Global Markets

Most equity indexes gained last week in volatile trading as investors first waited for the European Central Bank policy announcement and then the U.S. employment report. After Thursday's ECB announcement and press conference equities retreated on disappointment that policy was unchanged despite disinflation and growth concerns. However, equities rallied strongly after U.S. employers added 321,000 jobs in November.

According to the purchasing managers' indexes (PMI), manufacturing conditions varied with activity expanding robustly in the U.S., moderately in the UK and Japan and not at all in the Eurozone where all but one of the PMIs moved by 0.5 points or less. The exception was Germany, where the index was down1.9 points to 49.5, just below the critical 50.0 level that differentiates between expansion and contraction. Elsewhere in continental Europe, the PMI was unchanged in Italy, but slipped 0.1 point in France and 0.5 points in the overall Eurozone, leaving them in a narrow range between 49.0 and 50.1. The PMI dropped 0.3 to 58.7 in the U.S. and 0.4 points to 52.0 in Japan. The only increase occurred in the UK, where the PMI rose 0.2 points to 53.5. In China, the manufacturing PMI slipped to 50.0 from 50.4 indicating that the sector is neither growing nor contracting but is stagnant.

Although none of the five key central banks changed their respective monetary policies, three did manage to move markets — the Reserve Bank of Australia sent its currency lower, the Reserve bank of India sent the Sensex lower and the ECB sent both the euro and equities down.

European Central Bank

As widely expected the ECB left its key interest rate unchanged at just 0.05 percent. The rates on the deposit and marginal lending facilities remained at minus 0.20 percent and 0.30 percent respectively. With current levels already described by ECB President Mario Draghi as being at the lower bound, the outcome was all but assured.

However, analysts and financial markets alike were hoping that Mr Draghi's press conference would offer some strong hints about a new wave of monetary stimulus measures to be introduced after the turn of the year. To this end the ECB Chief sounded suitably dovish — in the wake of all the recent soft economic news he could do little else — and also signaled that there could be such a shift after a wholesale reassessment of policy and economic conditions next quarter.

Crucial to this will be the results of the second Targeted Long Term Refinancing Operation (TLTROs) due next week. The take-up here is expected to give some initial indications of how well the existing policy stance is faring in the ECB's expressed aim of expanding its balance sheet back to its early 2012 levels. It is the TLTRO, rather than either the current asset backed securities or covered bond purchases programs, that will have potentially the most significant impact on the balance sheet's dimensions.

Meantime the ECB's newly updated economic forecasts offer minimal support for the notion that policy is working. Real GDP growth is now put at 0.8 percent this year, 1.0 percent in 2015 and 1.5 percent in 2016. These figures are down sharply from the September projections of 0.9 percent, 1.6 percent and 1.9 percent respectively. Over the same time horizon, the HICP inflation projection is now 0.5 percent in 2014 (0.6 percent in September), 0.7 percent in 2015 (1.1 percent) and 1.3 percent in 2016 (1.4 percent). Moreover, the new forecasts do not incorporate the latest plunge in oil prices and so are subject to downside risk. However, the HICP is still seen remaining well below its 2.0 percent inflation target throughout the period.

Reserve Bank of India

Despite increasingly vocal calls from industry along with political pressure, the Reserve Bank of India opted to leave its monetary policy unchanged. The benchmark repo rate remains at 8.0 percent, the reverse repo at 7.0 percent and the marginal standing facility (MSF) rate and Bank Rate at 9.0 percent. The cash reserve ratio was also held at 4.0 percent. The outcome was in line with market expectations.

The decision underlines the determination of the RBI to achieve its medium term inflation goals and its belief that recent declines in inflation (annual CPI rate 5.52 percent in October) may not be sustained as favorable base effects fall away from this month. It also reflects uncertainty about the underlying picture with core inflation having only held steady in October and with inflation expectations stubbornly high in the double digits.

Still, the RBI has revised down its inflation forecast to 6 percent for March 2015, well below its 8 percent interim target mark for January, and it expects the rate to hover around this level over the rest of the coming year. Risks to the projection are seen as evenly balanced. Growth in 2014 to 2015 is still put at 5.5 percent. However, GDP growth slowed to a less than expected 5.3 percent on the year in the third quarter from 5.7 percent in the second.

