Mtg purchase apps, Gas prices, Greek debt, Euro area trade and inflation, Oil prices

Another setback for those grasping for straws looking for housing to lead a recovery:

MBA Mortgage Applications
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Gas prices up enough to hurt consumers, but not enough boost oil capex.

You might say it’s in the ‘sour spot’:
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Again, for all practical purposes this IS full debt forgiveness, and something Greece has yet to recognize as such:

IMF Proposal on Greece Sets Up Battle With Germany

May 17 (WSJ) — A new IMF proposal goes far beyond what Greece’s eurozone creditors have said they are willing to do. Germany is leading the pressure on the IMF to dilute its demands and rejoin the Greek bailout program as a lender. The IMF wants eurozone countries to accept long delays in the repayment of Greece’s bailout loans, which would fall due in the period from 2040 to 2080 under the proposal. The IMF is also pressing for Greece’s interest rate on its eurozone loans to be fixed for 30 to 40 years at its current average level of 1.5%, with all interest payments postponed until loans start falling due.

Trade continues to provide serious fundamental support for the euro, much like it did for the yen for two decades, which continued to strengthen even with 0 rates, QE, and perhaps the highest debt/GDP ratios in the world:
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This also provides fundamental support for the euro:
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And the recently rising oil prices work to increase the US trade deficit with prices and imports rising, as the price increase isn’t enough to slow the decline in US output. Again, you could call it the ‘sour spot’ for as long as it lasts:
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Personal income and spending, ISM manufacturing, construction spending

Spending still not good, and GDP *is* spending. Personal income growth remains low, but is higher than spending. I suspect this gets reconciled with downward revisions to income over time, perhaps due to downward revisions to employment.

With GDP growth near flat employment growth implies more employees are being hired to produce the same levels of output, which sends up a red flag for downward revisions to employment.

Personal Income and Outlays
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Highlights
Consumers had a healthy December but kept the money to themselves. Personal income rose a solid 0.3 percent with the savings rate moving 2 tenths higher to 5.5 percent, its strongest level since December 2012. Wages & salaries, however, slowed to only plus 0.2 percent in the month but follow outsized gains of 0.5 and 0.6 percent in the prior two months. Service industries lead the pay data with manufacturing pay in contraction. Proprietors’ income rose in the month along with rental income while income receipts were down on lower interest income, the latter reflecting, despite the Fed’s rate hike, the downdraft in rates.

Spending, as retailers already know, was very soft, unchanged with only services showing a gain. December spending on both durable and non-durable goods fell 0.9 percent each, the former reflecting weak spending on holiday gifts and also vehicles and the latter reflecting lower hitting bills. A partial offset is a 2 tenths upward revision to November’s spending to plus 0.5 percent.

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More bad, and downward revisions as well:

ISM Mfg Index
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Highlights
Employment sank the ISM index in January which could muster no better than a 48.2 for what, following annual revisions to 2015, is the fourth sub-50 reading in a row. This is by far the worst run for this closely watched indicator since the Great Recession days of 2009.

Employment fell a very steep 2.1 points to 45.9 to signal significant contraction for manufacturing payrolls in Friday’s employment report, which however would not be much of a surprise given the sector’s prior payroll contraction. This is the third sub-50 reading for employment of the last four months and the lowest reading since, once again, 2009.

There is good news in the report and that’s a snapback for new orders, to 51.5 for only the second plus 50 reading of the last five months and which points to overall improvement in the coming reports. But backlog orders, at only 43.0, remain in deep contraction, and what strength there is in orders isn’t coming from exports which are in contraction for the seventh of the last eight months. Manufacturers have been working down backlogs to keep production up, which came in at 50.2 to signal fractional monthly growth. Inventories remain steady and low but the sample still say they are too high, sentiment that points to lack of confidence in the business outlook.

Confirming the weakness is breadth among industries with 10 reporting composite contraction against eight reporting monthly growth. If it wasn’t for strength in new orders, January’s data would be almost entirely negative. This report is a downbeat opening to 2016 which follows a definitively downbeat year for the factory sector in 2015.

