Global Markets

Hurricane Sandy upstaged many important events this week including the U.S. presidential election and a slew of mostly favorable economic data from the United States. While U.S. economic data improved — data elsewhere mostly did not. China’s manufacturing PMI improved but those in Japan, the UK and Europe continued to show major contractions. For the month of October, equities were mixed. Gains ranged from 0.6 percent (DAX) to 3.8 percent (Hang Seng). Losses ranged from 0.7 percent (STI) to 4.5 percent (Nasdaq) and 4.2 percent (Kospi). For the week,

Manufacturing PMIs

Eurozone manufacturing declined for a 15^th consecutive month in October — the final October PMI reading slid to 45.4 from 46.1 in September. A number below 50 signals contraction. There was a broad based decline in production across the consumer, intermediate and investment goods sectors. Data from individual member states were also sobering and suggest that the downturn deepened over the month. With the Dutch PMI edging back into negative growth territory (48.9), only Ireland (52.1) registered above the 50 growth threshold. New orders dropped for the 17th successive month reflecting weakness in both domestic and overseas demand, and backlogs were also lower for the 17th month running. Job losses were recorded for the ninth time in as many months and at the fastest rate since July. Meanwhile, stocks of purchases saw their steepest depletion since December 2009. Among the larger members the German PMI fell 1.4 points to 46.0 while France registered a 1 point gain to a still very soft 43.7. Italy was down 0.2 points at 45.5 and Spain 1.1 points weaker at 43.5.

Although the U.S. October Markit PMI index slipped to a final reading of 51.0 from 51.1 in September, the reading is still above which indicates that manufacturing is still growing. New export business remained a drag on the sector, with a fifth successive monthly decline. The weaker reading mainly reflected a slower increase in new order volumes. New orders advanced, but the rate of expansion was broadly in line with July’s 34-month low. The rate of expansion was the second slowest in three years, accelerating only slightly from September’s near stagnant pace.

China’s final October Markit/HSBC manufacturing PMI reading was at an eight month high of 49.5, up from 47.9 in September. The index has signaled a full year of monthly deteriorations in Chinese manufacturing sector operating conditions. New orders grew, albeit marginally, for the first time in 12 months. Evidence suggested that growth of new orders was due to an increasing number of new clients. However, new export orders declined for the sixth successive month, with the rate of reduction again solid (but slower than in September). Weak demand from Europe and the U.S. was reported. However, data from the National Bureau of Statistics and China Federation of Logistics and Purchasing indicated that their PMI index reading was 50.2 in October.

Global Stock Market Recap

Europe and the UK

Equities advanced last week following better than anticipated U.S. economic data. The FTSE was up 1.1 percent, the SMI gained 1.5 percent, the CAC and DAX were 1.7 percent and 1.8 percent higher respectively. With the exception of the OMX Stockholm, all indexes advanced in October. The FTSE, CAC, DAX and SMI were up 0.7 percent, 2.2 percent, 0.6 percent and 1.5 percent respectively. The majority of the European markets advanced Friday boosted by the better than expected U.S. employment report. The initial reaction to the jobs report was very positive, but as the session progressed, those gains began to slowly erode. Investors now have shifted their focus to the U.S. presidential election on Tuesday, November 6th.

The National Institute of Economic and Social Research (NIESR) lowered its growth forecast for the British economy next year, while stressing that the fiscal consolidation efforts in the UK and Europe are having a large negative impact on growth. The gross domestic product is expected to grow 1.1 percent in 2013, with no contribution from net trade.

The Eurogroup has called on Greek authorities to resolve ’remaining issues’ so it can finalize the negotiations with the Troika institutions regarding the release of the next bailout tranche worth €31.5 billion. In a statement issued after the Eurozone finance ministers' conference call on Wednesday to discuss the next loan disbursement to Greece, Eurogroup President Jean-Claude Juncker said the Eurogroup took note of the progress made towards a full staff level agreement between Greece and the Troika on updated program conditionality, including ambitious and wide ranging measures in the areas of fiscal consolidation, structural reforms, privatization and financial sector stabilization. He added that the "Eurogroup expects to further discuss the Greek adjustment program at its next regular meeting on November 12^th on the basis of the relevant program documentation and seek to conclude on the program, subject to the completion of prior actions by the Greek authorities and of national procedures in Member States, in line with the established practice."

