Saturday, 3 September 2011

Shocks and Surprises, Week Ending September 2

Mostly the world took its cue from the US, where the shocks and surprises can be summarized as follows: during the first few days of the week,  a succession of measures tracking the industrial economy gave a series of modest and not-so-modest positive surprises (ISM PMI at 50.6). These were bolstered by surprisingly strong readings on personal spending (up 0.8% MoM) and factory orders (up 2.4% MoM), but were challenged by a series of shockingly bad readings on consumer confidence (from 59.5 to 44.5 in a single month!). Which did the market believe? Reluctantly, for the first three days it began to price-out some of the worst scenarios, perhaps on the basis that who, after all, could be expected to have retained their confidence during the final rounds of Debt-Limit Poker played during the first week of August?

All that was swept away on Friday by a set of US labour market data which were dark even by the standards of most economists’ worst projections (no rise in non-farm payrolls at all during August).  Personally, I suspect we will be revisiting that data and questioning the role of the seasonal adjustment process. However, for the time being, the lesson is very clear: it’s easier to believe that Shocks are not priced in, whilst pleasant Surprises probably might be. The wall of doubt is vertiginous.

Europe is following Wall Street’s cue, although with far less justification for optimism, given the combination of Europe’s debt problems (see this piece) and the audible ticking of the Euro Doomsday Machine. This week was entirely one-way traffic as far as Shocks and Surprises were concerned –  Eurozone PMIs and labour markets were far worse than expected, so were UK business readings.  Most worrying is the fact that Germany’s industry, built around its international trade in capital goods, is precisely exposed to just the sort of whiplash on capital spending which is an accelerating factor in all business cycle inflection points.

Asia is exposed to the West’s Shocks and Surprises at second hand, and at first glance the main news this week was the lack of negative shocks from China’s industrial sector. We had three separate readings on China’s industrial August, and all showed a modest uptick (within expectations), even though some of the lead indicators, such as new export orders, are deteriorating.

More worrying, perhaps, are signs from across the globe that input prices are once again rising: we saw this message coming from the US, from Europe, and from Asia, including China. This isn’t in the script for the second half of this year, and if it asserts itself, it will prove a complicating factor for Asian policy settings.  So far, the only confirmation of it in Asia has come from Korea, where a 5.3% YoY jump in CPI in August is the highest reading for three years, and was generated  rather worryingly not just by a jump in food prices, but also a 2.7% MoM jump in ‘misc’ goods and services. Well, there has to be a price for keeping your currency ridiculously low for ever to protect your exporters, I suppose. 

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