Global Markets

Equities mostly advanced last week. Although economic news was mixed, the policy decisions by central banks offset political tensions regarding the situation in Syria. Investors continue to focus on whether the Federal Reserve will curtail its stimulus when it meets on September 17^th and 18^th. Friday’s employment situation report only confused the issue when employment grew less than expected and the two prior months’ gains were revised downward.

Five central banks met and five left their monetary policies unchanged as expected. However, the economic circumstances surrounding their decisions differ.

European Central Bank

As expected, the European Central Bank left its key refinance rate at 0.5 percent, 50 basis points above the zero percent deposit rate and 50 basis points below the 1.0 percent marginal facility rate. Despite confirmation this week that the Eurozone economy has finally moved out of recession and despite the fact that policy is already highly accommodative, near term risks still point to some additional easing. Regional growth is at best only sluggish and of the four larger EMU members, both Italy and Spain still contracted last quarter. And Cyprus, Greece, the Netherlands and Slovenia also remain in recession. At the same time the credit markets are still sluggish and inflation, provisionally just 1.3 percent in August, is well below the ECB’s 2 percent target.

With bond yields having backed up sharply (bunds are trading at a four month high) in the wake of speculation that the Fed will shortly taper its asset purchases, ECB President Mario Draghi's press conference was predictably dovish. In particular, while acknowledging the pick-up in economic activity so far, he emphasized that the future recovery would be only slow and that downside risks remain. Unemployment is high, balance sheet adjustments will hamper growth and excess liquidity is declining. To this end — and crucially for financial markets — he reiterated the ECB’s newly adopted loose forward guidance pledge to keep official interest rates at present or lower levels for an extended period of time.

Bank of England

As anticipated, the Bank of England’s monetary policy committee which, under the umbrella of its new forward guidance framework, opted to leave the Bank Rate unchanged at 0.5 percent and its asset purchase program ceiling at £375 billion. Early indications are that third quarter growth could match, if not exceed, second quarter’s 0.7 percent quarterly rate. However, the minutes of this month's deliberations (due September 18) will be closely scrutinized for any hints that the more hawkish MPC members are becoming less comfortable with the current very accommodative stance of policy.

According to the central case scenario laid down in the BoE's August Inflation Report, unemployment is not expected to reach its threshold level of 7 percent before summer 2016. This implies that, subject to none of the three co-called ‘knockouts' being triggered, policy will not be tightened for the best part of another three years. However, already the recent buoyancy of the domestic economic data has raised some doubts in financial markets that policy can be left on hold that long without jeopardizing the 2 percent medium term inflation target. The BoE opted not to repeat its warning of July — made a few days after Mark Carney took over as governor — that investors were getting ahead of themselves.

On Friday, the National Institute of Economic and Social Research (NIESR) said that Britain's economy grew 0.9 percent in the three months to August, its fastest rate in more than three years. The latest growth estimate is the highest since the three months ending July 2010, although the NIESR warned that that rate of growth would likely soften. NIESR estimates the UK economy is now 2.7 percent smaller than its peak in January 2008.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent and left its bond buying program unchanged with the goal to increase the monetary base at an annual pace of about ¥60 to ¥70 trillion yen. The BoJ also upgraded its assessment of the Japanese economy. The BoJ said the economy “is recovering moderately.” The tone of the language is the strongest since March 2008 when the BoJ described the economy as "expanding moderately."

The declaration of a full recovery comes at a time of intense debate over whether the government should go ahead with a plan to raise the 5 percent consumption tax to 8 percent next April. Prime Minister Shinzo Abe is expected to announce his decision on the tax plan in early October. Recent data have been particularly encouraging, with the jobless rate at the lowest level in almost five years, summer bonuses increasing and consumer prices rising at the fastest pace in nearly five years. Finance ministry data showed a healthy increase in corporate investment, pointing to a sharp upward revision to second quarter GDP data from the preliminary figure which showed a 2.6 percent rate of expansion.

Reserve Bank of Australia

As anticipated, the Reserve Bank of Australia kept its cash rate at 2.5 percent after lowering it by 25 basis points in August. The Reserve Bank Board was unusually explicit about prospects for an immediate follow-up move with the minutes to the August. Another reason for inaction was the looming federal election slated for September 7^th — less than a week after this meeting. The RBA has now cut its cash rate by 225 basis points since the easing cycle began in November 2011.

