International Perspective will be taking off next week

and will return on Friday, January 4, 2013.

Happy holidays from all of us at Econoday!

Global Markets

Equities were decidedly mixed in the last full week of trading of 2012. Investors were cautious as the dialogue on the U.S. fiscal cliff waxed and waned. The failure of the Republicans to put a ‘plan B’ budget through the House of Representatives, even though President Obama said he would veto it, sent equities down on Friday. Economic data were virtually ignored given investor fixation with the rhetoric emanating from Washington.

Global investors have been betting that Congress will overcome its budget deadlock despite an apparently serious setback. Republican lawmakers rejected a proposal on Thursday by their leader, House of Representatives Speaker John Boehner. The dollar climbed against the euro, stocks slid from Tokyo to London and safe haven government bonds rose but in only muted fashion, indicating a continued belief that a deal will be done. There is, however, good reason not to panic since the term "fiscal cliff" is somewhat misleading. The U.S. will not suddenly fall off it on January 1, 2013. Rather, the tightening process will be more gradual.

On the week, most equity indexes in Europe, the UK and the US were up on the week while those in the Asia Pacific region were mixed.

Global Stock Market Recap

Europe and the UK

Although equity markets ended the week on the downside, most indexes were higher for the week. Both the CAC and DAX were up 0.5 percent while the FTSE was 0.3 percent higher. However, the SMI slipped 0.2 percent on the week. As the year end approaches, politics continue to overshadow economics and fundamentals. Investors reacted negatively to the failure of the Republican "Plan B" effort. However, the markets did pare their early losses following statements made by John Boehner, which suggested that he has not given up on continuing the negotiations.

The European Commission approved restructuring plans of four Spanish banks, allowing those banks to receive aid from the Eurozone bailout fund. The commission concluded that the restructuring plans of Liberbank, Caja3, Banco Mare Nostrum and Banco CEISS are in line with EU state aid rules. But problems in the Eurozone are never far off the agenda and Friday was no exception. S&P cut Cyprus to CCC+ from B, citing the rising risk of default. Cyprus has very close links with Greece and its banking sector. Greece had its credit rating raised following the country’s debt buyback. S&P cited the determination of euro area governments to keep Greece in the Eurozone. S&P lifted the rating from selective default to B- with a stable outlook. The new grade is the highest since June 2011 when the ratings company lowered the country to CCC from B.

Asia Pacific

Equities were mixed last week as investors continued to focus on the U.S. budget negotiations. Regional stocks retreated after House Republican leaders on Thursday evening canceled a vote on a "Plan B" bill, which would have extended tax cuts on incomes below $1 million, saying they did not have the votes to pass. The bill would have been vetoed by the president in any case. Analysts noted that Friday’s equity decline seemed odd given that equities had recently fallen on news that a vote on "Plan B" would go ahead. Gains ranged from 0.1 percent (Shanghai Composite) to 2.1 percent (Nikkei). Losses ranged from 0.2 percent (STI) to 2.3 percent (Taiex).

There was little reaction to Australia’s Treasurer Wayne Swan's comments on fiscal policy. He said that the government is unlikely to achieve its promised budget surplus in the fiscal year ending June 2013 in the wake of falling tax revenues due to a high Australian dollar and global economic uncertainty. However, the All Ordinaries still advanced 0.9 percent on the week.

The Nikkei climbed above the 10,000 level on Wednesday. The index had risen about 1,400 points in the last month or so, fueled by hopes for easier money from the Bank of Japan and that the U.S. will back away from the fiscal cliff. The index had been hovering around 8,600 before Prime Minister Yoshihiko Noda announced November 14^th he would dissolve the lower house of the Diet for a snap election which was held on December 16^th.

