Global Markets

Economic data continued to deteriorate globally. In Japan, gross domestic product declined more than originally estimated while trade balances in China especially — but also throughout Europe — showed the impact of the global economic slowdown. The U.S. trade deficit was larger than anticipated and put downward pressure on the dollar while the Canadian surplus shriveled on sinking commodities and the faltering U.S. economy. But equities were up generally speaking as investors focused on hopes that the U.S. Congress would pass an auto industry bailout program. And on the central bank front, interest rates continued to crumble with the Bank of Canada cutting a more than expected 75 basis points to 1.75 percent while the Banks of Taiwan and Korea cut their policy rates by 75 basis points and 100 basis points respectively. And the Swiss National Bank cut their libor target range to zero to 1 percent with a focus on 0.5 percent from 1 percent to 2 percent. This puts the Swiss interest rate just above Japan’s 0.3 percent rate. In the U.S., investors were so eager to buy Treasuries that the 3 month bill rate went negative for a few hours on Tuesday for the first time in the post-World War II era showing that investors valued safety so much that they were prepared to pay for it!

Investors hate uncertainty and equities were sapped Thursday and especially Friday after chances for the U.S. auto bailout died in the Senate after being approved by the House of Representatives. Asian stocks sank while the U.S. dollar tanked against the yen in intraday Asian trading to its lowest in over 13 years.

All equity indexes with the exception of the Shanghai Composite and Dow were up on the week. With 2008 almost over, the best performing index followed here is the Bolsa which is down 27.5 percent. It is followed by the FTSE, which is down 33.7 percent and the Dow, which is down 34.9 percent.

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC posted healthy gains last week despite Friday’s declines. While declines at week’s end managed only to erode gains on growing concern that the global economic crisis is deepening further. The week’s data revolved for the most part around sinking industrial production and evaporating exports. The dismal trade data were capped by the notable decrease in exports from the U.S. which pushed the October trade deficit unexpectedly wider while new jobless claims continued to climb at an alarming rate. These data influenced equities of companies who rely on U.S. for revenues. Meanwhile, the Ifo offered an even more pessimistic forecast for the German economy. The Ifo said that the economy had slipped into a recession from the middle of 2008 and would shrink 2.2 percent next year and continue to contract into 2010.

Earlier in the week, markets here were up on optimism that U.S. President-elect Barack Obama's plan for a huge infrastructure spending package would help revive the U.S. economy. Obama announced over the weekend that he is planning the largest U.S. public works spending program since the creation of the interstate highway system 50 years ago. Industrial and construction stocks rallied on Obama's plan to boost investment in roads, bridges and public buildings to create and preserve 2.5 million U.S. jobs. On the week, the FTSE was up 5.7 percent, the DAX was up 6.4 percent and the CAC gained 7.6 percent.

Swiss National Bank lowers rates again

The Swiss National Bank cut its interest rate to a four-year low of 0.5 percent and said further measures are possible as the economy faces a recession that may be the worst since 1982. The Swiss National Bank’s Governing Board in Zurich, led by Jean-Pierre Roth, lowered the three-month Libor target by 50 basis points. The SNB said that they would take all necessary steps to gradually bring the Libor down to the middle of the target range which now lies between zero and 1 percent. The SNB decision takes it closer to being the first central bank in Europe to reduce its benchmark to zero as the financial crisis saps growth across the Swiss economy. As policy makers run out of room to reduce the key rate, Roth may need to follow the U.S. Federal Reserve and announce new tools to revive growth. The SNB now expects the economy to shrink between 0.5 percent and 1 percent next year. A contraction of 1 percent would be the worst since 1982 and 0.5 percent would be the biggest decline in gross domestic product since 1991.

Asia/Pacific

With the exception of the Shanghai Composite, all Asian/Pacific indexes followed here were up last week despite Friday’s losses after the U.S. Senate failed to reach a bailout agreement for the auto industry. Friday’s losses bit into the week’s gains. Economic data for the region was generally negative. Japan’s gross domestic product data were revised downward while Australia lost jobs for the first time since May. And China’s data deluge pointed to alarming declines in exports, slowing retail sales and easing prices. And more central banks including those in Korea, Taiwan and India aggressively lowered policy interest rates with the Indian and Japanese governments putting forward new stimulus packages.

