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Chinese real GDP growth met expectations in Q3, rising 6.8 percent year-over-year. The deceleration in fixed investment spending in China continued, however, as a result of both secular and cyclical trends.

Chinese GDP Growth Slows Slightly in Q3

Data released today showed the Chinese economy growing 6.8 percent on a year-ago basis in Q3, matching the Bloomberg consensus forecast (top chart). The print marks a 0.1 percentage point slowdown from the 6.9 percent pace registered through the first two quarters of the year.

Although a breakdown of GDP into its demand components is not yet available, sector level data indicate that growth was largely steady in the key sectors of the Chinese economy. Growth in the secondary industry, which includes mining/quarrying, manufacturing, construction and utilities production, ticked lower by 0.1 percentage point to 6.3 percent on a year-over-year, year-to-date basis. The momentum may have reversed course late in the quarter, however, as Chinese industrial production data released in a separate report today showed output climbing 6.6 percent year-over-year in September, a marked improvement from the 2017 low of 6.0 percent growth in August. Growth in the tertiary industry, or the service sector, was modestly stronger, as was output in the primary sector, which includes agriculture, forestry and fishing.

Economic growth in China has firmed in 2017 relative to last year's pace amid the stronger global growth environment. At present, we expect real global GDP to accelerate about half a percentage point in 2017 from the growth rate registered in 2016. Even with the faster growth at home and abroad, fixed investment spending in China has continued to decelerate (middle chart). Some of the slowdown has been the continuation of a secular trend; investment spending has decelerated for most of this cycle as the Chinese economy continues the steady transition towards a more consumption-oriented growth model. To that point, retail sales data released today showed continued double-digit year-to-date growth through the month of September. More recently, investment spending growth has continued to slow as Chinese policymakers have moved to tighten policy amid concerns that the credit expansion, that occurred when the economy was slowing, might lead to debt imbalances.

Outlook Is for Modestly Slower Growth in China in 2018

As we have highlighted in previous reports, the leverage in the nonfinancial corporate sector in China, particularly for state-owned enterprises (SOEs) is an area we have identified as a potential risk to the outlook (bottom chart).* At the ongoing 19th Party Congress, the signals from leaders have suggested that policymakers will not move anytime soon to scale back the SOEs. We do not believe the corporate leverage/SOE challenges are likely to cause an implosion in the Chinese economy anytime soon, but they do represent both a downside risk to the outlook and a secular drag on the economy's potential growth rate. We continue to expect real GDP in China to decelerate modestly in 2018 to a 6.3 percent pace.

USD/JPY - 112.54

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 112.73

Kijun-Sen level                  : 112.73

Ichimoku cloud top             : 112.55

Ichimoku cloud bottom      : 112.30

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

Despite intra-day brief rise to 113.15, the subsequent much deeper than expected retreat has dampened our bullishness and signals a temporary top has been formed there, hence consolidation with mild downside bias is seen for test of indicated strong support area at 112.03-13 but break there is needed to add credence to this view and signal the rebound from 111.65 has ended, bring another fall towards this level later.

On the upside, whilst recovery to the Kijun-Sen (now at 112.73) cannot be ruled out, price should falter well below said resistance at 113.15 and bring another retreat later. Only break of said resistance at 113.15 would revive bullishness for retest of recent high at 113.44 which is likely to hold on first testing.

Chinese real gross domestic product (GDP) rose by 6.8% (year-on-year) in the third quarter, in line with consensus expectations. On a quarter-over-quarter basis, growth slowed a touch to a 1.7% pace in the third quarter, also in line with consensus. Growth in 17Q1 was revised up to 1.4% q/q from 1.3%, while growth in 17Q2 was revised up to 1.8% q/q from 1.7%. Altogether, the data released overnight puts China's economy on pace to expand at a 6.8% pace in 2017.

Nominal GDP grew 11.2% (y/y) in the third quarter, on par with the 11.1% pace recorded in the second quarter. Producer prices rose an average of 6.3% y/y, extending the streak of strong producer price gains that began at the start of this year. Consumer prices rose an average of 1.6% y/y in the quarter, the strongest pace of advance seen this year.

Economic activity on an industry basis was broad-based, with all major sectors expanding on a year-on-year basis. Secondary industry performance slowed a touch in the third quarter, likely a reflection of slower construction activity. Growth in tertiary (services) industries ticked up a bit from the previous quarter and recorded the strongest gain yet this year at 8.0% y/y. Service industries comprise the largest share of economic activity in China at just over half.

Fixed asset investment (excluding rural areas) slowed to a sub-8.0% trend pace in the third quarter after advancing at almost a 9.0% trend pace in the second quarter (reported on a year-over-year, year-to-date basis). It should be noted that fixed asset investment has been slowing consistently since early-2013 when it was rising by around 20% per year, reflecting the shift toward services.

