Global Markets

Equities retreated last week as the end of the third quarter segued into the last quarter of 2014. Growth worries particularly concerning the Eurozone and China, geopolitical risks as well as concerns about the effects of the Federal Reserve unwinding its massive stimulus have all conspired to unsettle global equity markets in recent weeks.

European Central Bank meets, maintains status quo

The European Central Bank governing council left its key refinance rate at the record low of 0.05 percent to which it was cut just last month while the rates on the deposit and marginal lending facilities remain at minus 0.2 percent and 0.3 percent respectively. After September's broad based monetary stimulus there was never much chance of a fresh move on interest rates, particularly since the ECB had already indicated that the lower bound has been reached. Neither was there any expectation for an announcement of new non-standard measures at the central bank's press conference. Markets were disappointed nevertheless.

Recent Eurozone economic data have been disappointingly weak and warn that deflationary forces may have been more acute than previously thought. To this end, financial markets remained alert to any hints that yet more easing might be in the pipeline. However, for now any talk of such action is pure speculation.

At his post meeting press conference, ECB President Mario Draghi was predictably dovish in his prepared statement and again emphasized downside risks to the region's economic activity. However, he offered few crumbs of comfort for those hoping for more than just a promise of future action if deemed necessary. Details of the asset backed securities (ABS) and covered bonds programs announced last time came as promised and included news that buying covered bonds will begin mid-October. But there was little to excite here. Mr Draghi confirmed that purchases will take place at least over the next two years, but disappointed investors by not confirming the size of purchases. Outright quantitative easing seems to be some way off, if it happens at all, despite the monetary authority's apparent determination to boost its balance sheet (€2.0 trillion currently) back to its level around the beginning of 2012 (about €2.8 trillion).

The bottom line is that the ECB (in public at least) believes that its September bundle of measures should be enough to ensure a recovery in the region's economy and see inflation move slowly back towards its near-2 percent medium-term target. However, financial markets lack patience and, even if the central bank ultimately proves correct, are unlikely to give the time needed for the measures to work. Speculation about additional monetary accommodation will not go away anytime soon.

Manufacturing PMI growth eases

Global manufacturing as measured by purchasing managers' indexes eased in September. In the Eurozone, manufacturing stagnated at a 14 month low of 50.3, revised down from the 50.5 flash estimate and only 0.3 points above the 50 growth mark. Production increased for a 15th successive month but only at a very moderate pace while new orders declined for the first time in 15 months. New demand from overseas improved slightly but domestic demand was weak. With offsetting performances among the member states (up in Italy, Spain and Ireland but down in France, Austria and Greece) overall payrolls were broadly unchanged from August.

Regionally, the best performer was Ireland (55.7) ahead of Spain (52.6) although in the case of the latter, even this was a seven month low. Particularly worrying is the decline in the German index to 49.9 which, with France weighing in at 48.8. This means that both core countries are now back below the 50 breakeven mark. Greece (48.8) and Austria (47.7) also are on the wrong side of the growth threshold and at multi-month troughs.

The Eurozone is not the only area where manufacturing PMIs weakened. Factory activity stumbled across much of the Asia Pacific with slowdowns in India, Japan, China and Australia. In Japan, the economy is still struggling to get over a sales tax increase that took effect on April first. The final Markit/JMMA Japan PMI eased to 51.7 in September, from 52.2 and followed data showing industrial output, consumer spending and real wages all declined in August. Indian factory activity expanded at its slowest pace in nine months in September with an index reading of 51.0, down from 52.4 in August, breaking what had been a promising run. Manufacturing eased in the UK most probably because of the moribund European economy but continues to grow at a satisfactory pace. The United States appears to be a global outlier in the strength of its manufacturing index, but there too, the PMI edged down to 57.5 from 57.9.

Global Stock Market Recap

Global Stock Market Recap — 2014 Quarterly Results

Europe and the UK

The dour mood that equity markets here exhibited during the week culminated with an intensified selloff Thursday after the European Central Bank gave no indication it plans to announce further stimulus. But the mood lifted Friday after the better than expected September U.S. employment report was released. Employment jumped 248,000 while the unemployment rate declined to 5.9 percent from 6.1 percent. However, Friday's gains were too little to make a significant dent in the week's losses. The FTSE was down 1.8 percent, the CAC declined 2.6 percent, the DAX lost 3.1 percent and the SMI retreated 1.0 percent.

