Macro suspense after the holiday

As the National Day holiday draws to a close, the upcoming press conference of the State Council Information Office on the first day after the holiday seems to bring back macro suspense. In the report "Pre-Holiday Macro Suspense" released on September 22, we had hinted at the possibility of changes in macro guidance before the holiday, and now that the shoe has dropped, the market's trend after the sharp rise will depend more on the macro narrative that follows.

So looking ahead after the holiday, what signals can be captured at the macro and policy levels? Combining the dynamics during the National Day holiday, we believe the following three points are worth paying attention to:

Firstly, in terms of policy shift, this round of top-down mobilization is significantly better than in the past.

As shown in Figure 1, compared with several major policy shifts since 2008, the current "full force" in the financial sector and the "unusual" political bureau meetings have shortened the time gap from central decision-making to the implementation by ministries, given that previous policy shifts have all involved the handover from the financial sector to economic ministries. We expect that the press conference of the National Development and Reform Commission (NDRC) after the holiday is just the beginning of this handover, and press conferences by other economic ministries such as the Ministry of Finance are also worth looking forward to.

Combining with the preview of the NDRC's first day after the holiday "systematically implementing a package of incremental policies" press conference, we believe it highlights a new approach, focusing on repairing the balance sheets of residents, local governments, and enterprises, which is actually hinted at by the financial sector's boost to the stock market and the political bureau meeting's statement on real estate "stabilizing after the decline." Only when these micro subjects no longer subtract from their balance sheets, can more incremental policies achieve the effect of addition.

Secondly, whether policy efforts can stabilize the fundamentals is crucial for the market's expectation of continued improvement. From high-frequency data, a series of policy positives before the holiday did have a certain pulse effect, especially evident in real estate sales and consumption (Figure 2, Figure 3) — which may also be the most important lever for the economy in the fourth quarter.

Moreover, with the "blessing" of the stock market, the potential of this consumption drive may be more promising. Drawing from history, the wealth effect brought about by a rising stock market usually stimulates residents' consumption or willingness to buy houses. In 2007, 2009, 2015, and 2021, China experienced four periods where the stock market led or rose simultaneously with house prices. From September 20th to now, the Shanghai and Shenzhen 300 Index has a weekly annualized return of 20.8%, significantly higher than the historical average of 2.0% for the four periods. We should be more optimistic about the fourth-quarter consumption recovery and stable house prices.

Lastly, even if market expectations are relatively ahead of policies, we believe there is no need to worry about a so-called "stimulus cliff." Looking at the external macro environment in the fourth quarter, the certainty of the Fed's interest rate cuts combined with the uncertainty of the U.S. election means that the current domestic policy shift will neither come to a sudden halt nor be completed in one step. **

We believe that a more likely scenario is a strategy similar to a "two-step" approach. The first step is to leverage the window of the Federal Reserve's unexpected rate cut before the U.S. election, focusing on financial policy with supplementary fiscal measures to stabilize market expectations for the year's economy;

The second step is to coordinate next year's economic work after the election, with a focus on fiscal policy and monetary easing to support economic stabilization in the first quarter of next year. In this sense, managing the expectations of the two-stage fiscal policies well also benefits the capital market to operate more steadily after this round of significant gains.

The pre-holiday policy rhythm is not impulsive, and post-holiday fiscal follow-up is a high probability event. However, the traditional model of "heavy investment, light consumption" may need to change. In recent years, the fiscal policy model has been characterized by "heavy investment, light consumption," with fiscal expenditures mainly used for project construction (especially infrastructure). However, as the scale continues to expand, the marginal effect is further limited.

On the other hand, in terms of consumption, there is still significant room for fiscal maneuvering—according to our calculations, the fiscal multiplier of expenditure linked to consumption is about 1.06; while the fiscal multiplier of expenditure related to investment is only 0.61, and has been declining overall since 2019. Therefore, it is necessary to appropriately increase the fiscal tilt towards consumption.

It is worth noting that the leverage effect of fiscal expenditure related to consumption on GDP has slightly declined in the past two years. The core reasons may be twofold: First, the ways in which fiscal expenditure "promotes consumption" still need to be optimized, and "where the money specifically goes" and "how the money is invested" may be key considerations for future fiscal efforts in the consumption sector;

Second, household consumption power has been overdrawn by the real estate market, coupled with the impact of the pandemic, resulting in insufficient effective purchasing power in society. Therefore, even if there is a slight inclination of fiscal expenditure towards consumption, residents have become indifferent. Of course, if fiscal support for consumption is "sufficient," the situation may change.

Article Author: Tao Chuan (S0600520050002), Zhong Yumei, Li Xiaoyu, Source: Chuan Yue Global Macro, Original Title: "Post-Holiday Macroeconomic Suspense (Livelihood Macro Tao Chuan)"