Global Markets

Equities declined globally last week, giving back some of October’s advances. Greece once again pretty much monopolized headlines leaving little room for other key events. Even the FOMC meeting played second fiddle to Greece along with earnings and the ECB meeting results. The U.S. employment report, normally the sole focus of investors, shared the stage with the results of the Group of 20 meeting and Greece.

The Eurozone won verbal support but no new money at a G-20 summit for its beleaguered efforts to overcome its sovereign debt crisis, while Italy was effectively placed under IMF supervision. Leaders of the world's major economies told Europe to sort out its own problems and deferred until next year any move to provide more resources to the International Monetary Fund. The European Union had hoped to come to the meeting of the Group of 20 large economies with a grand plan to rescue the Eurozone from its debt crisis and to leave with the firm support of its international peers. Instead, Europe departed with precious little to show. No G-20 country committed to help seed the Eurozone’s bailout fund.

The two-day summit began under the shock of Greece's since withdrawn plan to hold a referendum and ended with Italy being pressed to restore its credibility on financial markets. Prime Minister Silvio Berlusconi said Italy would welcome quarterly IMF monitoring of long delayed pension and labor market reforms and privatizations he has promised to implement. The European Commission will also monitor Italy, conducting a first assessment next week. But the IMF's new role takes the crisis to a new level and suggests markets no longer trust the EU to police its own economies.

Last week, the EU assembled a "comprehensive plan" aimed at stemming the crisis. It comprised efforts to recapitalize European banks, a new bailout program for Greece and an increase in the capacity of the euro zone's bailout fund, the European Financial Stability Facility. But Greece's political crisis — Mr. Papandreou called a public referendum on the bailout, and then withdrew it and faces a revolt in his own party — has shaken the plan.

Growth expectations lowered

Three central banks met last week. Two, the Reserve Bank of Australia and the European Central Bank lowered their interest rates by 25 basis points to 4.5 percent and 1.25 percent respectively. The Federal Reserve has no place to go on interest rates with the current fed funds target range at zero to 0.25 percent. Rather, it left unchanged its plans to lengthen the maturity of the Federal Reserve’s bond portfolio. However, all three lowered their growth expectations going forward.

The Reserve Bank of Australia cut its forecasts for economic growth and inflation for the next two years as financial turmoil abroad makes businesses more reluctant to hire and consumers wary about spending. The RBA said that while mining-related parts of the economy were growing strongly, elsewhere the high exchange rate along with fading injections from the earlier fiscal stimulus and changes in household spending and borrowing behavior are contributing to subdued conditions. The RBA sees growth of 4 percent in the 12 months to June 30, 2012, down from its August 5 estimate of 4.5 percent. Consumer prices are expected to rise 2 percent over the period, from a previous prediction of 2.5 percent. Underlying inflation is predicted at 2.5 percent from a previous 3 percent. The estimates are based on the overnight cash rate target remaining unchanged, it said.

While the ECB did not issue a formal forecast Thursday, new President Mario Draghi said that he expected that the Bank’s forecast would be revised lower and that he anticipated a mild recession. Last week’s data including shrinking services and manufacturing PMIs along with sinking German manufacturing orders underlined the Eurozone’s escalating woes stemming from sovereign debt issues and the vast uncertainty it has caused globally. Draghi said recent data suggest the ECB will probably have to revise down growth forecasts in its next round of projections due in December.

The Federal Reserve lowered its forecast for 2011 substantially to a range of 1.6 percent to 1.7 percent from the prior range of 2.7 to 2.9 percent. For 2012, forecast growth is 2.5 percent to 2.9 percent down from June's 3.3 percent to 3.7 percent. The unemployment rate is expected to gradually decline but at a slower rate. The 2011 fourth quarter rate is now expected to be 9.0 to 9.1 percent down from June's 8.6 to 8.9 percent. For 2012, unemployment is now expected to be in the range of 8.5 to 8.7 percent, down substantially from 7.8 to 8.2 percent.

