Global Markets

The budget and debt ceiling impasses have captured the attention of markets worldwide with little attention given to what normally would be important events. While Janet Yellen’s appointment as the new chair of the Federal Reserve garnered attention and stirred a brief rally, focus slewed back to the fiscal situation where the slightest indication of perceived progress instilled a positive mood in the markets. Both the Group of 20 and the IMF urged U.S. lawmakers to settle the impasses. At this writing, while communication has resumed between Congress and the While House, a gulf still remains. In the meantime, with most economic data releases postponed, markets have little real information to trade upon. Even many private indicators rely on input from the federal government to calculate their data. On the week, most indexes followed here advanced. Only the Taiex, SMI and Nasdaq retreated.

IMF new forecasts

The International Monetary Fund cut its world growth forecast Tuesday amid deteriorating emerging market prospects and urged authorities to shore up their economies. At the same time, the U.S. is preparing for the Federal Reserve to curtail its stimulus and wrestles with a budget impasse that threatens to derail the global recovery. In its sixth consecutive downward revision, the IMF now expects global output to expand just 2.9 percent, down from its July estimate of 3.1 percent, making it the slowest year of growth since 2009. It predicted a modest pickup next year to 3.6 percent, below its July estimate of 3.8 percent. According to the IMF, the United States is driving much of the global recovery and U.S. output should pick up further next year — as long as politics do not get in the way — referring to the current budget and debt ceiling impasses.

Emerging markets still account for much of global growth and their economies should expand nearly four times as fast this year as advanced economies. But the heady expansions some enjoyed in recent years may be a thing of the past, the IMF said. China in particular should slow over the medium term as its economy transitions away from investment to consumption drivers. Markets no longer expect the Chinese government to step in with stimulus if growth dips below 7.5 percent, the IMF said. Lower growth in China could spill over to others, especially commodity exporters dependent on China's insatiable appetite for energy.

The IMF said Japan had experienced an 'impressive' pickup since the government launched a massive stimulus program to spur the economy out of a prolonged stagnation, boosting output by about 1 percent. But growth should slow next year as the stimulus recedes and Japan moves ahead with higher consumption taxes, it added.

In Europe a better mood more than any change in policy lifted the core economies of Germany and France. Even Italy and Spain should edge into positive growth territory next year. But the IMF added that the Eurozone must still address financial fragmentation, improve the health of banks and move closer to banking union.

Global Stock Market Recap

Europe and the UK

Equities ended the week on an optimistic note that the U.S. budget and debt ceiling impasses will be resolved. The main driver for the market as a whole continues to be events in the United States, with investors cheering signs that politicians appeared ready to end the deadlock after meeting at the White House. After retreating the first three days of the week, equities rallied Thursday and Friday on signs of movement in Washington. The FTSE, CAC and DAX were up after declining the previous two weeks. The FTSE was up 0.5 percent, the CAC gained 1.3 percent and the DAX climbed 1.2 percent. However, the SMI edged down 0.1 percent on the week.

Bank of England

The Bank of England left its bank rate at 0.5 percent and its bond buying program ceiling at £375 billion. The lack of any change follows increasing evidence of solid economic growth last quarter (although August’s industrial production data were particularly soft). Inflation remained above the Bank’s 2.0 percent target. The nine member monetary policy committee has pledged to keep the bank rate at its current record low at least until unemployment falls from 7.7 percent to 7 percent, as long as prices are stable and the health of the financial system remains sound.

Since the MPC unveiled its forward guidance on interest rates in August, better than expected data have undermined markets’ faith in the new policy. The BoE thinks unemployment will not fall to 7 percent until the middle of 2016, but markets expect the first interest rate rise a year earlier. Members of the MPC have hit back against the framework’s critics in recent weeks, suggesting that doubters had misconstrued guidance as a commitment to hold rates for the next three years.

