Global Markets

Most equity indexes advanced for the week and month despite choppy trading. Equity investors continue to focus on the political rhetoric and the relative level of optimism flowing out of Washington surrounding the fiscal cliff talks. U.S. budget negotiations continue in efforts to reach an agreement before assorted tax breaks and spending cuts kick in at year end. The fiscal cliff was also referred to throughout the latest Beige Book to illustrate concerns about the economic outlook. However, traders were buoyed by easing Eurozone tensions and some emerging optimism about prospects for the global economy.

November saw the reelection of U.S. President Barack Obama and the transition of power in China. There was also another bout of Eurozone debt crisis brinkmanship before an agreement was finally found on the next tranche of Greek aid. But arguably the biggest influence on trader psyche has been — and continues to be — the struggle to prevent the U.S. economy tumbling over its fiscal cliff. Any such dislocation to the U.S economy is seen having a detrimental impact globally.

Some market watchers suggest that while the cliff may leave markets hostage to day-to-day headlines, many investors are starting to look beyond the issue — either because they think the downbeat comments from politicians are just tactical bluster and that the budget will be agreed in time, and/or because they prefer to concentrate on easy monetary policy and the U.S. economy’s improving fundamentals.

Equities were mixed on the week with gains ranging from 4.5 percent (Sensex) to 0.1 percent (Dow). Losses ranged from 0.2 percent (Bolsa and KLCI) to 2.3 percent (Shanghai Composite). Most indexes followed here were up for the month of November. Gains ranged from 5.8 percent (Nikkei) and 4.5 percent (Sensex) to 0.3 percent (S&P). On the downside, losses ranged from 0.4 percent (All Ordinaries) to 4.3 percent (Shanghai Composite).

OECD forecasts

The Organization for Economic Co-operation and Development (OECD) trimmed its global growth forecast. Now, the recovery is expected to be uneven over the coming two years largely due to the serious threat posed by the euro area sovereign debt crisis. The OECD called for decisive policy action to ensure that stalemate over fiscal policy in the United States and the continuing euro area instability do not plunge the world back into recession. The Organization expects that the global economy will grow 3.4 percent next year, down from its prior projection of 4.2 percent. The estimate for 2012 was lowered to 2.9 percent from 3.4 percent in May. 

The OECD expects the Eurozone economy to contract for the second successive year in 2013 and warned that the currency bloc “could be in danger” if there is a lack of sufficient progress by the region’s policy makers. U.S. growth is forecast at 2 percent next year, down from May’s estimate of 2.6 percent. Japan’s economy is expected to expand 0.8 percent, little more than half the growth expected in May. Greece is expected to be the worst performer among the membership, with its economy expected to contract 4.5 percent next year. The Spanish, Italian, Slovenian and Portuguese economies are also predicted to contract over the course of 2013.

The OECD called on some central banks to ease monetary policy and urged China and Germany to spend government funds should growth disappoint. The OECD urged the European Central Bank to lower rates by 25 basis points to 0.5 percent and to follow the Federal Reserve’s lead by making a verbal commitment to keep monetary policy loose for an extended period. Its call to issue forward guidance on policy is likely to rankle the Governing Council — a tenet of the ECB’s monetary framework is that it should never pre-commit on future decisions. The OECD backed the UK government’s fiscal consolidation, saying that the policy “remains appropriate to ensure the sustainability of the public finances.”

Global Stock Market Recap

Europe and the UK

Equities here were up on the week and for the month of November. Optimism that the U.S. Congress and President Obama will agree on a budget combined with the Eurozone’s agreement on a plan for Greece helped push equities upward. Both the FTSE and CAC were 0.8 percent higher on the week while the DAX gained 1.3 percent and the SMI was 1.6 percent higher. For the month, the FTSE, CAC, DAX and SMI were up 1.5 percent, 3.7 percent, 2.0 percent and 3.4 percent respectively. Investors here paid little attention to slumping economic data and focused on the U.S. situation.

The Eurozone and the International Monetary Fund reached an agreement on a new bailout program for Greece. The agreement came late Monday at the end of almost 10 hours of negotiations. The EU and IMF said Greece's sovereign long term debt would be reduced by €40 billion or 124 percent of gross domestic product by the year 2020. The initiatives agreed at the meeting included Greek debt buybacks, return of Securities Market Program (SMP) profits to Greece, reduction of Greek Loan Facility (GLF) interest rates, significant extension of the loan facility and European Financial Stability Facility (EFSF) maturities and the deferral of EFSF interest rate payments. The center piece of the agreement is the change in interest rates on Greek bailout loans. Bilateral loans provided to Athens under its first bailout would be cut 100 basis points to just 50 points above interbank rates, knocking about €2 billion off Greek debt levels or 2.0 percent of GDP by 2020.

