Waiting on Beijing

The surprisingly dovish tone of Fed Chair Jerome Powell’s speech on Wednesday is likely to drive world markets until the Fed’s December policy meeting, but for Asia, China’s economic data and government response to the ongoing domestic protests will be no less important.

The IMF, the US Treasury Secretary and the world’s biggest bond fund all chipped in with their views on China on Wednesday, although what investors really want to hear is word from Beijing.

The economic outlook is deteriorating. Chinese business activity is contracting at its fastest pace in six months, official PMI data showed on Wednesday, raising fears about next year. The final reading of the Caixin manufacturing PMI on Thursday is expected to be revised down too.

This is likely to prompt further fiscal and monetary policy easing from the authorities. But will it be enough to relax the COVID-19 restrictions and accelerate the broader reopening of the economy?

As analysts at CrossBorder Capital note, economic momentum in China is slowing again, while investors’ risk appetite remains near 2020 pandemic lows.

The IMF suggests there is scope for a further “gradual, safe recalibration” of Beijing’s zero-COVID policy. This comes a day after IMF Managing Director Kristalina Georgieva said the 4.4% forecast for Chinese growth next year could be cut.

US Treasury Secretary Janet Yellen said China’s zero-COVID policy was a threat to healing global supply chain difficulties, but said she would not give Beijing advice on managing the pandemic.

On the FX front, at least, Beijing may have got an inadvertent and indirect helping hand from the Fed on Wednesday, after Powell’s eagerly-awaited remarks on the economic outlook were deemed to be far more dovish than investors had expected.

The dollar fell almost 1%, and if that weakness is replicated and maintained in the weeks ahead, a renewed slide in the yuan’s exchange rate is one less thing Beijing has to worry about.

Another whoosh in global markets – Wall Street’s three main indices soared 2%-4% on Powell’s comments on Wednesday – won’t do any harm either.

Three key developments that could provide more direction to markets on Thursday:

– China Caixin manufacturing PMI (November, final)

– US PCE inflation (November)

– Fed’s Logan, Bowman, Kashkari, Barr all speak

(Reporting by Jamie McGeever in Orlando, Fla.; Editing by Deepa Babington)