Global Markets

After slumping the previous week, equities recorded healthy gains for the week. Only two indexes declined — the Sensex and Jakarta Composite. However, as the week wound down, investors chose to take profits as earnings season in the U.S. begins.

Despite Friday’s lackluster performance, the weekly gains ranged from 0.1 percent (Kospi) to 5.5 percent (Hang Seng). The Shanghai Composite was closed all week and reopened only on Friday. The Sensex dropped 2.9 percent while the Jakarta Composite edged down 0.2 percent.

Traders focused on the sinking U.S. dollar and soaring gold prices. The weak dollar and record gold prices forced several Asian central banks to intervene to curb the appreciation of their currencies. The Australian dollar touched a 14-month peak after the Reserve Bank of Australia became the first major central bank to increase interest rates and contrary to expectations, the country’s employment increased and its unemployment rate declined. The latter heightened analysts’ expectations of further rate increases in November and December.

Neither the Bank of England nor the European Central Bank changed interest policy at their regularly scheduled monthly meetings as anticipated.

Global Stock Market Recap

Europe and the UK

After declining for the two previous weeks, the FTSE, CAC and DAX rebounded last week. But they fizzled on Friday and ended the week on a more or less flat note. However, all three indexes recorded healthy gains for the week — up 3.5 percent, 4.1 percent and 4.5 percent respectively. Most economic data in the eurozone and the UK focused on merchandise trade and industrial production. Industrial output was up in France, Italy and Germany but shocked on the downside in the UK (the seasonal adjustment program may have negatively impacted the data here). The German merchandise trade surplus edged downward while the deficit in France widened. In the UK, the trade deficit narrowed slightly. However for the eurozone as a whole, retail sales continued to decline while the final revision of second quarter gross domestic product data showed that the economy contracted more than initially estimated.

Both the Bank of England and the European Central Bank did what had been expected by analysts — they both left policy unchanged.

Bank of England — waiting for the next Inflation Report

As expected, the Bank of England left its key interest rate at 0.5 percent where it has been since March. They also voted to leave its quantitative easing target at its current Stg175 billion level and will keep the program under review. The monetary policy committee has been explicit that decisions on quantitative easing are best made in the months when the quarterly Inflation Report is published. The next report will be published on November 11^th. At that time, new forecasts will be available to appraise its QE and interest rate policies. The Bank has bought more than Stg160 billion of government and company bonds and has pledged to spend the remainder of the Stg175 billion by November.

Recent economic data have been mixed. For example, industrial production released earlier in the week dropped to the shock of analysts. But the National Statistics Office suggested that the August report may have been especially poor due to increased activity in some areas during July ahead of holiday closures in August. Seasonal adjustment of the data around this time of the year is always problematic. On the positive side, house prices were up for the third month according to Halifax and the fifth according to Nationwide.

European Central Bank is less pessimistic

As expected the European Central Bank decided to leave its key interest rate unchanged at 1 percent where it has been since May. Recent data point to signs that the eurozone’s recession ended in the third quarter. However, despite the improvement in data and survey evidence, it is important to remember that this improvement is coming from a very low base. With still serious economic and financial problems facing the region, a sustainable recovery is still far from guaranteed. Despite the upward revisions, inflation is expected to stay below the ECB's price stability target of below but close to 2.0 percent for many months to come. And unemployment is slated to keep rising.

Recently the debate over policy has centered on whether the ECB's exit strategy would start with the unwinding of its main liquidity operations or increasing interest rates first. At present, the ECB is offering banks unlimited resources for up to 12 months at the Bank’s benchmark interest rate. While lending to households and companies has almost ground to a halt, banks have expanded their holdings of government bonds and their loans to the public sector.

