Chinese GDP miss

Chris Scicluna

Overview:
After yesterday’s modest gains in the US (the S&P500 closed up 0.3%), Asian stocks have had an underwhelming end to the week, falling back following a slightly weaker-than-expected Chinese GDP print (down to a new multi-year low of 6.0%Y/Y in Q3) even as September’s IP data beat expectations. Indeed, marking a steady downtrend in the aftermath of the release of those figures, China’s CSI300 ended the day down 1.4%. Most other major markets in the region similarly moved lower, e.g. Korea’s KOSPI closed down 0.8% and US futures fell. But having started the day in better shape, Japanese stocks fared better than most, with the Topix closing little changed on the day.

Japan’s latest inflation data had little market impact, providing no surprises as the BoJ’s forecast core measure of inflation dropped to a 29-month low (more on this below too). Certainly, JGBs were unperturbed, with yields edging up again for an eighth successive day. The curve flattened, however, with 2Y yields up another 1½bps to above -0.25% for the first time since mid-August as expectations for a BoJ rate cut at the end of the month continued to decline. Elsewhere, USTs are little changed (10Y yields close to 1.75%), while ACGBs weakened a touch after broadly upbeat comments from RBA Governor Lowe in Washington DC yesterday, where among other things he emphasised that negative rates in Australia are extraordinarily unlikely.

Gilts (and euro govvies) are also weaker after BoE Chief Economist Ramsden reiterated that the next move in Bank Rate might well be up if yesterday’s Brexit deal is eventually approved and implemented. In forex markets, however, sterling is little changed as investors await tomorrow’s vote in the House of Commons, which looks too close to call even if the chances of success for Johnson appear to have increased somewhat since yesterday afternoon. Meanwhile, the dollar is stable having yesterday dropped in trade-weighted terms to its lowest level in almost three months.

China:
Chinese economic growth extended its downtrend in Q3 with the pace of expansion dropping 0.2ppt – a touch more than expected – to 6.0%Y/Y, marking a new low on the series that dates back to 1992. On a seasonally-adjusted basis growth moderated 0.1ppt to 1.5%Q/Q, just above the bottom of the recent range. And growth in the year to date also eased 0.1ppt, to 6.2%Y/Y, also a series low but still consistent with the authorities achieving their full-year target of 6.0-6.5%Y/Y for 2019 as a whole.

Within the detail, industrial sector output slowed 0.4ppt to a new low of 5.2%Y/Y, but services were stronger. More happily, tertiary activity accelerated 0.2ppt to a three-month high of 7.2%Y/Y. And certain monthly data for September were also better than expected, with IP growth up 1.4ppts from August’s series low to 5.8%Y/Y (unchanged at 5.6%YTD/Y) and retail sales growth up 0.3ppt to 7.8%Y/Y (unchanged at 8.2%YTD/Y). Helping to explain the slowdown in GDP, however, fixed asset investment slowed for a third month to 5.4%YTD/Y, the weakest in a year.

Japan:
In line with expectations, Japanese inflation slowed in September, with all key measures lower. With prices in aggregate unchanged for a second successive month, the headline national CPI rate fell 0.1ppt to a seven-month low of 0.2%Y/Y. With fresh food price deflation quite so marked (up to -2.2%Y/Y from -4.8%Y/Y previously), the BoJ’s forecast core measure of inflation which excludes such items fell a larger 0.2ppt to 0.3%Y/Y, the lowest since April 2017. That drop, however, partly reflected lower energy inflation (down 1.6ppts to -1.9%Y/Y, with petroleum products down a sharp 4.8%Y/Y), the BoJ’s preferred core measure that strips out prices of fresh food and energy fell 0.1ppt to 0.5%Y/Y, matching the average so far this year. Not least due to higher hotel inflation, services inflation edged up 0.1ppt to 0.3%Y/Y while goods inflation slipped back by the same amount to 0.2%Y/Y.

Looking ahead, of course, the near-term path of inflation is far more uncertain than normal give the increase of the consumption tax at the start of the month. While the abolition of early years education prices will provide an offset, the BoJ’s forecast core measure might well take a step to around the 1%Y/Y mark. Given weakening economic activity and lower energy inflation, underlying inflation should remain muted. And when the base effects from the consumption tax hike fall away this time next year, the BoJ’s preferred measure of core inflation seems likely to have remained close to ½%Y/Y.

Euro area/US/UK:
It should be a relatively uneventful end to the week for economic news from the euro area with the ECB’s balance of payments for August the most notable new data due for release. It should be similarly uneventful in the US, with just the Conference Board coincident and leading indices due. However, FOMC members Kaplan, George and Clarida are set to speak publicly.

In the UK, meanwhile, there are no economic data releases of note today, allowing all eyes to remain on MPs ahead of tomorrow’s key votes on the Brexit Withdrawal Agreement in the House of Commons. Johnson’s chances of success took a hit yesterday when the Northern Irish DUP insisted that its 10 MPs would vote against the deal, given the marked difference in arrangements that it would give to the Province compared to the rest of the UK. So, with the Conservatives having just 288 MPs, and 319 votes likely to be required to win a majority, the PM will need most of the independent MPs (many of whom he recently expelled from the parliamentary Conservative Party) and the hardline members of the Conservative ERG who failed to back Theresa May’s deal, as well as a handful of Labour MPs (who will be ‘whipped’ by the party leadership to vote against) to vote in favour of the deal for it to be approved. So far, the indications are that most of the ERG and ex-Tory independents are largely on board. But the number of Labour MPs to back it remains very unclear. The probability of success, while rising perhaps, looks close to 50% in our view.

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