During the week, Asia kept its eyes on the machinations in Washington DC as they worked on an auto bailout plan and they were generally buoyed by the likelihood of a rescue package. In addition, the interest rate moves in Taiwan and Korea and stimulus packages elsewhere kept equities buoyant. But as hopes faded for the U.S. package, U.S. stocks dropped and took international indexes with them. More bad corporate and economic news were also a drag. But stock markets across the Asia/Pacific region fell sharply on Friday as they reaction to the Senate’s rejection of the carmaker bailout package. The Japanese stock market slumped 5.6 percent with automakers and exporters taking the brunt. The dollar’s decline to a 13-year low against the yen in intraday trading was also a big negative for exporters.

The Ministry of Finance reported that foreigners sold a net¥ 399.7 billion worth of Japan-based stocks for the week ending December 6. Foreigners were also sellers of a net ¥84.5 billion in Japanese bonds and notes. Meanwhile, Japanese residents remained net buyers of foreign-based stocks in the week, having acquired a net ¥497.5 billion worth of equities. They remained net sellers of foreign bonds and notes for the third straight week, having dumped a net ¥401.8 billion.

Reserve Bank of India cuts rates again

On Saturday, the Reserve Bank of India slashed its lending or repurchase rate by 100 basis points to 6.5 percent. This was the third cut since October. In doing so, the RBI sent a signal to banks to bring down lending rates as it scrambles to protect the real economy from a worsening global financial crisis. The Bank expects that the reduction in rates should result in a reduction in marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms. The Bank also said that economic growth may moderate "more than anticipated" in the current financial year that ends March 31, 2009. The RI has been easing monetary policy since October, joining other central banks in pumping cash as credit markets froze. With the latest cuts, the RBI has lowered its repo rate by 250 basis points, the reverse repo rate by 100 basis points, the cash reserve ratio by 350 basis points and the statutory liquidity ratio by 100 basis points since mid-September, when the global credit crisis deepened dramatically with Lehman Brothers' bankruptcy filing.

Bank of Korea chops interest rate

The Bank of Korea reduced its lending rate by 100 basis points to 3 percent to shore up its economy which has been buffeted by sinking exports amid recessions in its prime markets — the U.S., Japan and Europe — and weakening growth in China. South Korea’s currency, the won is Asia’s worst performing currency this year. It surged as much as 3.6 percent after the decision on optimism the central bank’s action may help cushion the economy. South Korea’s reduction was its fourth in eight weeks.

Taiwan lowers interest rates again

Taiwan’s central bank, the Central Bank of the Republic of China cut its interest rate by the most in 26 years — from 2.75 percent to 2 percent. The World Bank said last week that East Asia’s economies face “hard times,” forecasting international trade will shrink in 2009 for the first time in more than 25 years. This was Taiwan’s fifth rate cut in two months as faltering exports are driving the economy into recession. The Bank began lowering borrowing costs on September 25 after nearly four years of increases aimed at reining in inflation. The Bank highlighted easing inflation pressure thanks to lower commodity prices and downside risks to growth given the deteriorating global environment as the reasons for easing.

Canada

The Bank of Canada cut its key interest rate by 75 basis points to 1.5 percent. New data from Canada shows that the economy is weakening. A big jolt came when the November employment report showed that 70,600 jobs were lost. This was the largest drop in over 25 years with manufacturing hit the hardest. The Bank of Canada has an inflation target range of 1 percent to 3 percent but focusing on the midpoint. Inflation is well within the range whether using the headline consumer price index, core excluding food and energy or the Bank of Canada’s operational core CPI which excludes eight volatile items.

More pressure was put on the Bank last week when in the midst of the growing economic uncertainty, the Canadian parliament took an early holiday break after a fracture on a stimulus plan threatened to bring down the Conservative government. In an act of desperation, Prime Minister Harper convinced the Governor General to suspend Parliament until January 26, when he plans to have a new budget prepared which presumably will include stimulus proposals. This leaves fiscal policy on hold at least until then. Most analysts said that the economy was solid up until mid-September. However, in light of the collapse of Lehman Brothers and AIG, the middle of September must be seen as the point at which a seismic shift occurred in the global economy. Stimulus is being provided for now by the plunging Canadian dollar, which is now trading at about 80 cents to the U.S. dollar from near parity only recently.

