Global Markets

The deluge of earnings reports weighed on investors last week with many companies saying they expected lower revenue growth going forward. As a result, most indexes were lower on the week. The Bank of Canada, Reserve Bank of New Zealand and the Federal Reserve met and left their monetary policies unchanged. All but three of the indexes followed here declined. Losses ranged from 0.3 percent (Sensex) to 3.7 percent (Taiex).

Bank of Canada

As expected, the Bank of Canada kept its key overnight interest rate at 1.0 percent, in the middle of the corridor determined by the deposit rate at 0.75 percent and the Bank Rate at 1.25 percent. However, the key to the Bank’s statement accompanying the announcement was the update on the policy bias. The BoC retained its leaning towards tightening, pointing out that ‘‘some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 percent inflation target.'' In explanation, the Bank indicated that it saw economic developments since its September meeting as being broadly in line with its own expectations. In particular, real GDP growth is now put at 2.2 percent in 2012, 2.3 percent in 2013 and 2.4 percent in 2014, essentially unchanged from projections made last time. As a result, full capacity is now forecast to be reached by the end of 2013.

In the BoC's Monetary Policy Report (MPR) which was released the day after the policy meeting, contained only limited changes to the economic forecasts made in July. Both growth and inflation are marked down somewhat in the near term. But this is quickly made back and will have little impact on the more medium term picture. At 1.5 percent, core inflation last quarter was well short of the Bank's 1.9 percent call and the outlook has been revised a few ticks lower through second quarter of next year. Thereafter the new and old forecasts are broadly consistent but the attainment of full capacity is delayed slightly until the end of 2013.

Reserve Bank of New Zealand

As expected the Reserve Bank of New Zealand kept its official cash rate (OCR) unchanged at 2.5 percent where it has been since March 2011. This was the first meeting presided over by the RBNZ’s new governor, Graeme Wheeler. Wheeler took over from departing Governor Alan Bollard on September 26^th. Bank watchers are on a learning curve — they do not know what emphasis Governor Wheeler will place on offshore downside risks compared with emerging domestic upside risks to inflation.

The new PTA (policy target statement) between the RBNZ and the government kept the 1 percent to 3 percent inflation target band unchanged. However, more focus was put on the 2 percent mid-point. Also, while third quarter inflation fell below target, most of the downward pressure came from the high exchange rate. Non-tradable inflation is 2.3 percent, with a substantial amount of that upward pressure coming from high house prices in Auckland and Canterbury.

In his first speech as governor, Mr Wheeler signaled he wants a weaker currency without having to resort to unorthodox policy that may disrupt his efforts to contain inflation. The Reserve Bank of New Zealand “wishes to see a lower exchange rate provided it can be achieved without damaging price stability and financial stability,” he said in a speech in Auckland. “There are clear limits to what monetary policy and exchange rate intervention can do to lower the New Zealand dollar.”

Federal Reserve

As expected, the FOMC kept its fed funds rate target range at zero to 0.25 percent and anticipated that exceptionally low levels are likely to be warranted at least through mid-2015. The FOMC said that highly accommodative monetary policy will remain appropriate for a considerable time even after the economic recovery strengthens. To support economic recovery and foster maximum employment and price stability, MBS purchases will be maintained at a $40 billion per month pace. Operation Twist purchases will continue through year end. The FOMC noted that economic activity was expanding at a moderate pace. However, employment growth has been slow and the unemployment rate elevated. Household spending advanced a bit more quickly but business investment spending slowed. Housing has shown some signs of improvement, albeit from a depressed level. Inflation recently picked up somewhat due to higher energy prices, but inflation expectations remain stable.

Global Stock Market Recap

Europe and the UK

Equities retreated for much the same reasons those elsewhere declined — a mixture of disappointing corporate earnings reports, worrisome Eurozone economic data and the continuation of the simmering sovereign debt situation. The FTSE dropped 1.5 percent while both the CAC and DAX were 2.0 percent lower. The SMI dropped 2.3 percent.

