Global Markets

With the U.S. election over, equities dropped as investors’ focus shifted to the fiscal cliff and escalating Greek woes in Europe. Adding to worries were concerns about U.S. growth even though economic data have been better than anticipated. The concerns stem for the most part from the looming fiscal cliff — automatic tax increases and spending cuts next year if Congress does not act. However, economic data have disappointed elsewhere. In Japan, private machinery orders excluding volatile items tumbled more than expected while in Europe, signs of recession are virtually everywhere. However, data from China seemed to steady and improve.

Global Stock Market Recap

Europe and the UK

Equities were under pressure and mostly declined on the week. A number of Eurozone concerns continued to weigh on sentiment, along with worries over the U.S. fiscal cliff. Positive economic data from China were unable to provide a boost to the markets. But positive U.S. economic data managed to cut losses on Friday — but it was too late to salvage the week. The FTSE was down 1.7 percent, the CAC lost 2.0 percent and the DAX dropped 2.7 percent. Only the SMI managed a 0.2 percent increase.

Economic data underlined weakening growth in Europe. The October composite PMIs — which combines both manufacturing and services — painted a picture of economic contraction. And a report from the Bank of France stated they expected fourth quarter economic activity in France to contract by 0.1 percent, which means the economy will enter recession. And in Germany, exports declined in September at the fastest pace since December 2011, reflecting subdued demand from Europe and underpinned the assessment that the economy will remain weak at the end of 2012.

EU growth forecast

The European Commission said the Eurozone economy will expand 0.1 percent in 2013, down from a May forecast of 1.0 percent. It cut its forecast for Germany to 0.8 percent from 1.7 percent. The European Commission expects the euro area economy to come to a standstill next year as domestic demand is likely to remain weak amid high unemployment. The economy is expected to shrink 0.4 percent this year, slightly worse than the 0.3 percent contraction forecast earlier. The economy grew 1.4 percent in 2011. Eurozone growth is expected to recover gradually to 1.4 percent in 2014.

Germany's independent council of economic advisers or ‘wise men’ was less optimistic than the government on the economy's outlook. The council predicted that gross domestic product will grow 0.8 percent in 2012 and 2013, while the government forecasts the economy to grow 1.0 percent next year following a 0.8 percent expansion this year.

The economic falloff may make it harder for European governments to pull Greece back from the brink and deal with a possible aid program for Spain. Technically, the euro area will avert a recession, defined as two consecutive quarters of contraction, though the overall economy will still shrink 0.4 percent in 2012, ending a two year expansion, the commission said. Dilemmas facing Greece and its creditors were highlighted by a commission forecast that Greek debt will rise to 188.4 percent of gross domestic product in 2013, higher than the 168 percent predicted in May.

Bank of England

As expected the Bank of England opted to leave both Bank Rate (0.5 percent) and the asset purchase program ceiling (Stg375 billion) unchanged. The decision to maintain the status quo reflected the surprising buoyancy of a number of recent economic indicators, notably third quarter GDP as well as labour market and retail sales data. It was also probably influenced by the apparent doubts on the part of several MPC members about the diminishing gains to be had from raising the QE bar any higher. The MPC’s thinking will be revealed when the minutes of the November deliberations are made available on November 21^st following the release of the new Inflation Report. The failure to move on policy this time round does not preclude additional BoE asset purchases — or even a cut in official interest rates — over coming months should the economy begin to stumble again. The Bank has made very clear its willingness to be flexible in what are still, very uncertain economic times.

European Central Bank

As expected, the European Central Bank left its benchmark interest rates unchanged. The key refinance rate remains pegged at its current record low of 0.75 percent while the rates on the deposit and marginal lending facilities are held at 0.0 percent and 1.5 percent respectively. Similarly as expected, there was nothing new from ECB President Mario Draghi's press conference. The focus now will switch to the next meeting in December when the central bank's new economic forecasts will be presented. These seem certain to paint a generally gloomy picture of business activity and, in the light of the downbeat results of the ECB's new lending survey, may yet prompt fresh talk about another LTRO.

