Global Markets

Equities tumbled over the week but managed to stabilize and recover at week's end. Many reasons for the sharp sell-off have been offered. They include a negative reaction to the dour economic data from the Eurozone — especially Germany. A precarious 0.3 percent annual increase in inflation puts the Eurozone on the cusp of deflation along with stagnant growth. The Ebola crisis also contributed as new cases emerged outside of Africa. Then of course analysts, when looking for a reason, cite profit taking — prices went up, and now they are down because people are selling to unlock the profits that accrued when prices were going up. Investor nerves as the end of taper nears at the end of the month also contributed to the slide.

Equities stabilized and rallied encouraged by hints the monetary policy tightening in the U.S. and UK could be delayed. The volatility of this past week appeared to alarm some policy makers including the Bank of England's chief economist who said he favored delayed interest rate increases. He said evidence of a weaker global economy, lower inflation pressures and low wage growth had forced him to reassess the UK economic outlook. His comments followed those by James Bullard of the St Louis Fed who said the Federal Reserve should carry on with its asset purchases in October, instead of halting them as scheduled.

On the week, most stock indexes were down. The exceptions were the All Ordinaries (up 1.4 percent), the Jakarta Composite (up 1.3 percent), the DAX (up 0.7 percent) and the OMX Stockholm (up 0.6 percent). The S&P/TSX Composite was virtually unchanged on the week (up 0.32 point).

Global Stock Market Recap

Europe and the UK

Equities staged a strong rally Friday trimming steep weekly losses after dovish talk from central bank officials eased fears of a global slowdown. Benoît Cœuré, a member of the European Central Bank's governing council, said Friday that the ECB was ready to offer further stimulus measures if conditions warranted. At the same time, Bank of England Chief Economist Andrew Haldane said UK interest rates could remain at a record low for a longer period than he expected three months ago. If there is a genuine uncertainty about the path of the economy, the optimal policy response may be to avoid the worst outcomes, Haldane said. Meanwhile, remarks from Federal Reserve members have diminished speculation about a U.S. interest rate increase early next year. For the week, the FTSE lost 0.5 percent, the CAC declined 1.0 percent and the SMI retreated 1.5 percent. However, the DAX managed a turnaround and added 0.7 percent.

The FTSE's recovery began after Thursday's encouraging U.S. jobless claims and industrial output data, which helped world stock markets edge up from earlier lows. Comments from St. Louis Federal Reserve Bank President James Bullard that the Fed may keep up its bond buying economic stimulus program also helped. Further evidence of signs of relative strength in the U.S. economy emerged on Friday from preliminary October consumer sentiment which rose to its highest level in more than seven years.

Renewed economic weakness in Europe, particularly in Germany, has intensified questions over the durability of a recovery in the Eurozone just as the U.S. Federal Reserve is preparing to end its stimulus program. While anxieties over growth remain, officials from both the European Central Bank and the Bank of England offered a familiar tonic by suggesting monetary policy will remain supportive. On Friday, equities extended early gains after the ECB's Benoît Cœuré said it will start buying assets within days. As equities rallied Friday, European government bonds gave up some of the week's gains that had sent yields on German debt to record lows.

Entrenched disagreements between Germany, France and European Central Bank and other participants about how to revive growth are holding the Eurozone back from a coherent policy response, many policy makers say. A German-led camp wants more fiscal austerity and economic deregulation in France and Italy while others view more expansionary fiscal and monetary policies as essential.

Meanwhile, Europe's economic engine Germany has projected anemic growth for the next two years. The German Ministry of Economic Affairs slashed its forecast of growth this year to 1.2 percent, a significant downward revision from the 1.8 percent growth expected earlier in the year. Growth for 2015 was also revised down to 1.3 percent from 2 percent, the ministry said. On Tuesday, the ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations declined to a reading of minus 3.6 this month from 6.9 in September. This is the lowest level since November 2012. Earlier in the week, an International Monetary Fund report raised the likelihood of Eurozone recession to almost 40 percent.

Asia Pacific

Equities here retreated last week as part of the global selloff. Only the All Ordinaries (up 1.4 percent) and Jakarta Composite (up 1.3 percent) managed to gain on the week. Equities in Japan and Taiwan were hit the hardest with the Nikkei sinking 5.0 percent and the Taiex down 5.1 percent. Financial markets have been struck by volatility over the past week and a half, amid concerns about a stagnating European economy, questions about the strength of the U.S. economy and yet again, worries about the prospect of higher U.S. interest rates.

