The People’s Bank of China (PBoC) announced on October 21 a reduction of both the 1-year and 5-year Loan Prime Rates (LPR) by 25 basis points each, bringing them to 3.1% and 3.6%, respectively.

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In mid-September, the PBoC launched a series of large-scale monetary easing measures, including interest rate cuts, reserve requirement ratio reductions, and mortgage rate cuts to support economic growth. Additionally, the 7-day reverse repo rate was lowered by 20 basis points at the end of September, providing guidance for the latest LPR adjustments.

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The September monthly economic data did showed some initial signs of improvement, with retail sales rising by 3.2% year-over-year (previous: 2.1%), exceeding market expectations of 2.5%, and industrial output increasing by 5.4% year-over-year (previous: 4.1%), also above market expectations of 4.6%. Neverthess, the current stimulus plans seem unable to boost the economy.

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China’s third-quarter GDP growth came in at 4.6% year-over-year (previous: 4.7%), with cumulative GDP growth for the first three quarters at 4.8%, still below the annual target of 5.0%, highlighting the increasing urgency for the Chinese government to strengthen policy stimulus.

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Last week, following TSMC’s release of better-than-expected third-quarter earnings, the U.S. S&P 500 index hit a new record high. In the bond market, U.S. Treasury yields remained largely unchanged, with the 10-year minus 2-year yield spread holding at 13 bps. Meanwhile, the U.S. dollar index continued to rise to around 103, reflecting the weakened economic outlook in Europe, which has led the European Central Bank (ECB) to adopt a more accommodative stance.

Key Economic Data Review for Last Week:

U.S. Retail Sales (September): Retail sales in September grew by 0.4% month-over-month (previous: 0.1%), surpassing the market expectation of 0.3%. Core retail sales increased by 0.7% (previous: 0.3%). Overall, U.S. consumer spending remains robust. According to a Federal Reserve survey, the current growth in retail sales is likely driven by higher-income groups, whose asset prices have risen significantly due to the wealth effect during the pandemic, making their consumption more resilient.

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Eurozone Interest Rate Decision: As expected, the ECB cut interest rates by 25 bps, bringing the deposit facility rate, the main refinancing rate, and the marginal lending facility rate down to 3.25%, 3.40%, and 3.65%, respectively. The ECB indicated that inflation is expected to rise in the coming months before falling back to the target range next year. Recent data, however, shows that economic growth has been weaker than anticipated, particularly in the manufacturing sector and exports. Although easing policy restrictions and rising real wages may boost economic growth, overall risks to growth remain tilted to the downside.

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China’s Monthly Data & GDP (10/18): China’s September economic data showed initial signs of improvement. Retail sales grew by 3.2% year-over-year (previous: 2.1%), exceeding the market expectation of 2.5%. Industrial output grew by 5.4% year-over-year (previous: 4.1%), also beating the market expectation of 4.6%. However, third-quarter GDP grew by 4.6% year-over-year (previous: 4.7%), with cumulative GDP growth for the first three quarters at 4.8%, still below the full-year target of 5.0%.

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Key Economic Data Review for This Week:

China LPR (10/21): In mid-September, the People’s Bank of China (PBoC) implemented a series of large-scale monetary easing policies, including interest rate cuts, reserve requirement ratio (RRR) reductions, and housing loan rate cuts. At the end of September, the PBoC also lowered the 7-day reverse repo rate by 0.2% to 1.5%. The market expects that the 7-day reverse repo rate will guide the 1-year and 5-year Loan Prime Rates (LPR) down by 25 bps to 3.1% and 3.6%, respectively.

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Canada Interest Rate Decision (10/23): In its September monetary policy decision, the Bank of Canada cut interest rates by 25 bps to 4.25%. With inflation and growth risks in Canada continuing to rise, the market expects the central bank to implement its fourth consecutive rate cut this month, with the possibility of a larger 50 bps cut this time.

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China’s monthly economic data in September showed signs of improvement, according to China’s National Bureau of Statistics on October 18.

In terms of consumption, retail sales grew by 3.2% year-over-year in September, up by 1.1 percentage points from the previous month and exceeding market expectations of 2.5%. This growth was mainly driven by household electronics, which surged by 20.5% year-over-year, up 17.1 percentage points from the previous month, reflecting the continued impact of China’s “trade-in” policy. Auto sales in September rose by 0.4% year-over-year, an increase of 7.7 percentage points from the previous month, reflecting the industry’s entry into the peak sales season of “golden September, silver October.”