UK Chancellor of the Exchequer George Osborne named Bank of Canada Governor Mark Carney as the next Bank of England Governor, taking over from the incumbent Sir Mervyn King when the latter term’s expires in June 2013. Already an internationally well respected central bank chief, Carney’s selection ahead of the market favorite, current BoE Deputy Governor Paul Tucker, likely in part reflects his position as head of the Financial Stability Board. This body, which includes all G20 nations, is tasked with introducing global financial reforms and makes the BoC head ideally placed to oversee the expansion of the BoE’s powers next year when it takes over the regulatory powers presently held by the FSA.

Asia Pacific

The U.S. budget negotiations also dominated investor focus here as well. On Friday, after some better than expected economic data, the Japanese Cabinet approved a second round of stimulus worth ¥880 billion to revive economic growth as Prime Minister Yoshihiko Noda attempts to boost the economy before the December 16^th election. The Nikkei advanced for the third consecutive week, this time increasing by 0.8 percent. Over the last three weeks, Japanese shares have soared on the back of a weaker yen amid expectations that the Liberal Democratic Party will win the Japanese election. The Nikkei was up 5.8 percent in November.

The Sensex jumped 4.5 percent in a holiday shortened trading week and despite third quarter GDP growth slowing to 5.3 percent from a year ago. GDP increased by 5.5 percent in the second quarter. The Sensex was up 4.5 percent for the month. The Australian S&P/ASX jumped 2.0 percent on the week but slipped 0.4 percent in November.

The Shanghai Composite was the week’s biggest loser, declining 2.3 percent. However, after four down days, the index advanced as construction stocks rallied on expectations of further infrastructure spending in the coming years. Vice Premier Li Keqiang recently said the nation must deepen its rural urban population shift to support growth. The Hang Seng was up 0.5 percent on the week. The Shanghai Composite declined 4.3 percent in November while the Hang Seng was 1.8 percent higher.

The Shanghai Composite slipped below the key psychological level of 2,000 indicating deepening investor worries over the health of the nation's public equity markets. Already one of the world's worst performers this year — down 10.0 percent — the declines come even as China's economic outlook brightens after nearly two years of slowing growth.

Currencies

The U.S. dollar was mixed against its major counterparts last week. The currency was up against the Australian and Canadian dollars and the yen and pound sterling. It slipped against the euro and Swiss franc. The euro was up to a more than one month high against the dollar after German lawmakers approved Greece’s latest rescue package and amid optimism U.S. politicians will agree on a new budget. The euro gained against most major peers as legislators in Germany’s lower house of parliament — or Bundestag — voted to ratify an agreement forged among euro-area finance ministers earlier in the week to cut the rates on Greece’s bailout loans, suspend interest payments for a decade, give the country more time to repay and engineer a buyback of its bonds.

The yen slid to the weakest in seven months against the euro after data showed Japan’s consumer prices stagnated in October, adding to speculation the Bank of Japan will increase stimulus to spur inflation. The U.S. dollar jumped to its strongest level since March against the yen, adding to gains on expectations of even more easing from the Bank of Japan. The dollar jumped against the yen as Japan's parliament was dissolved and national elections were scheduled for December 16^th. On Friday, the Japanese government announced its approval of a second stimulus package in a little more than a month. The yen declined on the news.

Selected currencies — weekly results

Indicator scoreboard

EMU

October M3 money supply was up 3.9 percent — its fastest pace since April 2009. However, the increase from a slightly softer revised 2.6 percent rate in September was still only enough to see the ECB's 3-month moving average measure edge up to 3.1 percent from 3.0 percent. Not for the first time any apparent strength in the headline data had more to do with developments in the public rather than the private sector. While annual growth of credit extended to the former climbed from 8.2 percent in September to 8.8 percent last month, private sector growth fell from minus 1.2 percent to minus 1.4 percent. There were some cautiously promising signs. In particular, borrowing by households was up 0.5 percent on the year which, while still very sluggish, was at least 0.4 percentage points above the previous month's rate. Moreover, within this, lending for house purchases grew 1.3 percent after a 0.7 percent advance last time. That said, lending to non-financial corporations disappointed again, declining 1.8 percent from October 2011 having fallen 1.5 percent previously. On the same basis, loans to non-monetary financial intermediaries (excluding insurance companies and pension funds) were down 1.9 percent.

