Global Markets

Global equities retreated last week as ever tumbling crude oil prices sent stocks lower. All indexes followed here were down with the exception of the Shanghai Composite — it was virtually unchanged on the week. The heaviest losses were in Europe. The MIB's dropped of 7.4 percent while the CAC lost 7.0 percent, the IBEX was down 6.9 percent and the FTSE was 6.6 percent lower.

Investors also were jittery ahead of this week's FOMC announcement, Fed forecasts and Chair Janet Yellen's post meeting press conference all on Wednesday. The big question addling traders is will they or won't they drop the phrase "considerable time" from the FOMC statement. Whether they do or not, Janet Yellen is sure to be asked about it in her press conference.

Equities tumbled anew Friday after the International Energy Agency slashed its forecast for global oil demand growth for the fifth time in the last six months and said the current price slide will not dent global supply or hit demand, at least in the short term. It said that 2015 global oil demand will be weaker than previously estimated while supply from non-OPEC producers will increase.

According to the IEA, consumption will expand by 230,000 barrels a day less than estimated in November. Output from nations outside of the Organization of Petroleum Exporting Countries (OPEC) will grow at a faster pace than the agency predicted only last month. With production rising faster than demand, it could strain some nations' ability to store oil by the middle of next year. The agency cut projections because the economies of producer nations are being hurt by tumbling prices. Most of the reduction in next year's estimate is attributable to Russia, where sanctions are hobbling growth. The IEA also cut estimates for the amount of crude needed next year from OPEC countries by 300,000 barrels a day. World oil consumption is expected to increase by 900,000 barrels a day, or 1 percent, next year to average 93.3 million barrels a day. The IEA curbed estimates for Russian oil demand in 2015 by 195,000 barrels a day to 3.4 million a day. It kept estimates for global demand growth this year unchanged at 700,000 barrels a day.

Global Stock Market Recap

Europe and the UK

Equities plunged last week as sinking crude oil prices fueled concerns about the health of the global economy. The recent dramatic drop in oil prices was once thought mainly the results of oversupply, but OPEC and the International Energy Agency warned about diminished demand. On the week, the FTSE retreated 6.6 percent, the CAC dropped 7.0 percent, the DAX declined 4.9 percent and the SMI was 3.4 percent lower.

It was the FTSE's worst week since the depths of the Eurozone debt crisis in 2011 and left the index of down 6.6 percent this year. The FTSE's share of energy companies leaves it especially vulnerable to the drop in crude which was sustained this week when both OPEC and the International Energy Agency cut their forecasts for crude demand for 2015.

Beyond oil, jitters stemming from political uncertainty in Greece also pressured equities. Earlier in the week, the Greek government announced that the parliament would vote on a new president on December 17 — two months ahead of schedule — to replace Karolos Papoulias, whose five year term was slated to end in March. The move has sparked fears that Greece's radical left opposition Syriza party could win national elections if presidential voting rounds fail to find a solution acceptable to all. The possibility that the radical left Syriza party could come to power in Athens has sent Greek bond yields shooting higher and triggered the biggest one day collapse in the local stock market since 1987. The announcement came just hours after Eurozone finance ministers decided to extend Greece's deadlocked bailout talks into early next year.

Bank of England lifts the veil of secrecy

Bank of England governor Mark Carney moved Thursday to sweep aside much of the secrecy that surrounded the central bank's deliberations under former governor Lord Mervyn King, promising a revolution in the practices and transparency of the UK central bank. Following a review of its traditional practice of deleting the recording of policy meetings, the BoE has decided to publish transcripts of monetary policy meetings after an eight year lag, publish votes and minutes of interest rate decisions immediately when policy is announced.

From August 2015, the Monetary Policy Committee will publish the minutes of its meeting and the quarterly Inflation Report at the same time as it announces its decision. The change will require the committee to meet a week earlier for its economic deliberations with the vote and agreements of the minutes decided and finalized as usual on a Thursday. The BoE also wants to move towards fewer MPC meetings a year, following the Federal Reserve, the Bank of Canada and European Central Bank in having eight meetings a year. This change ultimately will require legislation, but to move in that direction, the BoE has proposed to merge the MPC and four Financial Policy Committee meetings from 2016, relieving some of the burden of the current monthly decision making process.

Both the minutes of its policy meetings and (in the relevant months) the Inflation Report will be published at the same time as its policy decisions starting in August 2015. Publication of written transcripts of the meetings at which monetary policy is decided and related staff policy briefing material will be published with an eight year lag as of the March 2015 policy meeting.

