International Perspective will be taking off next week to celebrate

Thanksgiving. IP will return on December 6, 2013.

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

Global Markets

Market chatter returned to the prospects of tapering bond purchases by the Federal Reserve once again with the release of the minutes from the most recent FOMC meeting. Investors remained cautious as they worried that a reduction of stimulus measures could start sooner than anticipated. Equities were choppy as investors deliberated between upbeat economic data, normally a boost to equities, and stimulus reduction prospects. Sentiment was buoyed by positive U.S. labor market and price data Thursday and improving economic data from Europe on Friday.

OECD’s November forecasts

The Organization for Economic Cooperation and Development, in its latest Economic Outlook, revised its forecast for the Eurozone down and expressed only subdued optimism for the rest of the world. It warned that emerging markets are beginning to falter and that growth worldwide is threatened by an array of risks. Global growth is now forecast at 2.7 percent this year and 3.6 percent in 2014 and is almost half a percentage point less than previously predicted. In the statement accompanying the publication, the organization said that there was risk of “another bout of brinkmanship” in the United States over the debt ceiling and from the tapering of asset purchases by the Fed which were designed to stimulate the economy.

The OECD said that the Eurozone would grow 1 percent next year after output declined an estimated 0.6 percent in 2013. Both forecasts were lower than estimates issued in its May outlook. According to the OECD, Eurozone growth will not be strong enough to make a big dent in unemployment, which currently is 12.2 percent. For the United States, OECD forecast an expansion of 2.9 in 2014 after 1.7 this year, a slightly more upbeat forecast. However, growth in China, estimated at 8.2 percent next year after 7.7 percent this year, would be slower than it forecast in May. The OECD warned that growth in emerging markets is slowing and could be a drag on Japan and the euro area because of their exports to the developing world. It forecast growth of 1.5 percent for Japan in 2014 after growth of 1.8 percent this year, a more optimistic outlook than in May.

Global Stock Market Recap

Europe and the UK

Equities were mixed last week with the DAX rising for the seventh consecutive week while in contrast, the FTSE was lower for a the third week. The FTSE lost 0.3 percent while the DAX advanced 0.5 percent. The CAC and SMI were down 0.3 percent and 0.9 percent respectively. The FTSE was pressured by miners — they retreated on concerns about their earnings outlook.

The International Monetary Fund said Thursday that it sees no acute financing pressures on Greece and the timing of the loan disbursement will depend on how the discussions between the troika and Greek authorities evolve. The IMF said that they believe Greece's financing needs in the coming months can be met from existing liquidity buffers and therefore do not see any acute financing pressures. The focus now is on reaching an agreement on the set of policies that would facilitate the conclusion of the fifth review of the country's economic adjustment program.

According to ECB President Mario Draghi and other members of the governing council, interest rates must remain low to give the economic recovery the support it needs. They sought to soothe concerns about the potential impact of exceptionally loose monetary policy. The comments suggest that policy makers are firmly committed to maintaining easy money to help Europe emerge from its worst recession in decades, even against the backdrop of concerns from some corners that low rates are sowing the seeds of future instability. When the ECB lowered rates earlier this month, it reinforced its forward guidance indicating that it could cut rates further if it deemed such a move appropriate to combat the risk of deflation. The ECB surprised financial markets on November 7 by cutting its main refinancing rate to 0.25 percent from 0.50 percent. The Bank said there was a risk of a prolonged period of low inflation and the rate cut aimed to shorten that period.

Mr Draghi said the interest rate that matters to long term savers there — namely the rate on long term German bunds — is not directly related to ECB policy, but rather a reflection of "safe haven" flows of capital into Germany. When the ECB takes action to reduce uncertainty, it should help reduce investors' desire to move their capital to Germany. Such a development should increase the interest rates of German bunds again. Since the ECB rate cut, Mr Draghi and the ECB have faced criticism in Germany, a country with an entrenched belief in sound money and a fear of inflation. Mr Draghi reiterated that members of the ECB's Governing Council make decisions based on the interests of the Eurozone as a whole rather than as individual nations.

Asia Pacific

Equities were mixed as investors grappled with interpreting the FOMC minutes and the discussion of its stimulus program with better than anticipated U.S. economic data. Boosting equities in Japan was a declining yen thanks to remarks from Bank of Japan Governor Haruhiko Kuroda. He said the BoJ remains open to further easing measures and that the recent decline in the yen was not abnormal. On the week, the Nikkei was up 1.4 percent, the Hang Seng and Shanghai Composite jumped 2.9 percent and 2.8 percent respectively.

