China's Q3 GDP positive but misses expectations

Chris Scicluna
Emily Nicol

Most stocks lift on US fiscal stimulus hopes; China underperforms as data proves mixed
US futures opened up firmer today – with S&P minis currently up about 0.7% – and USTs have weakened following the latest reports regarding prospects for additional US fiscal stimulus. Over the weekend talks continued between House Speaker Pelosi and Treasury Secretary Mnuchin, with the former stating that further progress needs to be made before the end of tomorrow in order for a bill to be considered ahead of the election. Also over the weekend, President Trump told reporters that he thought he could convince reluctant Senate Republicans to approve a bigger deal than they have contemplated so far, even mooting numbers higher than the $2.2trn already approved by House Democrats.

With that background, Asian bourses have most begun the week on a firmer note. The Nikkei 225 increased 1.1% to erase its loss for the year to-date despite Japanese exports picking up a little less than had been expected in September, with an unexpected increase in imports offering some comfort that hitherto tepid domestic demand might be finding a stronger footing. Smaller gains were seen in Australia, Hong Kong and South Korea. And one significant exception to the firmer trend was China, where the CSI300 declined 0.8% after the country’s Q3 GDP report fell modestly short of expectations, even as the key September activity indicators impressed (more on these reports below). Equities were also slightly weaker in New Zealand following the weekend’s General Election, which as widely expected saw PM Jacinda Ardern’s Labour Party emerge with a resounding mandate to lead the next government. Local investors may have been just a little disappointed that Ardern failed to rule out finding a role for the Green Party in her new government, even though her Labour Party has the numbers to govern alone. However, there was little reaction in the currency and interest rate markets.

Moving to Europe, markets appear broadly steady but govvies have followed USTs lower despite some further dovish noises from the heads of the region’s central banks in response to the accelerated spread of Covid-19. In an interview published today in Le Monde, Christine Lagarde – who will also speak at an ECB conference this afternoon – acknowledged that the “second wave of the pandemic in Europe, notably in France, and the resulting new restrictions are adding to the uncertainty and weighing on the recovery.” She thus flagged the risks that the ECB’s updated projections, to be published in December, will be “gloomier”. But she also noted that the ECB’s policy options “have not been exhausted. If more has to be done, we will do more.” The flash October PMIs, due on Friday, could well thus strengthen further the case for extra ECB monetary easing in December.

Likewise, on a G30 panel yesterday, BoE Governor Bailey acknowledged that there was still a “huge gap” between the level of activity now and at the end of 2019. And the “unprecedented level of economic uncertainty…is heightened now by the return of Covid… The risks remain very heavily skewed to the downside.” Of course, the risks to the outlook are heightened by the UK government’s amateur dramatics in the negotiations with the EU, increasing uncertainty and costs for business, and raising the risks that damaging new tariffs will be added on top of disruptive new non-tariff barriers to trade with the EU when the Brexit transition concludes at year-end. Nevertheless, while the government made sure that its supposed refusal to negotiate with the EU dominated the UK’s media over the weekend, dialogue will continue. Cabinet Office Minister Gove will discuss issues with Commission Vice President Sefcovic today while the two blocs’ chief negotiators Barnier and Frost will also have discussions early things week that are likely to morph back into formal negotiations in due course. But the past week’s events perfectly illustrated why Moody’s on Friday announced a cut in its UK sovereign rating, citing among other things a weakening in the quality of government and institutions.

China’s GDP growth picks up to 4.9%Y/Y in Q3, below market expectations 
The recent run of strong economic data in China culminated today with the NBS releasing the national accounts for Q3, together with the remaining key activity indicators for September. After rebounding an upwardly-revised 11.7%Q/Q in Q2, the economy grew a further 2.7%Q/Q in Q3. This outcome was 0.6ppt weaker than market expectations, but annual growth still picked up to 4.9%Y/Y from 3.2%Y/Y previously. And for the first time this year, and contrasting with the situation facing the world’s other major economies, growth was positive on a year-to-date basis at 0.7%YTD/Y. Growth in service sector activity picked up to 0.4%YTD/Y, lagging growth in the primary and manufacturing sectors which stood at 2.3%YTD/Y and 0.9%YTD/Y respectively. Given the upside surprises to the September indicators discussed below, it seems likely that analysts had collectively over-estimated the contribution to growth from net trade, and in particular underestimated the rebound in imports that had come with a welcome pick-up in domestic demand.

