European Central Bank is poised to act...
Amid rampant speculation about a possible European Central Bank interest rate increase, M3 - a measure money supply in the European Monetary Union - was released. It grew far above what the markets expected and above what the Bank considers a prudent rate of monetary growth without inflation. M3, which grew at an annual rate of 6.1 percent, is a broad measure of money supply and includes currency in circulation and overnight deposits; other short term deposits; and marketable instruments.

The ECB uses two major indicators when making policy. The first is the harmonized consumer price index for the European Monetary Union as a gauge of inflation. The CPI remains safely under their target rate of about two percent inflation for the EMU as a whole, although there are some member countries that are either dangerously close to the target or even above the accepted rate.

With September's M3 registering a 6.1 percent annual growth rate, following hard on the heels of August's 5.9 percent jump, analysts think that the European Central Bank will use these data to justify an interest rate increase at Thursday's meeting. The Bank's M3 reference growth rate is about 4.5 percent on an annual basis. A month ago, ECB officials drew attention to M3 by warning that money supply growth and credit expansion required close scrutiny. ECB president Wim Duisenberg said at that time that the governing council is ready to raise rates once it sees signs of an improving economy. However, officials have cautioned that it would not make a rate change solely on one indicator. With the ECB still trying to establish its credibility, some think that their primary policy rate, which now stands at 2.5 percent, will be raised by either 25 or 50 basis points on Thursday.

Across the channel...
The Bank of England's Monetary Policy Council meets on Wednesday and Thursday. While the markets have focused on the ECB, there is a strong possibility of an interest rate increase by the Bank of England as well to 5.5 percent. The current base rate is 5.25 percent, the same as that of the U.S. Federal Reserve Bank. Recent evidence of stronger than expected economic growth, coupled with a surge in official earnings data, are thought to have significantly increased the chances of a rate rise.

Indicator scoreboard
The news was definitely on the positive side last week judging by the outpouring of data in Europe and Asia. The highlights - and there are many of them - are covered below.

Europe
Britain
September's deficit on goods with countries outside the European Union narrowed substantially but more than half of the improvement was attributed to lower imports of aircraft and precious stones. The value of exports fell two percent on the month. The drop, however, was outweighed by a 5.7 percent decline in imports reflecting lower aircraft imports from the United States and precious stones from Switzerland.

The global deficit also narrowed in August. But this reflected a reduction in the surplus on trade in oil and in the deficit on trade in erratic items. The trend in the whole world goods deficit continues to be flat with both imports and exports climbing. The trend in the whole world goods and services deficit, on the other hand, is narrowing.

Germany
October's unadjusted consumer prices declined for the third month in a row, sliding 0.1 percent. The annual rate edged up 0.1 percentage point to 0.8 percent. The figures add weight to the European Central Bank's expectation that, despite stronger oil prices and a weak euro, the harmonized Euroland CPI will peak below its two percent target for price stability.

September import prices increased one percent, primarily because of higher oil prices. Excluding oil prices, import prices were up 0.5 percent. The annual import inflation rate was positive in August for the first time since February 1998 and surged in September to 2.7 percent. Excluding oil, import prices were down 0.4 percent on the year. Export prices rose 0.4 percent on the month and 0.2 percent on the year.

West Germany's September business sentiment in the manufacturing sector continued to climb into positive territory. The current conditions and business expectations subindexes also increased. Ifo also said that manufacturers and west German wholesalers expected their prices continued to rise in September. West German seasonally adjusted retail sentiment plunged, offsetting the increases in manufacturing and wholesale confidence. The previously reported overall seasonally adjusted Ifo west German business confidence index was unchanged at 95.4 in October.

Third quarter industrial production began at a weaker pace than originally thought. July output was revised down sharply by the Bundesbank. However, industrial production earlier in the year was revised up. Industrial activity in the second quarter was much stronger than previously expected. The net effect is that some of the output strength seen in July was transferred back into the second quarter.

August industrial productivity per employee and per hour worked in the manufacturing and mining industries increased on a monthly basis. Unit wages costs declined 2.2 percent in August on a monthly basis after rising 1.3 percent in July. Seasonally adjusted productivity per employee in August rose 1.1 percent from July and stood 1.5 percent above the year-earlier level.

France
September consumer spending on manufactured goods was weaker because of a surprising drop in clothing sales along with the expected fall in car sales. Nevertheless, even after two months of decline, consumer spending for the third quarter was up 1.8 percent on the quarter thanks largely to July's spending spree on cars and household durables. Clothing sales are likely to recover as winter approaches.

September's seasonally adjusted number unemployed dropped to 11.1 percent from 11.3 percent in August. France uses the International Labor Organization definition of unemployment and excludes job seekers that did any work during the month. When compared with September 1998 when the ILO rate stood at 11.8 percent, unemployment was down 169,000 or 5.5 percent. The drop in unemployment was sharper than expected.

