Shocks and Surprises, Week Ending November 25th

To summarise:

• For the first time in six weeks, in aggregate the news this week from the US surprised on the downside, although we don't take it particularly seriously.
• The news from the Eurozone – and particularly its service sector – surprised on the upside, and we don't take that particularly seriously either.
• The news from Japan's domestic economy surprised on the upside, and wasn't noticed at all. 
• The news from China was balanced, with very strong trade numbers from Hong Kong being offset by weak business survey readings and revisions from the mainland.

After six weeks in which positive surprises outweighed negative shocks, the news from the US surprised on the downside again this week. This was not so much the shock of 3Q annualized GDP being revised down to 2% from 2.5% - although no-one had expected such a revision, on close inspection the revision was due to a cut in inventories which took 1.55pps off growth, compared to the original cut of 1.08pps. The likelihood is that any stabilization in underlying demand will rapidly reverse that inventory trajectory very rapidly. The surprisingly positive news from labour markets over the last six weeks should bolster underlying demand. However, this week also showed us some more headwinds: whilst personal incomes rose 0.4% MoM (at the top end of expectations), personal spending only inched up 0.1% MoM, which was far below the bottom end of expectations. What's happening is that the personal savings ratio, which hit a miserable low of 2.2% in September, rose back to 3.5% in October, cutting spending on goods to 0.12% MoM, and on services to just 0.05%.

We continued the run of positive news from the housing sector, with existing home sales again coming in sharply above the range of expectations, at an annualized 4.97m. Just to recap the run of data: in the previous week we had positive surprises from housing starts, building permits, and the National Association of House Builders Market Index (highest since May 2010); two weeks prior to that new home sales also surprised on the upside.

As horrified onlookers watched Europe tottering effortfully towards the precipice, ironically the balance of its data this week managed to arrive in slightly better shape than expected. In particular, Germany's collection of IFO surveys not only managed to beat expectations, but they actually showed an overall slight MoM improvement for readings on the Business Climate and Expectations, with improvements in readings from the construction and wholesale sectors which were quite unlooked for. But the better-than-expected news from the services sector were also echoed in PMI readings for services in both Germany (rising to 51.4 from 50.6) and France (rising to 49.3 from 44.6), and for the Eurozone as a whole (rising from 46.1 to 47.8). And this resilience in the services sector even allowed the Eurozone Composite PMI to manage to rise from 46.5 to 47.2.

But can this survive the continued shocks coming from Europe's industrial sector, where new orders collapsed as stunning 6.4% MoM in October? Germany fell 4.4%, France fell 6.2%, Spain fell 5.3% and Italy fell 9.3%! These are truly shocking readings.

In Asia, this was a week of unacknowledged – because genuinely unexpected – modestly positive surprises. There are no surveys taken for expectations of Japanese supermarket and convenience store sales, so it passed largely unnoticed that October's readings (down 0.9% YoY and up 14.1% YoY respectively) were far stronger than anyone should have expected. Supermarket sales were 1.3 standard deviations above seasonal sequential patterns; convenience store sales were 1.6 Sds above trend. In other words, these are signs that genuine consumer demand is surfacing unexpectedly in Japan. We saw the same factor showing up in import growth, which jumped 17.9% YoY in yen terms – far higher than consensus expected. Mind you, part of this is driven by the J-curve effect of the very strong yen: although the J-curve is the stuff of first-year economcs, practicing economists always get its timing and strength wrong (and I am no exception).

There was also unexpectedly good news out of China. Well, Hong Kong actually, where October trade data showed a very strong and very unexpected rebound, with exports rising 11.5% YoY (vs a fall of 3% YoY the month before), and imports rose 10.9% (2.3% the month before). Hong Kong's trade numbers simply can't improve like this without it reflecting something of a strengthening in the mainland. In fact, exports to China rose 11.9^ (vs a fall of 7.3%), and imports from China rose 8.4% (0.8%).

But this result confounded the set of negative expectations surrounding China right now, and so this genuinely positive signal was lost in the negative reaction the previous day to the HSBC China Manufacturing PMI Flash, which fell to 48 (from 51) as output, new orders, quantity of purchases and stocks of finished products all contracted. And the impression of a new weakness was amplified at the end of the week when the final reading of China's MNI Business Conditions survey was revised down to 54.6 from an initial 55.5. This is not seasonally adjusted data, and for what it's worth, the MoM decline in October 2011 was identical to that of October 2010.