International Perspective will be taking off next week to celebrate

Thanksgiving. IP will return on December 5, 2008.

Happy holiday from all of us at Econoday!

Global Markets

As economic news continued to deteriorate, equities followed suit and crumbled as investors sought a safe haven from a global recession. And what was the major concern just a few months ago has turned around — inflation worries are ‘out,’ deflation worries are ‘in.’ Just in the past week, price pressures eased in the U.S., Canada and the UK thanks to eroding commodity prices and anemic demand by consumers. In both Canada and the UK, inflation targets have been put to the side as the Banks of Canada and England take policy actions to stave off rapidly sinking growth and financial market fractures. However, the European Central Bank with its total focus on inflation has moved more slowly. This should change however as new data show the EMU economies on a downward trajectory. With Japan’s 10-year struggle against deflation still ominously lurking in the background, investors everywhere bailed out of equities with renewed vigor and into the safe haven of government securities, and in the process drove yields down to record lows.

Financial markets did not take kindly to U.S. Treasury Secretary Henry Paulson’s announcement that he was withdrawing the promise to buy toxic mortgage-backed securities through auctions as part of the Troubled Asset Relief Program (TARP). The announcement on November 12^th to abandon that approach in favor of direct capital injections left investors nonplused. This injected more uncertainty into a marketplace with more than its share of uncertainty. Stocks continued to fall, with many indexes plumbing lows not seen in over five years. Banks were particularly hard hit amid concerns that falling asset prices would lead to even more write-downs.

Both developed and emerging markets were lower as reverberations of the decision swept through the markets and threatened to undo the fragile stability that policymakers had established across the financial system. Credit spreads on both sides of the Atlantic remained at elevated levels, hit by concerns about the economic slowdown and the risk of companies defaulting on debt repayments. On the week, all indexes followed here declined.

Global Stock Market Recap

Europe and the UK

Stocks were down four of five days as gloomy data from Europe and the U.S. combined to elevate concerns about the health of the global economy. In Europe, flash purchasing managers’ reports sank to new record lows while U.S. jobless claims climbed to their highest level in 15 years. The dire PMI reports compounded fears that a deep and prolonged recession is more likely in Europe. Worries about the U.S. job and housing markets, the overall economy and the battered stock market quickly crossed the Atlantic to Europe as U.S. consumers cut back on their spending — troubling signs both for companies as well as investors in the U.S. and abroad. The European markets were down on persistent worries that a global economic downturn would hurt profits of banks and lower demand for crude oil and metals. Heavily weighted oil stocks sank as crude oil prices dropped to three year lows while other resource related stocks were down as prices for commodities such as copper also continued to decline on weakened demand.

Risk tolerance has virtually evaporated as investors remained cautious against the backdrop of the longer-term declines on major indexes and with the burgeoning list of countries heading into or falling into recession of unknown length and depth. And data only underlined the perilous condition of the U.S. economy. For example, housing starts continue to tumble and give no evidence of a bottom while unemployment claims continue to ratchet upwards.

On the week, the FTSE was down 10.7 percent while the DAX dropped 12.4 percent and the CAC, 12.5 percent.

Bank of England minutes

The monetary policy committee vote was unanimous at the November 6^th meeting to slash the bank rate by 1.5 percentage points to 3 percent. This is the lowest policy rate since 1955 and the single largest cut since the Bank gained independence in 1997. And the MPC considered an even larger cut, underscoring its concerns at the effects of acutely tighter credit conditions globally and the marked decline in consumption and demand within the UK. The minutes said that the Committee was revising downward its central projection for inflation so sharply that a much bigger interest rate cut — two percentage points or more — would actually be needed to prevent inflation from falling too far below the inflation target in the immediate term. However, the MPC was concerned about what signal such a large cut in bank rates would signal to the markets. A cut that's too large a surprise could pose upside risks to the inflation target if the resulting depreciation of sterling was excessive. The committee noted that there was a risk that such a move might be misinterpreted as a change in the Committee’s reaction function, which would damage the credibility of the target.

But the minutes also show that despite the unanimous vote in favor of the largest single rate cut made since the MPC was formed in 1997, there were disagreements about the extent and timing of any additional cuts. Among other things, some members pointed to the government’s announced plans to bring forward spending in the hope of providing some fiscal stimulus to the economy.

