People are queuing outside some small banks in Henan, desperate to rescue their deposits. Is this the start of another near-collapse of China's banking system. 

On balance, the available evidence makes that very unlikely.  

We've now had more of January's foreign reserves data for Asia, and its generally shown modest falls, as you'd expect when the dollar strengthens and asset prices fall.  To recap: China's reserves fell 0.9% mom, Japan's fell 1.4% S Korea's fell 0.3% (thanks to some very active switching out of bonds);and Indonesia fell 2.5% (includes some foreign debt repayment). But Singapore managed a 0.1% rise. 

Today we had Hong Kong, which reported reserves down 0.9% mom - ie pretty much in line with what we've seen elsewhere. But there are a couple of problems: first Jan's loss comes after a year of near stasis, with the result that reserves are now falling in yoy terms. This is only marginal, but its very rare for HK, and shows that HK has received negligible reserves inflow from global QE this time - in stark contrast to the reserves bonanza HK enjoyed in 2009/2010.  The second problem is this: the HK dollar is run as a currency board: in theory, if foreign reserves fall, then the net HK$ clearing balance of the banking system, or currency in circulation, has to shrink too. In simple terms,  the impact of falling foreign reserves is sharper in HK than in most Asian economies.  And so, in Nov HK M0 grew only 1.7% yoy, and in Dec HK$M3 only 1.5%. 

And there is this third consequence: Hong Kong's continuing liquidity is increasingly being supplied by China. We have the net international breakdown of HK's banks net int'l position only up to October. But what is shows is consistent with the rising pressure: HK banks' total net assets fell by US$51bn yoy to US$327bn; but its position with China fell $41bn to a net liability of $28bn. My bet is that by January it was much deeper. Again, having a net liability position to China is very rare for HK - back in 2014 it had net assets in China of $335bn. The last time it had a net liability position was back in . . . 2008 - 2009.

What this adds up to is HK's increased financial vulnerability to a) a strengthened dollar; b) any tightening in China; plus, of course, any feedback in loss of confidence.  That's quite a lot of vulnerability to take into the likely environment of 2022.

There are statistics raw, and there are statistics adjusted.  By and large, the more statistics are adjusted to give a 'clearer view', the more careful you've got to be about them. 

With that in mind, I want to share some observations on Friday's US labour survey data.  On the face of it they were extremely positive: non-farm payrolls were up 467k, and Dec's payrolls were revised up to 510k from an initial 199k.  Even more spectacularly, Jan's h'hold survey of employment found employment up 1.199mn, which was the sharpest monthly gain since January 2000, on the back of an extraordinary 1.393mn rise in the labour force as the labour participation rate rose 0.3pps to 62.2%, the highest since March 2020. 

Not only are these really dramatic gains, but they also run absolutely counter to what ADP found in its Jan survey of private employment, where payrolls fell by 310k. 

What's going on?  The thing you need to is that the strength of Jan's labour survey results is largely the result of statistical adjustment of truly monstrous proportions. The seasonally adjusted establishment survey of non-farm payrolls rose 467k mom, but the unadjusted number show a fall  - yes, a fall - of 2.824mn mom. Similarly, the household survey's reported a seasonally adjusted 1.199mn rise in employment: but strip out the seasonal adjustments, and the raw numbers show a fall of 114k in January. 

There are at least two different things going on here, quite apart from the 'normal' seasonal adjustment. The first is simply that the Bureau of Labor Stats has revised its seasonal adjustment process, notably taking into account the massive disruptions seen during the onset of the pandemic and subsequent recovery.  This is responsible for the major upward revision in Dec's data, with the massive strength in June/July last year being quietly, and for these purposes invisibly, being revised down.  This is what is behind the abnormal and anomalous seasonally adjusted strength in non-farm payrolls reported in January.

The impact of this change is going to be felt throughout the year: essentially it will  bias non-farm payrolls results upwards through to May, before reversing the bias downwards sharply from June through to November.  You've been warned.

