- China’s economic data was robust, supporting our 8% GDP growth forecast for next year
- US jobs report painted a more upbeat picture in line with the view of a strengthening economy…
- …and increasing chances of a December taper, but we still think that the Fed will wait until March
China’s economy looking good at the start of Q4
China’s batch of October data generally beat expectations. For starters, export growth was solid and broad based in October at 5.6% yoy compared to -0.3% yoy in September. Export growth to the US rebounded to 8.1% yoy in October up from 4.2% yoy the previous month and exports to the EU surged to 12.7% yoy after a disappointing -1% yoy in September. Import growth was unchanged at 7.6% yoy. As for industrial production and retail sales, growth in October remained solid. The former increased to 10.3% yoy up from 10.2% yoy, while the latter was unchanged at 13.3% yoy. Fixed investment edged down to 20.1% yoy from 20.2% yoy. The details suggest that infrastructure and real estate investment are slowing down, making way for investment in manufacturing. Overall, the activity data point to upside risks to our GDP forecast of 7.5% for 2013, while they support our forecast of a firming of growth to 8% in 2014, mainly on the back of a strong demand from the advanced economies. Going forward, positive data could make China’s leaders more confident to introduce more in-depth economic reforms in the financial system and the tightly controlled capital account. Meanwhile, consumer price inflation rose to 3.2% in October up from 3.1% in September, mainly as a result of higher food prices. This is still below the government’s target of 3.5%, but the rising trend in consumer and property prices in the past months have put China’s central bank on guard. Indeed authorities have been trying to refrain from liquidity injections, while signalling a more prudent monetary policy stance.
US labour market report surprisingly good
In the US, October’s labour market report re-wrote the recent history of employment growth in what felt like ‘a press of a button’. Anyone looking at employment trends after the September report would have concluded that job growth was lacklustre, and with the shutdown set to do damage to the October jobs report, it seemed inconceivable that the Fed would move to taper in the short term. One month later we are left with an average gain in nonfarm payrolls of around 200K in the three months to October. This reflected an acceleration in job growth in October (204K) and 60K of revisions to the previous two months. The shutdown apparently did not have much impact of the payrolls numbers (though there may have a statistical effect because of an impact on the timing of data collection), though it played havoc with the household survey, which showed both jobs and the labour force plummeting (leaving the unemployment rate edging up to 7.3% from 7.2%). Putting ourselves in the shoes of policymakers, we doubt that the decision to taper will depend on any one report, and certainly not one that can have such ‘mood swings’. Other data have been mixed, with the ISM surveys very encouraging but hard activity data still unconvincing. In addition, the Fed seems minded to err on the side of caution. So although the chances of a taper of asset purchases in December have increased, we stick to our call that it will wait until March, even though we remain very optimistic about the outlook for the US economy.
Markets focus on taper implications of jobs report
The much stronger than expected US employment report led to strong reactions on financial markets as investors factored in a higher probability of early tapering of asset purchases by the Fed. There were drops in US Treasuries, emerging market currencies, and precious metals. US equities eventually rose after a cautious open. Investors seem to be torn between the tapering and growth implications of the data. We think that the US labour market numbers – and subsequently the batch of China data – confirm that the global economy is about to significantly gain momentum. Ultimately this will be good news for growth assets, despite the tapering of asset purchases.