Supply chains disrupted again

Supply chain disruptions are increasing due to the flooding in Thailand which has inundated key manufacturing areas of the economy. Autos once again are being hit. For example, Toyota extended ongoing production cutbacks at its Japanese and Southeast Asian factories to cope with a shortage of parts from Thailand. The company said that it will affect production in Japan, the U.S., Canada, South Africa, the Philippines, Vietnam and Indonesia. Cars are submerged in floodwaters at a Honda car factory north of Bangkok. Toyota, Ford, Honda and Isuzu have all suspended manufacturing in Thailand, a regional automotive hub. Thai flooding has affected auto makers and suppliers including Ford, Michelin and Honda.

The widespread flooding threatens to hamper the efforts by Toyota and other Japanese auto makers with facilities in that country to ramp up production to make up for lost output in the wake of the March earthquake in Japan. Over the past 20 years Thailand has become a global hub for the electronics and automotive industries, with many companies clustered in the now flooded central plains. The timing could not have been worse coming only six months after the earthquake and tsunami disrupted output in Japan. But the impact goes way beyond those manufacturers that were inundated. Other companies such as Ford and PC producers around the world are suffering from a shortage of components produced by suppliers in central Thailand.

Global Stock Market Recap

Europe and the UK

Equities gyrated with the news from Greece last week and wavering expectations from the Group of 20 meeting. The FTSE dropped for the first time in six weeks, sliding 3.1 percent. However, shares on the continent plunged with the DAX sinking 6.0 percent and the CAC ending 6.7 percent lower and in the process giving back a hefty chunk of October’s gains. The week ended on a sour note after the Group of 20 failed to agree on boosting the International Monetary Fund’s resources and a poor German factory orders report fueled concern the region is slipping into recession. Investors were also awaiting the outcome of the vote of confidence results for the Greek prime minister. Equities got a boost Thursday from the ECB’s surprise rate cut and reports that the proposed Greek public referendum on the Eurozone bailout package had been rescinded after PM George Papandreou's opponents in Parliament decided to go along with the plan.

European Central Bank

The European Central Bank surprised with a 25 basis point cut in its key interest rate to 1.25 percent. The move on the benchmark rate was accompanied by 25 basis point reductions in the rates on the deposit and marginal lending facilities which now stand at 0.50 percent and 2.00 percent respectively. Newly installed President Mario Draghi presided over his first meeting and post meeting press conference.

Only the timing of today's decision came as any real surprise. With the Eurozone economy having clearly slowed sharply since the middle of the year and financial markets suffering heightened volatility in the wake of Greek PM Papandreou's call for a referendum on the country's latest bailout package, speculation had focused on December for a full-blown ease. The unanimous decision to cut was not taken lightly not least because with HICP inflation running at 3.0 percent, the new president now risks being branded a policy dove.

At his the press conference, Draghi attributed the shift in policy to increased downside risks to the real economy and suggested that a significant negative revision would be made to the ECB 2012 growth forecasts in December. Instability in the financial markets and its potential impact in the real economy were instrumental here. Inflation, while expected to remain above target near term, is seen falling below 2.0 percent in 2012 due to the weaker outlook for output and demand.

Asia Pacific

Equity indexes declined last week with the exception of the Shanghai Composite (up 2.2 percent) despite a rally on Friday as investors responded to the ECB’s interest rate cut and after Greece canceled its financial bailout referendum. Declines ranged from a 0.1 percent slip in the Kospi to the Nikkei’s 2.8 percent drop. Essentially, the focus was on the negotiations in Europe as they ground on. Nerves were upset as some of the focus turned, albeit briefly, to Italy as the country struggles to get its fiscal house in order. On Friday, Italy agreed to permit the IMF to monitor its progress with fiscal reforms. IMF inspectors will head shortly to Italy and will report quarterly on Prime Minister Silvio Berlusconi's efforts to reduce Italy's huge debt burden, which is second only to Greece's in the Eurozone as a percentage of gross domestic product.

