China's July Numbers
Pettis Tweet Thread
- The PBoC unexpectedly reduced by 10 bps both the one-year medium-term lending-facility rate as well as the the seven-day reverse repo rate, even after having regularly expressed its concern about loosening while the Fed is tightening.
- This perhaps suggests just how worried the PBoC is about recent trade and economic data. The problem is that while the SCMP says the rate cuts will help boost economic activity, they are almost certainly wrong.
- If businesses were eager to expand production, but were unable to do so because the cost of capital was too high, a cut in rates would indeed cause an expansion in investment and production.
- But does anyone think that is the case? Businesses and households seem to be cutting back on their borrowing because of their concerns about economic weakness. The problem, in other words, is lack of domestic demand, not expensive capital.
- And I am pretty sure the PBoC knows this. In the end I think it announced the interest-rate cut mainly because it knows that something must be done, but it doesn't know what else to do. Even its "window guidance" hasn't helped much.
- One consequence, I guess, is that we are all going to be watching financial flows and the currency to see what kind of effect this will have. The PBoC is in a tough spot. Lower interest rates will almost certainly put downward pressure on the RMB.
- But contrary to what many unthinkingly assume, a weaker RMB won't help the economy. It will hurt it by strengthening exports at the expense of even weaker domestic demand. China, of course, doesn't need more export growth if this comes via a reduced household income share.
- The only way to get borrowing to rise, at this point, is to channel it through local governments into infrastructure spending, and that will only make the country's debt burden worse. Without directly boosting household income, it will be hard to get businesses to expand.
No Bright Spots in the Data
- It is hard to find a bright spot in today's data release except perhaps the slight decline in the official unemployment rate from July's 5.5% to 5.4%. The supply side of the economy was weaker than expected, but it still soared past the demand side.
- Industrial output was up 3.8% year on year and 0.38% month on month, well below expectations. For the first 7 months of the year, output rose 3.5%, just a tad over the very weak 3.4% recorded last month.
- Beijing has been pumping the supply side of the economy with credit, subsidies, tax rebates, and spending on improved logistics, but that still hasn't been enough to overcome zero-COVID policies and weak domestic demand.
- The real problem of course continues to be domestic demand. Retail sales in July were up 2.7% year on year and up 0.27% month on month. Year to date they were down 0.2%, much worse than the already-disappointing 0.3% increase recorded last month.
- The nearly 4 ppt gap between industrial output and retail sales is a proxy for the declining consumption share of GDP. While Beijing is able to get the production side of the economy slowly moving forward, it seems unable to do the same for the demand side.
- This, of course, is also the reason for what many analysts incorrectly see as the few bright spots in the economy: strong trade and low CPI inflation. With demand so weak, imported inflation is dampened domestically and China must export almost all additional production.
- The PBoC will continue doing what it can to boost business expansion – for example it unexpectedly cut key policy rates today – but with weak demand, and little reason to expect much change, it is pretty clear that the private sector would prefer to hold back.
China's retail sales are negative year-to date. China wants to stimulate consumer demand, but all it continues to do is goose exports.
Europe is a total basket case. So the consumer of first, last, and only resort is the US consumer.
Key US reports are out this week for the month of August: Housing starts, industrial production, retail sales, and existing home sales.
Expect weakness across the board in the US reports.
But whether that happens now, confirming recession, or later as some believe, it's clear the entire global economy is cooling rapidly.
It is delusional to believe the Fed can engineer a soft landing for the US, let alone the entire world by rapidly hiking rates smack into US and global weakness.
US Industries Are Buckling Under Pressure of Surging Electricity Costs
Things are much worse in the EU as noted yesterday in German Costs to Ship by Barge are up Twenty Times and May Soon Be Impossible
There is no way to avoid a global recession, and it's likely already started.
This post originated on MishTalk.Com.
Thanks for Tuning In!
Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.
If you have subscribed and do not get email alerts, please check your spam folder.