The U.Seconomy finds itself at a pivotal juncture, grappling with critical questions surrounding the timing of interest rate hikes and the possibility of escaping a significant recessionMeanwhile, the Chinese market is keenly watching fluctuations in the renminbi exchange rate, changes in real estate sales, and the restoration of medium to long-term credit.

In recent days, global financial markets resemble a jittery creature, susceptible to even the most minor disruptive events, leading to significant fluctuations across major asset categories.

On October 3rd and 4th, U.Sstocks soared, with the Dow Jones index climbing nearly 1,500 pointsConcurrently, the yield on the 10-year U.STreasury bond dropped swiftly by 20 basis points to around 3.62%. The U.S

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dollar index consequently fell sharply, plummeting from 114.8 on September 27th to 100 by October 4thInvestors speculated that the Federal Reserve might slow down its pace of interest rate increases, inspired by weak PMI data from Europe and the U.S.

However, this bullish sentiment proved short-lived as the market reversed course sharplyU.Sstocks experienced a new wave of selling, erasing prior gains and even setting new lowsThe yield on the 10-year U.STreasury surged back up to approximately 3.9%, while the dollar index climbed back to around 113. The market's unease returned in response to mixed employment data from the U.S., reigniting fears over aggressive rate hikes by the Federal Reserve.

In the same vein, the renminbi exchange rate demonstrated substantial volatilityOn September 27th, a national foreign exchange market supervisory meeting was held, emphasizing that maintaining stability in the foreign exchange market is of utmost importance

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The meeting called on self-regulatory bodies to actively contribute to stabilizing the foreign exchange market and to curtail large fluctuations in the currency exchange rateFollowing these discussions, the offshore renminbi exchange rate quickly rebounded from 7.27 to around 7.01 by October 5. However, it subsequently depreciated again, aligning with the dollar's rebound, settling around 7.2.

In contrast, the oil market sidestepped this rollercoaster and instead experienced a steady increaseFrom September 27th to October 7th, crude oil prices jumped from $76 to nearly $93, marking an increase of over 20%. This surge can be attributed in part to OPEC's unexpected decision to cut production levels, creating an immediate boost to oil prices.

At present, the global market's risk appetite mimics that of a restless child, easily swayed by minor events, leading to unpredictable behavior

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Factors such as soaring inflation in Europe and the U.S., rapidly rising interest rates wielded by the Federal Reserve, and a gradual economic slowdown dominate the financial narrativeRegardless of market sentiments, these crucial economic fundamentals remain pivotal, defining the current trends in the financial landscape.

The Chinese market found a fortuitous respite from the turbulence occurring overseas, effectively avoiding the disruptive wave during the National Day holidayThe quarter ahead holds potential; the question remains whether the trend of the previous three quarters can reverse.

By the end of September, policymakers were already releasing "red envelopes" of eased regulations in the real estate sectorThe People's Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission decided to lower the lending rate limits for first-time homebuyers in certain cities

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This marks one of the few comprehensive relaxations of real estate policies in recent yearsFurthermore, reports indicate that the regulatory bodies have urged major banks to increase their support for real estate financing.

However, A-share markets remained cautious post-holiday, with the Shanghai Composite Index dipping below 3,000 points and the CSI 300 and Shanghai 50 indices retracing levels last seen in AprilMarket expectations for effective policies have dulled as investors increasingly seek concrete evidence of improvement, with future attention shifting to fluctuations in the renminbi, real estate sales metrics, and the recovery of both medium and long-term credit structures.

As the U.Sstock market has dropped more than 25% from its peak—marking a standard bear market—it has perhaps already factored in a mild recession

Historically, U.Sstock performance tends to serve as a barometer for economic health, often predicting downturns more adeptly than other indicators.

At this crossroads—where economic policy and economic conditions meet—the market sentiment is understandably more fragileSuch neurotic feelings often manifest during the tightening end-cycles of monetary policy, as seen in the fourth quarter of 2018.

The Fed's dot plot from the September meeting suggested a federal funds rate midpoint of 4.25%-4.5% for 2022, indicating that another 125 basis points of hikes are anticipated by year's endYet, the same chart indicates a tapering to around 4.5%-4.75% for 2023, suggesting that further rate hikes may be scarce, thereby situating the current policy within the stages of tightening.

