Sunday, 2 October 2011

Shocks and Surprises, Week Ending October 1

With most of the week spent travelling back and forth to Istanbul, this week's shocks and surprises will be lighter than usual. (Also, I fear this will be slightly longer than usual. Oscar Wilde got it right, when he wrote: 'I'm very pressed for time, so this will be a long letter. . . . ') However, four strands stand out – one for each major economic geography - two of which (for the US and Japan)  suggests that consensus expectations will need to be adjusted.

First, in the US, we've entered that phase of expectations adjustment where positive surprises are now comfortably outweighing negative shocks, and are coming in about as frequently as data which reflects the consensus. This week I was looking for modest positive surprises from the housing market. We did get one – pending home sales were up 13.1% YoY, which was just over double the YoY the market expected. However, actual new home sales were a disappointment because although the 2.3% MoM fall was well within the range of expectations, the data came larded with a 8.7% MoM fall in the mean and median prices achieved. If this is not revised away, then the stabilization of volumes is being achieved only by slashing prices – ie, the market is not yet clearing.

Rather, most of the positive surprises came from the industrial and 'real' economy: the Chicago PMI and the Kansas City Fed Manufacturing Activity Index both came in far higher than the range of market expectations, both featuring jumps in output, new orders and (importantly) employment indicators. We also had a very strong weekly initial unemployment claims report, with new claims falling to the lowest readings since March this year. There's a claim that the strength of this report is owing to a 'slight mis-timing' of the seasonal adjustment process – but whether this mistiming means the past was better than it looked, or the future will be weaker than it appears, is not yet clear.

The second obvious story-strand this week was the broadening of the evidence that Japan's recovery is stalling, most probably in response to the belated J-curve impact of the strong yen. We'd noticed this last week in Japan's trade data, and we got confirmation this week from data on industrial production (up just 0.8%, vs a consensus of 1.5%), and the Markit/JMMA Manufacturing PMI which came in below 50 for the first time since April as export orders fell for the seventh month in succession. Moreover, retail sales also fell 2.6% MoM, which was far worse than the 0.8% MoM fall expected. We should expect targets for Japan's recovery for the rest of this year and early 2012 to be lowered in the coming days/weeks.

The third story-strand is the achievement of a consensus in and around China which is only mildly miserable. This has been a heavy week for second-string China data, and data from closely-associated economies in NE Asia – but a week which has yielded very few shocks or surprises. In China itself, there was no surprise from industrial profits data, from its Leading Index, from its own Manufacturing PMI, from the HSBC/Markit manufacturing PMI, or from the MNI Business Conditions survey. Outside China, Taiwan's clutch of leading and coincident indicators came in much as expected, as did its monetary data. Over in Hong Kong and South Korea, trade data barely deflected the dial. All these data confirm a softening which remains surprisingly unthreatening. We even got two semi-surprises in the form of better-than-expected industrial production numbers from Singapore and Korea. In both cases, circumstances suggest we don't take them too seriously.

The fourth strand, of course, is Europe. And, quite strangely, we're in a period where the consensus is alternately too cautious, then too optimistic. It is a land, in other words, where the economists are all over the shop. This week, economists proved themselves unrealistically optimistic when it came to French consumer spending and German retail sales, and almost all pan-European confidence indicators reflected a pessimism far deeper than economists had expected. And yet, within this darkness there were also unexpected shafts of light: German unemployment data remains far stronger than expected; Eurozone broad money is growing faster than anyone expected (as is inflation, which, at 3% is the highest since pre-crisis 2008), and even UK consumer confidence appears to have recovered its equilibrium from August's shocks rather sooner than expected.

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