31 October 2022
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German GDP surprises to the upside

By Daniel Richards

  • Germany’s GDP grew by 0.3% q/q in Q3, confounding expectations of contraction – consensus had predicted -0.2%. This followed the ECB meeting on Thursday where officials had implemented a dovish 75bps hike while talking up mounting recession risks, and the Eurozone confidence index also released on Friday showed it falling for the eight consecutive month to a near two-year low. However, the consumer and retail numbers saw a modest uptick and the German GDP data showed that consumers were still active to date even as inflation bit, with private consumption the key driver of growth. All the same, the positive GDP data stands somewhat at odds with other timely data releases and will likely be the last upside surprise for some time as Europe heads into winter. German CPI inflation in October was at 10.4% y/y (higher than the projected 10.1% and up from 10.0% in September) in other data released Friday and is expected to remain elevated given the energy challenges facing the country, which are also likely to weigh on industry as energy rationing remains a prospect. France also recorded q/q growth, at 0.2%, raising the prospects that the Eurozone growth figures released later today also show a modest expansion.
  • While stickier components of the inflation basket such as shelter and services have started to play a bigger role than food and energy in driving up prices, there could be greater pressure from food prices once again in the coming months as Russia has pulled out of the Ukraine grain export deal following a drone attack on its navy. Wheat prices have already jumped some 6% in trading this morning.
  • In the US the core personal expenditures index, the Fed’s preferred measure of inflation, came in at 5.1% y/y in September, moderately higher than the 4.9% in August but slightly lower than the consensus projection of 5.2%. Employment costs were up 5.0% y/y in Q3, slightly lower than Q2’s 5.1% but the reading is unlikely to deter the Fed from its hiking for now and the key event to watch for this week will be the Fed’s November FOMC meeting on Wednesday, where a 75bps hike appears the most likely outcome. The press conference will be closely parsed for any indication of a slowdown thereafter from Jerome Powell, but the NFP report that will come at the end of next week will likely give the greatest steer given Fed officials’ pledges to be data driven. On Thursday both the BoE and the RBI make their rate decisions.
  • China’s manufacturing PMI came in at 49.2 in October, missing projections of 49.8 and down from 50.1 the previous month. Non-manufacturing was even weaker at 48.7, down from 50.6 in September. The ongoing commitment to the zero-Covid strategy means that China’s economy continues to be buttressed by the virus. Elsewhere in Asia, Japanese industrial production disappointed in September as it contracted -1.6% (estimate -0.8%) as a decline in car production weighed on the headline. Y/y growth was 9.8%.

Today’s Economic Data and Events

  • 14:00 Eurozone GDP q/q, Q3. Forecast: -0.1%

Fixed Income

  • Another round of hot inflation prints—this time the employment cost and the personal consumption expenditure indexes—helped to sink US Treasuries at the end of the week and firmed up the case even more for a 75bps hike this week from the FOMC. Yields on the 2yr UST jumped 14bps to 4.414% while the 10yr UST yield added 9bps to settle at 4.012%. Market pricing is still mixed on the expectations for the December FOMC, pricing about halfway between another 75bps hike and a slow down to 50bps.
  • European bond markets were soundly beaten at the end of the week after preliminary CPI prints for October from major Eurozone economies all came in hotter than expected: headline inflation in Germany accelerated to 10.4% in October, up from 10% in September. Yields on 10yr bunds added 14bps to 2.095% while French 10yr yields added almost 15bps to 2.607% and Italian yields gained 17bps to 4.158%. Gilt yields also pushed higher, settling up 8bps at 3.466%.
  • Emerging market bonds settled on Friday slightly lower, according to an index of USD-denominated bonds. In local currencies, bonds were generally weaker. Yields on 10yr Turkish bonds rose 2bps to 10.87% while South African 10yrs added 3bps to 11.992% and Indian 10yrs were slightly weaker.

FX

  • The pop in UST yields at the end of the week helped to restore some dollar strength after solid selling earlier in the week. The DXY index closed on Friday at 110.752, up 0.15% on the day but still enduring a loss of 1.1% on the week. EURUSD closed nearly unchanged on Friday after some choppy intraday moves but managed a gain of 1% on the week. Japanese yen weakened on Friday after the Bank of Japan’s persistence with an accommodative policy stance but USDJPY closed the week nearly unchanged at 147.60. GBPUSD was the outperformer last week as markets expect a more orthodox economic policy stance from the Sunak government: GBPUSD added 2.8% on the week to close at 1.1615 including a gain of 0.4% on Friday alone
  • Commodity currencies managed to strengthen against the US dollar last week though all were softer on Friday. USDCAD dropped by 0.3% over the five days to 1.3596 while AUDUSD added 0.5% on the week to 0.6411, tempered by a fall of 0.6% on Friday. NZDUSD rose by 1% over the week though gains were dragged by a 0.3% loss on Friday.

Equities

  • Political developments in China the previous weekend weighed heavily on certain equity indices over the past week, with significant w/w losses recorded in the Shanghai Composite (-2.7%) and the Hang Seng (-7.0%). Elsewhere in Asia, markets were supported by the global risk-on tone over the week, with the Nikkei adding 1.2% w/w and the KOSPI 2.9% despite both dropping -0.9% on Friday.
  • Despite some disappointing earnings results and the still high inflation measures, US equities enjoyed a strong week, with robust gains on Friday leading to a w/w gain of 5.7% for the Dow Jones. The NASDAQ added 2.2% w/w as gains on Friday offset poor sessions the previous two days, while the S&P 500 gained 5.0% w/w.
  • In Europe, the DAX added 4.0% w/w and the CAC 3.9%. The UK’s FTSE 100 closed a slighter 1.1% up on the week.
  • Locally, the ADX closed up 1.7% w/w but the DFM ended down -1.5%.

Commodities

  • Oil prices settled higher last week as focus turns to the supply picture. Brent futures settled up 2.4% at USD 95.77/b while WTI added 3.3% to USD 87.90/b. Negativity around the demand picture in oil remains at a very macro level as oil market specific dynamics aren’t showing overt signs of weakening.
  • Russia has said it will walk away from the Black Sea grain export agreement, claiming drone strikes against its navy. A suspension of grain exports from the key Black Sea ports will threaten to exacerbate food price inflation in the coming months, particularly for many economies in the Middle East and North Africa region that were dependent on agriculture imports from Ukraine and Russia.

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Written By

Daniel Richards Senior Economist


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