Global Markets

After equities were dragged down all week, investors took solace in the positive gross domestic product reading from the U.S. and as a result, equities rebounded strongly on Thursday, only to lose all of their gains once again on Friday, and then some. While GDP was up at an annualized pace of 3.5 percent, most of the growth was the result of temporary stimulus packages for cars and homes. Just how much of this growth will stick to the ribs is open for question. Friday’s losses were attributed to poor consumer spending reports in the U.S. and Germany.

Markets for the most part were dragged down by a combination of so-so profits, mixed economic data and investor uneasiness regarding that old nemesis — risk. Investors bailed out of stocks as they worried about the impact of reduced stimulus on growth and whether the markets had gone too far too fast.

All indexes followed here were down last week with losses ranging from 0.8 percent for the Topix and PSEi to 7.0 percent for the Bolsa. The DAX, CAC, Nasdaq and Sensex incurred losses over 5 percent. For the month of October, four indexes managed to post gains while the Dow was virtually unchanged on the month — all others declined anywhere from 1 percent to 7.2 percent.

Global Stock Market Recap

Europe and the UK

Equities were down in October for the first month since June. Once again daily trading mostly was influenced by U.S. earnings reports and economic data — and how investors responded to them across the pond. For example, on Thursday, European and UK markets were up after third quarter U.S. GDP grew more than forecast. Stocks reversed direction on Friday after a monthly report showed that U.S. consumer spending had dropped in September and income was unchanged. That should not have been a surprise given that sales in August were beefed up by the cash for clunkers program. In Europe, most economic data were released late in the week giving investors ample opportunity to focus on earnings.

The FTSE retreated to a three-week low as concern increased that the rally that began in March may have taken share prices too high relative to prospects for economic and earnings growth. And in Europe, German retail sales were down once again bringing into question the strength of domestically driven growth. The FTSE fared better than its continental counterparts. It was down 1.7 percent in October while the DAX plunged 5.7 percent on the month and the CAC sank by 5.3 percent.

Asia/Pacific

Most Asian/Pacific indexes gave back hard-earned October gains last week, ending the month at a lower level than in September. For the All Ordinaries, Jakarta Composite and SET, it was the first monthly decline since February. All indexes save the Topix are up double digits for 2009. And except for the All Ordinaries (up 27 percent) and the Nikkei (up 13.3 percent), all other indexes followed here are up more than 40 percent for the year.

Except for the bounce U.S. GDP gave many indexes, it was a dreary week with most declining Tuesday through Thursday. The Sensex which was down 7.2 percent in October, declined everyday last week after the Reserve Bank of India took the first steps to unwind its ultra-loose monetary policy adopted to ward off the ravages of the global financial crisis. The RBI indicated that markets should begin to expect monetary tightening soon as it warned of asset bubbles and inflation. It also raised the proportion of deposits that banks have to invest in government bonds.

However, most markets ended in positive territory Friday as they responded to U.S. equity gains after the GDP data for the third quarter came in at 3.5 percent signaling a technical end of the recession. Optimism about the recovery in the global economy lifted market sentiment across most of the markets.

Japanese indexes were down both for the week and month and have gained the least in 2009. This was a heavy data week in Japan with about the only surprise being registered by the unemployment rate which dropped to 5.3 percent from 5.5 percent — analysts had expected the rate to rise. The strong yen continues to impact exporters’ stocks.

Reserve Bank of New Zealand

As expected, the RBNZ left its official cash rate (OCR) at 2.5 percent and maintained its easing bias. They expect to keep the OCR at its current level until the second half of 2010, contrary to analysts’ expectations that the RBNZ would soften their statement. The economy barely emerged from recession in the second quarter as measured by GDP which inched up 0.1 percent on the quarter. Recent comments from governor Alan Bollard indicated that the New Zealand dollar is not necessarily an impediment to raising the cash rate given that house prices are rising. The RBNZ has admitted there is little it can do to stem the currency’s strength. Other recent RBNZ comments suggested the pickup in housing market activity is temporary.

Bank of Japan

As expected the monetary policy board of the Bank of Japan voted unanimously to leave its key interest rate at 0.1 percent where it has been since November 2008. The Bank holds one-day meetings twice a year — in October and April when it issues its bi-annual Outlook on Growth and Prices. The outlook contains monetary policy board members’ forecasts for fiscal year 2010 ending March 31, 2011 and initial estimates for fiscal year 2011, ending March 31, 2012. The MPB is expected to keep its 0.1 percent interest rate until at least the middle of next year.

