Economic Highlights

The economy shrank by 0.3% month-on-month in August against market expectations of unchanged output. Services contracted by 0.1%, but the biggest contributor toward the overall decline was industrial production which plunged by 1.8%, itself driven by an 8.2% drop in the output of extractive industries and a 1.6% fall in manufacturing. Monthly GDP growth in July was revised down to +0.1% from a previously estimated +0.2%. We expect that economic activity will have slipped further in September thanks to the effects of the extra Bank Holiday for the Queen’s funeral. The labour market remains more resilient, though, mainly on account of short supply. In August alone, new jobs were found for 393,000 people. But job vacancies are falling from their peak and have been for four months. Worryingly, 333,000 people withdrew from the jobs market in the three months to August, with many citing long-term sickness as the reason. All this added up to fall in the unemployment rate from 3.6% to 3.5%, which is a 48-year low. Annual age growth in the three month period was 6%.  

Headline Consumer Prices rose 0.4% month-on-month in September, which was above the +0.2% reading expected. This meant that the year-on-year measure only came down to +8.2% against an expectation of +8.1%. The more concerning element was that core CPI was also higher than predicted. Monthly core CPI was +0.6% (vs. 0.4% expected) for a second month running, and this took the annual measure up to +6.6% – the highest that core inflation has been since 1982. Friday’s data provided more evidence to convince the market that the Fed will need to maintain its tightening policy bias. Retail Sales for September came in a little ahead of forecasts on top of some upward revisions for August, while there was also a tick up in consumer sentiment as measured by the University of Michigan’s monthly survey. The same survey also recorded a sharp rise in one-year inflation expectations from 4.7% to 5.1% against an expected fall to 4.6%. Meanwhile, 5-10 year expectations also rose from 2.7% to 2.9%.

Annual Consumer Price Inflation rose from 2.5% in August to 2.8% in September, mainly on account of rising food prices. More encouragingly, Producer Price Inflation reduced from 2.3% to 0.9% as other commodity prices fell back. China remains in a decent position to increase stimulus should it decide to. Total social financing (TSF) in September was a record RMB5.53trn, a good number well ahead of expectations. In addition, overall money supply growth was above 12% for the second month in a row. It is possible that both prints were designed to put a nice gloss on the Chinese Communist Party congress. Depressed public sentiment and weak business confidence remain significant headwinds to China’s economic recovery, and the demand impulse that creates for global commodities (China consumes ~50% of seaborne commodity supply). Consumer confidence in current and future conditions is at rock-bottom levels not seen in 30 years. The TSF figure provides a positive signal which could bolster the overall credit impulse in the next reported number. There is a 6-12 month lag between China’s credit impulse and commodity prices, implying a trough for commodities might not be not far off. Even so, we must also take account of the ongoing deflating of the country’s real estate bubble, suggesting that any recovery might be more subdued than in past cycles.