Morale was boosted at week's end thanks to encouraging U.S. economic reports including an unexpected drop in weekly initial jobless claims and a larger than expected increase in industrial production that eased investor concerns over slowing global growth. Traders hunted for bargains amid expectations the U.S. Federal Reserve will address concerns of slowing inflation when the FOMC meets on October 28 and 29.

The Nikkei hit a five month low as the yen strengthened on worries over slowing global growth and data showed Japanese business confidence is its lowest level in 1-1/2 years. Japan shares fell into correction territory Friday, pressured by global market volatility. The last time the Nikkei had such a decline was May 2013 when worries about the U.S. Federal Reserve tapering its economic stimulus program roiled markets globally.

Japan has emerged as the biggest victim in Asia of the sudden jump in global volatility, with the country's stocks plummeting and investors rushing to the safety of bonds and the yen. Safe haven government bonds soared, sending the yield on the 10-year note to the lowest in 18 months while money managers also fled the falling dollar, pushing the yen up as much as 1.7 percent. The trigger for the sudden fear in Japanese markets has been the wild swings in U.S. stocks and Treasuries as a global selloff accelerated during the week. Investors also point to the marked divergence of monetary policy between the U.S. and Japan, spurring the magnified moves in Tokyo. While the Federal Reserve is debating how soon it can lift interest rates, the focus in Tokyo is whether the Bank of Japan will introduce additional easing measures to spur the lackluster economy that recently contracted despite government efforts to lift it from years of stagnation.

The Shanghai Composite retreated as investors fretted over an impending withdrawal of liquidity ahead of a slew of new share offerings during the coming week. Major economic data including third quarter growth, industrial output and retail sales will be released as well. Stocks in Shanghai were also affected by uncertainty over the launch date of the Shanghai-Hong Kong Stock Connect program, which will give investors on the mainland and in Hong Kong access to each other's markets. Market participants are expecting an announcement on the start date soon.

Bank of Korea

The South Korean central bank lowered its benchmark 7-day repo rate from 2.25 percent to 2 percent as expected. The BoK last cut the rate from 2.5 percent to 2.25 percent in August, which had been the first cut since May 2013. The BoK is hoping to spur growth in the economy. South Korea's GDP was up 0.6 percent on the quarter and 3.6 percent from a year ago in the second quarter. In the first quarter, GDP was up 0.9 percent and 3.9 percent. Last month South Korea's government unveiled a plan to increase state spending by 5.7 percent next year, as part of increasingly aggressive measures to spur economic growth.

Currencies

The dollar retreated against the euro, yen, pound, Swiss franc and Australian dollar. It advanced against its Canadian counterpart. The currency dropped Wednesday after a weak U.S. retail sales report sent investors — already fretting about global growth — scurrying for safety. Concerns that the U.S. economy might not be immune to slowing global growth and falling inflation increasingly being seen elsewhere sent investors fleeing from the currency.

The dollar sank and the yen gained as did the euro. The currency's decline was exacerbated by comments from St Louis Fed Bank President James Bullard who voiced concern on U.S. inflation expectations and suggested that the Fed could defer the end of its bond buying program rather than end it at its meeting on October 29. Most expect the program to end as expected. But positive U.S. data at the end of the week helped the dollar to recover somewhat from its losses.

Selected currencies — weekly results

Indicator scoreboard

EMU

August industrial production declined 1.8 percent on the month, more than reversing a marginally smaller revised 0.9 percent gain in July. Output has now declined in three of the last four months and stands a workday adjusted 1.9 percent below its year-ago level following a 1.6 percent increase in the year to July. Weakness was led by the capital goods sector where a 4.8 percent monthly slump in output more than offset the increases seen in June and July. Intermediates were down 0.7 percent and nondurable consumer goods, 0.2 percent. Durable consumer goods edged up 0.2 percent but the headline contraction would have been more significant still but for a 1.2 percent rebound in energy. Regionally, the overall monthly output decline was led by Germany which recorded a 4.3 percent drop and without which total industrial output would have held up a good deal better. Among the other larger member states, it was rather better news with France down just 0.1 percent and Italy (0.3 percent) and Spain (0.1 percent) registering modest gains.

September harmonized index of consumer prices were up 0.4 percent on the month and 0.3 percent from a year ago — its lowest mark since October 2009. The yearly rate has now been below the ECB's inflation target of 2 percent for 20 months and sub-1 percent for 12 months. Excluding food, alcohol, tobacco and energy, the HICP was up 0.8 percent on the year, down 0.1 percentage points from its August mark. Omitting just seasonal food and energy as well as unprocessed food and energy, prices were 0.8 percent firmer on the year after a 0.9 percent increase in mid-quarter. The main downward contribution to the change in the annual headline rate was made by energy where inflation fell from minus 2.0 percent to minus 2.3 percent. Prices in services decelerated from a 1.3 percent annual rate to 1.1 percent and in non-energy industrial goods from 0.3 percent to 0.2 percent. Overall inflation would have been softer still but for a 0.6 percentage point bounce in food. Price trends were soft across most of the region and Greece (down 1.1 percent) occupied the bottom rung of the inflation ladder below Spain (down 0.3 percent), Italy, Slovenia and Slovakia (each down 0.1 percent) all of which also posted sub-zero rates. Finland (1.5 percent) and Austria (1.4 percent) took the top spots but otherwise only Latvia (1.2 percent) recorded a rate above 1.0 percent.