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No mention of the NY tax breaks that expired in June:

Construction Spending
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Highlights
Held down by weakness in the nonresidential component, construction spending didn’t get a lift at all from the mild weather late last year, rising only 0.1 percent in December following a downwardly revised 0.6 percent decline in November and a 0.1 percent contraction in October. Year-on-year, spending was up 8.2 percent, a respectable rate but still the slowest since March last year.

But there is very good news in the report and that’s a very strong 0.9 percent rise in residential construction where the year-on-year rate came in at plus 8.1 percent. Spending on multi-family units continues to lead the residential component, up 2.7 percent in the month for a 12.0 percent year-on-year gain. Single-family homes rose 1.0 percent in the month for an 8.7 percent year-on-year gain.

Now the bad news. Non-residential spending fell 2.1 percent following a 0.2 percent decline in November. Steep declines hit manufacturing for a second month with the office and transportation components also showing weakness. Still year-on-year, non-residential construction rose 11.8 percent.

Rates of growth in the public readings are led by highway & streets, at a 9.4 percent surge for December and a year-on-year rate of plus 12.0 percent. Educational growth ended 2015 at 9.4 percent with state & local at plus 4.4 percent. The Federal subcomponent brings up the rear at minus 1.4.

Lack of business confidence and cutbacks for business spending are evident in this report but not troubles on the consumer side, where residential spending remains very solid and a reminder that the housing sector is poised to be a leading driver for the 2016 economy. Still, the weak December and revised November headlines are likely to pull down, at least slightly, estimates for revised fourth-quarter GDP which came in at plus 0.7 percent in last week’s advance report.

A blind man can see this chart has been decelerating for a long time now:
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Looks to me like it was growing but then flattened out not long after oil capex spending collapsed?
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This is the ‘driver’ for 2016?
It’s only now just back to 2004 levels, and not growing nearly as fast as the prior cycle, and this chart isn’t adjusted for inflation, which brings it’s influence down that much more:
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Euro Trade Surplus, Euro Inflation

Trade surplus still trending higher along with deflation both make the euro ‘harder to get’ and ‘more valuable’:

European Union : Merchandise Trade
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Highlights
The seasonally adjusted merchandise trade balance returned a E19.8 billion surplus in August after an unrevised E22.4 billion excess in July. This was the least black ink since March. The unadjusted surplus was E11.2 billion, up from E7.4 billion in August 2014.

The headline reduction reflected mainly a 1.3 percent monthly fall in exports to E169.5 billion, their second successive decline and their lowest level since February. Imports were up 0.2 percent at E149.7 billion, only partially reversing July’s fall. Compared with a year ago, exports now show an unadjusted gain of 6.0 percent and imports a rise of 3.0 percent.

The average surplus in July/August was E21.1B, a drop of only 1.4 percent from the second quarter average. This is probably indicative of, at best, a much smaller contribution from total net exports to third quarter real GDP growth than the 0.3 percentage point boost provided in April-June. Further reason for being cautious about the speed of the Eurozone’s economic recovery.
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Dallas Fed, Chicago PMI, Japan Industrial Production, Italy Retail Sales, Comments on GDI and GDP

Shockingly negative:

Dallas Fed Mfg Survey
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Not so good:

Chicago PMI
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Highlights
The headline for August looks solid, at 54.4 for the Chicago PMI, but the details look weak. New orders and production both slowed and order backlogs fell into deeper contraction. Employment contracted for a fourth straight month while prices paid fell back into contraction. Lifting the composite index are delays in shipments which point to tight conditions in the supply chain. Inventories rose sharply in the month and the report hints that the build, despite the weakness in orders, was likely intentional. But strength is less than convincing and this report suggests that activity for the Chicago-area economy may be flat going into year end.
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Japan : Industrial Production
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Italy : Retail Sales
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Highlights
Retailers had another poor month in June as nominal sales fell 0.3 percent versus May when they declined a slightly steeper revised 0.2 percent. Unadjusted annual growth actually accelerated from 0.1 percent to 1.7 percent but this was due to extra shopping days in this year’s report. Volume purchases were also 0.3 percent lower on the month.

