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Global Markets

After a fairly dull week, activity picked up with a flourish on Friday. Before dawn (U.S. eastern time), Japan's prime minister dissolved the lower house of parliament, ECB President Mario Draghi gave a speech indicating that the bank would offer more help to escape looming deflation and stagnant growth and the People's Bank of China, in a surprise, finally lowered key interest rates. The moves occurred after markets in Asia Pacific were closed for the week.

Sentiment towards riskier assets was helped after Mario Draghi, the ECB president, used a speech in Frankfurt to argue that the central bank would do "what we must to raise inflation and inflation expectations as fast as possible." The instant verdict from the markets was that Mr Draghi is moving closer to a government bond buying program of the sort pursued by the U.S. Federal Reserve, the Bank of England and the Bank of Japan.

Mr Draghi's speech strengthened his stimulus pledge for the euro area by saying the European Central Bank cannot hold back in its fight to revive the economy. With the next policy meeting less than two weeks away and the region remaining close to economic stagnation, Mr Draghi may need to step up efforts to convince investors that he is serious about reigniting growth and inflation. The euro declined and bond yields dropped on speculation the ECB is closer to buying government debt in a full scale quantitative easing program.

If a still ailing Eurozone has been investors' biggest fear this year, the prospect of a sharp slowdown in Chinese growth has been a close second. And the unexpected decision by the People's Bank of China to cut its one year lending rate offered reassurance that while wanting to ease the country's credit boom, Beijing is wary of letting the pace of growth slow too much.

People's Bank of China

The People's Bank of China cut its benchmark interest rates for the first time since July 2012 as leaders step up support for China's economy. The one year lending rate was reduced by 40 basis points to 5.6 percent, while the one year deposit rate was lowered by 25 basis points to 2.75 percent, effective November 22. The reduction puts China on the side of the European Central Bank and Bank of Japan in deploying fresh stimulus and contrasts with the Federal Reserve which has ended its quantitative easing program. Until today, the PBoC had focused on selective monetary easing and liquidity injections as China heads for its slowest full year growth since 1990.

According to the PBoC, "This interest rates adjustment is a neutral operation and doesn't mean any change in monetary policy direction." As China is still able to keep medium to high growth rates, it "has no need to take strong stimulus measures, and the direction of prudent monetary policy won't change." The cut in the benchmark rates follows liquidity injections and targeted cuts to reserve requirements. Although the PBoC scrapped controls on most borrowing costs in July 2013, banks still use benchmark rates as a guide for loans including mortgages.

Data released November 13 showed the economy's slowdown deepened in October. Factory production rose 7.7 percent from a year earlier, the second weakest pace since 2009, while investment in fixed assets such as machinery expanded the least since 2001 in the 10 months from January through October. Retail sales gains also missed forecasts last month.

Bank of Japan

As expected, the Bank of Japan kept its policy interest range at zero to 0.1 percent. It said it would continue to buy JGBs at annual pace of ¥80 trillion. The announcement indicated that the split on its monetary policy board to increase its already aggressive levels of monetary stimulus has lessened. This came after the BoJ stunned markets on October 31 by expanding the asset purchase program from its existing ¥60 trillion to ¥70 trillion level. The BoJ said its board members voted 8 to 1 to keep policy steady. Only Takahide Kiuchi voted against, arguing that the earlier pace of purchases was appropriate. The latest vote shows much closer agreement than on October 31, when only five of the board members agreed to raise the levels of stimulus.

Support for the extra asset purchases grew after data showed that Japan had entered recession in the June to September quarter following the sales tax increase in April. On Tuesday, Prime Minister Shinzo Abe called a snap election to shore up support for his economic revival platform that has so far struggled to show lasting results. He has also delayed a scheduled second increase in consumption tax to avoid hurting growth further, stoking worries that the BoJ's monetary stance is bank rolling an alarmingly high public debt, already the highest among major economies. Having stunned markets with a surprise monetary easing on October 31, the BoJ now buys almost the same amount of government bonds issued each month, a move some critics describe as tantamount to debt monetization.