In January, the Bank began the unprecedented purchase of commercial paper and corporate bonds to ensure that credit flowed during the credit squeeze. Now recent conditions have improved and the need for these facilities has been dwindling. The MPB confirmed that they will end these measures December 31, 2009. However, the Bank said that it would continue to maintain an extremely accommodative monetary policy and would keep interest rates low for some time to come. The MPB voted to extend the unlimited funds provision until March 31, 2010 — the end of the Japanese fiscal year. It also extended the period of expanded corporate debt eligibility as collateral. The Bank said it would continue to provide ample funds to meet financial market demand.

While the BoJ aims for price stability, which it defines as inflation of zero to about 2 percent, it has repeatedly missed this range. The BoJ maintains that by keeping its policy rate at 0.1 percent for an extended time, price growth will resume in the medium to long term. In its outlook, the BoJ expects the nation to stay under deflationary pressure over the next two fiscal years, supporting the view that the Bank will likely keep its policy rates at ultra-low levels in coming months. Board members forecast the core consumer price index, which excludes fresh food prices, to drop by 1.5 percent in the fiscal year ending March 31, and projects it to decline by 0.8 percent in the next fiscal year and fall by 0.4 percent in fiscal 2011.

Currencies

The dollar continues to fluctuate along with investor appetite for risk. When stocks rise, the dollar declines — and when stocks drop, the dollar recovers some of its safe haven veneer and rises, especially against the euro. Last week was no different. The dollar ebbed and flowed as investors responded to earnings reports, economic data and concerns over the sustainability of the global asset market rally.

An example of the dollar’s behavior of late was on full display Thursday and Friday. The dollar sputtered Thursday moving back toward yearly lows against the euro after the GDP release that showed U.S. growth in the third quarter. The dollar reversed course on Friday after a report showed that consumer spending dropped in September.

The dollar started the week by hitting a fresh intraday trading 14-month low of $1.5061 against the euro after the People’s Bank of China recommended a diversification of its massive foreign exchange reserves away from the U.S. dollar. But after equity markets dropped sharply amid nervousness that the removal of monetary policy accommodation by the world’s central banks could halt the recent rally in risky assets, the dollar recovered. As equities dropped, investors unwound carry trades in which low yielding currencies such as the U.S. dollar and Japanese yen are sold to purchase higher yielding assets, and the dollar recovered. 

Selected currencies — weekly results

Indicator scoreboard

EMU

September M3 money supply growth slowed to 1.8 percent on the year. For the three months ending in September compared with a year ago — the measure preferred by the ECB — M3 growth slowed to 2.5 percent. Once again the data reflected weakness in the key private sector lending counterpart which saw its annual growth rate turn negative at minus 0.3 percent. Within this, lending to non-financial corporations dropped to a minus 0.1 percent rate and to households to minus 0.3 percent. Loans for house purchases fell 0.6 percent on the year after a 0.4 percent decline in the 12 months to August. The ongoing preference for liquidity was highlighted once more in sustained strength in narrow money M1 although annual growth here actually slipped last month to a still rapid 12.8 percent from 13.6 percent in August.

October flash harmonized index of consumer prices was down 0.1 percent when compared with last year. As with all flash releases, no detail was available. However, national statistics suggest that inflation accelerated in most EMU states this month. In particular, in Germany the annual HICP rate jumped 0.5 percentage points — albeit to only zero — and in Spain deflation fell from 1.0 percent to 0.6 percent. However, the Italian held steady at 0.4 percent. The EMU headline rate will continue to climb over coming months as weakness in oil prices in the year ago data biases up the 12-month rates of change.

September jobless rate edged up to 9.7 percent from 9.6 percent in August. The number of people out of work rose by 184,000 on the month, the largest gain since May, to 15,324,000. Most member states saw deterioration in their respective jobs market last month. Spain once again performed especially poorly with the rate jumping another 0.5 percentage points to 19.3 percent, easily the highest within the EMU bloc. The other most significant gain was in Ireland (up 0.5 percentage points to 13.0 percent). Among the other larger states, Germany was unchanged at 7.6 percent rate while the French rate rose 0.2 percentage points to 10.0 percent.

EU

October economic sentiment climbed to 86.2 from a reading of 82.8 in September, for the seventh consecutive monthly advance. The gain reflected modest improvements in most areas with confidence in industry (up 3 points to minus 21) providing the most robust performance. Consumer morale edged up just 1 point to minus 18 as did sentiment in construction to minus 29 while the service sector confidence rose 2 points to minus 7. However, retail was unchanged at minus 15. At the same time, confidence in financial services (not included in the headline ESI) stabilized after advances in August and September. Sentiment was up in larger EMU states including Germany, France, Spain and Italy. Most smaller members also registered gains including Belgium and Austria. However sentiment in Portugal fell a hefty 6.1 points to 81.2 and confidence in Slovenia dropped 2.7 points to just 59.8.

