China struggles to deal with momentum loss

Kia ora, 

Welcome to Monday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news China is struggling to adjust to its slowing economic momentum.

In China, prices for iron ore rose again on Friday, reversing the recent downward trend. And coal prices stayed at their very high level. Aluminium prices are now at their highest in ten years.

And the growth of profits generated by China’s industrial companies slowed for the fifth straight month in July, adding signs that the post-pandemic recovery in the world’s second-biggest economy is losing momentum.

But it going to get harder to really know what is going on in China. Beijing is moving to crack down on any media, formal or social, that it thinks is bad-mouthing the performance of its economy. Clearly Beijing is unnerved by the reporting of the loss of momentum in economic drivers there. Only rah-rah reporting from inside China now. And there's this.

And China’s policy makers are acknowledging they have a land-use problem. They are concerned about the loss of arable land. Of course some is going to urbanisation, but more is going into forestry and horticulture.

In the US, Fed boss Powell gave his widely-anticipated Jackson Hole speech over the weekend but it was something of an anti-climax with him repeating much of what he said after the last Fed review. He reaffirmed the central bank’s plan to begin tapering this year by reversing easy-money policies, and detailed why he expects a recent rise in inflation to be transitory.

Tapering now will leave the Fed’s balance sheet at a bit less than US$8.5 tln or about 37% of GDP. (For perspective, the RBNZ’s balance sheet is about 26% of NZ GDP. In Australia, it is just under 30%.)

The relative dovishness of Powell’s speech saw the USD slip, gold rise, and benchmark bond yields fall back.

Meanwhile, the Biden Administration (OMB) is more hawkish and has raised its forecast of inflation in Q4-2021 to +4.8%. It also raised its growth forecast to +7.1% in the same period. Budget deficits as a share of GDP are expected to be a full 1% less at -6.3% of GDP because of this higher growth. (They were -13.9% last year.)

In Australia, it is becoming clear that the country has probably slipped back into recession. Q3 economic activity will probably decline as it did in Q2, so that meets the technical definition of a recession. Australia went 28 years without one, and now it has had two in the past two years.

The pall over economic activity in Australia essentially relates to the number of jobs being lost. This is giving new life to the business and right-wing media covid-deniers push to open back up despite the public health risks.

In the US, the earnings season has produced a record result, underpinning equity valuations.

The UST 10yr yield opens today at 1.31%. 

The price of gold was up a strong +US$25/oz to end last week, and now at US$1817/oz which is its highest in a month and a gain of +2.1% in a week.

Oil prices have slipped by about -50 USc so in the US they are now just on US$68.50/bbl, while the international Brent price is just on US$71.50/bbl.

The Kiwi dollar opens the week at 70.1 USc. Against the Australian dollar we are still at 95.9 AUc. Against the euro we are starting at 59.4 euro cents. That means our TWI-5 starts today at 73.2 and still in the middle of the 72-74 range of the past ten months.

The bitcoin price has risen +0.8% from this time Saturday to US$48,743. Volatility in the past 24 hours has been low at just over +/- 1.9%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.