Against the Grain

For months we have been stressing the importance of COGS in any economic recovery (by that we meant the world economy can be seen as a series of cogs and look for those which have the momentum to shunt the whole economic machine back to a regular speed) and recent evidence shows how important China has been in getting the system turning again. A top Japanese government economist said “there’s no mistake that China’s economic recovery is contributing to a rebound in Japan and other economies in the region”. Since the lows South Korean industrial production has jumped 28% and Taiwan 26%. In Europe a bank released a report entitled “Eurozone Q2 GDP: Made in China”. French exports to China and other East Asia economies rose 18.7% Q2 (Q1 -16.2%), overall Euroland exports grew 6.3% (-6.2%). It seems China has replaced the US as the world locomotive but as Prof Kenneth Rogoff of Harvard (ex IMF chief economist) is quoted in the NYT “The big question is what happens next if the consumer in the US and Europe does not come back, I’m not sure Asia has a Plan B” (or the world economy as a whole, it seems all the eggs have been moved from one basket to another). Hong Kong reported Jul exports fell 19.9% yoy (Jne -5.4%), the breakdown showed a 15% drop in exports to the mainland, US -29.4%, UK -30.7% and Germany -29.8% with imports down 17.8%.

Metals pulled back from Mon close as equities underperformed, in the US the DJI gave back gains to end unchanged, while Shanghai lost 2.6% have being down over 5% at one stage as worries persist about future Chinese monetary policy. Another Chinese bank CEO warned of bubbles in the equity and property markets (suspect commodities as well. In China officials in Henan and Hunan provinces are checking pb smelters after the closure of a smelter in Shaanxi last week. The feature of LME stocks a rise in cu (Busan 3100) and drop in al, perhaps an indicator of the physical markets is the low level of cancelled warrants to total stock with sn the largest at 4%. The Mongolian Parliament has passed amendments clearing the way for Rio Tinto and Ivanhoe to finalise the investment agreement for the Oyu Tolgoi cu project targeted for 2013 and having average mine life cu production of 450 ktpa. The pb / zn spread hits US$ 210 from US$ 20 at Mon opening.

Late y/day the Chicago Fed released the Jul Midwest manufacturing index that rose to 79.9 (Jne 77.7) the gain accounted for entirely by the auto sector, with “cash for clunkers” at and end can it hold up. Very similar to housing where the rise in existing home sales Fri was attributed to “first home” buyers who get a Federal tax credit and prices hit by foreclosures, (by our rough reckoning, the US Census Bureau puts average US earnings at US$ 27,590 / year - the combined government car and house incentives are an extra 45% of untaxed income). The Jne Case – Shiller composite 10 city home price index rose 1.4%, yoy fell 15.1% (-16.8%) and the composite index of 20 cities -15.4% yoy (-17.1%). The Conference Board Aug consumer confidence index jumped to 54.1 shrugging off two months of falls (Jul 46.6), the rise expectations 73.5 (63.4) while present situation was 24.9 (23.3). The Aug Richmond Fed manufacturing index was 14.0 lower than expected (14.0). The DJI quickly up over 100 points, oil tested 75.0 with € steady at 1.435. Then the US Office of Budget Management in its annual mid session review saw ’09 growth contracting 2.8% ( previous-1.2%) and ’10 growth at 2% (+3.2) and ’11 +3.8% (4%) with unemployment hitting 10% in ’09 and 9.8% in ’10.