Global Markets

Equity investors were given an end of the week lift thanks to better than expected economic data from China and the U.S. But earlier in the week, investors were spooked by the debt standstill from Dubai World and by the Greek credit crisis that had been simmering away and came to a full boil on Tuesday when its sovereign debt was downgraded. Investors held back as they fretted about whether the Greek and Dubai debt woes would spread. News that Standard & Poor’s had put Spain on a negative credit outlook further dented sentiment. Sovereign debt woes aside, the year end is always a tricky time for investors — and this year is no different. Given the strong rally since March, many investors have packed things up for 2009 so volumes are thin and changes in direction accentuated. And with most economies at a delicate turning point, the tea leaves are even harder to read.

Equities were mixed last week with most indexes turning lower for the week. Twelve of 21 indexes edged down last week. Losses ranged from 2.6 percent for the Hang Seng to 0.1 percent for the Topix.

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC were down last week — losses incurred on the first three days of the week were too large to be offset by Thursday and Friday’s gains. Equities were up for the first time in four days Thursday. Banking stocks rebounded from recent losses thanks to concerns about the debt problems at Dubai World and economic woes of Greece and Spain. U.S. economic news helped fortify investors on Thursday as the U.S. trade deficit continued to shrink. And in the UK, the Bank of England did not surprise when it left its key interest rate at 0.5 percent and its quantitative easing program at £200 billion.

On Tuesday, Greece saw its credit ratings downgraded to the lowest level in the eurozone as fears mounted over its deteriorating public finances. Greek stocks and bonds dropped, taking other eurozone securities with them amid fears that, unless politicians tackled dangerously high debt levels, the country was heading for financial disaster and would take other EMU members with it. And on Wednesday, Standard & Poor's cut its outlook on Spain to negative and Fitch downgraded five Greek banks. And in the UK British Chancellor of the Exchequer Alistair Darling imposed a special 50 percent tax on bankers' bonuses in his pre-budget presentation before the parliament.

Bank of England maintains status quo

As expected the Bank of England monetary policy committee decided to keep its key interest rate at 0.5 percent where it has been since March. It also left its quantitative easing program at the £200 billion already committed. The Bank has signaled that it prefers to make major decisions about monetary policy on a quarterly basis when it makes its inflation forecasts. The next report is in February 2010. Last month, the MPC opted to extend quantitative easing by £25 billion to £200 billion after its November Inflation Report, rather than the £50 billion it had added in May and again in August, amid signs that the economy was finally turning round.

Growth is widely expected to return the fourth quarter, while the contraction in the third quarter looks likely to have been substantially revised away so that the economy is now thought to have declined by about 0.1 percent on the quarter instead of the initial 0.4 percent contraction.

According to the Bank’s November forecasts, the most likely path for the economy is 2.2 percent growth next year and 4.1 percent in 2011, a relatively sharp turn around from the expected decline of 4.6 percent in the economy this year. However, the Bank has emphasized that its strong growth forecast for the next couple of years comes from a low base after the recession, and that the level of excess capacity left by the downturn is likely to bear down on prices for some time. It is also worried about the risks to growth as consumers pay down debts with banks unwilling or unable to lend and with heavy cuts in government spending on the horizon.

Asia/Pacific

Equities were mixed last week but finished on a buoyant note thanks to better than expected data from China and positive trading in the U.S. In Japan, the weaker yen helped exporters’ stocks. After falling below the 10,000 level, the Nikkei rebounded to end the week above the critical level. Auto stocks were helped as confidence builds about the U.S. economic recovery — the major export destination for the country’s products. The Nikkei was up on the week but the Topix was lower. Overall, stock performance in the Asia/Pacific region was lackluster with seven indexes declining on the week while six of those followed here were up. Losses ranged from 2.6 percent for the Hang Seng to a decline of 0.1 percent for the Topix. Gains ranged from a modest 2 percent for the Kospi down to 0.3 percent for the SET, Jakarta Composite and STI.

Earlier in the week, concerns about Dubai and Greece depressed investor sentiment and led to heightened risk aversion. Profit taking also contributed to the weakness. Economic data were mixed with Australian employment increasing while unemployment declined. However, the news from Japan was dour as third quarter gross domestic product was revised downward substantially — growth was revised to just 0.3 percent on the quarter from the original estimate of 1.2 percent. But the news from China helped increase risk appetite and this in turn accelerated the yen’s decline as it lost some of its supposed haven status.

