Global Markets

After two weeks of hefty declines, equities rallied on signs that Europe is finally taking decisive action to resolve its sovereign debt crisis. What really boosted equities was Wednesday’s move by the six major central banks to ease access to U.S. dollars. All indexes followed here advanced with the exception of the Shanghai Composite which was down 0.8 percent. Gains ranged from 0.7 percent (PSEi) to 11.0 percent (MIB). But for the month as a whole, only the Dow, Bolsa and the SET managed to salvage November with gains of 0.8 percent, 1.9 percent and 2.1 percent respectively.

The Federal Reserve, European Central Bank, the Banks of England, Japan and Canada and the Swiss National Bank moved to buttress the global financial system by increasing the availability of U.S. dollars outside the United States. The move reflects growing concern about the fallout of the European debt crisis. The Banks announced that they would reduce the cost of existing dollar swap lines by 50 basis points to 0.5 percent from December 5^th and said the loans would be available until February 2013. Other measures included setting up bilateral swap arrangements between the central banks so that any bank could tap additional liquidity in their own currencies if necessary. The surprise coordinated move was aimed at preventing global financial markets from coming under pressure that could potentially lead to a seizing up of credit.

Stocks soared in response. Some analysts hailed evidence that policy makers were showing greater determination to address the crisis. Some analysts were quick to note that the program does not address the root causes of the European crisis. At best, analysts said, the move could buy the 17 Eurozone member states a little more time to agree on a broader plan to stabilize financial markets. The shortage of dollars in Europe results partly from the pullback of American money market funds, which cut their investments in European banks by 42 percent between the end of May and the end of October, according to Fitch Ratings.

The arrangements carry little risk for the Fed, which swaps dollars for the currency of the borrowing country together with a commitment to reverse the transaction at the same exchange rate. The Fed operated a similar program with a broader range of central banks immediately after the terrorist attack on September 11, 2001 and again during the financial crisis. The Fed’s decision to reduce the cost of the dollar loans means that it is now providing money at lower cost to European banks than to U.S. banks. The prevailing interest rate at the Fed’s discount window is 0.75 percent. The difference reflects the reality that European banks are in much more trouble.

The European Central Bank hinted on Thursday it was ready to move more aggressively to tackle the crisis if politicians agree on much tighter budget controls in the Eurozone, although it stopped short of detailing what exact measures it would take. ECB President Mario Draghi signaled on Thursday it stood ready to act more aggressively to fight Europe's debt crisis — if political leaders agree next week on much tighter budget controls. Draghi did not spell out what action the ECB might take, but it is under huge political and market pressure to massively step up purchases of Eurozone government bonds or lend money to the IMF to support ailing Italy and Spain. In the short-term, economists expect the ECB to relieve pressure on banks and an economy heading into recession by cutting interest rates at its December 8^th meeting and announcing longer-term cheap liquidity tenders with easier collateral rules. With the ECB formally barred by treaty from acting as lender of last resort to the Eurozone or directly financing governments, EU officials are working on ways to support states under bond market pressure via the International Monetary Fund.

After markets in the Asia Pacific region had closed Wednesday, the Peoples Bank of China cut bank reserve requirements for the first time in nearly three years. While some analysts were expecting a move before the end of the year, Wednesday's move came as a surprise for global markets, underscoring concerns about China's slowing growth trajectory. The PBoC said that effective December 5^th it would lower the reserve requirement ratio for banks by 50 basis points to 21 percent.

The Organisation for Economic Cooperation and Development (OECD) slashed its growth forecasts and said that the Eurozone’s sovereign debt crisis has become the biggest threat to the global economy. It said that a break up of the currency zone can no longer be ruled out and urged the ECB to play a bigger role in defusing the crisis. Its twice-yearly Economic Outlook forecasts world growth to slow to 3.4 percent in 2012 from 3.8 percent this year. This marks a sharp fall from its previous outlook in May when the OECD estimated the world economy would grow 4.2 percent this year and 4.6 percent in 2012.

