Global Markets

Trading last week mostly revolved around investors’ angst concerning Federal Reserve policy. The forthcoming FOMC meeting which is scheduled for December 17 and December 18 has been weighing on market sentiment globally especially after the U.S. posted another strong monthly labor report on December 6 and better than anticipated retail sales on Tuesday. Speculation over when the Fed will pare its stimulus has been a constant theme globally for much of the year and triggered a number of selloffs during the summer. After the U.S. posted a strong November labor report last week, expectations have increased for an imminent reduction, which some think could start as early as this upcoming meeting.

Equities were mostly lower on the week. Emerging markets were also hit, with sell-offs in currencies including the Indonesian rupiah and the Indian rupee on concern that tighter Fed policy could sap flows of money into emerging markets and push up their borrowing costs.

Global Stock Market Recap

Europe and the UK

Equities retreated last week — for the SMI, DAX and CAC it was the second consecutive weekly decline while for the FTSE it was the sixth and the longest streak since 2008. Though the six week selloff has been a relatively shallow one, it has left the FTSE trailing its European counterparts for the year. The decline has been attributed to sliding commodity prices since the FTSE is more commodity based than those in Europe.

The FTSE and CAC lost 1.7 percent, the DAX was down 1.8 percent and the SMI sank 2.9 percent. There were few catalysts to drive the direction of trading. The main focus for equity investors was whether the U.S. Federal Reserve may scale back its economic stimulus measures and signal an earlier than expected interest rate increase when it meets. While most investors still do not expect it to start curtailing its economic stimulus program until March 2014, some believe the Fed could begin this month. This uncertainty has led some investors to trim back equity holdings in order to book profits on the year's gains.

Swiss National Bank

The SNB's December Monetary Policy Assessment contained few surprises and, in line with market expectations, the Bank kept its target range for 3-month CHF LIBOR at zero to 0.25 percent with a point objective of zero percent. Accompanying the confirmation of its zero interest rate policy, the SNB also announced that the CHF1.20 floor against the euro stance would remain in place and that the Bank would continue to intervene in the currency markets as required to achieve this goal.

The domestic economic picture has not changed a great deal since September’s assessment and this was reflected in the monetary authority's latest forecast. Real GDP is still seen expanding at 1.5 percent to 2.0 percent this year, matching the previous call, before potentially accelerating to around 2.0 percent in 2014. The inflation projection for 2013 stays at minus 0.2 percent and has been revised just a tick lower to also 0.2 percent next year. Similarly, the 2015 forecast has been tweaked only 0.1 percentage points softer to 0.6 percent.

The SNB reiterated its view that it perceives no inflation risks over the foreseeable future and pointed to continued high levels of uncertainty about the global economy despite anticipating a slight pick-up in world growth over coming months. But it also expressed concern about the housing and mortgage markets, saying they needed to be dampened. The SNB set the 1.20 threshold more than two years ago to stave off deflation and shield the economy from recession. Investors seeking a safe haven from turmoil in the Eurozone had pushed the franc close to parity against the euro.

Asia Pacific

Equities indexes were mostly lower last week as investors remained apprehensive of Fed action at its policy meeting next week. Bargain hunters emerged after the recent selloff, capping the downside to a large extent. The Nikkei continues to vary with the value of the yen against the U.S. dollar and euro. On the week, the Nikkei added 0.7 percent as did the Malaysian KLCI while the Taiwan Taiex edged up 0.1 percent. With yearend approaching, gains and losses for the year are mixed, with the Nikkei soaring over 48 percent and the Philippine’s PSEi losing over 4 percent.

The Nikkei’s gains can be attributed to the sliding yen that hit its lowest level against the U.S. dollar in over five years amid Fed tapering speculation and after Japan's cabinet approved a $53 billion stimulus package for the current fiscal year to help support growth and cushion the impact of a planned sales tax increase in April. While mixed during the week, little attention was paid to economic data. Investors preferred to focus on whether the FOMC will vote to reduce its stimulus given a couple of strong economic numbers in the past week.

Foreigners are boosting holdings of Japanese stocks by the most on record, putting more at stake for overseas investors as Prime Minister Shinzo Abe seeks to revive the world’s third-largest economy. Buyers from outside Japan pumped ¥12.9 trillion into the nation’s stocks this year through November according to the Tokyo Stock Exchange. The inflows surpassed the previous highest total in 2005.

