Global Markets

The first week of September produced no respite as traders returned from vacations. Rather it was every bit as volatile and tumultuous as the weeks preceding it. Central banks garnered most of the news even though they did what was expected of them — the Reserve Bank of Australia as advertised lowered its rate to 7 percent from 7.25 percent while the Banks of Canada and England and the European Central Bank left their key rates at 3 percent, 5 percent and 4.25 percent respectively.

The plethora of new economic data did not help investor morale — there were few rays of sunshine — and that included Friday’s U.S. employment report. Normally falling commodity prices would cheer investors, but the price declines are now hitting energy and resource companies as profit concerns grow. Stocks were especially hard hit in commodity producing countries such as Australia and Canada.

Another issue of concern is the political vacuum that prime minister Yasuo Fukuda’s surprise resignation caused in Japan. And with the U.S. entering a prolonged political vacuum as the November presidential election looms, a prevailing view is that market participants may not expect to see drastic improvement until the start of the next year. China and other Asian nations, which were expected to prop up the world economy, are showing clear signs of economic slowdown. Concern is growing about the impact of the U.S. economic malaise on the world economy, which could manifest itself in the form of stalled U.S.-bound exports.

On the currency markets, worries about anemic eurozone growth helped drive the euro to an eight-month low against the dollar and its worst level against the yen since March. The European single currency was also hurt by comments by Jean-Claude Juncker, the Luxembourg chairman of eurozone finance ministers, who said the currency remained overvalued despite its recent decline. The euro has fallen about 10 per cent from the record high of above $1.60 in July.

On the week, all stock indexes followed here with the exception of the Philippine PSEi declined anywhere from 0.6 percent (Sensex) to 10.5 percent (Taiex).

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were down four of five days last week and suffered some of their largest losses of the year after U.S. unemployment climbed to a five-year high and concerns mounted that bank credit losses would increase. Banks were down after a major firm advised clients to sell Merrill Lynch because the firm may post more writedowns. Resource stocks were also hit by the continued declines in commodity prices.

Stocks were not helped on Thursday after the European Central Bank lowered its 2008 and 2009 growth forecasts while at the same time gave no indication that they would help the economy anytime soon with lower interest rates. Rather they continued to focus on inflation which is currently almost double the ECB’s 2 percent inflation target. And bank stocks dropped after the ECB said it is toughening rules on the collateral it accepted from banks for loans, reducing access to short-term financing.

The DAX retreated the most in more than five months on concern slowing economic growth would reduce earnings. The German economy is teetering on the verge of a technical recession (two negative GDP quarters) and data so far for the third quarter have been exceedingly weak. Despite its heavy losses, the FTSE continued to do better than either of its two European counterparts. The FTSE is down 28.8 percent this year while the DAX is down 24.1 percent and the CAC, 25.2 percent.

Bank of England maintains status quo

As expected, the Bank of England kept its key interest rate at 5 percent for the sixth month as growth continues to weaken and inflationary pressures remain high. The monetary policy committee last lowered interest rates at its April meeting. The MPC remains stuck firmly between a rock and a hard place — pulled in two directions by the conflicting trends of faltering growth and rising inflation pressures, both of which have grown worse since the committee met in August. Evidence continues to pile up that the economy is sliding into the grip of a serious slowdown, if not an outright recession. The preliminary estimate of second quarter GDP shows that growth stalled — ending the longest stretch of growth in more than a century — but managed to increase 1.4 percent on the year.

Recent economic data continues to weaken as the housing sector and with it, consumer confidence have tumbled. And both the manufacturing and services sector continue to weaken as well. The deepening slump in house prices continues to be a key factor in undermining growth and future prospects. June retail sales plummeted but recovered some in July.

The Bank’s 5 percent lending rate continues to be the highest among the Group of Seven nations while Japan's 0.5 percent is the industrialized worlds lowest. The Bank issued no statement with the decision. Bank watchers will have to wait until September 17 for the minutes of the meeting. At the August meeting, there was a three way split among monetary policy committee members on which direction interest rates should move and economists say the bank's quandary has worsened since then. The Bank has an inflation target of 2 percent which is set by the Chancellor of the Exchequer annually as part of his budget message.

