Economic Highlights

September’s CPI data was no cause for alarm, with the headline rate just 0.1% higher at 5.4% and the core rate stuck at 4%. On the same day, the minutes from the latest Fed meeting confirmed a slightly more hawkish stance and this helped keep longer-term inflation expectations under control. Helpfully, too, the 5-10 year inflation expectations component of the University of Michigan consumer sentiment survey slipped back from 3% to 2.8%. The market now fully expects central bank asset purchases to begin to be reduced before the end of this year.

August’s GDP data showed a return to month-on-month growth by +0.4%. Services made the biggest contribution with strong rebounds in accommodation, food services, arts, entertainment, and recreation. Even so, consumer-facing services are yet to recover the pre-pandemic output level. In contrast, all other services taken together have already reached that point, leaving further upside potential - bottlenecks permitting. Manufacturing output increased by 0.5%, but that followed a downward revision to -0.6% in July. Construction output slipped for a second month (-0.2%) as the sector struggled with raw material shortages which hampered repair and maintenance work. The aggregate GDP growth picture looks encouraging, with risks to 2021 GDP growth still skewed towards a stronger figure than the 6.2% currently expected by Investec Bank.

Q3 GDP rose by 4.9% y/y, just below the +5.0% consensus expectation and appreciably lower than the +7.9% reported in Q2. But not entirely surprising given multiple headwinds, including Evergrande and the property market, an energy crisis forcing output curbs, and further Covid-19 outbreaks leading to tighter social restrictions. Industrial production for September also came in beneath expectations at +3.1% y/y (forecast was +3.8%), with computers, chemicals and ferrous metals highlighted as weak sectors. Retail sales outperformed with growth of 4.4% y/y (forecast +3.5%). The unemployment rate fell back to 4.9% (forecast 5.1% as in August). The central bank continues to provide liquidity to markets, suggesting no desire to allow more disruption to emanate from the financial system. But at the same time, there is limited evidence of any more stimulative response to the current slowdown, suggesting that President Xi continues to want to clamp down on the more speculative elements of the economy.