Global Markets

Investors were increasingly wary as the week’s end approached. While earnings reports mostly beat expectations, economic data were mixed. But market participants were clearly preoccupied by many of this week’s big events — Tuesday’s U.S. mid-term elections, the FOMC announcement on Wednesday and the U.S. employment situation report on Friday. Needless to say, equity indexes were mixed last week. However, for the month of October the picture is different. Equities continued to improve with the exception of those in Japan and some profit taking in India. Equities and the U.S. dollar continued their inverse relationship — when the dollar rises, stocks fall and vice versa.

Last week in many ways underlined the fact that investors dislike uncertainty — and there was a good deal of it around. Investors would like answers to the questions below, preferably ASAP.

• What will the Fed do' Will it enact a second round of quantitative easing and if so how much'
• What will be the results of the U.S. mid-term elections Tuesday' Will it mean even greater gridlock in Washington'
• What will the U.S. employment report tell us about the labor market'
• In the UK and Europe, how will the Bank of England and European Central Bank respond to Fed action (or inaction)'
• In Japan, what further moves will the Bank of Japan take at its rescheduled policy meeting on Thursday and Friday'

And while anticipation of these political, monetary and macroeconomic events continue to build, relatively good news in the form of the third quarter earnings continues apace, where more than 80 percent of S&P 500 stocks have beaten expectations.

Global Stock Market Recap

Europe and the UK

Equities bounced from positive to negative and back again last week as investors increasingly focused on the important events of the first week of November. Debates raged as market players debated the amount of the Fed’s expected quantitative easing program assuming all the while that QE2 was a done deal. Thursday’s gains made a dent in losses incurred during the week, but did not erase them entirely. For the week, the FTSE was down 1.2 percent, the CAC lost 0.9 percent while the DAX edged down 0.1 percent. Despite last week’s swoon, the FTSE gained 2.3 percent in October while the CAC and DAX advanced 3.2 percent and 6.0 percent respectively.

There was a lot of economic news this past week, some of which just got passing notice given the QE2 fixation. Economic confidence in the eurozone improved to the highest level in nearly three years. In Germany, seasonally adjusted number of unemployed continued to decline. The big news Tuesday came from the UK where third quarter GDP expanded by 0.8 percent on the quarter — double expectations. As usual, investors across the pond pay close attention to U.S. data. There was only one really disappointing report — durable orders excluding the extremely volatile transportation sector slumped 0.8 percent. Consumer sentiment data continues to be lackluster as well.

Asia Pacific

Equities were mixed at week’s end as the region’s investors awaited U.S. data later in the day and a resolution to the QE2 question on Wednesday. In Asia as elsewhere, the focus is on the size of the Fed’s QE package. But there were reasons for shares to decline given regional economic news. For example, September industrial production data from both Japan and South Korea dropped more than expected. In Japan, industrial output sank 1.9 percent on the month while in South Korea, it drooped 0.4 percent.

Indexes were mixed last week with five of the 13 indexes followed here advancing. The Taiex was up 1.5 percent while the KLCI and PSEi each gained 1 percent. The All Ordinaries and Shanghai Composite were up 0.3 percent and 0.1 percent respectively. The picture was different for the month of October. The Nikkei and Topix continued to decline, dropping 1.8 percent and 2.2 percent respectively. The Sensex edged down 0.2 percent. October’s best performer here was the Shanghai Composite which leapt 12.2 percent on the month and is now down only 9.1 percent in 2010. At the beginning of July, the index was down about 28 percent.

Bank of Japan

The Bank of Japan’s Monetary Policy Board unanimously voted to keep its policy interest rate in the range of zero to 0.1 percent. The policy interest rate had been 0.1 percent from December 2008 until the October 6 meeting. The Bank said it would keep interest rates at this level until price stability emerged. At the October 6^th meeting, the BoJ said it would launch a fund for asset purchases. The fund would buy JGBs, CPS, corporate bonds, ETFS, REITS etc. The bank believes flexibility is the key to its JGB purchases. The BoJ already has a regular routine of buying long-term JGBs at a monthly pace of ¥1.8 trillion yen.

