China's Inflection, US Risk, British Jobs: Three From Last Week

Three things worth your attention from last week's data-flow:
1. The inflection in China's September monetary and domestic demand data. It's not that things are changing/improving at a fundamental level - it's just that there's more money about, which is unblocking cashflows. 
2. Yes, the global balance of shocks and surprises is reaching its peak of the year, after a third very 'surprising' week (globally 28.3% of releases surprised, 13.3% shocked). But don't ignore the fact that US bond markets seem to be indicating that financial risk appetite is about as positive as historically it gets. The message therefore is one of vulnerability. 
3. The rise in British jobs, extended again in August, looks a real phenomenon, rather than a statistical one, and is a sustained trend, rather than, say, an Olympics-related spike.  Of course, since it contradicts poor GDP data, it implies falling labour productivity.  But by no more than the 1998-2008 trend would have expected.
  
1. China Money and Domestic Demand Taken together, September’s money  and domestic demand data make a convincing case that China’s economy has reached an inflection point. M1 of 7.3% yoy surprised, as did M2 growth of 14.8%.  Similarly, retail sales growth surprised at 14.2% yoy, and was nearly a full standard deviations better than seasonal trends; and there was a surprise too from urban fixed asset investment growth of  20.5% ytd yoy. 

It is revealing that even as the growth of monetary aggregates surprised, they suggested no underlying change in the way China's consumers, investors and savers are behaving. For example, there was no uptick in liquidity preference (M1/M2) of the sort you'd expect if people were suddenly more keen to spend money on  goods, services or investments. Similarly, monetary velocity (GDP/M2) is still in decline, suggesting no underlying gain in banks' efficiency in allocating resources.  

In turn, this tells us that the upward inflection of the economy is not the result of an underlying improvement in the factors determining  cyclical behaviour, but simply a result of there being more money available to allow companies and individuals to maintain their previous behaviour. It is simply a direct result of a loosening of credit conditions.  

Whilst most commentary tends to focus on China’s trade data, what determines China’s domestic demand is changes in the availability of credit and (probably more importantly) cashflow. So the key event supporting this upward inflection point is probably the growth in financing that is not straight ‘bank lending’, but rather is everything else which is included in the much broader ‘social financing aggregate’ total (explained here). The monthly addition to social financing came to Rmb1.65tr in September, which was almost four times the addition in Sept 2011. In the three months to September, new ‘social financing’ came to Rmb 3.94tr, up from Rmb 2.04tr in the same period last year. The central difference between simply relaxing bank credit vs expanding the broader financing options of social financing is precisely that it tends to address the cumulative cashflow problems of China’s economy without privileging asset markets such as real estate.

2. US Surprises and Risk Premium  The 6wk global balance of shocks and surprises is approaching its most positive of the year so far. The improvements made in September (largely in Asia, but shared more modestly by the US and the Eurozone), has been accompanied by a rise in the US capital risk premium levels to pre and post crisis highs. This capital risk premium is calculated as the difference the yield on 10yr Treasuries and 10yr TIPS. The higher the premium, the greater the appetite for financial risk. Currently it stands at around 2.52% (Treasuries at 1.8%, TIPS and minus 0.715), which is a level last seen in March-April 2011, and before that June-July 2008. On both those occasions, this was the peak of risk appetite, and the retreat from that peak was accompanied by falling equity markets.  

There’s no certainty that anything similar will happen this time, but it does suggest that fixed income markets are now discounting a continuing stream of good news, and so are more vulnerable to disappointments than at any time for the last 18 months. 

 3. British Employment  The rise in British employment is one of the statistical mysteries of our time: in the 3m to August, the number of jobs rose by 212k qoq, with 162k new employees and a further 35k newly self-employed.  Moreover, the number of those economically inactive also fell by 138k during the same period. As the chart shows, this means that the number of British jobs is now 84k now than at the pre-crisis peak of early 2008. 

Quite often, surprise improvements in unemployment rates can be traced to strange movements in the denominator. Not in this case: the improvement looks quite genuine. But the improvement is in stark contrast to two things: first, GDP data which tells us the British economy is currently 3.8% smaller than it was at its pre-crisis peak. Second, it is also a great contrast to what is happening in the Eurozone, where in 2Q employment levels had fallen by 4m, or 2.7% from early 1Q2008 levels, with no sign of recovery.

In fact, the divergence between GDP and employment may be less surprising than it immediately seems. Certainly, if all the data is correct, it implies an erosion in labour productivity. However, once real output per worker is discounted by changes in capital per worker, it becomes clear that declining real labour productivity  has been the norm since at least 1998, and that, after steep cyclical productivity declines in 2008/09, current productivity levels have simply recovered to the (falling) 1998-2008 trendline.  The sharp rise in employment since 2010 ran alongside the recovery back to that (falling) trendline. From here on in, we should expect 'normal' employment patterns to be resumed.