Global Markets

The budget negotiations were front and center globally as investors swayed with each positive — and negative — word from Washington. Better than expected U.S. economic data did little to offset investor angst. Fed chairman Ben Bernanke added to concerns Wednesday during his press conference when he said that the Fed could not offset the fallout should no agreement be reached.

The Federal Reserve still has ability to surprise some in the financial markets. While analysts mostly expected a replacement for ‘operation twist’ expiring at year’s end, the change in guidance was largely unexpected by market players. The FOMC changed from timeframe guidance to one focused on indicators. The Fed, in accordance with its dual mandate to boost employment while also keeping down inflation, now says it will keep its policy fed funds rate near zero until the unemployment rate reaches 6.5 percent before considering a tightening of monetary policy. This assumes inflation remains within its long term target of 2.0 percent and below its trigger point of 2.5 percent rate.

Mixed picture emerges from flash PMI readings

The likelihood of the Eurozone recording a third successive quarter of contracting real GDP increased somewhat according to December flash PMI data. Of particular note, the composite output index, while above its final November reading and at a nine month high of 47.3, remained below the key 50 growth threshold. The manufacturing component remained in the doldrums, edging up just 0.1 point to a lower than expected 46.3. This is also a nine month peak but still deep into contractionary territory. Services were up 1.1 points at 47.8, a five month high.

Elsewhere, China’s flash manufacturing PMI remained above the breakeven point for a second month, climbing to a reading of 50.9 in December from 50.4 the month before. And the U.S. manufacturing PMI jumped to a reading of 54.2 from 52.4.

Global Stock Market Recap

Europe and the UK

Investors continue to monitor the Washington budget negotiations closely and effectively neutralizing better than expected economic data from China and the U.S. However, European data continues to show contracting growth although at a slower pace. The FTSE crept up 0.1 percent on the week while both the CAC and DAX were 1.0 percent higher. The SMI slipped 0.3 percent. The MIB and IBEX were up 1.3 percent and 2.4 percent respectively on the news that the Eurogroup finally approved the release of a second disbursement of bailout funds to Greece on the completion of the government's debt buyback operation. At its meeting in Brussels Thursday, Eurogroup authorized the bailout fund, the European Financial Stability Facility (EFSF), to release the next installment for a total amount of €49.1 billion. The disbursement will be made in several tranches. Greece will receive €34.3 billion shortly. The remaining amount will be disbursed in the first quarter of 2013.

Thursday was the first opportunity that investors here could react to the Federal Reserve’s actions at their FOMC meeting. Comments made by Fed Chairman Ben Bernanke at his press conference Wednesday raised concerns regarding the potential damage that the stalemate is causing. The Fed chairman warned that Fed support cannot fully offset the downside risks presented by the fiscal cliff. Bernanke expects Congress to reach a deal, but noted that inaction has already resulted in a troubling drop in business confidence.

Progress in Europe this week was two-fold — Greece finally will get some money and a banking structure has been agreed upon. However a lot remains to be done. EU finance ministers agreed to a deal on Thursday to provide nearly €50 billion in long delayed aid to Greece, prompting Prime Minister Antonis Samaras to declare an end to talk of a Greek exit from the single currency. It averts a catastrophic default and secures Greece's survival in the Eurozone after months of doubt and political turmoil.

The ministers also finalized an agreement that gives the European Central Bank more powers to oversee the functioning of banks. The decision came ahead of the two day EU summit in Brussels which began Thursday. The ministers plan to make the supervisory system fully operational by March 2014 or 12 months after the entry into force of the legislation, whichever is later, according to statement issued after the meeting. The Single Supervisory Mechanism (SSM) will be composed of the ECB and national competent authorities. As the chief watchdog, the ECB will be responsible for the overall functioning of the SSM and will have direct oversight of Eurozone banks, but "in a differentiated way and in close cooperation with national supervisory authorities," the ministers said in the statement.

Swiss National Bank

As universally expected, the SNB's Monetary Policy Assessment left the target range for 3-month CHF Libor unchanged at zero to 0.25 percent with a central target rate of zero. The SNB also again restated its determination to prevent the Swiss franc moving from below the 1.20 level against the euro and indicated a continued willingness to buy euros in unlimited quantities. The steady hand on policy reflected an essentially unchanged conditional inflation forecast which, at 0.2 percent for the end of next year, matched exactly the September projection. However, immediately ahead prices are expected to be a little stronger than last quarter with a positive annual inflation rate now seen next quarter, two quarters ahead of the previous forecast. Real GDP growth is now put at 1.0 percent this year and 1.0 percent to 1.5 percent in 2013.