Against this backdrop the RBI acknowledges that a change in policy early next year is possible and financial markets will look for a cut in key interest rates in the first quarter. Equities tumbled on the news.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia maintained its 2.5 percent policy interest rate where it has been since August 2013. Also as expected, the RBA repeated its key statement phrases. It retained its guidance that "…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 exchange rate has traded at lower levels recently, in large part reflecting the strengthening US dollar." However, the statement repeated that "the Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months. A lower exchange rate is likely to be needed to achieve balanced growth in the economy."

Regarding inflation, the RBA noted that inflation is running between 2 and 3 percent as expected with recent data confirming subdued rises in labour costs. It said that the continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2 to 3 percent target over the next two years. The RBA has become increasingly concerned about an unbalanced housing market in recent months as price gains in the biggest cities stoke fears of a bubble. The Australian economy is also coming under pressure as iron ore prices slump and demand from China eases up.

Analysts are increasingly predicting that the RBA will cut its policy rate when it returns from vacation in February 2015. However, cutting its interest rate risks fuelling a property market boom. However, inflation is no concern and the economy — judging by the disappointing third quarter growth — could use a boost. GDP was up a much less than anticipated 0.3 percent on the quarter and 2.7 percent from a year ago.

The main reason to cut rates would be to further devalue the Australian dollar. While the Aussie dollar has dropped nearly 11 percent in the last three months, the RBA still considers it overvalued. Key exports from Australia have suffered major price declines. Iron ore prices alone have been halved. Australia's terms of trade — a measure of buying power abroad — fell 3.5 percent last quarter. Because global commodity prices are denominated in U.S. dollars, a fall in the local currency helps boost exporters' profits.

Bank of England

As expected, the Bank of England kept its Bank Rate at 0.5 percent (where it has been since March 2009) and its asset purchase ceiling at Stg375 billion (where it has been since July 2012). Although we will not know until the minutes are released in two weeks, it was likely a split decision. Amid further indications of a probable further modest slowdown in growth this quarter, still comfortably below target inflation (1.3 percent in October) and a cooling housing market, there was plenty of ammunition for the neutral and more dovish monetary policy committee members to argue their case. For the hawks about the only new information in their favor since the November discussions has been some, as yet still tentative, signs that wages may at last have started to respond to the economic recovery.

Bank of Canada

As expected, the Bank of Canada kept its benchmark overnight rate at 1.0 percent with the deposit rate pegged at 0.75 percent and Bank Rate at 1.25 percent where they have been since September 2010. The BoC acknowledged recent signs of a pick-up in domestic business activity but offered few reasons for supposing that the first increase in an eventual tightening cycle will be delivered any sooner than seemed likely last time. Indeed, the BoC seems cautiously comfortable with the way the economy is evolving despite unexpectedly robust October inflation which the Bank simply attributes to temporary factors. While accepting that the output gap is smaller than thought in the October Monetary Policy Review, the BoC remains adamant that there is significant slack in the labour market and views inflation risks as being broadly balanced.

Global Stock Market Recap

Europe and the UK

Equities advanced for the week thanks to Friday's rebound from Thursday's heavy losses. Investors ended the week in an upbeat mood after a solid U.S. employment report and renewed hopes for additional Eurozone stimulus. The FTSE was up 0.3 percent and the CAC and SMI added 0.7 percent. The DAX advanced 1.1 percent to finish the week above the 10,000 mark for the first time since July 4, 2014.

Markets fell sharply on Thursday after ECB President Mario Draghi failed to provide clear enough signals that a broadening of its stimulus program was imminent. But they recovered early Friday, with some investors reassessing Mr Draghi's message and optimistically betting that the wide ranging asset purchases including government bonds are likely to be on the way in January according to traders.

The Bundesbank slashed its growth forecasts for 2014 and 2015 prompting speculation that the European Central Bank can no longer afford to hesitate on stimulus. The Bundesbank halved its forecast for German growth next year to 1 percent, a move that will exacerbate concerns the Eurozone economy will continue to stagnate. Germany's central bank says the country's economy will expand 1.4 percent this year, 1 percent in 2015 and 1.6 percent in 2016. In June, it had expected growth of 1.9 percent this year, 2 percent next year and 1.8 percent in 2016.

