Global Markets

Most equity indexes advanced last week despite sober economic data and little visible progress with Spain, the current focus of investor angst. Three of the four major central banks offered no change in policy but the Reserve Bank of Australia did reduce its interest rate. Only three indexes in the Asia Pacific region were down and marginally — the Nikkei, Kospi and Taiex.

Investors focused on a spate of new economic data including global purchasing managers’ surveys and of course, the U.S. employment report. But there were other revealing data releases during the week — Eurozone unemployment and German manufacturing orders in Europe and the Tankan in Japan for example.

In the Eurozone, the final manufacturing PMI for September weighed in at 46.1, a full point above the final August outcome and a six month high. Production dropped for the seventh consecutive month but at least at its slowest rate in five months. New orders were down for the 16th straight month within which exports were off for their 15th consecutive month. Job losses mounted for the eighth straight month but by less than in any period since March. Among the larger member states, the German PMI rose a point to 47.4, a six month high, but the French index slumped more than 3 points to just 42.7, a 41-month low. In Italy the headline index edged up just over 2 points to 45.7 while the Spanish index edged up 0.6 points to 44.0.

In China, both the Markit HSBC and the official National Bureau of Statistics and China Federation of Logistics and Purchasing PMI contracted in September. The CFLP reading was 49.8, up from August’s 49.2. The CFLP index last showed two straight months of contraction in January and February of 2009. The Markit HSBC index reading released earlier was 47.9. The CFLP index has been more positive than the HSBC PMI for several months. The reason is because it is weighted more heavily toward large, state owned firms, which have suffered less impact in the current slowdown than private exporters, which are more heavily represented in HSBC's index.

Reserve Bank of Australia

The first of four central bank announcements came from the Reserve Bank of Australia. The RBA cut its key interest rate by 25 basis points to 3.25 percent from 3.5 percent where it had been since June. Among the reasons for the cut stated in its announcement, the RBA noted that the exchange rate of the Australian dollar has remained higher than expected. It noted that the outlook for the next year looked a little weaker based on international developments. As a result, credit growth has softened as has the labour market in recent months. The statement noted that prospects over Chinese growth is even more uncertain than previously thought. China is Australia’s main export market for its commodities.

Australia’s economy grew about 4 percent in the first half of 2012 from a year earlier on the strength of resource industry investment and consumer spending. The RBA lowered borrowing costs by 1.25 percentage points from November to June to help shield the economy from Europe’s debt crisis and slower growth in China. Most analysts see another 25 basis point cut coming at the November policy meeting. The inflation report on October 24 will be important for the November decision which will be affected by the introduction of a carbon tax. The RBA has inflation target range of 2 percent to 3 percent.

Bank of England

As expected, the Bank of England left its key interest rate at 0.5 percent and the ceiling on its asset purchase program at £375 billion. With the current £50 billion round of official asset purchases not due to be completed until November, the economy would have had to have gone badly off track for any fresh policy moves to be announced at this meeting. An earlier strong market consensus for another £50 billion increase in asset purchases in November has started to waver in recent weeks following some tentative signs of a pick-up in business activity. However, the minutes of the MPC's September deliberations suggested that a number of members were biased towards additional monetary accommodation so next month's vote could well be very close.

Signs are mounting that Britain exited recession in the third quarter, as production bounced back from the hit caused by an extra public holiday in June and ticket sales for the London Olympics. Central bankers have also voiced confidence that their new Funding for Lending Scheme, aimed at getting credit flowing through the economy, will help support the recovery.

ECB

As expected, the European Central Bank’s governing council left its key refi interest rate at 0.75 percent. The deposit and marginal facility rates remained at 0.0 percent and 1.50 percent respectively. There were equally no surprises in the ECB President Mario Draghi’s press conference. Following the announcement last month of the so-called Draghi Plan to intervene as aggressively as needed to stabilize the secondary bond markets (outright monetary transactions or OMTs), news of any fresh initiatives today would have come as major surprise. Rather, the emphasis was once again put on Eurozone governments to address their current structural and fiscal imbalances in order to ensure the stability of the euro. For now at least, the policy ball in very much in the court of the Eurozone governments.

