Global Markets

Stocks were up for the most part last week but there was an undercurrent of unease emanating from the sinking dollar to rumbles once again in the banking system. This time the financial sector unease comes from the miss-handling of foreclosures which could potentially derail recovery and the stabilization of the housing market. Markets were in vigil mode Friday morning as they awaited word from Fed Chairman Ben Bernanke concerning QE2 in a Boston speech. There also was a plethora of important new economic data about consumer prices, retail sales, inventories and consumer sentiment around the same time.

Bernanke said nothing new. He kept his options open as he recapped the Fed’s position saying that any move towards further quantitative easing would have to be data dependent. The chairman reiterated that the FOMC was ready to provide additional accommodation if needed. But he noted that the Fed must weigh the costs and risks of further balance sheet expansion and stated that the Fed must move "cautiously" due in part to the Fed's inexperience with judging the impact of quantitative easing. He also listed the litany of economic weaknesses — unemployment is "clearly too high" and inflation "too low."

OPEC agreed on Thursday to hold intact its current supply policy that has been in place for nearly two years. It set aside concerns that a weak dollar would drive the oil price too high for a fragile economy. Oil prices did not react to the widely expected news, but they held firm at close to $84 a barrel, drawing support from a weak dollar. The market has climbed above the $70 to the $80 price range, which Saudi Arabia has said is ideal for producers and consumers.

On the week, equities in Europe, the UK and North America were up. In the Asia Pacific region, shares were mixed. Advances ranged from 8.5 percent (Shanghai Composite) to 0.3 percent (Kospi). Declines ranged from 0.5 percent (PSEi and Taiex) to 1.6 percent (Topix).

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX managed to advance last week despite some roadblocks along the way. Most of the worries swirled around the banking sector again as investors fretted that some banks may have to follow Standard Chartered and come to the market for cash to bolster their balance sheets to meet the Basel III bank capital rules. In on-again off-again gains, equities followed commodity prices — miners were up when commodities prices were up. Investors constantly were on alert as the U.S. dollar swooned and hopes escalated for further stimulus measures from the Federal Reserve. As the pace of the earnings season picked up investors were inspired by better-than-expected results from companies such as Intel, JPMorgan, CSX and Google — but they were also disappointed when GE did not meet their expectations.

The FTSE remained above 5,700 for the week despite a 0.4 percent decline on Friday. Financial stocks sold off as traders worried that Standard Chartered’s surprise rights issue could be the start of a series of cash calls in the sector. But a partial recovery in the banking sector, which rebounded as worries about capital requirements eased, offset profit taking in the mining sector — this sector led in the market’s recent advance. This was the first time that the FTSE ended the week above the 5,700 mark since April 23.

Asia Pacific

Stocks in this region were mixed last week with stocks in Japan showing declines. The Nikkei declined 0.9 percent while the Topix slumped 1.6 percent as the strong yen continued to hurt exporters’ stocks. The Indian Sensex (down 0.6 percent) tracked lower primarily on profit taking after vaulting over the 20,000 mark. Also down for the week were the PSEi and Taiex — both lost 0.5 percent. However, China’s Shanghai Composite soared 8.5 percent as economic growth spurred higher fund flows and improved earnings prospects. The index has cut its decline for the year to 9.3 percent — in mid-September the index was down over 20 percent since December 31, 2009. The Hang Seng gained 3.6 percent on the week and is up 8.6 percent in 2010. The SET was also a big winner last week as it approaches the 1,000 level (currently at 997). The index gained 3.5 percent and is up 35.8 percent so far this year.

The new Basel III capital requirement rules which take effect in 2013 are having an impact in Japan along with Europe. Analysts think that Japan’s three largest banks may sell a total of ¥2 trillion yen in shareholdings over the next three years. Emerging Asia relies on exports for growth so it is quite natural for investors here to monitor U.S. economic data. Indeed, on Friday, many of the indexes declined because initial jobless claims in the U.S. unexpectedly increased and once again sparked concerns about the strength of the economy. Stocks here won’t react to Friday’s better than expected retail sales data until Monday.

