A Dash of Coldwater Economics: Recent Episodes
Michael Taylor
Scan Widely, Watch Closely. For years I've tracked around 500 data-sets from the world's leading economies every month to produce the most data-rich suite of shocks & surprises indexes. When something catches my eye, this daily podcasts talks about it . . . briefly.
The US July CPI result was better than expected, with headline inflation moderating to 8.5% yoy (from 9.1% in June), mainly thanks to a 4.6% mom fall in energy costs. This was on the back of a 10.4% mom fall in Brent oil prices and a 8.5% mom fall in Nymex natural gas prices. It is not obvious this is being repeated in August: so far, on average oil prices have fallen a further 7.5% mom, but gas prices have rebounded 12.6% mom, and overall the CRB index, which fell 9.5% in July, is almost unchanged.
Still, July's result is strong enough to allow us to scale back the likely inflationary trajectory in the US, with it now expected to peak at 9.1% in September, before drifting down to below 8% by end-2Q23.
But two caveats. First, I'm fashioning these trajectories from the 6m deviation in 5yr seasonalized trends - but volatilities in CPI indexes during the last six months have been consistently dramatic (both above and below trend), and in some cases (UK) positively freakish. So even a 6m trend assumption isn't looking particularly stable month-on-month.
Second, whilst inflationary pressures may be moderating in the US, they are only now beginning to show up in force in NE Asia. Overall, this means that my measure of global aggregate inflation continued to rise in July. . . .
I'm less concerned with the recession/no-recession arguments (hey, don't US politics just absolutely fascinate you? Me neither), than with the implications for profits and stockmarket valuations. Three observations:
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Regardless of headline GDP, once you strip out extremely volatile inventory-flows, there's been essentially no growth in final sales of domestic product now for five quarter. There's just no momentum at all.
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The massive fiscal stimulus has not yet completely been washed out of the Kalecki profits reckoning. I calculate profits were down 7.4% qoq and 19.4% yoy, mainly thanks to the fiscal deficit moderating. But there's worse - the profits/GDP ratio has fallen to its lowest level since 1Q16 - so there's cyclical as well as one-off structural pressure at work.
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All of which means the S&P500 remains overvalued on my slow-model basis, which has been essentially on the money for the last 30 years. July's rally will extend that overvaluation. So the vulnerability continues, and rises.
The speed and severity with which data from the US has collapsed over the last month is extremely unusual. Why is the outbreak of inflation doing such damage so quickly.
One reason is the way in which the US profits model has changed over the years, until since 2000 to the present day, 77.6% of Kalecki profits are attributable to household and government dissavings, whilst only 22.4% come from net investment and net exports. Compare that to 1960-1980, when net investment and exports accounted for 65.7% of profits, with h'hold and govt dissavings generating only 34.3%.
Let's state the obvious: if your profit model depends disproportionately on h'holds and governments spending more than the earn, sooner or later, even the strongest financial balance sheet will become impaired, fragile. And it's that financial fragility which is kicking in, and kicking down, right now.
Two things today: first, a closer look at the ECB's so-called 'Transmission Protection Instrument'. Short take: it's open ended, with only decorative conditionality. The real constraint is that it mustn't inflate the ECB's balance sheet. So if it wants to do anything other than short-term fire-fighting in (say) Italy's bond market, it will have to do so by selling (say) German bonds. That'll make ECB meetings fun to watch.
Second thing: today's UK public sector deficit of £22.1bn featured an astonishing £19.9bn in interest payments. That's 23% of total spending, which is 6.2SDs above the long-term average. Cui bono? Why, chancellor Rishi Sunak of course, hoping to step up to become PM on a Treasury-determined manifesto of immediate recession-inducing tax rises. That unprecedented shock of interest payments could almost have been designed to illustrate the Treasury's - sorry, Rishi's - argument. And probably was - 6.2SDs after all.
The UK is about to enter the strange and disturbing world of sustained double digit inflation. We can tell that from the underlying trends generating June's 9.4% yoy headline CPI, but also by the way the gap between input PPI (24% yoy) and output PPI (16.5% yoy), and the gap between output PPI and CPI are continuing to widen. Not until we see some evidence that the pressure to 'pass-through' factory inflation pressures has peaked can we expect headline CPI to retreat. There's no sign of that yet.
Fiscal policy is doing the heavy lifting as China seeks to re-start its economy following zero-Covid strategy lockdowns. June's monthly data suggests they're having some success in re-opening, even if this isn't obvious in the yoy results.
But 2Q GDP growth of 0.4% yoy catches China's economy at its lowest ebb, and the closer you look at it, the uglier it gets. After all, this 0.4% yoy growth was generated really only by net exports and a surging fiscal deficit - strip those out and 2Q nominal domestic demand was in freefall. Which is what you'd expect when you close down the economy.
Full all-singing, all-dancing illustrated & detailed version available on the Coldwater Economic sustack page.
People are queuing outside some small banks in Henan, desperate to rescue their deposits. Is this the start of another near-collapse of China's banking system.
On balance, the available evidence makes that very unlikely.
We've now had more of January's foreign reserves data for Asia, and its generally shown modest falls, as you'd expect when the dollar strengthens and asset prices fall. To recap: China's reserves fell 0.9% mom, Japan's fell 1.4% S Korea's fell 0.3% (thanks to some very active switching out of bonds);and Indonesia fell 2.5% (includes some foreign debt repayment). But Singapore managed a 0.1% rise.
Today we had Hong Kong, which reported reserves down 0.9% mom - ie pretty much in line with what we've seen elsewhere. But there are a couple of problems: first Jan's loss comes after a year of near stasis, with the result that reserves are now falling in yoy terms. This is only marginal, but its very rare for HK, and shows that HK has received negligible reserves inflow from global QE this time - in stark contrast to the reserves bonanza HK enjoyed in 2009/2010. The second problem is this: the HK dollar is run as a currency board: in theory, if foreign reserves fall, then the net HK$ clearing balance of the banking system, or currency in circulation, has to shrink too. In simple terms, the impact of falling foreign reserves is sharper in HK than in most Asian economies. And so, in Nov HK M0 grew only 1.7% yoy, and in Dec HK$M3 only 1.5%.
And there is this third consequence: Hong Kong's continuing liquidity is increasingly being supplied by China. We have the net international breakdown of HK's banks net int'l position only up to October. But what is shows is consistent with the rising pressure: HK banks' total net assets fell by US$51bn yoy to US$327bn; but its position with China fell $41bn to a net liability of $28bn. My bet is that by January it was much deeper. Again, having a net liability position to China is very rare for HK - back in 2014 it had net assets in China of $335bn. The last time it had a net liability position was back in . . . 2008 - 2009.
What this adds up to is HK's increased financial vulnerability to a) a strengthened dollar; b) any tightening in China; plus, of course, any feedback in loss of confidence. That's quite a lot of vulnerability to take into the likely environment of 2022.
There are statistics raw, and there are statistics adjusted. By and large, the more statistics are adjusted to give a 'clearer view', the more careful you've got to be about them.
With that in mind, I want to share some observations on Friday's US labour survey data. On the face of it they were extremely positive: non-farm payrolls were up 467k, and Dec's payrolls were revised up to 510k from an initial 199k. Even more spectacularly, Jan's h'hold survey of employment found employment up 1.199mn, which was the sharpest monthly gain since January 2000, on the back of an extraordinary 1.393mn rise in the labour force as the labour participation rate rose 0.3pps to 62.2%, the highest since March 2020.
Not only are these really dramatic gains, but they also run absolutely counter to what ADP found in its Jan survey of private employment, where payrolls fell by 310k.
What's going on? The thing you need to is that the strength of Jan's labour survey results is largely the result of statistical adjustment of truly monstrous proportions. The seasonally adjusted establishment survey of non-farm payrolls rose 467k mom, but the unadjusted number show a fall - yes, a fall - of 2.824mn mom. Similarly, the household survey's reported a seasonally adjusted 1.199mn rise in employment: but strip out the seasonal adjustments, and the raw numbers show a fall of 114k in January.
There are at least two different things going on here, quite apart from the 'normal' seasonal adjustment. The first is simply that the Bureau of Labor Stats has revised its seasonal adjustment process, notably taking into account the massive disruptions seen during the onset of the pandemic and subsequent recovery. This is responsible for the major upward revision in Dec's data, with the massive strength in June/July last year being quietly, and for these purposes invisibly, being revised down. This is what is behind the abnormal and anomalous seasonally adjusted strength in non-farm payrolls reported in January.
The impact of this change is going to be felt throughout the year: essentially it will bias non-farm payrolls results upwards through to May, before reversing the bias downwards sharply from June through to November. You've been warned.
The second concerns a big technical change in the h'hold survey - the once which produced a rise of 1.199mn in January's employment despite a non-adjusted fall of 114k. What's happening here is that Jan's survey introduced updated population estimates, with a new estimate of population from the 2020 census & later data, rather than the 2010-based data which was what was used for the Dec 2021 survey. That, and that alone, raised the estimate of the labour force in Jan by 1.53mn, raised employment by 1.47mn, and unemployment by 59k.
And you'll have spotted it: if the change in census base raised employment by 1.47mn, and Jan's survey reported a rise of only 1.199mn, what it is telling is is that on same-survey basis regardless of seasonal adjustment issues, h'hold employment actually fell by 272k.
To summarise: we're all going to have to take the monthly labour market surveys from the US with a very large pinch of salt for the coming year: the next few months are going to be great: after that, not so much.
I'd expected that inflation was coming back for a second bite in January, but Eurozone's Jan CPI was far worse than even I had expected. Headline CPI up 5.1% yoy, with a monthly rise 3.3SDs above historic trends. Energy alone was up 6% mom and 28.6% yoy, but in addition, F&B was up 1.1% mom and 3.6% yoy. Energy and food - even if energy prices calm down, food inflation will stay with us, thanks to the longer-term impact of the jump in fertilizer prices. Strip energy and food out, and core CPI was up 2.3% yoy, but with a monthly movt 2.3SDs above historic seasonal trends.
The big problem is that January was the month when the Eurozone base of comparison turned friendly: Jan 2021's monthly rise was no less than 4.1SDs above trend, mainly because of the sharp and encouraged rise in CO2 emission prices. So Jan 2022 ought to have offered relief. That it didn't means we've got to raise likely yoy rates for the rest of the year. The revision is sharp too, pushing the likely yoy up by around 1pp for the whole of the year. That means its now reasonable to expect 1Q CPI to average 5.3%, 2Q 5.8%, 3Q 5.9% and 4Q 5.2%. Core CPI, meanwhile, will can be expected to rise above 3% for most of the year, starting in March.
Meanwhile, yesterday 10yr yields were at 0.04%.
It's very hard to see how the ECB can keep the pedal to the metal when you've got this scale of inflation.
Over in the US, I follow heavy truck sales as a good leading indicator - at least for recession. January's sales were extremely encouraging : not only were Jan's sales up 13.1% mom to the highest monthly total since Sept 2019, but in addition, sales numbers were revised up very sharply - by 27% no less from what was initially claimed. A rebound on this scale over the last two months removes what had been a worrying recession signal.
By contrast, the 301k fall in Jan's ADP's private payrolls count looks, on the face of it, grim. But for the time being, I'm suspending judgement. Why? First, remember that in Dec we had a 776k rise. That was exceptionally strong, and the pullback in Jan still leaves jobs up 475k over the last two months - and that's a very strong number indeed, comparing with 273k averaged in this period over the last five years. Second, more than half the fall came from leisure and hospitality - down 154k, which is hardly surprising given that a) holiday season is over and b) omicron is with us.
Jan's inflation has regained some momentum, reversing the slight relief we got in Dec's results. We've now had Jan CPI flashes from both Germany and France, and they confirm it. Germany's CPI was up 4.9% yoy against a very steep base of comparison (because Jan 2021 was when German CO2 charges really escalated). The monthly rise of 0.4% mom is 2.2SDs above historic seasonal trends. Not only was energy up 20-.5% yoy, but food was also up 5%.
This year, food inflation is going to feature heavily around the world, in response to the jump in fertilizer costs in 2020.
France's CPI also rose 2.9% yoy, which was worse than expected, with a 0.3% mom rise which was 1.8SDs above what was expected. Like Germany: energy was up 19.7% yoy, and fresh food was up 3.6%.
Tomorrow we get the Eurozone CPI flash: at the moment, consensus is expecting 4.3% yoy, but from what we know now, it will come in a bit higher than that.
The second thing I want to draw your attention to is an addition I've made to my data universe. I've included the Chicago Fed's Brave-Butters-Kelley (BBK) set of coincident and leading indexes for the US for the first time. Data is something I take seriously, but it has a fundamental problem. In particular, the idea that there is an unaltered canon of measurements that make up 'the economic data' is misleading - because an economy is a thing that's changing all the time, and the things that get included as 'the data' can only ever reflect an economic structure that have already been and gone. That's the 'data problem'. One way to address that is to scan as widely as possible - it's why I look at 500 data pieces every month.
The BKK indexes do pretty much the same, taking into account 500 datastreams a month just on the US. This is almost a 'big data' view on the US economy, and one I very much approve of. In Dec the BBK coincident index was 0.66 SDs above trend (good); but the leading index was 0.31 from trend (bad). Interpreting that, it suggests GDP growth was running at an annualized 4.6% in Dec. But there are warnings here too: this running growth rate was down from the 8.3% signaled in Nov and 9.1% in Oct. Worse, the leading index has been consistently negative now since April last year, and during June-August came within a whisker of minus 1 each month.
The significance? Leading index readings below minus 1 tend to signal an elevated likelihood of recession ten months out: ie, between March and May this year. I think that 'biggish data' judgement is worth taking seriously.
Germany's Deficit Blowout
Today's most important surprise - or shock - came from Germany, whicc reported a federal budget deficit of Eu48.bn for December. That compares with a surplus of Eu2.9bn in December last year, so it's a massive turnaround. It's not because revenues are down, it's because spending is truly spiraling: revenues were up 35.3% yoy, with a monthly movt 2.4SDs above historic seasonal trends. But spending jumped 153% yoy, with the monthly movt a trend-shattering 5.1SDs above historic seasonal trends.
Germany's pandemic has had a different rhythm to the rest of the world, escaping the worst in the first half of 2020, only to be ambushed towards the end of November last year. As a result, Germany's fiscal deterioration in 2020 and most of 2021 was far less dramatic than elsewhere.
But that deterioration is with us now: in 4Q, the Eu82.25bn deficit was equivalent to 8.8% of quarterly GDP, taking the deficit for calendar 2021 to 6% of GDP (vs 3.9% in 2020).
What's more, it will widen further this year, not only because Germany's pandemic continues, but also because the new government has just passed a supplementary budget allowing them to spend unused loans worth Eu60bn, to be spent on investments in climate protection and digitization. Fiscal consolidation will have to wait until 2023.
This means that Germany's fiscal policy will be expanding hard at a time when all its major trading partners are busy taking taking back the extraordinary fiscal expansion seen in 2020. For example, in the UK, the 2021 net public sector borrowing of £183bn is down 30.4% yoy, in the US, the federal deficit narrowed by 23% in 2021; and in Japan the 2021 fiscal deficit narrowed 38.9%, and even in China, the deficit probably narrowed by around 25.5%
In addition, of course, whilst the ECB is necessarily committed to maintaining its expansionary policy with near-zero interest rates, central banks in other major economies are taking the first steps towards tightening.
Frankly, I don't remember another time when Germany and by extension Europe was committed to expansionary monetary and fiscal policies whilst all other major economies were retrenching. This is the reverse of the usual dynamic. Could it be that it's enough to de-synchronize world growth patterns in 2022, with Europe actually emerging as a net source of demand for the rest of the world? If so, it's a big departure from their traditional mercantilist model. What's more, although fx movements are in my view unforecastable, this policy contradiction between Germany and the rest of the world would seem to suggest stress on the Euro. But, please bear in mind, that's not a forecast, merely an observation.
