Shocks & Surprises - Week Ending July 13th

·        The 8.6% mom contraction in China's June imports which shocked at the start of the week was the key to unlock most of what happened next. The crucial thing was the sharp fall in China's commodity imports – crude oil, refined products, copper, iron ore – and the impact this has on commodity prices.

·        All regions reported on producers’ prices, wholesale prices and trade prices. Except for US PPI, these indexes fell more sharply than expected. These are generally positive surprises, because prices of raw materials and intermediate goods fell more sharply than final goods, and import prices fell more than export prices. Relative price movements thus improved both industrial margins, and terms of trade for all but commodity-producers. The result is that trade balances are generally improving even though trade volumes remain uninspiring.

·        Just as expectations about monthly data have deteriorated enough to make it far easier to surprise than to shock, economists have finally downgraded forecast growth and inflation for the US and Europe. A month ago, the US expected 2H growth of 2.4% - now this is down to 2.2%.  A month ago, Europe’s recession was expected to be done by year-end – now that has been pushed out to 2Q13. Bucking the trend, Japanese forecasters, have raised their forecast for the next six months to around 2% from the previous 1.5% in capitulation to a run of  surprisingly positive monthly data.

This is an extract from a weekly four-page publication "Global Shocks & Surprises" which summarises developments in US, Asia and Europe, and draws out the key messages from the data in a concise form. If you wish to take a look at this please email me at michael.taylor18@btconnect.com

Shocks & Surprises, Week Ending June 22nd

·        Early June industrial data shows the US ‘soft patch’ getting softer and deeper, and lasting longer than previously expected. Labour market data has disappointed for the third week out of four, gnawing at the underpinnings of domestic demand. Labour market weakness is consistent with the worry the US economy’s is growing only at the ‘stall speed’ of around 2%. With the Eurozone crisis also undermining business confidence, economists will start cutting their forecasts of a 2H pickup.

·        The resurgence in intra-Asian trade is the one unequivocal bright spot in the world economy just now. Japan’s May confirmed what we’d already seen in China’s trade data. For Japan, the surge in imports from Malaysia, Philippines and Vietnam represents the first impact of supply-line diversification away from domestic, Chinese and Thai production, after last-years disasters and disruptions. But it is bolstered also by pent-up SE Asian demand, as signalled by the doubling of car-sales in Thailand.

·         Only immediate disaster can sink below European expectations now, whilst even severely bad news can pose as an unexpected surprise. Within these parameters, Germany’s expectations about its own economy shocked this week, but French Services PMI and UK order books, though both contracting, were better than expected.

Shocks & Surprises - Week Ending June 15th

·        Economic shocks are no longer concentrated in Europe or Asia, but in the US, where industry, labour markets and consumer data all disappointed this week. Financial institutions outside the Eurozone have had time to tiptoe away from a Euro banking melee – companies and households much less so. As it develops, the Euro crisis will emerge as an economic problem as much as a financial crisis for the rest of the world.

·        China's strong May trade data (exports up 15.3% yoy) could be a game-changer: in particular, the recovering strength of inter-Asian trade tells us Asia's inter-connected production base has not given up on world demand.

·        Falling commodity prices are setting the pace for disinflation, and pit-propping margins. This showed up in producer price disinflation in US, Germany and Korea, and it was there also in improvement in international terms of trade for US and Korea. For now, input prices are falling faster than output prices, and the reduced pressure on margins slightly offsets the anticipated fall in asset turns. Disinflation also makes more room for policymakers – room used when China cut interest rates this week. 

I am experimenting with a four-page weekly analysis/commentary on the week's shocks and surprises. Whilst it is under development, it needs all the advice, criticism and commentary it can get. If it is worth doing, it must be the most direct, useful and time-efficient production of its kind available anywhere - and for that I need your input. If you feel you could spare the time to look over this product-in-development and contribute your criticism, please let me know. Thanks in advance.  

Shocks & Surprises, Week Ending June 2nd

So much for 'normality'! This week delivered enough shocks to torpedoed the notion that the underlying strength of the US economy would prevail in the second half of the year after enduring a short-term 'soft patch' enabling industry to adjust to an anomalous uptick in savings surpluses during the first quarter (detailed here and here).

Data from both Europe and the US force a change in that complacent view. First, early in the week, the Eurozone's monetary aggregates confirmed that the money-go-round initiated by the ECB's LTRO operations (detailed here), had run out of steam. M3 growth slowed to 2.5% in April from 3.2% in March , and although credit to governments expanded 7.7% in April, credit to the private sector was flat yoy.

