Global Markets

Investors were uneasy last week as they waited first for the several key central bank announcements and then the U.S. employment situation report. While waiting they digested a slew of purchasing managers' reports from the key countries of China, Japan, the Eurozone, UK and the U.S. At week's end, most equity indexes had retreated.

European Central Bank

As expected, the European Central Bank left its key refinance rate at 0.05 percent and the rates on the deposit and marginal lending facilities remain pegged at minus 0.20 percent and 0.30 percent respectively. However, the lack of any move on rates does not mask increasing pressure for fresh stimulus from a real economy that is doing little more than stagnating and an inflation rate that is in danger of sliding below zero.

To this end, with essentially no room left to lower the refinance rate any further, the focus has turned to how the ECB will seek to grow its balance sheet by the €1 trillion or so 'target' amount intimated by President Mario Draghi last month (to the apparent chagrin of at least some Council members). Recent comments from ECB Vice President Constancio have suggested that around €600 billion of covered bonds and a further €400 billion of asset backed securities are eligible under the ECB's new bond buying initiative.

Purchases of covered bonds started last month and ABS buying should begin soon and together are expected to last around two years. Combined with the previously announced targeted longer-term refinancing operations (TLTRO), which will run through June 2016, these measures are seen by the central bank as sufficient to ensure that HICP inflation will meet its medium term goals. However, in his press conference Draghi was at pains to point out that economic risks are still seen to be on the downside and that the Governing Council is unanimous about using additional unconventional measures if needed.

There are growing suspicions that the current proposals will not be enough and a move to buy corporate bonds or even full blown quantitative easing could be on the cards early next year. Should the ECB's updated economic forecasts due next month still show inflation about 0.6 percentage points short of 2 percent in 2016 as they did in September, it will be very difficult for the central bank to maintain the current policy stance without jeopardizing its credibility.

Reserve Bank of Australia

As anticipated, the Reserve Bank of Australia left its key cash rate at 2.5 percent where it has been since August 2013. In his post meeting statement, governor Glenn Stevens repeated once again that "in the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates."

Regarding the Australian dollar, the RBA acknowledged that the currency has declined recently. However, in the Board's opinion the currency "remains above most estimates of its fundamental value, particularly given the further declines in key commodity prices in recent months. It is offering less assistance than would normally be expected in achieving balanced growth in the economy."

Later in the week, the RBA published its quarterly statement on monetary policy. In it the Bank lowered its forecasts for inflation while keeping its GDP forecast steady. The central bank noted that the Australian dollar remains above most estimates of its fundamental value despite the sizable declines in key commodity prices over the course of this year. The central bank foresees moderate employment growth and low wage growth in coming months.

Bank of England

As expected, the Bank of England's Monetary Policy Committee once again chose to leave policy unchanged. Bank Rate remains at 0.5 percent and its asset purchase program ceiling at Stg375 billion. The risk of an early move on rates has continued to dwindle since the October discussions amid fresh signs of slower economic growth and increasing evidence of some cooling in the housing market. Real wages, a key input into any change in Bank Rate, are still falling on an annual basis and that despite CPI inflation decelerating to just 1.2 percent in September (core rate 1.5 percent). Moreover, the trade weighted value of the pound has reached its highest level since the middle of June.

The BoE's new economic forecasts will be updated in next week's quarterly inflation report. However, there is little reason for supposing that these will cause financial markets to pull forward the timing of the first expected increase in rates (currently late first/early second quarter 2015). There should be a significant downward revision to the near term inflation projection that might well prompt some analysts to push what would be the first tightening in more than seven years even further into the future.

Global Stock Market Recap

Europe and the UK

European equities declined from a five week high as bank shares slumped amid signs the region's common supervisor is tightening scrutiny. But there were other reasons that equities slumped last week. Economic data disappointed with Eurozone retail sales retreating and PMI readings for October disappointing. Markets were skeptical of Thursday's promise from European Central Bank President Mario Draghi that policy makers stand ready with additional economic stimulus. On Friday, U.S. employment gains were less than anticipated, disappointing investors. On the week, the CAC was down 1.0 percent, the DAX retreated 0.4 percent and the SMI lost 0.2 percent. However, the FTSE managed to post a gain for the week of 0.3 percent.

