Shocks and Surprises, Week Ending August 12

Each week I check between 50 and 100 separate pieces of economic data from US, Europe, China, Japan and NE Asia. The data-tide never stops, and it serves two distinct purposes. First, for economists it is the raw data from which views and models can be constructed. Second, for the market, it is a source of (negative) shocks and (positive) surprises which might, just might, move the market.  Between them, these two purposes generate a third: the accumulation of shocks and surprises constantly modifies everyone’s expectations.  

So it pays to keep a close eye on Shocks and Surprises, and I intend to summarize them here each weekend.  If you only read one piece of mine every week, this should be it.

First, what constitutes a Shock (negative) or a Surprise (positive)? For those data for which there is a published list of Street estimates,  a Shock or a Surprise is a result which is outside the 1 SD range of the median estimate. For data where no such estimate is available, a Shock or Surprise is 1+ SDs either side of the historic seasonalised expectation.

In the week ending August 12, Shocks and Surprises showed several separate themes. First, and least surprising, was the collapse in confidence seen in the West. In the US, the Uni of Michigan Confidence Index fell to its lowest level since early 1980s, during Jimmy Carter’s Hostage Crisis months; and the Bloomberg Consumer Comfort Index made its worst reading since April 2010. In Europe the Sentix Investor Confidence Index fell to minus 13.5 – by far the gloomiest reading on record. Though economists had expected none of this, who in truth can be surprised that the combination of the Euro Doomsday Machine, and the US Fiscal Poker shredded our nerves? Usually confidence readings tend to tell us more about yesterday than tomorrow – let’s hope so this time.

The second theme is the way the Eurozone is finally producing the sort of Shocks you’d expect now the Doomsday Machine is really hitting its stride. Eurozone industrial production Shocked by falling 0.7% MoM (France down 1.7% MoM and even Germany fell 0.8% MoM).  Add to that, specific misery clustered round France – neither the 0% 2Q GDP preliminary, nor the 1.6% MoM fall in industrial production  was even nearly anticipated by the region’s economists.  

And there is a third series of Shocks coming from China: the trade cycle may still be supporting China, but much else is slowing faster than the Street anticipates. I’ve already written a little about the monetary and banking data (here), which delivered a series of Shocks. But industrial output slowing to 14.0% in July from 15.1% in June constitutes a Shock, and so does the relatively modest (but nonetheless unexpected) slowdown in retail spending to 17.2% in July from 17.7% in June.

But it was not all Shocks, thank God. There were a couple of pleasant Surprises:  first, the world’s trade cycle continues to surprise in its strength. We saw this not just in China’s exports (up 20.4% YoY in July, vs 17.9% in July), but also in Taiwan’s exports (up 17.6% in July vs 10.8% in June) and, across the Pacific, in the US trade deficit, which blew out to US$53.1b.

This dovetails with two other themes: the positive Surprises coming from US labour markets, and the continuing recovery in Japan’s industrial base. The intense gloom generated by the US Fiscal Poker, coupled with the earlier lurid GDP revisions disguises the fact that US labour markets are regaining strength: this week, we had Surprises in initial claims (best since April), continuing claims (biggest drop since Feb), and the highest reading in the JOLTs Job Openings survey since February 2008. Didn’t see that making headlines anywhere this week – but it happened.

Japan’s industrial recovery also continues to generate Surprises: core machinery orders jumped 7.7% MoM – the highest reading since August 2010, and expected by nobody. In addition, Japan’s services industries rose 1.9% MoM,  with the rises broadly based, and also not expected. Finally, despite the gloom out West, Japan’s pavement level Economy Watchers Survey’s reading of the current situation was seriously jolly, rising to its highest level since March 2006.