Shocks and Surprises, Week Ending January 7th

• Growth surprise emerging in US
• Echoed, against all the odds, in UK
• Germany shocks with weak retail and factory orders data. Eurozone too.
• China contradictory – weakness remains sectoral rather than systemic, whilst HK retail sales keep booming.

The first week's data of the year underlined the possibility that 2012 would be ambushed by a growth-shock from the US, for which bond and currency markets remain completely unprepared. There were no negative shocks from the US, but such big positive surprises from labour market that economists and statisticians were left interrogating the seasonal adjustment process for explanations. First the ADP count of changes in employment during December came in at +325k, which was the strongest monthly reading since at least 2002, and which was 123k higher than the 1SD upper range of expectations. This reading was completely unexpected, but the implications could be ignored because the week also brought the Department of Labor's count in change in non-farm payroll. Though less spectacular (+200k for non-farm, +212k for private payrolls), these were still stronger than the range of economists' expectations. This had a knock-on impact on the unemployment ratio, which fell unexpectedly to 8.5%.

I've previously written about how the fundamental ratios of household leverage had already been largely normalized by the end of 2011, so continued spending was now primarily hostage to confidence, which in turn meant the labour market. With the powerful improvement in the US labour market, then, one can expect a surge in both confidence and spending. This week we got some evidence of surprises opening up on these fronts. First, the RBC Consumer Outlook index reported the biggest monthly jump since September 08 (rather worrying, that), and the best reading in the Bloomberg Consumer Comfort index since July. And then there was a completely unexpected 1.2% MoM rise in construction spending, with residential spending up 1.8% MoM and non-residential up 0.9% MoM.

So far, economists, commentators and policymakers have not factored in these positive surprises from the US, nor their likely impact on fiscal sums. If one looks at consensus forecasts for 2012, we're still stuck at GDP growth of around 2.2% - unchanged since November, and actually still slightly down from the 2.3% consensus expected for 2012 in October.

More surprising than the emerging strength of the US, perhaps, is the strength of recent data from the UK – the country which, let it not be forgotten, in November chalked up consumer confidence worse even than the darkest days of 2009! Confidence continues to be wretched - this week saw the Lloyds Business Barometer reading plunge to its worst since 2009 – but indexes of economic activity bely this depression. On Monday the Manufacturing PMI came in sharply better than expected (49.6), on the back of the first rise in export orders for five months (Germany, Eastern Europe, and China to thank for that). The next day, the Construction PMI outstripped expectations, with civil engineering, residential and commercial construction all expanding for the first time in nine months. Finally on Thursday, the Services PMI, at 54, gave the strongest reading for five months, based on strong readings for activity and new business.

Britain certainly believes its economy is well within the impact-zone of any Eurozone implosion, but for now its trajectory is rather different, and better, than it perceives.

Meanwhile, the Eurozone delivered three sets of data showing end-demand beginning to buckle worse than consensus was prepared to envisage. The first, and probably more important, was the 0.9% MoM fall in German retail sales in November. Since Germany is, by almost all counts, the one industrial economy in the Eurozone which continues to grow, and where unemployment ratios continue to fall, it is to Germany that we must look for retail demand to be maintained. Well, it isn't: sales excluding autos fell 0.9% MoM and rose only 0.8% YoY, whilst car sales fell 3.9% MoM. With Germany's numbers shocking like this, it was inevitable that retail sales figures for the Eurozone would shock similarly. And they duly did, falling 0.8% MoM and 2.5% YoY. The only positive outliers were Ireland (up 2% MoM) and Austria (up 0.5%). End-demand in the Eurozone will not be rescued by Ireland and Austria!

The third serious Eurozone disappointment of the week again came from Germany, where factory orders fell 4.98% MoM in November, giving back all the unexpected strength experienced in October. The most alarming aspect of these numbers was their composition: capital goods orders fell 6.5% MoM, whilst intermediates fell 2.9% and consumer goods fell 2%. Even worse, the sharpest fall of all was for capital goods orders from outside the Eurozone, which fell 13.1% MoM.

Directly contradictory stuff from China, with the HSBC Services PMI for December unchanged on the month, and modestly positive (52.5), whilst the official PMI for the non-manufacturing sector recorded a sharp rebound (56) from November's contractionary 49.7. Meanwhile, quarterly surveys of the business climate and entrepreneur's confidence showed, respectively, the worst readings sinc 1Q09 and 3Q09. In both cases, the most depressed sectors were real estate (no surprise there) and transport/communications – which I take to be a comment not only on depressed shipping markets, but also the nationwide shortage of diesel fuel. On the other hand, distributive trades (wholesale & retail) and infocomm recorded virtually no downturn on either business climate or confidence. More surprisingly, the construction sector seems to be surviving far better than the real estate sector, both in current business climate terms, and in confidence, too.

This granularity is interesting, since it suggests so far that the real estate travails induced by China's credit squeeze has not yet soured the entire economy. Rather, it seems those woes have remained sectoral rather than systemic at this point. If this can be maintained, China's chances of avoiding a hard landing look good. Meanwhile, one can look over to Hong Kong and find its retail sales still surprising on the upside, rising 16.9% YoY in volume terms and 23.5% YoY in value terms – both still more resilient than consensus expected.