Global Markets

Equity investors were nervous the first week of December, a week packed with key U.S. economic data. Each release brought a reaction in terms of how each data point would impact the Federal Reserve’s decision to curtail its stimulus. In addition, it is the last month of the year and a time when investors normally tally up gains and losses for the year end. Despite Friday rallies in Europe and the U.S. on the better than expected employment and consumer sentiment reports, most indexes followed here retreated on the week. Some analysts attributed Friday’s gains in Europe and the U.S. as a ‘relief rally’ after a week when investors interpreted good news as bad news as they became ever more concerned about Fed tapering.

PMIs paint a mixed picture

The recovery in Eurozone manufacturing was a little stronger than in October, edging up to 51.6 from 51.3. It was the fifth successive month above the key 50 growth mark and its highest reading since June 2011. Production and both domestic and overseas orders all posted higher growth rates and backlogs were up for the third time in the last four months. However, strengthening economic activity failed to influence the deteriorating trend in employment with job cuts reported for the 22nd straight month.

Regionally, performances were mixed with Austria (54.3), Germany (52.7) and the Netherlands (56.8) hitting 30-month, 29-month and 31-month highs respectively. Italy (51.4), while still well short of the fastest growing members, also saw a 30-month peak. However, Spain (48.6) hit a 6-month low and France (48.4) a 5-month trough. Greece (49.2) achieved a 51-month high but was still in negative growth territory. The UK’s manufacturing PMI climbed nearly 2 points from an upwardly revised 56.5 in October to 58.4 — a 2-1/2 year high. November was the eighth consecutive month in which the survey has indicated positive growth.

Elsewhere, the manufacturing sector in the U.S. grew solidly in November with Markit's PMI at a 10-month high of 54.7, up from 51.8 for final October. The outlook for December is also solid as new orders, the most important and most heavily weighted component, climbed to 56.2 for a 3-1/2 point gain from October. In China, where the reading was more subdued than in the U.S., the manufacturing PMI was virtually unchanged, slipping to 50.8 from 50.9 the month before.

Four central banks met last week and all opted to maintain their current monetary policies.

Reserve Bank of Australia

As expected, the RBA kept its key interest rate at 2.5 percent where it has been since August 2013. In its November Statement on Monetary Policy, the RBA said domestic growth would be below trend at 2.5 percent in 2014. Momentum in the economy is broadly forecast to remain flat at 2.5 percent throughout the year with a pick-up to 3.5 percent expected in 2015. Inflation is expected to remain contained. Although the Bank does appear to have decided that more stimulus is required for the Australian economy, it is not through interest rates. That stimulus is now being sought through the unconventional channel of 'talking down' the currency. Once again the RBA acknowledged that the Australian dollar is below its earlier level but it still remains uncomfortably high and a lower currency is likely needed to assist economic rebalancing. The RBA said that its easy monetary policy is supporting rate sensitive areas of the economy.

Bank of Canada

As expected, the Bank of Canada once again left its key interest rates unchanged. The target for the overnight rate remains 1.0 percent where it has been since September 2010. The deposit rate and Bank Rate remain at 0.75 percent and 1.25 percent respectively. The Bank maintained its neutral stance noting that the substantial monetary policy stimulus currently in place remains appropriate. Bank of Canada Governor Stephen Poloz surprised investors at the last decision on October 23 by dropping language about the need to raise interest rates in the future, sending the currency and bond yields lower. Since then, consumer price gains have slowed while output gained at the fastest pace in two years.

Despite the strong third quarter growth of 2.7 percent, the BoC said economic growth in Canada does not yet indicate a rebalancing toward exports and investment. The Bank has long been expecting the economy to turn from the key pillars of consumer spending and the housing market to exports and business investment, but conceded Wednesday that growth in both remains elusive. The Bank dismissed concerns by analysts and international agencies that there is a risk of a housing market bubble due to elevated home sales and prices. Referring to a recent surge in both, the Bank said the housing sector had been stronger than expected but this was consistent "with updated demographic data and a pulling forward of home purchases" because of low mortgage credit. Business investment continues to be slow.