The MPB unveiled the details of its asset purchase program, under which the BoJ will acquire such instruments as commercial paper, corporate bonds and government bonds. The goal was to reduce risk premiums indicating that the Bank not only seeks to encourage a decline in longer-term interest rates but also directly lower the costs of raising funds for corporations.

In a complete surprise, the MPB decided to move up its next policy meeting to November 4^th and 5^th from the originally scheduled November 15^th and 16^th to discuss and decide the principal terms and conditions for direct purchases. This follows the two day FOMC meeting to be held on November 2^nd and 3^rd. At a news conference Thursday, BoJ Governor Masaaki Shirakawa emphasized that the new date was not set with the Fed's gathering in mind. Instead, he said the meeting was moved to allow board members to decide on basic details about the Bank’s unprecedented plans to buy exchange-traded funds and real estate investment trusts. However, market participants think that the BoJ wants to be able to respond quickly if the yen appreciates after the FOMC meets.

In its semi-annual Outlook Report which was released Thursday, the BoJ expressed concern over the economic drag being caused by the strong yen, which has already hurt business sentiment and could undermine Japan's export-led recovery. It warned that "the pace of the recovery is likely to slow due to factors such as the slowdown in overseas economies and the ending of the boost from policy measures targeted at durable consumer goods, as well as the recent appreciation of the yen." The BoJ also said that the appreciation of the yen is likely to exert downward pressure on domestic prices through import prices for the time being.

Reserve Bank of New Zealand

As anticipated, the Reserve Bank of New Zealand kept its key interest rate at 3 percent. The nation’s worst earthquake in eight decades is hobbling growth while slower consumer spending is easing inflation concerns. The likely pause may reflect growing concern about the September 4^th earthquake’s drag on growth. A 4 percent increase in the New Zealand dollar against its U.S. counterpart since the quake may further inhibit gross domestic product, a third of which depends on exports. The Bank has an inflation target range of 1 percent to 3 percent. Bollard’s pause may help give consumers time to recover and housing demand a chance to grow as rebuilding gets under way after the earthquake, signaling stronger economic growth in 2011.

Currencies

The U.S. dollar was mixed in volatile trading in the run-up to U.S. mid-term elections and the FOMC decision on QE2. The currency continued to fluctuate inversely with equities as investors evaluated risk. The uncertainty concerning Fed action is particularly acute. The dollar bounced as analysts tossed out varying possible amounts in the Fed’s program. However, first the FOMC needs to decide if there will be QE2. To date no decision on this score has been made. Part two, assuming they go this route will be the size and makeup of such a program. The direction of the dollar going forward will undoubtedly stem from that decision.

The yen was headed for its sixth monthly gain against the dollar, matching a stretch of advances last seen in January 2004. The currency has appreciated more than 5 percent against its U.S. counterpart since the September 15 intervention. The Bank of Japan has rescheduled its next policy meeting for the two days following the FOMC announcement. The MPB is on alert should the Fed announce further quantitative easing and by doing so, accelerate the dollar’s decline against the yen.

The U.S. dollar was down against virtually all major counterparts for the month of October.

Selected currencies — weekly results

Indicator scoreboard

EMU

September M3 money supply was up 1 percent on the year. For the three months ending in September M3 was up 0.8 percent when compared with the same three months a year earlier. Annual growth of bank lending held steady at 1.2 percent. Loans to non-financial corporations were 0.6 percent lower on the year but this compares favorably with a 1.1 percent decline in August. Lending to households grew 2.8 percent on the year after a 2.9 percent gain last time and loans for house purchase were steady at a 3.4 percent annual rate.

September unemployment rate was 10.1 percent, up from a revised 10.0 percent in August. September saw 67,000 jobs lost to lift the number of unemployed to 15.9 million. Among the larger EMU states, Germany was alone in seeing its rate decline 0.1 percentage points to 6.7 as both Italy (8.3 percent after 8.1 percent) and Spain (20.8 percent after 20.6 percent) recorded fresh increases. At 10.0 percent, the jobless rate in France was unchanged.

