Global Markets

Most equity indexes followed here were up in the shortened trading week. Economic data focused primarily on output and trade. In Australia and Canada, it was labor market data that took precedence with both countries counting larger than anticipated employment increases. Only Bank of Canada of the five central bank meetings last week decided to change interest rates. While stocks for the most part were up, continuing concerns about global growth and European banks linger, keeping gains modest.

On Thursday, the Organization of Petroleum Exporting Countries (OPEC) kept its oil demand forecast broadly unchanged but warned of weakening demand amid signs of an economic slowdown in industrialized nations. In its monthly report, OPEC said world oil demand growth in 2010 would remain at one million barrels a day. It also echoed concerns by the Organization for Economic Cooperation and Development (OECD) that a slowdown in global economic activity would be steeper than anticipated. On Friday the International Energy Agency (IEA), which is part of OECD, confirmed its overall projections for global oil demand growth and supply through 2011, but warned of downside risks on the one hand from weaker economic growth and on the other from supply disruptions. OPEC, whose members provide about 40 percent of the oil consumed worldwide, tends to have a more bearish view than the IEA.

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC were up for the week in light holiday trading. The FTSE gained 1.4 percent, the DAX was up 1.3 percent while the CAC increased by 1.5 percent. Both the FTSE and DAX are now positive for 2010, up 1.6 percent and 4.3 percent respectively. The CAC lags — it is down 5.3 percent. The week’s economic data news revolved around industrial output and international trade. And the Bank of England maintained its policy status quo.

There continues to be an underlying uneasiness concerning the strength of banking sector balance sheets in Europe amid speculation that the group needs to bolster capital positions. The uneasiness stems from a report that Deutsche Bank — Germany’s largest bank — is considering a stock sale of as much as €9 billion to do so.

In economic data, Germany’s unexpectedly weak manufacturing orders report unnerved investors early in the week. But output was up more than expected in France at week’s end. Data were mixed in the UK — the visible trade deficit unexpectedly widened while producer prices increased at the slowest annual pace in six months.

U.S. and German regulators are arguing over how much time to give banks to comply with new capital ratios being pushed to prevent future financial crises. The Basel Committee on Banking Supervision, which is meeting this weekend in Switzerland, will be pulled between U.S. demands to cap the implementation period at five years and German pressure to extend it to 10 years. Prodded by politicians concerned about public anger over the role of banks in the credit meltdown, regulators have proposed tighter capital rules and introduced liquidity requirements to rein in risk taking. The rule making has pitted countries against each other, as some including Germany say higher capital requirements will hurt their banks and curb lending at a time when global economic recovery is faltering. European banks are less capitalized than U.S. counterparts and may be required to raise more funds under the new Basel rules.

Bank of England

As expected, the Bank of England monetary policy committee left its key policy interest rate at 0.5 percent where it has been since March 2009. The MPC also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at 200 billion pounds. As is usual when the MPC leaves policy unchanged, it did not release a statement.

Recent economic data suggest that the economy is rebounding strongly with second quarter growth the highest since 1999 and employment levels growing by the most since 1989. There are fears that the strong performance will not last and that it reflected temporary factors such as a boost from inventory building as well as delayed activity from the first quarter, when cold and snow halted many businesses in their tracks. Recent business surveys such as the purchasing managers indexes have pointed to a slowdown in growth in the third quarter. And inflation seems to be persistently above the Bank’s 2 percent target. The BoE believes that inflation is largely above target because of the short-term effects of January’s VAT increase and a weak pound that is driving up the imported goods prices.

Asia Pacific

All Asian Pacific indexes followed here except the SET were up last week in thin trading. There were three indexes that outperformed everyone else. The PSEi vaulted by 4.5 percent while the Sensex soared 3.2 percent. The Jakarta Composite, which was open only two days last week, jumped by 2.1 percent. Both the Nikkei and Hang Seng scored increases of 1.4 percent. All regional indexes responded positively to the September 3^rd better than expected U.S. employment report as well as Thursday’s weekly jobless claims, which dropped more than anticipated. The reports relieved investor worries about the weaknesses in the U.S. economy.