While the Fed is diligently trying to correct any prior delays in controlling inflation, they risk opening new challenges

Leading voices in the Fed, especially those recently appointed, have released a strong signal indicating a preference to err on the side of over-tightening rather than allowing inflation to spiral out of control, reminiscent of the 1970s.

Fed official Chris Waller recently echoed this hawkish sentiment, dismissing any short-term market hopes for a change in directionHe conveyed that effective combat against inflation remains elusive, and that the Fed's concurrent double mission is somewhat unilateral at presentAmid events like the turmoil involving Credit Suisse and the UK’s debt situation, some speculate that financial stability risks might prompt the Fed to slow down rate increases; however, Waller unequivocally refuted this notion in his comments.

Similarly, newly appointed governor Lisa Cook maintained a hawkish stance, arguing that a decline in inflation expectations alone isn’t enough to warrant a policy shift from the Fed

She emphasized that tangible evidence of falling inflation metrics is essential before any consideration of a pivot would take shapeCook's mention of "risk management" does not imply that the Fed has started factoring in the risks of a downturn.

Consumer Price Index (CPI) inflation tends to lag; it typically surfaces long after an economy has overheated or has showing signs of weaknessFor instance, in the U.S., housing rents—often a significant component of inflation calculations—remain fixed for 6 to 12 monthsThis means that any downward adjustments in rents influencing inflation figures may not materialize until several months later, complicating the decision-making process.

Over the past two years, central banks in Europe and the U.Shave largely misjudged the high inflation environment, which has now escalated to a level deemed "unbearable." This miscalculation came with serious ramifications, mandating an aggressive interest rate increase to keep inflation in check

Initially, previous decades characterized by low inflation had left central banks feeling overly confident, rendering their standard analytical frameworks unsuitable in predicting future inflation trendsPast failures have bred a sense of frustration within the Fed, leaving policymakers to yield in response to lagging inflation indicators.

In contrast to external challenges, the domestic landscape presents no threat of inflation, yet the economy continues to struggle with slow recoveryConcerns persist within the A-share market over how vigorous and sustained future economic recovery might be.

As the market slips back below 3,000 points, valuations appear exceedingly cheapThe low point in April, when the index fell to 2,863 points, signified a reaction to pandemic disruptionsCurrent market responses may seem excessive in comparison

Firstly, the April lows represent a mere 0.4% growth for that quarter; any recovery in subsequent quarters, albeit slow, is likely to outshine second-quarter figuresFurthermore, the current price-to-earnings (PE) ratio of A-shares is approximately 12 times, indicative of historical low valuations as characterized in past recovery phases.

The market has been subject to considerable volatility in 2022, leaving investor expectations dulledEarly in the year, ahead of the "Two Sessions," the market held high hopes for growth and remained above 3,400 pointsHowever, after the pandemic struck in April and May, confidence plummetedSubsequent lending expansions in June, driven by strong growth policies, reignited optimism temporarily, pushing A-shares back toward 3,400 pointsUnfortunately, this resurgence proved fleeting, and ongoing doubts persisted following setbacks throughout July

Even with subsequent policy initiatives targeting stability, the market remains circumspect, unwilling to converge based on projections aloneFactors signaling renewed confidence in the market remain elusive.

Notable indicators for market sentiment include a surge in credit availabilityHistorically, bullish and bearish transitions in markets coincided with rapid credit growth, serving as tangible proof of economic recoveryThe latest data published for September indicates that a broader credit availability has begun to reflect positively, with new loans totaling 2.47 trillion yuan, significantly surpassing market expectations.

According to Citic Securities, the uptick in loan demand stems mainly from infrastructure, manufacturing, and social services sectors supported by stable growth policies

The introduction of 600 billion yuan in policy-oriented developmental financial instruments is being deployed as capital for infrastructure projects, prompting banks to extend creditAdditionally, the central bank has introduced over 200 billion yuan in special loans aimed at equipment updates, while special loans for "guaranteed delivery" of housing began to disburse in late September.

Another critical factor influencing market sentiment revolves around the real estate sectorIn the short term, housing sales remain stagnant; September's data reveal a year-on-year decrease of 121.1 billion yuan in household long-term loans, indicating persistent weakness in consumer purchasing intentions and exerting pressure on the market.

Nevertheless, with the gradual rollout of special loans for "guaranteed delivery," along with certain cities relaxing limits on first-time homebuyer loans and adjustments made to housing provident fund rates, improvements in housing loans are anticipated moving forward.

The stability of the renminbi also remains a critical variable for market confidence