Weekly Market & Currency Developments – From Our Bankers

China fires up the growth locomotive

Chinese economic data

Chinese retail sales rose at an 8.6 per cent annual rate in the year to October, (forecast: +9.1 per cent), down from 9.2 per cent in September. Real retail sales rose at a 5.6 per cent annual rate in the year to October, down from 6.4 per cent in September.

Chinese industrial production rose at a 5.9 per cent annual rate in October, above the forecast average (+5.7 per cent). Production had risen by 5.8 per cent in the year to September.

–  Chinese urban investment rose by 5.7 per cent in the ten months to October on a year earlier (forecast: +5.5 per cent), up from 5.4 per cent growth in the nine months to September.

–  The unemployment rate was steady at 4.9 per cent in October.

The Chinese data is important for exporters, especially rural producers, consumer goods, mining and energy companies.

What does it all mean?

–  It’s back to the future in China if today’s monthly economic activity data is any guide. The industrial sector was fired-up again by policymakers with announced stimulus boosting output and investment. Infrastructure spending lifted to 3.7 per cent over the ten months to October, up from 3.3 per cent over the nine months to September. And government spending rose by 8.2 per cent in October from a year earlier.

– China’s annual economic (GDP) growth rate decelerated to 91⁄2-year lows of 6.5 per cent in the September quarter as the government struggles to rebalance the economy and achieve its year-end annual growth target. On one hand, reigning-in China’s huge debt load through de-leveraging is a priority. But on the other hand, economic activity is slowing as the economy matures and pivots more inwardly towards the consumer. And US tariffs threaten to eventually weigh on output further, despite recent front-loading of goods by US importers.

–  Backed into a corner, Chinese policymakers have been pro-active. Fiscal initiatives have been announced focusing on tax cuts, bond issuance for infrastructure spending and social housing investment. China’s state planner has been busily approving around 45 projects worth near US$63 billion in the September quarter, focused primarily on technology, energy, agriculture and transport.

–  While production and investment activity appeared to find a floor in October, household consumption is becoming a concern. While most advanced countries would be very pleased with retail sales humming along at an annual growth rate of near 9 per cent, real retail sales (sales excluding inflation) have hit cycle lows of just 5.6 per cent over the year to October.

– Unemployment is stable at just 4.9 per cent and personal tax cuts have been announced, supporting still-elevated consumer confidence, but falling car sales and the near 20 per cent decline in the Shanghai Shenzhen CSI 300 sharemarket index appears to be weighing on spending. Alibaba’s Singles’ Day sales last Sunday were the best on record at US$30.8 billion, but the annual growth rate of sales at 27 per cent was lower than the whopping 39 per cent achieved last year.

What do the figures show?

Chinese Economy

Chinese retail sales rose at an 8.6 per cent annual rate in the year to October, (forecast: +9.1 per cent), down from 9.2 per cent in September. Real retail sales rose at a 5.6 per cent annual rate in the year to October, down from 6.4 per cent in September.

Annual retail growth rates were: garments (up 4.7 per cent); cosmetics (up 6.4 per cent); jewellery (up 4.7 per cent); personal care (up 10.2 per cent); home appliances (up 4.8 per cent); office supplies (down 3.3 per cent); furniture (up 9.5 per cent); telecommunications (up 7.1 per cent); oil products (up 17.1 per cent); automobiles (down 6.4 per cent); building materials (up 8.5 per cent).

Chinese industrial production rose at a 5.9 per cent annual rate in October, above the forecast average (+5.7 per cent). Production had risen by 5.8 per cent in the year to September.

–  Across industries, annual growth rates were: textiles (up 1.1 per cent); chemicals (up 4.4 per cent); non-metal minerals (up 7.7 per cent); ferrous metals (up 10.1 per cent); general equipment (up 6.8 per cent); transport equipment (up 5.0 per cent); machinery (up 6.8 per cent); communications (up 14.6 per cent); power equipment (up 5.9 per cent).

–  Across products, annual growth rates were: electric power (up 4.8 per cent); steel products (up 11.5 per cent); cement (up 13.1 per cent); crude oil runs (up 4.6 per cent); cast iron (up 7.3 per cent); steel (up 9.1 per cent); motor vehicles (down 9.2 per cent); cars (down 7.1 per cent); coal (up 8.0 per cent); natural gas (up 7.5 per cent); crude oil (up 0.3 per cent); coking coal (up 4.5 per cent).

–  Chinese urban investment rose by 5.7 per cent in the ten months to October on a year earlier (forecast: +5.5 per cent), up from 5.4 per cent growth in the nine months to September.

–  Across industries, year-to-date growth rates were: state firms (up 1.8 per cent); real estate (up 9.7 per cent); primary industry (up 13.4 per cent); secondary industry (up 5.8 per cent); tertiary industry (up 5.4 per cent); electricity (down 9.6 per cent); railway transport (down 7.0 per cent); domestic investment (up 6.1 per cent); Hong Kong/Taiwan investment (down 6.8 per cent); foreign investment (up 6.1 per cent).