The Shanghai Composite retreated 1.8 percent as investors waited for news from an economic planning conference aimed at setting an economic growth target for next year. This was the first weekly decline since the week of November 8.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its overnight cash rate (OCR) at 2.5 percent where it has been since March 2011. In his statement, governor Graeme Wheeler said that the Bank would increase the OCR as needed in order to keep future average inflation near the 2 percent midpoint of its 1 to 3 percent target inflation range. He noted that growth remains moderate but mixed for New Zealand’s main trading partners. However, export prices for New Zealand’s main commodities have continued to increase.

New Zealand is being buoyed by an estimated NZ$40 billion rebuild of the South Island city of Christchurch following a series of earthquakes in 2010 and 2011 that destroyed roads, homes and commercial property. The Bank has left the cash rate unchanged since March 2011 to allow the economy to recover and to revive confidence after Europe’s sovereign debt crisis curbed global demand. Exporters have also been buffeted by near zero interest rates in both the U.S. and Europe which helped boost the New Zealand dollar.

Governor Wheeler escalated the RBNZ’s inflation fighting rhetoric and signaled the Bank will start increasing interest rates in the first half of next year as the economy strengthens. He said that the Bank will increase its OCR as needed in order to keep future average inflation near 2 percent. New Zealand is expected to become one of the first developed nations to begin raising borrowing costs as accelerating economic growth and a housing boom stoke price pressures.

The RBNZ forecasts growth will average 3 percent in 2014 before starting to slow. It raised its growth forecast for the year through March 2015 to 2.8 percent from 2.3 percent, citing construction and a boost to spending from rising house prices. Growth will slow to 2.1 percent by March 2016. “The expansion in the economy has considerable momentum,” Wheeler said. “New Zealand’s terms of trade are at a 40-year high, household spending is rising and construction activity is being lifted by the Canterbury rebuild and the response to the housing shortage in Auckland.”

Currencies

The U.S. dollar was mixed last week against its major counterparts. It was down against the euro, Swiss franc and Canadian dollar but advanced against the Australian dollar, pound and yen. The pound leaped to a two year high before retreating on speculation its advance was overdone and, as Bank of England Chief Economist Spencer Dale said, interest rates will stay low.

The yen climbed from a five year low against the dollar amid speculation on the timing of a Fed stimulus cut. On Friday, the Japanese currency declined as the yield difference between U.S. Treasuries and Japanese bonds traded at almost the widest spread since April 2011. The decline in the yen prompted some profit taking. The reasons why the yen is depreciating again are the same reasons it depreciated earlier in the year. There is chatter that the Bank of Japan will expand its monetary policy again next year. The yen fell as low as ¥103.92 in overnight trading Friday — its weakest since October 2008. The yen has also been undermined all year by the determination of the Japanese government, led by Prime Minister Shinzo Abe, as well as the Bank of Japan to loosen policy in their attempt to defeat deflation and reach the goal of 2 percent inflation.

Governor Glenn Stevens signaled that a weaker Australian dollar (Aussie) is preferable over lower interest rates to help spur the nation’s slowing economy. The Aussie touched a more than three month low of 89.14 U.S. cents after Stevens said in a newspaper interview that a level of 85 cents would be closer to the mark than 95 cents. A weaker currency relieves pressure on struggling industries such as manufacturing, helping rebalance an economy weighed by a slowdown in mining investment. The RBA has reduced its benchmark interest rate by 2.25 percentage points since late 2011 to a record low 2.5 percent.

Selected currencies — weekly results

Indicator scoreboard

EMU

October industrial output excluding construction dropped 1.1 percent on the month and edged up just 0.2 percent from a year ago. Weakness was broad based with just intermediates (0.4 percent) posting a monthly increase. Capital goods (down 1.3 percent) as well consumer durables (down 2.4 percent) and nondurables (down 0.9 percent) endured a very poor period and unseasonably warm weather was a factor in a 4.0 percent plunge in the energy sector. Regionally the majority of Eurozone states saw monthly reversals and among the largest four members, output was down 0.3 percent in France, 1.2 percent in Germany and 0.8 percent in Spain. Only Italy (0.5 percent) made any headway. Elsewhere, Finland (down 0.6 percent) posted its third consecutive decline (and fourth in the last five months) and it was left to Estonia (1.1 percent) to record the only monthly increase of any note.

