Global Markets

Equity investors were upset last week because some economic data did not meet expectations. Most global indexes followed here were down on the week, despite healthy gains in September and for the third quarter. One needs to take a step back however. At this stage of a business cycle, data often pause in direction, most likely this time before they continue to recover again. But the critical question is how much of the nascent recovery is due to the huge injections of stimulus and how much is really self-sustainable. Investors’ confidence has not recovered fully and they remain tremulous of any change. Remember — one month’s data does not make a trend. For example, there was the slight dip in the U.S. ISM manufacturing index. It remained in positive territory but just didn’t shoot up as anticipated. Investors quickly became risk averse and sold equities. Central bankers of all stripes have repeatedly said that this recovery would be slow. And so it is proving.

But last week’s dip in equities had other factors in play other than disappointing economic data. With the end of the third quarter Wednesday, investors sought to profit from the quarter’s run up by almost all indexes followed here. And pre-earnings anxiety probably set in. The graph on the left compares the overall performance of five major equity indexes at the end of the third quarter. The indexes have steadily recovered from their early March lows — albeit with a hiccup in July. The Dow increased by the least of the five — only 10.7 percent while the Nasdaq gained the most — 34.6 percent. The Nikkei was up 14.4 percent while the FTSE increased by 15.9 percent and the DAX, by 18 percent.

Third quarter gains ranged from 21.8 percent for the Jakarta Composite to a mere 1.8 percent for the Nikkei. All indexes save the Topix and the Shanghai Composite which declined, were up in double digit range. The FTSE scored its highest quarter gain in its history which dates back to 1984. And the three U.S. indexes were up about 15 percent on the quarter.

Global Stock Market Recap

Selected Global Stock Market Indexes - 2009 Quarterly Results

Europe and the UK

After enjoying a vigorous third quarter and September — the FTSE, DAX and CAC swooned last week. The indexes were down four of five days. Despite declining the last two days of the month, the FTSE was up 4.6 percent while both the DAX and CAC were up 3.9 percent. Their quarterly gains were very impressive. The FTSE was up 20.8 percent, the CAC gained 20.7 percent and the DAX, 18.0 percent. For the FTSE it was its best three months since it was established in 1984. The rally was fuelled by government stimulus and liquidity programs, low interest rates and renewed investor optimism about the economic recovery. Since in early March when the global equity rally began the index gained 47.3 percent.

The last week of the month is usually a heavy one for new data in Europe. But the indexes here seemed to trade more on U.S. data. For example, the indexes declined on Thursday after disappointing reports on U.S. manufacturing and the labor market renewed worries about the pace of recovery there. In reality the data were not bad — they just did not meet the perhaps overly optimistic consensus forecasts. And in some cases, jittery investors sold stocks on data that are of minor importance.

Asia/Pacific

Four of the 13 equity indexes followed here managed to gain last week — the Sensex was up 2.6 percent while the Jakarta Composite gained 1.4 percent, the Taiex was up 0.9 percent and the SET edged up 0.4 percent. The heaviest declines were recorded at the beginning and the end of the week. Many indexes lost ground on Thursday and Friday after the close of the third quarter with the heaviest losses incurring in Japan. The declines in part can be traced to post-quarter profit taking and a distinctly negative reading of economic data. On the week, the Nikkei and Topix each were down 5.2 percent.

The Topix was down in the third quarter (2.1 percent) while the Nikkei climbed a relatively anemic 1.8 percent on the quarter in stark comparison with other major equity indexes. Only the Shanghai composite lost steam in the quarter, dropping 6.1 percent. Tokyo shares, which are very sensitive to global economic conditions, were down in spite of improving U.S. data, which generally benefits Japanese exporters. Exporters have been hurt by the strength of the yen which diminishes their competitiveness in key markets such as the United States. September’s losses for the Topix wiped out July and August gains — the index had been up for six consecutive months until then. Financial institutions, in particular, took a beating, with the Topix banking sub index losing 16 percent in the month. This is a stark contrast with western markets, where banking shares had an excellent quarter. Also weighing on equities are the uncertainties about the new administration’s policies including talk about a loan repayment moratorium and contradictory statements about the yen.

As usual, the last week of the month brings a deluge of Japanese economic data. The Tankan, easily one of the most important indicators, showed that although sentiment improved among Japanese businesses it remains at a very low level. For that reason, there seems little prospect of an increase in capital expenditures going forward. The Tankan showed that capital spending plans by major manufacturers, the main engine for sustainable economic growth, are expected to drop 25.6 percent from a year earlier this fiscal year to March 31, 2010, revised down from a decline of 24.3 percent in the previous survey.

