China's central bank slashes its lending and repurchase rates as economists watch with bated breath over whether the world's second-largest economy can reverse the course of its slowdown.
Exante Data Inc. Founder and CEO Jens Nordvig joins Yahoo Finance Live to break down the concerns in China's economic situation, touching upon the "extremely severe tension in [China's] real estate sector" and the levels of "incoherence in the policy framework."
"We are in a policy vacuum where there seems to be some internal disagreement about what should be the policy from here and that's creating a lag and a delay and that is making markets very, very uncomfortable," Nordvig, who is also the Founder and CEO of MarketReader, says. "And you're seeing that in the price action very clearly."
Nordvig outlines where China's economic weakness could impact foreign markets, while also turning to Japan's GDP growth and Russia's interest rate hikes amid falling value in the ruble.
BRAD SMITH: In a surprise move, China's central bank cut two key policy rates after a broad array of data across retail sales and investments came in softer than expected on Tuesday. As the world grows increasingly concerned about the global ramifications of China's lackluster recovery, will Beijing's latest move be enough to jump start the economy? Jens Nordvig, Exante Data Inc. founder and CEO joins us now. Jens, always a pleasure to speak with you as well. So will it be enough, and is there more stimulus that you expect to come?
JENS NORDVIG: So, China's economy had a little bounce as a function of its reopening in the first quarter, right? And then that has very, very quickly run out of steam. And the data releases we've seen over the last week or so have been not just weak but, I would say, outright alarming, right? They are trying to get credit to flow into the economy, and the credit numbers last week were horrible.
Overnight we had extremely weak retail sales data for Chinese standards, right? So the reopening has clearly run out of steam and they have big challenges on their hand. I haven't even mentioned that we have extremely severe tension in the Chinese real estate market, right? We essentially have most of the home-builders teetering on bankruptcy. So from that perspective, the Chinese crisis in real estate is bigger than the 2008 crisis in the United States. Like it's a bit different because we don't have a Lehman situation, but in terms of the actual real estate situation, it's very serious.
So now they're cutting rates by 10 basis points. It's hardly a game-changing policy. 10 basis points is not going to make any difference really to what's happening with lending. But it has started to impact the currency, right? It's a signal that they're trying to inject more liquidity, have lower interest rates, and the currency is responding.
And this is creating a huge problem in itself, right? Because they want to have a stable currency. So now last night we had a grotesque situation where they cut rates and then they had the state banks intervene in the currency like within minutes after the rate cut. So I would say we're getting to a point of like incoherence in the policy framework as well, which is not really generating confidence. And you can see, OK, we had a rate cut and equities were down, right? So that's not what you want to see as a policymaker.
JULIE HYMAN: Yeah, and speaking of, you know, sort of opacity there as well, you know, listing things that are sort of difficult to understand, they're now not reporting that youth unemployment rate anymore after it rose to 21.3% in June, kind of saying, well, this age cohort, they're students, they're-- that's what they should be doing anyway. What do you-- I mean, are we seeing sort of signs of desperation here, or how are you reading-- when you look at that combined with the policy response, how are you reading it?
JENS NORDVIG: Yes, I think China has a long track record, right, of not being particularly transparent about what they're doing on the data front, right? So when they had a currency crisis back in 2015, '16, there was a lot of the most important data they stopped publishing. And the youth unemployment has gotten a lot of attention over the last couple of months-- clearly a quite disturbing statistic, so now they stopped publishing that. So that kind of follows a pattern.
In terms of the policy framework, I think we have now been through three or four months where the market increasingly is sort of looking for any sign of any meaningful stimulus, right? And we have a couple of prices bouncing and that kind of thing every time that there's a bit of hope. But the bottom line is that we have not had really anything meaningful announced. Like we have various kind of like ideas about things they're going to do in the future, but nothing has really been put very concrete on the table.
And as I said before, 10 basis points on interest rates really not going to make much of a difference, right? So we're in a bit of a policy vacuum where there seems to be some internal disagreement about what really should be the policy from here, and that's creating a lag and a delay, and that is making markets very, very uncomfortable, and you're seeing that in the price action very clearly.