Global Stock Market Recap

Europe and the UK

Equities rallied last week and in the process recouped their losses of the previous two weeks. They also made a sizable dent in their monthly losses in November. The advances were supported by hopes that the European Central Bank will support the region's sluggish economy after political leaders forge a closer fiscal union. The week’s rally was the best of 2011. A favorable U.S. employment report on Friday helped to keep equities buoyant as the week ended. The FTSE was up 7.5 percent for the week and in the process cut November’s loss to 0.7 percent. The CAC and DAX soared 10.8 percent and 10.7 percent respectively. They lost 2.7 percent and 0.9 percent respectively on the month. The SMI chalked up a 6.0 percent gain on the week but lost 1.4 percent in November.

Comments from German and French leaders reinforced expectations that a credible plan to tackle the Eurozone debt crisis may be announced as soon as the December 9^th summit of all 27 European Union leaders. Surprisingly strong U.S. economic data also lifted spirits.

While the focus is on the sovereign debt situation, growth in the Eurozone economies is declining with accelerating speed. For example, Eurozone manufacturing activity shrank at the fastest pace in 28 months in November. The purchasing managers' index for the manufacturing sector fell to 46.4 in November from 47.1 in October. The PMI has signaled contraction in each of the past four months with a score below 50.

Asia Pacific

Equities in this region rebounded as well with all but the Shanghai Composite recording healthy gains. The Chinese index slid 0.8 percent on the week. All indexes in the region were down in November with the exception of the SET. Receding concerns about Europe's sovereign debt crisis and recent U.S. economic indicators showing signs of improvement in the United States bolstered the outlook for the global economy.

Investors in this region also were reassured after French President Nicolas Sarkozy said he will meet German Chancellor Angela Merkel on Monday in Paris and make proposals to guarantee Europe's future. But offsetting the progress in Europe and steady U.S. growth, economic data from China showed that the manufacturing sector deteriorated at the fastest pace in 32 months in November. The Markit/HSBC purchasing managers' index slid to a reading of 47.7 from 51 in October, marking the weakest score since March 2009. A reading below 50 marks contraction.

Peoples Bank of China

China eased monetary policy for the first time in three years by cutting the amount of deposits that banks must hold in reserve. On Wednesday, the People’s Bank of China said it would reduce the required reserve ratio for all banks by 50 basis points, starting on December 5^th. The Chinese move triggered a surge in global equity and commodities markets, though it came too late to reverse a drop in Asian equity markets. The required reserve ratio which was at a record high of 21.5 percent for the largest banks was reduced to 21 percent.

The move follows a string of increases earlier this year and is focused at reining in inflation that peaked at an annual rate of 6.5 percent in July. Consumer price increases slowed to 5.5 percent in October from a year earlier and expectations are that inflation cooled further in November, which would provide room for the PBoC to loosen monetary policy by cutting the reserve ratio. The reserve move suggests the government's policy focus is shifting toward promoting economic growth from controlling inflation.

Currencies

The U.S. dollar was down against its major counterparts with the exception of the yen last week as risk concerns eased. The euro advanced for the first time in five weeks against the dollar after six central banks including the Federal Reserve acted to make more funds available to lenders to keep Europe’s debt crisis from deepening. However, gains in the euro were tempered by concerns that the December 9^th summit of European leaders will not be able to stem the crisis.

Both the Swiss and Japanese continue to fight the escalation of their currencies’ value against the euro and the U.S. dollar. Switzerland said it may consider additional steps to support the Swiss National Bank in its fight to curb the currency’s gains. And in Japan, Finance Minister Jun Azumi said he will take action on speculative currency moves. To stem yen appreciation, Japan sold ¥9.09 trillion in the currency market between October 28 and November 28.

Both the dollar and the yen slid on November 30 as China, in a move to encourage growth, cut its bank reserve requirements damping safety demand. Appetite for risk and commodity currencies improved sharply that day as well after the Federal Reserve and five other central banks moved to improve liquidity in the financial system. The dollar fell across the board as investors moved into riskier currencies. Markets were already positive before the Fed’s announcement on news that China had cut the reserve requirement for its banks for the first time in almost three years.