Swiss National Bank

As expected, the Swiss National Bank again left policy on hold but with the Swiss franc just a few basis points above its 1.20 target floor against the euro, the Bank made plain its preparedness to implement additional monetary measures immediately if it sees the need. The target corridor for 3-month CHF Libor was duly held at zero to 0.25 percent with the SNB continuing to focus on the lower end of the band.

The SNB has stressed repeatedly that it is willing to take additional steps — including a negative rate — to reinforce its cap on the franc of 1.20 per euro. The prospect of further stimulus by the European Central Bank as early as next month has pushed the franc toward the upper limit the SNB introduced three years ago. The decision not to adjust policy was probably a close one as the official inflation projection has been revised down again and across the forecast horizon.

For this year assuming no change in interest rates, consumer prices are now seen just flat when compared with 2013 and even softer at minus 0.1 percent in 2015 and then 0.3 percent in 2016. The world oil price slump is expected to force headline inflation below zero over the next four quarters. However, the outlook for economic growth has been adjusted a little firmer and real GDP is now forecast to expand 1.5 to 2.0 percent this year (previously 1.5 percent) and 2.0 percent in 2015. Despite the recent upward revisions to GDP growth prompted by the switch to the ESA2010 accounting methodology, the SNB does not see any shift in underlying economic momentum.

Looking into 2015 much will depend upon European Central Bank policy. Most probably the main reason why the SNB did nothing was to keep its powder dry in anticipation of a fresh round of easing from its neighbor. Should the ECB, as seems increasingly likely, adopt full blown quantitative next quarter, the SNB would probably respond at once by cutting its deposit rate to below zero and stepping up foreign exchange intervention as required. For the Swiss monetary authority, all eyes are on the local currency and the ECB.

Norges Bank

The Norges Bank cut Norway's main interest rate by 0.25 basis points to 1.25 percent, a move that shocked markets and sent the krone down almost 2 percent against the euro. The decision came after almost three years of unchanged rates and marks a shift away from a policy that had sought to prevent excessive monetary easing from fueling house price growth. Governor Oeystein Olsen said the bank sees a "50-50 chance" for another rate reduction next year. The governor said that Western Europe's biggest oil producer is facing a major economic slowdown as crude prices continue to plunge. Norway depends on the oil industry for almost a quarter of its economic output and has built an $860 billion wealth fund from its offshore revenue.

Asia Pacific

Sliding oil prices weighed heavily on equities here with virtually all indexes declining on the week. The Nikkei, down 3.1 percent, continued to fluctuate with the value of yen. Trading prior to Sunday's (December 14) snap lower house of parliament election where the ruling government coalition is expected to retain power also influenced stocks. However, the Nikkei ended the week on a positive note thanks to better than anticipated U.S. data on consumer spending.

Investors in Japan and elsewhere are waiting to see if the Federal Reserve drops the phrase "considerable time" from its policy statement to convey a gradual increase in the federal funds rate. Data earlier in the week disappointed with machine orders (excluding volatile orders), which are a leading indicator of capital spending, dropping 6.4 percent in October. That Japan once again is in recession was confirmed by the second estimate of third quarter growth. GDP dropped a more than originally estimated annualized pace of 1.9 percent. The biggest cause for this is slow growth in public investment. Sluggish capital spending is also a source of concern.

The Sensex was down four of five days, losing 3.9 percent on the week. The index fell sharply Friday amid apprehensions that an improving U.S. economy may fuel a dollar rally and limit capital inflows. Also, investors adopted a cautious approach ahead of inflation and industrial production data that would be released after market hours Friday. The data provided a shock — October industrial output dropped 4.2 percent from the same month a year ago. Analysts expected an increase of 2.8 percent. And consumer prices eased in November to an increase of 4.38 percent after October's 5.52 percent increase. This should give the Reserve Bank of India some room to lower its policy interest rate when next it meets.

The Shanghai Composite index experienced a very volatile week with intraday gyrations of a major magnitude. For example on Tuesday, in late trading the Shanghai Composite suddenly dropped more than 8 percent from its intraday peak, ending 5.4 percent lower — its biggest daily loss in five years. The selloff started in the bond market, as traders rushed to sell and raise cash after a regulator banned investors from using low grade corporate debt as collateral to borrow cash. The turmoil then spread to the yuan, which recorded its biggest two day tumble ever. Later, the benchmark Shanghai index slumped 5.4 percent to record its biggest drop since 2009.

