Global Markets

Blame it on the Fed. Equities especially in Asia continued to be volatile during the week. Investors also continued to eye activity in China warily as a slew of new measures were announced in an attempt to stabilize the equity market and at the same time manage movements in the yuan.

Opinions about whether the Federal Reserve should begin interest rate normalization have come from a myriad of sources, including both the World Bank and the International Monetary Fund. Both have urged the Fed not to act given market turmoil. Investors also are weighing how much recent market volatility will count in the Fed's deliberations.

It was a relatively quiet week for economic data. European and Asian data were mixed. Japan's data disappointed with signs that deflation has not yet been slain while machine orders — a proxy for capital spending — dropped. The data present the Bank of Japan with a major problem at its upcoming meeting.

On the week, most equity indexes followed here advanced — the Taiex was the week's best performer with a gain of 3.8 percent.

Global Stock Market Recap

Europe and the UK

European equities advanced the first three days of the week but slumped the last two. Despite the retreat, only the IBEX declined on the week. The losses at week's end were attributed to investor uncertainty before the release of Chinese data over the weekend and the Federal Reserve meeting on the 16th and 17th. China is due to release its industrial production and retail sales for August on Sunday. The FTSE added 1.2 percent, the DAC was up 0.6 percent, the DAX advanced 0.9 percent and the SMI gained 1.4 percent.

Economic data were relatively sparse last week and what there were, were mixed. In the UK, overall industrial production slipped 0.4 percent in July as declines in manufacturing and oil/gas extraction more than offset increases in mining, electricity/gas, and water/sewerage. Manufacturing output fell 0.8 percent, the third decline in the last four months and the lowest level since May 2014.

In the Eurozone, output data were distinctly mixed. German industrial production continues to drift sideways — it rose 0.7 percent in the latest month but that followed a 0.9 percent decline in June and leaves output at approximately the same level as last December. French industrial production unexpectedly fell 0.8 percent, the third decline in the last four months and the lowest level since last November. Manufacturing output dropped 1.0 percent. However, Italian industry is showing some sign of life. Industrial production jumped 1.1 percent after sliding 1.0 percent in June. It was the fourth solid gain in the last six months and leaves production in a modest uptrend.

Bank of England

As expected the Bank of England's monetary policy committee left monetary policy on hold. The Bank Rate remains at 0.5 percent and its asset purchase ceiling at Stg375 billion. There was again only one dissenter, Ian McCafferty who, as in August, wanted an immediate 25 basis point tightening.

The minutes of the meeting, which were released at the same time as the announcement, showed concern about the slowdown in the global economy, particularly in China. However, while also acknowledging some recent softening in the UK labour market data, in general the MPC saw domestic output growth as still robust and productivity on the rise. Indeed, some suggested that slower employment growth might be a function of skills shortages. That said, there was still considerable uncertainty about the impact on consumer prices of both the slide in commodity prices and the ongoing strength of sterling.

Asia Pacific

Despite the week's volatility, most equity indexes advanced on the week. The week ended on a lackluster note, as lingering uncertainty in the run-up to the Federal Reserve's meeting tempered the positive sentiment that generated from further signs of stability in Chinese stock markets. Only the Jakarta Composite and PSEi ended lower on the week. The Nikkei added 2.7 percent while the Shanghai Composite was 1.3 percent higher.

Chinese Premier Li Keqiang sought to reassure investors over the health of China's economy, telling the World Economic Forum in the northeast city of Dalian Thursday that his country's economy is not heading for a hard landing, recent volatility will not affect its economic trajectory and reforms are on track. While expectations regarding the Fed interest rate increase continue to wax and wane, more stimulus measures and soothing words from China have helped stabilize markets. Worries about China's slowing economy and its leaders' ability to shore up markets after a summer selloff have doused investor enthusiasm.

The Nikkei added 2.7 percent this week after declining the previous four weeks thanks to a 7.7 percent increase on Wednesday. The gain was the index's biggest daily percentage gain since October 2008. The Nikkei had been down for four straight weeks prior to this week. However, equities ended on a cautious note — investors remained a bit wary of making big bets ahead of the Bank of Japan's monetary policy board meeting scheduled for Monday and Tuesday and the Federal Reserve's FOMC meeting Wednesday and Thursday. Although Japan's second quarter GDP was revised upward to a decline of 0.3 percent on the quarter, July core machine orders — a proxy for capital spending — dropped, reflecting the persistent weakness in domestic demand.  