Selected currencies — weekly results

Indicator scoreboard

EMU

October M3 money supply was up only 2.6 percent on the year after a slightly smaller revised 3.0 percent increase in September. However, the 3-month average of the annual growth rates still crept up from 2.6 percent to 2.8 percent. Annual growth of loans to the private sector accelerated from 2.5 percent to 2.7 percent despite a sharp drop in the personal sector (2.2 percent from 2.9 percent). Lending for house purchase (3.0 percent after 3.9 percent) slowed markedly. However, the deceleration here was more than offset by an increase in borrowing by non-financial corporations (1.9 percent from 1.6 percent) and, in particular, by a jump in loans to non-financial intermediaries, excluding insurance corporations and pension funds (8.7 percent from 4.5 percent).

November EU economic sentiment slid 1.1 points to 93.7, its ninth decline in a row. The latest reading reflected worsening conditions in most sectors of the aggregate economy with just construction (minus 24.8 after minus 25.1) managing any improvement. Declines in morale in both the consumer sector (0.5 points to minus 20.4) and industry (0.8 points to minus 7.3) were mild but there were somewhat sharper falls in services (1.8 points to minus 1.7) and retail (1.3 points to minus 11.0). Significantly, the deterioration in industrial morale means that confidence is now below its respective long-run average in every category.

November flash harmonized index of consumer prices was up 3.0 percent on the year, unchanged from its October rate. Among the larger states, inflation dropped a notch in Germany (now 2.8 percent), Italy (3.7 percent) and Spain (2.9 percent). Details of the core indexes will not be released until December 15^th.

October unemployment was up by a further 126,000 to a record 16.294 million. The increase was sufficient to lift the jobless rate to 10.3 percent from 10.2 percent in September. Outside of Germany where employment continues to grow at relatively respectable pace, the labor market is struggling. The French jobless rate held steady for the fourth consecutive month at 9.8 percent but both Italy and Spain saw their rates jump 0.2 percentage points to 8.5 percent and 22.8 percent respectively. Conditions also worsened significantly in Austria (4.1 percent from 3.9 percent) Cyprus (8.2 percent from 7.9 percent) and the Netherlands (4.8 percent from 4.5 percent). Apart from Germany (5.5 percent from 5.7 percent) the only countries to register a drop in their unemployment rate were Belgium (6.6 percent from 6.7 percent) and Luxembourg (4.7 percent from 4.8 percent).

November final estimate of the manufacturing PMI was unchanged from the flash reading of 46.4 — its lowest level since July 2009. The latest slide reflected further weakness in output and orders, the former down for the sixth consecutive month and the latter posting its fourth successive drop. The rate of decline in output was the fastest since June 2009 and would have been worse still but for a further erosion of backlogs. This warns that headcount, which for the first time since April last year failed to rise, will start to turn down soon. Regionally, the index slipped a larger revised 1.2 points from the flash estimate to 47.3 and a 29-month low in France while Germany saw an unchanged 1.2 point drop to 47.9, its worst level in 28 months. Spain at 43.8 was far short of the key 50 mark and the seventh consecutive month in which activity rates have declined. Italy saw a modest 0.7 point improvement to 44.0 but this only suggests a slight deceleration in the rate at which conditions are deteriorating.

Germany

October retail sales were up 0.7 percent but are still 0.6 percent below a year ago. The advance followed a marginally smaller revised 0.3 percent increase last time. The latest gain put sales 0.7 percent above their third quarter average.

November unemployment was down by 20,000 to more than reverse a smaller revised 6,000 increase at the start of the quarter. The number of people out of work now stands at 2.913 million, a 20-year low and the decline was large enough to lower the unemployment rate to 6.9 percent from 7.0 percent. The latest slide in joblessness was accompanied by an 11,000 gain in vacancies, up from a larger revised increase of 8,000 in October.

France

October consumer spending on manufactured products was up 0.3 percent on the month after an upwardly revised 0.1 percent increase in September. However, on the year sales were 0.2 percent weaker. October would have been a good deal more robust but for the auto sector which saw a 1.0 percent drop on the month following gains of 1.8 percent and 2.3 percent in August and September respectively. Apart from textiles (down 0.5 percent), demand was notably stronger and both household goods (2.2 percent) and the other products category (1.8 percent) fared especially well. Total spending was unchanged on the month following a 0.2 percent drop last time and was still 0.9 percent lower than in October 2011.

