Global Markets

Most equities declined last week as investors fled risk. Market players were looking for answers to sluggish, slowing economic growth from policy makers — mostly they did not hear what they wanted to hear.

Although U.S. markets were closed for Labor Day on Monday, reverberations from the poor September 2^nd employment report continued to echo in global markets. Added to this were increased uncertainties about the European sovereign debt situation and, once again, Greece in particular. The Swiss National Bank shocked currency markets Tuesday when it announced that it would not let the Swiss franc fall below 1.20 Swiss francs to the euro. Its currency had been soaring as investors sought a safe haven from risk. Disappointing data addled investors in the Asia Pacific region as private machine orders dropped in Japan and employment slid in Australia.

The much awaited speeches by Fed Chairman Ben Bernanke and U.S. President Barack Obama disappointed many market participants. Bernanke reassured markets that the Fed would continue discussions about ways it could boost growth and employment if needed. He did not and could not spell out a specific plan — only the FOMC can do that. President Obama’s proposals to increase employment were met with the headwinds of bipartisan politics leading up to an election year. It disappointed investors because they doubt it could get through both houses of Congress.

A plethora of central banks held policy meetings last week and no changes in policy were made. On Friday, the chief economist of the ECB, Jürgen Stark, resigned because of differences about the Bank’s bond purchase plans. Back in February, the then President of the Bundesbank, Axel Weber, resigned on the same issue. Weber had been considered the heir apparent to President Jean Claude Trichet. Trichet’s term expires at the end of October and Mario Draghi, current Governor of the Bank of Italy, will lead the ECB. Stark's resignation came amid rumors of a Greek default which sent equities spiraling down along with the value of the euro.

Global Stock Market Recap

Europe and the UK

Equities dropped across Europe and the UK last week with the exception of Switzerland as worries concerning the debt situation escalated. The positive note for Swiss equities occurred when the Swiss National Bank announced that it would defend a level of 1.20 for the Swiss franc against the euro.

Equities were boosted after the ruling by the German Federal Constitutional Court threw out suits targeting Germany’s share of the €110 billion in loans for Greece as well as a separate €750 billion rescue fund approved last year to halt the spreading European sovereign debt crisis. The German court affirmed the legality of Germany's role in the creation of the European Financial Stability Facility (EFSF), a special-purpose vehicle that can issue bonds to fund rescues. However, it also said the government would have to get approval from the parliament's budget committee before participating in future bailouts.

However, on Friday, the European Central Bank was hit by the surprise resignation of Jürgen Stark, Germany's top representative on the ECB’s executive board. It is a blow to an institution struggling with its credibility in Germany over its controversial decision to restart its government bond-purchase program. The news sent equities and the euro tumbling in North America, Europe and the UK. Mr. Stark, one of the ECB's most outspoken anti-inflation "hawks," had opposed the ECB's decision last month to reactivate its government bond purchase program, as did the head of Bundesbank, Jens Weidmann. Unless Mr. Stark is replaced by another German, his departure leaves the prospect of the ECB having three Italians on the 23-member governing council and only one German.

Bank of England

As expected the Bank of England left its key policy interest rate unchanged at 0.5 percent and held bond purchases at £200 billion. As usual, no statement accompanied the decision. Investors will have to wait two weeks for the minutes of the meeting. The pound rose from an eight week low against the dollar and gained against the euro. The BoE stopped buying securities in early 2010 as the economy emerged from recession. While Adam Posen has been the only policy maker to vote for further purchases, the darkening economic outlook prompted Spencer Dale and Martin Weale last month to end their push for an increase in rates. According to the National Institute of Economic and Social Research, economic growth slowed to 0.2 percent in the three months through August, from 0.6 percent in the three months through July.

ECB

The ECB offered no surprises in its latest policy announcement. They confirmed that the key refinancing rate will be kept at the 1.5 percent level to which it was raised in July. The rates on the deposit and marginal lending facilities were similarly left unchanged at 0.75 percent and 2.25 percent respectively. After the July interest rate hike many thought that the next monetary tightening would be delivered as soon as October but such speculation has been crushed by a worryingly sharp slowdown in Eurozone growth and more general concerns about the health of the global economy.