Thursday's slump was a major setback for a European stock market that has lately been propped up by hopes the ECB will do more to stimulate the region's struggling economy, including eventually resorting to large scale government bond purchases also known as quantitative easing. The scale of the challenge in reviving the region's flagging recovery was underlined Friday by purchasing managers data showing a sharper than expected slowdown in September private sector activity. The Markit PMI composite output index was revised to 52 from the flash estimate of 52.3, logging a 10 month low.

On Wednesday, European stocks declined, nearing their worst levels in more than a month, amid concerns about the health of the Eurozone economy. The latest round of downbeat news came from Italy — the Italian government said the country's gross domestic product will shrink 0.3 percent this year, down sharply from its April prediction for an increase of 0.8 percent.

Asia Pacific

Most equity indexes retreated on the week despite rebounds on Friday when stocks advanced for the first time in six days. With several markets closed during the week for national holidays, trading was thin. The Nikkei dropped 3.2 percent while the Hang Seng lost 2.6 percent. The All Ordinaries was virtually unchanged. The Shanghai Composite which was open for trading only on Monday and Tuesday added 0.7 percent. Uncertainty about U.S. nonfarm payrolls data due later in the global market day Friday contributed to a volatile session as did the lower volumes. Friday's rebound came even after the European Central Bank disappointed investors Thursday by giving no hints of an imminent sovereign bond buying program.

The focus here as elsewhere was on the situation in Hong Kong where the pro-democracy demonstrations continued. Hong Kong leader Leung Chun-ying defied pro-democracy protesters' demands to step down by Friday. Instead he delegated Chief Secretary Carrie Lam to hold a meeting with students to help resolve the political crisis.

Economic data disappointed. While South Korean exports rebounded sharply in September from a decline in the previous month, Australian retail sales missed expectations. China's manufacturing sector expanded at a stable rate in September according to the China Federation of Logistics and Purchasing. However, the Markit manufacturing PMI remained at a sluggish 50.2 for a second month.

Japanese shares hit a two week low in choppy trading during the week after the Bank of Japan's Tankan business survey showed service sector sentiment worsened in the three months to September due to the impact of the April consumption tax increase from 5 percent to 8 percent. But the large manufacturers' index, at 13, beat forecasts for 10 and was up from 12 in the second quarter. Separately, the Markit manufacturing PMI slowed in September, but continued to expand with a reading of 51.7. Also in Japan, August industrial production unexpectedly dropped 1.5 percent from the previous month and unemployment dropped to a three month low of 3.5 percent from 3.8 percent in July. Average household spending declined a steeper than expected 4.7 percent from a year ago and retail sales were up 1.2 percent on the year.

Reserve Bank of India

The Reserve Bank of India left its policy repurchase rate at 8.0 percent. In addition, the reverse repo was also held at 7.0 percent while both the marginal standing facility and Bank rates remain at 9.0 percent. The cash reserve ratio was similarly left at 4.0 percent.

The steady policy hand underscores the determination of the RBI to reduce consumer price index inflation (7.8 percent annual rate last month) to 6 percent ahead of the introduction of an explicit 4.0 percent inflation target in 2016. To this end, the RBI noted that rainfall from the southwest monsoon is now expected to be around 12 percent deficient which makes for continued uncertainty over the outlook for food prices. However, the Bank also pointed out that excluding food and fuel, inflation had hit a record low for the series and that a negative output gap should put further downward pressure on prices over coming months.

Consequently, with geopolitical events also regarded as a threat, the RBI assigned a broadly balanced risk assessment to its near-term inflation forecast. Nonetheless, it has retained upside risk over the more important medium-term despite a still patchy economic recovery. This continues to suggest that the monetary authority is in no hurry to cut key interest rates.

