Friday, 13 April 2012

Shocks and Surprises, Week Ending April 14th

  • China takes the most direct-possible route to ease up the cashflow cramps of 1Q, as bankers' acceptances surge more rapidly even than direct bank lending. The reflation is on. . . .
  • Japan provides its fourth week of consensus-bustingly strong data, this time led by orders for machine tools and for machinery. Street-level confidence survey also jumps unexpectedly to a full standard deviation above the series 10yr average
  • Eurozone's financial disaster resurfaces in a week that also delivered surprising strength in industrial production, and unexpectedly strong German trade data.
  • In the US, labour markets and trade data (imports down 2.7% MoM) suggest a soft patch, but consumers and businessmen's view of economic outlook surprise on the upside

China: A Reflation both Dramatic and Stealthy!
This week brought the end-of-the quarter data for China, with releases bringing news not only of many element's of March's trading environment, but also quarterly GDP data. And yet this news mostly merely confirmed expectations: GDP data, industrial production, investment and consumption data, monetary data and both export and import totals all arrived within a standard deviation of consensus expectations.

Despite that, it was in the details of China's monetary data that the week's most important surprise could be found, buried. And the surprise is that the aggressive reflation of China's economy has already begun. On the face of it, M2 growth accelerating modestly to 13.4% (from 13%) and M1 stuck at 4.4% (from 4.3%) was nothing surprising. New bank lending of Rmb 1,010 bn in March was a surprise, in that it was slightly higher than the Rmb 740bn to Rmb 848bn range of forecasts. But a big monthly lending total during one of the first three months is the rule rather than the exception in China's banking year, and new lending of Rmb 1tr+ is not unknown.

The real surprise came in the the details of China's new 'aggregate financing' total. This 'aggregate financing' includes bank lending, but also bonds, equities, foreign borrowing, trust loans and bankers acceptances. Whilst bank lending in March at Rmb 1,010bn was only Rmb 299.3bn higher than in February, the 'aggregate financing' was Rmb 820 bn higher, at Rmb 1,860bn. This is a huge total, equivalent to 17.2% of 1Q nominal GDP. Drill down to find what's driving it, and you find China's banks wrote a net Rmb 276.9bn of bankers acceptances in March, a reversal from the Rmb 31.2bn net redeemed in February.

Now, when economists second-guessed the timing, scope and nature of China's eventual reflation, the squabbling has mainly centred on the extent to which the relaxation would come via cuts in reserve ratios or cuts in interest rates. What's happened here is neither: rather, the rise sudden jump in bankers acceptances is an absolutely direct response to the cramping in corporate sector cashflows which we have previously identified. Old-timers will remember the 'triangular debt' problems which used to plague China in the 1980s and 1990s, in which unpaid bills are allowed to mount up among companies well past the point of easy netting off, resolution, or payment out of cashflows. Historically, when “triangular debt problems” began to torpedo the economy, the central bank started printing money. Today, since China's banks have been made to keep very low loan/deposit ratios, there's no need to print money: rather, the banks can simply be allowed to mobilize their resources, by, for example, writing bankers' acceptances. It is a very direct way indeed to respond to the seizing up of cashflows.

Compared with this policy surprise, even the other shocks and surprises delivered by China seem rather mundane: March trade data showed export growth at 8.9% (towards the top of expectations) whilst import growth slowed to 5.3% (right at the bottom of expectations), which taken together produced a US$5.4bn surplus which was better than expected. Also breaking upwards out of a declining trend was China's monthly Entrepreneur's Confidence Index – although no details were given, it may be that cashflows are improving.

But there was also a negative inflationary shock, with March CPI showing 3.6% YoY, up from February's 3.1%. Not only was this unexpected, but it was generated by a sequential rise that was a full standard deviation above historic seasonals. On the face of it the main reason was a 7.5% YoY rise in food prices (up from 6.2% in February). But in addition there was a surprising sequential jump in non-food prices, masked by an exceptionally easy base of comparison, and stemming ultimately from a jump in transport and telecoms prices, in turn driven by hikes in petroleum prices.

