International Perspective will be taking off next week to celebrate

Thanksgiving. IP will return on November 30, 2012.

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

Global Markets

Equities swooned last week as investors turned risk averse. Among the many reasons for the decline were a continuing lackluster earnings season and disappointing global economic data. Greek debt woes continue to be a drag on the markets. And in the U.S., attention has slewed to the fiscal cliff — shorthand for the billions of dollars in automatic tax increases and across the board spending cuts that would take effect early next year without a new budget deal. The uncertainty about Congress and the White House reaching an agreement has virtually paralyzed investors. However, on Friday, Congressional leaders struck a uniform note of optimism after their first official talks with President Barack Obama on budget measures needed to prevent the U.S. from plunging into recession next year.

In Japan, a snap election was called for December 16, 2012. The lower house of the Diet was officially dissolved Friday. The dissolution sets up the first general election since the Democratic Party of Japan came to power in 2009. The election will test the DPJ's hold on power against the main opposition Liberal Democratic Party and other small parties. Preceding the dissolution, the upper house enacted bills that had been held up by the LDP. Among these is a bill that allows the issuing of deficit financing government bonds. Prime Minister Yoshihiko Noda made the passage of these bills a condition to calling a snap election.

Most indexes were lower on the week. Only the Nikkei (up 3.0 percent) and the Jakarta Composite (up 0.4 percent) advanced on the week. Declines ranged from 0.8 percent (SET) to 3.1 percent (SMI).

Global Stock Market Recap

Europe and the UK

Equities slid last week as Greek negotiations continued to drag on. In the aftermath of the U.S. election, uncertainty about the outcome of the fiscal cliff negotiations took center stage. The negotiations between U.S. President Barack Obama and Congressional leaders took place on Friday, as they attempted to come to a solution on the impending fiscal cliff. Fears that the U.S. may fall back into recession if a deal is not reached have had a negative impact on the markets. At week’s end, the escalation of the conflict between Israel and Hamas in the Gaza strip raised concerns that the situation could develop into all-out war in the region.

The Eurozone slid into recession in the third quarter despite growth in Germany and France. Gross domestic product edged down 0.1 percent from the second quarter when it dropped 0.2 percent. Both Germany and France expanded 0.2 percent on the quarter. However, Italy posted a 0.2 percent decline — its fifth drop in a row — and Spain contracted 0.3 percent — its fourth straight decline. September industrial output dropped the most in more than three years led by double digit declines in Portugal and Ireland.

Asia Pacific

Equities declined as investors focused on events outside the region in addition to China’s new leadership. The U.S. fiscal cliff negotiations and the European debt crisis weighed on sentiment. The major exception was in Japan where the yen slid in value against the U.S. dollar amid expectations that a victory for Japan's Liberal Democratic Party in the upcoming election on December 16^th will result in more aggressive monetary easing. The Nikkei jumped 3.0 percent on the week.

Prime Minister Yoshihiko Noda dissolved parliament Friday, triggering an election on December 16^th that polls suggest his Democratic Party of Japan will lose. Shinzo Abe, the leader of the main opposition LDP, called Thursday for the Bank of Japan to pursue unlimited monetary stimulus to end deflation and revive an economy that contracted in the third quarter at the fastest pace since the 2011 earthquake. Political analysts expect the LDP to be more assertive in dealing with China. Shinzo Abe has said he would change the law so BoJ’s board must bend to his will or face the sack.

The Shanghai Composite declined 2.6 percent on the week. Xi Jinping was appointed general secretary of the Communist Party, putting him in line to become president. Wang Qishan, vice premier overseeing the financial sector, was named head of the party’s discipline body, indicating he will not have a post directly overseeing the economy. Wang was elected to the Standing Committee today, along with Xi. According to analysts, the composition of the top leaders indicates a go-slow approach to reforms of the financial markets and the economy and not in an aggressive way as expected by the market. The Shanghai Composite has fallen 8.4 percent this year on concern economic growth will slow unless the government reforms state owned enterprises and allows private companies to flourish. Two prominent reformers, Li Yuanchao, the head of the Party's Organization Department, and Wang Yang, the Party chief of Guangdong province, failed to make it to the powerful Politburo's Standing Committee.

