Decoupling From the Eurozone

Global CIO Commentary by Scott Minerd

"The resilience of the data following Hurricane Sandy shows how much momentum there is in the U.S. economy. As we head into Christmas, we will probably have a strong selling season, helping to bolster the economy even further. The news out of China has also been exceptionally good, with the economy expanding faster than expected, indicating things have bottomed out there. Interestingly, the latest data seems to indicate that Asia and the United States have disconnected from Europe. We saw a hard sell-off in Europe, while U.S. markets remained unchanged. At the same time, gold prices moved higher. The trend over the last few months has been that when risk assets go up, gold goes up, and when risk assets go down, gold follows. Seeing Europe sell-off while gold and the dollar moved higher shows that the rest of the world is decoupling from what is happening in the eurozone. As a result, Europe is unlikely to be a major drag on the U.S. markets at this point. It is amazing how problems, such as those in the eurozone, dominate the headlines, but ultimately become non-events. The pending change of government in Italy is almost certainly another example of this.”

Economic Data Releases

Employment Data Slightly Positive, Other Indicators Mixed

Employment data for the past week was positive overall, with nonfarm payrolls increasing 146,000 in November, outpacing the forecast of 85,000. The previous two months, however, were revised down by 49,000. The November unemployment rate dropped to 7.7%, the lowest since December 2008, primarily owing to a shrinking labor force. Initial jobless claims fell for the third straight month to 370,000, as the impact of Sandy continued to gradually dissipate. Other data was mixed, with the November ISM non-manufacturing index climbing to 54.7, after the manufacturing index showed a contraction. The most negative data came from surveys, with the University of Michigan Consumer Sentiment Survey falling 8.2 points in December, the largest drop in 21 months. The NFIB Small Business Optimism index fell 87.5 in November, the largest drop on record and a 32-month low. Trade data showed a narrower than expected October trade gap of -$42.2 billion, with exports falling 3.2%.

Eurozone and Japan in Recession, China Rebounding

Eurozone real GDP fell 0.1% in 3Q after revision, the second consecutive quarter of decline. The service PMIs for the eurozone remained in contraction in November, except for Ireland. The eurozone retail sales in October fell 1.2% MoM, the third consecutive month of decline. German data was mixed as factory orders jumped 3.9% from September to October, the biggest increase since January 2011, while industrial production fell 2.6% MoM. Industrial production was similarly bleak in the UK, France, and Italy, as production fell more than was forecasted in all countries. Italian GDP shrank for the fifth straight quarter, with a 0.2% third quarter decline. Data out of China was mostly solid for November, with industrial production rising 10.1% YoY, retail sales rising 14.9%, and the HSBC services PMI in expansion. At 2.9% year-over-year for November, China’s trade surplus shrunk to the lowest level in six months, and export growth fell to the slowest pace in three months. In Japan, third quarter real GDP declined 3.5% after revision, while second quarter GDP was revised down to -0.1%, indicating Japan is in a recession.

Chart of the Week

PMI Composites in the United States, Eurozone and China*

Purchasing Manager Indices (PMIs) have shown that economic activity in the U.S. and China has diverged from that of the eurozone over the past few months. Since February 2012, the eurozone PMI composite has remained below 50 for ten consecutive months, indicating a continued contraction in overall economic activity. However, PMI composites in U.S. and China, which have tended to move in a corollary fashion with those of the eurozone over the past few years, have been expanding for most of this year. Despite the negative impact from Hurricane Sandy, the U.S. PMI composite remains above 50, and a recent rebound in manufacturing activity in China drove its November PMI composite to a four-month high.

Source: Markit, Haver Analytics, Guggenheim Investments. Data as of 11/30/2012. *Note: The PMI composite for the U.S. is a weighted average index with 1/3 weight on ISM manufacturing and 2/3 weight on ISM non-manufacturing indices. PMI composites for Eurozone and China are from Markit.

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