Global Markets

Several moves during the week sought to ease financial market angst concerning the ongoing Greek sovereign debt crisis. The week began on a dour note as market participants weighed the meaning of chief economist and ECB executive board member Jürgen Stark’s late Friday (September 9) resignation. However, investors quickly turned their sights to a conference call Wednesday between Greek Prime Minister George Papandreou, French President Nicolas Sarkozy and German Chancellor Angela Merkel. The French president and German chancellor are “convinced” Greece will remain in the eurozone, according to a statement issued by Sarkozy after the three spoke Wednesday. The Greek government said in its own statement that it is determined to carry out all budget plans.

On Thursday, the European Central Bank along with the Federal Reserve, Swiss National Bank and the Banks of Japan and England said they will reintroduce three month dollar liquidity operations in the fourth quarter. The move was seen as favorable for the European banking system, which has experienced renewed stress in finding dollar funding due to growing distrust between lenders. The ECB said it will coordinate with the other central banks to conduct three separate dollar liquidity operations to ensure banks have enough of the currency through the end of the year. The three month loans are in addition to the banks’ regular seven day dollar offerings and will be fixed rate tenders with full allotment. Widespread optimism over containing the debt crisis came even as German Chancellor Angela Merkel rejected the idea of eurozone bonds as a solution.

It was the first coordinated effort to provide dollars since May 2010 and seemed to go beyond just providing reassurance that European banks would not be cut off by American lenders wary of their financial state. The central banks seemed determined to demonstrate that they would not hesitate to deploy their combined weight to keep the European sovereign debt crisis from becoming a bigger threat to the global economy. The central bank action came just prior to the meeting of European finance ministers and other key policy makers in Wroclaw, Poland.

On the week, equities were mixed with those in the Asia Pacific region mostly declining while those in Europe and the U.S. advanced.

Global Stock Market Recap

Europe and the UK

It was a rather tumultuous week in Europe. It began with Jürgen Stark’s resignation over the weekend from the European Central Bank’s executive committee and culminated with the Ecofin meeting on Friday. The FTSE and DAX were up four of five days while the CAC gained on three of five. However, for the week the indexes were up 2.9 percent, 7.4 percent and 1.9 percent respectively. The DAX weekly gain was its largest jump since July 2009. Economic data were virtually ignored — other than in the UK there wasn’t much new information available.

Initially, investors fled risk on fresh worries of a Greek default and the surprise resignation of Jürgen Stark, Germany's top representative on the European Central Bank’s executive board and its chief economist. Mr. Stark had opposed the ECB's decision last month to reactivate its government bond purchase program. Germany moved swiftly to install a guardian of its interests in the European Central Bank on Saturday, nominating Jörg Asmussen a deputy finance minister and career bureaucrat to replace Stark. But investor morale was boosted by the reaffirmation by Germany and France that Greece will remain a member of the euro and by the European Central Bank's coordinated measures to ensure that euro area lenders have enough dollars.

European finance ministers (Ecofin) met in Wroclaw, Poland on Friday to discuss the euro area crisis. ECB President Jean Claude Trichet said that the policy makers need to show the same “unity of purpose” as central banks did in providing extra dollars to European lenders. European finance ministers ruled out efforts to prop up the faltering economy and gave no indication of fresh aid for lenders to go along with the liquidity lifeline. Meeting with U.S. Treasury Secretary Timothy Geithner, finance chiefs from the euro region said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation. Timothy Geithner became the first U.S. Treasury Secretary to attend a European finance ministers’ summit.

Swiss National Bank

Following its surprise decision to cuts the target corridor for 3-month CHF LIBOR from zero to 0.75 percent to zero to 0.25 percent in August, the SNB left key interest rates on hold at its quarterly Monetary Policy Assessment meeting. It also indicated that it would continue to aim to keep rates as close to zero as possible. Predictably the central bank reemphasized its determination that the euro should not weaken below CHF1.20 and underlined its willingness to intervene in the currency markets as required to secure this goal. The performance of the local currency has become paramount to the monetary authorities' price stability objectives and to this end it has started to flood the money markets with extra liquidity. In fact, such action has already raised alarm bells in some quarters about its possible longer term implications for inflation. The SNB last introduced a currency cap in 1978 to stem gains against the Deutsche mark.