The Eurozone's financial institutions have no capital to buy or create risk assets, so credit to the private sector has dried up even as holdings of government securities rise. More, the deterioration in economic and industrial sentiment tracked by the EU's indicators confirms what we'd already been told by the ECB's quarterly banking conditions surveys – there's no appetite for new debt anyway. Service sector sentiment readings in May hit the lowest since October 09; general economic sentiment was the worst since Dec 09, and industrial sentiment the worst since Feb 2010.

And the Eurozone's corporate sector isn't generating much cashflow anyway: corporate deposits fell 0.8% yoy in April, and deposits by non-monetary financial institutions (mainly insurance and pension companies) fell 1% yoy.

It is hoped that Southern Europe can generate positive cashflows despite carrying a severely mispriced currency, and despite quite serious fiscal tightening. It would be nice to think there was even the faintest sign that Europe's policymakers understood how one can disaggregate the sources of profits. If so, they would know that of the three principal motors of profits generation:

1. exports minus imports;
2. government spending minus taxes; and
3. consumption spending minus wages);

the determination to stay in the Euro scuppers I) and fiscal austerity measures scupper ii). The de facto collapse of Southern Europe's banking systems mean that the private sector must necessarily generate positive cashflow, so the entire burden falls on iii – somehow cutting wages even faster than consumption.

This can't be done. So whilst current policies, institutions, preconceptions and political personnel cling on in the Eurozone, the Southern half of the Continent is condemned to a genuine Depression, the political consequences of which are unknowable. History will not be kind to this generation of policymakers.   

The three major shocks came in areas central to the health of the domestic economy:

1. Labour Markets, where the rise in May's non-farm payrolls came in at 69k only, against a consensus expectation of 150k with a 1 SD range of 129 to 173k. This poor news was accompanied by an unexpectedly trimming of the average workweek from 34.5 hours to 34.4 hours, and a rise in weekly initial unemployment claims back to mid-April levels.
2. Real Estate markets, where pending home sales fell 5.5% mom in April, led by falls in the West and South. This weakness found an echo in the labour market data, which showed construction sector employment fell by 13k mom.
3. Consumer confidence, which retreated unexpectedly to the lowest levels since January, with sharp downgrades on both the current and likely future economic situation.

Meanwhile, China's policymakers appear still to be underestimating the extent to which cashflows are cramped – perhaps not fully understanding that when a decade or more of excessive investment has left you with a capital stock growing at around 18%, when industrial production growth slows to 9.3% (as it did in April), with exports growing only 4.9% (as they did in April) asset turns must necessarily be collapsing, taking profits and cashflows with them. This last week brought shocks from China's official manufacturing PMI and HSBC's revision of its manufacturing PMI. The message of the two isn't absolutely identical (the official version has manufacturing stagnating, whilst HSBC's has it contracting), but the message is clear: output is slowing, but new orders are contracting faster, leading to a building up of inventories of finished goods and a contraction of order backlogs. Chinese companies are therefore slowing purchases of inputs, and (probably) firing staff, whilst deflationary forces intensify.  

Shocks & Surprises, Week Ending May 26th

The guiding principal of Shocks & Surprises is that it identifies that data which falls one standard deviation above or below the range of consensus expectations, or in the absence of a surveyed consensus, more than a standard deviation outside identifiable current trends.

One of the upshots of this is that if these Shocks & Surprises are distributed normally, we should expect roughly 16% of the data to Shock and 16% to Surprise, and the remaining 68% to conform to consensus or trend. That would represent a state of affairs we might call 'normality'. Over the last six weeks, we been a long way from normality: typically between 45% and on occasion 60% of the data coming across our screens has been either Shocking or Surprising. Statistically we have been living in distinctly non-normal times. I am sure you have noticed.

What is less obvious is that, news headlines notwithstanding, the last couple of weeks may be edging back to normality, in the sense that the economic data is beginning to conform once more to statistical normality. This is not wholly or solely a matter of the financial industry's stable of economists reconciling their short-term forecasts to the new reality; it also includes a reassertion of historic seasonal patterns, albeit perhaps at slightly lower levels than previously expected. Thus, two weeks ago, the proportion of Shocks & Surprises fell to 43.1%, and this last week it sank to 35.2% of the 70 pieces of data I tracked - which is within roughly three percentage points of statistical 'normality'.

More, the only part of the world which is still delivering a statistically abnormal proportion of Shocks & Surprises is, of course, Europe. In the US certainly, but also within Asia as a whole, we are no longer in abnormal territory.