Real gross domestic income (GDI) was up at only a .6% annual rate, only a bit higher than Q1, and in contrast to GDP being up 3.7% for the same quarter. This time looks to me like it’s GDP that’s out of line, as per my narrative where I don’t see any signs of any other sector stepping up and replacing the GDP supported by the now lost oil capital expenditures:
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The capital goods sector remains in retreat:
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Lots of anecdotals don’t jibe with 3.7% growth:

21 August 2015: ECRI’s WLI Growth Index Sinks Slightly More Into Contraction

(Econintersect) — ECRI’s WLI Growth Index which forecasts economic growth six months forward – remains in negative territory. This index had spent 28 weeks in negative territory then 15 weeks in positive territory – and now is in its second week in negative territory.

Rail Week Ending 22 August 2015: Some Improvement But Continued Deterioration Of Year-over-Year Rolling Averages

(Econintersect) — Week 33 of 2015 shows same week total rail traffic (from same week one year ago) marginally expanded according to the Association of American Railroads (AAR) traffic data. Intermodal traffic expanded year-over-year, which accounts for approximately half of movements. but weekly railcar counts continued in contraction.

Lots of reasons to suspect net exports will revert in Q3, or be revised down for Q2 as blips up like this latest one tend to quickly reverse, especially with all the surveys showing exports in retreat:
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The goods component is looking in full retreat:
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And the service component of exports isn’t offering any material support either:
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And the Atlanta Fed’s Q3 GDP forecast of only 1.2% remains well below mainstream forecasts:
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Redbook retail sales, Inflation adjustment, China, House prices, Consumer confidence

Still depressed
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Lower than the Fed thought:

U.S. inflation probably lower than reported, Fed study says

Aug 24 (Reuters) — U.S. inflation in the first half of the year was probably “markedly lower” than reported according to the San Francisco Federal Reserve Bank. Researchers at the regional Fed bank had earlier found that the very weak readings for economic growth in the early part of the year were likely due to inadequate adjustments for seasonal fluctuations. The same researchers applied similar methodology to inflation data and found that core PCE inflation was probably overstated by 0.3 and 0.2 percentage points in the first two quarters of the year, respectively.

This does nothing for output and employment:

China’s central bank pumps in billions to ease liquidity strain

Aug 25 (Xinhua) — The People’s Bank of China (PBOC) conducted 150 billion yuan (23.4 billion U.S. dollars) of seven-day reverse repurchase agreements (repo). The reverse repo was priced to yield 2.5 percent, unchanged from the yield on a net injection last week of 150 billion yuan using reverse repos, according to a PBOC’s statement. The PBOC also channelled another 110 billion yuan via its medium-term lending facility. Despite the cash injection the benchmark overnight Shanghai Interbank Offered Rate (Shibor) climbed by 1.3 basis points to 1.879 percent.

Not a good sign:

S&P Case-Shiller HPI
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Highlights
Inventories may be low and sales rates firm, but both Case-Shiller and FHFA are pointing to a surprising flat spot for home-price appreciation. Case-Shiller’s 20-city adjusted index fell 0.1 percent in June vs Econoday expectations for a 0.1 percent rise. Year-on-year, 20-city prices, whether adjusted or unadjusted, are unchanged at plus 5.0 percent. This rate has been inching higher but looks like it may be ready to fall back unless prices pick up.
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A bit less than expected and still at very depressed levels:

New Home Sales
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Settled back to depressed levels from last month’s blip up:

Richmond Fed Manufacturing Index
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Consumer confidence bounced up with lower gas prices, as it’s one man one vote, not one dollar one vote, and so hasn’t been a reliable indicator of retail sales.
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Retail Sales, Jobless Claims, Import Export Prices, Business Inventories, Japan Machine Orders, Freight Transportation, Gas Prices


This is being touted as a strong report, but, again, looks to me like it’s dropped since year end and at best is moving sideways from there, and not to forget that a large share of auto sales are imports.

But I do agree the Fed is heck bent on raising rates in Sept, even without ‘some’ improvement, and will do so unless there’s a stock market decline severe enough to hold them back. So far that’s not happening.

Retail Sales
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Highlights
Big upward revisions underscore a very solid and very important retail sales report. Retail sales rose 0.6 percent in July with June revised to unchanged from an initial reading of minus 0.3 percent and with May revised to a jump of 1.2 percent from 1.0 percent. The revisions to June and May point to an upward revision for second-quarter GDP.