It was a sparse week for new economic data. In Japan, the Cabinet Office revealed that August core machinery orders jumped a seasonally adjusted 10.1 percent and surged 24.1 percent on the year. In China, September foreign direct investment increased 6.1 percent from a year earlier to $8.38 billion. Foreign investment for the first nine months soared 16.6 percent to $74.34 billion when compared with the same nine months a year ago.

Bank of Korea

The Bank of Korea left borrowing costs unchanged as an appreciating won threatens export growth while at the same time offering a damper on inflation. Governor Kim Choong Soo and the policy board kept the seven-day repurchase rate at 2.25 percent on Thursday. The Bank last increased rates at its July meeting. The won’s 8 percent jump against the U.S. dollar in the past three months is thought to be endangering the trade gains that have fueled South Korea’s recovery. The advance may also curb accelerating inflation, giving the Bank more room to join counterparts from Malaysia to Australia in pausing interest rate increases.

Currencies

The U.S. dollar was buffeted last week as it continued to drop on expectations of further Federal Reserve stimulus. The pace of decline picked up as trading approached Friday when the Fed chairman gave an early morning talk called Revisiting Monetary Policy in a Low Inflation Environment. The gist of the speech, which synthesized already known information about further quantitative easing, steadied the currency Friday afternoon. However, on the week, the currency was down against all of its major trading partners except Canada.

The Australian and Canadian dollars moved in sync during the week as both hovered barely below parity. However, after reaching parity in early European trading, the Australian dollar fell back after Bernanke’s talk. The Aussie has been a favorite for the last several months — Australia’s relatively high and rising interest rates, close economic links to Chinese growth and the related strength of crucial mineral exports have all fueled the increase. While many monetary authorities in the Asia Pacific region have fought back against the strength of their currencies, Australia is traditionally viewed as willing to let its currency climb as market forces dictate, which lures in funds looking to snag smooth profits.

The Chinese yuan rose to the strongest level since 1993 on speculation that the U.S. Congress will step up calls for faster appreciation especially after the U.S. trade deficit with China widened to a record $28 billion in August. On Friday afternoon, the Treasury announced the postponement of its International Economic and Exchange Rate Policies report to Congress noting that with important G20 meetings ahead it would prefer to wait until after their conclusion to release any report.

Singapore

Singapore tightened monetary policy in a surprise move Thursday, saying it will guide its currency higher in a bid to contain inflation. The Monetary Authority of Singapore, the country’s central bank, said it will increase “slightly” the slope of its policy band for the Singapore dollar and widen the band in which it allows the currency to trade against an undisclosed trade-weighted basket of currencies. It maintained the level at which the band is centered. The MAS uses its currency and not interest rates to guide monetary policy. Investors viewed the MAS decision as an indication that Asian economies are now strong enough to tolerate monetary tightening. The surprise move came as the government reported that the economy contracted in the third quarter at an annualized pace of 19.8 percent from the previous quarter.

Selected currencies — weekly results

Indicator scoreboard

EMU

August industrial output was up 1 percent and 7.9 percent on the year. The spurt was led by the capital goods industry where production jumped 3.0 percent on the month. However, there were also solid gains in intermediates (1.4 percent) and durable consumer goods (1.8 percent). The two areas of weakness were energy (down 0.7 percent) and nondurable consumer goods (down 0.2 percent). The recovery in the latter has lagged well behind the other major groups with annual growth of just 4.0 percent compared with 10.8 percent in intermediates and 11.2 percent in capital goods. The underperformance here reflects the persistent sluggishness of household spending.

September harmonized index of consumer prices was up 0.2 percent and 1.8 percent on the year, its fastest pace since November 2008. Excluding food, drink, tobacco & petroleum as well as omitting just unprocessed food & petrol and without only seasonal foods & petrol, annual inflation held steady for the third month running at 1.0 percent. Rather, the upward pressure on the 12-month headline rate stemmed from an unusually soft period for prices in the year ago month when they showed no change against August. Among the main HICP components the rate picked up in transport (4.1 percent from 3.3 percent) and housing (2.9 percent from 2.6 percent). However, most other areas registered little change and deflation became more entrenched in communications (down 0.9 percent from down 0.5 percent). Regionally the steepest rise in inflation was in Belgium (2.9 percent from 2.4 percent) but Greece (5.7 percent) remained comfortably at the top of the inflation ladder. Ireland (minus 1.0 percent) was the only EMU member to see prices still falling on an annual basis.