Asia/Pacific

Japan

October merchandise trade deficit was ¥273.8 billion. On the year, exports slid 3.7 percent while imports soared by 17.9 percent. The hefty jump in imports was due to increased fossil fuel purchases to offset the loss of electricity generation capacity due to the continued shutdown of many of Japan’s nuclear reactors. In October, exports to Thailand (down 5.1 percent) in particular were expected to decline on the year because of flooding. Downward pressure from slowing overseas demand and the strong yen also played a role. Exports to the U.S. were down 2.3 percent and were 2.9 percent lower to the EU when compared with a year ago. Exports to China slid 7.7 percent and were down 6.6 percent to all of Asia. On a seasonally adjusted basis, the trade deficit ballooned to ¥457.9 billion from ¥96.7 billion the month before. On the month, exports were down 3.5 percent after increasing 1.4 percent in September. Imports were up 2.8 percent after increasing 2.4 percent.

October consumer prices edged up 0.1 percent on the month but were 0.1 percent lower on the year. Excluding only fresh food, the CPI was down 0.1 percent both on the month and year. Core excluding energy along with fresh food was down 0.1 percent on the month and dropped 1.0 percent on the year. Energy prices were down 0.5 percent in October but up 6.1 percent from last year. Prices were pushed down by the end of the tobacco tax increase effect. Most subcategories were down on the year, the exception being the fuel, light & water charges category which was up 4.2 percent. Transportation & communication prices were up 1.4 percent while clothing & footwear were up 0.3 percent. Goods prices were up 0.2 percent on the month and down 0.5 percent from last year while services were unchanged and edged up 0.1 percent.

October unemployment rate jumped to 4.5 percent from 4.1 percent in September. The number of unemployed persons was 2.88 million, a decline of 460,000 from the previous year. Employment dropped by 220,000 on the year after sinking 330,000 in September. The job offers to seekers ratio remained at 0.67. The labor participation rate was 59.4 percent.

October household spending was down 0.4 percent on the year for the eighth consecutive decline. On the year, spending was mixed with food spending slipping 0.4 percent on the year while housing jumped 37.1 percent. Fuel, light & water charges spending dropped 5.8 percent. However, spending on clothing & footwear (2.3 percent), furniture &household utensils (up 2.3 percent) and medical care (7.5 percent) all were up on the year. Education and culture & recreation spending dropped 7.6 percent and 7.5 percent respectively.

October retail sales jumped 1.9 percent on the year after sinking 1.1 percent in September. The increase was the first monthly rise since July. Retail auto sales soared 22.7 percent on the year after slipping 0.2 percent in September. Retail machinery sales however, plunged 30.2 percent after sinking 21.6 percent in September. Large scale retail store sales continued to decline, dropping 1.4 percent after declining 3.6 percent the month before.

October industrial production rebounded a surprising 2.4 percent and substantially more than the 1.0 percent monthly increase anticipated by analysts. In September output dropped 3.3 percent. On the year, output was up 0.3 percent after sinking 3.4 percent last time. Industries that contributed to the rebound were transport equipment, general machinery and chemicals (excluding drugs). Commodities that contributed to the increase were large passenger cars, small passenger cars and drive, transmission & control parts.

Australia

October retail sales were up a weaker than expected 0.2 percent on the month after rising 0.4 percent in September. Analysts forecast a 0.5 percent increase. On the year, sales were up 3.4 percent. Food retailing increased 0.5 percent while clothing, footwear & personal accessory retailing gained 1.2 percent. Household goods retailing and cafes, restaurants & takeaway food services both were up 0.2 percent. However, other retailing sales were down 0.4 percent while department stores were down 0.7 percent.