October flash harmonized index of consumer prices accelerated to 1.9 percent on the year from 1.8 percent in September. Inflation is now at its highest level since the 2.1 percent annual pace recorded in November 2008 but remains a whisker below they central bank's 2 percent ceiling. The details behind today's headline will not be available until the final data are released next month. Regionally, inflation was unchanged in Germany this month (1.3 percent) but edged up 0.1 percentage points to 2.2 percent in Spain and rose a surprisingly steep 0.4 percentage points to 2.0 percent in Italy.

October economic sentiment climbed another 0.9 points to 104.1, its best reading since September 2008. The headline gain was mainly due to stronger confidence in industry (zero after minus 2) although there was also a slight improvement in construction sector morale (minus 25 from minus 26). Sentiment in the consumer sector (minus 11) as well as in retail (minus 1) and services (8) was unchanged from September. Regionally there was a significant bounce in sentiment in France (up 3.4 points to 106.3) and smaller gains in Germany (0.3 points to 113.5) and Italy (0.3 points to 97.1). France, Germany and the Netherlands (up 2.8 points to 100.3) are all above their long-run averages but Spain (down 0.2 points to 90.5) registered a renewed decline. Elsewhere, confidence edged higher in recession-hit Greece (0.7 points to 67.3).

Germany

As per Wednesday’s leaks from the Labour Ministry, joblessness was confirmed as having fallen a seasonally adjusted 3,000 to 3.153 million in October. The decline followed a 40,000 drop in September and left the unemployment rate unchanged at 7.5 percent. Unadjusted unemployment dropped a steeper 86,000 to 2.945 million, its first sub-three million reading since 2008. On this measure, the jobless rate dipped 0.2 percentage points to 7.0 percent. Job vacancies were up an unadjusted 2,915 on the month after a 1,275 increase in September.

September retail sales excluding autos plunged 2.3 percent on the month followed a slightly steeper revised 0.4 percent drop in August and left the level of volumes at their weakest point since November last year. Annual sales growth was just 0.4 percent. The weakness was concentrated in the food, drink & tobacco sector which was down 3.5 percent on the year. By contrast, non-food sales were up 3.1 percent with clothing & shoes (5.3 percent) and the other goods category (4.7 percent) outperforming the other sub-sectors.

France

September household spending on manufactured goods jumped 1.5 percent after sinking 1.6 percent in August. Spending was up 1.1 percent on the year. The latest increase extended a particularly volatile period for sales which have swung between typically hefty rises and equally steep declines since the start of the year. However, over the quarter as a whole, purchases were up 1.2 percent from the previous period when they declined 0.8 percent. September was fuelled by a 4.6 percent monthly gain in durables, thanks to an 11.2 percent spike in auto demand. Household goods by contrast were only flat on the month and there were only small advances in both textiles (0.2 percent) and the other products category (0.1 percent). Annual growth was dominated by household goods (7.2 percent) and to a lesser extent, textiles (2.7 percent), but autos (down 4.2 percent) were well down on the year following the end of government incentive schemes.

September producer prices were up 0.3 percent on the month and 4.2 percent on the year. Prices were boosted by a 0.8 percent jump in the cost of food with meat and dairy products up 0.5 percent and 0.4 percent respectively. There was also an equally large advance in charges for refined petroleum products, which reflected a 1.6 percent jump in heating oil and an 11 percent spike in liquefied petroleum gas prices. Elsewhere the other manufactured products area saw a 0.3 percent monthly advance, mainly due to a 3.6 percent surge in chemicals. Transportation costs gained 0.2 percent and utilities prices edged 0.1 percent higher.

United Kingdom

First estimate of third quarter gross domestic product expanded 0.8 percent and 2.8 percent when compared with the same quarter in the previous year. Construction sector activity jumped 4.0 percent on the quarter and contributed 0.2 percentage points to the bottom line. No expenditure components are available in the preliminary figures but from the production breakdown it is clear that services performed particularly well with output up 0.6 percent on the quarter. Within this, transport, storage & communication rose 0.7 percent while distribution, hotels & catering advanced 0.6 percent and business services & finance gained 0.5 percent. The government sector also weighed in with a 0.6 percent increase. Total production was up 0.6 percent, but this concealed a solid 1.0 percent spurt in manufacturing output. Utilities shrank 0.2 percent and mining & quarrying was off 0.7 percent.

