China's GDP grows less than expected in Q3

Chris Scicluna
Emily Nicol

US equities and bond yields rise as corporate earnings and retail sales impress; Asian bourses weighed down today by China as the latter’s growth falls short of expectations
Financials and consumer discretionary stocks led the S&P500 to a further 0.75% gain on Friday and so to its highest close since 16 September. The gain in financials came as Goldman Sachs added to the week’s positive earnings news from the financial sector. Meanwhile, consumer stocks welcomed news of an unexpected 0.7%M/M lift in retail sales in September – with upward revisions to prior months – even as the University of Michigan reported a disappointing further decline in consumer sentiment to the lowest level since December 2011. The latter survey also reported that consumers’ held their highest one-year ahead inflation expectation since 2008. So, after moderating through most of last week, Treasury yields moved higher on Friday. The 10Y note closed at 1.57%, still finishing 4bps lower than a week earlier. But the 2Y yield closed near 0.40%, 8bps higher than a week earlier.

Treasury yields have opened a little higher again in Asian trading, with the 10Y presently sitting at 1.58% and the 2Y at 0.42%. While US equity futures are softer, it has been a mixed start to the week in Asia. Sentiment has been impacted by losses in Mainland China (the CSI300 presently down about 1.6%) after the latter released a weaker than expected GDP report for Q3 and monthly data indicated that the industrial sector was continuing to struggle late in the quarter (we review China’s data below). During a quiet start to the week for Japanese data, the TOPIX has declined 0.3%, with media commentary focused on PM Kishida’s sending of an offering to the controversial Yasukuni shrine. A Yomiuri poll released over the weekend found 44% support for Kishida’s LDP – far above the 12% held by the main opposition CDP but down 4ppts from a poll taken early in the month.

In the Antipodes, a quiet start to the week for data in Australia has seen the ASX200 make modest gains amidst the positive news that the state of Victoria, having met initial vaccination targets, will begin easing lockdown restrictions from midnight Thursday. Equities were constrained by a sell-off in the bond market, however, with the 10Y AGCB yield lifting 9bps to 1.74% – the highest yield since mid-May. While some sell-off was always likely given Friday’s rise in UST yields, Aussie bond yields were also dragged higher by a 16bps sell-off in the Kiwi 10Y NZGB to a new three-year high of 2.39%. The latter came after New Zealand reported that its CPI had increased 2.2%Q/Q in Q3 – far more than even the most pessimistic expectation. This outcome has caused the market to factor in a 50/50 chance that the RBNZ will opt for a 50bps hike in the OCR at next month’s meeting. And given the similarities between the two economies, investors are doubtless wondering whether Australia’s run of surprisingly tame inflation readings might end later this month, especially with monthly inflation indicators having firmed materially of late.

Following a quiet start, Japan’s trade and flash PMI data will be of interest later this week
It has been a quiet start to the week for economic news in Japan, with the first report of any note in this week’s diary being Wednesday’s release of merchandise trade data for September. According to Bloomberg’s survey, the median analyst expects the seasonally-adjusted trade deficit to widen to a 16-month high of near ¥600bn. This reflects an expectation that export growth will show sharply to just over 10%Y/Y from 26%Y/Y previously. Only about half of that slowdown is attributable to base effects associated with the recovery from the initial impact of the pandemic (exports increased almost 8%M/M in September last year), with the remainder likely to reflect interruptions to production due to supply chain bottlenecks, especially in the auto sector.

