Global Markets

The FOMC meeting is almost here and investors and traders will find out whether the Federal Reserve will cut back on its bond buying stimulus. Markets have been agitated by the uncertainty of where the Fed will go next with its monetary policy. Also addling markets is the situation in Syria and the threat of possible U.S. involvement in the conflict.

Equities were mostly up on the week with only the S&P/TSX Composite retreating. The SET gained 4.9 percent while the Shanghai Composite rallied 4.5 percent. Several indexes scored gains of over 3 percent including the Nikkei, IBEX, the Dow and Bolsa.

Global Stock Market Recap

Europe and the UK

Equities advanced last week, mostly thanks to Tuesday’s big gains. With little economic data during the week in Europe, investors focused on the Syrian situation. But as concerns over a potential U.S. military strike on Syria receded, investors returned attention toward the upcoming FOMC meeting on Tuesday and Wednesday and the fate of Fed stimulus. Tuesday’s gains reflected better than anticipated data from Japan — second quarter GDP growth was revised upward — and China where data showed the economy stabilizing.

Bank of England Governor Mark Carney on Thursday defended the introduction of forward guidance and reaffirmed that tightening will not be considered as long as the economy cannot withstand it. Forward guidance implies that the BoE will not increase its key interest rate at least until the ILO unemployment rate has fallen to a threshold of 7 percent. According to the Bank’s forecast, this will not happen until 2016. But markets are betting that rate increases will come sooner than what the BoE estimates due to the recent improvement in the economy and unemployment data. Data released Wednesday showed that the jobless rate dropped to 7.7 percent in three months to July from 7.8 percent, the lowest since the September to November period in 2012.

Unemployment in Greece continued to increase with the jobless rate reaching a new record high in June. The seasonally adjusted unemployment rate advanced to 27.9 percent in June from 27.6 in May and 27.1 percent in April. Elsewhere, July Eurozone industrial output dropped sharply to the lowest level in more than three years, raising doubts about the bloc's ability to a keep its modest recovery alive.

Asia Pacific

Equities advanced last week despite sagging at week’s end as investors waited for U.S. data that would reveal the strength of the recovery prior to this week's FOMC meeting. Many analysts expect the Federal Reserve to reduce its $85 billion monthly bond buying program by a modest $10 billion. Investors also remained focused on the possible fallout of the Syrian crisis as the U.S. and Russia began talks on a plan to eliminate Syria's chemical weapons.

China released its usual slew of monthly economic data at the beginning of the week. The data were basically positive with both retail sales and industrial production increasing more than expected. However, according to Premier Li Keqiang, China's economic recovery is still not on a solid footing. However he assured that the economy's fundamentals remained stable. "The foundation of economic recovery is not yet solid with many uncertain factors," Li said during a speech at the World Economic Forum in Dalian, China. He also warned against using stimulus to counter a slowdown of the economy, saying such an option would not help address the underlying problems.

Meanwhile, the Japanese government upgraded its assessment of the economy for the seventh time this year and said that deflation is ending. The Japanese economy is on the way to recovery at a moderate pace because of rising capital expenditure, mainly among non-manufacturing industries. The upgrade supports the government's case for a scheduled two stage increase in the sales tax. However, Japan is considering a reduction in corporate income taxes as part of a stimulus package to cushion the economy from a planned increase in the sales levy.

Reserve Bank of New Zealand

The Reserve Bank of New Zealand left its official cash rate (OCR) at 2.5 percent where it has been since March 2011. In his statement, Governor Graeme Wheeler said he expects that the OCR would remain at that level at least until the end of the year. The governor noted that the New Zealand dollar remains high. This continues to be a headwind for those engaged in international trade. He also said that the extent and timing of an interest rate increase would depend on house price inflation.

The housing sector has been under pressure since the massive earthquake in February 2011 in Christchurch. In August, the RBNZ announced a 10 percent limit on new housing loans where the loan-to-value ratio is over 80 percent, a move designed to dampen rising house prices and help reduce the risk of a housing boom ending in bust, and threatening financial stability in turn. Wheeler said in his post announcement remarks that inflation pressures have the potential to build up given the capacity constraints in the economy. He said that the RBNZ will need to raise the interest rate: “Exactly when that will start to trigger will be determined by many factors. At this point we don’t expect that to start this year.”

The RBNZ raised its growth forecast for the year through March 2014 to 3.2 percent from 3 percent, citing construction and a boost to spending from rising house prices. It expects growth will peak at about 3.5 percent in mid-2014 and slow to 2.3 percent by March 2015. It maintained its inflation forecast for 2014 at 1.9 percent. Inflation is not projected to reach the midpoint of the 1 percent to 3 percent range inflation target range until the second quarter of 2015. Consumer prices rose 0.7 percent in the year ended June 30.

