Global Markets

Optimism about the global recovery wavered amid cautionary central bank statements. And equities wavered too — although most indexes followed here were up for the week anyhow. While acknowledging that the economy has stabilized, the mantra of central bankers continues to revolve around the uncertainty and pace of the recovery. Whether it is Japan where deflation rules or Australia where the economy avoided a recession, central bankers continue to hedge on the recovery’s sustainability once monetary and fiscal stimuli are withdrawn. Some analysts opine that the current six month stock market rally is being driven by high liquidity levels which are largely the result of central bank policies rather than fundamentals.

New economic data from the U.S. and UK mostly were positive. Retail sales in the UK disappointed while those in the U.S. surprised on the upside. And in Germany the important ZEW investor confidence index continued to rise showing increased positive sentiment going forward. Some analysts said that the U.S. economy was improving thanks to the powerful stimulus measures — policy stimulus that will eventually fade. But the question is whether private demand will be strong enough to take over.  

Concerns about a trade row between the U.S. and China unsettled financial markets on Monday. This combined with worries that the risk rally had been overdone and pushed equities down. Washington’s imposition of a new duty on imported Chinese tires prompted Beijing to threaten action on imports of U.S. poultry and vehicles, triggering an early move out of equities and commodities. But China’s almost insatiable demand for chicken parts will probably tamp the protest.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were up for the second consecutive week, gaining 3.2 percent, 2.5 percent and 1.4 percent respectively. While the FTSE was up each day during the week, the CAC and DAX declined on both Monday and Friday. Equities were boosted by each round of fresh data that provided further evidence that the global recovery was indeed underway.

Most new economic data centered around the UK even though at times it seemed that investors there were paying closer attention to the slew of new — mostly positive — U.S. economic data including industrial production, housing starts and retail sales. Earlier in the week, markets got a boost from Fed Chairman Ben Bernanke who acknowledged that the U.S. financial system is beginning to emerge from a deep recession that is “technically over.” He pointed out that it could have been much worse had the U.S. and other countries not taken “aggressive” policy action.

Swiss National Bank

After its quarterly meeting, the Swiss National Bank reaffirmed its commitment to intervene in the currency markets to weaken the franc if necessary. As widely expected, the SNB announced no change in official interest rates and left its target band for 3-month at zero to 0.75 percent. The Bank said it will continue to aim at the lower end of this range, specifically 0.25 percent.

Meantime, the latest quarterly monetary policy assessment shows a somewhat more positive economic outlook following the decidedly pessimistic second quarter edition. The 2009 growth forecast range has been lifted to a range of minus 2.0 percent to minus 1.5 percent from the previous range of minus 3.0 percent to minus 2.5 percent. This was only to be anticipated in the light of the improvement in the recent real side economic statistics. The Bank also raised its inflation forecast to 0.6 percent in 2010 and 0.9 percent in 2011. It left its projection for 2009 at minus 0.5 percent.

Asia/Pacific

Equities were mixed amid little new regional economic data and as some investors paused to evaluate the status of the global recovery. Some traders preferred to take profits following the recent rally. The week began with all but Shanghai plummeting — but they rapidly recovered only to peter out at week’s end. The PSEi, Shanghai Composite, STI and both the Nikkei and Topix were down on the week. In Japan, traders were cautious prior to a three day holiday week which will see trading resume on Thursday. This was despite the fifth consecutive monthly increase in the Cabinet Office’s leading index and an upward reappraisal by the Bank of Japan of economic conditions. However, traders were buoyed during the week by a spate of positive economic news from their largest customer — the United States. And Fed chairman Ben Bernanke’s comments that the recession is technically over in the U.S. also lifted morale.

The minutes of the Reserve Bank of Australia’s September 1^st meeting revealed that the RBA felt that both the Australian economy and the global economy were improving, but the recovery was not sufficiently entrenched to begin raising interest rates. According to the minutes, the Board members noted that the global economy was improving, but that “an important question” remained as to whether the improvement would be sustained or whether it was a temporary effect of fiscal and monetary stimulus from central banks and governments.

