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China struggles with contracting factory activity; US income & spending rise; US mood stays sour; Australia PPI up but not excessively; UST 10yr 2.66%; gold firm and oil soft; NZ$1 = 62.9 USc; TWI-5 = 71.2

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China struggles with contracting factory activity; US income & spending rise; US mood stays sour; Australia PPI up but not excessively; UST 10yr 2.66%; gold firm and oil soft; NZ$1 = 62.9 USc; TWI-5 = 71.2

Here's our summary of key economic events over the weekend that affect New Zealand, with news the rise in both American personal income and personal spending topped forecasts in June, but bond markets have ignored this strength.

But first in China, they said they had an inflow of foreign investment in June of +US24.5 bln in the month. That was their best monthly result in more than a year.

But this comes after Beijing meetings on their economic slowdown and how they are responding. Missing are any mentions of the 5½% 2022 growth target. Replaced are calls for measures to "expand demand", work on "preventing decline" and "stabilising the current situation".

And over the weekend, their official PMIs were released for July. After having popped up to a rare expansion in June, the July manufacturing PMI contracted again, as it had done in each of the March to May months. So that is four of the past five months contracting. Both new orders and especially new export orders, fell. It wasn't a contraction analysts were expecting. Their services PMI was still expanding at a good pace July, but less so than in June, and their claim seems an odd result when only three of the ten sub-indexes actually expanded. New orders contracted in the 12 of the past 13 months.

And it is getting harder for non-national companies to operate in China. The car-making giant Stellantis (Chrysler, Jeep, Fiat, Citroen, Opel, etc) has pulled out altogether, citing the fast-growing political interference in its business there, and the risk of being caught up in geo-political struggles and sanctions. Political stability is 'a thing' in investment decisions.

However, the easing Chinese lockdowns, as tentative and uncertain as they have been, supercharged Japanese industrial production. After taking a heavy hit in May, this June rebound more than made up for the earlier shortfall and was way better than expected. It was the first rise in industrial output since March and the steepest pace on record. But Japanese retail sales growth slowed in June.

In the US, the widely watched PCE inflation gauge rose +1.0% in June from May, more than expected and up +6.8% in a year. But these inflation levels are far lower than the US CPI measure of inflation (+9.1%).

For a fourth consecutive week, American petrol prices have fallen. So some heat is coming out of this source of inflation. 

Perhaps more importantly, the PCE data set shows both incomes and spending growing faster than expected. Personal incomes are up +7.2% in a year, a rate that has been stable for many months. Personal spending growth was up more, but this is a more volatile series and is up at the rate of +7.6%. These shifts show on average most households are not quite keeping up with inflation. The slippage however is being assumed as more than it really is, which is why sentiment surveys are quite negative.

All of these indicators keep pressure on the Fed.

The widely watched University of Michigan sentiment survey bounced off its lows in July, but remains deeply pessimistic. In fact it is still basically at its all-time low in a record that does back 44 years, six recessions and some of those were long and deep. Yet, the US has record low unemployment and is not in recession presently, and yet these types of sentiment surveys record lowest-ever mood depths. But company earnings remain very strong. It is not easy to reconcile. They may be talking themselves into a recession.

At the end of this coming week we get the July update of the US non-farm payrolls. They are expected to record another +250,000 people added to payrolls in July. That is the seasonally adjusted level. Regular readers will know we look at the actual increase, and over the past five months, the monthly rise has averaged more than +1 mln per month on the 'actual' basis. Their employed workforce rose by +5.2 mln in those five months. There is no way that indicates a struggling or shrinking economy. The spending power of those 5 mln new workers is significant. We will be watching the actual July change as much as the universally-reported seasonally-adjusted data.

Expanding at a moderate pace, even if less so, is the heartland Chicago PMI. But of note in this survey is the sharpish shrinkage of new orders. Inventories are rising.

On the heels of the advance US Q2 GDP release on Friday, there were a slew of countries releasing Q2 economic activity reports over the weekend. Canada's was flat from May but up +1.1% in the year. Taiwan's was up +3.1% for the year. Mexico says it was up +2.1% for them. And the overall EU rate was +4.0% and a better than expected result. It was lower than the +5.4% in Q1, but well above the expected +3.4%. These come after a set of national releases that included France who said it grew +4.2% over the past year. Germany reported a +1.1% expansion rate. New Zealand won't report its Q2 GDP result until September 15.

