International Perspective will be taking off next week

and will return on Friday, December 30, 2011.

Happy holidays from all of us at Econoday!

Global Markets

Second thoughts once again permeated the markets as post summit euphoria quickly reversed direction. The exultation that the EU agreed to a plan — though not unanimously — was quickly tamped as strains among EU members over the agreement became apparent during the week. The renewed cacophony among European policymakers, just days after the 16^th summit since start of the debt crisis, unsettled financial markets as they awaited details of the agreement. Also hovering was the possible downgrade by Standard & Poor's which last week put 15 Eurozone countries' credit ratings on negative outlook.

German Chancellor Angela Merkel and Bundesbank President Jens Weidmann urged Europe to stick to stricter budget discipline and forget about one shot solutions after financial markets judged that another EU summit had failed to resolve the Eurozone’s debt crisis. Speaking separately, they rebuffed pressure for the European Central Bank to intervene decisively to stop the crisis escalating. Merkel told the German parliament on Wednesday it would take years, not weeks, to overcome the debt problems but Europe would emerge stronger. Weidmann made clear his opposition to ramping up purchases of troubled Eurozone states' debt, saying he was "no fan" of the existing limited bond buying program. He also said the Bundesbank would only provide fresh funds for the International Monetary Fund to help fight the crisis if countries beyond Europe do so too. Weidmann told journalists the ECB's mandate prevented it from embarking on unlimited bond purchases and that experience showed this would inevitably lead to inflation anyway.

Merkel ruled out increasing the size of the Eurozone’s planned permanent rescue fund, the European Stability Mechanism, beyond the agreed €500 billion, according to participants at a closed-door meeting in parliament on Tuesday. But European Council President Herman Van Rompuy said a review of whether the funds were adequate would be completed in March.

On the week, all indexes followed here with the exception of those in Indonesia, Malaysia and the Philippines were down. The SET was virtually unchanged. Losses ranged from 1.0 percent (SMI) to 6.3 percent (CAC).

Global Stock Market Recap

Europe and the UK

Equities were lower as the euphoria over the results of the December 9^th EU summit did not last through the weekend. At week’s end, worries about the situation continued to prey on investors’ minds. Positive U.S. economic data helped to mollify investors somewhat despite comments from International Monetary Fund Managing Director Christine Lagarde Thursday.

She warned that European debt problems are escalating and require action by all countries to prevent a full blown crisis. Separately, European Central Bank President Mario Draghi said there is no “external savior” for governments in the region. The bank’s program of buying bonds from countries such as Italy and Spain is “neither eternal nor infinite,” he said.

European stocks posted modest gains on Thursday but faded from early highs in the final hours of the session amid continued concerns about the economic outlook for the region. On Wednesday, Italian borrowing costs rose to a record high for the euro area, reflecting market concerns that austerity will lead to a prolonged recession. But on Thursday, Spanish and French yields declined with Spanish borrowing costs at the lowest in seven weeks. Although the indexes stabilized on Thursday, they resumed their slide Friday. On the week, the CAC and DAX were hit particularly hard, losing 6.3 percent and 4.8 percent. The FTSE and SMI were down 2.6 percent, and 1.0 percent.

After markets here closed for the week, Fitch lowered its outlook on France's triple-A rating to "negative" from "stable," indicating there is a one-in-two chance the nation could lose its top investment grade rating over the next two years. Fitch said the negative outlook reflects its view that the likelihood of liabilities arising from the worsening economic and financial situation in the Eurozone has materially increased. Fitch also said that France is the most exposed to a deepening of the crisis relative to its triple-A rated Eurozone peers.

Swiss National Bank

As widely expected the SNB left its interest rate and foreign exchange policy on hold at its December Monetary Policy Assessment. The target corridor for 3-month CHF LIBOR remains at zero to 0.25 percent and the Bank will continue to aim to keep rates as close to zero as possible. At the same time the monetary authority signaled a firm commitment to the CHF1.20 floor for EUR/CHF that it established in September.

The SNB indicated that it would take additional action as needed to ensure economic stability but with interest rates already at zero, any shift in policy today would most probably have concerned the exchange rate target. As it is, the SNB appears to feel cautiously comfortable that its decision to put a floor under the euro at the CHF1.20 level is working and that a higher base is not needed at this time. However the SNB also made it clear that it would intervene in unlimited amounts to protect this level.

