Global Markets

Profits were the big story last week as the major blue chip firms began to release their third quarter reports. Results were also released for several large banks that have been under everyone’s microscope. And while some estimates were better than expected, they did not equal JPMorgan’s stellar performance. Others disappointed. Although the overall trajectory for equity indexes was up, they were up in fits and starts as investors periodically paused for breath and sold.

Economic data were mixed for the week with little clear direction. In the U.S., manufacturing activity reports were mixed, August retail sales were distorted in the aftermath of the cash for clunkers program but jobless claims ebbed lower. Unemployment eased in the UK as well. And inflation remained muted in Canada, U.S., UK and EMU.

The U.S. dollar continued to decline as traders bet that interest rates there would stay at record lows for some time to come. The dollar dropped against the major currencies with the exception of the yen. On the week, most equity indexes followed here were up — with the exception of the PSEi, Kospi and SET. Gains ranged from a high of 4.1 percent (Sensex) down to 0.3 percent (Topix).

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX continued their surge upward — albeit with hesitations along the way. And while all three were up for the week thanks mostly to Wednesday’s impressive gains, disappointing earnings reports in Europe and the U.S. helped deflate the indexes on both Thursday and Friday. On the week, the FTSE and DAX were up 0.6 percent while the CAC was up 0.7 percent. Stocks have rallied since March amid expectations the worst of a global recession is past and earnings are picking up despite some disappointments such as Nokia, GE and Bank of America.

There was positive economic news to buoy investors — in its monthly bulletin the European Central Bank said the economy is stabilizing and is expected to recover at a gradual pace, though uncertainties remain high. However, Friday’s trade report disappointed. It said that August exports had tumbled raising doubts about the strength of the EMU economy given that it is driven by exports. And in the UK, unemployment appears to be abating and hinting at a tentative recovery while inflation remains moribund, allowing the Bank of England to keep its policy interest rate low.

Asia/Pacific

Equity gains petered out as the week ended. Traders preferred to take profits from the recent rally that stemmed from increased earnings optimism and an improving global economy. With little economic data within the region, investors honed in on earnings. Stocks were down in the Philippines, South Korea and Thailand for the week. Investors here continue to follow U.S. earnings releases intensely looking for evidence of a recovering economy. The Sensex was the best performer in the region, gaining 4.1 percent for the week. The index is up a hefty 79.6 percent so far this year.

In Japan, the Nikkei was up 2.4 percent on the week. Most of the stocks advanced on increasing optimism about the U.S. recovery — Japan’s major export destination. The Cabinet Office reiterated the Bank of Japan’s latest economic assessment. It said that the economy has been picking up, but it is short of ‘autonomous’ factors and remains in a perilous position thanks to rising unemployment.

All eyes are on Australia and its central bank. The Reserve Bank of Australia became the first major industrial central bank (and the second country after Israel) to increase its policy interest rate this month. And in a speech last week, its governor Glenn Stevens said that interest rates will need to be raised appropriately to foster a sustained economic recovery, giving a clear indication that further rate increases can be expected sooner rather than later. He said that he can’t be “too timid” in raising rates. This is fueling speculation that interest rates will be increased again at the RBA’s November meeting. Some analysts are even forecasting a 50 basis point increase to 3.75 percent. The comments pushed Australia’s currency to a 14-month high.

Australia’s economy managed to avoid the global recession and now shows signs of strengthening. Consumer confidence is up to the highest level in more than two years, the September jobless rate edged down to 5.7 percent from 5.8 percent and retail sales were up. Gross domestic product was up 1 percent in the first half of this year as consumers increased spending after the government distributed more than A$20 billion in cash to households. The government is spending another A$22 billion on roads, railways and schools.

Bank of Japan

As expected, the Bank of Japan left its key interest rate at 0.1 percent where it has been since December 2008. In its statement, the monetary policy board upgraded its assessment of the economy slightly. It said that the economy was picking up and that the deterioration in CAPEX (capital spending) was moderating. In January, the BoJ began buying commercial paper from financial institutions to support large companies' fundraising. And in March, it began buying corporate bonds. Both are temporary measures and in July, the Bank decided to extend them until the end of the year. The emergency programs are not being used as much now mainly because the financial market is returning to normal. The Bank said that there continues to be downside risks to the economy, a signal that interest rates will be kept near zero for a long time even after the withdrawal of emergency stimulus measures.

At his post meeting press conference, Bank governor Masaaki Shirakawa said that companies are finding it easier to get funding — a signal that the BoJ will probably end its credit easing programs this year. The Bank did not make a decision to end its special programs at this meeting as analysts expected. Rather, some said the monetary policy board avoided a judgment today because government ministers have expressed concern that small businesses are still struggling to borrow. Shirakawa stressed that any end to the credit programs would not mean the Bank is getting ready to halt its very low interest rate policy.

In its monthly economic report, the Bank of Japan raised its overall economic assessment for the second straight month saying the economy has started to recover. They also said that conditions are likely to improve gradually as "exports and production are expected to continue increasing, mainly reflecting continued improvement in overseas economic conditions." However, the BoJ was more cautious on domestic demand, saying it is likely to remain relatively weak.

