Global Markets

A mixture of bad and good news dominated equity markets last week. Equities slumped on weak U.S. economic data early in the week but jumped on Wednesday’s Federal Reserve interest rate cut, and then slumped again on Thursday as subprime/earnings issues asserted themselves. Equities sank on fears that major banks were facing still more heavy write offs on their credit exposure. And on Friday, the U.S. employment was up more than anticipated by analysts. However, the positive employment report was overwhelmed by the financial sector’s bad news. And Thursday’s jitters continued to dominate amid concerns that a host of big western financial institutions are nursing additional, serious problems related to the troubled mortgage markets subprime crisis. Investors are fretting that some of these institutions will soon reveal further credit write-offs. Global stocks for the most part followed U.S. stocks south.

As expected the Federal Reserve lowered U.S. borrowing costs by 25 basis points. It lowered its key fed funds target rate to 4.5 percent and its discount rate to 5 percent. The vote for the move was not unanimous — one committee member voted to keep rates unchanged. In its statement, the Fed seemed to be telling the markets to not count on another rate cut soon — although another rate cut is not ruled out either. With the rate cut, the Fed sees upside risks of too high inflation and downside risks for too weak growth as roughly balanced.

The dollar sank to new lows last week in part because of fears that the Federal Reserve might have to continue to cut interest rates to ease banking system strains. The Canadian dollar rose to an all-time high of C$93.27 against its U.S. counterpart supported by record oil prices and a surprise leap in jobs creation. Crude edged nearer to $100 a barrel and gold broke through the $800 mark for the first time since January 1980.

For the record, of the indexes followed here, all indexes were on the plus side for the month of October with the exception of the Nikkei. For the week, stocks in Australia, Japan and Hong Kong were up. In North America, the U.S. Nasdaq and the Canadian S&P/TSX Composite were also up on the week.

Global Stock Market Recap

Europe and the UK

After gaining for the week through Wednesday, stocks in Europe and the UK followed U.S. stocks downward on the last two days of the week. The immediate cause was the reemergence of risk concerns over troubled U.S. financial stocks stemming from the subprime crisis. Worries about U.S. banks in turn clobbered UK and European bank stocks and drove the region’s equities sharply lower. Rumors of write downs at major global banks raised fears of a second stage of the credit crunch. The bank stock decline list reads like a whose who of major banks.

On Friday, stocks pared some of their losses after the U.S. employment situation report for October said that employment was up more than anticipated. But that did not last for long, as selling renewed when U.S. markets gave the report short shrift and focused on financial sector woes. On the week, the FTSE, DAX and CAC were down 2 percent, 1.3 percent and 1.3 percent respectively.

Asia/Pacific

Despite Friday’s hefty declines in the six indexes followed here, gains earlier in the week forestalled weekly declines for all with the exception of the Kospi and STI. On Friday, Asian stocks sank the most in more than two months following the drop in U.S. equities on Thursday. Friday’s declines were led by financial shares, on concern that a major U.S. bank might be short of capital and renewed concerns that losses from U.S. subprime loans will reduce profits and slow growth significantly. Friday’s reversal was dramatic since only the day before, many Asian stocks hit record highs after the Federal Reserve's interest rate cut on Wednesday. For the week, the Kospi lost 0.4 percent while the STI was down 1.5 percent. The All Ordinaries and Hang Seng edged up 0.2 percent, the Nikkei eked out a 0.1 percent gain while the Topix was up 1.7 percent.

Bank of Japan remains on hold

As expected, the Bank of Japan kept its key interest rate at 0.5 percent by a vote of 8 to 1. At the same time, the Bank forecast slower economic growth. It said that it was no longer predicting that consumer prices would increase this (fiscal) year, thus making it harder to raise borrowing costs which are now the lowest in the world. BoJ governor Toshihiko Fukui continued to repeat the commitment to normalize interest rates as long as the economy keeps expanding and prices resume gaining. According to the Bank, keeping rates very low for too long could encourage excessive investment and hamper growth over the long term. They said that they will “adjust the level of interest rates gradually in accordance with improvements in the economic and price situation.”

In its semi-annual economic outlook which was released after its meeting, the BoJ said that the Japanese economy is expanding moderately. But recent data shows that the economy is extremely fragile. Consumer prices continue to hug the negative while housing starts have dropped. Consumer spending continues to be sluggish, partly because wages are declining and unemployment has started to inch up. Business sentiment is split between large firms which are growing and small domestic firms that continue to struggle. The Bank said that for the fiscal year starting April 1, 2008 core consumer prices would probably increase by 0.4 percent and economic growth would accelerate to 2.1 percent in the period. In April they predicted inflation of 0.5 percent. The growth projection was unchanged from six months ago.

Currencies

The U.S. dollar continues to decline against most major currencies, plumbing the depths against the euro, pound sterling and Canadian dollar in particular. New all time lows were reached after the FOMC lowered interest rates on Wednesday and again on Thursday and Friday thanks to the poor earnings and write off news from major U.S. financial companies.