After its quarterly meeting, the Bank said Swiss growth would slow sharply next year and prices would fall as the franc's almost 30 percent gain since 2008 weighs on exporters and the global economic outlook worsens. The franc, which has been driven higher by investors spooked by the Eurozone debt crisis, was up on disappointment the SNB had not shifted the cap, but analysts said the central bank was doing a good job of keeping the markets guessing.

Asia Pacific

What started as a week of optimism about Europe after 26 of the 27 euro nations agreed to join a "new fiscal compact" and pursue stricter budget rules to help fight the region's debt crisis, things quickly turned negative. Essentially equities here followed U.S. and European shares lower after the first glow of the agreement wore off in the cold light of day. Although equities ended the week on Friday on a mostly positive note thanks to positive U.S. economic data, most indexes in the region were down with only those in Indonesia, Malaysia and the Philippines advancing. The SET was virtually unchanged. Declines ranged from 4.5 percent for the Sensex and 3.9 percent for the Shanghai Composite to 1.1 percent for the All Ordinaries. Hovering over investors was IMF Christine Lagarde’s warning that the world economic outlook is "gloomy," and that no nation, irrespective of their economic status, is immune to the crisis.

Adding to European concerns were two pieces of economic data — from China and Japan — that disappointed. A preliminary reading of HSBC's China purchasing managers index for December showed the level of activity at mainland Chinese factories contracted again, though the rate of decline was slower than in November. And in Japan, the Tankan survey results were also lower than anticipated, especially those for large manufacturers that drive export driven growth. Adding to the week’s gloom, investors here were disappointed that the Federal Reserve refrained from announcing new measures to stimulate growth and offset the effects of worsening European debt crisis.

Reserve Bank of India

As expected, the Reserve Bank of India paused in its aggressive tightening cycle and kept its key repo interest rate at 8.5 percent despite data showing that wholesale inflation remained above 9 percent. Previously, the RBI had lifted rates 13 times since March 2010. The Bank also sent a strong signal that its next move is likely to be an easing of monetary policy as risks to economic growth increase. "While inflation remains on its projected trajectory, downside risks to growth have clearly increased," the RBI said in a statement, adding that inflation risks remained high and a slump in the rupee was also exerting price pressures. The RBI left the cash reserve ratio, the percentage of deposits banks must maintain with the RBI, unchanged at 6.0 percent despite market speculation that it might cut the ratio in order to bolster liquidity.

On Thursday, the rupee was down nearly 20 percent from a July peak before the RBI took measures to defend the currency, buying rupees in the market and announcing steps to curb speculation. The plunge in the currency has added a sense of alarm to concerns about India’s economy. The RBI did not unveil further steps on Friday to support the currency. The RBI does not set a target for the rupee but does sometimes step into the market to smooth market volatility. It is constrained from mounting a more forceful defense of the rupee by the need to fund a widening current account deficit.

Currencies

The euro dropped below $1.30 Wednesday for the first time in almost a year as stocks slid and Italy had to pay a euro era record yield to sell bonds. Nervous investors awaited a possible credit rating downgrade for one or more Eurozone countries. Italy had to pay 6.47 percent to sell €3 billion of five year bonds, highlighting fierce market pressure ahead of a year in which Italy has a gross funding goal of €440 billion starting in late January. Safe haven German Bund futures rose by more than one full point due to renewed doubts about the effectiveness of last week's agreement on deeper fiscal union. There was further pressure on markets as the German chancellor continued to resist increasing the size of Europe's permanent bailout fund, the European Stability Mechanism, and after an International Monetary Fund official warned that reforms in Greece are falling short of expectations.

The single currency dipped as low as $1.2945 against the dollar and £0.8374 against the British pound. While the currency managed to recover some on Thursday, Fitch’s announcement after equity markets closed for the week Friday sent the euro lower once again. Fitch said it may downgrade Belgium, Spain, Slovenia, Italy, Ireland and Cyprus, adding to concern the region’s debt crisis has not been contained. . Fitch said a “comprehensive solution” to the crisis is “technically and politically beyond reach.” Earlier in the day, the euro had advanced after Luxembourg’s Jean-Claude Juncker said Europe should meet a deadline for arranging loans with the International Monetary Fund as part of a crisis fighting package

Several Asian central banks stepped into the foreign exchange market Thursday to temper a sell off in their respective currencies. The banks aimed to keep them from weakening too rapidly as strains from the Eurozone’s debt crisis are being felt across the region. Central banks in Indonesia, Malaysia, the Philippines and South Korea were spotted selling dollars in relatively small amounts, as their currencies came under pressure from a region wide move by investors to pare risky bets. Asian currencies have turned lower against the dollar in the second half of this year as Eurozone stresses have intensified. That followed a long period of steady appreciation after the 2008 financial crisis.

