Market Rebound: A Reversal of Fortune or Just a Brief Respite?

The current market rebound has raised questions about its underlying drivers and sustainability. Steven Wieting, Chief Investment Strategist at Citi Private Bank, attributes the rebound to a growth panic rather than a genuine bounce. He notes that the severe economic downturn was triggered by China's currency devaluation, but there has been no follow-through on this trend.

Key Takeaways:

• The current market rebound resembles the mirror image of the previous selloff, with the roots of the downturn linked to China's currency devaluation.
• Despite government intervention, the Chinese market has failed to instill confidence, and the overall impact of monetary easing worldwide is a concern for the future.
• The idea that the market is fragile and poised for a collapse is a misplaced fear, according to Wieting, who believes that the economy is operating below potential.
• The stimulus provided by central banks from 2008-2013 has had a profound impact on markets, leading to disrupted effects and a heightened fear of interest rate hikes.
• The Federal Reserve's decision to tighten monetary policy will have significant implications for the US economy, with labor markets growing at unsustainable rates.
• The unemployment rate is expected to fall below 4% in the next couple of years, with employment demand outpacing supply by 2-1/2 times.
• The Swiss franc's recovery to a 1.09 handle highlights the global backdrop of economic uncertainty and the need for coordinated policy action.

Statistics:

• The unemployment rate has fallen 1% per year over the past 5 years, with employment demand growing 2-1/2 times faster than supply.
• The Federal Funds Futures Rate indicates a 30% probability of a rate hike, which is seen as a move and not just a reaction to headlines.
• The 2-year note suggests that interest rates remain low, with a need for pricing adjustments.
• Retail sales growth in China is at 10-1/2%, while imports are falling at 14%, highlighting the emerging world's concerns about China's economy.

Sources:

• Wieting, Steven (2015, November). Interview with Keene on Bloomberg.
• Buiter, Willem (2015, November). Citigroup Research.
• Bloomberg (2015, November). Transcript of Bloomberg's interview with Steven Wieting.