Shares in mainland China advanced on signs of policy easing. Analysts noted that Chinese authorities have shifted to an accommodative stance. They are injecting liquidity to the capital market through bank loans and open market operations. Investors are speculating that the government will accelerate measures to boost the economy after a report on nonmanufacturing industries signaled tight monetary policies are hurting businesses. But it was not only the nonmanufacturing PMI index that exhibited tepid results. The two manufacturing PMI indexes reported differing levels and change for the month. Survey results from the China Federation of Logistics and Purchasing show that the manufacturing PMI slipped unexpectedly to 50.4 in October, its weakest level in almost three years. Separately, data from Markit Economics/HSBC show that China's PMI for the manufacturing sector rose to 51 in October from 49.9 in September — a PMI reading above 50 indicates expansion of the sector.

Reserve Bank of Australia lowers rates

The Reserve Bank of Australia cut its key interest rate by 25 basis points to 4.5 percent. The RBA increased its interest rate to 4.75 percent just a year ago. Opinion among analysts had been split with many expecting the rate to remain unchanged at 4.75 percent. Last week’s consumer price report showed annual underlying inflation in the three months ended September 30 averaging about 2.5 percent, which is the mid-point of the RBA’s 2 percent to 3 percent inflation target range. But employment has weakened this year as the Australian dollar’s climb to a record has hurt manufacturing and tourism and as consumers have salted away cash rather than spend it.

In its statement, the RBA noted that recent economic information suggests the subdued demand conditions in combination with the high exchange rate for the Australian dollar have contained inflation. The rate cut reflects a decline in the nation’s underlying inflation rate to the weakest in 14 years as Europe’s debt crisis dims prospects for the world economy.

Currencies

The dollar advanced against all of its major counterparts including both the euro and yen last week. Japan surprised currency markets and unilaterally intervened on Monday. The dollar rose sharply from the ¥75 level to the ¥79 level Monday after the government and the Bank of Japan intervened in the currency market for the first time in three months. Market players said that the Japanese government imitated currency weakening moves made earlier this year by the Swiss National Bank against its franc by similarly setting a limit for the Japanese currency. According to several sources, the BoJ used the electronic brokering system to place a massive amount of sell orders for the yen and buy orders for the greenback at the limited rate slightly stronger than ¥79.20 to the dollar. The general sentiment is that the government and the BoJ are determined to stop any further appreciation of the yen. In August, they spent ¥4.5 trillion yen in a selling intervention, which caused the yen to depreciate from the ¥77 level against the dollar to the lower ¥80 level. The intervention came after the dollar fell to a post-World War II low of ¥75.31.

The euro dropped in volatile trading during the week as Group of 20 leaders failed to agree on funding to support European governments’ efforts to contain their debt crisis. The U.S. dollar strengthened about 2.7 percent against the euro on the week as investors sought safety amid concern that Greece could be headed for default and the sovereign debt crisis will cause Eurozone growth to contract.

Selected currencies — weekly results

Indicator scoreboard

EMU

October flash harmonized index of consumer prices was up 3.0 percent on the year matching its September rate. Regionally, inflation slipped 0.1 percentage point to 2.8 percent in Germany and held steady at 3.0 percent in Spain. However, the Italian HICP again surprised on the upside with a 0.9 percent monthly jump that boosted its annual rate by 0.2 percentage points to 3.8 percent. The VAT-hike inspired acceleration here will have been a major factor in the disappointing regional figure. Details of the key core indices will not be released until November 16.

September joblessness registered an 188,000 increase and boosted the unemployment rate by 0.1 percentage point to 10.2 percent following a small upward revision to the previous month's level. The new rate is a 15-month high. Among member states, the lowest jobless rates were recorded by Austria (3.9 percent) and the Netherlands (4.5 percent) while Spain (22.6 percent) remained firmly at the top following an additional 0.4 percentage point increase.