US GDP - Cyclical Position, Profits, S&P Valuations
In volume terms, GDP rose an annualized 6.9%, which was stronger than the 5.7% consensus expected, and a sharp acceleration from the 2.3% annualized in 3Q. But that strength is misleading, since approximately 74% of the qoq growth recorded in 4Q came from a build-up of private inventories. There's no way of knowing how voluntary that build-up of inventories was: remember, yesterday we reported retail inventories up 4.4% in Dec after retail sales fell 1.9% - which doesn't sound voluntary to me.
Strip out inventory movements, and final sales of domestic product rose only 1.8% annualized - pretty much a crawl. Within that, the star was personal consumption up 3.3%, but non-residential investment was running at just 2% and residential investment fell 0.8%. Despite the headline growth rate, this was not, then, a strong result, or one suggesting a strong cyclical impulse.
What of profits? The principle behind the Kalecki profits equation is that corporate profits must be equal to net investment, minus the savings imbalances of the rest of the economy - in practice that means the government, the household sector, and interactions with other economies.
In the 12m to 4Q, profits fell 0.5% qoq, and rose only 2.8% yoy. The main thing boosting profits during the pandemic was the extraordinary rise in the fiscal deficit - and the main factor now dragging it down is the continuing moderation of that fiscal deficit. That will remain true for the foreseeable future. In the meantime, profits are still a far higher proportion of GDP than previously - 30.3% in the 12m to December, vs a pre-covid long-term average of 24.6%, with a standard deviation of 2pps.
The key question is whether h'hold dissaving can rise faster than the fiscal deficit narrows. I think its' unlikely: savings rates are back to pre-covid levels, and dissaving/GDP is running at 13.9% of GDP, vs a pre-covid average of 14.6%. There's not a great deal of room to raise that proportion, so I think profits will remain under pressure in the short and medium term.
What do today's numbers do for S&P valuations? The Coldwater Slow Model considers that an asset is fairly valued when it maintains is value relative to the economy. In practice, I take the Kalecki profits and discount them based on l/t nominal GDP growth rates and volatilities. That model has tracked the S&P well since 1990, and continued to do so last year. On that basis, it told us the S&P 500 was approximately 10% overvalued at year-end when it was at 4766, and even if profits stabilized (which I don't think they will) then its still about 3% overvalued today.
If profits continue to fall - so will that valuation. Given the sharp downturn in economic data in January, it's difficult to expect an S&P recovery any time soon.
EU Heavy Truck Sales
In the US, heavy truck sales have proved a remarkably fine and prescient early cyclical indicator, not only being a good investment spending signal, but also being highly sensitive to broader commercial demand.
But they are not closely followed in Europe. I've decided to include them in my European shocks & surprises universe. And first time out, in December, we hit something that might be cyclically useful: EU heavy truck sales rose 23.5% yoy in December, with a monthly movt which was 2.6SDs above historic seasonal trends. That looks highly positive.
The details are not what I'd expect, or can easily explain. For the major economies, Germany was up 18% yoy and Italy up 15.7%, but France was up only 2.3% and Spain only 5.9%. But what really made the difference was a surge in registrations in Eastern Europe: Poland was up 69.4% yoy, Czech Republic was up 22.2% and Lithuania was up 146%. Small countries, small economies? Not really. Poland accounted for 16% of the EU's Dec heavy truck registrations, and was the third largest buyer after Germany and France. As for Czech and Lithuania, together they accounted for 7.3% of registrations. So take these Eastern Europe 3, and they accounted for just under a quarter of all the EUs heavy truck sales.
I'm not sure why its happening, but such heavy capital spending certainly suggests something is stirring either in Eastern Europe, or in their near trading partners. We'll keep watching.
Germany's reported a shocking 24.2% yoy rise in its December PPI. This was far above the 19.4% consensus expected, and was generated by a 5% rise which was no less than 7.9SDs above historic seasonal trendsl 7.9SDs! Of course, at the heart of this was energy prices, which jumped 15.7% mom and 69% yoy, with natural gas up 122% yoy and electricity up 74% yoy.
Now, a 15.7% mom jump in energy prices is actually quite difficult to explain, since in dollar terms Brent oil prices fell 7.6% mom in December and natural gas prices fell 23.8% mom. Elsewhere in the world, this slight relaxation in energy prices contributed to calming inflationary pressures. What's going on in Germany?
Part of the answer is the continuing extraordinary rise in the price of CO2 emissions trading prices. The price of emitting a ton of CO2 in the EU rose a further 22% mom in December to Eu 79.92. So whilst in Euro terms, the price of a barrel of crude fell Eu8.2 to 73.6, the cost of the permission to use it rose by Eu5.2 to 32.3. Overall, the cost of using a barrel of crude, then, barely retreated at all in December, so Germany, among others Europeans, was denied the benefit of the falling oil price.
In yoy terms and in Euro, a barrel of oil rose 35.8% yoy in December to Eu83.13; but once you include the emissions, it was up 52% to Eu115.6. The emissions cost came to 28% of the total, a new record.
Things aren't going to look better in January, since already Brent crude is up 12.5% mom, and emissions prices are up another 2.1%.
In this inflationary year, nothing, I think, has risen faster than the EU's emissions permit: up 155% yoy, and still rising like a rocket.
Also a quick word on Taiwan's December export orders: these were up 12.1% yoy, which sounds modest, but was generated by a monthly movt 1SD above trend. So not bad. Particularly because when you look at the details, which shows that China and HK (24.5% of the total) rose only 4.5% yoy, Europe rose only 8.2%, and Japan actually fell 5.8%. Those are big big customers, and their demand growth is slowing.
Today we got the UK's inflation data for December, which found CPI up 5.4% yoy, on the back of a 0.5% mom rise which was 1.9SDs above historic seasonal trends. That 1.9SD deflection from trend is a sharp improvement from Nov's 3.8SD and Oct's 6.3SD deflections. But it's still grim enough, and means that we should expect to see inflation at just under 6% in 1Q, rising to 6.3% in 2Q, 6.7% in 3Q and 6.1% in 4Q.
Currently, UK 10yr yields are running at just 1.3%, so there's a 5.4pp gap between that and where we can expect 4Q inflation to be at. That's the scale of the challenge facing Bank of England. It is the biggest gap between bond yields and likely 4Q22 inflation of any major economy: in the US the gap is 3.5pps, in Eurozone 4.8pps, and in Japan 0.3pps, whilst there are still premia available in China 1.1pp and India 1.4pp.
The prospects for the rest of the developed world aren't as bad as for the UK. I construct a global CPI index using US, Eurozone, and NE Asia baskets. And the influence of NE Asia's relatively restrained inflation means that globally we've probably seen the peak of yoy CPIs in December at 4.5%, and we can expect to see this coming down very gently in the coming year, sinking to just under 4% toward the very end of 2022.
That's what happens if the current 6m deflection against trends are maintained. But now central banks are on the case, surely the current deflections will be moderated? Let's think about this.
There is good news. By December, the world had got the inflation message, with the result that this week, for the first time since the beginning of January last year, my shocks and surprises inflation index managed to lift itself into positive territory. Are we then 'learning to live with inflation'?
If so, this could be good news. But there is a catch: in both November and December, a series of factors combined to moderate inflation. Let's start with the dollar; in Nov it gained 0.6% against the SDR basket, and followed up in December with a further 0.4% rise. A rising dollar tends to be disinflationary, not least for commodity markets. And so, oil fell 7.6% mom in Dec and after falling 3.2% in Nov; natural gas prices dropped 23.8% in Dec after falling 8.4% in Nov; and the wider CRB index fell 3.9% in Dec after falling 0.3T% in Nov. These sharp falls in commodity prices made their impact in Dec's inflation results all around the world.
But this has not been sustained in January. In fact, the dollar is now falling against the SDR - an inflationary sign. And guess what? oil prices are up 11.5% on the month, natural gas prices are up 5.4% and the CRB index is up 5.9% on the month. So we should not get too excited that we're learning to live with inflation - more nasty inflation shocks could well be lurking in Jan and Feb results.
China's taxing problem
Although China gave us both its full December data-release as well as its 4Q GDP results, we learned only a very limited amount. For years now, the rule governing China's monthly data is 'no drama please'. And so it was again today: industrial production up 4.3%, electricity down 2.1%, retail sales 1.7%, urban investment 4.9% ytd. These are all weak, but also all quite tightly in line with consensus. None of them featured in my shocks & surprises index for China. My momentum indicators barely flickered: my aggregate consumption momentum indicator down 0.1SD, industrial momentum up 0.2SDs, monetary conditions up 0.1SD.
And it's much the same with the GDP result: the 4% yoy rise claimed for 4Q means the quarterly movement was almost exactly in line with historic patterns. Nominal growth of 8.2% yoy confirmed the quarterly growth is still sinking below trend; the more so when you ex-out the 14.2% yoy rise in trade surplus to find domestic demand up 7.9% and slowing; and when you further ex-out the fiscal deficit of 4.1% fo GDP, you get private domestic demand rising only 7.6% yoy.
But none of this matters much compared to the real problem rising to confront China, and worsened again in 2021. That is simply that the government has never been able to raise enough taxes to satisfy their ambitions.
This is not immediately obvious, because the central government certainly does look munificently funded. But the thing to remember is that the fiscal revenues all run up to central level, rather like what happens in the Sopranos. Below the boss, there are pyramids of levels of government, all of them kicking upwards. So provinces are less well financed than central govt, but are better off than those in the prefectures that answer to them, and so on down to county and township/village level, where things can get quite desperate.
All those further down the fiscal food chain must find their own finances, and selling land development rights is, of course the most lucrative way of doing it, which is a big reason why China's real estate sector grew so wildly, and why the real estate bankruptcies really matter.
What's clear from 2021's numbers is that the situation is getting worse. We have all the fiscal data until November, so have a very good idea about what going on. Revenues will have risen by about 10% in 2021, whilst nominal GDP 12.6%. This means revenues/GDP shrank to 17.6%, the lowest since 2006, and continuing a decline which has been underway continuously since the high point in 2016 of 22.4%.
The real estate industry is bust for the foreseeable future, so China's provincial and local governments urgently need to find a new source of finance. As China's government works out how to cope with the Evergrande & related bankruptcies, that's the next question that will be being asked in Zhongnanhai.
US Retail Sales
No doubt about what's grabbing the attention today - it's US retail sales value, which fell 1.9% mom, or, if you ex-out vehicle sales, fell 2.3% mom. That's the worst since February 2021, and since these are value numbers, worse than they look, since the US was running CPI inflation at 7% yoy in December.
The immediate reaction is to blame it on the resurgence of covid, but that won't wash. First, the most recent covid surge in the US kicked off around 18th December, by which time I guess most Christmas shopping decisions would already have been made.
And if it was covid doing the damage, you'd expect to see restaurants deserted, and internet sales soaring. But that's not what happened: cafes & restaurant sales fell 0.8% mom only, whilst non-store sales dropped 9.5%. Conclusion? Covid ain't responsible.
Inflation almost certainly is. There are two contradictory reactions to inflation: the first is 'well, I'm not paying that much for it' and the other is 'better grab it now before the price goes up again.' The US consumer is in the first state - holding back as sticker shock kicks in.
Earlier this week, I talked about how confidence surveys showed the US consumer with a 'decent scepticism' about economic prospects, and worried about financial markets.
The Uni of Michigan consumer sentiment survey showed the same today, with the index down a further 1.8pts, with current conditions down 1pt and outlook down 2.4pts. Not panic, but certainly worry.
Nonetheless, the retail fall suggests things may be a bit tighter than that.
The details of the Uni of Michigan survey describe how inflation is eroding confidence. Three quarters citing inflation as the worst problem, and 33% reporting their finances weaker than a year ago. And inflation is hurting the lower paid the most: the index fell 9.4% mom for those with incomes below $100k, but rose 5.7% for those earning more than that.
I suspect there's another thing at work too: the rise in bond yields is shrinking the opportunity to raise disposable income by refinancing your house. Last week average 30yr fixed rates were running at 3.52%, compared with 3.24% at the beginning of December. Refinancing activity is down about 15% from the end of November, and this still accounts for 64% of all applications.
To re-iterate: there's no more 'catch-up' spending to be done in the US; and if the US is at or near full employment, continued demand growth will be sustained only if workers shift from low productivity to higher-productivity sectors to secure non-inflationary wage growth. That's the challenge for 2022.
Fading Investment Signals
Spare a moment to think about Japan's Dec machine tool orders, which were on the weak side in December. True, they rose 40.5% yoy, but the monthly movt was 1.3SDs below historic seasonal trends. The weakness was mainly foreign: export orders, which usually make up about two-thirds of orders, rose only 30.6% yoy and were 1.2SDs below trend, whilst domestic orders were still up 6.12% yoy (and were 0.7SDs below trend).
What's going on? Two things are worth considering. First, this might be about China and, incidentally, the auto industry. Or maybe specifically China'[s auto industry, which is a mess. China's car sales fell 4.3% in 2018, fell 9.4% in 2019, fell 2.1% in 2020 and managed a rise of 6.6% in 2021. 2021's car sales remained 13.2% below levels seen in 2017. They're still under pressure: China's auto industry is almost alone in being unable to raise prices: although China's PPI iron & steel prices were up 21.4% yoy in Dec, auto prices managed only a 0.3% rise. So they won't be in the mood for heavy investment: in fact, auto-industry investment fell 3.2% during Jan-Nov.
More broadly, the switch from internal combustion engines to electric cars means a dramatic cut in demand for machine tools by the auto industry. As electric cars take over, demand for auto-industry machine-tools will actually fall - with the tipping point probably arriving around 2026-27.
If it were just Japan's machine tool orders, it would be one thing. But the investment-spending signals are deteriorating all over the world. My shocks & surprises index for capital goods sector fell into negative territory early in December, and is now the most negative since August last year. The 12m average is also just about to turn negative for the first time since September 2020, snuffing out a short-lived recovery which had in turn overturned a negative trend which had been running since mid-2018.
Fading investment spending is obviously discouraging news for the global recovery cycle, and also for profits: after all, the Kaleckian profits equation gives substance to the neo-Keynesian observation that whilst household spend what they earn, the corporate sector earns what they spend . . . For Japan, net investment spending is the source for 47% of total profits.
Today I talk about US inflation and Eurozone industrial production numbers.
US December inflation: headline, up 0.5% mom sa, but the real headline is that unadjusted, the index was up 7% yoy, with a monthly rise 0.9SDs above historic seasonal trends. That's actually a bit of a relief from the 1.7SD deflection in November, and the 2.1SD deflection in October. But hold the celebrations: this is is probably not yet, quite, the peak of likely yoy: that's probably coming in February, when we can expect it at around 7.1% to 7.3% yoy.
Ex-out food and inflation, and core CPI rose 0.6% mom sa, and before adjustments was up 5.5% yoy, with a monthly movt also 0.9SDs above trend. Sequential inflation pressure has moved out from energy and food into the broader inflation this core index this measures. If current trends continue, its another three months before this peaks, and in the meantime we can expect to see it flirting with 6%.
Its now unrealistic to expect CPI to really retreat very much on its own: if the break above trend of the last six months is continued, you can expect 1Q at 7.2%, 2Q at 6.3%, 3Q at 5.9% and 4Q at 5.4%. There's no likely scenario which would take CPI back to the 2% level which was the average of the last 10yrs. In the meantime, although bond yields have risen to the dizzying heights of 1.75%, that's still 3.7pps below what we can reasonably expect inflation to be showing in 4Q22.
