Monday, 19 March 2012

Shocks and Surprises, Week Ending March 18th

This was a week of incremental change only, in which the most consequential data-point was probably the European trade balance for January, in which the non-seasonally adjusted deficit of Eu7.6bn was more than double the Eu 3bn expected. The important point about this was the resilience of Europe's import demand: although imports rose only 3.6% YoY (vs 0.9% in December), this was generated by a sequential change which was 1.1SDs above seasonalized historic trends. In seasonally adjusted terms, imports rose 2.4% MoM. In other words, the expected collapse of European import demand isn't yet visible. Unless it surfaces over the coming couple of months, people will be revising up numbers for NE Asian exports and growth.

Two positive surprises out of Asia this week perhaps prefigured/echoed this:
  • Singapore's non-oil domestic exports jumped 30.5% YoY in February, with electronics exports finally beginning to recover, up 23.3% YoY. One contributing factor to this was that exports to the EU were up 11.9% YoY (vs a fall of 14.5% YoY the previous month).
  • Taiwan's noticeably strong Manpower survey for 2Q, which recovered to a net positive reading of 36%, which was 1.1 SDs above the series' long-term average, and a sequential reading 1.3SDs above the long term average sequential change. The data from Taiwan's electronics-intensive industrial economy has been in decline since the middle of last year, so this improvement in the labour market environment was genuinely unexpected.
A third indicator gets an honourable mention in this theme: the 20.1% MoM jump in export orders received by Japan's machinery industry in January (up from a rise of just 5.6% in December).
This was a week with no significant shocks or surprises in the US data: we are used to labour market data being marginally better than expected and industrial economy indicators stuttering but generally improving. Industrial production came in flat MoM, against an expected 0.4% MoM rise, but the shock-value of this disappointment was moderated by a revision upwards in the previous month's data by . . . 0.4%. In addition, the US$124.1bn current account deficit for 4Q11 was roughly US$9bn bigger than expected, but is largely explained by the way the strength of the dollar (up 1.7% QoQ vs the SDR) deflates net international income receipts.

Perhaps marginally more worrying was a modest but unexpected retreat in economic confidence captured both by the University of Michigan reading (74.3 in March vs an expected 76.0 and 75.3 in Feb) and also in the IBD/TIPP Economic Optimism Index (47.5 in March vs 49.4 in Feb and 50 expected). These two should perhaps be viewed as a warning shot across the bows of the upturn, with doubts emerging about the economic outlook. At the moment, this message is neither coherent, nor unchallenged (the Bloomberg Consumer Comfort index, for example, came in stronger than expected this week). But it is worth watching.

Apart from the surprising strength of imports, the main feature of the week was the cheery optimism of German investors, as recorded in the Zew survey's of economic expectations both of Germany and the Eurozone. Whilst current situation readings rose only fractionally, there were very sharp jumps in expectations of the future (from +5.4 to +22.3 for Germany, and from -8.1 to +11 for the Eurozone). This is no doubt a reaction to the successful delay/defusing of the Greek sovereign debt crisis – in which the Eurozone has successfully dawdled through the crisis whilst the banks have quietly passed about US$37bn of their May 2010 US$68bn holdings of Greek debt to the Eurozone taxpayer, and thus cut their possible losses by at least 45%.

Against that, we had news that Eurozone industrial output grew only 0.2% MoM in Jan, having contracted 1.1% MoM the previous month. And, of course, output growth is concentrated in Germany, up 1.5% MoM, whilst France rose only 0.4%, Italy fell 2.5% and Spain fell 0.2%.

Finally, although this was probably China's most dramatic week politically since 1989, with the fall of Bo Xilai coupled with more public agonising from Premier Wen Jiabao about the absolute necessity of political reform to accompany the next, crucial, wave of economic and financial reform, we can only record that the drama didn't extend to the economic data. Foreign direct investment was recorded as falling 0.9% YoY in February (vs an expected rise of 14.6% YoY), and the Manpower employment outlook survey showed no significant overall improvement. It is just possible, however, that the 70 cities survey of real estate prices released over the weekend began to sketch out a bottom in the market.   

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