International Perspective will be taking off next week to celebrate

Thanksgiving. IP will return on December 4, 2009.

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Global Markets

After soaring Monday, most investors took time to digest their gains and take some profits. However, the pull back was accelerated by some ‘iffy’ economic data from the U.S. — housing starts and industrial production data disappointed and jobless claims did not continue to sink. With little new economic data in Europe, the focus was on U.S. and there was plenty of new information available for investors to consider. In the end, most of Monday’s gains disappeared, leaving most major equity indexes down on the week. And with December and year end looming, many investors are already squaring their positions, especially after the multi-month rally that began in March.

While investors look for signals that central banks are cutting back on their supportive activities as a sign of economic recovery, they do so with trepidation — the great unknown is whether the major economies are strong enough to withstand the withdrawal of what has been life support for the past year.

On the week, 11 of the 21 indexes followed here declined anywhere from 3.2 percent (Topix) to 0.3 percent (All Ordinaries). Gains ranged from 3.8 percent (Shanghai Composite) to 0.2 percent (Taiex).

Global Stock Market Recap

Europe and the UK

The equity rally of the previous two weeks petered out last week. After healthy gains on Monday, stocks edged lower for four days. In the process, the FTSE surrendered its fresh high for 2009 in low volume trading while the strength of the euro negatively affected European exporters. The end result was that all of Monday’s gains were eroded and the three indexes ended the week in the red. There was scant new local economic data during the week and investors focused on the ups and downs of the pound sterling and euro against the U.S. dollar. Equities did follow U.S. stocks in responding to U.S. data that covered a wide spectrum of economic activity. In the UK, investors read with interest the split in the monetary policy committee on expanding the Bank of England’s quantitative easing program. (See below)

On Friday, European stocks and commodities declined after Jean Claude Trichet said the ECB would withdraw emergency cash gradually. He had already signaled the ECB is unlikely to renew its offer of 12-month loans to banks after the third installment in December. At the same time, governing council members have stressed the exit from emergency lending measures doesn’t necessarily imply they will raise interest rates soon. And in London, worries about the potential impact on stock markets of a stronger dollar curtailed modest gains.

Bank of England Minutes

Monetary policy committee members were divided over their decision to increase the quantitative easing ceiling by £25 billion to £200 billion. One member preferred a much larger increase while another preferred no increase at all. They also deferred a decision to reduce the interest paid on a portion of commercial banks’ reserves held at the Bank as a means of encouraging these to lend more widely to households and businesses.

The MPC minutes also indicated that members discussed at length the initial estimate of third quarter gross domestic product which showed — much to the surprise of many — that the economy contracted further. MPC members concluded that although there may be reasons to expect a small upward revision to the 0.4 percent contraction officially recorded “it was likely that activity had been more subdued in the third quarter than the committee had previously anticipated.” However, members noted other data showing that the weakness was unlikely to persist to year end.

Asia/Pacific

After a rousing start, equities faded and ended the week on a ‘mixed’ note. Stocks edged lower as they followed U.S. averages downward on worries about the sustainability of the economic recovery after some decidedly weak U.S. economic data. This, combined with the strengthening of the dollar and declining commodity prices, drove traders to the sidelines as they locked in recent gains.

After jumping 2.7 percent on Monday, the Hang Seng Index was down 0.4 percent on the week after four straight days of losses. The Hang Seng dropped sharply on Friday thanks to a decline in Dell's quarterly profit. Speculation that the Chinese economy might have an asset bubble also raised concerns. Banks and property stocks were the major losers. Fresh concerns about the sustainability of global recovery resurfaced yet again after economic data related to housing starts and building permits declined more than expected in the U.S., and the consumer price inflation inched marginally higher. The weak U.S. economic data as well as profit taking in other markets also impacted market sentiment.

While stocks were down 0.4 percent or less in Australia, Hong Kong and Thailand, Japanese stocks swooned. The Nikkei sank 2.8 percent but the Topix dropped even more — down 3.2 percent. The Topix is now down 2.4 percent for the year and the only developed market index to be down this year while the Nikkei is up 7.2 percent. Both indexes have dropped for four consecutive weeks. Both indexes peaked in September and have glided downward since. After reaching it peak on September 24, the Nikkei has dropped about 10 percent. The Topix peaked on September 1. Since then, it has tanked by about 15 percent.