In Japan, stocks responded positively to stabilization of the surging yen and an upward revision of second quarter gross domestic product data. Although the report showed a significant slowdown in economic activity, capital spending continued to expand while consumers spent less after some products were declared ineligible for the eco-point subsidies.

Foreigners bought more Japanese shares than they sold for the first time in four weeks in the August 30 through September 3 week according to data released by the Tokyo Stock Exchange. Buying exceeded selling by ¥60.5 billion. During that week, market sentiment deteriorated due to the yen's increased strength and because of the looming release of key U.S. economic data. After the Nikkei fell to a year-to-date low on August 31^st, stocks gained for four straight sessions on signs that the market had bottomed out. On the other hand, domestic retail investors were net sellers for the first time in two weeks, to the tune of ¥77.8 billion.

Minutes of the Bank of Japan's monetary policy board meeting held on August 9^th and August 10^th indicated that many members voiced concern over the impact of the strong yen on the outlook for Japan's economic and price developments. At that meeting, the BoJ voted unanimously to maintain its target interest rate at 0.1 percent where it has been since December 2008. Many members were concerned that the yen's appreciation might depress growth in exports and corporate profits. However, the committee members did not see an imminent need to conduct additional monetary policy to cope with the strong yen. The BoJ's concern intensified as the month progressed. The board held an extraordinary policy meeting on August 30 and decided to ease policy further, introducing a six-month funding operation at a fixed rate of 0.1 percent totaling Y10 trillion to cope with the downside risks to Japan's economic and price moves.

The Bank of Korea left its key policy interest rate at 2.25 percent for the second consecutive month. Bank of Korea Governor Kim Choong-soo signaled the bank would be cautious in tightening.

Bank of Japan

As universally expected, the Bank of Japan left its policy interest rate at 0.1 percent where it has been since December 2008. It also did not take any further unconventional easing steps. The BoJ held an extraordinary meeting on August 30. At that time, the Bank was under strong political pressure because of weakening growth and a soaring yen. At that meeting it decided to expand a special loan facility. The move offers domestic financial institution ¥10 trillion worth of six month cheap loans and is in addition to the previously offered ¥20 trillion three month loans that it has been offering since December 2009.

There was no change in the BOJ's assessment of the overall domestic economy this month. The monetary policy board said that the economy shows further signs of moderate recovery and is likely to maintain a recovery trend. But the Bank said that it must watch the downside risks to the country’s growth and prices. They acknowledged that the uncertainly over economic growth has been increasing. It noted that both foreign exchange and stock markets have been unstable. And while exports and output are rising, they are doing so at a slower pace. The MPB said it would take necessary policy steps in a timely and appropriate manner.

At his post meeting press conference, BoJ governor Masaaki Shirakawa said monetary policy action is not aimed at each movement in financial markets and the authorities cannot control foreign exchange moves. But still the BoJ is keeping a close watch on how the currency market will affect economic growth and prices. Shirakawa also said that while the strong yen inflicts short term pain on exporters, some firms are taking advantage of the strong yen by transforming their operations to better withstand the impact of wild swings in currency rates. Shirakawa also said the August 30^th decision was not aimed at targeting any specific market moves but designed to cope with emerging downside risks to sustained growth and a recovery from deflation.

Reserve Bank of Australia

The Reserve Bank of Australia kept its key interest rate at 4.5 percent for the fourth month because of concerns about weakening global growth, especially in the U.S., Japan and Europe. Domestically, inflation is not a concern in the medium term as weaker government spending offsets a boost from the nation’s mining boom. However, analysts expect the round of rate increases to resume in either the fourth quarter or in early 2011 given the strength of growth. The RBA increased rates in six 25 basis point steps from May 2009 to October. The effect was to boost borrowing costs to levels described as average. The labor market report which was released two days after the meeting reinforced the probabilities of further rate increases. Employment increased more than expected while the unemployment rate slipped more than anticipated.

The RBA has an inflation target range of 2 percent to 3 percent. Second quarter consumer prices rose the least in three years last quarter. Core prices, as measured by the central bank’s trimmed mean gauge which excludes the most volatile price changes, rose 2.7 percent in the second quarter from a year earlier. China’s demand for raw materials such as coal and iron ore also boosted Australia’s terms of trade, a measure of income from exports, to a record last quarter.

