Saturday, 17 September 2011

Shocks and Surprises, Week Ending September 17

Summing the shocks and surprises this week is pretty easy: the financial world may be teetering on the brink, but industrial sectors around the world are holding firm, even as developed world trade and current account balances continue to improve. The world doesn't need to downgrade its expectations of the US, Japan's recovery is stabilizing, China isn't crashing, and we've stopped worrying about inflation threats for the time being.

So all we need to worry about is the financial and political implosion of Europe. For neurotics, that's plenty.

There were few shocks or surprises out of the US this week, as bulk of the major indicators of the real economy arrived in line with the depressed consensus: industrial production (up 0.2% MoM), capacity utilization (77.4%), the Phily Fed survey (-17.5), business inventories (up 0.4%), retail sales (flat), and three confidence indicators (the U of Michigan, the Bloomberg consumer comfort index, and the NFIB Small Business Optimism Index).

What shocks and surprises there were therefore made little impact on markets, and are unlikely to demand much of a trimming of views from the Street. The Empire State manufacturing index declined very slightly again, to minus 8.8, but the details were equivocal, with a sharp fall in shipments offset by much better news on unfilled orders, for example. Probably the worst news continues to come from the labour market, with both initial and continuing claims rising beyond the range of expectations. But there were similarly marginal nice surprises, from the current account deficit , and from the IBD/TIPP economic optimism index, both of which printed slightly better than consensus expected.

There are obviously no shortage of political and financial shocks and surprises in the Eurozone this week, but in contrast to this, the economic and industrial data provided something of a refuge. As with the US, the industrial economy is holding up reasonably well, with eurozone industrial production up 1% MoM – mainly on the back of Germany (up 4.1%) and capital goods (up 3%). Germany's still rising output offset falls of 1.7% MoM from both Spain and Italy. On the fringes of the eurozone, UK average weekly earnings rose faster than expected (by 2.8% YoY), and this allowed retail sales to fall no more than the depressed consensus expected (0.1% MoM).

Again echoing the US experience, external balances are improving. The US current account deficit continues to shrink slightly faster than expected, and the Eurozone's trade balance surged into a surplus which, for some reason I find statistically inexplicable, sprang a surprise on the posse of Euro-economists detailed to get this right.

But economists in stabilizing Japan seem to have found their range, where industrial output, capacity utilization, machine tool orders, business confidence surveys and even Tokyo condo sales all managed to come and go without disturbing the consensus or the markets.

China's monthly data tapestry was woven mostly over last weekend, and we remarked last week that the trade outcome for August was far better than expected, with exports up 24.5% YoY and imports up 30.2% YoY. Around the rest of Asia this week brought faint echoes of this positive surprise, both in a rise in Korea's terms of trade (yes, you read it right, a rise in Korea's terms of trade), and a surprise 8.3% YoY jump in Singaporean non-oil domestic exports. Don't get too excited about that, since the surprise seems to have been generated by exports of ships – more representatively electronics exports fell 19.4%, and pharma was down 7.1%.

Back in China, the monetary data contained both surprises and shocks to balance each other out. The positive surprise came in the 548.5b yuan in new loans made in August – some 16b yuan above the range of expectations. But this was offset by a slowdown in M2 growth to 13.5% from 14.7% - below the range of expectations. China's M2 growth has swung quite wildly from June to August, the best explanation for which lies in the scramble for deposits in June – during which expiring wealth-management products were channelled very briefly into on-balance-sheet deposits. In July those deposits scarpered once again, and August's 0.9% MoM growth probably represents a return to the underlying seasonal patterns.

Finally, whilst central bankers around the world try to work out how high they need to build the buttress of printed money in order to keep the Euro-cathedral from collapsing under the weight of its own dogmas, they were at least not disturbed by any significant inflationary shocks this week: Eurozone CPI , US CPI, US PPI and US import prices, UK CPI and even Japanese corporate goods prices all behaved as expected.  

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