Is the Baltic Dry worth listening to?

From 4Cast comes this take on what the recent crash in the Baltic Dry means and whether it’s worth listening to. I must say, the correlation between the BDI and Chinese PMI is closer than I’d imagined. Perhaps it’s time to dust off the index…

Weakness in the Baltic shipping index is gaining a bit of airplay as a harbinger of crashing activity, with the sub 1000 reading the ‘weakest since post Lehmans H2 2008’ as the more sensation headlines would put it.

However, though there are plenty of other reasons for global concern heading into spring-summer 2012 and there are practical reasons to give due consideration to this reading discussed below (mainly regarding the calendar volatility in China data), at the moment in all honesty this is likely massively over playing the genuine real underlying shifts. Aside from the excess m/t shipping supply issues of the last year or two, the fact is that the index is exceptionally seasonal, reflecting the rush for end of year shipments, and then the New Year lull. If you seasonally adjust the reading, sure it has eased and is still on a soft footing but it is only just below 2-mth lows, and still well off last autumn’s adjusted trough.

The adjusted 3mth change again is off its rebound bests, and is modestly negative, but it is easily within recent normal fluctuation ranges rather than the extreme crash that is painted. In short, much as it would be nice to push an eye-catching story, the fact is that the underlying trends are nothing out of line with the standard slowing lead indicator message.

All that said, what is at certainly true is that this does highlight the need to watch data that is also not well adjusted – particularly, China. For instance, the China PMI may also be subject to a potential very volatile move from a probably seasonally inflated recent bounce to a then seasonally weak payback (see Don’t overplay ‘seasonal’ China PMI bounce? Watch Jan, Feb prints). To this extent, the sharp Jan Baltic drop does at least highlight the need to watch for a very exaggerated swing in China data from generous Q4 to harsh (new year) early Q1. Given how strongly markets are shaped by perceptions – evident in the strong risk bounce after Q4 China GDP data – this is important to the extent that it will colour views about global trade and EM momentum in the next couple of months. What we saw – in the US and China – was a very ‘punching above its weight’ Q4 outcome as consumption was concentrated into the sales period and seasonals flattered – and we are likely to see the data, and perception, payback as Q1 develops. Indeed, the shift from generous to harsh will tend to exaggerate the perceptions of a steep trend change for the worse.

The correlation between the 3mth changes in the Baltic Index (unadjusted) and the China PMI is pretty decent (0.60+), and a basic single variable regression would argue that the China PMI, after bouncing above 50 in Dec to great reception, is likely to soon drop to a new low below Nov’s reading (something on a 48 handle). To this extent, it could still have a very big hand in shaping market’s blunt opinion, with excess optimism giving way to potentially more seasonally inflamed pessimism.