Vehicle sales, as expected, were the standout in July, jumping 1.4 percent to nearly reverse June’s 1.5 percent slide and nearly matching May’s historic 1.9 percent surge. But even outside vehicles, retail sales were strong with the ex-auto reading rising a solid 0.4 percent. Restaurants, in another strong signal of consumer strength, rose an outsized 0.7 percent following June’s 0.5 percent gain. These are very strong gains for this component. Excluding both vehicles and gasoline, retail sales rose 0.4 percent, again another solid reading.

Strength in both vehicles and restaurants point to the health of the US consumer and will likely give the hawks the courage, despite all the troubles in China, to push for a rate increase at the September FOMC.

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Tough times for department store sales continue, which explains some of the weakness in construction:

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‘Some’ deterioration:

Jobless Claims
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‘Some’ deterioration for Fed hopes of higher inflation. It’s been failing to hit its target for longer than I can remember…

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Excess inventory building in June helps Q2 GDP but the likely subsequent production cuts will hurt Q3. The now persistently too high inventory to sales ratio is overdue for a correction:

United States : Business Inventories
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Highlights
Inventories rose relative to sales in June but the news isn’t that bad given that the build was centered in autos. Business inventories rose 0.8 percent in June which was well ahead of a 0.2 percent rise in sales. The mismatch lifts the inventory-to-sales ratio to 1.37 from 1.36.

But retail inventories at auto dealers were to blame, up 1.4 percent in June and contributing to a 0.7 percent rise for the retail component. Inventories at manufacturers and wholesalers, the two other components of the business inventory report, also rose, up 0.6 and 0.9 percent respectively.

Inventories are on the heavy side but the concentration in autos is welcome given how strong sales are, evidenced by the 1.4 percent surge for the motor vehicle component of the July retail sales report released earlier this morning. Note that this report, along with the retail sales report, are likely to lift revision estimates for second-quarter GDP.

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Global weakness continues:

Japan : Machine Orders
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Highlights
June seasonally adjusted machine orders (excluding volatile items) declined for the first time since February. They dropped a larger than anticipated 7.9 percent on the month and were up 14.7 percent on the year. Core orders were up 16.6 percent based on the original series. This was in contrast to expectations of a 17.5 percent increase.

Core machine orders are considered a proxy for private capital expenditures. The downward move followed a 0.6 percent gain a month before. The government repeated its assessment that machine orders would advance in the third quarter.

Nonmanufacturing orders excluding volatile items were up 5.0 percent while manufacturing orders dropped 14.0 percent. All orders including volatile items dropped 6.2 percent on the month. Manufacturing orders likely softened on continued weaker export demand while the sluggish domestic economy weighs on nonmanufacturers.”

Another weak looking index:

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And I’d call this ‘some’ deterioration in the ‘labor market’. Looks like it was weakening before the 2014 oil capex boom supported it, and then has fallen off since the oil price collapse:

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This is to the point I’ve been making that surveys are one man one vote, not one dollar one vote, so optimism remained high even as retail sales, for example, were fading. Yes, a lot more people saved $10 per week on gas but an equal amount of income was reduced for sellers of oil, including those earning royalties and holding leases, and investors of all sorts, and seems the spending cuts on domestic product by that group outweighed the additional spending from pump savings.

Fueled by low pump prices, U.S. motorists to drive more in August – survey

By Jarrett Renshaw

August 11 (Reuters)

U.S. motorists are paying an average of $2.58 per gallon, nearly a dollar less than a year ago, according to AAA, the nation’s largest motorist advocacy group. And a quarter of respondents expected prices to continue to decline, up from 10 percent a month ago.

The survey found that nearly 80 percent of people say gas prices influence how they feel about the economy. And with gas prices down nearly $1 from a year ago, U.S. motorists are feeling positive about the direction of the economy, the survey found.

“There is good news for retailers as consumer optimism picks up during peak vacation season,” said NACS Vice President of Strategic Industry Initiatives Jeff Lenard.

