China's growth impetus stutters

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's growth impetus seems to be stuttering.

But first, and for the first time in more than a year, the FAO global food price index didn't rise in June, even if the dip was small. However, it is still one third higher than it was a year ago. Almost all the retreat was due to the already sky-high vegetable oils category. There was little relief in any other category with dairy prices up +22% in a year and meat prices up +15% in a year.

In China their central bank cut the Reserve Ratio Requirement over the weekend. This is a cut in the amount of cash that banks are required to hold as reserves, releasing about ¥1 tln yuan (NZ$220 bln) in long-term liquidity back into an economy that does seem to need some stimulus. They say these funds are being directed to aid small business. Even if this is not a major easing, it is a major shift in policy tone.

Chinese June car sales took an unexpected retreat, more evidence of a softening economy. Year-on-year they were down -12% and this is despite a surge in the first few months of 2021. A shortage of computer chips is also likely to have been a factor.

China's consumer inflation rate is slipping, dipping from a modest +1.3% in May to +1.1% in June and another unexpected fall back. This is also consistent with a developing drag in their economy. Consumption isn't driving growth yet. (Also note that pork, beef and lamb prices are now falling.) On the producer side however, PPI inflation remains very high at +8.8% pa in June compared with +9.0% in May. That slip is meaningless to some, and an indicator that the top has passed to others. Cost pressures are putting a real squeeze on Chinese businesses, and they don't seem to be able to pass those costs on, not locally at least. And given their business conditions are neither expanding nor contracting at present, the coming squeeze may become uncomfortable.

China's new bank lending swelled +12.3% year-on-year in June, marginally higher than in May but at the low end of their debt growth over the past 20 years.

The Chinese iron ore and metallurgical coal prices are staying high, although they haven't risen further this past week.

Copper prices may be slightly off their peak but they are still near decade highs. Aluminium is still near three year highs.

The Baltic Dry index is also staying high although it is not moving out of the range it has been in since mid-June which is its highest in a decade. But things are far hotter for shipping container rates. These are up more than +50% since May (when they were already high) and now average NZ$12,000 per trip globally. But there are plenty of situations where they are as high as NZ$17,000 in the China trade, and as high as almost NZ$30,000 for spot, last minute situations.

In the US, their new Administration has kicked off a big push to promote competition in the American economy and push back on the winner-takes-all environment that has built up quickly over the past decade. "Capitalism without competition isn't capitalism. It's exploitation," Biden said when he signed the related Executive Order. It is now expected that US Federal Agencies will reinvigorate significant anti-trust activities.

At the same time, the US Fed sent its semi-annual Monetary Policy Report to Congress, noting supply shortages and hiring difficulties are holding back their recovery from firing on all cylinders.

In Canada they recorded a good overall gain in employment, but it was all for part time work and almost all for young people; full-time employment actually fell. And their jobless rate blipped up to 7.8% in June.

With a worrying jump in numbers, NSW is confronting “the biggest challenge we have faced since the pandemic started”. Restrictions have been tightened as case numbers grow. The number of people in strict isolation has doubled to 14,000 in a day. Yesterday 77 new locally acquired community cases were uncovered and the expectation is that more than 100 will be revealed today. NSW's half-hearted lockdown measures are not working and until they are tightened their local risks will rise.

On Wall Street, earnings season is about to start for Q2-2021. And expectations are high. Usually analyst forecasts start out high and get whittled back as the company result release gets closer. But this year the reverse is happening with rising expectations. If it doesn't happen, the market reactions could be fierce.

The UST 10yr yield starts today at 1.36% and unchanged. 

The price of gold is now just over US$1808/oz which is down -US$3/oz from this time Saturday.

Oil prices have stabilised. In the US they are now just over US$74/bbl, while the international Brent price is now just over US$75/bbl.

The Kiwi dollar opens today just under 70 USc and marginally firmer than where we left it on Saturday. Against the Australian dollar we virtually unchanged at 93.5 AUc. Against the euro we are slightly firmer at 59 euro cents. That means our TWI-5 starts today up slightly at 72.6 but still almost -50 bps lower than this time last week.

The bitcoin price is now at US$33,907 and up +1.3% from this time on Saturday. Volatility in the past 24 hours has been a moderate +/- 1.6%.

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.