The new Japanese government took office at mid-week and on Friday, formally decided to suspend elements of the ¥15,000 billion economic stimulus package. Finance Minister Hirohisa Fujii said that savings could amount to several trillion yen and government ministers should identify elements of the package to scrap by October 2^nd. However, Mr Fujii and senior DPJ colleagues will be watching the performance of Japan’s economy closely in the next few months amid widespread concerns about the pace and resilience of the recovery. Some economists warn that shutting off the stimulative spending tap too rapidly could plunge the economy back into recession and that would be blamed on the new government.

Bank of Japan maintains emergency lending

As universally expected, the Bank of Japan left its key interest rate at 0.1 percent where it has been since December 2008. The Bank also said that it would maintain its emergency lending programs — measures that were aimed at supporting corporate financing, such as the outright purchase of corporate debt from banks. In December, the BoJ started buying corporate debt from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The board extended the programs until December 31, 2009 at its July meeting, and one option for policy makers in coming months is to stretch them into 2010.

After maintaining its cautious economic outlook at its August meeting, analysts will be looking to see the Bank’s assessment of the economy. In its statement at that time, the BoJ acknowledged that the economy had stopped getting worse thanks to increases in exports and output. The Bank upped its view of the economy and said that the economy is showing signs of improvement. But the Bank like all other major central banks views the current situation as uncertain. Recent economic data show that GDP expanded in the second quarter. But with unemployment soaring — it hit an all time high of 5.7 percent in July — the strength of the recovery is questioned. And the Bank now is dealing with a new round of deflation as consumer prices plunge at the fastest pace on record.

In its monthly economic report released Friday, the BoJ raised its overall economic assessment for September from the previous month, saying the nation's economy is “showing signs of recovery” and would likely start improving in the near future. The Bank also showed a more optimistic view toward individual components of the Japanese economy, raising its assessments for exports, industrial output and corporate funding conditions. However, the BoJ struck a cautious note over the strength of private consumption in the economy, saying it remains weak as a whole.

Currencies

The U.S. dollar was mixed last week, rising when equities were down and dropping when equities were up. There was some respite for the dollar on Friday, when it was lifted by a faltering risk appetite after a week in which the currency hit year lows on a trade-weighted basis. On the week, the dollar was down against the euro but up against the yen and pound sterling.

There are several reasons being cited for the dollar’s decline. A primary concern is the soaring federal deficit along with worries about the Federal Reserve’s balance sheet which to some has ballooned out of control. But much of what is weighing on the dollar is the expectation among investors that central banks outside the U.S. will raise interest rates before the Federal Reserve does. Higher interest rates will attract money to those countries with higher interest rates which in turn will lift their currencies.

The pound sterling took a pounding after worries about the underlying health of the UK banking sector resurfaced on Friday and took sterling lower against both the euro and U.S. dollar. Traders sold the pound after reports that tougher-than-expected capital requirements were likely to be applied to the potential exit of Lloyds Banking Group from the government’s asset-protection scheme. This undermined the improvement in sentiment towards the financial sector and the currency. And news that the UK’s public sector net borrowing requirement reached a series high in August also sounded alarm bells, although the £16.1 billion figure was not as high as forecasts of £17.5 billion.

The yen was down against the dollar last week after Bank of Japan governor Masaaki Shirakawa said at his post meeting press conference that a strong yen could shore up the economy in the medium term, while at the same time stressing that stable foreign exchange markets are desirable. Shirakawa's remark was interpreted by market participants as signaling that he is accepting the strong yen.

Shirakawa's remark followed a comment by Japan's new Finance Minister Hirohisa Fujii the previous day saying that the new government would not intervene in the currency market for the time being to stem the currency’s rise. Fujii also said he doesn’t agree a weaker yen is necessarily good for exporters. But he also said that it doesn’t mean higher yen is always the best. Japan hasn’t intervened in the foreign exchange market since the central bank, at the request of the Finance Ministry, sold a record ¥14.8 trillion yen in the first quarter of 2004 in an effort to weaken the currency.