Global Stock Market Recap

Europe and the UK

European stocks surged Friday, extending this week's strong gains after European Central Bank President Mario Draghi repeated vows to stoke inflation with monetary stimulus. A surprise interest rate cut from the People's Bank of China also lifted spirits, driving gains among metals and energy stocks. The moves highlight the extent to which central banks are driving world markets while investors fret about a slowdown in the global economy. The FTSE advanced for a fifth consecutive week, this time by 1.4 percent. The CAC was up 3.4 percent and the DAX added 5.2 percent while the SMI was 1.9 percent higher.

Economic data for the most part disappointed in Europe. Although the ZEW survey of analysts was a little more optimistic about the German economy, the flash PMI data were disappointing. The flash survey data showed the composite output index for Germany slipped to 52.1 in November from 53.9 in October. The activity expanded for 19 consecutive months but it was the slowest expansion in 16 months. The same data for France indicated a continued contraction. For the Eurozone, the composite output index dropped to 51.4 in November, the lowest score since July of last year, from 52.1 in October. However, the news from the UK was positive with retail sales rebounding more than anticipated in October.

Asia Pacific

Equities were mixed last week with the All Ordinaries (down 2.6 percent), Nikkei (down 0.8 percent) and the Hang Seng (down 2.7 percent) retreating. However, in Friday trading, many Asian stocks recouped early losses to end higher after Japanese Prime Minister Shinzo Abe dissolved the lower house of parliament for an election and China's People's Bank of China reportedly injected funds to boost liquidity in the banking system. Their announcement of a cut in interest rates occurred after markets here had closed for the week. Upbeat U.S. data showing broad economic strength during the week and a rebound in oil prices also helped investors shrug off renewed worries about the outlook for the Eurozone economy.

Australian stocks faded as commodity prices continued to slide. Equities now have retreated nine out of the last 10 trading days, ending at a five week low as worries about a slump in iron ore prices overshadowed a rebound in the energy sector. Going in the opposite direction was India's Sensex which hit a fresh record closing high Friday.

Trading for the week began on a dour note — Japan's economy unexpectedly slid into recession again. Japanese shares suffered their biggest single day loss in three months after gross domestic product unexpectedly contracted at an annualized pace of 1.6 percent in the third quarter, tipping the country back into recession. The headline figure was well shy of forecasts for an annualized increase of 2.2 percent after a 7.3 percent annualized contraction in the April to June quarter.

The Shanghai-Hong Kong Stock Connect trading link opened Monday. It opens up mainland Chinese markets to global capital, allowing international investors access to shares traded in Shanghai, while also granting wealthy Chinese individuals access to Hong Kong listed equities. Share purchases in both Shanghai and Hong Kong bourses slowed after the trading link started. Investors left 76 percent of the Shanghai-Hong Kong exchange link's quotas unfilled during the first week of trading, with some saying it may take months for cross-border flows to accelerate. However, initially investors poured money into Shanghai listed shares on the first day of a program to open the country's markets to international capital via Hong Kong, with a daily limit on investment into China triggered after an hour of afternoon trading.

Currencies

The U.S. dollar advanced against five of its six major counterparts for the week. Only the Canadian dollar gained on its U.S. counterpart. The euro dropped after European Central Bank President Mario Draghi said policy makers would broaden asset purchases if the inflation outlook for the region slowed.

The euro slumped against its peers as ECB President Draghi told the European Banking Congress in Frankfurt that officials "will do what we must to raise inflation and inflation expectations as fast as possible." The ECB is trying to boost the size of its balance sheet to early-2012 levels, signaling an increase of as much as €1 trillion to help revive the euro area economy. Policy makers are buying covered bonds and preparing to purchase asset backed securities. Europe's single currency staged its biggest move on Friday after the Draghi comments. Among the euro's major peers, only the Swiss franc declined amid speculation the Swiss National Bank (the nation's central bank) was intervening to defend a 1.20 per euro cap.

