Morning comment: China GDP, Japan CPI, etc.

Chris Scicluna
Mantas Vanagas

US and European equity markets suffered new declines yesterday, with the S&P500 down 1.4% (paring a 1.9% intraday decline into the close) as investors seemingly refocused on US tensions with both China and Saudi Arabia (amongst others), budgetary worries in Italy, and some disappointing corporate earnings reports. Risk aversion was also reflected in weakness in commodities and credit, slightly lower UST and Bund yields but a significant widening in BTP spreads to their highest since the euro crisis, as well as a firmer yen.

With that background Asian equity markets seemed set up to struggle today. And, indeed, Japanese markets made losses, with the TOPIX falling 0.7% as yesterday’s yen appreciation (much of which has since reversed) initially weighed. But markets in mainland China and Hong Kong were resilient, with the CSI300 notably up about 2.9% despite weaker than expected GDP and IP reports (more on China’s and Japan’s latest data below).

European stocks have opened little changed this morning, but BTPs have continued to underperform after the letter from the European Commission to the Italian authorities – released after euro area markets closed yesterday – simply told it how it is, stating that the country’s draft budgetary plan represents “an obvious significant deviation” from the euro area rules, and that the planned fiscal expansion and size of the deviation from requirements “are unprecedented in the history of the Stability and Growth Pact”. The Italian authorities have until noon Monday to reply, but seem unlikely to do so in a constructive manner. The confrontation seems likely to continue, with obvious implications for the markets for BTPs and Italian bank securities.

The main focus in Asia today has been on China, where the national accounts for Q3 and September activity indicators have provided a read on how the Chinese economy is coping with the initial round of US tariffs and associated uncertainty regarding trade policy. Turning first to China’s remarkably timely and stable national accounts statistics – probably best regarded as ‘illustrative’ – these confirmed that growth has slowed further in Q3. Quarterly growth picked declined 0.2ppts to 1.6%Q/Q in Q3. This was also 0.2ppt weaker than recorded in Q317, causing annual growth to slow to 6.5%Y/Y from 6.7%Y/Y – in line with the estimate of our China economist Kevin Lai but 0.1ppt weaker than market expectations and the slowest growth recorded since Q109. Perhaps not surprisingly, all of that slowdown came from secondary industry activity, where growth slowed 0.7ppt to 5.3%Y/Y – the slowest growth recorded in statistics dating back to 1992. More encouragingly, growth in tertiary sector activity edged up 0.1ppt to 7.9%Y/Y, while growth in activity in the primary sector rose 0.4ppt to 3.6%Y/Y.

The picture of slowing momentum in the manufacturing sector was reinforced by China’s key monthly activity indicators for September, which were also released today. Growth in industrial production declined 0.3ppt to 5.8%Y/Y – 0.2ppt below market expectations – while year-to-date growth slowed 0.1ppt to 6.4%Y/Y. Power generation rose 11.0%Y/Y but mining activity rose just 2.2%Y/Y. Manufacturing activity rose 5.7%Y/Y. Compared with earlier in the year, the most notable slowdown is in auto production where growth stood at just 0.7%Y/Y – down from 14.0%Y/Y just three months ago. That slowdown in growth is partly countered by a pickup in growth in both ferrous and non-ferrous metal smelting.

In keeping with the slightly improved performance of the tertiary sector, growth in retail spending picked up 0.2ppt to a 5-month high of 9.2%Y/Y – better than the flat outcome that the market had expected – albeit leaving year-to-date growth to steady at 9.3%Y/Y. And with the 0.2ppt increase in Y/Y growth simply matching the increase in CPI inflation during the month, this suggested no change in real growth. Meanwhile, growth in fixed asset investment edged up 0.1ppt to 5.4%Y/Y (measured as usual on a year-to-date basis), in contrast to the flat result that the market had expected. That small improvement reflected the activities of the state sector, with growth in year-to-date public spending rising 0.1ppt to 1.2%Y/Y – still just a fraction of the growth normally seen (and given the government’s policy stance, one would expect to see a more pronounced rise in growth before long). Meanwhile growth in private sector investment was steady at 8.7%Y/Y, so remaining near the upper end of the narrow range reported this year. By industry, growth in manufacturing sector investment increased a further 1.2ppts to 8.7%Y/Y, marking the best result this year. However, this was partly offset by weakening – but still positive – growth rates in the tertiary sector, notably as regards spending on the environment/public facilities. And spending in the utility sector declined 11.4%Y/Y. Growth in closely-watched property development similarly eased 0.2ppt to 10.1%Y/Y.

