Global Markets

Most equity indexes followed here were up last week. Gains ranged from 4.8 percent in Jakarta to 0.1 percent in London. In the Asia Pacific region, the Shanghai Composite dropped while the SET was barely negative. In Europe, both the DAX and CAC ebbed down 0.1 percent. North American indexes were positive for the week despite negative pressures from mixed economic data.

Mixed economic and earnings news combined with the Bank of Japan’s intervention in the currency markets influenced risk tolerance and the direction of equities. Tokyo’s Wednesday decision to intervene in the currency market for the first time in more than six years immediately sent the yen down from a 15 year high against the dollar. This in turn gave a boost to the nation’s exporters (and their stocks), who have long complained that a strong yen has hurt profits overseas.

Global Stock Market Recap

Europe and the UK

After a rousing start on Monday, equities faded for the remainder of the week. The FTSE managed to tick up 0.1 percent for the week but the DAX and CAC lost their positive hold before closing Friday with 0.1 percent dips. For the FTSE, it was its fourth consecutive weekly gain.

European equities had challenged five-month highs in early trading after positive earnings reports from Oracle and RIM Thursday night boosted Asian technology stocks and pushed U.S. equity futures to the top of their recent range. However, the re-emergence of eurozone sovereign debt woes and a weak U.S. consumer sentiment survey crimped this optimism.

The FTSE touched its best level since April on Friday, but the rally failed to hold into the afternoon after risk appetite was dulled by market rumors about Ireland facing emergency funding measures. Although Irish officials firmly rebuffed the idea of the International Monetary Fund stepping in to help, market sentiment was damaged for the rest of the day.

During the week, the main economic news stemmed from the UK where consumer prices continued to be above the Bank of England’s inflation target. Claimant count produced an unexpected increase while retail sales slumped. But an important reading of German sentiment on Tuesday — the ZEW — saw current conditions soar while expectations plummeted — not unlike the consumer sentiment reading Friday in the U.S.

Swiss National Bank

As widely expected, the Swiss National Bank again left interest rates on hold at Thursday’s quarterly Monetary Policy Assessment. The target range for 3-month CHF Libor remains 0.0 percent to 0.75 percent within which the central bank will continue to focus on keeping rates around the 0.25 percent mark. The latest policy decision reflects a notably softer profile to consumer prices over both the near- and long-term and monetary officials admit to the risk of inflation turning temporarily negative again in early 2011.

Stable interest rates also reflect a notable shift in the central bank's economic growth outlook. Although activity is now seen expanding 2.5 percent in 2010, up from 2.0 percent last time, real GDP has been marked down significantly over the rest of the forecast period. Although the economy has exceeded expectations so far this year, there have already been some signs of cooling in recent months thanks to the surging exchange rate which has compounded the effects of the slowdown elsewhere.

Asia Pacific

Asia Pacific equities with the exception of the Shanghai Composite (down 2.4 percent) and the SET (down 0.1 percent) were up on the week. Jakarta Composite (up 4.8 percent), Sensex (up 4.2 percent) and the Nikkei (up 4.2 percent) led the gains. Friday’s trading was boosted by technology shares after Research In Motion and Oracle reported better-than-estimated profits after U.S. markets closed Thursday night and the yen weakened. In Japan, exporters’ equities benefited from the yen which traded near a five year low against the euro. Stocks in Hong Kong were up for the week but those in Shanghai dropped. The Nikkei surged and exporters gained Wednesday after the government said it intervened to weaken the yen which on September 15^th reached its highest level against the dollar since 1995.

Hong Kong based companies with operations in mainland China were up as the yuan advanced against the U.S. dollar for its biggest weekly gain in 28 months. The Hang Seng was up 3.4 percent for the week while in contrast, the Shanghai Composite plunged by 2.4 percent. Investors have been spooked by murmurs the People’s Bank of China is getting tougher with banks in order to crimp speculative lending and after the central bank warned that problems in the financial sector were “hard to ignore”.

Reserve Bank of New Zealand

As expected the Reserve Bank of New Zealand left its key interest rate unchanged at 3 percent as the nation's worst earthquake in eight decades on September 4^th curbs economic growth and slowing consumer spending reduces the threat of inflation.

Governor Alan Bollard, who boosted borrowing costs for a second straight meeting in July, has now joined regional counterparts including Australia, South Korea and Malaysia in pausing on rates as they gauge the strength of the global economy. Recent data had shown retail sales, manufacturing and housing demand slowing prior to the magnitude 7 earthquake in the South Island city of Christchurch. In the aftermath of the earthquake, shops and factories closed and power was cut. It is estimated that 100,000 homes were damaged and water and sewage lines were severed. The Treasury says reconstruction may spur a rebound in 2011, with growth projected to be 0.5 percentage point stronger in the year ending June 30.