At his press conference ECB President Jean Claude Trichet was notably less hawkish. Trichet said threats to the euro region have worsened and inflation risks have eased, giving officials the option to take further action should the debt crisis worsen. This suggests that the ECB is no longer in tightening mode but has reverted instead to a neutral approach. While monetary policy is still “accommodative,” financing conditions have worsened in parts of the 17-member euro region and the ECB stands ready to pump more cash into markets if needed, he said. The ECB today cut its 2011 growth forecast to 1.6 percent from 1.9 and to 1.3 percent from 1.7 percent for 2012. Inflation forecasts were left unchanged at 2.6 percent for 2011 and 1.7 percent for next year. The ECB has an inflation target of just below 2 percent.

Since the July rate increase to 1.5 percent, the debt crisis has spread to Italy and Spain, the region’s third and fourth largest economies. Fears of a renewed global recession also caused stocks to tumble around the world and forced Japan and Switzerland to intervene to stop their currencies appreciating as investors seek havens.

Asia Pacific

Equities were lower in this region with the exception of the Sensex (up 0.3 percent) and the Jakarta Composite (up 4.1 percent). Losses ranged from 0.3 percent (SET) to 2.9 percent (Kospi). The week began on a sour note with investors selling shares as they reacted to the disappointing U.S. employment report. As the week progressed, worries about Europe’s debt crisis escalated. Investors also were looking forward to the two Thursday speeches from Fed Chairman Ben Bernanke and President Barack Obama.

It was a dismal week with the exception of Wednesday when shares rose across the board on bargain hunting following stronger than expected economic data from the United States (ISM nonmanufacturing index) and Australia (second quarter GDP). A favorable ruling from Germany’s Constitutional Court upholding the legality of Berlin's bailout packages for indebted eurozone countries, paving the way for further bailouts, also provided a positive boost to equities.

However, data from Japan, Australia and China triggered selling as the week ended. Second quarter GDP for Japan sank more than expected while Australian employment surprised and declined in August. In China, both industrial production and retail sales growth in August was softer than in July.

In addition to the Reserve Bank of Australia and the Bank of Japan, four emerging country central banks left policies rates unchanged despite elevated inflation. Their concerns stemmed from the threat of an export decline as the global outlook dims. The Bank of Korea held its benchmark interest rate at 3.25 percent, and the central banks of Indonesia and the Philippines kept their rates at 6.75 percent and 4.5 percent respectively while Malaysia left its overnight policy rate at 3 percent.

Bank of Japan

As expected, the Bank of Japan kept its policy interest rate range at zero to 0.1 percent while the monetary policy board continues to assess global economic policy risks. The BoJ said that the economic is recovering from the March earthquake and tsunami but is increasingly concerned over the slowing growth in the U.S. and in Europe. It is also concerned about the volatility in the financial markets and the elevated value of the yen. The MPB said that it must watch the impact of U.S. balance sheet adjustments along with European sovereign debt issues. The BoJ commented that there is a good deal of uncertainty surrounding growth in emerging economies, namely whether they can grow without inflation.

At his press conference after the monetary policy board meeting, Bank of Japan Governor Masaaki Shirakawa warned that the appreciation of the yen could undermine Japan's export led recovery by dampening business and consumer sentiment. He said that the recent yen rise to record high levels has not yet squeezed export volume but surveys show that Japanese firms are worried that the high yen may hurt sentiment, which in turn could depress economic activity. Shirakawa declined direct comment on the Swiss National Bank's decision to stop the Swiss franc from appreciating past Chf1.20 against the euro.

Reserve Bank of Australia

As widely expected, the Reserve Bank of Australia left its policy interest rate at 4.75 percent where it has been since November 2010. The tone of the RBA’s statement has become more neutral given the turmoil in world financial markets along with domestic inflationary risks. A key question for the RBA is how market volatility and slowing growth will affect domestic economic activity, commodity prices and inflation.