October flash manufacturing PMI was revised 0.2 points lower to 47.1 in the final figures. The small negative revision was largely due to a weaker reading out of France. However, national PMIs in all member states apart from Ireland signaled a contraction in activity. The new result is the weakest outcome since July 2009. The output index declined for the third month in a row to hit a 28-month low while new orders fell for the fifth consecutive month and more steeply than at any time since May 2009. Within overall orders, exports were off for the fourth month running and at their sharpest rate since June 2009. The slide in backlogs also accelerated. At the same time, employment essentially stagnated, registering its weakest increase since it began growing in May last year. Germany and France both saw sluggish gains but headcount fell steeply elsewhere. Input costs were down for the first time since September 2009 and factory gate prices were up at their slowest pace since they began their upward climb in April 2010. Regionally, in France the national PMI edged a smaller revised 0.3 points higher but at 48.5 still signaled another worsening in economic activity. Germany saw a 1.2 point drop to 49.1, signaling the end of a 27-month period of continuous expansion. Spain (up 0.2 points to 43.9) and Italy (down 5 points to 43.3) both saw fresh declines in activity rates. Ireland (50.1) was the only country to clear the 50 growth threshold.

Germany

September retail sales rebounded 0.4 percent on the month following a slightly shallower revised 2.7 percent plummet in mid-quarter. The September increase made for a 0.5 percent quarterly advance in purchases after a 0.4 percent dip in the previous period but left volumes only 0.3 percent higher on the year following a 2.5 percent rise last time. The limited breakdown of the figures suggested that underlying demand was even softer than the headline data implied. While sales of food, drink & tobacco were up 1.7 percent on the month, non-food purchases contracted 0.5 percent.

October joblessness increased by 10,000 and lifted the unemployment total to 2.941 million. This was enough to nudge the unemployment rate higher to 7.0 percent from 6.9 percent in September. The October gain came after a slightly smaller revised 22,000 decline in September. Vacancies were up 7,000 following an 8,000 advance in September and most business surveys still suggest a mildly positive jobs trend over the next few months. Indeed, the increase in unemployment in October followed news of a 9,000 increase in employment in September. This extended the monthly run of increases to 19 and put the number of people in work at a record high of 41.074 million.

September manufacturing orders sank 4.3 percent following an unrevised 1.4 percent decline in August. On the year, orders were up 2.4 percent. The slide reflected a 3.0 percent monthly drop in domestic orders as well as a sharper 5.4 percent contraction in overseas demand. Within the former, only consumer & durable goods (3.2 percent) showed positive monthly growth as both basics (down 5.3 percent) and capital goods (down 4.6 percent) registered sizeable declines. Foreign orders were dragged lower by a 12.1 percent plunge in Eurozone demand. The Non-Eurozone market dipped 0.3 percent. The Eurozone capital goods sector (down 16.1 percent) was the hardest hit although EMU basics (down 8.6 percent) also fell very sharply.

France

September producer prices were up 0.2 percent and 6.1 percent higher on the year. The latest monthly increase was largely due to the energy sector where sharply stronger petroleum costs (2.2 percent) made the largest impact on the headline data. Utilities bills (0.5 percent) were also significantly more expensive but prices of food & drink fell 0.2 percent, the other products category registered a 0.1 percent dip and electrical equipment & information technology were only 0.2 percent firmer.

United Kingdom

Third quarter preliminary gross domestic product expanded 0.5 percent both on the quarter and on the year. There are no details about the GDP expenditure components available in the preliminary release but the output figures revealed a 0.7 percent quarterly increase in services and a 0.5 percent gain in industrial production. Within the former, transport, storage and communication rose 0.9 percent and business services & finance, 0.8 percent. Government grew 0.5 percent. The increase in overall industrial output masked a very modest 0.2 percent gain in manufacturing and reflected instead a 2.3 percent surge in utilities and a 0.9 percent advance in mining & quarrying. Construction saw a 0.6 percent quarterly gain after a 1.1 percent bounce in the previous period.