Asia Pacific

Most equities were down on the week as investors shunned risk as attention immediately slewed to the fiscal cliff and to the intensifying Greek debt woes in Europe now that the U.S. presidential election is over. Trader angst about global growth was somewhat mollified after October Chinese data were better than expected for industrial production, retail sales and fixed asset investment. Investors also remained focused on Greece after European Union officials signaled a delay in releasing the next tranche of bailout money. Investors were also hesitant before China's Party Congress, which began on November 8^th. The country is expected to unveil the next generation of Chinese leaders at the meetings. The Nikkei lost 3.2 percent on the week while the Hang Seng dropped 3.3 percent and the Shanghai Composite was 2.3 percent lower.

Reserve Bank of Australia

The Reserve Bank of Australia left its key interest rate unchanged at 3.25 percent to the surprise of many analysts who expected the RBA to cut rates by 25 basis points. In his statement, Governor Glenn Stevens noted that recent information showed that prices were slightly higher than expected — the Bank has an inflation target range of 2 percent to 3 percent. He also noted that the outlook for the world economy appeared to be more positive. However, Asian growth had been dampened by more moderate growth in China. A quarter of Australia’s exports — or about 5 percent of gross domestic product — goes to China and 60 percent of those shipments are iron ore. Domestically, the housing market strengthened as the May, June and October interest rate cuts continue to work though the economy. The decision was the first since Stevens took the helm in 2006 that the RBA has not cut or raised rates at its November meeting, held on same the day as the Melbourne Cup, the nation’s richest horse race.

The exchange rate remains higher than the Bank expected. The Australian dollars’ 57 percent climb in the past four years has contributed to the loss of 37,000 manufacturing jobs in the past two years and 70,000 in construction in the past 12 months. The drop had been absorbed by the nation’s booming resource industries as companies invested in natural gas, iron ore and coal output to meet demand in Asia.

Currencies

The euro dropped against the U.S. dollar and yen as data continue to indicate a pervasive and growing weakening in the Eurozone economy — including both Germany and France. The euro slid to a two month low against the dollar and the weakest level in almost a month against the yen. The latest dismal data came from France where industrial production dropped more than expected just as Germany’s did earlier in the week. French industrial output slid 2.7 percent from a month earlier while in Germany, output dropped 1.8 percent. The euro pared losses on Friday after U.S. consumer sentiment climbed to a five year high. The yen climbed against the dollar as it usually does in times of political, financial and economic turmoil because Japan’s historical trade surplus means the nation does not have to rely on overseas lenders.

China is reining in the yuan after weeks of steady appreciation, a move that could help its big exporters but could undercut its longstanding pledge to give the market greater sway in the currency's fate. Beijing has consistently pushed the yuan to weaker levels against the U.S. dollar over the past two weeks despite signals from investors that they believe it should rise. The moves appear to signal China's intent to bring its currency back to steadier levels following an earlier bout of relatively fast appreciation. That burst, which some analysts said was partly driven by political considerations ahead of the U.S. presidential election, has left the yuan up 0.8 percent so far this year. But by doing so, the People's Bank of China has put itself in a tug of war with investors who have turned more bullish about the yuan.

Beijing, fearing financial turmoil and social unrest, typically takes extra care to ensure stability in both the economy and financial markets before and during a major domestic political event. As authorities prepared for the leadership transition that officially kicked off with the opening Thursday of a key Communist Party Congress, there was a strong incentive for the government to prevent its currency from rising too sharply and hurting a nascent economic recovery.

The yuan's exchange rate has been a source of contention between Washington and Beijing and became an issue in the U.S. election. Some U.S. businesses and lawmakers argue that China keeps its currency artificially low to help its exporters, whose products are cheaper in dollar terms when the yuan is weak. Republican Mitt Romney, who lost his bid for the presidency on Tuesday, had pledged to label China a currency manipulator on his first day in office.