In December it will be 20 years since the Nikkei peaked at 38,915.87. One reason that Japanese stocks have lagged behind recently is that investors have been taking their money out of poorly performing markets to invest in those that are doing better. An additional worry for investors is whether the market can absorb the deluge of new funding expected in the next few months — normally a peak time for issuance in Japan. There is also considerable uncertainty about how the new DPJ government will manage to stimulate domestic economic growth when it is expecting a tax shortfall and is trying to limit new bond issuance. It does not help that the DPJ is fragmented and many investors are looking for a more cohesive message from the government.

Reserve Bank of Australia meeting minutes

The RBA Board raised its key interest rate for the second consecutive month in November to 3.5 percent. In the minutes of that November 3 meeting, the RBA Board said that it was prudent to take a further step to lessen the degree of monetary stimulus. Members expected that if economic conditions evolved as expected, further gradual adjustment in the cash rate would most likely be appropriate over time, though the pace of the adjustment remained an open question.

Overall, members considered that the recent information was consistent with the conclusions reached by the Board in October — namely, conditions in the global and Australian economies were significantly better than had been expected earlier in the year and therefore concluded that it remained prudent, over time, gradually to reduce the degree of monetary accommodation.

They concluded that the information becoming available continued to suggest that a recovery in the global economy was under way. Asian economies were generally growing at quite solid rates after having contracted sharply in some cases. In the advanced economies conditions remained weak, but activity in most of these had now also begun to grow again. While the recovery in these latter economies was expected to be subdued, the important consideration for the Board was that — for the group of economies that comprise Australia’s major trading partners — a broad range of forecasters are expecting 2010 growth to be around trend.

Bank of Japan meeting

As expected, the Bank of Japan left its key interest rate at 0.1 percent after its two-day meeting. Also as expected, the Bank said that it would continue to maintain an extremely accommodative monetary policy. Although the Bank maintained its core economic assessment, it said that the economy is picking up and the decline in CAPEX (investment spending) is coming to an end. However the monetary policy board also said that the economy faces downside risks.

The economy grew at an annualized pace of 4.8 percent in the third quarter while the corporate and consumer goods prices continue to sink. The CGPI was down 6.7 percent on the year after dropping 8 percent in September. And consumer prices excluding fresh food dropped for a seventh month in September and the BoJ has indicated that it expects them to keep dropping into 2012. Making the situation even more complicated is the fact that the BoJ has not defined deflation. Rather it stated that such conditions can take different shapes and forms. It has vowed to do everything it can to prevent a deflationary spiral — that is when deteriorating economic conditions and falling prices end up feeding off each other in a vicious downward spiral.

In his post meeting press conference, BoJ governor Shirakawa said he agreed with the government's view that Japan is in mild deflation and vowed to keep interest rates very low. However, he declined to make any promise about additional monetary policy stimulus. He said that the root cause of the current price declines stemmed from a wide output gap. To stem sinking prices, final demand has to be lifted — that means that sluggish business investment and consumer spending has to rise. He rejected the idea that if a central bank injects ample liquidity it would contribute to weakening deflation. But the direct impact of injecting liquidity is aimed at stabilizing financial markets.

Currencies

With U.S. Barack Obama’s Asian visit, a good deal of market chatter focused on the dollar and U.S. interest rates and whether the low rates were fueling asset bubbles around the world. Earlier in the week, China was particularly acerbic in its comments. But some analysts point to data that show that a large portion of the inflows into high-yielding assets are long-term investments rather than short-term bets placed with borrowed funds, which is also known as the carry trade. That would make a short term move to a higher dollar, as seen during the 1998 Asian financial crisis or late last year, a much less likely outcome. Another reason why the carry trade isn't likely the main driver behind the dollar's weakness — increased volatility is the main enemy of the carry trade. The U.S. dollar was up against all major currencies last week. The dollar’s biggest advances were against the commodity currencies, the Australian and Canadian dollars.