The partial easing of tensions in Eurozone financial markets since the announcement of the so-called Draghi Plan has reduced upside pressure on the CHF in recent months — there were modest declines in the central bank's foreign reserves in both October and November. Nonetheless, the SNB's determination to keep its minimum exchange rate target intact remains as resolute as ever and has even prompted speculation about the introduction of negative official interest rates. The SNB’s foreign currency reserves have surged almost 70 percent over the past year to 424.8 billion Swiss francs at the end of November as policy makers stepped up euro purchases to curb flows sparked by the region’s debt crisis.

Asia Pacific

Most equity indexes were up after economic data pointed to signs of improvement in China’s economy. Sentiment improved as investors continued to hope that the Bank of Japan will pursue aggressive monetary easing after Sunday's Lower House Election. Positive news from Europe also helped. The next tranche of loans to Greece and the political agreement on a Eurozone banking union helped counterbalance worries over the progress of U.S. budget talks.

On the week, the Nikkei gained 2.2 percent, the Hang Seng was up 1.9 percent and the Shanghai Composite soared 4.3 percent. Japanese equities rallied to an eight month high after the yen declined following the announcement of the Fed’s new bond buying program and expectations of policy actions at home. The Shanghai Composite jumped on hopes new policies will emerge from the central economic work conference over the weekend. Also helping the index was the December flash manufacturing PMI reading that climbed to 50.9, a 16 month high. Equities in Australia were up 0.9 percent, near a 17 month high with ongoing worries about the fiscal cliff talks continuing to cap the upside.

Bank of Korea

The Bank of Korea kept borrowing costs unchanged before the presidential election to be held on December 19^th, and after North Korea launched a rocket in defiance of international sanctions. Governor Kim Choong Soo and his board kept its key seven day repurchase rate at 2.75 percent after 25 basis point cuts in July and October. South Korea’s economic data have given mixed signals and a rapid rebound in growth is “unlikely,” according to Kim. At the same time, Korea is poised for a “moderate” export led recovery and inflation will remain low, the BoK said in its statement, bolstering the view that the Bank will remain on hold.

Currencies

The dollar was down against most of its major counterparts last week with the exception of the yen. Even though traders were cautious as they listened to the rhetoric from the fiscal cliff negotiations in Washington. At the same time, concerns about the Eurozone’s sovereign debt woes eased when the Euro area finance ministers agreed finally to release a second tranche of funds for Greece and then subsequently agreed to give the European Central Bank regulatory power over banks.

The yen extended its losses against other major currencies for variety of reasons, including the likelihood of a big opposition party victory in Japan's general elections Sunday and a solid batch of economic data from China. Analysts cited strong expectations for an aggressive stance on monetary and fiscal policy by key opposition leader Shinzo Abe whose Liberal Democratic Party (LDP) is expected to win a major victory. An upbeat economic report from China and reduced concerns over the U.S. fiscal cliff were also factors behind the yen’s weakening at weeks end. The yen, along with the U.S. dollar, served as a safe haven during the worst of the Eurozone’s debt woes which pushed the Japanese currency’s value ever higher to the pain of its export industries.

Expectations for additional easing by the Bank of Japan were kept intact by the BoJ's Tankan survey of business sentiment showing Japanese companies more pessimistic about business conditions in the three months to December. The closely watched large manufacturers' business sentiment index deteriorated to minus 12 from minus 3 in the previous survey.

Selected currencies — weekly results

Indicator scoreboard

EMU

October industrial output dropped 1.4 percent on the month and declined 3.6 percent when compared with a year ago. With the exception of nondurable consumer goods, which posted a 1.2 percent advance, output was down on the month in all major sub-sectors. Durables declined 3.8 percent, capital goods were off 3.0 percent and intermediates 1.2 percent. Energy contracted 1.5 percent. The second consecutive hefty drop in industrial production left the level of output 2.7 percent below its third quarter average when it was up 0.4 percent. Regionally, it was Germany that did much of the damage with a sizeable 2.4 percent slump from September, its third decline in as many months. France saw a 0.6 percent slide after a 2.8 percent drop last time and Italy a 1.1 percent contraction, that following September's 1.3 percent gain. Some of the smaller states fared rather better but the strongest monthly gain, 4.8 percent in Portugal, came nowhere close to offsetting the previous period's 12.1 percent plunge. Eurozone industrial production is now at its weakest level since April 2010.

