Global Markets

Equities were mixed last week but not for September — all indexes followed here posted healthy gains. And in the third quarter, only the Nikkei and Topix were down. On the week, the All Ordinaries shed 0.4 percent while the Nikkei was down 0.7 percent. In the Asia Pacific region however, the Jakarta Composite jumped 4.4 percent on the week. The FTSE, DAX and CAC slumped while in North America the S&P/TSX Composite and Bolsa were up while U.S. indexes edged lower.

The eurozone’s debt crisis deflated some animal spirits after Ireland gave bail-out details for its Anglo Irish Bank and after Moody’s downgraded Spain’s credit rating. However, reports earlier in the week on U.S. economic activity buoyed investors. At week’s end, all eyes were on the various purchasing managers’ surveys for manufacturing activity. Here the picture was mixed with China’s indexes increasing and assuring faster growth there while those for Europe and the U.S. still showed growth, but at a slower pace. However, Japan slipped below the 50 breakeven point. The dollar sank against all of its major counterparts as this to many analysts seemed to mean that the Federal Reserve would begin a second quantitative easing program.

Gold continued to set new highs at the London afternoon fixing — it ended the week at $1,316.25 a troy ounce.

Global Stock Market Recap — Weekly Results

Global Stock Market Recap — Quarterly Results

Europe and the UK

The CAC and DAX declined for a fifth day to end the week down 2.4 percent and 1.4 percent respectively. The FTSE edged down 0.1 percent. Stocks in Europe declined Friday thanks to weakness in financials that more than offset some early enthusiasm that came from a favorable reading of manufacturing activity in China. The weakness in the financial sector came as European Union officials warned that the fallout from the eurozone debt crisis could negatively impact European lenders. Earlier in the week, Moody's downgraded Spain's sovereign bond rating and the Irish central bank increased its estimate of costs to support the ailing Anglo Irish Bank.

As is usually the case in the last week of the month, there were a lot of economic data for investors to digest. Consumer confidence deteriorated more than expected in the UK but house prices were up on the year according to Nationwide Building Society. In Germany, unemployment declined more than expected in September as companies started hiring more to meet rising demand. However, retail sales there were down for the third month. In the eurozone, economic sentiment improved and the unemployment rate remained stable at 10.1 percent. On Friday, the manufacturing PMIs painted a picture of less robust growth in most member states with the exception of France.

The three indexes were up in September and the third quarter. In September, the CAC was up 6.7 percent, the FTSE gained 6.2 percent and the DAX lagged with a 5.1 percent advance. For the quarter, the FTSE soared 12.8 percent while the CAC gained 7.9 percent and the DAX, 4.4 percent.

Asia Pacific

Equity indexes followed here were mostly positive last week on optimism about the sustainability of the global economic recovery. However, the All Ordinaries along with the Nikkei and Topix were down for the week. Positive U.S. economic data helped to lift market sentiment. Stocks were boosted by China’s purchasing managers’ surveys, both of which improved in September. Optimism was weighed down however, by the resurfacing of European sovereign debt woes in Spain and Ireland. And in Japan, stocks continued to be weighed down by the rising value of the yen which hurts exporters’ revenues.

The last week of the month marks the onslaught of Japanese data and last week was no exception. And there was a special highlight in the week— the intensely monitored Tankan on quarterly conditions. The Tankan showed improved readings for the third quarter but expectations for the fourth quarter were down as were capital expenditure expectations. Large industry CAPEX also disappointed. Spending is expected now to increase by only 2.4 percent this fiscal year compared to forecasts for a 3.0 percent advance earlier.

The monthly data were a mixed bag. Industrial production unexpectedly declined but consumer spending was up. And housing starts jumped 20.5 percent on the year which in turn helped real estate companies. A big negative was an 18^th straight decline for core consumer prices which excludes fresh food. The deflationary spiral continues and may be worsened by the strong yen. This will undoubtedly add to pressures already on the Bank of Japan to take more steps to loosen monetary policy at its meeting Monday and Tuesday.

