International Perspective will be taking off next week to celebrate

Thanksgiving. IP will return on December 2, 2011.

Happy holiday to all celebrants from all of us at Econoday!

Global Markets

Even though Greece and Italy have resolved their leadership questions for now, markets continue to focus on the evolving and escalating crisis in Europe and its spread to some of the more stabile countries such as France and even Austria and the Netherlands. While the ECB has purchased bonds to ease interest rates, it continues to say that it is not a lender of last resort. The situation in Europe has eclipsed a string of better than expected economic data in the U.S. with negative rhetoric drowning out the good news.

And in the U.S. the clock is ticking as a deadline is fast approaching for agreement to a budget plan. Normally this would be a major market focus but of late it has been playing out on the sidelines. The negotiations by the Congressional super committee have been deadlocked. The deadline for agreement is fast approaching — November 23 — the day before the Thanksgiving holiday and none is in sight at this writing.

Gold!

According to the World Gold Council, third quarter total central bank gold purchases were more than double the level reported in the previous quarter and were almost seven times higher than the year earlier period as countries continued to diversify their official reserves. At 148.4 metric tons, gold buying among central banks came in at its highest quarterly level since the sector became a net buyer of the precious metal in the second quarter of 2009. The official sector which includes central banks and other official institutions, had bought 66.5 tonnes of gold in the second quarter and 22.6 tonnes in the third quarter of 2010. Before 2009, central banks had been net sellers of gold bullion for around two decades.

The data came as a shock to traders and analysts, as it included a significant number of purchases that have not yet been reported publicly. The buyers could not be identified due to confidentiality restrictions, the council said. The heightened buying according to the WGC — an industry association representing 22 gold miners — was attributed to the acceleration of concerns over the creditworthiness of Western governments, as sovereign debt troubles remained squarely in the global economic and political spotlight.

Global Stock Market Recap

Europe and the UK

Not surprisingly, equities were down last week as bond yields surged and threatened to imperil Eurozone member states other than Greece and Italy. Now the yields on Spain’s debt have climbed to a euro-era record on waning demand at a bond sale, adding to concern the region’s sovereign debt crisis is deepening. And in France, the extra yield or spread that investors receive for holding 10-year French debt instead of benchmark German bunds reached 2 percentage points for the first time in the shared currency’s history. France is in focus as it is feared that it may lose its triple A rating due to exposure to its debt-ridden neighbors.

On the week, the FTSE slid 3.3 percent while the DAX lost 4.2 percent and the CAC tumbled 4.8 percent. The SMI was down a relatively modest 0.6 percent. European stocks struggled for direction, coming under pressure amid mounting concerns about soaring borrowing costs. In Italy, Mario Monti was sworn in as Italy’s new prime minister in a ceremony in Rome presided over by President Giorgio Napolitano. He passed votes of confidence in both houses of parliament by substantial margins.

France and Germany continue to clash on the role of the European Central Bank in the crisis. At issue is whether the ECB should intervene to halt the Eurozone’s accelerating debt crisis given that modest bond purchases have failed to end the rout. France seems to be pleading for stronger ECB action. Yields including those for France, the Netherlands and Austria have also climbed. But German Chancellor Angela Merkel made clear Berlin would resist pressure for the Bank to take a bigger role in resolving the debt crisis, saying European Union rules prohibited such action. And ECB policymakers continue to reject international calls to intervene decisively as Europe's lender of last resort, stressing it is up to governments to resolve the debt crisis through austerity measures and reforms.

On Friday, European Central Bank President Mario Draghi signaled that the institution is unlikely to move more aggressively to contain the crisis amid calls by France and others to play a bigger role in providing a firewall against further contagion across the Eurozone. Instead Mr. Draghi, in his first major address since becoming ECB President on November 1^st, told a banking forum it was up to national governments to move quickly to implement previously agreed upon plans to leverage up the firepower of the European Financial Stability Facility. "Where is the implementation of these long-standing decisions'" he asked.

Bank of England Inflation Report

The Bank of England released its quarterly Inflation Report on Wednesday. As expected, the report shows weaker forecasts for both economic growth and inflation. As such, it provides the justification for the additional Stg75 billion worth of quantitative easing initiated last month.

The Bank's updated outlook suggests a significantly more gloomy view of the UK's economic prospects. Consumer prices are now seen undershooting by some margin their 2 percent target level over both the two year (1.3 percent) and three year (1.5 percent) horizons on the basis of unchanged QE (Stg275 billion) and market expectations for interest rates to remain at the current 0.5 percent level. Real GDP growth is forecast to accelerate over the latter half of the projection period but the near term prognosis is markedly more pessimistic and even that is seen to carry downside risks in the event of a collapse of the euro.

As is usual these days, the BoE's central case forecast is surrounded by an exceptionally high degree of uncertainty and the report notes divisions within the MPC regarding both the growth and inflation outlooks. Nonetheless, the bottom line is that the current policy stance is not seen achieving its inflationary objectives and to this end, the door to yet more QE next year remains more than a little ajar.

