Global Markets

International Perspective will be taking off next week.

It will return on Friday, January 2, 2015.

Happy holidays from all of us at Econoday!

Equities were volatile last week with sharp swings both up and down on a daily basis. The sinking price of oil was one obvious cause of nerves but so was the slide in the Russian rouble which resulted in a massive interest rate increase to 17 percent by the Central Bank of the Russian Federation in its attempt to stabilize the currency.

A run up to a Federal Open Market Committee meeting and its monetary policy announcement always causes tension in markets — and a reaction afterwards globally. This time was no different especially since the U.S. economy is outperforming most major countries. The statement indicated a switch to the use of the word 'patience' from 'considerable time' and was the focus in the ensuing press conference by Fed Chair Janet Yellen. The latest statement said that the Fed would be patient before normalizing its fed funds rate, currently in the range of zero to 0.25 percent. During her press conference, Ms Yellen said that the promise to be 'patient' before starting to normalize rates is worth at least two meetings. This means that April 29th would be the earliest possible date for the first rate increase. However, most analysts expect that the June meeting is most probable for lift-off which means another transition in forward guidance is likely at the March meeting.

Bank of Japan

As expected the Bank of Japan left its key interest rate range at zero to 0.1 percent. It said it would continue to buy JGBs at an annual pace of ¥80 trillion. The BoJ said its board members voted 8 to 1 to keep policy steady. Only Takahide Kiuchi voted against the decision once again, arguing that an earlier pace of purchases (¥60 trillion) was appropriate.

At his press conference following the meeting, BoJ Governor Haruhiko Kuroda played down concerns over oil prices and expressed more optimism about Japan's economy which some took as a sign that he is not considering taking additional steps anytime soon. The decline in oil prices has been accelerating since late October when the BoJ expanded its monetary easing program. The Bank cited the decline in oil prices as a threat to its quest to defeat more than a decade of deflation. While emphasizing his optimistic price outlook, Mr. Kuroda acknowledged that unless Japanese companies raise wages, putting more real money into consumers' pockets, the BoJ could fall short of its target. "For us to achieve 2 percent inflation and make it sustainable, continued wage growth is absolutely essential," he said.

Earlier in the week, Prime Minister Shinzo Abe's Liberal Democratic Party and its coalition partner emerged from a snap election Sunday with 326 seats in the lower house, more than the 317 needed for a two-thirds supermajority. The Diet will convene December 24^th to appoint a prime minister. Abe, now assured of staying in office, will form a government that day. The victory gives Mr. Abe up to four more years in office.

Mr. Abe took a gamble in calling the election just after it was reported last month that Japan's economy had slipped into recession by contracting in both the second and third quarters. He said the vote would be a referendum on his economic policies, including his decision to delay a sales tax increase that had been scheduled for October 2015. Voter turnout was low with many voters, doubtful of both the premier's "Abenomics" strategy to end deflation and generate growth and the opposition's ability to do any better, staying at home.

Hopes for Abenomics were hit when Japan slipped into recession in the third quarter following an April sales tax increase. Wage increases have not kept pace with price rises and data suggest any economic rebound is fragile. Abe decided last month to put off a second tax hike to 10 percent until April 2017, raising concerns about how Japan will curb its huge public debt, which is the worst among advanced nations. Abe, whose support has now sagged well below 50 percent, called the election after just two years in office to strengthen his grip on power before tackling unpopular policies.

Swiss National Bank

On Thursday, the SNB announced a surprise 75 basis point cut in the lower end of its target corridor for 3-month CHF LIBOR which now stands at minus 0.75 to 0.25 percent. At the same time, it signaled that it was setting a minus 0.25 percent rate on sight deposits exceeding a given exemption threshold.

The moves reflect concerns that foreign exchange intervention alone will not prove sufficient to prevent the local currency from falling beneath its CHF1.20 minimum target level against the euro. Although the SNB indicated no change in policy at the December 11^th Monetary Policy Assessment, it was again forced to lower its inflation forecasts and made plain its preparedness to introduce additional measures at any time should it believe them necessary.

