Global Markets

In the end, ECB President Mario Draghi was not able to satisfy financial markets' overblown expectations. The monetary easing unveiled Thursday included a cut in the deposit rate and an extension of the Bank's asset buying program — but it did hold back some fire, disappointing markets that expected even more stimulus. The decision was not unanimous. According to Jens Weidmann, the easing was unnecessary as new forecasts by the bank's staff did not raise fresh concerns. Weidmann, who is the president of Germany's Bundesbank, said the fresh data confirmed his views that the sharp decline in energy prices supported the Eurozone's economic recovery and sluggish inflation is in great part due to the low oil price. Markets reacted sharply — the euro jumped against the U.S. dollar by over 3 percent, bond prices tanked in Europe and the U.S. sending yields soaring and equities plunged.

Fed Chair Janet Yellen followed the ECB post governing council press conference with testimony to the Joint Economic Committee of the U.S. Congress. She put forth her case for increasing the Fed funds rate on December 16 — pending data that would be released before the meeting. Friday's employment report all but assures that the Fed will begin normalizing policy. European markets steadied after the report while U.S. shares rallied. And the dollar advanced throughout the day.

The dollar's advance Friday was abetted by Mario Draghi's noon (US ET) speech to the Economic Club of New York. The ECB president said there can't be "any limit to how far" the central bank deploys its tools to lift inflation in the Eurozone. Mr Draghi said: "There is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would. There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate." He added: "I can say therefore with confidence – and without any complacency – that we will secure the return of inflation to 2 percent without undue delay, because we are currently deploying tools that we believe will achieve this, and because we can, in any case, deploy our tools further if that proves necessary."

Added to the mix of this busy week was Friday's OPEC (Organization of the Petroleum Exporting Countries) meeting. Oil prices tumbled as the cartel maintained its current levels of production rather than curtail output in the face of plunging prices. But members opted for maintaining market share to continue their pressure on higher priced producers as they try to put them out of business (read U.S. shale producers). According to the Baker Hughes rig count, the U.S. has been shutting down oil rigs steadily. While many shut down have been marginal producers at best, producing wells have declined by 1,183 rigs in the past year.

Global Stock Market Recap

Europe and the UK

Equities plummeted Thursday and for the week as the markets continued to struggle with the announcement from the European Central Bank. European markets dropped sharply Thursday because investors were disappointed that the ECB did not announce more aggressive stimulus measures. The FTSE lost 2.1 percent and the SMI, 2.2 percent on the week. The CAC and DAX dropped 4.4 percent and 4.8 percent respectively.

Investor expectations regarding this month's European Central Bank policy session were wrong, according to the ECB's Vice President Vitor Constancio. In an interview, Constancio said, "We have to recognize that the markets got it wrong in forming their expectations. ... They did indeed have higher expectations than were there and that's why they reacted like they reacted but that was not our intention."

European Central Bank

In its latest attempt to kindle inflation in the euro area and underpin feeble growth, the ECB on Thursday cut its deposit rate by 10 basis points to minus 0.30 percent and extended its asset purchase program until at least March 2017. The bank also broadened its asset purchases to include regional and local government bonds among other measures. But investors had expected a bigger cut to the deposit rate and an enhancement in the monthly asset purchases of €60 billion to as much as €80 billion. Some analysts had also predicted that the Bank would introduce a two-tier deposit rate to support the negative deposit rate.

ECB's Mario Draghi's expressed his confidence in the Eurozone's recovery as he unleashed a set of stimulus measures less radical than investors had hoped for. And it was the stimulus measures — which fell short of expectations on the size of the cut in the deposit rate as well as both the size and duration of its quantitative easing program — that grabbed attention. European stock markets, which were propelled higher in the first quarter as the ECB began its bond-buying program, fell sharply on Thursday's disappointment. German stocks had their biggest sell-off in more than 2 months, while French stocks had their biggest one day decline in more than three. The Governing Council was clearly split as Bundesbank President Jens Weidman, as expected, thought no increase in stimulus was necessary.

