Delivering Green Shoots

Week Ending 20 October, 2023

On the economic front, we continue to see improvements:

China: There are signs the stimulus and policy support measures are starting to deliver green shoots. Q3 GDP grew +1.3% q/q to +4.9% y/y, more than the forecast +4.4% (Q2:  +6.3%) while Industrial output grew +4.5% y/y (August: same). The recovery is not even. Retail sales (a proxy for consumption) grew 5.5% m/m (August: 4.6%). This was far stronger than the forecast 4.9%. Fixed Asset Investment grew 3.1% y/y for the first nine months (vs 3.2% y/y for the eight months to August). One area of persistent weakness remains property sales. By floor area, it fell -19.77% y/y (vs Aug: -23.95% y/y). Property investment fell -18.7% y/y (Aug: -19.1% y/y). Worth noting the pace of declines, for both sales and investment, reduced but the overhang is high. October sales are expected to stay soft while sales during Golden week were -20% y/y. S&P Global Ratings revised down its 2023 property sales to -10% to -12% (previously it forecast half this). It expects a further -5% decline in 2024. Overall, the government is on target to hit its 5% GDP target.

US: September retail sales rose +0.7% m/m to 3.8% y/y while August was revised higher to +0.8% m/m (from +0.6% m/m). Sales at auto-dealerships accelerated +1.0% m/m while receipts at gas stations rose +0.9% m/m as pump prices rose. Even excluding auto sales and gas stations, spending still rose +0.6% m/m. Sales at food/drinking services rose +0.9% m/m – often seen as a dining-out indicator. The month saw a drop in credit card spending – something which has raised concerns over the health of the consumer. Credit card balances cost 22.8% in interest rates to service (vs 16.3% one year ago). September manufacturing rose +0.4% m/m to -0.80% y/y (August was revised lower to -0.1% m/m). September single-family home starts (the bulk of homebuilding) gained +3.2% m/m to a seasonally adjusted annual rate of 963,000 (Aug: 933,000). Starts for 5+ units soared +17.1%. Permits for future single-family construction rose +1.8% to 965,000 (highest since May 2022). Multi-family permits fell -14.0% to 459,000 (lowest level since Oct. 2020). Existing home sales fell -2.0% m/m to a 13-year low of 3.96mn units. (South: -1.1%, Midwest: -4.1%, Northeast: 4.2% and West: 5.3%). Sales will probably fall even more as the latest MBA data shows loans (for home purchase) plunged last week to 1995 levels. There were 1.13mn existing homes for sale, down -8.1% y/y. Based on September inventory, it would take 3.4 months to exhaust it (vs 3.2 one year ago). Properties remained on the market for 21 days (up from 19 days one year ago). 69% of homes sold last month were on the market for less than a month. First-time buyers = 27% of sales (down from 29% y/y). Cash sales = 29% (up from 22% y/y). Distressed sales (including foreclosures) accounted for just 1% of transaction (no change y/y). The labour market remains tight as ever. The most current/forward looking indicator, the weekly jobless claims, for w/e 14th October, fell -13,000 to 198,000 (its lowest since January). The UAW strikes have had a limited impact on supply chains so far.

In light of the buoyant economic news, Fed Chair Powell has triggered off another round of speculation over rate hikes by suggesting rates might still have to go up given the underlying strength of the economy. This has left him open to criticism such as “the Fed doesn’t know what comes next, isn’t sure how long rates may have to stay high and doesn’t even know if rates are tight enough to bring inflation back to target”. Show me anyone who does! The Yield Curve is starting to steepen quickly. Looking at the 10y minus the 2y US curve, the difference is now just -0.17% as the 10y moves towards the 2y and not the other way round as we have seen until now. Each point, along the Yield Curve, tells its own story. The front end was all about trying to reach the neutral rate as quickly as possible to tame the economy. The rising longer end is signalling an improving economic picture – but with it comes inflation and especially rate worries.

Finally, a geopolitical update…..

This is the third week in the Israel-Gaza conflict. We have witnessed a US warship come under drone attack near Yemen; continued efforts to get aid into Gaza where water, food and medicine had been switched off and a hospital blast on a Gaza hospital compound with both sides blaming each other. Over 1,400 Israelis have died since Hamas began its attacks while in Gaza the Palestinian death toll is close to 4,000 (includes the 471 killed in the hospital blast).

1. What is Israel’s end game? In the short term, it is to crush Hamas! Some 360,000 Israeli troops are amassed on the Gaza border and are set to overrun an area just 360 square kilometres in size. However, even this will not be straightforward. Gaza is riddled with underground tunnels and booby traps. Israel has fought with Hamas in 2008/9, 2012 and 2014. The objective on each occasion did not include eliminating Hamas. This time, it does. The three confrontations saw 4,000 Palestinians dead vs 100 Israelis. This time round, Hamas is mobilised and the Israeli death count will be higher. So….
2. War psychology: ….Who buckles first? Contrary to popular belief, Hamas is not just present in Gaza – it has a presence across the occupied Palestinian territories, it has supporters across the Middle East and it has supporters from across the Globe. They know what they are up against and that’s why Israel is taking them so seriously with such a massive show of force.
3. How will other Arab states react? The risk of regional war is big. There have been uprisings across various Middle eastern states (Iraq, Jordan, Yemen, Tunisia). Iran’s foreign minister warned of a possible “pre-emptive action” against Israel if it carried out its invasion and that it would not watch from the sidelines if the US failed to restrain Israel. It also raises the question what Hezbollah (based in southern Lebanon) will do? In 2006, Israel was involved in a ground attack in south Lebanon against Hezbollah. It was a long and bloody battle in which the resistance put up by Hezbollah took Israel by absolute surprise. That was 17 years ago. I am guessing Hamas has raised its game since then.
4. Exit strategy – is there a long-term plan? Israeli officials have said they don’t have a clear idea what a post-war future might look like…..and that’s what makes this so futile. Simply crushing Hamas every so often doesn’t deal with the issue at hand – the plight of the Palestinians. There are 2.3mn of them! Even Arab officials have expressed concern at this (Gaza’s future). There are massive concerns over displacement of people with Egypt being a primary destination. This is exactly what happened in the 1948 Israeli war of independence and 1967 Arab-Israeli war.

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