China’s Massive Package

Here are some of the biggest stories from last week:

• The UK’s debt-to-GDP hit 100% for the first time since 1961.
• UK consumer confidence plunged at its fastest rate in two-and-a-half years.
• Business activity in the eurozone unexpectedly contracted.
• China unveiled a broad package of stimulus measures to boost the economy.
• The price of gold hit another record high.

Dig deeper into these stories in this week’s review.

UK

The UK government's budget deficit – the difference between its revenues and expenses – has been widening, with more money being spent on energy subsidies, social services, public-sector pay, and interest payments on debt. To plug the gap, the government is turning to bond sales as a means of raising funds. And last month, it borrowed a more-than-expected £13.7 billion ($18.2 billion), marking the highest August on record outside the pandemic. The figures mean that the government has borrowed £64.1 billion since the start of the fiscal year in April, or 11% more than the Office for Budget Responsibility had initially predicted in March. And all those extra liabilities have sent the UK’s national debt pile, relative to the size of its economy, to 100% for the first time since 1961.

The data is the penultimate snapshot of the country’s public finances before the newly elected Labour government unveils its financial plan in next month’s annual Budget. And this one could be significant: the Labour party has already been warned of “difficult decisions” ahead, after a pick-up in the economy earlier this year failed to improve the country’s finances. That’s got Brits bracing themselves for an unpopular combination of spending cuts and tax hikes, which is starting to weigh on sentiment. Case in point: recent data showed consumer confidence in the UK plunged in September at its fastest rate since April 2022, when energy costs spiraled in the wake of Russia’s invasion of Ukraine.

Europe

The eurozone got some bad news at the start of the week, with business activity in the bloc unexpectedly shrinking in September. The eurozone Purchasing Managers’ Index (PMI) sank to 48.9 this month from August’s 51, dipping below the 50 mark that separates growth from contraction for the first time since February. Analysts had predicted a modest fall to 50.5. The decline was led by the bloc’s two biggest economies, Germany and France, both of which saw business activity plunge far more than expected. All in all, the data suggests that the slowdown in the eurozone’s economy is becoming more pronounced after an early-year rebound lost momentum. And although lower interest rates may offer a bit of support, some analysts argue that the problems are structural and require more difficult fixes…

China

Over in China, authorities unveiled a broad package of stimulus measures on Tuesday aimed at reviving growth in the world’s second-biggest economy. First, the seven-day reverse repo rate, the central bank’s main policy rate, was lowered to 1.5% from 1.7%. Second, the reserve requirement ratio – the amount of money banks must hold in reserve – was cut by 0.5 percentage points to its lowest level since 2018, adding 1 trillion yuan in liquidity to the banking system. The central bank also hinted at the possibility of further reducing the ratio by an additional 0.25 to 0.5 percentage points this year.

Third, measures were announced to shore up the nation’s troubled property sector, including lowering borrowing costs on outstanding mortgages and easing the minimum down-payment ratio for second-home purchases to 15% from 25%. What’s more, the Chinese central bank will cover 100% of loans for local governments buying unsold homes with cheap funding, up from 60%. Fourth, officials announced a 500 billion yuan fund to help brokers, insurance companies, and funds buy stocks. The central bank will also provide 300 billion yuan to help companies conduct share buybacks. Those announcements helped send China’s CSI 300 index of Shanghai- and Shenzhen-listed shares up 4.3% on Tuesday – its best day since July 2020.

While several of the measures were expected, the highly publicized rollout signals that authorities are taking seriously the warnings that China risks missing its growth target of around 5% this year. While the policy package likely puts that goal back within reach, doubts remain about whether it will be enough to alleviate China's longer-term deflationary pressures and entrenched real estate crisis. What’s more, authorities have yet to introduce aggressive measures to boost consumer demand, which some analysts see as a crucial missing element for the economy. After all, making money cheaper won’t stimulate growth if Chinese consumers remain hesitant to spend…

Commodities

Another week, another record, with the price of gold hitting an all-time high of $2,670 an ounce on Wednesday. That came a day after a report showed US consumer confidence unexpectedly fell in September by the most in three years, prompting traders to bet on more aggressive rate cuts from the Fed. (Lower interest rates benefit gold by reducing the opportunity cost of owning the metal, which doesn’t generate any income). At the same time, anticipation of US interest rates declining further has sent the dollar lower, making gold cheaper for many buyers. Finally, a flare up in geopolitical tensions in the Middle East has also boosted safe-haven demand for gold.

Not wanting to be left behind, the price of silver is hovering near its highest level in over a decade. The metal is benefiting from gold’s rally, considering that the two often move in tandem. After all, both are seen as safe-haven assets and inflation hedges, and they’re influenced by similar economic and market factors. The main difference between the two is that silver has more weight in the industrial industry: 46% of silver’s yearly consumption comes from the sector versus just 6% for gold. And China’s unveiling of a massive package of stimulus measures to boost the economy this week has given a significant lift to industrial metals, like silver.

Next week

• Monday: Japan industrial production and retail sales (August), China PMIs (September), UK M4 money supply (August).
• Tuesday: Japan unemployment rate (August), eurozone inflation (September), US job openings and labor turnover survey (August). Earnings: Nike.
• Wednesday: Eurozone unemployment rate (August).
• Thursday: US factory orders (August). Earnings: Constellation Brands.
• Friday: US labor market report (September).