China faces a liquidity trap

Kia ora,

Welcome to Monday’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 China seems to be moving into a classic liquidity trap situation.

Chinese banks extended ¥679 bln in new yuan loans in July, the lowest reading in three months and well below ¥1.08 tln a year earlier. The level also disappointed investors which were expecting an expansion similar to last year. But the ongoing property crisis weighed on consumers mood and government bond issuance has slowed. Low interest rates, a fast-rising M2 money supply, and banks willing to lend but clients unwilling to borrow, and savers saving harder, is a classic liquidity trap.

In Malaysia, they reported an economic expansion in the June quarter that was more than expected, charging up at an almost +9% annualised rate and impressive even if it is off a lowish base.

India has reported positively on their June industrial production levels, a fourth consecutive month of outsized gains.

EU industrial production data was released for June and that also brought a positive surprise. It grew +3.2% in the whole EU from a year ago, very much better than the +1% expected. UK industrial production rose +2.4% on the same basis.

In the UK, their economy contracted in the second quarter from the prior one as households facing soaring inflation cut back on spending, and programs to contain the pandemic were wound down, signaling tough times for an economy that is expected to enter a lengthy recession.

In Russia, their economy also contracted but more steeply in the June quarter as the economic consequences of its war in Ukraine took hold. Their economy shrank -4% from April through June compared with a year ago. It is the first quarterly gross domestic product report to fully capture the change in the economy since the invasion of Ukraine in February, when Western sanctions shut Russia off from much of the global financial system, and many countries severed trading relationships with Moscow. It was also a sharp reversal from the first quarter, when the economy rose +3.5%.

In the US, the latest sentiment survey, this one for August and by the closely-watched University of Michigan series, indicates rising optimism. But to be fair, it is only off its deep low for current conditions. However, the year-ahead economic outlook rose substantially and that is probably significant - and may indicate consumers are turned off by the silly 'steal' political shenanigans.

The July USDA WASDE report paints a much more relaxed picture for the international grain situation. Despite the European war, they now think most regions will have production increases, especially for wheat. Corn and other coarse grains might become a bit tighter they say, but the rice trade will have plenty available even if slightly lower than last year. They also see slightly higher dairy prices, and higher beef prices, but few supply issues.

In Australia, new home sales plunged -13% in July from June, swinging from an almost +2% gain in June. The sudden slump is being blamed on the recent increases in the cash rate, with builders reporting fewer enquires and visits to display sites.

The UST 10yr yield starts today at 2.84% and ery little different from week-ago levels. 

The price of gold will open today at US$1804/oz which is up +US$2/oz from this time Saturday, and up +US$28/oz in a week, up +1.6%. It is also the first time above US$1800 in seven weeks.

And oil prices start today unchanged at just under US$91.50/bbl in the US, while the international Brent price is now just under US$97.50/bbl. A week ago these prices were US$88.50 and US$94.50/bbl respectively, so a +3% weekly rise.

The Kiwi dollar will open today at 64.5 USc which is more than +2c higher than this time last week and its highest since early June. Against the Australian dollar we are holding higher at 90.6 AUc. Against the euro we up at 62.9 euro cents. That all means our TWI-5 starts today at 72.7, our highest in more than three months. It is a +2.4% appreciation in a week.

The bitcoin price is up +0.7% from this time Saturday at US$24,248. Volatility over the past 24 hours has been modest at just under +/-1.7%.

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.