November economic sentiment edged up to 85.7 from October’s 84.3. However, the first increase since February still left the measure almost 8 points short of its level at the start of the year and more than 14 points shy of its long-run average. Among the main sectors performances were mixed. On a positive note, morale was up 3.2 points to minus 15.1 in industry, 2.5 points to minus 14.9 in retail and 0.2 points to minus 11.9 in services. The improvement in industry was largely attributable to a more upbeat assessment of order books which contrasts significantly with the downbeat findings of the manufacturing PMI. However, consumer confidence slipped a further 1.2 points to minus 26.9 and construction was down 2.6 points to a lowly minus 35.5. Regionally, there were gains in sentiment in all of the larger states with France up 1.6 points, Germany 2.3 points, Italy 0.4 points and Spain 0.5 points. However, with sentiment in Estonia slipping 0.7 points to 99.4, all EMU states are now below the 100 long run average for the first time this year and, at 63.4, Cyprus, currently in negotiations over an EU/IMF bailout package, hit a new record low.

November flash estimate of the annual harmonized index of consumer prices was 2.2 percent, down a sharp 0.3 percentage points from October's final rate for its lowest reading since December 2010. However, the limited data breakdown shows that the deceleration was largely due to softer energy costs which were up 5.8 percent on the year or 2.2 percentage points less than in October. There was also a minor dip in the food, alcohol & tobacco sector prices from 3.1 percent to 3.0 percent. More significantly, non-energy manufacturing products returned an unchanged 1.1 percent annual gain and services, a steady 1.7 percent increase.

October unemployment rate edged another tick higher to a new record high of 11.7 percent. There were 173,000 job losses, up from a 155,000 rise in September. The number of people out of work now stands at a fresh peak of 18.703 million. Jobless rates rose in most EMU states although both France (10.7 percent) and Germany (5.4 percent) were unchanged. Italy recorded a 0.3 percentage point increase to 11.1 percent but there were even larger rises in Cyprus, up 0.6 percentage points to 12.9 percent, and Spain, up 0.4 percentage points to 26.2 percent.

Germany

November joblessness was up just 5,000, down from a marginally downwardly revised 19,000 increase in October. This left the jobless rate unchanged at 6.9 percent rate to which it rose at the start of the quarter. In addition, vacancies also held up relatively well, falling just 2,000 on the month after a 7,000 drop last time. The ILO report showed employment contracting for the second consecutive month in October — a 9,000 decline from September reducing headcount to 41.524 million, its lowest level in four months.

October retail sales dropped 2.8 percent, their steepest decline since January 2009, to leave volumes at their lowest level since August that year. Annual growth nevertheless picked up from minus 3.4 percent to minus 0.8 percent due to calendar distortions. October's slump put volumes 2.6 percent below their third quarter average. Sales have now fallen in five of the last seven months and the latest will be all the more worrisome as the key Christmas holiday season approaches. However, surveys of the retail sector offer conflicting views of Christmas business. Hence, while the Market retail PMI found the most negative sentiment towards sales since Christmas 2008, the Gfk survey pointed to a very positive period.

France

October household spending on manufactured goods was unchanged on the month for the second month running in October. The steady performance means that sales have not risen since July and now show an annual decline of 0.9 percent. Autos fared relatively well, rebounding 0.7 percent on the month from a 1.9 percent drop in September and textiles were up 0.5 percent. However, gains here were offset by declines elsewhere including household goods (0.4 percent) and the other products category (0.1 percent). Food & tobacco purchases were down 0.6 percent, in part due to an increase in tobacco taxes at the start of the period. With energy consumption off 0.5 percent, overall spending on goods fell 0.2 percent from September and was 0.4 percent lower than the third quarter average when purchases were up 0.2 percent.

Italy

Third quarter jobless rate was 10.6 percent, up 0.1 percent from a lower revised 10.5 percent in the previous period. Unemployment rates for both men and women climbed 0.1 percentage points, the former now standing at 9.8 percent and the latter at 11.7 percent. The jobless rate has now risen every quarter since the July through September period of 2011, but at least the latest was the smallest, and by some margin too. However, new monthly figures revealed a sharp increase in October when on this basis, the rate posted a second successive 0.3 percentage point increase to 11.1 percent, 2.3 percentage points above the year ago level. This suggests that the fourth quarter could well see a much more marked rise.

United Kingdom

Third quarter gross domestic product was up an unrevised 1.0 percent on the quarter — the strongest increase since the third quarter of 2007. However, annual growth was shaded from zero to minus 0.1 percent. Household spending was up 0.6 percent on the quarter following a 0.2 percent decline in the previous period and was 0.9 percent higher than in the third quarter of 2011. Government final consumption also advanced 0.6 percent, after a 1.6 percent drop in the second quarter. At the same time, gross fixed capital formation gained 0.5 percent but only partially reversed a 2.7 percent slump in the second quarter while inventories were pared Stg0.1 billion. Much of the boost to headline growth came from net trade thanks to a 1.7 percent quarterly increase in export volumes and a 0.4 percent slide in imports. The jump in the former will in part reflect extra tourist spending linked to the Olympics. Combined, this meant that net exports alone added 0.7 percentage points to the quarterly change in real GDP. In terms of output, industrial production rose 0.9 percent on the quarter (manufacturing also 0.9 percent), its best performance for nine quarters while services expanded 1.3 percent (distribution, hotels and catering 2.0 percent), its strongest increase in five years. Construction contracted 2.6 percent, although even this was the smallest decline in three quarters.

