China GDP growth hit by headwinds

• Data released this morning showed China’s GDP grew 4.9% y/y in July-September, the weakest pace since Q3 2020 and slowing from 7.9% y/y in the second quarter. Power shortages, supply bottlenecks and sporadic Covid-19 outbreaks and rising curbs on the property sector are among the key factors. This is a further deceleration from the 18.3% y/y expansion in the first quarter, when the y/y growth rate was flattered by the very low comparison seen during the Covid-induced slump of early 2020. The data showed September industrial output rose 3.1% y/y, down from August's 5.3% y/y, and marking the slowest growth since March 2020. However, consumption improved with retail sales growing 4.4% y/y in September, faster than the 2.5% y/y in August.

• US retail sales rose 0.7% m/m in September, while data for August was revised higher to show retail sales increasing 0.9% m/m instead of 0.7% m/m. September’s gains were largely due to more expensive motor vehicles boosting receipts at auto dealerships according to data from the Commerce Department. Sales at auto dealerships rose 0.5% m/m after declining 3.3% m/m in August, while unit sales declined, the increase in receipts reflected higher prices. An ongoing global shortage of microchips is forcing automakers to cut production, leading to lower inventories at showrooms, which is driving prices higher. Online retail sales rose 0.6% m/m. Clothing stores sales jumped 1.1% m/m. Receipts at building material stores rose 0.1% m/m and furniture outlets gained 0.2% m/m. Sales at service stations surged 1.8% m/m due to higher fuel prices. There was also an increase in receipts at sporting goods, hobby, musical instrument and bookstores. Sales at restaurants and bars increased 0.3% m/m. Sales at electronics and appliance stores dropped 0.9% m/m. In addition to microchip shortages, congestion at ports because of a dearth of workers could mean fewer goods on shelves heading into the holiday shopping season. The FOMC minutes from the September meeting indicate that the Fed will vote to start tapering asset purchases in November.
• US business inventories rose 0.6% m/m after a similar gain in July, according to the Commerce Department. Inventories increased 7.4% y/y in August. Retail inventories gained 0.1% m/m in August as estimated in an advance report published last month, following a 0.4% m/m rise in July. Motor vehicle inventories dropped 1.4% m/m instead of 1.5% m/m as estimated last month. Retail inventories excluding autos, which go into the calculation of GDP, rose 0.6% m/m as estimated last month. Wholesale inventories increased 1.2% m/m in August, while stocks at manufacturers rose 0.6% m/m. Business sales dipped 0.1% m/m in August after increasing 0.5% m/m in July. At August's sales pace, it would take 1.26 months for businesses to clear shelves, up from 1.25 months in July.
• US import prices rebounded in September, rising 0.4% last month after falling 0.3% in August, according to data from the Labor Department, driven by higher food and fuel prices. Prices went up 9.2% m/m after advancing 8.9% m/m in August. Imported fuel prices increased 3.7% m/m last month after declining 3.0% m/m in August. Petroleum prices rebounded 3.9% m/m, while the cost of imported food accelerated 1.3% m/m. Excluding fuel and food, import prices dipped 0.1% m/m. These so-called core import prices fell 0.1% m/m in August and were up 4.7% y/y in September. The report also showed export climbing up 0.1% m/m in September after rising 0.4% m/m in August. Prices for agricultural exports fell 1.7% m/m, while nonagricultural export prices gained 0.3% m/m. Export prices rose 16.3% y/y in September after increasing 16.8% y/y in August.
• Tunisia is in discussions with GCC states for financial assistance as the country’s economic difficulties harden. Bloomberg reported a central bank official as saying that talks with the UAE and Saudi Arabia were at an advanced stage, and that talks with the IMF were also ongoing. The BCT has been severe in its language around the need for the political situation in Tunisia to improve, and in its October MPC statement highlighted the ‘acute drying up of external financial resources’.

Today’s economic data and releases

17:15 US industrial production, September m/m. Forecast: 0.2%

Fixed Income

• Yields on longer-dated USTs were under pressure for much of last week, with Thursday’s producer price inflation data contributing to the decline. However, much of this was reversed on Friday on the back of robust retails sales data, prompting yields to rise by 6bps. The 10yr ended the week at 1.5703, down 4bps from the previous week’s close.
• At the shorter end of the curve, the 2yr added 7bps over the week after ticking up steadily through Tuesday-Friday. The yield is now 0.3949%, back at levels last seen in March 2020 as the pandemic crisis began in the US.
• Notable central bank meetings this week include Indonesia on Tuesday, Turkey on Thursday and Russia on Friday. Another rate cut is anticipated in Turkey following the changes made to the rate-setting committee last week.

FX

• A pick-up in risk-on sentiment last week weighed on the dollar. The dollar index saw three consecutive days of falls through the end of last week as a robust earnings season and better-than-expected retails sales data saw the DXY close down -0.14% w/w on Friday, though it had been at 12-month highs earlier in the week and we still expect dollar strength over the coming months.
• The gains against the greenback were fairly widespread, with some commodity currencies in particular recording a strong week. The AUD added 1.5% and the NZD 1.8% to close on Friday at 0.7421 and 0.7067 respectively.
• GBP gained 0.6% on Friday to close at 1.3751 and record a weekly gain of 1.0% even as BoE officials pushed back against the narrative of imminent tightening. EUR saw more muted gains, climbing 0.3% w/w to close at 1.1601 on Friday.

Equities

• Solid gains on Friday led to a strong week’s performance for global equity markets, with almost all key indices closing higher as risk appetite returned. Investors shrugged off the ongoing supply chain issues as earnings season saw some strong results and US retail sales data surprised to the upside. In the US, the NASDAQ recouped some recent losses to end up 2.2% w/w, leaving it down just -1.0% compared to a month earlier. The Dow Jones added 1.6% w/w and the S&P 500 1.8%, leaving the broad-based index up 0.9% m/m.
• In Europe, the FTSE 100 closed up 2.0% w/w, taking the index to a pandemic high – although its comparatively sluggish recovery means it remains off the levels seen in February 2020. European markets saw even stronger gains, with the DAX added 2.5% w/w, the CAC 2.6% and the composite European STOXX 600 closing 2.7% higher than the previous week.
• In Asia, the Hang Seng was the standout leader, adding 5.7% w/w despite being closed Wednesday and Thursday, while Japan’s Nikkei closed up 3.6% as new Prime Minister Fumio Kishida laid out his economic plan for the country.

Commodities

• Commodity markets remained on a tear last week, with both major oil benchmarks hitting major milestones. Brent futures touched USD 85/b on Friday for the first time since 2018, before ending the session at USD 84.86, up 3.0% w/w. WTI meanwhile added 3.7% to record its eight straight weekly gain. It closed at USD 82.28/b on Friday, its highest level since 2014.
• According to Baker Hughes, the US crude oil rig count rose by 12 last week, to 445.

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