In its latest announcement, it noted that the Bank’s easy monetary policy is supporting rate sensitive areas more than expected. It noted that there were recent signs of increased demand by households for finance. The RBA has an inflation target of 2 percent to 3 percent and said it expected inflation to be consistent with its medium term target. It also noted that the Australian dollar is expected to continue falling over time helping to rebalance the economy. It said that the Bank would assess the outlook going forward and adjust its monetary policy as needed to foster growth. Second quarter economic growth was 2.6 percent after expanding 2.5 percent in the first when compared with the same quarter a year ago.

Australia has recorded 21 years of straight growth but the outlook has begun to dim as resources companies complete major mine building work, scale back investment in new projects and lay off thousands of workers. Mining services firms have been especially hard hit as producers shift their focus from digging up the ground to exporting raw materials to Asia.

Bank of Canada

As widely expected, the Bank of Canada made no changes to its monetary policy. In addition to leaving the target for the key overnight rate at 1.0 percent (and the deposit and Bank rates at 0.75 percent and 1.25 percent respectively) the BoC also opted to retain its gentle tightening bias with language identical to its July statement. Second quarter economic growth expanded at an annualized pace of 1.7 percent and was above official expectations but probably below the Bank's third quarter call of 3.8 percent. The recent underlying picture has been clouded by flooding and industrial action. The Bank may still be keen to emphasize that it anticipates the next move in policy rates to be up but with plenty of spare capacity and inflation well below the 2 percent mark on all the main CPI measures, any such move still looks a long way away. That said, the BoC did indicate that it now expects the output gap to start narrowing next year as opposed to 2015 as previously assumed.

Global Stock Market Recap

Europe and the UK

Equities rebounded from the previous week’s losses and gained across the board. Advances were in the two percent to three percent range with the exception of the IBEX — it jumped 4.4 percent. Stocks were particularly volatile Friday afternoon. A weaker than anticipated U.S. employment report sparked gains. The result triggered speculation among investors that the Federal Reserve may hold off on tapering its stimulus measures. But comments from Russian President Putin then drove equities sharply lower. Putin stated at the G20 Summit that Russia would continue to aid Syria if the country is attacked. The FTSE was up 2.1 percent, the CAC gained 2.9 percent, the DAX added 2.1 percent and the SMI was 2.6 percent higher on the week.

Economic data were mixed with German manufacturing orders and industrial production declining more than expected. Merchandise trade data disappointed with exports declining in Germany, France and the UK. Now onto the good news — UK manufacturing, services and construction PMIs continued to improve with readings of 57.2, 60.5 and 59.1 respectively.

Asia Pacific

With the exception of equities in the three emerging economies (Indonesia, Malaysia and the Philippines) all others advanced last week. India’s shares rallied at the end of the week thanks to new strength in the rupee. Weekly gains ranged from highs of 4.1 percent (Hang Seng), 3.5 percent (Nikkei) and 3.2 percent (SET) to a low of just 0.4 percent (All Ordinaries). Investor concerns were both political and economic in nature. The possibility of a military strike against Syria on one hand and potential Federal Reserve reduction in stimulus on the other dominated. Mixed economic data continued to sway sentiment for or against a diminution of stimulus as each report was parsed against potential Fed action. Emerging market economies have been whipsawed by rising bond interest rates and sinking currencies as investors shift investments away from emerging Asia.

India's Sensex rallied as the rupee staged a sharp recovery on the back of heavy Reserve Bank of India intervention. The rupee reacted positively this week to a number of steps announced by Raghuram Rajan, the new RBI governor. Among his steps to shore up the rupee, Rajan made it cheaper for banks to keep dollars received via some foreign currency accounts with the RBI. In another measure that would help the rupee, Japan and India Friday agreed to increase by more than three times their currency swap line to $50 billion. Dealers said dollar inflows related to an acquisition in India by a U.S. pharmaceutical company further helped the rupee Friday. Still, in the near term, the decision of the U.S. Federal Reserve on the withdrawal of its easy money policies will influence the movement of financial markets.

Currencies

The U.S. dollar slid the most in more than eight weeks after employment grew less than expected, dampening speculation the Federal Reserve will reduce its stimulus when it meets later this month. However, despite the daily losses, the currency gained against the yen, euro and Swiss franc on the week. It was lower against the pound sterling and the Canadian and Australian dollars. The euro declined after European Central Bank President Mario Draghi said that the Governing Council had discussed an interest rate cut at its meeting Thursday. Draghi said the ECB is “ready to act” as rising money market rates threaten his drive to reassure investors that borrowing costs will stay low.

The Canadian dollar gained against the majority of its most traded peers after August employment jumped by 59,200, exceeding a projected 20,000 job increase. India’s rupee climbed to the strongest level in more than a week on optimism that steps taken by the Reserve Bank of India to boost the supply of dollars will alleviate depreciation pressure on the currency.