Selected currencies — weekly results

Indicator scoreboard

EMU

September producer prices excluding construction were up 0.2 percent to leave an unchanged annual increase of 2.7 percent. Energy prices were becalmed, showing no change from their August level. The headline increase was attributable to 0.4 percent monthly increases in both intermediates and nondurable consumer goods. Both capital goods and consumer durables also registered no change, but excluding energy, prices were still up 0.3 percent for the second month in a row. Underlying annual PPI inflation accelerated from 1.0 percent to 1.2 percent, but remains soft enough as to pose no threat to the core HICP.

September retail sales excluding autos were down 0.2 percent on the month. The drop followed a revised decline of 0.1 percent in August. On the year, sales were down 0.8 percent after a 0.9 percent slide last time. Sales of food, drink and tobacco were up 0.8 percent. Excluding auto fuel, non-food purchases were down 0.6 percent after slipping 0.1 percent in mid-quarter. Nonetheless, overall sales were biased lower by the acute weakness of Spain. Here, the increase in VAT at the start of September was probably instrumental in a 7.3 percent monthly slump in demand that more than unwound August's 3.5 percent surge as consumers attempted to pre-empt higher prices. Elsewhere among the larger economies, Germany saw a solid 1.5 percent increase and France advanced 0.8 percent. By contrast, Portugal recorded a 4.0 percent decline, the steepest of any member state apart from its Spanish neighbor.

Germany

September manufacturing orders dropped 3.3 percent and were down 4.7 percent from a year ago. Domestic orders were down 1.8 percent from mid-quarter with all three main sub-sectors posting declines. Consumer & durables were down 3.7 percent, basics lost 2.0 percent and capital goods slid 1.5 percent. However, the main area of weakness was overseas where orders contracted a hefty 4.5 percent on the month. Within this, basics slumped 8.4 percent while capital goods dropped 3.0 percent and consumer & durables were down 0.2 percent. Regionally the decline was dominated by the other Eurozone countries which registered a 9.6 percent plunge with basics sinking 11.2 percent. Non-EMU orders were off 1.5 percent.

September industrial production dropped 1.8 percent and was down 1.2 percent on the year. Production has now fallen in three of the last four months with the latest being the steepest since a 2.2 percent slide back in April. September itself was hit by weakness in a number of areas. Intermediates were down 2.2 percent from August while capital goods collapsed 3.5 percent. Consumer goods expanded 0.7 percent but within this, durables were off 2.2 percent. Overall manufacturing posted a 2.3 percent decline. Among the more volatile sectors, energy was down 0.3 percent after a 0. 2 percent advance last time but construction followed a 2.6 percent drop with a 2.7 percent increase.

September seasonally adjusted merchandise trade surplus narrowed to €17.0 billion from a marginally smaller revised €18.2 billion last time. Unadjusted, the surplus stood at €16.9 billion, up from an unrevised €16.3 billion in August. The reduction in the adjusted black ink reflected a 2.5 percent monthly drop in exports that more than offset a 1.6 percent decline in imports. This was the third contraction in the former in the last four months although export levels are still only €2.6 billion shy of the record €94.9 billion achieved in mid-quarter. Over the year, total exports declined 3.4 percent, in no small way due to the weakness of the Eurozone market which shrank 9.1 percent. Sales to non-EU countries were 1.8 percent higher. Imports were 3.6 percent lower than in September 2011 with most regions suffering.

France

September seasonally adjusted merchandise trade deficit was €5.0 billion following an unrevised €5.3 billion deficit in August. The limited improvement was due to a 1.9 percent drop in imports, largely reflecting declines in energy and autos. This more than compensated for a 1.5 percent slide in exports which shrank despite strength in aerospace and pharmaceuticals. The resulting third quarter shortfall was €14.7 billion, down nearly 20 percent from a disappointingly large second quarter gap, which bodes well for a handy, and likely much needed, boost from the international trade sector to real GDP growth last quarter.