The main risk to policy stability today looks like the exchange rate which had been responding well to the raft of positive economic news. Otherwise, and working in the other direction, the strengthening housing market continues to attract a good deal of market interest. The recovery certainly has been unexpectedly robust but with the BoE's Financial Policy Committee having only just indicated that it does not see recent developments as a threat to UK financial stability, immediate policy implications should be minor.

Asia Pacific

Equities rallied to hit three week highs Friday after U.S. lawmakers said they would continue talks to find a temporary solution to stave off a debt default. For the week, only the Taiex retreated (0.2 percent). Gains ranged from 3.1 percent (Sensex) and 3.0 percent (Jakarta Composite) to just 0.5 percent (KLCI). The impasse in the U.S. has been a constant theme for global markets throughout the week, though markets here have been resilient to the declines and more receptive to good news.

A surprise move by Reserve Bank of India

On Monday, the RBI cut the rate at which it lends emergency funds to banks by 50 basis points to 9.0 percent. It further eased the exceptional measures it took in July to stabilize the rupee. The RBI said it cut the overnight marginal standing facility or MSF with immediate effect. The RBI also announced that it would conduct auctions every Friday when it would lend funds to banks for seven days and 14 days against government bonds. The RBI had lowered the MSF rate to 9.5 percent from 10.25 percent at its September 20 meeting, while simultaneously increasing its main lending rate by 25 basis points to 7.50 percent to fight inflation. At that time, the RBI had indicated that it would ease liquidity restrictions further as the rupee stabilizes.

The RBI had raised the MSF rate to 10.25 percent in July from 8.25 percent and limited the amount it lends to banks at its main lending rate. These measures were aimed at reducing the supply of the local currency in the banking system to make it tougher to buy dollars with borrowed rupees. The steps caused a spike in short term rates in the money market, and many banks responded by raising lending and deposit rates for customers.

The rupee has recovered sharply in recent weeks because of measures taken by the central bank to attract capital inflows and following the U.S. Federal Reserve's decision to keep its bond buying program intact. The currency has gained from a record low of 68.80 to the dollar, hit on August 28, to Friday at 61.08.

Currencies

The U.S. dollar advanced against most of its counterparts last week despite the ongoing fiscal crisis. At the same time, the yen retreated from its recent strength as risk appetite increased amid speculation that U.S. lawmakers will reach an agreement to avert a default, curbing demand for the yen as a refuge. The euro pared gains as a European Central Bank Governing Council member Ewald Nowotny said its strength may be harming the Eurozone’s exports.

The Chinese yuan hit a record high against the U.S. dollar in Hong Kong Friday, buoyed by positive news about the U.S. debt ceiling and optimism that the Federal Reserve will not quickly wind down its monetary stimulus. Market participants expect the Fed to further delay the start of winding down its monthly bond buying due to concerns about the political impasse in Washington. The yuan's gains left some traders speculating that China's September economic data due to be released over the weekend could be stronger than expected.

Selected currencies — weekly results

Indicator scoreboard

Germany

August seasonally adjusted merchandise trade balance surplus was €15.6 billion in August, up from a stronger revised €15.0 billion in July. The unadjusted surplus was €13.1 billion, down €3.1 billion from July. The improvement in the adjusted headline reflected a 1.0 percent monthly increase in exports that more than offset a 0.4 percent increase in imports and also more than reversed the 0.8 percent decline seen in July. However, the recent trend in exports has been at best only flat and August's level was still more than 1 percent below the recent high posted in April and some 5.4 percent weaker on the year. The advance in imports was the fifth in the last six months and left purchases from overseas 2.2 percent below their year ago reading.

August manufacturing orders were down 0.3 percent on the month — their fourth decline since March. On the year, workday adjusted orders were up 3.1 percent. The headline monthly drop was wholly attributable to a 2.1 percent drop in the overseas market. Domestic orders strengthened 2.2 percent. Within the home element, capital goods dominated with a 4.7 percent monthly surge while basics edged up 0.2 percent and consumer & durables declined 1.6 percent. The weakness of foreign demand reflected a 3.7 percent contraction on the month in capital goods that was only partially offset by a 0.8 percent increase in basics and a 0.6 percent gain in consumer & durables. Eurozone orders were off 2.9 percent (capital goods down 9.2 percent) after a 6.2 percent decline last time while non-Eurozone demand fell 1.6 percent following the previous 1.2 percent reversal.