Canada

Bank of Canada

As anticipated by many analysts, the Bank of Canada increased its key interest rate for the third time by 25 basis points to 1 percent. Growth slowed to an annualized rate of 2 percent after expanding by 5.8 percent in the first quarter. In its statement, the Bank cited the unusual uncertainty about the future outlook, saying that further interest rate increases would have to be carefully considered. The statement said that Canadian economic growth is to slow slightly on weaker U.S. growth. However, the Bank expected consumption to remain solid and business investment to rise strongly thanks to easy credit conditions.

Currencies

The yen continued to rise against its U.S. counterpart last week. The Japanese currency hit a fresh 15 year intraday trading high of ¥83.35 Wednesday. The currency was boosted by safe haven flows and news of a big jump in Japan’s current account surplus. And speculation is growing in the currency market that the yen will further strengthen against the dollar at the end of September because Japanese exporters will repatriate larger than usual amounts of profits earned overseas this year.

Exporters usually repatriate what they have earned in foreign currencies before September 30^th to lock in profit ahead of interim book closings. This year, a prolonged period of a strong yen has forced many exporters to postpone their selling of foreign currencies and buying of yen. But they cannot delay such transactions indefinitely because of the need to log profits by the end of the quarter. This may result in a heavy concentration of yen buying in late September. Many exporters had set an assumed yen rate that is weaker than the current one. So long as the yen stays at the current level to the dollar, they may put off selling foreign currencies. Yet such firms will come under growing pressure to execute such trading as the month draws to an end.

Selected currencies — weekly results

Indicator scoreboard

Germany

July manufacturing orders sank 2.2 percent after an upwardly revised 3.6 percent surge in June. With base effects significantly negative, the surprise decline reduced annual workday adjusted growth in total orders from 24.7 percent to 17.7 percent. The latest figures were driven lower mainly by a 2.7 percent monthly slide in foreign demand. However, domestic demand edged down 0.3 percent on the month. Overall capital goods orders posted the largest decline (5.5 percent) but basics (down 2.2 percent) were soft too. By contrast, consumer and durable goods were up 2.5 percent. Within the home market, capital goods dropped 1.8 percent and more than offset gains in basics (1.0 percent) and consumer and durables (0.9 percent). Foreign orders suffered from weakness elsewhere in the eurozone where orders slumped 6.1 percent on the month, largely due to a 12.3 percent collapse in capital goods demand. Non-eurozone orders were down 1.9 percent from June, again mainly due to a slide in capital goods (4.8 percent).

July industrial output edged up 0.1 percent and was up 10.9 percent on the year (workday adjusted basis). The minimal July advance was led by the consumer goods, up 0.5 percent while intermediates posted a 0.4 percent gain. However, capital goods production contracted 0.7 percent and energy recorded a 0.1 percent decline. Manufacturing output was unchanged on the month and up 12.6 percent on the year. Industrial production excluding construction was unchanged on the month and up 11.6 percent on the year.

July seasonally adjusted merchandise trade surplus was €12.7 billion, up slightly from June’s €12.4 billion. The modest monthly improvement reflected a contraction in both exports and imports. Exports were down 1.5 percent from June while imports declined 2.2 percent. On the year exports were still up a solid 18.3 percent while imports were 24.9 percent higher than in July 2009. The annual growth figures highlighted the relative importance of non-EU demand which saw purchases increase by 25.1 percent. This was exactly 10 percentage points faster than sales to other EMU countries. Imports told a similar story with purchases from outside the eurozone surging 30.8 percent on the year, 9.5 percentage points faster than imports from other EMU states.

France

July seasonally adjusted merchandise trade deficit expanded from a slightly smaller revised €3.7 billion in June to a much as expected €4.2 billion in July. The deterioration in the deficit reflected a 3.0 percent monthly increase in nominal imports that more than offset a 1.9 percent advance in exports. Over the first seven months of the year the deficit (E28.5B) expanded nearly 17 percent compared with the same period of 2009.

