Glimmers of Optimism from U.S., German Data

A number of observers are suggesting that the recent heavy tone in equities and the relative dollar and yen's strength in the foreign exchange market is a function of growing doubts about the green shoot story that unfolded for most of Q2. There have of course been some disappointing data. The recent employment report comes to mind. However, in the past 48 hours there have been two reports - one in the US and one in Germany - that seem distinctly more promising.

The US non-manufacturing ISM, reported Monday, was 47 in June, well above expectations and the highest level since Lehman's failure. The details were particularly encouraging as most of the sub-index readings have recovered their post-Lehman slide. Particularly suggestive was the rise in new export orders to 54.5 from 47.0, which is the highest since Bear Stearn's demise. Business activity rose to 49.7 from 42.3 and new orders rose to 48.6 from 44.4. There is no doubt that US residential mortgage foreclosures continue to rise and a number of Fed officials and private observers have identified the commercial real estate market as one of the significant risks remaining for the financial system. In the non-manufacturing ISM, six industries showed growth in June-- the top four were real estate, rental and leasing, construction, finance and insurance.

The non-manufacturing PMI bottomed before the manufacturing PMI, which is also what happened in the last recession. The correlation between the two appears to increase in recoveries and decline in economic downturns. The correlation is now at its highest since Q3 05.

Germany reported May factory orders Tuesday. The consensus was expecting a small increase. A five month decline was broken in March, with a 3.7% increase, but the April rise of 0.1% was less than the market expected. May's 4.4% rise was the largest in nearly two years. The news is obviously constructive for Germany, but there is more insight that can be teased from the data. Foreign orders were up a sharp 5.2%. Germany is heavily dependent on exports and Chancellor Merkel for one has declared no desire to change that, but this speaks to increased foreign demand. Orders from outside of the euro-zone increased by more than 9%. This seems to speak to a broader recovery.

Germany reports May industrial output figures Wednesday. Output fell hard in Europe's biggest economy between Sept 08 and Feb 09, contracting by a solid fifth. March posted a small gain 0.3% before the disappointing April 1.9% drop. The consensus calls for a small rise. Given the increase in orders, three months running, the risk is that output rises more than expected. It is easy to dismiss the glimmers of hope in these reports as one swallow a spring doesn't make. But the two time series were have looked at here are not simply one-offs, but we highlight these time series precisely because the latest reports continue a trend that has been in place for a few months.