With speculation growing about the likelihood of quantitative easing from the European Central Bank next quarter, the SNB clearly decided to preempt any such policy initiative by acting first itself. As desired, the initial reaction was a significant weakening in the Swiss franc as, amid increasing uncertainty about the outlook for emerging markets, the safe haven appeal of the Swiss unit saw many investors caught long. Indeed, the SNB indicated that recent developments in Russia were instrumental in its decision to cut rates. It remains to be seen how effective the measures are over the longer run, but not for the first time the Swiss central bank has shown that its policy promises are far from empty.

Central banks continue to adjust meeting schedules and other policies regarding the release of information from their meetings. The European Central Bank confirmed that minutes of its regular policy setting meetings will be published for the first time in 2015. The new procedure will come into effect with its deliberations scheduled for January 22. However, anyone hoping that the accounts will be released at the same time as the policy announcement (as per the Bank of England's recently indicated proposals) will be disappointed. Rather, there will be a four week lag, a week longer than currently employed by the FOMC. In 2015, the ECB will meet eight times a year instead of monthly. The ECB has also said that it will be replacing its current Monthly Bulletin with a new Economic Bulletin that will be published two weeks after each meeting.

In contrast, the Bank of England announced significant planned changes to its monetary policy committee's announcements. Under the new proposals the Bank will release the minutes of its monthly MPC meetings at the same time as it makes its policy announcement, rather than two weeks later as is currently the case. The switch is scheduled to take place from August 2015. In addition, the Quarterly Inflation Report (QIR) that provides the economic platform upon which the policy decisions are made will also be released alongside the policy announcement rather than a week later. The BoE also signaled that it is looking to reduce the number of MPC meetings from 12 to eight per year from 2016.

Global Stock Market Recap

Europe and the UK

European equities advanced despite their volatility as investors weighed the prospect of more monetary stimulus in Europe against the threat of political upheaval in Greece and the Russian currency crisis. Investors were spurred in part by the U.S. Federal Reserve's pledge to adopt a 'patient' approach when raising interest rates. However, traders said that investors may have overshot, considering there are several underlying sources of volatility. The FTSE was up 3.9 percent, the CAC gained 3.2 percent, the DAX added 2.0 percent and the SMI was 0.9 percent higher. As the week ended, fund managers and traders cited a gradual wind down in trading activity as investors cut risk before the holiday season. Now investors are trimming positions ahead of the few days off, just wanting to reduce the risk.

Back in Europe, the equity selloff was being spurred by political uncertainty in Greece as well as Standards & Poor's trimming the rating of several Italian lenders on Thursday including two of the country's largest banks, citing its recent downgrade of the sovereign's rating from BBB to BBB-. S&P said that the move reflects its view that economic prospects in Italy are likely to remain weaker over the next couple of years than the agency had previously anticipated.

Before this week's bounce, the FTSE had fallen nearly 9 percent in 1-1/2 weeks, as a slide in commodity prices hit energy and mining stocks and concerns about Russia's financial stability dampened emerging market economies.

Earlier in the week the Russian finance ministry said it was ready to sell as much as $7 billion to stabilize the rouble after the Bank of Russia carried out massive monetary tightening, increasing its key interest rate by 6.5 percentage points to 17 percent. Ultimately though, strategists agree that the fate of the Russian economy depends on the price of oil.

Asia Pacific

Equities were volatile last week with most of the indexes retreating at the beginning of the week, but rallying at the end. Investors continued to cheer the Federal Reserve's dovish policy statement, signaling that an interest rate increase would not happen until April next year.

The weekly results were mixed with the Shanghai Composite (up 5.8 percent), All Ordinaries (up 2.2 percent), the Nikkei (up 1.4 percent), the Kospi (up 0.4 percent) and the Sensex (up 0.1 percent) gaining on the week. The remaining indexes retreated with the Hang Seng down 0.6 percent and the STI down 1.3 percent.

The Shanghai Composite once again outperformed other regional indexes, ending the week at its highest level since November 2010. The weak flash manufacturing PMI, which indicated a contraction in factory output, fueled hope of more stimulus to aid the weakening economy. The preliminary HSBC China Manufacturing PMI slid to 49.5 from a final reading of 50.0 in November, a seven month low.