August industrial production including construction increased 1.4 percent on the month following a significantly smaller revised 1.1 percent decline in July. Annual workday adjusted growth was 0.3 percent. Excluding construction, output was up 1.8 percent. August's rebound was moderately broad-based but dominated by a 4.4 percent monthly surge in capital goods. Intermediates edged up 0.1 percent while consumer goods were up 0.4 percent as a 0.9 percent rise in nondurables more than offset a 2.1 percent drop in durables. Elsewhere, energy slipped 0.2 percent and construction was off 1.9 percent.

France

August seasonally adjusted merchandise trade deficit narrowed by €0.2 billion from July to €4.9 billion. The shortfall was minimally smaller than expected but did little to dent the near €0.6 billion deterioration seen at the start of the year. The decline in the red ink concealed declines on both sides of the balance sheet. Broad-based declines among the major sectors were responsible for a 1.4 percent monthly drop in exports which now stand at their weakest level since May. At the same time, imports contracted a sharper 1.6 percent, although this still left them more than 1 percent above their level in June.

August industrial production (excluding construction) was up 0.2 percent and down 2.9 percent from a year ago. Manufacturing was up 0.3 percent on the month. Within manufacturing, refining dropped 5.3 percent, electrical & electronic equipment declined 3.3 percent and the other manufactured goods category was off 0.3 percent. The weakness here was more than offset by a 1.1 percent increase in food & agriculture and, in particular, an 8.6 percent jump in transport equipment that more than reversed July's 6.9 percent slump. Elsewhere, energy & extracted goods output slipped 0.2 percent from July while construction was up 1.1 percent.

United Kingdom

August industrial production dropped 1.1 percent and was down 1.4 percent from a year ago. Manufacturing declined 1.2 percent and was down 0.2 percent on the year. The decline in manufacturing reflected weakness in six of the 13 reporting subsectors. Among these, pharmaceutical products & pharmaceutical preparations plummeted 7.0 percent on the month, computer, electronic & optical products dropped 7.4 percent and food, beverages & tobacco contracted 2.5 percent. The main positive contribution came from basic metals and metal products which saw a 4.2 percent monthly advance. Total industrial production was also hampered by a 1.9 percent monthly drop in electricity, gas, steam & air conditioning as well as smaller reversals in mining & quarrying (0.6 percent), water supply & sewage (0.6 percent) and oil & gas extraction (0.1 percent). Thanks to previous gains, the latest figures still leave industrial production 1.1 percent higher over the last three months and manufacturing output 1.2 percent stronger. In fact the ONS hinted that August's weakness may have had something to do with inappropriate seasonal adjustment and certainly the report is in sharp contrast to the bullish PMI and CBI surveys. This may mean that the September data will show a strong rebound.

August global goods deficit narrowed to Stg9.6 billion. The surprisingly small reduction in the red ink reflected a 1.1 percent monthly increase in exports and a 0.1 percent dip in imports. The underlying position followed the same path with the shortfall here also shrinking by Stg0.3 billion to Stg8.3 billion as exports advanced a monthly 0.6 percent and imports declined by the same amount. The limited improvement in the headline data was wholly attributable to trade with the non-EU bloc where the red ink dropped from Stg4.8 billion to Stg4.4 billion as exports rebounded nearly 6 percent on the month following their collapse in July and imports gained just 1.5 percent. The bilateral shortfall with the rest of the EU widened Stg0.1 billion to Stg5.3 billion.