Hopes earlier this year that Germany would lead the Eurozone to recovery have faded after signs that growth had slowed. Its economy contracted in the second quarter and expanded just 0.1 percent in the third.

Asia Pacific

Equities were mixed last week. They mostly advanced at the end of the week on expectations of more stimulus from the Bank of Japan and People's Bank of China. The expectations helped offset disappointment over the lack of clarity from European Central Bank President Mario Draghi on deploying additional monetary stimulus to mitigate deflation risks. At the same time, investors here were anxiously waiting for the U.S. employment report which was released later in the global market day after markets here were closed for the week.

Chinese shares ended an extremely volatile week sharply higher. On Friday, the Shanghai Composite gyrated wildly in intraday swings, gaining as much as 2.7 percent and falling 3 percent before finishing 1.3 percent higher after jumping 4.4 percent Thursday. For the week, the index soared 9.5 percent. In the process, the index is now the best performer this year, gaining 38.8 percent. India's Sensex, now in second place, is up 34.4 percent in 2014.

The Nikkei was up 2.6 percent thanks to an ever weaker yen that sent exporters shares higher in anticipation of better overseas sales and profits. The All Ordinaries managed to add 0.3 percent on the week despite weakness in miners and the energy sector. Equities in Australia benefited from better than anticipated retail sales and an improved merchandise trade balance, although third quarter growth disappointed.

Currencies

The U.S. dollar rallied against all of its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. It soared to the highest in five years after the November employment report showed that employers added the most jobs in almost two years, backing the case for the Federal Reserve to lead global central banks in raising interest rates. The U.S. dollar climbed to multi-year highs against the yen, euro and Canadian dollar as American companies added 321,000 jobs, topping all forecasts. The Canadian dollar touched a five year low after losing 10,700 jobs in November and adding to speculation the Fed will raise interest rates before the Bank of Canada. The yen slumped after an aide to Prime Minister Shinzo Abe said the decline is benefiting the economy.

Selected currencies — weekly results

Indicator scoreboard

EMU

November manufacturing PMI was 50.1, down 0.5 points from its final October level and close enough to the 50 expansion threshold to signal stagnation. Output growth was positive but only just, and new orders fell more steeply than in any month since April 2013. Moreover, another decline in backlogs will add to concerns about a widening negative output gap. Aggregate employment was broadly flat. Inflation developments were uniformly weak with both input costs and output charges falling moderately for a third successive month. Regionally, only Ireland (56.2), Spain (54.7) and the Netherlands (54.6) posted readings above the 50 mark meaning that three of the four larger economies were all in contraction. Germany (49.5) saw a 17-month low, France (48.4) a 3-month trough while Italy (49.0) was unchanged. The Eurozone's composite purchasing managers index — which surveys both the manufacturing and services sectors — was revised down to 51.1 in November, confirming the picture of a stalled economic recovery.

October producer prices (excluding construction) dropped 0.4 percent on the month, their steepest decline since October 2013 and their third drop since June. Annual PPI growth was minus 1.3 percent, the 15th consecutive sub-zero print. A 0.9 percent drop in energy costs was partly responsible for the monthly slide in the headline index but even without this sector prices were down 0.2 percent from both September and October last year. Elsewhere capital goods and consumer durables edged up a monthly 0.1 percent but intermediates dipped 0.1 percent and consumer nondurables were off a hefty 0.6 percent. Regionally the majority of member states recorded monthly declines led by Estonia and Greece (both 1.4 percent) ahead of the Netherlands (1.2 percent). Among the larger countries, national PPIs were down 0.3 percent in France, 0.2 percent in Germany, 0.6 percent in Italy and 0.5 percent in Spain.