United Kingdom

September industrial production was down 1.7 percent on the month and 2.6 percent on the year. Manufacturing edged up 0.1 percent but was down 1.0 percent from a year ago. The decline was mainly due to the effects of a sharp decline in oil and gas extraction. Oil rig maintenance work was primarily the cause of the plunge in oil and gas extraction which fell nearly 21 percent on the month, the steepest decline on record and enough to subtract 1.9 percentage points from overall production. At the same time, mining & quarrying saw a 15.3 percent monthly slump, the largest drop since February 1974. The meager monthly increase in manufacturing output was essentially offset by a small downward revision to August which now shows a 1.2 percent decline. Within manufacturing, seven sub-sectors were up while six declined from August. The largest positive contributions were made by pharmaceutical products, where output expanded 2.6 percent followed by transport equipment, which gained 1.4 percent.

Asia/Pacific

Japan

September private sector machinery orders, excluding volatile ones for ships and those from electric power companies, dropped a seasonally adjusted by 4.3 percent and were down 7.6 percent from a year ago. For the July to September quarter, orders were down 1.1 percent. Machine orders from overseas were flat on the month. The total value of machinery orders received by 280 manufacturers operating in Japan increased 9.6 percent from the previous month on a seasonally adjusted basis. However, for the quarter they were down 8.7 percent compared with the previous quarter. In the October to December quarter, the Cabinet Office expects the total amount of machinery orders to increase by 4.7 percent and private sector orders, excluding volatile ones, were forecast to increase 5.0 percent from the previous quarter.

Australia

September retail sales were up 0.5 percent following a revised increase of 0.3 percent the month before. The increase was slightly higher than anticipated. On the year, sales were 3.6 percent higher. The largest contributor to the monthly increase was food retailing (0.6 percent), followed by household goods retailing (1.2 percent), other retailing (0.8 percent) and cafes, restaurants & takeaway food services (0.5 percent). These increases were partially offset by declines in clothing, footwear & personal accessory retailing (down 0.6 percent) and department stores (down 0.5 percent). In volume terms, sales edged down 0.1 percent in the September quarter 2012 following a 1.2 percent increase in the June quarter 2012.

September deficit on goods and services was A$1.46 billion after recording a revised deficit of A$1.88 billion in August. Exports were down 0.7 percent on the month and dropped 10.4 percent on the year. Non-rural goods were down 2 percent while rural goods were 3 percent lower. Non-monetary gold was 20 percent higher. Services slid A$3 million. Imports dropped 2.2 percent on the month but were up 1.5 percent on the year. Capital goods imports slid 8 percent, consumption goods dropped 6 percent and intermediate and other merchandise goods slipped 1 percent. Non-monetary gold jumped 70 percent. Services imports edged up 1 percent.

October employment increased a much better than expected 10,700. The unemployment rate was unchanged at 5.4 percent. The number of people employed increased to 11,523,200. The increase in employment was driven by full time employment, up 18,700 people to 8,130,100 and was offset by a decrease part time employment, down 8,000 people to 3,393,100. The number of people unemployed declined by 8,800 people to 653,200. The labour force participation rate decreased 0.1 percentage points to 65.1 percent in October.

China

October consumer price index was up a slightly greater than expected 1.8 percent from a year ago. On the month, the CPI edged down 0.1 percent. For the months of January through October the CPI was up 2.7 percent on the year compared with 5.6 percent on the year for the 10 months in 2011. Food prices were up 1.8 percent after climbing 2.5 percent on the year in September. Non-food prices were up 1.8 percent compared with 2.5 percent on the year the month before. Both urban and rural prices eased in October. Urban prices were up 1.8 percent after increasing 2.0 percent last time while rural prices eased to 1.5 percent from 1.7 percent.