ECB continues to walk the tightrope

As expected, the European Central Bank left its key policy interest rate at 4.25 percent. The ECB increased their key rate by 25 basis points at its July meeting. The spread between U.S. and EMU interest rates is now 2.25 percent but there is only 75 basis point spread with the Bank of England. The latest flash reading for the harmonized index of consumer prices showed that inflation eased to 3.8 percent from the record setting 4.1 percent increase in July and the highest rate since statistics began in 1997. But inflation is still almost double the ECB’s inflation target of 2 percent.

Like the Bank of England the ECB is caught between a rock and a hard place – rising inflationary pressures and a sagging economy. Growth continues to be a worry — GDP was down 0.2 percent in the second quarter with Germany, France and Italy all declining in the quarter.

Unlike the Fed, which has slashed U.S. borrowing costs, the ECB focuses on controlling inflation rather than riding to the rescue of economic growth. In contrast with the Bank of England, the ECB makes its decisions by consensus and does not publish minutes after its meetings. Rather, to explain the governing council’s thinking, ECB president Jean Claude Trichet holds a press conference about 45 minutes after the meeting’s conclusion. At that time, he reads a prepared statement and then responds to questions from the press.

In his post-meeting news conference, Mr Trichet emphasized that the Bank remains focused on fighting inflation even after cutting its economic growth forecasts. He said “We're resolute in our determination to keep inflation expectations in line with price stability.” The ECB is trying to prevent second round effects from soaring food and energy prices that have pushed inflation to a 16-year high. At the same time, the economy is verging on a technical recession — second quarter GDP registered a decline of 0.2 percent from the previous quarter. Trichet said current interest rates will help to bring inflation back below 2 percent — the ECB's inflation target sometime during 2010. When asked about the ECB’s bias, Trichet said that the Bank has “no bias” on future rates but that they would do what is required to achieve the goal of bringing inflation down to target.

The ECB revised its economic growth forecasts lower to 1.4 percent from 1.8 percent in 2008 and to 1.2 percent from 1.5 percent for 2009. At the same time, its inflation forecast was raised to 3.5 percent from 3.4 percent in 2008 and to 2.6 percent from 2.4 percent in 2009.

Asia/Pacific

Stocks were down in the Asia/Pacific region last week — except in the Philippines —on growing concerns that the effects of the U.S. economic slowdown will be felt on a wider scale in Europe and emerging nations. Asian investors are getting no help from European and U.S. markets as stocks declined in both regions as well. For example, analysts said concerns about the global economy were reinforced by the steep drop in U.S. shares Thursday after initial jobless claims were higher than expected and raised fears about Friday’s employment situation report which was released after Asian markets were closed for the week. Investor worries were also fueled by the plunge in the European stock market amid increasing signs of an economic slowdown after the ECB slashed its eurozone growth forecasts for 2008 and 2009 Thursday.

The Hang Seng Index fell below 20,000 for the first time since April 2, 2007 following a cut in the city's growth forecast by Goldman Sachs. Continued weakness on mainland markets also dampened investor sentiment.

Political events are so intertwined with economics it is difficult to separate the two. In Japan, the prime minister resigned while in Thailand he did not with both causing problems that are affecting the economic wellbeing of their respective countries. The Japanese leadership issue will not be settled until September 22 when the LDP chooses a new leader among several candidates who will then become prime minister. And in Thailand, the stock market sank to its lowest level since January 2007. The country's embattled prime minister Samak Sundaravej rejected calls to resign combined while the government declared a state of emergency.