The Australian market ended the week in the red despite the solid PMI data from China. The housing sector is feeling the impact of higher interest rates. For example, the total dwellings approved for construction during August fell 4.7 percent from the previous month. The report further noted that the number of private sector houses approved for building dropped 4.3 percent while private sector other dwellings approvals climbed 1.4 percent. Manufacturing appears to be weakening as well. The Australian Industry Group and PriceWaterhouse Coopers said that manufacturing activity contracted in September with an index reading of 47.3 points, down 4.4 points from the August’s 51.7. Readings below 50.0 indicate contraction of activity in the measured sector.

The Sensex continued to climb above the critical 20,000 level, buoyed by positive global cues and strong growth in monthly sales numbers reported by auto makers. However, the September HSBC Purchasing Managers' manufacturing index declined to 55.1 in September from 57.2.

All indexes followed here were up in September. Gains ranged from 15 percent for the PSEi, 13.6 percent for the Jakarta Composite and 11.7 percent for the Sensex to a modest 0.6 percent for the Shanghai Composite. Only the Nikkei and Topix were down in the third quarter. The SET vaulted 22.3 percent while the PSEi soared 21.6 percent and the Jakarta Composite jumped 20.2 percent.

Currencies

The U.S. dollar dropped against all of its major counterparts as the manufacturing PMI expanded at its slowest pace in 10 months. The dollar fell to the lowest level since March against the euro. Against the yen, the currency dropped to its lowest since Japan intervened on September 15^th in overnight Asian trading. The data backed the Federal Reserve’s modest growth forecast and sent investors elsewhere seeking higher yields. Traders continue to debate whether the Fed will launch QE2 at the next FOMC meeting.

The yen traded near its strongest levels against the dollar on Friday since the Bank of Japan intervened to weaken the currency. Bank of Japan governor Masaaki Shirakawa said Monday (before the yen strengthened even more) that he is watching ‘with great interest’ the negative impact of the yen's strength against major currencies on the country’s export-led economic recovery, vowing to take ‘timely’ policy action. The appreciation of the yen weighs directly on the profits and profitability of exporting firms. In the current situation, it can also significantly affect business sentiment and consequently the outlook for Japan's economy by increasing uncertainty over the global economy.

The Bank of Japan conducted its first yen-selling intervention in over six years and the government has made it clear that it will take decisive actions, including interventions, if it deems it necessary. Japan's government sold ¥2.125 trillion through currency market intervention in September to help dampen the yen's persistent climb against the U.S. dollar, the Ministry of Finance said Thursday. The finance ministry, using the Bank of Japan as its agent, intervened after the currency hit a 15-year high of ¥82.87 to the dollar. There is also speculation that the government may have stepped into the market on September 24^th when the dollar rose a full yen to ¥85.40 over a short period during Tokyo trading.

The euro jumped to its highest since March against the dollar on Friday, despite comments from EU officials indicating the economic rebound is "fragile and uncertain." Even with sovereign debt problems and expectations of slow growth in the eurozone, the euro has surged higher against its U.S. counterpart on growing speculation the Federal Reserve is preparing additional measures to support the sluggish U.S. economy. At the very least, the Fed is all but certain to keep interest rates at a record low near zero for an extended period. Europe's recovery is "fragile and uncertain" and "the risks related to the sovereign-debt market could have a contagious effect on the banking sector," EU finance ministers said in a statement today after a meeting in Brussels.

Selected currencies — weekly results

Indicator scoreboard

EMU

August M3 money supply was up of 1.1 percent on the year boosting the 3-month moving average which is closely monitored by the ECB to 0.5 percent, up 0.4 percentage points from July. The improvement in the headline data was due to a rebound in bank lending to the private sector. This accelerated to a 1.2 percent 12-month rate from 0.8 percent last time courtesy of stronger growth in most areas. Lending to non-financial corporations was down 1.1 percent on the year after a 1.4 percent decline in July and borrowing by households was up 2.9 percent, a 0.2 percentage point advance over last month. Loans for house purchase edged up a tick to 3.5 percent.