Despite this, the index was virtually unchanged on the week. Disappointing economic data raised pressure on policymakers to take further action to support growth. China's industrial output grew an annual 7.2 percent in November, its weakest growth in three months while retail sales picked up pace, gaining 11.7 percent in November. The Hang Seng lost 3.1 percent on the week thanks to fresh signs of weakness in Mainland November data.

Reserve Bank of New Zealand

As widely expected, the Reserve Bank of New Zealand left its key overnight cash rate (OCR) at 3.5 percent where it has been since July 2014. In his statement, Governor Graeme Wheeler noted that CPI inflation remained modest at 1 percent on the year in the September quarter. The reasons include declining international oil prices and the high exchange rate. Once again Mr Wheeler said that "the exchange rate does not reflect the decline in export prices this year and remains unjustifiably and unsustainably high. We expect to see a further significant depreciation." He also said that some further increase in the OCR is expected to be required in the future.

Looking forward, the RBNZ expects growth to remain at or above trend through 2016, with unemployment continuing to decline. It expects inflation to be modest suggesting the expansion can be sustained for longer than previously expected with a more gradual increase in interest rates. Underpinning this, the economy's productive capacity is being boosted by high labour force participation, strong net immigration and continued investment growth. The RBNZ said that risks to the growth outlook include dairy prices, which are expected to recover in 2015, the overvalued exchange rate and the strength of construction activity. Inflation risks include the impact of rising capacity pressures on domestic inflation, the response of house prices to the strong migration inflows and the impact of lower oil prices.

Currencies

The U.S. dollar advanced against the Canadian and Australian dollars but was down against its other major counterparts — the euro, yen, pound and Swiss franc — as the FOMC meeting looms. The yen's gain is its biggest against the U.S. currency in 16 months as global stocks dropped and Japan prepared for the snap election called by Prime Minister Shinzo Abe for the lower house of parliament for December 16. The Swiss franc advanced after the Swiss National Bank kept the target range for its benchmark interest rate at zero to 0.25 percent at its quarterly meeting. Officials vowed to defend the 1.20 franc per euro cap given that the risk of deflation has increased.

The yen rallied after sliding for the previous seven weeks after the Bank of Japan increased its monetary stimulus. The yen has tumbled about 30 percent in the past two years as Mr Abe implemented his economic policy of fiscal spending and structural reform, and the Bank of Japan applied unprecedented monetary stimulus. Many analysts feel that the dollar-yen rally has been too rapid and expect some correction or at least consolidation for the next three months. This weekend's elections in Japan are adding uncertainty to the currency, which was hit last week by increased volatility. The yen has fallen especially fast, with the dollar racing from ¥108.73 on October 30 to a peak of ¥121.84 on Monday, accounting for almost 90 percent of the yen's decline this year.

In a lengthy interview with The Australian Financial Review, RBA Governor Glenn Stevens indicated the nation's currency will probably decline further next year and he pushed back against calls for near term interest rate cuts because the economy is performing as the central bank forecast. Australian inflation, economic growth and employment levels are running close to rates the RBA predicted a year ago. He said the RBA has tried to deliver a message of "stability and predictability" in setting monetary policy as a way of underpinning confidence. The Bank has pursued a policy of patience, keeping borrowing costs at a record low 2.5 percent for 16 months and flagging they will remain unchanged to stimulate domestic growth drivers as mining investment wanes. In response, housing has boomed, while companies have proved more reluctant to open their pocket books without greater signs of consumer demand.

The Australian dollar has fallen about 10 percent since the start of September as the price for iron ore, which accounts for one-fifth of Australia's export income, has about halved this year. The Australian dollar is on pace for its second straight annual decline. Stevens said another year of a weakening Aussie is probable. "It's quite likely that it will a year from now be lower than it is today, on the basis of the facts that we presently have," the newspaper quoted Stevens as saying. "And, yes, a year ago I said probably 85 U.S. cents was better than 95. And if I had to pick a figure now, I would say probably 75 is better than 85." The last time the Aussie fetched 75 U.S. cents was in 2009.

