Global Markets

Equity investors pulled back from risk as a tide of gloomy forecasts quashed sentiment. Even some better than expected economic data refused to pull investors out of their doldrums. For the week, all indexes followed here declined except the Shanghai Composite and Hang Seng. The former returned from a week’s holiday to rise 0.9 percent while the latter was 0.6 percent higher on the week. Losses ranged from 0.1 percent (All Ordinaries) to 3.8 percent (IBEX).

The IMF cut its global growth forecasts and warned of even slower growth unless officials in the U.S. and Europe address threats to their economies. The world economy is expected to grow 3.3 percent this year — the slowest since the 2009 recession — and 3.6 percent in 2013. These projections compare with predictions made as recently as July of 3.5 percent in 2012 and 3.9 percent in 2013. The organization now sees “alarmingly high” risks of a steeper slowdown, with a one-in-six chance of growth slipping below 2 percent. According to the IMF, “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component. ... The answer depends on whether European and U.S. policy makers deal proactively with their major short term economic challenges.”

The World Economic Outlook (WEO) called for the U.S. to find an alternative to planned automatic tax increases and spending cuts that would trigger a recession. Europeans must follow up on their commitments for a more integrated monetary union. At the same time, many emerging markets can afford to cut interest rates or pause in their tightening to fight off risks to their economies. The Eurozone will contract 0.4 percent this year and grow 0.2 percent in 2013. However, the U.S. is seen expanding 2.2 percent this year — higher than an earlier forecast — and growing 2.1 percent next year, less than previously predicted. Japan’s estimate was cut to 2.2 percent this year and to 1.2 percent in 2013. Growth forecasts were also lowered for emerging markets where domestic factors add to external constraints.

In a departure from the IMF’s previous position, IMF managing director Christine Lagarde said Greece should be given more time to implement its austerity program and European countries should refrain from fresh budget cuts or tax increases if growth weakens. Her call for slower adjustment is a boost to Athens, which is trying to persuade its Eurozone partners to give it more time. Ms Lagarde also urged countries more generally to refrain from new austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth. She cautioned against countries front-loading spending cuts and tax increases.

The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity. Ms Lagarde said that, given this reassessment of the impact of fiscal consolidation on output, it was no longer sensible for governments in Europe to stick to budget deficit targets should growth disappoint.

In its WEO, the fund said evidence from 28 countries showed that so-called fiscal multipliers, which governments use to estimate the impact of cutbacks on growth, had been too favorable. Olivier Blanchard, the IMF’s chief economist, indicated earlier this week that this research would affect the fund’s policy prescriptions.

Global Stock Market Recap

Europe and the UK

Equities were down for four of five days last week as investor concerns over Eurozone debt continued to undermine confidence. Even the better than expected U.S. consumer sentiment report on Friday did not lift morale. Rather European stocks declined as International Monetary Fund Managing Director Christine Lagarde said global growth is not fast enough to curb unemployment and data from China show that lending missed estimates. The FTSE, CAC, DAX and SMI retreated 1.3 percent, 2.0 percent, 2.2 percent and 0.3 percent respectively.

Investors focused on a series of meetings held at the beginning of the week by Eurozone finance ministers. But once those meetings ended, attention slued to the IMF/World Bank meetings held this year in Tokyo. Comments there regarding global growth and Europe in particular dampened positive sentiment. The onset of U.S. earnings season also amped up the anxiety level.

A split within the Troika on whether to give Greece more time to get its house in order was revealed in comments by IMF’s Lagarde. Ms Lagarde said during a meeting in Tokyo that Eurozone officials should allow Greece two extra years to meet austerity targets required for its bailout. Unemployment in Greece rose to a record high of 25.1 percent in July, up from 24.8 percent in June and 17.8 percent a year earlier. She also suggested debt reductions are needed before a €130 billion bailout can proceed.

The Eurogroup at its Monday meeting in Luxembourg officially launched the European Stability Mechanism (ESM), the Eurozone’s €500-billion permanent bailout fund. Eurozone finance chiefs also endorsed the latest austerity measures announced by the Spanish government and indicated that the aid for Spanish banks from ESM will likely start in November. Finance ministers from all the 27 countries in the European Union convened in Luxembourg in the lead up to a summit of the region’s leaders in Brussels on October 18^th and-19^th.