Currencies

The dollar was mixed against its major counterparts last week. However, the currency that dominated news was the yen. The Japanese currency plunged sharply following the government’s decision to dissolve parliament and call an early election in December. The yen dropped more than 2 percent against the U.S. dollar following the decision but stabilized somewhat on Friday. The move downwards earlier in the week was predicated on the belief that an incoming government, most probably led by Shinzo Abe, leader of the opposition Liberal Democratic Party (LDP), would put increased pressure on the Bank of Japan to implement aggressive easing policies. Analysts suggested, however, that Friday’s steadying might be a sign of the yen’s traditional haven qualities asserting themselves as investors recalculated the impact of the elections.

Selected currencies — weekly results

Indicator scoreboard

EMU

September industrial production excluding construction dropped 2.5 percent, its worst performance since January 2009. On the year, output was down 2.3 percent. All of the main output categories declined. The sharpest drop was recorded by durable consumer goods which saw a 4.3 percent contraction, but capital goods (3.0 percent), nondurable consumer goods (2.8 percent) and intermediates (2.0 percent) were all close behind. At the same time, energy was down 1.8 percent. Regionally it was bad news virtually across the board with just Cyprus (0.0 percent) and Slovakia (1.4 percent) avoiding a monthly production decline. Within the core, France posted a 2.7 percent decline while Germany was off 2.1 percent. With Italy falling 1.5 percent and Spain 2.8 percent, the larger states all witnessed hefty reversals. Amongst the smaller members, Portugal (down 12.0 percent) saw an especially steep drop.

Third quarter flash gross domestic product slipped 0.1 percent on the quarter after contracting 0.2 percent in the second quarter, putting the Eurozone in a technical recession. GDP contracted 0.6 percent from a year ago after declining 0.4 percent in the second quarter. As usual with the flash data, Eurostat provided no details behind the GDP headlines but the national figures reveal sharp differences in performance between the core and the other larger EMU states. While both France and Germany saw their respective economies expand 0.2 percent on the quarter, Italy posted a 0.2 percent decline, its fifth drop in a row, and Spain a 0.3 percent contraction, its fourth straight decline. Among the smaller countries, Portugal followed a 1.1 percent quarterly drop in the second quarter with a 0.8 percent decline and there were marked contractions too in the Netherlands (1.1 percent), Cyprus (0.5 percent) and, to a lesser extent, Austria (0.1 percent). However, Estonia (1.7 percent) enjoyed a strong quarter and there were gains too in Finland (0.3 percent) and Slovakia (0.6 percent). Belgian real GDP was flat.

October harmonized index of consumer prices were up 0.2 percent on the month and 2.5 percent from a year ago. Underlying developments remained benign with all three core measures posting unchanged annual rates from September. Specifically, excluding food, alcohol, tobacco & energy annual inflation was 1.5 percent and without seasonal food and energy 1.7 percent and less just unprocessed food and energy, 1.6 percent. The main upward pressure on prices came from a 2.2 percent monthly jump in the cost of education. Clothing & shoes matched this gain, although this was only seasonal and, indeed, small enough to reduce annual inflation in the sector from 1.6 percent to 1.2 percent. Elsewhere, food prices were up 0.6 percent on the month and alcohol & tobacco gained 0.9 percent. Monthly declines were recorded in transport (0.6 percent), communications (0.4 percent), recreation & culture (0.3 percent) and hotels & restaurants (0.3 percent). Overall energy prices dropped 0.5 percent.

Germany

November ZEW survey was on the weak side of market forecasts with both the current conditions and expectations components declining from their respective October readings. Current conditions slid nearly 5 points to 5.4 while the more closely watched expectations measure dropped in excess of 4 points to minus 15.7, a decline that reversed much of October's 6.7 point gain. ZEW pointed out that analysts see the Eurozone recession hitting the German economy via foreign trade and confidence.

