Data from China reinforces the view of instability and pessimism with the economy and affects goods

Data from China reinforces the view of instability and pessimism with the economy and affects goods

If you encourage some data from the US economy last week, then the data released from China last Wednesday evening (14) represents an additional pressure source for commodities, especially iron ore, which makes the roles of companies related to raw materials fell by a record.

Industrial production rose 3.8 percent in July from a year earlier, down from 3.9 percent in June and a 4.6 percent increase analysts had expected in a Reuters poll. Retail sales, which only resumed growth in June, rose 2.7% from a year earlier, against expectations of 5.0% growth and a 3.1% increase observed in June.

The housing sector, which also suffered from a mortgage boycott affecting buyer confidence, deteriorated in July. Real estate investment fell 12.3% last month, the fastest rate this year, while the decline in new sales intensified to 28.9%.

Amid this set of data, iron ore futures contracts in Dalian and Singapore tumbled on Monday amid a string of disappointing economic indicators and heat waves in the Asian giant.

The most traded iron ore contract, scheduled for delivery in January next year, on the Dalian Commodity Exchange ended 2.9% lower at 707.50 yuan (104.64 US dollars) per ton. On the Singapore Stock Exchange, the September contract for steel components fell 3.1% to $107 per ton.

As a result, shares of mining and steel companies such as Vale (VALE3), CSN (CSNA3), Usiminas (USIM5) and Gerdau (GGBR4) fell 2.2%, 4.3%, 3% and 1.5%, respectively. Ibovespa during a Monday afternoon session (15).

Moreover, the chances of a rebound in activity this month seemed slim with extreme heat being felt in many areas of China. “Dangerous and historic high temperatures … will damage economic activity,” said Attila Wednell, managing director of Navigate Commodities.

Oil prices also fell about 4% on Monday on demand concerns, as disappointing economic data from China revived concerns about a global recession.

Government data showed that refinery production in China fell to 12.53 million barrels per day, the lowest level since March 2020.

With data showing a slowdown, what do you expect from the Chinese economy and the effectiveness of government measures?

To support the faltering economy, China’s central bank (PBoC) unexpectedly cut interest rates for the second time this year on Monday. The People’s Bank of China (PBoC) announced that it has cut interest rates on both its one-year medium-term credit facilities and seven-day reverse repo agreements by 10 basis points, while injecting liquidity through both instruments.

The one-year MLF rate was lowered to 2.75% and the seven-day reverse repo rate was lowered to 2.0%. The cuts could lower China’s benchmark lending rate – the benchmark lending rate – later this month as rates are priced on the basis of multilateral fund rates. The central bank also injected 400 billion yuan ($59.3 billion) in liquidity through the one-year multilateral fund and two billion yuan through seven-day reverse repurchases.

Indicators of Chinese economic activity have largely been below market expectations. The real estate market remains the main negative event, showing the continued slowdown, even home sales, which rebounded somewhat in June, after the easing of Covid-19 restrictions. On the other hand, investments in infrastructure continued to increase, a trend that we expect to continue with the start of stimulus measures”, notes Bradesco BBI.

Goldman Sachs also confirms that activity data for July was largely below expectations, indicating that the sequential recovery in growth after the Omicron shutdown stalled in April and May and reversed slightly in July – despite the easing in Covid control policy, support The growing political and positive base effects.

“This points to continued weak domestic demand amid the intermittent Covid outbreak, production cuts in some energy-intensive industries, and the negative impact of recent risk events in real estate,” Goldman said.

Industrial production growth slowed, mainly affected by weak computer production and metal smelting. Retail growth slowed in sales of offline products such as cars, food and medicine, which more than offset the modest improvement in online product sales and meal sales.

Fixed-asset investment growth slowed in July, mainly due to lower investment in real estate and manufacturing, while investment in infrastructure remained strong. Unemployment rates surveyed fell in July, indicating that labor market pressure has eased a bit with more political support.

Goldman noted that he expects growth to pick up from April/May into the remainder of this year, but believes the pace will be much slower and more bumpy than in 2020 (when there were also many Covid-19 restrictions). Lack of some major catalysts for activity (eg exports, real estate) and continued implementation of the zero-Covid policy.

We are seeing unexpected cuts in the key rate by the Central People’s Bank in reaction to the weaker than expected activity, credit and inflation data in July. We hold our view that public finances (particularly infrastructure) and credit easing may play a more important role in the coming months, but their impact may weaken during the Covid-zero regime and weaken the housing sector,” US bank economists note.

For Morgan Stanley, the increased downside risks to growth warrant further monetary and fiscal easing.

July activity readings remind us that the economy remains in a fragile and below-average recovery mode, adding to our conviction that annualized GDP can only achieve 2.7% growth in the third quarter, the bottom line of current market expectations (consensus around 4%). ). Downside risks are increasing in the outlook for Q422 and 2023 as the downward spiral of the real estate sector and COVID-0 measures hamper the impact of monetary easing in the credit market.”

Along the same lines, JPMorgan notes that lowering interest rates in this context is a desirable move, but the impact of the policy will depend on whether the government is able to mitigate the uncertainty associated with Covid-zero policy and Omicron’s (prevailing) expectations the factor behind weak investment incentive and consumption). Moreover, it also depends on whether immediate action can be taken to address the weakness in the housing market and the projected fiscal funding gap in the last quarter of the year.

He points out that “monetary policy is an important component, but perhaps of secondary importance in the current environment.” If no further action is taken, the bank’s analysts see significant risks to their current outlook for the Chinese economy (currently up 5.7% in the fourth quarter year-on-year).

For Morgan Stanley, policy makers will need to respond with more aggressive easing to contain downside risks. “We expect further rate cuts and housing stimulus measures,” the bank’s economists note.

After the July data, ING lowered its growth forecast for the Chinese economy for 2022 from 4.4% to 4%, warning of the possibility of an additional cut.

(with Reuters and Estadão content)

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