China's slowdowns accentuate imbalance risks everywhere

Economy Watch

Kia ora,

Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

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

Today we lead with news the world's second largest economy may be seriously out of balance, with implications for everyone.

With the US on holiday. the big global influences come from elsewhere today. First up, the private Caixin PMI for Chinese factories moved up from a minor contraction in July to a minor expansion in August. According to this survey, output growth accelerated amid an upturn in new orders and a stabilisation in employment. Meanwhile, price pressure eased and confidence hit a 3-month peak. All this was marginally better than the official factory PMI which recorded a slightly deeper contraction. The difference is that the Caixin survey is more about their private sector, the official PMUI more about their SOEs and the enterprises that dominate Chinese manufacturing.

But despite this stable factory activity, their firms have been buying raw materials at a high rate, so consequently there is a huge buildup in inventories across a wide range of sectors. If the world doesn't take the surge in exports that would be necessary to justify this build-up, then the resulting pullback will have large-scale international consequences. There are plenty of signs this imbalance may end badly for everyone involved.

And China's property woes are deepening, which is driving sharper equity market retreats. Falling prices aren't being stemmed, squeezing developers further and keeping house buyers away.

Taiwan's August PMI only registered a modest expansion in the island nation, about the same as for China.

Japan's August PMI showed neither an expansion nor contraction.

South Korea's August data pointed to sustained and stronger increases in both output and new orders for their manufacturing sector amid growing signs of client confidence.

India's August PMI registered softer increases in new business and output during August, albeit with rates of expansion remaining elevated by historic standards.

In Australia, their factory sector is deteriorating at a faster rate, but there are some signs things may improve later in the year. Although new orders and production continued to fall, export orders picked up and along with it, confidence in the future. But they also report that cost pressures are not easing, which will worry the RBA.

Australia is quite vulnerable to the Chinese economy's struggles

So it will be no surprise that job ad levels continue to shrink in Australia. And that company profits seem to be diving.

Meanwhile on the Australian property front, building consents jumped in July, especially for multi-unit developments although to be fair that is off a very low base, so it may not be significant.

And CoreLogic said August house prices rose only modesty from July to be up +7% for the year. However all this rise was from Brisbane (+15%), Adelaide (+15%) and especially Perth (+24%). Without them, there would be no rises.

The UST 10yr yield is now at just on 3.93% and up +2 bps from yesterday. The key 2-10 yield curve inversion has now disappeared, replaced by a positive +1 bp.

The price of gold will start today down -US$4 from yesterday at US$2499/oz.

Oil prices are little-changed from yesterday again, still just under US$73.50/bbl in the US while the international Brent price is still just over US$77/bbl.

The Kiwi dollar starts today down -20 bps from yesterday at 62.3 USc. Against the Aussie we are sharply lower at 91.7 AUc. Against the euro we are also lower at 56.3 euro cents. That all means our TWI-5 starts today at 70.2 and down -30 bps from yesterday.

The bitcoin price starts today at US$58,472 and back up +0.8% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.4%.

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

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

Kia ora. I'm David Chaston. And we will do this tomorrow.