China’s IP growth up strongly in September, retail sales also picks up notably
Turning to China’s monthly indicators, the IP report was consistent with the ongoing factory sector recovery that has been clearly indicated by recent PMI and trade data. Indeed, growth in IP picked up to 6.9%Y/Y from 5.6%Y/Y previously – much more than the market had expected so that production for the year-to-date rose 1.2%YTD/Y. In the detail, growth in manufacturing activity increased 1.6ppts to 7.6%Y/Y – the fastest pace since March 2019 – with growth in auto production increasing to 16.4%Y/Y and growth in machinery production increasing to 15.9%Y/Y. While growing less quickly, a number of other industries saw pickups of more than 3ppts this month, including pharmaceuticals, rubber and non-metal minerals. Outside of manufacturing, growth in mining activity picked up 0.6ppt to 2.2%Y/Y, but growth in power generation slowed 1.3ppts to 4.5%Y/Y.

The news from the demand side of the Chinese economy also improved in September. Of particular note, growth in retail spending picked up to 3.3%Y/Y – more than double market expectations – from just 0.5%Y/Y in August. And considering that CPI inflation eased 0.7ppt during the month, the real improvement appears even greater than indicated by the nominal growth data. In the detail, after almost halving earlier in the year, the decline in spending on restaurants and catering slowed to 2.9%Y/Y in September from 7.0%Y/Y in August. Categories to see considerably stronger growth this month included beverages, alcohol and tobacco, clothing, food and medicine. Unfortunately, even with the pick-up in September, retail spending was still down 7.2%YTD/Y reflecting the slump in spending recorded at the beginning of the year.

Moving to the business sector, investment spending on non-rural fixed assets increased 0.8%YTD/Y in September – just a notch below market expectations but an improvement on the 0.3%YTD/Y drop reported in August. The decline in private sector investment slowed to 1.5%YTD/Y from 2.8%YTD/Y previously, whereas growth in state investment increased slightly to 4.0%YTD/Y. Coming off sharp declines earlier in the year, improving trends were evident across most industries, albeit with spending still down on a YTD basis in most cases. In the manufacturing sector, investment was still down 6.5%YTD/Y, despite an understandable 21.2%YTD/Y surge in spending in the pharmaceutical sector. Spending in the healthcare/social works sector increased a strong 18.9%YTD/Y. Finally, with the economy back on an expansionary path, the urban unemployment rate declined 0.2ppt to 5.4% in September – now just 0.1ppt above where it stood in January.

The rest of the week should be relatively quiet in China
Looking ahead, the only remaining data release in China this week is tomorrow’s home price report for September. Tomorrow the PBoC will also announce the outcome of its review of settings for the 1- and 5-year prime lending rates that are an important benchmark for banks’ lending rates to businesses and households. According to Bloomberg’s survey, with the economy performing well, analysts expect these rates to remain steady at 3.85% and 4.65% respectively.

Japan’s trade surplus increases much less than expected in September
The main focus in Japan today was on the merchandise trade report for September. As suggested by last week’s Chinese trade data, which showed a pick-up in imports from Japan, September was again a better month for Japan’s exporters. That said, the further 4.5%M/M lift in the value of exports during the month was a bit less than markets had expected, leaving exports down 4.9%Y/Y (and also down similarly from pre-pandemic levels). The news regarding imports offered a positive surprise, with values unexpectedly rising 2.6%M/M. This outcome reduced the annual decline in imports to 17.2%Y/Y from 20.8%Y/Y – a contraction that continues to highlight the relatively weak state of the domestic economy, in particular relating to the demand for capital goods. Given these outcomes, the adjusted trade surplus expanded to ¥475.8bn in September from an upwardly-revised ¥359.0bn in August. While this marked the largest surplus since February, this was still about ¥375bn smaller than the decade-high surplus that analysts had expected.

As usual, a little later in the day the BoJ released its analysis of the export and import data, adjusting the MoF’s statistics to remove the influence of both seasonality and changing prices. According to the BoJ, real exports rose 5.5%M/M in September following an upwardly-revised 6.6%M/M increase in August. As a result, exports increased an impressive 13.3%Q/Q in Q3, albeit failing to reverse the 18.4%Q/Q plunge that was recorded in Q2. By contrast, the BoJ estimates that real imports increased just 2.4%M/M in September, albeit marking the first increase since April. And despite this increase, real imports fell 8.1%Q/Q in Q3 as firms responded to the sharp contraction in domestic demand that took place in Q2. Taken together, these outcomes suggest that net goods exports are likely to make a sizeable positive contribution to a rebound in overall economic activity in Q3, perhaps even fully reversing the 3.0ppt negative contribution made to GDP growth in Q2. Unfortunately, the rebound in domestic demand is certain to be much less complete, so that overall activity will likely recover no more than half of the decline recorded in Q2.

