Global Markets

Equities wobbled as the month of September began. The list of worries was long — investors fretted over the strength of the recovery and whether it had legs, the health of the banking sector, the strength of the recovery in China — and the list goes on. The week began on a down note but then investors vacillated — they were sufficiently unsure of what their next move should be given positive economic data in Europe and Australia. Data this week suggested the global economy is improving with an index of U.S. manufacturing expanding for the first time in 19 months and a similar gauge in the eurozone rising to its highest in 14 months.

Most stock indexes were down — but historically, September has been the trickiest month for investors, so the retreat isn't a surprise. Investors fled cyclical assets for the safety of gold and government debt amid worries that stock markets would give back more of their summer gains. Global equities were broadly lower after poorly received U.S. data added to the uncertainty over the economic outlook. Global equities have faltered after a euphoric six-month rally led by financials as investors suffered another round of concerns about banks.

U.S. Treasury Secretary Timothy Geithner and ECB president Jean Claude Trichet are among Group of 20 finance officials at Friday’s meeting in London who say that it is too soon to unwind stimulus. While data are confirming that the slump is easing, policy makers are unwilling to cut spending, begin unwinding their record low interest rates and curtail debt purchases.

OECD revises its outlook up again

In its interim quarterly review, the Organization for Economic Cooperation and Development (OECD) predicts a “modest” recovery for the world’s leading industrialized economies. The combined economy of the Group of Seven nations is expected to contract 3.7 percent this year less, than the 4.1 percent projected in June. That would still be the worst recession since World War II. OECD warned that weakness in corporate profits, hiring, incomes and housing markets will slow the subsequent rebound. The organization did not revise its 2010 growth forecast — it will wait until November to do that.

The OECD said that the major central banks should delay raising interest rates well into next year at the earliest and communicate their intentions so as to restrain borrowing costs in markets. And while governments don’t need to inject extra fiscal stimulus, they should deliver on their previous plans. The organization said that credible exit strategies and fiscal consolidation plans should be formulated now even if they are implemented later.

Not all estimates were revised. For example its estimate of a 2.8 percent contraction in the U.S. this year was unchanged but it said that the eurozone would shrink 3.9 percent rather than 4.8 percent. Japan will slide 5.6 instead of 6.8 percent while Germany’s outlook improved the most — it will contract 4.8 percent or 1.3 percentage points less than the June estimate. However, OECD said that the UK would contract 4.7 percent, worse than the original decline of 4.3 percent.

G20 plans for stimulus exit

World financial leaders meeting in London began planning for the withdrawal of emergency support for the global economy even though they warned that the crisis is not over. The U.S., UK, France and Germany called for work to start to spell out how the successful policy response to the economic crisis could be reversed.

Global Stock Market Recap

Europe and the UK

Stocks lost ground last week even though economic data proved to be mostly positive. The FTSE was down three of four days (markets were closed on Monday for a holiday) while the DAX and CAC were down four of five days. Their Friday gains were just not good enough to offset losses incurred earlier. For most of the week, investors deferred action until the results of Friday’s U.S. employment report were known. The selling of risk reflects the nervousness of investors about the sustainability of global economic recovery.

There was an abundance of new economic news. For example, the Markit service sector PMI which covers about 40 percent of the economy recorded its highest reading since September 2007 and showed that the economy was on track to return to growth in the third quarter. And while the eurozone manufacturing PMI is still below the 50 breakeven point, it was at its highest level in 17 months. The downside as it is everywhere is the continuing climb in the unemployment rate. It threatens to continue its dampening effect on the consumer sector.

In the UK, the news was mixed. While the manufacturing PMI retreated from July, the service sector which accounts for most of the economy, expanded at an increased rate in August, the fourth consecutive month of growth. The sector’s purchasing managers’ index reached its highest reading since September 2007 at 54.1.

ECB offers a revised forecast

As expected, the ECB decided to leave its key interest rate unchanged at 1 percent. Analysts anticipate that the next move, albeit several months away, will be an increase. Data and anecdotal evidence since the August meeting have continued to paint a brighter picture of the economy and have helped to allay deflationary fears. One of the biggest surprises came from the eagerly anticipated second quarter GDP data, which showed that the region contracted by only 0.1 percent on the quarter while Germany and France managed to exit their recessions and grow 0.3 percent. Meanwhile, inflation looks to have troughed in July after rising sharply to a decline of 0.2 percent on the year in August.