Volumes in the global foreign exchange market are increasing as traders expand activities in developing nations and banks focus on the currency markets while stricter regulations after the financial crisis threaten earnings from other divisions. According to the Bank for International Settlements (BIS), foreign exchange trading surged to an average $5.3 trillion a day in April 2013, boosted by greater yen volumes. Trading increased 33 percent since the same period in 2010, citing a survey of currency traders it runs every three years.

The yen had the biggest jump in trading activity among major currencies, while the euro’s role as the second most traded currency was reduced. The U.S. dollar increased its lead as the most traded currency. It was on one side of 87 percent of all trades, an increase of 2 percentage points since the previous survey. Yen trading surged 63 percent between 2010 and 2013, with the most notable increase in activity occurring between October 2012 and April 2013. That period preceded the Bank of Japan’s announcement on April 4 that it would buy an unprecedented ¥7 trillion of bonds a month in an attempt to achieve a 2 percent inflation goal within two years.

Trading became increasingly concentrated within the world’s major financial centers during the survey period, the BIS report showed. The UK, U.S., Singapore and Japan accounted for 71 percent of foreign exchange trading, up from a combined share of 66 percent through April 2010. The UK increased its role as the largest center of foreign exchange activity, with 41 percent of global turnover, compared with 37 percent in 2010. Singapore overtook Japan to become the world’s third-largest trading center.

Selected currencies — weekly results

Indicator scoreboard

EMU

August final manufacturing PMI reading was 51.4, a 26-month high. The growth rates of output, new orders and exports all saw their highest readings since May 2011 and the new orders/inventory ratio hit its best value in 28 months. There was also a small increase in backlogs. However, employment news was again disappointing with job losses recorded for the 19th straight month. A 6.8 point jump in the input cost sub-index was the second sharpest increase in the survey's history but on average only made for broadly flat prices over the period. National PMIs were above the key 50 mark in all countries except France (49.7) and Greece (48.7) although in the case of the latter this was still the best performance in close to four years. Italy (51.3) hit a 27-month high and Spain (51.1) a 29-month peak. Germany (51.8) managed a 25-month high.

Second quarter gross domestic product was up an unrevised 0.3 percent but was down 0.5 percent from a year ago. The first look at the GDP expenditure components showed a 0.2 percent quarterly increase in private consumption but this came after drops of 0.5 percent and 0.2 percent in the fourth quarter of 2012 and first quarter of 2013 respectively. Gross fixed capital formation also returned to positive growth but only marginally and a 0.3 percent increase came nowhere close to offsetting the previous period's 2.2 percent slump. Government consumption was up 0.4 percent, unchanged from last time. Inventory accumulation subtracted 0.1 percentage points from growth after adding 0.4 percentage points in the first quarter. Net trade was mildly positive with export volumes advancing 1.6 percent on the quarter and imports up a slightly slower 1.4 percent. As a result, net exports added 0.2 percentage points to the quarterly change in total output after having provided no support at the start of the year.

July retail sales edged 0.1 percent higher after dropping 0.7 percent the month before. Workday adjusted volumes were down 1.3 percent on the year following a 1.1 percent drop at the end of last quarter. The underlying details were even softer than the headline figures which were helped by a 1.0 percent monthly increase in purchases of food, drink & tobacco. Excluding auto fuel, non-food sales were off 0.4 percent after a 0.6 percent decline in June. Weakness was particularly apparent in Germany where June's 0.8 percent monthly contraction was followed by an even steeper 1.4 percent slide and in Slovenia where demand was down 3.4 percent. Sales in Spain were flat but jumped 2.0 percent in France, albeit following a 1.4 percent slump previously.

Germany

July manufacturers’ orders plunged 2.7 percent after soaring a revised 5.0 percent in June. Workday adjusted orders were 1.9 percent higher on the year after a 5.6 percent annual increase last time. July's partial reversal mainly reflected weakness in overseas markets where June's 6.1 percent monthly jump was replaced by a 4.5 percent slump. However, domestic orders held up much better, sliding just 0.3 percent after a 3.5 percent bounce at the end of last quarter. Total orders were depressed by a 5.1 percent monthly drop in the capital goods sector although even this failed to offset June's 9.0 percent jump. Consumer & durable goods orders were down a more modest 1.0 percent and basics rose 0.8 percent.