Industrial production rose 6.6% (y/y) in September, a touch firmer than the consensus call for a 6.5% gain. However, industrial production in the third quarter as a whole slowed to its slowest pace of advance year-to-date at 6.3% y/y, suggesting slower economic activity in the fourth quarter.

Key Implications

Once again Chinese economic activity did not disappoint market expectations. But, monthly indicator data suggests that growth is likely to slow a bit further in the fourth quarter, reminiscent of the trend of strong mid-year growth giving way to weaker activity at year-end and at the start of the next year observed since 2015.

Concerns remain about the rapid pace of credit growth in China, particularly in the years following the Great Recession. Total social financing credit growth ticked up a touch in the third quarter, but remained well below the strong pace recorded in the first quarter. Slower credit growth is consistent with weaker trend growth of fixed asset investment. Chinese authorities have made some gains in reining in excess credit growth, but remain sensitive to historically high and rising levels of debt across all sectors (consisting of corporate, household, and government) in light of the risks that this poses to its domestic banking sector, particularly in an environment of slowing economic growth. As such, we anticipate policymakers will continue to maintain a tightening bias in domestic credit conditions at least for the remainder of this year.

The 19th National Congress of the Communist Party of China kicked off yesterday, and is expected to last until October 24th. Over the next few days we anticipate Chinese officials to outline an updated five-year economic plan for China, as well as announce new political appointments. Some of the most notable announcements thus far include ambitions for China to become a globally influential leader by 2050, and plans to continue to pursue market-oriented reforms that help to assure foreigners that China will open up to more foreign investment. We plan on releasing a summary of the major announcements after the conclusion of the congress.

The price dropped sharply and erased the last two day's gains. It could drop much deeper in the upcoming days if will close the day below the $57.30 per barrel. Brent is very heavy right now and seems poised to turn to the downside again in the upcoming period. The rate is pressuring an important dynamic support, a valid breakdown will signal a further drop in the upcoming period.

I've said in the previous weeks that the rate could start a larger drop if will stabilize somewhere below the 57.00 psychological level. Price increased in the last weeks, but I've said that this could be only temporary and the bears could take the lead again on the short term.

Brent drops even if the United States Crude Oil Inventories have dropped to -5.7 million barrels in the previous week, much below the -4.7M estimate and versus the -2.7M in the former reading period.

Price edges lower on the Daily chart and looks determined to take out the dynamic support from the median line (ML) of the major ascending pitchfork and the horizontal support from the 57.72 static support.

Will drop much deeper if will close below the median line (ML) of the ascending pitchfork. Technically, it is expected to drop much deeper after the failure to reach and retest the upside line of the ascending channel and the 59.50 previous high. Only a valid breakdown from the up channel will signal a further drop.

The rate dropped significantly today and recovered after the yesterday's impressive rally. Is retesting the broken fifth waring line (wl5) of the former descending pitchfork, the 1.1536 broken horizontal resistance (resistance turned into support) and the upper median line (uml) of the minor descending pitchfork.

A rejection from here will send the rate much higher in the upcoming period, the next target will be at the 1.1621 previous high.

EUR/GBP increased sharply and resumed the minor rebound. Is pressuring the confluence between the minor downtrend with the median line (ML) of the major ascending pitchfork. A valid breakout through the confluence area and above the 0.9000 psychological level will accelerate the bullish momentum. Another drop will be confirmed by a rejection, followed by a minor drop.

EUR/GBP - 0.8979

Original strategy  :

Sold at 0.8975, Target: 0.8855, Stop: 0.9015

Position : - Short at 0.8975

Target :  - 0.8855

Stop : - 0.9015

New strategy  :

Hold short entered at 0.8975, Target: 0.8855, Stop: 0.9015

Position : - Short at 0.8975

Target :  - 0.8855

Stop : - 0.9015
 

Although the single currency has rebounded again today and marginal gain from here cannot be ruled out, if our view that top has been formed at 0.9033 last week is correct, upside would be limited and bring another decline later, below 0.8925 would suggest an intra-day top is formed, bring test of 0.8899 but break there is needed to signal the rebound from 0.8856 has ended, bring another test of indicated support at 0.8850-56. Once this level is penetrated, this would add credence to this view and signal the rise from 0.8746 low has ended, bring further fall to 0.8800-10 later. 

In view of this, we are holding on to our short position entered at 0.8975. Above 0.9000 would defer and risk a stronger rebound to 0.9015-20 but still reckon price would falter well below said resistance at 0.9033, bring another selloff.

