Shocks and Surprises, Week Ending August 19

Sometimes the worst shocks leave an imprint on the stockmarket charts. This week it happened on Thursday when the Philadelphia Fed business outlook survey diffusion index collapsed to minus 30.7, from plus 3.2 in the previous month. This was off the charts, being way below anyone's surveyed expectations, and the worst reading since March 2009. The S&P had opened very weak, and promptly lurched down again on this news, and at the time of writing hasn't recovered. So dramatic and thorough-going was this fall – huge falls in all the subindexes – the Philly Fed accompanied it with something that was almost an apology: 'The collection period ran from Aug 8 to Aug 16, overlapping a week of unusually high volatility in both domestic and international financial markets.'

The Philly shocker was presaged earlier in the week by the Empire State Manufacturing survey, which at minus 7.72 was also far below consensus, and which told a sorry sale of dwindling work backlogs, new orders and inventories. Finally, the 3.5% MoM fall in sales of existing homes wasn't foreseen, but its shock-value was mitigated by housing starts and building permits data which was very much as expected.

Since this week will be remembered in the US (and probably elsewhere) for Philadelphia's contribution to financial panic, it's pretty certain that we'll forget that this week also delivered some positive surprises from the US. Yes, no-one had expected industrial production to rise 0.9% MoM, but it did (thanks mainly to a 5.9% MoM increase in auto-production), and no-one had expected capacity utilization rates to climb to 77.5% either. In other environments, the news that capacity utilization was running at its highest levels since 3Q2008 might have been noted and remembered for its likely impact on the investment cycle.

For form, I should also mention the surprisingly positive 0.5% MoM rise in the US' Leading Indicators. But there's a big caveat to this: the surprise was generated almost wholly by rises in M2, stockmarkets (yes!), and the steepening of the yield curve. So there's no doubt what next month's Leading Indicator is going to look like. Be warned.

At its highest level, I take the politico/diplomatic news from the Eurozone as being genuinely trivial. A Merkel/Sarkozy meeting produced ever-more fantastic declarations of dedication to maintaining the existence of the Euro Doomsday Machine. There comes a point at which these statements seem not merely incredible or ill-advised, but actually bonkers. I reached that threshold this week. Meanwhile, the Doomsday Machine continues its work: poor numbers from Eurozone 2Q GDP (up 0.2% QoQ) were as expected, as were trade and current account balances. However, Germany's 2Q GDP falling to just 0.1% QoQ, on a fall in net exports, and slower household consumption and construction spending was a shock. Since Germany is thought to be the Western economy best positioned to benefit from global growth, its unexpected slowdown is troubling confirmation that global growth really isn't what we took it to be.

Europe held one rather limp surprise: UK average weekly earnings actually rose 2.6% YoY in the past three months! Does that make anyone feel better? Thought not.

If the West was mired in misery this week, could we at least see some positive surprises from Asia? Well, this was not a week for economic data from China, and what was released was, even though there was no survey to determine consensus, unsurprising. Unsurprising, but could have been worse. The MNI Flash survey of business sentiment in China deteriorated mildly, but in the detail there was a surprising recovery in new orders (best since May), and a financial position subindex which, though bad, was slightly less bad than lasts month. Since the MNI tracks loads of SMEs, I personally hadn't expected this very marginal improvement. The China Conference Board Leading Economic Indicator also rose 1% in June, higher than the 0.6% in May and 0.3% in April: consumer expectations, loan growth and new export orders, apparently helped the rise. I'm sceptical – this survey has a short track record, which includes major revisions.

This doesn't mean that there wasn't something worth noting: Taiwan's export orders, for example, came in very slightly stronger than expected at 11.1%,, but with the problems afflicting the electronics sector, and the slowdown in Taiwan's exports recently, there was every chance this data-point would disappoint – and it didn't. No surprise, then, but certainly a minor relief. This minor relief was offset, however, by Singapore's trade data, which showed non-oil domestic exports down 2.8% YoY - a modest positive YoY had been expected.

Finally to Japan, which surprised nicely with a 2Q GDP result which showed a fall of only 0.3%. This probably wasn't worth cheering too much, since a rise in inventories contributed 0.3 pp to the overall growth, and in any case the sharp fall in Japan's terms of trade flattered the GDP number. When you add back the trading losses (which are counter-intuitively obliterated by the deflators for exports and imports), Gross Domestic Income (rather than Product) fell by 0.8% QoQ. Which, I should say, was about consensus.

What do we take from this week's Shocks and Surprises? I think there are two main lessons. First, the West, and particularly Europe, is slowing. Second, that the perception that it's all bad in the US is actually wrong – the message is more subtle than the cacophony of fear and panic can allow. Third, that perhaps surprisingly, the world's trading environment, and with it China, continues somehow to teeter without falling, yet.