Global Markets

Most equity indexes advanced last week thanks to better than expected data, especially labor market reports from Australia, Canada and the United States. Indexes in the Asia Pacific advanced as they did in Europe and the UK. However, North America was mixed. Investors focused once again on the rhetoric from Washington concerning the fiscal cliff negotiations.

Among the key data released during the week were the various purchasing managers’ indexes for key countries globally. Unlike other data, these reports paint a gloomy picture. While the indexes showed some sign of stabilization, they are doing so at a low level, with those in Europe and Japan in contraction. According to the Markit PMIs pictured, only the U.S., China and India were above the breakeven line of 50. All three improved in November from the month before.

In the Eurozone, the final manufacturing PMI for last month reinforced the depressing picture painted by the flash report about 10 days earlier. At 46.2, the number improved from October's 45.4. However, bear in mind that the October figure was the weakest since June 2009. China’s seasonally adjusted HSBC PMI climbed to a reading of 50.5, up from October’s final of 49.5 and the flash November estimate of 50.4. This signals a marginal improvement in operating conditions and was the first improvement recorded in 13 months.

Central Bank announcements

Five major central banks met and announced their policy decisions. Only one changed policy — the Reserve Bank of Australia.

Reserve Bank of Australia

As expected by most analysts, the Reserve Bank of Australia lowered its key interest rate by 25 basis points to 3.0 percent as hiring faltered and an elevated currency is hurting industries such as manufacturing and tourism. This was the fourth time this year that the RBA has lowered rates. The country's resource-dominated economy has been hit by sharp declines in industrial commodity prices, prompting mining companies to shutter sites and collectively shed thousands of workers. Iron ore and coal — two of the raw materials most exposed to declining Chinese demand for steel — account for more than a third of Australian exports. Elevated currency levels have hurt exports as well. Governor Glen Stevens is aiming to rebalance the two-speed economy, where mining regions in the north and west thrive and manufacturers, builders and retailers in the south and east struggle.

In its statement, the RBA noted that the full effect of earlier measures had yet to be seen. The Board felt that the cut at this meeting will help to foster sustainable growth. Key commodity prices for Australia remain significantly lower than earlier in the year, though trends have been more mixed over the past few months.

Bank of Canada

As anticipated, the Bank of Canada left its key overnight interest rate unchanged at 1.0 percent where it has been since September 2010. The deposit rate remains at 0.75 percent and the Bank Rate at 1.25 percent. In its statement, the BoC repeated that over time, modest rate increases were to be expected. It noted that weak Canadian growth in the third quarter was due to transitory energy disruptions. It expected growth to increase through 2013 on consumer and business investment. The Bank said that the global financial picture remains vulnerable to major shocks in Europe and the U.S. With regard to exports, the BoC noted that exports continued to suffer given weak demand and the high value of the Canadian dollar. The Bank again expressed its continuing concern over the record high debt of Canadian households. Last October it had also introduced the phrase that the timing and degree of rate increases would be weighed against global and domestic developments, "including the evolution of imbalances in the household sector." That formulation was repeated again Tuesday.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its official cash rate (OCR) unchanged at 2.5 percent. In his statement, Reserve Bank Governor Graeme Wheeler noted that growth had slowed. Inflation is below the Bank’s inflation target range of 1.0 percent to 2.0 percent. However, unemployment is rising. Since taking over from Alan Bollard in September, Wheeler has issued one brief no change official cash rate review, delivered the biannual financial stability review and delivered a speech that reiterated an approach similar to Bollard's policies. The OCR is at a record low after the RBNZ lowered it by 50 basis points in March 2011 in response to the Christchurch earthquake.

Wheeler is betting that rising unemployment and falling consumer spending will not justify a rate cut because they will both reverse while earthquake related construction and housing investment will boost growth next year. He indicated he may need to hold borrowing costs unchanged through 2013. Unemployment rose to a 13-year high of 7.3 percent and retail spending fell in the third quarter, adding to the case for weaker economic growth in the second half of the year. Gross domestic product is expected to expand 0.6 percent in the six months through December, the RBNZ said. That is down from a 1.1 percent pace predicted in September.

European Central Bank

The European Central Bank left its key interest rates unchanged. The key refinance interest rate remains at its current record low of 0.75 percent while the rates on the deposit and marginal lending facilities remain at zero and 1.50 percent respectively. Regular money market repo operations will continue to be on a fixed rate tender basis through at least early July 2013.

Outside of an update of the latest staff economic forecasts there was nothing particularly new in ECB Chief Draghi's press conference. In the ECB’s view, the ball remains firmly in the court of the EMU governments as far as efforts to stabilize the region's economic and financial activity are concerned and the ECB President again stressed the need for both fiscal and structural reform. Essentially, this was just a reiteration of the message delivered at the November meeting.

