- US Initial Jobless Claims declined to 423k last week vs 420k exp and 428k prev.
- A short-term spending bill failed to pass through the House on Wed after several Republicans broke w/the party leadership and joined Dems in rejecting the measures. The Republicans wanted to see more spending cuts while Dems rejected to too little disaster funding. There are growing doubts about whether Congress can pass a bill to fund itself when the new FY starts Oct 1. WSJ
- PMI for Sept:
- EU Composite declined to 49.2 vs 49.8 exp and 50.7 prev
- EU Manufacturing declined to 48.4 vs 48.5 exp and 49 prev
- EU Services declined to 49.1 vs 51 exp and 51.5 prev
- HSBC China PMI declined to 49.4 vs 49.9 prev
- EU Consumer Confidence declined to -18.9 in Aug vs -18 exp and -16.5 prev.
The risk off move started with the release of the Chinese PMI data overnight and has been relentless since. The global sell off in EM assets is reflective of a new intensity in deleveraging behavior. As the chart from JPM below shows, LatAm FX has been trading off of the S&P for most of the past 2 years, but has now collapsed, as investors apparently have decided (again) that EM can’t decouple from DM:
3) As we know, capital investment requires commodities, and lots of it. And Chinese customs data has suggested that imports have slowed – a view supported by price weakness across the commodity complex.
4) Credit availability has tightened quite sharply. Real M2 growth has fallen to levels not seen since 2008:
Ultimately, we won’t know how well capitalized Chinese banks are until well after the fact, but even a stagnation of capital formation in China has big implications for macro assets. Note in particular that Chinese demand has driven Australian real estate prices to crazy levels, with a median price to rents ratio of ~14. Chinese demand has also altered the composition of Australian economy – Gross Fixed Capital Formation now represents about 30% of GDP:
The exposure of Australian economic growth, real estate and credit to China means that a slowdown in Chinese demand (and we know this is coming at some point) will cause a very sharp repricing of Australian growth expectations. In particular, a sharp drop in Australian real estate prices (from levels even more overvalued than the US market) will almost certainly require the RBA to institute some form of QE down the road.