Morning Update

China’s largest private developer, Country Garden is back in the headlines with renewed concerns over the firm defaulting on international debts. In a statement to the Hong Kong stock exchange, the property giant said yesterday that it expects it “will not be able to meet all of its offshore payment obligations” when due. At the end of the last calendar year, Country Garden had total liabilities of some $194bn and some $10bn in USD denominated debt. As we looked at earlier this summer, according to the Telegraph “its potential failure to repay its debts would dwarf the default of developer China Evergrande two years ago”. This came as Country Garden could not meet international bond payments back in August. This led to a 30-day grace period being instated which allowed the property giant to avoid default, but pressure now appears to be mounting. Instability around Country Garden has thus renewed fears over the fragility of the Chinese property market, with potential contagion risks spanning far from China’s shores.

Yesterday evening, Vice Chair of the Fed Philip N. Jefferson indicated that “We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy being too restrictive”. Jefferson further stated that “Looking ahead, I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy.” Jefferson also reiterated the time lag effects of monetary tightening, in a nod to how the impact of rate cuts have not fully percolated through the economy. As we looked at yesterday, Jefferson was recently confirmed by the Senate as vice chair of the Fed in an 88-10 vote which generally speaking demonstrated bipartisan support for him. Jefferson’s voting record (which has involved him opting to raise rates each time since March 2022), is indicative of what many describe as his slightly more hawkish stance and thus yesterday slightly more dovish undertones fed into markets downwardly revising their rate hike expectations from the Federal Reserve. This was on the back end of Dallas Fed president Lorie Logan who similarly expressed some dovish concerns over the prospect of over-tightening. Both speakers however reiterated how inflation remains above target, and that the Fed would remain focused on bringing it back down.

Accordingly, as Reuters notes the “CME Group’s FedWatch showed the estimated chance of a rate hike at the Fed’s upcoming meeting plummet from around 27% at the start of the day to around 14% after the two officials spoke. The chance of a rate increase at the December meeting fell from around 36% to 24%.”