September economic sentiment strengthened to a reading of 103.2 from an upwardly revised August reading to 102.3. This was the highest reading by the index since its record low in March 2009 (70.6). The improvement reflected increased confidence in retail (up 2 points at minus 1), services (up 1 point at 8), the industrial sector (also up 1 point at minus 2) and, in particular, construction (up 3 points at minus 26). Only the consumer sector (unchanged at minus 11) failed to make any fresh ground. Among the larger EMU members, Germany again led the way with a 2 point advance in overall sentiment to 113.2. This was backed up by Spain which posted a 1.1 point gain to 90.7 and France where morale edged up a tick to 102.7. However, sentiment in Italy dropped more than a point to 96.8.

September flash harmonized index of consumer prices was up 1.8 percent on the year and 0.2 percentage points higher than in August and at its highest level in 22 months. Among the larger EMU members, the 12-month rate rose 0.3 percentage points to 1.3 percent in Germany and was up 0.2 percentage points at 2.0 percent in Spain. However, Italian inflation bucked the trend, falling to 1.6 percent from 1.8 percent in August.

September final estimate of the manufacturing PMI nudged the flash figure a notch higher to 53.7, still an eight month low. The completed survey confirms a marked deceleration in economic activity in Germany (55.1 from August's 58.2) and a more modest slowdown in Italy (52.6 after 52.8). French growth accelerated slightly (56.0 after 55.1) but ominously the PMIs in Greece, Ireland and Spain all signaled either no expansion or a renewed contraction. On the positive side, output was up across the region for the fourteenth consecutive month. However, the increase was the smallest since October 2009 and reflected a cooling in consumer, intermediate and investment goods production. Even more worrying was the deceleration in new orders growth to its slowest pace since September 2009. Employment continued to creep higher but by an increasingly insignificant amount.

August unemployment dropped by 20,000 on the month to 15.87 million. However, the decline in the number of people out of work was accompanied by a steady unemployment rate of 10.1 percent following an upward revision to the July level. The rate remains at an all time high for the region. Indeed, the headline data would have looked markedly worse but for the ongoing resilience of the German labor market. Here the rate fell 0.1 percentage points to 6.8 percent. This compares with a 0.1 percentage point increase in France to 10.1 percent and a 0.2 percentage point advance in Spain to a positively scary 20.5 percent. However, the Italian rate also fell, down 0.2 percentage points to 8.2 percent, its lowest reading this year.

Germany

September seasonally adjusted unemployment dropped a surprisingly large 40,000 from August. The unemployment rate slipped to 7.5 percent from 7.6 percent in August. The unadjusted rate was down 0.4 percentage points at 7.2 percent. The latest decline in the number out of work followed a slightly steeper revised 20,000 drop in August to yield a third quarter decline of 83,000. Total seasonally adjusted unemployment now stands at 3.146 million. Vacancies grew a further 4,000 after a 5,000 increase last time and bode well for further payroll gains over coming months. In August, the latest month for which payroll data are available, employment rose a solid 46,000 or some 28,000 more than recorded in July.

August retail sales declined 0.2 percent after dropping 0.4 percent in July. On the year, sales were up 2.2 percent. Average sales in July and August combined were 0.1 percent below their second quarter mean and warn that overall consumer spending probably slowed last quarter after a 0.6 percent advance in the previous period. Annual growth figures showed a 2.0 percent slide in purchases of food, drink & tobacco but a 5.3 percent jump in non-food sales. Within this latter category, demand for clothing & shoes gained 8.4 percent and furniture & household goods stores saw a 6.3 percent gain. Sales of pharmaceuticals & related products rose 3.8 percent and the other goods sub-sector advanced 2.6 percent.

France

August consumption of manufactured goods slumped 1.6 percent after bouncing up 2.7 percent in July. On the year, spending was up 1.2 percent. Textiles, the strongest performing category in July with a 12.5 percent monthly surge, posted the largest drop, off 6.1 percent. Autos (minus 1.5 percent) fell for the fourth month out of the last five, household goods slipped 0.3 percent and the other products category edged down 0.2 percent. Seasonal adjustment problems between the two months probably explain much of the volatility.

August producer prices edged up 0.1 percent and were 3.5 percent higher on the year after a 3.8 percent annual advance last time. The main boost to prices came from the electrical & information technology equipment category where costs jumped 0.5 percent from July. Other areas were much better behaved and posted either a minimal 0.1 percent monthly increase or a 0.1 percent decline.