In his statement, governor Glen Stevens noted that the global financial conditions are very unsettled given the uncertainty over settlement of the eurozone sovereign debt problems and growth prospects in Europe and the United States. He said monetary policy has been exerting a degree of restraint. Credit growth has declined and is very subdued by historical standards, even with evidence of greater willingness to lend. The RBA has an inflation target range of 2 percent to 3 percent. Its two preferred measures of annual inflation accelerated to 2.7 percent in the second quarter, compared with a gain of about 2.3 percent in the first quarter. The RBA has relied on the Australian dollar’s strength to temper gains in consumer prices.

Currencies

The dollar was up against all of its major counterparts last week as finding a safe haven took precedence over weakening U.S. growth and low interest rates. Investors are concerned about the European debt situation together with mixed economic data. Also having an impact is the ECB’s return to a neutral monetary policy and the Swiss move to lower the value of its currency. The euro declined against the dollar as ECB President Jean Claude Trichet said “downside risks” to the region’s economy have intensified, dampening the outlook for interest-rate increases. The euro weakened against all major counterparts except the Swiss franc after Trichet said inflation risks are down.

The Swiss National Bank shocked currency markets when it moved unilaterally to weaken the Swiss franc. It said that it would not allow the euro to trade below 1.2 francs and was committed to buying unlimited amounts of foreign currency to defend it. The stated goal is to weaken the currency in an effort to help exporters. The strong franc has hurt many companies by making their products less price competitive in foreign markets. The SNB, backed by recent economic data, believes that the unusually strong franc poses an acute threat to the economy and carries the risk of a deflationary development. The SNB said it will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in "unlimited quantities." The Swiss franc tumbled as investors speculated the SNB would stand firm in its pledge to weaken the currency.

Selected currencies — weekly results

Indicator scoreboard

EMU

July retail sales were up 0.2 percent after a 0.7 percent gain in the previous month. Sales were 0.2 percent lower on the year. Sales of food, drink & tobacco were 0.4 percent lower on the month while non-food (excluding fuel) sales were up 0.5 percent after a 0.6 percent increase in June. Among the big four economies, sales were steady at their respective June levels in both Germany and Spain, although a 1.6 percent annual rise in the former contrasted sharply with a 3.9 percent decline in the latter. France saw demand up 0.6 percent while Italy did not provide any data.

Second quarter gross domestic product growth was confirmed at 0.2 percent on the quarter and was up 1.6 percent on the year. The first look at the GDP expenditure components revealed the main culprit for the slowdown as household spending which declined 0.2 percent on the quarter following a 0.2 percent increase in the previous period. The negative impact here was compounded by a sharp deceleration in gross fixed capital formation which grew just 0.2 percent or some 1.6 percentage points less than in the first quarter. Government consumption subtracted from the bottom line as budget austerity measures saw a 0.2 percent drop that offset an equivalent rise in the previous three months. However, the weakness of domestic demand was offset by the net trade balance which, with exports expanding 1.0 percent on the quarter and imports up just half that rate, added 0.2 percentage points for the second consecutive quarter. Across the region, economic performances were very mixed. Key to the weak headline figures was the slowdown in German where quarterly growth dropped from 1.3 percent at the start of the year to just 0.1 percent. France similarly had a major dampening effect as its expansion rate declined from 0.9 percent to zero. Italy fared rather better but a 0.3 percent rate, up from 0.1 percent in the first quarter, left annual growth of just 0.8 percent and so well below the eurozone average.

Germany

July manufacturing orders sank 2.8 percent and were up 8.7 percent on the year. July was dominated by weakness in overseas demand which slumped 7.4 percent on the month while domestic orders were up 3.6 percent. Orders from the eurozone dropped 3.3 percent but the non-eurozone component was off 10.2 percent. However, the July slump in total foreign demand followed a 13.1 percent surge in June and left the 2-month moving average up a very respectable 5.5 percent. The monthly increase in domestic orders was broad-based with consumer & durable goods up 3.4 percent, basics up .5 percent and capital goods up 3.6 percent.