Prime minister Yasuo Fukuda’s surprise announcement means that he is resigning less than a year after he took office. His government has suffered chronic unpopularity. Mr Fukuda has also been frustrated by the upper house of parliament, which is controlled by the opposition. Japan's next general election must be held no later than September 2009. Since Fukuda took office in late September of 2007, foreign investors have fled the market amid political uncertainties and fears of an economic downturn in Japan and elsewhere. Equities sank after the announcement.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia cut its policy interest rate by 25 basis points to 7 percent and its first cut since 2001. The financial markets had been prepared for the move since the August meeting as the biggest slump in retail sales in six years, sinking business confidence and slower job growth prompted the RBA to signal that a rate cut would occur soon to avoid a deeper and more persistent economic slowdown. The bank had added 300 basis points to their key rate since December 2001. The RBA last raised borrowing costs in March to curb consumer prices that jumped 4.5 percent in the second quarter. The Bank has an average inflation target range of between 2 percent and 3 percent. The RBA faces the challenge of balancing slowing household spending, which accounts for about 60 percent of Australia's $1 trillion economy, with the threat that inflation will accelerate amid rising energy costs and a shortage of skilled labor. The RBA thinks that surging Chinese demand will increase export income by 20 percent, which will offset slower domestic growth. The RBA follows the Reserve Bank of New Zealand into an easing cycle. The RBNZ cut its key rate to 8 percent from 8.25 percent last month.

Bank Indonesia

As widely expected, the Bank Indonesia raised its key interest rate by 25 basis points to 9.25 percent for the fifth month in a row to fight inflation, which has remained at double-digit level since May 2008. The central bank said that the decision was taken to support the stability of the Indonesian economy and financial system and specifically to maintain the medium-term outlook for the inflation target.

Canada

As expected, the Bank of Canada left its key interest rate at 3 percent where it has been since April saying that is remains appropriately accommodative amid slower than expected growth. The Bank has an inflation target range of 1 percent to 3 percent but focuses in on the midpoint 2 percent. Overall inflation has climbed from a low of just 1.4 percent in March to 3.4 percent in July while core inflation (less food and energy) has remained at 1.2 percent on the year and much tamer than that in Europe and the U.S. Second quarter GDP data reflect an economy with strong domestic demand but an ailing external sector. The Bank has a mandate to “preserve the value of money by keeping inflation low and stable,” which infers that they would not stimulate the economy through rate cuts if it was at the expense of high inflation. Like other central banks, the Bank of Canada is struggling to sustain growth while at the same time fight inflation thanks to high energy prices.

Currencies

The euro continued to tumble against the U.S. dollar as fears about the European economy escalated. The euro sank Thursday, after the ECB lowered its growth forecast and said it would continue to focus on inflation. The euro dropped for a seventh day on Friday and its longest decline since October 2006. The euro is down more than 10 percent against the dollar from the record high of $1.6038 set in intraday trading on July 15. At the same time, the yen continued to climb after the U.S. employment report on Friday. The yen also rallied against other major currencies on global recession concerns. The Australian and New Zealand dollars dropped to two-year lows on speculation a slump in stocks and commodities encouraged investors to reverse carry trades.

The pound sterling also continued its slide against the dollar and euro and it has created a headache for the Bank of England as the inflationary impact on imports has acted as a counterweight to arguments for interest rate cuts to bolster growth. But even as the cost of dollar and euro-denominated oil, commodities and food stuffs have hit UK consumers and companies reliant on imports, at the same time, sterling’s decline has boosted the revenue and profits of many British companies whose sales are mostly generated overseas.

Several of the ASEAN countries including Thailand, Malaysia and Indonesia were suspected to intervening to defend their declining currencies on Tuesday. Traders in Singapore and Bangkok said they suspected the Bank of Thailand sold dollars to put a floor under the baht, which hit a one-year low on growing political tensions. And South Korean authorities verbally intervened, helping the won recover from a 4-year low.