In Australia, producer prices rose +5.6% over the past year to June, slightly faster than in the year to March, but lower than their CPI rise of 6.1%. The equivalent New Zealand data for the June quarter isn't due out until August 17, 2022.

Staying in Australia, the latest APRA data shows moderating growth in mortgage loans to owner-occupiers as rate hikes and the rising cost of living taps the brakes for household borrowing, but loans to investors are picking up sharply - in anticipation of more migration. Overall, private sector lending was up more than +9% year-on-year.

The UST 10yr yield starts today at 2.66% where it ended in New York last week. A week ago it was at 2.75% so a net -9 bps retreat. The UST 2-10 rate curve is less inverted today, now at -24 bps and their 1-5 curve is more inverted, at -30 bps. Their 30 day-10yr curve is now at +47 bps and marginally steeper than this time Saturday. The Australian ten year bond is down -1 bp at 3.07%. The China Govt ten year bond is still down at 2.77%. And the New Zealand Govt ten year will start today lower at 3.40%. A week ago it was at 3.72% so it has been a substantial weekly retreat.

The price of gold opens today at US$1767/oz in New York which is up +US$2 from this time Saturday.

And oil prices start the week marginally softer at just on US$97.50/bbl in the US, while the international Brent price is now at US$103.50/bbl. The number of North American oil rigs operating is now back to pre-pandemic levels.

The Kiwi dollar opened today marginally firmer from this time Saturday at 62.9 USc. Against the Australian dollar we are also marginally firmer at 90 AUc. Against the euro we are a tad softer at 61.5 euro cents. That all means our TWI-5 starts today at 71.2 and little-changed in a week.

The bitcoin price has moved sideways from this time Saturday, down a mere -0.8% to US$23,735. Volatility over the past 24 hours has been moderate at just over +/-2.2%.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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30 Comments

Sino-forming of Global South passes point of no return

As Western nations question the benefits of globalization, China has become the world’s leading globalizer

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Two articles. The first China is not a globaliser, it is the worlds largest beneficiary of globalisation as the worlds major manufacturing hub for most things, but now they're getting desperate. As COVID continues it's ravages and many companies profiteer off the consequences most countries in the world realised the risks associated with moving their manufacturing off shore (some - like NZ, are still in denial), and are working to bring it back. Add this to the CCPs aspirations and political manipulations and the environment puts a lot of pressure to take their manufacturing back. DC's comment on the car manufacturer pulling out is indicative, but China will continue to try to exert political pressure to prevent countries like NZ from doing that. 

The second article - America's 'diplomacy' has like China's, always been about America. The difference being America sees itself as the bastion of freedom and democracy, while China seeks control. Yes America does too, or rather it sees it has greater influence through promoting freedom and democracy, and that influence can be argued as being a form of control.

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5

I'm wondering about the car pull-out. What happens in this scenario? Do they sell the factories/plant to a Chinese buyer who then uses them to rip off the cars, or do they dismantle the factories and ship them elsewhere?

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I wondered that too. Surely they would need to take the machinery and dies with them? If not, as you indicate, they are just leaving the door wide open to Chinese companies going back to what they did best - piracy.

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You make some good points. Just to add that, over the past few decades, America's diplomacy has shifted from being about America to serving the vested interests of its coveted industries (military complex, O&G/mining, tech, etc.) at the expense of all others, including its own general public.

Most nations are increasingly aligning themselves with the likes of China and Russia as a result. UAE and Saudi deserting the US camp for Putin's Russia should be a loud wake-up call for American politicians.

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Audaxes, I read these articles with the requisite propaganda shields in place but this is a good one. As always, heavy on the sauce, but there are some bones of insight there.

Thanks.

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The only 'value' China has managed to extract from the belt and road initiative is a bunch of bad debts that they funded with thin air and will probably get thin air back in return. 

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Thin air, and leverage. "We gave you a bunch of money to build an airport that no one uses, so you can't pay us back. How about we just start using that airport for our purposes and call it even?"

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https://www.rt.com/business/559819-world-economy-risk-deglobalization/

The comments are pretty pathetic; the piece is a bit like the Titanic Times noticing their typeset is getting wet.

