Asia Sentry Dispatch

August 07, 2012

The folly of a payrolls relief rally

Asian stocks advanced this morning, not only continuing to bask in the light of the brighter than expected July payrolls report in the US on Friday night, but also warming to the news that German Chancellor Merkel would back the ECB bond-buying plan announced last week. I consider the South Korean Won to be the risk-appetite canary in the Asian coal mine and the 0.2% gain in the Won vs the greenback (the leading gain of the majors) speaks amply of the generous liquidity being provided by the Worlds central banks likely to once again find its way into Asian and emerging market assets. Anyhow, enough of the tortured metaphors, back to our theme of today. We believe Asia, by contributing to a positive change in global growth delta, now leads the global growth cycle whereas the US labour market lags it. A relief rally in Asian assets in response to a lagging indicator, therefore seems inappropriate.
Payrolls and one of our favorite Asia indicators Hong Kong Ports container throughput

Source: Asia Sentry Advisory Pty Ltd and Bloomberg

Tuesday, August 07, 2012.

Page |1

Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

Payrolls lags the post-crisis cycle, Asia now leads it.

It happens every month, and I sound like a broken record decrying it, but the links and lags between the US non- farm labour market and Asian industrial production are tenuous at best and it really is a bit of a stretch that the Asian markets still have such a high reaction function to the monthly payrolls outturn. Sure, in the pre-crisis world the payrolls report was unquestionably the most important economic data point, full stop. Now, it is one of several. Our contention would be that those other important data points (such as China IP and the suite of regional PMIs) are more coincident with, if not leading, the global output cycle. I think the chart set below illustrates this point nicely. Still, Im not one to stand in front of several trillion dollars of hot-money on principle. This is clearly an established dynamic the market responds to and it would be folly simply to declare that it is wrong. Its outdated, but as long as the market still views it as the primary causal (for market price action) economic data point then perhaps we should use it as a trading opportunity when it coincidentally moves in the opposite direction to which the Asian economic data has been evolving.
CHART SET: CHINA LEADS GLOBAL PMI WHICH IN TURN LEADS THE US LABOUR MARKET Payrolls and JPMorgan Global PMI

China PMI (New Orders) and JPMorgan Global Composite PMI

Source: Asia Sentry Advisory Pty Ltd and Bloomberg

Tuesday August 07, 2012.

Page |2

Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

Will Asia this week be dovetailed by a buoyant start and weak finish?
Thanks to payrolls then, Asia has gotten off to a cracking start this week. However, the key challenge we perceive will be a further weakening in the Asian trade and manufacturing data as foreshadowed by the July PMIs. That reality check will start with a trickle tomorrow (we expect Japanese machinery orders to remain weak given excess capacity is once again plaguing the Japanese economy) but the bucket of cold water will not be thrown till Thursday when we expect Chinas key industrial production and retail sales figures for July are released and most probably repeated on Friday with the released of the Chinese trade figures. One of our key calls is that the Chinese economy continued to weaken in July. Hence we are expecting the pace of industrial production and retail sales growth to slow further on Thursday, but the more apparent signs of weakness are likely to be a more significant slowdown in Chinas exports and imports over the year to July when the trade figures are released on Friday. Also on Thursday, the disinflationary impulse China is currently experiencing as her output gap widens (actual growth running below potential) will be borne out by a continued rapid cooling in consumer price inflation and ongoing producer price deflation.

Todays conclusion. The China data points at the end of this week are much more important for Asian asset prices than the US data point at the end of last week. We are expecting a further weakening in Chinas key aggregates consistent with an economy continuing to slow, not stabilise.

Tuesday August 07, 2012.

Page |3

Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

Asia Sentry Advisory Pty Ltd Suite 9, Level 40, Northpoint Tower 100 Miller Street, North Sydney, NSW, 2060, Australia. Ph: +61 2 9931 7820 Fx: +61 2 9931 6888 M: +61 401 548 820 www.asiasentry.com gbmaguire@bloomberg.net glenn@asiasentry.com

Asia Sentry Advisory Pty Ltd is a boutique economic consultancy established to meet the growing demands of clients seeking greater exposure to the most dynamic economic region in the post-crisis global economy, Asia. Asia Sentry Advisory marries keen judgment with a rigorous model-based approach and a deeply intuitive understanding of Asia that can only come from on-the-ground experience to deliver market out-performing analysis and forecasts.
How closely are you watching?
Follow us on Twitter, @AsiaSentry Watch us on YouTube. Asia Sentry Advisory See us analyze in real-time on LiveStream, Asia Sentry Advisory