Three Shocks & Surprises to Think About

Here are three of the shocks & surprises of the last week which look genuinely interesting - each of them worth following up in greater detail.  

1. The continuing collapse of Eurozone consumer confidence.  This is deteriorating far faster than the monthly data on retail spending, auto purchase etc suggests. 
2. The truly startling improvement in Spain's trade balance.  For the first time since the Euro was introduced, it looks like Spain is earning a current account surplus - and not just because imports are falling. 
3. China's August property prices. After the spectacular break-out in July, August's data tells us the authorities managed to retain control - absolutely necessary to broaden China's surprisingly narrow range of policy options.  

1. Eurozone Consumer Confidence September’s Consumer Confidence fell to the glummest reading since May 2009. This matters because the index has a good track record as a directional indicator, and because for the last nine months European demand has held up better than the erosion of confidence suggested. Bottom line, 4Q domestic demand looks extremely vulnerable.

In the chart, the domestic demand momentum indicator tracks retail & vehicle sales, labour markets and, where possible, real estate and construction data in Germany, France and the UK. It displays the results as an aggregate number of standard deviations from historic seasonalised trends. The surprising strength over the last three months originates solely in the Britain, whilst the most obvious signs of new weakness are showing in Germany. France, meanwhile, has been slowing gently but uninterruptedly since July 2011.

2. Spanish Trade Balance: Even if some combination of ECB largesse and sustained fiscal austerity manages to put the Humpty-Dumpty of the pan-Eurozone banking system back together, the Southern European nations still won’t be able to compete within the Eurozone or in the rest of the world, whilst hobbled by a currency far stronger than their economies would justify. That’s the underlying problem. Or is it?

Quietly, Spain’s trade data is beginning to improve so strongly that it begins to look as if Spain can compete, and is competing, successfully. So far this is overlooked – there is so little interest that the market cannot even muster a consensus forecast! The improvement isn’t just reflecting collapsing import demand. July’s data showed exports up 5.2% yoy, imports up 5% yoy, and the trade deficit falling to just Eu1.69bn. Almost certainly this means that for the first time since the introduction of the Euro, Spain will have earned a current account surplus in July! More, as the chart shows, over the last three months, Spain’s trade deficit is equivalent to just 10% of exports – fundamentally a modest imbalance. But if Spain can compete well enough to earn a positive cashflow in its transactions with the rest of the world, the Euro’s underlying problems look less impossible than common sense would suggest.

3. China Property Prices: The important message from August’s 70 cities price indexes is one of control.  The chart shows the net total of cities where the price of new homes rose during the August, minus those where prices fall – a net reading of +16. This is a retreat from July when prices rose in 49 cities and fell in only nine – a net +40. This surprise was a striking reminder that property is still seen as one of the few   potentially explosive saving/investment vehicles available to urban Chinese. And the authorities view that, correctly, as a potentially major political headache. Explosive property prices create political dissatisfaction, imploding property prices compromise the banking system and local government finances. So the ‘disappointment’ of the pullback in August is probably reassuring to China’s policymakers. After all, they spent most of August actively trying to dampen the market. If August’s data tells them have succeeded in taming the market without eroding the financial system, it helps the core agenda of financial reform, as well as making modest policy accommodation easier.