weekly update 23 October

Strong wages data in the UK, but inflation and retail sales fell short

Despite strong wages data in the UK, inflation and retail sales fell short of expectations. Regular weekly earnings in the UK unexpectedly picked up from 2.9% to 3.1% year on year (yoy, last three month basis), having accelerated significantly in the last three months, at an annualised 4% rate, whilst the rate including bonuses picked up from 2.6% to 2.7% yoy. The unemployment rate was unchanged at 4.0%, but for less than positive reasons – the number of jobs decreased, but was offset by a fall in the participation rate.

Ordinarily, this wage surprise would be expected to intensify inflation expectations, but the most recent inflation numbers actually disappointed, with CPI falling further than expected from 2.7% to 2.4% yoy (2.6% was expected). Core CPI fell from 2.1% to 1.9% (2.0% was expected), with transport, recreation & culture and food costs the main detractors. This soft consumer theme was reinforced by disappointment in retail sales, as growth slowed from 3.4% to 3.0% yoy – markets had expected the figure to rise to 3.6% – with a ‘stark slowdown’ in food store sales the main detractor according to the Office for National Statistics (ONS).

The contemporaneous releases largely seemed to offset each other in the eyes of the markets and allay fears that inflation might impact the path of interest rates. However, it is important to remember that wage growth can be a leading indicator for inflation, and is nonetheless a positive forward-looking economic indicator after a period when the UK consumer has looked somewhat fatigued.

Rare miss for Chinese GDP

There was a rare miss for Chinese GDP, which saw the third-quarter reading slow from 6.7% to 6.5% yoy (6.6% had been expected), and is particularly unusual given that China is a command economy. While investment picked up slightly consumption was flat and it was manufacturing activity that dragged the figure lower, potentially a sign that the trade war is starting to have a measurable economic impact. Despite the disappointment, this is merely in line with the country’s full-year target of 6.5% growth, and comes before some of the policy stimulus measures from earlier in the year have had a chance to kick in.

In apparent response, the Chinese authorities announced fresh stimulus measures over the weekend in the form of surprisingly wide-ranging personal tax breaks which are likely to spur further consumption. Not only would this likely help support slowing economic growth, it could also sow the seeds for a potential de-escalation in the current trade war if this consumption translates into trade deficit reduction, other political motives notwithstanding. The other data released from China were mixed, with Retail Sales growth rising from 9.0% to 9.2% yoy (no change was expected), Fixed Asset Investment rising from 5.3% to 5.4% yoy (on a year-to-date basis, no change was expected) but Industrial Production growth slowed from 6.1% to 5.8% (6.0% was expected).

Last week’s other events

• In the US, the Federal Open Market Committee (FOMC) minutes suggested that the committee members were potentially becoming more hawkish than the market had previously thought, with a ‘substantial majority’ expecting rates will have to move temporarily above the long-run rate, and ‘a few’ considering that policy would have to become ‘moderately restrictive’. US Retail Sales were unchanged in September, increasing 0.1% month on month (mom), which disappointed forecasts for an increase to 0.6%
• In China, CPI inflation increased as expected from 2.3% to 2.5% yoy
• Japanese CPI inflation slipped from 1.3% to 1.2% yoy, against forecasts for no change

The markets

Markets stabilised last week, with limited moves on equities and non-US sovereigns flat to firmer (US Treasuries were marginally weaker).

Equities

Equity markets stabilised last week. Europe (excluding the UK) returned 0.8% on the week, with the UK just behind at 0.6% (both using the MSCI indices). The S&P 500 returned 0.1% on the week (just 0.05% unrounded!). In Japan the TOPIX index was down -0.6%. The MSCI Emerging Markets index fell -1.0%.

Bonds

10-year gilt yields fell 6 basis points (bps) to finish at 1.58% on Friday, while the equivalent German bund yields fell 4 bps to 0.46%. 10-year US Treasury yields moved in the opposite direction, rising 3 bps on the week to close at 3.19%, while 10-year Japanese Government Bond yields were unchanged at 0.15%.

Commodities

Oil was slightly softer on the week, with Brent crude dipping below the US$80 mark to finish at US$79.78 per barrel. Copper softened to US$2.78 per lb while gold was marginally stronger at US$1,226 per ounce.

Currencies

Sterling was broadly softer on the week, but only marginally so. Sterling closed on Friday at US$1.31, €1.13 and ¥147.

The week ahead

There’s a lot going on in the week ahead. Friday sees the first estimate of US third-quarter GDP, and given the weakness in the Chinese print, any deviation could impact the negotiating tactics of the US administration (a slowdown from 4.2% to 3.4% annualised is expected). On Thursday the European Central Bank’s (ECB) monetary policy meeting concludes, and whilst no formal change in policy is expected, market participants will be looking for any details of the quantitative easing reinvestment policy once programme expansion finishes, which is expected to be at the end of the year. Elsewhere we have PMI data from Japan, the Eurozone, and the US to look forward to – see below for further details. The daily breakdown is as follows:

Monday: Japanese All Industry Activity is reported in the morning, along with Convenience Store Sales, and then in the afternoon the US reports the Chicago Fed’s National Activity Index.

Tuesday: In the morning, Japan reports retail sales figures and machine orders. Later in the morning, the Confederation of British Industry reports business trends and optimism. In the afternoon, it’s the turn of the Richmond Fed in the US to report on manufacturing activity, whilst the Eurozone will report on consumer confidence.

Wednesday: Japanese Manufacturing PMI is the first release of the day, which will be followed by Eurozone Manufacturing and Services PMI numbers later in the morning (the Composite PMI reading is forecast to slip from 54.1 to 53.9, with both components expected to be softer). In the afternoon, US PMI readings from Markit are released, and forecasts point to Manufacturing PMI slipping from 55.6 to 55.3 whilst Services PMI is expected to increase from 53.5 to 54.0. In the evening, the US Federal Reserve releases its Beige Book of anecdotal business condition reports.

Thursday: German survey results for consumer confidence and business expectations are released ahead of the main event of the ECB monetary policy meeting conclusion. In the afternoon, the US reports on Durable Goods Orders (a -1.5% mom contraction from 4.4% is expected) with the Kansas City Federal Reserve reporting manufacturing activity later in the day.

Friday: The first estimate of US third-quarter GDP is the only data of note, but is certainly important enough to hold investors’ attention into the week’s close.