Weekly focus – China makes a big push to turn the economy

The big news this week was the barrage of new stimulus measures from China. At an economic briefing on Tuesday, People's Bank of China and financial regulators announced a wide range of measures to shore up the ailing economy: the policy rate was cut by 30bp, Reserve Requirement Ratios for banks were cut by 50bp, measures to increase buying in the stock market was launched and mortgage rates on existing loans will be cut by 50bp. On top of this reports suggested China's big banks will be recapitalized with 1 trillion CNY (142 billion USD). On Thursday, China top leaders dedicated their monthly meeting in the Politburo to the economy, which is not normally the case in September. They sent a clear signal that stimulus will be stepped up across the board and turning the economy has the number one priority now. It is the biggest round of stimulus since the current crisis started three years ago and could turn out to be China's 'whatever-it-takes' moment. We now see upside risk to our growth estimate of 4.8% this year and next.

The Chinese stock market rallied strongly all week and is up 15% from the start of the week (offshore stocks); albeit coming from very low levels. The CNY also strengthened significantly. It is probably not a coincidence the measures were launched a week before China goes into the one-week National Holiday starting on Tuesday as policy makers hope for the measures to lift confidence when millions of families get together across China.

It has also been an eventful week on the data front. Flash PMIs from the euro zone and US kicked off the week with disappointing readings. Euro manufacturing PMI slipped further to 44.8 from 45.8 signalling clear contraction and raising the chance that the ECB could cut rates again next month. Service PMI also dropped, although it was probably more related to the end of the Olympics. US manufacturing PMIs also disappointed but the service PMI stayed at robust levels alleviating recession fears. Focus is also still on US labour market data as they are key for Fed policy. This week provided a mixed bag with the 'jobs plentiful' index in the consumer confidence survey falling yet again signalling a further rise in unemployment. However, initial jobless claims was better than expected.

On the geopolitical front we saw escalation in the Middle East with extensive Israeli attacks in Lebanon. It is still not having much impact on markets, though, and oil prices actually dropped this week from USD75 per barrel to USD71.5 per barrel as Saudi Arabia plans to increase supply and a new agreement in Libya is also set to put more oil on the market.  

Risk sentiment was generally improving this week with global stocks moving higher while bond yields and the USD moved broadly sideways. Metal prices saw a strong rally following the Chinese stimulus announcements.

Focus the coming week will be on the US labour market report where both payrolls and the unemployment rate will be key for guiding Fed policy. ISM for both manufacturing and services are also due. In the eurozone, the Flash CPI for September will be a key input going into the October meeting. We expect euro area HICP inflation to decline to 1.7% y/y (consensus 2.0% y/y) in September from 2.2% in August after lower-than-expected data this week from France and Spain.

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