Asia Pacific

Equities were down for the most part last week with the exception of those from mainland China and Hong Kong. The Shanghai Composite rallied after returning from the previous week’s Golden Week holidays. Investors here were focused on the continuing European worries plus the slew of downbeat news from the IMF and World Bank as they held their annual meeting in Tokyo. The Nikkei (down 3.7 percent), the Taiex (down 3.4 percent) and the Kospi (down 3.1 percent) were the region’s big losers. Also pressuring sentiment was the ongoing territorial dispute between China and Japan that has disrupted trade between the two countries.

Bank of Korea

As expected, the Bank of Korea cut its benchmark interest rate by 25 basis points to 2.75 percent. The BoK has an inflation target range of 2 percent to 4 percent. In September, inflation climbed to 2.0 percent on the year from 1.2 percent in August. In its statement, the Bank noted that growth has continued to slow in emerging market countries due mostly to the impact of the economic slumps in advanced countries. "The committee expects the pace of global economic recovery to be very modest going forward and judges the downside risks to growth to be large." Recent economic data provided some support for a rate cut as South Korea's exports declined sharply in August, adding to signs that the economy is losing momentum as the European debt crisis cripples external demand.

The BoK set the inflation target for 2013 onwards at the range between 2.5 and 3.5 percent, in terms of the rate of change in the consumer price index. The Bank of Korea will publish a comprehensive report on inflation twice a year to explain price developments, future inflation forecasts and conditions, the monetary policy stance and so on. The period over which the new inflation target will be applied is three years from 2013 to 2015. In consideration of monetary policy continuity, the committee will set the next target prior to expiration of this target period at the end of 2015.

Currencies

The U.S. dollar was up against most of its major counterparts last week — the exceptions were the Australian dollar and yen. The euro gained toward the end of the week, but too late to prevent a weekly loss against the dollar. The euro’s late week gain occurred amid speculation Spain is moving closer to requesting a sovereign bailout that would unlock a European Central Bank bond purchase program. But the euro eased Friday after it was reported in the media that the European Stability Mechanism lacks the cash to bail out Spain if the country asks for help before the end of the year. The euro has strengthened against the dollar after S&P cut Spain’s sovereign debt rating on October 10^th. The move fueled speculation the nation would be pressured into seeking a bailout.

Japan's economy minister said Thursday that Tokyo may intervene in the currency market on its own to rein in the yen's strength. The minister, Seiji Maehara, also said foreign exchange was an issue over which Japan and the U.S. were at odds. While handling currency issues is not Mr. Maehara's prerogative, his comments are just another indication of Japan's concerns about the yen's persistent strength, which is hurting the country's already slowing exports.

The renminbi (or yuan) has jumped to its highest level in nearly two decades against the dollar in a small burst of appreciation that has caught many investors by surprise. The Chinese currency almost hit the upper limit of its daily trading band against the dollar on three consecutive days, a show of strength that appeared to be at odds with data pointing to a broad slowdown in China’s economy. Over the past three months the renminbi has climbed about 2 percent against the dollar, frustrating many investors who had been betting on the currency to depreciate as Beijing tries to support the country’s beleaguered exporters.

Appreciation could also in part be a response to the dollar’s brief period of weakness since early September. Chinese officials have expressed concern that the US Federal Reserve’s policy of quantitative easing would fuel higher global commodity prices, and a stronger renminbi is a way of blunting imported inflation. China has on numerous occasions let its currency appreciate more quickly in the run-up to or during important political events, including high-profile visits by U.S. officials and global economic summits, where complaints about Beijing's currency policy typically become louder.

Selected currencies — weekly results

Indicator scoreboard

EMU

August industrial production was up 0.6 percent but declined 2.9 percent on the year. It was the third monthly gain in the last four months and left average output in July/August a healthy 1.0 percent above its second quarter mean when it declined 0.4 percent. In August alone, production was underpinned by a 3.9 percent surge in durable consumer goods together with a 1.3 percent bounce in nondurables and a 0.7 percent increase in capital goods. Intermediates were changed but energy output expanded 0.9 percent. Among the larger Eurozone states, only Germany (down 0.4 percent) struggled over the month as France (1.5 percent), Italy (1.7 percent) and Spain (1.3 percent) all registered very solid gains. In fact of those countries providing statistics, only Belgium (0.4 percent) and Finland (1.1 percent) recorded monthly declines.