August seasonally adjusted merchandise trade surplus was €15.8 billion following upwardly revised black ink of €12.7 billion in July. The unadjusted surplus was €9.2 billion after a €7.3 billion surplus last time. However, the improvement in the adjusted headline masked weakness in both sides of the balance sheet. Exports declined 0.9 percent from July, their fourth monthly contraction in the last five months, while imports were down an even sharper 3.1 percent which more than erased the gains made in the three previous months. Compared with August 2013, exports declined 3.0 percent and imports were off 4.0 percent. Comparable figures for the first eight months of 2014 stand at just 1.0 percent and zero respectively.

Germany

October's ZEW current conditions index slumped more than 22 points to 3.2, its steepest decline since August 2011 and its weakest level since June 2010. This was the measure's fourth consecutive monthly drop. At the same time, expectations slid 10.5 points to minus 3.6, their 10th successive slide and their first sub-zero reading since November 2012. ZEW ascribed the surprisingly gloomy results to spreading geopolitical tensions and unexpectedly weak economic developments in a number of Eurozone countries. Pessimism was also fueled by the shock declines in German industrial production (4.0 percent) and manufacturing orders (5.7 percent) in August.

United Kingdom

September consumer prices were unchanged from August. It was sufficient to shave 0.3 percentage points off the annual inflation rate which, at just 1.2 percent, hit its lowest mark since September 2009. The largest downward contribution to the change in the 12-month rate came from transport where prices dropped 2.4 percent from August compared with a 1.4 percent decline in the same period in 2013. In particular, seasonal declines in sea & air fares were larger than a year ago. This sector alone subtracted 0.2 percentage points from the overall yearly change. Recreation & culture charges also dipped this year when compared with an increase in September 2013 with notable softness in technological goods. The other main negative contributory factor was restaurant & hotel bills which climbed at a slower rate. There were no significant upward contributions. The core CPI edged up just 0.1 percent on the month to yield an annual increase of only 1.5 percent, 0.4 percentage points short of its mid-quarter rate and its softest reading in more than four years.

September producer output prices declined 0.1 percent on the month and were down 0.4 percent on the year. Input prices dropped a steep 0.6 percent from August and were down 7.4 percent from a year ago. The majority of subsectors in the output price index saw monthly declines led by food products (0.5 percent) and paper & printing (0.3 percent). The only monthly increase of any note was tobacco & alcohol (0.3 percent). The core index was also 0.1 percent below its August level. On the year, the core was up 0.8 percent. The monthly decline in input prices was dominated by a 3.1 percent drop in imported food materials and 2.5 percent slump in crude oil. Partial offsets were provided by a 1.9 percent increase in other home-produced materials and a 1.0 percent rise in imported metals.

September claimant count unemployment dropped 18,600, enough to see the jobless rate slip another 0.1 percentage points to 2.8 percent for its lowest mark since July 2008. Using the ILO definition, the number of people out of work on this definition tumbled a sizeable 154,000 in the three months to August. The unemployment rate in August alone held steady at 5.9 percent but the headline 3-monthly average measure still slipped to 6.0 percent. However, if the labour market is still tightening, its impact upon wage growth remains about as muted as ever. Thus, overall annual average earnings growth in the three months to August was only 0.7 percent, slightly above its July pace. Excluding bonuses a 0.9 percent increase was still sub-1 percent and followed a marginally upwardly revised 0.8 percent increase last time.

Asia/Pacific

Japan

September producer price index edged down 0.1 percent on the month and was up 3.5 percent from a year ago. Excluding the sales tax increase, the monthly change also was down 0.1 percent and up 0.7 percent from a year ago. The annual increase has been steadily decreasing after peaking 4.5 percent in June. Since then it slipped to 4.4 percent in July and to 3.9 percent in August. All sub-categories were up on the year with the exception of electronic components & devices which was down 1.0 percent. Petroleum & coal products prices were up 6.7 percent from a year ago while nonferrous metals were 6.0 percent higher. Lumber & wood products added 5.0 percent and metal products were up 5.1 percent. Food, beverages, tobacco & feedstuff prices were up 3.3 percent.