Expectations had been running high ahead of the meeting, after ECB President Mario Draghi had repeatedly talked up the need for further stimulus. With this in mind, the euro had fallen over 5 percent since the start of October, helped also by the prospect of a U.S. rate rise that should boost the U.S. dollar against the European currency. It traded at a seven month low ahead of Thursday's announcement. European stocks had gained around 11 percent over that period. Lower interest rates make the currency less attractive to investors. They also tend to boost stock markets by driving investors out of low-yielding bonds or cash into riskier assets.

Asia Pacific

Equities were mostly lower last week, with many of the losses occurring Friday after Thursday's plunge in U.S. and European markets on the news that the ECB had not given markets what they were looking for in additional stimulus. However, the Shanghai Composite, Hang Seng and STI gained 2.6 percent, 0.8 percent and 0.7 percent respectively. Losses ranged from 0.1 percent (PSEi) to 2.7 percent (Kospi) as stocks here joined the global selloff after the ECB's stimulus disappointed some investors. The Nikkei lost 1.9 percent on the week after its biggest one day drop in more than two months on Friday.

A slew of economic data were reported at the beginning of the week. The pace of contraction in China's manufacturing sector slowed in November and the services sector showed resilience, replacing manufacturing as the growth engine. Encouraging economic data from Japan and Australia also boosted investors' appetite for risk.

Reserve Bank of India

As expected, the Reserve Bank of India left its benchmark repo rate at 6.75 percent. The reverse repo remained at 5.75 percent and the marginal standing facility rate and Bank Rate were both left unchanged at 7.75 percent. At the same time the RBI also confirmed that the cash reserve ratio (CRR) would stay at 4.0 percent. In justifying its stance, the RBI pointed to its September statement when it stressed that its (unexpectedly aggressive) 50 basis point easing should be seen as front-loaded in response to weak domestic and global demand. Since then inflation has turned up as anticipated and is expected to climb higher this month before plateauing. Indeed, uncertainty about crop supply in the wake of El Nino is seen as making for some near-term upside risk. However more generally, inflation is seen broadly following the profile laid out in September with the medium-term balance of risks tilted slightly to the downside. The real GDP growth forecast for FY2015/16 was also left unmodified at 7.4 percent.

Reserve Bank of Australia

As expected, the RBA Board left its interest rate unchanged at 2.0 percent for the seventh consecutive month. The Bank lowered rates in February and May, taking the cash rate to 2.00 percent from 2.50 percent, having been on hold since August 2013. It has since been in 'watch and see mode' assessing the impact of these moves. It noted that the Australian dollar is adjusting to the significant declines in key commodity prices. The RBA also noted that these prices are lower when compared with a year ago on supply and weaker demand. The RBA thought that the prospect for economic improvement firmed in recent months. The RBA has explicitly stated that low inflation may provide scope to lower rates if needed to further support demand. However, the Bank's current views on demand do not appear to give much of a case for more easing. The RBA retained its 3 percent growth forecast for 2016 in its November statement. It also stated that it expected the unemployment rate to hold steady before eventually declining in late 2017. The RBA takes off for its summer vacation in January and will meet again on February 2, 2016.

Currencies

The U.S. dollar had been climbing all week — that is until Thursday when the euro jumped the most against the dollar since 2009 after the scale of the European Central Bank's stimulus measures disappointed investors. The euro jumped against all of its major peers after the ECB extended its quantitative easing program through March 2017 and reduced the deposit rate by 10 basis points, or 0.10 percentage point, to minus 0.3 percent. The dollar slipped further as Federal Reserve Chair Janet Yellen emphasized the gradual path of interest rate increases, while reiterating that the FOMC will consider a move in December.

After ECB President Mario Draghi promised to "do what we must" to raise lackluster inflation in the euro area, speculation raged surrounding the probable extent of rate cuts and extensions to the length and magnitude of officials' stimulus program. Hedge funds piled on wagers against the euro in anticipation, lifting speculative positioning to the highest since May. Those trades were being painfully unwound.