Germany

October industrial output excluding construction was down 1.2 percent on the month after sliding 0.7 percent in September. On the year, output was up 1.1 percent in October. The declines were led by both capital goods and consumer durables. Output was down 1.1 percent when compared to the third-quarter average, while the three-month moving average for August through October edged down 0.1 percent compared to July through September. Manufacturing output overall dropped 1.1 percent in October, led by strong declines in capital goods (down 3.0 percent) and consumer durable goods (down 4.5 percent). Overall consumer goods dropped 0.8 percent while nondurables were unchanged. Intermediate goods, however, were up by 0.9 percent. Energy retreated 1.9 percent while construction lost 1.7 percent with main construction down 3.8 percent but finished construction up 0.7 percent.

United Kingdom

October industrial production was up 0.4 percent and 3.2 percent from a year ago. Manufacturing output also was up 0.4 percent on the month but gained 2.7 percent on the year. Transport equipment was up 2.0 percent on the month and 16.8 percent on the year and accounted for 0.21 percentage point of the total monthly increase. However, oil extraction dropped 2.5 percent and shaved 0.21 percentage points from the total monthly increase due to problems with a North Sea pipeline.

The deficit on trade in goods narrowed to Stg9.7 billion in October from an upwardly revised Stg10.1 billion in September. The smaller than anticipated improvement reflected weakness in both sides of the balance sheet with imports down 1.9 percent on the month and exports off 1.3 percent. The goods balance with the rest of the EU posted a record deficit of Stg6.5 billion, as exports fell Stg0.5 billion, mainly due to weakness in oil, and imports declined a smaller Stg0.2 billion. However, net exports to the rest of the world improved Stg0.7 billion to reduce the bi-lateral shortfall to Stg3.3 billion as purchases from overseas increased Stg0.2 billion and imports contracted Stg0.5 billion.

Asia/Pacific

Japan

Third quarter gross domestic product was revised down to an increase of 0.3 percent on the quarter from the original 0.5 percent or an annualized rate of 1.1 percent, down from 1.9 percent previously. From a year ago, GDP was up 2.4 percent. Capital expenditures were revised down to no change on the quarter from a 0.2 percent increase. Domestic demand was revised down to an increase of 0.7 percent on the quarter from 0.9 percent. Private consumption was revised up to 0.2 percent from zero percent. Private residential investment was revised down to 2.6 percent from 2.7 percent.

October tertiary industry activity surprised analysts and declined 0.7 percent. Analysts expected a monthly increase of 0.3 percent. On the year, the index was 0.3 percent higher. Among the industries that contributed to the decline were finance & insurance (down 1.9 percent), real estate & goods rental & leasing (down 2.1 percent), accommodations, eating & drinking services (down 1.9 percent) and miscellaneous services (except government services, etc.) which lost 1.5 percent. Also declining were wholesale & retail trade (down 0.3 percent), information & communications (down 0.7 percent), living-related & personal services & amusement services (down 1.5 percent) and scientific research, professional & technical services (down 0.3 percent). Among the industries that advanced were electricity, gas, heat supply & water (up 3.6 percent), medical, health care & welfare (up 0.3 percent) and transport & postal activities (up 0.1 percent).

November corporate goods price index edged up 0.1 percent on the month and was up 2.7 percent from a year ago. Since April, when the annual rate of change of the CGPI turned positive, the index has increased by a greater amount than the month before. For example, prices were up 2.2 percent in September and 2.5 percent in October before climbing 2.7 percent in November. Among the categories that increased when compared with a year ago were agriculture, forestry & fishery products (up 2.2 percent), lumber & wood products (up 13.9 percent), petroleum & coal products (up 12.6 percent) and nonferrous metals (up 6.8 percent). However, prices for information & communication equipment were down 4.6 percent and transportation equipment was down 0.25 percent.

October private machine orders excluding volatile orders were up 0.6 percent on the month and were up 14.7 percent when compared with a year ago. Orders were down 2.1 percent on the month in September. Manufacturing orders slipped 0.2 percent while non-manufacturing orders jumped 11.5 percent. Overseas orders sank 16.0 percent. Total orders including volatile ones dropped 4.6 percent on the month.