Bank of England

The Bank of England left monetary policy unchanged sticking to its commitment to keep interest rates at a record low 0.5 percent until Britain's recovery is more firmly established. It also left in place its asset buying program with a ceiling of £375 billion. The BoE made the announcement shortly after Chancellor George Osborne announced a sharp upward revision to official growth projections. The bank began buying bonds in March 2009 to shore up an economy buffeted by recession and high debt levels. It has indicated it will not begin to sell back the bonds until interest rates have returned to a more normal level.

Britain has had a surprisingly strong recovery since the start of the year, overtaking its Eurozone peers to become one of the fastest growing advanced economies in the world with annualized growth in excess of 3 percent. The reversal in Britain's fortunes has lifted the pound to a five-year high on a trade-weighted index and raised expectations the BoE will be the first of the major central banks to raise interest rates. However, the economy remains smaller than it was before the financial crisis and the BoE has signaled it is in no rush to remove its stimulus.

Under BoE Governor Mark Carney, the Bank has said it will not think about raising interest rates until the unemployment rate falls to 7 percent. But Carney and other policymakers have also stressed that the 7 percent threshold is not an automatic trigger after the recent growth spurt helped push the unemployment rate down more quickly than the BoE had forecast.

European Central Bank

As expected, the European Central Bank kept its refinance interest rate at the new record low of 0.25 percent. The ECB had lowered its key interest rate to that level in a surprise move at its November meeting. The announcement of no change as well as no change in either the deposit or marginal facility rates (0.0 percent and 0.75 percent respectively) came as no surprise.

At his press conference, ECB President Mario Draghi also confirmed the existing forward guidance that sees key interest rates being kept at present or lower levels over an extended period of time. Nonetheless, speculation about additional monetary easing — and sooner rather than later — continues to bubble away amid further evidence of economic weakness and with inflation below the ECB’s inflation target of 2.0 percent.

New economic projections showed real GDP contracting 0.4 percent this year before a modest acceleration in growth to 1.1 percent in 2014 and 1.5 percent in 2015. For the same periods, HICP inflation is forecast at 1.4 percent, 1.1 percent and 1.3 percent. Even with current policies, official inflation predictions have been revised down from September. And even in 2015, the HICP is still seen to be well short of its nearly 2 percent inflation target level. The bottom line is that monetary policy will remain very loose over the foreseeable future with the risks to an unchanged stance stacked in favor of additional accommodation.

President Draghi reiterated his commitment to keeping borrowing costs low “for an extended period of time” as policy makers continue their deliberations over whether they have done enough to prevent deflation and support the region’s recovery, or whether they need to embrace measures such as a negative deposit rate.

Global Stock Market Recap

Europe and the UK

Friday’s rally cut into losses incurred earlier in the week, but the gains were not sufficient to erase the damage done. On the week, the FTSE lost 1.5 percent but European losses were much larger. The SMI was down 2.4 percent, the DAX lost 2.5 percent and the CAC dropped 3.9 percent. The catalyst for Friday’s rally was the better than expected U.S. employment gains and an unemployment rate that fell to a five year low.

The losses earlier in the week were centered on whether the Federal Reserve, given a spate of positive economic data, would curtail its stimulus sooner than the March date analysts had been projecting. Investors continue to try and gauge when the Federal Reserve will reduce stimulus amid signs of an improving U.S. economy as exhibited by the week’s improving employment, jobless claims and growth data.

The Bundesbank lifted its growth projections for Germany on Friday and said the economy has picked up momentum largely supported by private consumption. Releasing its new semi-annual projections, the Bank said it now expects gross domestic product to grow 0.5 percent this year, up from the 0.3 percent growth predicted in June. Growth was also raised for 2014 to 1.7 percent, better than the 1.5 percent expansion projected earlier. The economy is forecast to grow 2.0 percent in 2015.