On Friday, the Nikkei jumped the most since early November, buoyed by U.S. equities' strong performance on Thursday. The index climbed 411 points or 2.39 percent to 17,621.40. Helping equities, the yen traded at a one week low after the Bank of Japan kept its monetary policy steady and offered a slightly more upbeat view of the economy, saying the effects of a decline in demand following the sales tax increase have been waning on the whole.

Currencies

The U.S. dollar advanced against all of its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. The yen declined to a one week low Friday after the Bank of Japan maintained its monetary stimulus while the U.S. Federal Reserve moved toward raising borrowing costs for the first time since 2006. The Canadian dollar approached a five year low after the November consumer price index slowed more than forecast.

Japan's currency slid against all of its 16 major peers as a rally in Asian stocks sapped demand for safety. Russia's rouble was up as a short term cash crunch spurred demand. India's rupee slid to a 13-month low, leading a retreat in Asian currencies as Russia's financial crisis and declining oil prices prompted investors to favor safer bets than emerging market assets.

On Friday, the Russian rouble, too, found a respite from its plunge in recent days, although trading remained volatile. The currency had begun to recover on Wednesday as the market welcomed measures by the Bank of Russia to shore up the country's banks. The central bank increased interest rates to 17 percent to 10.5 percent to stave off the currency's decline.

The financial market gyrations — the rouble ranged this week between 56.18 and 80.10 — underscore the financial crisis that has evoked memories of Russia's 1998 default. The Bank of Russia also provided almost 488 billion roubles at a special repurchase auction of three day cash after the rate banks charge each other for overnight funds soared to an eight-year high of 27.3 percent yesterday. Sanctions over Vladimir Putin's annexation of Crimea and support for Ukrainian separatists have worsened the rouble's retreat this year by creating a domestic U.S. dollar shortage. That prompted companies to hoard foreign exchange, increasing depreciation pressure that nearly $90 billion of central bank currency interventions initially failed to arrest.

Selected currencies — weekly results

Indicator scoreboard

EMU

December flash composite PMI was up 0.6 points to 51.7. The flash manufacturing PMI climbed 0.7 points above its November reading to 50.8, a 5 month high. The comparable service sector index was 0.8 points stronger at 51.9. The details showed manufacturing output unchanged at November's lowly pace but aggregate new orders returned to positive growth. However, overall output was again supported by running down backlogs which decreased for a seventh consecutive month. Still, both sectors recorded respectable employment increases which, in sum, saw its largest increase since July. Input costs were dampened by tumbling oil prices and as a result inflation hit an 8-month low. In turn, this contributed to yet another drop in output charges which have now been on a downward spiral for 33 months. Regionally within the core the results were mixed but overall disappointing. The composite output index added 1.2 points to 49.1 in France but dipped 0.3 points to 51.4 in Germany.

November final harmonized index of consumer prices was down 0.2 percent on the month and up 0.3 percent on the year. Core HICP was up 0.7 percent. However, the core which excludes energy & seasonal foods slipped a tick to 0.6 percent. Non-energy industrial goods prices were 0.1 percent lower on the year for a second successive month and service sector inflation was steady at 1.2 percent. Annual growth of energy charges declined to minus 2.6 percent from minus 2.0 percent and food, alcohol & tobacco was unchanged at 0.5 percent. Regionally, Greece (minus 1.2 percent) and Spain (minus 0.5 percent) again posted sub-zero headline rates and in Cyprus, Estonia and Slovakia prices were flat on the year. Austria (1.5 percent) remained at the top ahead of Finland (1.3 percent) but all other member states were below 1 percent.

Germany

December ZEW survey was surprisingly upbeat with a significantly brighter assessment by analysts of current economic conditions as well as a markedly more optimistic view of the outlook. Current conditions were up 6.7 points following November's minimal 0.1 point increase for their first back-to-back rise since May/June. At 10.0, the balance was at a 3-month high. Meantime, expectations were up even more strongly, registering a 23.4 point jump from November after an already sizeable 15.1 point spurt in mid-quarter. The resulting balance of 34.9 was the highest mark since April. According to ZEW, improving confidence was attributable to a weaker euro and the falling cost of oil. It may also say something about an increasingly entrenched market belief that the ECB will finally yield to calls for QE next quarter.