Similarly, expectations for the new government's policies are affecting investors' medium to long term outlook. Shinzo Abe, who leads the Liberal Democratic Party and will be Japan's next prime minister, met Tuesday with BoJ Governor Masaaki Shirakawa, calling again for a policy accord between the government and the bank, including a 2 percent inflation target. Abe also met the same day with Natsuo Yamaguchi, head of the LDP's coalition partner, New Komeito, and the two agreed to cooperate to pass a large fiscal 2012 supplementary budget. Markets have welcomed the swift moves by Abe to ratchet up the pressure on the BoJ and stimulate the economy, which has further weakened the yen and given Tokyo stock prices another lift.

Bank of Japan

At its monetary policy board (MPB) meeting, the Bank of Japan unanimously voted to keep its key interest rate range at zero to 0.1 percent where it has been since the collapse of Lehman Brothers in 2008. It also expanded its stimulus by raising the ceiling of its asset buying program. The MPB voted to increase its asset buying fund by another ¥10 trillion to Y101 trillion. The BoJ will increase its JGB buying from ¥19.5 trillion to ¥24.5 trillion. In addition the bank will offer new loans totaling over ¥15 trillion. The new loans will be offered quarterly until March 2014. The BoJ also will be reviewing its longer term price stability goal. With the latest move, the BoJ has expanded asset purchases five times this year, the most frequent activity during a single year in a decade. The last time it eased so many times was in 2001, when Japan was battling a domestic banking crisis.

Incoming Prime Minister Shinzo Abe has been pressuring the Bank of Japan to increase its stimulus given that the country has fallen into a technical recession and deflation continues to be thoroughly entrenched. He has advocated that the Bank of Japan adopt an inflation target of 2 percent. Mr Abe had turned the BoJ’s role in reviving the Japanese economy into a central election issue and repeatedly called for the bank to do more to combat persistent deflation by adopting “unlimited” easing. He piled more pressure on the BoJ in the wake of his Liberal Democratic party’s landslide victory on December 16^th, reminding Bank Governor Masaaki Shirakawa of his desire to implement an inflation target of 2 percent.

Mr Shirakawa, who has long resisted calls for more aggressive easing, said Thursday that the BoJ MPB would review its current inflation goal at its next meeting in January and make a decision on whether to change it. He admitted that Mr Abe’s request for a higher price goal was one factor behind the decision to discuss inflation at the January meeting. Mr Shirakawa’s term as governor ends in April and Mr Abe is expected to choose a more dovish central bank governor. Analysts said that the BoJ believes it is impossible to achieve an inflation target — it cannot force people to spend.

Currencies

Equity investors were not the only ones to feel the impact of the fiscal cliff negotiations. Currencies traded on the news as well with the yen and the U.S. dollar strengthening as investors sought perceived safety on concern U.S. budget talks will fail to avert spending cuts and tax increases that threaten to push the economy into a recession. The euro erased almost its entire weekly advance after House Republican leaders canceled a scheduled vote on Speaker John Boehner’s plan to allow higher tax rates for annual incomes above $1 million. The shared currency declined the most in two weeks after a report said Italian Prime Minister Mario Monti will resign. Monti tendered his resignation Friday night as expected to Italian President Giorgio Napolitano after Parliament approved budget legislation.

Despite the yen’s gain after the U.S. budget talks stalled, the yen still declined for the week against most of its 16 major peers. Incoming Japanese Prime Minister Shinzo Abe has called for a doubling of the central bank’s inflation goal to 2.0 percent and unlimited easing to revive growth.

The dollar is a favored currency at times of stress as it remains the world's reserve currency, and tends to be resilient even during U.S. economic uncertainty. For the week — even though the dollar slipped against the Swiss franc and euro and was unchanged against the pound — the currency strengthened against a number of its counterparts as investors dumped asset classes that are seen as more risky. The U.S. dollar was up against the yen and Australian and Canadian dollars.

Selected currencies — weekly results

Indicator scoreboard

EMU

October seasonally adjusted merchandise trade surplus narrowed unexpectedly sharply from a slightly smaller revised €11.0 billion in September to a three month low of €7.9 billion in October. The unadjusted surplus was €10.2 billion, a marked improvement on the €0.7 billion deficit posted in the year ago period. The reduction in the adjusted surplus was mainly due to weaker exports which followed a 1.3 percent monthly drop in September with a 1.4 percent decline this time and in so doing reached their lowest level since July. However, imports also chipped in, rising 0.6 percent from the end of last quarter. Despite October's reversal, annual export growth now stands at 14.0 percent, twice the rate of imports.