The second concerns a big technical change in the h'hold survey - the once which produced a rise of 1.199mn in January's employment despite a non-adjusted fall of 114k. What's happening here is that Jan's survey introduced updated population estimates, with a new estimate of  population from the 2020 census & later data, rather than the 2010-based data which was what was used for the Dec 2021 survey.  That, and that alone, raised the estimate of the labour force in Jan by 1.53mn, raised employment by 1.47mn, and unemployment by 59k. 

And you'll have spotted it: if the change in census base raised employment by 1.47mn, and Jan's survey reported a rise of only 1.199mn, what it is telling is is that on same-survey basis regardless of seasonal adjustment issues, h'hold employment actually fell by 272k. 

To summarise: we're all going to have to take the monthly labour market surveys from the US with a very large pinch of salt for the coming year: the next few months are going to be great: after that, not so much. 

I'd expected that inflation was coming back for a second bite in January, but Eurozone's Jan CPI was far worse than even I had expected. Headline CPI up 5.1% yoy, with a monthly rise 3.3SDs above historic trends. Energy alone was up 6% mom and 28.6% yoy, but in addition, F&B was up 1.1% mom and 3.6% yoy. Energy and food - even if energy prices calm down, food inflation will stay with us, thanks to the longer-term impact of the jump in fertilizer prices.  Strip energy and food  out, and core CPI was up 2.3% yoy, but with a monthly movt 2.3SDs above historic seasonal trends. 

The big problem is that January was the month when the Eurozone base of comparison turned friendly: Jan 2021's monthly rise was no less than 4.1SDs above trend, mainly because of the sharp and encouraged rise in CO2 emission prices. So Jan 2022 ought to have offered relief. That it didn't means we've got to raise likely yoy rates for the rest of the year. The revision is sharp too, pushing the likely yoy up by around 1pp for the whole of the year. That means its now reasonable to expect 1Q CPI to average 5.3%, 2Q 5.8%, 3Q 5.9% and 4Q 5.2%. Core CPI, meanwhile, will can be expected to rise above 3% for most of the year, starting in March.

Meanwhile, yesterday 10yr yields were at 0.04%. 

It's very hard to see how the ECB can keep the pedal to the metal when you've got this scale of inflation. 

Over in the US,  I follow heavy truck sales as a good leading indicator - at least for recession. January's sales were extremely  encouraging : not only were Jan's sales up 13.1% mom to the highest monthly total since Sept 2019, but in addition, sales numbers were revised up very sharply - by 27% no less from what was initially claimed. A rebound on this scale over the last two months removes what had been a worrying recession signal. 

By contrast, the 301k fall in Jan's ADP's private payrolls count looks, on the face of it, grim. But for the time being, I'm suspending judgement. Why? First, remember that in Dec we had a 776k rise. That was exceptionally strong, and the pullback in Jan still leaves jobs up 475k over the last two months - and that's a very strong number indeed, comparing with 273k averaged in this period over the last five years. Second,  more than half the fall came from leisure and hospitality - down 154k, which is hardly surprising given that a) holiday season is over and b) omicron is with us.

Jan's inflation has regained some momentum, reversing the slight relief we got in Dec's results. We've now had Jan CPI flashes from both Germany and France, and they confirm it. Germany's CPI was up 4.9% yoy against a very steep base of comparison (because  Jan 2021 was when German CO2 charges really escalated). The monthly rise of 0.4% mom is 2.2SDs above historic seasonal trends. Not only was energy up 20-.5% yoy, but food was also up 5%. 

This year, food inflation is going to feature heavily around the world, in response to the jump in fertilizer costs in 2020. 

France's CPI also rose 2.9% yoy, which was worse than expected, with a 0.3% mom rise which was 1.8SDs above what was expected. Like Germany: energy was up 19.7% yoy, and fresh food was up 3.6%. 

Tomorrow we get the Eurozone CPI flash: at the moment, consensus is expecting 4.3% yoy, but from what we know now, it will come in a bit higher than that. 