Currencies

The U.S. dollar crumbled to a 13 year low against the yen in Asian trading Friday after the Senate could not come to an agreement on a suitable auto industry bailout package. The dollar fell as low as ¥88.1 in intraday trading but recovered as the day wore on. The dollar had been weakening as the likelihood that the auto rescue would be defeated in the Senate. The sudden moves prompted speculation about possible intervention by the Ministry of Finance as the higher value of the yen increases the burden on the country’s exporters. The Ministry of Finance voiced concern over the sudden strength of the yen. Naoyuki Shinohara, vice finance minister for international affairs, said the currency moves were excessive and that he was concerned about it. He told reporters that the ministry would act “appropriately” depending on the situation. Finance minister Shoichi Nakagawa said the ministry was not considering intervening at the moment.

The rising yen has created additional problems for Japan, given their dependency on exports. With the dollar-yen breaking below ¥90 which was once perceived as a "line in the sand" for the Bank of Japan, there was increasing talk of intervention. But the BoJ has not intervened since 2004 and market players do not think that they will intervene now. The yen is rising against other currencies as well and not just the dollar. It has risen especially against the euro and other Asian currencies.

The euro is climbing once again against the U.S. dollar and continues to set new records against the pound sterling. It broke through $1.34 yesterday for the first time in seven weeks after the U.S. trade deficit unexpectedly widened and European Central Bank council member Axel Weber signaled the bank may be nearing the end of its rate-cutting cycle. The pound weakened to a record low against the euro after HBOS Plc said bad loans will keep rising as credit conditions deteriorate, signaling the UK recession is intensifying. The pound sterling also declined against the dollar after the rejection of the auto bailout sent stocks tumbling as demand for riskier assets evaporated.

Russia devalued the ruble for the fifth time in a month and widened its trading band against the dollar and euro after reserves fell $161 billion as the central bank tried to defend the exchange rate. Russia has drained 27 percent of its reserves since the start of August to stymie a 16 percent decline in the ruble versus the dollar as tumbling oil prices, the war in Georgia and the global financial crisis caused precipitated a run on the currency. Russia is suffering as the price of Urals crude, its main export blend, has dropped 71 percent from a July record to $40.32 a barrel, below the $70 average required to balance the nation’s 2009 budget.

Selected currencies — weekly results

Indicator scoreboard

EMU

October industrial output excluding construction dropped 1.2 percent and was down 4.9 percent when compared with last year. The declines were widespread with all of the major categories except nondurable consumer goods (up 0.3 percent) down on the month. The weakest performers were intermediates and capital goods where production fell 2.0 percent in each sector. Durable consumer goods posted a 1.4 percent decline while energy slipped 0.1 percent. Among the larger EMU states, output fell 2.0 percent on the month in Germany, 2.7 percent in France, 1.9 percent in Spain and 1.2 percent in Italy. The largest drop within the EMU bloc as a whole was in Ireland (6.4 percent) but all member states saw declines apart from Portugal where production rose 1.3 percent.

Germany

October industrial output sank 2.1 percent and was down 3.9 percent when compared with the same month a year ago. Industrial production has now declined in three of the last four months and in four of the last six. The slide was broad-based with just energy (up 0.2 percent) and nondurable consumer goods (unchanged) avoiding a monthly drop. Intermediate output dropped 2.2 percent, capital goods sank 3.1 percent, consumer durables were down 2.3 percent and construction declined 3.0 percent. Overall manufacturing production was down 2.2 percent on the month and 3.9 percent on the year.

October merchandise trade surplus rebounded to €15.8 billion from €13.7 billion in the previous month. Exports were down 0.5 percent on the month while imports dropped a hefty 3.5 percent. Exports have declined in three of the last four months while imports have dropped in five of the last seven. On the year to October, total exports were up just 1.4 percent and within this purchases by the other EMU countries edged up a mere 0.1 percent. Sales to non-EU countries rose 5.2 percent. Total imports were up 5.4 percent on the year with sales by the EMU bloc rising 4.7 percent and by non-EU countries 7.8 percent.

December ZEW survey was mixed with the expectations index rising for the second month running to minus 45.2 from minus 53.5 in November and minus 63.0 in October. However, by contrast, the current conditions measure slumped more than 14 points to minus 64.5. The improvement in expectations needs to be put in context since the long-term average for the index is plus 26.8. At the same time the ongoing nosedive in current conditions must be a worry. Since a temporary 8.2 point blip in September, this index has now lost almost 64 points.

France

October merchandise trade deficit was €7.1 billion and wider than the €6.0 billion deficit posted in September. For the first 10 months of 2008, the deficit was up more than 53 percent when compared to the same period in 2007. In October there were significant increases in the deficits on trade in both consumer and basic goods.