Australia

September retail sales were up 0.4 percent after rising 0.6 percent the month before. It was the third consecutive month of increased sales. On the year, sales were up 2.3 percent. All sectors recorded increased sales. Household goods retailing was up 1.0 percent, cafes, restaurants & takeaway food services gained 0.9 percent and food retailing was up 0.2 percent. Higher sales were also recorded by other retailing (0.3 percent), clothing, footwear & personal accessories (0.1 percent) and department stores (0.1 percent). Sales were also higher in all territories with the exception of Victoria where sales were relatively unchanged.

Americas

Canada

August real GDP was up 0.3 percent on the month and 2.4 percent on the year. The monthly increase in real GDP was wholly attributable to the goods producing sector which registered a solid 0.9 percent bounce in output. However, within this, manufacturing contracted 0.4 percent, utilities dropped 0.8 percent and agriculture, forestry & fishing fell 0.1 percent. Rather, it was an erratic jump in mining and oil & gas extraction (3.3 percent) that was responsible for almost all of the sector's increase in production. Construction (0.1 percent) was the only other category to see output expand. Excluding energy, real GDP was essentially flat on the month. Service sector activity was unchanged, mainly due to a 1.4 percent retracement in wholesale trade. Arts, entertainment & recreation (down 1.4 percent) also suffered as did accommodation & food (down 0.9 percent). Largely offsetting gains were registered in finance, insurance & real estate (0.6 percent) and retail trade (0.2 percent) alongside minor advances in a number of other areas.

September industrial product prices were up 0.4 percent on the month and 5.3 percent when compared with a year ago. The main driving force was the motor vehicles area where prices were up 1.3 percent from August. In addition, there were significant gains in petrol & coal (0.7 percent), lumber & other wood products (1.0 percent) and chemicals (0.5 percent). Excluding energy, the IPPI was 0.5 percent firmer on the month and 2.5 percent higher on the year. However the largest impact came from a weaker local currency without which the headline index would have been unchanged from August. Only three of 21 groups saw prices decline on the month and these were only minor. Raw material costs jumped 1.4 percent from August following four consecutive monthly drops. Mineral fuel charges jumped 4.1 percent. Excluding this category, the RMPI would have declined 1.0 percent. The next largest monthly increase was wood (0.7 percent) while partially offsetting declines were seen in animals & animal products (3.2 percent) and vegetable products (1.1 percent).

October employment plummeted 54,000 while at the same time the unemployment rate spiked 0.2 percentage points to 7.3 percent. The drop in jobs was attributable to a hefty 71,700 decline in full time positions as part time employment was up 40,000. Moreover, employment in the private sector was down a sizeable 32,000 while public sector jobs slid 3,800 and the number of self-employed dropped 18,100. Goods producing payrolls accounted for almost the entire slide with the sector losing 51,900 jobs. Most of this was in manufacturing which followed a poor September with another 48,400 decline. Construction (down 20,100) also suffered but there were partly offsetting gains in natural resources (12,100), agriculture (2,600) and utilities (2,000). Services shed just 2,000 positions. Most sub-sectors saw relatively mild changes in staffing levels with health care & social assistance (10,400) providing the largest boost and the other services category (down 11,700) the most significant negative impact. Trade posted a 5,600 advance and business, banking & other support services rose nearly 8,000 but professional, scientific & technical services declined 7,600 and public administration was off 7,100.

Bottom line

It was a hectic week with many key events vying for investors’ attention. Both the European Central Bank and Reserve Bank of Australia lowered their key interest rates while the Federal Reserve kept its policy unchanged. All three banks lowered their economic forecasts. The European debt crisis continued. Europe was offered moral support in its struggle, but no financial help from G-20 members. Japan intervened in the foreign exchange market to lower the yen from a post-World War II high.

Europe will continue to wrestle with its sovereign debt problems. The Bank of England meets Thursday with no policy change expected. Economic indicators will be focused mostly on industrial output and merchandise trade. Australia’s labour force report will garner attention especially after the RBA’s interest rate cut last week.

Looking Ahead: November 7 through November 11, 2011

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