On to Eurozone industrial production. Around the turn of the year, you can expect index series to get rebased every so often, using new weighting of items, sectors or countries. But if the index is rebased from, say, 2015 to 2020 weightings, you get told. There was no such explanation for what happened to the Eurozone's industrial production series today. Rather, what we got from Eurostat was a completely unexplained, and sharply material, revision of an absolutely central series.
For the record, it showed November's output up 2.3% mom, which was way better than one could expect from what we already knew (Germany had already reported production down 0.2% mom and France down 0.4% mom). What appears to have swung it was Ireland, where output was reported up 37.3% mom but down 30.4% yoy. Really.
But the whole series was made anew - all new numbers - and this new series materially alters what we thought we knew. To give simply the latest number: the new series says output fell 1.3% mom in October, whilst the old series reported a 1.1% rise. Overall, between Nov 2020 and Oct 2021, we used to be told that output rose 0.6%; the new series tells us it actually fell by 3.4%. You can't just slip that sort of revision in without explaining what happened. So I've asked Eurostat about it, but have no answers yet.
We've had four sets of confidence indicators out of the US in the last couple of days. They tell a story of sustained main-street economic confidence contrasted with a sudden gap-down in financial market confidence. This seems to me to be eminently reasonable, given near=full employment and the prospect of monetary tightening.
The NFIB small business optimism index really did nothing, rising 0.5pts to 98.9, which extends the modest recovery of the last couple of months. Expectations for the coming six months remain sharply negative despite rising 3pts to minus 35.
But for me, it's the NY Fed's monthly survey which is the king of US sentiment surveys. What get's advertised is the movt in inflation expectations, and there was little to report from Dec's survey: 12m expectations were almost unchanged at 5.99% and so were 3yr expectations at 4%. House price inflation expectations rose slightly to 5.5%, and chances of moving home down slightly at 16.7%
But the survey doesn't end there: it looks at the full spectrum of household attitudes and expectations: employment, chances of getting a new job, expected earning, expected spending, expected taxes; difficulty of getting credit. There's almost too much to take in. What did it tell us in Dec? I think overall, the Fed will be pleased - US households seem both basically confident but decently sceptical of their good fortune.
Compared to November, expected wages were up a bit 2.97%, and h'hold income up a bit at 3.37%, but spending down a bit at 5.53% and taxes down a bit at 4.4%. Credit availability slightly less difficult than in November. Likelihood of losing a job retreated to the lowest on record, and the chances of finding a new job quickly rose to the highest since Feb 2020.
And what do people think about financial markets? Well, 28% expect interest rates on savings accounts will rise this year, which is 0.7SDs below the l/t average. Meanwhile, 38.9% expect the stockmarket will rise this year, but that's 0.8SDs below the l/t average. This looks basically not encouraging.
And so on to direct measurements of stockmarket confidence.
Today we had the IBD/TIPP index, which tracks economic optimism among investors, sank 7.6% mom to the weakest since July 2020. That's what they say, but what are investors doing?
Yesterday we had the December investor movement index, which tracks actual behaviour of Ameritrade clients. That dropped 9.6% mom in December, to the weakest since February, coming off a plateau it has enjoyed since last March last year.
Ameritrade's results are similar to what we heard out of State street on 29th December, when its investor confidence index - also calculated by looking at what people are actually doing with their money - dropped no less than 25.9pts to 85.6, which was the worst since October 2020. The US fell 14 pts to 96.4, which again is a drop-off from a plateau its held since July. But the real killer came from European investors, with the index down 27.8pts to 67.6, which is lower than at any time during the pandemic.
Loads of data today, of which the most commented will be the US labour market surveys. I see loads of commentary about how the 199k rise in non-farm payrolls was a 'big miss'. I don't see it that way, and I don't fell like arguing about it much - when you're near full-employment - which I think functionally the US is now - you don't expect to see big gains. Rather, focus on the fall in unemployment rate (3.9% on the U3 score, 7.3% on the broadest U6 score) both now way below the l/t average.
Instead I want to ask: How was it for you? How bad did 2021 feel from an economic point of view? Was the soaring US stockmarket enough to offset the inflation, the supply chain ruins, the on-again-off-again medically induced coma etc?
If journalism is the first sketch of history, the SF Fed's Daily News Sentiment Index tells us how these proto-historians are feeling. The index scans US economic news stories from 24 daily US papers, scoring them for optimism or pessimism. The higher the score, the more upbeat the press is about the US economy. It's been tracking this score, daily, since 1980.
How about 2021? If you think last year was an unprecedentedly grim year for the US, you'd be wrong: it registered as very slightly positive year, coming in at #21 out of the 40yr sample. Only averagely bad, then. Score one for the S&P.
Its a good parlour game to guess when the public presses were happiest and most optimistic about the economy. The happiest years were, in this order . . . 2006, 1997, and 2005 (closely followed by 2004).
The most miserable years were . . . . 1980 (inflation, Paul Volcker using interest rates to smash inflation), 2020 (covid, obviously) and 2008 (financial crisis, obviously).
Which was the most optimistic decade, which the most pessimistic? Well, by some distance the best decade was the 1990s, followed by the noughties. Worst decade, it turns out, was the 1980s - which I rather enjoyed. The last decade - the 20teens were also mildly negative.
There's some interesting re-writing of history going on as well. Presidents remembered fondly generally got a bad economic press: Ronald Reagan's economy was almost uninterruptedly negative according to press sentiment. But this is probably not political bias, since President Obama got very similar treatment.
Meanwhile, the happy recipients of sustained optimistic press were Clinton 2 and George W Bush. Generally speaking, the US press was most upbeat between 1993 and 2006, with only a brief dip into pessimism in 2002 (by which time the recession was already well in the review mirror).
So maybe we could amend the saying: Journalism may be the first draft of history, but its judgements get scrubbed and forgotten very quickly.
The most important thing we're seeing today is the uprising in Kazakhstan, which has seen riots and protests throughout this vast country, with govt buildings fired in Almaty. And now we've got Russian paratroops involved. Dozens of deaths are reported, but we don't really know, since the internet has been cut off.
Where to start with Kazakhstan? It's the size of Western Europe with the population of the Netherlands. It's vast empty steppes are almost certainly teeming with every kind of commodity the world needs - including uranium and oil. It's a giant chemistry set. It is neighbour to Russia, China, Kyrgyzstan (China's Central Asian best friend), Uzbekistan. On the other shore from the Caspian Sea, it neighbours Russia (again) Iran and Azerbaijan. In other words, it's strategically the one Central Asian country that really matters.
A few years ago I spent a couple of weeks in Almaty being paid to frame an obviously futile, indeed crazy, investment trust based on the Kazakhstani consumer sector. (Truth is stranger than fiction.) I left with a few thoughts: the mountains outside Almaty are dazzlingly beautiful; the Russians are in a minority; and the Kazakhs themselves the toughest scariest bunch I've ever met. Ethnically, I think they are first cousins to the Koreans, with significant Mongol and Turkish input. Among them, the resident Russians felt, with good reason, felt pretty jumpy.
My driver there, though, had something to say. His highly credentialled mother used to work as chief admin to the wife of someone very very, very, senior in the government. (In today's situation, I'm naming no names.) One day, he turned to me, and just said: 'I tell you, these people are wolves'.
Because of its size and its immense commodities potential, whoever is leading Kazakhstan can do pretty much whatever he likes with the economy and with the financial system - it's just one of those places that can never really go bust, such is its hidden natural wealth. And that in turn has meant it has an absolutely appalling record of corruption and bad governance at the top that has gone on for decades - with the family of former president/strongman Nazarbayef outstanding in this respect. My driver again: 'These people are wolves'.
All these years ago, this was already obvious, the resentment was everywhere, and the people the toughest I've ever met. So don't be fooled into thinking what's going on is just about fuel prices. There are decades of resentments coming out now.
Distinctly mixed news from the US. Good news from the labour market front, with the ADP total of private payrolls rising 807k - that's up 5.2% yoy. The demographics are good too - small cos adding 204k, medium-sized 214k and large cos +389k. No real sign then either that large cos are pulling in their horns, or that smaller companies are finding it impossible to hire. A genuinely encouraging result, then, and one which helps offset yesterday's slightly disappointing JOLTS job openings number when openings fell 529k to 10.562mn. After all, if you've got hiring accelerating in the way ADP is reporting, you'd expect some of those openings to be getting filled.
If you remember what I was talking about yesterday, there's no more 'catch-up spending' to be expected, and domestic demand will depend therefore a lot on healthy labour markets. Which is what we have got.
On the other hand, the news from December's vehicle sales were truly dreadful: car sales fell 3.6% mom and fell 23.% yoy, with domestic producers down 3.8% whilst foreign makers rose 7.2%. Not much better for the light truck market - it fell 4.2% mom with domestic down 5.2% and foreign up 0.1%.
But the worst news came from the heavy truck market. The US is meant to be dealing with its supply-chain issues, and you'd think that this would absolutely mandate rising heavy truck sales. Not so: Dec's heavy truck sales fell 17.1% mom and fell 1.96.% yoy, with the total number sold the lowest since June 2020. What's more, November's sales were also revised down sharply. Why does this matter? Well, collapsing sales of heavy trucks have been early signals of approaching recession in each of the last four recessions since 1980, with no false signals either. So here's hoping that the weakness in Nov and Dec were merely end-of-year jitters. Definitely one to keep watching.
Throughout the last two years, the suspension of normal economic and financial relations has resulted in wild swings in money flows to households which in turn have resulted in extreme volatility in such basics as spending and saving. The reasons are fairly obvious: lockdowns cut the opportunity for plenty of the usual spending, whilst governments' furlough payments kept income flowing into your account.
In 2020 we got the collapse, and then much of 2021 was taken up watching the rebound. Catching up on that deferred spending made for spectacular year-on-year retail numbers. To take just one example, in the US, personal spending on goods and services fell 3.2% in 2020, but in the first 11 months of 2021 rebounded by 11%. And that in turn was met by supply chains only just waking up from the medically induced coma.
2022 is the year when this first wave of volatility gets dialled down, because household finances are settling back to 'normal' patterns.
Again, the US illustrates the point. Back in early 2020, the personal saving rose to an astonishing 33.7% of disposable income. That came down throughout 2020 and 2021, but by November last year it was down to 6.9%, which was actually below the pre-covid long term average of 7.4%. Moral - the 'catch-up' spending has been done.
Today's UK mortgage data shows something similar. In the UK, housing investment is the mainstay of personal saving efforts, so throughout the pandemic the housing economy was supported by a swathe of tax incentives and debt holidays. And so mortgage lending for new purchases rose 12.3% yoy in 2020, but has been falling since July 2021, and was down 32.7% yoy in November.
But it's the change in refinancing behaviour which is revealing. This is, after all, how households take cashflow from the rising equity value of their homes. With household finances underwritten by the government during the pandemic, the value of remortgaging a record low of 22% of the value of new mortgages. But those days are over, and by November, whilst new mortgages fell 32.7% yoy, the value of remortages rose by 43.5%. The proportion of new remortgage debt to new mortgages has now risen to 37%, which is roughly back to the pre-covid l't average of 39%.
Just like the US saving rate returning to normal, so the rise in UK remortaging relative to new mortgaging tells us we're back in the realm of 'normal' activity. So don't expect rebound spending in the US to have legs much longer, and ditto in UK demand markets, including housing.
Welcome back to 2022.
Christmas and the New Year holidays are marked by a relative absence of important economic data, and also, of course, thin markets.
Thin markets are a mixed blessing: they can thrown up anomalies, and can be unusually sensitive to people with strong views trading early and aggressively. Right now, they are throwing a number of curve balls in currency, commodity and bond markets.
I put a number of currencies, commodities and bond signals through a technical filter, with the aim not of catching the first 5% of a movement, but rather giving me consistently accurate picture of the way the world is developing, These are not trading signals, more a bunch of 'reality' signals.
And over the holidays, they have been flashing all over the place. Just today, the dollar is on the cusp of falling into a weakening trend, thanks to the Euro, which is on the cusp of generating a strengthening trend vs the dollar. Add to that, gold broke through to a strengthening trend (which helps explain why the C$ is also today breaking through), and natural gas re-asserted a rising trend. In bond markets the inflation risk premium on 10yr treasuries also started a rising trend.
What's the moral? The key is the dollar: a weakening dollar is a generally inflationary signal, which we're seeing echoing in commodity markets and bond yields. If inflation is bad for equity markets, then so is a weakening dollar.
As for over-the-holiday data, there is not much to report. Today is dominated by Markit's monthly PMIs: all you need to know about them is they bear no interesting statistical relationship to eventually surveyed reality.
The one thing which really caught my eye over the holidays, though, was the collapse in State Street's Global investor confidence indexes. These are interesting, because they are not the result of asking investors 'how ya feeling?' but rather looking at what they are actually doing with their money. And in December, the global index dropped 25.9pts to the weakest since Oct 2020, led by Europe down 27.8pts to 67.6, which is weaker than at any stage during the pandemic so far. That got to be the omicron virus taking its toll. But US also fell to the weakest since June, and Asia to the weakest since July.
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Terms of trade - which track the difference between changes in export prices minus changes in import prices - are important. When your terms of trade are rising, the chances are that manufacturers and traders are seeing their margins, and their profits, rise. And you'll see that in an improving trade balance. But when terms of trade deteriorate, margins and profits are going to get squeezed, trade balances fall.
But look, it takes time to work through, because manufacturers and traders will fight like hell against a falling terms of trade. They'll avoid buying inputs at these high prices and run down their inventories instead. They'll avoid passing on prices as long as they can to maintain their market position. Eventually the weakest will go out of business, and the survivors will finally be able to put up prices. That's typically the sort of dynamic at work.
At the moment, it's probably Germany which faces one of the biggest challenges because its terms of trade are falling sharply, but the country remains fundamentally mercantalist, with net exports accounting for 35.2% of Kalecki profits in the last 12m - second only as a contributor to net investment.
But look what's happening: in November, export prices rose 0.8% mom and 9.9% yoy - pretty good, eh? But import prices were up 3% mom and 24.7% yoy. That led to terms of trade falling 2.2% on the month, and 12.1% yoy. That's the sharpest yoy collapse in terms fo trade that modern Germany has seen, and terms of trade are now the worst we've seen since 2012. And look at some of those import prices: fertilizers 144%, aluminium 64%, iron& steel 60.2%, plastics 44.7%.
It takes time to work through - Germany's manufacturers and traders have been fighting it hard. Really, it was really only in the last couple of months, and Oct in particular, that the implications are beginning to show: In the 3m to October, the trade surplus came to Eu40.5bn, which was down 21.5% yoy; and the current account was Eu 47.2bn, which was down 28.7%. But it is very likely that Germany's trade and current account surpluses are going to shrink far more noticeably in the next couple of quarters, taking margins and profits with it.
Sorry about that, but modern Germany really hasn't experienced this sort of terms of trade shock before, and 2022 will be the year when we find out how it copes with it.
In economic and financial terms, the last two years have been unlike anything I've seen in my life - medically-induced economic comas, massive fiscal deficit financed by equally massive monetary creation which has distorted financial asset prices beyond anything the global economy can justify.
At the root of all this are patterns of spending, saving and investment. And you can tell a lot about them from movements in country's current accounts.
You've got to treat UK trade numbers with caution, because there's a persistent track record of them being revised, often quite dramatically. We had this again today, when the current account deficit for the first half of the year was revised from £17.4bn to £24.8bn - that's £7.4bn worse than previously reported.
With that caveat, the 3Q deficit was reported at £24.4bn, up £11bn on the quarter, and equivalent to 4.2% of GDP. Strip out the volatile trade in precious metals, the deficit was up £6.7bn to £21.7bn, or 3.7% of GDP.