Since the governing council met in August, economic data has shown signs that a recovery is taking place in several member states. Both Germany and France surprised with positive growth in the second quarter while for the eurozone as a whole GDP contracted 0.1 percent on the quarter. However, on the downside is rising unemployment and the expiry of numerous government rescue packages which could dampen the expansion going forward.

In his post meeting press conference, ECB president Jean Claude Trichet sounded a note of caution, forecasting only a very gradual recovery and hinting that growth could be thrown into reverse again. He said that although strategies for unwinding emergency measures could be discussed, it was no time for exit yet. Mr Trichet highlighted a decision that unlimited one-year loans would again be offered to the eurozone banking system at its main interest rate, in an operation scheduled for later this month. The first such offer in June helped to reduce interest rates as it pumped in €442 billion in 12-month liquidity.

The latest ECB forecasts showed eurozone gross domestic product contracting at a rate in a range with a mid-point of 4.1 percent this year and then growing 0.2 percent in 2010. Economic indicators pointed to the recession being followed by a period of stabilization and very gradual recovery. The eurozone would benefit from an export recovery and economic stimulus measures as well as from stock-building. Risks, however, are posed by the weakened banking system and by volatile commodity prices. The ECB’s forecasts also noted that “in view of the widespread need to restructure balance sheets, global growth is projected to remain sluggish”.

Asia/Pacific

Equities began the week on a sour note, with all indexes (except the Taiex) declining, pulled down by the Shanghai Composite’s formidable 6.7 percent plunge. However, many worked off the losses incurred and were up on the week. The Shanghai ended the week virtually unchanged while the Sensex, despite Friday’s 1.9 percent gain, was only able to mitigate the losses of the first four days of the week. Concerns about stock valuations in addition to the sustainability of the recovery made the traders pause for profit taking after a summer of robust gains.

In Japan, the election outcome did not inspire an equity rally. Rather the Nikkei and Topix were down four of five days to end the week down 3.3 percent and 3.5 percent respectively. Part of the problem is the rising yen which cuts into exporters’ profits. The landslide victory of the Democratic Party of Japan (DPJ) and the better than expected industrial output data initially buoyed stocks on Monday. However, the yen was up strongly against the U.S. dollar and this prompted investors to sell instead. Japan's July industrial output was up 1.9 percent, recording the fifth straight monthly increase. But yet another report, this one on retail sales, showed a struggling consumer. Domestic retail sales sank 2.5 percent on the year marking the 11th straight month of decline.

The Hang Seng was volatile to say the least swinging from losses of 1.9 percent and 1.8 percent to a gain of 2.8 percent. Despite this, the index managed to end the week with a 1.1 percent gain. A day after Monday’s plunge of 6.7 percent, the Shanghai Composite regained its positive vigor after a robust PMI report showed a reading of 55.1, up from 52.8 in the previous month. The index, after plunging on Monday, rallied for four days on speculation that the government would introduce measures to support the market. And on Friday after the Shanghai market closed, China unveiled a draft proposal to raise the limit on foreign investment in mainland shares. Monday’s 6.7 percent swoon was triggered by fears that a slowdown in bank lending, together with imminent new share listings, would drain liquidity from the market.

The Reserve Bank of India said that this year’s awful monsoon season and food shortage could push inflation above its 5 percent target by the end of the year. The RBI has been caught by rising food prices at a time when any sudden increase of interest rates risks hitting a delicate economic recovery. The price of sugar, for which India is the world’s second biggest producer and largest consumer, reached a 28-and-a-half year high on Tuesday on continued supply concerns.

Reserve Bank of Australia

As expected the Reserve Bank of Australia left overnight cash target interest rate at 3 percent where it has been since April even as the economy strengthens. Just last month, the RBA revised its forecast for the economy to contract this year and instead predicted that it would expand 0.5 percent. The bank expects growth will accelerate to 2.25 percent in 2010 and 3.75 percent in 2011. While the economy slowed, it did not suffer a recession. Rather, the economy contracted only in the fourth quarter of 2008.

Since then, consumer and business sentiment have improved sharply to the highest levels in two years. Sentiment is also being buoyed by the government spending another A$22 billion on upgrading roads, schools, hospitals and railways. Second quarter gross domestic product which was released a day after the RBA meeting showed that the economy grew by 0.6 percent both on the quarter and on the year.

