Global Markets

Global economic data continue to be unremittingly bad. Just last week for example, data showed that the eurozone and its largest countries are in a technical recession having experienced two quarters of declining gross domestic product while on the other side of the globe, China’s industrial production along with other indicators show a dramatic slowdown in growth. And gloomy unemployment data combined with Bank of England projections in its Inflation Report and the likelihood of further rate cuts saw the British currency sink below the $1.50 level for the first time in six years.

Asian and European markets were boosted Monday after a Chinese stimulus package was released over the weekend. Markets roared their approval — until trading reached North America. By that time, enthusiasm sagged and North American markets were down, unlike their counterparts in Asia and Europe. And as a renewed focus on the sharp slowdown in global economic growth reasserted itself, both the yen and U.S. dollar were up close to the multi-year highs they hit in October.

At midweek, U.S. stocks hit their lowest levels in more than five years, before staging a dramatic recovery Thursday as global financial markets reacted to the U.S. Treasury’s decision to shelve plans to buy toxic mortgage assets. On Thursday, in an awesome display of volatility, the Dow, after sinking over 300 points, rallied and gained over 550 points for no discernable reason. Early weakness was triggered by a combination of poor economic data, bleak corporate news and renewed worries about risky assets after the Treasury announced changes to its Troubled Asset Relief Program (Tarp). According to analysts, there is an uncomfortable sense that the goalposts have been moved under the Paulson plan.

China, the biggest contributor to world growth, unveiled a 4 trillion yuan ($586 billion) plan to sustain its economy, spurring gains in stocks, metals and oil. China's cabinet pledged ”fast and heavy-handed investment” in housing and infrastructure through 2010 along with relatively loose monetary policy, according to a State Council statement. The government didn't say how much spending was previously allocated and indicated some will be private investment. China accounted for 27 percent of global economic growth last year, according to International Monetary Fund estimates.

Global Stock Market Recap

Europe and the UK

Stocks were down last week thanks to poor data that showed weak and declining economic growth. Friday’s rally was aborted by poor U.S. data for retail sales. The data indicated that consumers had zipped their purses and were not spending. European and British news presented a dour economic picture. In the UK, unemployment was up and the Bank of England’s Inflation Report painted a bleak picture for the economy going forward. Analysts said the Inflation Report offered a clear indication that the Bank would continue to cut interest rates from the current level of 3 percent — even after the aggressive 150 basis point cut on November 6. And the flash estimates of third quarter gross domestic product in the eurozone painted a picture of a technical recession with only France managing to eke out a positive third quarter GDP gain — albeit only 0.1 percent.

On the week, the FTSE, DAX and CAC declined by 3.0 percent, 4.6 percent and 5.1 percent respectively.

Bank of England’s Inflation Report

The Bank of England released its quarter Inflation Report on Wednesday and said that the UK economy would contract throughout 2009 and prices would slow and fall below its 1 percent minimum inflation target unless it lowered rates further. The Bank predicted inflation would fall “well below” its 2 percent target from the middle of 2009 and that the economy would contract at an annual rate of 1.8 percent in the first quarter of next year. This was the biggest single downward revision in its inflation outlook since it gained independence in 1997 and said it was likely that Britain was already in a recession.

The Bank forecast that national income could shrink by one to two percentage points over the next few quarters and growth would probably be flat by the end of next year. It expects that consumer price inflation, which at its last reading was up 5.2 percent on the year, would fall to its target rate of 2 percent by the middle of 2009. In remarks at a press briefing Mervyn King, Bank of England governor, said interest rates could fall much lower than their current 3 percent and declined to rule out cutting rates to zero. The governor’s comments helped send the pound tumbling below $1.50 against the dollar for the first time in six years. It also hit a record low against the euro. The FTSE 100 fell more than 100 points at one stage as worries about the outlook for corporate earnings weighed heavily on investors.

But the Bank warned that the prospects for economic growth and inflation were unusually uncertain, reflecting the “exceptional” economic and financial factors affecting the outlook. It added: “There are also marked uncertainties over the extent to which the slowdown in demand results in spare capacity despite slowing supply growth, and the degree to which it feeds through into easing price pressures; the prospects for world commodity prices; and the likely scale and pace of pass-through of a lower exchange rate.”

Asia/Pacific

Despite relatively strong performance on Monday and Friday, stocks in Asia were down for the week with the exception of mainland China and the Philippines. Though the Asian markets snapped a three-day losing streak Friday, the gains were not sufficient to outweigh mid-week losses. Optimism ahead of the Group of 20 meeting in Washington to coordinate government responses to the worst financial crisis in 80 years also added to the positive sentiment. But analysts warned that the outlook remained bleak as fears of a long and deep global economic downturn mounted.