Where does that say about the UK's savings patterns? Well, the public sector had a deficit of £41.4bn during the quarter, so strip that out, and that leaves the private sector making net savings of £16.9bn. That's down £29.8bn qoq, and down nearly £50bn yoy. My bet is the bulk of savings remaining are corporate profits.
Overall, for the 12m, it means the UK is running a current account deficit of 3.3% of GDP (compared with an average since 2008 of 3.7%), with public sector borrowing of 9.1% of GDP, and a private savings surplus of 5.8% of GDP. In short, still a long way from anything approaching pre-covid 'normality'. That delayed encounter with normality will surely have to happen sometime, in the UK and elsewhere, and maybe it will become unavoidable in 2022?
As I've written elsewhere: governments find it pretty easy to break economies, but have little idea about how to put them back together again.
European governments have embraced and encouraged omicron panic, and they're good at it, as two surveys today showed. Germany's GfK expected consumer confidence index for January dropped 5pts to minus 6.8, which was the weakest since June. The economic outlook fell to the weakest since April, income expectations the weakest since February, and propensity to spending weakest since January. A pretty thorough axing of confidence, then.
That didn't fully show, yet, in Eurozone consumer confidence advance, which fell only 1.5pts to minus 8.3, but this was still the weakest since April 2021.
And there's much the same coming out of the UK, where the CBI's monthly diffusion index of retail sales dropped 31pts to +8, with sales for the time of year down 37pts to minus 2. CBI commented that there's a big difference in response before and after the govt's Dec 8 scare campaign started. Before Dec 8, over half of firms reported that sales were ‘up’ on last year, but after Dec 8 this fell to one third.
To be clear: this isn't the impact of the omicron variant - it's the success of European governments' attempts to scare the living daylights out of their electorates about omicron. The economic consequences will be with us for at least a couple of months, regardless of how omicron variant actually develops.
Taiwan's monthly export orders report turns out to tell us more about what's going on in the rest of the world - particularly in China and electronics, of course - than it is to the near-term outlook for Taiwan's exports.
With that in mind, November's orders were interesting. They rose 13.4% yoy, which doesn't sound that great, considering that for most of the last last year we've got used to rises of 30-40%. But in fact this was a strong result for two reasons: first, November 2020 was the month at which the real rush to secure supplies of Taiwan's semicons broke into the open - with the highest yoy since 2010 - so it was a really tough base of comparison. And second, October's orders were genuinely weak, with the monthly movt down 1.6SDs from historic seasonal trends, and Nov's result corrected that, with a bounce 1.5SDs above trend. So, that relatively modest 13.4% yoy rise masks a genuinely strong result.
Electronics remains at the core of this: they word 17.9% yoy, and accounted for 31% of all orders. They were also up from 13.2% yoy in Oct. But headline number was helped along by basic metals +32.6% yoy, chemicals +41.1% and rubber/plastic products +22.6%, in turn helped along by high prices.
The other really striking thing was where demand is coming from: it's China and the rest of Asia which is now driving demand, whilst the West is sagging. China & HK was up 25.3% yoy and Asean up 33.7%, but Europe fell 2% yoy, Japan nudged up just 0.7% and the US was a lacklustre 10.8%.
New car registrations are just about the earliest monthly signal we get for European demand, and since they are big-ticket items, for consumer confidence too. We got them today, and - well - what they tell us is pretty much 'situation normal'.
And that's despite the latest surge in covid. Timing's important, because covid numbers really took off in Germany in the last week of October, and the daily totals really didn't peak until the end of November. For France and Italy, the timing was about 10days later.
You'd expect that to hit the numbers. But it's not really happened: for the EU as a whole, registrations fell 20.5% yoy, but the monthly movt was 0.5SDs above historic seasonal trends. For Eurozone, numbers were down 20.8% yoy, but the monthly was 0.2SDs above trend. For Germany, registrations fell 31.7%, but the monthly was 0.3SDs above trend. For the rest of the Eurozone, down 14.2% and 0.6SDs above trend.
How does the UK stack up with this: Nov's registrations were up 1.7% yoy and the monthly was 0.5DSs above trend. Same story, incidentally, shows up in today's UK retail numbers: sales volumes up 1.3% mom, with the monthly movt 0.5SDs above trend.
Suggested conclusion? Scary covid-stories are dominating the newspages and sending govts into panic. But Europe's populations - not so much, it seems.
Well, Bank of England has tightened, putting up s/t rates by 15bps to 25bps.
They expect inflation to dissipate over time, as supply disruption eased, energy prices stopped rising and global demand rebalanced from goods to services. We'll see. But let's remember, in its November meeting, BOE expected CPI to rise to 'around 5%' by spring 2022. It got there, we now know, in November itself.
The UK's inflation isn't quite as bad as the US - November's 5.1% yoy in the UK vs the US 6.8% - but the likely 12m trajectory looks worse, and the distance between where 10yr rates are now, and where inflation is likely to be in 12m time is worse.
Looking at the UK's likely inflation pattern over the coming 12m: if the deflection against trend we've sen in the last 6m is maintained, we'll see inflation rising to around 6% by March, and staying there or thereabouts until September. Meanwhile, UK 10yr yields are just 0.8% - so there's a gap of about 5.4 percentage points between 3Q22 CPI and bond yields. In the US that gap is 4.3pts, and in the Eurozone 4.8points. So UK bond markets are out there on their own. The BOE needs to keep buying those bonds!
But maybe things won't be that bad: after all, in yoy terms, Brent oil peaked in October up 101% yoy, since when it's fallen about 12%, and the yoy has fallen to 47%. The wider CRB index also peaked in October up 58.3% yoy, since when it is down 5.6% and the yoy has come down to 37%, and even natural gas prices are down 29% from their October peak.
The problem is, even if UK inflation resumes its normal historic patterns, we'll see inflation nearer 5% than 4% for the next nine months; even if we go 1SD below trend, it' ll still be August before we dip back below 4%. In the meantime, BOE has put up rates by 15bps to 25bps. A lot will have to go right, a lot will have to prove 'transient' for that to be the end of tightening.
IATA's monthly compilation of air freight transport traffic came out a week late, yesterday. Still, what it told us was that by February, air freight was genuinely booming. In terms of cargo tonne kilometers, international air freight rose 10.4% yoy. This was not just a base effect from covid, it was also up 9.6% from February 2019. Of the largest markets, N America was up 23%yoy, Europe was up 10.5% and Asia Pacific (which had been hit less badly by covid last year) was up 8.2%. In terms of gains over February 2019, N America was up 17.6%, Asia Paci was up 29.2% and Europe was up 22%.
These are genuine boom numbers. Why is it happening? Well first, of course, its a reflection of surging global exports: remember, NE Asia's exports were up 33.9% yoy in February in dollar terms, and were up 32.4% from Feb 2019. But there's more: globally supplier delivery times are stretched to near-record levels, so there's a race to secure supplies and to build inventory. Typically, air cargo picks market share from marine up when there's an inventory-rush, and that's happening now. The fact that Suez Canal got blocked for days recently means this pressure will only have built in March.
But that's not all either. Covid has dramatically cut the number of passenger planes in the air, which in turn means that all that belly cargo capacity has also been taken out of the equation. In fact, international air cargo capacity - that's air freighters and belly cargo combined - was down 13.7% yoy.
So a rush of demand is having to be met by a smaller supply capacity. The result is . . . well, here I'm going to quote the IATA bulletin: 'the industry-wide cargo load factor reached a record high outcome for any month of February in the history of our time series, at 57.5%. At the regional level, Asia Pacific carriers continued to report the highest load factors (69.2%), followed by European carriers (64.1%).
Moral: airlines are going bust because of Covid, but air freighter asset turns and ROC must be booming.
Today we got the first report of foreign reserves movements in NE Asia for March. My technical models recognized that the dollar broke out of its weakening trend and established a strengthening trend against the SDR currencies starting March 9, so it was reasonable to expect some pressure on Asia's massive fx holdings simply because of that. In fact, in March the dollar gained 1.6% against the SDR basket (which of course includes itself as a major component). In addition, of course, US bond markets got hammered, with 10yr yields rising from 1.44% at the beginning of the month to 1.76% by month-end. Not, in other words, a great month to be tasked with preserving the value of Asia's c $6tr foreign reserves.
So what happened? Well, the collective foreign reserves of China, Japan, S Korea, Taiwan & Singapore fell by $52bn, or 0.9% to $5.906tr. How did they do? It went with size - the biggest were the least able to take evasive action. So China's reserves fell 1.1% to $3.17tr; Japan's fell 0.8% mom to $1.368tr; Taiwan's fell 0.8% to $539bn; S Korea's fell 0.3% to $446.1bn, Singapore's fell 0.2% to $382bn.
A couple of things to say: this fall will have a small tightening effect on Asia's money markets, and will slightly depress - nothing too dramatic, however, and I don't think this is the most significant thing about today's results. Two other things are more important.
First, when you look at the data, its clear that Japan has really bought the 'inflation's back' story. Overall reserves fell $10.9bn, but within that securities holdings fell $19.6bn, but deposits rose $6.8bn. In other words, they didn't just lose money on bonds, they sold reasonably aggressively on the way down. But there's more: they also started buying gold: in dollar terms gold holdings rose $3.1bn, or by 7.3% during a month when the gold price fell 5.2%. In other words, they actually raised their holdings of physical gold, up 2.6mn troy oz, or by 10.6% on the month. I don't know when the last time Japan's reserves managers bought gold, but it certainly has been any time in the last three years. Selling bonds and buying gold - Japan believes in inflation.
Second, Taiwan is interesting: the central bank blamed its 0.8% mom fall not only on the dollar's strength, but also on 'large capital outflows'. But that's not right: foreigners net holdings of Taiwan deposits and securities fell only $1.1bn (vs a fall of 4.3bn in foreign reserves), or by 0.2%. In other words, those capital outflows were responsible for only a quarter of the fall in reserves. And, note, those holdings now could to $670bn, which is 124% of Taiwan's 539bn of foreign reserves.
Today I'm looking at the series of Eurozone confidence indicators released today, which give the strongest signals we've seen for just over a year. The growth-tracking economic sentiment index rose 7.6pts to 101, the best since February last year - this index amalgamates confidence indicators for industry, for services, and for consumers undertaken by all Eurozone member countries. That's a huge footprint, so it's no surprise that it has a good track record at, yes, tracking changes in economic growth. In fact, I think it's one of the most useful single-monthly data-points for the Eurozone that we have. So I take it seriously.
The problem is that this quite dramatic vote of confidence almost certainly reflects attitudes before it because obvious that the Eurozone was being hit by a third wave of covid, which was going to lead to new and hardened lock-downs, without the expectation of early release. Because of the survey's huge footprint, these results are almost certainly out of date. Some of this is obvious. For example, France's consumer confidence index for March, which forms one input into these indexes, were reported today up 3pts to 94. That was better than expected, but then we learn that the data was collected between February 24th and March 20th.
Like yesterdays sharply positive Markit PMIs for the Eurozone - which were all far stronger than expected - the timing matters. Those PMIs also relied on the surveys undertaken between March 12 and March 23rd.
But if you look at the coronavirus data you can see the rise in the 7 day average of covid cases arriving only beyond doubt rather recently - I'd say around 18th March for France and 20th March for Germany. That terrible news arrived too late to filter through to these surveys.
So I take two things from them. First, unless there's a health miracle in the next couple of weeks, the confidence recorded in today's surveys will be reversed and dashed in April's survey. But second: these surveys show what would have happened - what would have been the instinctive dramatic surge in confidence if, in fact, the end of the pandemic really was in sight for the Eurozone, so they are a a harbinger of what to expect in countries where the pandemic is already beaten back, and also in due course what we can expect eventually in the Eurozone. Just not now, unfortunately.
Today's bulletin is really a short addendum to last Friday's rather longish piece about what's going wrong in the EU's Emissions Trading Scheme. I noted then that this evolved into a bankers ramp, in which the only rational expectation is for prices to continue to rise. Which they continue to do, threatening to cramp EU growth whilst at the same time as pushing up prices - the classic ingredients for stagflation.
This piece looks at the historic relationship between movements in Europe's economic growth and the CO2 price. Between 2009 and end-2017 these moved predictably in sync (98% confidence). Using that same model today, CO2 price have risen to between 12 and 14 times what one would expect to be justified by the underlying economic conditions. The dislocation, this unacknowleged and damaging tax on EU production and consumption will only rise.
Today episode is about the EU's emissions trading scheme. This is the sort of mess you thought you didn't need to know about. But now the way it has pushed up the price of CO2 for EU companies by approximately 150% yoy means you do need to know about it, because the jolt in Co2 pricing will simultaneously push up Eurozone inflation, and retard its recovery. In short, its the sort of mess which needs watching.
To understand what's happening now, we need to know the history of the project. The details will probably bog us down, but the fundamental story is much the same as you find almost every time you get governments target a crucial economic input and end up trying to fix prices by using a 'stabilization fund'. You can be pretty certain that whatever it achieves, 'stabilization' will be elusive in the long run.
The history is long and messy, but the result is this: by committing to a visible long-term tightening of supply at without actually knowing how, if at all, CO2 emissions really can be cut to near-zero in the medium term, the EU's scheme has created the sort of market dynamic which will be familiar to those who've looked at Bitcoin's supply-side fundamentals. Far from stabilizing the market, they have created a classic 'bankers ramp'.
The market has cottoned on, and the price is absolutely soaring, from an average of Eu7.60 per ton during 2012 to 2018, to Eu 42.3 a ton earlier this week. What does this mean? Well, a barrel of crude is estimated in use to produce 317kg of CO2. With the ETS price at Eu42.3 a ton, that adds about Eu13.5 to the EU effective price of a barrel of oil. At current exchange rates, that comes to an extra $16 a barrel. Currently Brent crude is selling at US$69.4 a barrel, which is bad enough, but add on the ETS price and the price is up to $85.4 in the EU. In yoy terms, these calculations tell us the effective price is up 137% yoy.
There seems no good reason to believe that the EU CO2 price will top out anywhere neare Eu42.3 a ton, or top out any time soon. In short, its a broad-based tax rise on EU industry which will be past on to the consumer at just the time when its not needed. Worse, there's no knowing how high this tax will rise, nor who, if anyone can stop it.
There are a number of prices I check daily, and run simple technicals to identify trends. These include all the major currencies and some minor ones, commodity signals, major crypto values and US bond market signals. The metrics I use are actually quite simple, but easier to explain with a worksheet going than not. But the signals have a pretty good track-record, if you view their purpose as correctly naming trends, rather than catching the first or last few percentage points of a move.
What they signalled last week is that the dollar has established a strengthening trend against the SDR - no surprises there - but that the key currency mover which pushed it over the edge was China's Rmb, which broke from the strengthening trend we'd picked up in July last year when it was over 7 to the dollar (it was 6.50 when we called it) and established a weakening trend.
This raises important issues, which I raise in today's edition. But the crucial thing to notice is that that it has happened: one way or another, this is a regime-change moment.
This episode looks at the UK's trade data for January, to take a first measure of the impact of the new UK-EU trade barriers which went up in January.
This is hazardous, since the UK's monthly trade numbers are about as unreliable a series as I know of. That's simply because they so often get major revisions on a scale which you just don't see in other countries. You can take two view on this. Either it suggests unique incompetence, or, just as plausibly, a uniquely scrupulous approach to getting it right, even if it takes far longer than can be achieved in the six weeks it takes to produce the first estimate. But the upshot is dramatic: the revisions to monthly exports and imports data can come to literally to tens of billions, so we cannot, we must not, take January's numbers at face value.
And of course, there are other complicating issues just now: the impact of renewed lockdown, the aggravated frictions on the EU borders, and also the probably big inventory swings built up in the months before January's new EU borders kicked in.