July industrial output excluding construction was up 0.9 percent and 5.5 percent on the year. Manufacturing achieved a 1.4 percent monthly gain. Within this, there were healthy advances in food & beverages (1.6 percent), coke & refined petroleum (2.8 percent), electronic & machine equipment (1.3 percent) and transport equipment (3.4 percent). Autos were especially robust, rising 6.7 percent after a 6.5 percent slump in the previous month. Output from the other manufacturing category also was up 0.9 percent. Overall industrial production was held back by a 2.6 percent drop in mining & quarrying & waste management. Activity in the construction sector also declined 1.0 percent on the month after a 0.2 percent dip in June.

Italy

July industrial production edged up 0.1 percent and 4.8 percent on the year. It was the seventh consecutive monthly increase. The only sector to see any real increase in production was energy where activity surged 2.1 percent. Capital goods managed a 0.1 percent rise but output of consumer goods fell 0.1 percent and intermediates were off 0.4 percent. Over the three months to July output in all the major groups was up at least 1.0 percent (capital goods 3.9 percent) so the sector as a whole has clearly seen acceleration in business activity.

Second quarter revised GDP expanded 0.5 percent on the quarter and 1.3 percent when compared with the same quarter a year ago and its fastest annual pace since the third quarter of 2007. Despite the improvement in the headline data the first look at the GDP components make for less than impressive reading. On the positive side quarterly growth would have been 0.5 percentage points stronger but for a sharp unwinding of business inventories. There was also a much needed 1.3 percent increase capital investment. However, the household sector remained in the doldrums with consumption only unchanged. Government spending was up 0.4 percent and exports jumped 3.3 percent. In fact net exports contributed fully 0.6 percentage points to quarterly growth without which, and for the second quarter in succession, the economy would have contracted. Net domestic demand added only 0.3 percentage points.

United Kingdom

July industrial output was up 0.3 percent and 1.9 percent on the year. Manufacturing was also up 0.3 percent and was up 4.9 percent on the year. The latest increase in output was led by the textile industry which posted an impressive 4.9 percent advance over June. Metals expanded 0.4 percent and the others category increased 0.5 percent. Production was unchanged in both chemicals and food and shrank 0.2 percent in engineering. Utilities output contracted 0.7 percent on the month but oil & gas extraction was up 0.8 percent and mining & quarrying grew 0.6 percent. The recovery in manufacturing has been built upon a particularly strong upturn in the capital goods sector. Annual growth here now stands at 8.0 percent, well ahead of the 3.8 percent and 1.7 percent increases posted by durable goods and nondurable goods respectively. Output of intermediates in July was still 0.5 percent below its year ago level.

July global visible merchandise trade deficit expanded sharply to Stg8.7 billion — a new record — from a slightly larger revised deficit of Stg7.5 billion in June. Moreover, the headline deterioration was largely matched by the underlying deficit (excluding-oil & erratics) which widened out from Stg6.9 billion to Stg7.7 billion in July. Both balances were hit by a combination of weaker exports and higher imports. Thus, overall merchandise exports fell 0.9 percent on the month while imports climbed an impressive 3.1 percent. On the same basis underlying exports declined 0.2 percent and imports were up 3.1 percent. The bulk of the damage was caused by the chemicals sector which saw a Stg424 million drop in overseas shipments compounded by a Stg410 million jump in imports. Regionally the deterioration reflected worsening net positions with both the EU and non-EU blocs.

August producer output prices were unchanged on the month and up 4.6 percent on the year. Input prices dropped 0.5 percent on the month were up 8.1 percent from August 2009. The August data means that, from a recent high of 5.9 percent in April, annual output price inflation has now decelerated in each of the last four months. More significantly, given the high levels of monthly volatility in the data and the effects of the Budget, both the core rate and ex-duty rate have declined too. The core index edged up 0.1 percent on the month after a 0.2 percent gain in July and now stands 4.6 percent higher on the year, down 0.1 percent from July's pace and 0.4 percentage points below the June high of 5.0 percent. At the same time output prices net of duty were steady on the month and also up 4.6 percent from a year ago. This compares favorably with July's 4.9 percent annual rate and the April peak of 5.4 percent. Input cost inflation has also decelerated in recent months, even if current rates are still relatively firm. August's 8.1 percent annual pace is 3.7 percentage points below the April high and the core rate is running markedly slower still (6.4 percent).