Currencies

The U.S. dollar declined against all of its major counterparts with the exception of the yen last week. On Friday, investors scurried to revise down estimates of the Fed’s monetary stimulus reduction after the release of weaker than anticipated retail sales and consumer sentiment data. The consensus is that the FOMC will taper at its meeting, although the amount of the reduction differs among forecasters.

The pound sterling advanced against all of its 16 major peers before the Bank of England releases the minutes of its September meeting on Wednesday amid speculation policy makers may have to raise interest rates sooner than they had projected. Data earlier in the week showed the unemployment rate unexpectedly fell. The pound strengthened to a seven month high against the U.S. dollar as a UK government report showing construction output accelerated in July added to signs Britain’s economic recovery is gaining momentum. Construction accounts for 6.3 percent of the economy.

Selected currencies — weekly results

Indicator scoreboard

EMU

July industrial production (excluding construction) dropped 1.5 percent — the steepest decline since September 2012. Annual workday adjusted growth deteriorated from a significantly weaker revised drop of 0.4 percent at quarter-end to a decline of 2.1 percent for the worst performance since February. July's downswing was broad based with all the major sectors seeing renewed monthly declines in production. Capital goods (down 2.6 percent) recorded the most marked decline but consumer durables (down 2.2 percent) were not far behind and neither nondurable consumer goods (down 0.9 percent) nor intermediates (down 0.7 percent) performed much better. Energy also had a negative impact, falling 1.6 percent from June. Regionally the monthly headline decline was led by Germany where output slumped 2.3 percent and more than reversed June's 2.2 percent gain. France (down 0.6 percent) and Italy (down 1.1 percent) similarly struggled to leave just Spain (up 0.1 percent) among the larger member states avoiding a contraction. Elsewhere there were also fresh declines in Portugal (down 3.2 percent), Greece (down 2.8 percent) and the Netherlands (down 0.5 percent).

United Kingdom

August claimant count dropped 32,600 after a larger revised 36,300 slide last time. Over the last three months this measure of unemployment now shows a decline of 98,300. The jobless rate also edged a notch lower to 4.2 percent, its weakest level since February 2009. According to the labour force survey statistics that form part of the BoE's new forward guidance, unemployment in the three months to July dropped 24,000 or 1.0 percent and was 105,000 lower on the year. In turn this saw the key jobless rate dip from 7.8 percent in the February to April period to 7.7 percent. Employment in the same period increased a very healthy 80,000 on the quarter, wholly attributable to a 95,000 jump in full time jobs as part time positions fell 15,000. Wages remained very subdued. Annual headline average earnings growth in July was just 1.1 percent, down from 2.2 percent in June and slightly softer than anticipated. Single month earnings growth was only 0.6 percent while headline regular pay was up just 1.0 percent on the year, reversing a minor blip higher last time.

Asia/Pacific

Japan

Second quarter gross domestic product was revised upward to an increase of 0.9 percent on the quarter or at an annualized rate of 3.8 percent as expected. GDP was up 1.3 percent from the same quarter a year ago. On the quarter, domestic demand was revised upward from 0.4 percent to 0.7 percent. CAPEX was revised significantly to an increase of 1.3 percent from a preliminary estimate of a decline of 0.1 percent. This was the first increase for CAPEX in six quarters. Public investment was revised upward to 3.0 percent from 1.8 percent.

July tertiary index declined 0.4 percent on the month and was up 1.0 percent from a year ago. Industries that declined included wholesale & retail trade (down 2.3 percent), finance & insurance (down 2.1 percent), accommodations, eating & drinking services (down 1.6 percent) and miscellaneous services except government services (down 0.7 percent). Also lower on the month were medical, health care & welfare, compound services and learning support. The losses above were partially offset by gains in scientific research, professional & technical services (up 2.4 percent), information & communications (up 1.0 percent) and living related & personal services & amusement services (up 1.7 percent). Real estate & goods rental & leasing and electricity, gas, heat supply & water also advanced.

August corporate goods price index was up 0.3 percent and was 2.4 percent higher from a year ago. This was the fifth consecutive month that the annual increase has been positive. Among the categories that made a positive contribution in August were petroleum & coal products, electric power, gas & water, nonferrous metals and business oriented machinery. On the year, lumber & wood products jumped 12.3 percent for a second month while petroleum & coal products jumped 16.0 percent after 16.8 percent the previous month. The latter probably reflects the decline in the value of the yen.

July private sector machine orders excluding volatile ones for ships and those from electric power companies were virtually unchanged on the month and up 5.8 percent from a year ago. In July, manufacturing orders were up 4.8 percent after increasing 2.4 percent the month before while nonmanufacturing orders excluding volatile ones were virtually unchanged on the month after sinking 17.5 percent in June. Orders from overseas were up 1.4 percent after plunging 16.7 percent in June. The total value of machinery orders received by 280 manufacturers operating in Japan rebounded 4.4 percent after decreasing 14.3 percent in June on the month.