Still, exports of goods and services fell 11.2% mom, and fell 26.5% yoy. Goods fell 18.3% mom and services fell 0.9%. And it's all to do with the EU trade: exports to EU fell 40.5% mom, with Eurozone down 38.5% and non-Eurozone down 53.6%. But exports to the rest of the world actually rose 3.6% mom. That's fairly unambiguous: in January 2020 the EU accounted for 44% of UK's goods exports, but this was down to 36% in January 2021.
For all the reasons I've mentioned, its impossible to draw long-term conclusions from today's data. All we can say is that one month on, trade volumes with the EU collapsed in a way they didn't with the rest of the world. Whether this is the start of a longer-term re-structuring of UK trade will only be visible much later in the year.
Confused about the US labour market numbers? You should be.
Every Thursday I track the US jobless insurance claims - initial claims and continuing claims. Historically these have been pretty useful. But these are strange days for the indicator.
Take this week's numbers: initial jobless claims fell 42k to just 712k, and continuing claims fell 193k to 4.144mn. That sounds pretty good. But look down at the bottom of the report and you'll find a quite different set of numbers. The total number of people claiming benefits jumped 2.087mn on the week to reach a staggering 20.116mn. This time last year it was 2.137mn. And whilst the total number of claimants fell fairly consistently until the end of October, they've since stabilized, and since January they've been quietly and gently rising.
What's did the damage this week is Pandemic Unemployment Assistance, which jumped 1.058mn on the week to 8.387m, and Pandemic Emergency Unemployment Compensation rose 986k on the week to 5.455mn.
Since the Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation numbers are more than three times as many as those formally claiming unemployment benefit, we need to know what's happening. Which is what today's edition looks at.
Today I'm turning the spotlight on the surge in sales of heavy trucks in the US in October - up 8.3% mom to 38.95k. Just as the slump of late last year once again heralded trouble to come, now the recovery in sales suggests robust economic growth ahead. The 6m deflection above trend is now up to 0.7SDs, which is the highest since the recovery of 2010!
A slightly strange one today, looking at recent movements in Bank of Japan's ETF buying and the Bundesbank's Target 2 lending to the ECB to help explain the fundamental overvaluation of the TOPIX and DAX respectively.
Spoiled for choice, but I return today to Japan's machinery industry. Yesterday's Japanese wholesale and retail sales numbers posed a real question. Retail sales of machinery were up 17.2% yoy; wholesale sales of the same were up 36.8% yoy, with industrial equipt up 82.1% and electrical equipt up 26.1%. Is this a signal of a major upturn in capital goods demand, or are Japan's machinery makes simply stuffing the distribution channels?
It's an important question, given that Japan is one of the world's biggest capital goods suppliers.
Today we had September's industrial production numbers, which showed output up 4% mom sa and down 9% yoy, but with a monthly movt which was 2.4SDs above historic seasonal trends. Within that, production machinery was up 11.1% mom, shipments were up 11.8% , inventories up 1.5% and the inventory/shipment ratio down 11%. That inventory/shipment ratio was the lowest since February, but also still 19% higher than last year's average. So although September showed dramatic progress, it was from a poor starting position. Still, on the face of it, it isn't channel stuffing which is driving production, or wholesale sales for that matter. It's demand.
Three stories to chase up today:
First, the 33.1% annualized rise in US 3Q GDP - this is what full-throated and unconstrained fiscal and monetary stimulus can do;
Second, the unexpectedly sanguine results of the Eurozone's confidence and sentiment indexes for October. The survey period ended on Oct 22nd, so these surveys may just have missed, or disbelieved, news of the new European lockdowns;
Third, there's the divergence in Japan between retail sales (down 4% yoy) and wholesale sales (+14.9%). In both, the star performers are capital goods: so are producers simply stuffing the channels, or is there a genuine capital goods resurgence around the corner?
Towards the end of the month, not only do we get a whole raft of hard economic data, we also get a bunch of confidence indicators, tracking consumers, business and investors. On a global scale, my global confidence shocks & surprises is still slightly positive, but has been in very steep decline since late September. That global signal, however, isn't really showing up how regional confidence indicators are now moving in different directions.
We got a significant foretaste today, from State Street's global investor confidence index, which tracks risk appetite by what investors are actually buying The global signal fell 3.8pts to 80.1, which was the weakest since May. There are distinctly opposite trends coming from Asia and Europe. Asia's confidence rose 7.2pts to 91.7, which is just very slightly higher than 2019's average; but Europe's dropped 17.4pts to 92.8, which is weaker even than the lowest points of the initial lockdown,m and in fact the weakest since August 2019. The US indicator, too, showed a modest 2pt decline in risk appetite to 76.8, which remains higher than pandemic levels, and quite significantly higher than the 2019 average of 71.9.
The recovery of confidence in Asia was confirmed by S Korea's Oct consumer confidence index, which rose 12.2pts to 91.6, which was the best since March, and was almost a return to pre-Covid normality. The details suggest a powerful return of optimism: readings of current economic conditions were up 16pts to 58, and economic expectations rose 17pts to 83.
France's Oct onsumer confidence dipped only 1pt to 94, but that's pretty grim: even at the worst of the initial coronvairus wave,m the index only sank to 92. And when you look at the details, the index is being supported by improved reviews of the last 12 months, whilst expectations were falling quite hard.
Many more confidence reports coming over the next two days.
Today we had the first glimpse of Markit's October PMIs for Japan, Germany, France, UK and US, with prelimninary reading for both manufacturing and services sectors.
As always with the Markit's PMIs, its a struggle to drag anything of genuine substance out of them, but maybe there is some genuine information hiding in the broad sweep of the conclusions. Anyway, averaging the movements in all these economies, there was a very slight acceleration in manufacturing expansion in October vs September, with the average rising to 52.7 from 52.4 in September. But the divergence between countries widened a bit, with the standard deviation rising to 3.7pts from 3.4. The main reason for both those features is an acceleration in Germany, where the PMI rose 1.6pts to 58, with the output index up at 64.9, the best since Feb 2011! Elsewhere, there's no change in pattern: Japan is still contracting but we've got mild expansions elsewhere.
For services, there's a slight slowdown with the average falling 0.3pts to 50.9 - a much more fractional expansion than manufacturers are having. Once again, there is a greater divergence between economies, and once again, it's Germany that's responsible. It's services PMI fell 1.7pts to 48.9, the weakest since June. Germany fared unusually well in the first wave of Covid, but seems to be sharing the same panic as the rest of Europe this time round.
The other thing that stands out is there's a clear split between on the one hand Japan and continental Europe, which are all showing service sector contraction, and the US and UK, where servies are not only expanding, but actually accelerated slightly in October.
I took some time out from this podcast for a couple of reasons: for a week there, it seemed like the economic data wasn't really telling me anything new that I hadn't already talked about. But when China releases its 3Q GDP and a bunch of data for September, it would be surprising if there's nothing there to be seen.
And there is. To cut a long story short, no matter which was you cut and analyse the data, they all tell us the same story - that far from a 'dead-cat bounce' after Covid, China's recovery continues to make progress, with an underlying sequential acceleration which has dimmed only very slightly over the last three months. What's more, it looks like the recovery is genuinely being driven by a recovery in private, nominal, domestic demand, rather than merely a product of fiscal stimulus.
The story today is the stark contrast between the sagging spirits in Europe and the recovery of confidence in the US. Doubtless, Europe's renewed slump is related to the renewed efforts to act, somehow, against the coronavirus, but the source of the renewed confidence in the US is difficult to fathom.
Let's take Europe first. The main exhibit is October's Zew survey of German financial opinion. This reported expectations for the Eurozone down no less than 21.6pts to 52.3, which was the lowest since May, even though current conditions retreated a relatively mild 4.3pts to 76.6. Things were just as bad in Germany, where expectations dropped 21.3pts to 56.1, which was also the weakest since May, even though current conditions were down only 6.7pts to minus 59.5, which was the least-bad since March. Meanwhile, expectations weren't just deteriorating for Europe, this survey found expectations for US and Japan also down just as badly. Zew cites not just the sharp rise in coronavirus cases in Europe, but also the prospect of the UK leaving the EU without a trade deal, and uncertainties about the US election as depressing factors.
Meanwhile, it's a completely different story in the US, where two business confidence indicators released today found a genuinely surprising surge in confidence. The September NFIB small business confidence index rose 3.8pts to 104, which basically takes it back to the sort of levels seen before Covid-19 surfaced. This was not just a sharp recovery, it was broad-based, with 9 of the 10 subindexes improving. In particular, 6m expectations rose 8pts to net +32%, and expected real sales rose 3pts to net 8%.
And then Oct's IBD/TIPP economic optimism index found something similar, as it rose 10.2pts, or 22.7% mom to 55.2 - which was the best since February. Expectations jumped 30.4% mom to 54.1, which was the biggest monthly jump since Nov 20078, and assessment of federal policies rose 26.1% mom to 52.6, which was the sharpest monthly rise since the immediate aftermath of Sept 11 attack. Even assessment of personal finances rose 13.9% to 58.9 - solidly optimistic.
With all that the US has been through during the last few months, this outbreak of of optimism is extremely surprising. If it was only one survey, I'd cast doubt - but when two find much the same thing, you can assume they're on to something.
A typical mid-month Monday - very quiet with very little to report. Still, the highlight of the day was probably Sept's orders for Japan's machine tool orders. Although these fell 15% yoy, the monthly movt was actually 2.1SDs above historic seasonal trends. This follows on from monthly gains sharply higher than trend for July, July and August. Right now the 6m deflection against trend is running at 0.9SDs above trend, which is the highest since early 2014. The problem, of course, is that the base of comparison is so low now, that even this strong run hasn't been enough to rescue the yoy. The 12m yoy is still running down 35.4% yoy, and this comes after a fall of 32.3% in calendar 2019.
Still, you've got to take your surprises where you can get them. And here the surprise is in foreign orders, which were actually up - yes, up - 1.8% yoy in September, which was the first yoy gain for two years, with a monthly movt 1.3SDs above trend. Domestic orders, meanwhile, are still down 34.3% yoy, although the monthly movt was 1.2SDs above trend.
Machine tool orders are literally the cutting edge of the industrial cycle, and so we can probably say that whilst there's signs of life ex-=Japan, there's really not sign that we're going to break into positive territory domestically in Japan any time soon.
It is shared wisdom that trade is a motor of global economic growth, so it is puzzling that no attention is paid to the continuingly proliferating thicket of non-tariff barriers (NTBs) planted to impede and curtail this growth. The World Trade Organization maintains a database of who is raising NTBs, but as far as I can tell, it is ignored in mainstream economic coverage. But I have the freedom to watch and comment, so I check it on the first Friday of every month.
In September, the four major economic powers (US, China, EU, Japan) added a further 66 NTBs designed to impede and slow trade. Over the year to September, they added a further 380, taking the total to 13,704 - up 4.9%yoy.
- US added 11 in September, taking the total to 6,234, up 4.0% yoy
- China added 27 in September, taking its total to 2959, up 4.7% yoy
- EU added 20 in September, taking its total to 2544, up 5.6% yoy
- Japan added 8 in September, taking its total to 1967, up 7.5% yoy
The rise is relentless, with the obstacles in place up 86% since 3Q 2010. Erect enough obstacles and eventually trade will be impeded. That point has probably already been reached: on a 12m basis the imports of these four giant economies peaked in 2018, well before the world had heard of coronavirus. The pandemic accelerated the decline, it did not initiate it. By August, 12m imports from these countries was down 7.9% yoy, and was down 9.5% from the 2018 peak.
Although the world's trade warriors are plainly winning their war against trade, there is no sign that their efforts will flag or abate.
Today we had further evidence of the improvement in Japanese consumer confidence - something still new, and still genuinely surprising.
After last week's modest recovery in the consumer confidence index, we got more dramatic confirmation with the release of September's pavement-level Economy Watchers indexes. The assessment of current conditions improved sharply, up 5.4pts to 49.3, which was the highest since April 2018, The outlook rose 5.9pts to 48.3, which was the highest since February 2019. The biggest improvements in outlook came in employment, which rose 7.2pts to 48.9, and the household outlook, which was up 6pts to 48.5. The outlook for business also rose 5pts to 47.4, with manufacturing up 5.2pts and non-manufacturing up 4.4pts.
This recovery in confidence coincides with the very sharp recovery in trade numbers in September, which I talked about yesterday. That included exports down only 1.9% yoy in yen terms, or 0.3% in dollar terms, with a monthly movt 3.5SDs above historic seasonal trends.
Still, overall, the improvement in Japan's outlook has rather crept up on me: with the exception of the rise in money and lending numbers, it's been hard to find any consistent evidence of recovery in either industrial data, or domestic demand indicators. But, when I look at my Shocks & Surprises index for Japan, I find that actually, when you strip out the volatility, you discover that Japan's 12m index has made it into positive territory during the last few weeks for the first time since April 2018.
I've previously talked and written about how the visible trends in NE Asia's exports and G3 Imports have exited the pandemic in far stronger condition than expected. In August, for example, NE Asia's exports were up 2.9% yoy, which may not sound great, but achieving a positive yoy has been rare over the last 18 months.
We've now got enough data for September to be confident that this strength is going to be maintained. Today we got Japan's 20-day data for September, which showed exports down 1.9% yoy in yen terms, but with a monthly movt up 3.5SDs above historic seasonal trends. In dollar terms, these exports were down only 0.3% yoy, compared with a fall of 15.1% in August.
Earlier, we'd learned that S Korea's Sept exports rose 7.7% yoy in dollar terms, with the monthly movt 2SDs above historic seasonal trends, with exports to US up 23.2% yoy.
We also had data from Taiwan. Taiwan has been the conspicuous front-runner in NE Asia's trade recovery, and in September its exports rose 9.4% yoy - and whilst the monthly movt was only on-trend, this was still the highest yoy growth since early 2018 (excepting CNY affected months).
Japan, S Korea and Taiwan account for a third of NE Asia's exports, so unless China springs a really nasty shock on us, September is going to be another month of unusually strong export growth for NE Asia. And there's no reason to believe China's exports are going down - its September PMIs, included a 1.7pts rise in the export order subindex to 50.8 , the first 50+ result since Dec 2019, and the strongest since May 2018.
Main message of the day: it's quiet out there. After the collapse, and after the rebound comes this period, when things look surprisingly normal.
All over the world, too. Australia's exports fell 21.9% yoy and were 1SD below trend, but its core industrial commodities businesses did OK: iron ore up 4.5% yoy, copper up 37.3%. And although exports to China fell 14.1% yoy, that's considerably better than the average.
In Europe, Germany's August factory orders were also near-normal, up 4.5% mom and down only 2.2% yoy, with domestic orders up 1.7%, export orders up 6.5%.
And in the US, we had normality in the JOLTS job openings: not only were the 6.5mn openings almost unchanged from July, so also it was for hire, separations and quits. Meanwhile, August's 2.2% mom rise in exports was also . . . well, normal.
As usual, the week started quietly, with data only adding detail and nuance to trends we've already identified.
In Taiwan, Sept's manufacturing PMI rose 3pts to 55.2, the highest since March 2018, bolstered by very strong growth in orders, exports, output, payrolls, backlogs. But as we've seen elsewhere, demand surprises tend to run headlong into supply shocks, and this is happening in Taiwan too, with delivery time continuing to lengthen.
In Europe, the UK is/was the only economy showing a service-sector recovery, with Sept's PMI at 56.1, whilst Eurozone was still contracting, at 48.
