Straya T’day 23/9/2014 (updated)

HSBC flash PMI firms

The HSBC flash PMI for September was released this morning and showed a slight bounce, coming in at 50.5 on expectations of a flat 50, from 50.2 last month. Full report.

Key themes:

  • Exports are leading the charge
  • Prices continue to ease as deflationary impulses arising from severe overcapacity exert themselves
  • Employment exhibiting a slightly worrying trend (bearing in mind the relatively narrow scope of this survey)

This survey is broadly in tune with the trends prevailing in the Chinese economy at present. These are; ongoing structural adjustment of growth patterns, a property sector shakeout, and abating price pressures in industries suffering overcapacity, especially those tied to the property sector (i.e. steel).

Without knowing precisely what is driving rising export orders in this survey, it is reasonable to surmise a significant contribution from steel exports (improving US demand for consumer goods is likely the other main factor). The most recent reading on the steel industry showed weakening domestic demand, partially offset by surging exports. Chinese steel products are becoming the solar panels of previous years, with sizeable excess supply being dumped into global markets after years of over-investment in new capacity. This process looks to be accelerating sharply now owing to weak domestic demand. We have already seen signs that foreign governments will not tolerate this indefinitely. With steel prices still sliding (the most-traded rebar contract was down again this morning, despite the PMI), the tidal wave of steel hitting global markets is unlikely to slow any time soon. It will be very interesting to see how long it takes for an international backlash to turn China’s excess supply back on to itself.

The situation in the steel market is a neat microcosm of the broader state of the Chinese economy. When the GFC hit, China switched its primary source of final demand from foreign consumption demand to domestic investment demand. Without external surpluses, China had to flood its economy with credit to facilitate extremely high investment levels. Now that China is approaching the limits of this growth model (willingly, for now, but note that the adjustment would have been forced upon it eventually had the government persevered with debt-funded investment spending), any help it can get from external consumption demand would lessen the slowdown it must endure as it rebalances its economy. In other words, trade surpluses will help China ‘grow out’ of its debt burden. The question is, Are other countries able and willing to run the corresponding deficits to enable China to pursue this policy? A USD bull market means the US could assume the role of international debtor nation, but whether it is foolish enough to adopt that model again, so soon after it proved so ruinous, is a question I would rather not speculate on.

Anyway, for now Aussie markets are enjoying some much-needed relief courtesy of the better-than-expected data, which isn’t especially surprising since both equities and the currency looked oversold on a short-term basis.


AUD 23:9chart

Update 1

No relief for steel or iron ore futures today, despite the PMI lift. More at the usual place.

SPI futures and the AUDUSD are giving up their gains accordingly, though sagging European growth prospects are certainly weighing on equities markets generally this evening.

Yesterday I mentioned the horror show that is the WA budget, which has become reliant on frankly ridiculous forecasts for iron ore prices. Today we finally received an admission from the Treasurer that current prices are starting to fray nerves in the West. Gone are the days of WA’s GST largesse being redistributed to the laggard states of the Federation. This is not good news for my home state of South Australia, which is grappling with its own budget mess. As an aside, the current government may blame the industrial composition of the state for its economic travails, but it certainly cannot blame the Federal government for its public finance issues. The ALP has been in power in SA since 2002, it has had ample time to address the weaknesses of the economy. Instead it came to rely far too heavily on the promise of Olympic Dam, to the detriment of its own budget position.


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