The SNB produced a gloomier economic forecast for the economy. Real GDP growth was revised to 1.5 percent to 2.0 percent this year (zero in the second half) from the 2.0 percent forecast last time but the major change is in the CPI outlook. Average inflation has been shaded from 1.0 percent this year to 0.4 percent and slashed from 1.0 percent in 2012 to minus 0.3 percent. A return to positive figures is anticipated in 2013 (0.5 percent) but this is still well short of the previous projection (1.7 percent). The SNB said there is no risk of inflation in Switzerland over the foreseeable future but there are downside risks to price stability should the CHF not weaken further. The inexorable rise of the Swiss franc has underscored its pre-eminence as a safe haven currency and to this end it is unclear whether the SNB's recent actions will have the desired effect on the currency over the medium-term. However, what is certain is that Swiss interest rates are set to remain as low as possible for some considerable time.

Asia Pacific

Just as investors in the U.S. and Europe traded with a wary eye on the European sovereign debt situation last week, so too did those in this region. Equities were mostly lower last week with only the Kospi (up 1.5 percent), Nikkei (up 1.4 percent), Topix (up 1.6 percent) and Sensex (up 0.4 percent) advancing. Losses ranged from 0.4 percent (Taiex) to 4.1 percent (Jakarta Composite). The SET was down 2.7 percent, the KLCI lost 2.6 percent and Hang Seng dropped 2.1 percent. Economic data were virtually ignored as investors monitored the ups and downs in the debate over Greece. They rallied at week’s end when there appeared to be an easing in tensions.  

Equities here have not escaped the fallout from Europe's troubles, with many exporters and financial shares coming under selling pressure in recent weeks. The news of the dollar funding plan has not made Europe’s problems go away. The Ecofin meeting was due to start after markets here had closed for the week.

Reserve Bank of India

The Reserve Bank of India increased its key interest rate by 25 basis points to 8.25 percent. It was the 12^th increase since the start of March 2010 and was expected by most analysts. RBI Governor Duvvuri Subbarao’s move contrasts with Brazil and Russia, which cut borrowing costs in the past month, while China paused since early July. Higher food and fuel prices and weakness in the rupee may keep inflation above 9 percent, a level exceeded in each of the last nine months. Inflation in India is the highest among the BRICS nations, quickening to a 13-month high of 9.78 percent in August. Consumer prices rose 7.2 percent in Brazil, 8.2 percent in Russia and 6.2 percent in China last month from a year earlier. The Indian economy expanded 7.7 percent in the three months ended June 30 from a year earlier, the slowest pace since the last quarter of 2009. Gross domestic product rose 7.8 percent in the previous three months.

Reserve Bank of New Zealand

As expected the Reserve Bank of New Zealand kept its key interest rate, the overnight cash rate, at 2.5 percent where it has been since March. The primary reason for leaving the OCR unchanged was the poor outlook for New Zealand’s trading partners and the deterioration in global financial market sentiment. A slowdown in exports, which make up 30 percent of gross domestic product, could have a negative affect on the economy. The RBNZ has an inflation target range of 1 percent to 3 percent. Consumer prices jumped 5.3 percent on the year in the June quarter — the most since 1990 after emissions trading levies and an increase in sales tax added an estimated 2.5 percentage points.

The RBNZ cut rates in March as a preemptive move after the destructive February 22^nd earthquake. On July 28, Governor Alan Bollard said that there was little need to retain the 50 basis point cut he made in March to buoy the economy after the temblor in the South Island city of Christchurch devastated the city center and killed more than 180 people. He also said then a strong New Zealand dollar would reduce the need for rate increases in the short term.

In his statement governor Bollard said that the economy had performed relatively well while headline inflation has increased somewhat since the June Statement. At the same time, however, global economic and financial risks have increased. He noted that domestic economic activity surprised on the upside. Continued high export commodity prices and, in time, reconstruction in Canterbury are expected to provide impetus to demand going forward.

Currencies

The dollar was down against its major counterparts with the exception of the pound sterling and Australian dollar. The pound was depressed by a slew of disappointing economic data reports including unemployment, retail sales and inflation. Traders viewed the data as elevating the possibilities of action by the Bank of England in implementing their version of QE2.