However, the better than expected UK GDP report provided a boost. Third quarter GDP jumped a surprising 1.0 percent helped by the Olympics. The advance took the country out of its double dip recession. However, in Europe, the flash purchasing managers’ indexes were dismal at best, with the Eurozone, France and Germany composite indexes below the 50 breakeven point between growth and contraction. However, China’s flash manufacturing index revealed that the rate of contraction for output and new orders were decelerating while U.S. manufacturing continues to grow with a reading above critical 50 level.

In Greece, Finance Minister Yiannis Stournaras said mid-week that its international lenders have agreed to give Athens extended time and other concessions for meeting the terms of the country's bailout program. Stournaras said a new package of austerity measures would be put to vote in the parliament next week. The finance minister, however, did not specify how much extra time Athens had been granted by its creditors. Nevertheless, media reports citing a leaked copy of the draft loan agreement, suggested that Greece had been given until the end of 2016 to meet the bailout targets. In March, Greece pledged a series of economic reforms and spending cuts worth €13.5 billion for 2013 and 2014 in exchange for a joint €130 billion bailout from the troika of lenders — the European Union, European Central Bank and the International Monetary Fund. Athens has long been seeking an extension of up to two years to implement the economic reforms and spending cuts agreed under the bailout deal. The Greek government had been negotiating with representatives of the troika for months for release of the next tranche of the bailout loan, as well as more time and concessions for implementing the bailout conditions.

Asia Pacific

Equities were mostly lower last week thanks primarily to lower than expected earnings and wariness about the health of the global economy. Hopes that the U.S. economy is recovering gave way to caution ahead of GDP data due later in the global market day on Friday. Only the STI, Jakarta Composite and KLCI edged up for the week. Losses elsewhere ranged from 0.3 percent (Sensex) to 3.7 percent (Taiex). The Hang Seng was virtually unchanged.

In Japan, equities swung between gains and losses as investors deliberated over whether the Bank of Japan would ease for a second consecutive month. The Bank is expected to expand its asset purchase program by ¥10 trillion at its October 30^th monetary policy board meeting to a total of ¥90 trillion.

The Hang Seng touched a 14-month high on Thursday, up for a 10^th day that marked its longest winning streak in over two years, spurred by the flood of cash unleashed by U.S. and European central banks' easing measures. The index dropped on Friday, ending the streak. Hong Kong is benefiting both from expectations that slowing growth in mainland China has bottomed out, and the city's open economy that makes it easy for money from overseas to rush in.

In China, shares declined on growth concerns. The HSBC/Markit purchasing managers' index for the manufacturing sector climbed to a three month high of 49.1 in October from 47.9 in September. However, the reading below 50 suggested a contraction in activity, albeit at a more moderate pace. The index has indicated contraction since November 2011. The manufacturing output index increased to 48.4 from 47.3 in September. This was the highest reading in three months. New orders as well as new export orders contracted at a slower pace during the month, the survey showed.

Currencies

The U.S. dollar was up against most of its major counterparts with the exception of the Australian dollar and the pound sterling. The Japanese currency was down against the dollar and euro amid speculation the Bank of Japan will increase monetary stimulus next week. The yen typically strengthens in times of political, financial and economic turmoil because Japan’s historical trade surplus means the nation does not have to rely on overseas lenders.

On Thursday, the yen dropped to its weakest level in four months against the U.S. dollar as investors speculated that the Bank of Japan will expand its monetary stimulus program. Japan’s currency declined against almost all of its 16 most-traded peers as the Nikkei newspaper reported the BoJ will consider boosting its asset purchase program and global stocks advanced. The BoJ will release a forecast for Japan’s consumer prices and growth on October 30^th. Economy Minister Seiji Maehara, who has been calling for more action from the central bank, said earlier this week he may attend the meeting. He was present at the Bank’s previous meeting — the first minister to do so for more than nine years.