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

USD/CAD - 1.2481

Trend:  Down

 
Original strategy       :

Exit long entered at 1.2515,

Position: - Long at 1.2515

Target:  -

Stop: -

 
New strategy             :

Stand aside

Position: -

Target:  -

Stop:-

As the greenback retreated after meeting resistance at 1.2591, retaining our view that further consolidation below indicated previous resistance at 1.2599 would be seen and test of 1.2433 support cannot be ruled out, however, break there is needed to signal top has been formed at 1.2599, bring further fall to 1.2400 and later towards 1.2350-55 but indicated previous support at 1.2313 would hold from here.

On the upside, above 1.2530-35 would bring another bounce towards 1.2591-99 but only break there would revive bullishness and signal the rise from 1.2061 low (wave iii trough) has resumed for further gain towards previous resistance at 1.2663, however, upside should be limited to 1.2700 and price should falter well below another previous resistance at 1.2778. We are keeping our count that wave v as well as wave (C) ended at 1.3794 and impulsive wave (i ii, i ii) is now unfolding with minor wave iii ended at 1.2414, followed by wave iv correction ended at 1.2778, wave v has reached our indicated downside target at 1.2100 and may extend to 1.2000.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

• European equities lose up to 1%, copying a sudden slide in the Hang Seng Index at the end of Asian trading. Comments by PBOC governor Zhou on a "Minsky moment" are to blame. US stock markets opened losses between 0.3% and 0.6%, with the Nasdaq underperforming.
• The Spanish government has promised to begin the process of taking direct control over Catalonia after the region's president Carles Puigdemont declined to renounce claims to independence.
• China will fend off risks from excessive optimism that could lead to a "Minsky Moment", central bank governor Zhou Xiaochuan said, adding that corporate debt levels are relatively high and household debt is rising too quickly. A Minsky Moment is a sudden collapse of asset prices after a long period of growth, sparked by debt or FX pressures.
• UK retail sales fell more than forecast in September, leaving growth in the third quarter at its weakest in four years. Sales dropped 0.8% from August, far more than the 0.1% estimated. Over the third quarter, annual growth slowed to 1.5%, the worst performance since October 2013, according to the ONS.
• The number of Americans filing for unemployment benefits fell to its lowest level in more than 44 years last week (222k), pointing to a rebound in job growth after a hurricane-related decline in employment in September. The Philly Fed business outlook unexpectedly rose from 23.8 to 27.9.
• New Zealand First party backed Labour to form a government after 12 days of talks following inconclusive elections. The new PM will be Jacinda Ardern, who became Labour leader in July. NZ First argues the kiwi is overvalued and wants to change the RBNZ's inflation mandate to a system in which it can directly control the currency. NZD/USD crashed from 0.7150 towards 0.70.
• President Donald Trump's drive to overhaul the US tax code headed for a pivotal moment, with Senate Republicans poised to approve a budget measure that would help them pass tax legislation without Democratic support.
• Austria's likely next chancellor assured EU leaders of his support for the EU, allaying concerns that his country would become a dissonant voice in the bloc with the far right expected to enter its government.

Rates

Risk aversion with US outperformance

Global core bonds gained ground today in a risk-off environment. US Treasuries surprisingly outperformed German Bunds. A sudden drop of Hong Kong shares at the end of Asian trading initiated a disappointing European stock market opening and triggered first safe haven flows. Equity investors took a scare from comments of PBOC governor Zhou who warned for a Minsky moment (see headlines) in Chinese assets. Developments in Spain caused a second bout of risk aversion, even if it was short-lived (Bund completely retraced the move). Catalan President Puigdemont refused to renounce his claim on independence, forcing Madrid to proceed with activating article 155 which would strip Catalunya from its autonomy. Spanish parliament is expected to vote on the issue on Monday. The Spanish asset underperformance was rapidly undone, in line with previous days. Investors clearly think that the Spanish-Catalan stand-off won't spiral out of control. US eco data printed very strong with historically low jobless claims and a strong Philly Fed Business outlook, but couldn't change the tide on the US Treasury market.

At the time of writing, US yields decline by 2.4 bps (2-yr) to 3.8 bps (10-yr). Changes on the German yield curve are limited between -0.6 bps (2-yr) and -0.1 bp (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are close to unchanged with Greece underperforming (+5 bps) and Portugal outperforming (-5 bps).