So we must start with Europe, where this last week brought the advance readings of manufacturing PMIs for May. Dire reading they made, with Germany, France and the rest of the Eurozone showing the worst readings for around three years, and with new orders shrinking fast owing to faltering domestic demand more than falling export interest. In the UK, the CBI Trends Total Orders survey gave the same message, as it retreated to levels last seen in December, although export orders eased only marginally. Germany's Ifo Institute also published their monthly survey of Germany business sentiment, with readings for overall Business Climate, Current Conditions and Expectations all falling below the level of expectations – although even now German business expectations are running higher than the long-term average for the series. There's no such mitigation for Italian Consumer Confidence, which for the second successive month explored previously untouched depths of gloom: a reflection on the outlook for the national economy rather than current individual economic and financial experience.

Even in Europe, however, positive surprises remain. The Eurozone's construction output for March surprised, jumping 12.4% mom as the zone recovered (Germany particularly) from February's construction-halting freeze. In addition, there were two sharply positive surprises from the UK, when March output of services rose 0.5% mom, and April's budget cash surplus was roughly four times bigger than the previous year (and expectations). The regular run of UK data for 1Q becomes increasingly difficult to reconcile with the 0.3% qoq GDP contraction recorded in the national accounts.

The US gave us two surprises this week. The first was a 1.8% mom rise in the Federal Housing Finance Agency house price index: to put this into context, it was the highest monthly jump for at least the last 10 years, with prices jumping all across the US. There's no other real estate data reporting this sort of a jump, so for the time being it remains an unexplained anomaly, raising the suspicion that there's something surprising about the way the data has been produced, rather than it telling us something genuinely surprising about improving conditions in the US real estate market. The second surprise looks far more convincing: the final version of the Uni of Michigan Consumer Confidence survey for May contained a very sharp upward revision in the 'economic outlook' reading, which took the total index to its highest level since October 2007.

Set against that, orders for capital goods, excluding defence and aircraft, contracted 1.9% mom in April, extending a run that's really souring fast: January orders fell 3.1% mom, in February they rose 2.9%; in March they fell 2.2% and now in April they are down 1.9%.

Asia brought no positive surprises at all during the week, but few shocks either. The HSBC Manufacturing PMI for China made headlines as it retreated to 48.7 in May from 49.3 in April, but although this was towards the bottom end of current trends, it did not break them. Rather, the Shocks came elsewhere: Japan's 7.9% yoy rise in exports in April disappointed (exports to China fell 12.4% mom); Taiwan's April export orders shocked by falling 3.5% yoy (mainly thanks to a 8.2% mom fall in orders from US and 7.1% mom fall in orders from China and HK); and Singapore's industrial production also disappointed by falling 3.5% mom and 0.3% yoy in April.  

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.  

Shocks & Surprises, Week Ending May 12th

Things rarely turn out as expected. This was going to be the year when the giant emerging economies, led by China, would throw a tow-rope to a near-stalling US economy. Instead, the data tells us that even sustained recovery in the US is struggling to provide China with enough external stimulus to allow it to overcome its own cyclical and structural problems.

That, at any rate, was the message this last week, when:

·         Shocks were concentrated in China and Europe, and to a much lesser extent NE Asia

·         Surprises were concentrated in the US and to a much lesser extent in Japan

China Sneezes

The week's shocks were dominated by China's data for April: seven out of the 11 pieces of official data released by China this week undershot economists' consensus, or current trends, by a full standard deviation or more. The worst news is still monetary: where M1 growth slowed to just 3.1% yoy, and actually contracted by 300bn yuan during April. Deposits also contracted by 600bn yuan during the month, even though the banks gave out 680bn yuan in new loans. What this tells us is that the cashflow cramps afflicting China's economy are intensifying, with China's banks running to a net negative cashflow (deposits in minus loans out) of 1.14tr yuan last month.

In response, PBOC has announced reserve ratios will be cut by a further 50bps starting May 18^th. But this easing now looks to be behind the curve, freeing up only 420-430bn yuan in lendable funds. So far PBOC has not released the broader 'aggregate financing' measure for April, so we cannot be sure there isn't further action being taken behind the scenes to relieve the pressure on corporate cashflows.

The cashflow grind is behind China's other major shocks: imports grew an anaemic 0.3% yoy; exports did little better, falling 1.5% mom (though growing 4.9% yoy) even in the face of unexceptionable growth in Western demand (see below). This underlines our observation that the crucial structural fact about China's economy since the financial crisis has been its failure in export markets, not its success. Growth of industrial production slowed to 9.3% yoy, the weakest since May 09, mainly reflecting slumping output of electricity and rolled steel. Retail sales slowed to 14.1% yoy from 15.2% in March. Although this was shockingly weaker than economists' estimates, it merely extended the sequential weakness seen in March.