The Chinese renminbi was anointed as one of the world's elite currencies on Monday, a milestone decision by the International Monetary Fund that underscores the country's rising financial and economic importance. The move will help pave the way for broader use of the renminbi in trade and finance. Just four other currencies — the U.S. dollar, the euro, the pound and the yen — have the IMF designation. To meet the IMF requirements, China was forced to give up some of its tight control over the currency, culminating in the abrupt devaluation of the renminbi that shook global markets in August. The IMF designation is an accounting unit known as the special drawing rights. The change will take place in September 2016.

The renminbi is mainly replacing part of the euro's role in the special drawing rights. Assessing currencies for the accounting system, the fund put a greater emphasis on their different roles in international finance. The dollar still dominates in finance and trade, while the renminbi is quickly gaining ground on the euro. The changing makeup of the International Monetary Fund's accounting system reflects the rising economic power of China, while Europe's influence wanes. Weight of each currency in the IMF's basket of currencies currently and after the renminbi becomes a member — British pound — 11%, 8%; Japanese yen — 9%, 8%; Chinese renminbi — 11%; Euro — 37%, 31% and the U.S. dollar — 42% which stays same.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

The November PMI was 52.8, 0.5 points above its final October level and at its strongest mark since April 2014. Growth of production and new orders saw their fastest rates in around a year-and-a-half, the latter underpinned in no small way by the sharpest gain in exports since May. Backlogs also continued to climb while employment was up for a 15th successive month and more strongly than at any time since August. However, despite the relative buoyancy of demand, price pressures continued to diminish. The rate of deflation for input costs and factory gate charges actually declined somewhat, but absolute declines in both indexes underline the problems still facing the ECB in its efforts to achieve price stability. Regionally, the strongest performer was Italy (54.9) ahead of the Netherlands (53.5) and Ireland (53.3). Spain (53.1) also had a respectable month as did Germany (52.9). However, Austria (51.4) was relatively sluggish, France (50.6) did little more than stagnate and Greece (48.1), despite registering an 8-month high, again contracted.

November flash harmonized index of consumer prices was up just 0.1 percent from a year ago. Excluding food, alcohol, tobacco & energy, the yearly rate dropped a surprisingly large 0.2 percentage points to 0.9 percent, reversing October's gain. Without just unprocessed food & energy, inflation slipped a tick to 0.9 percent. Weakness was most apparent in services where a 1.1 percent yearly rate was down from 1.3 percent at the start of the quarter and matched its recent June trough. However, non-energy industrial goods also fell 0.1 percentage points to 0.5 percent. Other minor downward pressure came from food, alcohol & tobacco (1.5 percent after 1.6 percent), partially offset by less marked energy deflation (7.3 percent after 8.5 percent).

Germany

October manufacturing orders were up 1.8 percent on the month following a significantly smaller revised decline in September although this still failed to prevent annual growth from deteriorating from minus 0.6 percent to minus 1.5 percent. October's monthly advance was broad-based and included hefty gains in consumer & durable goods (3.8 percent) and capital goods (2.7 percent). Basics were up a modest 0.1 percent. Geographically, the headline growth was roughly evenly split between the domestic and overseas markets with the former up 1.7 percent from September and the latter 1.8 percent stronger. Foreign orders were lifted by a 2.4 percent bounce in demand from the rest of the Eurozone although even this reversed only about a half of the previous month's slump.

Asia/Pacific

Japan

October household spending dropped 2.4 percent from a year earlier after slipping 0.4 percent in September. Most subcategories were lower. However, spending on both food and housing rose 0.8 percent and 7.9 percent from a year ago. Furniture and household utensils were up 7.9 percent as well. Medical care slumped 7.0 percent while transportation & communication was 7.5 percent lower. Education plummeted 13.4 percent.

Japan's jobless rate has fallen to its lowest point in just over 20 years. The unemployment rate was 3.1 percent in October, down from 3.4 percent in September amid expectations for it to hold steady at that level. This is now the lowest jobless rate since July 1995. The falling jobless rate comes courtesy of a shrinking labour force. The job to applicant ratio stalled at 1.24 in October. This is still the highest level of job availability since January 1992 and suggests the unemployment rate could still go lower in coming months. It can also be noted the ratio has been in a strong, continued uptrend since mid-2009 when it was 0.43.