Many analysts expect that the RBA will be the first of the industrialized countries central banks to raise interest rates. In fact, analysts expect that the RBA will raise the benchmark rate by 25 basis points as soon as next month followed by similar increases in December and February. But others disagree pointing out that the Board, in its brief post-meeting statement, was decidedly unhawkish. This is in contrast to the U.S., UK and Europe where it is unlikely that central banks will begin increasing borrowing costs anytime this year. On Wednesday, Australian Treasurer Wayne Swan told markets that without government stimulus the Australian economy would have been in recession. He warned that the government would begin to remove its support in the fourth quarter.

Currencies

The dollar was down against the yen, pound sterling and the Australian and Canadian dollars. The dollar was virtually unchanged against the euro. The Australian currency benefited from better than anticipated second quarter growth while analysts anticipated that the Reserve Bank of Australia could be the first of the major industrialized countries to increase its policy interest rate.

The yen hit its highest level in nearly two months against the dollar as weak global stocks dented risk appetite and heightened safe haven demand for the currency. The yen was also given a boost after the landslide general election victory of Japan’s Democratic party (DPJ). The election win by the DPJ raised hopes it could come good on pledges to encourage consumer spending in an effort to lift the country out of its deflationary spiral. The yen performed strongly against commodity-linked currencies as a poor performance from global equities raised fears over global growth in spite of a series of relatively upbeat economic data releases across the globe.

The euro was mixed against other majors after the European Central Bank left interest rates unchanged at 1 percent again. In his post-meeting comments, ECB President Jean Claude Trichet said that the eurozone economic recovery is expected to be uneven, given the temporary nature of some of the supporting factors. Although the decision was expected, the euro edged down after Mr Trichet offered no sign that the central bank would exit from its loose monetary policy stance. Mr Trichet said the eurozone faced a very gradual recovery and added it was too early to end exceptional measures to boost the region’s economy.

Selected currencies — weekly results

Indicator scoreboard

EMU

August flash harmonized index of consumer prices was down 0.2 percent on the year after dropping 0.7 percent in July. The acceleration was a reflection of higher rates in all of the larger EMU members that provided data. German inflation returned to zero from minus 0.7 percent while Spain registered a 0.6 percentage point gain to minus 0.8 percent. At the same time, Italy was up 0.2 percent. As with all flash releases, detail was not available.

August manufacturing PMI hit a 14-month high as the headline index climbed 1.9 points to 48.2. Production increased for the first time in 15 months with particularly strong gains in France and Germany. Even so, Italy and Spain both recorded declines with the drop in the former disappointingly exceeding its fall in July. New orders were up for the first time since March 2008 with most member states benefitting, although Italy once again missed out and posted another decline. Export orders stabilized on average but Germany saw a sharp improvement with overseas demand growing at its fastest pace in 17 months. Stronger economic activity in most member states failed to translate into higher employment levels and jobs losses were again a feature. Employment has now fallen in each of the last 15 months.

July unemployment hit a new 10-year high as the jobless rate ticked up to 9.5 percent. The number out of work rose by 167,000 to 15.09 million. Unemployment rates increased in most EMU states although Germany (7.7 percent), Austria (4.4 percent) and Portugal (9.2 percent) were unchanged and there were declines in Belgium (8.0 percent from 8.1 percent) and Slovenia (6.0 percent from 6.1 percent). In France, joblessness climbed 0.2 percentage points to 9.8 percent and in Spain, a further 0.3 percentage points to 18.5 percent.

Second quarter gross domestic product contracted an unrevised 0.1 percent on the quarter and dropped 4.7 percent when compared with a year ago. Private consumption was up 0.2 percent on the quarter but down 0.8 percent on the year. Government consumption was up 0.4 percent and 2.2 percent on the year. Gross fixed capital formation dropped another 1.3 percent and was down 10.9 percent on the year although this still compared very favorably with a 5.3 percent slump at the start of the year. At the same time, inventories subtracted 0.7 percentage points from the bottom line, much in line with their 0.8 percent negative impact in the first quarter. Exports dropped 1.1 percent on the quarter and 17.1 percent annually but with imports declining 2.8 percent and 14.4 percent on the year, net foreign trade added 0.7 percentage points to real GDP growth.

July producer prices excluding construction dropped 0.8 percent and were down a record 8.5 percent on the year. The decline was dominated by energy prices which were off 3.1 percent from June. Excluding this sector, the PPI would have been flat on the month and down 4.0 percent from a year ago. Among other sectors, prices were unchanged on the month in intermediates and durable consumer goods. Capital goods declined 0.1 percent while nondurable consumer goods edged up just 0.1 percent.

