Chinese data show a continued rebalancing of growth

Market Movers

• Besides this morning’s Chinese data releases (see more below), the calendar is fairly thin, with US housing data released in the afternoon as the highlight.

• The NAHB housing market index for October is expected to be unchanged after climbing in September to 62, its highest level since 2006. Note that further US housing data are due for release later this week, including housing starts and building permits (Tuesday) and existing homes sales (Thursday). Generally speaking, we expect data to support the picture of a housing market that continues to benefit from a favourable mix of low interest rates and positive real income growth.

• Fed’s Brainard (voter, dovish) and Lacker (voter, hawkish) are scheduled to speak but the topics are not related to the economic outlook or monetary policy.

• There are no data releases in Scandinavia today.

Selected Market News

Chinese data disappointed but show no signs of an economy collapsing. A range of data was released in China this morning. Q3 GDP growth was in line with expectations, increasing 1.8% q/q (DBM estimate 1.5% q/q) and 6.9% y/y (consensus 6.8% y/y) but industrial production disappointed, falling to 5.7% y/y (August: 6.1%, consensus 6.0%). As a comparison, the low point for industrial production during the financial crisis in 2008 was 5.4%, so the industrial activity is comparable to this very weak period. The monthly change fell to 0.4% (August: 0.5%) so still no sign of recovery. Fixed asset investment (current prices) fell to 10.3% y/y year-to-date in September (August: 10.9%, consensus 10.8%), the lowest level in 15 years. Finally, China’s retail sales showed an increase of 10.9% y/y in September (August: 10.8%, consensus 10.8% y/y).

In our view, the Chinese data show a continued rebalancing of growth; weaker industrial growth is compensated for by higher service sector activity, leaving GDP growth broadly flat. This has global implications, as the service sector is much less reliant on imports than the manufacturing sector. We expect Chinese GDP growth to be broadly flat around 1.8% q/q in Q4 (see Chinese Q3 GDP in line with expectations but industrialgrowth continues to disappoint, 19 October 2015).

Last week’s economic data were on the weak side; in the US, September retail sales disappointed, suggesting that momentum in private consumption is slowing, while industrial production declined in Europe in August, in line with expectations. In China, trade data showed exports falling less but the decline in imports increased.

However, global equity indices managed to eke out small gains. In the US, stocks were up for the third week in a row, as the first batch of Q3 results were generally well received by investors. Furthermore, renewed concerns about the economic outlook have also casted doubt on whether the Fed will raise rates in 2015, which in itself may have supported risky assets. Last week, two Fed governors (Tarullo, Brainard) signalled unease about the economic outlook, preferring to wait for more solid evidence that inflation is moving higher before raising rates.

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