November harmonized index of consumer prices was down 0.2 percent on the month and was 2.2 percent higher on the year, down from 2.5 percent in October. Much of the deceleration was due to the effects of the more volatile categories, notably energy which saw a 1.4 percent monthly decline in prices that reduced its annual inflation rate from 8.0 percent at the start of the quarter to 5.7 percent. However, excluding food, drink tobacco & petroleum, the 12-month rate slipped a notch to 1.4 percent and without just seasonal food and petroleum, the rate similarly edged 0.1 percentage points lower to 1.6 percent. Omitting unprocessed food & petroleum, inflation was steady at also 1.6 percent.

Germany

December ZEW current conditions index was up a smaller than expected 0.3 points to 5.7 — it was still its first increase since May. More importantly, expectations climbed a surprisingly steep 22.6 points to 6.9, the strongest gain since September and the highest reading since April. Even so, further anticipated weakness in overseas demand means that ZEW does not see any significant upswing in business activity over the first half of 2013.

October seasonally adjusted merchandise trade surplus narrowed from a marginally smaller revised €16.9 billion in September to €15.2 billion at the start of the current quarter. The unadjusted surplus was €15.8 billion, down €1.1 billion from last time. The smallest adjusted surplus since March reflected a 2.5 percent monthly surge in imports that swamped a modest 0.2 percent increase in exports. Imports, which were up 6.0 percent from October 2011, hit their highest level since May while exports, which have now fallen in three of the last five months, were up 10.6 percent on the year and are now 2.2 percent short of their August peak.

France

October industrial production (excluding construction) declined 0.7 percent on the month following an unrevised 2.7 percent drop in September. Output was down 3.6 percent on the year, a much steeper rate of decline than the drop of 2.5 percent seen last time. The latest decline, which left output at its lowest level since December 2009, was largely attributable to a 2.4 percent monthly slide in transport equipment. However, production also contracted in both the other manufactured goods category (1.2 percent) and electronics & machinery (0.5 percent). Partial offsets were registered by food (up 0.1 percent) and refining (up 3.6 percent) and energy was up 1.7 percent. However, construction was off 1.1 percent and manufacturing output dropped 0.9 percent after a 3.4 percent slump at the end of last quarter.

United Kingdom

November claimant count unemployment declined 3,000 monthly — its first fall since August. October's increase had been revised to just 6,000 from 10,100. This left the jobless rate steady at the 4.8 percent level to which it first fell back in July. ILO employment increased a solid 40,000 over the three months to October to a record high of 29.601 million. Moreover, the entire gain was attributable to full time positions which were up 44,000. At the same time, unemployment declined 82,000, leaving the jobless rate at 7.8 percent.

Asia/Pacific

Japan

Third quarter unrevised gross domestic product was down 0.9 percent on the quarter or contracted at an annualized rate of 3.5 percent. On the year, GDP was up 0.5 percent. The estimates of the expenditure components were little changed from the first estimate. Domestic demand was down an unrevised 0.2 percent. However, private consumption was revised to a drop of 0.4 percent from a 0.5 percent decline in the first estimate. CAPEX was revised to a decline of 3.0 percent from the earlier estimate of a 3.2 percent drop on the quarter.

October tertiary industry activity index slipped 0.1 percent and was up 0.2 percent from a year ago. Among the industries that declined on the month were wholesale & retail trade, living related & personal services & amusement services, electricity, gas, heat supply & water, accommodations, eating & drinking services, information & communications, medical, health care & welfare, real estate & goods rental & leasing, finance & insurance and compound services. Industries that were up on the month were miscellaneous services (except government services etc.), transport & postal activities, scientific research, professional & technical services, and learning support.

November corporate goods price index was unchanged on the month and down 0.9 percent for its eighth consecutive drop from a year ago. Food, beverages, tobacco & feedstuffs were up 0.7 percent on the year after increasing 0.5 percent in October. Iron & steel prices dropped 9.8 percent after dropping 10.1 percent the month before. Textile products slipped 0.3 percent after rising 0.2 percent on the year. Elsewhere, prices for information & communications equipment dropped 7.9 percent after sliding 10.0 percent in October.

October core private sector machinery orders excluding volatile items from electric utilities and ships — were up 2.6 percent on the month but were down 4.6 percent on the year. This was the first monthly increase since July. However, the government downgraded its view for the first time in four months as overseas demand remains weak. Core orders were up from carmakers, refineries, construction firms and information services in a rebound after September's widespread declines ranging from the car and electronics industries to construction and farming. Total machinery orders were down 1.6 percent and 6.9 percent on the year. Overseas orders were up 9.4 percent but sank 12.8 percent on the year.