July retail sales were down 0.2 percent and were down 1.8 percent on the year. The latest monthly drop was led by the food, drink & tobacco sector where purchases dropped a disproportionately large 0.5 percent. Excluding food and gasoline, sales were flat. Across the region performances were mixed. At the most optimistic end, sales were up 1.4 percent in Belgium, 1.3 percent in Slovakia and 1.1 percent in Austria. However, by contrast demand slumped 1.2 percent in Spain and 0.1 percent in Slovenia. Germany posted a 0.7 percent gain.

Germany

July retail sales excluding autos were up 0.7 percent but were 1.0 percent lower than a year ago. This was the first monthly gain since April and only the second increase in 2009. Over the first seven months of the year sales were down 2.0 percent in real terms. The non-food sector has suffered the most with purchases down 1.5 percent in the year to July. By excluding autos, this report provides a somewhat misleadingly weak picture of overall consumer spending since the government's car-scrapping scheme has had a significant impact on demand in the auto sector.

August number of jobless declined by 1,000 leaving the unemployment rate unchanged at 8.3 percent. The number out of work stood at 3,481,000. However, once again the data were distorted by accounting changes which biased the headline figures down. Adjusting for these effects, the jobless total was up an estimated 25,000 following increases of 30,000 in June and 50,000 in July. Vacancies fell 3,000 after a 1,000 drop in June.

France

Second quarter unemployment climbed to around 2.6 million. As a result, the jobless rate jumped by 0.6 percentage points to 9.1 percent — its highest level since the beginning of 2006. At the same time, the unemployment rate in the first quarter was revised down a couple of notches to 8.5 percent. Including overseas territories, the total unemployment rate rose to 9.5 percent. The figures would have been a good deal worse but for government incentives aimed at encouraging firms to retain workers through heavily subsidizing reduced working hours. INSEE has forecast that unemployment will rise by more than 700,000 this year to take the metropolitan rate to 10.1 percent in the fourth quarter, its highest reading in 18 years.

Italy

June seasonally adjusted merchandise trade deficit was €0.6 billion thanks to a 1.1 percent decline in exports and a 1.7 percent increase in imports. Weakness was prominent in most sectors. Within overall exports, consumer goods fell 11.7 percent on the year, investment goods dropped 21.9 percent, intermediates declined 24.0 percent and energy was down fully 37.0 percent. Imports followed much the same pattern although consumer goods bucked the trend by holding steady at their year ago level. Investment goods fell 15.2 percent, intermediates were down 33.8 percent and energy dropped 16.7 percent.

June retail sales were down 0.4 percent and were down 0.8 percent when compared with last year. Food sales edged down by 0.1 percent from May. The key non-food sector saw demand contract 0.5 percent. Over the second quarter as a whole, total sales fell 0.4 percent within which non-food purchases dropped 0.6 percent.

Asia/Pacific

Japan

July industrial production was up once again but at a decelerating rate as the impact of special policy measures begin to fade. Output was up 1.9 percent but was down 22.8 percent when compared with last year. This was the fifth consecutive monthly increase. METI expects August output to be up 2.4 percent and up 3.2 percent in September. Industries that mainly contributed to the increase were transport equipment, steel and iron and other manufacturing. Commodities that mainly contributed to the increase were both large and small passenger cars as well as large trucks. Shipments were also up, increasing by 2.3 percent.

July retail sales dropped 2.5 percent when compared with the same month a year ago. Analysts had expected sales to sink by 3.3 percent. Aside from already weak sales, an unseasonably wet summer put a damper on spending on hot weather items such as air conditioners, while the effect of government cash handouts ended in July. Large scale retail stores saw their sales plummet an adjusted 8.4 percent on the year in July. Rising unemployment and shrinking income have put a pall on consumer spending.

Australia

Second quarter gross domestic product was up 0.6 percent when compared with the previous quarter and up 0.6 percent when compared with the previous year. This was the second consecutive quarter of growth after contracting in the fourth quarter of 2008. Both household and government expenditures increased 0.8 percent on the quarter. They were up 1.7 percent and 2.6 percent respectively on the year. The main contributors to growth in the household sector were food (up 1.1 percent) and furnishings & household equipment (up 1.9 percent). The sole negative contributor was electricity, gas & other fuel (down 0.7 percent). Gross fixed capital formation increased 0.8 percent on the quarter. Private business investment increased 1.9 percent, largely reflecting an increase in machinery and equipment investment (up 5.6 percent), and a decline in non-dwelling construction investment (down 1.6 percent). Dwelling investment dropped 5.5 percent due to a decline in both new and used dwellings (down 2.9 percent) and alterations and additions (down 8.3 percent). The GDP chain price index was down 2.2 percent in June quarter 2009.