With regards to the new economic forecasts, not surprisingly, these show another downward revision to the region's growth prospects. Real GDP is now expected to contract between 0.6 percent and 0.4 percent in 2012 (from previously between 0.6 percent and 0.2 percent). In 2013, the economy is expected to grow between minus 0.9 percent and plus 0.3 percent (minus 0.4 percent and 1.4 percent previously). At the same time, inflation is still seen falling back below target next year, within a 1.1 percent to 2.1 percent range, and to drop to between 0.6 percent and 2.2 percent in 2014.

Bank of England

The Bank of England’s monetary policy committee kept its key interest rate at 0.5 percent and the size of the asset purchase program at £375 billion. The decision to hold, which was widely expected, comes on the back of signs that the economy will contract in the final months of this year. Sir Mervyn King, the governor of the BoE and chair of the MPC, said last month that there was a good chance that the economy would shrink in the three months to December. He warned that Britain “may be in for a period of persistently low growth”.

Global Stock Market Recap

Europe and the UK

Most equities advanced last week with the exception of those in Spain (down 1.1 percent) and Italy (down 0.7 percent). Investors here monitored the progress — or lack of progress — in the U.S. budget negotiations. Equities were pressured first on Thursday after the European Central Bank lowered its forecast for Eurozone growth and again on Friday, when the Bundesbank lowered Germany's growth forecast. They also kept a close eye on U.S. economic data. Equities were up Friday following the much better than anticipated U.S. employment report. However, the markets pared those gains in late trading following the release of disappointing U.S. consumer sentiment data. The FTSE was up 0.8 percent, the CAC gained 1.4 percent while the DAX and SMI were 1.5 percent higher on the week.

The Bundesbank on Friday slashed Germany's growth forecast for next year, citing widespread uncertainty and difficult economic situation in parts of the euro area. Gross domestic product is now expected to grow 0.4 percent in 2013, considerably slower than the 1.6 percent expansion forecast in June. This year, growth is estimated at 0.7 percent, down from the previous forecast of 1.0 percent. Growth is seen picking up to 1.9 percent in 2014.

Asia Pacific

Equities were up across the board last week despite cross currents from little progress in the fiscal cliff negotiations and mixed economic data. However, these concerns were balanced by hopes that the new Chinese leadership will give more government support to the economy. At week’s end, better than anticipated U.S. economic data helped to offset the lack of progress in the U.S. budget negotiations and the ECB’s downgrade of European growth forecasts. Weekly gains ranged from 0.3 percent (Jakarta Composite) to 4.1 percent (Shanghai Composite). Chinese stocks fell to multi-year lows at the beginning of the week before rebounding sharply Wednesday on hopes of more government support for the economy.

Australian shares rose to a seven week high, led by miners benefiting from a rebound in iron ore prices as investors look ahead to China's industrial production data due over this weekend. The All Ordinaries was up 0.8 percent on the week. Besides the RBA meeting, Australia released a number of important indicators. Third quarter GDP was up a pretty much as expected 0.5 percent on the quarter while the labour force survey beat expectations with a November employment gain of 13,900 and a decline in the unemployment rate to 5.2 percent. However, October retail sales disappointed with no gain. October merchandise trade recorded its tenth consecutive deficit.

Currencies

The U.S. dollar was mixed last The U.S. dollar was mixed last week — it was down against the Canadian and Australian dollars and the pound sterling. However, it jumped against the euro and the Swiss franc. The yen was unchanged after Friday’s 7.3 magnitude earthquake off the coast of Japan. The dollar was up against the euro and Swiss franc. The euro declined Thursday after the European Central Bank cut its growth forecasts. The drop continued Friday after the Bundesbank followed with cuts in its forecast for German growth. Germany is increasingly being negatively affected by the austerity drive across the Eurozone. The euro had already sold off after expectations rose that the Eurozone may cut interest rates again next year, after ECB President Mario Draghi hinted that a decision to keep rates on hold had not been unanimous.

On Thursday, the euro declined the most in a month against the dollar after Draghi said economic weakness will persist next year, suggesting the ECB has scope to lower interest rates. The euro dropped from almost a seven month high against the yen after the ECB cut its growth forecasts and said it saw “downside risks” for the region. The yen strengthened against most of its major counterparts as investors sought safer assets.