Germany

August seasonally adjusted merchandise trade surplus was €18.3 billion, close to a 5-year high in August. Unadjusted, the surplus stood at €16.3 billion, down just €0.6 billion from July. The latest improvement followed a slight upward revision to July which now stands at €16.3 billion and reflected a 2.4 percent monthly increase in exports that easily outpaced a 0.3 percent advance in imports. The former are now at a record high and show annual growth of 5.8 percent, well ahead of a 0.4 percent increase in imports which have yet to recover to their May level. Exports to other EMU countries were down 3.1 percent on the year and continue to underscore the weakness of domestic demand across the region but were up 13.0 percent outside of the EU. Imports from the rest of the Eurozone were up only 1.1 percent from August 2011 but were hardly changed on the year from non-EU states.

August industrial production declined 0.5 percent after increasing a downwardly revised 1.2 percent in July. On the year, production is down 1.4 percent. The third monthly fall in output since March reflected in large part a 1.3 percent decline in intermediates although durable consumer goods were down a sizeable 1.4 percent too. Capital goods were flat and a 0.7 percent gain in nondurables was enough to ensure a 0.7 percent increase in total consumer goods. Among the more volatile categories, construction output was down 2.8 percent but energy was up 1.5 percent. The Statistics Office warned that holiday effects may have biased the August data slightly weaker.

France

August merchandise trade deficit widened out to €5.3 billion from a downwardly revised €4.1 billion in July. The €1.2 billion deterioration reflected an otherwise healthy 3.6 percent monthly increase in exports that was more than offset by a 6.3 percent rebound in imports. The former was boosted by particularly strong performances by the aviation and agriculture industries while the latter was helped by a sharp jump in oil purchases.

August industrial production excluding construction was up a robust 1.5 percent after a larger revised 0.6 percent increase in July. On the year, output was down 0.9 percent. Manufacturing was up 1.8 percent following a 1.0 percent advance at the start of the quarter. Within this, food & agriculture expanded 3.6 percent but even this fell short of a 6.5 percent surge in transport equipment. The other manufactured goods category registered a 1.0 percent increase but electronics & machines were down 0.7 percent and refining was off 2.6 percent. Among the more volatile sectors, construction grew 1.4 percent while energy & extracted goods edged up 0.2 percent.

United Kingdom

August merchandise trade gap widened to Stg9.8 billion following a marginally larger revised Stg7.3 billion shortfall in July and the second highest reading on record. Following a monthly 8.8 percent jump in July, total exports dropped 4.0 percent while imports rebounded 4.5 percent after a 1.9 percent decline last time. However, most likely both sides of the balance sheet were once again influenced by Jubilee distortions leaving the underlying trend still very clouded. The shortfall with the rest of the EU grew 10.5 percent on the month to Stg4.9 billion but the bulk of the damage was caused by the non-EU bloc where the deficit was up nearly 70 percent at Stg5.0 billion. Part of August's deterioration could be attributed to a marked worsening in net oil exports but even allowing for volatility in oil and other erratic items, the deficit expanded nearly Stg1 billion to Stg7.7 billion.

August industrial output dropped 0.5 percent on the month and was down 1.2 percent on the year. Manufacturing slid a steep 1.1 percent decline and was also 1.2 percent lower on the year. Within manufacturing, 10 sub-sectors saw monthly declines while two posted gains and one remained unchanged. The largest negative contribution was made by transport equipment where production was down 4.5 percent followed by machinery & equipment which suffered a 2.5 percent drop. There were some signs that changes to holiday dates may have had some impact, notably in the transport category. Total industrial production found some support from a 1.4 percent monthly increase in mining & quarrying and a 2.1 percent gain in oil & gas output. However, utilities were off 0.6 percent. Various distortions have impacted the data in recent months and the August figures may well have been biased down by the surprisingly large bounce in output that followed the end of the Queen's Jubilee celebrations. However, a 0.7 percent drop in manufacturing over the last three months is still disappointing and is likely to raise fresh doubts about the underlying health of the sector.

