More evidence of a cyclical bottom in China with policy support accelerating

China’s exports and imports both improved further in September

• CNH: Export growth beat expectations at -6.2%YoY (Citi/Mkt: -7.0/-8.0%YoY, Prior: -8.8%YoY). Imports were slightly above consensus, with contraction narrowing to -6.2%YoY (Citi/Mkt: -5.8/-6.3%, Prior: -7.3%). Trade surplus expanded to US$77.7bn compared with consensus of US$70.6bn. For the first three quarters, exports posted a decline of -5.7%YoY amid weakness in global goods demand, while imports lost more, down -7.5%YoY.
• CNH: China’s export growth was strong in the region in the first three quarters and gained momentum in the past two months. In September, while exports to ASEAN deteriorated, there were improvements to the EU and other regional trading partners. Exports to Russia have also shown resilience. The global semiconductor cycle shows signs of turnaround, which would support consumer electronics exports. New exports such as EVs and lithium batteries remained robust, although we need to gauge if their growth could be peaking out.
• CNH: Looking forward, in addition to favorable base effects, China’s diversified product structure and partner network will continue to play a crucial role in facilitating the recovery of exports. Citi Research expect export growth to become positive in the fourth quarter, but still decline -3.5%YoY for the whole year amid global demand slowdown and extended geopolitical tensions. On the other hand, imports could further benefit from a domestic demand recovery were it to continue.

Consumer prices flat and PPI remained negative

• CNH: China’s inflation readings missed consensus expectations by a touch in September. CPI came in at 0.0%YoY, while the consensus, including us, were expecting the mild reflation to continue (Citi/Mkt: 0.2%YoY, Prior: 0.1%YoY). The high base driven by pork prices last year could be responsible for the soft reading. Sequentially, CPI inflation stayed solid at 0.2%MoM, in line with previous September readings. By major breakdowns,
• CNH: Food price is again responsible for the unexpected dip. Food inflation rose +0.3%MoM, yet the high base last year drove the year-on-year reading to -3.2%YoY, the lowest since March 2022. Core goods inflation is steadily recovering. According to Citi Research’s estimates, core goods inflation rose to 0.2%YoY in September, up from 0.0%YoY in August. Services reflation softened post the summer travel rush, which is hardly a surprise. Services inflation expanded 1.3%YoY in September, unchanged from August. Its sequential change recorded a small negative at -0.1%MoM, down from +0.1%MoM in August. The NBS also commented that prices of air fares, tourism and hotels all moderated.
• CNH: Meanwhile, PPI deflation continued to ease with demand recovery and oil prices. In September, PPI inflation came in at -2.5%YoY (Citi/Mkt: -2.4%YoY, Prior: -3.0%YoY), the third consecutive month of improvement. Its sequential change hit 0.4%MoM, the highest reading since October 2020. Most of the improvement came from the upstream sectors. Domestic oil prices rose +4.1%MoM, with its contraction narrowing to -3.3%YoY in September from double-digit contraction in August. Metal prices also picked up, with nonferrous metal at +1.7%MoM (+9.7%YoY) and ferrous metal at +3.2%MoM (+9.7%YoY). The PPI breakdown for consumption goods rose +0.1%MoM (-0.3%YoY), recording the third positive sequential reading in a row.

More policy support: potential budge revisions and “national team” purchasing stocks

• CNH: Bloomberg reported that China is considering raising its budget deficit for 2023 by at least RMB1trn. Policymakers could issue at least RMB1trn of additional central government bonds for infrastructure investment to meet the growth target this year. The plan is still subject to approval and could be announced as early as this month according to the news agency.
• CNH: China’s State-owned Central Huijin Investment Ltd. bought about $65 million worth of shares in the nation’s big four banks, i.e., Bank of China, AgBank, CCB and ICBC. The fund also plans to further increase holdings over the next six months. China’s benchmark CSI 300 Index has retreated 5% this year, with the financial sector down 1.5% in 2023, on track for a third year of losses. Increasing stake in the nation’s biggest banks could stoke investor hopes that authorities will intensify efforts to prop up its sinking stock market.