In the US, Friday's vehicles data had autos/light trucks up 7.6% mom to a level only 3.6% below the 2019 average - ie, recovery. But heavy truck sales, which I think is a great indicator, were down 5.3% mom and down 26.3% yoy. The slump started in Oct/Nov last year, and hit collapse during Covid, and the recovery we've seen since then only takes sales back to around the lows seen in 2016. This signal remains basically negative.
Today I looked at the US labour market data for September, and the surprising rise of Japan's consumer confidence index.
The 661k rise in September US non-farm payrolls was only slightly disappointing, and offset by a 0.5pps fall in the unemployment rate to 7.9%. But the details are not nice: in particular, the 0.3pp decline in the labour participation rate, to 61.4% is the very stuff of 'economic scarring' people have warned about. It also explains the fall in the unemployment rate: the number unemployed dropped 970k, but mainly because 879k dropped out of the workforce. Yes, this is only one month so far, but it is distinctly bad news.
Genuinely surprising news, from Japan, though, where Sept's consumer confidence index rose 3.4pts to 32.7, which was the highest since pre-covid February. Actually, though, this slightly underplays the surprise: what was driving this was a rise in expected income up 3.7pts to 35.1, and a willingness to buy durables, which rose 2.9pts to 34.9. What's unexpected about them is that it brings both indexes to within hailing distance of the 2019 average. For income, the result is 35.1, the 2019 average of 37; for wilingness to buy we had 34.9, vs a 2019 average of 35.9.
Loads of data landing from around the world today, but in the end telling us little new. In particular, Japan's 3Q Tankan was a damp squib.
In the US, the ISM manufacturing index reported a surge in prices paid, with the index rising to the highest since October 2018. This is the supply shock of the pandemic kicking in again as demand beings to recover. That shows up in the comments accompanying the survey: eg, a computer/electronics guy saying 'still struggling with long lead times for components coming from China'; Or the transport equipt sector comment: 'Business is booming and the supply chain has been caught off guard. . . . the resin industry, along with plastics, is driving cost increases and scarce availability'.
And then there's Markit's manufacturing PMIs: The average for those released today and yesterday rose 0.6pts to 52.1, suggesting a steady mild improvement in conditions, though the standard deviation between countries rose a little to 3.1pts from 2.2pts in August. Within than, Europe's PMIs averaged 53.1, up 1.1pt from August, with the SD unchanged at 2.3pts. Asia, however, inched up only 0.3pts to 50.9 - barely back in perceptible growth, although here there is a wide variation, witha SD of 4pts (up from 2.2 in August).
Three topics today caught the eye:
China's PMIs (steady as she recovers, some sign of life in export orders);
Hong Kong's monetary data, which signal to us the dramatic recovery in Hong Kong's function as a capital-raising centre for China - capital raised is up 99.4% ytd, with the real boom starting in 3Q;
In the US, the ADP's payrolls rise of 749k suggests a slightly faster rate of rebound than August. Nevertheless, payrolls are still down 10.4mn from pre-Covid levels, and at this rate of recovery, we won't get back there until the end of 2021. That's the size of the problem visible.
Today was really all about confidence indicators - interesting at a time when we're supposedly embarking on this alleged 'second wave' of coronavirus. And generally speaking, things got better as you went from East to West.
In Asia, S Korea's BOK survey discovered expectations on the slide - particularly for non-manufacturers, who tend to service the domestic economy. In Europe, the EU's giant monthly compilation of confidence indicators continued to show improvement despite the 2nd wave worries, but there's no acceleration in that improvement, and sentiment remains very sharply worse than in pre-Covid February.
In the US, the news is distinctly brighter, with the expectations result in the consumer confidence survey recovering no less than 20.1% mom to a level which is now 3.6% higher than the average expectations recorded in 2019. There's now positive expectations for jobs, for income and for business.
Today is unusual: very little data, and that which does lands comes in pretty much as was expected. So nothing today to challenge assumptions or to merit significant comment.
But keep listening: we're at the end of the month, so Wednesday and Thursday are going to be hectic. Not today though.
I'm on the lookout for early signs about how the world economy is reacting to the so-called arrival of the so-called 'second wave' of coronavirus (about which I am profoundly sceptical, on statistical grounds). Today we got what may be two early straws in the wind: S Korea's Sept consumer confidence, and the Eurozone's August money data.
S Korea's confidence got hit, but encouragingly, mainly on assessment of current conditions and employment prospects, whilst the impact on longer-term expectations was muted.
Eurozone money growth slowed noticeably, but when you look closely, you'll find that's less to do with any significant change in household financial behaviour or situation, and more to do with the ECB choosing August as a month to withdraw a net Eu123bn in lending to the banking system. Bad timing, as it turns out, and you can be certain they are now putting it all back again.
Today's economic news extended two strands of the narrative we've been following.
In Asia, Taiwan's August money growth put in a third month of spectacular outperformance of trend. It's all down to rises in reserve money, which, in turn, is an irresistible function result of the huge build-up of foreign assets on the central bank's balance sheet. We don't know the exact number for August yet, but between May and July, that build-up of foreign assets was roughly equivalent to the average yearly build-up of the last five years!
In the US, the housing market numbers continue to soar. With 1,011k new homes sold in August, that's the busiest month since Sept 2006! What's intriguing is that even though inventories are falling, so too are median prices. In fact, the premium put on new homes vs existing homes, which has been in decline since 2014, disappeared almost entirely in August.
In the monthly economic calendar there comes a day when all else is quiet, and Markit looses its preliminary PMIs on the world. It's a smart timing, because in the absence of real economic news, these indexes manage to generate headlines, which I guess is good for Markit's business. But the precision of the index numbers is spurious, and when the real economic data comes in in a few weeks time, there's no statistical reason to think it will bear any interesting relationship to these PMIs.
The decimal point twitches really don't mean anything, but the general drift of the numbers might, possibly. So, to summarize, September's indexes suggested Japan is continues to contract, as manufacturing has been continuously since May last year, and as services have since February. Barely a flicker of change. In Europe, the post-covid expansions of July and August ground to a halt in September, reaching just about statis. Germany's manufacturing is still growing, but services aren't; France's is back in overall contraction again, although manufacturing is just about stable.
The UK, meanwhile, is still in recovery, and still growing fast, with both manufacturing and services looking similarly strong. The US too continues to grow solidly, with both manufacturing and services firing positively.
In fact, the UK's result was the strongest of the day at 55.7, but with utter predictability, Markit's commentary for the UK was predictably blackly glum, whilst for everyone else they were either positively upbeat, or at worst offering mitigation. The British penchant for destructive self-criticism remains gobsmacking.
Hong Kong is being hit by a triple whammy: it is now in its sixth consecutive quarter of political unrest; its an global services economy at a time of global travel lockdown; and now, of course, it is a target of China's own new-found diplomatic and political aggression.
So you'd expect Hong Kong's balance of payments to be reeling. But the first rule in Asian economics is 'never rule out Hong Kong'. And today its 2Q balance of payments showed it's current account surplus up HK$26.3bn yoy to $60.5bn. You can mainly thank the $55.1bn yoy narrowing of the trade deficit - but what happens to its trade balance is pretty much out of Hong Kong's hands.
It's the other bits of the picture that are surprising. First, the services surplus was down only $28bn yoy to $21.4bn, which is a pretty good result considering that in 2019 travel exports made up 29% of total services exports, but in 2Q dropped 97% yoy transport exports (last year, 30% of exports) fell 41.3% yoy In fact, if you exclude travel and transport, all other services exports fell only 6.2% yoy, whilst services imports ex transport & travel fell 10.6%. Ex travel and transport, the balance of all other services showed a surplus of $11.7bn, which was up 22.4% yoy!.
Then there's capital flows. There is, or was, some capital outflow , but nothing that amounts to capital flight. In fact, direct dis-investment amounted to only HK$18.4bn in the 12m to June, and in 2Q itself, there was a very small positive net direct investment into the place. Then there's portfolio investment: that showed an outflow of just HK$36bn in the 12m to June. But in context that's peanuts, and net portfolio investment into HK came to $231bn in 2Q alone.
Put it all together, add the net result is that HK's foreign reserves rose HK$15.5bn qoq in 2Q. For the world's most open economy, under siege both from within and without, that is pretty extraordinary. Never count Hong Kong out!
Sometimes - usually on a Monday during the middle of the month - things get quiet in the economic-data world. Today's one of those days. The only economy reporting any significant data was Taiwan, which reported August's export orders up 13.6% yoy and foreign direct investment into Taiwan up 12.3% during Jan-August.
Export demand is concentrated in Taiwan's electronics sector, but offsetting that sectoral concentration is the the fact that demand for Taiwan's electronics is growing almost everywhere. Electronics orders are up 28.2% yoy, and infocomms equipt up 26.4% yoy, and those two sectors account for 53% of orders. But look at the spread of orders: US up 19.5% yoy, China & HK up 21%, Europe up 21.2%, and even Asean up 5.5%. The only place not building orders with Taiwan is Japan, down 9.6% yoy.
Then there's Taiwan's FEI numbers - which showed inward FDI rising 12.3% in the first 8 months, with investment from the mainland up 54.2% and from the rest of the world up 11.6%. Meanwhile, Taiwan's outward FDI is growing faster - up 43.2% ytd, with investment in the mainland up 49.5% and in the rest of the world up 39.5%.
Conclusion? Despite the stresses between China and Taiwan and the rest of the world, Taiwan's commercial ties with the mainland continue to deepen unabated.
Back after a couple of days away - fortunately relatively insignificant days as far as data is concerned.
Today the focus is on the US, where the Uni of Michigan sentiment index rose 6.5% mom to the best since March, and topping June's immediate post-pandemic highs. But at 78.9, it is still far below last year's average of 96, and the l/t average for the series of 85.6. Getting better, but still glum, then.
More shocking was the $59bn qoq deterioration in the US 2Q current account to $170.5bn, with all active components of the balance deteriorating. Maybe the previous few months data on trade in goods and services should have alerted us to deterioration on this scale, but it didn't. But there's a silver lining: given the extraordinary blowout in the fiscal deficit (ie, govt dissaving) during the quarter, the current account soured only rather mildly. Which in turn means the private sector was saving, and saving exceptionally hard, during the pandemic. Firepower for the recovery.
We're regularly told that we've not yet really felt the full impact of the pandemic, and that pretty soon now, we're going to realize that it's going to leave behind a tide of unemployment which will kill the rebound in the short term, and scar the economy for years to come. And I have to say that on the face of it, that's plausible - it could happen.
My hope that it won't has two supports: first, the lockdown wasn't a 'recession', it was (merely) a medical/social emergency; second, the downside of the flight from the urban economy is unavoidably visible to reporters and analysts, whilst the positive impact on smaller towns and villages is not. If economies are being restructured (and they are), as rise in frictional unemployment is inevitable. But that's not the tsunami we are told to fear.
And so on to the UK's labour market data for July. Here's the spoiler alert: although July's headline unemployment rose, the report contained the first coherent and plausible evidence that UK labour markets are beginning to recover. Crucially, employment is rising, particularly full-time employment by companies; inactivity is falling; vacancies are rising; and early data for August from PAYE data also confirms that employment is continuing to rise.
In a light day for data, the most interesting results are from the NY Fed's August survey of expectations. This is usually watched for inflation expectations, and these are continuing to rise, with 12m expectations up a further 11bps to 3%, which we last saw in May and before than in Dec 2018; the 3 yr expectation also rose 25bps to 2.98%, which is the highest since Dec 2018. These are both now above the average this survey has had since 2013. In fact, despite covid, inflation expectations have been generally rising since the low-point of Nov 2019 - even though headline CPI dropped like a stone as coronavirus hit. The Fed may have relaxed its tolerance for inflation, at least partly on the grounds that it needed to head-off any fall in inflation expectations. Well, there's no back-up for that position coming from the NY Fed's own survey.
Other expectations are dimming. Labour market earnings are expected to rise only 2%, and h'hold incomes are expected to grow only 2.2% - that's down 1.6SDs from the average. H'hold spending is expected to rise just under 3% - that's 0.9SDs below average. Part of the problem expected credit conditions dropped very sharply in August - in fact, you've got to go back to 2013 to find a more pronounced negative conviction about credit conditions.
The results for the property market aren't quite the bull-run you'd expect either. Yes, the expected rise in prices is accelerating to 2.82%, but that's still below the level expected pre-covid. But the survey finds that the expectation of moving home in the next 12 months is the lowest since the survey started, and is still falling. And the sharpest fall is for those aged under 40 - ie, usually the most active demographic.
Overall, this survey doesn't really conform to the usual descriptions we hear about the current state of the US economy, and its likely near-term trajectory. People seem more worried about inflation, more worried about employment and income, and less likely to spend big, or move. Overall, you have to say, these are more 'hunker-down' results than straightforward recovery.
China's money and financing numbers for August take centre stage today, with an unusual contrast between quite subdued banking activity and soaring government bond issuance. The 1.35tr in new bank lending is actually smaller than the 1.38tr raised in government bonds, which is, I think, a monthly record for government issuance. It means the govt's bond debt stock is up 15.3% yoy at a time when nominal GDP is running at 3.5% on a 12m basis. It means that in August, government deficit-financed spending was a bigger stimulus to China's economy than the banks could manage.
The problem, as always, is that China's government does not raise enough in taxes to finance its responsibilities and ambitions: in the 12m to June, China's total govt revs came to just 17.8% of GDP, and the fiscal deficit reached 5.3%. So its' not entirely surprising that govt bond issuance is soaring. After all, if the banking system isn't going to provide the extra oomph, the government will have to.
Another quiet day, but also one in which we got more opportunity to track the modest supply-squeeze showing up in US distribution channels. It came with two sets of data: the wholesale sales & inventory data for July, which cut the inventory/sales ratio back to the levels we've been used to since 4Q2018, with the ratio for durable goods falling hard and generally.
And in addition, we got a modest inflation shock from August's PPI, not least because retailers and wholesalers responded to the supply squeeze by widening their margins.
These strange post-pandemic dynamics won't last long, but the current modest supply squeeze can be expected to produce strong US industrial and NE Asian export numbers for a few months yet.
A quiet day today, with no major news at all from Europe - the slackers! - and little pulse-quickening from Asia either (though Japanese machine tool orders, S Korean unemployment, and Australia home loans all beat expectations).
In the US, the focus continued to fall on the labour market, with the JOLTS job openings survey showing openings up 10.3% mom to 6.618mn. This was the strongest since February, but still way down from the 'hot' levels of pre-Covid 2019. Still the average openings/unemployed rate of the last 10yrs looks within grasp over the coming months.
A question remains: if openings are so strong, why are hirings so weak - they fell 17% on the month? A look at the soaring quits rate suggests employers are finding it increasingly difficult to find the right people to fill the holes increasingly available. Add skills shortage to the combined supply and demand shocks in the US economy.
Yesterday, we had trade data for August from enough of NE Asia for us to be confident about the region's export performance: we expect NE Asia's exports rose 2.3% yoy in August, with a monthly movt 0.2SDs below historic seasonal trends. Today we have import data from Germany and France for July. The Eurozone is the last of the G3 economies to report its monthly trade numbers, but today's results give us enough to let us be confident about what happened to G3 imports in July. And remember, the relationship between G3 import demand and NE Asian export supply is the hinge on which the globalized world has turned during the last 20-30 years.
To cut a numbers-heavy story short, Germany and France's import numbers were good enough for us to be confident that in July G3 imports fell 12% yoy in dollar terms, but that the deflection against trend was positive to the tune of 1.8SDs above trend. That follows from, and builds on, the 2.1SD upward deflection in June, and tells us unambiguously that the recovery is being maintained. Which is what we have also seen in NE Asia's August export numbers.
This does not mean everything is plain sailing: in trade terms the trend is not your friend - the ever-growing thicket of non-tariff barriers continues to see to that. Still, if we're tracking data with the aim of seeing whether we are returning to something like economic normality, the trade news of the last two days is unambiguously cheering.
