Tuesday, 27 November 2012

Eurozone's Consumers, NE Asian Trade, China Industrial Momentum - Three Shocks & Surprises From Last Week

Three threads to pick up from the shocks and surprises of last week: 

  • Eurozone Consumer Confidence Warns of Sharply Slowing 4Q Retail Sales
  • NE Asian Trade - The Fall in Japan's Exports Says More About Falling Market Share than Falling Global Demand
  • China Industrial Momentum Recovery - Reacting to Eased Money Conditions and Modest Uptick in Domestic Demand

1.Eurozone Confidence & the Consumer 
The EU Commission’s November Eurozone consumer confidence survey fell to its lowest level since May 09 in its preliminary reading. Although no details come with the preliminary reading, separate independent consumer confidence surveys today from Germany and Italy find both slipping worse than expected, with Italy making another record low. 
Over the past five years, the EU’s confidence survey has been a good indicator of the health of Eurozone retail demand, and an early indicator too, because it appears two months in advance of retail spending data. Thus, the latest Eurozone retail sales volume data we have is for September (when it fell 0.2% mom and fell 1% yoy). 

If this continues, then we must brace ourselves for intensifying retail weakness during 4Q. In yoy terms, retail sales fell 1.1% yoy in 3Q, but if the mom patterns were maintained through 4Q,  the yoy fall would be trimmed to just 0.2% yoy during the quarter. But if the consumer confidence indicator is any guide, we should be looking at a fall of around 2% yoy. If so, we should expect retail sales to fall by around 1% mom throughout 4Q. This is incompatible with consensus GDP forecasts, which purportedly expect a steady state decline throughout 3Q and 4Q.  

2. NE Asian Trade  Japan’s exports fell by 6.5% yoy in October, hobbled by a 9.9% mom fall in exports to the EU. The export weakness landed Japan with a Y549bn trade deficit –worse than the range of expectations and once again underlining the erosion of Japan’s private sector saving surplus. But Japan’s export weakness is more to do with its competitive weakness than with the state of world demand. Taking NE Asian together (China, Japan, S Korea, Taiwan), October exports rose 3.8% yoy in October, with the 6m momentum trendline inflecting up (though it is still modestly negative). In dollar terms, China’s exports rose 11.5% yoy, Korea’s rose 1.2%, Taiwan’s fell 1.9%, but Japan’s fell 9.2% yoy.
There is, simply, no comparison with 2008/09.  

Rather, what is happening is that Japan is losing market share at an accelerating rate: in the 12m to October Japan’s market share of NE Asian exports fell by 1.2pps to 22.1% whilst China’s rose 2.3pps to 54.9%  (Taiwan and S Korea lost 0.6pps and 0.5pps respectively). Why is it happening? US Customs data tells us since Jan 2008 the price of imports from Japan have risen 9.4%, whilst during the same period China’s have risen only 4%. If Japan’s productivity has not similarly outperformed China’s during the same period, competitiveness will have been lost. As it evidently has. There’s no reason to expect the downward pressure on the yen to abate soon.

3. China Industrial Momentum Although exports play a key role in soaking up the surplus production China’s financial repression/super-heavy investment growth model inevitably produces, this is not an export-driven or export-oriented economy. Rather, the pattern is that changes in demand shadow changes in monetary conditions, and that, generally, industrial momentum follows along in due course.

That’s what seems to be happening in the latest data. As the chart above shows (and as we have been pointing up in our reports) China has allowed a gentle degree of re-liquefication of the economy over the last few months, quietly using instruments such as bankers acceptances rather than straightforward bank lending.  Domestic demand (retail sales, investment, vehicle sales, property sales) have responded in appropriately low-key fashion. And finally, this week’s data suggested that the industrial sector is responding too: the MNI Business Sentiment index for November scored its most positive reading since June; the HSBC Manufacturing PMI flash for November gave its first (marginally) 50+ result since October 2011, and the Conference Board’s October Leading Economic Index rose strongly enough to break an already-rising trend.  There seems no reason to expect them to be wrong.

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