Week Ahead: US Retail Sales, Housing Starts MoM, Existing Home Sales, Japan September CPI, Trade Balance, NZ Q3 CPI, AU September Labour Force Survey, Canada CPI NSA MoM (Sep), China 3Q GDP YoY, Industrial production Sep YoY, Retail Sales YoY, Fixed Assets Sep YoY, 5yr Loan Prime Rate

US: retail sales, housing data

• USD: Retail Sales – Citi: 0.1%, median: 0.2%, prior: 0.6%, Retail Sales ex Auto – Citi: 0.1%, median: 0.2%, prior: 0.6%, Retail Sales ex Auto, Gas – Citi: 0.0%, median: 0.1%, prior: 0.2%, Retail Sales Control Group – Citi: 0.0%, median: -0.2%, prior: 0.1%, Cit Research expect a modest 0.1%MoM increase in total retail sales in September, which follows a couple of months of strong increases. Autos should boost retail sales this month after unit auto sales increased in September following two months of declines. Gasoline sales could also provide a modest boost since gas prices increased in seasonally adjusted terms. Citi Research expect control group sales to remain unchanged this month, with non-store sales increasing but most other control group categories declining. Despite September retail sales being on the softer side, goods consumption growth has been much stronger in the third quarter overall compared to the second and has boosted Q3 GDP. If real goods consumption continues to be strong in the coming months, that would add to the evidence that the rotation from goods to services has come to an end.
• USD: Housing Starts MoM – Citi: 8.7%, median: 7.6%, prior: -11.3%, Building Permits – Citi: 1505k, median: 1450k, prior: 1541k,Building Permits MoM – Citi: -2.3%, median: -5.9%, prior: 6.8%, Housing starts should rebound substantially in September after a steep decline in August, rising 8.7%MoM to 1395k. Single family starts should continue to rise in line with persistent increases single family housing permits. While even higher mortgage rates will still weigh on demand of housing, housing construction could still be somewhat supported as any remaining demand is pushed increasingly into new construction as existing supply is also constrained by higher rates. After a large drop in August, Citi Research also expect a rebound in multifamily housing starts. Permits, however, could reflect the opposite changes, with a decline in multifamily permits that results in a moderate pullback in overall permits to 1505k in September.
• USD: Existing Home Sales – Citi: 3.90m, median: 3.90m, prior: 4.04m, Existing Home Sales MoM – Citi: -3.6%, median: -3.5%, prior: -0.7%, Existing home sales should fall to a new recent low in September of 3.90 million, reflecting the effects of a continued rise in mortgage rates. Higher rates will both weigh on demand but also limit supply of existing homes to buy as homeowners are also deterred from selling and facing now-much-higher rates. While continued pressure on demand could ultimately result in lower prices, constrained supply has instead put upward pressure on home prices in recent months. There is substantially uncertainty around just how high rates would have to rise before prices could fall. While a more volatile and crude measure of home prices, median prices of existing homes sold will be the most important aspect of existing home sales report in the coming months, in our view. Continued increases in prices will increasingly raise the probability of a pick-up in shelter prices in CPI later in 2024.

Japan – CPI and trade balance

• JPY: CPI September – Citi Forecast: 3.0%YoY, Previous: 3.2%YoY; CPI September excluding fresh food– Citi Forecast: 2.7%YoY, Previous: 3.1%YoY, CPI September excluding fresh food and energy– Citi Forecast: 4.1%YoY, Previous: 4.3%YoY. Citi Research expect nationwide core CPI (excluding only fresh food) to rise 2.7% YoY in September, moderating from a 3.1% YoY increase in August and falling below 3% for the first time since August 2022. Reflecting earlier declines in LNG prices, downward pressure from energy items likely continued. Citi Research also pencil in moderation for the CPI excluding fresh food and energy to +4.1% YoY in September from +4.3% YoY in August. As September Tokyo CPI data confirmed, YoY inflation likely slowed, especially for goods, as businesses raised prices rapidly a year ago. Citi Research also expect overall CPI to moderate from +3.2% YoY in August to +3.0% YoY in September, although a spike in fresh food prices probably meant overall CPI didn’t slow as much as core CPI.
• JPY: Trade balance – Citi Forecast: -¥562.6bn NSA; -¥551.0bn SA, Previous: -¥937.8bn NSA; -¥555.7bn SA Both exports and imports look set to rebound in September — The customs-clearance trade balance likely came to a ¥562.6bn deficit before seasonal adjustment and a ¥551.0bn deficit after it in September (-¥937.8bn and -¥555.7bn, respectively in August). The trade deficit after seasonal adjustment likely remained flat. Trade data for the first twenty days suggest a YoY rebound, which would mean both real exports and real imports increased on a MoM basis. Citi Research expect a rebound as typhoons were a factor for the August drop. Given signs that the Chinese economy is bottoming out, our focus is on whether Japan’s exports will show a recovery as well.