Selected currencies — weekly results

Indicator scoreboard

EMU

September M3 was up 2.7 percent on the year, down from a slightly weaker revised 2.8 percent gain in August. The latest figures put the 3-month moving average measure liked by the ECB at 3.0 percent, also 0.1 percentage points less than last time. Bank lending to the private sector was down 0.8 percent from a year ago, a somewhat steeper drop than the 0.6 percent slide reported in August. Loans to households were up a minimal 0.1 percent from September or 0.1 percentage points less than last time and within which borrowing for house purchase grew 0.7 percent after a 0.8 percent increase. Lending to non-financial corporations was especially weak with its annual rate of decline doubling to 1.4 percent while the volatile loans to non-monetary financial intermediaries (excluding insurance companies and pension funds) improved from minus 3.5 percent to minus 2.0 percent.

October flash composite PMI reading was 45.8, down 0.3 points from its final September reading. This was a 40-month low and far enough below the key 50 growth threshold to indicate a potentially sizeable contraction in real GDP. The manufacturing PMI fell almost a point to a 45.3, a 2-month low with output declining at a slightly faster pace than last time and new orders contracting at their steepest rate in three months. Backlogs were similarly down at their sharpest pace since July as was the sector's headcount. At the same time, input price inflation hit a 6-month high and factory gate prices saw their first increase in five months. Service sector activity also continued to contract with its flash PMI weighing in at 46.2, up just a tick from last time. The decline in new business slowed as did the slide in employment but backlogs were still down for the 16th consecutive month and business confidence deteriorated further. Among the larger countries, the German composite output index was 48.1, down over a point from last time while the French index recovered 1.6 points but only to a still very soft 44.8.

Germany

October Ifo sentiment was down 1.4 points to a reading of 100.0 and at its weakest level since February 2010. The latest decline was wholly attributable a 3 point slide in the current conditions component to 107.3, its fourth successive monthly drop. By contrast, expectations held steady at 93.2. All of the major sectors registered declines in morale, particularly in manufacturing where the sentiment diffusion index dropped nearly 3 points to minus 7.2 and in wholesale which posted a 3.3 point slide to minus 3.3. Retail was down 1.8 points at minus 5.9 and construction 1.8 points weaker at minus 11.9. The (unadjusted) services index was off 5 points at 9.1.

United Kingdom

Third quarter first estimate of gross domestic product expanded 1.0 percent on the quarter and its best performance in some five years. The rebound followed an unrevised 0.4 percent contraction in the previous period and left the level of total output unchanged from a year ago. The third quarter data were boosted by the inclusion of ticket sales for the Olympics and Paralympics. These are thought to have added around 0.2 percent to GDP. In addition, comparison with the second quarter is flattered by the extra holiday in June linked to the Queen's Jubilee celebrations. This was estimated by the ONS as having knocked 0.5 percentage points off economic growth in the April to June period. In other words, output needed to grow about 0.7 percent on the quarter just to keep the underlying level of GDP unchanged. To this end, the reported headline 1.0 percent gain really translates into a modest 0.3 percent quarterly increase. Growth was broad and evenly split between the goods producing and service sector industries, the former seeing output gain 1.1 percent on the quarter and the latter a slightly larger 1.3 percent. Within overall industrial production, manufacturing recorded a 1.0 percent rise while mining & quarrying expanded 2.3 percent and water supply 4.1 percent. The only decline was in electricity, gas & steam (2.2 percent). Within services, with distribution, hotels & catering (1.6 percent) and business services & finance (1.0 percent) advancing. Government services saw a 1.6 percent rise. Elsewhere, agriculture was up 2.2 percent but the construction industry remained a drag, output here falling another sizeable 2.5 percent from the second quarter, its third consecutive decline, to leave an annual drop of 10.8 percent.