Currencies

The U.S. dollar climbed to a four year high Friday as the U.S. unemployment rate declined to the lowest since 2008 and the economy added more jobs than forecast, bolstering the case for the Federal Reserve to raise interest rates next year. The pound dropped below $1.60 for the first time in almost a year and the euro threatened to breach $1.25 for the time in two years. Both the New Zealand and Australian dollars plunged. On the week, the U.S. currency was up against all its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars.

The pound sterling dipped below $1.60 for the first time since November 2013. Also contributing to the currency's decline was the Markit/CIPS services PMI. The index retreated from August's 60.5 to 58.8, adding to signs that UK growth is losing momentum.

Asian currencies fell for a fifth week, the longest losing streak in 18 months, as the prospect of higher U.S. interest rates sapped demand for emerging market assets at a time when China's economy is sputtering.

Selected currencies — weekly results

Indicator scoreboard

EMU

September EU Commission index of economic sentiment (ESI) was 99.9 — below its 100 long-run average value for the first time since November last year. The index has now shed nearly 3 points from its May peak. The latest deterioration was largely attributable to a weaker consumer sector where morale dropped by 1.4 points to minus 11.4, its lowest point since February and as indicated in its flash estimate. By contrast, confidence in industry sipped just 0.2 points to minus 5.5 and actually improved 0.7 points to minus 27.7 in construction. However, there was an ominously steep 2.6 point decline in retail which, at minus 7.2, saw its lowest reading so far in 2014 and has now declined more than 5 points since June. Consumer price expectations dropped 2.6 points to 4.0 — 16.4 points short of their long-run average. Regionally among the larger states, national ESIs dipped in Germany (down 0.3 points to 103.8) and Italy (down 0.9 points to 96.9) but firmed in France (up 0.2 points to 95.3) and Spain (up 0.5 points to 104.0). However, within this group both France and Italy are below the common 100 long-run mean and even Germany is less than 4 points above this level having been nearly 8 points higher as recently as May.

September flash harmonized index of consumer prices slipped 0.1 percentage points to 0.3 percent from a year ago. The drop in the headline rate was more than matched by the core index that excludes energy, food, alcohol & tobacco. This declined 0.2 percentage points to 0.7 percent, reflecting softer rates in services and non-energy industrial goods. The former dropped from 1.3 percent to 1.1 percent and the latter fell from 0.3 percent to 0.1 percent. Elsewhere, energy also had a negative impact on the headline print with prices 2.4 percent lower on the year following a 2.0 percent decline in August. The main upward pressure on prices came from food, alcohol & tobacco where the yearly rate advanced from minus 0.3 percent to plus 0.2 percent.

August number of people out of work declined a sizeable 137,000 on the month. However, this still left the jobless rate unchanged at 11.5 percent. August's fall means that unemployment was 834,000 lower than in the same month of 2013 within which 210,000 was attributable to a reduction in under-25s. Even so, in line with the overall rate, the youth jobless rate was also steady at its July level of 22.3 percent. Using Eurostat methodology, regionally, among the larger member states, the national jobless rate dipped 0.1 percentage points to 24.4 percent in Spain and 0.3 percentage points to 12.3 percent in Italy. Both Germany (4.9 percent) and France (10.5 percent) saw no change. Bottom of the unemployment ladder was still Austria (4.7 percent) while Greece (27.0 percent in June) continued to occupy the top rung.

Germany

September unemployment rate held steady at the expected 6.7 percent, its seventh consecutive month at this level. However, the number of people out of work climbed a further 12,000 to 2.918 million. The September increase followed a marginally larger revised rise of 3,000 in August. However, in line with last month there was further good news on vacancies which climbed 5,000 after August's 10,000 gain. However, the increase here may say as much about a shortage of relevant skills limiting the supply of workers as businesses seeking to increase headcount. The September unemployment figures come just after the release of the August employment report which showed a 26,000 increase in payrolls, down from the 43,000 gain seen in July. Employment growth remains relatively firm but well down from the rates registered earlier in the year. Accordingly, both sets of data are consistent with some loss of economic momentum in recent months.

