Global Markets

After soaring on Monday, investors stepped back and contemplated recent gains. There was little economic data during the first part of the week. The exception — there always is one — was in the UK where employment data indicated that the labor market was stabilizing and the Bank of England released its long awaited quarterly Inflation Report. In Asia, investors focused on the monthly slew of Chinese data, but elsewhere investors had to wait until Friday for third quarter flash estimates of eurozone gross domestic product.

And in Asia, investors focused on the words emanating from APEC members in the run up to their weekend meeting in Singapore where the U.S. dollar and Chinese renminbi (yuan) were in focus for much of the week.

On the week, most indexes followed here were up as encouraging Chinese economic data helped bolster investor risk appetite mid-week. Only the Nikkei and Topix were down while the Kospi and SET were virtually unchanged. Gains ranged from 4.3 percent (Sensex) down to 0.7 percent for the Shanghai Composite.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were up for the second week thanks to both merger news and economic news. The FTSE ended the week at its highest since October 19as the British Airways merger with Iberia sent the stock soaring while gains were also powered by strength in banks. But the rise was limited by declines in commodity prices which hit miners and energy stocks, which together constitute a third of the index. The index is up 19.4 percent this year and has soared about 51 percent since touching a six-year trough in March.

The DAX was up 3.6 percent last week and is up 18.2 percent in 2009. Since hitting its nadir in March, the index is up by 65 percent. And the CAC gained another 2.7 percent on the week and is up 18.3 percent in 2009. Since hitting its 2009 low, the index is up 67 percent.

There were two major economic stories — the Bank of England’s Inflation Report on Wednesday and the eurozone’s GDP data Friday. The Inflation Report was more dovish than expected while the GDP data vividly painted a picture of a diverse economy with many key member states still in recession despite growth in Germany, France, Italy and for the eurozone.

Bank of England’s Inflation Report

The Bank of England upgraded its growth forecasts for the next two years but still expects any recovery to be slow and unstable because of how deeply output has fallen since early last year. According to BoE governor Mervyn King the country is “facing a prolonged period of balance sheet adjustment” as all parts of the economy, from households and businesses to government, cut spending to levels they can afford. This in turn is expected to put a damper on inflationary pressures. The Bank said that the economy would grow 2.1 percent in 2010 and 4 percent for 2011. It should be noted that these estimates are higher than private forecasters’ estimates. Governor King noted that GDP had fallen so far that even relatively rapid rates of growth would leave total output well below where it would have been had the recession never happened.

Some analysts found the report two-handed as the Bank offset its more positive forecasts with a list of the risks still facing the economy. Some analysts said that the decision to depict the economy in gloomy terms probably came from a desire to keep financial conditions loose and the Bank’s policy options open.

Asia/Pacific

Asian/Pacific markets ended the week on a ‘mixed’ note. For the week, both the Nikkei and Topix declined while the Kospi and SET were virtually unchanged. In South Korea, traders preferred to adopt a wait and watch approach ahead of key economic data slated for release during the coming week.

There was new economic information from China where their monthly outpouring of economic data captured headlines momentarily. October industrial production soared by 16.1 percent from last year and the most since March 2008 while retail sales jumped 16.2 percent on the year and the trade surplus almost doubled.

Shortly after the data were released, the People’s Bank of China said that its foreign exchange policy would take into account global capital flows and changes in major currencies. The yuan, which has been pegged to the dollar since July 2008, has declined in value along with the U.S. currency against the euro and yen. The PBoC also noted the risk that China’s record stimulus efforts could cause a run up in asset prices as economic growth strengthens. The PBoC pledged to maintain a “moderately loose” stance, and said the economy can maintain stable and relatively fast growth.

The Nikkei and Topix continue to be the worst performers of all the indexes followed here. Deflation remains a problem — the corporate good price index continued to show unremitting declines, dropping 6.7 percent on the year in October.

Australia’s employment data illustrated the lopsidedness of the recovery there. While employment is growing in the mineral producing regions, it continues to decline in the more populous areas of the country.

Currencies

The dollar was down against the euro and virtually unchanged against the yen last week. During the week, the euro soared above $1.50 before the dollar rebounded on Thursday after U.S. Treasury Secretary Timothy Geithner said that the U.S. supports a strong dollar and as attention refocused on the renminbi (yuan) as the Asian Pacific Economic Cooperation (APEC) finance ministers met in Singapore. The Chinese currency has been pegged to the dollar since July 2008. When the dollar declines against the yen and euro, the renminbi does too.

China’s currency policy was spotlighted last week preceding U.S. President Barack Obama’s visit to Shanghai and Beijing. Earlier in the week China hinted that it might be preparing to let the renminbi appreciate. Speculation mounted after the People’s Bank of China omitted a phrase promising to keep the renminbi stable in its third-quarter monetary policy report. The PBoC said that it would consider significant currencies, not just the dollar, in guiding the exchange rate of the renminbi. China’s foreign exchange reserves are estimated to be about $2.3 trillion as a result of keeping the renminbi at what many people consider to be artificially low levels in order to support exports.