The BoJ will release more details regarding the commodity breakdown and destination of these exports on Thursday. In the meantime, the MoF’s own volume estimates indicate that growth in exports to China doubled to 15.8%Y/Y in September. Exports to elsewhere in Asia fell 3.7%Y/Y, but this represented an improvement compared with the 7.3%Y/Y decline recorded in August. Exports to the US remained down 6.1%Y/Y, but this was still a vast improvement on the 20.1%Y/Y decline reported in August – a development that seems consistent with the increasingly robust recovery in the US economy (as demonstrated most recently by Friday’s retail sales report). Finally, as was the case last month, the situation with respect to European markets remained exceptionally weak, with exports still down 23.3%Y/Y in September.

BoJ reports in focus in Japan in the near term; CPI and PMI reports due later in the week
Looking ahead to the remainder of the week, on Wednesday the BoJ will release the results of its latest quarterly survey of Senior Loan Officers, which amongst other things will provide information on how Japan’s largest banks are viewing the demand and supply of credit. On Thursday the BoJ will first release its quarterly survey of household opinion, which amongst many other things will cast light on consumers’ intention to spend over the coming year. Later in the afternoon it will release its semi-annual Financial System Report, which will detail how the financial system is coping with the pandemic. As in April, when financial conditions were much more stressed than at present, the BoJ will undoubtedly conclude that the system remains broadly stable and playing its necessary role in supporting the economy. A somewhat busier Friday is highlighted by the release of the preliminary PMI readings for October, which in line with the trend in other indicators should reveal further modest improvement. Meanwhile, based on advance readings from Tokyo, the nationwide CPI for September is likely to see the key measures of core inflation remain mildly below zero in annual terms, even with prices increasing slightly during the month. Finally, Friday will also bring the final results of the MHLW’s Monthly Labour Survey.

Euro area flash PMIs the key release this week
The most notable new data from the euro area due this week will be the preliminary October PMIs, due Friday. Given the revival in the pandemic, the services PMIs weakened significantly last month. And as a result of the further intensification over recent weeks, we expect to see ongoing deterioration in October, particularly in France, where additional restrictions on activity in the sector have recently been imposed. With a slight softening of momentum in manufacturing also possible, we expect the euro area composite PMI to slip back from 50.4 in September, and fall below the key 50 level for the first time since June. Ahead of the PMIs, Thursday sees the publication of the latest German and flash euro area consumer confidence surveys, as well as the French INSEE business confidence indices for October. We expect all of these survey indicators to suggest a deterioration in sentiment, albeit with Germany weathering the storm better than its neighbours. In terms of hard economic data, meanwhile, the week will be quiet with only euro area construction output figures for August scheduled for release today. While the equivalent German figures remained weak, French construction activity surged that month, so we would expect to see positive growth in the euro area figures overall.

Beyond the economic data, today will also see Christine Lagarde give the opening remarks at the ECB’s annual two-day Conference on Monetary Policy. This conference, which is of an academic flavour, will incorporate sessions on climate change and monetary policy; monetary policy objectives and transmission; and policy instruments and interactions. The substance of the debate at the conference will feed into the ECB’s review of its monetary policy strategy as will any insights from a further “ECB Listens” event on Wednesday at which Lagarde and Chief Economist Lane will speak.

UK inflation, retail sales and PMI reports in focus this week
Like in the euro area, Friday will bring the flash UK PMIs for October. And, like in France, we expect to see some softening in the UK services indices in response to the revival in the pandemic. Nevertheless, with activity in the manufacturing sector seemingly holding up, the UK’s composite PMI is likely to remain above the key 50 mark, albeit likely falling to a four-month low from 56.5 in September. Retail sales data for September are also due on Friday. Surveys suggest a further increase in sales last month as consumers stock-piled essentials fearing more stringent lockdown measures ahead. If so, retail sales will have risen by more than 17%Q/Q in Q3, probably a touch firmer than the rate of growth in GDP. Whilst we expect retail sales to remain above the pre-pandemic levels over coming months, as households maintain an increased level of spending on goods at the expense of spending on many face-to-face services, rising joblessness will in due course take a toll on spending. The latest GfK consumer confidence survey, also due Friday, will provide clues on that front.