August seasonally adjusted merchandise trade gap widened rather more than expected to €1.4 billion. The worsening was attributable to 1.0 percent monthly gain in exports that was more than offset by a 1.8 percent jump in imports. Annual growth in exports was 31.0 percent, just a percentage point short of that achieved by imports. Even so, the unadjusted trade deficit was a sizeable €4.3 billion, sharply up on the €2.8 billion of red ink posted in the year ago period. The largest positive contribution to the bottom line was provided by Germany where a €6.6 billion surplus constituted a small decline from July's €6.9 billion of black ink. Among the other larger EMU members only France (€0.2 billion) offered any help as both Italy (down €2.5 billion) and Spain (down €3.7 billion) again subtracted from the overall balance.

France

August industrial production excluding construction was unchanged from its July level and up 3.2 percent on the year. Within manufacturing, where production also was unchanged on the month, there were some areas of strength. Autos were up 2.4 percent from July and there were respectable gains in electronics & machines (1.5 percent), data processors (2.3 percent) and wood & printed material (1.2 percent) as well. However, the improvement here was largely offset by declines in textiles & leather (6.6 percent), chemicals (2.0 percent), food & agriculture (2.1 percent) and extracted goods (0.9 percent). Output in the construction industry also slipped 0.1 percent.

Italy

August industrial production was up 1.6 percent and 9.5 percent on the year. August was the eighth successive month in which output has expanded. With the exception of energy, which saw a 2.8 percent monthly drop, all of the main sectors increased production on the month. The strongest performer was capital goods (4.8 percent) but intermediates (3.1 percent) also fared well. By comparison, consumer goods (0.5 percent) struggled although this was hardly surprising given the persistent weakness of household spending.

August merchandise trade deficit widened out to a seasonally adjusted €3.3 billion. The deterioration from a slightly larger revised €2.0 billion shortfall in July put the average deficit for the first two months of the quarter at nearly €2.7 billion, up around 10 percent from the second quarter mean. The deficit was caused by a combination of weaker exports, down 1.6 percent on the month, and stronger imports, up 2.8 percent. Both sides of the balance sheet continue to show robust growth over the year with unadjusted exports 31.5 percent higher and imports up an even stronger 38.1 percent.

United Kingdom

September consumer price index was unchanged on the month and was up 3.0 percent on the year. Core CPI was up 0.1 percent and 2.7 percent on the year. Both the retail price index and the index excluding mortgage interest payments posted 0.4 percent advances over August to stand 4.6 percent higher on the year. By far the most significant impact on the monthly change came from a 27.8 percent plunge in air transport fares. This ensured that prices for the transport sector as a whole slumped 3.4 percent on the month. Smaller declines were seen in communications (1.5 percent) and recreation & culture (0.1 percent). The main boost to the CPI came from clothing & footwear which compounded a 2.8 percent monthly bounce in August with a 6.4 percent surge in September. Although this will to a large degree be a function of seasonal factors, the increase was surprisingly large. The other major positive impact was from furniture & furnishings where prices climbed 4.0 percent. The 12-month CPI rate essentially reflected the spike in clothing prices and higher food and non-alcoholic drinks charges, offset by lower fuel costs.

August visible merchandise trade gap shrank by just Stg0.5 billion to a larger than expected Stg8.2 billion in August. The improvement in the headline masked a contraction in both sides of the balance sheet as exports dropped 1.8 percent on the month and imports declined 2.7 percent. The underlying (excluding oil & erratics) balance moved in much the same fashion with monthly declines in both exports (0.3 percent) and imports (1.9 percent) reducing the shortfall by almost Stg0.5 billion to Stg7.1 billion. The shrinkage in the overall trade gap was due to a stronger net position with the EU where the bilateral deficit narrowed by around Stg0.4 billion to Stg3.5 billion. The shortfall with the rest of the world was broadly stable at Stg4.7 billion.