July seasonally adjusted merchandise trade surplus unexpectedly narrowed to €14.5 billion — €1.3 billion less than June's marginally larger revised €15.8 billion and the smallest since March 2012. The unadjusted balance was a surplus of €16.1 billion after a €17.0 billion in June. Seasonally adjusted exports were down 1.0 percent on the month to €90.3 billion, their lowest level since November 2012 and were compounded by a 0.5 percent increase in imports. Compared with a year ago exports were only flat and down 0.7 percent to the rest of the EMU bloc. Imports expanded a modest 0.9 percent from July 2012 and within this purchases from the Eurozone were 1.7 percent weaker.

July industrial production dropped 1.7 percent on the month and was 2.2 percent below its year ago level. The weak performance reflected broad based monthly declines among the main production sectors. In addition to a 3.4 percent slump in capital goods output, consumer goods dropped 1.2 percent (durables 4.4 percent) and intermediates 1.0 percent. Energy was off 2.9 percent and but for a 2.7 percent increase in construction, the headline data would have looked a good deal worse. Manufacturing contracted 2.1 percent, more than reversing June's 1.9 percent advance.

France

The second quarter mainland jobless rate edged up to 10.5 percent from 10.4 in the first quarter. This was 0.7 percentage points above its level a year ago and its highest posting since the fourth quarter of 1997. Including overseas territories the rate was 10.9 percent, also 0.1 percentage points higher than in the first quarter and 0.7 percentage points above its reading in the second quarter of 2012. In both cases the weakest part of the labour market was the 25 to 49 year old sector which, in mainland France, saw a 0.2 percentage point increase to 9.6 percent. However, even this was the smallest increase since the third quarter last year and in keeping with the slightly less pessimistic tone of recent business surveys.

July seasonally adjusted merchandise trade deficit widened out to €5.1 billion and was €0.6 billion larger than the marginally larger revised deficit posted in June and reversed around half of the narrowing seen since May. The headline deterioration occurred despite a 1.3 percent monthly increase in exports as imports expanded 2.7 percent due to higher energy purchases and a one-off deal in the space industry. Compared with a year ago exports were down 0.6 percent while imports were up 1.1 percent.

United Kingdom

July industrial production was flat following a slightly stronger revised 2.0 percent bounce in June. Manufacturing was up 0.2 percent from June after a marginally larger revised 1.3 percent gain previously. On the year, total output was down 1.6 percent while manufacturing output declined 0.7 percent. The modest monthly gain in manufacturing reflected a very mixed period for the various sub-sectors. On the positive side there were healthy advances in other manufacturing & repair (4.5 percent), other machinery & equipment (3.7 percent) and computer, electronic & optical equipment (3.7 percent). However, a sizeable offset was provided by drops in pharmaceutical products & pharmaceutical preparations (4.7 percent), electrical equipment (6.9 percent) and chemicals & chemical products (3.6 percent). Total industrial production was hampered by a 0.5 percent monthly decline in mining & quarrying and a 2.2 percent contraction in electricity, gas, steam & air conditioning. However, water & waste management was up 1.2 percent.

July global goods shortfall widened out surprisingly sharply to Stg9.9 billion, up from a Stg8.2 billion deficit in June. Excluding oil and other erratic items, the red ink expanded Stg1.3 billion to Stg8.7 billion. The disappointing headline data reflected a 7.6 percent monthly plunge in exports — mainly of machinery & transport — only partially offset by a 1.0 percent decline in imports. The bulk of the slump in exports was driven by a surely erratic 15.8 percent collapse in sales to non-EU countries which, with imports dropping a relatively mild 2.9 percent, saw the bilateral deficit jump some 61.4 percent to Stg4.5 billion. Net trade with the rest of the EU was in the red to the tune of Stg5.3 billion, a decrease of almost Stg0.1 billion from last time.

Australia

July retail sales edged up 0.1 percent on the month and were up 1.9 percent from a year ago. Household goods retailing was up 1.8 percent, food retailing gained 0.5 percent, clothing, footwear & personal accessory retailing was up 1.4 percent and cafes, restaurants & takeaway food services inched up 0.1 percent. However, the increases were largely offset by declines in department stores (down 7.9 percent) and other retailing (down 0.2 percent). Over the longer term, the largest contributor to the weakness is department stores which were down 1.3 percent in trend terms. The state which was the largest contributor to the increase was South Australia (1.6 percent) followed by Victoria (0.2 percent), the Northern Territory (3.1 percent), Tasmania (1.5 per cent) and the Australian Capital Territory (0.3 percent). However, they were largely offset by declines in Western Australia (down 0.7 percent), New South Wales (down 0.1 percent) and Queensland (down 0.2 percent).