Third quarter gross domestic product expanded 0.2 percent on the quarter and was up 0.9 percent from a year ago on a workday adjusted basis. The increase followed an unrevised 0.3 percent advance in the previous quarter. In unadjusted terms, the economy expanded 0.4 percent on the year after a 0.5 percent increase last time. As is usual with the flash report, no details were provided. However, there were positive contributions from net exports, household consumption and government spending. However, outside of construction, investment was weak.

France

Third quarter gross domestic product edged up 0.2 percent on the quarter and was up 0.2 percent from a year ago as well. The economy was saved from technical recession by a combination of stronger household consumption and public spending as well as a turnaround in net exports. Consumer spending grew 0.3 percent on the quarter, more than reversing the second quarter's 0.2 percent decline. This was supported by a second successive 0.4 percent gain in government expenditure. However, gross fixed capital formation was weak, declining 0.2 percent after a 0.5 percent increase mainly on the back of a 0.4 percent drop in the business sector. In total, final domestic demand contributed 0.2 percentage points to quarterly GDP growth, a 0.1 percentage point increase on last time. Inventories were pared for the first time since the fourth quarter of 2011 and reduced quarterly growth by 0.3 percentage points. Exports continued to make slow progress, posting a 0.5 percent increase from the second quarter when they were up 0.3 percent. With imports falling 0.6 percent, net trade boosted the bottom line by 0.3 percentage points having subtracted 0.4 percentage points previously.

Italy

Third quarter gross domestic product declined 0.2 percent on the quarter and dropped 2.4 percent from a year ago. This was the fifth consecutive quarter that GDP has contracted albeit not at the same magnitude, of the 2008/09 recession. Istat provided no details behind the headline figures but did indicate that agriculture and services saw fresh declines in output while manufacturing managed a small increase. The level of GDP is now at its lowest since the second quarter of 2009.

United Kingdom

October producer input prices were up 0.4 percent while output prices edged up 0.1 percent. On the year, input prices were up 0.1 percent while output prices were 2.5 percent higher. Output prices were boosted by a 0.5 percent monthly spurt in tobacco & alcohol charges and a 0.3 percent increase in computer & electrical products. However, gains here were in large part offset by a 0.4 percent drop in petrol and a 0.2 percent dip in chemicals & pharmaceuticals. Most other areas saw little monthly change and core prices were only up 0.1 percent from September and 1.4 percent from a year ago. The monthly increase in raw material and fuel costs reflected a 3.1 percent jump in fuel and, to a lesser extent, a 0.5 percent advance in imported parts & equipment. However, at least part of the damage here was offset by modest monthly declines in a number of categories, the steepest being in imported food materials (0.5 percent).

October consumer prices were up 0.5 percent and 2.7 percent on the year. A near trebling of university tuition fees, which saw education add nearly 0.4 percentage points to the monthly change in headline prices, did much of the damage ahead of clothing & footwear, recreation & culture and food & non-alcoholic drinks (each adding 0.1 percentage points). Education also had by far the largest impact on the annual rate, contributing 0.3 percentage points of the overall 0.5 percentage point acceleration from September. Food & drink (0.2 percentage points) had the second most significant impact. Core CPI was 0.7 percent higher than in September and 2.6 percent up on the year after just a 2.1 percent annual increase last time.

October claimant count unemployment jumped 10,100 — its steepest increase in more than a year and after September's 4,000 drop had been revised to show an increase of 800. However, with the bulk of this concentrated in London and probably in no small way reflecting a further unwinding of earlier Olympics hiring, the underlying picture was almost certainly rather more robust. The jobless rate on this measure held steady at 4.8 percent. The lagging ILO figures remained very firm, showing both a 49,000 drop in joblessness and a 100,000 increase in employment over the three months to September. However, note that these figures were likely distorted by the Olympics too (the ONS has not provided any official estimate of the effects). The jobless rate on this definition was 7.8 percent, down 0.2 percentage points from the previous quarter.