December Ifo business climate rose 0.8 points to 105.5. Its second consecutive increase put the composite index at its strongest mark since August but more than 5 points below its January level. Current conditions were unchanged at 110.0 and so remained 1.6 points above their October reading but still 0.4 points short of their September posting. Expectations made further progress, climbing an additional 1.3 points to 101.1, their highest value since August but, like the current conditions measure, well below their first half-year levels. For the major sectors it was a mixed picture with morale firmer in manufacturing, wholesale and services but weaker in both retail and construction.

United Kingdom

November consumer price index was down 0.3 percent on the month and up 1.0 percent on the year, its lowest level since September 2002. A number of sectors contributed towards the monthly decline in the annual inflation rate. Transport prices declined 1.2 percent between October and November this year compared with a 0.5 percent drop over the same period in 2013. Petrol prices were an important factor here and downside pressure was exacerbated by an unusually large decline in air fares. Recreation & culture charges were down 0.3 percent on the month compared with a 0.4 percent increase a year ago and alcohol & tobacco prices declined 1.2 percent this year compared with a dip of just 0.1 percent in 2013. There was also a small negative impact from food & non-alcoholic beverages. There were no notable upward contributions to the change in the yearly inflation rate. The core CPI was 0.1 percent softer than in October and, at 1.2 percent, its annual increase was 0.3 percentage points below its previous print and at its weakest level since December 2008.

November output prices were up 0.2 percent and were down 0.1 percent from a year ago. Input prices declined 0.1 percent and were down 8.8 percent on the year. The monthly rise in factory gate charges was almost wholly attributable to a 2.7 percent jump in the chemicals & pharmaceuticals subsector although other manufactured products also posted a 0.3 percent advance. Elsewhere, prices typically showed little movement except for petroleum products which were down 1.4 percent. Core output prices were up a relatively firm 0.5 percent from October and, at 1.4 percent, their yearly increase was 0.5 percentage points above the rate at the start of the quarter. The monthly decline in input costs was dominated by a 7.6 percent slump in crude oil compounded by smaller declines in imported metals (0.3 percent) and other home produced materials (0.7 percent). Partial offsets were provided by sizeable gains in fuel (2.2 percent) and imported food materials (2.6 percent).

November claimant count dropped 26,900 after a sharper revised 25,100 drop at the start of the quarter. Having stalled in October, the unemployment rate on this measure resumed its downward trend and, at 2.7 percent, posted its lowest level since July 2008. However, the lagging ILO data showed a relatively mild 63,000 decrease in the number out of work over the three months to October. This was the smallest decline since the third quarter of 2013. The jobless rate was 6.0 percent in the three month period, although for the October month alone, the rate dropped to 5.9 percent from 6.1 percent in September. Falling unemployment helped to give a boost to wages. Annual average earnings growth in the August to October period accelerated to 1.4 percent from 1.0 percent last time and within this regular wages were up at a 1.6 percent yearly rate after a 1.2 percent reading in July to September.

November retail sales volumes jumped 1.6 percent on the month, their sharpest increase since December 2013. October purchases were also revised a little firmer and now show a 1.0 percent gain from September. Compared with a year ago, sales last month were up 6.4 percent, their fastest growth in more than a decade. Excluding auto fuel, purchases expanded a monthly 1.7 percent and were 6.9 percent above their level in November 2013. The underlying picture was still stronger as, excluding auto fuel, non-food sales jumped 2.6 percent on the month on the back of broad-based gains among the major subsectors. Clothing & footwear as well as non-store retailing surged 3.8 percent, household goods were up 3.6 percent and non-specialist stores climbed 2.6 percent. Other stores recorded a 0.8 percent increase and food a 0.4 percent advance. Fuel purchases grew just 0.1 percent. However, the buoyancy of demand failed to impact prices. It seems that significant discounting was itself a key to the jump in volumes. Thus, average store prices declined 2.0 percent on the year, their steepest decline since November 2002. Weaker petrol prices were an important factor here but even excluding auto fuel the deflator was down an annual 1.7 percent following a 1.2 percent drop in October.