For global markets, the important bit was that rate rises are likely to be slower than thought in June. The Bank continues to expect to gradually remove monetary policy stimulus over the projection. However, the pace and extent of further OCR [official cash rate] increases are likely to be much more moderate than was projected in the June Statement.

Reserve Bank of India

As expected, the Reserve Bank of India increased its interest rates for the fifth time this year, signaling again that the accommodative monetary policy adopted during the global financial crisis has ended and once more it is focused on containing fast rising consumer prices. The RBI said Thursday that it was moving closer to a neutral monetary policy by raising its repo rate — at which the central bank lends to commercial banks — by 25 basis points to 6 percent. It also surprised with a 50 basis point increase to the reverse repo rate 5 percent.

The Bank has been encouraged by a robust international outlook and a consolidated recovery in the domestic economy. Industrial production exceeded most expectations by bouncing back strongly in July, while the agricultural sector is forecast to regain its strength this year after much better seasonal rains.

In a statement, RBI governor Duvvuri Subbarao said that the RBI’s global outlook had been influenced by the “remarkable resilience” that Europe had shown in emerging from the sovereign debt crisis this year. But the bank cautioned that its “dominant concern” was inflation. The wholesale price index, India’s most closely watched inflation measure, has stubbornly remained in double digits, frustrating political leaders who have promised that it will fall to 6 percent by the end of the year.

Currencies

The U.S. dollar was down against all major trading counterparts — except of course the yen. The Bank of Japan intervened midweek in the currency markets to the tune of about ¥2 trillion to puncture the inflated value of the yen. And traders have not been able to shake the Japanese Ministry of Finance’s resolve to intervene thus far. Japanese Prime Minister Naoto Kan reiterated on Thursday that Tokyo would take decisive action on the yen’s strength if needed. Before the intervention, the yen had reached a 15-year high against the U.S. dollar to threaten profits of export issues and the overall Japanese economy. The timing and scale of the yen selling came as a surprise to many market participants who had believed intervention was less likely under Mr Kan than it would have been under his Democratic Party rival Ichiro Ozawa.

Analysts said that Japan has plenty more room to hit the market “hard, fast and furious”, because the country suffers from deflation and has near-zero interest rates. That means it can benefit from extra liquidity without destabilizing the economy. The Bank of Japan appears not to have sterilized the excess funds as central banks do if worried that intervention will stoke inflation. The action of the Japanese authorities was unsupported by other central banks, which may weaken its effectiveness. The argument for stopping yen appreciation is partly a psychological one according to analysts. Though exporters have complained about the currency, they continue to reap solid profits abroad and the repatriated earnings may actually help the yen appreciate.

Selected currencies — weekly results

Indicator scoreboard

EMU

August harmonized index of consumer prices was up 0.2 percent and 1.6 percent on the year. Core inflation was up 1.0 percent on the year. The steepest pick-up in annual price comparisons occurred in education (2.3 percent from 1.7 percent) followed by food (1.1 percent from 0.8 percent). Communications prices declined 0.5 percent after dropping 0.9 percent the month before while recreation & culture edged down 0.1 percent after decreasing 0.3 percent. The main downward force on the 12-month rate came from clothing (up 0.2 percent after 0.7 percent) and transport (up 3.3 percent from 4.5 percent). Prices also eased slightly in the housing sector (up 2.6 percent from 2.7 percent).

July industrial production was unchanged from its June level which in turn reduced workday adjusted annual growth from 8.3 percent in June to 7.1 percent, its slowest pace since February. Output in July was held in check by a second consecutive monthly drop in intermediates (0.3 percent), itself compounded by more a modest decline (0.1 percent) in both energy and durable consumer goods. On a positive note, production expanded marginally in capital and nondurable consumer goods (both up 0.1 percent).

July seasonally adjusted merchandise trade deficit narrowed from a smaller revised €1.4 billion in June to just €0.2 billion. The unadjusted balance recorded a surplus of €6.7 billion but this was well down from the €11.9 billion posted in July 2009. The improvement in the adjusted data reflected a 0.6 percent monthly decline in nominal exports that was more than compensated for by a 1.5 percent drop in imports. On the year however, imports continue to expand at a significantly faster pace than exports with figures of 24.0 percent and 18.0 percent respectively.

