CM: Crude Fluctuates around 82 as China Growth Slows
Crude oil retreated after raising yesterday as investors take profits and China's economic growth slowed in the third quarter. The front-month WTI slipped to as low as 81.85 in European session despite USD's renewed weakness against major currencies. Investors worried that slowdown in economic growth would dampen oil consumption from the world's 2 biggest oil user. Gold edged higher as the dollar plunged. The euro rose as PMI data beat market expectations, signally the region's recovery remained intact.
GDP growth in China eased to +9.6% y/y in 3Q10 from +10.3% in 2Q10 as the government tightened stimulus measures adopted in late 2008 by raising reserve ratio and interest rates. Exports growth decelerated while domestic demand continued to pick up. Industrial production grew +13.3% y/y in September, moderating from +13.9% a month ago while FAI growth also dipped to +24.5% y/y from +24.8% in August. Yet, inflation remained at elevated level, surging +3.6% y/y in September, the highest level in 23 months. In our opinion, while the set of data indicates slowdown in China's economic growth, the pace is stabilized. Moreover, the growth rate remained resilient and once again soothed market concerns of a hard landing. While CPI stays at high level, it probably has peaked in October and will ease to +3% by the end of the year. Therefore, the government may be relieved from implementing aggressive measures to curb inflation. We believe one more rate hike would be enough for the rest of the year.
In the Eurozone, the manufacturing PMI beat market expectations and rose to 54.1 in October from 53.7 a month ago. The reading for Germany alone also improved to 56.1 from 55.1 in September. The market had anticipated a drop. The readings indicate strength in the manufacturing and upstage the bigger-than-expected slowdown in the services sector. The single currency advanced for a second day against the dollar.
The pound was the only G-7 currency that fell against the dollar. Speculations that the BOe will expand the asset-buying program intensified after the October minutes showed the first 3-way split in 1 year. Policymakers discusses about the possibilities of further easing and Adam Posen voted for expanding the current asset-buying program by 50B pound to 250B pounds. Economic data remained weak in the UK. Retail sales contracted -0.2% m/m in September, following a downwardly revised -0.7% decline a month ago. Mortgage approvals in major banks fell to 44K, a 17-month low, in September from 47K in August. Consumer confidence plummeted amid uncertainty about the impact of the government's plan to reduce deficits.
Yesterday, the Chancellor of the Exchequer George Osborne announced at the Spending Review that the government plans to reduce the country's budget deficit by 156B pound. Debt interest payments will be lowered by1B pound in 2010, then 1.8B pound in 2013 and 3B pound in 2014 - a total of around 5B pound by 2015. The cut is expected to reduce jobs in the public sector by 500K. The legislation to introduce a permanent levy on banks will be published tomorrow. According to Osborne, 'once fully effective, the permanent levy will raise more net each year and every year for the Exchequer than the one-year bonus tax did last year'. We believe reduction in spending and hike in tax will affect the country's growth outlook and prompt the central bank to ease further.