Asia Pacific

Equities here — as seemingly everywhere else — were heavily influenced by U.S. economic data and in turn, what the impact of the favorable data will be on the Federal Reserve’s upcoming monetary policy decision on December 17 and 18. Most indexes retreated on the week with only the Shanghai Composite (up 0.7 percent), the Sensex (up 1.0 percent) and the KLCI (up 0.8 percent). Declines ranged from 0.5 percent (Taiex) to 3.2 percent (Kospi). Markets here were closed before the U.S. employment data were released.

The Nikkei continues to fluctuate inversely to the yen for the most part. When the yen rises, the Nikkei inevitably declines. A higher yen weighs on exporters — their sales and profits rely on the relative value of the yen. For example, Japanese shares rebounded from two days of losses on Friday in thin trading after the yen edged lower across the board. Concern the U.S. will soon scale back its economic stimulus offset reports that Japan would ramp up its own stimulus. During the week, Bank of Japan Governor Haruhiko Kuroda reiterated that the Bank will not hesitate to act if risks to the economic outlook materialize. He said the BoJ will examine both upside and downside risks to economic activity and make adjustments as necessary without hesitation to achieve the price stability target.

Currencies

The U.S. dollar was mixed last week, losing ground to the euro and Swiss franc but increasing against the yen, pound and the Canadian dollar. It was unchanged against the Australian dollar. On Friday, after the employment report release, the dollar initially gained against most of its major counterparts but later gave back some of those gains.

On Thursday, the euro surged to a five week high as European Central Bank President Mario Draghi indicated that further monetary easing measures for the region are not imminent. At its monthly policy announcement, the ECB kept interest rates unchanged at record lows as widely expected and offered a slightly more upbeat assessment of the Eurozone economy. The ECB also lifted its growth forecast for 2014 and 2015. According to analysts, the new ECB staff forecast does not suggest the Bank is seriously contemplating the use of unconventional monetary policy such as negative interest rates and does not seem overly concerned by the euro's recent strength. 

The euro had weakened sharply following October's anemic inflation data and last month's surprise interest rate cut. It has since recovered a large part of those losses, reawakening concerns that a strong single currency could threaten the region's fragile economic recovery by hampering exports. Mr Draghi's reluctance this month to act on that, or on tight credit conditions, surprised some investors.

Selected currencies — weekly results

Indicator scoreboard

EMU

November flash harmonized index of consumer prices was up 0.9 percent on the year after increasing 0.7 percent the month before. The acceleration in the headline rate was mirrored in the core which excludes food, alcohol, tobacco & energy which was up 1.0 percent, also a couple of ticks higher than last time. The energy sector had a small positive impact with inflation here gaining 1.1 percent but the headline advance was driven mainly by services which saw a 0.3 percentage point increase to 1.5 percent. By contrast, non-energy industrial goods were unchanged at 0.3 percent.

October M3 money supply was up just 1.4 percent on the year after increasing 2.0 percent in September. The increase was its weakest since October 2011. In turn this saw the 3-month moving average monitored by the ECB drop from 2.2 percent to 1.9 percent. Bank lending was predictably sluggish again with loans to the private sector shrinking 2.1 percent on the year after a steeper revised 2.0 percent contraction at the end of last quarter. Borrowing by households was steady at a minimal 0.1 percent annual rate and within this, mortgage lending was actually a tick stronger at 0.9 percent. However, loans to non-financial corporations were down 3.7 percent on the year after a 3.6 percent drop last time and borrowing by non-monetary financial intermediaries (excluding pension funds and insurance companies) slumped 7.9 percent following September's 7.3 percent decline.