The All Ordinaries retreated 1.2 percent on the week while the Sensex was 0.9 percent lower. The typhoon ravaged PSEi plunged 4.1 percent while the SET dropped 4.3 percent on political worries. Emerging market indexes dropped on concerns over the possible stimulus reduction in the U.S. which may spur capital outflows from emerging markets. The OECD cited a slowdown in developing nations in its November outlook.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. It also left its financial asset purchases unchanged. The goal is to increase the monetary base at an annual pace of about ¥60 to ¥70 trillion yen. The monetary policy board maintained its view that the economy is recovering moderately. The MPB noted that growth overseas has been picking up moderately although somewhat lackluster. As a result, exports have been picking up. It said that CAPEX has been picking up along with corporate profits. Regarding its aim to achieve 2 percent inflation in two years, it noted that core CPI excluding fresh food is in the range of 0.5 to 1.0 percent and inflation expectations seemed to be picking up

Governor Kuroda said in speaking to the lower house financial affairs committee that the yen has been in a correction process since last year and there is no "bubble-like, abnormal yen weakness right now in the currency market." Meanwhile, the BoJ released its monthly economy report, affirming its earlier view that the economy is recovering moderately. The BoJ slightly upgraded its assessment of global economy, saying overseas economies are picking up moderately.

Currencies

The U.S. dollar was down against the euro, Swiss franc and the pound sterling last week. However it advanced against the yen and the commodity currencies — the Canadian and Australian dollars. The Australian dollar fell the most in four months against the U.S. dollar after Reserve Bank of Australia Governor Glenn Stevens said that while the RBA has been unconvinced about the effectiveness of trying to drive down the exchange rate, he was “open-minded” on currency intervention. Australia’s currency dropped on the remarks. It climbed almost 50 percent in the four years ended December 31 as the country escaped the 2009 global recession and a China-led mining investment boom spurred growth. That squeezed manufacturers and tourism operators in Australia’s southeast, spurring job losses at major companies.

The euro gyrated during the week. It was pummeled on Wednesday after Bloomberg reported that the European Central Bank was considering cutting its so-called deposit rate, a move designed to inject further stimulus into the Eurozone economy. Such a measure would be intended to deter commercial banks from leaving cash with the ECB and amount to a loosening in policy by the Bank. However, this was denied and the currency promptly rebounded. It was helped after governing council member Joerg Asmussen cautioned that the Bank would be unlikely to cut its deposit rate which is currently zero to negative anytime soon. And a report showing an improvement in German business confidence this month also helped the euro.

Selected currencies — weekly results

Indicator scoreboard

EMU

November flash composite PMI reading declined to 51.5, down from October’s 51.9 and its worst reading in three months. The decline was wholly attributable to a deceleration in activity in services where the PMI provisionally dropped 0.7 points to also a 3-month low of 50.9. By contrast, the manufacturing index crept up 0.2 points to 51.5, still close enough to the 50 mark to signal only sluggish growth but its best reading in some twenty-nine months. Manufacturing output (52.8) weighed in at a half respectable pace as new orders made fresh gains, helped by the steepest rise in exports since May 2011. Backlogs were also up and employment was trimmed just slightly. By contrast, new business in services slowed for the second successive month and payrolls declined at their sharpest rate since August. Regionally there was good news out of Germany (composite output 54.3, manufacturing 52.5 and services 54.5) but disappointing developments in France (composite output 48.5, manufacturing 47.8 and services 48.8). For comparison, China and the U.S. readings for manufacturing only were 50.4 and 54.3 respectively.

Germany

November ZEW current activity slipped a point to 28.7 after having declined 0.9 points the month before. However, expectations climbed 1.8 points to 54.6, their fourth consecutive monthly increase and the highest reading since October 2009. While making little change to their assessment of current business conditions, analysts became slightly more optimistic about the outlook for the German economy. The improvement in expectations for Germany was reflected in the results for the Eurozone as a whole where a 1.1 point gain, the seventh in a row, took the index up to 60.2, its best performance since March 2006.

