Three things we learned last week:
1. Shockingly weak Chinese credit growth shows that monetary policy is pushing on a string. Friday’s data showed aggregate financing, a broad measure of credit, was almost half of what economists expected. Bank loan growth slowed to 11%, near the historical low. That’s occurring at a time when the financial markets are flush with cash and interbank interest rates are falling well below the central bank’s benchmark.
In other words, money is aplenty, but no one wants it. It reflects weak confidence among businesses and households amid the housing slump and the Covid restrictions. It’s “a classic sign of a liquidity trap,” Craig Botham at Pantheon Macroeconomics remarked.
What’s more, Beijing is facing a fiscal cliff as the local governments have pretty much used up their special bond-issuance quota for the year. Unless Beijing makes more funding available, the fiscal support may be waning.
China’s exporters are feeling the pain from slowing demand in Europe and North America. That’s adding to the downward pressure on the economy from the emerging real estate crisis. The PBoC signaled last week they are keen to avoid the inflationary problems other major economies are dealing with. Over the weekend, political priorities led to the Medium-Term Lending rate being shaved by 10 basis points while the central bank withdrew liquidity to sanitise it.
Industrial metal prices are one of the best ways of measuring the health of the Chinese economic model because it is the dominant consumer of most of them. That’s especially true of copper. The price rebounded over the last month to retest the region of the 1000-day MA and is now pausing.
Nickel continues to pull back from the region of the 200-day MA and remains in a correction.
China pulled out from climate negotiations with the USA last week, ostensibly in pique at Nancy Pelosi’s Taiwan visit. An alternative narrative is financially supporting legions of loss making solar companies and building more expensive cleaner coal plants is not easy when recession risk is non trivial.
Reducing the price of key inputs would be a significant benefit to renewable energy manufacturers outside China and most particularly in the battery sector. Tesla extended its rebound today.
Meanwhile the Renminbi is susceptible to additional weakness.
Gold pulled back sharply from the $1800 area as the Dollar rebounded.
Silver’s rebound also paused in the region of the lower side of the overhead trading range.
Brent crude oil continues to distribute below the psychological $100 area and demand volatility faces off against the assumption of limited supply.