September claimant count unemployment increased by 5,400 but the unemployment rate remained at 4.5 percent for the fourth consecutive month. The ILO data paint a rather different picture with joblessness declining 20,000 in the three months to August after a 17,000 drop in the three months to July. Although this gauge lags the claimant count, the discrepancy between the two has been unusually large in recent months and it is not clear which is the more accurate. The ILO jobless rate was 7.7 percent, down from 7.8 percent in the previous three month period. Headline (3-month) average earnings growth in August was a subdued 1.7 percent, up from a weaker revised 1.3 percent pace in July. Excluding bonuses earnings were up 2.0 percent. Both rates are historically very subdued and certainly not indicative of any potential inflationary pressure.

Asia/Pacific

Japan

September corporate goods price index was unchanged on the month for the third month and slipped 0.1 percent on the year. Prices were mixed on the month with textile products and nonferrous metals up 1.1 percent and 1.4 percent respectively. Petroleum & coal products dropped a monthly 2.2 percent. On the year, processed food stuffs dropped 0.8 percent, information & communication equipment slipped 7.2 percent and electronic components declined 4.2 percent. Nonferrous metals jumped 7.4 percent. The surging yen (or rather the plunging dollar) has added to the downward pressure on the CGPI.

Americas

Canada

August merchandise trade gap narrowed to a smaller than expected C$1.35 billion from a revised C$2.55 billion at the start of the quarter. The improvement reflected a 3.1 percent monthly bounce in nominal exports compounded by a 0.5 percent decline in imports. The increase in cash exports was almost matched by volumes which were up a healthy 2.9 percent from July. Real imports edged up a modest 0.3 percent implying a boost from the net trade sector to real GDP during the month. Nominal sales to the U.S. expanded 2.7 percent on the month and helped to ensure a near doubling in the bilateral surplus to C$2.95 billion. There was also strong growth in exports to the EU which surged 10.0 percent but with imports up an even larger 14.6 percent, the bilateral deficit here grew by nearly C$0.2 billion to C$0.39 billion. By product, overall exports were boosted by strong monthly gains in industrial goods & materials (5.8 percent) and other consumer goods (26.8 percent). Machinery & equipment (2.2 percent) and forestry products also posted advances (1.4 percent) but energy exports edged up just 0.2 percent. Imports were depressed by sizeable declines in autos (6.5 percent), industrial goods & materials (3.3 percent) and forestry products (4.7 percent). Energy imports climbed 2.2 percent.

August manufacturing sales rebounded a strong 2.0 percent and were up 10.3 percent on the year. Nominal gains were quite widespread with fifteen of the twenty-one reporting industries all seeing sales higher than a month ago. Volumes also fared well, up 2.1 percent on July (9.6 percent on a year ago) and more than retraced last time's decline. The headline increase in cash sales was led by the transportation sector which reported a 7.9 percent leap on the month. Within this, motor vehicle shipments climbed 13.9 percent although sales of parts dropped nearly 3 percent. Excluding the auto category, sales were up a more modest 1.1 percent from July and were 8.4 percent higher on the year. Other areas enjoying a particularly good month were paper manufacturing (2.3 percent), petroleum & coal (2.4 percent), non-metallic minerals (6.3 percent) and furniture & related products (5.5 percent). On the downside there were declines in leather & related products (3.7 percent), wood (1.1 percent) primary metals (2.2 percent) and miscellaneous manufactures (3.1 percent). New orders were up 5.3 percent from July, backlogs were up 1.5 percent and the inventories-to-sales ratio slipped a tick to 1.33.

Bottom line

The dollar continued its descent but steadied and even rose after Fed chair Ben Bernanke’s Friday early morning speech. On the week, the dollar declined against all of its major counterparts except the Canadian dollar. Economic data continue to be mixed.

Next week, the Bank of Canada meets and is expected to leave its policy rate unchanged at 1 percent. The Federal Reserve releases its pre-FOMC meeting Beige Book which will no doubt lead to new QE2 speculation. In Europe, The Bank of England will publish the monetary policy committee minutes of October 7^th. In Germany both the ZEW and Ifo surveys are on the docket along with the flash purchasing managers surveys. And in Asia, a new five-year plan is expected from China along with its monthly slew of economic data.

Looking Ahead: October 18 through October 22, 2010

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