The Neighbours Catch Cold

China's slowdown is also taking its toll on its nearest NE Asian neighbours. The most obvious sign of this was Hong Kong's GDP, which slowed unexpectedly to just 0.4% yoy in 1Q – a slowdown that was not anticipated, and owed everything to a trade contraction (exports of goods fell 5.7% yoy, imports fell 2.7% yoy). And Taiwan's export performance is also shockingly slowed by China: April exports fell 3% mom and 6.4% YoY, with exports to Hong Kong and China down 5.6% mom, whilst exports to the US fell only 0.7%, and to Japan rose 4.1%.

Japan Still Surprises

Part of what ails China's export and industry yoy comparisons is the fact that this year, no combination of earthquake/tsunami/electricity shortage has knocked Japan out of the ring. This is still not being represented in economists' views on Japan (and certainly not the stockmarket), and for the fourth week out of five, Japan's data produced more positive surprises than negative shocks. The highlight was the unexpectedly strong reading of the Economy Watcher's Outlook survey, which rose to levels previously seen only in mid-2007, on the back of particularly strong readings for prospects for employment, services, retail and the non-manufacturing sector.

US: Trade, Jobs, Federal Budget

The US had its strongest set of readings for a month, strong enough to offset the series of modest negative shocks of the previous three weeks. Three sets of surprises in particular are worth noting: the best JOLTs job openings data since July 2008; the strength of March trade data (exports up 2.9% mom, imports up 5.2% mom); and a US$59.1bn April Federal budget surplus that very nearly doubled consensus expectations, resting on a 10.1% yoy jump in receipts. The strength of exports is particularly important, since we have previously identified the role that exports need to play in regulating the mismatch between industrial supply and domestic demand which underlies and regulates the US's current 'soft patch.

The strength of the US's exports is partly testament to German demand – US exports of goods to the EU jumped 13.8% mom in March. Germany, after all, accounts for nearly 52% of total Eurozone import demand.

Europe: Germany and the Rest

Although Europe's data is still regularly shocking in its weakness, Germany remains resilient. Its industrial sector in particular refuses to buckle, with output surprising by rising 2.8% mom and 1.6% yoy in March, whilst factory orders rose 2.2% mom. Encouragingly, this strength is still resting on the capital goods sector, where orders were up 4.2% mom and output was up 2% mom. And it's still overseas orders which are driving the numbers: that 4.2% rise in capital goods orders came despite a fall of 1.3% in domestic orders and a 2.9% mom fall in orders from the Eurozone! Similarly, Germany's exports showed surprising strength, rising 0.7% yoy overall, with a 3.6% yoy fall in exports to the Eurozone being offset by a 6.1% yoy rise in exports outside Europe.

For the rest of Europe, though, there is no such comfort: last week saw the Sentix Investor Confidence survey slump to its weakest reading since June 09 – investors expect a severe recession from which even Germany will not escape altogether unscathed. The oscillations in UK data continue, with the week bringing shocks in like-for-like retail sales (down 3.3% yoy) and Nationwide Consumer Confidence, which dived because of a very sharp deterioration in 'economic expectations' rather than any downturn in 'current conditions'. In Spain, however, the plight of current conditions was signalled by a 7.5% yoy fall in industrial output in March – the sharpest contraction since October 2009. 

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.

Shocks and Surprises, Week Ending April 21st

·         US data shocks tell us we're back in a 'soft patch': industrial data, labour markets and real estate all reported results worse by 1SD or more from consensus.

·         Europe has a busy data-week, producing few shocks or surprises. Probably the most shocking event was ECB’s revisions to current account balances for 2010 and 2011, which cut the annual deficits by an average of 86%.

·         Japan's puzzling strength continues: March trade data was surprisingly strong, and so, just about, does domestic demand.

·         China and NE Asia released little data, and no challenge to consensus views.

US – The Soft Patch Arrives

Evidence for a 'soft patch' in the US came in thick and fast as no fewer than seven data-releases slid more than a full standard deviation below the range of estimates. From the industrial sector, the Empire State manufacturing index slid to just 6.6 from March's 20.2, and the Philadelphia Fed survey fell to 8.5 from 12.5 in March. These two surveys are among the earliest indicators for April's industrial activity, and both were shockingly weak. Industrial output data for March was flat MoM for a second successive month. This was a shock, but even worse, the output data hid a 0.2% MoM contraction in manufacturing, which was offset mainly by a 1.5% MoM rise in utilities output. This flatlining in the industrial sector found echoes in labour and property markets. Thursday brought a second successive week in which initial unemployment claims rose above the range of expectations. And finally, outcomes for housing starts, existing home sales, and the NAHB Housing Market Index all fell more than 1SD below the range of expectations.