Asia/Pacific

Japan

October retail sales sank 1.2 percent from a year ago after rising 0.4 percent in September. It was the first decline in sales since July. Auto sales plunged 3.5 percent after falling 1.5 percent in September. However, this needs to be looked in the context of sales increases ranging from 20 percent to 55 percent in the preceding six months. Machinery sales continued to decline, losing 5.8 percent on the year in October after sliding 1.4 percent in September. Fuel sales were up 0.7 percent after edging up 0.1 percent the month before. Apparel sales slid 1.6 percent. General merchandise sales were down for the seventh consecutive month.

October consumer prices were unchanged on the month and down 0.4 percent on the year. Excluding fresh food, the CPI was unchanged both on the month and year. Excluding food and energy, the CPI was unchanged on the month and down 0.5 percent from a year ago. Energy costs were up 4.6 percent on the year after rising 4.3 percent the month before. Television prices were down 1.8 percent after sinking 4.7 percent in September. Durable goods prices were down 6.6 percent after swooning 9.9 percent the month before. Goods prices were down 0.6 percent while services prices slid 0.2 percent. November Tokyo CPI dropped 0.4 percent on the month and 0.5 percent from November a year ago.

October unemployment remained at 4.2 percent for the third month. The number of unemployed was 2.71 million a decrease of 180 thousand from a year ago. The number of employed increased by 310,000 to 63.2 million. The job offers to seekers ratio dropped 0.01 point to 0.80 in October from the previous month. The medical and welfare as well as construction industries continued to hire workers while manufacturing employment along with information and communications were down.

October household spending edged down 0.1 percent on the year. Analysts were expecting a drop of 0.7 percent. Among the spending categories that increased were furniture & utensils (up 12.0 percent), transportation & communication (up 7.8 percent) and education (up 2.2 percent). Housing expenditures dropped 13.5 percent while clothing & footwear declined 6.7 percent.

October industrial production surprised and was up 1.8 percent on the month — analysts expected a decline of 2.1 percent. This was the first increase in four months. On the year, output dropped 6.8 percent against expectations of a larger 8.1 percent decline. However, METI said that the trend was down. This was borne out earlier in the weaker manufacturing PMI reading. Japan’s economy is at risk of a recession as slowing global growth and a diplomatic dispute with China hurt exports and the expiry of car purchase subsidies weakens consumer demand at home.

Americas

Canada

September monthly gross domestic product was unchanged on the month and up 1.0 percent on the year. The weaker than expected result reflected a 0.2 percent monthly decline in the goods producing sector — that after a 0.6 percent contraction in August — together with steady output in the service sector. Within the former, manufacturing and construction both saw activity edge 0.1 percent higher but this was offset by declines elsewhere amongst which utilities (0.7 percent) was the most marked. Services saw generally small monthly changes in most subsectors. The only real exceptions were wholesale trade, which dropped 1.1 percent and arts, entertainment & recreation, which slid 2.6 percent. Retail trade advanced just 0.1 percent while transportation and warehousing was up 0.3 percent.

Third quarter gross domestic product edged up 0.1 percent on the quarter and was up 1.5 percent on the year. This contrasts to a quarterly increase of 0.4 percent and 1.7 percent in the second quarter. Household spending advanced a quarterly 0.9 percent, the fastest pace so far in 2012. However, business investment in non-residential structures and in machinery and equipment was down 0.6 percent following consecutive quarterly increases since the third quarter of 2009. General government expenditure was up 0.3 percent having shown no change in the previous period. Final domestic demand was up 0.4 percent. Inventory accumulation was strong with stock building adding 0.4 percentage points to the bottom line. The main area of weakness was net exports which alone subtracted 0.6 percentage points from the quarterly change in total output. Exports were down 2.0 percent on the quarter while imports climbed 0.4 percent.

Bottom line

Economic data were mixed. While Japan’s data were better than expected, those in Europe painted a recessionary picture. Unemployment in the Eurozone and Germany climbed but economic sentiment appeared to level off, albeit under the 50 breakeven point. U.S. data were distorted by superstorm Sandy, especially jobless claims and personal income and spending. In any event, investors gave data little notice and instead hung on every word of those taking part in the fiscal cliff negotiations.

The first week of the month is always a busy one. The Reserve Bank of Australia, European Central Bank and the Banks of Canada and England will hold their policy meetings. Key manufacturing PMI data for major countries will be released along with PMIs for the services sector.

Looking Ahead: December 3 through December 7, 2012

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