But the dollar is not the only currency suffering from investor distain, but for different reasons. Both the yen and Swiss franc have been pushed to multi-year lows this year as carry trade investors have sold the low-yielding currencies to fund purchases of riskier, higher-yielding assets elsewhere. Lower U.S. interest rates have been a main driver of dollar weakness of late. U.S. interest rates are now the same as in Canada (4.5 percent) while the spread between the ECB’s key interest rate (4 percent) and the fed funds target rate has narrowed to a mere 50 basis points. But unlike the yen or Swiss franc, the dollar is not backed by a country with a large current account surplus or a large stock of savings ready to be deployed abroad. Another factor playing a role in the U.S. dollar’s decline has been from China’s diversification activities as it manages the renminbi against the dollar by buying the euro.

The Canadian dollar surged to its highest level against its U.S. counterpart since the currency was floated about 50 years ago after a surprisingly strong Canadian employment report that showed the economy added five times more jobs than expected and the unemployment rate edged down to a 33-year low. The Canadian dollar, up about 20 percent against the dollar so far this year, jumped to a record high of C$0.9327. Analysts said the data increased the chances that the Bank of Canada would leave interest rate on hold at 4.5 percent. Crude oil prices, which hit a record high last week, are playing a role in supporting the currency.

Indicator scoreboard

EMU — October flash harmonized index of consumer prices jumped to 2.6 percent when compared with the same month a year ago and from 2.1 percent in September. As with all flash estimates, no details are available but country data suggest that higher food costs, combined with energy base effects, were key.

September unemployment rate was 7.3 percent — and the lowest since the series began in 1993 — down a notch from 7.4 percent in the previous month. The data were affected by changes in how they data are compiled. The methodology reflects a switch by Eurostat to using the continuous Labour Force Survey (LFS) to calculate harmonized unemployment rates and, crucially, brings Germany into line with the methods employed by the rest of the EU.

EU — October economic sentiment declined to 105.9 from 106.9 in the previous month. Both consumer and service sentiment were unchanged at minus 6 and 18 respectively while industry confidence edged down to plus 2. Retail sector sentiment edged higher to minus 2.

Germany — October unemployment rate was 8.7 percent and continued to decline. The number of unemployed persons dropped by 40,000 while vacancies were up by 5,000. The bulk (38,000) of the drop in unemployment was concentrated in the west where the pace of decline picked up quite significantly from the previous few months. The unemployment rate in the west was 7.2 percent and in the east, it was 14.8 percent.

September retail sales excluding autos and gasoline jumped by 2.3 percent — the largest since December 2006 (3.5 percent). Total sales were up 1.6 percent, but were down 0.3 percent when compared with the same month a year ago. Over the first nine months of 2007, sales have fallen a real 1.6 percent, led by a 2.9 percent drop in food, drink and tobacco. Non-food sales over the same period dropped 0.8 percent although clothing (up 1.5 percent) and pharmaceuticals (up 1.2 percent) have managed to buck the trend.

France — September producer price index was up 0.4 percent and 2.7 percent when compared with last year. Excluding food (0.9 percent) and energy (1.0 percent), the core PPI was up a much more modest 0.1 percent and an equally more subdued 1.8 percent on the year. Among the other main sub-categories, prices climbed relatively sharply for consumer goods (0.5 percent) with clothing and leather notably firm (2.1 percent) and wood, paper and cardboard (0.5 percent) also showed an above average gain. Semi-finished goods were flat and capital goods a little stronger (0.1 percent).

Italy — September producer price index was up 0.5 percent and 3.5 percent when compared with the same month a year ago. Fuel prices were up 4.6 percent on the month, manufactured goods posted a gain of 0.6 percent and there was a hefty increase in the food, tobacco and beverages sector of 1.0 percent. Within the consumer area, prices were up 0.4 percent (2.7 percent on the year) but capital goods were flat and intermediate goods fell 0.1 percent. Total energy climbed 2.1 percent.

Asia/Pacific

Japan — September retail sales were down 1.5 percent but up 0.5 percent when compared with last year. Sales were also up 0.5 percent in August after plunging 2.3 percent in July. September sales at large retail stores were down 2.0 percent on the year.

September unemployment rate climbed unexpectedly to 4 percent from 3.8 percent in August and 3.6 percent in July. Job creation dropped by 90,000. It was the first decline in 12 months. The ministry also said the total number of jobless fell for the 22nd straight month, decreasing 110,000 from the same month a year earlier to 2.69 million.

September household expenditures of two or more persons were up 3.2 percent when compared with the previous year. Spending on housing was up 5.4 percent while transportation & communication jumped by 7.8 percent and furniture & household utensils soared by 9.2 percent. However spending on culture & recreation sank 10.9 percent while spending on clothing & footware dropped 4 percent and on medical care dropped 3.9 percent.

