Lucky country’s luck is wearing thin

Inflation came in hot today.

Underlying inflation rose to 3.7% in the September quarter, well above the Reserve Bank of Australia’s forecast of 3.4%. That’s the RBA’s preferred gauge, which strips out the wildest price swings.

Money markets now put the odds of a rate rise on Melbourne Cup day at 87%. That would be the fifth increase, taking the cash rate to 4.85%.

In punting terms, a rate hike is now the $1.15 favourite.

That’s the risk everyone can see.

But a second one is brewing in China, and it’s showing up in the iron ore price.

Iron ore is looking ill

The iron ore price hit a two-year low of US$89.25 a tonne on Tuesday, down ~24% since May.

Source: Trading Economics

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The Chinese yuan denominated price is also now at a four-year low.

Just 6.9% of Chinese steelmakers were profitable at the end of September, according to industry data.

Why does this matter to you?

Iron ore is Australia’s biggest export, and China buys the lion’s share.

It’s the main profit engine for BHP, Rio Tinto and Fortescue, whose dividends land in millions of super accounts.

Donald Horne called Australia “the lucky country” in 1964.

He meant it as a warning, and it seems now a fair chunk of our luck since that period has been shovelled out of the Pilbara and shipped north.

China’s slow puncture

Prices around US$90 a tonne have usually marked a floor, as higher-cost mines cut back supply.

This time, new supply is arriving from the Simandou mine in Guinea, and the bad omens from inside China keep stacking up.

On Monday, Goldman Sachs downgraded its outlook for China’s property sector again.

Since the start of the year, new home starts are down 25% and land sales revenue has fallen 28%.

At its peak, property made up 30% of China’s economy, and Goldman expects that to halve to 15% this year.

Imagine a third of Australia’s economy coming from building homes, and that slice halving.

(Gosh, I wish we could build homes, or anything really, in this country).

Anyway, that’s the hole Beijing has been staring into for six years.

Meanwhile, China is flooding the world with cheap exports, EV cars especially.

Waiting for Beijing to blink

If China’s slowdown deepens into next year, our big iron ore producers could cop a nasty shock.

Share prices usually move well before earnings do.

But Beijing has a habit of reaching for the stimulus lever when growth wobbles.

So it’s not all bad news.

See the spike in late 2024 on the chart?

That followed Beijing’s September 2024 stimulus, when the price jumped about 20% in a matter of weeks.

Westpac’s economists expect Beijing to announce material stimulus in the next three to six months, aimed at resetting the property sector.

If that lands after a sharp sell-off, it could open a fresh buying window in certain commodities stocks.

Choppy seas ahead

Anyone who’s crossed Bass Strait on the Spirit of Tasmania knows the feeling in your stomach amid the moving vessel.

You grab something solid while walking and stay seated while waiting for calmer water.

With rates likely heading higher and China’s economy wavering, investors are likely in for a rough period.

So knowing when to hunker down, and when to head back on deck, matters more than ever.

This is where my colleague Charlie Ormond’s ATLAS system could help.

ATLAS is an AI engine that scores hundreds of small and mid-cap ASX stocks from 1 to 100 each day, based on how their share prices are behaving.

It also watches for money draining out of whole sectors.

Every stock ATLAS flags comes with its own exit line, which climbs as the share price rises.

If the price breaks below it, that’s your cue to take profits or cut your losses.

It will get some calls wrong, as every system does. ATLAS never places trades or goes near your account, so the final call stays with you.