Further easing needed in China

Volatility has eased back from the initial spike seen following CNY devaluation, but is still some way from returning to pre-devaluation levels, which can be attributed to the general elevation in global risk aversion indicators. Most activity indicators in September continue to highlight the challenging economic backdrop. 

Although the trade surplus was wider than expected at USD60.2bn, it was due to a 13.8% contraction in annual import growth, which far outweighed the marginally better than expected contraction in annual export growth. 

Annual PPI deflation is at a pace last seen in 2011. Flash manufacturing PMI came in at 47, which was the lowest reading on record and seventh straight month in contractionary territory. Increasing evidence was worrisome that the labour market is coming under increasing stress. 

Labor demand continues to outstrip supply, but the Q2 reading of 1.06 represented a sharp drop from the 1.15 reading in Q4, and is the lowest level since Q3 2012. The Manpower Employment Outlook, which measures the difference between the percentage of firms planning to add headcount versus the percentage of firms planning to reduce headcount, fell to 5% in Q4, down from 13% in Q3 and the lowest level since Q1 2009. 

"As the Chinese government has a stated priority for unemployment, further stimulus in the next 1-3 months is expected. Further stimulus is expected in the next 1-3 months, a 25bps cut to the 1 year lending rate and at least 50bps in cuts to the RRR", says RBC capital markets.