The Tankan survey was slightly worse than analysts expected. Fourth quarter Tankan reading for large manufacturers was minus 12, down from the third quarter’s reading of minus 3. Analysts expected minus 10. This was the third straight quarter drop, hit by depressed exports. Small manufacturers’ index reading was minus 18 after a reading of minus 14 last time, and slightly better than the consensus estimate of minus 20. Large non-manufacturing index was at plus 4 while small non-manufacturers index reading was minus 11. But capital investment plans by all firms for fiscal 2012 have been revised up. Total CAPEX for fiscal year 2012 was projected at 7.1 percent, up from September’s 5.8 percent. Big firms see CAPEX was up 6.8 percent after saying it would rise 6.4 percent in June. Small firms see CAPEX increasing 6.2 percent after third quarter’s unchanged.

China

November consumer price index was up 2.0 percent from a year ago after increasing 1.7 percent in October. For year to date, the index is up 2.7 percent for a second month when compared with the same months a year ago. On the month, the CPI edged up 0.1 percent. The urban CPI was up 2.1 percent while rural gained 1.9 percent. Food prices jumped 3.0 percent after increasing 1.5 percent in October. Nonfood prices were up a tame 1.6 percent on the year. The CPI will end 2012 well within the government’s official 4.0 percent inflation target.

November producer price index declined 2.2 percent from a year ago. Year to date, the PPI was down 1.7 percent, little changed from the drop of 1.6 percent seen in October. On the month, the PPI slipped 0.1 percent. Raw chemical materials prices declined 4.5 percent after dropping 5.7 percent in October. Production materials deflation was down 3.0 percent, the best showing since June's 2.9 percent decline.

November industrial production improved to an increase of 10.1 percent on the year after rising 9.6 percent in October. This was the first double digit increase since March's 11.9 percent gain. Improving growth was seen in key categories, including steel, where production growth jumped to 16.5 percent from 11.7 percent despite overcapacity and pricing problems in the industry. Electricity output was up 7.9 percent on the year marking a fifth month of improvement after registering zero growth in March.

November retail sales were up 14.9 percent on the year. Urban retail sales were up 15.0 percent while rural sales advanced 14.6 percent. Auto sales showed signs of recovery, rising 8.3 percent in November from 7.0 percent the month before. However, sales of building and decoration materials was 19.0 percent higher after increasing 24.7 percent in October, suggesting cooling housing demand. Furniture growth cooled to 23.9 percent from 29.8 percent.

November merchandise trade surplus was $19.63 billion, lower than analyst expectations of a $25.5 billion surplus. Exports were up 2.9 percent on the year while imports were unchanged. Expectations were that exports would climb 9.3 percent and imports, 2 percent. Exports for 11 months are up 7.3 percent while imports are 4.1 percent higher from the same months a year ago. The trade surplus so far this year is $199.54 billion. In 2011 the trade surplus for 11 months was $141.3 billion.

Americas

Canada

October seasonally adjusted trade balance returned a surprisingly small deficit of just C$0.17 billion, down sharply from a slightly wider revised C$1.01 billion shortfall in September. The improvement reflected a 1.0 percent monthly increase in exports together with a 1.2 percent decline in imports. A similar pattern in the volumes data meant that the real trade position was also much stronger than last time. Within the monthly advance in overall nominal exports, sales to the U.S. market slipped 0.2 percent which, with imports up 1.6 percent, saw Canada's bilateral trade surplus with its neighbor narrow from C$3.21 billion at the end of last quarter to C$2.77 billion. Among the major export product categories, most areas saw gains over the previous month, notably metal & non-metallic mineral products (5.1 percent), farming & fishing products (18.3 percent) which hit a record high, and energy (3.0 percent). However, there were declines in metal ores & non-metallic minerals (21.9 percent) and motor vehicles & parts (1.6 percent). Imports were weighed down by monthly declines in a number of categories, most notably industrial chemicals, plastics & rubber (8.4 percent), metal & non-metallic mineral products (5.7 percent) and electronic equipment (3.1 percent).

Bottom line

Positive economic data were neutralized by investors’ concerns about the progress of the U.S. budget negotiations. News out of the Eurozone concerning Greece and a banking union helped improve investors’ sentiment. U.S. data were mostly better than anticipated. The Federal Reserve surprised by changing its policy guidance.

The Bank of Japan meets and bank watchers closely will watch what policy changes are made given the streak of poor economic data and the outcome of the national elections. Investors will monitor the South Korean elections mid-week. And everyone will be watching — and listening to Washington — as they await the outcome of the U.S. budget negotiations as the deadline draws ever closer.

Looking Ahead: December 17 through December 21, 2012

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