Australia

November employment jumped 21,000. The unemployment rate remained at 5.8 percent as expected. The number of people employed increased to 11,659,900. Full time employment was up 15,500 people to 8,107,900 and part time employment increased 5,500 to 3,552,000. The increase in total employment was driven by increases in male full time employment and female part-time employment. The number of unemployed increased 3,400 to 712,500 in November. The seasonally adjusted underemployment rate was 7.6 percent. Combined with the unemployment rate of 5.8 percent, the latest seasonally adjusted estimate of total labour force underutilization was 13.4 percent in November. The seasonally adjusted labour force participation rate remained steady at 64.8 percent in November.

China

November merchandise trade surplus climbed to $33.8 billion from $31.1 billion in October. This was the largest surplus since February 2009. The year to date trade surplus rose 17.3 percent to $234.15 billion. China is on target to record the biggest annual trade surplus since 2008's $295.5 billion. Exports were up a larger than forecast 12.7 percent while imports were up a less than expected 5.3 percent. Exports to the EU were up 18.4 percent on the year while those to the U.S. increased 17.7 percent. The data followed warnings from the State Administration of Foreign Exchange (SAFE) about abuses of the current account suggesting that the November data are being inflated by over invoicing to bring illegal funds onshore to take advantage of relatively higher interest rates.

November consumer prices eased to an increase of 3.0 percent on the year from 3.2 percent last time. On the month, the CPI was down 0.1 percent. Year to date, the CPI was up an unchanged 2.6 percent. The urban and rural CPIs were up 3.0 percent and 3.1 percent respectively. Food prices eased to an increase of 5.9 percent after jumping 6.5 percent in October. Non-food prices were up 1.6 percent for a third month. Transportation & communication prices were down for a third month – this time by 0.5 percent. Tobacco & alcohol prices declined 0.2 percent for a third month.

November producer prices were down 1.4 percent on the year after declining 1.5 percent the month before. When compared with the previous month, the PPI was unchanged for a second month. Year to date, the PPI was down 2.0 percent also for a second month. Consumer goods prices edged up 0.1 percent after remaining unchanged in October. Among consumer goods, food and related products were up 0.8 percent after increasing 0.5 percent last time. Production material prices dropped 1.9 percent on the year. Mining & exploration dropped 4.2 percent while raw materials and processing were down 2.4 percent and 1.4 percent respectively.

November industrial production was up 10.0 percent on the year after increasing 10.3 percent in October. On the month, output was up 0.76 percent. For the 11 months of 2013, output was up 9.7 percent. Motor vehicles were up 25.6 percent, about the same as it October. Transport equipment was up 10.3 percent after increasing 8.7 percent the month before. Textile output climbed to 8.2 percent from 7.8 percent on the year. Machinery output jumped to 12.8 percent from 11.8 percent in October.

November retail sales were up 13.7 percent from a year ago after increasing 13.3 percent in October. On the month, sales increased 1.32 percent after adding 1.18 percent the month before. Year to date, sales were up 13.0 percent for a second month. Urban retail sales were up 13.6 percent while rural sales were up 14.8 percent. Both were above their October gains. Auto sales were up 11.6 percent after jumping 14.2 percent in October. Home appliances and furniture gained 19.6 percent and 24.8 percent, up substantially from the prior month. Communication equipment sales were up 39.8 percent from a year ago after increasing 31.4 percent in October.

Bottom line

Focus last week was on the prospects of a possible curtailment of Federal Reserve policy on December 18. Economic data were mixed from Japan, China and Europe and were largely ignored. Both the Reserve Bank of New Zealand and the Swiss National Bank left their respective monetary policies unchanged.

Upcoming is the last full trading week before year end and the calendar is busy. The Bank of Japan, Reserve Bank of India and the Federal Reserve all hold monetary policy meetings. The latter will be followed by what will be Ben Bernanke’s last press conference before his term as governor ends. While analysts expect more easing from the BoJ, they also assume it will be in the spring. The economic data plate is full and includes December flash PMIs and the Bank of Japan’s Tankan survey.

Looking Ahead: December 16 through December 20, 2013

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