Asia/Pacific

Japan

The December quarter Tankan reading for large manufacturers was a slightly less than expected plus 12, down from September's plus 13. Analysts expected a reading of plus 13. Small manufacturers scored a better than anticipated plus 1 after a minus 1 reading in the September quarter. Expectations were for a minus 2 reading. Large manufacturers tend to be exporters while the smaller companies are more focused on the domestic economy. Fiscal 2014 CAPEX planned expenditures rose 5.5 percent, up from 4.2 percent in September. Large manufacturers see an increase of 11.4 percent while small manufacturers see an increase of 7.9 percent. Large enterprises (including nonmanufacturing) expect an increase of 8.9 percent while small enterprises (also including nonmanufacturing) see a drop of 6.7 percent.

On an unadjusted basis, the November merchandise trade deficit widened from ¥737 billion in October to ¥891.859 billion. Japan has been running a deficit since the March 2011 earthquake and tsunami when all nuclear power plants went off line and imports of oil and coal soared. On the year, exports were up 4.9 percent for the third straight increase while imports were down 1.7 percent on the year for the first drop in three months. Exports to Asia were up 5.8 percent on the year for the third consecutive increase. Exports to China edged up 0.9 percent, also for the third straight increase. Exports to the U.S. were up 6.8 percent while those to the EU were down 1.3 percent from a year ago. On a seasonally adjusted basis, the November deficit was ¥925 billion. On the month, exports were up 1.9 percent while imports added 0.4 percent.

Americas

Canada

November consumer price index dropped 0.4 percent and was enough to reduce the annual inflation rate from 2.4 percent to 2.0 percent reversing the previous month's acceleration. The main negative impact on the annual headline rate came from cheaper gasoline where prices slumped 5.9 percent after a 0.6 percent increase in October. Missing the benefits of falling oil, underlying price developments were somewhat more robust. Even so, excluding food and energy the CPI still declined 0.3 percent on the month which held its yearly rate steady at 2.0 percent. At the same time, the BoC's preferred measure which excludes eight volatile items was 0.2 percent below its October's level, reducing its annual change to 2.1 percent. This was the first time in four months that the central bank index has decelerated. Seasonally adjusted, the CPI was down 0.2 percent. On the same basis, the excluding food & energy, the index dipped 0.1 percent and the BoC gauge was flat. Within the overall adjusted basket the only monthly gains of any size were in food (0.4 percent) and health & personal care (0.7 percent). Other increases were no more than 0.1 percent. Tumbling fuel costs ensured that weakness was most apparent in transportation (down 1.2 percent) but there was also a sizeable decrease in recreation, education & reading (0.7 percent).

October retail sales were flat following September's unrevised 0.8 percent monthly increase. Compared with October 2013, sales were 4.9 percent higher. Prices had no significant impact on cash purchases and volumes were also steady at their September level and 3.2 percent firmer on the year. Within the overall nominal sales performances were very mixed. Among the six subsectors reporting monthly increases, electronics & appliance stores (3.2 percent), sporting goods, hobby, book & music stores (1.4 percent) and miscellaneous store retailers (4.1 percent) stood out. However, gains here were essentially offset by declines in furniture & home furnishings (2.6 percent), motor vehicle & parts (0.6 percent) and clothing & clothing accessories (0.6 percent).

Bottom line

Markets were volatile in the last full trading week in 2014. Currencies attracted attention as Russia tried to stem the rouble's decline by raising interest rates and intervening. At the same time, the Swiss National Bank lowered its policy interest rate into negative territory to prevent its currency — the Swiss franc — from appreciating against the sinking euro and in advance of any quantitative easing the ECB might undertake. The Bank of Japan left its policy unchanged. Flash December PMIs showed some stabilization in the Eurozone while Japan's reading improved and China's deteriorated.

The next two weeks will be quiet with a dearth of new economic information. But the pace picks up on January 2 when everyone returns from their holiday break, including yours truly. Best wishes for the holiday season and thank you for your support in 2014!

Looking Ahead: December 22 through December 26, 2014

Looking Ahead: December 29, 2014 through January 2, 2015

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