China

September trade balance was $31.0 billion, down from $49.9 billion in August. Analysts expected a surplus of $39.9 billion. Exports were up 15.3 percent from a year ago ahead of expectations of 13 percent. Imports were up 7 percent on the year against expectations of a 2 percent drop. Seasonally adjusted exports were up 2.1 percent on the month and 6.0 percent on the year. This compares with August's 1.6 percent monthly increase and 12.3 percent on the year. Imports jumped 11.6 percent on the month and were up 2.2 percent on the year. This compares with August's monthly 3.1 percent increase and 1.7 percent annual gain.

September consumer prices were up 1.6 percent on the year after increasing 2.0 percent in August. Expectations were for an increase of 1.7 percent. This headline CPI is still much lower than the official target of 3.5 percent indicating the government will maintain its relatively loose monetary policy stance. On the month, the CPI was up 0.5 percent. For the year to date, prices were up 2.1 percent. Urban CPI was up 1.7 percent on the year after increasing 2.2 percent. Rural prices were up 1.4 percent after rising 1.9 percent the month before. Subcategory prices were mostly lower in September. Food prices were up 1.7 percent after increasing 2.0 percent in August while non-food prices were 2.3 percent higher after increasing 3.0 percent. Clothing prices were up 2.4 percent after 2.8 percent. Transportation & communication prices dropped 0.3 percent on the year after increasing 0.2 percent in August. However, price increases for household facilities (up 1.1 percent) and recreation & education (up 1.9 percent) were unchanged from August.

Producer price index declines accelerated in September, dropping 1.8 percent on the year after sinking 1.2 percent in August. Expectations were for a decline of 1.6 percent. For the year to date, the PPI was down 1.6 percent. On the month, the index declined 0.4 percent. Production material prices were down 2.4 percent after 1.7 percent in August. However, consumer prices edged up just 0.1 percent after increasing 0.2 percent in August. Consumer durable prices were down 0.8 percent for a second month. Among the price declines within production materials, mining & exploration dropped 6.7 percent after sliding 4.4 percent the month before. Raw materials were down 2.7 percent after declining 1.5 percent last time. Processing was down 1.8 percent after 1.5 percent.

Americas

Canada

August manufacturing sales dropped 3.3 percent on the month, their steepest decline since May 2009. The outcome followed an upwardly revised 2.9 percent gain in July and put annual sales growth at 6.1 percent, down from 8.5 percent at the start of the quarter. Volumes performed in much the same fashion, posting a hefty 3.7 percent drop from July and now stand 3.3 percent higher than in August 2013. Within the monthly slump in overall nominal shipments, transportation plunged 12.8 percent. Without this category, sales would have declined a more modest 1.9 percent on the month and risen 6.4 percent on the year. The other major losers were petroleum & coal (down 3.4 percent), plastics & rubber (down 2.4 percent), computer & electronic products (down 2.4 percent) and machinery (down 1.3 percent). Outside of chemicals (1.0 percent) and electrical equipment, appliance & components (1.5 percent) there were no increases of note. New orders were off 3.8 percent from July and backlogs slipped 0.1 percent. Stock levels declined 0.6 percent but this was not enough to stop the inventories/sales ratio climbing 0.04 points to 1.37.

September consumer price index edged up 0.1 percent on the month and was up 2.0 percent on the year. The outcome means that the yearly rate has now been at or above the BoC's 2 percent inflation target midpoint for six consecutive months. Excluding food and energy, the core index posted a 0.3 percent increase from mid-quarter for a 1.9 percent annual rate. At the same time, the BoC's preferred underlying measure saw a 0.2 percent monthly advance which left its yearly increase unchanged at 2.1 percent. Seasonal factors are not very strong in September and the adjusted CPI registered only a marginally steeper 0.2 percent monthly gain. Excluding food and energy the adjusted CPI gained 0.1 percent and the BoC gauge was 0.2 percent firmer. The main impetus to the seasonally adjusted basket came from food where charges jumped 0.7 percent and clothing & footwear were up 0.4 percent. Elsewhere prices were subdued and there were monthly declines in transportation (0.5 percent) and household operations, furnishings & equipment (0.3 percent).

Bottom line

Despite an end of the week rally, equities declined on global growth fears, Ebola and the looming end of Federal Reserve bond buying.

This coming week brings key data from China including third quarter GDP, industrial production and retail sales. Also on tap is September merchandise trade data from Japan. Flash October manufacturing PMIs will be released as well. The UK posts its first estimate of third quarter GDP.

Looking Ahead: October 20 through October 24, 2014

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