On Thursday, the BoJ will release both its latest semi-annual Financial System Report and its quarterly Senior Loan Officer Survey. We expect that the former will again conclude that Japan's financial system “has been maintaining stability on the whole”, while continuing to highlight concerns about risks to the outlook associated with a likely future rise in credit costs, possible moves in global financial asset prices and a possible destabilization of foreign currency funding in the event of a tightening of foreign currency funding markets. Friday will bring release of the flash PMIs for October, which might continue to highlight difficult trading conditions – even in the manufacturing sector due to supply constraints – but perhaps also point to an expectation of improved conditions ahead following the removal of state of emergency conditions in Japan at the end of last month. Also on Friday, we will receive the national CPI for September. The advance report from Tokyo suggests that, thanks to a big rebound in the price of fresh food, annual headline inflation will rise markedly and so likely turn positive for the first time in 13 months. However, the BoJ’s preferred core measure – the CPI ex fresh food and energy – will likely improve only marginally on its August reading of -0.5%Y/Y, with the equivalent measure for Tokyo steady at -0.1%Y/Y in September.

China’s GDP grows a weaker than expected 0.2%Q/Q in Q3; IP growth slows further in September; retail sales growth picks up from a very weak August, but still very soft
As far as data were concerned, the focus for investors in the Asian time zone has been China’s release of the national accounts for Q3, together with key domestic activity indicators for September. In summary, these reports pointed to an almost complete loss of forward momentum in the economy, amidst the combined impact of a mid-quarter virus outbreak, floods, electricity shortages, measures to meet climate targets, high commodity prices and supply chain bottlenecks. After growing an unrevised 1.3%Q/Q in Q2, the economy grew just 0.2%Q/Q in Q3. Due to base effects – the economy grew 2.9%Q/Q in Q3 last year – annual growth slowed to 4.9%Y/Y from 7.9%Y/Y previously. This outcome was a tenth below the consensus expectation in Bloomberg’s survey. According to the NBS, activity in the service sector grew just 5.4%Y/Y, down from 8.3%Y/Y previously. Growth in manufacturing output more than halved to 3.6%Y/Y, while growth in primary sector activity slowed to 7.1%Y/Y from 7.5%Y/Y previously.

Turning to China’s monthly indicators, annual growth in real industrial output slowed to 3.1%Y/Y from 5.3%Y/Y previously, which was 0.7ppts below the consensus expectation and the slowest pace of growth since March last year. For the year to date, industrial output increased 11.8%Y/Y, but this follows pandemic-impacted growth of just 1.2%Y/Y a year earlier. In the detail, mining and quarrying activity grew at a faster pace of 3.2%Y/Y compared with 2.5%Y/Y in August, while growth in power generation picked up to 9.7%Y/Y from 6.3%Y/Y. However, activity in the manufacturing sector grew just 2.4%Y/Y, which was down from 5.5%Y/Y in August. On an industry basis, unsurprisingly, the standout performer remained medicine production, which grew 26.5%Y/Y. By contrast, activity involving the smelting and processing of ferrous metals fell 9.7%Y/Y and the production of autos declined 8.2%Y/Y. Negative growth was also recorded in the textiles, rubber and plastics and non-metallic minerals industries. Growth in production of ICT equipment slowed to 9.5%Y/Y from 13.3%Y/Y previously, but was still the second-best performing industry.

Turning to the demand side of the economy, growth in the value of retail spending picked up to 4.4%Y/Y in September from just 2.5%Y/Y in August. This outcome was 0.9ppts above the consensus expectation, and reflects the easing of restrictions on activity since the late-July virus outbreak was brought under control. Real spending grew 2.5%Y/Y, which is still a very soft result considering that spending grew just 2.4%Y/Y a year earlier but 6.4%Y/Y in September 2019. Of course, lacklustre consumer demand makes it very difficult for China to meet its overall GDP growth targets without ongoing very high – and progressively less efficient – levels of investment spending. For the year to date, retail sales increased 16.4%Y/Y, but this comes off the back of a 7.2%Y/Y decline a year earlier. Spending on catering services increased 3.1%Y/Y, compared to a 4.5%Y/Y decline in August. Growth in spending on goods picked up 4.5%Y/Y from 3.3%Y/Y previously, not least due to a pick-up in spending on phones.

