International Perspective will be taking off next week to celebrate

Thanksgiving. IP will return on December 4, 2014.

Global Markets

In a quiet week for new economic data, investors preferred to focus on the minutes of the October FOMC meeting rather than the terrorist attacks in Paris. Most equity indexes were up on the week. Markets hate uncertainty — something they have had a large dose of in the past several months. But now, with a fed funds rate increase a virtual certainty (ceteris paribus) investors seem to be looking at the Fed increase as a favorable event. It indicates that the U.S. economy is strong enough to tolerate the increase without negative effects.

The reaction to the terrorists' assault on Paris was relatively muted perhaps because traders had the weekend to digest and then react to the event. As the week wore on, concerns surrounding the attacks were put on the back burner after French police killed three terrorist suspects and arrested more in the Paris suburb of Saint-Denis during a major security operation. The history of terror incidents around the world over the last 15 years shows market reactions are often sharp and, increasingly, short-lived. All equity indexes advanced with the exception of the STI which was down 0.3 percent on the week.

Stock market investors have started to view the Federal Reserve's tilt toward a near term interest rate increase more positively. This is a shift from recent weeks, when worries about higher borrowing costs and slower growth triggered selling. Now, many investors, as well as global central banks, are eager for the Fed to act, if only to settle the uncertainty. Some said they believe any rate increases would be incremental and that a December increase would signal the Fed's vote of confidence in the global economy. "We have done everything we can to avoid surprising the markets and governments when we move, to the extent that several emerging market and other central bankers have for some time been telling the Fed to 'just do it,'" said Fed Vice Chairman Stanley Fischer in San Francisco on Thursday.

Global Stock Market Recap

Europe and the UK

Despite the terrorist attacks in Paris last week, investors maintained their calm sending European markets higher for the week. There were very little economic data to drive the direction of trading. Rather, investors focused on dovish comments from European Central Bank President Mario Draghi and on the FOMC minutes that were released earlier in the week. The FTSE climbed 3.5 percent, the DAX gained 3.8 percent, the SMI added 3.0 percent and the CAC was 2.1 percent higher.

In remarks to the Frankfurt European Banking Congress, Mario Draghi pledged that the ECB would do what it must to increase inflation as quickly as possible. He said that at the upcoming meeting on December 3, the governing council will thoroughly assess the strength and persistence of the factors that are slowing the return of inflation towards 2 percent. He added, "If we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate." Draghi's remarks were seen as a sign that the ECB may ramp up its asset purchase program.

But according to the Bundesbank's president Jens Weidmann, the monetary stimulus measures already taken by the European Central Bank need more time to have a real impact on the Eurozone economy, but maintaining ultra-loose policy for a long time raises the risk of losing their efficiency. "We need to be aware that the longer we stay in ultra-loose monetary policy mode, the less effective this policy will become and the more the attendant risks and side-effects will come into play." He pointed out the exuberance in some financial markets and the problems faced by life insurers as examples.

While markets maintained their equilibrium after the attacks, the impact on the real economy has yet to be assessed. For example, the impact on the hotel and tourism industries cannot be overstated. According to anecdotal evidence, hotels have been very hard hit in Paris. Both tourists and meeting planners have canceled. Whether this is just a knee jerk reaction or augers a longer term negative — it is too soon to tell.

Asia Pacific

While a bit tremulous Monday in the wake of the Paris terrorist attacks, the indexes picked up and recorded gains for the week. The All Ordinaries were the star performer, adding 3.8 percent. At week's end, investors remained confident that the European Central Bank will expand its stimulus at its December governing council meeting. Sentiment was also underpinned by expectations that the Federal Reserve will take a very gradual approach to rate normalization.

Chinese shares were up 1.4 percent on expectations the People's Bank of China will retain a bias to ease its policy further in the coming months as China undergoes a structural transformation. Sentiment was buoyed after the PBoC cut borrowing costs further on loans made under the standard lending facility in its latest effort to underpin the slowing economy. The Hang Seng added 1.6 percent from last Friday.

The Nikkei advanced 1.4 percent despite traders' disappointment that the Bank of Japan left its monetary policy unchanged. Japanese shares hit a three month high even as the yen strengthened and merchandise trade data pointed to continued weakness in the economy. However, shipping stocks fell on Friday after the Baltic Dry index, a measure of shipping rates for commodities, hit a record low in London overnight.

Meanwhile, the fallout from slumping commodity prices and continuing concerns about China's economic slowdown continued to weigh on shares in Singapore where many resources firms, shipbuilders and property companies, trade. The FTSE Strait Times Index (STI) lost 0.3 percent on the week.

