Shocks and Surprises, Week Ending October 29th

Whilst most attention has been directed towards policy development (or the lack of it) in the Eurozone, the most significant developments in policy over the last month have come from China. Over the last three weeks, China's authorities have moved swiftly over a broad policy front to identify and start to relieve the worst of the pressures points. Local authorities have been pressured into recollateralise projects and in return China's bank regulator is beginning to allow those debts coming due in the coming 18 months to be rolled. The Ministry of Finance has been prevailed upon to widen the scope of provincial/municipal bond issuance very slightly. Bank regulators have ushered in a number of policies incentivising banks to return to the SME lending market. And, of course, we've had that all-important acknowledgement that the population of those potentially-destabilizing private lenders are disproportionately comprised of precisely the local bureaucrats and SOE executives who are favoured by China's current system of credit rationing.

These moves are coherent and realistic, and represent a policy-response to China's difficulties far more nuanced than the China risk on/China risk off population of investors usually contemplates. Nonetheless, they do represent the key turning point in China's current cycle.

And the timing of that turning point is justified best not by data from China itself – where national data from this huge economy still describes an economy at the very apex of its inflationary cycle, but rather from its fringe. This week the big economic shocks came precisely from fringe China. Hong Kong trade data was truly dreadful, with exports falling 3% YoY on a sequential slowdown which broke the 2SD from seasonalized trends barrier, and which incorporated a 7% YoY fall in exports to China. Similarly, Taiwan's industrial output result for September – a rise of just 1.6% YoY – was off-the-map bad and the worst reading since early 2009. There is every sign the industrial slowdown is now spilling over too into Taiwan's money numbers – no one watches these, but they are deteriorating unexpectedly.

And this also found an echo in Japan, where industrial production contracted 4% MoM in September, leaving inventory/shipment ratios rising 4.2pps MoM and 9.6% YoY. But one has to set against that the fact that Japan's export numbers came in higher than expectations, at 2.4% YoY, with a pattern of demand which showed resilient demand from both Europe and China.

The moral of the story is, I think, that though China's government is now moving persuasively to address the problems which have been obsessing the markets all year, and which are therefore likely to close off the worst of the 'China hard landing' scenarios for now, those fringe economies leveraged to China flows have months of pain yet to endure.

Elsewhere in the world, the most important stuff we learned came from the US. There, we see developing a dangerous game of chicken between the household as consumer (where consumption is holding up far better than expected – 2.4% annualized in the 3Q GDP numbers, and personal spending, up 0.6% MoM in September) - whilst incomes are stagnating (up 0.1% MoM in July, down 0.1% in August, up 0.1% in September). What this means, of course, is that for now personal saving ratios are collapsing again, in September hitting just 3.6% of disposable income. That's the worst reading since December 2007, and in nominal terms, the lowest dollar amount of monthly savings made since August 2008. The willingness to keep spending whilst incomes stagnate is puzzling, not least because we have some dreadful readings of consumer confidence out there: the Conference Board Consumer Confidence Index gave its most wrist-slitting reading since March 09 this week. Yet even here the message is contradictory, for the US's other major measure of cosumer confidence - the University of Michigan reading – was this week revised upwards unexpectedly to give its most positive reading since July. The word I'm grasping for is 'unstable' .