Swiss National Bank

The Swiss National Bank, in its third unscheduled move since October, lowered its target interest rate by an unprecedented full percentage point for the 3-month Libor to 1 percent. It was the Bank’s biggest single cut since it began targeting Libor in 2000. The SNB predicted inflation will fall below 2 percent as soon as this year, giving it room to lower interest rates to counter a possible recession. Swiss inflation slowed to 2.6 percent last month. The SNB is scheduled to hold its next regular monetary policy meeting on December 11. The central bank has cut rates by a total of 175 basis points since October 8^th. The Swiss franc dropped to its weakest level in 15 months against the dollar after an interest rate cut from the Swiss National Bank surprised investors.

Asia/Pacific

Equities continued their downward trajectory as economic news and sinking stocks elsewhere pulled indexes followed here lower. Japanese data did little to instill confidence and post-policy meeting comments by the Bank of Japan’s governor did nothing to boost morale. Japan entered a technical recession as its gross domestic product declined for the second consecutive quarter. The same held true for Singapore while Taiwan’s GDP dropped for the first time since 2003. However, most indexes followed here did end the week on an upbeat note, rising for the first day in five on Friday. They were buoyed by speculation that China would once again adjust its interest rates over the weekend and on a report that Citigroup was weighing the possibility of auctioning off pieces or even selling the company outright. But it was not only the financial sector that weighed — U.S. automakers appeared before Congress to plead for funds to bail them out of a financial mess that has been many years in the making under the threat that they could seek bankruptcy relief without help.

The Japanese stocks were down three of five days. On Friday, stocks opened sharply lower, but rebounded in the afternoon session on short covering following gains in U.S. stock futures and a recovery in other Asian markets. The Nikkei was down 6.5 percent on the week. The Shanghai Composite was also down three of five days, ending the week on a negative note amid speculation about an interest rate cut during the weekend and suspected government buying of shares. For the week, the index was down 0.9 percent. And in Australia, the All Ordinaries index was up for the first time since the previous Friday. The index rebounded from five-year lows, as bargain hunting emerged and investors scooped up mining stocks following their recent sharp drops.

On the week, all indexes followed here were down. Losses ranged from 0.9 percent for the Shanghai Composite to 10.7 percent for the PSEi. Both the Jakarta Composite and All Ordinaries were down over 9 percent.

Bank of Japan on hold

As unanimously expected, the Bank of Japan kept its key interest rate at 0.3 percent. The vote was unanimous. The BoJ had lowered its rate to 0.3 percent from 0.5 percent at its last meeting on October 31. Earlier this week, data for gross domestic product showed that the economy had entered a technical recession — it had experienced two declining quarters of GDP. Third quarter GDP edged down 0.1 percent on the quarter after declining by 0.9 percent in the second. And Japan’s merchandise trade balance was in deficit for the third month as exports sank by 7.7 percent on the year. Japan had depended on exports to grow while the domestic economy languished. Now it is taking a big hit in its primary growth sector as trading partners, both emerging and developed, cut back on spending. And as energy prices contract, the consumer price index could once again show signs of deflation or declining prices when the data become available next week. Excluding food and energy, the CPI edged up only 0.2 percent on the year in September. Some question whether cutting interest rates further would do any good, pointing out that it is not tight credit that is the problem but rather there is no desire, given business conditions, for businesses and consumers to borrow.

In his post meeting press conference, governor Masaaki Shirakawa said the Bank will do what it can to supply ample liquidity to financial markets. He also signaled that he is reluctant to return to the zero interest rate policy (ZIRP) because the policy could discourage lending rather than promote it. He said "In terms of securing smooth functions in the short-term money market, there is a possibility that an additional rate cut might cause various problems under already-accommodative financial conditions.” He said that the deterioration in financial market functions has been an issue and the BoJ needs to consider "the impact of further monetary loosening.”

The remarks suggested that the BoJ is not about to change its policy rate soon. But Shirakawa acknowledged that Japan's economic downturn is likely to be lengthy, and said the BoJ is "studying what policy we should implement when economic conditions become more severe down the road." Shirakawa described the current global economic slowdown as an "adjustment of an imbalance that was built amid high global economic growth."

The BoJ kept its key rate at near zero from 2001 thru 2006 and flooded the banking system with cash to encourage lending, stimulate growth and end deflation. Since reducing the overnight lending rate on October 31, Shirakawa has warned that further cuts could freeze up the money market by making it unprofitable for banks to lend to each other. That in turn would stifle the flow of money through the economy.

Currencies

The yen continued to climb against both the U.S. dollar and euro despite concerns voiced by Shoichi Nakagawa, Japan’s finance minister. He reaffirmed an intervention threat made earlier — he would sell the yen in order to slow its pace of appreciation. The yen has been rallying as carry trades unwind and equities drop. And with intervention in the air, the upward trajectory of the yen eased Friday. Analysts said that the Group of Seven statement in October had drawn a line in the sand for dollar/yen at ¥90 under which the Japanese authorities were expected to intervene unilaterally. But analysts think that unilateral intervention would, at best, only slow the pace of further yen appreciation.

