Shocks and Surprises, Week Ending March 25th

• Europe: Intensifying gloom from output surveys; surging optimism from confidence indicators
• Asia: Japan benefits from trade resilience; three China output surveys suggest moderate and lingering weakness
• US: Housing data initially shocks on the downside, but closer inspection lightens the mood

Europe: Singing in the Rain

We continue to have a clear split between data recording what's happening to output, and data recording levels of optimism. This last week, the monthly collection of PMIs for the Eurozone delivered a flurry of body-blows, as PMIs for the Eurozone, but also separately for Germany and France all came in below the range of expectations. The numbers themselves tells not merely of a contraction which has pushed the Eurozone into technical recession during 1Q, but worse, a contraction which is still intensifying. The disappointments encompassed the Eurozone manufacturing PMI (47.7 in March vs 49 in Feb), Eurozone services PMI (48.7 vs 48.8), the Eurozone composite PMI (48.7 vs 49.3), German manufacturing PMI (48.1 vs 50.2), German services PMI (51.8 vs 52.8) and French manufacturing PMI (47.6 vs 50). Italy produced a shock of its own, with industrial orders falling 7.4% MoM in January, reflecting a 7.6% MoM collapse in domestic orders.

German manufacturers are the single brightest hope to shorten and moderate the Eurozone's current recession. But, it was the German manufacturing PMI which was the most shocking, because the details recorded a fall in employment for the first time in two years, whilst input inflation accelerated to its highest since June 11. German manufacturers thus found themselves facing rising costs they could not pass one to customers, and which also left them unable to stimulate sales by discounting.

So it seems perverse that the week also brought a surprise recovery in European consumer confidence, to the best reading since April 11. But it is evidently no flash in the pan.

In France, the Business Confidence Indicator recovered beyond expectations to the highest level since November, based on a jump in export orders sentiment. In addition, in the UK, the CBI's survey of trends found optimism about pricing is far above expectations, and the best since June 11. This was not the first week that European optimism has proved surprisingly strong: in the previous week we saw Germany's Zew survey of economic expectations for both Germany and the Eurozone recover far beyond the range of expectations. And these were joined in the UK by the best reading since September of the Lloyds Employment Confidence survey.

At this stage, one can only read these jumps in European optimism as a relief reflex as the Eurozone backs a few steps away from catastrophic financial crisis. Who wouldn't be more cheerful in these circumstances. The proof of the pudding, however, is in the eating: and in this case, what really matters is whether the immediate financial relief translates into improved credit conditions and monetary conditions. The data for that arrives on Wednesday this week.

Asia: Don't Blame World Trade

Meanwhile, Asia continues to benefit from the surprising resilience of the world's trade cycle, even though China continues to struggle inconclusively with its own cyclical and (more difficult) structural issues. The resilience of the trade cycle was exemplified this week by a surprisingly good set of trade numbers from Japan for February, in which exports fell only 2.7% YoY (vs 9.3% in Jan and an expectation of 6.5%), thanks to a 11.9% YoY rise in exports to the US (which offset falls of 10.7% YoY to the EU and 13.9% to China). This export strength allowed Japan to record a small trade surplus for the first time since September.

Finally China. This week delivered three private surveys attempting to track current business conditions: the HSBC Manufacturing PMI Flash; the MNI March Business Sentiment Survey Flash, and the Conference Board Leading Economic Index. Whilst none of these provided any reason for early optimism, only the HSBC Manufacturing PMI Flash fell outside the range of expectations, declining to 48.1 in March from 49.6 in February. Most worryingly, all of the six subindexes came in below 50 (ie, recorded a contraction), and this contraction is new for output, employment and stocks of finished goods indexes. Not just the size of the overall decline, but also the uniformity of the details means this was a genuine shock.

In that light, it was natural to extend the shock to the MNI Business Sentiment Survey (down to 56.7 from 58.9) and the slowdown in the Leading Economic Index (up 0.8% MoM, after rising 1.5% MoM the previous month). Natural but wrong: although there are no consensus surveys for these two indicators, both these two surveys came in exactly in line with recent trends, and should not significantly accelerate a consensus on China which should be mildly gloomy (but is probably intensely gloomy).

US: Housing Market Wobbles

Main detail of the week was an unexpected deterioration in housing market data. This disappointment arrived in three tranches: first the NAHB Housing Market index reading for March was no better than flat; then the monthly house price index for January also came in flat, and with an additional sharp revision downwards for December (to 0.1% from 0.7%). Finally, new home sales for February fell to the lowest point since October 2011.

Yet this was not the all the housing market information delivered for the week: building permits for February came in higher than expected, with single family homes up 4.9% MoM, and housing starts and existing home sales both came in as expected.

So it's perhaps useful to look at the shocks a little more closely – particularly because the that the housing market will eventually clear is a major part of the belief in a sustained cyclical upturn. And the signals were less grim than initially appears. First, although the NAHB Housing Market Index disappointed, it didn't fall, but rather held steady at the most optimistic reading since 2007. Moreover, the details disclosed an improvement in future conditions, and a sharp jump in the regional reading for the Northeast (cyclically the most depressed regional housing market). Second, the drop in new home sales isn't quite what it seems, either: sales dropped 1.3% MoM, but the median prices jumped 8.3% MoM to the highest level since July 2011. What the numbers reflect is a drop-off in sales of houses priced under US$150,000, not a generalized deterioration in the market.