Asia/Pacific

Japan

August core private machine orders excluding volatile ones for ships and those from electric power companies jumped a greater than expected 5.4 percent on the month and were 12.7 percent higher from a year ago. This was the first monthly increase since May. Manufacturing orders were up 0.8 percent on the month after jumping 4.8 percent in July. Nonmanufacturing orders excluding volatile ones were up 6.3 percent after they were virtually unchanged on the month in July. Orders from overseas climbed 22.4 percent after increasing 1.4 percent in July. The total value of machinery orders received by 280 manufacturers operating in Japan was up 4.5 percent after increasing 4.4 percent the month before.

August tertiary index was up 0.7 percent on the month and 1.3 percent from a year ago. Analysts expected a 0.5 percent monthly increase. Among the industries that contributed to the rising index were wholesale & retail trade (up 1.0 percent), scientific research, professional & technical services (up 2.4 percent), information & communications (up 1.0 percent), accommodations, eating & drinking services (up 1.9 percent), living-related & personal services & amusement services (up 1.9 percent) and medical, health care & welfare (up 0.4 percent). Industries that declined were finance & insurance (down 0.6 percent), real estate & goods rental & leasing (down 0.4 percent) and electricity, gas, heat supply & water (down 0.2 percent).

September corporate goods price index was up 2.3 percent on the year. This was the sixth consecutive increase. On the month, the CGPI was up 0.3 percent. Imported products have become more expensive as the yen weakens. Of the 19 categories, nine were down on the year while 10 saw increases. Exerting upward pressure was petroleum & coal products which were up 11.9 percent from a year ago. Lumber & wood products jumped 12.3 percent. Nonferrous metals were up 7.4 percent. Food, beverage, tobacco & feedstuffs were up 1.4 percent while textile products were 3.7 percent higher from a year ago. Prices continued to decline for electronic components & devices, electrical machinery & equipment, transportation equipment and information & communications equipment.

Australia

September employment increased 9,100. The unemployment rate decreased to 5.6 percent from 5.8 percent in August. On a seasonally adjusted basis, the number of people unemployed decreased by 14,700 to 697,100. The increase in employment was due to increased full time employment, up 5,000 to 8,133,700, and part time employment, up 4,100 people to 3,512,100. The increase in total employment was driven by an increase in male full time employment and an increase in female part time employment. The seasonally adjusted labour force participation rate edged down 0.1 percentage points to 64.9 percent in September.

Americas

Canada

September employment was up 11,900 after increasing 59,200 in August. However, with the participation rate off 0.2 percentage points at 66.4 percent, the jobless rate still declined to 6.9 percent from 7.1 percent, its lowest level since December 2008. Job creation was wholly attributable to full time positions which expanded 23,400. In contrast, part time employment was down 11,500. The private sector actually performed well, adding 73,600 to its headcount but the public sector shed 16,300 and the number of self-employed slumped 45,400. Hiring in the goods producing sector turned negative again, dropping 10,300 after a 26,600 increase last time. Within this, manufacturing dropped 26,000 and construction was down 14,100 but natural resources (18,900) provided a useful offset. Agriculture saw an 8,500 gain and utilities rose 2,400. The service sector employment grew 22,200, mainly thanks to a 33,200 increase in finance, insurance, real estate & leasing and a 13,100 increase in trade. The only other advance of any note was in other services (13,100). The main areas of weakness were public administration (down 17,400), health care & social assistance (down 12,300) and accommodation & food (down 8,800).

Bottom line

The deadlock over the U.S. debt ceiling and budget continued for a second week. While talks are underway, no agreement has been reached. It was a relatively light week for new economic data outside the U.S. Data centered on industrial output and merchandise trade. Data continue to be mixed with UK output staging a surprising drop and German manufacturing orders declining on the month. In Japan, corporate goods prices increased thanks to a weak yen’s impact on imports such as energy.

Most U.S. government indicators already have been canceled for the week. However, investors will hone in on the monthly deluge of China’s economic data looking for clues to global growth.

Looking Ahead: October 14 through October 18, 2013

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