Second quarter gross domestic product was up 0.6 percent from the previous quarter and up 2.6 percent from the same quarter a year ago. Growth for the quarter was driven by a 0.2 percent contribution from household final consumption and 0.2 percent contribution from inventory change. The main negative was public gross fixed capital formation which subtracted 1.4 percentage points from growth. Final consumption expenditures were up 0.5 percent on the quarter and 1.5 percent from a year ago. Gross fixed capital formation slipped 0.1 percent and was down 1.6 percent on the year. The industries that contributed to growth in the June quarter were finance, mining and construction. The finance industry contributed 0.2 percent to GDP while the other industries each contributed 0.1 percent to the GDP increase. The terms of trade increased 0.1 percent. Financial and insurance services were up 2.1 percent and construction was up 1.9 percent.

July merchandise trade deficit was A$765 million after recording a surplus of A$243 million in June. Exports edged up 0.2 percent on the month and 4.3 percent on the year. Non–rural goods were up 1.0 percent while rural goods were up 3.0 percent and net exports of goods under merchanting climbed 8.0 percent. Non–monetary gold dropped 19.0 percent. Services exports were 2.0 percent higher. Imports were up 4.1 percent on the month and 1.6 percent from the same month a year ago. Intermediate and other merchandise goods jumped 9.0 percent while consumption goods were 2.0 percent higher. Non–monetary gold gained 11 percent while capital goods rose A$12 million. Services imports were up 2.0 percent.

Americas

Canada

July merchandise trade deficit was C$0.93 billion, the largest deficit since April. The deterioration reflected a combination of weaker exports and stronger imports, the former falling 0.6 percent on the month and the latter increasing 0.6 percent. However compared with a year ago, exports were up 4.3 percent while imports were down 0.8 percent. The worsening in the real balance was even more marked as export volumes dropped 1.7 percent from June and real imports advanced 1.0 percent. Much of the increase in the deficit could be attributable to rising imports from the U.S. which was up 2.7 percent on the month. With exports across the border gaining just 0.8 percent, the bilateral surplus narrowed from C$3.6 billion to C$3.2 billion. The other main area of weakness was in trade with the EU where the bilateral deficit widened by C$0.3 billion to C$1.0 billion. Within the overall monthly slide in nominal exports, metal ores and non-metallic minerals were down 10.5 percent, metal and non-metallic mineral products lost 7.3 percent and aircraft & other transportation equipment & parts dropped 22.8 percent. Declines here were almost offset by gains in farm, fishing & intermediate food products (10.5 percent), forestry products & building & packaging materials (8.2 percent) and consumer goods (3.8 percent). Imports were supported by a hefty 38.5 percent monthly surge in metal ores & non-metallic minerals and a nearly 13 percent leap in basic & industrial chemical, plastic & rubber products. However, energy dropped 14.2 percent and aircraft & other transportation equipment declined 18.1 percent.

August employment jumped 59,200 after declining in both June and July. The unemployment rate slipped to 7.1 percent from 7.2 percent in July. At the same time, the participation rate edged up to 66.6 from 66.5. The recovery was dominated by part time positions which more than made up for July's losses with a sizeable 41,800 advance. Full time jobs were up a more modest 17,400. Private sector employment grew 30,900 while government payrolls were up 9,000. The number of self-employed also expanded 19,200. The services area added 40,600 jobs with health care & social assistance adding 59,500 positions. There were also sizeable increases in information, culture & recreation (33,200) and accommodation & food (22,500). However, elsewhere the story was notably weaker with employment in finance, insurance, real estate & leasing down 18,500, business, building & other support services off 11,000 and education down 22,400. Trade fell 100 and professional, scientific & technical services dropped 400. Goods producing industries lagged well behind with payrolls up 18,600, mainly thanks to a 17,700 increase in construction. Manufacturing rose only 5,700 and utilities were up 7,300. Agriculture declined 10,800 and natural resources 1,400.

Bottom line

The Reserve Bank of Australia, European Central Bank and the Banks of Canada, Japan and England refrained from changing their respective monetary policies. Economic data were mixed with August PMIs showing improvement for the most part. Investors continue to wait to see what the Federal Reserve’s next policy move will be.

The upcoming week will feature the monthly plethora of data from China including August consumer and producer prices, industrial output, merchandise trade and retail sales. Both the UK and Australia report labour market data. But investors will also be monitoring the situation in Syria and of course FedSpeak for the last clues before the pre-FOMC meeting blackout period. 

Looking Ahead: September 9 through September 13, 2013

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