Selected currencies — weekly results

Indicator scoreboard

EMU

November harmonized index of consumer prices edged up 0.1 percent on the month and was up 3.0 percent on the year. The core measures essentially mirrored the headline with 12-month growth rates of all three steady at their respective October levels. Excluding food, drink, tobacco & petroleum the HICP remained at just 1.6 percent for the third month running while omitting only seasonal foods & petroleum or unprocessed foods & petroleum, the rate was unchanged at 2.0 percent on the year. Annual inflation was broadly stable in most of the major sub-sectors. The only changes of any real note are in housing (5.3 percent from 5.1 percent), transport (5.4 percent from 5.8 percent) and in the miscellaneous category (2.5 percent from 2.2 percent).

October industrial production edged 0.1 percent lower on the month and workday adjusted growth was up 1.3 percent on the year. The October decrease left the level of output 0.9 percent below its second quarter average. The monthly decline was led by a 0.9 percent drop in energy but there was also a 0.8 percent decline in intermediates as well as a 0.4 percent dip in durable consumer goods. However, capital goods partially recovered after a 3.9 percent drop in September, rising 1.2 percent on the month and nondurable consumer goods were up 0.6 percent.

Germany

December ZEW expectations improved to a reading of minus 53.8 from minus 55.2 in November after nine consecutive months of decline. However, the current conditions sub-index was down 7.4 points at 26.8, the lowest level since July 2010. For the Eurozone as a whole, the ZEW's six-month outlook also recovered in December to minus 54.1 from minus 59.1 in November. Conversely, the current situation component fell for the sixth consecutive month to minus 44.1 after minus 39.8.

United Kingdom

November consumer price index was up 0.2 percent and 4.8 percent on the year. Core CPI edged up 0.1 percent and 3.2 percent on the year. Mild weather, the lower cost of gasoline and much softer food prices along with continuing discounting by supermarkets all contributed to drive inflation down in November. The biggest single downward effect came from food & non-alcoholic beverages, which accounted for 0.1 percentage point of the 0.2 point decline in the annual rate. Smaller downside effects came from clothing & footwear and furniture & furnishings.

November claimant count unemployment was up 3,000 and the unemployment rate remained at 5.0 percent for the third month. The lagging ILO measure showed a 128,000 increase in joblessness over the three months to October and an unemployment rate of 8.3 percent. The softness of the labor market was also reflected in continued sluggish wage growth. October headline average earnings were just 2.0 percent higher on the year after a 2.3 percent increase last time with regular pay growing 1.8 percent after a 1.7 percent rate in September.

November retail sales were down 0.4 percent and a still sharper 0.7 percent excluding fuel purchases. However, the mid-quarter drop in overall volumes followed a significantly stronger revised 1.0 percent gain in October and put sales a slightly firmer than anticipated 0.7 percent higher on the year. The November decline probably reflects the decision by many retailers to bring forward seasonal sales into October amid increasing gloom about Christmas demand. Food purchases were down 0.8 percent on the month while non-food sales were a full 1.0 percent lower within which household goods (down 1.2 percent) and the other stores category (down 3.4 percent) suffered especially badly. However, it was not all bad news with clothing & footwear enjoying a 1.1 percent bounce and non-store retailing up a solid 2.8 percent. Fuel purchases were 1.9 percent higher on the month.

Asia/Pacific

Japan

November corporate goods price index edged up 0.1 percent on the month and was up 1.7 percent on the year. It was the 14th consecutive on-the-year increase. Among components, petroleum & coal products prices were up 14.2 percent on the year as Japan continues to import more fuel after shutting down many nuclear generating facilities. Elsewhere, chemicals & related products were up 3.9 percent and lumber & woods products were 3.2 percent higher. Pulp, paper & related products were up 1.0 percent. Pulling prices lower were nonferrous metals which were down 4.2 percent and information & communications equipment which lost 8.7 percent. Also down when compared with a year ago were general machinery & equipment, electrical machinery & equipment, electronic components & devices and transportation equipment.

