Shocks and Surprises, Week Ending December 9th

This was the week that we got a close look at most of the world's industrial sectors. We've had monthly trade data from China (and Taiwan), from the US, and from Germany (and Britain). And we've had industrial output data from much of Europe, China, as well as various readings of factory orders.

When we extract the detail from this mass of data, we confront a paradox:

• on the one hand there's a very sharp contraction in the trade in intermediate goods, which bodes ill for the short-term industrial output,
• on the other hand, the demand for capital goods is, so far, undiminished, which suggests that capex plans, and therefore expectations of how the industrial cycle will develop over the medium and longer term, are unchanged, and rather bullish.

As a generalization, industry worldwide is bracing itself for a short-term demand shock, but still tooling up aggressively for expansion.

We shall start with the US, where both exports and imports fell MoM in October (by 0.8% and 1.0% respectively) , but the trade deficit (US$43.5bn) was much as expected. It's the details that matter: exports of capital goods rose 1.1%, but industrial supplies fell 3%. And it was the same story for imports: capital goods rose 2.7%, but industrial supplies fell 5.5%.

And it wasn't just happening in the US. Germany's factory orders, which 5.2% MoM – massively higher than anyone expected – mainly because orders for capital goods jumped 7.8% MoM, whilst orders for intermediates rose only 2%

We had negative industrial production shocks from the UK (down 1.7% YoY) and Spain (down 4% YoY), and both each case, what was doing the damage was a collapse in production of intermediate goods: in the UK machinery rose 2.5% MoM, but intermediates fell 1.1%. In Spain, output of capital goods fell 1.3% YoY, but intermediates fell 5.5% YoY. Italy's industrial production fell 4.2% YoY, though the pattern was less clear (capital goods fell 1.5%, intermediates fell only 0.2%).

In Asia, we had two confirmations of this pattern. First, in Taiwan, which produced negative shocks for both exports (up only 1.3% YoY), and imports (down 10.4% YoY), we saw a sharp fall in imports of of minerals (down 6.1% YoY), and chemicals (down 18.5%).

Second, at first glance the 6.9% MoM fall in machinery orders from Japan, which was well below the level of expectations, immediately suggests a broad fall in demand for capital goods. But in fact, the deterioration was confined to domestic orders, and in particular demand from non-manufacturers (down 7.3% MoM). In fact, export orders for Japan's machinery were up 1.6% MoM – a bounce-back from a very weak September sequential.

Beyond that, the data offered no conclusive evidence of a sharp slowdown in global trade. True, Germany's trade data was worse than expected, with exports down 3.6% MoM, and imports down 1% MoM. But it's failing demand from the the Eurozone that's pulling down the numbers: exports to the eurozone fell 0.4% YoY, but rose 3.1% YoY to other Europeans, and 8.3% elsewhere. And it's the same story with imports: imports from the Eurozone rose 6.1% YoY, but 10.2% from elsewhere in Europe, and 10.9% YoY from elsewhere.

And in China, readings for both exports (up 13.8% YoY) and imports (up 22.1% YoY) in November were just about within the (extremely optimistic) range of expectations. In MoM terms, both exports and imports were higher by a full standard deviation or more from what one would expect from seasonalized historic trends. I count this, then as a significant surprise. The surprising strength in exports was built on sequential strength in exports to the US (up 17% YoY) and Asean (up 21.5%), whilst exports to the EU, HK, and Japan were merely in-line with trends.

The second major data event of the week was, of course, the monthly raft of news from China. This provided more pleasant surprises than nasty shocks, and isn't likely to persuade Chinese authorities to alter whatever plans they already had in mind. In addition to the surprisingly strong trade numbers, retail sales rose 17.3% YoY, confounding expectations by some distance. At the same time, CPI inflation surprised by retreating to 4.2% YoY (from 5.5% in October), and PPI fell to 2.7% YoY (from 5% ) to its lowest reading since December 2009. The only negative shock in the data was the retreat in urban fixed asset investment, which slowed to 24.5% in the year to November, from 24.9% in the year to October. Industrial production growth slowed to 12.4% YoY (from 13.2% in October) – a slowdown in YoY which was no surprise, since it reflected a MoM change entirely in line with historic seasonal patterns.