Global Markets

An agreement between the two political parties of the U.S. Congress and signed by President Barack Obama ended the government shutdown and removed the threat of a U.S. default for now. By deferring the dates involved — the budget to January 15, 2014 and the debt ceiling to February 7^th there is more time to resolve conflicting opinions and hopefully make way for a long term solution. During the week, equities rallied on progress and sold on disappointment on the up and downs of the negotiations. Many key U.S. economic data releases were postponed including the important employment situation report. That has been rescheduled for Tuesday but many others, at this writing, are still postponed.

On the week, only the Shanghai Composite and Bolsa retreated. Equities mostly rallied on the thought that the Federal Reserve would have to put off — perhaps into 2014 — any thought of curtailing bond purchases given that Congress only provided a temporary fix.

Global Stock Market Recap

Europe and the UK

Equities here ended the week on a positive note, thanks to the positive economic data released by China. Investors were also encouraged by some strong U.S. earnings reports, including better than expected results from Google. European stocks closed at a fresh five year high as expectations that the Federal Reserve will have to keep its bond buying program in place for longer following the partial U.S. government shutdown buoyed equity markets but sent the U.S. currency lower. All indexes covered here advanced on the week. The FTSE gained 2.1 percent, the SMI was up 1.9 percent and both the CAC and DAX were up 1.6 percent on the week.

China's economic growth accelerated for the first time in three quarters in the third quarter, supporting policymakers' efforts to restructure the economy in order to achieve sustainable growth in the longer term. GDP was up 7.8 percent from a year ago — this was faster than 7.5 percent growth in the second quarter and 7.7 percent in the first quarter.

European shares inched higher on Thursday, steadying after a sharp rally, as investors shifted their focus onto corporate news following an 11th hour deal in Washington to avert a U.S. debt default. The broader markets paused following the agreement, which was largely priced into equities already. The sense of relief was overshadowed by concerns over the temporary nature of the agreement. Late Wednesday, the U.S. Congress approved an agreement to end a partial government shutdown and avoid a debt default that would have had damaging ripple effects across the world. The deal offers only a temporary fix, however, as it funds the U.S. government until January 15 and raises the debt ceiling until February 7, leaving open the prospect of another bitter budget fight and shutdown early next year.

It is now over a month after the German election and still no government has been formed. While Angela Merkel won the election, her party — the CDU — does not have a majority. An attempt to form a coalition with the Green Party failed. Now talk is of a grand coalition between the two major parties — the CDU and the SPD. But negotiations are expected to drag on, leaving Germany without a new government, possibly until next year. Given that Italy has recently stabilized politically, this delay does not pose a major risk to the Eurozone but it could further delay progress on Eurozone institutional reform, in particular the banking union.

Asia Pacific

Equities advanced last week despite the uncertainty of whether a solution would be reached in the U.S. debt crisis. However, a combination of a temporary solution to the U.S. fiscal crisis at the 11th hour combined with the latest spate of Chinese economic data helped improve investor confidence as the week wore on. Gains were capped across the region due to the temporary nature of the agreement.

For emerging Asia, investors were cheered by the thought that the Federal Reserve will refrain from reducing its bond purchases as long as the fiscal situation remains in flux. These nations benefited from the Fed’s stimulus and low interest rates and were fearful that the end of the programs would negatively impact their economies.

The only index to decline in this region was the Shanghai Composite. It was down three of five days and lost 1.5 percent on the week. Investors seemed to discard the disappointing export data (September exports were down 0.3 percent from a year ago) and focused on third quarter growth instead which was up 7.8 percent from a year ago — an improvement from the second quarter’s 7.5 percent increase. The All Ordinaries, PSEi and SET advanced 1.8 percent from a week ago.

The Reserve Bank of Australia released the minutes of its monetary policy meeting held earlier this month. At that meeting, the RBA maintained its easing bias. The most important aspect of the minutes was the decision by the Board to retain the following sentence — "Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them." This statement had been used in both the August and September minutes as well. Analysts said it was retained particularly as a signal to currency markets that Australian interest rates can still come down. The Bank has often referred to the relatively high value of the Australian dollar as an impediment to growth.