The All Ordinaries advanced 0.7 percent after a particularly volatile week. Disappointing second quarter GDP growth had analysts warning that Australia risks falling into a recession. The country has not had a recession since 1991. On Tuesday, the index jumped 2.0 percent only to tumble 2.3 percent on Wednesday.

Reserve Bank of New Zealand

As pretty much expected, the Reserve Bank of New Zealand cut its official cash rate (OCR) by 25 basis points to 2.75 percent. This was the third 25 basis point reduction in the OCR this year. The RBNZ said the cut was warranted by the softening of the economy and the need to keep future average inflation near the 2 percent midpoint of its inflation target range. It said that some future easing seemed likely but will be data dependent. 

It noted that global economic growth remains moderate, but the outlook has been revised down due mainly to weaker activity in the developing economies. "Concerns about softer growth, particularly in China and East Asia, have led to elevated volatility in financial markets and renewed falls in commodity prices." While the U.S. economy continues to expand, financial markets remain uncertain as to the timing and impact of an expected tightening in U.S. monetary policy.

The Bank noted that the domestic economy was adjusting to the sharp decline in export prices and the consequent decline in the exchange rate. It said the slowdown was due to the plateauing of construction activity in Canterbury and a weakening in business and consumer confidence. The economy is now growing at an annual rate of around 2 percent. However, several factors continue to support growth, including robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions, and, importantly, lower interest rates and the depreciation of the New Zealand dollar.

Currencies

The U.S. dollar was mixed last week, declining against the euro, pound sterling, Swiss franc and Australian dollar but up against the yen. The U.S. currency was unchanged against its Canadian counterpart. The U.S. currency waxed and waned according to the market's feelings about what the Federal Reserve will do at its meeting mid-week. Trading has been choppy.

The Australian dollar continues to retreat as declining commodity prices hit the country's economy. It should be noted that earlier complaints by the Reserve Bank of Australia that the currency was too strong have abated and, in its last statement, the RBA noted that the currency is adjusting to the significant declines in key commodity prices. However, the currency performed above other Asian currencies this week. The traditional rival — the New Zealand dollar — edged up despite the interest rate cut by Reserve Bank of New Zealand earlier in the week. There was some good news for the Australian dollar — the unemployment rate fell 0.1 percentage points to 6.2 percent in August and the economy added a better-than-expected 17,400 jobs.

Selected currencies — weekly results

Commodities

According to the International Energy Agency (IEA), Non-OPEC production is expected to record its biggest decline in more than two decades in 2016 as low oil prices bite and drive demand for crude from OPEC countries. The agency noted that the oil price collapse is closing down high cost production in the UK, U.S. and Russia. The Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly 'inefficient' production according to the IEA. The lower price environment is forcing the market to "behave as it should" by shutting in production and inducing demand.

U.S. output from shale fields is expected to bear the brunt of an oil price rout that has wiped more than half the value off Brent crude, the international oil benchmark, to around $48 a barrel, the IEA said. Producers outside the U.S. are also adjusting to lower oil prices. The sizeable slump in non-OPEC production and robust demand growth suggest that "unless prices recover, lower cost OPEC producers would need to turn up the taps during the second half of 2016 to keep the market in balance." Previously during periods of oversupply, Saudi Arabia has adjusted its production to bolster prices. But last November the kingdom drove a decision by OPEC not to cut output and instead focus on maintaining its market share. An oil price slump, it was thought, would trim growth among high cost rivals and generate a need for the cartel's crude.