Meanwhile, growth in investment spending on non-rural fixed assets declined 1.6ppts to 7.4%YTD/Y in August, which was 0.5ppts below the consensus expectation. Growth in private sector investment slowed 1.7ppts to 9.8%YTD/Y, whereas growth in state investment slowed 1.2ppts to 5.0%YTD/Y. In the manufacturing sector, investment grew at a relatively quick pace of 14.8%YTD/Y, but this was down from 15.7%YTD/Y in August and follows a 6.5%YTD/Y decline a year earlier. Where the breakdown was available, the slowdown in growth appeared reasonably broad-based. Of note, capex in the auto sector is now down 6.5%YTD/Y in contrast to the positive growth rates that continue to be reported in almost other industries. Property development increased 8.8%YTD/Y, which was down from 10.9%YTD/Y in August and 0.7ppts below market expectations – perhaps not surprising given the concerns about indebtedness in that industry. Finally, despite a mediocre end to a very soft quarter, the surveyed urban unemployment rate declined 0.2ppts to 4.9% in September, marking the lowest reading since December 2018.

Looking ahead to the remainder of the week, Wednesday will bring news on home price developments during September. Also on Wednesday, after last week conducting its 1Y MLF operation at an unchanged rate of 2.95% for a 17th consecutive month, the PBoC is likely to report that the benchmark 1Y and 5Y loan prime rates will remain at 3.85% and 4.65% respectively. Speaking at a G30 meeting over the weekend, PBoC Governor Yi argued that while growth momentum had moderated somewhat, the trajectory of China’s recovery is unchanged with business conditions returning to normal following last quarter’s virus outbreak. Yi also expressed confidence that the PBoC could contain risks associated with China Evergrande Group, arguing that exposures were not concentrated but instead spread across hundreds of entities.

Inflation and flash PMIs take centre stage this week in the euro area
The main economic data focus in the euro area early this week will be inflation, with Wednesday bringing the release of final euro area CPI numbers for September to be accompanied by German PPI figures for the same month. In line with the final national numbers published last week, these are expected to confirm that headline euro area inflation jumped 0.4ppt to 3.4%Y/Y, a thirteen-year high. While this was principally driven by energy, core inflation also jumped to a thirteen-year high of 1.9%Y/Y. This release will provide a comprehensive breakdown by goods and services, and therefore an update on trimmed mean and super core (excluding energy and selected food) estimates, which in August stood at 2.4%Y/Y and 1.7%Y/Y respectively. The back end of the week will bring several sentiment survey indicators of note, including the Commission's preliminary consumer confidence index on Thursday and the flash PMIs on Friday. While households are likely to have remained broadly upbeat about economic conditions at the start of Q4, they might well express some concerns about their financial situation on the back of the anticipated increase in household energy bills over the near term. Meanwhile, ongoing and widespread supply bottlenecks are likely to have weighed further on business sentiment in October, with the headline output PMIs likely to have fallen further. However, they are also expected to remain comfortably above the key 50-mark, therefore signalling a moderate loss of recovery momentum rather than contraction ahead. Other releases this week include euro area construction output (tomorrow) and balance of payments figures (Wednesday), both for August, as well as the French INSEE business survey for October (Thursday).

Beyond the economic data, after Germany's SPD, Greens and FDP last week agreed a 12-page blueprint for a coalition deal – including agreement to leave the country's Constitutional debt limits intact, avoid new tax increases, but also increase spending on R&D and green activities, accelerate the exit from coal by eight years to 2030 and raise the minimum wage – detailed negotiations on a policy programme and ministerial posts should start this week after the Greens gave the go-ahead over the weekend. In addition, the European Commission will publish a consultation paper on possible reforms to the EU's fiscal rules, the Stability and Growth Pact, which could strongly influence the euro area fiscal stance from 2023 on.