Four indexes in the area were up over 20 percent in the third quarter. The Jakarta Composite was up 21.7 percent while the Kospi was up 20.4 percent and both the SET and All Ordinaries were up 20 percent. In September, the Taiex was up 10 percent, closely followed by the SET, up 9.8 percent and the Sensex, which was up 9.3 percent.

Currencies

The dollar was up against the euro and almost unchanged against the yen on the week. However, the U.S. currency was buffeted during the week as economic data were weaker than analysts’ anticipated. For example, the dollar was down initially on Friday after a disappointing employment report that reinforced speculation that the Federal Reserve would continue to hold borrowing costs near zero next year. But in intraday trading Friday, the U.S. dollar hit its strongest level against the euro in almost a month but declined later in the day. The same pattern of initial euro declines followed by gains occurred after the September 4 payrolls report. Over the past few months, the dollar has tended to appreciate on negative U.S. economic reports as investors seek safety in the world’s main reserve currency. But that could be changing as bad news cements expectations for the Fed to keep its interest rates low while other central banks may start to increase interest rates.

The euro fell after European Central Bank president Jean Claude Trichet said “disorderly movements” in exchange rates have “adverse implications” for economies. The euro rallied 2.1 percent versus the dollar in September in its third straight month of gains. The euro reached $1.4844 on Sept. 23, the highest level in a year. Mr Trichet also said that he backed the argument for a strong dollar saying that it was extremely important for the global economy.

Analysts continue to warn that the data will show that the path to recovery is unlikely to be a straight line and investors must overcome some disappointments along the way. And central bankers have been warning of a slow recovery from recession as well.

Selected currencies — weekly results

Indicator scoreboard

EU

September economic sentiment climbed to 82.8 from 80.8 in August. The gain reflected generally stronger morale across the major sectors with the exception of retail (down 1 point to minus 15). The main advance was seen in the consumer area (up 3 points to minus 19) ahead of services (up 2 points to minus 9) and industry (up 1 point to minus 24). Construction also edged a notch firmer (minus 31). All indexes nonetheless remain at historically weak levels. Regionally, the performance was quite mixed particularly among the larger EMU states with both France and Germany seeing gains and Italy and Spain declines.

EMU

August jobless rate edged up to 9.6 percent from 9.5 percent in July. The rate now stands at its highest level since March 1999 and reflects a monthly 165,000 increase in the number of people out of work. Over the year to August, unemployment climbed some 3.224 million to a total of 15.165 million. Job loses were significant in most EMU states although rates held steady in Germany (7.7 percent), Slovenia (5.9 percent) and Finland (8.7 percent) and dipped 1 tenth to 7.2 percent in Malta and by the same amount to 4.7 percent in Austria. Spain remains at the top of the unemployment pack with a rate of 18.9 percent, up 0.4 percentage points from July.

September flash harmonized index of consumer prices dropped 0.3 percent on the year. September was the fourth month in a row that inflation has been in negative figures and although data provided in the flash estimate are limited, national figures suggest that a retracement in heating oil costs was a major factor.

September manufacturing PMI climbed to a reading of 49.3 — a 16 month high — from 48.2 in August. It remains below the key 50 mark that separates growth from decline. The latest rise reflected the strongest increase in output since May as well as the fastest growth in orders since November 2007. Export orders however, registered only a marginal gain for the second consecutive month while stocks of finished goods continued to be unwound at a rapid pace leaving the new orders/inventory ratio steady at August's 32-month high. Employment again declined, albeit at a slower pace than seen earlier in the year and job losses were recorded in all the participating countries. September data point to a mixed pace of recovery in manufacturing across the region. On the bright side, the PMI in France jumped 2.2 points to 53.0 and in Germany edged up 0.4 points to 49.6 and so only just shy of the growth threshold. However, despite a 3.4 point bounce in its headline index (47.6) Italy remains well below 50 and in Spain the activity index actually dropped 1.4 points to a lowly 45.8.

August producer prices excluding construction were up 0.4 percent but remain 7.5 percent below last year’s level. Energy costs jumped 1.5 percent but are down 16.3 percent on the year. Excluding this category, the PPI was up just 0.1 percent from July and down 4.2 percent on the year. Other sectors were much better behaved — only intermediates (0.3 percent) posted a gain of any size. Capital goods, consumer durable and nondurable goods were all unchanged on the month. Regionally price gains were quite widespread with just Ireland (0.6 percent), Slovakia (0.2 percent) and Slovenia (0.1 percent) registering monthly declines. Most other members saw moderate rises although there were markedly above average increases in Greece (1.6 percent) and Belgium (0.9 percent).