Indicator scoreboard

Eurozone

Second quarter gross domestic product was revised higher to a gain of 0.4 percent on the quarter from 0.3 percent in the flash estimate. Annual growth was boosted by 0.3 percentage points to 1.5 percent, its best performance since the second quarter of 2011. The first quarter was also revised firmer and now shows real GDP 0.5 percent higher than in the final quarter of 2014. However, while the boost to headline growth is good news, the GDP expenditure components confirm a disproportionately large contribution from oversea demand. While household consumption also rose 0.4 percent on the quarter, gross fixed capital formation contracted 0.5 percent which, with government consumption up 0.3 percent, meant that domestic final sales added just 0.2 percentage points to the quarterly change in total output. Inventories subtracted 0.1 percentage points. By far the largest positive impact came from exports where a 1.6 percent quarterly jump lifted GDP economic growth by some 0.7 percentage points. Imports were up 1.0 percent which left an overall net export contribution of 0.3 percentage points. Among the individual member states, the strongest quarterly rise was registered in Latvia (1.2 percent) ahead of Malta (1.1 percent) and Spain (1.0 percent). Slovakia (0.8 percent) also had a good period. No country recorded a contraction. For the other larger economies, Germany (0.4 percent) led the way ahead of Italy (0.3 percent) but France only stagnated and Eurozone growth overall had to rely heavily on the smaller countries. Finland saw its first increase in total output since the second quarter of last year.

Germany

July industrial production was up 0.7 percent on the month after an upward revision to a 0.9 percent decline in June from the previously reported 1.4 percent decline. Annual growth was 0.5 percent, down from 1.0 percent and the slowest since March. Performances among the major production sectors were mixed. A solid 2.8 percent monthly surge in capital goods and an even larger 3.2 percent bounce in construction contrasted sharply with a 3.7 percent drop in consumer goods and an 0.8 percent slide in basics. Energy output was up 1.9 percent.

July exports climbed 2.5 percent on the month to reach a new record high. With imports up 2.3 percent, the seasonally adjusted trade balance widened out from a minimally larger revised €22.1 billion at the end of the second quarter to €22.8 billion, also a new peak. The unadjusted data paint a similar picture with the surplus climbing from €24.1 billion in June to €25.0 billion. Compared with July 2014, exports were 6.2 percent stronger with sales to the other EMU countries up 5.5 percent and to non-EU nations 6.4 percent better off. Total imports were 6.1 percent higher on the year.

United Kingdom

July industrial production was down 0.4 percent on the month for a second month while the key manufacturing sector contracted 0.8 percent, easily eclipsing a 0.2 percent increase last time. The monthly drop in manufacturing output reflected decreases in seven of 13 subsectors. Within this, the steepest drop was posted by basic metals & metals products (5.7 percent), mainly due to weakness in weapons production which can be very volatile — this alone accounted for half of the overall decline. The second largest negative impact came from transportation equipment which subtracted 0.3 percentage points from monthly growth. However, outside of these categories performances were rather better and in particular there was a solid 5.8 percent gain in pharmaceuticals, in part courtesy of surprisingly buoyant export demand. Total industrial production found some support from a 0.4 percent monthly increase in the volatile mining & quarrying subsector together with increases in electricity, gas, steam & air conditioning (1.3 percent) as well as in water & waste management (0.5 percent).

The July shortfall on global trade in goods widened out from a smaller revised Stg8.51 billion in June to a much larger than expected Stg11.08 billion — its worst performance since July 2014. Excluding oil and other erratic items, the red ink was up from Stg8.47 billion to Stg10.76 billion. The sizeable headline deterioration reflected a 9.2 percent monthly slump in exports (mainly chemicals and finished manufactured goods), their steepest decline since July 2006 and enough to reduce their annual growth from 5.0 percent to minus 5.4 percent. By contrast, imports were up 0.8 percent from June but even they were 4.2 percent lower on the year. Regionally the damage was done mainly by trade with non-EU countries where the balance worsened from a deficit of Stg1.5 billion to a shortfall of Stg3.5 billion. However, the red ink with other EU countries also climbed, from Stg0.6 billion to Stg7.6 billion. Despite July's setback, underlying volume trends were moderately positive. Hence, excluding oil and erratics, exports in the latest three months were up 0.9 percent compared with a 0.8 percent fall in imports. Moreover, revisions to the nominal data mean that total net exports could have boosted second quarter real GDP by somewhat more than the 1.0 percentage point previously estimated.