Selected currencies — weekly results

Indicator scoreboard

EMU

July producer price index was up 1.1 percent and 9.0 percent when compared with last year. The July spurt was again led by energy where prices jumped a further 2.8 percent on the month. Excluding energy, the PPI was up 0.5 percent and 4.3 percent on the year. Among the other major sectors, prices were up a steep 0.8 percent in the month for intermediates but a relatively modest 0.2 percent in capital goods, consumer durables and consumer non-durables. On the year, the PPI was up in most EMU states.

Second quarter preliminary gross domestic product was down 0.2 percent but was up 1.4 percent when compared with the same quarter a year ago. Consumer spending declined 0.2 percent on the quarter while capital formation dropped 1.2 percent. Government consumption was up 0.5 percent, inventory accumulation was essentially flat and both exports and imports posted declines (each 0.4 percent). By country, second quarter GDP was down 0.5 percent in Germany with both France and Italy declining by 0.3 percent. Spain, however, managed to edge up by 0.1 percent.

July retail sales declined 0.4 percent and dropped 2.8 percent when compared with last year. The latest monthly slide was led by the food, drink & tobacco sector (down 0.9 percent) which easily outstripped a modest drop in the other areas (down 0.1 percent). Regionally, the performances were quite mixed but dominated by a hefty contraction in Germany (1.5 percent). Neither France nor Italy supplied any figures but there were also marked declines in Belgium (0.7 percent) and Luxembourg (3.7 percent). By contrast, Spain (0.1 percent), Austria (1.5 percent) and Portugal (3.5 percent) all registered gains.

Germany

July retail sales excluding autos and gasoline stations declined 1.5 percent and were unchanged on the year. Including autos and gasoline stations, retail sales were up 0.6 percent but sank 3.2 percent on the year. The data reflect dour consumer sentiment that continues to be weighed down by high energy prices, the ongoing financial crisis and now recessionary fears. Food sales dropped 1.6 percent on the month and were down 1.2 percent on the year while home furnishings were down 0.5 percent and down 1.2 percent on the year. However the lone positive note came from the clothing category — that managed to increase by 2.8 percent and 1.5 percent on the year.

July manufacturing orders were down for the eighth consecutive month, dropping by 1.7 percent and were 4.1 percent below the level of a year ago. The monthly decline in total orders was dominated by a 3.6 percent nosedive in the domestic component on the back of broad-based declines among major sectors. Basics were off 2.7 percent, capital goods were down 3.9 percent and consumer & durable goods sank 4.8 percent. Overseas orders were up 0.3 percent. A jump in basics (2.8 percent) more than offset drops in both capital goods (1.2 percent) and consumer & durable goods (0.3 percent). All of the gain in foreign orders was generated in the eurozone which posted a hefty 8.1 percent jump, largely thanks to a surprisingly strong 12.8 percent leap in capital goods which easily more than offset an 8.4 percent fall in June. Non-eurozone orders fell a further 5.7 percent.

July industrial production dropped 1.8 percent and was down 0.6 percent when compared with last year. With the exception of energy (1.2 percent), all of the major sectors posted monthly declines in output. Weakest was consumer durables (down 6.5 percent) which, combined with nondurable goods (down 0.7 percent), ensured another hefty drop in total consumer goods (down 1.7 percent). Capital goods (down 3.7 percent) also endured a miserable month and neither intermediates (0.6 percent) nor construction (2.0 percent) fared much better. Overall manufacturing production slumped 2.0 percent on the month and was down 0.2 percent on the year.

France

Second quarter unemployment rate was 7.2 percent, unchanged from the previous quarter. The number of unemployed stood at 2.7 million, also essentially unchanged since the end of 2007. Including overseas territories, the rate similarly stabilized at an upwardly revised 7.6 percent. In metropolitan France the unchanged headline rate masked a sharp increase in joblessness among 15 to 24 year olds (18.3 percent from 17.4 percent) and a smaller rise in the rate for over 50 years old (5.1 percent) as unemployment in the key 25 to 49 year old sector fell (6.5 percent from 6.6 percent). A similar pattern held for total France. At the same time, the employment rate on the mainland edged up a tick from the previous quarter to 65.1 percent while the activity rate was unchanged at 70.1 percent.

