Monday, 9 April 2012

Shocks and Surprises, Week Ending April 8th

  • Japan's run of upside surprises continues with huge jump in car sales, break-out in Leading Indicators, and strong cash earnings. But Tankan shows no corporate Japan doesn't believe it: no investment follow-through is contemplated yet.
  • In China, official and HSBC/Markit PMIs for manufacturing sector contradict each other. HSBC's more gloomy assessment fits better with the available evidence, but this week will give us a clearer picture for March. In NE Asia, manufacturing PMIs for both Taiwan and Korea surprise on the upside, but March export data doesn't.
  • In Europe, UK extends its run of positive surprises, whilst consumer sentiment remains glum. In the Eurozone, retail and industrial sector data continues to deteriorate shockingly. But French consumer confidence is strangely buoyant and trade balance deteriorates.
  • US non-farm payrolls provided a shocking disappointment which throws the spotlight back on Ben Bernanke's recent policy thoughts.
Japan: Upswing with No Corporate Believers

Japan extended the run of positive surprises which we've noticed over the last couple of weeks (see last week's Shocks and Surprises). The positive signals from may be difficult to account for, but increasingly they're even more difficult to ignore. Or are they? This week, for example, we learned that vehicles sales jumped no less than 78.2% YoY in March. Since there's no survey taken to form consensus, it's easy both to miss the strength of this result, or – if it's noticed at all – dismiss it simply as reflecting the exceptionally easy base of comparison generated by the disasters of March 11, 2011 and their aftermath. But it was 12.3% higher than March 2010, 54.1% higher than March 09, 5.6% higher than March 08, 2.1% higher than March 07. And sequentially is was a full standard deviation above seasonalized historic trends. In other words, this was a fully-functioning surprise indication of domestic demand.

And it was supplemented by the most positive reading from the Leading Indicators Index since January 2008, a reading which, once again, was a full standard deviation higher than the average since 1990. Further, we had an unexpected rise of 0.7% YoY in cash earnings in February, despite a 17.7% YoY fall in bonus earnings.

Economists aren't the only ones not to fully recognize or react to the way signals from Japan are confounding expectations – corporate Japan isn't buying it either. We know this from unexpectedly dim readings from the quarterly Tankan survey of corporate attitudes: business confidence both for 2Q and for the outlook for the year disappointed mildly, without actually deteriorating QoQ. Far more disappointing is the reading that corporate Japan does not intend to raise capex at all this FY (started April 1). Right now, there's simply no follow-through to the signals of strengthening domestic demand.

China – Official and HSBC Manufacturing PMI both surprise – in different directions

The week for China and its neighbours in NE Asia (excluding Japan) was dominated by two sets of shocks and surprises. The first came from China, where we had a straight conflict between the HSBC/Markit reading of China's manufacturing PMI, and the official manufacturing PMI. HSBC's survey found a further contraction in March, led by the sharpest fall in new orders measured this year, to which manufacturers responded by cutting payrolls and purchasing activity. By contrast, the official manufacturing PMI discovered the best reading for a year, in which there were sharp rises in new orders and output,and more moderate rises in purchases and employment.

Both cannot be right, and the weight of corroborating evidence is clearly on the side of HSBC's more gloomy reading. This week will probably settle the dispute, since we will get data for trade, output and investment and retail sales for March.

Among China's Northeast Asian neighbours we've already seen how Japan's economic readings are surprising on the upside at the moment, and we also got positive surprises from both South Korea and Taiwan this week. South Korea's manufacturing PMI came in at the strongest reading for a year, with new orders being driven both by domestic and exports demand. Taiwan's manufacturing PMI was similar, producing the best result since April 2011, with the growth in new export orders continuing to accelerate. We got a related surprise from Singapore's monthly Electronics Sector Index, which improved more than expected driven by strong rises in both production and export orders, even as inventories fell and orders backlogs expanded.

That said, it remains difficult to square the improvements in these surveys with current trade data: South Korea's exports fell 1.4% YoY in March, and Taiwan's fell 3.2% YoY (reported today), and in both cases, the slowdown looks well spread geographically, with sharp fall-offs in exports to Europe, and no significant sign of recovering strength in China.

UK's Positive Surprises – Can It Escape Eurozone Recession
Within Europe, the UK delivered a series of three positive surprises, whilst the Eurozone, including the core of Germany and France gave us a series of negative shocks. The UK's positive surprises came from the Markit PMIs for both construction and services. The construction measure gave the strongest reaidng since June 2010, with the strongest growth in output coming from the commercial sector, and the sharpest jump in new orders since September 2007. The service sector surprise was less pronounced, but it took the 1Q12 average to the strongest since 2Q10. Both construction and service sectors are now reporting growth in employment and purchases. This renewed strength is surprising, not only because it diverges from the experience of the Eurozone, but also because it finds no echoes in recent consumer confidence studies, which over the last three weeks have been shocking in their misery. But perhaps actual economic behaviour is a more accurate guide than responses to opinion-surveyors. For example, this week also showed UK car registrations up 1.8% YoY in March. It may not seem much, but March is a crucial month for UK car sales, typically representing 18% of the year's sales, and this result was in fact more than a full standard deviation above seasonalized historic trends, and, in addition, was powered by a 7.4% YoY rise in private car purchases.

Meanwhile in the Eurozone, the week brought negative shocks from:
  • Eurozone retail sales, which fell 0.1% MoM and 2.1% YoY;
  • German factory orders for February (up 0.3% MoM but down 6.1% YoY), with orders from the Eurozone falling 3.2% MoM, in particular led by a 9.4% MoM collapse in Eurozone orders for consumer goods.
  • German industrial production for February, which fell 1.3% MoM and rose 1% YoY. Although statistically a 'shock', the weakness was intensified by extremely cold weather in the first half of the month which contributed to a 17.1% MoM fall in construction output.
  • France's trade data for February, in which a slowdown in export growth (to 1% MoM) and continued import growth (2.8% MoM) resulted in a trade deficit far bigger than expected. Most worrying is France's trading position with the rest of the Eurozone: exports to the region fell 0.9% MoM, whilst imports jumped 6.9% MoM. We have previously noted the strange surge in consumer confidence in France following the ECB's decision to extend cheap three-year money munificently in December and February. It's not difficult to see these trade numbers as an expression of that strange and lop-sided surge in confidence.

US: Labour Markets and Monetary Policy

This week was above all concerned with US labour markets, in which Good Friday's sharply disappointing non-farm payrolls data (up only 120k, vs an expected 205k, and Feb's 240k), brought into focus a recent speech by Fed chairman Ben Bernanke.

The abrupt slowdown recorded in non-farm payrolls was a real shocker – since the previous three months had averaged 246k. If it is confirmed (and it was contradicted by an ADP Employment change reading which was strong at 209k) it will train attention on the various pieces of data which have disappointed recently: the series of regional Fed manufacturing surveys, and, this week, vehicle sales, and construction spending (down 1.1% MoM).

And that in turn will focus attention back on the Fed's intentions. The argument made by Bernanke in his recent speech is a two-parter. The first part warns that intense recessions can lead to a lower structural participation ratio, and hence depress the growth potential of the economy. The second part says not only that this is unacceptable, but that monetary authorities can and should act to avert it. If the first part of this argument is an important statement of economic history, the second is, to say the least, contentious – since the one sure way to discover the (new) limits of the productive capacity of the economy is to print money until inflation is actually discovered. Whilst this seems extraordinarily complacent, even reckless, as a methodology for determining monetary policy, Bernanke does at least seem right that there's no obvious sign that the US is yet bumping up against its supply constraints.  

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