This bi-weekly analysis tracks key high-frequency economic indicators across six dimensions: supply, demand, prices, inventories, transportation & logistics, and liquidity. The review covers the period from June 8 to June 21.
Key Observations
Four major developments were observed in the past fortnight. First, the signing of a U.S.-Iran memorandum of understanding initially pushed Brent crude prices down to $76.4 per barrel, but subsequent tensions involving Israel and Lebanon led to renewed volatility and a slight price increase.
Second, property sales showed modest weakening in early to mid-June. New home sales turned negative year-on-year at -0.6%, compared to 0% growth in May. Sales of existing homes also decelerated, with year-on-year growth slowing to 10.6% from 16.6% in May.
Third, operational rates in the steel, cement, asphalt, coking coal, and automotive sectors declined sequentially, indicating continued weakness in real-estate and infrastructure-related activity.
Fourth, domestic money market rates rose above policy rates for the first time in two months, signaling tighter liquidity conditions. Concurrently, renewed expectations for U.S. Federal Reserve rate hikes contributed to a stronger U.S. dollar.
Core Insights
Recent fluctuations in U.S.-Iran relations are progressing towards a final agreement. However, the sustained period of elevated oil prices over the past three months means their full lagged impact is yet to be felt across the economy.
For the broader economy, persistently high oil prices are likely to further squeeze profit margins for downstream industries. Regarding inflation, while year-on-year readings for both the Consumer Price Index and Producer Price Index are expected to continue rising, the pace of increase is anticipated to moderate.
In terms of policy, the immediate focus remains on the effective implementation of existing measures. The timing and nature of any additional incremental policy support will be contingent on evolving economic conditions.
Detailed Sectoral Performance
Supply Dynamics
The impact of high oil prices is becoming evident, with operational rates across most upstream and downstream sectors declining.
Demand Trends
Property sales softened slightly, and production resumption activities mostly retreated.
Price Movements
Oil prices retreated, leading to a divergence in price trends between upstream resources and downstream goods.
Inventory Status
U.S. petroleum inventories fell to their lowest level in 22 years.
Transportation and Logistics
The number of operating flights increased, while subway passenger numbers declined.
Liquidity Conditions
Domestic funding costs rose, and the U.S. Dollar Index strengthened.
In-Depth Analysis
Spotlight: U.S.-Iran Negotiations and Oil Price Swings
Despite the signing of a memorandum of understanding between the U.S. and Iran, the Strait of Hormuz remains effectively blocked, with shipping volumes staying low. Following the agreement, Brent crude prices fell sharply to $76.4 per barrel. However, subsequent military actions and threats to close the strait reintroduced uncertainty, causing prices to fluctuate.
Current market expectations, post-agreement, project an average Brent crude price of approximately $88 per barrel for the year, with Q3 and Q4 forecasts around $84 and $79 per barrel, respectively.
Global floating crude oil storage has declined significantly, driven by inventory drawdowns due to strait disruptions, recovering demand from Asian buyers, and strengthened expectations for supply restoration following the diplomatic progress.
Supply-Side Pressures
Operational rates for blast furnaces, coking plants, and key infrastructure materials like asphalt and cement all declined on a sequential basis, underperforming their typical seasonal patterns.
Performance within the chemical and textile sectors was mixed. While PTA operating rates increased, polyester filament operating rates in the Jiangsu-Zhejiang region decreased.
Automotive tire production rates also fell, underperforming seasonal norms.
Demand-Side Softness
Power coal consumption in eight coastal provinces declined sequentially. Land transaction volumes in 100 cities remained at historically low levels for this period.
Apparent demand for steel products showed a slight sequential decline but performed better than the average seasonal trend, though absolute levels were low.
Sales activity in the property market diverged. New home sales turned negative year-on-year in June, while existing home sales growth decelerated. Passenger vehicle sales also fell both sequentially and year-on-year.
Divergent Price Trends
Upstream resource prices moved in different directions. While coal prices rose, prices for crude oil, copper, and iron ore declined.
Prices for midstream industrial products like rebar and cement edged lower.
In the consumer sector, pork prices fell, while vegetable prices increased.
Inventory Developments
U.S. crude oil and petroleum product inventories dropped to a 22-year low. In China, coal stockpiles at coastal power plants rose, while inventories for metals and construction materials like asphalt and cement generally decreased.
Transportation and Logistics Metrics
Flight operations recovered slightly, but subway ridership in key cities declined. In shipping, the Baltic Dry Index fell, while the China Containerized Freight Index rose.
Liquidity and Financial Markets
Domestic money market rates climbed above policy rates, indicating tighter interbank liquidity. The central bank increased open market operations to manage funding pressures.
In bond markets, yields on government bonds moved higher at both the short and long ends.
Globally, renewed Fed rate hike expectations bolstered the U.S. dollar. Easing geopolitical tensions contributed to lower oil prices and moderated inflation expectations, leading to a decline in yields for U.S., Japanese, and most European government bonds.
Risk Factors
The economic outlook faces potential risks from unexpected changes in policy intensity, the external environment, and geopolitical developments.
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