The euro rebounded on the week after the European Central Bank said it will lend dollars to euro area banks, damping liquidity concerns related to the region’s sovereign debt crisis. The euro had been taking the brunt of the crisis and had been declining on debt fears. The currency rallied as the ECB said it will coordinate with four other central banks to offer three separate three month loans to ensure eurozone banks have enough of the U.S. currency through the end of the year. At the same time, the dollar dropped after weaker than forecast economic reports dampened confidence in the recovery.

Selected currencies — weekly results

Indicator scoreboard

EMU

July industrial output was up 1.0 percent after dropping 0.8 percent the month before. On the year, output was up 4.2 percent. The July gain was mainly attributable to a particularly marked bounce back in capital goods where activity expanded 3.0 percent on the month and to a sharp pick-up in durable consumer goods (2.9 percent). Intermediates (0.8 percent) just about reclaimed the ground they lost in June but nondurable consumer goods (down 0.6 percent) contracted for the third month in a row. Energy production also dropped, down 0.8 percent. Across the region performances were very mixed. Dominating the monthly increase in overall production was Germany (4.1 percent) although there were solid gains too in France (1.6 percent) and the Netherlands (3.5 percent) as well as a much needed advance in Greece (4.1 percent). However, output was down for the second month in a row in Spain (0.7 percent) and for the third month in succession in Italy (0.7 percent).

August harmonized index of consumer prices was up 0.2 percent and up 2.5 percent on the year for a second month. The stability of overall inflation was mirrored in the key core rates all of which matched their respective July annual rates. Excluding food, drink, tobacco & petroleum, the HICP was up 1.2 percent on the year while omitting just seasonal foods and petroleum it rose 1.6 percent and without unprocessed foods and petroleum it advanced 1.5 percent. Regionally annual inflation rates accelerated in France (2.4 percent from 2.1 percent) and Italy (2.3 percent from 2.1 percent), but fell in Germany (2.5 percent from 2.6 percent) and Spain (2.7 percent from 3.0 percent). Among the smaller states, Luxembourg saw a sharp jump (3.7 percent from 3.2 percent) but there were sizeable declines in Belgium (3.4 percent from 4.0 percent), Cyprus (2.7 percent from 3.5 percent) and, notably, Greece (1.4 percent from 2.1 percent).

United Kingdom

July merchandise trade deficit was essentially unchanged at Stg8.9 billion. However, the broadly stable headline masked a clear deterioration in the underlying (ex-oil and erratics) shortfall which, in widening out from Stg7.7 billion in June to Stg8.2 billion, reversed all of the improvement seen last time. Total exports were up a solid 5.6 percent on the month while imports were up 4.3 percent to ensure that both sides of the balance sheet expanded to new record levels. The deficit with the rest of the EU was Stg3.4 billion, up less than Stg0.2B from the June outcome while net exports to the rest of the world showed a Stg5.5 billion shortfall following a Stg5.7 billion deficit last time.

August consumer prices were up 0.6 percent and 4.5 percent on the year. Higher utilities bills were a key factor in the August acceleration with some suppliers' gas tariffs rising around 18 percent on the month on top of hefty increases in electricity charges. However, the conclusion of summer sales saw clothing & footwear prices jump 3.7 percent. There was also a boost from furniture, household equipment & maintenance where charges jumped 1.0 percent from July. Elsewhere prices were rather better behaved and there were monthly declines in alcohol & tobacco (0.6 percent) and in recreation & culture (0.4 percent). Core consumer prices were up a relatively firm 0.7 percent on the month although this was not enough to raise the annual underlying inflation rate from July's 3.1 percent.

August claimant count unemployment was up by 20,300 to 1.58 million following a slightly reduced 33,700 rise in July. Unemployment on the ILO measure jumped 80,000 for the three months to July, its steepest gain in two years. The claimant count jobless rate was 4.9 percent and the ILO rate 7.9 percent, both unchanged from last time. July headline average earnings growth remained sluggish at 2.8 percent. However, regular earnings growth slipped from 2.3 percent to just 2.1 percent.