October consumer prices were up 0.3 percent from a year earlier, up from zero percent in September. While headline prices looked a little better, it was not the case for the core measures which tend to be preferred by policy makers because they strip out prices for volatile items. Core inflation, which includes energy prices but not food prices, was down 0.1 percent last month from a year ago, matching the pace of September. That is the third straight month of deflation for this measure and the first set of negative numbers since April 2013. Meanwhile, so-called "core-core inflation", the BoJ's preferred measure which excludes both energy and food prices, edged up by 0.7 percent but down from September's 0.9 percent pace. Earlier this week, in explaining why it chose not to boost its stimulus program at the highly-anticipated October meeting, the BoJ said it was keen to progress toward its inflation target of 2 percent in a stable manner.

October unadjusted retail sales jumped 1.8 percent from a year ago after slipping 0.1 percent in September. All subcategories increased with the exception of fuel, down 13.1 percent. Motor vehicle sales were up 3.0 percent after declining the month before. Machinery & equipment also rebounded from September's decline, increasing 0.3 percent. General merchandise sales were up 3.2 percent while food climbed 4.0 percent. Fabrics, apparel & accessories jumped 8.1 percent.

October industrial production increased 1.4 percent from the previous month and was up 0.3 percent from a year ago. This was the second consecutive month that output increased. General-purpose, production & business oriented machinery rebounded, increasing 5.8 percent after having retreated for the previous three months. Transport equipment was up 4.0 percent after rising 0.8 percent in September. Electronic parts and devices increased for a second month, this time by 2.4 percent after climbing 5.9 percent. In its decision to not boost its monetary stimulus efforts, the Bank of Japan noted industrial production was one area where the economy was just puttering along. They show how the BoJ has a tough decision on its hands with respect to potentially ramping up its quantitative easing program. The monthly numbers look good, the yearly ones not so much.

Australia

The Australian economy grew more than expected in the third quarter. The data squashed the notion that a slowing China and no commodities boom will inevitably push the country into recession. September quarter gross domestic product was up 0.9 percent on the quarter and 2.5 percent when compared with the same quarter a year ago. The data were just below trend. The major contributions to economic growth in the quarter came from exports, with net exports contributing 1.5 percentage points to GDP growth. The growth in exports is reflected by strong growth in mining activity (5.2 percent), bouncing back after the decline in the June quarter. These positive contributions were offset by a decline in total gross fixed capital formation of 4.0 percent, driven by drops in private (down 2.9 percent) and public (down 9.2 percent) investment.

The October trade deficit widened more sharply than expected, due to fewer exports. The deficit was A$3.3 billion after September's A$2.4 billion. Seasonally adjusted, the value of exports fell 3 percent compared to September, largely due to less demand for commodities such as gold. Imports, however, edged up 0.6 percent. On the year, exports dropped 1.3 percent while imports were up 6.5 percent. Non-rural goods exports were down 3 percent while rural good slid 4 percent. Non-monetary gold was down 8 percent. Services credits however were up A$8 million. Intermediate and other merchandise goods imports were up 3 percent while capital goods added 4 percent. Consumption goods retreated 4 percent and services were down A$20 million.

October retail sales were up 0.5 percent as expected following a 0.4 percent increase in September. On the year, sales were 3.9 percent higher. Among the subsectors, food retailing gained 0.6 percent, department stores were up 3.5 percent and household goods retailing added1.1 percent. However, cafes, restaurants & takeaway food services declined 0.6 percent and clothing, footwear & personal accessory retailing slipped 0.1 percent. Other retailing was virtually unchanged. Retail sales increased in New South Wales, Victoria, Queensland, South Australia, Tasmania, the Australian Capital Territory and the Northern Territory. Sales were virtually unchanged in Western Australia.

