September 3 – Stock futures pulled back from their lofty levels overnight, as crude oil prices fell on poor Chinese economic data, while traders also brace for a series of employment data that will be coming out this week. The VIX is trading back above 16 this morning, while the dollar index is trading near 101.7, representing a two-week high. Yields on 10-year Treasuries are trading near 3.85%, while yields on 2-year Treasuries are trading near 3.88%. Crude oil prices are down 3% to fresh seven-month lows, while the grain and oilseed markets are mixed, with corn and soybean prices modestly higher, while wheat prices are again weaker.
China’s official August purchasing managers index indicated yesterday that factory activity was in contraction for the fourth consecutive month with a reading of 49.1, down from 49.4 the previous month and below expectation of 49.5. The new orders index fell to a new low for the year at 48.9, while new export orders stood at 48.7. A number below 50 indicates month-on-month contraction. The government blamed the poor numbers on localized flooding that occurred during the month, but that might have carried more weight if it wasn’t a trend prior to the adverse weather. The input price subindex fell to 43.2, which was its lowest level of the past 15 months, indicating active deflation pressures are at work in China. The non-manufacturing PMI index shows very modest expansion at 50.3, but the construction portion of that put in a new 12-year low of 50.6.
Summer holiday travel in China in July and August reached 140 million people, up 12% on the year and 18% above pre-pandemic levels in 2019. But that was accomplished with big discounts on prices. The average price of an air ticket on a domestic flight dropped more than 10% year-on-year. Box office ticket sales over the summer dropped by 40% from the previous year, despite an increase in new movies. Travel booking agencies report that airfare and hotel bookings for the Mid-Autumn Festival holiday in mid-September are down 20 – 30% from the summer peak as consumers pull back on discretionary spending.
Canada joined the United States and Europe in hiking import tariffs on Chinese electric vehicles, as well as steel and aluminum products, raising the ire of Chinese officials. As a result, China instigated an anti-dumping investigation into Canadian rapeseed shipments. China imported a record 5.05 million metric tons of Canadian rapeseed last year, which accounted for more than 90% of China’s rapeseed imports, and more than half of Canada’s exports. China’s interest in rapeseed is primarily driven by rape oil consumption, which is the second-largest consumed cooking oil in China. As a result, China may increase imports from Russia and the UAE as an alternative, while increasing soymeal use to replace its rapeseed meal consumption. It could also lean more on canola oil coming from Australia and Ukraine. China could also increase its soyoil imports, although it should be noted that lower restaurant patronage resulted in lower rapeseed oil consumption this year, with consumption down by roughly 20% in the first seven months of the year. That would also leave Canadian rapeseed looking for a home, which could result in in a flood of canola oil flowing south into the U.S. biofuel market, which pressured U.S. soyoil prices overnight.
President Richard Nixon visited China in 1972, ending 25 years of isolation between the United States and the People’s Republic of China that had started when the communists took control of the country. Nixon sought to influence China by opening up trade between the two countries. China’s economy began to rapidly grow as trade opened up. We now see how dependent the growth of China’s controlled economy is on that foreign money coming into the country. China built its economy on exports fueled by the cheap labor of its people, along with a flood of foreign investment. It’s economy is now struggling as the West begins to deleverage from dependence on Chinese goods, along with a 29% year-on-year decline in foreign investment in China. This has China’s economy reeling. We will likely see government stimulus increase as the U.S. Federal Reserve cuts interest rates, allowing the stimulus with a minimal adverse impact on the value of the yuan. Nonetheless, China is angered by the deleveraging of the West that is cutting off the money flow that allowed it to build into a superpower contender. That anger led to President Xi Jinping pulling back from many of his interactions with western leaders, while becoming hard lined on his commitment to take control of Taiwan, and to dialog primarily just with other communist nations, and those who will do business with him. He altered his leadership structure to only those who will speak favorably. This makes China’s relationship with the West one of the most potentially volatile issues impacting future demand for commodities, and a sleeping black swan that could be awakened at any moment.
