"Deflation pulsing from China...", from fxstreet.com ... ... ... ...
(Trying to get the board back on topic.)
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Did the Fed cut rates on Tuesday? It sure looked like the “reflation trade” was back in vogue on Wednesday. Metals marveled, energy was ecstatic, bonds bounded, and the dollar did a disappearing act.
One of the reasons traders say they have been buying long bonds is because inflation is under control, as I skeptically indicated yesterday. After a bit of home work on the topic, it appears it’s not only “under control,” but could be very hard to find. And maybe this is why the “reflation trade” is rearing its head once again.
“The shock came from Sweden. Consumer prices were much weaker than expected in November, dropping 0.6%M as a result of lower energy prices and cheaper imported goods (clothing) and services (holiday packages). With headline inflation at 0.5%, Sweden is now bordering deflation, once the upward biases that are distorting price measures are stripped out. Besides, one index calculated by Statistics Sweden, the Net Price Index, is at 0.2%Y, which is indeed very close to nominal deflation. In my view, this is a harbinger of what several other European countries might face and is the consequence of the rebalancing of the global economy triggered by the downgrade of the US dollar,” wrote Morgan’s Eric Chaney.
Mr. Chaney went on to make this key point: “Raising the repo [benchmark central bank interest rate] (i.e., starting the normalization process) might push the currency even higher, while cutting it would fuel the property bubble. Hence, we continue to expect the Bank to keep the repo at 2.0% until Q2 2005.” Thus, the central bank is boxed in. Just as the European Central Bank is boxed in, and just as the Bank of Japan is boxed in. And being boxed in, there is little they can do as the deflation from the east settles over them.
China is flooding the globe with supply at a time when global demand is, shall we say, less than vibrant. The juggernaut of the Chinese low-cost manufacturing machine, coupled with a currency that is at rock bottom, is crushing and threatening industry after industry throughout any country in its wake.
This extreme competitive pricing pressure seen as a boon for shoppers is also hollowing out said shoppers’ job base. Wal-Mart should be so proud. Oh, sorry. I forgot. It’s not the $0.10 an hour labor that makes Wal-Mart so “competitive,” it’s their technological and logistical prowess; they would have us believe. And Santa should be here any day now.
These tidbits of evidence of the Chinese deflationary dragon come from Weldon’s Money Monitor:
• The world’s fourth largest brewer, Heineken, will begin to produce beer, domestically in China, which is now the world’s LARGEST beer-consuming nation.
• China’s largest telecom company signed the country’s FIRST telecom-service/equipment contract with Europe, as a ‘low-cost’ provider, amid a dramatic step up in 3G build-out competition on the ‘Continent’.
• Chinese Exported more than $60 billion of goods during November ALONE, helping post a RECORD monthly trade SURPLUS.
• Chinese CPI disinflated FAR MORE than anticipated in November.
• Chinese Output growth slowed MORE than expected in November.
• Hewlett Packard unveiled a new personal computer in China, under-cutting the already-mega-low priced local competitor by slashing prices. Moreover, the local competition is none other than Lenovo, the company paying $1.25 billion for IBM’s hardware biz. OH, and by the way, China has over-taken Japan as the world’s second largest ‘consumer’ of PCs.
• Yet another major Aluminum producer announced the completion of capacity build-out projects, upping their 2005 output forecast by +23% … on the same day the government announces NEW ‘tightening’ measures to inhibit the explosion in output.
Chinese CPI … +2.8% yr-yr in November, a deep slide compared to October’s +4.3% pace, FAR below the expected result of +3.8% …and … almost HALVED from the peak rate of +5.3% posted in both July and August.
More ‘tellingly’, according to Goldman Sachs:
• 3-Month Annualized CPI … +0.7% end-November, a MAJOR DISINFLATION relative to the +2.9% rate posted as of end-October, one month ago.
• Of specific thematic-interest, consumer finished goods inflation remains in the grip of OUTRIGHT DEFLATION …
And it’s not just the static high wage inflexible labor country crowd that’s taking it on the chin from China. Again, from Weldon’s:
• Over 500 Apparel plants in Mexico, Central America, and the Caribbean have closed over the past three years (according to ARGUS Group).
• NONE of the ‘input-fabrics’ are produced in Mexico, Central America, or the Caribbean, and, the region buys over half of its ‘cotton yarn’ from the US.
• The latest ‘official’ survey conducted by the Chinese government reveals that NINETY-ONE PERCENT of Chinese textile and clothing manufacturers expect to EXPAND output over the next 12 months.
China now controls about 17% of the global market in textiles. But it’s estimated they “will gain control of more than 50% of the global market within three years,” according to WTO estimates, Weldon reports.
When you dwell on the prospects for deflation pulsing from China, you then begin to make sense of the bond market rally in the face of 125 basis points of Fed tightening beginning in July…" |