The yen strengthened Friday, paring a fifth straight weekly drop, after Japan's Finance Minister Taro Aso said the currency has depreciated too rapidly. The U.S. dollar gained 1.3 percent against the yen and 1.1 percent against the euro this week.

Selected currencies — weekly results

Indicator scoreboard

EMU

November flash composite PMI reading was 51.4, a 16 month low and down from October's final reading of 52.1. At 50.4, the flash manufacturing PMI was down only 0.2 points from its final October level but a surprisingly sharp decline in services (51.3 from 52.3) had a more marked impact on the overall picture. Of special concern was the first drop, albeit only marginal, in aggregate new orders since July 2013. New business in manufacturing was already in decline but the contraction in services (15-month low) is a new and particularly worrying feature. Compounding such worries, overall backlogs fell for a sixth straight month and at their fastest rate since June last year. Employment at least held steady in both sectors but output prices were down yet again despite a modest increase in input costs. Neither core country offered any reason for optimism with the composite output index in Germany sliding 1.8 points to a 16-month low of 52.1 and at 48.4,the French measure, despite edging a couple of ticks stronger, signalling another contraction in economic activity. Germany's manufacturing reading was at the breakeven level of 50.0. Manufacturing continued to contract in France, this time with a reading of 47.6. Elsewhere, the manufacturing readings for China, Japan and the U.S. were 50.0, 52.1 and 54.7 respectively. There are no composite readings for the three.

Germany

November ZEW current conditions index edged up to 3.3 for its first increase in five months. Even so, this was still its second weakest print since June 2010. Expectations were a good deal more robust, climbing 15.1 points to 11.5, their first advance since December 2013 and their largest gain since February that year. Expectations are now at their highest level since July. However, both the current conditions and expectations gauges remain well short of their respective readings earlier in the year and are hardly indicative of any anticipated real near-term bounce in GDP.

United Kingdom

October consumer prices edged up 0.1 percent on the month and were up 1.3 percent from the same month a year ago. The main boost to the change in the yearly rate came from transport where prices declined 1.1 percent on the month this year compared with a steeper 1.5 percent decline a year ago. This was largely due to a decline in the cost of petrol, only about half the fall seen over the same period in 2013. Air fares also had a small positive effect and the headline rate was also supported by recreation & culture where a 0.4 percent monthly gain was double the pace posted last year. The only notable negative impact on the yearly change in prices came from furniture, household equipment & routine maintenance where charges were down 1.1 percent between September and October this year compared with a decline of just 0.4 percent between the same two months a year ago. The core CPI was up 0.2 percent from its September level to leave its annual growth rate unchanged at 1.5 percent.

October producer output prices declined 0.3 percent on the month and were down 0.5 percent on the year. Input prices were off a smaller than anticipated 1.5 percent on the month after an unrevised 0.6 percent decline in September and have now fallen for five months in a row. Annual input cost inflation was down 8.4 percent. The monthly drop in factory gate prices was led by a 2.3 percent swoon in petroleum products. There were also smaller drops in food products (0.4 percent), transport equipment (0.2 percent), and chemical & pharmaceuticals (0.1 percent). The only monthly increase of any size was in clothing, textiles & leather (0.2 percent). The core output price index edged 0.1 percent higher on the month and 0.9 percent on the year. The monthly drop in input costs was dominated by a 9.1 percent slump in the price of crude oil which alone subtracted more than 1.9 percentage points from the headline change. Imported metals were also down 1.5 percent. Elsewhere, fuel was up 2.4 percent, imported food materials rose 1.6 percent and imported parts and equipment 1.0 percent.

October retail sales rebounded 0.8 percent on the month after sinking 0.3 percent the month before. On the year, sales were up 4.3 percent, the best performance since April. The non-food sector enjoyed a very good month with non-fuel purchases up 1.5 percent from September when they slumped 1.6 percent. Within this, all of the major subsectors posted gains apart from non-store retailing (down 0.6 percent). Household goods (2.6 percent) and the other stores category (1.8 percent) saw especially robust demand and textiles, clothing & footwear also advanced 0.5 percent. Food sales increased 0.3 percent and fuel was up 1.0 percent. The overall retail sales deflator recorded a 1.5 percent yearly drop, its fourth consecutive decline and its steepest fall since October 2002. Excluding fuel, prices were 1.2 percent lower on the year after a 0.9 percent drop last time. All subsectors posted negative annual rates.