Eurozone – Busy but Few Shocks/Surprises

Truly, Europe’s major surprise of the week came from the way the ECB revised the last two years' current account data, cutting 2010 and 2011 deficits by an average 86%.  Yes, data gets revised, but when such major revisions are made to such central data, it cannot help but make you question the basis upon which policies are made. Besides that, although the wires were busy, there were few shocks or surprises (tally: 17 datapoints on consensus; four surprising on the upside, and three shocking on the downside). Moreover, one of the surprises (UK's retail sales rising 1.8% MoM in March), and one of the shocks (Eurozone's construction output falling 7.1% MoM in Feb) told us more about the weather than the economy: Germany froze in February (construction fell 17.1% MoM), whilst March sun brought out clothes shoppers in the UK.

Japan – Baffling Run of Strength Extends One More Week

Japan's run of stronger-than-expected data extended to March's trade data, in which exports rose 5.9% YoY (vs an expectation of just 0.2%), and imports rose 10.5% YoY (vs expectation of 7%). The strength of export was largely attributable to a 44.7% YoY jump in auto-exports, whilst Japan's import bill was swollen by petroleum (up 22.8% YoY) and petroleum products (up 32.1%). (Soaring oil imports are what happens when Japan closes its nuclear power plants). Domestic demand indicators were less clear: March department store sales surprised with a 14.1% YoY jump, but convenience store same-store sales disappointed by rising only 0.4% YoY. The jump in condo sales in February was reversed to a 6.1% YoY fall in March, but average prices rose and inventory is getting cleared.

China and NE Asia – Little Data, No Surprises

Japan apart, Asia produced almost nothing to trouble consensus. In China:

·         FDI used during the first quarter was reported down 6.1% YoY;

·         a rise in news orders propelled the MNI Business Sentiment survey for April slightly higher;

·         the 70 cities real estate data showed prices of new residential property falling in a net 38 cities in March (vs a net 42 in February).

All three came in slightly higher than expectations or central trend, but in each case by less than a standard deviation: no need to revise the consensus.

Similarly, the little data released in NE Asia need not detain us: Taiwan export orders fell 1.6% in March, and S Korean export prices were flat YoY – both in line with expectations and trends. In fact the only surprise delivered by Asia ex-Japan this week was the 16.8% MoM collapse in Singapore's non-oil domestic exports – a puzzling collapse which was attributable neither to electronics, nor pharma, nor even Europe. 

Shocks and Surprises, Week Ending April 14th

• China takes the most direct-possible route to ease up the cashflow cramps of 1Q, as bankers' acceptances surge more rapidly even than direct bank lending. The reflation is on. . . .
• Japan provides its fourth week of consensus-bustingly strong data, this time led by orders for machine tools and for machinery. Street-level confidence survey also jumps unexpectedly to a full standard deviation above the series 10yr average
• Eurozone's financial disaster resurfaces in a week that also delivered surprising strength in industrial production, and unexpectedly strong German trade data.
• In the US, labour markets and trade data (imports down 2.7% MoM) suggest a soft patch, but consumers and businessmen's view of economic outlook surprise on the upside

China: A Reflation both Dramatic and Stealthy!

This week brought the end-of-the quarter data for China, with releases bringing news not only of many element's of March's trading environment, but also quarterly GDP data. And yet this news mostly merely confirmed expectations: GDP data, industrial production, investment and consumption data, monetary data and both export and import totals all arrived within a standard deviation of consensus expectations.

Despite that, it was in the details of China's monetary data that the week's most important surprise could be found, buried. And the surprise is that the aggressive reflation of China's economy has already begun. On the face of it, M2 growth accelerating modestly to 13.4% (from 13%) and M1 stuck at 4.4% (from 4.3%) was nothing surprising. New bank lending of Rmb 1,010 bn in March was a surprise, in that it was slightly higher than the Rmb 740bn to Rmb 848bn range of forecasts. But a big monthly lending total during one of the first three months is the rule rather than the exception in China's banking year, and new lending of Rmb 1tr+ is not unknown.

The real surprise came in the the details of China's new 'aggregate financing' total. This 'aggregate financing' includes bank lending, but also bonds, equities, foreign borrowing, trust loans and bankers acceptances. Whilst bank lending in March at Rmb 1,010bn was only Rmb 299.3bn higher than in February, the 'aggregate financing' was Rmb 820 bn higher, at Rmb 1,860bn. This is a huge total, equivalent to 17.2% of 1Q nominal GDP. Drill down to find what's driving it, and you find China's banks wrote a net Rmb 276.9bn of bankers acceptances in March, a reversal from the Rmb 31.2bn net redeemed in February.

