Wall Street’s rally is kicking into high gear, with the S&P 500 flirting with record highs, thanks to last week’s Federal Reserve interest rate cut.

Now, China’s bold new stimulus package is stepping into the spotlight, as the country doubles down on its role as the global economic powerhouse.

Global equity markets have been trending upward, spurred by the jumbo-sized 0.50% federal funds rate cut last week by the Fed. As of the third quarter, the S&P 500 is on track for a nearly 5% gain, pushing its year-to-date increase close to 20%.

This week, China’s release of its monetary stimulus package has dominated the financial headlines. In response to slowing economic growth, China unveiled a wide range of measures aimed at boosting its economy.

Sector dynamics have shifted. Rate-sensitive industries, such as utilities and real estate, have emerged as leaders, while technology, communication services, and energy have lagged.

Bond markets tell a different story: while the 2-year Treasury yield has dropped in line with the Fed’s rate cuts, the 10-year yield has steadied, causing the yield curve to steepen, reversing its earlier inversion and reaching its highest level of the year.

China’s monetary policy moves are key to the current global financial landscape. The People’s Bank of China (PBoC) introduced a set of aggressive policies, including short-term interest rate cuts and reduced bank reserve requirements.

These steps aim to shore up the country’s domestic consumption while addressing challenges in the struggling property market and stock market, offering liquidity and the possibility of stabilization funds. Chinese equity markets have surged in response, while global commodity markets, particularly natural gas, also have rallied.

While these measures are encouraging, there’s skepticism over whether monetary policy alone will be enough to kick-start meaningful growth. China may need additional fiscal support and government-led investment to spark a broader economic recovery. The country’s debt-ridden real estate sector is a worsening concern.

China’s economy is still growing, but at a markedly decelerating pace. China’s gross domestic product (GDP) grew by 4.7% in the second quarter of 2024 compared to the same period one year before, according to data released by China’s National Bureau of Statistics. This pace is down from the first quarter, when GDP expanded by 5.3%. China’s once-torrid economic growth has been on a long-term downward slope (see chart).

Here in the U.S., the Fed is set to release on Friday the August reading for its preferred inflation gauge, the personal consumption expenditures price index (PCE).

Economists expect headline PCE inflation to fall from 2.5% to 2.3% year-over-year, while core PCE inflation could rise slightly from 2.6% to 2.7%. The Fed has already adjusted its inflation forecast, projecting headline PCE inflation to hit 2.3% and core PCE to moderate to 2.6%. Given easing rent costs and slower wage growth, inflation is likely to continue its gradual decline.

The Fed’s monetary loosening already has invigorated the U.S. economy and bull market. We’ll see if Beijing’s stimulus measures can do the same for the world’s second-largest economy.

In the meantime, the main U.S stock market indices took a breather from their long winning streak and closed lower Wednesday as follows:

• DJIA: -0.70%
• S&P 500: -0.19%
• NASDAQ: +0.04%
• Russell 2000: -1.19%

The benchmark 30-year U.S. Treasury yield climbed 1.10% to settle at 4.13%.

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John Persinos is the editorial director of Investing Daily. You can reach John via mailbag@investingdaily.com

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