Better Than Expected US Economic Data

Once again, US economic data came in better than expected. The ISM manufacturing index came in at 57.0 in December, with the employment  component at 56.9, another increase. New orders improved to 64.2, though export orders declined to 55 from 59.5. The prices paid component suggested that inflation remains tame. Generally, the data supports the view that US manufacturing should improve this year. Construction spending rose by a better than expected +1.0% in November, with overall spending the highest since 2009, on an annualised basis. The fear that the inventory build would be unwound in Q4 does not appear to be the case, suggesting that Q4 GDP will come in higher than current estimates of around +2.5%. Consumer spending rose by +0.5% in November. Personal incomes rebounded in December, rising by +0.2%, having declined in November. New home sales did decline in November, but prior months data was revised higher. In addition, inventory levels remain low.

EZ December manufacturing PMI rose to 52.7, up from 51.6 in November, the highest in 2 1/2 years.  Germany outperformed as usual with its PMI coming in at 54.3, up from 52.7 in November, a 30 month high. However, France disappointed once again with its PMI declining to a 7 month low of 47.0 (ie, contraction territory), down from 48.4 in November. Spain surprised to the upside, reporting PMI of 50.8, with Italy doing even better at 53.3, a 32 month high. Spain also surprised positively on the jobs front – unemployment claims declined by 108k in December, the 2nd largest decline ever recorded and much better than the decline of 24k expected. Some of this improvement could have been due to seasonal factors admittedly, though recent data has been better.

Latvia became the 18th country in the EU to use the Euro.

UK manufacturing growth fell to 57.3, from a revised 58.1 in November and came in below expectations of 58.4. Whilst below expectations, UK data has generally been strong

The HSBC Chinese December manufacturing PMI declined to 50.5, from 50.8 in November. It was the weakest reading in 3 months. The official PMI number declined to  4 month low of 51.0, down from 51.4 and below forecasts of 51.2.  The export component came in at 49.8, suggesting contraction. Once again this reading suggests that recent export data was inflated. The State Council has forecast that GDP will increase by +7.6% this year, but I suspect that is an optimistic estimate. Chinese non-manufacturing PMI declined to 54.6 in December, from 56.0 in November, further confirming a slowing economy.

To deal with the enormous amount of debt accumulated by the provinces in China, the government has agreed that local governments can roll over debt to avoid defaults. The National Audit office stated that total debt accumulated by the provinces amounted to nearly US$3 tr as of June last year, with some 40% of the total due to mature this year and 60% by the end of next year.  The problem however is that a great deal of the expenditure was on low or indeed on projects which will produce negative returns, which will result in the level of accumulated debt increasing.

A quiet week given the New Year holidays. The general theme is that US data is improving. Q4 GDP may well exceed analysts expectations of around +2.5%, coming in around +3.0%. With stronger growth and increasing expectations of a tighter monetary policy earlier than previously anticipated, the US$ should finally start to rise against the Euro. In Euro land, with the exception of Germany, growth looks anemic, with France facing serious economic challenges. I continue to believe that Japan looks like an accident waiting to happen – the only question is when.

Investors continue to exit bond funds, with the proceeds mainly invested into equities. As a result, markets should see some support for a while. The 10 year US treasury rose above 3.0%, though closed just below. However, it looks as if yields will continue to rise to around 3.25%. Rising US yields will not be positive for emerging markets.
All the very best for the New Year

Kiron Sarkar
5th January 2014.

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