Europe and the UK
The FTSE, CAC and DAX were down on the week. All three declined sharply on Friday after U.S. indexes dropped in the wake of the surprisingly weak Philadelphia Federal Reserve report on Thursday. In the UK, banks, miners and oil companies were down on the deteriorating outlook for U.S. economic growth. Volatile mining stocks sank on fears that weaker-than-forecast manufacturing activity could harm demand for their products. In Europe, technology and travel stocks dragged the indexes lower. The positive European growth outlook was dented by the collapse of sentiment in Germany as reported by the ZEW (see indicator scoreboard below).

Bank of England minutes
The monetary policy committee voted unanimously to keep their key interest rate at 4.75 percent after August's surprise 25-basis-point increase. However, the minutes did nothing to assuage analysts' expectations of another rate increase before 2006 ends. Most committee members noted that consumers expect higher prices and this could lead to demands for higher wages. Other concerns that could increase inflationary pressures included higher overseas price increases along with the increasing ability of manufacturers to pass on higher costs. These concerns along with stronger-than-expected EMU growth were offset by the possibility of slower worldwide growth due to slower U.S. growth centered in housing.

Asia/Pacific
Most Asian/Pacific indexes ended the week on a negative note. Investors are concerned their domestic economies, which are dependent on exports, will be hurt by the U.S. economy's slowdown. The coup in Thailand only had a momentary effect Tuesday, as it remained country specific. The Thai military seized power in Bangkok on Tuesday and subsequently suspended the Constitution and declared marshal law. The Hang Seng gained last week on the good news from the Fed that interest rates would remain unchanged. The Hong Kong dollar is pegged to the U.S. currency and interest rate changes in the U.S. are immediately reflected in interest rates there.

The Nikkei dropped to its lowest level since August 10th, depressed by a combination of Wall Street weakness, foreign selling and fears over Internet stocks. Export-focused sectors also dropped in response to fears about the U.S. economy. Japanese analysts still see their economic future tied inextricably to that of the U.S. But many of the sharpest declines were in domestically focused sectors. Analysts said the markets had long discounted the outcome of the leadership election for the LDP and were therefore unaffected by it.

For the first time in 18 years, the amount of corporate tax paid by Japanese companies is likely to exceed the amount of individual income tax payments, highlighting the role corporate profits have had in underpinning Japan's lengthy recovery. According to data compiled by the Nikkei newspaper, companies are expected to pay more than the ¥13,100 billion ($111 billion) budgeted by the finance ministry in the fiscal year ending March 31, 2007. In the first quarter (April through June 2006), corporate tax collection is about 50 percent ahead of last year, as corporate earnings improve and deferred tax assets - or previous losses carried forward - decline.

Currencies
The yen was up on the week as the new LDP chairman and probable new prime minister said that currencies should reflect economic fundamentals. Market players concluded that Abe is willing to accept a stronger yen. Abe's comments came immediately after an attempt by European and Japanese politicians at last weekend's Group of Seven meeting to break the slide of the yen, which has dropped over 6 percent against the euro in the past three months and is near a five-month low against the U.S. dollar. Despite this, the yen resumed its slide on Monday and in Asian trading on Tuesday. However, the yen rallied against the euro Wednesday after Abe's comments.

The U.S. dollar was down against the euro and yen after Wednesday's dovish monetary policy statement by the Federal Open Market Committee. The currency market viewed the statement as a little softer than some had expected. The Fed, for example, noted a 'cooling' in the housing market rather than the 'gradual cooling' that was used in the previous statement. The Fed's comments also included a reference to falling energy prices as a downside risk to inflation as opposed to an upside risk to growth. This too was interpreted as having a minor dovish tilt.

Indicator scoreboard
EMU - July industrial output was down 0.4 percent but up 3.2 percent when compared with last year. A strong German monthly gain did not offset weakness elsewhere. Nondurable consumer goods were down 0.9 percent while durable consumer goods sank 0.3 percent. Capital goods output edged down 0.1 percent.

Germany - August producer price index was up 0.2 percent and 5.9 percent when compared with August a year ago. Price increases for energy, petroleum products and metals eased. Energy prices were up 0.2 percent, significantly less than July's 1 percent increase. The PPI less energy was up 0.1 percent and 3 percent on the year.