Selected currencies — weekly results

Indicator scoreboard

EMU

October retail sales dropped 1.2 percent and were 3.6 percent lower than their year ago level. The latest decline followed a revised 0.6 percent monthly drop at the end of the third quarter. Sales of food, drink & tobacco were down 0.8 percent from September. Excluding auto fuel, non-food purchases were down 1.4 percent following a 1.1 percent slide last time. Regionally there were respectable monthly performances by Ireland (1.9 percent), Belgium (0.7 percent), Luxembourg (0.6 percent) and France (0.4 percent) However, on the downside there were hefty declines in Portugal (down 4.5 percent), Finland (down 3.0 percent) and Germany (down 2.8 percent).

Third quarter gross domestic product contracted 0.1 percent on the quarter and 0.6 percent from a year ago. Household consumption was flat at its second quarter level when it shrank 0.4 percent while fixed investment followed the previous period's 1.8 percent decline with a 0.7 percent drop. With government consumption off 0.2 percent, final domestic demand subtracted 0.2 percentage points from the quarterly change in total output. Destocking hit the bottom line to the same extent so that the overall contribution of domestic demand was disappointingly soft at minus 0.4 percent. The relatively mild decline in headline GDP had much to do with another sizeable boost from overseas trade. Export volumes were up 0.9 percent from the second quarter and imports, just 0.2 percent, so that net exports added 0.3 percentage points to quarterly economic growth. Regionally it was a surprisingly positive quarter for the core EMU states with both France and Germany posting a 0.2 percent gain over the second quarter. However, for those member states seen as the largest threat to euro stability it was uniformly bad news. In particular, the Spanish economy contracted a further 0.3 percent, Italy was down 0.2 percent, Portugal a hefty 0.8 percent and Cyprus 0.5 percent. Comfortably the strongest performer was Estonia (up 1.7 percent).

Germany

October manufacturing orders rebounded 3.9 percent after sinking 3.3 percent in September. On the year, orders were down 2.0 percent. The increase was driven by overseas demand which comfortably more than reversed September's 2.9 percent slide with a monthly 6.7 percent bounce. Within this, capital goods were up 8.4 percent and basics, 6.7 percent. However, consumer and durables were only flat. Non-Eurozone orders climbed 8.5 percent on the month, well ahead of the EMU bloc's 3.5 percent increase, the latter's failing to come anywhere close to offsetting September's 8.3 percent plunge. However, domestic demand was relatively soft with orders up just 0.4 percent from the end of last quarter, and that after a 1.8 percent decline last time. Despite a 4.6 percent gain in consumer and durables and a 0.9 percent advance in capital goods, overall orders were held largely in check by a 0.8 percent drop in basics.

October industrial production dropped 2.6 percent — its third decline in a row — and was down 3.8 percent from a year ago. Manufacturing was down 2.4 percent, also its third decline in as many months. Outside of nondurable goods, which managed a minimal 0.1 percent increase, output was lower on the month in all of the main sub-sectors. Worst hit was durable consumer goods which posted a 6.2 percent contraction, but construction (minus 5.3 percent) and capital goods (minus 4.3 percent) were not far behind. At the same time, intermediates were off 1.1 percent and energy 3.2 percent.

France

Third quarter mainland ILO unemployment rate inched up 0.1 percentage point to 9.9 percent from an upwardly revised 9.8 percent in the previous period. Including overseas territories, the rate also advanced a tick to 10.3 percent. Not for the first time the bulk of the increase was seen at the younger end of the age spectrum where the rate jumped 1.4 percentage points to 24.2 percent. Both the mainland and overall unemployment rates have now risen every quarter since the third quarter of last year.

October seasonally adjusted merchandise trade gap was €4.7 billion, down €0.3 billion from an unrevised €5.0 billion deficit in September and the smallest amount of red ink since July. October's improvement reflected a 0.7 percent monthly increase in exports together with a 0.2 percent drop in imports. However, the recovery in the former, which was largely due to strength in chemicals, refined petroleum products and grain, failed to fully reverse a 1.6 percent decline in September and so left exports short of that month's record high. The slide in imports was led by pharmaceuticals and transport equipment although this was almost offset by a rebound in energy.

United Kingdom

October merchandise trade gap widened to Stg9.5 billion from an unrevised stg8.4 billion September shortfall as exports dropped 1.0 percent on the month and imports were up 2.5 percent. The deterioration was wholly attributable to a worsening in the core balance. Hence, excluding oil and other erratic items, the deficit grew from Stg6.7 billion to Stg8.4 billion, the largest shortfall since June. This reflected a 3.8 percent jump in core imports and a 3.2 percent slump in exports. The shortfall with the EU expanded by Stg0.5 billion to Stg5.0 billion and so nearly matched the record Stg5.1 billion high seen in August while the deficit with the rest of the world climbed by Stg0.6 billion to Stg4.5 billion.