BRAD SMITH: For, say, S&P 500 companies that have the largest exposure to China, how will that continue to impact their revenues and some of the moves and actually the lackluster kind of performance that's taking place over the course of this year in China?
JENS NORDVIG: Yeah, so I use the MarketReader technology every day, right, to scan what's going on in the equity market and pick out, OK, where is sort of the epicenter of volatility? And what we've seen repeatedly is that we have these ups and downs in sentiment around China-linked equities. And that can be, you know, FXI, ETF, but it can also be the materials stock and the stocks that have consumer exposure, such as the, you know, luxury goods companies.
So we're starting to see some wobbles there. And I think when I look at the data in China-- I've been covering China for about 20 years. I've never seen this type of weakness where it feels like you have a real confidence issue where the consumer is starting to get extremely nervous, worried about the future, and holding back.
And it was difficult to see it very clearly in the data, right, because we had that bounce because of the reopening. But under the surface, we have a confidence issue that is very severe, and that's certainly going to have spillovers into stock markets around the world. I'm surprised we have not seen more spillover. Like given the severity of this I think you could call it crisis-- consumer confidence crisis in China, I think we will see more spillover than we've seen to date.
JULIE HYMAN: Jens, speaking of things you probably haven't seen too much during your career, Japan GDP growth at 6%. What do you make of that? I know a lot of it is because of exports. But it also is such-- in such sharp contrast to China. It's really interesting.
JENS NORDVIG: Well, there's a lot going on in the market that even if you've been in the market for a while, you've never seen before, right? A lot of people say you should never short JDBs. It's a widow-maker at its core, right? And it has been the right [INAUDIBLE] to short JDBs over the last couple of months as they finally started to change policies there.
So we have dynamics going on in markets all around the world that are unprecedented. I would say also if you just think about what's happened this week where we have, as we've discussed, very serious issues in China that arguably are deflationary impulses, right, and at the same time, we have bond yields breaking up to the top side in the US and in Europe, right?
So we have a disconnect between the signal from China and what's going on in the bond markets. It's probably because the bond markets have become more flow driven as opposed to just following the CPI prints that would have also suggested lower yields. So there's a flow dynamic going on in the bond market that we have also not been seeing for a very, very long time.
JULIE HYMAN: Jens, want to throw one more thing in here. Although this at this point certainly is less connected to the rest of the globe, and that is Russia and what's going on with the ruble there tumbling and then the central bank there coming in raising the benchmark rate to 12% to try to forestall that, I mean, how should we think about-- from a currency perspective and just an economic perspective, how should we be thinking about Russia even at this point, given how isolated it is amidst its invasion of Ukraine?
JENS NORDVIG: I think-- I think the ruble is a good kind of barometer of what's going on in Russia, right? So we had a period where energy prices were very high. Russia benefited from that. Energy prices have now come down irrespective of the bounce in oil we've had this year. Russia is generating much, much less energy-related revenue than it was at the beginning of the war, right? So they are under pressure.
The war is expensive. And that's mapping into the ruble. We've had a dramatic period of weakness over the last couple of months that is potentially going to be important for Putin's popularity or unpopularity on the ground. So very important thing to follow and showing that Russia is under pressure here.
JULIE HYMAN: I just saw a headline that Wells Fargo just raised its US GDP forecast to something like 2%. We got the retail sales number this morning. So to bring it back to the US for a moment, Jens, just finally want to get your thoughts on the data this morning and, again, how we should sort of contextualize that in the bigger US growth story.
JENS NORDVIG: Yeah, so I speak to big institutional investors every day, and I have a couple of clients that describe the US economy as the Terminator economy. It just continues to come back. And that's very much the case with this retail sales number. It's very strong. A lot of people have been looking for weakness starting this summer, right? It's not happening.
Our labor market tracking shows continued resilience, right? So this economy is not dying quickly. Eventually the rate hikes will have an impact, right? But it's a much, much slower process than people thought. It takes a lot of time for debt to roll. So I think rate hikes really biting is more of a story for 2024 than 2023.
JULIE HYMAN: Wow. All right, Jens, good stuff. On fire this morning. Jens Nordvig, Exante Data Inc. founder and CEO. Also head of MarketReader. Thank you so much. Good to see you.
JENS NORDVIG: Thank you.