One country that did intervene was Australia. The Reserve Bank of Australia purchased the Australian dollar as it approached a five-year low against its U.S. counterpart. The RBA bought its own currency to provide liquidity as on previous occasions. The RBA bought A$3.15 billion ($1.96 billion) of its own currency in October, the biggest net purchase on record, as the Australian dollar posted a record monthly drop.

Emerging market currencies in Asia came under renewed pressure on Thursday, with the South Korean won and the Indonesian rupiah falling to their lowest levels since the Asian financial crisis of 1998. Analysts said that fears over a sharp slowdown in global growth prompted a renewed downward shift in risk appetite. This drove foreign investors into repatriating funds from the region, piling pressure on local currencies. Emerging market currencies were hit hard last month as interbank lending seized up. This had led foreign investors to sell emerging market assets as they scrambled for dollar liquidity. However, the announcement that the Federal Reserve had established currency swap lines with four emerging market central banks, including South Korea, helped ease liquidity concerns and pulled emerging market currencies away from their lows at the end of October.

Selected currencies — weekly results

Indicator scoreboard

EMU

September seasonally adjusted merchandise trade deficit was virtually unchanged at €5.7 billion. The unadjusted deficit was € 5.6 billion. Nominal exports were up 2.2 percent while imports were up 2.1 percent. By main product group, the unadjusted data for the first eight months of the year show a sharp widening over the same period of 2007 in the shortfall on primary products (€228.9 billion from €165.8 billion). This was entirely due to a widening deficit on energy (€211.1 billion from €146.4 billion). The surplus on manufactured goods over the same period actually grew respectably (€197.0B from €165.3B). As usual amongst the larger EMU countries, only Germany registered a seasonally adjusted surplus while France, Italy and Spain all posted deficits.

Germany

October producer price index was unchanged on the month and up 8.3 percent when compared with last year. The expected drop in energy prices failed to materialize and a 0.6 percent monthly advance in prices here was solely responsible for the lack of decline. Households paid an extra 6.8 percent for natural gas last month. However, excluding energy, the PPI slipped 0.3 percent on the month, reducing the annual underlying rate to 2.9 percent from 3.6 percent. Among the other major sectors there were monthly declines in prices in basic goods (0.8 percent) and modest gains in consumer goods (0.1 percent) and in capital goods (0.3 percent).

France

October consumer purchases of manufactured goods dropped 0.4 percent and were up 0.7 percent when compared with last year. The October decline was the second in the last three months and reflected broad-based declines among the major components. The only exception was household goods where purchases continued to rise gently with a 0.2 percent gain that matched the September rise. The largest decline was in autos (0.9 percent) excluding which demand dropped a more modest 0.3 percent. Textiles declined 0.4 percent in line with other products.

Italy

September unadjusted merchandise trade gap widened to €2.6 billion from €2.2 billion in August and €1.5 billion a year ago. Total exports were up 8.6 percent on the year but were comfortably outpaced by imports which grew a robust 11.7 percent. However, net exports to the rest of the EU saw a return to black ink of €0.7B following a revised €0.1B deficit in the previous period and a €0.6 B surplus in September 2007.

September retail sales were unchanged on the month and were down 0.5 percent when compared with last year. Food and non-food sales were unchanged on the month but while the former was up 1.4 percent on the year, non-food was down 0.1 percent. Large store sales rose 1.6 percent on the year but purchases at small outlets declined 0.3 percent. By product, musical instruments dropped 2.2 percent, and computer & telecoms equipment declined 1.7 percent.

United Kingdom

October consumer prices were down 0.2 percent but were up 4.5 percent when compared with last year — a drop from 5.2 percent in September. The decline in the targeted measure of prices was mirrored in both the RPI where the 12-month rate dropped to 4.2 percent from 5.0 percent, and in the formerly targeted RPIX which decelerated 0.8 percentage points to 4.7 percent. The fall in all the inflation measures largely reflected sharply weaker fuel prices. In particular, petrol prices slumped some 7.1 percent on the month while the cost of diesel prices fell 7.0 percent from September. The large declines in energy prices were in turn responsible for a steep slowdown in inflation in the transport sector (4.3 percent from 7.6 percent). Core CPI was unchanged on the month and up 1.9 percent on the year. Inflation fell in a number of sectors with education (8.6 percent from 10.8 percent) leading the way.