October industrial output excluding construction sank 2.7 percent and was down 7.2 percent when compared with last year. All major production categories were down with auto industry output collapsing 14.3 percent. Other declines were less steep but still sizeable in food & agriculture (2.0 percent) and in semi-finished goods (3.5 percent). Consumer goods held up rather better with a drop of only 0.4 percent as did capital goods, down 0.5 percent. Manufacturing output contracted 3.2 percent on the month and dropped 8.4 percent from October 2007.

Italy

Third quarter gross domestic product contracted 0.5 percent on the quarter and dropped 0.9 percent when compared with the same quarter a year ago. Since this was the second consecutive quarterly decline, the Italian economy is now in a technical recession. The breakdown of the expenditure components of GDP confirms the anticipated weakness of net domestic demand which, on a quarterly basis, subtracted 0.3 percentage points from the bottom line. In turn this reflected an especially sharp drop in capital investment (1.9 percent) that reduced total output by 0.4 percentage points. Private consumption (0.1 percent) actually managed a meager 0.1 percentage point contribution while government spending was essentially unchanged. Inventory accumulation added 0.1 percentage points to growth last quarter.

October industrial output was down 1.2 percent and sank 6.9 percent when compared with last year. The monthly drop was a reflection of lower output among all of the major product groups with the exception of consumer products where output was up 0.8 percent. Capital goods fell 1.5 percent, energy was down 1.7 percent while intermediates slumped 2.1 percent.

United Kingdom

November producer output prices dropped 0.7 percent but were up 5.1 percent when compared with last year. Tumbling energy prices had the biggest impact on the monthly change. Petroleum product prices dropped 8.3 percent. The core PPI gained 0.2 percent and was up 5.2 percent on the year. Food prices were down 0.2 percent and other products were down 0.3 percent. However, prices for transport were up 1.1 percent and chemical products were up 0.6 percent. Producer input prices dropped 3.3 percent and were up 7.5 percent on the year. The continued collapse in fuel costs was once again the driving force behind the monthly decline. The cost of crude oil slumped 19.1 percent while home food materials were down 1.4 percent, and imported metals declined 0.7 percent. Prices were up for fuel (1.0 percent), imported food materials (1.3 percent) and other home-produced materials (1.2 percent). Other sectors seeing higher prices were imported chemicals (0.6 percent), imported parts & equipment (2.5 percent), and other imported materials (0.3 percent). From an annual rate of some 34.1 percent in June, the deceleration in input costs has been dramatic in recent months. However, but for the sharp decline in the value of sterling against the U.S. dollar, the decline would have been steeper still.

October industrial output sank 1.7 percent and was down 5.2 percent, its steepest decline since April 1991. The monthly slide reflected output drops in all of the major sectors with the exception of electricity, gas & water where production jumped an erratic 1.2 percent. Worst hit was oil & gas extraction (down 7.6 percent) but mining & quarrying (7.3 percent) was not far behind. Manufacturing production fell 1.4 percent on the month and just short of 5 percent on the year. Manufacturing output sank 1.4 percent on the month and was down 4.9 percent on the year. There were widespread declines but particularly weak were transportation industries where production dropped 4.6 percent and paper, printing & publishing which saw output slump 3.4 percent while basic metals & metal product industries were down 2.6 percent.

October global trade deficit widened to Stg7.8 billion from Stg 7.4 billion in September. On the month, exports slumped 3.4 percent while imports were off 1.2 percent. Excluding oil and erratics, the shortfall narrowed by Stg0.2 billion as imports fell slightly more quickly than exports to leave intact a broadly flat underlying picture. The increase in the deficit reflected a rise in the shortfall with EU countries from Stg2.8 billion to Stg3.4 billion with exports falling 7.8 percent on the month and imports down 2.4 percent. Net exports of goods to non-EU countries improved marginally with a deficit of Stg4.4 billion compared with a Stg4.6 billion shortfall last time.

Asia/Pacific

Japan

Third quarter gross domestic product was down a revised 0.5 percent and down 0.3 percent when compared with the same quarter a year ago. On an annualized basis, GDP dropped 1.8 percent. The main reason for the revision was the revised decline in the capital investment component from minus 1.7 percent to minus 2.0 percent. GDP has now declined for two quarters in a row putting Japan in recession, its first since 2001. And the recession appears to be deepening as companies cut production, jobs and spending as exports keep dropping. In addition to capital investment, private demand was revised downward to a decline of 0.3 percent on the quarter from minus 0.1 originally. Gross fixed capital formation was also revised downward to a decline of 0.8 percent from the original drop of 0.6 percent.