Italy

August domestic producer prices edged up 0.2 percent and were up 3.7 percent on the year. On the month, the main increase occurred in nondurable consumer goods (0.5 percent) but charges for intermediates (0.2 percent) were also up. Elsewhere prices were steady with durable consumer goods, capital goods and energy all recording no change from July. On the year most sub-sectors provide few inflationary signals with the notable exception of energy (7.9 percent). Intermediate goods prices were up a relatively firm 2.8 percent but overall consumer goods were a minimal 0.1 percent firmer while capital goods declined 0.2 percent.

United Kingdom

The final estimate of second quarter gross domestic product was up an unrevised 1.2 percent and 1.7 percent above the same period in 2009. However, there was a significant switch in the composition of demand in favor of investment and at the expense of business inventories. Household spending was up an unrevised 0.7 percent on the quarter (1.4 percent on the year). However, the previously reported quarterly 2.4 percent drop in gross fixed capital formation was replaced by a 1.4 percent gain (3.7 percent on the year) while business inventories are now seen rising just Stg88 million rather than the Stg1.0 billion reported last time. With general government final consumption expanding a stronger 1.0 percent (1.9 percent on the year), total domestic expenditure grew a quarterly 1.2 percent (2.9 percent on the year). Exports advanced 2.3 percent (previously 1.1 percent) while imports were up 2.4 percent (0.9 percent), essentially implying a still neutral contribution to the bottom line. However, the overall current account deficit narrowed from Stg11.3 billion in the first quarter to a surprisingly small Stg7.4 billion.

Asia/Pacific

Japan

August unadjusted merchandise trade surplus was 103.2 billion yen and below analysts expectations of a surplus of 440 billion yen. The surplus sank for the first time in 15 months by 37.5 percent from a year ago. On the year, exports were up 15.8 percent but imports jumped 17.9 percent. Exports were up for the ninth month in a row while imports were up eight. Exports to China and to Asia were up 10 months in a row on the year. Exports to China were up 18.5 percent while to Asia, they gained 18.6 percent. Exports to the European Union were up 13.7 percent on the year for the ninth consecutive increase while to the U.S., exports were up for the eighth month by 8.8 percent. On a seasonally adjusted basis, the merchandise surplus edged down to 589.7 billion yen from 594.8 billion yen in July. Both exports and imports dropped on the month. Exports were down 2.3 percent while imports declined by 2.5 percent.

Third quarter Tankan large manufacturer index climbed to a higher than expected plus 8 from plus 1 in June. This was the highest reading since March 2003. However, large manufacturers forecast the fourth quarter December reading only at minus 1. Large nonmanufacturer reading was plus 2, up from minus 5 in the previous quarter. Small manufacturer index edged up to a reading of minus 14 from minus 18 while small nonmanufacturer index was up to minus 21 from minus 26 in June. In the important CAPEX readings for fiscal year 2010, all firm CAPEX was minus 1 percent on the year while manufacturing was plus 3.7 percent but nonmanufacturing was 3.4 percent. Large enterprises saw a 4.0 percent increase in CAPEX, down from June’s estimate of 4.4 percent. Small firms see fiscal year 2010 CAPEX down 15 percent, up slightly from June’s estimate of minus 15.5 percent.

August industrial production surprised on the down side and swooned 0.3 percent. However, output was up 13.7 percent from the previous year. Industries that declined include general machinery, iron and steel and other manufacturing. Commodities that contributed to the decline included reaction vessels, active matrix lcds (liquid crystal devices) large and large trucks. According to METI’s production forecast survey, production is expected to edge down 0.1 percent in September but rebound 2.9 percent in October.

August retail sales jumped a healthy 4.3 percent on the year after jumping 3.8 percent in July. This was the eighth consecutive increase on the year. Sales were pushed up by auto sales which soared by 18 percent on the year after jumping by 8.1 percent in July. Fuel sales were up 11.2 percent after increasing by 8.1 percent in the previous month. However, large scale retailers continue to tumble. Sales were down 1.9 percent on the year in August.

