Monday, 14 May 2012

Shocks & Surprises, Week Ending May 12th

Things rarely turn out as expected. This was going to be the year when the giant emerging economies, led by China, would throw a tow-rope to a near-stalling US economy. Instead, the data tells us that even sustained recovery in the US is struggling to provide China with enough external stimulus to allow it to overcome its own cyclical and structural problems.
That, at any rate, was the message this last week, when:
·         Shocks were concentrated in China and Europe, and to a much lesser extent NE Asia
·         Surprises were concentrated in the US and to a much lesser extent in Japan

China Sneezes
The week's shocks were dominated by China's data for April: seven out of the 11 pieces of official data released by China this week undershot economists' consensus, or current trends, by a full standard deviation or more. The worst news is still monetary: where M1 growth slowed to just 3.1% yoy, and actually contracted by 300bn yuan during April. Deposits also contracted by 600bn yuan during the month, even though the banks gave out 680bn yuan in new loans. What this tells us is that the cashflow cramps afflicting China's economy are intensifying, with China's banks running to a net negative cashflow (deposits in minus loans out) of 1.14tr yuan last month.

In response, PBOC has announced reserve ratios will be cut by a further 50bps starting May 18th. But this easing now looks to be behind the curve, freeing up only 420-430bn yuan in lendable funds. So far PBOC has not released the broader 'aggregate financing' measure for April, so we cannot be sure there isn't further action being taken behind the scenes to relieve the pressure on corporate cashflows.

The cashflow grind is behind China's other major shocks: imports grew an anaemic 0.3% yoy; exports did little better, falling 1.5% mom (though growing 4.9% yoy) even in the face of unexceptionable growth in Western demand (see below). This underlines our observation that the crucial structural fact about China's economy since the financial crisis has been its failure in export markets, not its success. Growth of industrial production slowed to 9.3% yoy, the weakest since May 09, mainly reflecting slumping output of electricity and rolled steel. Retail sales slowed to 14.1% yoy from 15.2% in March. Although this was shockingly weaker than economists' estimates, it merely extended the sequential weakness seen in March.

The Neighbours Catch Cold
China's slowdown is also taking its toll on its nearest NE Asian neighbours. The most obvious sign of this was Hong Kong's GDP, which slowed unexpectedly to just 0.4% yoy in 1Q – a slowdown that was not anticipated, and owed everything to a trade contraction (exports of goods fell 5.7% yoy, imports fell 2.7% yoy). And Taiwan's export performance is also shockingly slowed by China: April exports fell 3% mom and 6.4% YoY, with exports to Hong Kong and China down 5.6% mom, whilst exports to the US fell only 0.7%, and to Japan rose 4.1%.

Japan Still Surprises
Part of what ails China's export and industry yoy comparisons is the fact that this year, no combination of earthquake/tsunami/electricity shortage has knocked Japan out of the ring. This is still not being represented in economists' views on Japan (and certainly not the stockmarket), and for the fourth week out of five, Japan's data produced more positive surprises than negative shocks. The highlight was the unexpectedly strong reading of the Economy Watcher's Outlook survey, which rose to levels previously seen only in mid-2007, on the back of particularly strong readings for prospects for employment, services, retail and the non-manufacturing sector.

US: Trade, Jobs, Federal Budget
The US had its strongest set of readings for a month, strong enough to offset the series of modest negative shocks of the previous three weeks. Three sets of surprises in particular are worth noting: the best JOLTs job openings data since July 2008; the strength of March trade data (exports up 2.9% mom, imports up 5.2% mom); and a US$59.1bn April Federal budget surplus that very nearly doubled consensus expectations, resting on a 10.1% yoy jump in receipts. The strength of exports is particularly important, since we have previously identified the role that exports need to play in regulating the mismatch between industrial supply and domestic demand which underlies and regulates the US's current 'soft patch.

The strength of the US's exports is partly testament to German demand – US exports of goods to the EU jumped 13.8% mom in March. Germany, after all, accounts for nearly 52% of total Eurozone import demand.

Europe: Germany and the Rest
Although Europe's data is still regularly shocking in its weakness, Germany remains resilient. Its industrial sector in particular refuses to buckle, with output surprising by rising 2.8% mom and 1.6% yoy in March, whilst factory orders rose 2.2% mom. Encouragingly, this strength is still resting on the capital goods sector, where orders were up 4.2% mom and output was up 2% mom. And it's still overseas orders which are driving the numbers: that 4.2% rise in capital goods orders came despite a fall of 1.3% in domestic orders and a 2.9% mom fall in orders from the Eurozone! Similarly, Germany's exports showed surprising strength, rising 0.7% yoy overall, with a 3.6% yoy fall in exports to the Eurozone being offset by a 6.1% yoy rise in exports outside Europe.

For the rest of Europe, though, there is no such comfort: last week saw the Sentix Investor Confidence survey slump to its weakest reading since June 09 – investors expect a severe recession from which even Germany will not escape altogether unscathed. The oscillations in UK data continue, with the week bringing shocks in like-for-like retail sales (down 3.3% yoy) and Nationwide Consumer Confidence, which dived because of a very sharp deterioration in 'economic expectations' rather than any downturn in 'current conditions'. In Spain, however, the plight of current conditions was signalled by a 7.5% yoy fall in industrial output in March – the sharpest contraction since October 2009. 

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