of the most prominent companies in the China market.

Rate cut doubts

While China might have to do more to get its economy humming again, the US might have gone too far with its 50-basis-point rate cut last month.

The latest US jobs report, which was out last Friday (Oct 4), showed that non-farm payroll employment increased by 254,000 in September. This was higher than the average monthly gain of 203,000 over the prior 12 months.

Non-farm payroll employment gains in July and August were revised up to 144,000 and 159,000 respectively. With the revisions, the combined employment gain for the two months was 72,000 more than previously reported.

The unemployment rate came in at 4.1 per in September, down from 4.2 per cent in August and 4.3 per cent in July.

These seemingly strong jobs numbers suggest a higher likelihood of a “soft landing” scenario for the US economy, which would be generally positive for US stocks.

However, this would mean a more gradual pace of Fed rate cuts than the market has been expecting. Certainly, the prospect of another 50-basis-point rate cut at next month’s Fed meeting seems off the table for now.

Against this backdrop, it could be harder for countries in Asia – including China – to support their economies with aggressively looser monetary policy, without their currencies eventually coming under pressure.

Indeed, the ringgit, rupiah and baht suffered sell-offs last week.

On Friday, the 10-year US Treasury bond yield shot up from 3.85 per cent to 3.98 per cent. The US dollar index rose nearly 0.5 per cent.

Rising tide of liquidity

Investors should not lose sight of the bigger picture, though.

The path to a soft landing for the US economy is bound to be littered with conflicting data points and news stories.

While the September jobs report was stronger than expected, it comes after the Fed’s 50-basis-point rate cut drew questions about the resilience of the US economy.

And even though the long-term outlook for China stocks is uncertain, they are trading at relatively low valuations.

The way I see it, the Fed is on track to gradually cut rates in the months ahead. This should continue to facilitate the flow of liquidity around the globe – including to China.

What should investors in Singapore do? Over the past fortnight, the Straits Times Index has retreated from 17-year highs. A number of neighbouring markets have pulled back in tandem.

One explanation is that the sudden rally in China stocks is drawing funds away from other Asian markets.

Over the next few months, however, the flow of global liquidity to Asia could be the proverbial tide that lifts all boats.

Meanwhile, the financial stimulus that has driven the big rally in China stocks over the last couple of weeks could begin spurring its economy.

Companies listed in Singapore and around the region that have exposure to China’s economy could find themselves riding a strong wave of investor interest.