Asia/Pacific

Japan

September unadjusted merchandise trade surplus was ¥797.0 billion when compared with the same month a year ago. Exports were up 14.4 percent while imports were up 9.9 percent. Exports to the U.S. were up for the ninth month in a row, gaining 10.4 percent on the year. Exports to the EU jumped 11.2 percent, increasing for the 10th month in a row. Exports to Asia and China advanced 14.3 percent and 10.3 percent respectively, both for the 11^th consecutive increase. On a seasonally adjusted basis, the merchandise trade surplus was ¥587.6 billion, up from ¥570.2 billion in August. On the month, both exports and imports edged down. Exports lost 0.1 percent while imports sagged by 0.5 percent.

September retail sales were up 1.2 percent on the year after jumping 4.3 percent in August. Sales have advanced for nine consecutive months. Sales were pushed up by fuel sales which were up 7.7 percent after climbing 11.2 percent in August. Auto sales were up 1.6 percent after soaring 17.9 percent in August. Large scale retail stores continued their decline, dropping 1.7 percent on the year after swooning 1.8 percent in the previous month.

September unemployment edged down to 5.0 percent from 5.1 percent in August. The number of unemployed persons was 3.40 million, a decrease of 230,000 or 6.3 percent from the previous year. The number of employed persons was 63.09 million, an increase of 140 thousand or 0.2 percent from the previous year. In the month of September, employment increased by 41,000. The labor participation rate was 60.2 percent. The employment rate was 57.1 percent.

September household spending was unchanged on the year, surprising analysts who had expected an increase of 0.9 percent. Spending was mixed. Food spending dropped 2.2 percent on the year while clothing & footwear sank 4.1 percent. Medical care expenditures dropped 7.3 percent while culture & recreation declined 2.7 percent. Spending soared on housing, which was up 17.8 percent and fuel, light & water which advanced 11 percent. Furniture & household utensils spending increased 9.5 percent on the year. Spending was underpinned by government programs rewarding purchases of energy efficient appliances and motor vehicles. It appears that consumers are already pulling back on spending even though the rewards program is not scheduled to be withdrawn until the end of the year. The government is currently working on a stimulus package which is likely to include funding to extend the program.

September national consumer price index was up 0.3 percent but down 0.6 percent on the year. Core CPI excluding only fresh food was unchanged on the month but 1.1 percent below a year ago level. Excluding food and energy, the CPI was up 0.1 percent but swooned 1.5 percent on the year for the second consecutive month. On the year, prices plunged 12.9 percent for education and dropped 4.2 percent for furniture & household utensils. Prices were down 0.6 percent for food but up 0.6 percent for housing. Fuel, light & water charges were up 3.3 percent. Prices for goods were up 1.0 percent on the month and unchanged on the year. Services prices were down 0.4 percent and down 1.1 percent on the year. October Tokyo CPI was up 0.5 percent on the month and 0.3 percent on the year. Excluding food, the CPI was up 0.4 percent but down 0.5 percent on the year. Excluding both food and energy, prices were up 0.7 percent but sank 0.6 percent on the year.

September industrial production plunged 1.9 percent but was up 9.3 percent on the year. The monthly decline far exceeded analyst estimates for a drop of 0.5 percent. It was the fourth consecutive monthly decline. In its forecasts, METI says that production will decline 3.6 percent in October and 1.7 percent in November. At the same time the agency noted that the economy was weaker. Transport equipment, electronic parts & devices and other manufacturing led the decliners. Commodities that contributed to the decline included large passenger cars, metal oxide semiconductor ICs (Logic) and photovoltaic modules.