Bank of Japan

The Bank of Japan decided to leave its policy unchanged again despite data earlier in the week indicating that the country had fallen into a technical recession for the second time in two years. The BoJ 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 vote to maintain its policy was 8 to 1. Once again, Takahide Kiuchi voted against the decision arguing that a reduced pace of purchases (¥45 trillion) was appropriate.

In its statement, the monetary policy board once again said that the economy continued to recover moderately and was likely to continue doing so. The MPB said that the core CPI was likely to continue to be about zero for now due to the decline in energy prices. However, both exports and output have been affected by the slowdown in emerging markets. It noted that private consumption has been resilient but capex remains weak.

After the Bank of Japan decided to keep its monetary policy unchanged, BoJ Governor Haruhiko Kuroda put a positive spin on recent developments. Speaking at his press conference after the BoJ's policy board concluded its November meeting, Kuroda said the bank "genuinely acknowledged weakness in indicators like the breakeven inflation rate and some questionnaires that measure inflation expectations." But he went on to add, "Companies are changing the way they price their products, and households are willing to accept price increases. From a longer term perspective, inflation expectations appear to be rising on the whole." The acknowledgement of weaker indicators follows the bank's decision to push back the time frame for achieving its 2 percent inflation target. That decision was made during the previous meeting.

The governor also remained bullish on Japan's economy, despite the fact that it has entered a technical recession. "The negative growth in the three months ended in September was mostly down to a decrease in inventory investment," he said. "Final demand is strong. Inventory adjustment is making progress. We are seeing a different picture from the April to June period."

The governor, however, seemed irritated at the apparent lack of wage growth. "Companies are posting record profits, and Japan is near its structural unemployment rate. In light of these developments, I'd have to say wage growth remains weak," Kuroda said. "I will be keeping a close eye on developments."

Currencies

The U.S. dollar was up against most of its major counterparts including the yen, euro, pound sterling, Swiss franc and the Canadian dollar. However it retreated against its Australian counterpart. There was little reaction to the Paris attacks. The dollar strengthened broadly over the week as investors prepared for the Federal Reserve to raise U.S. interest rates next month while other central banks continue to signal easier monetary policy.

The decline in the euro was traders' reaction to ECB President Mario Draghi's comments regarding monetary policy going forward, namely that the ECB would act by using all the instruments available within its mandate. The yen retreated after data indicated that the economy once again was in a technical recession. GDP contracted in both the second and third quarters for a second consecutive year.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

October harmonized index of consumer prices edged up 0.1 percent on the month and up 0.1 percent on the year. Core HICP excluding food, alcohol, tobacco and energy and omitting just unprocessed food and energy now show a 0.2 percentage point increase to 1.1 percent and 1.0 percent respectively from a year ago. All the principal subsectors outside of processed food, alcohol and tobacco (flat), saw prices accelerate. The third underlying gauge which excludes only seasonal food and energy was a tick firmer than in September at a 0.9 percent yearly rate.

Germany

November ZEW current conditions index fell for a second consecutive month but, at 54.4, by less than a point. This was still its softest reading since February and nearly 16 points short of April's high. However, expectations were surprisingly robust, climbing 8.5 points to 10.4, their first increase in eight months albeit still their second weakest print in a year. Both indexes are consistent with what appears to have been some underlying loss of economic momentum in recent months. ZEW pointed out that economic pessimism does not appear to have increased in the wake of the November 13 terrorist attacks in Paris.

United Kingdom

October consumer prices were up 0.1 percent on the month but were down 0.1 percent on the year. This was the third month in a row that inflation has been either zero or below. The main upward pressure on the change in the annual rate came from clothing & footwear where prices were up 2.0 percent on the month compared with a 0.6 percent increase during the same period a year ago. The other principal boost was from recreation & culture where a 0.8 percent monthly gain this year was double the rate posted in 2014. Downside pressure was concentrated in education and food & non-alcoholic beverages. The core CPI rose 0.3 percent on the month to nudge its yearly rate up to 1.1 percent from 1.0 percent last time, a 3-month high.

October retail sales were down 0.6 percent after a 1.7 percent surge in September. Compared with a year ago, sales were still up 3.8 percent but this was well short of the previous period's 6.2 percent mark. Excluding auto fuel, purchases were 0.9 percent lower on the month and 3.0 percent higher on the year. A reversal in October was always in the cards in the wake of a September jump that was biased up in no small way by strong demand for food and drink associated with the Rugby World Cup. Not surprisingly therefore, England's early exit in the opening rounds saw sales at predominantly food stores contract 1.3 percent on the month this time. Non-food purchases dropped 0.3 percent reversing much of September's 0.5 percent gain. Weakness was particularly apparent in clothing & footwear (down 1.8 percent), non-store retailing (down 1.3 percent) and household goods (down 0.8 percent). The other stores category (1.6 percent) and auto fuel (1.7 percent) recorded the only advances.