Selected currencies — weekly results

Indicator scoreboard

EMU

July industrial production (excluding construction) dropped 0.3 percent on the month and was down 15.9 percent on the year. The drop was led by capital goods where output fell 1.2 percent on the month after strong gains in both May (1.8 percent) and June (2.2 percent). The decline here was compounded by a 1.2 percent drop in energy and a 0.8 percent slide in durable consumer goods. However, nondurables were up 0.7 percent for their third consecutive monthly advance and intermediates edged up 0.3 percent. Overall eurozone output would have been stronger but for hefty 0.8 percent monthly drops in both Germany and Spain. Together they more than offset a 1.0 percent increase in Italy and a 0.1 percent gain in France.

August harmonized index of consumer prices was up 0.3 percent but down 0.2 percent on the year. Core HICP which excludes food, drink, tobacco and petroleum was also up 0.3 percent on the month and was up 1.2 percent on the year. On the month, energy prices were up 1.8 percent, the sharpest gain among the major expenditure categories and largely responsible for a 1.1 percent jump in transportation costs. Other, more modest increases were seen in housing, household equipment and hotels & restaurants (all 0.3 percent), alcohol & tobacco (0.2 percent) and in recreation & culture (0.1 percent). Prices were down in food (0.5 percent), education (0.4 percent) and health (0.1 percent).

July seasonally adjusted merchandise trade surplus widened out from a larger revised €2.3 billion in June to €6.8 billion. The improvement reflected a 4.1 percent monthly increase in exports combined with a 0.3 percent decline in imports. The unadjusted data showed a €12.6 billion surplus, its best reading in seven years and sufficient to put the cumulative year-to-date total at €9.1 billion versus a €21.3 billion shortfall over the same period last year.

Germany

September ZEW expectations index climbed to 57.7 from 56.1 in July. Current conditions edged up 3.2 points after a 12.1 point leap last time but, at minus 74.0, remain solidly in negative territory. ZEW is confident enough about recovery prospects to suggest that additional fiscal stimulus would not be appropriate but at the same time warned that German prospects are heavily dependent upon developments in the rest of the world. Car production at home is seen falling due to the end of the car scrapping scheme but ZEW sees consumption as a stabilizing factor over the next six months. Heavy industry and the chemicals sector are both expected to perform better.

August producer prices were up 0.5 percent but were down 6.9 percent when compared with last year. Energy costs climbed 1.1 percent and once again dominated developments in the headline index. Excluding this sector, prices were up only 0.3 percent from July and down 3.4 percent on the year. Both the consumer goods and capital goods sectors saw no change last month but basics were up 0.5 percent.

United Kingdom

August consumer price index was up 0.4 percent and was up 1.6 percent when compared with last year. At the same time, retail prices (RPI) climbed 0.5 percent from July, reducing its 12-month rate of decline to 1.3 percent. The formerly targeted RPI less mortgage interest payments (RPIX) also was up 0.5 percent on the month, in turn boosting its annual rate to 1.4 percent. On the month, prices were down in the food & drink sector (0.6 percent) and in communication (0.1 percent). All other components were up except education (flat). The largest gain was in furniture & household equipment (1.5 percent) followed by clothing & footwear (1.3 percent). Core CPI advanced 0.6 percent. This was sufficient to leave the underlying 12-month inflation rate unchanged at 1.8 percent.

Average earnings for the three months ending in July were up 1.7 percent when compared with the same three months a year ago. For July alone, earnings were up 1 percent after climbing 1.9 percent in June on the year. Excluding bonuses, the rate also decelerated sharply and at 2.2 percent in the latest three months, posted its smallest gain on record. Within the overall headline data, private sector wages were up 1.2 percent while the public sector was up 3.4 percent. Meantime, annual pay rates all but dried up in the manufacturing sector (down 0.7 percentage points to 0.7 percent) while the service sector also declined, off 0.8 percentage points to 1.9 percent.

August claimant count unemployment was up 24,400 following a smaller revised 25,200 increase in July. This nudged the jobless rate just a tick higher to 5.0 percent. The jobless rate on this measure is still at its highest level since 1997. On the ILO measure, the number of people out of work rose a further 210,000 in the three months to July. The increase lifted the jobless rate to 7.9 percent and its highest level since 1996. The level of ILO unemployment now stands at 2.47 million, the worst reading since 1995.