September ZEW sentiment on the economic outlook among financial experts sank for the eighth month to minus 22.2, the lowest level since January 1999 when the reading was minus 25.1. Current condition index climbed to plus 38.9 from 33.6 in the previous month. ZEW said the index dropped because of the expected U.S. slowdown which would impact exports; the expected increased in VAT at the beginning of 2007; and tighter ECB monetary policy. The index is prepared by the Center for European Economic Research (ZEW) located in Mannheim, Germany. ZEW surveyed 307 German financial experts for their opinions between September 4th and September 18th.

France - August consumer spending on manufactured products was up 3.3 percent and 6.4 percent when compared with last year. July spending was down 0.9 percent and up 3.7 percent on the year. French spending data are not released during August, therefore both July and August are released together in September. Spending on manufactured goods accounts for 27 percent of total private consumption. Auto sales were down 7.4 percent in July but rebounded in August by 3.9 percent. Clothing sales were up during both months. The other manufactured goods category edged down 0.1 percent in July but rebounded by 1.2 percent in August.

Italy - Second quarter unemployment rate dropped to 7 percent from 7.3 percent in the first quarter. It is the lowest rate since 1992 when the survey began. More than 30 percent of the increase in registered employment came from immigrant workers who gained legal status. Many of these registered jobs are low-skilled positions. The jobless rate has also been helped by changes to labor laws that have made it easier to hire part-time and temporary workers. The number of workers with non-permanent contracts grew 8 percent while those with short-term contracts now account for 9.5 percent of total employment according to Istat.

Asia
Japan - August unadjusted merchandise trade surplus jumped to ¥200.5 billion from ¥102.6 billion in August a year ago. Exports soared 17.7 percent on the year thanks to auto shipments to the U.S. that rose at the fastest pace in almost a decade. Imports were up 16.1 percent during the same period thanks to higher oil and commodity prices. Auto shipments accounted for 23 percent of Japan's export growth as U.S. demand for fuel-efficient vehicles surged 49 percent, the most since 1997. Exports to the U.S. were up 19 percent while shipments to China gained 20 percent and 18 percent to the European Union. On a seasonally adjusted basis, however, the August trade surplus was ¥685.8 billion, down from ¥786 billion in July. Exports were up 1.5 percent while imports climbed 3.5 percent on the month.

Americas
Canada - August consumer price index was up 0.2 percent and 2.1 percent when compared with last year. Core CPI excluding food and energy was down 0.1 percent but up 2.2 percent on the year. The Bank of Canada's core CPI which excludes eight volatile items (fruit, fruit preparations & nuts, vegetables & vegetable preparations, mortgage interest cost, natural gas, fuel oil & other fuel, gasoline, intercity transportation, and tobacco products & smokers' supplies) along with the effect of changes in indirect taxes was up 0.2 percent on the month and 1.5 percent on the year. On a seasonally adjusted basis, the CPI was up 0.2 percent and 2 percent on the year. Seasonally adjusted core also was up 0.2 percent but only 1.4 percent on the year.

July retail sales soared 1.5 percent and were up 5.7 percent when compared with last year. Excluding autos, sales were up 0.7 percent and 7.5 percent on the year. The large monthly increase was due to a rebound in vehicle and parts sales along with gasoline sales. Gasoline sales jumped by 3.7 percent. Excluding these sales, retail sales were up a tame 0.2 percent.

Bottom line
While there were few economic indicators last week, those that were released packed a punch in the financial markets. The plunge in the ZEW sentiment index in Germany astounded market watchers. Up to this point, they had been looking to Germany to lead the EMU out of its economic funk. And in the U.S., the Philadelphia Fed index also stunned analysts and forced them to reassess their growth estimates.

The political turmoil in Hungary underlines the dire economic problems in the country. Although a member of the EU, its EMU membership appears to be on the far, far horizon. Hungary's budget deficit, expected to total about 10 percent of gross domestic product this year, is the highest in Europe, and its public debt is rising well above 60 percent of GDP, the benchmark for euro membership. The country has missed its budget targets five years in a row by a large margin and the government faces a sizable credibility gap. A recording (that was leaked) of Prime Minister Ferenc Gyurcsany acknowledging at a May party meeting that he was deceiving the public about the true state of public finances has led to the current riots in Budapest.