France

August consumption of manufactured goods was up 0.8 percent on the month, offsetting most of July's 0.9 percent contraction and, at 1.4 percent, boosted annual sales growth back into positive territory. All of the major expenditure categories gained. The overall rise was dominated by a 0.9 percent increase in the other manufactured goods category and a 0.5 percent advance in household goods. Autos and overall durable goods saw a minimal 0.1 percent increase while textiles were up 0.3 percent. Total spending on goods was up 0.7 percent on the month and also 1.4 percent on the year.

United Kingdom

Final second quarter gross domestic product showed a small upward revision that means total output now expanded 0.9 percent on the quarter. Annual growth was unrevised at 3.2 percent. The first look at the GDP expenditure components revealed a 0.6 percent quarterly increase in household consumption, down just a tick from its first quarter pace. Gross capital formation jumped 2.2 percent after a 1.1 percent contraction at the start of the year although within this, growth of gross fixed capital formation was almost halved to 1.3 percent. Even so, business investment was up 3.3 percent following a 0.9 percent increase last time. With general government final consumption expenditure posting its first quarterly rise (1.0 percent) since the third quarter of 2013, total domestic expenditure rose 1.0 percent on the quarter and 4.1 percent on the year. Net foreign trade had a zero impact with a 0.4 percent quarterly drop in exports offset by a 0.3 percent decline in imports. In the first quarter net exports added 0.6 percentage points to overall growth. This report includes major revisions resulting from the introduction of a new methodology for calculating GDP (ESA 2010) intended to bring the UK national accounts more into line with other EU countries. As a result, the UK economy is now thought to have surpassed its pre-crisis peak in the third quarter of 2013 rather than in the second quarter of 2014 as previously estimated and the peak to trough decline in total output is put at 6.0 percent, 1.2 percentage points less than indicated earlier. However, 2013 real GDP growth remains at 1.7 percent.

Asia/Pacific

Japan

August household spending dropped 4.7 percent from a year ago for the fifth consecutive decline as households continue to cut back on purchases. Analysts expected a 3.6 percent decline. Spending by this measure has declined every month since April when the sales tax increased to 8 percent from 5 percent. Spending within the major categories was down with the exception of clothing & footwear spending which was up 2.6 percent on the year. Housing spending sank 21.2 percent on the year while furniture & household utensils dropped 8.8 percent. Fuel, light & other charges slid 6.6 percent.

August unemployment rate dropped to 3.5 percent from 3.8 percent in July. Analysts expected an unemployment rate of 3.8 percent. That marks the lowest level since May when unemployment also hit 3.5 percent and the lowest reading since Shinzo Abe took power and instigated a sweeping reform program dubbed Abenomics. Employment increased by 530,000 from August 2013. On the month, employment was up 90,000.

August seasonally adjusted industrial production was down 1.5 percent on the month and declined 1.6 percent from a year ago. Among the industries that contributed to the decline were general purpose, production & business oriented machinery which were down 7.4 percent, transport equipment which was down 3.8 percent and electrical machinery which was down 3.2 percent. According to METI's production survey, industrial production is expected to increase 6.0 percent in September but retreat 0.2 percent in October. The industries that are anticipated to increase in September include general-purpose, production & business oriented machinery, electronic parts & devices and transport equipment. In October, declines are expected in electronic parts & devices, transport equipment and other.

August retail sales were up a greater than expected 1.2 percent on the year. Analysts expected a minimal increase of 0.3 percent. Both motor vehicles and machinery & equipment were down for a fifth month, declining 1.7 percent and 3.5 percent respectively. However, food & beverage sales increased 2.8 percent after gaining 1.3 percent in July. Fuel sales declined 1.5 percent after increasing 1.3 percent the month before. Apparel sales were up 3.1 percent after 0.9 percent. General merchandise sales were up 1.7 percent after declining the four months before.

Third quarter Tankan reading for large manufacturers was a greater than expected plus 13, up from June's plus 12. Analysts expected a reading of plus 10. Small manufacturers also scored a better than anticipated minus 1 after a plus 1 reading in June. 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 overall CAPEX planned expenditures increased 4.2 percent after a 1.7 percent increase in June. Large manufacturers expect an increase of 8.6 percent while small enterprises see a drop of 12.9 percent.