Third quarter gross domestic product was up 0.2 percent on the quarter after advancing a minimal 0.1 percent. On the year, GDP was 0.8 percent above its year ago level, matching the annual rate posted in the second quarter. Household spending was up 0.5 percent on the quarter, nearly double the previous period's pace and easily its best performance so far in 2014. Fixed investment declined a further 0.3 percent while growth of government consumption was unchanged at 0.3 percent. Inventory accumulation had no impact on the quarterly change in real GDP. Growth would have been somewhat more robust but for a deterioration in net exports which subtracted 0.2 percentage points having added 0.1 percentage points in the second quarter. The worsening here reflected a 0.8 percent quarterly increase in exports that was more than offset by a 1.2 percent rise in imports. Regionally among the larger member states only Spain, where total output was up a quarterly 0.5 percent, managed anything like a respectable expansion rate. France (0.3 percent) at least more than reversed its second quarter decline (0.1 percent) but a 0.1 percent increase in Germany only made for flat GDP over the last two quarters and Italy (down 0.1 percent) fell back into recession. Among the smaller countries Greece and Slovenia (both 0.7 percent) and Slovakia (0.6 percent) performed well in sharp contrast to Cyprus (down 0.4 percent) and Austria (down 0.3 percent).

Germany

October manufacturing orders were up 2.5 percent on the month following a stronger revised 1.1 percent gain in September. As a result, annual workday adjusted growth picked up from down 0.6 percent to plus 2.2 percent, its best performance since July. The monthly headline bounce was reasonably broad-based with capital goods rising 3.0 percent and basics 2.5 percent. In line with September, only consumer & durable goods (down 0.1 percent) failed to increase. Domestic orders expanded 5.3 percent on the month and more than unwound the 2.6 percent slide posted last time. Overseas demand increased 0.6 percent after a 4.0 percent jump at quarter-end. Within this, the Eurozone grew just 0.3 percent and the rest of the world, 0.8 percent.

Asia/Pacific

Australia

Third quarter gross domestic product was up 0.3 percent on the quarter and 2.7 percent when compared with the same quarter a year ago. On the expenditure side, the increase was driven by final consumption expenditure (0.4 percentage points) and net exports (0.8 percentage points). These increases were partially offset by decreases in private gross fixed capital formation (down 0.5 percentage points) and public gross fixed capital formation (down 0.2 percentage points). On the year, mining (0.9 percentage points), financial and insurance services (0.5 percentage points) and construction (0.3 percentage points) industries were the largest contributors to total trend growth of 2.7 percent. Professional, scientific & technical services (down 0.4 percentage points), agriculture, forestry & fishing (down 0.2 percentage points) and transport, postal & warehousing (down 0.2 percentage points) were the largest detractors in trend terms.

October retail sales were up a greater than anticipated 0.4 percent – expectations were for an increase of 0.1 percent. On the year, retail turnover was up 5.7 percent when compared with the same month a year ago. Household goods retailing was up 1.4 percent, with food retailing (0.5 percent), department stores (2.0 percent), clothing, footwear & personal accessory retailing (1.1 percent) and other retailing (0.2 percent) all posting gains. This was partially offset by a decline in cafes, restaurants & takeaway food services (down 2.1 percent). Retail sales increased in New South Wales (0.7 percent), Queensland (0.4 percent), South Australia (1.2 percent), Western Australia (0.1 percent) and the Australian Capital Territory (0.4 percent). Victoria remained relatively unchanged. The gains were partially offset by declines in Tasmania (down 1.0 percent) and the Northern Territory (down 0.4 percent). Total online retail trade, in original terms, increased 9.5 percent in October following a gain of 8.7 percent in September.

October merchandise trade deficit was a less than expected A$1.3 billion, down from September's deficit of A$2.2 billion. Analysts expected a trade deficit of A$1.8 billion. Exports were up 1.5 percent on the month but down 1.8 percent from a year ago while imports retreated 1.7 percent on the month and were 1.0 percent higher on the year. Non-rural goods exports were up 4 percent. Non-monetary gold declined 13 percent while rural goods were down 4 percent. Services exports edged up 1 percent on the month. Imports of intermediate and other merchandise goods were down 4 percent, consumption goods declined 1 percent as did capital goods. Non-monetary gold slid 9 percent. Services imports edged up 1 percent.

India

Third quarter gross domestic product was up 5.3 percent on the year after growth of 5.7 percent in the second quarter and was well shy of the rates seen throughout 2010 and 2011. The slowdown reflected some softening in activity rates in most of the major sectors. In particular, manufacturing output was up just 0.1 percent on the year after a 3.5 percent increase in the April to June period while electricity, gas & water supply advanced 8.7 percent after a 10.2 percent gain. Agriculture, forestry & fishing slowed from a 3.8 percent rate to 3.2 percent and financial, insurance, real estate & business services from 10.4 percent to 9.5 percent. The only areas to see any significant acceleration were trade, hotels, transport & communication (3.8 percent after 2.8 percent) and community, social & personal services (9.6 percent after 9.1 percent).