Summarising the various monthly indicators, Bloomberg’s measure of monthly GDP grew 6.61%Y/Y in September, down from 6.69%Y/Y in August. Even so, the urban unemployment rate fell 0.1ppt to a three-month low of 4.9% in August. But with the full force of US tariff policy yet to take effect, growth seems likely to slow further into year-end. And so, the numerous pressures on China’s policymakers are only going to rise. Kevin Lai notes that the authorities are going to have to choose between saving the CNY (by supporting yields and controlling the money supply) and saving domestic credit and supporting economic growth (by offering more easing). The latter, which would inflict pain on external lenders and investors, might seem more likely than the former.

The domestic focus in Japan today was on the CPI report for September, which provided no major surprises. After rising a seasonally-adjusted 0.5%M/M last month, the headline index was unchanged in September so that the annual inflation rate nudged down 0.1ppt to 1.2%Y/Y – 0.1ppt below market expectations. The price of fresh food rose a further 1.9%M/M – a smaller increase than usually seen at this time of the year, but coming after solid increases in both July and August (prices are now up 5.7%Y/Y). As a result, the core inflation index forecast by the BoJ in its quarterly Outlook Report – which simply excludes fresh food prices from the CPI – rose 0.1%M/M, nudging annual inflation up 0.1ppt to a 7-month high of 1.0%Y/Y. This result was in line with market expectations and consistent with BoJ Governor Kuroda’s latest assessment – given in a speech to branch managers at the release of the Bank’s quarterly Regional Economic Report yesterday – that core prices are rising “around 1%Y/Y”, rather than the “0.5%-1.0%Y/Y” range that had been referred to previously.

Within the detail, energy prices rose a further 0.8%M/M in September and were thus up 8.1%Y/Y (electricity prices rose 3.6%Y/Y but fuel prices rose 23.2%Y/Y). This meant that the BoJ’s recently preferred measure of core prices, which excludes both fresh food and energy prices, was unchanged in September, leaving annual inflation steady at a paltry 0.4%Y/Y – an outcome that was also in line with market expectations. Moreover, the measure of core prices that strips out prices of all food items and energy (as monitored closely in many other major economies) fell 0.1%M/M. As a result, annual inflation on this measure was a barely positive 0.1%Y/Y, down 0.1ppts from August. Prices for non-energy industrial goods were unchanged from a year earlier. Meanwhile, inflation in the services sector fell 0.3ppt to 0.2%Y/Y in September, fully unwinding the increase recorded in August. This reflected the normalisation of hotel charges, which rose 0.8%Y/Y in September compared with the 10.2%Y/Y increase reported in August (volatility likely associated with the Obon festival).

So in summary, even with the economy running the largest positive output gap seen in 10 years, at this stage the underlying inflation pulse remains barely positive and certainly still distant from being consistent with the BoJ’s current 2% target. Therefore, in the absence of clear signs of negative feedback on the financial sector – something that we expect to be absent in this coming Monday’s BoJ semi-annual Financial System Review and quarterly Senior Loan Officer Survey reports – there seems to be little prospect of the BoJ reducing the degree of accommodation provided by its “yield curve control”. However, as market conditions allow, the Bank will continue to gradually wind back its JGB purchases, which are no longer regarded as a key monetary operating target – a point articulated clearly by Kuroda in a Bloomberg TV interview last weekend.

Euro area:
While Italian fiscal policy rightly continues to dominate attention, it should be a quiet end to the week for euro area economic data, with just August balance of payments figures due for release. On the back of an improved goods trade surplus that month, these are likely to see a modest increase in the headline current account surplus, from the 15-month low of €21.3bn in July.

The end of the week in the UK will bring only the latest public finances figures, which will obviously play second fiddle to the ongoing Brexit farce in the Conservative party. The data so far for the first five months of FY18/19 showed that public borrowing was £8bn lower compared to the equivalent period last year. With the OBR having forecast only a small improvement this financial year the Chancellor of the Exchequer appears to have a little more room for manoeuvre for next year’s budget, which will be announced on 29 October. However, with his existing plans having been predicated on ongoing annual cuts to spending on day-to-day public services over the remainder of the parliament, and the government having made a commitment to boost spending on the health service, Theresa May’s recent statements promising an end to austerity seem implausible given the Chancellor’s objective to balance the budget by the mid-2020s.

In the US, today will bring existing home sales figures for September.

New Zealand:
Today’s only Kiwi economic report was the release of migrant and visitor arrival information for September. After adjusting for seasonality, a net migrant inflow of about 4,600 people was recorded this month – this smallest since December 2014 – although still sufficient to add 1.0ppt to annual population growth if maintained for a full year. This slowdown reflects both slightly fewer arrivals and slightly higher departures (in particular an increase in departures to Australia). Meanwhile, the report revealed a 1.9%M/M decline in short-term overseas visitor arrivals during the month, lowering annual growth to 2.0%Y/Y.

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