Germany

October manufacturing orders sank 2.5 percent on the month after increasing a slightly smaller revised 3.1 percent monthly increase in September. A 2.5 percent drop on the month at least failed to reverse all of the previous period's increase but annual workday adjusted growth slumped from 7.8 percent to 1.9 percent. October was hit by a hefty 5.2 percent monthly decline in capital goods which more than offset gains in both basics (2.2 percent) and consumer & durable goods (0.6 percent). The domestic market saw a 2.0 percent monthly contraction while overseas orders were off 2.3 percent. Within the fall in foreign demand the Eurozone was down a relatively mild 1.3 percent.

France

Third quarter mainland unemployment rate was 10.5 percent, up from a marginally lower revised second quarter 10.4 percent. Including overseas territories, the jobless rate also edged a tick higher, to 10.9 percent. The number of people out of work in the metropolitan area was up 31,000 at a new record high of 3.011 million following a much smaller 5,000 increase in the previous period. However, the increase was still comfortably short of the average 74,000 increase recorded over the first half of the year and, in another positive, youth unemployment declined for a third consecutive quarter.

United Kingdom

Third quarter gross domestic product was up 0.8 percent from the second quarter and 1.5 percent higher than the same quarter a year ago. Household consumption also expanded 0.8 percent on the quarter and alone accounted for 0.5 percentage points of the change in total output. However, there was better news on gross fixed capital formation which accelerated to 1.4 percent from the second quarter's 0.8 percent rate and contributed 0.2 percentage points of the increase in overall GDP. Government final spending edged up 0.1 percent on the quarter for the second consecutive time while business inventories added just 0.1 percentage points to growth. Total domestic expenditure was up 1.7 percent on the quarter and 2.2 percent on the year. However, net trade had a significant negative impact. With exports declining a quarterly 2.4 percent, and so wiping out much of the previous period's 3.0 percent advance, and imports rising a further 0.4 percent, net foreign trade subtracted 0.9 percentage points from the change in GDP. In terms of output, industrial production was up a quarterly 0.6 percent, down from 0.8 percent last time, and within which manufacturing output expanded 0.9 percent. Services gained 0.7 percent, their best quarter since the same period a year ago, mainly courtesy of strength in distribution, hotels & catering (1.1 percent) and business & financial services (also 1.1 percent).

Asia/Pacific

Japan

October retail sales were up 2.3 percent from a year ago for their third straight increase on solid demand for big ticket items ahead of a sales tax increase in April 2014. Auto sales jumped 14.8 percent after increasing 11.1 percent in September. Retail fuel sales were up 4.1 percent, slightly below September’s 4.4 percent increase. Retail machinery sales (TVs, air conditioners, etc.) rebounded 5.3 percent after sliding 2.9 percent the month before. However, sales decelerated from September’s 3.0 percent increase thanks to unseasonably mild weather that dampened demand for autumn and winter clothing at department stores.

October consumer price index was up 0.1 percent on the month and 1.1 percent from the same month a year ago. Excluding fresh food, the CPI was up 0.2 percent and 0.9 percent on the year. Excluding energy and fresh foods, the index was up 0.3 percent both on the month and year. Food excluding perishables was up 0.2 percent on the year after increasing 0.1 percent in September. Electronics slid 0.9 percent after increasing 0.4 percent in September. TVs dropped 3.8 percent after sinking 3.7 percent in September. Energy costs, however, were up 7.0 percent after jumping 7.4 percent in September.

October industrial output was up 0.5 percent and was up 4.8 percent from a year ago. This was the second consecutive monthly increase after gaining 1.3 percent in September. The increase was led by higher output of semiconductor-making machines, air conditioners and plastics. The October output index (98.8) was the highest since May 2012, when it was also at 98.8, but was still below the level before the 2008 collapse of Lehman Brothers. Production gains were offset by declines in output of information and communication electronics equipment which dropped 0.7 percent while the output of general machinery was up 7.4 percent. METI maintained its assessment that Japan's industrial production continues to show an upward movement.