A busy week for important data in the UK, with the CPI and flash PMIs of particular interest
After BoE Governor Bailey stated on the weekend that the MPC will “have to act” to keep inflation expectations anchored, again hinting at a rate hike before the end of the year, the coming week is a busy one for top-tier UK data, kicking off on Wednesday with September's inflation release. Having jumped to a 9½-year high in August, we expect headline CPI to have risen a further 0.2ppt to 3.4%Y/Y last month, underpinned by a further pickup in energy inflation. Indeed, core inflation is likely to have eased temporarily by 0.1ppt to a still-elevated 3.1%Y/Y, reflecting a moderation in services inflation on the back of base effects associated with the conclusion of the government's Eat out to Help out scheme last year. Friday's retail sales figures will also be closely watched for further signs of a slowdown in recovery momentum. However, sales at petrol stations will have been boosted significantly by the fuel crisis towards the end of the month, which saw widespread panic-buying of petrol amid reports of disruption to supplies. Meanwhile, the latest GfK consumer confidence survey (also due Friday) seems likely to highlight increasing concerns not least about rising prices.

Survey-wise in the UK, the preliminary October PMIs (Friday) are also expected to flag persistently high price pressures against the backdrop of supply bottlenecks. And with firms also expected to emphasise labour shortages, as well as softer demand, the output PMIs, for both manufacturing and services alike, are likely to have fallen further at the start of the fourth quarter, albeit remaining above the key-50 expansion level. The CBI's latest quarterly industrial trends survey (Thursday) will provide an update on output, orders, employment and investment intentions in the manufacturing sector. Separately, ahead of the Government's Budget and Spending Review announcements on 27 October, Thursday will also bring the latest public finance figures for September. These are likely to confirm that the Chancellor will have some room to relax future consolidation plans, even though he has chosen this time around to plan his Budget on the basis of out-of-date weaker GDP data.

Factory and housing data the main focus in the US this week; earnings season heats up; Fed diary includes the Beige Book and Chair Powell’s participation in a panel discussion
This week’s US economic diary contains mostly factory and housing-related indicators, starting today with the IP report for September and the NAHB housing index for October. Daiwa America’s Mike Moran forecasts that IP increased just 0.2%M/M in September, with mining and manufacturing indicators pointing to only a small advance and utility output likely weaker as temperatures returned to more comfortable levels. Tomorrow will bring the release of housing starts and building permits figures for September. Here, Mike suspects that aggregate starts might have declined slightly in September, weighed down by a pullback in multi-unit starts from comparatively high levels. News on existing home sales will follow on Thursday, with Mike anticipating a 3.7%M/M lift on the back of the jump in pending home sales reported in August. The Also that day the Conference Board’s leading index for September will likely post its 17th increase in the last 18 months, with positive contributions from ISM new orders, the leading credit index, and the slope of the yield curve offsetting negative contributions from the manufacturing workweek and orders for consumer goods. Other than these reports, the Philly Fed’s manufacturing survey for October and weekly jobless claims will also be of interest on Thursday, while federal budget data for September should be released at some point this week.

Aside from the economic data, this week will also see the corporate reporting season heat up, with 78 S&P500 and 9 Dow companies scheduled to present their results. After last week’s focus on the banking sector, the focus this week turns more towards the tech and manufacturing sectors, with notable entries including Proctor and Gamble, Johnson & Johnson, Tesla, AT&T and Intel. This week’s Fed diary includes Wednesday’s release of the latest Beige Book. There are also a number of Fed speaking engagements scattered through the week, including Fed Chair Powell’s participation in a panel discussion on Friday.

A relatively quiet week ahead in Australia
There were no economic releases in Australia today and the remainder of this week’s diary is devoid of potential market-moving entries. Tomorrow’s minutes from this month’s RBA Board meeting are unlikely to deviate from the clear message in the post-meeting statement or recent speeches made by Governor Lowe. The RBA will release its Annual Report for 2021 on Thursday. Early on Friday, Governor Lowe with participate in an online panel discussion at the Universidad de Chile's conference on “Central Bank Independence, Mandates and Policies”.