Germany

December Ifo survey reading was 102.4, suggesting little change in business conditions this month. December’s overall economic sentiment was up just a point from its November level and nearly 3 points short of where it stood a year ago. However, this was the measure's second consecutive increase and was its highest reading since July. December's modest headline improvement was wholly attributable to a pick-up in expectations which, at 97.9, increased 2.7 points from November. By contrast, current conditions lost a point to 107.1, their fifth decline in the last six months. Morale strengthened in most sectors, notably manufacturing and services but both construction and retail posted fresh, albeit minor, losses.

November producer prices edged down 0.1 percent on the month for a 1.4 percent annual increase — the slowest pace since July and 0.2 percentage points short of October's rate. The first monthly decline in the headline index since back-to-back falls in June and July was mostly driven by a 0.4 percent drop in the cost of energy. However, even without this impact the PPI would have been just flat versus October and 1.4 percent above its year ago level. Basics were 0.1 percent lower than at the start of the quarter while capital goods were 0.1 percent more expensive. It was only consumer goods (0.3 percent) that showed any real strength. In fact at 2.2 percent (nondurables 2.4 percent), the annual rate of PPI inflation in the consumer goods area is running at about twice the pace of that seen in basics and capital goods.

United Kingdom

November consumer prices were up 0.3 percent and were 2.7 percent higher from a year ago. The headline index was boosted by further gains in food and utilities prices, the latter reflecting the round of tariff increases introduced by major energy suppliers over the last couple of months. The cost of food & non-alcoholic drinks was up 1.1 percent on the month and alone contributed more than half of the total CPI rise while housing & household services advanced 0.6 percent, largely on the back of increases in gas and electricity charges. Clothing & footwear were up 0.6 percent, but this was essentially seasonal small enough to see annual inflation in this sector drop from minus 0.1 percent to minus 0.6 percent. The only other area of any real strength was restaurants & hotels (0.5 percent) where bills were driven up by more expensive catering services. Elsewhere prices were generally quite subdued. The main downward pressure came from falling gasoline charges and a seasonal drop in the cost of air travel. As a result, the core CPI was up only 0.1 percent from October and unchanged on the year at 2.6 percent.

November producer output prices were down 0.2 percent on the month and were up 2.2 percent on the year. Input prices edged up 0.1 percent on the month following a smaller revised increase of the same magnitude in October. Compared with a year ago prices were down 0.3 percent after a zero reading last time. The main downward pressure on output prices came from a 2.1 percent monthly decline in petroleum product charges which essentially alone accounted for the entire monthly drop in the headline measure. Most other categories registered only small moves leaving the core index unchanged on the month and were 1.4 percent above the year ago level. As usual, input costs were more volatile with fuel prices up 2.6 percent on the month and imported chemicals 1.0 percent firmer but crude oil down 1.6 percent and imported metals off 1.2 percent.

November retail sales were unchanged following a slightly smaller revised 0.7 percent monthly drop in October. This left volumes 0.9 percent higher than a year ago. Excluding fuel, sales were 0.1 percent firmer on the month and 2.0 percent stronger on the year. Excluding fuel, overall purchases were held in check in November by a 0.1 percent monthly dip in the food sector. Non-food was up 0.3 percent for a respectable 3.7 percent yearly advance. Within this latter group, household goods dominated with a 3.8 percent monthly gain but elsewhere the news was less upbeat. In particular, clothing & footwear was down 0.1 percent, the other stores category was off 0.4 percent and non-specialized stores down 1.5 percent. Fuel purchases were 1.3 percent weaker.