There is still speculation about a cut in the refi rate from its current historic low. To this end, Draghi repeated that risks to the region's economy remain on the downside and that current inflation levels (flash 2.7 percent in September) should be only transitory and so not a threat to second round effects. However, a number of Council members seem to see little virtue in such a move which would imply an unwelcome narrowing the 150 basis point official interest rate corridor unless the deposit rate is allowed to go into negative territory.

Bank of Japan

As expected the Bank of Japan’s monetary policy board left its monetary policy unchanged. At its last meeting on September 17^th and 18^th, the BoJ added ¥10 trillion to the Bank’s asset purchasing fund which now totals ¥80 trillion.

The monetary policy board said that the economy is leveling off ‘more or less for now’ and repeated that overseas economies have moved deeper into a slowdown. The MPB said that it must watch global market developments especially with the high degree of uncertainty that currently exists. It repeated that it must watch the movement of the yen and its impact on prices.

Minister for economic and fiscal policy, Seiji Maehara, attended the meeting and said he would attend BoJ policy board meetings regularly. He is the first cabinet minister to do so in 10 years. Earlier in the week, he suggested that the BoJ should buy foreign bonds — a road its officials are reluctant to travel. Since these purchases would involve exchanging yen other currencies, they would help temper the yen’s strength. But BoJ officials say this amounts to intervening in the currency market, something that only the Ministry of Finance has the legal authority to do.

The Bank has been under heavy political pressure to do more. But should the BoJ act on the day a high ranking politician comes to a meeting, it may given the impression that the BoJ is affected by political pressure. A 1998 revision to the law governing the Bank was a victory for its independence, stripping the government of the power to fire BoJ officials. The changes at that time were meant to prevent runaway inflation as a result of political arm twisting on monetary easing.

Global Stock Market Recap

Europe and the UK

Markets here scored impressive gains last week despite the unsettled Spanish and Greek debt situations. Investors also seemed to ignore gloomy regional economic data. Rather they focused on a string of better than expected economic news from the U.S. Equities were boosted at week’s end by the U.S. September employment report. The data overshadowed investor concerns over the situation in Spain and in Greece. The Bank of Japan also abstained from announcing further stimulus Friday, just as the European Central Bank and Bank of England did on Thursday. On the week, gains ranged from 2.0 percent (OMX Stockholm) to 5.2 percent (FTSE MIB).

Earlier in the week, a media report suggested that Spain was prepared to request a Eurozone bailout as early as the weekend, but that Germany is urging it to wait. However, a subsequent report by Spanish news service said that Prime Minister Mariano Rajoy had no such plans. A Spanish bailout request would trigger Spanish bond buying by the European Central Bank, which would help to bring down the country's borrowing costs. On Thursday, Spanish Economy Minister Luis de Guindos insisted that his country does not need a bailout, despite rumors that the country may request European aid. The minister's remarks came a couple of days after Prime Minister Mariyano Rajoy denied reports that Spain is planning to seek a bailout at the upcoming meeting of Eurozone finance ministers on October 8^th.

Greece will run out of cash in November without the next tranche of bailout fund according to Prime Minister Antonis Samaras in an interview with Handelsblatt. Samaras said the European Central Bank should consider accepting lower interest rates on Greek debt holdings or rolling over its debt holdings to give more time. The International Monetary Fund has no fixed timeline for the troika report on Greece.

Asia Pacific

Equities were mostly higher last week with only the Nikkei, Kospi and Taiex edging lower. The Shanghai Composite was closed for the week for the Golden Week holidays. The indexes were bolstered by better than anticipated U.S. economic data and reassurance from the European Central Bank that it would buy bonds of the troubled Eurozone states as soon as the necessary conditions are fulfilled. Australian equities were up 2.4 percent after the Reserve Bank of Australia lowered its key interest rate by 25 basis points to 3.25 percent and intimated that further interest rate reductions could be in the RBA’s future.