Now, when economists second-guessed the timing, scope and nature of China's eventual reflation, the squabbling has mainly centred on the extent to which the relaxation would come via cuts in reserve ratios or cuts in interest rates. What's happened here is neither: rather, the rise sudden jump in bankers acceptances is an absolutely direct response to the cramping in corporate sector cashflows which we have previously identified. Old-timers will remember the 'triangular debt' problems which used to plague China in the 1980s and 1990s, in which unpaid bills are allowed to mount up among companies well past the point of easy netting off, resolution, or payment out of cashflows. Historically, when “triangular debt problems” began to torpedo the economy, the central bank started printing money. Today, since China's banks have been made to keep very low loan/deposit ratios, there's no need to print money: rather, the banks can simply be allowed to mobilize their resources, by, for example, writing bankers' acceptances. It is a very direct way indeed to respond to the seizing up of cashflows.

Compared with this policy surprise, even the other shocks and surprises delivered by China seem rather mundane: March trade data showed export growth at 8.9% (towards the top of expectations) whilst import growth slowed to 5.3% (right at the bottom of expectations), which taken together produced a US$5.4bn surplus which was better than expected. Also breaking upwards out of a declining trend was China's monthly Entrepreneur's Confidence Index – although no details were given, it may be that cashflows are improving.

But there was also a negative inflationary shock, with March CPI showing 3.6% YoY, up from February's 3.1%. Not only was this unexpected, but it was generated by a sequential rise that was a full standard deviation above historic seasonals. On the face of it the main reason was a 7.5% YoY rise in food prices (up from 6.2% in February). But in addition there was a surprising sequential jump in non-food prices, masked by an exceptionally easy base of comparison, and stemming ultimately from a jump in transport and telecoms prices, in turn driven by hikes in petroleum prices.

Seemingly, China's policymakers agree with those analysts who have downplayed this result. However, on a statistical basis, this was a negative shock.

Japan and NE Asia: Despite Tankan, Japan is re-tooling

For the fourth week in a row, Japan's economic data contained significant upside surprises. This week's data specifically called into doubt the previous Tankan's forecast that there will be no expansion of capital spending this year. Machine tool orders roses 2.4% YoY, and whilst that was no break in trend, domestic orders jumped 29.1% MoM and 24.7% YoY, which was a sequential jump fully 2.3 Sds above historic seasonal patterns. Later in the week, core machinery orders rose 4.8% MoM, despite a 18.3% MoM fall in foreign orders. Manufacturers' orders rose 16% MoM (driven by chemicals, oil and foods) and non-manufacturers' rose 2.3%. (Bank lending data was also stronger than expected, despite rising a meagre 0.9% YoY: however, this looks more the product of lazy forecasting than true evidence of surprising strength.) Finally, the Economy Watchers survey of current conditions for March not only jumped far more strongly than expected, but arrived at a level that was a full standard deviation above the series' 10yr average.

After literally decades of disappointment, it will take far more than four weeks' of surprisingly robust data for the consensus on Japan to change.

Elsewhere in Northeast Asia, the week brought little challenge to consensus, with the most prominent perhaps being an unexpected fall in S Korea's unemployment ratio to 3.4% in March from 3.7% in February – a fall which looks genuine enough.

Eurozone: German Trade Still Robust

Even as the Eurozone crisis claws its way out of the ECB's wallet again, the industrial sector can still spring some positive surprises: industrial production rose unexpectedly by 0.5% MoM in February, although this was still down 1.8% YoY. On closer inspection, though, the surprise was really confined to the Netherlands, where output rose a baffling 13% MoM.

German industrial output fell 0.2% MoM, but any disappointment there was offset by a set of German trade data for February showing vigorous growth beyond anyone's expectations: exports rose 1.6% MoM (up 13.4% YoY to countries outside Europe), and imports jumped 3.9% MoM. But there's no evidence from Germany's data that its trading strength is doing much for the Eurozone, since trade with the rest of the Eurozone was geographically the weak spot.

And, of course, Europe also produced negative economic shocks, of which the worst was probably Britain's trade deficit, which expanded far beyond the worst expectations of economists as exports fell 3.4% MoM whilst imports were flat. Over recent weeks, Britain's data has managed to confound the Eurozone doldrums – and indeed it was at it again this week, with like-for-like retail sales rising 1.3% MoM in March. But the price for that relative domestic resilience is a newly-deteriorating trade deficit.