EU forecasts

The European Commission sharply lowered its economic growth forecasts for the Eurozone this year to just 0.8 percent. Italy fell back into recession earlier this year, Germany may now be in one and France is stagnating. With the possible exception of Ireland there are few bright spots on the economic constellation, forcing everyone from the European Central Bank to the International Monetary Fund — and now the Commission — to trim their forecasts to about 0.8 percent this year.

The European Commission slashed its economic outlook for the Eurozone, predicting the currency bloc would grow only 1.1 percent in 2015, down from a 1.7 percent forecast just six months ago. The revisions were particularly big in the two largest Eurozone economies — Germany and France — for which the commission cut its projections by nearly a full percentage point for 2015. The German gross domestic product forecast was cut from 2.0 percent in May to 1.1 percent while France went from 1.5 percent to 0.7 percent.

The struggles facing the Eurozone to return to a sustainable growth path lie in stark contrast to the U.S. (which in the third quarter expanded at the quickest pace in a decade) and the UK (which is one of the fastest growing economies in the Group of Seven). The commission raised its forecast for Britain saying it expected the economy to grow 2.7 percent next year, compared with the 2.5 percent May forecast.

Although none of the 18 members of the Eurozone are projected to see their economies contract, the severe downgrade raised anew the prospect that the bloc could be tipping into a triple dip recession and may fuel fears the EU is headed for a dangerous deflationary spiral. The commission said the "risks to the inflation outlook remain balanced". But it also slashed its projections, saying consumer prices would grow just 0.5 percent this year and 0.8 percent next year, down from May forecasts of 0.8 percent and 1.2 percent and further from the European Central Bank's target of close to 2 percent.

Asia Pacific

Equities were mostly lower last week with only the All Ordinaries (up 0.3 percent), Nikkei (up 2.8 percent) and STI (up 0.4 percent) posting gains. The Sensex was virtually unchanged in a holiday shortened trading week. As the week ended, equities in Australia, Japanese and Seoul shares advanced on upbeat U.S. economic data and talk of further stimulus efforts from the European Central Bank, while the Shanghai Composite (down 0.1 percent) and Hang Seng (down 1.9 percent) retreated on profit taking after recent sharp gains. Japanese equities advanced as the yen's weakness boosted exporter shares. The yen extended losses to hover near a seven year low against the U.S. dollar, as stronger U.S. economic data and dovish comments from ECB President Mario Draghi helped bolster investor risk appetite.

Currencies

The U.S. dollar advanced against all of its major counterparts last week. However, it gave back some of the gains Friday after the October employment increase was below estimates. Both the euro and yen continued to retreat as the European Central Bank and Bank of Japan were looking to increase their respective stimulus to counteract flailing economies. While the Bank of Japan took action at its October 30 and 31 meeting, the ECB thus far has only said it would take action. The Canadian dollar rallied nicely on Friday on a better than anticipated labour report.

The rouble (or ruble) rebounded on Friday after Russia's central bank said it could intervene "at any moment" to prop up the currency. The rouble's recent decline has piled pressure onto Russia's ailing economy. The central bank said fluctuations in the currency's value "were causing concern for society" and posed "a risk to financial stability". The weakness was caused by several fundamental factors including falling oil prices and restrictions on access to finance on the international capital markets, the bank said.

On Wednesday, the central bank decided to limit its intervention in the financial markets. The rouble has lost more than a quarter of its value since the start of 2014. Western sanctions over the conflict in Ukraine have played a major part in the currency's decline by making Russia an unattractive place to keep funds. The fall in oil prices is also important as the export of crude is a major source of foreign currency for Russia. The central bank has been using its own reserves in an attempt to contain the rouble's fall, but on Wednesday the Russian bank abandoned its currency intervention policy. The bank's policy rate was raised 150 basis points to 9.50 percent on October 31.