Italy
October consumer confidence picked up, suggesting that September's decline was only a temporary setback, even though confidence is still lower than the levels recorded during the summer.

August unadjusted retail sales fell one percent when compared with last year. This is the lowest reading since January 1997. In July, retail sales rose 1.3 percent when compared with last year after falling back from June's 2.3 percent gain.

September non-EU trade deficit was below market expectations as the continued rise in imports more than offset the improvement in exports. September is often a volatile month for trade figures, and follows a strong August surplus. In August, the surplus with its EU trading partners continued to climb. European Union exports increased 10.2 percent while imports jumped 7.4 percent over August 1998. September hourly wages continued to rise steadily with contract renewals for retail workers the main factor behind the increase. The September year-on-year rise was above analysts' expectations and was the highest since December 1998, when the index rose 2.2 percent when compared with the previous year.

October's inflation rate was up 0.4 percent registering the sharpest jump since November 1997. The annual inflation rate came in at two percent, the highest level registered since September 1998. Rising gas and energy prices pushed up transport costs by 0.5 percent on the month and by 3.9 percent on the year. Italy's annual inflation rate is well above the European Union average of 1.2 percent. Only Ireland with 2.6 percent, Spain with 2.5 percent and Denmark with 2.4 percent registered higher rates.

Spain
September's non-seasonally adjusted producer prices jumped 0.7 percent after a 0.6 percent gain in August. The increase pushed the annual producer inflation rate up to 2.4 percent after a 1.4 percent rise in August. The higher than expected increase will heighten concern that Spanish consumer prices - already among the highest in Euroland at 2.5 percent when compared with last year will rise further in coming months. As in previous months, higher oil prices accounted for a good share of the September price rise. Refined petroleum and related product prices rose six percent on the month, while electricity and natural gas prices rose 1.0 percent.

EMU
August's European Monetary Union's current account surplus was below last year's surplus. As in previous months, the lower August surplus when compared to a year earlier was mainly due to a lower surplus for trade in goods and the shift in services from surplus to deficit. However, the balances of both investment income and current transfers recorded slight improvements relative to August last year.

August's trade surplus with the rest of the world for the European Monetary Union was 3.7 billion euros during August, down from a surplus 6.1 billion euros a year earlier. In July, the trade surplus stood at 12.0 billion euros, revised down slightly from the 12.1 billion euros surplus initially reported. Euroland exports continued to grow more slowly than imports when compared with last year.

However, trade within the EMU rose eight percent when compared to last year. August EMU-11 exports were up three percent from August 1998, the same as reported in July. Imports were up eight percent when compared with last year and up from 6 percent in July.

August industrial production surged more than expected when compared to a year earlier. The data suggest that the economy is growing faster than many expected. Increases were particularly strong in Italy (7.3 percent) and Spain (4.3 percent). The jump was led by the durable consumer goods sector, where output rose 11.8 percent. Durable consumer goods output was particularly strong in Italy and Germany, the laggards in the Euroland economy. In addition, August year over year output climbed 3.1 percent in nondurable consumer goods, 2.6 percent in intermediate goods and 0.3 percent in capital goods.

Asia
Japan
September's trade surplus shrank by 9.7 percent when compared with last year because the strengthening economy stimulated demand for imports and the stronger yen lowered the value of exports. September marked the sixth straight month in which Japan's surplus narrowed. The major factor behind the surplus' contraction was a pick up in economic activity Japan, which helped boost import volumes by 10.4 percent when compared with last year - the eighth consecutive month of increases. The value of imports fell by 5.6 percent - the 21st straight month of declines - as the value of those goods declined in yen terms as a result of the yen's appreciation. As has been the case in the last few months, the latest trade figures showed the impact of currency movements. The surplus with the United States rose 4.9 percent in the month from September a year ago.

September retail sales fell two percent when compared with the previous year while overall sales including wholesale sales fell 5.9 percent on the year. Wholesale sales dropped 6.8 percent on the year while sales at large scale retail stores dropped 1.7 percent or 3.1 percent when adjusted for new stores and stores closing. Retail sales fell 1.6 percent in August and 2.4 percent in July.

September's seasonally adjusted industrial output dropped 0.8 percent when compared with August but was up by an unadjusted 2.6 percent on a year earlier. Industries that contributed to the decline were general machinery, electrical machinery and plastic products. Commodities that contributed to the decrease were printing machines, personal computers and parts of steam turbines.

The jobless rate edged lower in September to 4.6 percent from 4.7 percent in August, registering the second straight month of declines. The last time the jobless rate fell for two straight months was in February and March 1996. The drop in the jobless rate partly reflected the growing desperation of Japan's unemployed ranks, as more jobless people took on temporary jobs. The number of part-time or temporary workers rose from levels a year earlier by 210,000, or 4.3 percent, to 5.12 million. The number of such workers has increased in every month since September 1996. But the total number of jobholders fell by 120,000 from levels a year earlier, marking the 20th straight month in which the number of jobholders fell.