Asia Pacific

Equities were mixed last week as investors focused on Hurricane Sandy, the upcoming U.S. employment report, the plethora of economic data that were released and the nearing U.S. presidential election. Volume was thin at the beginning of the week given the closure of U.S. markets on Monday and Tuesday. Better than anticipated economic data from the U.S. and China helped boost morale. There was a mixed reaction to the Bank of Japan’s expansion of its asset purchase program. Losses for the week were under 1.0 percent. The All Ordinaries was down 0.3 percent while the STI lost 0.5 percent and the KLCI, 0.9 percent. Gains ranged from 0.4 percent (PSEi) to 2.6 percent (Hang Seng). For the month, the Hang Seng was up 3.8 percent while the STI dropped 4.2 percent and the Taiex plunged 7.1 percent.

Equities ended the week on a positive note, mirroring rallies in the U.S. and in Europe as a slew of positive economic reports from China and the U.S. fueled hopes that the global economy is regaining some traction. However, lingering uncertainty over Greece and Spain and lower commodity prices amid the dollar's strength tempered investor optimism to some extent ahead of the crucial U.S. non-farm payrolls report that was released after markets here closed for the week and coming just days before Tuesday's Presidential election.

Reserve Bank of India

The RBI left its key repurchase rate at 8.0 percent where it has been since April. It also maintained the reverse repurchase rate — at which it absorbs excess liquidity from the banking system — at 7.0 percent and the interest it charges for the marginal standing facility, which banks use to borrow funds in times of shortages, at 9.0 percent. However, the RBI cut banks' cash reserve ratio by a quarter of a percentage point to 4.25 percent. The move seeks to preempt a crunch in liquidity, which can come under pressure close to festivals such as Diwali, which is in November. In its statement, the RBI said that managing inflation and inflation expectations must remain the primary focus of monetary policy. The RBI lowered its growth forecast for the fiscal year through March to 5.8 percent from 6.5 percent, citing slowing investment. The RBI deflected pressure from industry groups and the government to cut rates to augment government efforts to revive India's economy, which is growing at its weakest pace in nearly a decade.

Bank of Japan

As expected, the Bank of Japan took new easing steps at their monetary policy board meeting in its efforts to do more to end deflation and revive the economy. For the second time in two months the BoJ added stimulus. At its last meeting that ended October 5^th, the bank held off from more easing after expanding its asset purchase program in September by ¥10 trillion to ¥80 trillion. The Bank has been under pressure from the government to do more. Prime Minister Yoshihiko Noda's government has been pressing the BoJ to fix falling prices and achieve the inflation goal, which would free the government to raise the consumption tax as planned in April 2014.

The BoJ conceded that its 1 percent inflation target would not be reached without more aggressive stimulus. The BoJ expanded its asset purchase program by about ¥11 trillion to ¥91 trillion, mainly by adding ¥10 trillion of government bonds and bills. It will also buy ¥500 billion of exchange traded funds, ¥300 billion of corporate bonds and ¥100 billion of commercial paper.

In a sign of strong political pressure on monetary policy makers, the announcement was accompanied by a joint statement from the government and the BoJ, declaring that both sides “share the recognition that the critical challenge for Japan’s economy is to overcome deflation as early as possible and to return to a sustainable growth path with price stability.” Economy minister Seiji Maehara, who sat in on the policy makers’ deliberations for a second successive meeting, described the statement as “unprecedented”. The last time the BoJ eased policy in two consecutive months was May 2003.

Recent economic data has been almost entirely gloomy. In the BoJ’s latest survey of Japan’s nine regions, the only prefecture that said that conditions had not deteriorated since July was Tohoku, the scene of post-tsunami rebuilding. Separate data released on Tuesday showed that industrial production across the country fell for a third straight month in September, recording its biggest fall since last year’s earthquake and tsunami. Persistently weak shipments are the main reason why many economists expect Japan to have entered a recession in the third quarter.

Currencies

The U.S. currency advanced against all of its major counterparts with the exception of the Canadian dollar. The currency advanced as investors awaited the results of Tuesday’s presidential election. On Friday, the dollar advanced to a six month high against the yen after the U.S. employment increased more than forecast. The yen declined for a third week as economic weakness combined with disappointing corporate earnings and expansion of the Bank of Japan’s stimulus program. The euro declined for a third week after Eurozone manufacturing contracted once again in October.