November corporate goods price index declined for the third month and at an accelerating pace. The CGPI was down 1.9 percent on the month after declining 1.4 percent in October and 0.6 percent in September. On the year, the CGPI was up 2.7 percent. The increase has diminished substantially over the last several months thanks to sinking commodity prices and the increased purchasing power of the yen. In August the index was up 7.4 percent on the year. On the month, petroleum prices plummeted 13.8 percent while nonferrous metals prices dropped 9.3 percent. Chemicals & related products were down 2.9 percent. On the year, petroleum prices were down 3.1 percent while nonferrous metals were down 20.7 percent. Yen-based import prices sank 12.2 percent and were down 8.6 percent on the year. Export prices were down 4.4 percent and 10.4 percent on the year.

Australia

November employment declined 15,600 to 10,750,000. It was the first decline in employment since May. Employment has increased by a net 148,300 in 2008. The decline was accounted for by part time employment which decreased by 24,400 while full time employment increased by 8,800. The unemployment rate edged up to 4.4 percent as expected from October’s 4.3 percent rate. The participation rate decreased by 0.2 percentage points to 65.1 percent.

China

November merchandise trade surplus increased to $40.1 billion from $35.2 billion previously. Exports dropped 2.2 percent on the year but imports plunged 19.2 percent. In November, seasonally adjusted exports sank 11.3 percent for the fourth straight monthly decline. The details show that the export decline was led by mechanical and electrical exports. Imports plummeted 23.8 percent on the month. The sharp decline was partly due to the lower global commodity/energy prices.

November producer price index was up 2 percent when compared with last year. Seasonally adjusted PPI dropped 3.1 percent after sinking 1.7 percent in October. The easing reflects the recent correction in energy and commodity prices. Lower input costs in the industrial/ manufacturing sectors in turn suggest easing pipeline inflation pressure for general consumer goods prices going forward, hence leaving notable room for comprehensive stimulative macro policy support to help ensure stable economic growth.

November consumer price index was up 2.4 percent when compared with the same month a year ago after climbing 4 percent in October. Food prices were up 5.9 percent — the smallest gain in almost two years. Non-food prices increased 0.6 percent, the least in almost four years. Telecommunications prices tumbled 19 percent, pork fell 9.3 percent and garments declined 2 percent.

Americas

Canada

October merchandise trade surplus was C$3.8 billion and down from the revised C$4.3 billion surplus in September. The latest deterioration reflected a 2.5 percent monthly gain in nominal exports that was easily more than offset by a 4.1 percent bounce in imports. However, in volume terms both sides of the balance sheet contracted. The near 11 percent fall in the spot value of the Canadian dollar over the month had an important inflationary impact on import prices which climbed 8.0 percent from September. Within the monthly rise in total nominal exports, there were strong advances in machinery equipment (5.7 percent), agriculture & fishing products (6.1 percent) and forestry products (3.4 percent). Energy exports were up 1.8 percent on the month. The only decline was in automotive sector (2.4 percent). The increase in imports was dominated by a surge in energy products (22.3 percent). Other increases were much more modest but still significant in forestry products (3.8 percent), machinery & equipment (3.2 percent), agriculture & fishing products (2.0 percent) and other consumer goods (2.4 percent). The only decline of note was in automotive products (1.7 percent). Exports to the U.S. rose 1.7 percent but with imports jumping 6.1 percent, the bilateral surplus narrowed from C$8.2 billion to C$7.3 billion.

Bottom line

Last week the focus was on the travails of the auto rescue package as it torturously made its way through the House of Representatives only to be defeated in the Senate. But at this writing although there has been no confirmation, it appears that the Treasury will help the three automakers until the new Congress convenes after the first of the year.

Economic data continued to show the corrosiveness of the economic downturn just about everywhere. Exports suffered not only in the U.S. but in China as well. And industrial production continues to be on a downward trajectory in Europe. The Swiss National Bank, Bank of Korea, Central Bank of the Republic of China (Taiwan) and the Reserve Bank of India all lowered their policy interest rates.

Coming up this week are the policy meetings of the Federal Reserve and the Bank of Japan. The FOMC is expected to lower its fed funds target rate by 50 basis points to just 0.5 percent while the BoJ is expected to leave its 0.3 percent target rate unchanged. This puts U.S. rates on a par with Switzerland at 0.5 percent and slightly above that of the Bank of Japan. And in Japan, the all important Tankan Survey will tell us how bad the recession there really is.

Looking Ahead: December 15 through December 19, 2008

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