Currencies

The U.S. dollar swooned in the aftermath of the agreement in Washington. Given the short term nature of the agreement, investors decided that the Federal Reserve would not curtail its bond purchase program until sometime next year given the negative impact of the closure on the U.S. economy. The dollar retreated after Dallas Fed President Richard Fisher said the fiscal discord has undermined the case for slowing the Fed’s bond purchases.

On Thursday, the dollar fell to an eight month low against a basket of 10 major currencies on bets that disruption from the U.S. debt ceiling debate would dampen growth and prompt the Federal Reserve to postpone tapering its stimulus program. Analysts opined that the uncertainties of the debt ceiling and government shutdown were only delayed.

The Chinese have intervened aggressively in currency trading lately to blunt a rise in the yuan's value. Analysts said the moves are a sign of China's caution in liberalizing its foreign exchange policy. The figures, which show a sharp increase in the country's foreign reserves in the past quarter, follow the opening late last month of a free trade zone in Shanghai that China said would be used to accelerate difficult changes such as loosening currency and interest rate policies. These moves are seen as essential to achieving Beijing's goal of a more consumption-driven economy. According to the data released Monday, China's foreign exchange reserves reached $3.66 trillion at the end of the third quarter, up from $3.50 trillion at the end of the second quarter.

Selected currencies — weekly results

Indicator scoreboard

EMU

August industrial output was up 1.0 percent but was down 2.1 percent on the year. The increase in production was broad-based but dominated by the capital goods sector which posted a 2.4 percent monthly gain. Intermediates advanced 0.9 percent, consumer durables 0.8 percent and non-durables 0.5 percent. Energy expanded 0.4 percent. Among the larger members, France (0.2 percent), Spain (0.1 percent) and, in particular, Germany (1.8 percent) all saw renewed monthly growth but Italy contracted a further 0.3 percent after a 1.0 percent drop last time. Elsewhere, industrial output was up a monthly 1.0 percent in Greece and 8.2 percent in Portugal but fell 3.5 percent in Estonia.

September harmonized index of consumer prices was up 0.5 percent on the month and an unrevised 1.1 percent from a year ago. Excluding energy, food, alcohol & tobacco, prices were up 1.0 percent on the year (as provisionally estimated) after a 1.1 percent increase in August while excluding just energy & unprocessed food the rate slipped to 1.2 percent from 1.3 percent. Similarly, without only energy and seasonal food, inflation dropped to 1.3 percent from 1.4 percent. Energy prices were down 0.9 percent from September 2012 after a 0.3 percent decline in the year to August. Annual inflation rates were down in the majority of member states. At the bottom of the ladder remained Greece (down 1.0 percent) where the rate has now been sub-zero for four consecutive months, just below Ireland (unchanged) and Cyprus and Portugal (both 0.3 percent). Estonia (2.6 percent) continues to occupy the top slot despite a full 1 percentage drop in its rate.

August seasonally adjusted trade balance returned a €12.3 billion surplus following a marginally smaller revised €11.0 billion of black ink in July. The unadjusted excess was €7.1 billion, a sharp widening from the €4.6 billion posted in the year ago month. The latest improvement in the adjusted headline reflected a 1.0 percent monthly increase in exports that more than offset a 0.2 percent gain in imports. However, on the year both sides of the balance sheet continued to contract with exports down 5.0 percent and imports off a steeper 7.0 percent.

Germany

October ZEW current conditions index slipped 0.9 points to 29.7 — its first fall since June. However, the new level was still the second highest since June 2012. The expectations measure climbed a further 3.2 points to 52.8, its third increase in a row and its fifth since April. It was also its best reading since April 2010. The dip in current conditions is not surprising in the wake of some slightly disappointing economic news at home and the inevitable concerns prompted by the U.S. fiscal impasse.

United Kingdom

September consumer price index was up 0.4 percent on the month and 2.7 percent on the year. The main upward pressure on the 12-month rate came from air fares which saw a much smaller seasonal monthly drop (18.7 percent) than in September 2012 (25.2 percent). The largest downward impact stemmed from motor fuels which declined 0.2 percent compared with a 2.7 percent jump in the year ago period. Most other categories made only relatively minor contributions to the change in the annual rate. The core CPI matched the 0.4 percent headline monthly gain. Its annual rate at 2.2 percent, up from August’s 2.0 percent pace.