July industrial output surged 4.0 percent and 10.1 percent on the year. The increase reflected strong advances in all the main manufacturing categories, with manufacturing output jumping 4.5 percent on the month. The best performer was capital goods (7.5 percent) but within a 2.5 percent gain in consumer goods, durables were up a hefty 15.4 percent, easily more than reversing a 6.3 percent drop last time. Intermediates expanded 2.3 percent. Elsewhere, energy activity was down 1.0 percent after a 3.4 percent gain at the end of the second quarter but construction rebounded 3.2 percent following a 3.7 percent slide. Monthly output data have been highly erratic in recent months so the 2-month moving averages are all the more important in determining the underlying trend. Here the news was more measured but still unexpectedly upbeat with total industrial production 1.5 percent stronger and manufacturing up 1.8 percent.

July seasonally adjusted merchandise trade surplus narrowed more than expected from an unrevised €11.5 billion in June to €10.2 billion at the start of the current quarter. The deterioration, which left the black ink at its smallest level in 18 months, reflected a 1.8 percent monthly drop in nominal exports that easily more than offset a 0.3 percent dip in imports. Exports have now declined in three of the last four months and stand just 4.4 percent higher on the year, less than half the 9.9 percent annual pace recorded by imports. Overseas demand has weakened especially sharply in other EMU states where purchases were up less than 2 percent on the year. Exports to non-EU countries rose 5.1 percent over the last 12 months.

France

July merchandise trade deficit widened out from a slightly smaller revised €5.4 billion in June to a larger than expected €6.5 billion in July. The increase in the red ink was attributable to a 2.9 percent monthly increase in imports, mainly reflecting solid advances in transportation, refined petroleum products and computer & electrical products. The overall gain here eclipsed a 0.3 percent rise in total exports. The July figures compare with an average second quarter shortfall of €6.3B and warns of another disappointing performance by the foreign trade sector in the current quarter.

July industrial production (excluding construction) rebounded from a slightly smaller revised 1.5 percent monthly slide in June with a much larger than expected 1.5 percent gain. Annual workday adjusted growth was 3.7 percent, up from 2.5 percent in June and the strongest reading since February. The July recovery incorporated a 1.4 percent monthly increase in manufacturing output within which electronics & machines (3.7 percent) and transport equipment (2.6 percent) fared particularly well. There were also smaller advances in food & agriculture (0.7 percent) and in the other manufactured goods category (0.8 percent). The only decline in this sector was refining (down 4.5 percent) but elsewhere construction also slipped 0.1 percent while energy was up 2.2 percent.

Italy

Second quarter gross domestic product was up 0.3 percent on the quarter and 0.8 percent when compared with the same quarter a year ago. The second quarter gain followed a 0.1 percent quarterly rise in both the previous two quarters and matched the best performance since the second quarter of last year. The real GDP expenditure components indicated a modest 0.2 percent quarterly increase in both household consumption and capital investment. With government consumption unchanged, final domestic demand contributed 0.2 percentage points to overall quarterly growth. However, inventories subtracted 0.8 percentage points so the bottom line would have been negative but for a welcome 0.9 percentage point contribution from net exports. The sharp improvement in the real trade balance reflected a 0.9 percent quarterly increase in export volumes and a 2.3 percent drop in imports.

United Kingdom

July industrial production slipped 0.2 percent and was down 0.7 percent below its year ago level. Manufacturing sector output edged up 0.1 percent from June to stand 1.9 percent higher on the year. Within total manufacturing, seven industries posted increases and six saw declines. The largest contributions to the monthly increase came from electrical & optical equipment where production climbed 1.0 percent and coke, refined petroleum & nuclear fuels (7.0 percent). By contrast, textiles & leather clothing slumped 3.5 percent. Overall industrial production was hit by a 1.4 percent monthly contraction in mining & quarrying, compounded by a 1.1 percent slide in utilities and a 1.5 percent decline in oil & gas extraction.