Australia

August retail sales edged up just 0.1 percent and were up 5.1 percent from the same month a year ago. Other retailing (1.6 percent) followed by food retailing (0.3 percent), cafes, restaurants & takeaway food services (0.2 percent) and clothing, footwear & personal accessory retailing (0.3 percent) all advanced on the month. However, department stores declined 2.9 percent and household goods retailing was down 0.8 percent. Sales in Victoria (0.7 percent), Northern Territory (1.7 percent) and Western Australia (0.1 percent) were up while those in South Australia and Tasmania were relatively unchanged. Sales declined in Queensland (0.6 percent), New South Wales (0.1 percent) and the Australian Capital Territory (0.4 percent).

August merchandise trade deficit improved to A$787 million from A1.1 billion the month before. Both exports and imports declined on the month. Exports were down 1.5 percent while imports were 2.5 percent lower. On the year, exports dropped 4.7 percent while imports slid 5.1 percent. Exports of rural goods were down 4 percent (A$142 million) while non-rural goods dropped A$26 million. Nonmonetary gold was down 21 percent. Imports of intermediate and other merchandise goods dropped 9 percent while consumption goods slipped 1 percent and nonmonetary gold fell 10 percent. Capital goods imports were up 6 percent.

Americas

Canada

July monthly gross domestic product was unchanged on the month and up 2.5 percent from a year ago. July's stagnation reflected mixed performances among the industrial and service sectors. On the downside, the former contracted a monthly 0.2 percent, its first decline since April. However, the fall here masked a solid 1.0 percent gain in manufacturing and a 0.4 percent increase in construction. Nonetheless, this progress was more than offset by declines elsewhere with agriculture, forestry, fishing & hunting shrinking 2.4 percent, utilities off 2.3 percent and mining, quarrying and oil & gas extraction down 1.5 percent. Services were up 0.2 percent from June despite a 0.6 percent decline in wholesale trade and a 0.4 percent drop in transportation & warehousing. Arts, entertainment & recreation also declined 1.4 percent. The strongest increase was posted by educational services (1.5 percent) ahead of professional, scientific & technical services (0.5 percent) and management of companies & enterprises (0.4 percent). Most other areas saw little change.

August merchandise trade balance recorded a deficit of C$0.61 billion after a smaller revised C$2.20 billion surplus in July. This was the first deficit since April. Following three successive gains and having hit a record high at the start of the quarter, exports were down 2.5 percent on the month but were still up 9.1 percent on the year. Imports, which declined heavily in June and were just flat in July, rebounded 3.9 percent to hit a new all-time peak and now show an annual increase of 8.8 percent. Within the overall monthly drop in exports, sales to the U.S. declined 2.5 percent which, with purchases from across the border 1.4 percent higher, shrank the bilateral surplus from C$4.8 billion in July to C$3.5 billion. The real trade balance also deteriorated as a 1.8 percent fall from July in export volumes compounded a 2.4 percent jump in imports. The monthly drop in total nominal exports reflected in no small way an 11.2 percent contraction in motor vehicles & parts and, to a lesser extent, a 5.8 percent decline in energy. Electronic & electrical equipment & parts were also off 2.3 percent and metal & non-metallic mineral products 1.9 percent. The only increase of note was in basic & industrial chemical, plastic & rubber products (4.9 percent). The increase in imports was dominated by a 24.1 percent surge in metal & non-metallic mineral products alongside a 20.8 percent leap in energy. Metal ores & non-metallic minerals were up 33.2 percent.

Bottom line

Both the Reserve Bank of India and the European Central Bank maintained the status quo and left their respective monetary policies unchanged. Global economic data were mixed. Key data in Japan disappointed while in the U.S., most data on balance were positive — especially employment and the unemployment rate. Eurozone data were disappointing with the flash harmonized index of consumer prices for September slipping to an annual increase of only 0.3 percent.

The Banks of Japan and England along with the Reserve Bank of Australia will announce their monetary policy decisions. No change is anticipated. Canada and Australia announce their employment and unemployment data for September. Most data from the Eurozone revolves around industrial production and merchandise trade balances with German manufacturing orders and output likely to catch the most attention.

Looking Ahead: October 6 through October 10, 2014

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