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In the industrial sector, industrial output increased by 5.4% year-over-year in September, an improvement of 1.3 percentage points from the previous month, and surpassing market expectations of 4.6%. High-tech manufacturing continued to drive overall industrial growth, with a year-over-year increase of 10.1%, up 1.5 percentage points from the previous month, reflecting China’s focus on high-quality development and new productivity policies.

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In terms of investment, cumulative fixed-asset investment grew by 3.4% year-over-year in September, on par with the previous month, and slightly above market expectations of 3.3%. Industrial investment increased by 12.3%, up 0.1 percentage points from the previous period, while infrastructure investment grew by 4.1%, down 0.3 percentage points from the previous period. Additionally, both private and foreign investment continued to decline, signaling weaker business confidence in future prospects.

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Overall, the September data suggests early signs of improvement in China’s domestic economy. However, the latest GDP data reveals that real GDP grew by 4.6% year-over-year in the third quarter, down by 0.1 percentage points from the previous quarter. Cumulative GDP growth for the first three quarters stood at 4.8%, still below the annual target of 5%.

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Despite the Chinese government’s announcement of a series of monetary easing measures in late September, the ongoing slowdown in economic growth indicates that the recovery is still in its early stages. The government will need to expedite the implementation of large-scale fiscal policies to further stimulate economic growth.

According to data released by the U.S. Census Bureau on October 17, U.S. retail sales remained strong in September. Retail sales increased by 0.4% month-over-month, exceeding both the previous month’s 0.1% growth and the market expectation of 0.3%.

Breaking down the details, 10 out of 13 major retail categories showed growth. The largest contributor was grocery store sales, which saw a 4.0% month-over-month increase, up 3.7 percentage points from the previous period. The next largest growth was seen in clothing sales, which rose by 1.5%, an increase of 2.7 percentage points from the prior month. On the downside, sales declined in categories such as furniture stores, electronics and appliance stores, and gas stations.

Core retail sales, excluding autos and gas stations, increased by 0.7% month-over-month, higher than the previous month’s 0.3%. The control group for core retail sales also posted a 0.7% increase, up from 0.3% in the previous period.

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Overall, consumer spending in the U.S. remains robust. According to a Federal Reserve research, this strength is likely being driven by higher spending among middle- and upper-income groups.

The report noted that during the pandemic, loose monetary policy and subsequent government subsidies boosted the spending power of all income groups, especially lower-income households. However, since mid-2021, spending patterns have diverged. Middle- and upper-income groups have been able to maintain or even increase their average real spending, while lower-income groups have seen a decline. As of August 2024, average spending by higher-income groups had grown by 16.7%, while lower-income groups saw only a 7.9% increase.

(Source: Federal Reserve, TrendForce) 

UK CPI fell within the target range in September, according to data released by the UK Office for National Statistics on October 16. The CPI increased by 1.7% year-over-year in September, down from 2.2% in the previous month and below the market expectation of 1.9%, marking the lowest level since April 2021.

Core CPI, which excludes energy, food, and tobacco, rose by 3.2% year-over-year, a decrease of 0.4 percentage points from the previous month.

The main factor behind the CPI decline was the transportation sector, where prices dropped by 2.2% year-over-year, a 3.5 percentage point reduction from the previous month, contributing -0.3 percentage points to overall CPI growth. This was primarily due to lower airfares and a decline in crude oil prices.

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Moreover, The Bank of England’s closely watched services prices rose by 4.9% year-over-year, down 0.7 percentage points from the previous month, reflecting the continued easing of wage pressures. The latest data shows that regular pay growth in August was 4.9% year-over-year, a decline of 0.2 percentage points from the previous period, marking the lowest level since June 2022.

Earlier, in its August Monetary Policy Report, the Bank of England predicted that as wage pressures ease, services inflation would gradually decline to around 5.3% in 2024.

According to Reuters report, the latest CPI data has further fueled market expectations for a rate cut by the Bank of England. The probability of a two-rate cut by the end of the year has risen from 80% to 90%, and the British pound fell by approximately 0.8 cents against the U.S. dollar on October 16.

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