Third quarter gross domestic product was up 0.3 percent and workday adjusted annual rate of 0.6 percent originally estimated in the flash report. Unadjusted total output also expanded an unrevised 1.1 percent on the year. The quarterly increase in GDP was less than half the 0.7 percent pace achieved in the previous period but this masked acceleration in domestic demand which expanded 0.7 percent after a 0.4 percent increase last time. Within this, private consumption edged up 0.1 percent following a 0.6 percent bounce in the second quarter but gross capital investment surged 3.0 percent and alone added some 0.5 percentage points to the quarterly change in total output. Investment in machinery and equipment rose 0.5 percent and was up 2.4 percent in construction. Government spending advanced 0.5 percent while business inventories added 0.2 percentage points, reversing most of the second quarter's 0.3 percentage point subtraction. Exports edged up just 0.1 percent on the quarter which, with imports advancing 0.8 percent, saw net foreign trade cut 0.4 percentage points off headline growth having added 0.3 percentage points last time.

November Ifo survey paints a generally upbeat picture of German economic activity this month. At 109.3 the overall sentiment measure was up nearly 2 points from October and at its highest level since April 2012. The headline improvement reflected the combination of gains in both its current and expectations components. The former advanced a modest 0.9 points to 112.2 but this was still its strongest level since June last year, while the latter was up a more sizeable 2.7 points to 106.3, its best reading since May 2011. All of the major sectors were more optimistic in mid-quarter, most notably manufacturing and wholesale where the sentiment indexes climbed 4 points to 15.0 and 11.8 respectively. Services gained 3.6 points to 19.1, retail advanced 1.8 points to 5.1 and construction gained 3.1 points to minus 3.1.

Asia/Pacific

Japan

October merchandise trade deficit was a greater than expected Y1.091 trillion. Unadjusted exports were up 18.6 percent from a year ago while imports jumped 26.1 percent. It was the eighth straight increase in exports and the twelfth for imports. Exports to Asia were up 18.6 percent from a year ago and bounced up 21.3 percent to China. Exports to the EU were up 27 percent – a fifth consecutive increase. Exports to the US were up 26.4 percent for the tenth straight increase. On a seasonally adjusted basis, the merchandise trade deficit was Y1072 billion, slightly less than September’s deficit of Y1128 billion. Exports were up 1.5 percent on the month while imports were up 0.5 percent. On the year, exports were up 17.4 percent and imports, 26.2 percent. The weakening yen is giving a boost just as the global economy improves, helping exports, but also driving up the cost of imports at a higher than expected rate.

Americas

Canada

October consumer prices were down 0.2 percent on the month and were up 0.7 percent from a year ago. Headline inflation is now beneath the bottom of the BoC's 1 percent to 3 percent target. Excluding food and energy prices, the CPI gained 0.3 percent from September and on the BoC's preferred gauge which excludes eight volatile items, 0.2 percent. This made for annual rates of 0.9 percent (unchanged from September) and 1.2 percent (1.3 percent) respectively. Seasonally adjusted, the CPI dipped 0.1 percent on the month while the core excluding food and energy was steady. Within the adjusted basket the only real upward pressure on prices came from shelter (0.2 percent) and household operations, furnishings & equipment (also 0.2 percent). Food alongside alcohol & tobacco were up 0.1 percent. Elsewhere the major categories all saw monthly declines, notably clothing & footwear where prices were down 0.7 percent.

September retail sales were up 1.0 percent and 3.6 percent on the year. Volume sales were equally firm, also climbing 1.0 percent from August. Within the overall monthly nominal increase, gains were registered by six of the eleven sub-sectors, within which motor vehicle & parts jumped 4.1 percent. Excluding this category, sales were flat from mid-quarter and 1.6 percent higher than in the same month in 2012. Elsewhere, gasoline sales increased 0.8 percent as did building materials & garden equipment, while health & personal care was up 0.2 percent. On the downside, food & beverages dropped 0.3 percent, clothing & accessories were off 0.6 percent and electronics & appliances declined 1.1 percent.

Bottom line

The focus last week was on the FOMC minutes and when the Federal Reserve might begin to cut back on its bond purchases. Most economic data in the U.S. was favorable while elsewhere it was mixed. Investors were disappointed when the Chinese flash manufacturing PMI reading eased along with those in the Eurozone. The Bank of Japan, as anticipated, left its monetary policy unchanged.

Japan releases its key economic data during this week while the U.S. continues to catch up on key data releases that were postponed because of the October government closure. However, the first week of December will provide a deluge of new economic data along with monetary policy decisions from the Reserve Bank of Australia, the Banks of Canada and England and the European Central Bank.

Looking Ahead: November 25 through November 29, 2013

Looking Ahead: December 2 through December 6, 2013

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