The Asian Development Bank slashed its growth forecast for developing Asia, citing gloomier global prospects and weak domestic demand in the region's largest economies. In its Asian Development Outlook 2012 update, the bank cut the region's growth forecast excluding Japan for this year to 6.1 percent from the 6.9 percent estimated in April, but noted that most of the developing Asia economies have room to counteract shocks emanating from the unresolved euro area sovereign debt crisis or a sharp fiscal contraction in the U.S.

Currencies

The U.S. dollar mostly was down last week after investors shed their risk aversion. The dollar weakened Friday after an unexpected drop in the U.S. unemployment rate prompted investors to spurn the safety of the U.S. dollar and seek higher yielding assets. The U.S. currency was down for a second day against the euro as stocks climbed after the jobless rate slid to its lowest level since January 2009. The euro remained close to a two week high against the dollar after European Central Bank president Mario Draghi on Thursday came close to urging European leaders to tap its debt-buying plan.

The yen was down after the Bank of Japan left its policy unchanged. The U.S. jobs report supported risk sentiment on Friday. However, the dollar surged against the Japanese yen after the report’s release. The yen had been supported by the Bank of Japan’s decision not to ease monetary policy despite pressure from Japan’s new economic and fiscal policy minister, Seiji Maehara. Mr Maehara became the first Japanese minister to attend a BoJ board meeting since 2003 after saying he wanted the bank to pursue “powerful monetary easing”. The BoJ did, however, repeat its warnings of the effects of a strong yen on the economy.

Selected currencies — weekly results

Indicator scoreboard

EMU

August unemployment rate was 11.4 percent, unrevised from July. The number of unemployed increased 34,000 to a new record high of 18.196 million. Regionally there was more bad news for Spain where the unemployment rate edged 0.1 percentage points higher to 25.1 percent, while the other larger states all saw no change from their respective July levels. Elsewhere, Portugal added 0.2 percentage points to its rate which, at 15.9 percent, was the second highest across the region and so continued to contrast sharply with the likes of Germany (5.5 percent).

August retail sales excluding autos edged up 0.1 percent on the month. Purchases have now risen for four months in a row but volumes were still 1.3 percent lower on the year. Nonetheless, Non-fuel sales excluding food were 0.7 percent weaker on the month and more than offset July's 0.5 percent advance. This sector has now recorded declining volumes in three of the last five months. Purchases of food, drink & tobacco were 0.1 percent firmer than in July. Regionally, the picture was very mixed. Germany saw a 0.3 percent monthly rise but France a 0.8 percent drop. With a 2.1 percent surge, Spain was especially strong but this was probably largely due to sales being brought forwards in anticipation of September's hike in VAT.

Germany

August manufacturing orders were down 1.3 percent following a smaller revised 0.3 percent increase in July. On the year, workday adjusted volumes 4.8 percent lower after a 4.6 percent annual decline last time. The slide was largely attributable to capital goods which posted a 3.0 percent drop and, to a lesser extent, a 0.7 percent dip in consumer & durable goods. By contrast, basics expanded 1.3 percent, building on the 0.3 percent monthly gain in July. Domestic demand was down 3.0 percent on the month. Capital goods, down 6.8 percent, again dominated the headline decline. Foreign orders held up much better and in aggregate, showed no change from their July level. Somewhat surprisingly, orders from the other Eurozone countries jumped 2.4 percent with capital goods surging 5.3 percent and consumer & durables up 4.8 percent. The non-EMU bloc fared much worse and dropped 1.4 percent.

Asia/Pacific

Japan

The Tankan survey was slightly better than analysts expected. Third quarter Tankan large manufacturers’ index reading was minus 3, down from second quarter’s reading of minus 1 and analysts’ expectations of minus 4. The small manufacturers’ index reading was minus 14, down slightly from June’s minus 12 and slightly better than expectations of a minus 15 reading. Large non-manufacturing index was unchanged at plus 8 while small non-manufacturers index reading was unchanged at minus 9. Total CAPEX for fiscal year 2012 was projected at 5.8 percent, up from June’s 4.0 percent. Big firms see CAPEX unchanged after saying it would sink 6.6 percent in June.