October retail sales dropped 0.8 percent on the month following a slightly smaller revised 0.5 percent increase in September. Annual volume growth was 0.6 percent, down sharply from 2.4 percent at quarter-end. Purchases of motor fuel were 1.7 percent beneath their September level and excluding this category, sales were 0.7 percent lower on the month and 1.1 percent higher on the year. October was a poor month for most sub-sectors and while excluding fuel, food dropped 0.6 percent while non-food demand was down 1.0 percent. Within this, only non-store retailing (1.3 percent) made any progress and there were significant declines in non-specialized stores (0.7 percent), household goods (0.5 percent) and, in particular, clothing & footwear (2.3 percent).

Asia/Pacific

Japan

First estimate of third quarter gross domestic product contracted 0.9 percent on the quarter and edged up 0.2 percent from a year ago. It was the steepest decline since the earthquake hit in the first quarter of 2011. On an annualized basis, GDP dropped 3.5 percent. Third quarter domestic demand was down 0.2 percent on the quarter after increasing by 0.2 percent in the second quarter. Net exports (exports minus imports) cut 0.7 percentage point off the Q3 GDP after trimming Q2 economic growth by 0.1 percentage point. Personal consumption, the largest component of GDP, was also weak. It slid 0.5 percent on the quarter for a second straight quarterly drop. Capital investment tumbled 3.2 percent from the second quarter as firms have turned cautious about their plans in light of the global economic slowdown. Housing and public capital investment posted growth thanks to demand for rebuilding the earthquake-hit northeast region and fiscal programs for disaster prevention, but they were not strong enough to prevent the economy from shrinking in the third quarter.

October corporate goods price index slid 0.3 percent on the month and declined 1.0 percent from a year ago. The annual decline was the seventh consecutive decline. Most sub-categories declined on the year. Lumber & wood products were down 3.4 percent when compared with a year ago while electronic components & devices dropped 3.6 percent and iron & steel prices tumbled 9.9 percent. However, petroleum & coal products were up 4.3 percent and production machinery was 1.4 percent higher.

September tertiary activity index was up 0.3 percent from a month ago and up 1.0 percent on the year. Among the industries that increased during September were finance & insurance (2.8 percent), medical, health care & welfare (0.7 percent), information & communications (0.6 percent), living-related & personal services & amusement services (1.3 percent) and real estate (0.4 percent). However, wholesale & retail trade was down 1.2 percent, scientific research, professional & technical services lost 2.8 percent and electricity, gas, heat supply & water was 1.4 percent lower on the month.

Americas

Canada

September manufacturing shipments were up 0.4 percent and were up 1.8 percent on the year. Volumes advanced 0.4 percent from September and now stand a healthy 4.1 percent higher on the year. Eight of 21 reporting industries gained but aerospace dominated surging 43.0 percent. Sales in the metals were up 3.7 percent and transportation equipment was up 2.5 percent despite a 3.6 percent slide in motor vehicles. Textiles weighed in with a 6.4 percent increase and petroleum & coal advanced 1.2 percent. However, machinery dropped 1.8 percent, leather retreated 6.8 percent and printing was off 4.1 percent. New orders gained 2.2 percent but backlogs dropped 0.3 percent. With inventories rising just 0.2 percent, the inventory/sales ratio was unchanged at 1.31 months.

Bottom line

Markets in the past week were focused on political events in Japan, China, the U.S. and the Middle East where tensions between Gaza and Israel escalated. Economic data were mostly disappointing with both the Eurozone and Japan contracting in the third quarter. U.S. data for October were mostly lower than anticipated thanks to Hurricane Sandy.

Next week, the Bank of Japan meets and the Bank of England releases the minutes of its meeting that took place earlier this month. Flash November manufacturing indexes highlight the week’s data — even though it is being released on Thursday — the Thanksgiving holiday in the U.S.

Looking Ahead: November 19 through November 23, 2012

Looking Ahead: November 26 through November 30, 2012

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