US: Labour softens but outlook improves

The shocks and surprises in the US this week look linked. First, the weekly tally of initial unemployment claims jumped unexpectedly to the highest reading since early December. If last week's non-farm payrolls data had not been so shocking (up just 120k, vs an expectation of 205k) this would have carried less import. As it is, the sudden weakening of labour market data has been sufficient to re-start speculation of a third round of quantitative easing, and driven 10yr Treasuries back to around 2% levels from the 2.3% levels seen only ten days ago.

But if the durability of the labour market recovery is being questioned, some weakness in demand is also narrowing the trade deficit unexpectedly. Trade data for February showed the deficit narrowing to US$46bn in February, primarily reflecting a fall of 2.7% MoM in imports. And there's little doubt but that it's slackening consumption demand that's driving the fall in imports: imports of consumer goods fell 6.3% MoM, food and beverage fell 6.3% and imports of autos contracted 4.2%.

This sits awkwardly with the news from the wholesalers, who reported surprising strength in both sales (up 1.2% MoM) and inventories (0.9% MoM) in February.

If the labour market data does presage another 'soft patch' for the US, the message has not yet got through to consumers and businessmen consulted about their expectations by surveyors. The IBC/TIPP Economic Optimism index jumped to the highest reading since February 2011, driven primarily by improved expectations about the economic outlook; and although the University of Michigan's preliminary consumer confidence index for April retreated slightly, measurements of confidence in the economic outlook continued to rise to new levels.

Shocks and Surprises, Week Ending April 8th

• Japan's run of upside surprises continues with huge jump in car sales, break-out in Leading Indicators, and strong cash earnings. But Tankan shows no corporate Japan doesn't believe it: no investment follow-through is contemplated yet.
• In China, official and HSBC/Markit PMIs for manufacturing sector contradict each other. HSBC's more gloomy assessment fits better with the available evidence, but this week will give us a clearer picture for March. In NE Asia, manufacturing PMIs for both Taiwan and Korea surprise on the upside, but March export data doesn't.
• In Europe, UK extends its run of positive surprises, whilst consumer sentiment remains glum. In the Eurozone, retail and industrial sector data continues to deteriorate shockingly. But French consumer confidence is strangely buoyant and trade balance deteriorates.
• US non-farm payrolls provided a shocking disappointment which throws the spotlight back on Ben Bernanke's recent policy thoughts.

Japan: Upswing with No Corporate Believers

Japan extended the run of positive surprises which we've noticed over the last couple of weeks (see last week's Shocks and Surprises). The positive signals from may be difficult to account for, but increasingly they're even more difficult to ignore. Or are they? This week, for example, we learned that vehicles sales jumped no less than 78.2% YoY in March. Since there's no survey taken to form consensus, it's easy both to miss the strength of this result, or – if it's noticed at all – dismiss it simply as reflecting the exceptionally easy base of comparison generated by the disasters of March 11, 2011 and their aftermath. But it was 12.3% higher than March 2010, 54.1% higher than March 09, 5.6% higher than March 08, 2.1% higher than March 07. And sequentially is was a full standard deviation above seasonalized historic trends. In other words, this was a fully-functioning surprise indication of domestic demand.

And it was supplemented by the most positive reading from the Leading Indicators Index since January 2008, a reading which, once again, was a full standard deviation higher than the average since 1990. Further, we had an unexpected rise of 0.7% YoY in cash earnings in February, despite a 17.7% YoY fall in bonus earnings.

Economists aren't the only ones not to fully recognize or react to the way signals from Japan are confounding expectations – corporate Japan isn't buying it either. We know this from unexpectedly dim readings from the quarterly Tankan survey of corporate attitudes: business confidence both for 2Q and for the outlook for the year disappointed mildly, without actually deteriorating QoQ. Far more disappointing is the reading that corporate Japan does not intend to raise capex at all this FY (started April 1). Right now, there's simply no follow-through to the signals of strengthening domestic demand.

China – Official and HSBC Manufacturing PMI both surprise – in different directions

The week for China and its neighbours in NE Asia (excluding Japan) was dominated by two sets of shocks and surprises. The first came from China, where we had a straight conflict between the HSBC/Markit reading of China's manufacturing PMI, and the official manufacturing PMI. HSBC's survey found a further contraction in March, led by the sharpest fall in new orders measured this year, to which manufacturers responded by cutting payrolls and purchasing activity. By contrast, the official manufacturing PMI discovered the best reading for a year, in which there were sharp rises in new orders and output,and more moderate rises in purchases and employment.