The communiqué after the APEC finance ministers’ forum in Singapore called for “market-oriented” exchange rates and interest rates. Some analysts said this was a polite way to ask for the appreciation of the renminbi and that the call for renminbi appreciation was gaining support within Asia was an important development.

The inverse relationship between stocks and the value of the dollar reasserted itself after a brief pause on Thursday. In recent months traders bought riskier assets such as equities and commodities when the dollar was weak. And poor economic data were considered good for the dollar as they encouraged haven buying. However, when risk appetite rises, it puts pressure on the dollar encouraging investors to use it as a funding currency in carry trades, in which low yielding currencies are sold to fund the purchase of riskier, higher yielding assets elsewhere.

Selected currencies — weekly results

Indicator scoreboard

EMU

September industrial production was up 0.3 percent but down 14.0 percent when compared with last year. The increase was driven mainly by capital goods which built on a 1.4 percent monthly rise in August with a 1.7 percent advance this time. Nondurable consumer goods also fared well with a 1.1 percent increase, although this followed a similar sized drop in August. Intermediates were up 0.6 percent. However output dropped 6.0 percent for consumer durable goods while energy output dropped 2.1 percent. Regionally, industrial production was up a solid 3.0 percent in Germany, 0.7 percent in Slovenia and a whopping 11.0 percent in Ireland (albeit after a 16.0 percent nosedive in August). However, with the exception of the Netherlands (unchanged) all the other reporting EMU states posted declines, notably in France (1.4 percent), Italy (5.3 percent) and Spain 1.4 percent).

Third quarter gross domestic product was up 0.4 percent but remained 4.1 percent below last year. There are very few details about the GDP expenditure components provided in the flash estimate but it is apparent from some of the national statistics that exports were a key driving force while consumer spending once again proved disappointing. Regionally there were positive quarterly rates registered in Belgium (0.5 percent), Germany (0.7 percent), France (0.3 percent), Italy (0.6 percent), the Netherlands (0.4 percent), Austria (0.9 percent), Portugal (0.9 percent) and Slovakia (1.6 percent). Further contractions however, were recorded in Greece and Spain (both down 0.3 percent) and Cyprus (down 1.4 percent).

Germany

September merchandise trade surplus narrowed to €9.9 billion from €10.6 billion in August. Exports were up 3.8 percent while imports jumped by 5.8 percent. On the year, exports dropped 18.8 percent while imports sank 16.3 percent.

September industrial production was up 2.7 percent and down 12.9 percent from a year ago. Excluding construction, output was up 3.0 percent and down 13.8 percent on the year. The latest jump in production reflected monthly advances in most of the main sectors. Leading the way was capital goods which surged 5.9 percent followed by consumer nondurables, up 2.9 percent. Basics were up 0.9 percent and energy gained 0.4 percent. However, there were some areas of weakness. Output of consumer durables slipped 1.1 percent and construction was down 1.8 percent.

November ZEW expectations slipped to 51.1 from 56.0 in October. However the current conditions index was up a further 6.6 points to minus 65.6, its best level since December 2008. The deterioration in expectations seems to reflect fresh concerns over the outlook for consumer spending. This is hardly surprising in the wake of a series of disappointing figures for retail sales.

Third quarter gross domestic product was up 0.7 percent after gaining 0.4 percent in the second quarter. On the year, GDP was down 4.8 percent on the year. Although the flash estimate contains few details, the Statistics Office indicated that growth was built upon gains in just exports and investment in plant and construction. A run-up in inventories was largely via higher imports and so had little impact on the bottom line but crucially, consumption made another negative contribution.

France

September industrial production excluding construction dropped 1.5 percent and was down 10.4 percent when compared with last year. Third quarter output was up a healthy 2.9 percent over the previous period. The September decline was led by manufacturing where output dropped 1.6 percent from August. Transport equipment was especially weak (down 5.1 percent) and there were also drops in electronics & machines (down 2.4 percent) and in the other manufactured goods sector (down 0.9 percent). Energy & extracted goods was off 1.6 percent. Food & agriculture output expanded 0.5 percent and refining was up 0.4 percent. The construction sector posted a minimal 0.1 percent gain.

Third quarter gross domestic product was up 0.3 percent and was down 2.4 percent when compared with the same quarter a year ago. This was the second consecutive quarter of growth. The main impetus came from exports, which were up 2.3 percent on the previous period and public sector spending which was up 0.7 percent. Imports were up 0.4 percent making for a positive contribution from net exports. However, household consumption was flat and gross fixed capital formation slumped 1.4 percent with businesses down 0.7 percent and households off 2.9 percent. Excluding stocks, domestic demand slipped 0.1 percent from the second quarter when it edged up 0.1 percent. Inventories subtracted another 0.1 percentage points from the bottom line.