At his post meeting press conference, ECB president Jean Claude Trichet outlined a fractionally more upbeat picture on the European economy than in September. He emphasized that the outlook remained fraught with uncertainty saying that he expected the recovery to remain rather uneven. He gave no clue as to when the ECB might start unwinding its extraordinary measures and return to a more normal monetary policy. ECB officials — like officials in other central banks — are wrestling with the question of how to begin unwinding the extraordinary stimulus offered during the crisis.

Asia/Pacific

Most major Asian markets were up last week on increasing optimism that the world economy is recovering. The exceptions were the Sensex and Jakarta Composite which were down 2.8 percent and 0.2 percent respectively. Economic news was focused on Australia where the Reserve Bank of Australia became the first of the major central banks to increase its key interest rate. The Bank of Korea, which also met last week, did not change its interest rate from 2 percent, preferring to wait a bit longer and reiterating that it would maintain its accommodative policy stance for the time being.

Friday saw some profit taking as traders locked in gains ahead of the weekend and moved to the sidelines amid concerns about upcoming U.S. corporate earnings and the slew of economic data slated for release next week. The Chinese market, which opened for trading after national holidays on Friday, surged more than 4.5 percent for the day. In Japan, the Nikkei climbed over the 10,000 mark once again thanks to positive economic data showing that core machinery orders rebounded in August, with the increase being driven by rising orders in the manufacturing sector and a slower rate of decline in orders in the core non-manufacturing sector. And in Australia, equities cheered the healthy employment report that showed a drop in the unemployment rate and an increase in employment which defied expectations of a jobs decline.

Reserve Bank of Australia

The Reserve Bank of Australia surprised just about everyone and lifted its key interest rate by 25 basis points to 3.25 percent. The rate had been 3 percent for five months. Governor Glenn Stevens and the bank board had cut the lending rate by a record 425 basis points between September 2008 and April 2009 to cushion the economy against fallout from the global credit squeeze. But just last week the governor said that interest rates would have to increase from their unusually low level at some point as private demand increases. The currency (Australian dollar) which had been rising in anticipation of a possible rate increase jumped on the news.

Australia was the first Group of 20 nations to pause the cycle of interest rate cuts in March. So it was perhaps fitting that the RBA should also be the first to tighten. The unexpected move was vindicated by the labor report on Thursday (local time) when employment was up — analysts expected it to decline — and the unemployment rate edged downward. Other recent economic data show that retail sales, approvals to build private homes, bank mortgage lending and property prices all jumped in August adding to signs of a stronger economy in the quarter that just ended. Consumer spending was fueled by A$20 billion in government cash handouts to households. The government is also boosting domestic demand by spending an extra A$22 billion on roads, railways, ports and schools.

Currencies

After falling to a 14-month low against other major currencies on Thursday, the dollar rebounded after Fed chairman Ben Bernanke repeated the strong dollar mantra. This followed comments made by ECB president Trichet at his post meeting press conference that a strong dollar policy is extremely important in the present circumstances. In Asia, many emerging countries including South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong again intervened to slow the dollar's decline against their currencies fearing that the dollar’s decline could hurt their export driven economies. However, for now, the weaker dollar helps U.S. exporters by making their products more competitive abroad — it used to be the reverse.

Despite the dollar's plunge, stock prices have held up while interest rates that the Treasury has to pay on its borrowing have stayed down. A weakening dollar would worry the Fed if it appears to be raising market and consumer expectations of higher inflation.

Dollar losses were prompted by the Reserve Bank of Australia’s interest rate increase. The RBA lifted rates from an historic low of 3 percent to 3.25 percent. The tightening contrasted sharply with the Fed current mantra — it has reiterated at every policy meeting since it lowered its target range to between zero to 0.25 percent in December that economic conditions were likely to warrant exceptionally low levels of the federal funds rate for some time.

Higher interest rates tend to boost a currency's value by luring global investments. With U.S. rates close to zero, a move by another central bank to boost rates would tend to lift its currency against the dollar. During the crisis, the Fed flooded the world with dollars to help get financial markets moving. But the increase in dollars will eventually reduce the currency’s value as the U.S. government borrows more from abroad to finance its budget deficit. 