Australia

Third quarter producer price index jumped 1.3 percent on the quarter and was up 2.2 percent on the year. The quarterly increase was mainly due to increases in prices received for electricity, gas & water (up 8.9 percent) and building construction (up 1.0 percent). These increases were partly offset by declines in prices received for petroleum refining (down 2.7 percent) and bakery product manufacturing (down 3.6 percent). Intermediate goods prices increased 1.1 percent on the quarter and 2.4 percent on the year. The quarterly increase was mainly due to higher prices received for grain, sheep, beef & dairy cattle farming (up 7.0 percent) and coal mining (up 12.6 percent). These were partly offset by price declines for other agriculture (down 3.4 percent) and petroleum refining (down 1.4 percent). Preliminary stage commodities were up 1.2 percent and 2.9 percent on the year.

September quarter consumer prices advanced 0.7 percent on the quarter as expected. When compared with the third quarter a year ago, prices were up 2.8 percent after jumping 3.1 percent in the June quarter. The most significant price increases on the quarter were for tobacco (up 7.0 percent), water & sewerage (up 12.8 percent), electricity (up 6.0 percent), property rates & charges (up 6.2 percent) and rents (up 1.1 percent). Offsetting these increases were price declines for automotive fuel (down 3.7 percent), vegetables (down 5.4 percent), pharmaceuticals (down 3.9 percent), audio, visual & computing equipment (down 2.7 percent) and soft drinks, waters & juices (down 1.8 percent). The Reserve Bank of Australia’s weighted mean measure of consumer prices were up 0.5 percent for the second quarter but eased to an increase of 2.3 percent from 2.7 percent in the previous quarter. The trimmed mean was up 0.6 percent after increasing 0.5 percent in the previous quarter. On the year, the trimmed mean eased to 2.5 percent from 2.7 percent.

Americas

Canada

August monthly gross domestic product was up 0.3 percent and 4.1 percent on the year. The monthly expansion was evenly split between the goods producing and service sectors, each registering a 0.3 percent advance. Within the former, manufacturing output was up 0.5 percent, a rate matched by mining and oil & gas extraction. Construction was up 0.4 percent from July but there were declines in both utilities (0.8 percent) and agriculture & forestry (0.6 percent). Services derived most support from a 1.1 percent monthly bounce in wholesale trade. This was augmented by a 0.7 percent increase in accommodation & food services as well as a 0.6 percent gain in finance, insurance & real estate. On the downside, there were output declines in arts, entertainment & recreation (0.4 percent) and administrative & waste management services (0.2 percent). A number of sub-sectors saw no change in production.

September industrial product prices were up 0.2 percent and 1.4 percent on the year. Prices were boosted by a 2.0 percent monthly jump in primary metals and, to a lesser extent, a 0.5 percent gain in petroleum products. Excluding petroleum & coal, the IPPI was up just 0.1 percent from August and was 1.2 percent firmer on the year. Most other sub-sectors saw little change in prices although there was a notable 0.5 percent decline in motor vehicles & other transport equipment, itself largely attributable to C$ strength. The raw materials price index dropped 0.4 percent from August (up 5.8 percent on the year) led by a 3.3 percent drop in mineral fuels. Without this sector the RMPI would have jumped 2.2 percent on the month and risen 10.6 percent on the year. Overall prices were underpinned by a 5.5 percent bounce in vegetable products, compounded by a 4.4 percent leap in non-ferrous metals and 1.4 percent advance in ferrous materials. The cost of animals and related products dropped 0.2 percent on the month while wood edged 0.1 percent weaker.

Bottom line

Economic data were mixed and so were equity markets last week. The U.S. dollar was volatile as market participants debated the amount and effectiveness of a possible resumption of quantitative easing by the Fed.

Investors were increasingly wary as the week’s end approached. While earnings reports mostly beat expectations, economic data were mixed. But market participants were clearly preoccupied by this week’s U.S. mid-term elections, the FOMC announcement and the U.S. employment situation report. And to add into the mix, the Bank of Japan announced at the conclusion of Thursday’s meeting that it moved up the date of its next policy board meeting to the two days after the FOMC concludes. The move was widely seen as its way of preparing for major monetary easing by the Fed. Oh yes — the Reserve Bank of Australia updates its monetary policy on Tuesday while the Bank of England and European Central Bank announce Thursday.

Looking Ahead: November 1 through November 5, 2010

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