The dollar rallied against other major currencies Friday, gaining as stronger than expected U.S. employment growth spurred thinking that the Federal Reserve may be less likely to embark on further quantitative easing beyond what it is already committed to. The strength of this data has fueled dollar gains as it threatens to cut short QE3's lifespan. Quantitative easing is typically seen as devaluing a currency.

Selected currencies — weekly results

Indicator scoreboard

EMU

October economic sentiment deteriorated marginally to 84.5 — the eighth decline in a row and its weakest level since August 2009. A 2.1 point slide in industrial confidence to minus 18 was the main reason for the latest decline although services (minus 12.1 after minus 11.9) and construction (minus 33.0 after minus 31.7) also posted further small losses. Elsewhere the news was a little brighter with gentle gains in morale in both retail (0.9 points to minus 17.4) and the key consumer sector (minus 25.7 after minus 25.9). Regionally, sentiment worsened in France (1.8 points to 86.4) and in Germany (1.4 points to 93.3) but there were small gains in both Italy (0.5 points to 79.0) and Spain (1.8 points to 85.9).

September unemployment was up 146,000 on the month to a new record peak of 18.490 million at the end of last quarter. The jobless rate was 11.6 percent. According to Eurostat methodology, the jobless rate held steady in Germany at 5.4 percent but edged up 0.1 percentage point to 10.8 percent in France and 0.2 percentage points to the same level in Italy. Spain continued to suffer disproportionately with another 0.3 percentage points added to its rate which now stands at 25.8 percent. The lowest rates were recorded in Austria (4.4 percent) and Luxembourg (5.2 percent).

October flash harmonized index of consumer prices was up 2.5 percent on the year after increasing 2.6 percent in September. Food, alcohol & tobacco prices were 3.2 percent higher on the year, up from 2.9 percent in September while energy inflation was down 1.3 percentage points to 7.8 percent. Non-energy industrial goods posted a 1.1 percent annual increase while service sector charges were 1.8 percent firmer. Regionally, inflation fell 0.1 percentage point to 2.1 percent in Germany and 0.6 percentage points to 2.8 percent in Italy. In Spain, where VAT was hiked just last month, the rate was steady at 3.5 percent.

Germany

October unemployment increased 20,000, but the unemployment rate remained at 6.9 percent for a second month. Joblessness has risen for seven consecutive months but at 2.937 million, is still close to the post-reunification low. The October jobless data are consistent with the more tardy employment figures which showed a 15,000 monthly drop in September.

France

September consumption of manufactured goods was up 0.2 percent on the month following a slightly shallower revised 0.9 percent drop in August. Annual growth improved from a decline of 1.0 percent to a 0.5 percent drop. The headline gain was heavily influenced by a 1.7 percent monthly increase in household durables which more than offset declines in autos (0.2 percent) and food (0.1 percent). Spending on textiles & leather was stable but other engineered goods posted an 0.8 percent advance. With energy consumption down 0.4 percent from August, total spending on goods edged 0.1 percent higher on the month after a 0.8 percent drop last time.

September producer prices were up 0.3 percent on the month and 2.9 percent on the year. Much of the advance was attributable to the food, drink & tobacco sector which saw prices jump 0.9 percent from August on the back of sharp increases in the cost of swine & cereal. Elsewhere, prices were more benign with coke & refined petroleum products up 0.1 percent from mid-quarter and electrical equipment flat. Transport equipment registered a 0.1 percent monthly slide and both the other products category and the utilities area posted 0.3 percent gains in line with overall manufacturing.

Asia/Pacific

Japan

September retail sales were up for a second consecutive month when compared with a year ago. September sales were up 0.4 percent after jumping 1.7 percent in August. Auto sales were down 1.6 percent after increasing at a torrid pace of 19.7 percent in August. Retail machinery sales however, continued to decline – they were down 1.5 percent after sinking 10.4 percent in August. General merchandise sales declined 1.1 percent after slipping 0.1 percent the month before. Food and beverage sales were up for a second month, this time increasing by 1.8 percent after gaining 1.2 percent in August.

September household spending declined 0.9 percent from a year ago. Spending was mixed. Food spending was up 1.4 percent while furniture & utensils was 1.2 percent higher. Transportation & communication jumped 12.3 percent. On the down side, education plunged 23.7 percent from a year ago while housing dropped 14.5 percent. Spending on clothing & footwear was down 2.9 percent and culture & recreation declined 3.6 percent.