The second thing I want to draw your attention to is an addition I've made to my data universe. I've included the Chicago Fed's Brave-Butters-Kelley (BBK) set of coincident and leading indexes for the US for the first time.  Data is something I take seriously, but it has a fundamental problem. In particular, the idea that there is an unaltered canon of measurements that make up  'the economic data' is misleading - because an economy is a thing that's changing all the time, and the things that get included as 'the data' can only ever reflect an economic structure that have already been and gone. That's the 'data problem'. One way to address that is to scan as widely as possible - it's why I look at 500 data pieces every month. 

The BKK indexes do pretty much the same, taking into account 500 datastreams a month just on the US. This is almost a 'big data' view on the US economy, and one I very much approve of. In Dec the BBK coincident index was 0.66 SDs above trend (good); but the leading index was 0.31 from trend (bad).   Interpreting that, it suggests GDP growth was running at an annualized 4.6% in Dec. But there are warnings here too: this running growth rate was down from the 8.3% signaled in Nov and 9.1% in Oct.  Worse, the leading index has been consistently negative now since April last year, and during June-August came within a whisker of minus 1 each month. 

The significance? Leading index readings below minus 1 tend to signal an elevated likelihood of recession ten months out: ie, between March and May this year.  I think that 'biggish data' judgement is worth taking seriously. 

Germany's Deficit Blowout

Today's most important surprise - or shock - came from Germany,  whicc reported a federal budget deficit of Eu48.bn for December.  That compares with a surplus of Eu2.9bn in December last year, so it's a massive turnaround.  It's not because revenues are down, it's because spending is truly spiraling: revenues were up 35.3% yoy, with a monthly movt 2.4SDs above historic seasonal trends. But spending jumped 153% yoy, with the monthly movt a trend-shattering 5.1SDs above historic seasonal trends. 

Germany's pandemic has had a different rhythm to the rest of the world, escaping the worst in the first half of 2020, only to be ambushed towards the end of November last year. As a result, Germany's  fiscal deterioration in 2020 and most of 2021 was far less dramatic than elsewhere. 

But that deterioration is with us now:  in 4Q, the Eu82.25bn deficit was equivalent to 8.8% of quarterly GDP, taking the deficit for calendar 2021 to 6% of GDP (vs 3.9% in 2020).  

What's more, it will widen further this year, not only because Germany's pandemic continues, but also because the new government has just passed a supplementary budget allowing them to spend unused loans worth Eu60bn, to be spent on investments in climate protection and digitization.  Fiscal consolidation will have to wait until 2023. 

This means that Germany's fiscal policy will be expanding hard at a time when all its major trading partners are busy taking  taking back the extraordinary fiscal expansion seen in 2020. For example, in the UK, the 2021 net public sector borrowing of £183bn is down 30.4% yoy, in the US, the federal deficit narrowed by 23% in 2021; and in Japan the 2021 fiscal deficit narrowed 38.9%, and even in China, the deficit probably narrowed by around 25.5%

In addition, of course, whilst the ECB is necessarily committed to maintaining its expansionary policy with near-zero interest rates, central banks in other major economies are taking the first steps towards tightening.

Frankly, I don't remember another time when Germany and by extension Europe was committed to expansionary monetary and fiscal policies whilst all other major economies were retrenching. This is the reverse of the usual dynamic. Could it be that it's enough to de-synchronize world growth patterns in 2022, with Europe actually emerging as a net source of demand for the rest of the world?  If so, it's a big departure from their traditional mercantilist model.  What's more, although fx movements are in my view unforecastable, this policy contradiction between Germany and the rest of the world would seem to suggest stress on the Euro.  But, please bear in mind, that's not a forecast, merely an observation.

US GDP - Cyclical Position, Profits, S&P Valuations

In volume terms, GDP rose an annualized 6.9%, which was stronger than the 5.7% consensus expected, and a sharp acceleration from the 2.3% annualized in 3Q. But that strength is misleading, since approximately 74% of the qoq growth recorded in 4Q came from a build-up of private inventories. There's no way of knowing how voluntary that build-up of inventories was: remember, yesterday we reported retail inventories up 4.4% in Dec after retail sales fell 1.9% - which doesn't sound voluntary to me. 

