On the economic front, we continue to see improvements:
China: There are signs the stimulus and policy support measures are starting to deliver green shoots. Q3 GDP grew +1.3% q/q to +4.9% y/y, more than the forecast +4.4% (Q2: +6.3%) while Industrial output grew +4.5% y/y (August: same). The recovery is not even. Retail sales (a proxy for consumption) grew 5.5% m/m (August: 4.6%). This was far stronger than the forecast 4.9%. Fixed Asset Investment grew 3.1% y/y for the first nine months (vs 3.2% y/y for the eight months to August). One area of persistent weakness remains property sales. By floor area, it fell -19.77% y/y (vs Aug: -23.95% y/y). Property investment fell -18.7% y/y (Aug: -19.1% y/y). Worth noting the pace of declines, for both sales and investment, reduced but the overhang is high. October sales are expected to stay soft while sales during Golden week were -20% y/y. S&P Global Ratings revised down its 2023 property sales to -10% to -12% (previously it forecast half this). It expects a further -5% decline in 2024. Overall, the government is on target to hit its 5% GDP target.
US: September retail sales rose +0.7% m/m to 3.8% y/y while August was revised higher to +0.8% m/m (from +0.6% m/m). Sales at auto-dealerships accelerated +1.0% m/m while receipts at gas stations rose +0.9% m/m as pump prices rose. Even excluding auto sales and gas stations, spending still rose +0.6% m/m. Sales at food/drinking services rose +0.9% m/m – often seen as a dining-out indicator. The month saw a drop in credit card spending – something which has raised concerns over the health of the consumer. Credit card balances cost 22.8% in interest rates to service (vs 16.3% one year ago). September manufacturing rose +0.4% m/m to -0.80% y/y (August was revised lower to -0.1% m/m). September single-family home starts (the bulk of homebuilding) gained +3.2% m/m to a seasonally adjusted annual rate of 963,000 (Aug: 933,000). Starts for 5+ units soared +17.1%. Permits for future single-family construction rose +1.8% to 965,000 (highest since May 2022). Multi-family permits fell -14.0% to 459,000 (lowest level since Oct. 2020). Existing home sales fell -2.0% m/m to a 13-year low of 3.96mn units. (South: -1.1%, Midwest: -4.1%, Northeast: 4.2% and West: 5.3%). Sales will probably fall even more as the latest MBA data shows loans (for home purchase) plunged last week to 1995 levels. There were 1.13mn existing homes for sale, down -8.1% y/y. Based on September inventory, it would take 3.4 months to exhaust it (vs 3.2 one year ago). Properties remained on the market for 21 days (up from 19 days one year ago). 69% of homes sold last month were on the market for less than a month. First-time buyers = 27% of sales (down from 29% y/y). Cash sales = 29% (up from 22% y/y). Distressed sales (including foreclosures) accounted for just 1% of transaction (no change y/y). The labour market remains tight as ever. The most current/forward looking indicator, the weekly jobless claims, for w/e 14th October, fell -13,000 to 198,000 (its lowest since January). The UAW strikes have had a limited impact on supply chains so far.
In light of the buoyant economic news, Fed Chair Powell has triggered off another round of speculation over rate hikes by suggesting rates might still have to go up given the underlying strength of the economy. This has left him open to criticism such as “the Fed doesn’t know what comes next, isn’t sure how long rates may have to stay high and doesn’t even know if rates are tight enough to bring inflation back to target”. Show me anyone who does! The Yield Curve is starting to steepen quickly. Looking at the 10y minus the 2y US curve, the difference is now just -0.17% as the 10y moves towards the 2y and not the other way round as we have seen until now. Each point, along the Yield Curve, tells its own story. The front end was all about trying to reach the neutral rate as quickly as possible to tame the economy. The rising longer end is signalling an improving economic picture – but with it comes inflation and especially rate worries.
Finally, a geopolitical update…..
This is the third week in the Israel-Gaza conflict. We have witnessed a US warship come under drone attack near Yemen; continued efforts to get aid into Gaza where water, food and medicine had been switched off and a hospital blast on a Gaza hospital compound with both sides blaming each other. Over 1,400 Israelis have died since Hamas began its attacks while in Gaza the Palestinian death toll is close to 4,000 (includes the 471 killed in the hospital blast).
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