China released its monthly slew of new economic data for November and investors were pleased. Briefly, industrial production surged more than expected while exports fell the least in 13 months and imports surged. Output was up 19.2 percent from a year earlier after jumping 16.1 percent in October. The industrial output number was boosted by the November 2008’s low base after the Lehman Brothers collapse intensified the global financial crisis. Exports dropped 1.2 percent while imports were up 26.7 percent. New loans were up more than forecast while money supply expanded by a record amount. The government adjusted its stimulus policies to curb property speculation, while extending subsidies for rural purchases of consumer goods and pledging a “moderately loose” monetary policy in 2010. Consumer prices were up 0.6 percent for the first increase in 10 months while retail sales climbed 15.8 percent from a year earlier.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand kept its official cash rate (OCR) at 2.5 percent where it has been since April. The Bank also shifted its policy bias to a tightening risk in mid-2010 from the second half of the year. The economy barely emerged from recession in the second quarter as measured by GDP which inched up 0.1 percent on the quarter. Third quarter GDP will not be available until the end of the month. The Bank is required to keep annual inflation between 1 percent and 3 percent. The consumer price index is expected to increase by 1.4 percent next year and accelerate to 2.6 percent in 2011.

The RBNZ said that it will raise the benchmark interest rate sooner than it previously indicated as a stronger housing market leads the economy out of recession. The New Zealand dollar (kiwi) gained on the prospect of the removal of monetary stimulus measures from the middle of 2010. According to Reserve Bank governor Alan Bollard, if the economy continues to recover then conditions may support beginning to remove monetary stimulus around the middle of 2010. The economy will expand 1.9 percent in the first quarter of 2010 from a year earlier and will accelerate to 4.2 percent by the first quarter of 2011 according to the Bank’s latest forecast.

Canada

As expected the Bank of Canada left its key interest rate at 0.25 percent and reiterated that it would stay there until mid-2010. Inflation remains low — overall CPI edged down 0.1 percent in October and inched upward by 0.1 percent on the year. The Bank, which has an inflation target of 2 percent to 3 percent, uses a core measure of the CPI that excludes eight volatile items. In October the Bank core inflation rate was up 0.1 percent on the month and 1.8 percent on the year.

The economy grew for the first time in the third quarter after contracting for three consecutive quarters and the housing market is rebounding at a faster pace than expected. Low borrowing costs and record government stimulus spending pulled Canada out of its first recession since the last quarter of 1992. However, exporters are hampered by the strong Canadian dollar, which the bank warned could drag down growth. The Bank also said that global economic developments were only slightly more positive since its last meeting in October but “significant fragilities” remain. Aggregate demand is shifting to the consumer and away from net exports which continue to drag the economy down.

In Canada, no banks collapsed or sought a bailout during the global credit crunch. Lending practices here have been more conservative than those of U.S. financial institutions. Subprime loans accounted for 5 percent at the peak of Canada’s market in the summer of 2007.

Currencies

The dollar was up against most major currencies last week as credit woes in Greece and Dubai undermined the euro and pound sterling while weak economic data put pressure on the yen. Helping the U.S. dollar was the unexpected narrowing of the U.S. trade deficit. Rebounding economies overseas and a weaker dollar pushed exports up for a sixth consecutive month. And better than expected retail sales on Friday helped as well.

The euro was down as concerns over the financial health of several member states weighed on the currency. After Fitch downgraded Greece, S&P revised its outlook on Spain’s credit rating outlook from stable to negative. Focus on sovereign risk and the possibility of a default from heavily indebted countries has intensified after Dubai’s debt standstill last month. The news highlighted budgetary problems in other eurozone countries such as Ireland that are struggling with debt burdens.

While the Bank of England announcement was a non-event for the currency market (and everybody else), the pre-Budget report on Tuesday was not. The pound dropped to its lowest level in almost two months against the U.S. dollar as the report focused attention on the health of the country’s finances. In spite of heightened sensitivity to sovereign risk, Chancellor of the Exchequer Alistair Darling delivered a fiscally neutral package. The concerns over government debt have weighed on sterling, given the possibility that the UK may face a similar fate if it does not get its public finances in order. Analysts said the government had deemed it too early to begin an assault on the UK’s budget deficit however, because of fears that deep spending cuts could choke off the anemic economic recovery.

An exception was the New Zealand dollar (kiwi) which was up against the U.S. dollar on the week after the Reserve Bank of New Zealand sounded a hawkish note in its post-policy meeting statement, suggesting that interest rates could rise sooner than expected. The RBNZ said it will raise borrowing costs sooner than it previously indicated — a stronger housing market and a boost in commodities are leading the economy out of recession.