September industrial production was down a greater than anticipated 4.1 percent after sliding 1.6 in the previous month. It was the third monthly decline. On the year, output dropped 6.8 percent after declining 4.7 percent in August. Declining industries included transport equipment (12.6 percent), general machinery (5.0 percent) and iron and steel (5.3 percent) Commodities that contributed to declining production were large passenger cars (11.0 percent) small passenger cars (20.3 percent) and drive, transmission & control parts (10.4 percent). The data reflect slowing growth worldwide that has hit exports and in turn, output.

September unemployment was 4.2 percent as expected. The number of unemployed was 2.75 percent, a decline of 20,000 from a year ago. The number of employed persons was 63.08 million, a decline of 130,000 from the previous year.

Australia

The producer price index for final demand products (excluding exports) was up 0.6 percent in the September quarter and 1.1 percent when compared with the same quarter a year ago. The gain was mainly due to price increases for electricity supply, gas supply & water supply, sewerage & drainage services and other agriculture. The increases were partly offset by price declines for petroleum refining & petroleum fuel manufacturing and pharmaceutical & medicinal product manufacturing. Intermediate demand prices edged up 0.1 percent and were up 1.5 percent on the year. Preliminary demand prices were down 0.2 percent on the quarter but increased 1.2 percent on the year.

Americas

Canada

September industrial product prices were up 0.5 percent but were down 0.3 percent on the year. The RMPI was up 1.3 percent from mid-quarter and declined 3.9 percent from a year ago — its seventh consecutive drop. The main upward pressure on the IPPI came from a 5.1 percent monthly spike in primary metals, compounded by a 2.7 percent advance in petroleum & coal. Excluding the latter category the index would have gained just 0.2 percent from August and dropped 0.7 percent compared with September last year. Most other areas saw relatively modest monthly price changes although, on the downside, motor vehicles & parts were 0.8 percent lower. The bounce in raw material & fuel costs reflected an 8.8 percent monthly surge in non-ferrous metals that more than offset weakness in animal & animal products (down 3.1 percent), vegetable products (down 0.5 percent) and wood and ferrous metals (both down 0.3 percent). Mineral fuels were also firm, up 0.9 percent.

August monthly GDP contracted by 0.1 percent and reduced annual growth to 1.2 percent. Weakness was concentrated in the goods producing sector where output declined 0.5 percent from July. Within this, manufacturing posted a disproportionately steep 0.6 percent drop but there were even sharper declines in both mining and oil & gas extraction (0.7 percent) where oil rig maintenance was a factor, and utilities (0.8 percent). With construction off 0.1 percent, the only increase in production was left to agriculture, forestry & fishing (0.7 percent). The service sector activity was flat on the month. Outside of wholesale trade, which registered a solid 1.0 percent monthly advance, and retail, which recorded a 0.5 percent drop, most categories saw little change over the month.

October employment crept up 1,800 while the unemployment rate remained at 7.4 percent. Full time positions advanced 7,300 while part time jobs were down 5,500. However, while the public sector boosted its payroll by 36,900, the private sector headcount was down more than 20,000. Self-employment also suffered, falling 14,900. At a sector level, job losses were apparent only in goods producing industries where staff levels were down 19,300. Within this, manufacturing gained 3,100 and construction added 3,500 — but improvements here were more than offset by a 16,200 decline in agriculture. There was also a sizeable drop in utilities (9,300). Services increased by 21,000 with a sizeable proportion in education (16,200) and the other services category (10,100). Public administration was up 8,500 and health care & social assistance gained 8,600. However, transportation & warehousing dropped 7,700, accommodation & food was off 13,800 and retail slipped 2,100.

Bottom line

Hurricane Sandy captured investors’ attention as the week began and forced New York markets to close for Monday and Tuesday. Despite the difficulties on the U.S. East Coast economic data were released in a timely manner — and they were mostly positive. However, that cannot be said about European data that showed unemployment continuing to grow while manufacturing continued to contract. In Japan, the Bank of Japan found it necessary to increase its asset purchase program. The Japanese government continued to apply pressure on the BoJ, threatening its independence.

The big event this week is the U.S. presidential election on Tuesday. Investors are already looking past the election and to the resolution of the ‘fiscal cliff’ at year’s end. Three central banks meet — the Reserve Bank of Australia, the Bank of England and the European Central Bank. China’s monthly deluge of economic data is due along with global services and composite purchasing managers’ indexes. But the outcome of the election and its ramifications will occupy investors.

Looking Ahead: November 5 through November 9, 2012

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