August retail sales were unchanged on the month and were up 2.1 percent on the year. Heavy rain over the month probably contributed towards a 1.3 percent drop in purchases of clothing & footwear but there were also declines at non-specialized stores (0.3 percent) and the other stores sector (0.6 percent). Combined, these declines ensured a 0.6 percent monthly drop in overall non-food sales. By contrast, food purchases climbed 0.7 percent and were up a firm 3.3 percent on the year. In addition, non-store retailing gained 1.1 percent and 12.4 percent from a year ago. Annual growth in the retail sales deflator edged up from minus 0.7 percent to minus 0.4 percent.

Asia/Pacific

Japan

July tertiary index was up 0.6 percent but was down 5.5 percent on the year. This was the second monthly increase in a row. Eight industries were up while five declined on the month. The best performing group was wholesale & retail trade which jumped 3.2 percent. Transport & postal activities gained 1.3 percent while information & communication was up 1.0 percent. Accommodations, eating & drinking services also was up 1.0 percent. Miscellaneous services excluding government were up 1.2 percent. Living related & personal services & amusement services, scientific research, professional & technical services and compound services were also up on the month. Declines were led by finance & insurance which sank by 1.5 percent while electricity, gas, heat supply & water was down by 1 percent. Other declining industries included medical, health care & welfare, real estate & goods rental & leasing and learning support.

Americas

Canada

July manufacturing shipments jumped 5.5 percent but were still down 22.4 percent on the year. Motor vehicle sales were the driving force behind the July gain, posting a monthly rise of 48.2 percent as some assembly lines resumed production. In addition, the auto parts industry saw shipments up 30.0 percent. Excluding this sector, sales would have risen a more modest 2.1 percent after a 2.6 percent increase in June. Other winners last month were primary metals where sales climbed 11.2 percent together with aerospace products and parts (12.2 percent) and plastics & rubber (9.0 percent). On the downside there were monthly declines in petroleum & coal products (3.6 percent), mainly due to lower prices, and in food (1.3 percent). New orders were down 3.7 percent, but this was little surprise in the wake of an 18.6 percent bounce last time. Backlogs slipped 4.3 percent after a 1.8 percent increase in June but were off only 2.0 percent ex-aerospace. More promisingly, inventories dropped 2.0 percent, their sixth consecutive monthly decline. This reduced the inventory/sales ratio to just 1.48, its lowest value since November last year.

August unadjusted consumer price index was unchanged on the month and was up 0.8 percent when compared with last year. Excluding food and energy, the unadjusted CPI was also steady on the month and was up 0.9 percent on the year while the Bank of Canada’s preferred measure — the CPI less eight volatile items —edged up 0.1 percent and was up 1.6 percent on the year. On the year, inflation was boosted by a smaller decline in energy prices which were off 19.1 percent compared with an annual decline of 23.4 percent in July. The other main positive was clothing & footwear where prices dropped 6.7 percent after sinking 9.1 percent in July. On the downside, the CPI was driven lower by weaker 12-month rates in food (4.0 percent), shelter (minus 2.2 percent) and health & personal care (2.9 percent).

Bottom line

Generally positive economic data were welcomed by investors, but trepidations about the longevity and strength of the recovery continue. Caution is the by-word when describing central bankers’ rhetoric as they cite the uncertainties surrounding current economic conditions. The FTSE closed at its highest point since the Lehman Brothers collapse a year ago while the Dow reached a peak for 2009.

The Federal Reserve meets Tuesday and Wednesday — needless to say, all eyes will be on the post-meeting statement. Investors are looking for clues on the Fed’s plans to downsize its balance sheet. And in Pittsburgh on Thursday and Friday, the G20 will meet to continue its dialogue on meeting today’s economic challenges. Financial markets are sensitive to any talk of exit strategies worrying that if stimulus is removed too fast, the global economic recovery could falter, but if they are left in place too long the world could face an inflationary surge.

Looking Ahead: September 21 through September 25, 2009

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