Selected currencies — weekly results

Indicator scoreboard

Germany

October manufacturing orders plunged 2.1 percent and were down 8.5 percent on the year. The last time orders dropped on the month was February. Domestic orders dropped 0.5 percent while foreign orders tumbled by 3.5 percent. Within domestic orders, the damage was mainly caused by consumer and durable goods which slumped 5.8 percent. Capital goods slipped 1.2 percent after an 8.0 percent nosedive in September but basics were up 1.2 percent. Foreign orders were hit by a 5.5 percent drop in eurozone demand, which was largely due to a 10.9 percent decrease in capital goods. By contrast, consumer and durable orders from the EMU bloc built on a 13.5 percent jump in September with another solid 9.8 percent advance. Non-eurozone orders dropped 1.9 percent on the month with capital goods down 4.1 percent. However basics were up 2.3 percent and consumer and durables flat.

October industrial output dropped 1.8 percent on the month which left production levels 12.4 percent lower on the year. The decline was mainly due to the capital goods area where output fell 3.5 percent on the month. Weakness here was compounded by a 3.4 percent slide in energy and 1.9 percent decline in consumer goods with nondurables down 2.3 percent. Although intermediates were up 0.6 percent, manufacturing production slipped 1.6 percent after a 3.7 percent jump in September.

October merchandise trade surplus climbed to €12.9 billion from €9.7 billion in September. The expansion was due to a combination of higher exports and weaker imports. Exports rose a solid 2.5 percent on the month and have now posted gains in five of the last six months. By contrast, imports fell 2.4 percent from September, their first decline since May.

France

October merchandise trade gap widened sharply to €4.4 billion from €2.8 billion in September. Exports dropped by 1.3 percent on the month while imports jumped by 3.9 percent to their highest level since December 2008. Over the first 10 months of the year, the trade deficit narrowed to €32.9 billion from a €46.2 billion shortfall in the same period of last year.

October industrial production excluding construction was down 0.8 percent on the month and was the second decline in a row. Output was down 8.4 percent on the year. The latest slide in output was led by the auto sector where production slumped 5.0 percent on the month. However, there were also hefty declines in metallurgy (4.0 percent), textiles & leather (3.4 percent), transport goods (2.4 percent) and refining (2.2 percent). The best performing sub-sector was electronics which was up 3.5 percent. Data processors also advanced 1.3 percent while the other transport area was up 1.1 percent. Activity in construction was unchanged on the month.

Italy

October industrial output advanced by 0.5 percent on the month but is down 11.8 percent when compared with last year. The bounce reflected gains in most major sectors apart from consumer goods where output was unchanged on the month as a 0.9 percent slide in durables offset a 0.2 percent increase in nondurables. Intermediates were up 1.1 percent while capital goods jumped 1.7 percent and energy advanced 2.7 percent.

Third quarter gross domestic product was up 0.6 percent and contracted 4.6 percent when compared with last year. This was the best quarterly performance since the fourth quarter of 2006. Final demand was up 0.3 percent. Within the category, private consumption increased by 0.4 percent but was still down 1.6 percent from the year ago period. Capital investment was up 0.3 percent but government current spending fell 0.2 percent. Net exports added 0.2 percentage points to the bottom line thanks to a 2.5 percent quarterly rise in exports that more than offset a 1.5 percent advance in imports. Business inventories also contributed 0.1 percentage points to growth.

United Kingdom

October industrial output was unchanged on the month and was down 8.4 percent when compared with last year. Manufacturing output was also unchanged on the month and down 7.8 percent on the year. Mining & quarrying however was up 0.6 percent and oil & gas extraction jumped 1.0 percent on the month. But the gains here were offset by a 1.5 percent fall in utilities' output. Nine of 13 main sectors posted monthly declines while four managed gains. On the weak side, output slumped 2.3 percent in textiles, 0.7 percent in food and 2.4 percent in coke & related products. The declines were largely offset by a 1.0 percent increase in engineering and a 2.6 percent advance in chemicals. By market group, durable goods dropped 0.5 percent while nondurables were down 0.4 percent. Intermediates were off 0.4 percent but capital goods output was up 1.2 percent.

October merchandise trade deficit widened out to Stg7.1 billion from a smaller revised Stg6.9 billion in September. Exports were up 4.7 percent on the month but their impact on the bottom line was more than offset by a 4.1 percent increase in imports. The deterioration in the total goods balance was fully reflected in the underlying shortfall (excluding oil and erratics) where the red ink grew from Stg6.2 billion to Stg6.5 billion. Regionally the damage was caused by the EU which saw its surplus with the UK widen to Stg3.6 billion from Stg3.2 billion in September. Net trade with the rest of the world actually improved slightly as the shortfall narrowed by Stg0.3 billion to Stg3.5 billion.

