October headline industrial production (IP) growth may recover to 6.2% YoY from 5.8% YoY in September. The reported IP growth in October may be boosted by the favorable working-day effect, since there is one more working day in October 2018 compared with last year. Meanwhile, high-frequency data pointed to a mild pick-up in capacity utilization for selected raw material sectors in October amidst marginal easing of the environmental protection related supply side constraints.

Reported headline nominal urban Fixed Asset Investment (FAI) growth may edge up to 6.3% YoY in October, vs. 6.0% YoY in September. Thereby, year-to-date nominal FAI growth may edge up to 5.5% YoY. We reiterate that monthly reported nominal FAI and its related series are among the least informative macro data series in China, since it will take years of lower-than-GDP growth for the level of reported FAI to “normalize” to a sensible level. However, the pick-up in reported FAI in recent months may indicate reduced pressure for “(downward) data revision” for selected provinces with previously highly-inflated FAI statistics. Sector wise, we expect infrastructure investment growth to recover further – the net issuance amount of local government special bonds surged in the past two months, and the pace of infrastructure project execution rebounded in a number of provinces. Property investment growth may moderate as growth of both property and land transaction slowed, Meanwhile, mfg. vestment growth may also decelerated on the back of declining industrial profit growth.

Nominal retail sales growth will likely decelerate to 8.7% YoY in October from 9.2% YoY in September, which will be partially driven by a potential decline of CPI (see below for more on inflation forecast). In addition, high-frequency demand indicators continued to slow, e.g. auto sales growth slipped further to -25% YoY in October MTD, compared with -14% YoY in September.

October headline export growth is expected to decline to ~ 8% YoY and headline import growth may also decelerate to ~12% YoY (both in USD terms), compared with 14.5% YoY and 14.3% YoY in September, respectively. Our forecast of softer export growth was based on the observations that 1) global mfg. cycle started to show early signs of a “soft-patch”, evident in the weak PMI data in advanced economies, esp. Europe, and 2) the impact of the rising Sino-US trade friction may gradually unfold – The US imports of Chinese goods on its first (US$34bn) tariff list, which took effect on July 6, already plunged by 17.4%YoY in August. Given that exporters may have front-loaded in September before the tariffs on the second batch of US$200bn in China exports became effective, China’s exports to the US may see greater downward pressure in October. Consequently, we expect the trade surplus in October to widen to US$33.8bn, consistent with weaker domestic demand growth and marginal easing of supply side constraints in October. Meanwhile, the usual seasonal pattern dictates that the trade surplus may remain relatively elevated in 4Q.

We expect both CPI and PPI inflation to decline in October. CPI may moderate to 2.3% from 2.5%, while PPI will likely fall to 3.2%. The shift of the Mid-Autumn Festival from October last year to September this year will likely dampen YoY food prices in October. Meanwhile, the environmental protection protocol loosened on the margin, sending raw material prices lower in recent weeks.

New RMB loans may come in at around Rmb800bn in October, total social financing (TSF) under the new definition is expected to increase by around Rmb1.2trn, and M2 growth may stay flat at 8.3% YoY. The PBoC injected Rmb270bn in October MTD, compared with Rmb969bn in October last year, however, the 100bp RRR cut helped replenish liquidities amidst the October tax-submission season.  In addition, bond issuance slowed considerably in October vs. September, as the quota for special local government (construction) bonds ran out.

FX reserves may decline by ~US$30bn to US$3.06trn in October. Our calculation has factored in the negative valuation effect from the 1.3ppt USD index appreciation MTD, and widened capital outflows. CNY trading volume picked up visibly in October, indicating potential intensification of the capital outflow pressure.

Overall, October macro data will likely point to sluggish demand growth and weaker inflationary pressure. The rapid deterioration of coincident growth and profitability indicators highlights the urgency for more decisive and coordinated policy adjustments. Going forward, we continue to rely on our preferred leading indicator of nominal growth—adjusted TSF growth, to gauge the effectiveness of the current growth-stabilization policy combination. We reiterate that looser fiscal policy and more pragmatic approach to regulatory tightening will go a long way in reducing the “blockage” of policy transmission from looser liquidity to a pick-up in demand.