A number of key economic numbers for China were the focus of investors as worries mounted anew about the state of the U.S. and Chinese economies. Industrial production and retail sales weakened and inflationary pressures eased. The government released details of a stimulus package which sent equities soaring on Monday only to return to earth Tuesday as investors fretted that China's $586 billion economic stimulus package may not avert a global slowdown. On Thursday (in Asia) comments from U.S. Treasury secretary Henry Paulson that the U.S. government was no longer planning to buy troubled mortgage-backed assets with the rescue money also dented investor sentiment.

The Shanghai Composite was up 13.7 percent on the week after the government’s announcement of its stimulus package over the weekend and approval on Wednesday. The Shanghai defied the gravitational pull of other Asian stock indexes and the gains did not carry over to the Hang Seng, which was down 4.9 percent on the week. Economic data showed that industrial production although up 8.2 percent on the year had slowed from 11.4 percent in the previous month as weakening exports took their toll on output. And both consumer and producer price pressures eased. As part of their stimulus, China said that it would loosen credit conditions, cut taxes and embark on a massive infrastructure-spending program in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand. The package announced would add up to $586 billion in spending over the next two years.

Currencies

As investors’ risk appetites change, so do currency values. Currencies continue to be volatile along with equities. As stocks went up, the yen and U.S. dollar declined. However, when investors bailed out of equities, the value of the yen was up as was the ultimate safe haven currency — the U.S. dollar. Despite the gyrations caused by volatile stocks, some currency traders paid attention to economic news. The British pound sterling was the target of a major sell-off especially after the Bank of England’s Inflation Report, which among other things virtually assured that interest rates would continue to sink in the UK as the economy battles its way out of recession.

The pound tumbled to a record low against the euro and dropped below $1.50 against the dollar for the first time in six years as traders abandoned the currency. The pound also fell to its lowest level in 13 years on a trade-weighted basis after the Bank of England said the UK economy had fallen into recession and signaled that there would be more interest rate cuts to come. Some analysts said the current situation was similar to the events of September 1992, when sterling was ejected from the European Exchange Rate Mechanism. The pound was hit because investors believed that the UK authorities would take drastic action to ease monetary policy in the face of a steepening recession. Following the Bank of England’s aggressive interest rate cut and subsequent comments, UK interest rates are now below eurozone rates for the first time since the creation of the single currency in 1999.

Selected currencies — weekly results

Indicator scoreboard

EMU

September industrial output was down 1.6 percent and was down 2.2 percent when compared with last year. The monthly decline was broad based and led by intermediates which slumped 2.6 percent. Also declining were durable consumer goods (2.5 percent), nondurable consumer goods (0.4 percent), capital goods (1.8 percent) and energy (0.8 percent). Regionally, Germany dominated with a 3.7 percent collapse on the month. However, the other larger EMU states fared little better with hefty declines posted by Italy (2.1 percent), Spain (1.9 percent) and France (0.5 percent).

Third quarter flash gross domestic product declined 0.2 percent while annual growth eased from 1.4 percent to 0.7 percent. As usual with the flash estimate, no details were provided on the GDP components. Among the larger EMU members, there were declines in Germany (0.5 percent) and Italy (0.5 percent) that left both economies in recession. However, a contraction in Spain (0.2 percent) was the first of the year and followed a 0.1 percent increase in the second quarter. France was the only large country to record a minimal 0.1 percent gain.

October harmonized index of consumer prices was unchanged on the month and up 3.2 percent when compared with last year and down from September’s 3.6 percent reading. Excluding food, drink, tobacco & petroleum, HICP inflation remained at 1.9 percent but excluding energy & unprocessed foods core HICP was up 2.4 percent. Among the main categories, inflation rates dropped significantly on the year in food (4.7 percent from 5.7 percent), transport (3.7 percent from 5.8 percent) and education (1.5 percent from 2.9 percent). The only acceleration of any note was registered in clothing (1.0 percent from 0.7 percent).

Germany

November ZEW expectations climbed to minus 53.5 from minus 63 in October. The results were mixed with current conditions dropping a hefty 14.5 points to minus 50.4. While welcome, the recovery in expectations should not be overstated since the index remains well below its historical average of 27.1. The ZEW said the rebound was a partial correction from a steep October decline that accompanied increased turbulence in financial markets. The German government's rescue package for the financial sector and economic-stimulus plans also boosted confidence slightly.