Americas

Canada

Third quarter GDP was up 0.9 percent on the quarter and 2.4 percent from a year ago. On an annualized basis, GDP was up 3.5 percent. However, the domestic GDP expenditure components were soft. Household consumption expanded 0.3 percent on the quarter while government spending was up just 0.2 percent and gross fixed capital formation only 0.1 percent firmer. Housing investment was up 2.6 percent but investment in plant & machinery slumped 0.9 percent. Inventories were unwound aggressively and subtracted about 0.7 percentage points from the bottom line. Final domestic demand grew just 0.2 percent. The main impetus to growth came from net foreign trade as export volumes surged 3.4 percent on the quarter while imports declined 0.8 percent. The combined effect was to add more than 1 percent to quarterly growth. In terms of output, the goods producing sector saw a quarterly gain of 1.4 percent (manufacturing 0.9 percent) while services achieved a more modest 0.6 percent advance. Inflation news was positive with the GDP deflator up only 0.3 percent on the quarter, half its second quarter pace.

September monthly GDP was up 0.2 percent and 3.0 percent on the year. The latest advance, which followed a stronger revised 0.4 percent gain in August, was led by the goods producing sector where output was up 0.5 percent. Manufacturing was up 0.6 percent while construction gained 0.2 percent. However, utilities dominated with a 1.2 percent bounce, well ahead of mining & oil & gas extraction (0.5 percent). The only decline in this category was agriculture, forestry & fishing (0.1 percent). Service sector output edged just 0.1 percent higher on the month, mainly thanks to a 0.7 percent bounce in retail trade. The only other increase of note was in arts, entertainment & recreation (1.7 percent) although a number of other sectors saw small gains. Information & cultural industries (down 0.4 percent) recorded the only decline of any real significance.

October industrial product price index edged down 0.1 percent on the month but was 4.7 percent higher than a year ago. The raw material price index dropped 1.2 percent but was up 11.3 percent on the year. The monthly decrease in the IPPI was led by a 4.4 percent slump in primary metal product prices and masked modest increases in several sub-sectors, although motor vehicles & other transport equipment (1.2 percent) was notably firm. Prices of electrical & communications products (0.5 percent) and petroleum & coal (0.6 percent) also advanced. Excluding the latter, the headline index would have declined 0.2 percent from August and risen 2.3 percent on the year. The RMPI was depressed by an 8.8 percent monthly plunge in the cost of non-ferrous metals, compounded by sizeable declines in both vegetable products (3.5 percent) and ferrous materials (2.4 percent). However, animal & animal products were up 3.4 percent and mineral fuels 0.7 percent. Without the latter, the RMPI would have dropped a much steeper 2.9 percent on the month.

November employment dropped 18,600 while the unemployment rate edged up to 7.4 percent from 7.3 percent in October. The jobs decline masked a respectable 34,600 increase in full time positions. However this was more than offset by a hefty 53,300 drop in part time employment. Private sector jobs rose 11,000 while the public sector shed 2,200 and the number of self-employed fell 27,500. The November deterioration was concentrated in services where payrolls shrank 43,900. Within this, trade (down 34,100) was especially weak and there were double digit declines too in business, building & other support services (29,200), education (13,400) and finance, insurance, real estate & leasing (10,800). On the positive side, jobs increased significantly in professional, scientific & technical (10,000) as well as in the other services category (36,200). The goods producing sector saw a 25,200 advance in its workforce, led by construction (19,600) and natural resources (9,900). There was also a decent gain in utilities (8,000) but manufacturing lost a further 7,300 positions and agriculture was down 5,100.

Bottom line

Last week, unexpected policy moves sent equities higher and helped to erase some of the steep November losses. The PBoC announced a cut in its bank reserve requirements. And six major central banks announced a new currency swap agreement. U.S. economic data were generally better than expected, erasing some of the doubts about the economy. But European data showed signs of weakening economies tipping into recession.

Four major central banks meet this week. The Reserve Bank of Australia and the Bank of Canada meet Tuesday while the Bank of England and European Central Bank make announcements on Thursday. While the Banks of Canada and England are expected to leave their policy interest rates unchanged at 1.0 percent and 0.5 percent respectively, many analysts see the ECB cutting rates for a second consecutive month by 25 basis points to 1.0 percent. Opinion is divided about the RBA, given the bank will not meet again until February 2012. The EU summit is scheduled for the end of the week.

Looking Ahead: December 5 through December 9, 2011

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