Originally published by Rivkin
Global equities declined while bonds rallied on Thursday following weaker than expected Chinese trade data that prompted concerns that the recent improvement in economic activity may be short lived. Chinese exports (YoY Sep) declined -10% well above the forecast -3.3% forecast while imports declined -1.9% with expectations for a +0.7% gain. In U.S. dollar terms the trade balance shrunk to $41.99 billion from $52.05 billion previously as estimates for an increase to $53 billion.
The fact that imports declined by a wider margin than anticipated is a concern, however I would warn against focusing too much on one specific data release, especially when trade figures can be volatile. Today we will have Chinese consumer price index and producer price index data out along with new loan growth followed by the third quarter GDP figures next Wednesday. The first chart below shows the USD/CNH (Offshore Renminbi) which has strengthened significantly over the past year as a result of a slowdown in economic activity and capital flight out of China. While the value has declined significantly, declines have been orderly and therefore not as concerning, especially compared with the disruption seen by the sudden devaluation from August 2015.
China’s transition from an economy led by investment growth to one driven by consumers is certainly not complete and there will be some bumps in the road as it is not by any means an easy task. However prior to this disappointing trade data we saw continued signs of stabilisation in recent data and policy makers have shown a commitment to step in with stimulus when needed. Time will tell as we monitor the incoming data to determine whether this is just a one off negative reading or the beginning of a larger trend.
The U.S. dollar declined -0.41% against a basket of its peers having rallied significantly over the past three weeks as market expectations shift towards a December rate hike. Despite the weaker dollar, bonds rallied with both the yield on two & ten-year debt falling -3 basis points to +0.8385% & +1.7446% respectively. Equity markets pared the majority of initial losses of over 1% to finish marginally weaker, the S&P 500 & Nasdaq 100 down -0.31% & -0.34% respectively as a +1.22% gain in utilities helped offset declines in financials & technology of -0.80% & -0.67% respectively.
Weekly initial jobless claims extended their longest streak below 300,000 since the 1970’s surpassing estimates for 253,000 with an actual reading of 246,000 for October 8th consistent with a healthy labour market. Continuing claims from October 1st were also better than forecast at 2.046 million with estimates for 2.050 million.
In Europe the notable data release was German CPI (YoY Sep) which remained unchanged at 0.7% in line with forecasts. The Euro gained +0.45% against the U.S. dollar, the yield on two-year German bonds was unchanged at -0.657% while the yield on ten-year debt decreased -2.6 basis points to +0.041%. Equity markets were broadly lower across Europe, both the Euro Stoxx 600 & DAX declining -0.87% & -1.04% respectively.
In the U.K. the GBP/USD advanced for a second day, up +0.43% having been extremely oversold the past few weeks. Despite better than expected data over the past three months gains in the Pound should be fairly limited over the coming weeks as the uncertainty and political situation around Brexit negotiations weigh on the currency. The yield on two-year government debt was unchanged at +0.213% while the yield on ten-year debt decreased 2 basis points to +1.024% and both the FTSE100 & 250 finished trading -0.66% & -0.44% weaker respectively.
In commodities oil prices reversed initial losses to close higher as declines in in inventory for gasoline and distillate helped offset a larger than forecast increase in crude oil inventories. For the week ending October 7th U.S. crude oil inventories increased 4.850 million barrels with estimates for only a 2 million barrel increase. At the same time gasoline inventories declined more than expected at -1.907 million against estimates of a 900,000 decline and distillates inventories declined -3.746 million barrels vs -1.2 million expected. Both WTI & Brent crude oil finished trading +0.54% & +0.41% higher after initial declines over -1.5%.
The second chart below shows natural gas futures which closed +3.83% higher as natural gas storage was lower than expected. A combination of increased demand as a result of warmer than expected weather on the U.S. east coast, supply disruptions from hurricane Matthew and reductions in output are helping to reduce a supply glut to be at the highest levels since December 2014.
Elsewhere commodities were lower as measured by the Thomson Reuters CRB index which finished -0.76% weaker. Copper prices, which are highly sensitive to Chinese data, declined -2.42% while precious metals spot gold & Silver posted modest gains, up +0.22% & +0.26% respectively.
The AUD/USD was flat around 0.7562 as Australian consumer inflation expectations (MoM Oct) increased to 3.7% from 3.3% a month earlier while the ASX200 was -0.71% weaker. Meanwhile we can expect a slightly stronger open to trading this morning with ASX SPI200 futures up 11 points in overnight trading.
Data releases:
- Chinese CPI & PPI (YoY Sep) 12:30pm AEDT
- Euro-zone Trade Balance (MoM Aug) 8:00pm AEDT
- Fed’s Eric Rosengren Speaks In Boston 11:30pm AEDT
- U.S. Advance Retail Sales (MoM Sep) 11:30pm AEDT
- U.S. Business Inventories (MoM Aug) 1:00am AEDT
- U.S. University of Michigan Consumer Confidence Survey (MoM Oct) 1:00am AEDT
- Fed Chair Janet Yellen Speaks In Boston 3:00am AEDT
- U.S. Baker Hughes Rig Count (Oct 14) 4:00am AEDT