Strip out inventory movements, and final sales of domestic product rose only 1.8% annualized - pretty much a crawl. Within that, the star was personal consumption up 3.3%, but non-residential investment was running at just 2% and residential investment fell 0.8%. Despite the headline growth rate, this was not, then, a strong result, or one suggesting a strong cyclical impulse.   

What of profits? The principle behind the Kalecki profits equation is that corporate profits must be equal to net investment, minus the savings imbalances of the rest of the economy - in practice that means the government, the household sector, and interactions with other economies. 

In the 12m to 4Q, profits fell 0.5% qoq, and rose only 2.8% yoy. The main thing boosting profits during the pandemic was the extraordinary rise in the fiscal deficit - and the main factor now dragging it down is the continuing moderation of that fiscal deficit.  That will remain true for the foreseeable future. In the meantime, profits are still a far higher proportion of GDP than previously - 30.3% in the 12m to December, vs a pre-covid long-term average of 24.6%, with a standard deviation of 2pps.  

The key question is whether h'hold dissaving can rise faster than the fiscal deficit narrows.  I think its' unlikely: savings rates are back to pre-covid levels, and dissaving/GDP is running at 13.9% of GDP, vs a pre-covid average of 14.6%.  There's not a great deal of room to raise that proportion, so I think profits will remain under pressure in the short and medium term.

What do today's numbers do for S&P valuations?  The Coldwater Slow Model considers that an asset is fairly valued when it maintains is value relative to the economy. In practice, I take the Kalecki profits and discount them based on l/t nominal GDP growth rates and volatilities. That model has tracked the S&P well since 1990, and continued to do so last year.  On that basis, it told us the S&P 500 was approximately 10% overvalued at year-end when it was at 4766, and even if profits stabilized (which I don't think they will) then its still about 3% overvalued today. 

If profits continue to fall - so will that valuation. Given the sharp downturn in economic data in January, it's difficult to expect an S&P recovery any time soon.

EU Heavy Truck Sales

In the US, heavy truck sales have proved a remarkably fine and prescient early cyclical indicator, not only being a good investment spending signal, but also being highly sensitive to broader commercial demand.  

But they are not closely followed in Europe. I've decided to include them in my European shocks & surprises universe. And first time out, in December, we hit something that might be cyclically useful: EU heavy truck sales rose 23.5% yoy in December, with a monthly movt which was 2.6SDs above historic seasonal trends. That looks highly positive. 

The details are not what I'd expect, or can easily explain. For the major economies, Germany was up 18% yoy and Italy up 15.7%, but France was up only 2.3% and Spain only 5.9%. But what really made the difference was a surge in registrations in Eastern Europe: Poland was up 69.4% yoy, Czech Republic was up 22.2% and Lithuania was up 146%. Small countries, small economies?  Not really.  Poland accounted for 16% of the EU's Dec heavy truck registrations, and was the third largest buyer after Germany and France.  As for Czech and Lithuania, together they accounted for 7.3% of registrations. So take these Eastern Europe 3, and they accounted for just under a quarter of all the EUs heavy truck sales. 

I'm not sure why its happening, but such heavy capital spending  certainly suggests something is stirring either in Eastern Europe, or in their near trading partners.  We'll keep watching. 

Germany's reported a shocking 24.2% yoy rise in its December PPI. This was far above the 19.4% consensus expected, and was generated by a 5% rise which was no less than 7.9SDs above historic seasonal trendsl 7.9SDs!  Of course, at the heart of this was energy prices, which jumped 15.7% mom and 69% yoy, with natural gas up 122% yoy and electricity up 74% yoy. 

Now, a 15.7% mom jump in energy prices is actually quite difficult to explain, since  in dollar terms Brent oil prices fell 7.6% mom in December and natural gas prices fell 23.8% mom.  Elsewhere in the world, this slight relaxation in energy prices contributed to calming inflationary pressures.  What's going on in Germany?