'So some heat is coming out of this source of inflation.'

This has always been true, but while the amount of heat per burned litre hasn't hasn't changed, the amount - and quality - of litres, has. Downwards. Which is driving the link above....

 

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Morgan Stanley: Market Participants Do Not Appreciate The Implications Of New Capital Requirements

 The CFO of Citigroup noted on an investor conference call that the bank is requiring some of its least profitable trading clients to post more collateral and is even dropping some of them to help boost returns in its markets business. Betsy estimates that JPMorgan needs to reduce RWA by another ~US$90 billion by 1Q23 to get to its required capital ratios with a 100bp buffer, or US$28 billion with a 50bp buffer. JPMorgan indicated that it would distinguish between franchise and non-franchise lending and reduce the latter. Clearly, different banks will react differently to RWA pressures, but in aggregate we will likely see lower overall liquidity, lower credit formation, and continued pressure on spreads on capital-intensive assets.

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2

Interesting that J Snider has not chimed in on this, I would have thought that this would cause an increase in the cost of eurodollar financing or repo liquidity issues or both?  

This will be helpful in the fight against inflation but raises risks in refinancing for "non-franchised" banks, potentially serious ones.

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He is well aware of banks' liquidity preference demand for zero rated (RWA) pristine collateral sovereign debt purchases.

It's not an accident that repo fails correlate w/demand for USTs, including notes and bonds not just bills. Collateral shortage, liquidity problems, demand for USTs that "too many Treasuries" people never consider in favor of only Fed buying. Link

 

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"The car-making giant Stellantis (Chrysler, Jeep, Fiat, Citroen, Opel, etc) has pulled out altogether, citing the fast-growing political interference in its business there,...."

Sales down? Wonder where the lost production is going to be made up?

I'm sure the Chinese car industry can take up this slack.

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Agreed, but withdrawing from the world's largest car market means there must be some serious underlying issues surely?

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So the Revenue Minister David Parker admitted today that an unknown number of people living abroad could slip through the cracks and receive the 'Cost of Living' payment starting today.

This would mostly include people (including non-PR and non-citizens) who have moved out of NZ but are still identified as tax residents by IRD.

Terry White has lived in Switzerland since 2004, he said he was surprised to get the letter from IRD telling him he would receive the money.

David Parker said on the radio this morning that the government will never know the full scale of this waste of taxpayer funds.

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It's quite a clever strategy. If we can pump money into the pockets of people living overseas, we will be increasing the inflationary pressure over there rather than over here. This will help make our own inflation problem look less bad. 

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11

What inflationary pressure. According to our PM Adern government spending is making very little contribution to NZ’s spiralling inflation. This is apparently based on her only previous work experience where as well as from making sure the hoki didn’t get mixed up with the moki, she found slipping in  a few extra chips to those she saw as being in special need, didn’t inflate them one little bit.

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Poor people spend  money ... they waste it on cheese , Maccas , beer ... bread ... that's inflationary ...

... rich people save money ... that's not inflationary ...

Ergo : the $ 880 000 000 ought to have been divvied  up amongst everyone on over $ 70 000 p.a. ....

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lol...pick your inflation...asset or consumption...ultimately the end result is the same.

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Fay and Richwhite live in Switzerland. They probably got IRD  letters as well. Surely they keep their NZ taxable incomes below 70K. Couple of hundred Euro would buy them a nice bottle of wine. Even a box of wine perhaps.

 

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Eric Watson needs it. Wonder if IRD can find him, actually probably hasn't got a legit bank acc for it.

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Eric probably legitimately qualifies for it. He is broke ass.

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2

I guess $16M of project management, coding and testing doesn't go very far these days.

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I wonder what percentage went to consultants?

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110%

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Doesn't matter just pump the pre-election bribe into as many hands as possible (with a year to run before repeating it right before the next election).

What's many millions of dollars between friends? 

 

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In 2017 , at the end of National's 9 year reign , there were 120 people living in cars ...

... in 2022 , after 5 years of Labour , there are 480 people living in cars ... a four fold increase ...

The lesson from this ? ... under Labour more people can afford a car than they could under National ... fantastic ! ... 

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They just can’t afford to drive the car anywhere…

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