Currencies

The dollar rebounded from about a 14 month low against the euro Friday after some investors thought that the decline had been overstated given this week’s signs that the economy continued to recover. In the U.S., industrial output was up more than forecast on Friday and more than offset a pullback in consumer sentiment. The unwelcome euro appreciation has complicated policy for the European Central Bank. It has been on a steadily rising trend against the dollar for about six months and is threatening to stifle growth in the export dependent economies.

At the same time, the pound sterling — another beleaguered currency — also rebounded on speculation the Bank of England will suspend quantitative easing. The currency got a lift against the euro and dollar after the Financial Times reported that Bank of England markets director Paul Fisher said policy makers would be more likely to suspend asset purchases, giving themselves the option of “doing more later.” And BoE deputy governor Charles Bean said earlier that rising asset prices and improved confidence may signal the program is working. Sterling had been declining against the euro since June as the BoE increased the size of its asset purchase program and governor Mervyn King was cited in the Newcastle Journal as saying the currency’s weakening was helpful to the economy.

The yen was down against the euro and was the worst performer against the dollar in the last five days among the 16 most-traded currencies. Investors doubt that the new Japanese government will support a stronger currency. Finance Minister Hirohisa Fujii said that governments are responsible for ensuring the stability of their currencies which “need to reflect the strength” of economies.

Selected currencies — weekly results

Indicator scoreboard

EMU

August industrial production was up 0.9 percent and was down 15.4 percent when compared with a year ago. The monthly advance was led by a 5.3 percent bounce in durable consumer goods production which easily eclipsed a 1.3 percent drop in nondurables. Intermediate goods output was up 0.5 percent, a gain that was matched by the energy sector but exceeded by capital goods where production rose 1.1 percent. Among the larger EMU states, output was up 1.9 percent in France, 1.5 percent in Germany, 1.0 percent in Spain and some 7.0 percent in Italy. The smaller countries, however, put in a very mixed performance with production jumping 5.2 percent in Portugal and 4.9 percent in Slovenia but slumping nearly 17 percent in Ireland and edging 0.2 percent lower in Finland.

September harmonized index of consumer prices was unchanged on the month and down 0.3 percent when compared with last year. Core HICP which excludes energy and unprocessed food edged up 0.2 percent on the month and was up 1.1 percent on the year. By sector, weakness was inevitably most apparent in energy where annual inflation was down 11.0 percent. However, most areas saw their respective rates edge 0.1 percentage point lower and housing fell 0.3 percentage points to minus 1.6 percent. Annual inflation rates declined in all of the larger EMU states except Italy which saw a 0.3 percentage point acceleration to 0.4 percent.

August seasonally adjusted merchandise trade surplus dropped to €1.0 billion from a €6 billion surplus in July. Exports dropped 5.8 percent while imports declined by 1.3 percent. On an unadjusted basis the trade deficit was €4 billion. In the year to August, exports were down 23.0 percent, a somewhat smaller decline than the 27.0 percent slide in imports. As usual, the positive bottom overall line was wholly attributable to Germany which provided a contribution of €5.3 billion, slightly down on the €5.6 billion surplus it registered in July. Most other EMU members posted deficits although Ireland maintained its surplus albeit largely due to the collapse in domestic demand, and France just kept its head above water. Italy and Spain both recorded deficits. On an unadjusted basis, the trade data recorded a deficit of €4.0 billion, implying a €5.2 billion cumulative surplus for the first eight months of the year compared with a €40.5B billion shortfall over the same period of 2008.

German

October ZEW survey expectations component slipped to a reading of 56.0 from 57.8 in September. However, the current conditions index crept 1.8 points higher to a still strongly negative minus 72.2. The weakening in expectations was the first since July and only the second since October last year. Compared with its trough of minus 63.9 in July 2008, the measure is almost 120 points to the good. In fact the last monthly change of any real significance was in August when the index jumped 16.6 points to 56.1. It has been essentially flat since then.

Italy

August seasonally adjusted merchandise trade balance swung back into a larger than expected €0.8 billion shortfall. The deterioration from a smaller revised €0.9 billion surplus in July reflected a sharp 7.7 percent monthly drop in exports that easily more than offset a 0.8 percent decline in imports. The unadjusted trade deficit was €1.3 billion. On the year, exports were down 25 percent and all the major sectors posted significant declines. Overseas purchases of intermediates were especially weak (down 29.3 percent) but capital goods (down 25.2 percent) fared little better. Exports of consumer goods dropped 15.9 percent on the year with durables (down 26.4 percent) suffering more than nondurables (down 13.4 percent). Energy exports were off some 41 percent. Imports dropped 26.1 percent. It was largely attributable to hefty drops in intermediates (34.5 percent) and energy goods (35.3 percent) but capital goods (down 21.8 percent) also performed poorly. Imports of consumer goods declined a relatively modest 5.9 percent.