Commodity block – New Zealand (NZ) Q3 CPI, Australia (AU) September employment report, Canada CPI

• NZD: NZ Q3 CPI, Citi QoQ forecast; 2.3%, Previous; 1.1%, Citi YoY forecast; 6.2%, Previous; 6.0%, Citi Research expect the pace of aggregate price growth to almost double to 2.3% in Q3, the strongest quarterly gain in 34 years. But rather than signalling an increase in demand driven market-based prices, the large increase in inflation above recent results is almost entirely a function of the New Zealand Government reinstating the full amount of petrol excise duty in the quarter. Excluding the excise increase would produce a Q3 CPI result of around 1.3%, which is much closer to recent results. After the transport component, Citi Research expect the next highest contributions to quarterly CPI to come from housing and household utilities and food prices. This view comes from strong demand for shelter thanks to strong net-migration flows and rising fresh food prices combined with higher restaurant and ready-to-eat food prices.
• AUD: AU September Labour Force Survey, Citi employment forecast: 33.7k, Previous; 64.9k, Citi unemployment rate forecast; 3.6%, Previous; 3.7%, Citi participation rate forecast; 67.0%, Previous; 67.0%, In original terms, the September LFS tends to see strong employment gains because of hiring ahead of the spring and summer tourism season. Therefore, the bar for an even stronger September LFS in seasonally adjusted terms is high. But Citi Research still pencil a solid increase in September in seasonally adjusted terms because there’s a likelihood that strong services demand will continue to see solid hiring ahead of summer. The downside risk to this view is that the labour market has softened further in September and that hiring could be less in original terms, leading to a weaker seasonally adjusted outcome.
• CAD: Canada CPI NSA MoM (Sep) – Citi: 0.1%, median: NA, prior: 0.4%, CPI YoY – Citi: 4.1%, median: NA, prior: 4.0%, Consumer Price Index – Citi: 158.9, median: NA, prior: 158.7, Citi Research expect headline CPI in September to rise 0.1%MoM, which would send the year-on-year reading to 4.1%. This would be a seemingly modest increase, but much stronger than the usual 0.3-0.4%MoM seasonal declines in September in pre-pandemic years. Part of the strength will be in the mortgage cost component, which could see the strongest increase since the BoC began raising rates. While officials will look past this strength when determining policy, there should be some strength in other elements of CPI, such as education services and car prices. Other components could be on the softer side, with another decline in recreation services and a pullback in gas prices this month.

China: 3Q GDP, retail sales, fixed assets and PBoC loan prime rate decision

• CNH: 3Q GDP YoY– Citi Forecast: 5.0 %YoY, Previous: 6.3%YoY; Previously Citi Research had downgraded our GDP forecast out of policy disappointment. Yet, since end-August, policy momentum exceeded expectations clearly with mortgage repricing and property easing in tier-1 cities. Now, with a clear cyclical bottom, Citi Research revise up our growth forecast to 4.3%YoY for 23Q3E and 5.0% for 23Q4E, with annual growth now at 5.0%, in line with the around 5% growth target. 
• CNH: Industrial production Sep YoY – Citi Forecast: 4.5 %YoY, Previous: 4.5%YoY; Industrial Production could stay at 4.5%YoY despite a higher base. This round of cyclical stabilization is again led by supply, with the Mfg PMI production sub-index rebounding to 52.7 in September.
• CNH: Retail sales September YoY– Citi Forecast: 5.0%YoY, Previous: 4.6%YoY; Headline Retail Sales could further improve to 5.0%YoY given low base last year. CPCA projected auto sales improved to 3.0%YoY in September vs. 2.5%YoY in August (CPCA, Sep 21). Additionally, the long-awaited mortgage repricing and Personal Income Tax cut, along with the introduction of new smartphones, are anticipated to provide further support to the ongoing consumer recovery.
• CNH: Fixed assets Sep YoY – Citi Forecast: 3.3%, Previous: 3.2%; For Fixed Asset Investment, improving industrial profit could support capex while infrastructure could accelerate with policy push. Citi Research expect the headline number to slightly pick up to 3.3%YoY Ytd amid ongoing property weakness.
• CNH: 5yr loan prime rate – Citi Forecast: 4.20%, Previous: 4.20%; 1yr loan prime rate – Citi Forecast: 3.45%, Previous: 3.45%, The focus of the PBoC should be liquidity management and credit growth instead of policy rate cuts with fiscal and property easing gathering momentum.