Asia/Pacific

Japan

August private sector machinery orders excluding volatile orders dropped 3.3 percent from July and were down 5.6 percent from the same month a year ago. In July, orders were up 4.6 percent. Core private sector orders exclude large, volatile orders for ships and electric power generation equipment. Total orders dropped 12.6 percent on the month. Private manufacturing orders slid 15.1 percent but nonmanufacturing orders (excluding volatile items) were up 3.6 percent. Orders from overseas dropped 14.7 percent.

September corporate goods price index was up 0.3 percent on the month but dropped 1.4 percent from a year ago. On the month, petroleum & coal products were up 4.1 percent and nonferrous metals were 2.6 percent higher. Among the other categories that were up minimally were food, beverages, tobacco & feed stuffs, textile products, metal products and electrical machinery. Among those with declining prices were pulp, paper & related products, plastic products, iron & steel and information & communication equipment. On the year, Iron & steel prices plunged 10.0 percent and information & communications equipment sank 11.0 percent. Nonferrous metals dropped 5.9 percent while electronic components 7 devices slid 4.0 percent.

August tertiary index was up 0.4 percent on the month and 0.5 percent from a year ago. Among the industries that were up on the month were wholesale & retail trade (1.2 percent), accommodations, eating & drinking services (3.0 percent), scientific research, professional & technical Services (1.7 percent) and electricity, gas, heat supply & water (2.3 percent), Among those that declined were transport & postal activities (down 1.1 percent0, finance & insurance (down 0.9 percent) and information & communications.

Australia

September seasonally adjusted unemployment rate increased to 5.4 percent 5.1 percent in August. The number of people unemployed increased by 38,800 to 662,700 from August. Employment was up by 14,500 to 11,511,900. The increase in employment was driven by full-time employment which was up 32,100 people to 8,107,000, and was offset by a decline in part-time employment, down 17,700 people to 3,404,900. The increase in employment was driven by increased female full-time employment, up 32,100 to 2,876,300. Since January, employment has risen by 97,800 jobs. The ABS monthly aggregate hours worked series showed an increase in September, up 7.6 million hours to 1,627.5 million hours. The seasonally adjusted labour force participation rate increased 0.2 percentage points to 65.2 percent in September.

Americas

Canada

August seasonally adjusted trade deficit was C$1.32 billion, the fifth consecutive month in which it has been in the red. The latest shortfall followed a larger revised C$2.53 billion gap in July. Exports slipped 0.1 percent on the month for their second drop in a row and now stand 1.6 percent lower on the year. However, imports were much weaker, down 3.1 percent from July after a 2.0 percent slide last time. Although this still provided for an annual gain of 0.6 percent, imports were at their lowest level since September 2011. Exports to the U.S. actually grew 1.4 percent on the month which, with imports down 4.3 percent, saw the bilateral surplus surge nearly C$1.5 billion to C$3.5 billion. Within total exports, energy products were up 5.5 percent and there were solid gains too in both forestry products (2.2 percent) and agriculture (6.5 percent). However, advances here were effectively offset by declines in industrial goods & materials (6.1 percent), autos (2.3 percent) and other consumer goods (3.8 percent). At the same time, imports benefited from a 6.1 percent monthly jump in energy but this was easily more than compensated for by weakness elsewhere, notably via declines in forestry products (6.1 percent), industrial goods & materials (7.4 percent), machinery & equipment (3.8 percent) and autos (3.3 percent). The other consumer goods category also saw imports drop 2.9 percent.

Bottom line

Equities slid last week as investors shied away from risk as the third quarter earnings season gets underway. Economic data were mixed with UK and German industrial output disappointing but overall Eurozone output surprising on the upside.

Key data are on tap this week including the German October ZEW survey along with the UK’s labour market report, consumer prices and retail sales. But focus will be on the latest data deluge from China for the month of September and for the third quarter as well. Both the Bank of England and the Reserve Bank of Australia will release minutes of their respective October meetings. The minutes from the BoE will provide some sense from the policy debate earlier this month on how likely the MPC is to expand its asset purchase program at its next scheduled meeting on November 8th. From the RBA, analysts will be looking for more information on why the Bank cut its policy rate a month sooner than was generally expected and will be looking for clues on whether there will be another quarter point cut before yearend.

Looking Ahead: October 15 through October 19, 2012

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