Glenn Maguires Asia Sentry Dispatch

July 24, 2012

Global trade is retrenching sharply. More to come.

The ripple effects from the sharp selloff in the Spanish bond market look set to usher in a new period of risk aversion and underperformance of cyclical assets. No surprise that the AUD continued its slide through the Asian session this morning. Notwithstanding what looks to be a new exogenous shock emanating from Europe, the data points in Asia this morning confirm that global trade was already retrenching sharply over June, and we suspect this will continue into Q3 given yet more travails in Europe. The HSBC Flash PMI improved over July but still points to contracting manufacturing activity, an outturn echoed by terrible industrial production data in Taiwan. The broader brush of unadulterated data continues to provide no tangible evidence that the Chinese economy is finding a bottom and we reiterate our conclusion of yesterday that the Chinese economy will continue to decelerate over the second half of 2012.

Taiwans industrial production shockingly weak in June.

Taiwans industrial production continued to weaken in June, down -2.4%YoY after a 0.21% decline over the year to May. The consensus that industrial production would recover to be up 0.5% over the year was wide of the mark. Though the year-to figures are weakening, the month-on-month change for June was shockingly weak with industrial production declining by 2.0%MoM sa over the month. There is little doubt that the acute weakness in external demand is the main culprit, however the ongoing moderation in domestic consumption (dual drags of weaker sentiment and higher inflation) is also marginally weakening IP. The very weak June IP result now leads us to expect Taiwans Q2 GDP figures to be negative next week. We would look for the economy to contract by 0.5% over the quarter (consensus is looking for a 0.5% increase) following a 0.4% increase in Q1 GDP. Looking at the consensus figures, which we do expect to be revised lower after the poor results for June, confirms the unfounded notion that Asia, led by China, will be rebounding in Q3 and that the bottom of the growth profile for this year was in the second quarter.

Tuesday, July 24, 2012.

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

China Flash PMI. Improvement Expansion.

The price action in Asian markets belied the reality of the China flash PMI. Both the Australian and Japanese share markets pared losses, as did the AUD-USD, on the improvement in the headline PMI, however a reading below 50 on a net-balance indicator still points to contracting, not expanding, manufacturing activity. What we can conclude from the HSBC flash PMI is that the contraction in Chinese manufacturing activity is now more enduring in this cycle than it was in 2008-09 in the immediate aftermath of the global financial crisis. That sub-50 track in the China PMI was arrested by the mother of all stimulus packages announced by China in November 2008. We do not believe China has the same wherewithal in 2012 to arrest what is now a well-entrenched contraction in the manufacturing sector. Taken in concert with the appalling Taiwan IP figures, which weakened dramatically on the back of weak demand from China, there was little (in fact, nothing) to cheer about in todays data. Key supply side indicators such as steel and electricity production remain weak.
China steel and electricity production Taiwan IP and China IP growth
80 60 40 20 0 -20 China IP YoY RHS -40 Taiwan IP YoY LHS -60 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 0 Jun-12 -20 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 5 15 10 10 0 -10 25 20 40 30 20 China Steel Production YoY 3MMA LHS China Electricity Production YoY 3MMA RHS 35 30 25 20 15 10 5 0 -5 -10 -15 Jun-12

Still, the consensus looks for China to rebound like a roly-poly toy in Q3. We believe such an outcome would be extremely unlikely. Chinese demand is not showing a significant recovery at this stage, whilst US and European orders are both forecast to weaken further in coming months. Triple-Threat global slowdown in play. We would still assert the view that the Chinese, US and European economies are slowing synchronously at this time. This triple-threat to the global growth profile is still being overlooked. Why? Perhaps due to the fact that unlike 2008, when output collapsed violently and unemployment surged, the growth slowdown which emerged in the second half of 2011 has been more gradual and moderate. This has allowed firms to adjust hours worked and enforce unpaid leave to cope with excess capacity rather than abruptly shedding labour. Whereas the labour market adjustment (employment down and unemployment rates up) of 2008-09 were almost coincident with the collapse in output, the 2011-12 slowdown in output looks to have a more traditional lagging labour market response. The markets appear to need the cue of a rising unemployment rate before accepting the durability of the current broad-based global slowdown. Todays Conclusion: China is not a roly-poly toy. Manufacturing sentiment on output has improved, but output is still expected to contract. Moreover, the durability of the slowdown in China has now seen China export her manufacturing weakness to the rest of Asia. Cyclical assets should remain under downward pressure.

Monday, July 23, 2012.

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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.
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