India

Gross domestic product improved in the July to September quarter by 0.4 percentage points to 7.4 percent when compared with the previous year. The pick-up was led by manufacturing where the yearly increase in output rose 9.3 percent from 9.1 percent in the previous period. Utilities (6.7 percent after 3.2 percent) also gathered significant momentum and there were also advances too in financial, insurance, real estate & other professional services (9.7 percent after 8.9 percent) and public administration, defense & other services (4.7 percent after 2.7 percent). On the downside construction (2.6 percent after 6.9 percent) slowed sharply and trade, hotel, transport & communication services (10.6 percent after 12.8 percent) similarly cooled. Elsewhere, agriculture, forestry & fishing (2.2 percent after 1.9 percent) firmed modestly while mining & quarrying (3.2 percent after 4.0 percent) decelerated.

Americas

Canada

Third quarter gross domestic product was up 0.6 percent on the quarter and was up 1.2 percent from a year ago. Third quarter expansion came largely from a 2.3 percent surge in exports which, combined with a 0.7 percent decline in imports, saw net foreign trade add nearly a full percentage point to quarterly growth. Elsewhere, household consumption rose 0.4 percent, down from a 0.6 percent gain last time, but gross fixed capital formation declined 0.7 percent, compounding a 1.5 percent drop in the second quarter. Within this, business investment in non-residential structures, machinery & equipment contracted 1.5 percent and easily more than offset a 0.6 percent increase in residential structures. With government sector final consumption slipping 0.4 percent and investment off 0.5 percent, total real final domestic demand was only flat. At the same time, inventories subtracted 0.3 percentage points.

Following a surprisingly robust gain in October, employment in November saw its first decline since June. The 35,700 drop was significantly steeper than market expectations and, despite a 0.2 percentage point decline in the participation rate to 65.8 percent, enough to nudge the jobless rate a tick higher to 7.1 percent. November's headline slide was wholly attributable to a 72,300 drop in part-time positions as full-time jobs were up a very respectable 36,600. However, private sector payrolls were down 40,800 and the public sector shed a further 35,700. Consequently, the overall picture would have looked a good deal worse but for a 26,300 gain in the number of self-employed. At a sector level, weakness was concentrated in services where employment plunged 82,000, reflecting mainly a 32,500 shakeout in public administration but also broad-based decline elsewhere. Trade was off 15,600, transportation and warehousing 11,200 and information, culture & recreation 11,900. Accommodation & food was down 9.800 and other services 7,800. The only offsets of any size were in education (6,000) and professional, scientific & technical services (17,800). By contrast goods producing industries added 46,300 jobs within which manufacturing advanced 17,400. Construction was up 15,300 and agriculture 15,000.

October merchandise trade deficit was C$2.76 billion, up from a larger revised C$2.32 billion shortfall in September. The deterioration reflected a 1.8 percent monthly drop in exports that more than offset a 0.8 percent decline in imports. The real trade balance moved in the same direction as export volumes dropped 1.5 percent from September while imports slipped just 0.2 percent. Within the nominal decline in total exports, sales to the U.S. were down 2.8 percent on the month. With imports only 0.3 percent lower, the bilateral surplus narrowed from C$2.41 billion to C$1.58 billion. Overall cash exports were hit by widespread monthly declines among which metal ores & non-metallic minerals (9.4 percent) and basic & industrial chemical, plastic & rubber products (5.6 percent) stood out. Energy was flat. Imports were more mixed with decent gains in metal ores & non-metallic minerals (9.0 percent) and metal & non-metallic mineral products (3.6 percent) contrasting with declines in energy (6.8 percent) and electronics (3.1 percent).

Bottom line

It was a busy week to say the least. Of the four central banks that met, only the European Central Bank altered policy. The move immediately was met with market dissatisfaction that sent stocks and bonds plunging and the euro soaring. Economic data were mixed globally with manufacturing weakening but services improving. Both Canada's and Australia's third quarter growth beat expectations. And in the U.S., November's employment gain all but assured, ceteris paribus, that the Fed would begin normalizing interest rates on December 16.  

The week ahead seems rather benign compared to this last one. There is little new economic data. Industrial production and merchandise trade data dominate in Europe. China reports its key economic data for November including the merchandise trade balance, consumer and producer prices, industrial production and retail sales. The Swiss National Bank and the Bank of England meet and announce their respective policy decisions.

Looking Ahead: December 7 through December 11, 2015

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