Selected currencies — weekly results

Indicator scoreboard

France

October industrial production (excluding construction) dropped 0.8 percent on the month and followed an unrevised unchanged reading in September. Output was 1.0 percent lower on the year, its worst performance since May. However, the monthly headline decline was largely attributable to weakness in the more volatile subsectors, notably energy and extracted goods, where production sank 3.7 percent, and food & agriculture which posted a 0.9 percent decrease. Elsewhere it was mixed. Refining was up 0.9 percent but electronics & machinery declined 0.8 percent. Transport equipment was up 0.3 percent but the other manufactured goods category saw a 0.1 percent dip. Overall manufacturing was off 0.2 percent while construction advanced 0.3 percent after a 1.9 percent slump last time.

United Kingdom

October merchandise trade shortfall on goods narrowed from an upwardly revised stg10.51 billion in September to a marginally larger than expected stg9.62 billion in October — the smallest deficit since March. However, October's decline in the red ink was largely attributable to a stronger performance by the oil and other erratic items balance. Excluding this category, the shortfall fell less than Stg0.3 billion to Stg9.0 billion. Overall exports were up for a second consecutive month, rising 0.9 percent from September when they were up a revised 4.0 percent. This was the first back to back increase since February/March and boosted annual export growth by nearly 3 percentage points to minus 1.7 percent. By contrast, imports were down 2.0 percent on the month and so unwound much of their September gain. Compared with October 2013, imports dropped 3.0 percent after a 3.1 percent annual decline last time. The headline improvement was roughly evenly split between EU and non-EU countries. For the former, the red ink shrank from Stg6.4 billion to Stg6.0 billion while the latter saw a Stg0.5 billion reduction to Stg3.6 billion.

Asia/Pacific

Japan

The second estimate of third quarter GDP turned out to be worse than both the first estimate and analyst expectations. Third quarter GDP is now estimated to have contracted 0.5 percent on the quarter, worse than the original 0.4 percent estimate and much worse than analysts' expectations for only a 0.1 percent decline. The annualized pace of decline deteriorated from 1.6 percent to 1.9 percent. On the year, GDP contracted 1.2 percent, down from the original 1.1 percent decline. CAPEX was revised to a decline of 0.4 percent on the quarter from the original estimate of a 0.2 percent slide. Some analysts expected this to be revised to a gain rather than a decline. Personal consumption was unchanged and still showed a gain of 0.4 percent. The data come just ahead of snap elections to be held this coming weekend. Prime Minister Shinzo Abe called the elections to shore up support for a plan to continue his reform path and delay a consumption tax increase scheduled for next October. The economy has been in a deep slump since Japan's consumption tax was increased from 5 percent to 8 percent in April. In the second quarter, GDP contracted by an annualized 6.7 percent.

November producer prices were down 0.2 percent on the month and up 2.7 percent from the same month a year ago. Since peaking in July with an annual increase of 4.5 percent, the PPI has declined each month. Excluding the sales tax, the PPI declined 0.3 percent on the month and was 0.2 percent lower on the year. The PPI has been hit by declining petroleum & coal product prices which were down 1.2 percent on the year along with electronic components & devices, down 0.9 percent. While all other sub-categories showed price increases, many including lumber & wood products, ceramic, stone & clay products, iron & steel, metal products and production machinery were up less than in October on the year. However, prices of nonferrous metals, plastic products, information & communication equipment and electrical machinery & equipment were up more than October from a year ago.

October tertiary index was down 0.2 percent and down 0.9 percent from a year ago. Among the industries that contributed to the decline were miscellaneous services, wholesale & retail trade, living-related & personal services & amusement services, accommodations, eating & drinking services, transport & postal activities, scientific research, professional & technical services, real estate & goods rental & leasing and learning support. Among the industries that increased were finance & insurance, electricity, gas, heat supply & water, information & communications, medical, health care & welfare and compound services.

Machine orders are still recovering from the April sales tax increase which caused orders to plummet by 19.5 percent in May. October private sector machine orders except volatile items dropped 6.4 percent after climbing 2.9 percent in September. This was the first monthly drop since May. On the year, orders were down 4.5 percent. Analysts expected orders to slide 2.2 percent on the month. Nonmanufacturing orders excluding volatile items dropped 7.5 percent while manufacturing orders were down 5.5 percent on the month. Overseas orders also declined, this time by 4.6 percent after sinking 9.4 percent in September. The total value of machinery orders received by 280 manufacturers operating in Japan was down 2.9 percent after they increased 8.0 percent in September. In the July through September period, orders dropped by 14.9 percent compared with the previous quarter.

