Sunday, 4 December 2011

Shocks and Surprises, Week Ending December 2nd

  • Labour, housing, confidence all surprising positively in the US;
  • Sharp monetary slowdown finally shows up in the Eurozone;
  • Bad PMIs for China, but is this shocking? Broader NE Asia dataflow suggests ambivalence;
  • Japan's capex crumbles and unemployment soars, but production, retail sales and wages surprise positively.

A series of positive surprises in the US from labour and housing markets, and also from consumer confidence, suggests we can expect some upwards revision of economists' growth forecasts for 4Q11 and 1Q 12 (currently consensus stands at 2.3% and 1.9% respectively). The biggest headline was the completely unexpected fall in the unemployment ratio in November from 9% to 8.6%. This major surprise was due entirely to the fact that the rate of firing has fallen sharply (from 5.2% to 4.9%), whilst the ratios for job leavers, for re-entrants and for new hires were all unchanged. We'd had a hint that numbers might be stronger than expected earlier in the week, when the ADP survey sprang a similar surprise, reporting a rise of 206,000 during November, very nearly double the rise in October, and the strongest reading since December 2010.

The news from housing markets remains choppy, but we have reached the stage where the weight of surprisingly good news is beginning to outweigh the shocking bad stuff. This week, for example, discovered a 10.4% MoM jump in pending home sales (ie, sales where the contract has been signed but not completed). This was the strongest reading since November 2010, and completely unexpected: sales in the Midwest popped 24.1% MoM, and the Northeast (the most depressed market) jumped 17.7%. But whilst volumes may be in remission, it's still not clear what's happening to pricing: the US House Price index showed a rise of 0.9% (which no economist had expected), but the S&P Case Shiller 20 Cities price index showed a fall of 3.6% YoY (which was even worse than economists had forecast).

Finally in the US, consumer confidence also appears to be rebounding: with the index for November rising to 56, from 40.9 in the previous month. This was the most cheerful assessment for five months, reflecting sharp improvements in the view of both the current and likely future economic situation.

The picture I've painted here is quite brightly positive. But of course, the week's news washed up a shore-drift of consensus-confirming and  minor negative data shocks. Remember, I'm concentrating here only on the data which really stood out.

And for that reason, when we shift to the Eurozone, there's a swathe of data which tells a story of an economy under siege: labour market indicators, business climate and confidence surveys , PMIs for the Eurozone, for Germany and France individually, consumer spending indicators for France, industrial sales for the UK: they all consistently paint a picture of the European economy slowing fast. But very few of them stand out as being exceptionally better or worse than we had expected. But two readings did stand out this week.

First, Germany's retail sales, excluding autos, were far stronger than expected, rising 0.7% MoM, with exceptionally strong spending on clothes/shoes (up 7.8% MoM), and autos (up 3.8%). Should we really be surprised that the German consumer remains in good health? After all, though financial catastrophe may stalk southern Europe and threatened the financial architecture of the continent, Germany's unemployment ratio in November fell to 6.9% from a previous 7%.

Second, though, and probably far more important, the European Central Bank reported – for the first time during the ongoing crisis – really sharp slowdowns in monetary aggregates during October. M2 slowed from 2.5% YoY in September to 2% YoY in October, implying a sequential slowdown 1.75 SDs below seasonalized historic trends; M3 growth slowed from 3% YoY to 2.6% YoY, implying a slowdown of 1.8 SDs below seasonalized historic trends. The problem here is that we also know that Eurozone monetary velocity is absolutely flat. By implication, nominal GDP growth in the Eurozone must have very nearly stopped by now. There is a message for the ECB here: 'Sie mussen Zinssenkung'. (It's the only language they understand.)

China's contribution to the global central-bank effort to forestall the collapse of Eurozone banks was for the People's Bank of China to cut its reserve requirement ratio on China's banks by 50bps to 21% (for large banks). This was announced two hours before the rest of the world's major central banks cut 50bps from dollar-funding costs. The slight asynchronicity was enough to feed speculation that PBOC was reacting to the deterioration in China's own economic data. The focus was on China's Manufacturing PMI for November, which fell to 49 from 50.4 (which was worse than the range of expectations) and the HSBC/Markit Manufacturing PMI, which fell to 47.7 from 51. This was joined on Saturday by a sharp fall in China's Non-manufacturing PMI to 49.7 from 57.7. In short, the surveys tells us that China is now slowing, and more sharply in November than in October.

But is this actually a shock? I ask because the week brought a mass of hard data (ie, non-survey data) from the rest of NE Asia, almost all of which came in as expected: South Korean exports and industrial production and service industry output, Taiwan leading and coincident indexes (and Taiwan's Manufacturing PMI for that matter). In addition, Hong Kong's retail sales surprised on the upside in both value and volume measures (up 23.1% YOY and 15% YoY respectively), as did South Korea's trade surplus (thanks to strong exports, primarily to the US).

Adding Japan to the mix extends the feeling that the data on NE Asian growth is no worse than ambivalent. This last week brought upside surprises on retail sales (up 1.9% YoY), on industrial production (up 2.4% MoM, mainly thanks to rising output of transport equipment, and machinery); and even cash earnings (up 0.1% YoY). On the other hand, we also had two negative shocks. First, capital spending fell 9.8% YoY in 3Q: this is best seen as further delayed and intensified J-curve effect from a sharper revaluation of the yen even than followed the Plaza Accord in the late 1980s. Most likely Japan's capex loss is likely to be China's FDI gain. Second, the unemployment ratio jumped unexpectedly from 4.1% to 4.5% (even as wages surprised on the upside). This is a mirror image of what we saw this week in the US, when unemployment fell, but so did wages.  

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