Italy

September industrial production sank 5.3 percent after jumping by 5.8 percent in August. On the year, output was down 15.7 percent. There were broad-based declines among the major sectors. Worst hit was intermediate goods which nose dived 7.9 percent on the month. Capital goods were not far behind with a 5.6 percent drop while consumer goods output fell a relatively mild, but still hefty, 4.1 percent. Energy production was off 3.9 percent.

Third quarter gross domestic production was up 0.6 percent but size down a sizeable 4.6 percent when compared with the same quarter a year ago. As is usually the case, little additional information was available other than there were gains in industrial production and service sector activity while agricultural output declined. The quarterly increase was the best performance since the end of 2006 and the first positive reading of any kind since the first quarter of 2008.

United Kingdom

September global merchandise trade deficit widened to Stg7.2 billion from a revised Stg6.1 billion in August. Excluding oil and erratics the deficit was Stg6.4 billion. The headline deterioration masked sharp gains in both sides of the balance sheet as total exports were up 3.9 percent on the month while imports jumped by 7.5 percent. The latter was helped significantly by car imports, at least in part due to the government's scrappage scheme. The deficit on passenger cars climbed more than Stg0.4 billion to Stg0.8 billion. Regionally, the bilateral gap with the EU widened by Stg0.4 billion to Stg3.4 billion but the bulk of the damage was with non-EU countries where the bilateral shortfall worsened by Stg0.7 billion to Stg3.8 billion.

Average earnings for the three months ending in September slowed to an increase of 1.2 percent, down from 1.6 percent when compared with the quarter a year ago. Excluding bonuses, earnings were up 1.8 percent. Slower headline growth rates were seen in both the private sector (0.8 percent, down from 1.1 percent) and public sector (2.8 percent down from 3.2 percent). Pay rates in services eased to just 1.2 percent from 1.5 percent, but manufacturing saw a modest uptick to a still sluggish 1.5 percent from 1.3 percent.

October claimant count unemployment was up by 12,900 on the month and lifted the jobless rate to 5.1 percent from 5.0 percent in September. The October gain was the smallest since April 2008. Total unemployment now stands at 1,639,500. According to the ILO measure, joblessness was up 30,000 to 2,461,000 in the quarter just ended. The increase left the jobless rate at 7.8 percent, unchanged from its level in the second quarter. The third quarter advance in unemployment was the smallest 3-month gain since March through May 2008 and, in line with the more timely claimant count figures, points to a significant slowdown in the pace at which joblessness is increasing.

Asia/Pacific

Japan

October corporate goods price index sank 0.7 percent and plunged 6.7 percent when compared with last year. It was the first monthly decline in four months and the 10th consecutive drop on the year. The Bank of Japan said the monthly drop was due to firms’ price revisions. Manufacturing industry products were down 0.4 percent and 6.4 percent on the year. Petroleum & coal products continue to add downward pressure to the index, dropping 0.9 percent on the month and 26.6 percent on the year. Iron & steel declined 2.2 percent on the month and 20.3 percent on the year.

Australia

Employment was up for the second consecutive month, climbing by 24,500 jobs after adding 39,800 in September. The number of unemployed was up by 11,100 as the number of persons looking for full time work increased by 3,500 and the number looking for part time work rose by 7,600. The unemployment rate edged up to 5.8 percent from 5.7 percent in September. The participation rate was unchanged at 65.2 percent.

Americas

Canada

September merchandise trade shortfall was C$927 million, down significantly from August’s deficit of C$1.99 billion. The improvement reflected a 3.5 percent monthly advance in exports and a 0.1 percent dip in imports. The gain in exports was due to higher volumes, up 4.5 percent from August. This was the third month out of the last four in which exports have strengthened. By contrast, import volumes dropped 0.8 percent on the month although their second successive decline failed to offset the hefty gain posted in July. Exports to the key U.S. market were up only 0.5 percent while imports were up 1.7 percent. As a result, the bilateral surplus with the U.S. narrowed to C$2.1 billion. The strongest export increase was to the EU (34.1 percent) and this was the main factor behind a sharp reduction in the bilateral red ink from C$0.8 billion to near balance. Total exports were boosted by a 15.8 percent surge in overseas purchases of automotive products and a 6.3 percent increase in shipments of industrial goods & materials. Machinery & equipment (up 4.5 percent) also saw solid demand. On the negative side, there were monthly declines in energy and other consumer goods (both down 2.5 percent). Imports saw a hefty 8.5 percent jump in industrial goods & materials but outside of forestry (4.7 percent) most other sectors recorded sizeable declines.

Bottom line

The EMU emerged weakly from recession as the big three — Germany, France and Italy — posted positive GDP gains for the third quarter. Spain’s economy, however, continued to decline. In the next few weeks we will have more detail but at this point, the data point to growth thanks to the revival of international trade.

The Bank of Japan meets at the beginning of the week after the release of third quarter GDP data Monday morning local time.

Looking Ahead: November 16 through November 20, 2009

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