The pound continued its downward path with trade-weighted sterling hitting a five-month low while the UK’s economic outlook remains cloudy. It is also close to its lowest level against the euro this year. The latest weakness began on Tuesday after UK industrial production surprised and sank in August. And on Wednesday data showed that corporate profitability had deteriorated for a fifth successive quarter to stand at its lowest level in eight years. Analysts said the data were likely to reinforce Bank of England concerns that the recovery was still struggling to find a firm footing. This in turn would ensure that interest rates would be left at record lows for many months to come.

Selected currencies — weekly results

Indicator scoreboard

EMU

August retail sales were down 0.2 percent and were down 2.6 percent when compared with last year. Total sales were down despite a 0.5 percent bounce in food, drink & tobacco purchases. Non-food and excluding auto fuel products sank a sizeable 0.6 percent after a 0.2 percent decline in July. Among those states providing data, sales were up on the month in Spain (1.4 percent) and Slovakia (0.4 percent). All other members saw declines with especially large drops registered in Germany (1.5 percent), Austria (2.0 percent), and Portugal (0.8 percent).

Final second quarter gross domestic product contracted 0.2 percent and was down 4.8 percent when compared with the previous year. Private consumption growth was revised downward to 0.1 percent on the quarter compared with 0.2 percent in earlier estimates. However, there were also some essentially offsetting modifications to the other domestic expenditure components. Fixed capital formation now shows a 0.2 percentage point steeper decline of 1.5 percent while government spending growth is up an extra 0.3 percentage points at 0.7 percent. In addition, both exports and imports were revised weaker.

Germany

August manufacturing orders were up 1.4 percent but remain 21.1 percent lower than a year ago. Overseas demand was up 4.6 percent on the month but domestic orders sank 1.9 percent although this was hardly surprising in the wake of recent very sharp gains. Within the domestic component, capital goods dropped 5.1 percent however basics were up 1.7 percent from July while consumer and durable goods were unchanged. The monthly bounce in overseas orders was largely non-eurozone driven (5.9 percent) although the EMU bloc also made a positive contribution (2.8 percent). Total foreign orders were lifted mainly by capital goods (6.5 percent) but there was a more than useful gain in basics too (4.0 percent). However, consumer and durable goods orders slumped 7.4 percent.

August total industrial production was up 1.7 percent but was still 16.8 percent weaker on the year. Manufacturing gained 2 percent while intermediates were up 3.4 percent and capital goods increased by 1.5 percent on the month. Consumer goods edged up 0.1 percent as a 3.2 percent spike in durables was all but mitigated by a 0.4 percent drop in the nondurables sector. Energy output fell 2.6 percent from July but construction followed a 1.1 percent drop last time with a hefty 4.2 percent rebound. Excluding construction, industrial production was up 1.5 percent but sank 18.4 percent on the year.

August seasonally adjusted merchandise trade surplus narrowed to €10.6 billion. Exports dropped 1.8 percent while imports were up 1.1 percent. The export drop was the first since April while imports have expanded for three months in succession. Over the first eight months of 2009, exports dropped 22.3 percent on the year within which purchases by other EMU countries were off 21.5 percent and by non-EU countries, down 20.9 percent. Imports over the same period fell 18.5 percent with EMU demand down 17.2 percent.

France

August merchandise trade deficit widened to €3.4 billion following a slightly smaller revised €1.0 billion shortfall in July. The increased deficit reflected a 9.1 percent slump in exports that more than offset a 1.2 percent decline in imports and left the cumulative year to date deficit at €25.4 billion, down some 24 percent from the same period in 2008. Holiday closures will have had a negative impact upon both sides of the balance sheet but the reversal in exports will also have been prejudiced by a nearly 10 percent monthly leap in July.