Asia Pacific

European concerns continued to drag down equities and in particular bank shares last week. Only the SET managed to increase on the week despite the ongoing production disruptions from the severe flooding that has hit Thailand. Many auto and electronics parts companies from Japan and elsewhere have been hit by shutdowns due to high water. Equity losses elsewhere in the region ranged from 0.2 percent (PSEi) to 4.8 percent (Sensex). The Hang Seng and the Shanghai Composite were down 3.4 percent and 2.6 percent respectively on worries about mainland China’s housing sector. The Nikkei was down 1.6 percent with exporters slipping on worries about anemic growth in its European market. The strong yen also weighs on profits and market share abroad.

Bank of Japan

As universally expected, the Bank of Japan unanimously kept its interest rate range of zero to 0.1 percent. The monetary policy board lowered its economic assessment since it met on October 28 citing adverse effects from the European debt crisis and the appreciation of yen. The BoJ maintained its asset purchase program at ¥20 trillion after boosting it by ¥5 trillion last month. The BoJ board is increasingly worried about the sharp, negative impact Europe's debt crisis could have on broader financial markets, the global economy and Japanese activity. The weaker global economy will be a drag on Japan along with the high value of the yen which hurts exports. The negative impact on Japanese production from the Thai flooding is also troubling the monetary policy board. About 1,600 Japanese firms are operating in Thailand. About 25 percent of the firms have been seriously hit by the flood, according to unofficial data. Production of automobiles, hard-disk drives and digital cameras have been hit particularly hard and have forced Japanese firms to shut down their local factories.

Currencies

The U.S. dollar was up against all of its major counterparts last week with the exception of the yen. The yen has continued to climb in value once again from the lows hit on October 31^st when the Bank of Japan on behalf of the Finance Ministry intervened in the currency markets. Although Japanese officials continue to talk tough saying that they would intervene again, the currency has continued to edge upward on flight to safety demand. Meanwhile, the euro continues to slide lower as worries about sovereign debt grow even more.

Selected currencies — weekly results

Indicator scoreboard

EMU

September industrial production (excluding construction) dropped 2.0 percent following a revised 1.4 percent advance in August. Adjusted for differences in working days, the level of production was 2.2 percent higher on the year. September alone was bogged down by declines in all of the major sub-sectors. Worst hit was capital goods where output was down 4.2 percent on the month. Consumer goods activity contracted 3.8 percent while intermediates were down 2.2 percent. Energy output was down 1.4 percent from August.

Third quarter flash gross domestic product edged up 0.2 percent on the quarter and was up 1.4 percent on the year. The third quarter pick-up reflected a 0.5 percent quarterly advance in Germany and a 0.4 percent gain in France. However, total Spanish output was only flat on the quarter. As with most flash releases, no details of the GDP expenditure components were released but consumer spending and fixed investment were almost certainly soft once again.

October harmonized index of consumer prices was up 0.3 percent on the month and 3.0 percent on the year, unchanged from the previous month. The underlying data told a similar story with the 12-month growth rates of all three core indexes unchanged from their respective September levels. Excluding food, drink, tobacco & petroleum, prices were up 1.6 percent higher on the year. Regionally, the picture was mixed. Among the larger member states, annual inflation was unchanged in Germany (2.9 percent) and in Spain (3.0 percent) but edged up 0.1 percentage points in France (2.5 percent) and was 0.2 percentage points firmer in Italy (3.8 percent) where VAT effects have been a consideration.

Germany

November ZEW survey declined by 6.9 points for the ninth decline in a row to a reading of minus 55.2. This value is below the indicator’s historical average of 25.0 points. A lower value of the indicator was last seen in October 2008. The assessment of the current economic situation is still in the positive territory, but it has once again worsened compared to the previous month. The corresponding indicator has dropped by 4.2 points to the 34.2.

Third quarter flash gross domestic product was up 0.5 percent on the quarter after rising a revised 0.3 percent in the second quarter. Adjusted for working days, the annual rate of expansion dropped from a revised 2.9 percent to 2.6 percent in the third quarter. As with all flash estimates, no detail was available.

France

Third quarter flash gross domestic product was up 0.4 percent on the quarter after a revised 0.1 percent contraction in the second quarter. On the year, GDP was up 1.6 percent. Estimates of key expenditure components were included. Household spending grew 0.3 percent on the quarter after a very disappointing 0.8 percent drop in the previous quarter. Gross fixed capital formation was up 0.4 percent, compounding a 0.4 percent gain in the second quarter. Within this, household investment jumped 1.4 percent. However, capital spending by business was down 0.3 percent. With government spending up 0.2 percent, domestic demand excluding stocks contributed 0.3 percentage points to quarterly growth, a marked improvement on the 0.3 percentage point subtraction last time.