September output prices slipped 0.1 percent on the month while raw material and fuel costs were down a steep 1.2 percent. The latest monthly developments left output prices 1.2 percent higher on the year after a 1.7 percent gain in August and input prices 1.1 percent firmer, down from 2.4 percent last time. Within the output price index, monthly moves among the main subsectors were quite small, ranging between 0.3 percent (paper & printing and petroleum products) and down 0.3 percent (computer, electrical & optical products). The core measure was also 0.1 percent weaker than in mid-quarter and just 0.7 percent firmer on the year. Components of the input costs gauge were more volatile but all the major categories saw monthly declines except fuel (0.4 percent) and other home produced materials (0.3 percent). The steepest declines were posted by crude oil (1.9 percent) and imported metals (also 1.9 percent) ahead of other imported materials (1.7 percent).

September claimant count unemployment dropped 41,700 — the largest since June 1997 and followed a significantly steeper revised 41,600 decline in August. The quarterly slide on this measure was nearly 120,000 and sufficient to reduce the jobless rate from 4.3 percent at the start of the period to a surprisingly low 4.0 percent, its best reading since January 2009. With the advent of forward guidance, the main market focus now is the ILO measure of joblessness. The decline was 18,000 in the three months to August, insufficient to lower the unemployment rate from July's 7.7 percent.

September retail sales volumes were up 0.6 percent following a slightly smaller revised 0.8 percent decline in August. Sales were up 2.2 percent on the year. Excluding fuel, sales climbed 0.7 percent from August and were 2.8 percent stronger than in September 2012. The underlying picture was significantly more robust than the headline data suggest as food sales dipped 0.2 percent on the month. Excluding fuel, non-food purchases posted a solid 1.8 percent advance led by particularly robust gains in household goods (3.0 percent) and the other stores category (2.5 percent). With clothing & footwear also up 1.2 percent and non-specialized stores up 0.2 percent, the only decline within this group was in non-store retailing (0.9 percent) although with annual growth of 19.9 percent, some pullback here was probably overdue. Elsewhere, fuel demand was off 0.7 percent.

Asia/Pacific

China

September merchandise trade balance was $15.2 billion, down from August’s $28.52 billion surplus. Exports dropped 0.3 percent from a year ago while imports were up 7.4 percent. The disappointing export data indicate fragile external demand. The drop in exports was broad based, with volumes to the European Union, Hong Kong and Taiwan dropping. Exports to many developing economies also fell. Exports to the U.S. were up 4.2 percent while imports were 14.9 percent higher. Exports to the European Union were 1.1 percent lower on the year while imports were up 8.3 percent. Exports to Japan edged up 1.3 percent but imports dropped 7.7 percent.

September consumer prices were up a greater than expected 3.1 percent when compared with a year ago. In August the annual increase was 2.6 percent. September’s gain was the largest since February when the CPI was up 3.2 percent on the year. On the month the CPI was up 0.8 percent after rising 0.5 percent in August and only 0.1 percent in July. For the nine months through September, the CPI was, for a second straight month, up 2.5 percent when compared with the same months the year before. Food prices drove the increase. They jumped 6.1 percent on the year after increasing 4.7 percent in August. Urban prices were up 3.0 percent while rural prices were 3.3 percent higher. Other price categories were relatively well behaved with increases little changed from the month before. Non-food prices were up 1.6 percent after increasing 1.5 percent for example.

September producer prices were down 1.3 percent from a year ago after sliding 1.6 percent in August. On the month, the PPI was up 0.2 percent. For the nine months through September, the PPI was down 2.1 percent when compared with a year ago. Contraction in production materials prices is easing. They were down 1.7 percent after declining 2.1 percent in August and 3.0 percent in July. Consumer goods prices slipped 0.1 percent after remaining unchanged for the previous three months. Clothing and related products prices were up 1.0 percent. Ferrous prices appear to be firming, dropping 1.4 percent after sliding 3.7 percent in August and 5.9 percent in July. However, non-ferrous metal prices dropped 5.7 percent after declining 4.5 percent in August.