MTG Purchase Apps, EU Industrial Production, China Industrial Production, JOLTS

Yes, purchase apps are up 20% vs last year, but you can see from the chart the
number of applications has leveled off and declined a bit more recently this year, and remains
at depressed levels:

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The slump in industrial production is global:

European Union : Industrial Production
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Highlights
Industrial production declined more than expected in June. Following a decline of 0.2 percent on the month, output excluding construction dropped 0.4 percent. Annual workday adjusted growth was 1.2 percent, down from 1.6 percent last time.

Durable consumer goods led the monthly declines, falling by2.0 percent from the previous month, followed by capital goods (down 1.8 percent) and intermediate goods (down 0.5 percent). Energy production (up 3.2 percent) was the sole sub-category to record a monthly advance.

Regionally, the biggest declines were seen in Portugal (down 2.1 percent) and Ireland (down 2.0 percent) while the Netherlands (up 3.9 percent) and Slovakia (up 1.4 percent) led to the upside. In the larger countries, Germany’s industrial output contracted 1.4 percent on the month while output in France also weakened 0.1 percent.

The disappointing figures will likely impact analysts’ expectations for Eurostat’s flash estimate of second quarter Eurozone GDP, which is scheduled for Friday.

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And the latest from China was below expectations as the downtrend continues:

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This turned a bit lower which ordinarily doesn’t mean much, but when the Fed is looking for ‘some’ improvement this is not that:

United States : JOLTS
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Highlights
Job openings contracted in June to 5.249 million from 5.357 million in May. The decline likely reflects, at least in part, new hiring as the hiring rate rose 1 tenth to 3.7 percent. But layoffs point to weakness in labor demand with the layoff rate up 1 tenth to 1.3 percent. The quits rate was unchanged at 1.9 percent. Job growth has been no better than moderate this year and this report, which is mixed, doesn’t point to acceleration.

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China, Germany, Productivity, NFIB Index, Redbook, Wholesale Trade


A few thoughts:

China’s US Tsy holding had been falling perhaps because they were selling $ to buy Yuan to keep it within in the prior band.

Pretty much all exporting nation’s currencies have already weakened vs the $, including the Yen and Euro, so this is a bit of a ‘catch up.’

In a weakening global economy from a lack of demand (sales) and ‘western educated, monetarist, export led growth’ kids now in charge globally, the path of least resistance is a global race to the bottom to be ‘competitive’. And the alternative to currency depreciation, domestic wage cuts, tends to be less politically attractive, as the EU continues to demonstrate.

The tool for currency depreciation is intervention in the FX markets, as China just did, after they tried ‘monetary easing’ which failed, of course. Japan did it via giving the nod to their pension funds and insurance companies to buy unswapped FX denominated securities, after they tried ‘monetary easing’ as well.

The Euro zone did it by frightening China and other CB’s and global and domestic portfolio managers into selling their Euro reserves, by playing on their inflationary fears of ‘monetary easing’-negative rates and QE- they learned in school.

The US used only ‘monetary easing’ and not any form of direct intervention, and so the $ remains strong vs all the rest.

I expect the Euro to now move ever higher until its trade surplus goes away, as global fears of an inflationary currency collapse are reversed and Euro buying resumes as part of global export strategies to export to the Euro zone. And, like the US, the EU won’t use direct intervention, just more ‘monetary easing’.

Ironically, ‘monetary easing’ is in fact ‘fiscal tightening’ as, with govts net payers of interest, it works to remove interest income from the global economy. So the more they do the worse it gets.

‘No matter how much I cut off it’s still too short’ said the hairdresser to the client…

The devaluations shift income from workers who see their purchasing power go down, to exporters who see their margins increase.
To the extent exporters then reduce prices and those price reductions increase their volume of exports, output increases, as does domestic employment. But if wages then go up, the ‘competitiveness’ gained by the devaluation is lost, etc., so that’s not meant to happen.

Also, the additional export volumes are likewise reductions in exports of other nations, who, having been educated at the same elite schools, respond with devaluations of their own, etc. etc. in a global ‘race to the bottom’ for real wages. Hence China letting their currency depreciate rather than spend their $ reserves supporting it.

The elite schools they all went to contrive models that show you can leave national deficit spending at 0, and use ‘monetary policy’ to drive investment and net exports that ‘offset’ domestic savings. It doesn’t work, of course, but they all believe it and keep at it even as it all falls apart around them.