Russia has a catalogue of economic problems and the downward trend of the rouble makes them even harder to fix. Inflation is too high, now more than 8 percent. A falling currency drives up import prices and aggravates that problem. The usual policy tool for dealing with inflation is raising interest rates which can work partly through the impact on the currency. Higher rates make the country more attractive to invest in. But official interest rates in Russia are already high, and the economy is struggling — the IMF recently described the outlook as bleak. The central bank's unexpected 150 basis point interest rate increase a week ago and changes this week to its intervention policy to ward off speculators have failed to shore up the rouble.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

October flash PMI manufacturing reading was revised down to 50.6 in the final report. As such, the indications are that manufacturing activity last month continued to expand at a very modest rate albeit slightly faster than in September (50.3). Manufacturing production rose for a sixteenth consecutive month and at a slightly quicker pace than at the end of last quarter. However, expansion rates remained relatively modest and ominously, new orders were down for a second successive time. Employment was up at its strongest pace in five months but, again, only marginally and masked cutbacks in a number of countries including France and Italy. Price developments were soft with both input costs and factory gate prices posting declines versus September, the former reflecting reduced oil costs and the latter on-going strong competition. Regionally, the best performer was Ireland (56.6) which saw a 2-month high ahead of the Netherlands (53.0) which achieved a 3-month peak. Spain (52.6) was unchanged and Germany (51.4) moved back above 50 but elsewhere there were a number of multi-month lows notably in Italy (49.0), France (48.5) and Austria (46.9).

Germany

September manufacturing orders were up 0.8 percent after sinking 4.2 percent in August. Annual workday adjusted growth declined from plus 0.9 percent to minus 1.0 percent, its worst performance since June. The monthly increase in September was wholly attributable to a 3.7 percent monthly gain in overseas orders as the domestic market contracted 2.8 percent reflecting hefty declines in all major sectors. Overseas orders from the Eurozone were up 2.5 percent and non-EMU 4.4 percent. Within overall orders, basics were up a monthly 0.8 percent and capital goods 1.3 percent. However, consumer goods declined 1.4 percent.

September industrial production was up 1.4 percent after sinking a revised 3.1 percent in August. Seasonally and workday adjusted annual output growth was down 0.2 percent, up from a decline of 2.3 percent last time. September's partial rebound was dominated by a 4.5 percent jump in capital goods output although even this failed to make up for its 7.9 percent slump in mid-quarter. Energy increased 2.4 percent monthly but intermediates compounded August's 1.5 percent drop with a 0.2 percent dip and consumer goods were off 1.4 percent after just a flat performance last time. At the same time, construction again struggled, contracting a further 1.2 percent.

September merchandise trade surplus was €18.5 billion following an unrevised €17.5 billion excess in August. The unadjusted surplus stood at €21.9 billion, a hefty improvement compared with August's €14.0 billion. The modest headline gain reflected strength in both sides of the balance sheet. Exports were up 5.5 percent on the month, reversing most of August's 5.8 percent decline and their second increase in the last three months. Imports were not far behind, advancing 5.4 percent for their first increase since June. Imports now stand at a record €79.2 billion but exports (€97.7 billion) are still 0.6 percent below their peak in July.

France

September industrial production excluding construction was unchanged on the month following a downward revision to August that left output 0.2 percent below its July level. As a result, annual production growth in September was down 0.3 percent and the seventh month out of the last eight in which it has been the wrong side of zero. The headline index was hit by a 2.3 percent monthly drop in production in the mining & quarrying, energy and utilities sector. Manufacturing output actually posted a respectable 0.6 percent gain, albeit after a 0.5 percent drop in mid-quarter. Within this, solid increases in food & drink (2.5 percent), coke & refined petroleum products (5.8 percent) and electrical & electronic equipment (1.5 percent) were only partially offset by a 0.2 percent decline in the other manufactured goods sector.

September seasonally adjusted merchandise trade deficit was €4.7 billion after a significantly smaller revised €5.0 billion shortfall in August. The latest improvement was attributable to a 1.7 percent monthly increase in exports (mainly transport equipment, refined chemicals and industrial machinery) to a near record €36,817 million. This more than eclipsed a 0.7 percent gain in imports. Compared with a year ago, exports were up 1.1 percent while imports were 1.8 percent weaker.