October tertiary industry activity index was up 0.6 percent after sliding 0.4 percent the month before. On the year, the index was up 0.5 percent. The information & communications industry was up 4.2 percent on the month while living-related & personal services & amusement services gained 5.1 percent. Wholesale & retail trade was up 0.7 percent while accommodations, eating & drinking services was 0.6 percent higher. Both medical, health care & welfare and transport & postal activities were 0.3 percent higher. Also advancing on the month were electricity, gas, heat supply & water, learning support and real estate & goods rental and leasing. Offsetting some of the gain were scientific research, professional & technical services (down 2.8 percent), miscellaneous services except government services etc. (down 2.3 percent), finance & insurance (down 0.6 percent) and compound services (down 2.8 percent).

Fourth quarter Tankan large manufacturers’ index slipped to a reading of minus 4 from plus 2 in September. The weakening here underscores the threat posed to Japan's export-led recovery by the global economic slowdown, the strong yen and supply chain restrictions in flood-hit Thailand. Large firms are not expecting an improvement — they forecast the key number to weaken to minus 5 in the March quarter. However, the small manufacturers’ index improved to a reading of minus 8 from minus 11 the previous quarter thanks in part to the boost in domestic demand from earthquake rebuilding. The reading for large nonmanufacturers was plus 4, up from plus 1 in the third quarter, while small firms in this category improved to minus 14 from minus 19 in September. Capital spending plans by major manufacturers were revised down from three months ago. In December, major manufacturers said they plan to increase their capital spending by 6.2 percent this fiscal year, compared with the 10.1 percent rise estimated in the previous survey. However the overall reading for all firms was unchanged.

Australia

October merchandise trade surplus was A$1.6 billion, down from A$2.2 billion in September and A$2.6 billion in August due to slowing growth in China and the global economy. Exports were down 0.2 percent but up 11.6 percent from a year ago. Exports of non-monetary gold dropped 15 percent. Rural goods exports were up 2 percent while non-rural goods were up A$14 million. Services exports were up 2.0 percent. On the import side, imports were up 2.4 percent on the month and 17.2 percent on the year. Imports of non-monetary gold jumped 57 percent, intermediate and other merchandise goods gained 2 percent, capital goods were up 1 percent as were consumption goods. Services however, slipped.

Americas

Canada

October manufacturing sales declined 0.8 percent and were up 7.8 percent on the year. In real terms shipments failed to rise for the first time since June, declining 0.9 percent but were up 3.6 percent from a year ago. Lower nominal sales were registered in 13 of 21 industries with petroleum & coal (down 4.3 percent) especially weak due mainly to maintenance shutdowns. Aerospace & parts (down 9.7 percent) also had a bad month and there were declines too in food (1.1 percent) and paper (3.6 percent). On the upside there were solid increases in motor vehicle parts alongside computer & electronics (6.3 percent) and wood (5.2 percent). Excluding the auto sector, sales dropped 1.1 percent from September but rose 7.9 percent from October 2010. The rest of the survey made generally negative reading. In addition to a 4.7 percent monthly contraction in new orders, backlogs were off 0.3 percent while inventories climbed 1.4 percent. As a result, the inventory/sales ratio rose 0.03 months to 1.33 months, its first increase since June.

Bottom line

Markets continued to be roiled by events in Europe. Positive U.S. economic data did garner some attention with investors virtually ignoring the stalemate in Washington DC over the budget. Both the Swiss National Bank and the Reserve Bank of India left their key monetary policies unchanged. In China, the manufacturing sector continued to contract according to the flash manufacturing PMI while in Japan, the Tankan was weaker than expected.

The Bank of Japan meets this week and is expected to lower its growth estimates for the economy. Both the Reserve Bank of Australia and the Bank of England release the minutes of their policy meetings held two weeks ago. In the U.S., key housing data are on tap along with the final estimate of third quarter GDP. Among the indicators to be released in Europe is the German Ifo survey while the UK releases its final estimate of third quarter growth. It is the last full week of trading before the holiday season. No doubt investors will be tidying their portfolios for the end of the year.

Happy holidays!

Looking Ahead: December 19 through December 23, 2011

Looking Ahead: December 26 through December 30, 2011

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