October industrial production declined 0.8 percent on the month and was 3.0 percent lower on the year while manufacturing output dropped 1.3 percent from September and was 2.1 percent below its year ago level. A significant part of the drop in manufacturing was attributable to hefty monthly declines in food, drink & tobacco (2.4 percent) and pharmaceuticals (4.4 percent). Together these sub-sectors subtracted nearly 0.6 percentage points from the monthly change in total manufacturing output. The overall goods producing sector was hit further by a hefty 19.6 percent monthly plunge in the output of coke and refined petrol, in no small way caused by the continued closure of the Buzzard oil field (reopened November 3). Total oil and gas extraction was off 4.4 percent from September and mining and quarrying was down 3.9 percent. However, elsewhere there were decent gains in electricity, gas, steam & air production (4.5 percent) and water supply & waste management (1.1 percent).

Australia

October seasonally adjusted retail sales were unchanged on the month – analysts had expected sales to increase by 0.4 percent on the month. On the year, sales were up 3.1 percent. The only industry to increase was food retailing (0.9 percent). This was offset by declines in household goods retailing (down 1.6 percent), other retailing (down 0.5 percent), cafes, restaurants & takeaway food services (down 0.3 percent), department stores (down 0.1 percent) and clothing, footwear & personal accessory retailing (down 0.1 percent).

Gross domestic product was up a slightly less than expected 0.5 percent in the September quarter. On the year, GDP was up 3.1 percent. Growth was driven by a 0.5 percent contribution from private business investment, a 0.3 percent contribution from changes in inventories and a 0.2 percent contribution from household final consumption expenditure. These increases were partially offset by a negative 0.5 percent contribution from public investment. The industries that drove growth in the September quarter were mining, manufacturing and health. Mining contributed 0.4 percent while both manufacturing and health contributed 0.1 percent to the increase in GDP. Final consumption expenditures were up 0.1 percent and 3.3 percent on the year. Gross fixed investment was up 0.4 percent on the quarter and 4.5 percent on the year.

November employment increased 13,900. The unemployment rate slipped 0.1 percentage point to 5.2 percent. The increase in employment was driven by part time employment, which was up 18,100 to 3,414,200 and was offset by a decline in full time employment, down 4,200 to 8,132,200. The increase in employment was driven by increased female part time employment. The number of unemployed people was down by 16,300 people to 637,400 in November. The seasonally adjusted labour force participation rate decrease of 0.1 percentage point to 65.1 percent. The seasonally adjusted underemployment rate was 7.2 percent. Combined with the unemployment rate of 5.2 percent, the latest estimate of total seasonally adjusted labour force underutilization was 12.5 percent in November.

October trade deficit expanded to A$2.1 billion from a revised A$1.4 billion in September as the strength of the Australian dollar continues to hurt exporters. It was the tenth consecutive trade deficit in as many months this year. Exports were up 0.4 percent on the month and were down 9.4 percent from a year ago. Imports jumped 3.0 percent in October and were 3.2 percent higher than a year ago. Within exports, rural goods were up 5 percent while non-monetary gold was 7 percent higher. Non-rural goods declined 1.0 percent. Within imports, capital goods were up 13 percent, consumption goods climbed 3.0 percent and intermediate and other merchandise goods were up 1.0 percent.

Americas

Canada

November employment was up 59,300, its best performance since April and sufficient to reduce the jobless rate by 0.2 percentage points to 7.2 percent, its lowest level since June. The headline advance in jobs was dominated by full time positions which were up 55,200. Part time jobs advanced 4,100. Private sector payrolls climbed 48,200 while the public sector added 5,400. Self employment was up 5,800. However, the goods producing sector lost 6,200 jobs led by a 19,600 drop in manufacturing. Construction trimmed 8,400 but there were partially offsetting gains in agriculture (9,000), natural resources (6,200) and utilities (6,600). It was left to services to provide the boost and a 65,700 increase here was dominated by trade (25,300), professional, scientific & technical services (22,800) and accommodation & food services (28,300). Health care & social assistance (10,900) and public administration (10.400) similarly logged respectable gains. On the downside, there were sizeable declines in other services (15,300), business, building & other support services (10,400) and transportation & warehousing (13,600).

Bottom line

Five central banks met but only the Reserve Bank of Australia trimmed its key interest rate. The European Central Bank lowered its economic growth forecast. Economic data globally were mixed. Employment data in Australia, Canada and the U.S. surprised on the up side. Meanwhile the U.S. budget negotiations continued.

The Federal Reserve will meet this week and update its economic forecasts. Elsewhere, flash Markit December manufacturing PMIs are scheduled. In Japan, revised third quarter GDP and the fourth quarter Tankan are among its key data releases. And as the end of the year approaches, the negotiations in Washington will continue to get heightened scrutiny.

Looking Ahead: December 10 through December 14, 2012

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