Friday 23 March 2018

Daily Market Update: Chinese economic growth slows but still better than expected


Richard Ramsey

Last week’s focus in financial markets was more about the views of central bankers than the incoming economic data.

A number of Federal Reserve FOMC members publicly stated that a lift-off in interest rates should be delayed until 2016. A few FOMC members countered this view and still expect the Fed to raise interest rates for the first time in almost a decade in 2015. Whilst the FOMC are clearly divided, financial markets appear more certain that a Fed rate hike will be deferred until 2016. Fed funds futures markets assign a 30% probability of a 2015 rate hike. This pushing back of a rate hike until next year weighed heavily on dollar sentiment last week. EUR/USD opened last week at $1.137 and fell just shy of $1.15 late last week. On Thursday, however, it was then the turn of the ECB’s Ewald Nowotny to talk up the need for more stimulus and in the process talk down the single currency.

The euro has been on the back foot since Nowotny’s comments with EUR/USD currently back below where it started last week at $1.136. Sterling on the other hand was the main gainer last week. On Friday MPC member Kirstin Forbes sounded a rather hawkish tone “despite the 'doom and gloom' sentiment, the news on the international economy has not caused me to adjust my prior expectations that the next move in UK interest rates will be up and that it will occur sooner rather than later," Forbes argued that Britain had limited direct exposure not only to emerging markets but also to key trading partners such as Germany. However, in the event of a sharper than expected slowdown in emerging markets or a financial crisis of some sorts, the UK economy will not be immune but the exposure "appears manageable" she said before adding that widespread pessimism about emerging markets such as China was overstated. GBP/USD is trading 0.8% higher at the start of this week at $1.547 up from $1.534 this time last week. Meanwhile EUR/GBP has fallen by 0.9% over the same period, down from 74.1p last Monday to 73.4p this morning.

Elsewhere on the commodity markets, last week saw the price of a barrel of Brent crude fall 6%. Brent crude opened last week at $53pb and is sub-$50 this morning. The general trend in the incoming Chinese economic data of late has been one of disappointment. However, this morning’s retail sales and GDP figures provided a somewhat rare surprise to the upside. Third quarter GDP came in at 6.9% y/y, which was better than the 6.8% annual increase pencilled in by economists. Nevertheless, the 6.9% print was weaker than the Chinese authorities’ target of 7% and it still represented the weakest quarterly expansion since Q1 2009. China’s economic growth figures conceal contrasting fortunes between its manufacturing and services sectors. The latter is offsetting significant weakness in the manufacturing sector. Chinese retail sales picked up in September with the 10.9% y/y increase exceeding analysts’ expectations. Meanwhile industrial production slowed from 6.1% y/y in August to 5.7% y/y last month – the weakest rate of growth since December 2008.

The oil price is responding to increased supply and concerns over an easing in demand. Last week a number of manufacturing surveys in the US came in weaker than expected. On Friday, September’s industrial / manufacturing production figures posted monthly declines with the Philly Fed and Empire manufacturing surveys earlier last week signalling further declines for October. This week on Friday we get the US-wide Markit flash manufacturing PMI which is expected to signal renewed weakness in October. The same theme is likely to emerge with the Eurozone flash PMIs on Friday. In September, France was the only one of the top four Eurozone economies to post an improvement in its composite PMIs. Thursday’s ECB policy announcement and press conference will be closely watched. While no change in the policy settings is expected markets will be closely listening to President Draghi’s press conference. Medium-term inflation expectations have been falling back to levels that pre-dated the start of the ECB’s QE programme. Markets will pay close attention to any talk of additional policy stimulus. In turn, this would put more pressure on the single currency. In the UK, the week ahead is pretty light on the economic data front with Thursday’s retail sales the key release. Governor Mark Carney is also due to appear tomorrow at a Treasury Select Committee hearing.

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