The French treasury tapped two on the run OAT's (€1.8B 0% May2021 & €2.57B 0% Mar2023) and an off the run OAT (€2.63B 1.75% Nov2024) for a combined €7bn, the maximum amount on offer. Demand was good with a 2.07 auction bid cover. The Spanish debt agency sold three on the run bonds (€1.81B 0.05% Jan2021, €1.02B 1.45% Oct2027 & €0.74B 2.9% Oct2046) and one off the run Obligacion (€0.97B 4.65% Jul2025). The combined amount raised, €4.53B, was in the middle of the €4-5B target range with a 1.52 auction bid cover. Given today's escalation in the Spanish constitutional crisis, the result could have been much worse.

Currencies

Euro outperforms despite Spain triggering art 155

All eyes were on Spain today. EUR/USD spiked lower as the Spanish government stated the process of suspending the regional powers of the Catalan government. However, the euro decline was almost immediately reversed. EUR/USD even moved in positive territory. A tentative global risk-off sentiment caused US Treasuries to outperform German bunds; reducing the interest rate differential in favour of the euro. EUR/USD trades in the 1.1835 area. USD/JPY dropped to the mid 112 area.

Overnight, the Chinese Q3 GDP was in line with expectations. The composition was OK. Even so, Chinese data were insufficient to enhance the Asian risk rally. Most regional indices showed modest losses. Japan outperformed on overall yen weakness. At the end of the session, shares in Hong Kong even fell off a cliff, closing the day with a loss of 1.92%. USD/JPY tried to regain the 113 barrier overnight, but the risk-off correction pushed the pair back below the big figure. EUR/USD was little affected by the Asian equity swings. The pair hovered in the low 1.18 area.

European equities opened little changed, but volatility from Asia and uncertainty ahead of the Catalan deadline triggered caution among European (equity) investors. Catalan president Puidgemont refused to withdraw the Catalan independence claim. As a result, Spanish PM Rajoy started the procedure to suspend the power for the regional authority, invoking article 155 of the Spanish constitution. EUR/USD spiked to the 1.1770 area on the announcement of the start of this procedure. However, the euro decline was very short-lived. EUR/USD soon returned to the 1.18 area and even moved in positive territory. The euro already showed resilience to the Spanish political uncertainty of late. Other factors were also at play. Global risk sentiment , but Spain wasn't the only factor to blame. US equity futures nosedived (fall-out from Hong Kong?). Remarkably, despite the Spanish uncertainty, interest rate differentials moved in favour of the euro rather than the dollar as US Treasuries outperformed German bonds. EUR/USD stayed well above the 1.18 barrier. In the same move, USD/JPY dropped to mid-112 area.

The US jobless claims and the Philly Fed business outlook were both very strong. Claims even dropped to the lowest level since 1973. However, the reports didn't help the dollar. The key question for global trading was whether or not US stocks would join a broader risk-off correction. US equities opened with modest losses of 0.3% to 0.6%. EUR/USD stabilizes in the 1.1835 area. USD/JPY is changing hands in the 112.55 area. Dollar sentiment remains fragile. Despite Spain, the US currency looks at least as vulnerable to global uncertainty than the euro.

Poor UK retail sales cause additional sterling selling

UK retail sales fell 0.8% M/M in September, reversing a rise of 0.9% the previous month. The September decline brings third quarter growth to 1.5% Y/Y, the slowest level since Q2 2013. The ONS said that the rising cost of goods eroded Britton's spending power. Today's retail sales suggest that there is little room for the BoE to raise its policy rate beyond a sole rate hike in November. The prospect of little additional interest rate support triggered further sterling selling. EUR/GBP spiked to the 0.8990 area and remained close to that level for the remainder of the session. Cable set a minor low for this week (1.3135 area), but further losses were blocked as the dollar came also under pressure. At the EU summit in Brussels, UK PM May will ask the other EU leaders to proceed talks on the future relationship between the EU and the UK. The EU might give some encouraging words, but it is unlikely that they will make big unilateral concessions. In this context, sterling might remain the defensive.

Daily Pivots: (S1) 112.35; (P) 112.70; (R1) 113.27; More...

Intraday bias in USD/JPY is turned neutral again as it failed to break through 113.43 resistance and retreats sharply today. On the upside, break of 113.43 will resume the rise from 107.31 and target 114.49 resistance. More importantly current development revives the case that correction from 118.65 has completed at 107.31. Decisive break of 114.49 will pave the way to retest 118.65 high. However, break of 111.64 will mixed up the outlook again and turn bias back to the downside for deeper fall.

In the bigger picture, rise from 98.97 (2016 low) is seen as the second leg of the corrective pattern from 125.85 (2015 high). It's unclear whether this second leg has completed at 118.65 or not. But medium term outlook will be mildly bearish as long as 114.49 resistance holds. And, there is prospect of breaking 98.97 ahead. Meanwhile, break of 114.49 will bring retest of 125.85 high. But even in that case, we don't expect a break there on first attempt.