United Kingdom

September industrial production was up 0.6 percent — its largest increase since February. On the year, output was up 1.4 percent. Manufacturing output was up 0.4 percent on the month after a marginally firmer revised 0.2 percent advance in August to stand 2.9 percent higher on the year. Within the monthly manufacturing increase, the largest contribution was made by transport equipment which saw a 3.0 percent gain, largely reflecting a rebound in auto production after extended summer shutdowns. The main negative impact came from basic metals & metal products which recorded a 3.3 percent drop. Elsewhere within overall industrial production, mining & quarrying expanded a monthly 3.8 percent courtesy of a 5.2 percent jump in crude petroleum & natural gas as some large North Sea oil fields came back on stream. Electricity, gas, steam & air conditioning dropped 4.5 percent but water supply, sewerage & waste management was up 1.5 percent.

September deficit in trade in goods was Stg9.8 billion but followed a smaller revised Stg9.0 billion shortfall in August. Overall exports were up 4.2 percent on the month but were outpaced by imports which grew nearly 6 percent. Excluding oil and other erratic items the picture was little better as a 0.7 percent monthly increase in nominal exports was easily eclipsed by a 6.0 percent spurt in imports. This increased the underlying red ink from Stg7.7 billion to Stg8.5 billion. Similarly, while core export volumes edged just 0.2 percent firmer from August underlying imports climbed fully 3.4 percent. September's headline deterioration was led by a worsening in the bilateral balance with other EU countries where the shortfall expanded from Stg5.3 billion in mid-quarter to Stg5.8 billion. However, net exports to the rest of the world also weakened to leave a deficit of Stg4.0 billion, up Stg0.3 billion from last time.

Asia/Pacific

Australia

September seasonally adjusted retail sales increased a much greater than expected 1.2 percent. Expectations were for a modest 0.4 percent gain. On the year, sales were up 5.7 percent. In seasonally adjusted terms the largest contributor to the increase was household goods retailing (4.1 percent) where electrical & electronic goods retailing recorded growth (9.2 percent). This figure was influenced by the release of the iPhone 6 during the month. The increase in electrical & electronic goods retailing represented about half of the total Australian sales movement of 1.2 percent in seasonally adjusted terms. Cafes, restaurants & takeaway food services (2.0 percent), food retailing (0.4 percent), department stores (1.3 percent) and clothing, footwear & personal accessory retailing (0.4 percent) also advanced on the month. This was partially offset by a decline in other retailing (down 0.2 percent). Sales were up in New South Wales (1.7 percent), Victoria (1.3 percent), Western Australia (1.3 percent), Queensland (0.4 percent), South Australia (1.2 percent), the Australian Capital Territory (1.9 percent) and Tasmania (0.8 percent). This was partially offset by a decline in the Northern Territory (down 0.6 percent). In volume terms, sales were up 1.0 percent in the September quarter 2014, seasonally adjusted, after slipping 0.1 percent in the June quarter 2014. Online retail turnover contributed 2.8 percent to total retail turnover in original terms.

September deficit on goods and services was A$2.261 billion following a revised deficit of A$1.013 billion in August. This was the biggest trade deficit since November 2012 as growth in imports far exceeded the pace of exports. The sum of seasonally adjusted balances for the three months to September 2014 was a deficit of A$4.518 billion, a decline of A$362 million on the deficit of $4.880 billion for the three months to June 2014. Exports were up 1.0 percent. Non-monetary gold was up 60 percent, rural goods were up 2 percent and non-rural goods declined 3 percent. Services edged up 1 percent. Imports jumped 5.6 percent. Intermediate and other merchandise goods were up 11 percent, both consumption and capital goods gained 3 percent and non-monetary gold was up 59 percent. Services imports edged up 1 percent.