October seasonally adjusted unemployment rate was 4.0 percent for a second month. The pace of job creation from a year earlier decelerated to 450,000 from the 510,000 increase in September. However it was the 10th consecutive increase. The number of unemployed declined 80,000 on the year for the 41st straight monthly drop. Payroll employment was up 80,000 from the previous month to a seasonally adjusted 63.27 million in October, marking the second consecutive increase after rising 190,000 in September.

October household spending gained 0.9 percent on the year after jumping 3.7 percent in September. Analysts were looking for an increase of 1.2 percent. In October consumers showed continued good appetite for durable goods ahead of a sales tax increase from 5 percent to 8 percent in April.

Australia

October retail sales were up 0.5 percent and 3.6 percent from a year ago. The October increase follows an increase of 0.9 percent in September. Sales were up in food retailing (0.5 percent), cafes, restaurants & takeaway food services (1.2 percent), other retailing (0.5 percent) and clothing, footwear & personal accessory retailing (0.6 percent). These increases were partially offset by a decline in department stores (down 0.3 percent). Household goods retailing was relatively unchanged on the month. Over the longer term, food retailing is the strongest contributor to growth (up 0.4 percent in trend terms). Turnover was up in New South Wales (0.7 percent), Victoria (0.3 percent), Queensland (0.4 percent), Western Australia (0.6 percent), Tasmania (1.3 percent) and the Australian Capital Territory (1.4 percent). These increases were partially offset by declines in South Australia (down 0.3 percent) and the Northern Territory (down 1.1 percent). Over the longer term, Victoria was the strongest contributor to growth (up 0.6 percent in trend terms).

Gross domestic product grew a slightly less than expected 0.6 percent in the September quarter 2013. Analysts expected a quarterly increase of 0.7 percent. On the year, GDP was up 2.3 percent, again below expectations of 2.6 percent. Growth for the quarter was driven by a 0.7 percent contribution from net exports and a 0.4 percent contribution from final consumption expenditure. These increases were partially offset by a minus 0.5 percent contribution from changes in inventories. The mining industry drove the growth in the September quarter contributing 0.3 percent to GDP. The construction, transport, postal & warehousing, financial & insurance services, public administration & safety and health care & social assistance industries each contributed 0.1 percent to the increase in GDP.

The October balance on goods and services was a deficit of A$529 million in October 2013, an increase of A$258 million on the deficit in September 2013. Analysts had expected a deficit of A$325 million. Exports were down 0.1% on the month but up 11.8 percent on the year while imports were up 0.8 percent and 3.6 percent. Exports of rural goods dropped 3.0 percent while non-rural goods were down A$51 million. Non-monetary gold jumped 12 percent. The main component contributing to the decline in rural goods was cereal grains and cereal preparations, down 17 percent. Partly offsetting was the other rural component, up 4.0 percent. The main components contributing to the decline in non-rural goods were other mineral fuels, down 11 percent, and metal ores and minerals, down 1 percent. Partly offsetting these declines was the coal, coke and briquettes component, up 7 percent. Goods and services imports were up 1 percent. Intermediate and other merchandise goods were up 1 percent, consumption goods also increased 1 percent, capital goods were up A$23 million and non-monetary gold was up A$1 million.

India

Gross domestic product accelerated modestly in the July to September quarter with the annual increase in total output climbing from the previous quarter's unrevised 4.4 percent to 4.8 percent. The latest expansion was led by electricity, gas & water supply where growth more than doubled from 3.7 percent to 7.7 percent and agriculture, forestry & fishing (4.6 percent after 2.7 percent). Construction (4.3 percent after 2.8 percent) also enjoyed a decent period and manufacturing (1.0 percent after minus 1.2 percent) at least returned to positive territory. The other main improvement was in financial, business, insurance & real estate services category which was up 10.0 percent. Elsewhere, mining and quarrying (minus 0.4 percent after minus 2.8 percent) contracted again but at a reduced pace while community, social & personal services (4.2 percent after 9.4 percent) slowed notably. Growth in trade, hotels, transport & communication (4.0 percent) was essentially flat.