Australia

November unemployment rate edged up to 6.3 percent while employment was up a greater than anticipated 42,700 jobs to 11,637,400. The labour force participation rate increased 0.1 percentage point to 64.7 percent. The increase in employment was driven by increased part time employment for females (up 36,400) and full time employment for males (up 23,300) which partially were offset by a decline in female full time employment (down 21,400). Total full time employment increased only 1,800. The number of people unemployed increased by 4,700 to 777,700. The seasonally adjusted underemployment rate was 8.6 percent, an increase of 0.3 percentage points from August 2014. Combined with the unemployment rate of 6.3 percent, the latest seasonally adjusted estimate of total labour force underutilization was 15.0 percent, an increase of 0.6 percentage points from August 2014.

China

China recorded its biggest merchandise trade surplus in November of $54.47 billion, up from $45.41 billion in October. Expectations were for a surplus of $44.7 billion. Exports were up only 4.7 percent on the year after climbing 11.6 percent in October. Expectations were for an increase of 8.8 percent. However, imports slumped 6.7 percent on the year after increasing 4.6 percent last time. Expectations were for a 3.4 percent increase. The import data indicate that consumption could be much lower than thought. For the 11 months through November, exports were up 5.7 percent and imports, just 0.8 percent when compared with the same months a year ago.

November consumer price index was up a less than expected 1.4 percent from a year ago. Expectations were for a 1.6 percent increase. The annual increase in the CPI has been steadily decreasing since its recent peak of 3.2 percent in November 2013. The CPI slipped 0.2 percent from a month ago. For the year to date, the CPI was up 2.0 percent when compared with the same months a year ago. The urban CPI was up 1.5 percent while the rural CPI was 1.3 percent higher on the year. In October, the former was up 1.7 percent and the latter, 1.4 percent. Food prices eased to an increase of 2.3 percent from 2.5 percent the month before. Non-food prices were up 1.0 percent after 1.2 percent. The decline in prices for tobacco & alcohol accelerated to minus 0.7 percent after declining 0.5 percent the month before. Transportation & communication prices declined 0.8 percent after a decline of 0.3 percent in October. Clothing prices however, were up 2.6 percent after 2.4 percent in October.

The decline in producer prices accelerated in November to 2.7 percent from a year ago after falling 2.2 percent in October. On the month, the PPI dropped 0.5 percent. For the year to date, the PPI retreated 1.8 percent after 1.7 percent in October. PPI has now been caught in deflation for 33 months as a slowing economy and a turning housing market weaken demand for industrial goods. The decline in raw materials procurement, fuel and power accelerated to minus 3.2 percent after retreating 2.5 percent in October. Production materials prices dropped 3.5 percent after 3.0 percent in October. Consumer goods prices which had been increasing modestly slipped 0.1 percent. Fuel and power dropped 5.2 percent after declining 3.8 percent last time as crude oil prices continue to slide.

November retail sales were up 0.89 percent on the month and 11.7 percent from a year ago. For the year to date, sales were up 12.0 percent. Urban sales improved, increasing 11.6 percent on the year after 11.4 percent last time. Rural sales were up 12.5 percent after increasing 12.4 percent. Sales in eight of 12 subcategories improved in November with communications equipment soaring 57.2 percent after increasing 42.3 percent in October. Sales also improved for clothing, household nondurables, home appliances, furniture, building & decoration materials and cosmetics. However, auto sales managed to increase only 2 percent after 4.5 percent the month before. Sales of stationery, gold, silver & jewelry and oil and oil products weakened in November.

November industrial production was up 7.2 percent on the year after increasing 7.7 percent in October. On the month, output was up 0.52 percent. For the year to date, output was up 8.3 percent. Eight of 13 subcategories had lower output in November. Motor vehicles output was up 2.6 percent after increasing 6.8 percent in October. Cement declined 4.0 percent after slipping 1.1 percent the month before. Output increased less than in October for non-metal minerals, general equipment, transport equipment, machinery, electricity and steel products. Output was higher than the month before for textiles, chemicals and ferrous metals. Power & thermal was unchanged.

Bottom line

Crude oil prices continued to decline and in the process took equities along with them. All equity indexes were down on the week with the exception of the Shanghai Composite — it was virtually unchanged. Economic data for the most part disappointed with the exception of the U.S.

The upcoming week is the last full trading week of the year and is chuck full of key economic data releases. However, the key event of the week is the FOMC meeting followed by Chair Janet Yellen's press conference. Flash manufacturing PMIs will be released for China, Japan, Germany, France, the Eurozone and the United States. Key price data will be posted for the UK and the Eurozone.

Looking Ahead: December 15 through December 19, 2014

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