Germany

October unemployment dropped 26,000, reducing the unemployment rate to 8.1 percent from 8.2 percent. In line with recent months, the latest figures were once again distorted by changes to methodology introduced in July. However, even excluding these effects, the number of job seekers would have fallen 20,000 — the first month that the underlying, as well as the total, has declined. Total joblessness now stands at 3,427,000. Once again it seems that extensive subsidies provided by the German government to firms to keep employees on their payrolls while working shorter hours is having a significant impact. The Labour Agency has estimated that 1.1 million workers will benefit from this scheme in 2009 which, with a 33 percent cut in working hours compared with normal, is the equivalent of about 36,000 full-time positions.

September retail sales excluding autos slumped 0.5 percent on the month to stand 3.9 percent weaker on the year. The decline was the fourth in the last five months. For the third quarter as a whole, volumes dropped 0.8 percent, a notably poorer performance than the 0.2 percent slide posted in the previous period. The annual drop reflected broad-based weakness with declines seen in all the major expenditure categories. Non-food purchases were down 4.9 percent with mail order (down 10.3 percent) the hardest hit. There were especially hefty falls too in clothing & shoes (6.4 percent) and in furniture & household goods (2.2 percent).

France

September producer prices resumed their downtrend declining by 0.3 percent on the month and 8.1 percent on the year. Prices fell most steeply on the month in coking refining products (4.3 percent) but also declined in utilities (0.2 percent) and in food, drink & tobacco (0.3 percent). Overall manufactured goods prices dropped 0.4 percent. There were no increases in prices among the main categories with electrical equipment & information technology, transport materials and other industrial products all showing no change from August.

Italy

September producer prices were down 0.3 percent and down 7.9 percent when compared with last year. September was twelfth month out of the last fourteen in which the PPI has fallen. Prices for the month were down in all of the main production categories except intermediates (up 0.4 percent). The main area of weakness was energy where prices dropped 1.9 percent but consumer goods also declined 0.2 percent led by a 0.4 percent drop in the durables sector. Capital goods prices were unchanged from August.

Asia/Pacific

Japan

September retail sales were down for the 13^th consecutive month. Sales were down 1.4 percent when compared with the previous year after dropping by 1.8 percent on August. August sales were affected by rainy weather. Large scale retail sales were down 5.6 percent after sinking by 6.8 percent in the previous month. Overall retail sales were boosted by a healthy 4.2 percent increase in car sales. They were also helped by a temporary spurt in leisure related expenditures during the five day "silver week" holiday period. The extended holiday break only occurred due to recent legislative changes which align public holidays with the nearest Monday or Friday.

September industrial production was up 1.4 percent but down 17.9 percent when compared with last year. This was the seventh consecutive monthly increase. Output increased for transport equipment, up 8.2 percent, electronic parts & devices, up 5.0 percent and electrical machinery, up 5.7 percent. According to METI’s October forecast, production is expected to increase by 3.1 percent in October and 1.9 percent in November.

September unemployment rate surprised analysts and dropped to 5.3 percent from 5.5 percent in August adding to signs that a recovery is spreading to consumers. The number of employed persons was 62.95 million, a decline of 980,000 from a year ago. The number of unemployed was 3.63 million, up 920,000 or 33.9 percent from the same month a year ago. The labor force declined by 50,000. A decline in the number of labor force participants played a role in reducing the unemployment rate.

September household spending was up 1 percent when compared with last year, after jumping 2.6 percent in August. Spending was lifted during the bonus silver week holidays. Despite unemployment and downward pressure on wages, household spending has been supported by government stimulus and falling prices. In May the government handed out 2 trillion yen to households in one off cash bonus and has introduced a rewards program to encourage the purchase of eco friendly household appliances. Tax breaks apply to the purchase of low emission motor vehicles while toll way fees have been slashed to encourage weekend road trips. At the same time retailers have been aggressive in offering their own rewards programs and passing on lower costs to customers to encourage them to spend.

September national consumer price index was unchanged on the month and down 2.2 percent when compared with the same month a year ago. All major categories were down with the exception of education on the year. Fuel, light and water charges dragged the index down by dropping 9.1 percent on the year. Core CPI excluding just fresh foods was up 0.1 percent on the month and down 2.3 percent on the year. Excluding both fresh food and energy, prices edged up 0.1 percent on the month and were down a more modest 1.0 percent on the year. Goods prices were up 0.4 percent and down 4.0 percent on the year while services were down 0.4 percent both on the month and year. October Tokyo price index dropped 0.4 percent and was down 2.4 percent on the year. Core, excluding fresh food edged down 0.1 percent and dropped 2.2 percent on the year.