Seemingly, China's policymakers agree with those analysts who have downplayed this result. However, on a statistical basis, this was a negative shock.

Japan and NE Asia: Despite Tankan, Japan is re-tooling
For the fourth week in a row, Japan's economic data contained significant upside surprises. This week's data specifically called into doubt the previous Tankan's forecast that there will be no expansion of capital spending this year. Machine tool orders roses 2.4% YoY, and whilst that was no break in trend, domestic orders jumped 29.1% MoM and 24.7% YoY, which was a sequential jump fully 2.3 Sds above historic seasonal patterns. Later in the week, core machinery orders rose 4.8% MoM, despite a 18.3% MoM fall in foreign orders. Manufacturers' orders rose 16% MoM (driven by chemicals, oil and foods) and non-manufacturers' rose 2.3%. (Bank lending data was also stronger than expected, despite rising a meagre 0.9% YoY: however, this looks more the product of lazy forecasting than true evidence of surprising strength.) Finally, the Economy Watchers survey of current conditions for March not only jumped far more strongly than expected, but arrived at a level that was a full standard deviation above the series' 10yr average.

After literally decades of disappointment, it will take far more than four weeks' of surprisingly robust data for the consensus on Japan to change.

Elsewhere in Northeast Asia, the week brought little challenge to consensus, with the most prominent perhaps being an unexpected fall in S Korea's unemployment ratio to 3.4% in March from 3.7% in February – a fall which looks genuine enough.

Eurozone: German Trade Still Robust
Even as the Eurozone crisis claws its way out of the ECB's wallet again, the industrial sector can still spring some positive surprises: industrial production rose unexpectedly by 0.5% MoM in February, although this was still down 1.8% YoY. On closer inspection, though, the surprise was really confined to the Netherlands, where output rose a baffling 13% MoM.

German industrial output fell 0.2% MoM, but any disappointment there was offset by a set of German trade data for February showing vigorous growth beyond anyone's expectations: exports rose 1.6% MoM (up 13.4% YoY to countries outside Europe), and imports jumped 3.9% MoM. But there's no evidence from Germany's data that its trading strength is doing much for the Eurozone, since trade with the rest of the Eurozone was geographically the weak spot.

And, of course, Europe also produced negative economic shocks, of which the worst was probably Britain's trade deficit, which expanded far beyond the worst expectations of economists as exports fell 3.4% MoM whilst imports were flat. Over recent weeks, Britain's data has managed to confound the Eurozone doldrums – and indeed it was at it again this week, with like-for-like retail sales rising 1.3% MoM in March. But the price for that relative domestic resilience is a newly-deteriorating trade deficit.

US: Labour softens but outlook improves
The shocks and surprises in the US this week look linked. First, the weekly tally of initial unemployment claims jumped unexpectedly to the highest reading since early December. If last week's non-farm payrolls data had not been so shocking (up just 120k, vs an expectation of 205k) this would have carried less import. As it is, the sudden weakening of labour market data has been sufficient to re-start speculation of a third round of quantitative easing, and driven 10yr Treasuries back to around 2% levels from the 2.3% levels seen only ten days ago.

But if the durability of the labour market recovery is being questioned, some weakness in demand is also narrowing the trade deficit unexpectedly. Trade data for February showed the deficit narrowing to US$46bn in February, primarily reflecting a fall of 2.7% MoM in imports. And there's little doubt but that it's slackening consumption demand that's driving the fall in imports: imports of consumer goods fell 6.3% MoM, food and beverage fell 6.3% and imports of autos contracted 4.2%.

This sits awkwardly with the news from the wholesalers, who reported surprising strength in both sales (up 1.2% MoM) and inventories (0.9% MoM) in February.

If the labour market data does presage another 'soft patch' for the US, the message has not yet got through to consumers and businessmen consulted about their expectations by surveyors. The IBC/TIPP Economic Optimism index jumped to the highest reading since February 2011, driven primarily by improved expectations about the economic outlook; and although the University of Michigan's preliminary consumer confidence index for April retreated slightly, measurements of confidence in the economic outlook continued to rise to new levels.

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