On Tuesday, European Central Bank President Jean Claude Trichet said in an interview to French newspaper Le Monde that low interest rates are considered to be appropriate for the euro area. Although the economy is coming out of the period of free fall, there remains a lot of uncertainty. Trichet also noted the euro was never intended to be a reserve currency and welcomed remarks made by Federal Reserve Chairman Ben Bernanke, who said the Fed was paying attention to the weakening dollar.

Mr Bernanke’s dollar comments caught investors’ attention. He said the Fed was attentive to changes in the dollar and that its existing mandate should ensure that the currency remained strong. The remarks ignited a rally in the dollar, which quickly faltered. But what struck many economists (including myself) was that the Fed chairman said anything at all about the dollar. It is extremely unusual for a Fed chairman to comment on the dollar — that is usually left to the Treasury.

On his first visit to China, U.S. President Barack Obama urged the government to allow its currency — the renminbi (yuan) — to rise. In recent weeks ECB President Trichet and IMF Managing Director Dominique Strauss-Kahn also have called for a stronger Chinese currency. China allowed the yuan to rise by 21 percent against the dollar in the three years to July 2008, but since then it has more or less kept the rate fixed. As a result, the yuan’s trade weighted value has been dragged down by the weakening dollar, while many other currencies have soared, seriously eroding those countries’ competitiveness.

Selected currencies — weekly results

Indicator scoreboard

EMU

October harmonized index of consumer prices were up 0.2 percent but edged down 0.1 percent when compared with the same month a year ago. Core HICP, which excludes food, drink, tobacco & gasoline, was up 0.3 percent and was up 1.2 percent on the year while omitting just unprocessed food and gasoline, the HICP was up 1.0 percent from the year before. On the year, education was up 1.5 percent while energy dropped 8.5 percent. Clothing prices edged up 0.3 percent while household equipment prices were up 1.4 percent and health prices gained 1.1 percent. Food prices were up 1.3 percent.

September seasonally adjusted merchandise trade surplus jumped to €6.8 billion from a larger revised €2.2 billion in August. The marked improvement reflected a 5.5 percent monthly jump in exports that easily eclipsed a 1.1 percent advance in imports. On the year, exports were down 18.0 percent while imports were down an even steeper 24.0 percent. Third quarter surplus was €14.6 billion, a dramatic gain over the second quarter’s surplus of €3.1 billion. On an unadjusted basis, the trade surplus was €3.7 billion, up from a deficit of €2.3 billion in August.

Germany

October producer prices were unchanged on the month and dropped 7.6 percent on the year. Energy prices were up 0.3 percent leaving the non-energy PPI to edge 0.1 percent lower on the month and stand 3.3 percent weaker on the year. Other upside pressure on the monthly change came from basic goods (0.2 percent) and durable consumer goods (0.1 percent). However there were declines in capital goods (0.1 percent) and consumer nondurables (0.4 percent). Total consumer goods were off 0.3 percent.

United Kingdom

October consumer price index was up 0.2 percent and 1.5 percent when compared with last year. This was the first increase in the annual rate since February. Core CPI was up 1.8 percent on the year. On the year, food & drink prices were up 2.2 percent while household equipment & furniture jumped 3.3 percent. Transport inflation spiked 2.3 percentage points higher to 3.5 percent, dominated by changes in oil prices and the effects of a shortage of second hand cars. Education inflation dropped 3 percentage points to 5.2 percent.

October retail sales were up 0.4 percent and were 3.4 percent higher than a year ago. The October gain followed an upward revised 0.4 percent advance in September (was flat). The increase was led by a 2.1 percent jump in purchases of clothing & footwear. Household goods sectors sales were up 1.1 percent while non-specialized stores gained a 0.9 percent. Non-store retailing also did well with sales up a healthy 1.7 percent. With the other stores area down 1.4 percent, total non-food purchases were up 0.6 percent on the month and 3.5 percent on the year. However, food stores saw demand slip 0.1 percent on the month for annual growth of 1.6 percent.

