This was a week in which by and large consensus won out, much good though that did world equity markets: Euro Stoxx lost 6.6%, the Nikkei lost 2.4%, both the S&P and the Hang Seng lost 1.7%, and the Shanghai Composite lost 1.2%. What was being priced in this week was something below and beyond what the evidence is currently describing.
Case in point: Europe's markets got the worst kicking, but it was in Europe that the consensus won most often this week: Eurozone GDP revisions, Eurozone retail sales, Eurozone Services PMI, Eurozone Sentix Investor Confidence index, and even the Eurozone Composite PMI all came in roughly as expected. So too did French business sentiment, German imports and trade balance and UK industrial production: modest deterioration was expected, and modest deterioration was what was duly recorded.
Europe even sprang a couple of upside surprises : both French industrial production (up 3.7% YoY) and Germany industrial production (up 10.1% YoY) showed up the consensus as too cautious. But evidently these exercised less impact than the repeated confirmation of an increasingly gloomy consensus, laced with a couple of nasty shocks. The worst of these was the 2.8% MoM sa fall in German factory orders. This one got worse the closer you looked at it: capital goods orders fell 7% MoM, and export orders for capital goods were down full 12.8% MoM.
The US market hasn't yet recovered its poise from the Sept 2 non-farm payrolls shock (seasonally adjusted, there were no new jobs). I was sceptical about that number, and this week brought an answering upward surprise in the Job Openings and Labor Turnover data, which bust through the upper range of estimates, mainly on a sharp rise in manufacturing hirings, and also revised up the previous month's data. There were other pleasant surprises, including a the trade deficit which came in about US$5 billion lower than anyone expected, mainly owing to a 3.6% MoM rise in exports. Still, it's that Sept 2 labour market number which continues to set both the political and financial agenda.
The other story emerging from the week has yet, I think, to be fully appreciated: Japan's heroic recovery phase is over, to be replaced by an everyday series of mild disappointments. There were loads of these this week: monetary aggregates were noticeably weaker than anyone expected, machine tool orders growth slowed sharply (to 15.3% from 34.8% in the previous month), and machinery orders overall fell 8.2% YoY. When you look at the details, you find export orders for Japan's machinery collapsed 13.5% YoY. This is the same story in suspended or collapsing investment spending that saw Germany's export orders for capital goods falling 12.8% MoM.
And so to China, where investment spending accounts for 48.6% of GDP. By this stage, I hope it won't come as a surprise that the negative shock in China's August monthly data was the way in which investment spending came in far weaker than expectations (up 25% YTD, vs 25.4% in the previous month). There is a specific problem here: after the multiple scandals which have engulfed China's railway ministry – of which the Wenzhou high-speed rail disaster is only the most high-profile – this is a ministry which can no longer invest. Spending on railway infrastructure actually fell 15.5% YoY in August, whilst as recently as June it was rising 18.3% YoY. Much of the rest of China's August data so far has been roughly in line with expectations: retail sales (up 16.9%), industrial production (up 13.5%) and the HSBC/Markit Non-manufacturing PMI (50.6) – non of them surprised.
And yet, the week withheld one of its biggest surprises until today: China's trade data for August was much better than expected. In the case of exports (up 24.5% YoY), this mainly reflected how cautious the consensus has become – since the monthly gain was only slightly better than historic seasonals. But the growth of imports – up 30.2% YoY – was not only way out of line with consensus (which expected 19.1% to 23.1%), but was also a full standard deviation above historic seasonals. Such an appetite for imports strongly suggests that, at the very least, China's inventory cycle is on the turn.
Is it enough to challenge a gloomy consensus which got a lot of confirmation this week? We'll see on Monday morning.
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