Australia

August seasonally adjusted merchandise trade deficit was A$2.03 billion, an increase of A$497 million on the deficit in July. Exports dropped 3.3 percent on the month and were down 12.3 percent from a year ago. Non-rural goods dropped 6 percent while non-monetary gold slid A$2 million. The main components contributing to the decline were metal ores & minerals, down 7 percent. Imports were down 1.3 percent but were 5.4 percent higher on the year. Intermediate and other merchandise goods dropped 4 percent and non-monetary gold slid 24 percent. Consumption goods were up 2 percent and capital goods rose $10 million. Services imports were 1 percent higher.

August retail sales were up a less than expected 0.2 percent after sinking 0.8 percent in July. Analysts expected an increase of 0.4 percent. On the year, sales were 3.2 percent higher from a year ago. Contributing to the increase were department store sales (up 6.9 percent), followed by food retailing (0.4 percent) and other retailing (0.4 percent). These increases were partially offset by declines in household goods retailing (down 1.5 percent), cafes, restaurants & takeaway food services (down 0.9 percent) and clothing, footwear & personal accessory retailing (down 0.7 percent). The increase in department stores follows a larger drop in July. However, department stores remain the weakest performing industry over the longer term (down 0.4 percent in trend terms). The strongest performing industry over the longer term was cafes, restaurants and takeaway food services (up 0.5 percent in trend terms).

Americas

Canada

August industrial product prices posted their fourth monthly decline in a row slipping 0.1 percent dip on the month following a steeper revised 0.6 percent decline in July. On the year, the IPPI was down 0.3 percent. At the same time, raw material costs jumped 3.4 percent July, their first back-to-back monthly increase since March/April last year. The RMPI was down 4.0 percent on the year. The IPPI was depressed by a 1.3 percent monthly decline in motor vehicles and other transportation prices within which motor vehicles were off 1.8 percent. The other main source of downward pressure from the sub-sectors came from primary metals (down 0.8 percent) but the largest single impact was the exchange rate. Hence without the benefit of the stronger local currency, the IPPI would have risen 0.4 percent from July. The principal upward pressure on prices came from petroleum & coal where charges jumped 3.4 percent on the month and without which the IPPI would have declined a more substantial 0.5 percent. The second consecutive monthly increase in the RMPI reflected a 9.1 percent surge in mineral costs. Excluding this category, the RMPI would have fallen 1.3 percent on the month. The main areas of weakness were ferrous materials (down 3.2 percent) and non-ferrous metals (down 3.0 percent).

September employment was up 52,000 after August's unrevised 34,300 advance and the best performance since April. However with the participation rate climbing 0.2 percentage points to 66.8 percent, the jobless rate still edged up 0.1 percentage points to 7.4 percent, its highest level since February. The increase in employment was mainly attributable to full time positions which posted a healthy 44,100 advance. Part time jobs were up a more modest 8,000. With public sector payrolls declining 10,800, job creation was left to the private sector (29,100) and, notably, the self-employed (33,800). The goods producing industry added a net 34,500 to its headcount while services gained 17,600. However, within the former, manufacturing was down a disappointing 6,200, although this was easily more than offset by a 28,800 increase in construction. Utilities (11,300) and agriculture (8,700) also advanced but natural resources shed 8,200. Services were boosted by a 34,100 surge in retail and a 23,600 gain in information, culture & recreation. Other smaller increases were recorded by finance, insurance, real estate & leasing (6,800), professional, scientific & technical services (6,700) and public administration (8.600). However, transportation & warehousing lost 13,500 jobs, business, building & other support services shed 17,100, education was off 13,600 and the other services category was down 18,900.

Bottom line

Only the Reserve Bank of Australia changed its monetary policy last week. Equities rallied on better than anticipated U.S. data but paid little attention to dismal regional data.

Data in the upcoming week focuses on industrial output and international trade data. The Federal Reserve releases its Beige Book of anecdotal economic information in preparation for its upcoming meeting on October 24^th and 25^th. The IMF and World Bank hold their annual meeting in Tokyo beginning October 9^th.

Looking Ahead: October 8 through October 12, 2012

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