August producer output prices edged up 0.1 percent and were up 6.1 percent on the year. Input prices dropped 1.9 percent on the month but were up 16.2 percent on the year. Output prices were generally well behaved with only chemicals (1.0 percent) registering a monthly rise of any significance. Five sub-sectors saw no change while petroleum product prices fell 0.6 percent and transport was off 0.2 percent. The core index was up a slightly firmer 0.2 percent from July and 3.6 percent on the year. Input costs were driven lower by a near-6 percent monthly drop in the cost of crude oil, itself enough to subtract some 1.7 percentage points from the overall monthly change. There were also declines in fuel (0.8 percent), home food materials (1.1 percent), imported metals (0.7 percent) and imported parts & equipment (0.6 percent). The only increases of note were in other imported materials (0.5 percent) and imported chemicals (0.6 percent).

Asia/Pacific

Japan

July core private sector machine orders excluding volatile items (orders for ships and from electric power companies) sank 8.2 percent and were up 3.8 percent on the year. Manufacturing orders were down 5.2 percent while non-manufacturing orders slumped 23.2 percent. Orders from overseas dropped 9.8 percent after sinking 5.9 percent in June. Total machine orders received by 280 manufacturers operating in Japan declined by 11.3 percent in June from the previous month.

Second quarter gross domestic product contracted a revised 0.5 percent on the quarter and 1.1 percent on the year. On an annualized basis, GDP declined 2.1 percent. This was the third consecutive quarter of contraction. Domestic demand was revised to a quarterly increase of 0.2 percent from the original 0.4 percent. Private demand was revised to a decline of 0.1 percent from a gain of 0.3 percent previously. Private non-residential investment was revised to a drop of 0.9 percent from an increase of 0.2 percent. Public demand was up 1.2 percent, up from the original estimate of 0.9 percent.

Australia

Second quarter gross domestic product was up 1.2 percent on the quarter after sinking a revised 0.9 percent in the first. On the year, GDP was up 1.4 percent. Growth was driven by a 0.8 percent contribution from changes in inventories. Household final consumption expenditure added 0.5 percentage points and private gross fixed capital formation added 0.3 percentage points. Offsetting these rises were net exports (subtracting 0.5 percentage points) and public gross fixed capital formation (subtracting 0.2 percentage points). Real gross domestic income was up 2.6 percent while the volume measure of GDP increased by 1.2 percent, reflecting an increase of 5.4 percent in the terms of trade. This gives an increase of 6.5 percent in real gross domestic income for the 2010-11 financial year — the largest annual increase since 1987-88.

August unemployment rate edged up to 5.3 percent from 5.1 percent in July. Employment declined for a second consecutive month, not a good sign for third quarter growth. The number of employed slid by 9,700 from a revised drop of 4,100 in July. The number of people unemployed increased by 18,400 to 636,800. The decrease in employment was driven by a decline in full time employment of 12,600 to 8,034,900. This was partially offset by an increase in part time employment of 2,900 to 3,397,600. The labour force participation rate was 65.6 percent.

China

August consumer price index was up 6.2 percent on the year after jumping 6.5 percent in July. For the eight months through August, the CPI was up 5.6 percent compared with an increase for 2.8 percent for the same eight months in 2010. On the month, the CPI was up a more modest 0.3 percent after jumping 0.5 percent in July. Food prices were up 13.4 percent on the year after climbing 14.8 percent in July. Non-food prices were up 3.0 percent on the year. Urban CPI was up 5.9 percent after increasing 6.2 percent the month before. Rural CPI eased to an increase of 6.7 percent from 7.1 percent on the year in July. Health care costs increased faster in August, up 4.1 percent from July’s 2.7 percent.

August producer price index was up 7.3 percent on the year, slightly lower than July’s 7.3 percent increase. On the month, the PPI was up 0.1 percent. For the eight months through August the PPI was up 7.1 percent for the second month compared with an increase of 5.6 percent for the same months in 2010. Raw materials procurement, fuel & power prices were up 10.6 percent after rising 11.0 percent on the year the month before. Production materials climbed 8.0 percent, down from 8.4 percent in July. Consumer goods prices were up 4.8 percent for a second month.