Asia/Pacific

Japan

The Japanese economy unexpectedly entered recession in the third quarter, a surprise that may ensure Prime Minister Shinzo Abe will call snap elections and delay a planned consumption tax increase scheduled for next October. Third quarter GDP declined 0.4 percent from the previous quarter or by an annualized pace of 1.6 percent in the third quarter. Analysts expected a rebound of 2.2 percent (annualized). The economy has been in a deep slump since an increase in Japan's consumption tax in April. The prior quarter's 7.1 percent annualized slump was revised down to minus 7.3 percent. Business spending drove the third quarter decline, dropping 0.2 percent on the quarter. Personal consumption was up 0.4 percent.

October merchandise trade deficit improved to Y710 billion from Y958.3 billion when compared with the same month a year ago. October was the 28^th consecutive trade deficit in a row. Expectations were for a deficit of Y1 trillion. Exports on the year were up a better than expected 9.6 percent while imports were up a less than anticipated 2.7 percent. Exports to China were up 7.2 percent on the year, 10.5 percent to Asia and 5.4 percent to the European Union. Exports to the U.S. were up 8.9 percent. On a seasonally adjusted basis, the trade deficit was Y977.5 billion after a deficit of Y1.1 trillion in September. On the month, exports 1.9 percent while imports edged up 0.4 percent. Between 1980 and 2010 Japan recorded a trade surplus every year. But since the Fukushima nuclear disaster of March 2011, the energy poor nation has been forced to increase imports of fossil fuels as a substitute, and with the yen getting battered those imports cost more than usual. As a result last year's trade deficit was the worst on record.

Americas

Canada

October consumer prices were up 0.1 percent. The monthly increase was enough to lift annual inflation from 2.0 percent in September to 2.4 percent, matching the recent high posted in June and some 1.7 percentage points above its level a year ago. The buoyancy of the headline CPI was more than matched by both underlying measures. Excluding just food and energy the CPI was up 0.4 percent on the month for a 2.0 percent on the year after a 1.9 percent increase at the end of the quarter. At the same time, the BoC's preferred core index advanced 0.3 percent for a 12-month rate of 2.3 percent, up from 2.1 percent last time and its strongest mark since February 2012. Seasonally adjusted, the CPI also climbed 0.1 percent on the month. Similarly adjusted, the excluding food and energy index and the Bank of Canada gauge both gained 0.2 percent. Within the adjusted basket the main upward pressure stemmed from a 0.5 percent increase in alcoholic beverages & tobacco but there were sizeable increases too in transportation, clothing & footwear household operations, furnishings & equipment (all 0.3 percent). The only monthly decline was in health & personal care (0.1 percent).

Bottom line

Most equity indexes advanced on the week. In Japan, the lower house of parliament was dissolved and a snap election was called for mid-December. At the same time, the second sales tax increase was postponed for 18 month (April 2017). The People's Bank of China surprised and lowered its key policy interest rates on Friday on signs the economy continues to weaken. ECB President Mario Draghi gave indications of further moves by the bank to fight disinflation and a stagnant economy.

Germany, the UK and U.S. will update their third quarter gross domestic product data. Canada will release its third quarter growth data as well. The Organization of Petroleum Exporting Countries (OPEC) meets during the week to decide production quotas. Given the recent crude price declines, the meeting is expected to be contentious.

The first week of December will bring its many central bank meetings. The Reserve Banks of Australia and India, the Banks of Canada and England and the European Central Bank will all announce policy decisions. However, the one that will be watched the most closely will be the European Central Bank, especially after ECB President Draghi's recent statements.

Looking Ahead: November 24 through November 28, 2014

Looking Ahead: December 1 through December 5, 2014

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