President Xi secures historic third term

• China’s President Xi secured an unprecedented third term as the country’s leader over the weekend. The 24-member Politburo and the smaller Standing Committee have been packed with officials loyal to President Xi. In his speech on Sunday, Xi said China’s economy would continue to open up and integrate with the rest of the world, but he did not signal any shift away from China’s Covid-zero policy, which has hampered growth this year. 
• China’s Q3 GDP growth came in higher than expected at 3.9% y/y, a sharp improvement on the 0.4% y/y growth in Q2. GDP grew 3.0% y/y in the first nine months of the year, in line with Bloomberg consensus estimates but much slower than the 5.5% the authorities had targeted earlier this year. Industrial production in September also beat expectations, up 6.3% y/y from 4.2% in August, signalling an improvement in manufacturing output last month. However, retail sales continued to disappoint up just 2.5% y/y, much slower than the 5.4% y/y growth recorded in August, and unemployment rose for the first time in four months to 5.5%. Trade data also released this morning pointed to a weaker external environment for China last month, with export growth slowing in USD terms to 5.7% y/y from 7.1% in August, while import growth  remained unchanged at 0.3% y/y, another indication of weaker domestic demand.
• Japan’s flash PMI for October signalled an improvement in business conditions in the services sector relative to last month, as the country reopened its borders to tourists earlier this month. The services PMI rose to 53.0 from 52.2 in September while the manufacturing PMI slipped to 50.7 from 50.8 in September.
• UK news was dominated by the selection of a new leader of the Conservative Party over the weekend. Former PM Boris Johnson dropped out of the race, and several party heavyweights announced their support for former chancellor Rishi Sunak, including Suella Braverman and Grant Shapps. If Penny Mordaunt is able to garner the support of 100 MPs by this afternoon, party members will vote on a new prime minister this week with results due Friday. If she is not able to get 100 MPs to back her, Sunak will be appointed the new leader of the party.

• Bloomberg has reported that the government’s fiscal plan, originally due to be delivered on 31 October, could be delayed. While the new chancellor, Jeremy Hunt, will continue to work towards that date, the final decision will rest with the new Prime Minister. Any delays to the fiscal plan may further unsettle financial markets and complicate the BoE’s next interest rate move. The fiscal plan had originally been scheduled ahead of the MPC decision on 3 November, to allow policy makers to account for the government’s updated fiscal stance in their interest rate decision.
• Consumers in the UK remain under pressure from high inflation. The GFK consumer confidence index rose slightly in October to -47 from the historic lows hit in September (-49) while retail sales volumes and values both fell -1.4% m/m. The September fall in the volume of sales was significantly steeper than the -0.5% m/m decline economists had expected. The largest contributors to the monthly fall in September sales volumes were food and non-store retail. The monthly decline appears to be part of a broader downward trend, with retail sales volumes falling by -2% q/q in Q3 2022. Although the value of retail spending remains above pre-pandemic levels, the volume is now -1.3% below the level seen in February 2020. While inflationary pressures are undoubtedly reducing the volume of household spending, the September decline is also likely to be a function of the loss of a trading day as a result of Queen Elizabeth’s funeral.      
• Dubai is planning to sell 10% of district cooling firm Empower in November, according to local press. This would be the fourth IPO of a GRE this year, and book building is set to start on 31 October.
• Saudi Arabia has launched a new program, the Global Supply Chain Resilience Initiative, to attract SAR 40bn (USD 10.6bn) of foreign investment to the kingdom. Financial and non-financial incentives worth around SAR 10bn (USD 2.7bn) will be offered to investors who make Saudi Arabia part of their global supply chains. The kingdom is looking to encourage investment into green metals manufacturing, green hydrogen and advanced recycling industries.

Today’s Economic Data and Events

• 12:00 Eurozone flash composite PMI (Oct) forecast 45.5
• 12:30 UK flash composite PMI (Oct) forecast 48.0
• 17:45 US flas composite PMI (Oct) forecast 49.3

Fixed Income

• US Treasury markets moved higher at the end of the week as comments from Mary Daly, head of the San Francisco Fed, suggested the Federal Reserve is thinking ahead to a moderation in its policy tightening. The Fed may choose to slow down its pace of tightening but likely won’t ease financial conditions until inflation is much more under control. The 2yr UST yield slumped almost 14bps on the comments from Daly, falling to 4.472% at the end of the week while the 10yr closed marginally lower after some wider intraday moves. Yields on the 10yr settled at 4.217%.
• Gilt yields closed Friday higher as markets turn to the need for the Bank of England to engage in substantial tightening at its November meeting and also to the instability on the political front as the Conservative Party goes through another leadership selection process. Yields on the 10yr gilt rose 14bps to 4.038% at the end of last week. European bonds generally closed weaker with an eye to this week’s ECB meeting.
• S&P affirmed their ‘B’ rating on Egypt and maintained the outlook at stable and also affirmed the Emirate of Sharjah at ‘BBB-‘ with a negative outlook.
• The European Central Bank will be the highlight among central banks this week with another 75bps hike looking likely for its meeting on October 27. The Bank of Canada is also expected to hike rates by 50bps on October 26. The Bank of Japan also meets at the end of the week with no change in its accommodative stance expected.

FX

• The drop in UST yields at the end of last week on expectations that the Fed will slow its pace of tightening from December helped to sink the dollar at the end of the week. The broad DXY index fell 1.2% over the week with EURUSD getting a 1.4% w/w bump to close at 0.9862. GBPUSD also rallied strongly, up 1.2% over the five days to 1.1303 even as the UK goes through another period of political uncertainty. USDJPY dropped 1.7% on Friday alone, helping to bring the pair’s losses for the week to 0.7%, closing at 147.65.
• Commodity currencies were stronger across the board with a 2.9% gain w/w in AUDUSD to 0.6379 while USDCAD dropped 1.8% over the week to 1.364.

Equities

• Strong gains on Friday, bolstered by those comments from Mary Daly which outweighed some disappointing earnings results, saw the three benchmark US indices all close higher on the week. The NASDAQ led the pack with a 5.2% gain, but the S&P (4.7%) and the Dow Jones (4.9%) enjoyed similarly good weeks.
• European equities also gained over the week as the FTSE 100 shrugged off political chaos in the UK to rise 1.6%, though it lagged the CAC which added 1.7% and the DAX which closed up 2.4%.
• Asian markets were less sanguine as the Hang Send lost -2.3% w/w, the Shanghai Composite -1.1% and the Nikkei -0.7%.

Commodities

• Oil prices settled mixed last week as the negative prospects for demand remain powerful as indicated by China’s insistence on using a Covid-Zero policy to control coronavirus. Brent futures added 2% to settle the week at USD 93.50/b while WTI dropped by 0.7% to USD 85.05/b.
• US officials are reportedly closing in on the price level they want to use as a price cap on Russian oil with USD 60/b seemingly targeted. That’s roughly about 16% lower than where the market for Urals, a major Russian export grade traded at the end of last week.

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