Asia/Pacific

Japan

Third quarter gross domestic product was revised downward from 1.2 percent to just a quarterly gain of 0.3 percent. On an annualized basis, GDP was up 1.3 percent. On the year, GDP dropped 4.7 percent. Most major components were revised downward. The all important private non-residential investment or CAPEX was revised downward to a contraction of 2.8 percent from the originally estimated gain of 1.6 percent. Private consumption was revised upward from 0.7 percent to 0.9 percent growth on the quarter.

November corporate goods price index inched up 0.1 percent but plunged 4.9 percent on the year. The CGPI has declined for 11 consecutive months. The monthly increase was the first in four months. The import price index was up 0.8 percent and down 11.9 percent on the year while export prices declined 0.3 percent and were down 3.5 percent on the year. Manufacturing prices were unchanged on the month and were down 4.8 percent on the year. Within manufacturing most categories are lower than a year ago with the exception of nonferrous metals and ceramic, stone & clay.

Australia

October merchandise trade balance of goods and services deficit widened to A$2,379 million from A$1.85 million in September. Exports dropped 3.5 percent while imports declined by 0.8 percent. Within exports, non-rural goods dropped 3 percent, rural goods swooned by 8 percent and non-monetary gold sank 17 percent. Services exports edged up 1 percent. Within imports, consumption goods edged down 1 percent while intermediate and other merchandise goods fell 3 percent, non-monetary gold dropped 9 percent and capital goods were up 1 percent. Services imports were up 2 percent.

November employment was up by a greater than expected 31,200 while the unemployment rate was 5.7 percent, down from 5.8 percent in October. This was the third consecutive month of employment gains. The increase was driven by full time employment which was up 30,800 to 7.627 million. The number of unemployed declined by 13,300 in November to 653,100. Seasonally adjusted monthly aggregate hours worked was up 13.4 million hours (0.9%) to 1,536.3 million hours. The participation rate was 65.2 percent. The seasonally adjusted labour force under-utilization rate was 13.5 percent in November, down 0.1 percent from August.

Americas

Canada

October merchandise trade surplus was C$0.43 billion after recording a trade deficit of C$ 0.85 billion in September. The improvement reflected mainly a 3.4 percent monthly gain in nominal exports, itself due to a 2.6 percent jump in volumes and a 0.8 percent increase in prices. By contrast, imports were down 0.8 percent as a 0.3 percent rise in volumes was more than offset by a 1.2 percent slide in prices. Nominal exports to the U.S. grew 3.6 percent on the month while imports dropped 3.1 percent prompting a widening of the bilateral surplus by C$1.4 billion to C$3.4 billion. However, at the same time, net exports to the EU deteriorated as September's minor C$60 million shortfall jumped to C$0.55 billion in October. Exports of industrial goods and materials surged 8.8 percent and, combined with a 6.5 percent increase in energy shipments, were largely responsible for the turnaround in the bottom line. Exports of autos were up 1.1 percent, forestry products were up 6.5 percent and agricultural & fishing products grew 2.9 percent. Imports showed broad-based weakness with just agriculture & forestry (0.9 percent) and energy (6.3 percent) among the major categories registering monthly increases. Machinery & equipment was down 4.4 percent while forestry products dropped nearly 6 percent.

Bottom line

Economic data focused on both industrial production and merchandise trade balances. Industrial production especially in Germany surprised and declined raising fears of a weak fourth quarter. U.S. trade balance surprised also — but on the positive side as the deficit narrowed thanks to growing exports. The Banks of England and Canada met and left policy unchanged. The Reserve Bank of New Zealand met and indicated that they could alter their interest rate policy sooner than previously indicated. The kiwi rose at the prospect.

This week brings an FOMC meeting. While no policy change is anticipated, the post-meeting statement will be parsed with a microscope as analysts try to guess at policy moves in 2010. And the Bank of Japan will also meet. The BoJ is under pressure to end the latest round of deflation and ensure that the economy does not slip back into recession after the significant downward revision to third quarter GDP. Also on tap is the much monitored Tankan Survey on Monday. This survey, which is conducted quarterly by the Bank of Japan, is considered the most complete reading of Japanese economic performance. The Tankan surveys individual components of the economy, such as large and small manufacturing and nonmanufacturing enterprises

Looking Ahead: December 14 through December 18, 2009

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