- Chinese growth slowed less than market expectations in Q3
- ECB starts buying covered bonds – spreads modestly tighter
- Fed officials signal that QE will likely end as planned – investors not phased
Chinese growth slowed less than expected in Q3
Asian and commodity currencies rose after the release of China’s Q3 GDP this morning. Real GDP growth slowed to 7.3% yoy in the past quarter (Q2: 7.5% yoy), compared to market expectations of 7.2% yoy. Quarterly growth fell back to 1.9% qoq (Q2: 2.0% qoq). The better than expected outcome was supported by stronger than expected rebound in industrial production in September which rose 8% yoy against market expectations 7.5%. Nevertheless it is clear that the ongoing property market correction and the curtailment of shadow banking are leaving their marks on the economy, while it takes some time for the latest targeted stimulus to have an effect. Retail sales and fixed assets investment continued their gradual slide, reaching 11.6% yoy and 16.1% yoy, respectively, in September (August: 11.9% yoy and 16.5% yoy). While these data confirm that the Chinese economy continues its gradual slowdown, we remain of the view that the authorities will continue to add targeted stimulus to prevent a hard landing. Recent measures such as fresh liquidity injections into Chinese banks and a general easing of housing restrictions lend support to this view. Moreover, exports continue to be a welcome tailwind. All in all, we have kept our 2014 and 2015 growth forecasts at 7.5% and 7%.
ECB starts buying covered bonds
Yesterday, the ECB started buying covered bonds. It seems that the ECB has bought a wide range of covered bonds, across countries as well as maturities. First it was reported that the central bank was buying French shorter-dated covered bonds, but Spanish, Italian, and Portuguese covered bonds were also in scope, as was Finnish and German paper. In Dutch and Belgian names, it seems that the ECB started targeting the belly of the curve. The ECB has not yet had a massive impact on prices, as spreads are only modestly tighter. This probably also reflects that spreads have already narrowed strongly following the announcement of CBPP3 in early September. It also seems the market is more than willing to offload some risk in peripherals, given the weakness in the respective sovereigns. Overall, core and France seems to have tightened about 1 to 2bp, and peripherals a bit more. We think the programme will support the market going forward.
Fed official signal likely end to QE later this month
At the end of last week, against the background of volatile financial markets, the President of the St. Louis Federal Reserve suggested that there could be a ‘delay to the end of the QE’. However, since then, other officials have signalled that it will go ahead as planned, with the FOMC likely to end asset purchases altogether at its meeting later this month. The Boston Fed President, Eric Rosengren that the market volatility was not enough for him to change his forecasts. As such bond purchases should end as planned, unless there is additional information that suggests that there is a ‘much more severe problem’. His comments have added importance as he is usually one of the most dovish officials. Meanwhile, his counterpart at the San Francisco Fed, John Williams also said that his baseline scenario was to end the asset purchase programme ‘on schedule this month’. Finally, the hawkish President of the Dallas Fed said he would also still support the end of QE. Financial markets did not appear phased by these comments, with equities appearing to focus more on the corporate earnings news on both sides of the Atlantic. Our central view is that the Fed will indeed end its asset purchases this month. We expect the first interest rate increase at around the middle of next year.