The other notable day for UK data will be Wednesday, when inflation and public finances figures for September will be published. With the Government’s “Eat out to help out” scheme having concluded at the end of August, inflation is likely to tick a little higher in September after previously dropping 0.8ppt to 0.2%Y/Y, the lowest level since December 2015. We currently expect a rise of 0.2ppt in the headline CPI rate to 0.4%Y/Y, with the core measure also rising 0.2ppt to 1.1%Y/Y. The ONS’s official house price data for August are also scheduled for release that day.

MPC members Cunliffe (today), Vlieghe (tomorrow) and Ramsden (Wednesday) will also speak publicly, with the latter two possibly giving clues as to whether or not they will support extra stimulus at the November monetary policy meeting.

US data focused on the housing market this week as Presidential election draws closer
This week’s rather sparse US data flow is mainly focused on the housing market – one of the bright spots in the economy given exceptionally low mortgage interest rates. First up, today brings the NAHB housing index for October, which last month surged to a record high. Tomorrow we will receive housing starts and permits data for September, while on Thursday the existing home sales report for September is expected to signal the most active housing market in 13 years. The Conference Board’s leading indicator for September is also released on Thursday, while the weekly jobless claims report will be analysed closely too. The data flow concludes on Friday with the preliminary Markit PMI readings for October, although these indices continue to attract much less market attention than their longer-running ISM counterparts.

As far as Fed events are concerned, the release of the Beige Book on Wednesday is of note, while there are also a large number of speeches scheduled earlier in the week before communication ceases ahead of the 5 November FOMC meeting. And with the presidential election now just over a week away, politics will be a clear focus for investors too. The final televised debate to take place on Friday and ongoing fiscal stimulus talks will be followed through the week in the perhaps still unlikely event that they make progress.

New Zealand re-elects its centre-left government; focus now on Friday’s CPI report
The main news in New Zealand since Friday has been the outcome of the weekend’s General Election. As was very widely expected, and largely reflecting her impressive management of the pandemic, the electorate delivered a very strong mandate to Jacinda Ardern to form the next government. Indeed, the provisional count – which is likely to change only slightly once ‘special votes’ are added in a fortnight – gave the left-of-centre Labour Party a whopping 49.1% of the popular vote, up from 36.9% in 2017. This also marks the highest vote share that any party has achieved since 1951. The right-of-centre National Party won just 26.9% of the popular vote, collapsing from 44.5% in 2017. Given the results obtained by other parties and the intricacies of MMP, this means that the Labour Party has provisionally won 64 of the 120 seats in the next parliament, technically allowing it to govern alone. However, perhaps with one eye on the 2023 election, Ardern has indicated that she may yet decide to give some role to previous coalition partner, the left-wing Green Party, which has provisionally won 10 seats in the Parliament. The opposition will consist of the National Party with a provisional 35 seats and the right-wing ACT Party, which has provisional boosted its representation by 9 seats to 10. The Maori Party has provisionally won 1 seat, but with a narrow margin that could yet be overturned.

On the data front, today saw the release of the BNZ-Business NZ services PMI. In common with Friday’s report from the manufacturing sector, the PMI pointed to a lift in activity – doubtless reflecting the stepping down of pandemic alert levels – with the headline index rebounding 3.1pts to 50.3. After falling sharply last month due to the re-imposition of some restrictions, especially in Auckland, the activity/sales index increased 7.6pts to 52.4 and the new orders index increased 6.9pts to 54.9.

Looking ahead to the remainder of the week, the only notable report scheduled – but a very important one – is the CPI for Q3, released on Friday. That said, this report will be clouded by continued difficulties associated with data collection due to the impact of the pandemic, volatility associated pandemic-induced discounting and/or price gouging and the triennial updating of expenditure weights. With that in mind, Bloomberg’s poll indicates that on balance analysts expect a 0.9%Q/Q increase in consumer prices in Q3, which would lift annual inflation by 0.2ppts to 1.7% – still a little below the midpoint of the RBNZ’s inflation target on unlikely to deter the Bank’s from easing further given its worries about downside risks to the economic and inflation outlook.

A quiet week ahead in Australia as RBA awaited
There were no economic reports in Australia today. Indeed, a relatively quiet week looms ahead, leaving investors with little macro news to trade off as they await the RBA’s next Board meeting on 3 November. Some guidance might be provided by tomorrow’s release of the minutes from this month’s Board meeting, although these will likely not add much to the comments made by Governor Lowe in his market-moving speech last week. Tomorrow the ABS will release its high-frequency indicator of the labour market (based on tax data), and will follow that up on Wednesday with the preliminary estimate of retail spending in September. The quarterly version of NAB’s business survey will be released on Thursday while the week will conclude with the release of the preliminary readings of the CBA PMI indices for October.

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