Part of the answer is the continuing extraordinary rise in the price of CO2 emissions trading prices. The price of emitting a ton of CO2 in the EU rose a further 22% mom in December to Eu 79.92.  So whilst in Euro terms, the price of a barrel of crude fell Eu8.2 to 73.6, the cost of the permission to use it rose by Eu5.2 to 32.3.  Overall, the cost of using a barrel of crude, then, barely retreated at all in December, so Germany, among others Europeans, was denied the benefit of the falling oil price. 

In yoy terms and in Euro, a barrel of oil rose 35.8% yoy in December to Eu83.13; but once you include the emissions, it was up 52% to Eu115.6. The emissions cost came to 28% of the total, a new record. 

Things aren't going to look better in January, since already Brent crude is up 12.5% mom, and emissions prices are up another 2.1%.

In this inflationary year, nothing, I think, has risen faster than the EU's emissions permit: up 155% yoy, and still rising like a rocket. 

Also a quick word on Taiwan's December export orders: these were up 12.1% yoy, which sounds modest, but was generated by a monthly movt 1SD above trend. So not bad. Particularly because when you look at the details, which shows that China and HK (24.5% of the total) rose only 4.5% yoy, Europe rose only 8.2%, and Japan actually fell 5.8%.  Those are big big customers, and their demand growth is slowing.

Today we got the UK's inflation data for December, which found CPI up 5.4% yoy, on the back of a 0.5% mom rise which was 1.9SDs above historic seasonal trends. That 1.9SD deflection from trend is a sharp improvement from Nov's 3.8SD and Oct's 6.3SD deflections. But it's still grim enough, and means that we should expect to see inflation at just under 6% in 1Q, rising to 6.3% in 2Q, 6.7% in 3Q and 6.1% in 4Q.  

Currently, UK 10yr yields are running at just 1.3%, so there's a 5.4pp gap between that and where we can expect 4Q inflation to be at. That's the scale of the challenge facing Bank of England. It is the biggest gap between bond yields and likely 4Q22 inflation of any major economy: in the US the gap is 3.5pps, in Eurozone 4.8pps, and in Japan 0.3pps, whilst there are still premia available in China 1.1pp and India 1.4pp.

The prospects for the rest of the developed world aren't as bad as for the UK. I construct a global CPI index using US, Eurozone, and NE Asia baskets. And the influence of NE Asia's relatively restrained inflation means that globally we've probably seen the peak of yoy CPIs in December at 4.5%, and we can expect to see this coming down very gently in the coming year, sinking to just under 4% toward the very end of 2022. 

That's what happens if the current 6m deflection against trends are maintained. But now central banks are on the case, surely the current deflections will be moderated?  Let's think about this. 

There is good news. By December, the world had got the inflation message, with the result that this week, for the first time since the beginning of January last year, my shocks and surprises inflation index managed to lift itself into positive territory.  Are we then 'learning to live with inflation'?

If so, this could be good news. But there is a catch: in both November and December, a series of factors combined to moderate inflation. Let's start with the dollar; in Nov it gained 0.6% against the SDR basket, and followed up in December with a further 0.4% rise.  A rising dollar tends to be disinflationary, not least for commodity markets. And so, oil fell 7.6% mom in Dec and after falling 3.2% in Nov; natural gas prices dropped 23.8% in Dec after falling 8.4% in Nov; and the wider CRB index fell 3.9% in Dec after falling 0.3T% in Nov. These sharp falls in commodity prices made their impact in Dec's inflation results all around the world. 

But this has not been sustained in January.  In fact, the dollar is now falling against the SDR - an inflationary sign.  And guess what?  oil prices are up 11.5% on the month, natural gas prices are up 5.4% and the CRB index is up 5.9% on the month. So we should not get too excited that we're learning to live with inflation - more nasty inflation shocks could well be lurking in Jan and Feb results.