Shocks & Surprises, Week Ending May 19th

For the first time in five weeks, positive surprises on growth outstripped negative shocks in the 58 separate piece of economic data released this week, with both the US and Europe being the surprise-providers. More, as the chart shows, the proportion of negative shocks reached their lowest level for give weeks. This does not necessarily mean the data is getting stronger, but it does suggest that the consensus is catching up with the data.

 There is a third aspect: there was very little data this week from China and NE Asia, and that which did arrive all conformed to consensus or current trends. In China, for example, the MNI Business Sentiment Survey flash pulled back slightly, the 70 cities residential price index declined slightly, but on closer inspection showed signs of stabilization, and FDI fell 0.7% yoy, which was within the range of expectations. There was no signal here that commanded a change in view or policy.

US: May Blossoms?

As usual, the US produced the biggest concentration of positive surprises. The most important was Empire State Manufacturing survey: this is the first read we have for May, and it showed a sharp rebound from April's weakness as shipments and working hours jumped, whilst new orders and payrolls also gained. But running it a close second was a surprise rise in the NAHB Housing Market Index, which produced the strongest reading for five years, and which was led by a large increase in buyers' traffic in the Northeast.

On the face of it, March's 1.1% mom rise in industrial output ought to have been the biggest surprise of the week, given that this was the strongest reading since December 2010. However, the surprise was mainly confined to a 4.5% mom jump in utilities output, which in turn reflected a 17% mom jump in natural gas : by contrast manufacturing rose by 0.6% - respectable but no reason to reassess consensus.

Although the Empire State Manufacturing survey gave a very strong steer for May's conditions, it was contradicted later in the week by a shockingly poor Philadelphia Fed manufacturing survey, which delivered the weakest verdict since September 11, as new orders and unfilled orders both actually contracted.

Europe: Eurostat Says 'No Recession'

The Eurozone sprang the least-likely surprise of the quarter, when the European Commission's Eurostat announced that the Eurozone had escaped recession during the first quarter. It's challenging to think that although the Eurozone may be the epicentre of a epoch-defining financial catastrophe, its statisticians can know that it is sailing through it without contracting.

Germany's 1Q GDP grew a surprise 0.5% qoq, with growth in net exports and domestic consumption offsetting a fall in investment spending, and this in turn was sufficient to allow the Eurozone as a whole to report no overall contraction qoq in 1Q – although France was flat, Spain contracted 0.3% and Italy contracted 0.8%.

The avoidance of recession is miraculous on two counts. First, the Eurozone hasn't shown a Manufacturing PMI of 50 or better since July 2011, and has produced a Services PMI reading of better than 50 only once in the last nine months. And, of course, the 50 reading is meant to be the fulcrum between expansion and contraction. And second, there is the broader data-run: during the last six weeks, I have tracked 139 major pieces of economic data from the Eurozone and its major economies, of which 70 conformed to consensus or trend, 43 arrived more than a standard deviation below consensus or trend, and 26 (including this GDP result) were a standard deviation or better than consensus or trend.

If Eurostat's preliminary calculations must be expected eventually to be revised towards the land of plausibility, the week did bring some less-unlikely positive surprises: Italian industrial orders rose 3.5% mom, Eurozone trade balance doubled expectations for March (as imports shocked by falling 0.4% yoy). French non-farm payrolls rose 0.1% qoq, and UK unemployment fell to 8.2%. But there were also shocks: UK unemployment is falling, but wage growth slowed very sharply, to just 0.6% yoy in the 3m to March, with private wages rising 0.3% and public sector wages up 1.3%. Eurozone industrial production fell 0.3% mom and 2.2% yoy in March, despite rises of 1.3% in German and 0.5% in Italy.

Whilst China and NE Asia sprang no shocks or surprises this week, two readings from Japan's machinery industry – both shocking - need noticing: machinery orders for March fell 2.8% mom and 1.1% yoy, whilst machine tool orders for April rose only 0.5% yoy. Both numbers were worse by more than a standard deviation than consensus or trend, with foreign orders generally weaker than domestic orders: NE Asia's investment cycle is stuttering.