But as long as the US and EU don’t have use of the tools for currency depreciation, the rest of the world can increase it’s exports to these regions via currency depreciation to lower their $ and Euro export prices, all of which is a contractionary/deflationary bias for the US and EU.

Of further irony is that the ‘right’ policy response for the US and EU would be a fiscal adjustment -tax cut or spending increase- large enough to sustain high enough levels of domestic spending for full employment. Unfortunately, that’s not what they learned in school…

The drop in expectations is ominous, particularly as the euro firms:

Germany : ZEW Survey
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Highlights
ZEW’s August survey was mixed with a slightly more optimistic assessment of the current state of the economy contrasting with a fifth consecutive decline in expectations.

The current conditions gauge was up 1.8 points at 65.7, a 3-month high. However, expectations dipped a further 4.7 points to 25.0, their lowest mark since November 2014.


The drop in unit labor costs and downward revision of the prior increase gives the Fed cause to hold off on rate hike aspirations:

United States : Productivity and Costs
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Highlights
A bounce back for output gave first-quarter productivity a lift, up a quarter-to-quarter 1.3 percent vs a revised decline of 1.1 percent in the first quarter. The bounce in output also held down unit labor costs which rose 0.5 percent vs 2.3 percent in the first quarter.

Output in the second quarter rose 2.8 percent vs a depressed 0.5 percent in the first quarter. Compensation rose 1.8 percent, up from 1.1 percent in the first quarter, while hours worked were little changed, up 1.5 percent vs 1.6 in the first quarter.

Looking at year-on-year rates, growth in productivity is very slight at only plus 0.3 percent while costs do show some pressure, up 2.1 percent in a reading, along with the rise in compensation, that will be welcome by Federal Reserve officials who are hoping that gains in wages will help offset weakness in commodity costs and help give inflation a needed boost.


Up a touch but the trend remains negative:

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Redbook retail sales report still bumping along the bottom:

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A decline in sales growth and rise in inventories is yet another negative:

United States : Wholesale Trade
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Highlights
A build in auto inventories as well as for machinery drove wholesale inventories up a much higher-than-expected 0.9 percent in June. Sales at the wholesale level rose only 0.1 percent in the month, in turn driving the stock-to-sales ratio up 1 notch to a less-than-lean 1.30. This ratio was at 1.19 in June last year.

Fed Labor Indicator, NY Fed Consumer Expectations, Lumber Prices, China Trade

This Fed indicator, whatever it means, just went down some:

Labor Market Conditions Index
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Highlights
If the Fed relied exclusively on its labor market conditions index, no one would be in much hurry for the rate hike. The index for July came in slightly below expectations at 1.1 vs a revised 1.4 in June. The index, based on a broad set of 19 components, has been hovering near zero all year, well off its 5.4 average of last year. Unemployment may be down but hiring has been soft and the 2015 trend for this index is the weakest of the recovery.

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Remember when this was taken as an indication of falling demand for housing?

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Another indication of a weaker global economy, and a good reason for China to allocate more reserves to Euro:

China : Merchandise Trade Balance
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Highlights
China’s trade figures shocked analysts. July’s unadjusted merchandise trade surplus was $43.0 billion, down from $45.7 billion in June. Exports plunged 8.3 percent against expectations of a 3.0 percent drop. Imports sank 8.1 percent against expectations of a 8 percent drop. The year to date trade balance was $305.2 billion compared with $212.9 billion in the same period a year ago. For the seven months through July, exports were down 0.8 percent on the year while imports dropped 14.6 percent. On a seasonally adjusted basis, exports slid 3.4 percent on the month after increasing 1.5 percent in June while imports declined 3.8 percent after jumping 6.9 percent in June. On the year, seasonally adjusted exports dropped 7.9 percent while imports were 8.4 percent lower.

China’s top government body, the State Council, said last month that it would give high priority to the nation’s trade sector, providing tax breaks and cutting red tape while reducing import duties. The government has also accelerated a range of infrastructure projects to boost demand at home. Meanwhile, the central bank has cut interest rates four times since November in an effort to help struggling domestic companies.

Adding to the problems for exporters is the relatively strong Chinese currency, which has held steady against a buoyant dollar. That has carried the yuan more than 10% higher against the Euro, providing a drag on exports to some key European markets.