Asia/Pacific

Japan

Third quarter gross domestic product contracted a greater than expected 0.2 percent on the quarter. Analysts expected a 0.1 percent decline. GDP contracted an annualized rate of 0.8 percent. On the year however, GDP was up 1.1 percent after increasing 1.0 percent in the second quarter. Two negative quarters means that Japan once again entered a technical recession which is described as two negative quarters of GDP. Among its components, consumption increased 0.5 percent on the quarter but CAPEX dropped 1.3 percent. Inventories also negatively affected GDP, subtracting 0.5 percentage point from growth. Domestic demand also subtracted 0.3 percentage point. The poor data draw into question the Bank of Japan's decision to keep policy unchanged at its October 30 meeting. The worse than expected result may prompt the BoJ to reconsider its options at its meeting at the end of this week.

October unadjusted merchandise trade balance surprised with the first surplus since March. The unadjusted surplus was Y111.5 billion when compared with a year ago. Exports were down 2.1 percent on the year while imports sank 13.4 percent. It was the first decline in exports in 14 months. Imports retreated for the 10th consecutive month from a year ago. Exports to Asia and China were 3.6 percent lower. However, exports to the US and EU were up 6.3 percent and 5.4 percent respectively. On a seasonally adjusted basis (graph above), the trade deficit was Y202.3 billion. Exports were up 0.6 percent on the month but down 2.5 percent from a year ago. Imports slipped 1.1 percent on the month and 11.0 percent from a year ago.

Americas

Canada

September manufacturing sales declined a surprising 1.5 percent following a 0.6 percent decrease in August. Lower sales in the motor vehicle assembly and the petroleum & coal product industries were responsible for the decline. Sales were down in 13 of 21 industries, representing 78.6 percent of Canadian manufacturing. Constant dollar manufacturing sales were down 1.6 percent, indicating that the volume of goods sold was lower in September as well. On the year, sales sank 3.0 percent after increasing 0.3 percent the month before. In the motor vehicle assembly industry, sales fell 10.3 percent following four months of gains. Sales in the petroleum & coal product industry were down 7.1 percent to C$4.8 billion in September, the fourth consecutive decline. The decrease largely reflected partial shutdowns at a number of refineries during the month for maintenance work. Although refineries often shut down for part of September, this year the shutdowns were more extensive than usual. Higher sales in the machinery and primary metal industries offset some of the declines.

Following four months of gains, September retail sales retreated 0.5 percent. On the year sales were up 1.2 percent. However, after removing the effects of price changes particularly lower gasoline prices, retail sales in volume terms edged up 0.1 percent. Sales at gasoline stations declined 3.7 percent in September to their lowest level since January 2015, reflecting lower prices at the pump. According to the CPI, unadjusted gasoline prices declined 7.9 percent in September compared with August. Following seven consecutive monthly advances, sales at motor vehicle & parts dealers were down 0.5 percent, partly offsetting August's gains. Sales were down at sporting goods, hobby, book & music stores from weaker sales at sporting goods stores. Sales also declined at clothing & clothing accessories stores, jewelry, luggage & leather goods stores and at furniture & home furnishings stores. General merchandise stores sales were up for the fourth time in five months while sales at building material & garden equipment and supplies dealers advanced, though the level of sales remained below the all-time high recorded in May. Food & beverage store receipts also edged up on the month.

October consumer price index edged up 0.1 percent and was up 1.0 percent on the year.  Lower energy prices continued to moderate the annual increase in the CPI, led by the gasoline index, which was down 17.1 percent in the 12 months to October. Prices were up in seven of the eight major components from a year ago led by higher prices for food. Increases in the shelter index and the household operations, furnishings and equipment index also contributed to higher consumer prices. The transportation index, which includes gasoline, recorded its 12th consecutive year-over-year decline. On a seasonally adjusted monthly basis, the consumer price index increased 0.2 percent following a 0.2 percent decrease in September. In October, four of the eight major components increased on a seasonally adjusted monthly basis, three indexes posted no change, while the recreation, education and reading index declined.

Bottom line

Equities advanced last week as the uncertainty around the Federal Reserve's rate increase dissolved and the ECB continued to indicate that they would increase its stimulus program to raise inflation. The Bank of Japan disappointed — it left its policy unchanged. There were few economic indicators. UK inflation remained around zero while retail sales retreated.

The week ahead is a short one in the U.S. because of the Thanksgiving Day holiday. But before then, flash PMIs will be released for the Eurozone, Germany, France, the U.S. and Japan.

Looking Ahead: November 23 through November 27, 2015

Looking Ahead: November 30 through December 4, 2015

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