August industrial output excluding construction jumped 1.8 percent but was still down 10.8 percent on the year. The latest gain was led by transport equipment where output surged 11.0 percent from July thanks to an 18.2 percent leap in auto output. The other main advances were in the other manufactured goods sector (1.8 percent) and in energy (1.9 percent). On the downside, production declined in food & agriculture (1.6 percent), refining (5.3 percent) and electronics & electrical machinery (1.0 percent). Activity in the construction sector also contracted (1.6 percent) but overall manufacturing output was up an impressive 1.9 percent.

Italy

August industrial output soared by 7 percent — the largest on record — but was still 18.3 percent below last year’s level. Output during the latest three months was up 4.4 percent from the previous period. The mid-quarter surge almost inevitably in part reflects problems with the seasonal adjustment of the data during the holiday period. August output was bloated by a 9.2 percent surge in intermediates, itself compounded by a 7.0 percent jump in capital goods. By comparison, a 2.0 percent increase in consumer goods production looked tame as did a 2.1 percent gain in energy. Manufacturing output jumped 7.2 percent with non-metal goods excluding machinery up 16.3 percent while home tools & appliances climbed 13.5 percent and transport vehicles rose 12.9 percent. The steepest decline was in the mining industry (14.8 percent) followed by pharmaceuticals (9.3 percent).

United Kingdom

August industrial production dropped 2.5 percent and was down 11.2 percent when compared with last year. The nosedive reflected output losses in all sectors. The steepest decline was in oil & gas extraction (7.7 percent), in part due to maintenance work in oil and gas fields, closely followed by mining & quarrying (7.3 percent). Utilities posted a 0.5 percent contraction but most significant was a 1.9 percent drop in manufacturing output. Manufacturing output is now down 11.3 percent on the year. All 13 major sub-sectors declined. Seasonal adjustment of the July/August data is always complicated by the timing of holiday shutdowns and it may be that some of the August drop should have occurred in July.

August merchandise trade gap was essentially unchanged at Stg6.2 billion, the smallest since June 2006. Exports fell 0.6 percent while imports declined 1.2 percent. Excluding oil and erratics, the deficit widened by Stg0.3 billion to Stg5.8 billion although this only returned the red ink to its June level. Net trade with the non-EU group improved with the bilateral shortfall narrowing by more than Stg0.8 billion to Stg3.0 billion but this was largely offset by a Stg0.7 billion deterioration to Stg3.2 billion in the deficit with the EU.

September producer output prices were up 0.5 percent and were up 0.4 percent when compared with the previous year. Almost half of the monthly increase reflected higher duties which were estimated to have added about 0.2 percentage points to the bottom line. In particular, petroleum product prices alone were up 2.0 percent and contributed nearly 0.2 percentage points. Other sizeable monthly gains were registered by electrical & optical equipment (0.7 percent), transport (0.6 percent) and food (0.3 percent). Softer prices were seen in just tobacco & alcohol (0.2 percent) and paper (0.1 percent). Core output prices were up 1.4 percent and 0.8 percent on the year. Excluding duties, the overall index would have risen 0.4 percent on the month but fallen 0.6 percent on the year. Producer input prices were down 0.5 percent and were down 6.5 percent on the year. Prices were driven lower by a 4.4 percent drop in the cost of crude oil. Fuel prices also declined significantly (3.1 percent) but all other areas except other home produced materials (0.0 percent) saw increases. The steepest gain was in imported metals (3.2 percent) followed by imported chemicals (1.7 percent) and imported parts & equipment (1.6 percent).

Asia/Pacific

Australia

August merchandise trade deficit was A$1.5 billion, down from July’s deficit of A$1.8 billion. Exports were down a seasonally adjusted 1.8 percent while imports dropped 2.9 percent. On the export side, non-rural goods dropped 3 percent with the coal, coke & briquettes component sinking by 8 percent. Rural goods were down 3 percent while non-monetary gold edged down 1 percent. Services were up 1 percent. On the import side, intermediate & other merchandise goods plunged by 10 percent with the fuels & lubricants component plummeting by 24 percent while consumption goods dropped 6 percent. The declines were partially offset by increases in non-monetary gold which was up 118 percent, while capital goods were up 2 percent and services imports edged up 1 percent.

