Are market worries overdone?

by: Han de Jong

Last week saw an aggressive sell-off of risky assets. Many commentators blamed worries over global growth as one of the causes. Other factors mentioned were concern about China’s financial stability, renewed economic and financial stress in Argentina, political instability in Turkey, Thailand and Ukraine, as well as position squaring by hedge funds. One never knows, of course, what the real driver has been as the market is made up of many players who all have their own motives to trade. However, as far as fears over global economic strength are concerned, I see little reason to be particularly concerned. In fact, I thought the majority of economic indicators released last week were supportive of our view that economic growth is gaining momentum. So, as far as worries over global growth have played a role in last week’s sell-off, I think they are overdone.

Taking the pulse of the economy: global trade growth gaining momentum

We have long argued that logic suggests global growth should gain speed and that leading indicators for global trade, which is the pulse of the global economy, are pointing to an acceleration of growth. Various purchasing managers’ surveys have shown a meaningful improvement in orders positions, including export orders. The Dutch CPB compiles monthly series on global trade based on trade data of a large number of countries. While their series are, understandably, not very timely, they are starting to confirm what logic dictates and what leading indicators have been suggesting. The CPB published November data last week. Their global trade numbers are a little volatile, but when the data is smoothed somewhat, the numbers suggest that global trade growth is shifting to a higher gear. Last week also saw encouraging data in Taiwan – an early cyclical economy. Export orders were up more than 7% yoy in December and industrial production just over 5% – in both cases the highest growth rate for some time. Even in Italy, where competitiveness is a problem, industrial orders are on the rise, gaining 2.3% mom in November, and 3.0% yoy. Italian industry has now strung three positive monthly year-on-year numbers together for orders, the first time they managed that since the summer of 2011.

I attended a lunch in Antwerp last week where our local people had invited a number of their best clients from different business lines. At one stage, I was sitting beside a client running an industrial company, though with my limited technological understanding, I could not figure out what products he was producing. Anyway, he said he had never seen order books as full as they currently are. Ever! This is, of course, only one small anecdote, but still…



Worries over PMIs

Economic commentary focussed on the disappointing January PMIs in China and the US. The Chinese HSBC PMI for the manufacturing sector fell to 49.6 from December’s 50.5. While this was not good news, there are a couple of points to be made. First, this indicator is not the best for describing what is going on in China’s economy. We consider the official PMI, which is due for release on 1 February, a better gauge. Second, Chinese economic data can be a little distorted in the first two months of the year on account of the changing timing of Chinese New Year. This year, New Year is on 31 January, a week and a half earlier than last year. Other Chinese data released last week suggested a modest slowing in GDP growth, retail sales and industrial production growth. On the other hand, exports seem to have picked up. Our view remains that economic growth should be OK this year as the improvement in world trade and the industrial cycle will support activity. Reforms will hurt growth, but we think that is more of a 2015 story. One danger for China is the loss of competitiveness as neighbouring countries are seeing their currencies weaken.

The Markit PMI for the US manufacturing sector fell from 54.4 in December to 53.7. This was also a disappointment, but I think there are at least some qualifications to be made about this. First, the US was hit by the polar vortex which made for a cold start to the year, disrupting the economy. The Markit report accompanying the numbers certainly suggested as much. Second, as I wrote here last week, inventory levels are relatively high and will correct at some stage leading to some temporary weakness in output growth.

Other US data was modestly encouraging, I thought. Existing home sales rose in December for the first time in four months. Perhaps this suggests that the housing market has got over the scare of last summer when borrowing costs rose sharply. Median house prices were also up. Initial jobless claims were more or less unchanged last week at 326,000, close to the average of the last six months. Continuing claims have spiked up sharply early this year. It seems to me that the rise in continuing claims is likely to be the result of the cold weather, in which case it is actually a little surprising perhaps that initial claims haven’t risen.

It is clear that the extreme weather conditions in the US at the start of the year are affecting the economic data. We should expect a lot of the January data to be influenced, in which case there should be a noticeable bounce back in February, barring a repetition of the bad weather.

Europe: surprise, surprise

While the US was hit by cold weather, the winter in Western Europe has so far been unusually mild. It seems that the weeds in my garden have boldly continued to grow while they normally give me a break. Perhaps the favourable weather conditions are flattering the economic data in Europe. Nevertheless, last week’s data was again generally stronger than expected. The various preliminary PMI numbers for January, which measure business confidence, were uniformly better than expected. The manufacturing PMI rose to 53.9 from 52.7 in December, the highest level since May 2011. The PMI has risen steadily since reaching a trough of 44.0 in July 2012, albeit with a few wobbles along the way. The improvement in this series has recently gained momentum. The PMI for the services sector also improved in January, which was very welcome after three consecutive monthly declines. Also encouraging was the rise in French PMIs. The manufacturing PMI rose after a five-month period of weakness. The absolute level (48.8 versus 47.0 in December) still appears to suggest that the sector is contracting. However, analysis by my colleague Aline Schuiling shows that there is something strange going on with these numbers. The absolute level of the PMIs for France do not seem to reflect the actual growth performance of the economy. The ‘neutral’ level where the sector neither grows nor shrinks, which is normally at 50.0 seems to be much lower in France, perhaps as low as around 44. As a result, the direction of the series is more important than the absolute level.


Better data in Holland at last

The Dutch economy has had a dismal cyclical performance in recent years. The country underperformed its peers as the housing bubble deflated. But recent indicators suggest that an improvement is underway. Consumer confidence continued its impressive resurgence in January, reaching a level which is above the average for the last ten years and not far below the average for the full history of this series (going back to 1986). As many people will see their net income improve somewhat on their payslips due to some changes in taxes and lower pension premiums for public sector workers, confidence should improve further. Consumer spending (in real terms) registered the first rise on a yoy basis in November since 2011. This is welcome, but is no reason for euphoria as spending in November last year had been particularly weak, making the comparison ‘easy’. Last, house prices in the Netherlands rose 0.5% mom in December and the yoy decline of house prices eased from -4.7% to -3.7%, suggesting that the housing market is now stabilising. On the negative side, unemployment jumped from 8.2% in November to 8.5% in December, the first rise after four monthly declines as the recent trend of job seekers moving away from the labour market reversed.


I will cry for you, Argentina

It has taken much longer than I thought likely, but Argentina’s unorthodox economic policies seem to be hitting a brick wall. After the crisis of 2001 the governments, successively led by Mr and Mrs Kirchner, have followed policies that can be called unorthodox. Economic numbers were massaged here and there, fiscal prudence was not given a particularly high priority, relationships with creditors were never fully repaired and capital flows were restricted. The Kirchner governments were, nevertheless, successful in generating a recovery following the 2001 crisis and what looked like reasonable growth since. But the misallocation of resources has eventually got the better of the policymakers. The peso dropped sharply last week as the central bank felt forced to stop using its dollar reserves to continue its managed-float policy. One hopes that the policymakers will be able to bring the situation under control, but the imbalances built up over years are now translating in significant capital flight, despite the controls. A significant further fall of the peso is a distinct possibility. This would raise domestic prices, pushing the economy into recession. With a bit of bad luck, this could evolve in chaos. We will see. It is only two years ago when commentators advised Greece to take the ‘Argentina route’. The next few months will show how attractive that route really is.

Developments in Argentina seem to have played a role in last week’s sell-off of risky assets. That is more a psychological thing than anything else. Argentina is clearly an entirely unique case and it would appear very odd to use Argentina as a reason for ‘contagion’ to other emerging economies.