August unemployment rate edged down to 5.1 percent from 5.2 percent the previous month. The number of unemployed persons dropped by 240,000 on the year to 3.37 million. The number of employed persons edged down by 1,000 in August and declined by 180,000 from the previous year. The labor force participation rate slipped 0.3 percent to 59.9 on the year while the employment rate was down 0.2 percent to 56.8 percent.

August consumer prices were up 0.3 percent but down 0.9 percent for the second month. Core CPI excluding only fresh food was up 0.1 percent but down 1.0 percent on the year. Excluding both food and energy, the CPI was up 0.1 percent but dropped 1.5 percent on the year. On the year, prices were pulled lower by education, down 13 percent and furniture & household utensils which dropped 4.4 percent. Food and housing prices were down 0.9 percent and 0.7 percent respectively. However, fuel, light & water charges were up 2.8 percent. Prices for goods were up 0.3 percent on the month but down 0.6 percent on the year while services were up 0.4 percent but dropped 1.1 percent on the year. September Tokyo CPI was up 0.3 percent and dropped 0.6 percent on the year. Both cores —excluding fresh food and excluding both fresh food and energy — edged up 0.1 percent on the month. On the year, they were down 1 percent and 1.3 percent respectively.

August household expenditures for two or more person households were up 1.7 percent when compared with last year. Spending on housing jumped 17.4 percent while transportation & communication advanced by 8.6 percent. However spending on medical care dropped 13 percent. Education spending increased by 5.7 percent on the year. Spending was underpinned by government programs rewarding purchases of energy efficient appliances and motor vehicles, household spending. The concern though is consumers will pull back on spending if the rewards program is withdrawn as scheduled at the end of the year. The government is currently working on a stimulus package which is likely to include funding to extend the program.

Americas

Canada

August industrial product price index was up 0.4 percent and is 0.6 percent above its level last year. The raw materials price index was up 2.2 percent and 5 percent on the year. The IPPI was supported by a 3.3 percent monthly spike in primary metal products, itself compounded by a 2.9 percent jump in miscellaneous non-manufactures. Most other gains were relatively small, including a 0.4 percent increase in the petroleum & coal sub-sector. Without this category, prices were up a marginally smaller 0.3 percent from July but were also up 0.6 percent on the year. Weaker prices were seen in a number of areas but the steepest monthly decline was 0.5 percent and limited to the rubber, leather & plastics industry. The RMPI was bolstered by the non-ferrous metals sub-sector which saw prices surge 6.3 percent from their July level. There were also notable advances in vegetable products (3.1 percent), animals & animal products (1.5 percent) and mineral fuels (1.3 percent). The RMPI without mineral fuels was up 2.9 percent from July and 7.5 percent higher than in August 2009.

July monthly gross domestic product declined 0.1 percent on the month but was up 3.7 percent on the year. Total output declined 0.1 percent on the month in both the goods producing and service sectors. Within the former, manufacturing output sank 0.7 percent following a hefty 1.1 percent gain in June. Construction was down 0.5 percent (residential off 2.0 percent), its second drop in the last three months, and utilities slipped 0.4 percent. With agriculture, forestry & fishing registering a 0.3 percent decline, oil & gas extraction posted the only monthly increase (1.1 percent). Within services the biggest loss of output was seen in accommodation & food services and the other services category (both down 0.7 percent). The drop here was compounded by weakness in retail trade (down 0.5 percent) and wholesale trade (down 0.2 percent). Other sub-sectors were broadly steady on the month.

Bottom line

Investors digested a slew of economic data last week. They particularly focused on the purchasing managers’ surveys — they showed slower growth in the industrialized countries and India but stronger growth in China.

This week features central banks. On Tuesday (local time) the Bank of Japan and Reserve Bank of Australia will announce their monetary policy decisions. Analysts are split on whether the RBA will resume increasing its policy interest rate currently 4.5 percent. The Bank of England and the European Central Bank announce Thursday. Neither is expected to make a policy move. Also on next week’s agenda are employment reports from Australia, Canada and the U.S. Needless to say, all three will be monitored very closely!

Looking Ahead: October 4 through October 8, 2010

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