Australia
The consumer price index jumped 0.9 percent in the third quarter when compared with the second quarter and 1.7 percent when compared with a year earlier. The quarterly rise was the highest in four years, while the annual rate of 1.7 percent was the highest in three years. Contributing to the increase were petroleum product prices, the cost of property rates and charges, house purchases, hospital and medical services, fresh fruit and holiday travel.

Americas
Canada
August Real gross domestic product at factor cost leaped 0.5 percent as both the goods and service producing sectors were higher. The August increase marked the thirteenth consecutive monthly gain, the longest uninterrupted series of gains in more than ten years. GDP at factor cost rose 4.1 percent when compared to August 1998.

September industrial product prices were up 0.5 percent. When compared with a year earlier, industrial product prices were up 3.1 percent. Intermediate goods prices were up 0.7 percent on the month and increased 3.6 percent on the year, while finished goods prices were up 0.1 percent from a month ago and 2.1 percent against a year ago. Petroleum and coal products increased five percent on the month, pulp and paper products were up 1.8 percent, and chemicals and chemical products were up 1.6 percent. The largest declines were for lumber, sawmill and other wood products (-1.7 percent) and meat, fish and dairy products (-1.4 percent).

The raw materials price index soared 3.5 percent because of an 11.5 percent surge mineral fuel prices. Excluding mineral fuels, the raw materials index was down 0.6 percent and up 1.6 percent when compared to a year ago. Only two of the index's seven major components increased while four declined and one remained unchanged.

World equity markets
It was unanimous! All the major world equity markets closed on a ringing positive note last week. At the beginning of last week the markets continued to be volatile. However, after the strong U. S. gross domestic product data release on Thursday, the markets soared.

Japan
Nikkei
On Friday, the Nikkei 225 stock average posted its biggest gain since May, surging 3.03 percent. With Japan's economy just emerging from recession, some investors see more potential for further gains in that stock market than in the United States. The stock market rally stemmed from optimism about U.S. growth prospects, which would continue to support Japanese exports along with favorable Japanese economic reports. Foreign investors continue to be net buyers in the Japanese stock market as they have been for 37 of the last 40 weeks, according to figures from the Tokyo Stock Exchange.

Europe
Prices jumped sharply again Friday with London's FTSE 100 index scaling near two month highs amid renewed optimism about the outlook for U.S. interest rates. Relief that Fed Chairman Alan Greenspan did not hint at a rate increase in Thursday night's speech helped to fuel the rally on both sides of the Atlantic. The FTSE closed up 106.6 points at 6,255.7 and up 3.5 percent on the week. The FTSE climbed despite fears that the Bank of England could increase interest rates again when it meets Wednesday and Thursday.

France's CAC index closed the week at a new high. It gained 4.5 percent on the week on favorable economic news, especially on the unemployment front. Germany's DAX also was exuberant, closing up 3.13 percent on the week. The news from the United States had as much to do with the soaring equities markets as did domestic economic news. The EMU countries however, are fretting over a possible interest rate increase by the European Central Bank at its meeting on Thursday.

Currencies
Yen
The yen rose on Friday amid expectations that investors will channel more funds into Japanese stocks as its economy continues to exhibit strength. Economic reports released in Japan raised confidence in the recovery there. The yen rose 1.6 percent against the dollar this week, to 104.10 per dollar from 105.81 a week ago. During the week, it climbed as high as 103.71, not far from the almost four-year high of 103.20 reached in mid-September. However, the yen's gains may be limited by speculation on the possibility of Bank of Japan intervention to weaken the currency if it gains more in value.

Euro
One of the things roiling the foreign exchange market for the euro is the European Central Bank meeting scheduled for Thursday. Speculation that the ECB will raise interest rates is likely to help the euro. A rate increase would trim the interest rate advantage U.S. deposits currently enjoy over their EMU counterparts. An illustration of the currency's sensitivity to all things concerning a possible interest rate rise occurred Friday. The euro fell to a one month low against the dollar after European Central bank chief economist Otmar Issing hinted that there's not enough evidence of inflation to persuade the ECB to raise interest rates.

Why U.S. investors care...
As the European and Asian economies continue to rebound, so do investment opportunities. Investors are fortunate to have confidence in a growing U.S. economy without inflation along with options in European and Asian markets. Competition is forcing these economies to address long standing problems such as labor force structural imbalances. The central banks have the delicate task of timing interest rate increases so that they temper inflationary pressures that might develop without choking off economic growth. Truly a daunting task…

Release dates are subject to change.
For U.S. data releases, see this week's Simply Economics.