It's all about NE Asia's exports today, with China & Taiwan reporting August results, and Japan reporting on the first 20 days of August.
What emerges is twofold. First, NE Asia's exports as a whole probably rose around 2.3% yoy in August, largely building on the post-pandemic strength seen in July. This is the second yoy rise in a row - and to find something similar, you've got to go back to Oct-Nov 2018!
Second, China's commercial hegemony over NE Asia's exports continues to grow: almost exactly two-thirds of NE Asia's total exports in August came from China - that's up 4.4pps yoy. And there's a further 8.8% coming from Taiwan (up 0.5pp yoy). Meanwhile, Japan and S Korea are on the wane, now accounting for only 24.6% between them! Neither political trade pressures or the impact of the pandemic has slowed China's continuing rise.
The US labour market surveys for August took centre stage: whilst the 1.37mn rise in non-farm payrolls was roughly as expected, the household survey data was tremendously strong: employment rose 3.76mn, the unemployment rate fell 1.8pps to 8.4%, labour participation rose 0.3pps to 61.7%, unemployment fell 2.79mn.
Not just that, for those at work average weekly hours ticked up, and are now running longer than this time last year; and hourly wages rose 0.4% mom, with the sharpest rises in manufacturing and leisure/hospitality.
These numbers describe an economy showing a conspicuously broad and robust recovery from the coronavirus shutdown - and its a sharp contrast with what we're seeing in Europe.
The focus today is on service turnover data in 2Q for the Eurozone: it fell 15.5% qoq and fell 18.8% yoy. These are truly dreadful numbers, even if they no longer actually shock us. The available data allows us to work out which Eurozone member suffered most (Spain) and which least (Germany). It also allows us to see how the Eurozone compared with the UK (the Eurozone did slightly less badly), and with the US (the hit to the Eurozone service industries was approximately double that to the US).
Over in the US, whilst the weekly jobless numbers were encouraging, there's a twist in the numbers: the number of people actually claiming benefits jumped 2.2mn on the week, almost certainly in response to the extension of the Pandemic Unemployment Assistance scheme deployed retroactively to August 1st. If you give it, they will come.
A quiet day after the avalanche of data seen during the last two days.
In Asia, what stood out was the 14.2% yoy rise in S Korean lending to business, and the 7% qoq fall in Australia's 2Q GDP.
In Europe, the main event was the 0.9% mom fall in Germany's July retail sales. The Covid-bounce was back in May, when sales rose 13.2% mom; since then it's been down 1.9% in June and now down 0.9% in July.
In the US, the 248k rise in payrolls in August tracked by ADP was slightly, but not desperately, disappointing. Meanwhile, July's factory dynamics showed orders up 6.4% mom, shipments up 4.6%, but inventories down 0.5% - or down 0.8% if you are talking about finished goods. Moral, the inventory-shortage in the US is not fixed, and will continue to drive industrial dynamics for the next few months.
First, let's recognize the US's ISM manufacturing index for August for the comprehensive strength it reported. It underlined the message that this recovery in an economy running short of inventory is producing joint supply and demand shocks. Even though production surged, so also did work backlogs, whilst customer inventories shrank even more. Essentially, manufacturing supply can't keep up with the inventory-accelerated mini-cycle, and one result is also the worst inflation in prices paid since November 2018.
The bulk of today's report, however, is on Japan's massive MOF quarterly survey of private sector balance sheets and p&ls. This is detailed enough to allow us to do a nearly-full Dupont analysis of corporate Japan. What corporate Japan could and couldn't do when faced with a 17.7% yoy collapse in demand is probably very similar to what most companies have been doing.
The usual avalanche of Asian data arrives with the end of the month. Surprisingly, despite generating seven surprises and five shocks, there was little compelling to explore.
China's CFLP PMIs for August were, frankly, a non-event, with manufacturing almost unchanged, and non-manufacturing up slightly. The details are, frankly, dull.
India's 2Q GDP dropped 22.8% yoy: utterly disastrous but also dictated above all by the mandated pandemic lockdown.
Japan and S Korea reported industrial results for July, with Japan having the slightly better month (output up 8% mom and inventory/shipment down 8.9% mom), vs S Korea's manufacturing output +1.8% mom and inventory/turnover down 1.4% mom). But Japan is starting a long way back, with output down 16.1% yoy vs S Korea down 2.4% yoy. And both have a long way to go to deal with their still-worrying inventory disequilibria.
Today has featured the EU's major monthly set of confidence indicators, aggregating to their growth-tracking Economic Sentiment index. It's recovery continues, but it's only partial - indeed, it's still 15.2% below pre-Covid levels. And that's the sort of frailty which confidence indexes around the world are showing, even though they (mostly) continue to improve.
Just about the only place confidence has recovered beyond pre-Covid levels is in financial markets, with State Street's global investor confidence index now roughly 10% above pre-Covid levels.
The second strand in today's bulletin is the continuing efforts being made to rebuild US inventories, after the huge inventory dump of the first half of the year. Progress isn't easy, and in some cases, shortage of materials is now closing production lines. What we're seeing in this part of the inventory cycle is combined supply and demand shocks.
Today I focus on the Eurozone monetary data for July, trying to track the various flows between the ECB, Eurozone governments, and Eurozone banks.
Sadly, this is an endeavour which is pretty tricky. However, the bottom line is this: the ECB's balance sheet has grown much more rapidly than the absolutely rise in M3. The ECB lends to the banks, who in turn lend on a multiple of that to governments, who return the favour by shoring up the liability side of the banks' balance sheets by taking out deposits and buying bank bonds. Meanwhile, it looks as if the private sector has been offloading longer-term bank liabilities rapidly.
In the end, this is a belt-and-braces attempt by the ECB and Eurozone governments to shore up the liabilities side of banks' balance sheets during the pandemic. And you've got to say - so far, so good. Eurozone monetary velocity is clearly dropping like a stone, but at least the banks are still standing.
Three things surfaced from today's economic data:
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The strength of US orders for durable goods and capital goods. This extends the run of surprisingly strong global capital goods sector numbers seen since mid-July. Quite surprisingly, it seems that the capital goods sector is the first out of the blocks as far as post-Covid recovery is concerned.
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Hong Kong's July trade data was overall rather disappointing, but the relative strength of exports to China vs the relative weakness of imports from China suggests quite simply that China's domestic demand recovery is running ahead of recoveries in the rest of the world. HK's trade numbers can be seen as warehouse movements indicating the state of China relative to the rest of the world.
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S Korea posted improved survey results for manufacturers. But don't be fooled - even though they beat expectations, they're still not better than the worst moments of the pre-Covid world.
Today was all about confidence indicators:
In the US, the Conf Board's consumer confidence index slumped 7.5% mom to its lowest point since early 2014 - worse even than the lowest points of the first wave of coronavirus. (But is the survey's pessimism more important than the extraordinary surge in new home sales - up 36.3% mom to the highest since December 2006?)
In addition, we had consumer confidence from S Korea (about half confidence recovered from Covid's worst); and Germany's August Ifo survey, which showed the business climate index almost fully recovered from Covid's travails.
It is difficult to avoid the unexpectedly strong news coming out of Taiwan right now. Last week we saw surprisingly strong export orders and a current account surplus boosted by a previously unseen surplus of services. The week before it was strong wage growth that was popping up unexpectedly.
Today, I focus on what's happening in Taiwan's money numbers. To put it briefly, broad money is surging for a second month, and not because bank lending is pushing it along. In fact, the monthly rise in net deposits was probably the second-largest in Taiwan's history.
What's driving it is a massive rise in capital inflows - foreign assets inflow are up 3-4x over the last couple of months, and whilst the central bank and government are combining to try and sterilize the inflows, they have only achieved so much.
If Hong Kong's 'good & friendly China' role were to start transferring over to Taipei, you'd see increased services exports, large scale capital inflows, a build-up of deposits in Taiwan's banking system, and an outperforming economy.
Which sort of echoes what the data is telling us right now.
One cannot entirely avoid the start of Markit's PMIs for August. Their shorthand message: Japan still bad; Eurozone recovery relapsing; UK and US surging.
Elsewhere, the data merely added more evidence for strands already evident: in the US existing home sales jumped 24.7% mom, and in the UK retail sales volumes rose 3.6% mom. In both cases, these no longer look like the 'inevitable' rebounds from very depressed levels - rather they look like actual expansions.
Today is all about Taiwan, because:
a) July's export orders jumped 12.4% yoy, which was exceptionally strong, and amplifies yesterday's comments about the recovery in Northeast Asia's exports; and
b) Taiwan's 2Q balance of payments included two interesting developments: a services surplus! and very strong capital inflows. Is Taiwan going to inherit Hong Kong's mantle as the commercially friendly face of China to the world?
Two trend stories from Asia today, prompted by data released today.
First, Japan's July trade data rounds off the set for NE Asia, and the results from the region show an unexpectedly sharp rebound in export volumes, even though the yoy comparisons still tend to be negative. So it's easy to miss the rebound that is underway - but which of course also finds echo in recovering G3 import appetite.
Second, although Hong Kong's unemployment rate unexpectedly dipped 0.1pp to 6.1%, the larger story, and the larger concern, is the continuing and post-97 unprecedented fall in the territory's labour force.
Another slow and sleepy mid-August day, enlivened only slightly by the US's strong housing starts/building permits numbers, and Indonesia's trade and current account improvements.
Of those, the improvement in Indonesia's external balances is the most important. Almost certainly, Indonesia's private sector is now generating a savings surplus, which is protecting Indonesia's bond markets and fx rate. Indonesia is extremely fortunate to have someone like Sri Mulyani Indrawait i/c the country's finances!
It's a mid-August Monday, so very quiet out there.
Today I look at Japan's 2Q GDP fall, noting in particular the damage being done by 'real' net exports; and I look at the surge in confidence in the US housing market shown by August's NAHB housing market index.
The main feature of the day was probably China's July domestic and industrial economy data. What it suggests is a sequential slowdown, perhaps a relaxation after the dash to make the half-year numbers, and/or perhaps a response to tightening monetary conditions. China's recovery is not accomplished yet, but the 13.8% private sector savings surplus gives them plenty of ammo.
In the US, it's worth pondering the divergence between surprisingly good productiviy gains (up 7.3%) and shockingly bad unit labour costs (up 12.2%) - that's truly lockdown dynamics at work.
And finally, I note that July was another very busy day for trade lawyers finding new reasons to stop trade: another 31 non-tariff barriers erected during the month, taking the total for the US, EU, China and Japan to 8,206.
A quiet day today, but the tone remains firm.
In the absence of compelling data, I unravel how it was possible for France's 2Q unemployment rate to fall 0.6pps to 7%. In the words of France's poetical statisticians, it is merely a 'trompe d'oeil'.
Today I look at the 20.4% qoq fall in the UK's 2Q GDP. I identify three issues:
First, the relatively lacklustre rebound in services activity in June 2020;
Second, the degree to which the UK's world-losing performance reflects the highest degree of lockdown stringency in Europe;
Third, the surprisingly positive impact on Kalecki profits.
Today I look at China's money and banking data for July, which gives evidence for a monetary tightening which is offsetting China's fiscal blowout.
And I look at the UK's labour market data for June, which continues to be something of a Rorschacht test in which you can see what you want/need to see. On balance, there's more slightly surprisingly good news than bad.
A quiet start to the week, with only the US's JOLTS job openings and labour turnover survey for June providing interesting.
Still it's conclusions were reasonably cheering: better than expected job openings; separations falling DESPITE quits rising; and another big net hirings total.
A very busy day, and a very positive one too: 20 surprises and only 2 shocks. As far as shocks & surprises indexes are concerned it's all looking very V.
I highlight three releases today: the 8.8% mom jump in US wholesalers sales in June - a jump which pushed their inventory/sales ratios back to 'normal' levels, even as retailers are pressing them to restock their own shelves.
Second, I look at China's unexpected disclosure of their 1H current account surplus estimates, which imply a private sector savings surplus running at an astonishing 13.8% of GDP. That's firepower deferred.
Third, I look at Japan's June monthly labour earnings - down 1.7% yoy but with a big upward deflection against trend, and importantly so becuase June is Japan's number two bonus month. A bullet dodged, this.
Today, the unexpected strength of Germany's June factory orders, led by suddenly surging demand for capital goods, leads me to question whether the rebound will turn out to be an investment-led recovery. Not altogether such an unlikely prospect as it immediately seems.
Three things mentioned today:
First, the very disappointing ADP payroll numbers for the US in July - the rebound stopped in its tracks?
Second, the rebound of UK car sales in July;
Third, and perhaps most intriguingly, Taiwan's central bank battle to contain the impact of large-scale capital inflows.
Today I look at what the world's major central banks have been doing with their balance sheets during July - the first of what I intend to be a regular series of updates.
I also look at the encouraging July numbers coming for auto sales in the US.
Alas, today's economic news is dominated by the carpet bombing of Markit's PMIs.
Broadly they purport to find industry in Europe now expanding in July, Asia still contracting, and the US broadly stable. Treat this economic clickbait with scepticism.
Also be sceptical about the reported 0.7% mom fall in US construction spending in June - these numbers are regularly revised upwards, and the 1.4% fall in residential spending contradicts all other data from June's housing market.
A very busy data day for both Asia and Europe - the usual end-of-month pile-up.
So I have to be selective today: I look at the surprisingly good news from the industrial sectors of Japan and S Korea, and consider its impact on their inventory overhangs.
I look at Hong Kong's budget deficit - blowing out alarmingly, and problem the territory could really do without right now.
In Europe, I look at the 'surprising' jump in CPI numbers; and note that the 12.1% qoq fall in 2Q GDP annualizes to a drop of 40.3%. Big hole, big hole.
Although this was a busy day, there is no avoiding the main event - the sighting shot at US 2Q GDP.
Looking at the details, I can identify four factors likely to power a 3Q rebound:
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Service sector lockdowns easing
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2Q's inventory-dump has left the economy inventory-light - so there will need to be an inventory rebuild, and fast;
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Residential investment is already in the early stages of recovery, with positive yoy results in June. And, of course, there's an inventory shortage here too!
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Huge govt transfer payments left disposable income up 42.1% in 2Q, much of it banked: personal savings tripled in dollar terms. Firepower!
Today I highlight two topics:
First, the 9% yoy fall in HK's 2Q GDP isn't too bad - but the 46.6% yoy fall in services exports is genuinely disastrous. Services exports is, after all, what HK does, and unless this collapse is reversed, Hong Kong's pricing (and therefore financing) structures will come under serious pressure.
Second, I look at the fall in US inventories reported by the retail and wholesale sectors in June. Much to my surprise, it turns out that right now the US is running inventory-light! Two months ago I was worried about whether the inventory overhang would compromise the industrial recovery. How rapidly that sorted itself out!
We're in the lull before the storm of data which will hit towards the end of the week. Also, I'm happy to report that results are becoming noticeably less chaotic - so the world is becoming less opaque and more predictable.
Today, I look at three releases: the surprising strength of retail sales reported by the UK's CBI members in July; the pull-back in US consumer confidence index; and the third consecutive positive result from the US chemical activity barometer.
The main feature of the day was . . . it's sheer normality. Only three out of the 18 releases I track arrived more than a standard deviation away from consensus or trend.
And that's the important news of the day: after four months when even short-term data-forecasting became effectively impossible, we are beginning once again to get back to a present where multiple standard-deviation events are becoming the rarity they should be. And that means we're going to get a lot more clarity over the near-term future during the next few months. Thank goodness.
Today I focus on Markit's preliminary PMIs for UK, Eurozone and UK, looking primarily at what they are telling us about shifts in sentiment as we simultaneously ease out of lockdown whilst at the same time coronavirus makes its own bid for a rebound.