Australia — September retail sales were up for the fourth month as a hiring boom spurred spending. Sales were up 0.8 percent and 8.2 percent when compared with last year. Retail sales are being fueled by an unemployment rate which is at a 33-year low, rising wages and income-tax cuts. Most sales categories were up with the exception of department stores, which were down 0.4 percent and clothing & soft goods, which sank 2.1 percent. Household goods were up 1.6 percent followed by food which was up 1.3 percent. Hospitality was up 0.6 percent.

September merchandise trade deficit expanded to A$1.9 million from A$1.7 million in August. Imports were down 2.7 percent while exports dropped 4 percent. Non-rural goods exports were down 5 percent while rural goods were up 7 percent. Services exports were up 1 percent. Capital goods imports were down 1 percent while intermediate and other merchandise goods dropped 4 percent. Consumption goods imports were up 1 percent. In consumption goods, imports of household electrical items were up 6 percent.

Americas

Canada — September industrial product price index dropped 0.9 percent and was up 0.1 percent when compared with last year. Despite higher commodity costs, prices declined for the fifth consecutive month since the historical peak reached in April. In large part the drop was a reflection of lower prices for motor vehicles (1.9 percent), primary metal products (1.2 percent) and pulp and paper products (1.5 percent). The other main factor driving prices lower was once again the appreciation of the exchange rate, without which the IPPI would have shown no change on the month and a 2.4 percent on the year. The only categories showing any significant increase were petroleum and coal products (1.7 percent) and food (0.7 percent). Intermediate goods were 0.8 percent lower on the month, a decline matched by the finished goods sector thanks to a 1.4 percent fall in capital goods prices.

September raw material price index dropped a surprisingly steep 0.9 percent, dragged down by an 8.2 percent drop in non-ferrous metals. The other major areas of weakness were wood (down 1.1 percent) and animals and animal products (down 0.9 percent). Primarily working in the other direction were vegetable products which jumped 6.5 percent on the back of higher grain costs (12.9 percent) and oilseeds (7.0 percent). Mineral fuel costs were up 1.1 percent, excluding which the RMPI would have fallen a more marked 2.7 percent.

August monthly gross domestic product was up 0.2 percent and 2.4 percent when compared with the same month a year ago. Growth was evenly split between the goods producing and services sector in mid-quarter with the former enjoying a 0.6 percent bounce in the mining and oil and gas extraction industry, supported by a 0.5 percent increase in output from the agriculture, forestry and fishing and construction industries. Manufacturing, however, was flat on the month (total industrial output up 0.1 percent) as a 0.5 percent decline in non-durables offset a 0.3 percent advance in durables. Energy production was similarly unchanged on the month as crude oil output grew modestly but natural gas activity contracted. Within services, retail trade shot up an impressive 1.3 percent, easily overshadowing otherwise solid gains in accommodation & food services (0.9 percent) and transport (0.5 percent). The largest loser in this area was arts, entertainment & recreation which dropped 0.5 percent.

October employment soared by 63,000 while the unemployment rate dipped to 5.8 percent, a 33 year low. The increase was in the service sector, most notably in health care & social assistance, "other services" and public administration. However, this strength was tempered by losses in business, building & other support services, as well as accommodation & food services. Full time employment was up 35,500 while part time employment was up 27,500. For the second consecutive month, more than half the increase in employment occurred in Ontario, increasing by 32,000.

Bottom line

Data were mixed last week, offering both optimists and pessimists evidence of continuing growth and stalling economies. Japan’s unemployment rate unpleasantly surprised, rising to 4 percent from 3.8 percent while employment declined. In contrast, Canada’s employment soared by an unexpected 66,000 and its unemployment rate declined. The U.S. also produced a positive employment report — one that was overwhelmed by continuing bad news from the financial sector as subprime losses slowly get revealed.

Focus overseas will shift in part to central bank activities with several meetings on the agenda. The Reserve Bank of Australia meets this week to decide monetary policy. Given the country’s current growth and inflation, analysts expect a possible 25 basis point interest rate increase to 6.75 percent. The Bank of England also meets. Given recent rhetoric by monetary policy board members, analysts expect that the key interest rate will remain unchanged at 5.75 percent. The ECB is anticipated to keep rates unchanged at 4 percent but with a disapproving eye on the jump in October consumer prices of 2.6 percent. The U.S. Federal Reserve continues to be the only major central bank that has lowered interest rates — thus far.

Looking Ahead: November 5 through November 9, 2007

Central Bank activities
November 7	Australia	Reserve Bank of Australia Announcement
November 7,8	UK	Bank of England Meeting
November 8	EMU	European Central Bank Meeting
Other
November 4	United States	Standard Time Begins
The following indicators will be released this week...
Europe
November 5	UK	Industrial Production (September)
November 6	EMU	Producer Price Index (September)
		Retail Sales (September)
	Germany	Manufacturers' Orders (September)
November 7	Germany	Industrial Production (September)
November 8	Germany	Merchandise Trade Balance (September)
November 9	France	Industrial Production (September)
	Italy	Industrial Production (September)
	UK	Merchandise Trade Balance (September)
Asia/Pacific
November 8	Australia	Employment, Unemployment (October)
Americas
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