Asia/Pacific

Japan

Third quarter gross domestic product was up by 1.2 percent when compared with the previous quarter and much more than anticipated by analysts. When compared with the same quarter a year ago, GDP dropped 4.4 percent. GDP was up at an annualized rate of 4.8 percent. This compares with an annualized growth rate of 3.5 percent in the U.S. and a weak 1.5 percent for the EMU. For the Japanese economy, this is the second consecutive quarter of growth after sinking for four prior quarters. Private consumption was up 0.7 percent on the quarter while the all important private non-residential investment or CAPEX was up 1.6 percent. Government investment was up 0.4 percent. Private demand was up 1 percent.

September tertiary industry activity index dropped for the first time since May. The index was down 0.5 percent on the month and sank 4.6 percent on the year. Declining industries included information & communications, finance & insurance, wholesale & retail trade and medical, health care & welfare. Industries that increased on the month included transport & postal activities, scientific research, professional & technical services accommodations, eating & drinking services, living-related & personal services & amusement services, miscellaneous services (except government services etc), real estate & goods rental & leasing, electricity, gas, heat supply & water, learning support and compound services.

Americas

Canada

September manufacturing shipments were up 1.4 percent but remained 18 percent lower on the year. The September bounce mainly reflected a 16.4 percent jump in motor vehicle sales to their highest level since September 2008. Motor vehicle parts were also up an impressive 13.7 percent. Excluding this sector however, overall shipments sank 0.4 percent from August. Primary metals sales were up 6.7 percent, helped by a number of plants restarting production after earlier maintenance shutdowns. But some of these gains were offset by a nearly 29 percent slump in aerospace products following a 34.2 percent nosedive in August. New orders surged 8.3 percent for their first rise since a 20.4 percent leap in June but backlogs fell 0.6 percent, their third consecutive drop and the fifth fall in the last six months.

October consumer price index edged down 0.1 percent and was up 0.1 percent on the year. At the same time, the core index (excluding food & energy) was up 0.2 percent on the month for an annual rate of 1.3 percent, up 0.4 percentage points from last time. The Bank of Canada’s preferred measure, which excludes eight volatile items, edged up 0.1 percent on the month to lift its 12-month rate to 1.8 percent from 1.5 percent. Seasonal factors helped to keep prices in check in October. The seasonally adjusted CPI was up 0.4 percent on the month following a 0.1 percent gain last time. This was the fifth month out of the last six that seasonally adjusted prices have risen. Clothing & footwear prices were up 0.4 percent on the month and recreation, education & reading prices were up 0.3 percent. Both shelter & household operations and furnishings recorded a 0.2 percent increase. By contrast, prices fell 0.6 percent in health and 0.2 percent in transportation. On the year, the bulk of the increase was due to energy prices. Gasoline prices were down only 13.1 percent after a 23.0 percent decline in the 12 months to September. Excluding energy, the annual CPI rate last month was 1.4 percent, up just a tick from its September pace.

Bottom line

While there was minimal new European and Asian economic data, there was a deluge from the U.S. with expected mixed results. After exuberant gains on Monday, investors retrenched as latent worries about the strength of the global recoveries resurfaced once again. And with the year-end fast approaching, many investors are choosing to square their positions for 2009.

EU leaders met in Brussels to select their first full-time president and the high representative for Foreign Affairs. These new posts were created by the Lisbon Treaty, which will come into force on December 1, 2009. EU leaders chose Belgian Prime Minister Herman van Rompuy to be the first permanent European Council President and UK Baroness Catherine Ashton as head of foreign affairs. Both are seen as low key consensual politicians.

European and Asian countries will more than make up for last week’s sparse new economic data over the next two weeks. With the Thanksgiving holiday in the U.S., markets are expected to be thin this week. And the following week — November 30 through December 4 will see policy announcements from the Reserve Bank of Australia and the European Central Bank. While no change is anticipated from the ECB, analysts are divided over whether the RBA will increase rates for a third consecutive month.

Looking Ahead: November 23 through November 27, 2009

Looking Ahead: November 30 through December 4, 2009

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