Germany

September joblessness declined by 12,000 to 3,461,000 and in the process shaved 0.1 percentage point off the unemployment rate which now stands at 8.2 percent. However, recent data have been distorted by changes to methodology. Without these effects unemployment would have climbed by 10,000 following increases of 18,000 and 13,000 in July and August respectively. The apparent resilience of labor demand seems to reflect the impact of government schemes designed to keep employees on the payroll working with reduced hours. Some 1.5 million workers are on short-time hours at the moment.

August retail sales excluding autos dropped 1.5 percent and were down 2.6 percent when compared with last year. The sectoral breakdown is only available on an annual growth rate basis with food, drink & tobacco sales down 1.0 percent while non-food purchases were down 3.5 percent. Within the latter, sales were particularly soft in mail order (down 9.2 percent), clothing & shoes (down 5.0 percent) and in the other goods area (down 5.5 percent). The only increase was in pharmaceuticals & cosmetics (2.5 percent).

France

August producer price index was up 0.4 percent but was down 8.5 percent on the year. Prices were supported by a 6.3 percent monthly jump in the coking & refining sector, although steep increases in 2008 still ensured an annual drop of 39.2 percent. Prices were down on the month for food, drink & tobacco (0.4 percent) and in electrical equipment & machinery (0.3 percent). Transport equipment and mining, energy & water were unchanged on the month. Overall manufacturing registered a 0.5 percent monthly increase and a 9.1 percent drop from a year ago.

Italy

August producer prices were up 0.6 percent but declined 7.8 percent when compared with last year. Among the main market sectors, the sharpest monthly increase was seen in energy (2.6 percent) which easily dominated the other categories. Consumer goods prices were up just 0.2 percent (nondurables 0.3 percent) as were capital goods while intermediates were unchanged.

United Kingdom

Final reading of second quarter gross domestic product was to a decline 0.6 percent on the quarter (from a decline of 0.7 percent). On the year, the drop was unrevised at 5.5 percent, the worst performance since records began in 1955. Among the main output sectors, services were down 0.6 percent on the quarter and industrial production declined 0.5 percent. Construction declined 0.8 percent. Within the expenditure components, household spending dropped a quarterly 0.6 percent while gross fixed capital formation slumped 5.2 percent. A 0.6 percent increase in government spending helped to limit the fall in total domestic expenditure to 0.8 percent. Inventories continued to be pared aggressively while a faster pace of decline in imports than exports saw the real trade balance add 0.2 percentage points to the bottom line.

Asia/Pacific

Japan

August consumer prices were up 0.3 percent but down 2.2 percent for the second month when compared with last year. Excluding only fresh food, the index was unchanged on the month but down 2.4 percent on the year. Excluding both food and energy, the index was up 0.1 percent and down 0.9 percent on the year. All major categories with the exception of education and medical care were lower on the year. Prices most affected by energy costs which have dropped precipitously since last year were those that declined the most. Fuel, light & water sank 9.1 percent on the year while transportation & communication dropped 7.6 percent. Reading and recreation were down 3.0 percent while furniture & household utensils drooped 3.1 percent.

August industrial production was up for the sixth consecutive month — gaining 1.8 percent. However on the year, output was down 18.7 percent. Steel & iron, transport equipment and electrical parts & devices were up on the month. Commodities that were up included cellular telephones, semiconductor products machinery and small passenger cars. According to METI’s survey, output is expected to increase 1.1 percent in September and 2.2 percent in October. Despite the METI forecast, analysts continue to be concerned that the increase experienced over the last six months will fade as consumers continue to keep their hands in their pockets and limit purchases at home and abroad.

Third quarter Tankan for large manufacturers improved to a reading of minus 33 from minus 48 in the second quarter. Confidence remains at a very low level. The small manufacturers’ index edged up to a reading of minus 52 from minus 57. Many analysts are focusing on the small manufacturing sector as a sign of a more pervasive recovery. Small manufacturers generally focus on the domestic rather than the export sector of the economy. The Tankan continued to show a big gap in the improvement in sentiment between export-oriented manufacturers and other firms. Business confidence also improved at major non-manufacturers as well as medium-sized manufacturers and non-manufacturers but the degree of improvement was limited as they haven't benefitted as much from recovering exports. The Tankan results also showed that Japanese firms feel they continue to have excess production capacity and too many employees, suggesting that business managers will remain especially cautious about their capital spending and hiring plans.

