Sunday, 13 November 2011

Shocks and Surprises, Week Ending Nov 11th

The pattern this week was quite clear: in both the US and China, quite heavy weeks for data produced plenty of positive surprises, and only a couple of negative shocks. In Europe, however, this was the week when monthly economic data finally began to slow fast in response to the exceptional financial and political crisis.

This raises a question which I suspect is going to be much-analysed over the coming weeks and months: can a combination of a slowly recovering US, and a slowing but financial secure Asia de-couple from a Eurozone rout?

We might as well get Europe's misery out of the way first. The following results were all far worse that the continent's economists had expected:
  • Germany's industrial output fell 2.7%
  • France's industrial output fell 1.7% MoM
  • Italy's industrial output fell 4.8% MoM
  • Germany's imports fell 0.8% MoM
  • Eurozone retail sales fell 0.7% MoM, despite Germany rising 0.2% and France 2%.

Germany's trade data still had one positive surprise up its sleeve – exports rose 0.9% MoM, led by a 11.5% YoY rise in exports to the Eurozone. Here's something worth remembering about Germany's trade data for coming months: 40% of Germany's exports go to the Eurozone, but only 14.3% of its trade surplus is generated by trade with the Eurozone (data for Jan-Sept). The moral is that we could quite easily expect that as Eurozone demand shrivels in the coming months, Germany's export growth slows noticeably more sharply than its trade surplus dwindles.

If one is embroiled in the ongoing disaster in the Eurozone, it is sometimes difficult to recognize that the US and Asia is simply not in the same situation – rather, economic data continues to surprise economists by showing the US substandard recovery ever more obviously intact, and China's slowdown stubbornly not turning into a hard landing.

In previous work, I've noticed how in important measurable respects US household deleveraging is approaching a level at which some respite should be expected. However, "continued and sustained debt deleveraging by the US householder is based not on the discomfort of the current situation, but fears about deteriorating prospects. Jobs and job safety, in other words. Over the last few weeks, labour market data and confidence indicators have both surprised positively. T'his week, for example, the JOLTs Job Openings surprised with a jump of 7.2% MoM to the best reach since August 2008, whilst the weekly initial unemployment claims also came in, once again, under the range of expectations. Much more positively surprising, however, were two sharp improvements in confidence indexes. First, the NFIB Small Business Optimism index gave its best reading since June, and later the University of Michigan Consumer Confidence Index held a similar surprise. In both cases what's improved are not assessments of what the US economy is currently experiencing, but rather expectations about what's to come.

In China, a lot of October's data landed around consensus: exports up 15.9% YoY; industrial production up 13.2%; retail sales up 17%; industrial productionM2 up 12.9%; CPI up 5.5%, HK GDP up 0.1% QoQ – none of this surprised.

However, a second raft of data turned out to be stronger than the range of analysts' expectations:
  • China's imports, which rose 28.7%;
  • China's Urban Fixed Asset Investment, which rose 24.9%;
  • Taiwanese trade (exports rose 11.7% YoY, imports rose 11.7% - both easily stronger than expected);
  • China's new bank lending, which rose to 586.8bn yuan.

Finally, there's one other trend which opened up fairly clearly this week: in response to a slowing economy, pricing pressures are falling fast. This is most welcome in China, where the PPI for October fell to 5% YoY, which means PPI inflation is now running below CPI (which came in at 5.5%): this is very rare in China, having been seen only in early 2001 and late 2008. It surely heralds further and probably sharper falls in CPI in the next few months. Something similar was seen in Japan, where Domestic Corporate Goods PI fell to 1.7% YoY (from 2.5% in September), on the back of raw materials and intermediates falling 0.9% MoM, and final goods falling 0.2%. This fall in Asian producer prices also showed up on the other side of the Pacific, where US import prices fell 0.6% MoM, allowing the YoY to retreat to 11% YoY – which was 50bps below the range of expectations.

At the moment, this sign of price weakness is almost wholly benign – neither Asia nor the US is in imminent danger of deflation. Meanwhile, over in Europe, price pressures are doing nothing unexpected: German WPI, French CPI and UK PPI all touched down in their expected landing zone.

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