United Kingdom

September consumer price index was unchanged and up 1.1 percent when compared with last year and its slowest pace since September 2004. The core CPI edged up 0.1 percent on the month and was up 1.7 percent on the year. The slide in the annual headline rate was mainly attributable to a sharp deceleration in housing & household services to minus 1.1 percent, itself largely due to lower fuel tariffs. Elsewhere, food & drink prices were up 1.6 percent, restaurants & hotels were up 1.6 percent and recreation & culture were up 1.4 percent. Monthly price advances were led by a seasonal bounce in clothing & footwear (3.6 percent), education (1.8 percent) and furniture & household equipment (1.6 percent). Monthly declines were limited to transport (down 1.5 percent), food & drink (down 0.9 percent) and communication (down 0.3 percent).

Average earnings for the three months through August were up 1.6 percent when compared with the same three months a year ago. Earnings less bonuses eased to an increase of 1.9 percent from 2.2 percent in July. Over the same period, private sector earnings eased 0.2 percentage points to 1.2 percent, a decline matched by the public sector albeit to a more robust 3.2 percent pace. The overall deceleration was concentrated in services where headline earnings growth slipped 0.4 percentage points to 1.7 percent and in so doing more than offset a 0.6 percent bounce to 1.3 percent in manufacturing.

September claimant joblessness was up 20,800 and nudging the unemployment rate to 5.0 percent from a lower revised 4.9 percent in August. Total claimant count unemployment now stands at 1.63 million. On the ILO measure, joblessness rose another 88,000 in the three months to August, putting the unemployment rate at 7.9 percent. The increase in the number out of work in the latest three months was the smallest since the May to July period 2008 and accordingly this report paints much the same picture as the more timely claimant count data. Employment fell only 45,000 in the latest quarter, its smallest decline since the three months to January 2009. Vacancies were 434,000 in the latest three months, unchanged from the three months to June but 163,000 from a year ago.

Asia/Pacific

Japan

September corporate goods price index edged up 0.1 percent on the month but tumbled 7.9 percent on the year. It was the ninth consecutive drop on the year. The annual declines largely have been due to the plunge in oil prices since this time last year. The appreciation in the yen to an eight month high is also helping contain prices on major commodities. However the commodity prices including oil have recently started to rise, which will lead to a moderation in the downward trend. September export prices dropped 2.2 percent and 13.6 percent on the year while import prices declined 1.8 percent on the month and plunged 31.2 percent on the year. Manufactured prices were up 0.1 percent but down 7.7 percent on the year. Within manufacturing, the major annual declines occurred for petroleum & coal products which plunged 38 percent, nonferrous metals which dropped 20.2 percent and iron & steel which declined 18.9 percent.

Americas

Canada

August manufacturing sales dropped 2.1 percent after gaining a hefty 5.2 percent in July. Shipments are now down 19.1 percent on the year. The drop was led by hefty monthly declines in transportation equipment (12.8 percent), electrical equipment & related products (5.5 percent), textile product mills (3.4 percent) and clothing (2.7 percent). Paper (2.7 percent) and chemicals (2.5 percent) also saw sizeable declines. Aerospace products & parts dropped 35.6 percent while motor vehicle shipments were down 6.3 percent following a near 49 percent surge in July. On a brighter note there were respectable gains in petroleum & coal products (7.2 percent), furniture & related products (2.7 percent), textile mills (2.1 percent), non-metallic minerals (1.8 percent) and food (1.3 percent). Other aspects of the report were mixed. On the downside, backlogs tumbled 4.2 percent on top of a 5.5 percent fall in July and despite a 0.7 percent dip in inventories, the inventory/sales ratio edged up 0.02 points to 1.49 months. However, this is still well down on the 1.64 month high seen at the start of the year and at least new orders crept up 0.2 percent.

September consumer price index edged up 0.1 percent and was down 0.9 percent when compared with a year ago. Core CPI excluding food and energy was up 0.3 percent and 0.9 percent on the year. However, the Bank of Canada’s core measure which excludes eight volatile items was up 0.3 percent and 1.5 percent on the year. On the month, health & personal care was up 1.0 percent while household operations & furnishings increased by 0.5 percent. Other areas were much more subdued with a 0.2 percent increase in clothing & footwear the only gain of any real significance. The chief factor keeping the lid on the overall index was energy and weakness here was reflected in a 1.0 percent decline in prices in the transportation sector. Other monthly declines were seen in food (0.2 percent), shelter (0.2 percent) and alcohol & tobacco (0.1 percent).

Bottom line

Investors focused on earnings but didn’t mind the mostly positive economic data that happened to come their way. Even the Bank of Japan was (somewhat) upbeat — it said that the economy showed signs of improvement.

The Bank of Canada meets this week and is expected to maintain its current policy and is expected to leave its overnight rate target unchanged at 0.25 percent where it has been since April. At the Bank’s September 10 meeting, the BoC retained its conditional commitment to leave its policy rate unchanged at the current extremely low level until the middle of 2010. And on Wednesday, the Federal Reserve regional banks will issue their anecdotal laden Beige Book. And on Thursday, we will get our first glimpse of third quarter gross domestic product from the UK.

Looking Ahead: October 19 through October 23, 2009

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