–  Chinese property investment rose by 9.7 per cent in the ten months to October on a year earlier, down from 9.9 per cent in the nine months to September.

–  China’s unemployment rate was steady at 4.9 per cent in October.

What is the importance of the economic data?

China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for interest rates and investors?

–  China’s policymakers have some work to do in the fourth quarter if they want to meet their own annual growth target of 6.5 per cent by year-end. A plethora of policies have been announced, which will likely spur construction and infrastructure-related activity in the months ahead. Already steel, cement and electricity production have accelerated. And export activity has been front-loaded in advance of proposed US tariff increases early next year.

–  The tilt back to infrastructure spending is a positive for Australia’s resources sector. The old locomotive is being fired up, so it is no surprise that iron ore prices have been on a tear in the second half of this year. Of course, thisis great news for Aussie exporters and should support Australia’s fiscal position even further.

–  But the slowdown in China’s consumer sector is a worry. Concerns over job security and wages are yet to showup in the official consumer confidence data, but are certainly worth keeping an eye on. Tax cuts for salary earners should act as a support going into 2019, but will it be enough for the government to hit its fabled growth target?

–  Economists expect the gradual slowdown in China to continue into 2019 with annual growth of 6.3 per cent forecast. But the IMF has warned that the escalating trade war could shave off 1.6 percentage points from growth over the next two years.

– Experts expect Australian interest rates to be unchanged until late 2019.

Investor Signposts: Week Beginning November 18 2018

Australia

On Monday, the Bureau of Statistics (ABS) releases the September overseas arrivals and departures data. The weaker Aussie dollar is supportive of overseas tourism demand. Over the year to August a record 1,435,700 tourists came to Australia from China, up by 7.7 per cent.

On Tuesday, the regular weekly reading on consumer confidence is published by ANZ and Roy Morgan.

Also on Tuesday the ABS releases the “National Accounts: Distribution of household income, consumption and wealth (2003/04-2017/18)” publication. Supplementary data on household income and wealth, access to goods and services, population, housing, government benefits and taxation will be of particular interest, given the impact on overall living standards.

On Wednesday, the Department of Jobs and Small Business issues its monthly skilled internet job vacancies data. The Internet Vacancy Index fell by 0.6 per cent in September, but is still 1.6 per cent higher than a year ago. Job vacancies are at 61⁄2-year highs in Tasmania, up by 16 per cent from a year ago.

–  On Thursday, the ABS releases its population projections for states, territories, capital cities and state regions. According to the ABS, “the projections are not predictions or forecasts, but are illustrations of the growth and change in population which would occur if certain assumptions about future levels of fertility, mortality, internal migration and overseas migration were to prevail over the projection period.”

US home building and durable goods orders data in focus

– In a holiday-shortened week in the US, a raft of housing-related data are issued. Durable goods orders feature with the ‘flash’ purchasing managers’ manufacturing indexes from developed economies, such as the US, Japan, UK and Eurozone.

– The week kicks off on Monday in the US, with the release of the National Association of Home Builders (NAHB) Housing Market Index. The index has held steady at around 70 points since June. NAHB Chief Economist Robert Dietz has said, “Favourable economic conditions and demographic tailwinds should continue to support demand, but housing affordability has become a challenge due to ongoing price and interest rate increases.”

– The usual weekly data on US chain store sales is released on Tuesday along with October monthly housing starts and building permits figures. Housing starts fell by a greater-than-expected 5.3 per cent in September as construction activity in the South fell by the most in nearly three years (down 13.7 per cent) due to Hurricane Florence disruptions. But starts are forecast by economists to rebound by 1.6 per cent in October.

– US building permits fell by 0.6 per cent in September – the second straight monthly decline – as permits for the construction of multi-family homes declined by 7.6 per cent to 390,000 units. Permits are tipped to fall by 0.8 per cent to 1.26 million units in October.

On Wednesday in the US, the October consumer durable goods data will be issued. In September, the data was volatile, distorted by a 120 per cent surge in orders of defence aircraft. Business equipment investment rebounded in the September quarter, but economists don’t expect this to be sustained with a 2.5 per cent decline in orders tipped in the preliminary read for October.

Also on Wednesday, weekly MBA mortgage applications and monthly existing home sales data are issued. Sales of previously-owned homes fell to the weakest level (5.29 million) in almost three years in September – the sixth straight monthly decline. US mortgage rates have lifted to the highest level in almost eight years.

– And the Conference Board’s Leading Index for October is also scheduled for Wednesday. The index, which takes into account building permits, the ISM index of new orders and sharemarket prices, has lifted for 12 consecutive months.

– US markets are closed for the Thanksgiving Day public holiday on Thursday.

On Friday Markit’s ‘flash’ manufacturing purchasing managers’ indexes are issued for November across developed economies.

DISCLAIMER

This Freightplus article contains information obtained from sources believed to be reliable and has been prepared in good faith and with all reasonable care. Freightplus makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this website.

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