Americas

Canada

Third quarter gross domestic product was up 0.7 percent on the quarter or at a seasonally adjusted annualized rate of 2.7 percent. On the year, GDP was up 1.9 percent after growing 1.4 percent in the second quarter. However, the composition of aggregate demand was rather less robust. In particular, quarterly household consumption growth (0.6 percent after 0.9 percent) slowed as did general government final consumption (0.1 percent after 0.4 percent). On a brighter note, gross fixed capital formation rebounded (0.6 percent after minus 1.0 percent) but almost half of the quarterly headline gain was attributable to inventory accumulation. Final domestic demand was up 0.5 percent, only matching its pace of the previous quarter. Net foreign trade had a small negative impact as exports declined 0.5 percent from the second quarter while imports advanced 0.3 percent. The current account narrowed but only by C$0.5 billion and remained sizeable at C$15.5 billion.

October seasonally adjusted trade balance returned an unexpected surplus of C$75 million following a slightly smaller revised C$0.30 billion deficit in September. The headline improvement concealed a contraction in both sides of the balance sheet with exports falling 0.3 percent on the month and imports down a sharper 1.2 percent. Compared with October 2012, exports were up 5.3 percent, somewhat ahead of a 4.6 percent increase in imports. The bilateral surplus with the U.S. contracted C$0.2 billion to C$3.9 billion as sales across the border edged up 0.2 percent from September and purchases from the U.S. advanced 1.0 percent. The main area of weakness in overall exports was aircraft and other transportation equipment and parts which slumped 16.1 percent on the month. The other main decliners were metal & non-metallic mineral products, which saw a sizeable 6.2 percent decline, and motor vehicles & parts, which were off 5.0 percent. Energy was also down 2.1 percent. On the upside, farm, fishing & intermediate food products gained 11.8 percent and industrial machinery, equipment & parts rose 7.1 percent. There was also a solid 6.1 percent advance in basic & industrial chemical, plastic & rubber products. Imports were undermined mainly by an 8.5 percent monthly drop in energy products although there were sizeable declines too in industrial machinery, equipment & parts (4.5 percent), electronic & electrical equipment & parts (3.3 percent) and motor vehicles & parts (2.8 percent). Easily the strongest increase was in basic & industrial chemical, plastic & rubber products (15.1 percent).

November employment was up 21,600, its largest increase since August although this was still not enough to lower the jobless rate from October's 6.9 percent mark. Job creation was dominated by part time positions which were up 20,000, well ahead of a modest 1,400 increase in the full time employment. However, the private sector more than accounted for the overall gain, posting a 31,400 increase that was only partially offset by a 28,800 decline in the public sector. The number of self-employed increased 19,100. Goods producing industries added 5,900 positions within which manufacturing was up 24,900. However, construction declined 17,500 and agriculture was down 5,500. Service sector employment expanded 15,700, largely thanks to a sizeable 31,200 increase in business, building & other support services. Information, culture & recreation (16,200) also had a positive impact alongside education (12,900) and transportation & warehousing (7,600). The steepest decline was seen in public administration (17,700) but there were marked reversals too in health care & social assistance (15,400) and in accommodation &food services (13,500). Trade was down (7,600).

Bottom line

Equities retreated last week thanks to investor nerves regarding the Federal Reserve’s policy decision on December 18. Four other major central banks met and left their policies unchanged. Economic data were mixed globally but mostly positive in the U.S.

The cacophony surrounding the Federal Reserve’s policy decision probably will pick up in intensity until the FOMC decision on December 18. In the meantime, each and every morsel of economic data will be dissected for clues to a decision. A reminder, the Fed may be data dependent in its decision making — but one data point does not make a trend!

Looking Ahead: December 9 through December 13, 2013

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