Italy

June merchandise trade deficit widened out to a larger than expected €1.0 billion as exports fell 2.1 percent on the month and imports dropped 3.6 percent. In unadjusted terms, the trade balance swung from a €0.4 billion surplus in the year ago period to a shortfall of €1.0 billion. Annual growth in total exports went negative (3.8 percent) but global imports just kept their head above water (0.6 percent). Net trade with the EU was an unadjusted surplus of €1.3 billion, up from €0.6 billion in June 2007 as imports (7.7 percent) fell at more than twice the annual rate of exports (3.6 percent).

Asia/Pacific

Australia

Second quarter gross domestic product was up 0.3 percent when compared with the previous quarter as expected by analysts. This was the weakest quarter of growth since the fourth quarter of 2004. GDP was up 2.7 percent when compared with the same quarter in the previous year for the weakest annual growth since the fourth quarter of 2006. Consumption edged up 0.2 percent and was up 3.3 percent on the year while gross fixed capital formation jumped 2.9 percent and was up 7 percent on the year. Consumption was finally cooled by high interest rates thanks to the Reserve Bank of Australia’s aggressive policies combined with soaring energy prices. Household spending edged down 0.1 percent. The main negative contributors to growth were operation of vehicles (down 2 percent) and food (down 0.8 percent). Within gross fixed capital formation, the main driver was investment in new machinery and equipment (up 10.1 percent) which was offset by a decline in new engineering (down 5.4 percent).

July seasonally adjusted merchandise trade deficit was A$717 million after recording a surplus of A$ 351 million in June. The deficit was primarily due to the strong rise in imports of goods and services, mainly intermediate and other goods. Exports were down 0.8 percent with non-rural goods dropping 4 percent and rural goods down by 3 percent while other goods were up. The drop in non-rural and other goods was largely driven by coal, coke and briquettes, which dropped by 9 percent. Imports were up 3.9 percent while intermediate and other goods imports were up 12 percent. They were driven by fuels and lubricants. However, capital goods imports were down 5 percent and consumption goods dropped 2 percent.

Hong Kong

July retail sales volumes were up 6.6 percent when compared with last year and 13.8 percent in value terms helped by a rebound in tourism flows and a sharp jump in motor vehicle sales. Seasonally adjusted, retail sales volume gained 2.5 percent on the month. Consumer durables were up 13.4 percent thanks to a surprising uptick in motor vehicle sales, which surged by an impressive 39.0 percent in July. This is likely a payback to the previous four consecutive monthly declines.

Americas

Canada

August employment was up 15,200 after sinking by 55,200 jobs in July. The unemployment rate remained at 6.1 percent for the second month. All of the gain occurred in full-time jobs (16,100) while part-time employment edged lower (900). The goods producing area accounted for the bulk of the increase. However, within the overall advance of 14,800, construction jumped 18,500, but manufacturing was also up a respectable 13,800. Utilities edged up 4,500 but there were declines in natural resources (4,100) and agriculture (17,800). Service industries added 400 with the most significant gain posted by educational services (30,000) followed by accommodation & food (15,900) and finance, real estate & leasing (5,900). There was a marked decline in health care & social assistance (21,700) together with smaller declines in business buildings (7,300), professional, scientific & technical services (7,000) and public administration (13,400). The number of unemployed was up by 7,300 to 1,112,500. Both the employment rate and part-time rate were unchanged at 63.4 percent and 18.3 percent respectively.

Bottom line

Only the Reserve Bank of Australia lowered interest rates last week while the Banks of Canada and England and the ECB maintained the status quo. Fears about global economic growth sank equities but boosted the U.S. dollar.

This week provides a respite from the heavy data flow of the past two week except in the UK where key releases on manufacturing output and producer prices along with merchandise trade will be released.

Looking Ahead: September 8 through September 12, 2008

Anne D Picker is the author of International Economic Indicators and Central Banks.