Asia/Pacific

Japan

Second quarter GDP was revised upward from the initial estimate of 0.1 percent to a gain of 0.4 percent on the quarter. On the year GDP was revised from a gain of 1.9 percent to 2.4 percent. On an annualized basis, GDP grew 1.5 percent, up from the original estimate of 0.4 percent. Gross fixed capital formation was revised to an increase of 0.3 percent on the quarter from a decline of 0.6 percent. Domestic demand was also revised upward — from a decline of 0.2 percent to unchanged on the quarter. The upward revision puts growth in line with the U.S. and could get rid of concern over a double-dip recession for now.

August corporate goods price index was unchanged on the month and year. July was revised to unchanged as well. On the month and year, prices were mixed. Manufacturing prices were unchanged on the month but down 0.3 percent on the year. For example, within manufacturing, petroleum & coal products were down 0.8 percent but up 8.1 percent on the year. Nonferrous metals were up 1.6 percent on the month and 7.2 percent on the year.

Australia

August employment increased 30,900, slightly higher than analysts anticipated. Full time employment was up a healthy 53,100 to 7,920,400 while part time employment declined by 22,100 to 3,351,600. The unemployment rate declined to 5.1 percent from a revised 5.3 percent rate in July. The number of unemployed decreased 22,500 to 607,700. The number of persons looking for full time work dropped by 17,600 to 429,300 while the number of persons looking for part time work slipped by 4,900 to 178,400. The participation rate edged down by 0.1 percentage point to 65.4 percent.

Americas

Canada

July merchandise trade deficit widened substantially to C$2.7 billion. The deterioration in the bottom line reflected a 0.7 percent decline on the month in nominal exports — their fourth decrease in the last six months — compounded by a 2.0 percent gain in imports. The drop in the former was largely due to a 2.2 percent decline in purchases from the U.S. although this was almost offset by a hefty 8.0 percent surge in EU buying. Imports were boosted by inflows from the U.S. (2.9 percent) and the EU (2.8 percent). Most export categories struggled in July. Forestry products (down 5.3 percent), machinery equipment (down 1.9 percent) and the other consumer goods sector (down 7.3 percent) all saw hefty declines. The only gain of note was in industrial goods & materials (up 2.3 percent). Imports held up pretty well across the board with notable increases registered in energy (11.9 percent), autos (2.9 percent), agriculture & fishing (2.3 percent) and industrial goods & materials (1.3 percent).

August employment was up 35,800 after declining by 9,300 in July. However, with more people entering the labor force, the unemployment rate edged up 0.1 percentage point to 8.1 percent. Public sector payrolls rose 57,500 on the month but the private sector lost 39,900 positions. Net new job creation was concentrated in services (43,900) as the goods producing sector posted a fresh decline (8,200). Within the former the suspiciously large 65,000 decline in education payrolls in July was reversed with the sector adding some 68,400 new positions. The turnaround supports the view that there are some problems with the seasonal adjustment process here as the same pattern has now been seen for some years. Elsewhere within services the picture was mixed. The professional, scientific & technical category posted a 28,300 gain and there was a 6,900 increase in public administration. However, headcount in trade fell 5,300 and declined 6,500 in transportation & warehousing. There were also more sizeable declines in business, building & other support services (18,700) and in information, culture & recreation (18,100). Accommodation & food shed a net 9,200 jobs. The slide in goods producing employment reflected mainly a hefty 25,600 shakeout in manufacturing. This was compounded by a 4,000 drop in agriculture and was only partially offset by advances in construction (12,000) and natural resources (9,300).

Bottom line

Central bankers continue to voice their concerns over the state of the global economy. But it did not deter the Bank of Canada from increasing its policy rate to a still low 1 percent. Equities were mostly positive in this holiday shortened trading week. Volumes continued to be low.

Only the Swiss National Bank releases its monetary policy statement this week. Key data releases in Europe include the German ZEW survey and producer prices. In the UK, investors will intently monitor consumer prices which have been holding above the Bank of England’s 2 percent inflation target. They also will check retail sales for the health of the consumer and the labor market report to see if recent trends towards higher employment and lower unemployment rates continue. The U.S. makes up for the dearth of news abroad. Consumer, manufacturing and price data make for a heady mix for the next readings on the pulse of the economy.

Looking Ahead: September 13 through September 17, 2010

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