September retail sales were up 13.3 percent as expected from a year ago. On the month, sales were up 1.24 percent. For the year to date, sales are up 12.9 percent when compared with the same months a year earlier. Urban retail sales were up 13.1 percent on the year while rural sales were up a hefty 14.8 percent. All categories recorded gains ranging from 6.6 percent (sports & recreation) to 27.0 percent (building & decoration materials). Autos were up 13.2 percent while oil & oil products were 9.6 percent higher.

September industrial production was up 10.2 percent on the year as expected. On the month, output was up 0.72 percent, down from August’s monthly increase of 0.92 percent. For the year to date, output was up 9.2 percent. All subcategories increased. Motor vehicles climbed 17.5 percent after increasing 14.8 percent in August. Textiles were up 8.9 percent after increasing 8.1 percent. Transport equipment was up 10.0 percent after edging in up 2.2 percent in August and declining the two previous months. However, both power & thermal and electricity output eased in September with the former up 8.7 percent after increasing 12.2 percent and the latter up 8.2 percent after 13.4 percent.

Third quarter gross domestic product was up 7.8 percent when compared with a year ago as expected. GDP was up 2.2 percent on the quarter. For the year to date for the first three quarters, GDP was up 7.7 percent. The growth stems in part from modest government stimulus efforts focused on urban infrastructure spending, as well as the delayed effects of a massive increase in new lending earlier in the year and a small improvement in external demand as the global economy strengthened.

Americas

Canada

August manufacturing sales edged down 0.2 percent after jumping an unrevised 1.7 percent in July. On the year, sales were up 0.3 percent. The volume of shipments was down 0.3 percent from the start of the quarter and was 2.1 percent below its year ago level. Nominal sales declined on the month in 11 of the 21 reporting industries with miscellaneous manufacturing (22.6 percent) hit the hardest. Shipments of food slipped 1.6 percent and motor vehicle assembly was off 2.5 percent. Excluding motor vehicles, parts & accessories, sales were flat on the month. On the upside, stronger aerospace products (17.8 percent) lay behind a 1.5 percent monthly advance in transportation equipment while petroleum & coal products rose 1.0 percent and primary metals 3.0 percent. There was also a 1.1 percent bounce in fabricated products alongside healthy gains in computer & electronic products (5.9 percent) and electrical equipment, appliance & components (5.3 percent).

September consumer price index was up 0.2 percent and up 1.1 percent from a year ago. Excluding food and energy, the CPI was up 0.3 percent on the month but were unchanged at a 0.9 percent annual rate while the Bank of Canada core which excludes eight volatile items, matched the 0.2 percent monthly headline advance for a 1.3 percent 12-month rate. The seasonally adjusted CPI was also up 0.2 percent from August but both underlying measures edged up just 0.1 percent following flat readings last time. Within the adjusted basket the main upward pressure on prices was provided by alcohol & tobacco, where costs climbed a relatively steep 0.4 percent on the month and transportation which was up 0.3 percent. Shelter and health & personal care gained 0.2 percent but food edged just 0.1 percent firmer, household operations, furnishings & equipment were flat and recreation, education & reading retreated 0.3 percent. However, easily the steepest decline in prices was in clothing & footwear (1.2 percent).

Bottom line

Equity markets registered their relief that the U.S. fiscal crisis had been resolved for now and gained on the week. The dollar, however, retreated as investors saw that the Federal Reserve would not curtail its bond buying in light of the hit the economy took from the government closure and the uncertainty of the situation going forward.

While the U.S. will be catching up with the release of many indicators that had been postponed, the Bank of Canada will hold a monetary policy meeting — no change in its key interest rate, now 1.0 percent, is anticipated. The Bank of England’s minutes of its monetary policy meeting held earlier this month should be interesting reading in light of continuing mostly positive economic data and especially the latest labour market report. Investors will look to the flash PMI reports for the Eurozone, Germany, France, China and the U.S. to evaluate the health of the manufacturing sector.

Looking Ahead: October 21 through October 25, 2013

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