Third quarter flash gross domestic product declined 0.5 percent but remains up 0.8 percent when compared with the same quarter a year ago. GDP declined 0.4 percent in the second quarter. This puts Germany in a technical recession as defined by two negative quarters of GDP. As usual with flash estimates, details of the expenditure components were not available.

France

September industrial output (excluding construction) was down 0.5 percent and was down 1.9 percent when compared with last year. The decline was concentrated in autos (3.1 percent), semi-finished goods (1.5 percent) and energy (0.7 percent). Semi-finished goods saw broad-based declines led by metals (3.8 percent), chemicals & plastics (2.2 percent) and wood & paper products (1.1 percent). Overall manufacturing output was down 0.8 percent on the month and was 2.5 percent lower on the year. However, the other main sectors fared significantly better with consumer goods (0.4 percent) boosted by solid gains in clothing (2.3 percent) and printing (1.1 percent) while capital goods (0.7 percent) benefitted from higher production of machinery (1.1 percent) and electrical goods (1.6 percent).

Third quarter flash gross domestic product edged up 0.1 percent after declining by 0.3 percent in the second quarter. GDP was up 0.6 percent when compared with the same quarter a year ago. The quarterly gain in total output was achieved courtesy of a rebound in private consumption (0.2 percent) and another solid increase in government spending (0.5 percent). Total gross fixed capital formation declined another 0.3 percent although within this, investment by non-financial enterprises rose 0.3 percent after a 1.0 percent fall in the previous quarter.

Italy

September industrial output sank 2.1 percent and was down 5.7 percent when compared with last year. The contraction reflected monthly declines in all of the major sectors. Worse hit were consumer goods (3.3 percent), but both intermediates (2.6 percent) and capital goods (2.5 percent) fared almost as badly. Energy output was down 1.7 percent.

Third quarter gross domestic product declined by 0.5 percent and was down 0.9 percent when compared with the same quarter a year ago. This was the second quarterly decline in a row and puts Italy in a technical recession. As with all flash reports, ISTAT gave few details of the third quarter accounts except to say that industry, agriculture and services all saw output declines.

United Kingdom

October producer output prices dropped 1.0 percent but were up 6.8 percent when compared with last year and a considerable drop from the previous month’s 8.5 percent increase. The decline was largely due to a drop of 5.6 percent on the month in petroleum prices. However, there were also declines in the price of food (0.4 percent), metal products (0.1 percent) and other products (2.3 percent). Prices were up in transport (0.5 percent), electrical & optical equipment (0.3 percent), paper (0.2 percent) and tobacco & alcohol (0.2 percent). Producer input prices sank 5.6 percent on the month but increased 13.8 percent on the year, still a considerably reduced rate from the previous month (up 34.1 percent). Crude oil prices nose dived 19.5 percent on the month. The other component declines were in imported metals (5.1 percent), fuel (3.7 percent) and other imported materials (1.3 percent).

September merchandise trade gap narrowed to Stg7.5 billion from Stg8.4 billion in the previous month. This was the smallest shortfall since June 2007. The decline reflected an increase of 2.9 percent in exports that more than offset a modest 0.3 percent increase in imports. The drop was due to a decline in the bilateral shortfall with non-EU countries which fell more than Stg0.7 billion to Stg4.5 billion. By contrast the net trade position with the EU bloc deteriorated by nearly Stg0.2 billion to Stg3.0 billion.

Average earnings for the three months ending in September eased to 3.3 percent from 3.4 percent when compared with a year ago. This was the weakest pace seen since July 2003. In September, wages eased to just a 3.0 percent annual rate from 3.2 percent in August. The easing in growth was due to a slowdown in the private sector (3.1 percent from 3.4 percent) which more than offset a pick-up in the public sector (3.9 percent from 3.5 percent). Manufacturing earnings edged up from 2.7 percent to 2.9 percent but dropped in services from 3.7 percent to 3.5 percent.

October claimant count unemployment jumped a further 36,500 to boost the jobless rate to 3.0 percent from 2.9 percent. The increase constituted the largest monthly rise since December 1992. ILO unemployment climbed another 140,000 in the third quarter, lifting the jobless rate to 5.8 percent. This is the highest rate since the first quarter of 2000. At the same time, ILO employment dropped 99,000, reducing the employment rate by 0.4 percentage points to 74.4 percent.

Asia/Pacific

Japan

October corporate goods price index declined 1.6 percent after edging down 0.6 percent in September. On the year, the CGPI eased for the second month after reaching a gain of 7.4 percent in August. The index was up 4.8 percent in October. Petroleum & coal product prices plummeted 12.4 percent after sinking 5.4 percent in the previous month but were still up 16.1 percent on the year. Nonferrous metal prices also sank, declining by 10.5 percent on the month and are now down 16.7 percent on the year. Import prices for all commodities on a yen basis were down 11.1 percent after dropping 6.7 percent the previous month. Export prices for commodities were also down. The index dropped 6.8 percent on a year basis and is down 8.7 percent on the year.