Third quarter gross domestic product was revised lower to a 0.9 percent quarterly gain from 1.0 percent. Annual growth was left unchanged at minus 0.1 percent. The main reason for the modest quarterly adjustment was a smaller increase in household spending, now put at 0.4 percent, down from 0.6 percent last time. The positive contribution of net exports was also shaded from 0.7 percentage points to 0.5 percentage points but there was a small upward amendment to business investment. In terms of the major output sectors, services expanded a quarterly 1.2 percent or 0.1 percentage points less than before while growth of manufacturing output was lowered by 0.2 percentage points to 0.7 percent.

Asia/Pacific

Japan

November merchandise trade deficit (unadjusted) was ¥953.4 billion. It was the fifth straight month that the balance has been in negative territory. On the year, exports dropped 4.1 percent while imports were 0.8 percent higher. Exports to Asia and the European Union remained weak and imports were up on strong demand for mobile phones and LPG for heating. Exports to Asia were down 2.5 percent on the year while those to China sank 14.5 percent. There is a Chinese boycott of Japanese products over the territorial dispute. Exports to the EU plunged 19.9 percent from a year ago on weak demand given the European slump. However, exports to the U.S. continue to increase. They were up 5.3 percent thanks to solid demand for Japanese cars and car parts. On a seasonally adjusted basis, the trade deficit expanded to ¥868.5 billion from ¥619.4 billion in October. On the month exports slipped 0.1 percent while imports jumped 4.3 percent. On the year, exports were down 4.7 percent while imports were up 0.9 percent.

Americas

Canada

October retail sales were up 0.7 percent and 1.7 percent from a year ago. However, volumes performed less impressively, posting a modest 0.3 percent monthly gain. Within the overall nominal increase, eight of the 11 reporting subsectors reported increases on the month. Dominating the headline was motor vehicles & parts (1.6 percent) and without the contribution here, sales would have risen a more modest 0.5 percent from September and 1.4 percent from a year ago. Gasoline, which matched the bounce in autos, also had a significant positive effect alongside clothing & accessories (1.8 percent) and, to a lesser extent, food (0.5 percent) and miscellaneous retailers (0.8 percent). However furniture & home furnishing stores declined 2.0 percent and electronics & appliances (down 1.6 percent) as well as sporting goods and hobbies (down 1.9 percent) fared little better.

November consumer prices were down 0.3 percent and increased just 0.8 percent on the year. The 12-month rate is now the lowest since October 2009. The weakness of the overall index was partially mirrored in the core measures, both of which continue to signal an absence of any significant underlying pressures. Hence, excluding food & energy prices the core was unchanged on the month and up 0.9 percent from a year ago. The Bank of Canada’s preferred gauge was also flat on the month, similarly shaving its annual rate from 1.3 percent to 1.2 percent. Seasonally adjusted CPI also declined 0.2 percent on the month while the non-food and energy index was 0.1 percent higher and the BoC measure still unchanged. Within the adjusted basket prices were up quite strongly for recreation, education & reading (0.5 percent) and for alcohol & tobacco (0.4 percent). Household operations and furnishing & equipment (0.2 percent) also posted an increase. However, shelter was down 0.1 percent, food up only 0.1 percent and transportation off 1.2 percent.

October monthly gross domestic product edged up 0.1 percent and was 1.1 percent higher from a year ago. The small advance came courtesy of a minimal 0.1 percent monthly increase in service sector output. This was largely thanks to a 0.8 percent jump in wholesale trade which easily outstripped the next largest increase — 0.3 percent in retail trade. Six sub-sectors posted a 0.2 percent gain but transport & warehousing was off 0.6 percent and arts, entertainment & recreation dropped a hefty 1.6 percent.

Bottom line

U.S. budget negotiations dominated the headlines while economic data barely got a glance. The Bank of Japan met and acceded mostly to the wishes of the prime minister elect who will take office on December 26^th after a parliamentary vote. The December 24^th week is a quiet one with only Japan releasing its monthly slew of reports for November. However, activity will pick up the following week in the New Year.

Best wishes for a happy holiday season and New Year.

Looking Ahead: December 24 to December 28, 2012

Looking Ahead: December 31 to January 4, 2013

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