United Kingdom

October consumer prices were up 0.1 percent and 5.0 percent on the year. The largest downward pressures came from declines in the cost of food (due to significant and widespread discounting by supermarkets and good harvests for certain produce), air fares and petrol. Partially offsetting these were upward pressures from increases in the cost of clothing, electricity and gas. Core consumer prices were slightly stronger than the overall index, registering a 0.2 percent month increase to nudge the annual core inflation rate up from 3.3 percent in September to 3.4 percent.

October claimant count unemployment was up by 5,300, its weakest increase since February. September was downwardly revised to a 13,400 gain. As a result, the claimant unemployment rate held steady at 5.0 percent. However, the relatively good news here was undermined by a hefty 129,000 surge in unemployment in the ILO figures for the three months to September. Employment was down 56,000 during the period while the jobless rate on this basis was up 0.2 percentage points from last time to 8.3 percent. The weaker picture was supported in the earnings data which showed annual growth of just 2.3 percent in the third quarter, down sharply from a downwardly revised 2.7 percent rate in the three months to August. Excluding bonuses pay was up 1.7 percent.

October retail sales were up 0.6 percent and 0.9 percent on the year. Excluding fuel, sales also climbed 0.6 percent from the end of last quarter and were similarly 0.9 percent up on a year ago. Food advanced 0.6 percent while non-food demand expanded 0.9 percent. Dominating the gain was the other stores category (2.7 percent) although clothing & footwear (0.5 percent) and household goods (0.3 percent) also advanced. The main areas of weakness were non-store retailing, where purchases dropped 1.1 percent on the month, and non-specialized stores which declined 0.9 percent.

Asia/Pacific

Japan

Preliminary third quarter gross domestic product was up 1.5 percent on the quarter after declining 0.3 percent in the second quarter. On an annualized basis, GDP grew 6.0 percent. GDP posted its first gain since the economy was brought low by the March 11 earthquake and tsunami. According to Japanese officials, exports and spending was led by auto output pickup. Economic growth was led by recoveries of capital investment and net exports. Private consumption also contributed. The quick recovery of supply chains, which had been wrecked by the March earthquake and tsunami, pushed up exports of automobiles, in particular. On the quarter, domestic demand was up 1.0 percent. Private demand grew 1.4 percent with private consumption gaining 1.0 percent. Private non-residential investment was up 1.1 percent on the quarter or at an annualized pace of 4.4 percent.

Americas

Canada

September manufacturing sales were up 2.6 percent on the month for the third consecutive monthly increase. The gain largely reflected higher sales in the petroleum & coal products and transportation equipment industries. Constant dollar manufacturing sales were up 1.8 percent, the third monthly gain. Higher sales were reported in 10 of 21 industries, representing 60.5 percent of total manufacturing. On the year sales were up 10.8 percent after increasing a revised 7.4 percent in August. Sales of petroleum & coal products were up 13.7 percent — the largest gain in percentage terms since March 1999. The advance partly stemmed from higher volumes reported by some petroleum refineries following shutdowns for maintenance and expansion. Transportation equipment sales were 7.1 percent higher. The increase reflected gains in the aerospace product & parts and motor vehicle industries. The September increase was partly offset by a 3.0 percent decline in sales in the food industry. Lower sales were also reported in the miscellaneous industry (down 13.3 percent), stemming from a decline in jewelry and silverware manufacturing. Unfilled orders were up 3.0 percent for the ninth consecutive monthly advance. Unfilled orders were at their highest level since March 2009. New orders jumped 4.8 percent.

October consumer price index was up 0.2 percent and 2.9 percent on the year. Excluding food and energy, prices were up just 0.1 percent on the month and 1.5 percent on the year. Similarly, the Bank of Canada index was up 0.3 percent and 2.1 percent on the year. Seasonally adjusted, the CPI was up 0.3 percent on the month. The seasonally adjusted index excluding food and energy index edged up 0.1 percent while the BoC's core measure was up 0.2 percent. Within the overall seasonally adjusted CPI, most of the increase was caused by transportation, which registered a 1.3 percent monthly jump in charges, and shelter, where prices were up 0.6 percent. Food and health and personal care were up 0.2 percent from September but there were declines in recreation, education and reading (0.2 percent) and in alcohol and tobacco (0.1 percent).

Bottom line

Markets continued to focus on the situation in Europe and virtually ignore everything else. Positive economic data which normally would lift morale and equity purchases is overlooked. And at week’s end the U.S. Congress super committee began to draw attention as its deadline for a proposal nears.

The calendar is light in Europe and Asia but not so in the holiday shortened U.S. week. Revised growth data are on tap in Germany the UK and the U.S. But all attention will continue to be on Europe with some to spare for the super committee and its Wednesday deadline.

Looking Ahead: November 21 through November 25, 2011

Looking Ahead: November 28 through December 2, 2011

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