On the data front, on Thursday the quarterly edition of the NAB business survey will confirm the sharp decline in firms’ assessment of current business conditions indicate in the monthly survey. However, the forward-looking part of the quarterly survey will likely indicate an expectation that business conditions will improve over coming months as vaccination targets are met, allowing restrictions on activity and travel to gradually ease. The flash PMIs for October, released on Friday, will doubtless confirm ongoing weakness in the service sector over the past month.

Kiwi CPI jumps 2.2%Q/Q and 4.9%Y/Y in Q3, far above expectations; services PMI rebounds
While Kiwi investors had anticipated that today’s Q3 CPI report would indicate another sharp lift in prices – especially after a 1.3%Q/Q lift in Q2 that was almost double expectations – today’s outcome was far above even the most pessimistic of expectations. According to Statistics NZ, the headline CPI index increased 2.2%Q/Q – 0.7ppts above the consensus market forecast and 0.8ppts above the RBNZ’s forecast – lifting annual inflation by 1.6ppts to 4.9%Y/Y. Excluding movements associated with increases in the rate of GST (consumption tax), this was the largest quarterly movement since 1987 and the highest annual inflation rate since 2008. Needless to say, this outcome provides the green light for the RBNZ to continue to withdraw policy accommodation at next month’s meeting, with the market now pricing a near 50/50 risk that the OCR will be increased by a full 50bps to 1.0% (rather than the standard 25bp movement), especially with the subsequent policy meeting not occurring until early February.

In the detail, tradeables prices increased an even larger 2.8%Q/Q in Q3, lifting annual inflation to 5.7%Y/Y from 3.4%Y/Y previously. Non-tradeable prices – which are more reflective of conditions in the domestic economy – increased a very solid 1.8%Q/Q and 4.5%Y/Y, with the annual outcome 0.7ppts above the RBNZ’s May forecast. About 0.5ppts of the quarterly increase in the CPI owed to a 2.7%Q/Q increase in the price of food. A similar contribution was made by the transport group, largely due to a further 6.5%Q/Q increase in the price of fuel and a 16.8%Q/Q lift in the price of passenger transport services (led by airfares, especially for international travel). Over 0.7ppts of the outcome was driven by the housing group, led by a whopping 7.1%Q/Q increase in local authority property rates and 4.5%Q/Q increase in home construction costs – the latter reflecting both supply constraints on the price of raw materials and excess demand pushing up the price of labour. Other notable price movements included an 18.4%Q/Q surge in the price of games, toys and hobbies.

Importantly, the various analytical and model generated measures of core inflation indicated that the breadth of price increases was wider that just the items mentioned above. Even the 30% trimmed mean increased 1.3%Q/Q – up from 1.1%Q/Q in Q2 – and 4.0%Y/Y, while the weighted median increased 0.8%Q/Q and 3.3%Y/Y. Excluding the price of food, household energy and petrol, the CPI increased 1.9%Q/Q and 4.8%Y/Y. As usual, the RBNZ published its own two model-generated filter-based measures of core inflation, which tend to evolve more slowly. These now both portray core inflation at 2.7%Y/Y – the fastest pace since 2009.

Today’s other Kiwi economic news was the BNZ-Business NZ services PMI report for September. After slumping more than 20pts in August as the country entered a strict national lockdown, the subsequent easing of restrictions to varying degrees has seen the headline index rebound 11.5pts to a 46.9 in September – still a contractionary level, with retail stores, bars and restaurants and other public facilities still closed in the northern end of the country. In the detail, the activity/sales index rebounded 19.8pts to 45.3 and the new orders index rebounded 15.2pts to 47.5. The employment index, which recorded a comparatively small decline in August, increased 2.7pts to 52.0, indicating that the labour market will likely return to previous buoyant conditions once vaccination progress allows a more significant easing of restrictions on activity.

Following today’s news, there are no further economic reports of material interest in New Zealand over the remainder of the week. 

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