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Market Recap Friday, October 13, 2017

In Brief

  • U.S.: PPI ticking higher and inflation not dead; small business confidence peaking with D.C. risk; jobless claims still low
  • Eurozone: Another good month for Eurozone sentiment; structural reform tough, but Catalonia risk contained and a second wind for sentiment; Emmanuel Macron has challenged EU leaders to sort out reform of the bloc within a year
  • Japan: Data and Abe’s power grab looking promising; Japan still could be underestimated; Japanese stocks hit 21-year high as investors shrug off concerns
  • China: Mixed data ahead of power consolidation; politburo reshuffle on Oct 18; “Golden Week” spending should boost data next month; still concerns about pollution; IMF says China should shift focus to tackling debt, reform
  • LEIs: Still signaling softer global activity over the next six months

On the U.S.

The Producer Price Index (PPI) jumped to 0.4% in September 2017, and the core PPI, a measure preferred by economists, rose 0.2%. The increase in PPI pushed the 12-month rate of wholesale inflation to 2.6%, the highest level since February 2012; most of the increase in wholesale prices was attributed to a runup in gasoline prices after Hurricane Harvey knocked several major oil refineries offline.

On the other hand, developments in D.C. continues to be volatile and messy. Onlookers, including small business owners, are seeing optimism peak. The NFIB optimism softened to 103.0 in September, resulting from increased pessimism towards future sales, capital outlays, and economic outlook. Despite, the reading was still historically high; the recent hurricanes did not impact the reading.

The number of Americans filing for unemployment benefits fell to more than a one-month low last week as claims in Texas and Florida continued to decline after being boosted by Hurricanes Harvey and Irma. Initial claims for state unemployment benefits decreased 15,000 to a seasonally adjusted 243,000 for the week ended October 7, according to the Labor Department. Data for the prior week were revised to show 2,000 fewer applications received than previously reported.

On Eurozone

The Sentix Euro Area Investor Confidence Index rose to 29.7 in October, which was a 10-year high. Investors are feeling better about the region as events and data, including German election, Catalonia vote, PMIs, production, weaker Euro, inflation, and North Korea, have unfolded favorably the past months. On the other hand, real structural progress is yet to materialize, populism is not dead, and some soft data still looks toppy in the euro area.

The French President set out his own blueprint for a more tightly integrated union in September during a speech at Goethe University in Frankfurt before a later public appearance with Mrs. Merkel, calling for a string of changes including a shared budget and joint defense force. He warned October 10 that member states only had one year before the 2019 European Parliament elections to sort out reforms.

On Japan

Foreign and domestic demand continues to fuel the quiet recovery. Exports helped the current account move further into positive territory for the 42nd month in a row. Machin orders were robust again. The amplified demand is translating into mild inflation. The PPI accelerated for the 16th consecutive month to 3.0% year on year.

At the group level, many Consumer and Technology names continue to act very well and the recent improvement from the Autos is also welcome. SoftBank, the Nikkei’s second largest weight, is breaking out from a multi-year base and there are also many attractive names throughout the Industrials sector. In dollar terms, Japan continues to trend higher. The TOPIX is still below its 2015 high, but breadth broke out nearly a year ago. Japanese small-cap equities have led this entire rally.

On China

It is tough to see much rocking the boat before the key Politburo reshuffle next week; the data for this week was a mix of good and decent. Private sector PMIs disappointingly fell just above the important 50 mark in September. Environmental inspections weighed on supplier performance and the consequential reduction in output caused inflationary pressures to intensify.

From another perspective, “Golden Week” spending should boost data next month. Average daily sales of retailers and catering firms increased 10.3% to 1.5 trillion yuan (US$226 billion) during the eight-day National Day holiday. Daily revenue grew 10.7% compared to the previous year. This should positively impact data in the future.

The IMF on October 10 raised its estimate for growth in China’s GDP for 2017 to 6.8% from a July projection of 6.7%, citing a better-than-expected economic performance in the first half of the year, which was bolstered by earlier policy easing and supply-side reforms including cutting excess industrial capacity. The IMF also raised its GDP growth forecast for 2018 by 0.1% to 6.5% on the expectation that the government will maintain a sufficiently expansionary policy mix, particularly through high public investment, to meet its target of doubling GDP by 2020 from 2010. Meanwhile, the IMF warned that the higher projections reflect its anticipation that China’s transition away from the old growth drivers of investment and exports toward services and consumption will slow down, and that there will be a further increase in debt. This will leave the government with less fiscal leeway to respond to any abrupt adjustment.


The OECD’s Leading Economic Indicators (LEIs) continue to indicate economic activities for the third quarter and fourth quarter will be milder in most G7 countries, as (a) the nominal reacceleration concludes, (b) the “spinach” period continues in U.S. politics, and (c) real growth drivers are still a distance off.

On the flip side, LEIs for India, China, and Mexico are all reaccelerating, signaling better growth in the second half of 2017 in each of those countries. LEIs for Brazil and South Africa appear to be bottoming. However, the OECD’s Total LEI is still showing the global economy will undergo a softer patch over the next six months.


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