July merchandise trade deficit was A$1,556 million, an increase of A$1,018 million on a revised deficit of A$538 million in June 2009. Exports dropped 1.4 percent while imports were up 3.5 percent. Exports of other goods sank by 22 percent while the non-monetary gold component dropped 27 percent. Rural goods were also down, dropping by 4 percent with cereal grains & cereal preparations down 17 percent. Services edged down by 1 percent. These declines were partly offset by non-rural goods which were up 1 percent mainly due to a 5 percent increase in the metal ores & minerals component. On the import side, intermediate & other merchandise goods were up by 7 percent with the fuels & lubricants component up 21 percent. Capital goods imports were up 5 percent while consumption goods were up a modest 2 percent. Services edged up 1 percent.

Americas

Canada

Second quarter gross domestic product was down 0.9 percent and was down 3.2 percent when compared with last year. The quarterly decline was led by the goods producing sector where output dropped 3.6 percent. Manufacturing sank 3.8 percent while energy swooned by 4.2 percent and construction declined 2.1 percent. The service sector expanded 0.3 percent, mainly thanks to a 4.0 percent jump both in finance, insurance & real estate and in information & communications technologies. Retail trade edged up 0.2 percent but transportation and warehousing fell 0.9 percent. Personal consumption was up 0.4 percent on the quarter, a gain more than matched by government consumption (0.8 percent). By contrast gross fixed capital formation contracted 1.5 percent, a good deal less than the 6.3 percent drop in the first quarter. However, by far the steepest decline was posted in the foreign trade sector where exports slumped some 5.2 percent, more than twice the rate of decline in imports (2.2 percent).

June monthly gross domestic product edged up 0.1 percent on the month and was down 3.6 percent when compared with last year. The June uptick was led by services where activity climbed 0.4 percent on the month. By contrast, industrial production was down 0.6 percent within which manufacturing contracted 0.7 percent following a 1.9 percent slump May. Wholesale trade was up a strong 1.3 percent and the energy sector saw output rebound 0.9 percent.

August employment was up 27,100 however the unemployment rate edged up to 8.7 percent from 8.6 percent in July. New jobs last month were concentrated in part time employment (30,600) as full time positions declined a further 3,500. The jobs were in the private sector (39,200) while public sector payrolls were down (11,500). Overall the number of employees rose 37,700 while self-employment declined 10,600. The goods producing sector continued to shed jobs with a 6,800 drop reflecting an additional 17,300 drop in manufacturing employment that easily offset a 12,100 advance in construction. Utilities and agriculture fell 1,300 and 3,700 respectively but natural resources were up 3,300. By contrast service sector employment posted a solid 33,900 increase. Within this, trade jobs were up 21,200 and finance, real estate & leasing gained 17,500. Professional, scientific & technical services also advanced 10,400 and information, culture & recreation rose 9,200. On the downside, there were more losses recorded in business, building & other support services (32,700) and in education (16,700). The increase in the jobless rate reflected a 21,900 rise in the number out of work to 4,396,800, a jump of some 43.2 percent from a year ago. The participation rate edged up 0.1 percentage points to 61.4 percent but the employment rate was unchanged at 61.4 percent. A key factor behind the recent rise in joblessness has been school leavers unable to find work. The unemployment rate for students hit 16.4 percent in August, up some 5 percentage points from a year ago and the highest August rate on record.

Bottom line

Equities were mixed as September began. Historically it has been a difficult month for equities and indeed it got off to a rocky start. Investors wavered as they sought to balance risk with concerns about future earnings and growth. Most of the new economic data released were positive — but despite this, investors wavered before ending the week on a positive note.

Both the Bank of Canada and Bank of England meetings are expected to be non-events with policy interest rates remaining at their current levels of 0.25 percent and 0.5 percent respectively. In the U.S., the 12 Federal Reserve District Banks will release the Beige Book which gives anecdotal evidence about the state of their respective economies. And in the U.S., summer truly ends with the Labor Day holiday on Monday.

Looking Ahead: September 7 through September 11, 2009

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