Germany

September ZEW current conditions index soared a surprisingly large 15.6 points to 59.9. However, the more closely watched expectations measure lost 18.3 points to stand at minus 4.3, its first negative reading since March last year and its weakest level since February 2009. It was also the sharpest deterioration in expectations since October 2008. The survey would seem to confirm that while the economy has outperformed most forecasts so far this year, few believe that the current pace of recovery is sustainable — not surprising amid signs of softer growth overseas and an increasing focus once again upon fiscal tightening at home.

United Kingdom

August consumer prices were up 0.5 percent and 3.1 percent on the year. Core CPI was up 0.7 percent and 2.8 percent on the year. The August acceleration in overall consumer prices was mainly due to higher prices for clothing & footwear. This sector alone added nearly 0.2 percentage points to the monthly CPI change and almost 0.1 percentage points to its annual rate. Upward pressure also came from food & non-alcoholic drink which lifted the 12-month headline rate by a further 0.08 percentage points. Outside of these sectors however, prices were rather better behaved. In fact annual rates decelerated appreciably in furniture & household goods (2.8 percent from 3.3 percent) and in communication (5.7 percent from 6.4 percent).

August claimant count unemployment increased by 2,300 following a revised decline of just 1,000 in July and constituted the first monthly increase since January. Although the data are subject to sometimes sizeable revision, these latest figures currently point to a clear cooling in labor market activity. The claimant count jobless rate held steady at 4.5 percent. By contrast, the less timely ILO statistics revealed an 8,000 decline in the jobless total over the three months to July and a record 286,000 increase in employment. The unemployment rate on this measure was unchanged at 7.8 percent. Average earnings data for the three months ending in July were up 1.5 percent when compared with the same three months a year ago. Excluding bonuses, earnings were up 1.8 percent.

August retail sales dropped 0.5 percent and are up 0.4 percent on the year. Excluding fuel the picture was much the same with a 0.4 percent monthly decline. Annual sales on this basis were up 1.9 percent. The overall decline was the first since January and completely at odds with the CBI survey which pointed to an especially strong period for retail sales. The weakness could not be blamed on an erratic drop in one area as a number of sectors saw significant declines. In particular, clothing & footwear (down 0.4 percent), household goods (down 0.5 percent) and the other stores category (down 2.1 percent) all saw demand drop. Total non-food sales volumes were off 0.7 percent on the month while food was down 0.5 percent. Indeed, the headline data would have looked a good deal worse but for a 2.1 percent bounce in purchases in non-store retailing and a 0.9 percent gain at non-specialized stores.

Asia/Pacific

Japan

July tertiary index jumped 1.6 percent and was up 2.2 percent on the year. Analysts had expected a monthly increase of 0.7 percent after two very lackluster months. Wholesale & retail trade was up 2.3 percent while transport & postal activities gained 3.5 percent. Scientific research, professional & technical services soared by 4.5 percent while accommodations, eating & drinking services jumped 3.1 percent. Other industries that were up on the month included information & communications, electricity, gas, heat supply & water, finance & insurance, learning support, and compound services. However, miscellaneous services dropped 2.3 percent while living-related & personal services & amusement services were down 0.9 percent. Medical, health care & welfare and real estate & goods rental & leasing declined as well.

Americas

Canada

July manufacturing sales tumbled 0.9 percent while annual sales growth slowed sharply to 6.8 percent. Twelve of 21 reporting industries posted monthly declines. Among these, furniture related products (down 10.7 percent), motor vehicles (down 8.0 percent), paper (down 5.5 percent), clothing (down 4.4 percent) and wood products (down 4.0 percent) were especially weak. However, there were some solid gains, notably in beverages & tobacco (3.2 percent), textile products mills (3.1 percent), electronic equipment & appliances (2.6 percent), computers (1.7 percent) and machinery (1.2 percent). Petroleum and coal products were up a modest 0.4 percent but chemicals were off 0.3 percent. Elsewhere the news was generally quite gloomy as well. Backlogs dropped 1.1 percent and new orders slumped 3.9 percent. With inventories up 0.3 percent, the inventory-to-sales ratio edged up 0.01 to 1.33 months.

Bottom line

Economic data were mixed with business sentiment in Germany and consumer sentiment in the U.S. more sanguine about the current situation but much less so about expectations. Currency markets were rocked by Japan’s surprising intervention to reduce the value of the yen.

New economic data are light next week. However, market players will be hanging on every word of the post FOMC meeting statement Tuesday afternoon.

Looking Ahead: September 20 through September 24, 2010

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