Asia/Pacific

Japan

September merchandise trade deficit was ¥558.6 billion. Exports were down 10.3 percent from a year ago while imports were 4.1 percent higher. Exports declined to virtually all of Japan’s markets with the exception of the U.S. — they were up 0.9 percent. It was exports’ fourth consecutive drop on the year while it was the second increase for imports. Exports to Asia were down 8.3 percent from a year ago. They dropped 14.1 percent to China. Exports to the EU plunged 21.1 percent from a year ago for the 12^th consecutive decline. On a seasonally adjusted basis, the merchandise deficit in September was ¥980.3 billion. Imports were up 10.0 percent while exports were 0.9 percent higher. On the year, seasonally adjusted imports were up 8.3 percent while exports slid 8.0 percent.

September consumer price index edged up 0.1 percent but was 0.3 percent lower on the year. The key core CPI that excludes only fresh food was up 0.2 percent but down 0.1 percent from a year ago. Excluding both food and energy, the CPI slipped 0.1 percent and 0.6 percent. Goods prices were up 0.9 percent on the month but down 0.4 percent from a year ago. At the same time, services prices were down 0.6 percent and 0.2 percent on the year. Energy prices were up 4.3 percent from a year ago while TVs slumped 4.7 percent after sinking 7.1 percent in August. Recreational durable goods declined 9.9 percent from a year ago.

Australia

Third quarter consumer price index was up 1.4 percent on the quarter and 2.0 percent from a year ago. The Reserve Bank of Australia uses two analytical series to measure inflation for monetary policy purposes. The trimmed mean was up 0.7 percent and 2.4 percent on the year while the weighted median was 0.8 percent higher on the quarter and 2.6 percent above a year ago. The most significant price increases in the September quarter were for electricity (up 15.3 percent), international holiday travel & accommodation (up 6.6 percent), medical & hospital services (up 4.5 percent), vegetables (up 10.5 percent) and gas & other household fuels (up 14.2 percent). The most significant offsetting price declines were for automotive fuel (down 3.9 percent), motor vehicles (down 1.0 percent), pharmaceutical products (down 2.6 percent), domestic holiday travel & accommodation (down 1.3 percent) and other financial services (down 0.9 percent). On July 1, 2012 the Australian government introduced a $23 per tonne carbon price on greenhouse emissions, to be paid directly by Australia's largest greenhouse gas emitting companies, together with compensation and incentive packages. Carbon pricing changes the relative prices of high and low emission intensive goods. The ABS will not be able to quantify the impact of carbon pricing, compensation or other government incentives and will not be producing estimates of price change exclusive of the carbon price or measuring the impact of the carbon price.

Americas

Canada

August retail sales were up 0.3 percent and 2.7 percent from a year ago. The monthly headline gain was wholly attributable to higher prices with volumes 0.3 percent weaker than in July. Within the overall monthly nominal increase, only five of the 11 reporting subsectors registered gains. The largest was gasoline (2.9 percent) where higher pump prices were a dominant feature. Elsewhere performances were typically quite lacklustre. Only sporting goods & hobbies (1.0 percent) and general merchandise (0.6 percent) offered advances of any significant magnitude. Food & beverages matched the headline increase but there were declines in autos & parts (0.2 percent), clothing & accessories (1.1 percent), health & personal care (0.8 percent) and furniture & home furnishings (0.1 percent).

Bottom line

Equities were lower last week on mixed economic data and disappointing earnings reports. Unease about the European debt situation continued to make investors wary. The Federal Reserve, Bank of Canada and the Reserve Bank of New Zealand chose to leave their monetary policies unchanged. Both UK and U.S. first estimates of third quarter GDP were better than expected. Flash PMIs however, showed continued contraction everywhere but in the U.S.

The Bank of Japan meets Tuesday and is expected to add to its asset purchase program. The week is a busy one with key economic data on tap globally along with a continuing onslaught of earnings reports. Among the important data to be released are final manufacturing PMIs globally, Japan’s monthly deluge of new economic data and in the U.S. a slew of reports culminating in the employment situation report on Friday.

Looking Ahead: October 29 through November 2, 2012

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