August retail sales were down 0.2 percent and unchanged from a year ago. Excluding fuel, purchases were down 0.1 percent from July and on the year. Weakness was relatively broad-based with sales of food 0.3 percent lower than at the start of the quarter and non-food demand 0.1 percent softer. Within the latter, non-specialized stores (down 0.8 percent) performed especially poorly but demand also fell in household goods (0.2 percent) and in the other stores category (0.4 percent). Monthly gains were recorded by clothing & footwear (0.5 percent) and non-store retailing (0.7 percent) but fuel sales were off 1.1 percent. Rioting across selected parts of the country may have had some impact upon the headline figures but the ONS said that it was not possible to quantify the effect. However, despite the weakness of demand, prices were up again with the ex-fuel retail sales deflator rising 3.3 percent on the year after a 3.1 percent increase in July. This was the fastest annual rate since 1995.

Asia/Pacific

Japan

July tertiary activity index slipped 0.1 percent after rising a revised 1.8 percent in June. On the year, the index edged up 0.1 percent. Among the industries that declined were scientific research, professional & technical services, information & communications, transport & postal activities, electricity, gas, heat supply & water, miscellaneous services (except government services etc.) and real estate & goods rental & leasing. Those industries that advanced on the month included finance & insurance, wholesale & retail trade, accommodations, eating & drinking services, living related & personal services & amusement services, medical, health care & welfare, learning support and compound services.

August corporate goods price index edged down 0.2 percent and was up 2.6 percent on the year. It was the index’s 11th consecutive annual increase. Most subcategories recorded gains on the year. Manufactured goods prices were up 2.5 percent. Processed foods were up 4.0 percent while textile products were up 3.7 percent. Lumber & wood products were up 3.7 percent as well. Petroleum & coal products jumped 18.0 percent while nonferrous metal prices were up 8.7 percent after increasing 13.1 percent on the year the month before. Scrap & waste prices were up 13.4 percent after soaring 19.6 percent in July. Offsetting these increases were a 7.5 percent decline on the year for information & communications equipment, a 3.0 percent drop in electronic components & devices and a 2.0 percent slide for electrical machinery & equipment.

Australia

July merchandise trade surplus was A$1,826 million, a rise of A$9 million from June. Exports were down 0.9 percent on the month and 4.0 percent on the year. Non-rural goods were down 4.0 percent while rural goods were down 1.0 percent. Non-monetary gold rose 82 percent and net exports of goods under merchanting were up 15.0 percent. Services slipped 1.0 percent. Imports were down 0.9 percent and were up 4.0 percent on the year. Intermediate and other merchandise goods dropped 6.0 percent. Consumption goods were up 3.0 percent, non-monetary gold was up 39.0 percent while capital goods were up 3.0 percent. Services slipped 3.0 percent.

Americas

Canada

July manufacturing sales rebounded by 2.7 percent after three consecutive months of declines. On the year, sales were up 6.9 percent. Volumes performed even better with a 3.0 percent monthly spurt and now stand 3.0 percent higher than in the same month of 2010. Fifteen of the 21 reporting industries posted advances within which petroleum & coal products (6.1 percent), primary metals (7.6 percent) and fabricated metal products (8.7 percent) all posted disproportionately large gains. Plastics & rubber (4.2 percent), wood products (4.9 percent) and miscellaneous manufacturing (24.8 percent) also enjoyed a good July. Motor vehicles registered a 5.5 percent bounce but with aerospace sharply lower (17.5 percent), overall transport equipment edged just 0.3 percent firmer. On the downside machinery dropped 1.3 percent from June, food was off 0.6 percent and printing & related activities declined 1.3 percent. Elsewhere the survey's findings were also generally promising. In particular, new orders were up 1.3 percent from June while backlogs were up 2.2 percent. Moreover, with inventories slipping 0.1 percent, the inventory/sales ratio shed 0.04 months to 1.35 months and now stands just 0.01 months higher than in July last year.

Bottom line

Investor focus remained solidly on the evolving events in the Greek sovereign debt crisis. Economic data were mostly ignored even in the U.S. where data on prices, retail sales, international capital flows and consumer sentiment filled the calendar. The Swiss National Bank and Reserve Bank of New Zealand left policy interest rates unchanged while the Reserve Bank of India added 25 basis points to its policy rate.

Next week, investors will focus on Wednesday’s FOMC announcement. In the UK, the Bank of England’s monetary policy board will release minutes from its September 8^th meeting. It is a light calendar elsewhere.

Looking Ahead: September 19 through September 23, 2011

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