Australia

August employment surprised and declined 10,800. This was the second consecutive month that employment declined. The unemployment rate inched up 0.1 percentage point to 5.8 percent. The number of people employed decreased by 10,800 to 11,637,100 in August. The decrease in employment was due to declines in both full and part time employment. Part time employment was down 8,200 to 3,508,300 and full time employment was down 2,600 to 8,128,800. The decline in total employment was mainly driven by a decrease in male full-time employment and a decline in female part-time employment. The number of people unemployed increased by 9,400 people to 714,100. The seasonally adjusted labour force participation rate decreased 0.1 percentage point to 65.0 percent in August. The seasonally adjusted underemployment rate was 7.8 percent in August 2013. Combined with the unemployment rate of 5.8 percent, the latest seasonally adjusted estimate of total labour force under-utilization was 13.7 percent in August.

China

August merchandise trade surplus was $28.5 billion, up from July’s surplus of $17.8 billion. Exports were up 7.2 percent on the year while imports were up 7.0 percent. For the year to date, the trade surplus was $154.2 billion. Exports to Europe were up for the second straight month on the year, this time by 2.5 percent while imports were up 5.1 percent. Exports to Japan slipped 2.2 percent and were down 9.0 percent from a year ago. Exports to the U.S. were up 3.4 percent while imports leaped 18.3 percent. Relatively soft import growth may be ascribed to the surge in raw materials prices in the month, given the run-up in crude and iron ore prices.

August consumer prices eased to an increase of 2.6 percent when compared with a year ago. The CPI was up 2.7 percent in July. On the month, the CPI was up 0.5 percent after edging up 0.1 percent in July. For the year to date, the index was up 2.5 percent. Urban prices were up 2.5 percent while rural prices jumped 2.9 percent. Food prices eased to an increase of 4.7 percent from 5.0 percent the month before while non-food items were up a benign 1.5 percent after 1.6 percent. Clothing prices were up 2.2 percent for a second month. Transportation & communication prices were unchanged on the month.

August producer price index was down 1.6 percent on the year after dropping 2.3 percent in July and 2.7 percent in June. It was the 18^th consecutive monthly decline and the best showing since February. On the month, the PPI edged up 0.1 percent. For the year to date, the PPI was down 2.2 percent when compared to a year ago. Consumer goods prices were unchanged for the third consecutive month while production materials were 2.1 percent lower. Ferrous metals prices were down 3.7 percent following drops of 5.9 percent in July and 6.3 percent in June.

August retail sales were up 1.17 percent on the month and were up 13.4 percent on the year after rising 13.2 percent in July. This was strongest showing so far in 2013. Year to date growth was 12.8 percent, unchanged from last time. Annual sales growth accelerated modestly in both the urban (13.1 percent from 12.9 percent) and rural (15.1 percent from 15.0 percent) areas and most spending categories made fresh headway. Notable among these were home appliances (12.8 percent after 7.5 percent), cosmetics (16.2 percent after 10.1 percent) and furniture (21.3 percent after 17.6 percent). Oil and gas purchases also climbed from a 9.9 percent to a 12.7 percent rate. The main areas of weakness were gold, silver & jewelry (21.8 percent after 41.7 percent) and communications equipment (16.0 percent after 22.7 percent).

August industrial production was up 0.93 percent on the month and 10.4 percent on the year — the fastest pace in 17 months. Year to date growth was 9.5 percent and the best performance since March. The main reason for the improvement was renewed strength in steel products, where annual growth jumped from 10.9 percent to 15.6 percent, electricity (13.4 percent from 8.1 percent) and power & thermal (12.2 percent from 8.3 percent). However, there were also gains in machinery (12.8 percent from 10.6 percent), transport equipment (2.2 percent from minus 0.3 percent) and ferrous metals (13.6 percent from 11.8 percent). Among the weaker categories, motor vehicle output growth slowed from 15.4 percent to 14.8 percent and the rise in cement production eased from 9.1 percent to 8.2 percent.

Bottom line

Concerns about Syria were prominent during the week. As diplomatic efforts to resolve the problem began, fears receded and investor angst concerning possible Federal Reserve action kept investors on the sidelines as they waited for the FOMC announcement and the Fed chairman’s post meeting press conference. The UK continued to post better than expected economic data, this time on the labour market. China’s data showed the economy there beginning to stabilize.

The FOMC finally will announce its decision concerning the reduction of Fed stimulus this week. Also on tap, the Reserve Bank of India under its new governor Raghuram Rajan will try to find ways to stimulate the Indian economy and bring about reforms that are desperately needed. The Bank of England releases minutes from its September monetary policy board meeting. They will be parsed carefully as bank watchers look for further clarification of the Bank’s forward guidance.

Looking Ahead: September 16 through September 20, 2013

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