China

October producer prices were down 1.7 percent but were up 6.6 percent when compared with last year. The further easing in the headline PPI reflects the recent correction in global energy and commodity prices, and was shown in easing prices for crude oil, ferrous and non-ferrous metals and raw material producer goods, amongst the October PPI components.

October consumer price index edged down 0.1 percent and was up 4 percent when compared with last year. The annual increase was the lowest since May 2007. Food prices were up 8.5 percent on the year while nonfood prices were up 1.6 percent. While fuel costs have remained elevated, the price moderation is broad-based across utilities, rental, healthcare and other services.

October industrial production was up 8.2 percent on the year — a significant deceleration from September’s 11.4 percent rise. This was the weakest reading for this measure since November 2001. Seasonally adjusted, industrial production was down 1.0 percent on the month. Textile production was up 7.8 percent while electronics & telecom products were up 6.9 percent. Production in general equipment & machinery sectors slowed to 11.9 percent and 13.9 percent on the year. However, cast iron production dropped by 16.8 percent while crude steel was down 17.0 percent and steel product production contracted by 12.4 percent.

October retail sales eased to an increase of 22 percent on the year from 23.2 percent in September. The slowdown in sales growth is rather broad-based. Grain & edible oil sales eased to 10.2 percent on the year from 19.3 percent in September and reflects in part declining food prices. Jewelry sales were up 30.6 percent and down from 35.5 percent in September while household electronics sales dropped to 0.8 percent from 30.3 percent. The deceleration in retail auto sales was particularly significant — up 19.6 percent and down from 33.4 percent in the preceding month.

Americas

Canada

September merchandise trade surplus declined to C$4.5 billion from C$6 billion in the previous month. This was the smallest surplus since January and reflected a 1 percent decline in exports and an increase of 1.9 percent in imports. Auto exports sank 3.4 percent while industrial goods & materials dropped 1.9 percent and energy products were down 1.4 percent. Imports were buoyed by a hefty jump in energy products (10.3 percent) together with more modest gains in autos (2.0 percent), agricultural & fishing products (0.9 percent) and machinery & equipment (0.8 percent). By contrast, there were declines in forestry products (1.7 percent) and industrial goods & materials (1.4 percent). Regionally, the bilateral trade surplus with the U.S. narrowed to C$8.3 billion while the deficit with the EU widened to C$1.2 billion.

October factory shipments were up 0.1 percent and were up 4.9 percent when compared with the same month a year ago. In real terms, sales were up 0.7 percent after dropping 4.0 percent in the previous period. Thirteen of the twenty-one reporting industries reported increases with the most significant posted by transportation equipment (1.1 percent). A 4.8 percent rise in sales of aerospace products & parts played a major role but motor vehicles were down 0.3 percent, compounding a 4.7 percent slump in August. At 3.0 percent, primary metal manufacturers registered the largest decrease in nominal sales although this was mainly due to weaker prices which fell 2.8 percent. New orders were down 3.6 percent while unfilled orders edged down 0.3 percent on the month.

Bottom line

The eurozone entered its first recession since its creation in 1999 when gross domestic product declined for a second consecutive quarter. Of the major EMU states, only France managed to eke out a 0.1 percent increase over the second quarter. Other economic data showed that most global economies are either slowing or are on the verge of a recession as measured by GDP. In response to the slowing Chinese economy, a major stimulus plan designed to jump-start production was introduced last weekend by the government

Japan’s third quarter gross domestic product will be released on Monday (local time). It is expected to show that the economy declined for the second consecutive quarter. And on Friday (again, local time), the Bank of Japan will announce its policy decisions. The Bank lowered rates to 0.3 percent from 0.5 percent at their meeting three weeks ago, leaving little wiggle room for future moves.

On Saturday, the Group of 20 nations will meet in Washington to discuss the world’s financial malaise. Some have compared it with the Bretton Woods, New Hampshire meetings held in 1944 as World War II was drawing to a close — but it is not. And on the eve of the meeting, many leaders have scaled back their expectations given that the U.S. is in the midst of a transfer in leadership. However, the G20 is expected to promise to support growth, establish principles for future regulation, lay out an action plan to put these into effect and establish working groups to examine specific regulatory and institutional issues.

Looking Ahead: November 17 through November 21, 2008

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