Americas

Canada

Third quarter gross domestic product was up 0.7 percent on the quarter following a 1.1 percent increase the quarter before. GDP was up 2.6 percent from the same quarter a year ago. Third quarter GDP was up at an annualized pace of 2.8 percent, down from an upwardly revised 3.6 percent in the second quarter. The slowdown was mainly attributable to a deceleration in consumer spending which was up a quarterly 0.7 percent following a 1.1 percent increase in the second quarter. Elsewhere within domestic demand, government final consumption was flat after a 0.3 percent rise but gross fixed capital formation picked up from a 0.8 percent rate to 1.3 percent. Within the latter, residential investment expanded 3.0 percent. Inventories had a negative impact, reducing the quarterly change in total output by 0.2 percentage points. Final domestic demand matched the headline's 0.7 percent quarterly increase. A 1.7 percent quarterly increase in exports outpaced a 1.0 percent rise in imports to see net foreign trade add 0.2 percentage points to growth. The improvement here was also reflected in a narrowing in the current account deficit from C$9.9 billion in the second quarter to C$8.4 billion.

November employment declined 10,700 after robust gains in both September and October. The monthly decline was the first since August and, with the participation rate unchanged at 66.0 percent, sufficient to nudge the jobless rate back up a tick to 6.6 percent. The headline decline in jobs was wholly attributable to part time positions which were down 16,300. By contrast, full time headcount actually increased a further 5,700. However, private sector employment sank 45,600 and the overall picture would have looked a good deal worse but for a 22,600 increase in public sector jobs and a 12,300 advance in the number of self-employed. Services saw a 28,000 contraction dominated by a 41,600 slump in trade and a 32,900 slide in professional, scientific & technical services. Partial offsets were seen in healthcare & social assistance (11,500), finance, insurance, real estate & leasing (11,300) and accommodation & food services (13,100). Most other subsectors registered relatively small monthly changes. Employment in goods producing industries climbed 17,300. However, this was largely on the back of a 14,800 gain in natural resources and masked a 400 drop in manufacturing and a 5,300 decline in construction. Agriculture was up 8,000 and utilities, 500.

October merchandise trade surplus was C$0.1 billion following a downwardly revised C$0.31 billion excess in September. October was the sixth consecutive month to register a surplus although it was also the smallest over the period. The real trade balance posted a relatively sharp deterioration as exports volumes declined a monthly 1.5 percent and imports edged down just 0.2 percent. The decline in the surplus was attributable to a 0.5 percent monthly increase in overall imports which easily more than offset a meagre 0.1 percent gain in exports. Within total exports, sales to the U.S. were up 0.7 percent which, with purchases from across the border 1.0 percent firmer, saw the bilateral black ink narrow slightly from C$3.6 billion in September to C$3.5 billion. Overall nominal exports were hit an 8.6 percent monthly drop in farm, fishing & intermediate food products together with smaller declines in consumer goods (2.2 percent), basic & industrial chemical, plastic & rubber products (2.4 percent) and metal ores & non-metallic minerals (also 2.4 percent). Energy products were off only 0.5 percent. The best performing subsector was industrial machinery, equipment & parts (8.0 percent) ahead of electronic & electrical equipment & parts (5.7 percent). Aircraft & other transportation equipment & parts were down 4.4 percent. Imports were supported by a 13.8 percent jump in metal ores & non-metallic minerals and a 12.4 percent surge in aircraft & other transportation equipment & parts. Consumer goods climbed 3.1 percent but energy slumped 10.1 percent.

Bottom line

Central banks dominated the news last week. Although there were no policy changes, investors were disappointed that the Reserve Bank of India did not cut rates despite slowing economic growth and that the European Central Bank did not propose additional stimulus measures but would rather review the situation. Economic data were mixed globally but positive in the U.S.

This week's focus will be on industrial production and inflation. China reports on consumer and producer prices, output, retail sales and merchandise trade. Australia's labour force survey for November is on tap. The Reserve Bank of New Zealand announces its monetary policy decision.

Looking Ahead: December 8 through December 12, 2014

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