August retail sales dropped for the 12^th month in a row when compared with the previous year. Sales were down 1.8 percent after sinking 2.4 percent in July. This continues to underline the weak consumer sector suffering from rising unemployment and despite large infusions of stimulus from the government. Large scale retailers saw their sales sink 6.8 percent after slumping 8.4 percent in July.

August unemployment rate declined to 5.5 percent from 5.7 percent in July. The number of employed persons declined by 1.09 million or 1.7 percent from the previous year to 62.96 million. The employment rate declined 1 percent on the year to 57 percent. The number of unemployed increased by 890,000 or 32.7 percent from the previous year to 3.61 million.

August household spending for households with two or more people surprised, rising by 2.6 percent on the year. Spending had declined in both June and July. On the year, spending was up for most categories with the exception of clothing & footwear (down 10.2 percent) and housing (down 0.4 percent). Furniture & household utensil purchases jumped 13 percent while education was up 11 percent on the year. Culture & recreation was up 10 percent on the year. Households have been lured by government initiatives to buy eco friendly products and heavy price declines across most major consumables. Worker household spending was up 1.2 percent on the year.

Australia

August retail sales were up 0.9 percent after dropping the two previous months. On the year, retail sales were up 5.8 percent. Food retailing was up 1.8 percent while household goods were up 0.9 percent. Department stores gained 2.4 percent and cafes, restaurants & takeaway food services were up 1.9 percent. Other retailing declined by 3.0 percent while clothing, footwear & personal accessory retailing was unchanged on the month. Unadjusted sales for August dropped 1.1 percent. Chains and other large retailers dropped 1.5 percent and the estimate for 'smaller' retailers decreased 0.3 percent.

Americas

Canada

July monthly gross domestic product was unchanged on the month and down 4.6 percent on the year. Strikes by 24,000 public sector workers in Toronto contributed towards a 1.6 percent drop in activity in municipal public administration but this is unlikely to have hit the bottom line by more than 0.1 percentage points. The stagnation in July masked a solid 0.6 percent monthly advance in manufacturing output, itself largely predicated upon a rebound in the auto industry. Even so, overall goods producing output was off 0.4 percent courtesy of declines in agriculture, forestry & fishing (1.6 percent), mining & oil & gas extraction (1.5 percent), utilities (2.4 percent) and construction (0.2 percent). Services edged up 0.1 percent led by wholesale trade (1.6 percent). There were also gains in finance, insurance & real estate (0.2 percent) and accommodation & food services (0.6 percent). Against this, there were small declines in output in a number of sectors including retail (0.1 percent) and information & culture (0.3 percent).

August industrial product price index was up 0.5 percent but remained 6.7 percent lower on the year. Prices would have been significantly weaker but for a 6.2 percent jump in petroleum & coal products. Excluding this sector the IPPI edged down 0.1 percent on the month and was down 2.4 percent on the year. Other monthly price gains were limited although primary metal products (up 4.9 percent) were especially firm. Chemicals & chemical product prices gained 1.4 percent and fruit & vegetable costs were up 0.4 percent. Prices dropped for miscellaneous non-manufactures which were down a hefty 7.5 percent, motor vehicles & transport equipment which were down 1.9 percent and pulp and paper which were off 1.4 percent. In addition, prices for electrical & communications products declined 1.1 percent. The raw materials price index jumped 3.7 percent but the RMPI remains down a hefty 26.4 percent on the year. As usual, developments in the headline were essentially a reflection of the latest swing in mineral fuel costs which were up nearly 7 percent on the month. Excluding this sector, prices were up just 0.8 percent on the month and down 8.7 percent from a year ago. Prices for vegetables dropped 2.0 percent on the month, and were down 2.5 percent for animals and related products. Non-metallic minerals fell 1.0 percent and ferrous metals declined 0.9 percent. However, there were gains in wood (0.9 percent) and non-ferrous metals (6.3 percent).

Bottom line

Equity indexes scored impressive gains as the quarter wound down. However, so-so economic data sent investors running for the door. As a result, most indexes followed here were down on the week. As is usually the case, investors had copious amounts of new economic data to absorb. And at first reading, they became wary about the strength of the recovery.

The IMF is holding its annual meeting beginning on October 3^rd in Istanbul, Turkey. At the same time the Group of Seven finance ministers will meet. The currency markets will follow the discussions closely as they look for trading clues — especially about the value of the U.S. dollar and its role in the world economy. Also next week, the Reserve Bank of Australia, Bank of England and the European Central Bank hold their monthly policy meetings. While most analysts expect the RBA to be one of the first to increase interest rates, it is unlikely that it will happen as soon as Tuesday (local time).

Looking Ahead: October 5 through October 9, 2009

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