Shocks and Surprises, Week Ending May 5th

Of the 68 data-releases monitored this week:

·         32 conformed to within one standard deviation above or below the consensus or current trends,

·         15 provided positive growth surprises, and

·         21 fell shockingly below that standard.

By dint of sheer regularity, Europe shocked most regularly, but in proportionate terms, the heaviest shockers were NE Asia (ex China and Japan) followed by the US. For positive surprises, China provided easily the largest proportion of surprises, albeit on a sparse sample. So the major shocks and surprises this week were:

·         The degree to which still-intensifying weakness in Europe is now finding a mirror in data in NE Asia and to a lesser extent the US

·         The surprise recovery of growth momentum in China

Other features of the week were

·         The extension, but not intensification of the US soft patch

·         The shocking implosion of Italian manufacturing, services and labour data

China: Surprising Recovery of Growth Momentum

China’s three positive surprises were the HSBC Services PMI for April, the CEMAC/Goldman Coincident Indicators Index for March, and Hong Kong's retail sales for March. The HSBC Services PMI rose to 54.1, the strongest reading since October, and good enough to break a nine-month trend. New orders grew the strongest for 10 months, payrolls the strongest since November. But – and this is worrying – input price inflation also jumped to the worst since August 2010, whilst output prices were unchanged. The CEMAC/Goldman Coincident Indicators index had little detail, but its modest improvement was sufficient to break the recent deteriorating trend. Both these indicators, however, are consistent with our previous observations about the easing of China’s cramped cashflows. As for Hong Kong's retail sales (up 17.3% YoY by value, 13.4% by volume), the surprises came from strong demand for the sort of portable luxury items most associated with the mainland tourist trade: jewellery and watches rose 19%, clothing/footwear rose 15.7%, and department store sales rose 14.5%.

NE Asia: Echoing the Soft Patch

Meanwhile, the US’s soft patch is turning up in the data from the nimble/niche economies of NE Asia. South Korean industrial production rose only 0.3% yoy in March, whilst exports fell 4.7% yoy in April. Dig down, and the problem was a sudden weakening in exports to the US (up 7.2% yoy in April vs 27.7%% in March), as well as to Japan (down 11.3% yoy) and Asean (up 4% yoy). Taiwan's Manufacturing PMI showed the weakest pace of growth since January. Orders continued to rise – but predominantly from domestic buyers – whilst margins continue to deteriorate. Finally, Singapore's PMI shocked by a relapsing back into a contraction for the first time in three months, as employment and backlogs of orders both fell.

US Soft Patch, Extended but Not Intensifying

Data from the US confirmed and modestly extended the manufacturing soft patch into labour markets and the service sector, but didn’t intensify it. The ADP Employment data early in the week gave early notice that Friday's non-farm payroll data was likely to be shocking, and in due course it was: a rise of just 115k was the worse reading since October, and to add insult to injury, previous months' gains were also revised down sharply. The bad news was amplified by shocks to average earnings (flat mom), whilst the cheer engendered by the unemployment ratio unexpectedly falling to 8.1% was dissipated by the fact it was mainly generated by a fall in the labour participation ratio. In addition to the labour market data, there was a clutch of shocks from regional surveys: the ISM New York survey, the Chicago PMI, and the Dallas Fed Manufacturing Activity all disappointed, with the Chicago PMI falling to the weakest reading since November 09.

Nonetheless, almost all surveys show that growth is continuing, albeit at a slightly reduced pace. And positive surprises are also continuing: the ISM Manufacturing survey for April was the strongest since last June, and even the weekly unemployment counts managed to surprise on the upside.

Europe: Continent of Falling Swords

Europe would kill for a 'soft patch' like that. But it's at the start of a recession which in Southern Europe is fast curdling into depression.  In Italy the reality is souring even faster than expectations. Its Manufacturing PMI came in at 43.8, the worst reading since October, and jobs were cut at the sharpest pace since January 2010. The Services PMI showed just 42.3, the sharpest contraction since mid-2009, with jobs being shed at the most rapid pace since July 09. In view of the message from the PMIs, the shocking jump in  unemployment to 9.8% in March - the worst reading in 12 years – should be no surprise. Certainly the news will be even worse in April.

There was also a shock from France, where the previous week's very soft Services PMI preliminary reading of 46.4 was cut in the final release to 45.2. New orders and work backlogs were both falling at the steepest pace since April 09. This collapse has not yet produced job cuts – but they surely cannot be long in coming.

Even in Europe, however, there were a couple of positive surprises. Eurozone retail sales fell only 0.2% yoy, which was better than expected, mainly because German retail sales rose 0.9% mom and 2.3% yoy, both pleasantly surprising. 

Outside the Eurozone, UK PMI readings continue to outpace both its European partners and the recent GDP data: this week the UK's Construction PMI read 55.8; its Services PMI read 53.3 and its Manufacturing PMI read 50.5.