More surprising, however, were the extraordinary strength in UK's June retail sales, and Taiwan's June financial data, both of which I look at.
Another quiet day for global economic data. Today I look at:
Taiwan's falling unemployment rate;
The rise in the Eurozone's 1Q fiscal deficit.
Today's main event is the agreement to allow the European Commission to raise Eu750bn on financial markets. This bulletin looks at those details which are available, trying to discover its true worth.
It also notes signs of stabilization in the UK's June fiscal results.
A quiet day, and so a short bulletin.
Topics covered include:
Japan's June trade data; Taiwan's June export orders; and the Eurozone's contradictory accounts of its May current account balance.
The US shocks & surprises index is rocketing upwards, but that's probably because the data we're getting now mainly reflects the situation before the coronavirus resurgence became undeniable.
So today I take a look at the latest confidence indicators for consumers and business. And when you look, the shadow of worry is there, darkening the picture and the medium term outlook.
Today is necessarily all about China, which released its 2Q GDP results, and a bunch of data for June. What sort of recovery is China seeing already, and what are the prospects for the rest of the year? I offer some suggestions.
I also note the continuing quite dramatically positive run of data seen this week, exemplified above all by the US, which today generated more surprises - this time in June retail sales and July's housing industry confidence index.
Today I look at the impact the coronavirus is having on Asian trade balances. Indonesia and India both usually run a fairly precarious trade position. But this year, as domestic demand has slumped, trade positions are improving dramatically. India, for example, managed an $800mn trade surplus in June - so far as I can tell that's the first surplus since March 2002!
I also look at how the timing of Ramadan is affecting Indonesia's recent trade performance.
Today was an unusually quiet / insignificant day for data.
The one potentially significant piece of data came from the NY Fed's June series of expectations surveys, which, apart from showing receding inflation expectations, highlighted the underlying caution about labour markets and earnings growth which looks likely to restrain household spending in the recovery of the coming 12m.
Elsewhere, I note the dramatic rebound in Australia new home sales - thanks to a lavish government program of grants - and India finally reconstructing CPI results for April and May as it released the June index.
The main item today is to highlight the dramatic improvement in Japan's terms of trade during 2Q - they have improved 9.5% qoq and 10.9% yoy. This is pretty much unprecedented, and will make an impact not only on corporate cashflows, profits and ROEs, but will also make Japan's second quarter national accounts really difficult to read.
I make brief mention of slightly better than expected manufacturing output results from India, France and Italy for May - despite the fact that they're all still down 25%-35% yoy.
I mention the 1.2% yoy fall in Taiwan's average monthly earnings, which were hit by slumps in overtime and bonus payments.
This was a solidly positive day for economic data, but offering sadly little in the way of analytical interest. Nonetheless, two things stood out:
First, the great volatility of Japan's machinery orders continued in May, so I take this opportunity to unravel what's happening when you strip out the very considerable noise. And there is a coherent story.
Second, I look at US wholesale sector numbers for May. These were better than expected, with sales rising and inventories falling, with a bigger and earlier recovery in the inventory/shipment ratio than expected. In particular, the strength in the auto sector supply chain signals are impressive.
Two main concentrations today, both in the US.
First, although the headlines from May's JOLTS job openings were unspectacular, the recovery in hirings, and - just as importantly - the recovery in 'quits' make this a very encouraging account of labour markets. This was more evidence against the fear that coronavirus will leave a 'scarring' on US labour markets.
Second, there was a very different picture from July's IBD/TIPP economic optimism index, which relapsed unexpectedly to the weakest since 2016. Is this coronavirus redux, or is it responding to the broader deterioration of the political environment?
I also briefly note dissapointments in Germany's May industrial data, France's trade and current account deficits, and Australia AiG services PMI.
Today I look at:
The unambiguously bullish result of the ISM's non-manufacturing composite index for June - pointing out the dramatic divergences within sectors, and the overall likely impact on 2Q GDP.
Germany's disappointing factory orders, propped up as they are by orders from the Eurozone ex-Germany which are, apparently, surging owing to spectacular recovery in demand for Germany's transport equipment.
Eurozone retail sales data, where the 17.8% mom rise in May's sales was lopsidedly generated by Germany, whilst other Eurozone majors continued to slump.
With the US on holiday, and most Statistics bureaus resting after the week's heft exertions, there's little 'hard' economic news.
But in its place, we have yet more of Markit's PMIs - this time for services. This is the economic equivalent of junk food - ubiquitous, tasty if you're in the mood, but of little nutritional value.
So, in the absence of hard news, I update you on the movements of Coldwaters' best-in-class global and regional Shocks & Surprises indexes.
Today concentrates on what the labour market data from the US and Europe is telling us about how bad things are as we come out of the worst impact of coronavirus.
Unemployment is counted differently in the US and Europe, and we have to consider Europe's various furlough schemes to get an idea of what is really happening.
In the US, by contrast, the data is pretty explicit about the extent of the problems, but June's data was already beginning to show the a solid return of people to the labour markets, with rising labour participation rates which will limit the extent of the dreaded 'economic scarring' to come.
This is the one-month anniversary of the bulletin.
Today was another dysfuntionally busy day for the world's data, mainly thanks to the profusion of Markit's manufacturing PMIs. They show different economies at different stages of recovery, and I split them into those which are still facing very tough times; those nearly stabilizing, and those which actually began to grow again in June.
But the only one which really mattered today was the US ISM, which was very strong.
I also look at recovery signals coming from global international air freight volumes in May, headed by US, with Europe and Asia lagging.
The end of the month brings a data-crush, so today's bulletin is slightly longer than yesterday's.
First, I look at what the mass of data from NE Asia for May is telling us about conditions. The conclusion is that the data shows NE Asia's industrial economy is still under the cosh, but domestic demand is beginning to stir nonetheless.
I also look at the UK's current account balance and revised GDP data for 1Q. They show the private sector in rapid retreat from its dissavings, and it is likely that by 2Q we'll see the UK showing a private sector savings surplus. At the same time, although GDP was revised down, Kalecki profits growth was maintained, with the structure moving away from household sector dissaving and back towards net investment spending. Which is good news.
A busy day from which I selected two strands which I thought are interesting:
First, I look at the sharply divergent trends in Japan's wholesale sales relative to retail sales. Disentangled, it looks as if the initial disequilibrium between supply and demand which opened up so sharply in March and April had begun to close quite nicely by May. This is almost certainly good news for how Japan's inventory/shipment spikes are being dealth with.
Second, I look at May's UK money and credit numbers, note the continuing fall in consumer credit, the absence of mortgage lending and the rise in household financial asset holdings, and conclude that whilst that's bad for Kalecki profits in the short term, it looks like the sort of structural change which the UK's growth model badly needs.
Today's main strands are:
The slightly underwhelming, slightly tentative recovery in consumer confidence indicators reported around the world;
The continued surge in Eurozone money and credit data, which has its root firmly in the ECB's balance sheet expansion.
Today the main focuses are on:
Early signs of recovery in May's US data, including a focus on the way in which inventory excesses of March and April are being addressed by May;
In addition, I highlight the damage the last few months' unthinkably volatile data must be doing to economists' models, and consequently their ability to forecast the recovery. There should be a big warning light flashing above their computers: 'What we're going through is incompatible with the models we've got, the current situation impossible according to their parameters'.
I had expected to be talking about European confidence indicators, but neither Germany's Ifo survey, nor France's business climate index provided much of a story.
Instead, today I look at the US housing market, noting that mortgage applications are consistently at their highest levels since 2012, but home sales are equivocal, and whilst mortgage deliquency rates started the year very low, the mortgage forebearance rate is now in double digits!
Forebearance isn't delinquency, but if we're going to see 'scarring' on the market, it's here it'll begin to show.
The day has been crowded with Markit's PMIs for Japan, Europe and the US.
Whilst these might give a vague general sense of the direction of travel, they should not be taken too seriously.
I explain why.
Today I herald signs of the longed-for return of dataflows to something resembling normality.
I also look at what links the disappointment of the Conference Board's leading indicator fall for China, and the unexpected rebound in the Chicago Fed's National activity index.
Today I look at the UK retail sales results for May, which is the third hard indicator we've had this week about what's happening as Europe begins to think about climbing out of lockdown.
It's a quiet day for data, with the main item of interest being, the unexpectedly sharp rebound in the Philadelphia Feb business outlook index (aka the Philly Fed).
In addition, I take a couple of minutes to explain how I compile the Coldwater shocks & surprises indexes, which I believe to be the 'best in class'.
Quiet day today for data. I focus on May's new car registrations for the EU, which is the first real 'hard' indication of how European demand is reacting as the continent backs out of lockdown. Conclusion? Genuinely modestly encouraging.
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Today I focus on:
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The strength of US retail sales in May
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The complexities of UK labour market data for the 3m to April
Topics covered in today's bulletin include:
The improvement in the Empire State manufacturing index for June
The internal coherence of China's core May data, and the evidence of a government-spending led recovery
Dramatic trade balance improvements for Indonesia and India vs dramatic trade balance deterioration for Eurozone
The bulletin today looks at:
The recovery in confidence indicators in the US;
The 'return to normality' in China's money and financing data for May;
The dramatic falls in UK's April economic data, and considers the implications for 2020 GDP in the light of this week's OECD forecasts.
In a quiet day for data I focussed on:
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The relative strength of capital goods vs the consumer goods they produce - not what you'd expect if we're really entering the worst recession of the post-war period.
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The radical uncertainty about the near-term future shown by Japanese businesses in the 2Q Business Outlook Survey
The purpose of this bulletin is simple to state - trying to keep you abreast of what's happening in unexpectedly positive or negative ways in the data from the world's major economies.
Today I focus on the disinflationary forces showing across the globe, and particularly in Asia's CPI and PPI results. This disinflationary is almost solely the result of falling oil prices, which is the combined result of a very high base of comparison in April-May 2019 and the collapse in prices owing to coronavirus. Both factors are now coming off, and so disinflationary forces will wane obviously in the second half of the year.
I also note the rise in S Korea's May unemployment rate, but attribute it to people coming back into the workforce en masse as coronavirus retreats. In fact, employment rose quite sharply in May.
In the US, I note the sharp fall in April's freight transport services index - the worst since 2009 - a clear signal about weakness in the industrial and construction sectors.
In Europe, I trace the implications of yesterdays 1Q Eurozone GDP breakdown to calculate Kalecki profits: I estimate they were down 12.7% qoq and fell 9.1% yoy to the lowest profits/GDP that I've come across.
The bulletin aims to keep you abreast of the surprises and shocks thrown up in the economic data of the world's major economies.
Today I feature the strength of the NFIB small business optimism index, and the weakness of the JOLTS job openings survey.
In Asia there was more evidence about two themes we've seen in the last couple of weeks; the strength of Japan's banking expansion; and the recovery of confidence in Australia's economy.
In Europe, which was the source of most of today's shocks, we had shockingly bad trade data from both Germany and France. Does it matter? Yes it does, since the fall in net exports in 1Q was responsible for 1 percentage point of the overall 1.4% yoy fall in 1Q GDP.
On Monday's I include a weekly check on trends in currencies, commodities and US bond yields. This week I note a regime change from Strong Dollar to Weakening Dollar, and conclude: 'disinflation out, reflation in'.
The economic data covered is mainly Asia. It focusses first on what looks very like a 'fat finger' error in China's reported May trade data which has resulted in a significant over-statement of the trade surplus. And it also looks at the upward revisions made to Japan's 1Q GDP data, as the surprise strength in corporate investment kicks in.
This bulletin tracks those economic data from the US, Asia and Europe which surprise or shock consensus expectations.
Today in the US I focus on May's strong trade data.
In Asia I look at the weakness of Japan's 20-day trade data; and the shocking collapse in Singapore's retail sales.
In Europe, I lament the sharp and broad fall in Germany's April's factory orders.
If you need to know more, feel free to contact me on mjtcoldwater@fastmail.com
A daily bulletin rounding up the significant movements in economic data seen this day.
Today I look at May's US heavy truck sales, April's US exports, and the weekly jobless data
In Asia I concentrate on Australia April exports.
In Europe, I look at Eurozone's April retail sales and UK's May new vehicle registrations.
The attempt to provide a clear and direct account of the way the world's economic data is moving.
Today, we look at the US ADP employment data, and the rise in industrial inventory/shipment ratio.
In Asia there was little significant data released, but we mention the rise in China Services and Hong Kong PMIs.
In Europe cast a sceptical eye on the surprisingly modest rise in April's Eurozone unemployment rate, and cast scorn on Italy's contribution.
A regular bulletin designed to keep you in touch with the twists and turns of global economic data.
This is the Shocks & Surprises Global Weekly Summary for week ending 8th May.
It takes issue with the idea that 'scar tissue' from the current lockdown will inevitably mean we can expect only a lacklustre recovery.
I was thinking about how Covid was going to have an impact on globalization. Things got dark, as I doubt there will be any early cure or vaccine against Covid. But just as I was getting absolutely down about how I'd not be seeing my overseas friends again any time soon, I realized how ridiculous the idea of de-globalization actually was. Covid can't and won't kill globalization. But it might very well put what I've called 'casual globalization' into eclipse.
And that has its own consequences, not all of which will necessarily be bad.
- Michael
An audio version of my Shocks & Surprises Global Weekly Summary for the week ending 1st May.
It's a trial endeavour - I hope it's useful.
In which I look at the rather improbable improvements in Japanese capital investment spending, and Germany's construction spending. Both would seem to run counter to the rather dark background of trends in return on capital, and profits. Nevertheless, maybe something surprisingly counter-cyclical is happening.
In which, as usual, I stand under the cataract of global economic information and try to catch whatever fish I can.
This episode I also look at the 2019 outcome for China, and argue that it was a year spent treading water - neither waving nor drowning. There were some mildly encouraging signs, but the real story, I think, is that those mild upward inflections were bought at the cost of neglecting long-standing problems, or even abandoning earlier attempts to fix them.
There's no reason to expect 2020's outcome to be much different.
Quite a start to the New Year: World War III declared and then seemingly forgotten; global data mildly positive, and the six-week signal in positive territory (glory be). A good week for Asia and Europe, but a third disappointing week for the US. Quite possibly it really is time now to get on recession-watch for early-mid 2021.
And finally, I have some questions about what it means when 'capital raising markets' become 'capital redeeming markets', as they did in both the US and Eurozone in 2019.
Any comments, reactions and queries happily received at mtaylor@coldwatereconomics.com
Until next week . . .
Thanks
The holidays bring a much reduced data-flow from US and Europe, whilst Asia continues to report much as usual. So this episode tracks developments showing up in that data for the two weeks. In particular,
I look at the way inventory-clearing is improving US trade data at the cost of depressing industrial activity;
I look at the strange broad improvement in South Korea's recent data, and question how it can be justified;
I look at the dramatic erosion of Hong Kong's fiscal position, which unless Beijing gives them a pass, will have to be dealt with;
And I look highlight the two or three piece of data to come from Europe over the holiday period which just might be significant.
Christmas week brings a lull in the data-gusher which I try to understand and control each week. So this week I look at what I think have been the characteristics of 2019. Without wanting to embrace Scrooge-like gloom, I have to say that 2019 was marked by Funk, Lies and Displacement Activity. Let's at least grasp that and hope that 2020 will bring something a little better, a little more honest, and a little more imaginative from policymakers.
Each month I look at approximately 500 different datapoints from the world's leading economies, and identify those which land a standard deviation above or below where they 'should' have been, according to consensus or trend. This allows me to track the health of the world economy in near-real time, as well as identifying those directions which might be telling us something about the longer-term picture.
This podcast summarises the results from the previous week.