Saturday, 27 August 2011

Shocks and Surprises, Week Ending August 26

The whole point of Shocks and Surprises is to spot how the consensus is likely to change by tracking where current assumptions and forecasts are being proved wrong.

Judging from the last fortnight's Shocks and Surprises, it seems we may have got to the point where economists' assumptions (and by extension stockmarket pricing) are proving overly pessimistic. In my round-up last week I noticed that signals from the world's industrial economies were now more often surprising on the upside than shocking on the downside. The same was true this week, and particularly for Europe and the US – generally perceived as the most vulnerable parts of the world economy.

Take Europe: this last week gave us a rash of PMI readings for the Eurozone – readings which economists had by and large expected to show significant deterioration. Some did – France's manufacturing PMI, and Germany's services PMI, for example. But most simply didn't. Not only did the Eurozone Composite PMI, the Eurozone Services PMI, Germany's Manufacturing PMI and France's Services PMI turn out to be better than the range of surveyed expectations, but they almost all actually told a tale of market conditions which had improved during the month. The message was repeated outside the Eurozone, with British order books and consumer confidence readings beating both consensus and the range of expectations.

Something similar, but a little less dramatic, happened in the US, where durable goods orders jumped 4% MoM (and popped the S&P about 20 points) unexpectedly, where 2Q personal consumption growth was revised up from 0.1% QoQ to 0.4%, and where continuing unemployment insurance claims fell unexpectedly (a result obscured by a rise in initial claims generated by industrial disputes). On top of that, the Chicago Fed National Activity Index also came in far stronger than expected – though grazing the ceiling of the most optimistic expectations.

In all, then, the West produced 10 positive surprises, and only eight shocks. And the shocks weren't even difficult to predict – four of them stemmed from the wholesale collapse of German investor confidence tracked by the ZEW Survey. Frankly, ZEW need hardly have bothered: I could have told you that for free. (Indeed, I do.)

More worrying, and much more worth tracking, was the deterioration beyond expectations of Eurozone monetary aggregates. M3 rose only 2.0% YoY, vs an expectation of 2.2% and a range of expectation of 2.1% to 2.3%. Twenty basis points below expectations may not seem a big deal, but the details underlying it are horrible (repos up 20.1% YoY, money market institutions down 12.7%, private sector credit up only 1.9%). Moreover, as I explained here, Eurozone monetary velocity is flat on its back, so if Eurozone financial institutions no longer have the capital to buy or create financial assets, that strain will quickly show up in nominal GDP.

The economist in me worries about this a lot – so much so I'd be adding my weight to those consensus forecasts which are currently still proving too pessimistic.

If it has been a data-heavy week in the West, it's been data-light in Asia. Moreover, as far as China and NE Asia is concerned, there were few surprises. Almost all growth-related forecasts were about right: China MNI Business Conditions Survey, China HSBC Flash Manufacturing PMI , Taiwan IP, Taiwan commercial sales, leading/coincident indicators, Korea consumer confidence – all came in about as expected. That's the good news, the bad news is that the consensus expected stability or a modest continuing deterioration in conditions, and that's what happened.

Within that context, however, Hong Kong's trade data for July was a moderately unpleasant shock: not only did export growth of 9.3% YoY and import growth of 10.2% YoY undershoot expectations of 14.2% and 14.9% respectively (and the range of estimates too), but for both exports and imports, a MoM slowdown in the China-trade was to blame.

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