September employment surprised and jumped by 40,600 — analysts expected a decline of 10,000. At the same time, the unemployment rate edged down to 5.7 percent from 5.8 percent. Analysts expected it to rise to 5.9 percent. Both full time and part time employment were up. Full-time employment increased by 35,400 to 7,589,800 while part-time employment increased by 5,200 to 3,215,800. The number of unemployed declined by 3,800 to 658,600. The number of persons looking for full-time work increased by 9,500 to 497,400 while those looking for part-time work decreased by 13,300 to 161,200. The participation rate edged up to 65.2 percent from 65.1 percent.

Americas

Canada

September employment was up 30,600 — the largest increase since May 2006. The gain was the second in a row. At the same time, the unemployment rate dipped to 8.4 percent from 8.7 percent in the previous month. Employment growth was wholly accounted for by full-time jobs which surged 91,600. Part-time positions while part-time jobs dropped 61,400. Private sector employment slipped 17,100 while public sector jobs rose 36,400. At the same time, the number of self-employed climbed 11,300. The goods producing industries outperformed services with a 46,200 gain versus a 15,600 decline. Within the former, manufacturing posted a solid 26,100 advance, almost matched by a construction sector (24,600) which is clearly benefitting from the upturn in the housing market. Services sector positions were hit by job losses in transportation & warehousing, professional, scientific & technical services, accommodation & food services and business, building & other support services. However, payrolls rose in finance, real estate, insurance & leasing, educational services and health care & social assistance. The decline in the unemployment rate reflected a dropped of 55,200 in the number out of work that easily offset a 24,500 fall in the labor force. Unemployment now stands at 1,549,700, an increase of 420,100 or 37.2 percent from a year ago. The employment rate was steady at 61.4 percent while the participation rate slipped to 67.1 percent from 67.3 percent.

August merchandise trade deficit widened to C$1.99 billion as exports slumped 5.1 percent on the month (volumes down 5.0 percent) and imports declined 2.8 percent (down 0.3 percent). The jump in the shortfall from July masked no significant change in the bilateral shortfall with the U.S. (C$2.2 billion) but it reflected instead mainly a C$0.4 billion deterioration in net exports to the non-EU and non-Japan OECD countries. Within the monthly decline in exports, machinery & equipment were especially weak (down 10.4 percent) alongside agriculture & fishing products (down 10.3 percent). However, autos also dropped sharply (5.5 percent) and there were significant declines in both forestry products (3.4 percent) and industrial goods & materials (3.3 percent. Energy was unchanged on the month. Imports were depressed by a steep decline in energy (9.8 percent). There were marked declines in machinery & equipment (4.9 percent) and industrial goods & materials (3.4 percent). By contrast, auto imports were up 3.8 percent and purchases of agricultural & fishing products edged higher by 0.5 percent.

Bottom line

Both the U.S. dollar and British pound took it on the chin last week as investors became less risk averse. The Australian dollar surged after the Reserve Bank of Australia became the first of the major banks to increase their policy interest rate. New European economic data showed that industrial production was up in Germany, France and Italy but sank in the UK. As expected, the European Central Bank and Bank of England left their monetary policies unchanged. Both Australia and Canada’s labour force reports were better than expected with employment rising and unemployment rates dropping.

The Bank of Japan meets at the beginning of the week with no change in policy expected. In the UK, unemployment is expected to increase while average earnings remain weak. And in the U.S., new information on prices, retail sales and industrial output is expected to keep investors busy assessing the latest clues to economic growth.

Looking Ahead: October 12 through October 16, 2009

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