Both cannot be right, and the weight of corroborating evidence is clearly on the side of HSBC's more gloomy reading. This week will probably settle the dispute, since we will get data for trade, output and investment and retail sales for March.

Among China's Northeast Asian neighbours we've already seen how Japan's economic readings are surprising on the upside at the moment, and we also got positive surprises from both South Korea and Taiwan this week. South Korea's manufacturing PMI came in at the strongest reading for a year, with new orders being driven both by domestic and exports demand. Taiwan's manufacturing PMI was similar, producing the best result since April 2011, with the growth in new export orders continuing to accelerate. We got a related surprise from Singapore's monthly Electronics Sector Index, which improved more than expected driven by strong rises in both production and export orders, even as inventories fell and orders backlogs expanded.

That said, it remains difficult to square the improvements in these surveys with current trade data: South Korea's exports fell 1.4% YoY in March, and Taiwan's fell 3.2% YoY (reported today), and in both cases, the slowdown looks well spread geographically, with sharp fall-offs in exports to Europe, and no significant sign of recovering strength in China.

UK's Positive Surprises – Can It Escape Eurozone Recession

Within Europe, the UK delivered a series of three positive surprises, whilst the Eurozone, including the core of Germany and France gave us a series of negative shocks. The UK's positive surprises came from the Markit PMIs for both construction and services. The construction measure gave the strongest reaidng since June 2010, with the strongest growth in output coming from the commercial sector, and the sharpest jump in new orders since September 2007. The service sector surprise was less pronounced, but it took the 1Q12 average to the strongest since 2Q10. Both construction and service sectors are now reporting growth in employment and purchases. This renewed strength is surprising, not only because it diverges from the experience of the Eurozone, but also because it finds no echoes in recent consumer confidence studies, which over the last three weeks have been shocking in their misery. But perhaps actual economic behaviour is a more accurate guide than responses to opinion-surveyors. For example, this week also showed UK car registrations up 1.8% YoY in March. It may not seem much, but March is a crucial month for UK car sales, typically representing 18% of the year's sales, and this result was in fact more than a full standard deviation above seasonalized historic trends, and, in addition, was powered by a 7.4% YoY rise in private car purchases.

Meanwhile in the Eurozone, the week brought negative shocks from:

• Eurozone retail sales, which fell 0.1% MoM and 2.1% YoY;
• German factory orders for February (up 0.3% MoM but down 6.1% YoY), with orders from the Eurozone falling 3.2% MoM, in particular led by a 9.4% MoM collapse in Eurozone orders for consumer goods.
• German industrial production for February, which fell 1.3% MoM and rose 1% YoY. Although statistically a 'shock', the weakness was intensified by extremely cold weather in the first half of the month which contributed to a 17.1% MoM fall in construction output.
• France's trade data for February, in which a slowdown in export growth (to 1% MoM) and continued import growth (2.8% MoM) resulted in a trade deficit far bigger than expected. Most worrying is France's trading position with the rest of the Eurozone: exports to the region fell 0.9% MoM, whilst imports jumped 6.9% MoM. We have previously noted the strange surge in consumer confidence in France following the ECB's decision to extend cheap three-year money munificently in December and February. It's not difficult to see these trade numbers as an expression of that strange and lop-sided surge in confidence.

US: Labour Markets and Monetary Policy

This week was above all concerned with US labour markets, in which Good Friday's sharply disappointing non-farm payrolls data (up only 120k, vs an expected 205k, and Feb's 240k), brought into focus a recent speech by Fed chairman Ben Bernanke.

The abrupt slowdown recorded in non-farm payrolls was a real shocker – since the previous three months had averaged 246k. If it is confirmed (and it was contradicted by an ADP Employment change reading which was strong at 209k) it will train attention on the various pieces of data which have disappointed recently: the series of regional Fed manufacturing surveys, and, this week, vehicle sales, and construction spending (down 1.1% MoM).

And that in turn will focus attention back on the Fed's intentions. The argument made by Bernanke in his recent speech is a two-parter. The first part warns that intense recessions can lead to a lower structural participation ratio, and hence depress the growth potential of the economy. The second part says not only that this is unacceptable, but that monetary authorities can and should act to avert it. If the first part of this argument is an important statement of economic history, the second is, to say the least, contentious – since the one sure way to discover the (new) limits of the productive capacity of the economy is to print money until inflation is actually discovered. Whilst this seems extraordinarily complacent, even reckless, as a methodology for determining monetary policy, Bernanke does at least seem right that there's no obvious sign that the US is yet bumping up against its supply constraints.