October seasonally adjusted unemployment rate remained at 6.2 percent (compared with a revised rate for September 2014). Employment increased 24,100 to 11,592,200. The employment gain was driven by increased full time employment for both females (up 26,100) and males (up 7,300). However, this was partly offset by a decline in part time employment of 9,400 to 3,533,700. The labour force participation rate increased 0.1 percentage point to 64.6 percent in October 2014. The number of people unemployed increased by 7,100 to 772,100 in October. After publishing volatile data over the summer that strained credulity, the Australian Bureau of Statistics updated its methodology for measuring seasonal adjustments and published revisions to previous data. ABS noted that in the latest release and for upcoming releases over the next few months, the new method will be used to compile seasonally adjusted estimates for the period December 2013 onward. When ABS conducts its annual seasonal reanalysis in early 2015, the new method will be used to compile seasonally adjusted estimates for the full time series back to February 1978. This will lead to revisions to historical estimates, which for the most part ABS said will be small. It was not possible, because of timing constraints, to introduce the new method into the full time series from the October 2014 release.

Americas

Canada

September merchandise surplus was C$710.1 million after a deficit of C$463.5 in August. Exports were up 1.1 percent on the month and imports declined 1.5 percent. Annual growth rates were 8.4 percent and 7.4 percent respectively. The September surplus was well short of the July's C$2.0 billion excess but at least means that net exports have been on the right side of zero in four of the last five months. There was also a significant improvement in the real trade balance as export volumes jumped 1.6 percent from August and imports shrank 1.0 percent. Nominal exports to the U.S. were up only a monthly 0.8 percent while imports were up 0.7 percent. This left the bilateral surplus essentially flat at C$3.92 billion. The headline improvement came about via a decline in the deficit with non-OECD countries (C$1.28 billion after C$2.38 billion). Within the overall monthly increase in cash exports, metal ores & non-metallic minerals (8.0 percent), metal & non-metallic mineral products (6.2 percent) and forestry products & building & packaging materials (2.4 percent) all saw solid gains as did motor vehicles & parts (6.0 percent). However, aircraft & other transportation equipment & parts (down 20.9 percent) suffered a sizeable reversal. Energy products were up just 0.6 percent. Imports were hit by hefty monthly declines in energy (19.4 percent), metal ores & non-metallic minerals (17.6 percent) and metal & non-metallic mineral products (12.0 percent) as well a sharp drop in basic & industrial chemical, plastic & rubber products (5.4 percent).

October employment was up 43,100. With the participation rate holding steady at 66.0 percent, the employment increase was large enough to reduce the jobless rate by a further 0.3 percentage points to 6.5 percent, its lowest reading since November 2008. October's headline employment gain was biased towards full time positions which advanced 26,500 or 10,000 more than the gain posted in part time jobs. Moreover, the increase was more than fully accounted for by the private sector where headcount was up an impressive 70,600. By contrast, the public sector shed 53,800 workers while the number of self-employed increased 26,300. Goods producing industries added 19,400 to its payroll within which manufacturing was up 33,200. Construction and utilities both added 3,200 and agriculture, 1,900. However, natural resources shrank 22,200. Services performed marginally better, creating a net 23,700 new jobs. Trade (38,500) led the increase followed by finance, insurance, real estate & leasing (35,700) and educational services (21,700). Transportation & warehousing (8,100) also had a reasonably good month as did business, building & other support services (9,600). Even so there were sizeable losses in other services (26,000), information, culture & recreation (12,200) and health care & social assistance (11,600).

Bottom line

Three central banks met and left their respective monetary policies unchanged. October global manufacturing and composite PMIs disappointed especially in China and the Eurozone. The dollar's rally continued although it lost some steam Friday while U.S. employment gains were below those expected by analysts.

The Bank of England's Quarterly Inflation Report will be closely studied for hints of when the BoE will increase interest rates. China releases its spate of economic data for October including consumer and producer price indexes, retail sales, industrial production and merchandise trade. In Europe, flash third quarter gross domestic product data will be reported. Analysts will be looking to see if the Eurozone grew at all in the quarter. October consumer price data will also be looked at for signs of a pickup in prices.

Looking Ahead: November 10 through November 14, 2014

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