October producer price index was down 2.8 percent on the year after dropping 3.6 percent in September. On the month the PPI edged up 0.2 percent. For the first 10 months of the year, the PPI was down 1.6 percent from a year ago. Fuel and power prices declined 3.3 percent while production materials dropped 3.7 percent. However, consumer goods prices were up 0.2 percent on the year. Ferrous metals prices sank 11.4 percent after retreating 12.0 percent in September.

October industrial production was up 0.81 percent on the month, boosting annual growth to 9.6 percent from 9.2 percent in September and its recent low of 8.9 percent in August. For the ten months in 2012, output was up 10.0 percent when compared with a year ago. Most sub-sectors saw output accelerate at the start of the quarter. In particular, textile production was up 11.9 percent on the year after a 10.1 percent rise last time while non-metal minerals gained 11.0 percent after 10.0 percent. Ferrous metals (12.6 percent after 9.6 percent) and electricity (6.4 percent after 1.5 percent) similarly posted healthy advances as did steel products (11.7 percent after 4.9 percent). Indeed, the only real area of weakness was autos where the trend slowdown in activity continued and annual output growth dropped from 6.3 percent in September to just 3.8 percent.

October retail sales were up 1.34 percent on the month and 14.5 percent when compared with a year ago. The start of quarter gain constituted the third pick-up in the annual rate in as many months. For January through October, sales were up 14.1 percent when compared with same ten months a year ago. Urban purchases were up 14.5 percent while rural sales were 14.8 percent higher on the year. The latest acceleration was mainly due a sharp pick-up in autos (7.0 percent from 1.7 percent) and grain & food oil (21.8 percent from 18.5 percent) together with stronger growth in household nondurables (19.0 percent from 15.8 percent) and cosmetics (18.1 percent from 15.7 percent). However, it was not all good news as a number of areas saw smaller increases than in September, notably clothing (18.7 percent from 20.4 percent) and sports & recreation (8.9 percent from 19.3 percent).

Americas

Canada

September seasonally adjusted trade deficit was C$0.83 billion after a larger revised C$1.5 billion deficit in August. September was the seventh month out of the last eight in which the bottom line has been in deficit. The improvement reflected a prices-led 1.9 percent monthly increase in total exports within which sales to the U.S. were up 1.3 percent. The main area of strength was Japan, where exports jumped 47.9 percent. Overall imports were flat, although purchases from across the border edged up 0.5 percent. As a result, the bilateral surplus with the U.S. widened from C$3.2 billion to C$3.5 billion while a C$0.1 billion shortfall with Japan was replaced by a C$0.2 billion surplus. Among the major commodity groups, exports of aircraft & other transport equipment climbed 17.9 percent and metal ores & non-metallic minerals were up 17.4 percent. Farm, fishing & intermediate food products (14.4 percent) also fared well and energy products were up 4.2 percent. The main areas of weakness were metal & non-metallic products, which saw a 4.1 percent drop, and consumer goods which were down 2.9 percent. Within overall imports, metal ores & non-metallic minerals climbed 11.6 percent and metal & non-metallic products 8.4 percent. However, consumer goods declined 3 percent and motor vehicles & parts were down 2.5 percent.

Bottom line

The U.S. reelected Barack Obama to serve a second four year term as President. The financial markets immediately shifted attention to the fiscal cliff and its potentially dire consequences for the U.S. economy unless Congress and the White House can resolve the crisis before the end of this year.

The Reserve Bank of Australia, Bank of England and the European Central Bank met and decided to leave their respective monetary policies unchanged. While U.S. economic data mostly beat expectations, data in Japan and Europe did not. China’s slew of October data showed a steadying economy.

In the upcoming week, Japan along with the Eurozone countries release their first estimates of third quarter gross domestic product. However, investors will most likely be focused on both the European negotiations with Greece and fiscal cliff deliberations in the U.S.

Looking Ahead: November 12 through November 16, 2012

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