China unveils massive stimulus package

China unveiled a significant stimulus package aimed at revitalizing its struggling economy, the largest since the early COVID-19 pandemic. Key measures include cutting interest rates, reducing the reserve requirement ratio, and potentially injecting 1 trillion yuan into the economy. Support for the real estate sector includes lowering interest rates on existing mortgages. China will also inject 800 billion yuan into a market stabilization fund and refinance loans for share buybacks to bolster the stock market. The government plans to issue special sovereign bonds worth 2 trillion yuan as part of its fiscal stimulus. The Chinese stock market surged in response to the news.

• China could not provide stimulus until the Federal Reserve cut interest rates at the risk of strengthening its currency, which is tied to the US dollar
• With the Fed cutting cycle underway, China was able to launch a very aggressive fiscal and monetary stimulus package
• This is bullish short to intermediate-term for Chinese equities as well as other emerging markets
• Given the second-largest economy has been the slowest to recover from Covid lockdowns, this serves as a boost to the global economy
• Notably, hedge fund manager David Tepper gave a rare interview expressing his bullish views on Chinese stocks given these developments
• The Chinese stock market trades at a single-digit valuation multiple versus 20 times for US stocks
• Many banks had decreed China to be un-investible over the last few years given the political uncertainly of Xi Jinping’s third term

Housing market thawing

The average 30-year fixed mortgage rate reached a new low of 6.08%, a significant drop from the 2023 peak of 7.79%. This is also down over 1% since just a few months ago. The housing market has been frozen since 2022 due to the highest mortgage rates in decades. As rates have dropped, we have begun to experience an uptick in activity. According to Redfin, mortgage demand surged by 70% on September 23, 2024, compared to the previous month, driven by lower rates. Redfin’s Homebuyer Demand Index is up 7% from last month, showing the highest buyer interest since May. In addition, the median monthly mortgage payment has decreased by 4.4% year-over-year, marking the largest decline in over four years. New listings are up 7.6% year-over-year as sellers take advantage of improved market conditions. Some buyers are still waiting for mortgage rates to drop further, ideally into the 5% range, before making a purchase.

• Mortgage rates are not based on the Fed Funds interest rate, but the 10-yr treasury bond
• Given the 10-yr treasury bond yield has come down over 100 bps (1%) since the second quarter of this year, so have mortgage rates
• That said, consumers were provided psychological comfort in the further direction of rates lower after the Federal Reserve announcement last week
• With the average mortgage payment declining (due to lower rates), housing becomes more affordable, spurring both buyers and sellers to action
• The jumpstart in activity is positive for the economy as housing is roughly 15% of US GDP
• It is important to understand, however that even if the Fed continues to lower rates, mortgage rates will remain higher if the 10-yr bond yield does not come down substantially from today’s levels

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OpenAI announces changes but continues to innovate

OpenAI announced a significant shake-up, with Mira Murati departing her role as co-founder and CTO. Mira follows the departures of other co-founders, Ilya Stutskever, John Schulman, and Greg Brockman, earlier this year. Sam Altman seems to be the only original co-founder left at the company. Despite turmoil at the management level, the company announced a new Advanced Voice Mode feature, further enhancing ChatGPT’s offering. Additionally, the company is said to be pursuing a conversion to a for-profit company model and raising a financing round, valuing it at $150BN.

• While OpenAI’s recent history has been filled with drama, including the short-lived ouster of Sam Altman last year, the company continues to ship product faster than competitors
• Many argue that the original non-profit setup was flawed from inception, and much of this drama is a result of the inherent conflict that existed
  
• Given the magnitude of departures, it seems most of Sam’s co-founders do not agree with the new path forward
• For instance, Ilya Stutskever recently announced his new company, Safe Superintelligence, will be focused on advanced AI systems that prioritize safety over commercial pressures
• As part of the conversion to a for-profit entity, Sam Altman is said to be receiving 7% of the company, or roughly $10bn at the rumored new valuation
• Regardless of one's opinion about which approach is more appropriate, OpenAI continues to be the category-defining AI company to date

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