October retail sales edged down 0.1 percent and were up 1.9 percent when compared with the same month a year ago. Purchases were heavily geared towards food which saw a 1.0 percent jump on the month while non-food demand slumped 1.1 percent. The nosedive in the latter was led by household goods (3.4 percent) and clothing & footwear (1.5 percent). Sales also declined at non-specialized stores (1.0 percent) and non-store retailing was flat — but there was a respectable gain in other stores (1.2 percent). With inflation no longer officially perceived as a threat to the economy, a sharp deceleration in the retail sales deflator to an annual 0.6 percent from 1.0 percent in September will be seen as reinforcing the gloomy picture of domestic demand.

Asia/Pacific

Japan

Third quarter gross domestic product inched down by 0.1 percent on the quarter or at an annualized rate of minus 0.4 percent. Second quarter GDP was revised down to a drop of 0.9 percent from the originally reported 0.7 percent decline on the quarter or a drop of 3.7 percent. GDP was unchanged when compared with the same quarter a year ago. Japan is in a technical recession now that GDP has declined for two consecutive quarters although the government has yet to make it official. While domestic demand edged up 0.1 percent on the quarter with private consumption up 0.3 percent. But the all important private nonresidential investment sector declined 1.7 percent. With exports of goods and services remaining lackluster, external demand cut 0.2 percentage points off quarterly growth.

October unadjusted merchandise trade deficit was ¥63.9 billion, a significant change from last October’s ¥999.4 billion surplus. On the year, exports were down 7.7 percent while imports were up 7.4 percent. Exports declined to all regions with the exception of the Middle East. Exports to the EU plummeted 17.2 percent while those to the U.S. sank for the 14 month in a row, dropping 19 percent on the year. Even exports to Asia declined for the first time in 80 months. They were down 4 percent with exports to China down 0.9 percent. On a seasonally adjusted basis, the trade deficit was ¥175.6 billion. This was the third monthly deficit in a row. Exports declined for the second month, dropping 6.1 percent on the month while imports, down for the third month, declined 4.5 percent.

September tertiary industry index declined by 0.6 percent and was down 1.5 percent when compared with last year. The industries with the largest declines were information & communications, down 5.7 percent and wholesale & retail, down 2.8 percent. The electricity, gas, heat supply & water component was up 2.4 percent while learning support industries was up 4.5 percent.

September all industry index ebbed down 0.1 percent and was down 0.6 percent when compared with last year. The tertiary index which is a major component of the all industry index declined 0.6 percent and 1.5 percent on the year. The all industry index takes a reading of activity in the 11 service industries that comprise the tertiary index, along with activity in the construction, agricultural & fisheries industries, the public sector and industrial output. This index is considered a close approximation of gross domestic product growth as measured by industrial and service sector output.

Americas

Canada

October consumer price index dropped 0.5 percent thanks to tumbling energy prices and was up 2.6 percent when compared with last year. Excluding food and energy, the CPI was unchanged on the month and was up 0.9 percent on the year. The Bank of Canada’s core CPI, which excludes eight volatile items was unchanged and up 1.7 percent on the year. The Bank of Canada’s inflation target range is 1 percent to 3 percent and focuses on the 2 percent midpoint. The deceleration in the annual rate was dominated by slower energy inflation (9.7 percent from 18.2 percent) but price pressures also eased significantly in shelter (3.8 percent from 4.5 percent) and transportation (1.6 percent from 4.7 percent). At the same time prices fell even more steeply in the clothing & footwear sector (2.8 percent from 1.3 percent). Working in the other direction, prices accelerated notably in food (6.1 percent from 5.6 percent) and also edged higher in alcohol & tobacco (1.3 percent from 1.1 percent).

Bottom line

Economic news continued to be unremittingly bad. Japan joined the EMU and others in the growing list of those in a technical recession — two negative quarters of gross domestic product. And consumer prices dropped dramatically in the U.S. and UK, signaling that the plunge in commodity prices combined with weakened demand has begun to feed through to the indexes. The easing of price pressures will allow the central banks with inflation targets to focus on economic growth and reduce interest rates. On Monday, the Chancellor of the Exchequer Alistair Darling will introduce the government’s fiscal stimulus package with its promise of a multi-billion pound package of support for small business.

Many new pieces of economic information will become available in the next two weeks. Next week brings the monthly onslaught of Japanese data which ranges from consumer prices to retail sales and unemployment. Germany’s Ifo business index will give an up-to-date look at business sentiment as will the EU consumer and business survey later in the week.

The first week of December brings policy meetings for the Reserve Bank of Australia, the Bank of England and the European Central Bank. Large rate cuts are anticipated from all three.

Looking Ahead: November 24 through November 28, 2008

Looking Ahead: December 1 through December 5, 2008

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