Australia

Third quarter producer price index for final goods edged up 0.1 percent on the quarter and was up 0.2 percent when compared with last year. Intermediate prices declined 0.6 percent and were down 4.9 percent on the year while preliminary prices declined 0.5 percent and dropped 7.5 percent. In the final or stage 3 index, domestically produced items were up 1 percent while imported items dropped 5.1 percent. In the domestic component, price increases in electricity, gas & water supply (12.1 percent), bakery product manufacturing (10.4 percent) and petroleum refining (6.3 percent) were offset by price declines in computer services (down 7.1 percent) and other agriculture (down 5.6 percent). The imports component decreased due to price declines for industrial machinery & equipment manufacturing, electronic equipment manufacturing, other manufacturing and other transport equipment manufacturing. These decreases were partially offset by price increase in beverage & malt manufacturing and petroleum refining.

Third quarter consumer price index was up 1.0 percent on the quarter and up 1.3 percent when compared with the same quarter a year ago. Food prices were down 0.8 percent but up 2.5 percent on the year while health dropped 1 percent and was up 4.4 percent on the year. Prices in all other sectors were up on the quarter and year with the exception of transportation and financial services. Prices in transportation were up 1.9 percent on the quarter but sank 5.1 percent on the year while financial & insurance services were up 0.9 percent on the quarter but dropped 7.2 percent on the year. Housing prices jumped by 2.9 percent and 5.5 percent on the year. The Reserve Bank of Australia has two CPI measures — the weighted median and trimmed mean. The weighted median was up 0.8 percent on the quarter and 3.8 percent on the year while the trimmed mean was up 0.8 percent and 3.2 percent on the year. The RBA has an inflation target range of 2 to 3 percent.

Americas

Canada

September industrial product price index declined 0.5 percent from August to stand 6.1 percent lower than a year ago. Excluding exchange rate effects, the index would have fallen 0.4 percent on the month. As usual, the single largest impact on the headline was made by petroleum & coal products where prices slumped 2.6 percent on the month and fell 32.1 percent on the year. Excluding this sector, the IPPI would have dropped 2.1 percent from September 2008. Among the other sectors most monthly price moves were relatively small. However, declines were seen in chemicals & related products (0.6 percent), metal fabricated products (0.5 percent) and in the auto sector (0.4 percent). Other declines were no more than 0.2 percent. Raw material product prices sank 1.1 percent and were down a sizeable 21.4 percent on the year. Mineral fuels were down 1.5 percent on the month and 32 percent on the year. Excluding this area, the RMPI would have declined 0.6 percent from August and dropped 7.4 percent on the year.

August monthly gross domestic product edged down 0.1 percent and is down 4.0 percent on the year. The latest contraction reflected a 0.7 percent monthly drop in goods output that more than offset a 0.1 percent expansion in service sector activity. Within the former, a 0.7 percent decline in manufacturing output was compounded by a 1.9 percent decline in mining & oil & gas extraction, in part due to maintenance work, and a 2.2 percent slide in agriculture, fishing & forestry. The overall energy sector dropped 1.0 percent. A 0.2 percent increase in the construction sector was underpinned by the ongoing revival in the housing market and utilities supported the bottom line with a solid 1.8 percent advance. The main winner in services was accommodation & food (0.8 percent) ahead of public administration (0.6 percent). Other gains were relatively small including retail and health care both up 0.3 percent.

Bottom line

Equities took it on the chin last week as investors raised questions about the strength of the economic recovery and what will happen when all of the stimulus is withdrawn by central banks. The Bank of Japan met and left its interest rate at 0.1 percent and assured market players that it would be accommodative for some time to come.

Central bank meetings will be in focus this week with four scheduled — Reserve Bank of Australia, Federal Reserve, Bank of England and the European Central Bank. Although some analysts expect the RBA to follow its October interest rate increase with another in November, others expect the Bank to leave it at 3.25 percent, deferring any action until December. Bank watchers will look to see if the Bank of England increases its asset purchases after a shocking and surprise decline in third quarter GDP. Many expect the BoE to increase its asset purchases by another £50 billion to £225 billion. Both the Fed and ECB are expected to maintain their current policies. But be reassured — all bank statements will be parsed carefully as investors look for clues on how and when the banks plan to withdraw their extraordinary measures.

Looking Ahead: November 2 through November 6, 2009

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