August industrial production was up 1.0 percent on the month while annual output growth eased to 13.5 percent from 14.0 percent at the start of the quarter. Over the first eight months of the year production was up an annual 14.2 percent compared with a 16.6 percent gain over the same period in 2010. Annual growth in August was hit by a partial loss of momentum in most sub-sectors. Electricity (10.0 percent after 13.2 percent) and cement (12.8 percent after 16.8 percent) posted particularly sharp declines. However, there were a few exceptions, notably motor vehicles where output was up 9.5 percent on the year following a 1.3 percent drop in July.

August retail sales were up 1.4 percent on the month and 17.0 percent on the year, slightly lower than July’s annual increase of 17.2 percent. The modest drop in growth reflected a slight softening in the urban sector where demand was 17.1 percent firmer than in August 2010 after a 17.3 percent gain last time. Rural sales held steady at a 16.4 percent rate. With the exception of household nondurables (26.9 percent after 22.5 percent) and autos (12.4 percent after 11.9 percent), all of the major expenditure categories saw annual sales growth decline. Declines were especially marked in building & decoration materials (25.4 percent after 32.4 percent), communications equipment (27.8 percent after 33.6 percent) and cosmetics (14.8 percent after 18.9 percent). August was the second consecutive month in which annual sales growth has slowed and was 0.7 percentage points shy of the recent June peak.

Americas

Canada

July merchandise trade deficit narrowed by a larger than expected C$0.6 billion to C$0.8 billion. The improvement reflected a 2.2 percent monthly bounce in nominal exports that more than offset a 0.5 percent gain in imports. The real trade balance also rebounded well with export volumes up 4.1 percent from June and real imports down 0.4 percent. Exports in July were boosted by autos which rose 7.6 percent on the month and there were solid increases as well in machinery & equipment (5.5 percent), agricultural products (3.0 percent) and industrial goods & materials (2.8 percent). Energy (down 2.1 percent) and forestry (down 4.3 percent) were the only sectors to see a decline. Imports found support mainly from energy, which jumped 6.1 percent from June, and autos (5.8 percent). However, a number of categories posted small declines and machinery & equipment dropped 5.3 percent.

August employment dropped by 5,500 on the month and the jobless rate reversed half of its July decline in edging up to 7.3 percent from 7.2 percent. The slide in jobs was concentrated in part time positions which registered a 31,200 decline. By contrast, full time employment continued to make ground, climbing another 25,700. However, the headline data would have looked a lot worse but for a 22,000 gain in the public sector as the private sector headcount dropped by 20,600. Self-employment contracted 6,900. The goods producing sector was especially soft, shedding some 40,100 jobs. However, manufacturing payrolls expanded a modest 3,100. The slump was attributable to a 24,300 shakeout in the construction industry compounded by smaller declines in both utilities (9,200) and natural resources (11,500). Agriculture added a net 2,000 jobs. By contrast, the service sector created a net 34,600 new positions. The increase here was dominated by a 50,100 surge in health care & social assistance, supported by much less significant gains in education services (9,500) and the other services category (8,100). However, retail lost 6,600 jobs and transportation & warehousing was down 13,500. Information & culture saw an 11,400 contraction and accommodation & food services were off 6,100.

Bottom line

Most equities dropped last week on worries about global growth and the sovereign debt crisis in Europe. Central banks met but left policy unchanged given economic and financial market uncertainties. The Swiss National Bank drew a line in the sand and unilaterally intervened in the currency market to prevent the Swiss franc from appreciating. Economic data were mixed with major disappointments in Japan — second quarter GDP dropped more than originally estimated — and in Canada and Australia where employment declined.

This week promises to be quieter on the economic front at least. Industrial production and merchandise trade data will dominate in Europe while in the UK, the important labour force report is on tap along with consumer prices and the merchandise trade gap. In the U.S., manufacturing data including industrial production and the Philadelphia Fed survey are on the calendar along with updated retail sales and sentiment for the consumer.

Looking Ahead: September 12 through September 16, 2011

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