Against the Grain

The Jul consumer and producer inflation data has shown a sharp rise in the reporting of negative inflation rates (deflation), from China, US, Germany, Japan and some UK definitions. Deflation is defined as a decrease in general price levels and associated with times of negative or stagnate economic growth. It can be harmful as people delay spending hoping for cheaper prices (though the rise of instant gratification especially in electronic goods offsets this), employees resist wage cuts causing further inflation (evidence employers have been cutting hours and other things to avoid lay offs), real interest rates rise as consumers work of excess credit and increases debt for them and governments. Some of this could be offset by rising productivity, improved technology and lower costs especially in these times. This is before currency considerations in the UK petrol prices are nearly as high presently with crude at US$ 70 / bbl as they where this time last year with the price at over US$ 140 / bbl.

The Asian markets were under pressure again as equities in Shanghai declined 4.3% which is 20% since the Aug 4 peak, other markets followed Nikkei -0.7% and India 1.5%. The metals struck out for higher ground in early Asia helped by the DJI, oil and € with cu up to 6140 but this soon turned lower as sellers dominated proceedings like y/days London pm session. The Jne Japanese all industry activity index rose 0.1% below expectations (May +0.7%) while final Jul machine tool orders were down 72.3% (72.2%). See WSJ article on Australia’s relations with China “The China Paradox” (http://online wsj.com).

The metals certainly under performed y/day as interestingly did the soft commodity sector as broad commodity indices turned lower. We had hopes that with no al stock build up before third Wed the inflow might have slowed but post date has reversed that. The LME stocks dominated by a 52 kt al inflow (31 kt into the Netherlands & Detroit 16 kt). From Aug 26 the LME initial margin on al will rise US$ 750 to US$ 3500 per contract  and ni up US$ 1800 to US$ 13,200 / contract. The Russian Sayano – Shushenskaya hydro plant could take up to 5 years to repair with the company saying back up coal power stations will provide the lost energy. RUSAL takes 70% of its off take with two smelters with a combined capacity of 832 ktpa near it. The company says ’09 production could be affected by 10% going forward, in H1’09 its output was down 10% yoy at 1.98 million tonnes. The ILZSG reported a zn surplus of 273 kt in H1’09 with the stock to consumption ratio at 7.5 weeks in pb the surplus was 37 kt for the same period. Demand was down 18% in Europe, 11.6% US and 47% in Japan offset by Chinese usage up 25%.

In Europe Jul German PPI declined 1.5% (Jne -0.1%) falling yoy 7.8% (-4.6%) the biggest decline in 60 years as energy costs retreated. The UK industry group CBI reported Aug industrial trends total orders improved to -54 (Jul -59).

In the US last night the weekly ABC / Washington Post consumer sentiment index crept up to -46 from previous -47. The only data today weekly MBA mortgage applications rose 5.6% from previous week decline of 3.5% and look set to improve further as long rates fall. The annual “Jackson Hole” Wyoming meeting of guru’s run by the Kansas Fed begins today so watch out for “market moving” comments. Very nervous markets as they headed into the afternoon with every financial instrument watching each other like Olympic pursuit cycle finalists. Metals touch lows as US equities opened cu at 5818 before a rally, with oil up, € stronger and DJI not as low as expected – was a bear trap set? – Yes more by luck than management. At 15:30 US weekly oil stocks fell most in a year as imports declined by 15% this saw oil jump US$ 2 to 71.3 / bbl in five minutes. Separately the € rose over 1.42 and gold advanced US$ 7 as the US and Swiss reach agreement on the UBS tax affair. The Deere & Co the world’s largest farm equipment maker reported Q3 profits down 27% and going forward equipment sales to fall 34% as strong farm sales were offset by lower construction and lawn equipment. It will be interesting to see what Asia makes of the reasons for the oil, € and gold bounce with a late surge in the DJI.

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