Asia/Pacific

Japan

Second quarter gross domestic product was upwardly revised to a decline of 0.3 percent on the quarter or at an annualized pace of 1.2 percent from the preliminary estimate of 0.4 percent. The data indicate that domestic demand remains weak while exports suffer from sluggish growth globally. CAPEX was revised down to a decline of 0.9 percent on the quarter from the first estimate's slip of 0.1 percent. Revised private consumption was down 0.7 percent on the quarter after the preliminary estimate of a 0.8 percent drop. Private residential investment was up an unchanged 1.9 percent. Exports of goods and services were down an unrevised 4.4 percent.

July core machine orders that exclude volatile items such as ships and those from electric power companies were down 3.6 percent on the month after declining 7.9 percent in June. Total orders were up 2.2 percent on the month and up 11.9 percent from a year ago. Core machine orders are considered a proxy for private capital expenditures. They declined for a second month in July. The government downgraded its view and said the pickup in machine orders is stalling. Nonmanufacturing orders excluding volatile items declined 6.0 percent after edging up 0.6 percent in June while manufacturing orders dropped 5.3 percent after sinking 14.0 percent. Manufacturing orders likely softened on continued weaker export demand while the sluggish domestic economy weighs on nonmanufacturers.

The decline in producer prices worsened again in August not helping Bank of Japan's fight against deflation. July producer prices dropped a greater than expected 3.6 percent from a year ago after declining 3.1 percent in July. On the month, the index was 0.6 percent lower after declining 0.3 percent. Excluding the sales tax effect, the PPI was down 3.6 percent after declining 3.0 percent the month before. The decline marks the fifth consecutive month of contraction for the series. The decline in part was from the continuing impact of the drop in petroleum & coal product prices which were down 26.2 percent from a year ago after sinking 22.9 percent in July. Iron & steel were also lower by 4.0 percent. The decline in chemicals and related products accelerated to 7.7 percent from 7.2 percent in July.

Australia

August unemployment rate was 6.2 percent, down from a revised July rate of 6.3 percent. Employment was up 17,400 after gaining 39,200 the month before. The seasonally adjusted labour force participation rate decreased 0.1 percentage point to 65.0 percent in the August 2015 estimate. Of the 17,400 increase in jobs, full time employment added 11,500 positions while temporary work was up 5,900. The number of unemployed decreased 14,400 to 781,100. The number of unemployed persons looking for full-time work decreased 3,500 to 561,400 and the number of unemployed persons only looking for part-time work decreased 11,000 to 219,700. The seasonally adjusted underemployment rate remained steady at 8.4 percent in August 2015. Combined with the unemployment rate, the latest seasonally adjusted estimate of total labour force underutilization was unchanged at 14.3 percent in August 2015, from a revised May 2015 estimate.

China

August merchandise trade balance was $60.24 billion (CNY368.03 billion). August imports, in renminbi terms, fell 14.3 percent on the year after sinking 8.6 percent in July. This was the 10th consecutive decline and the worst print since May, calling into question hopes for a third quarter rebound. Exports improved somewhat — they were down 6.1 percent from a year ago after an 8.9 percent drop in July. In US dollar terms, exports were down 5.5 percent on the year while imports dropped 13.8 percent. Seasonally adjusted, exports rebounded 5.7 percent on the month after sliding 3.4 percent the month before. On the year, seasonally adjusted exports were down 4.1 percent after dropping 7.9 percent in July. Imports were down 2.5 percent after retreating 3.8 percent in July. On the year, imports sank 13.5 percent after declining 8.4 percent on the year.

Consumer prices in August rose at their fastest pace in 13 months. The CPI was up 2.0 percent on the year after increasing 1.6 percent in July. That is the fastest rate since July 2014 but it remains well below Beijing's target of "around 3 percent" this year. The CPI was bolstered by food prices which were up 3.7 percent on the year after rising 2.7 percent in July. Nonfood prices were up 1.1 percent.

Producer prices declined for a 42nd consecutive month. The PPI dropped 5.9 percent on the year in August and its deepest since 2009. While food prices boosted the CPI, inflationary pressures are minimal given low energy prices, a still recovering housing market and overcapacity across many sectors of the economy.

Bottom line

Equities mostly advanced in another week of volatile trading. Investors focused on China and its growth woes as new economic data indicated weakness in domestic demand. Investors also focused on the Federal Reserve and whether the FOMC will begin to normalize rates at its upcoming meeting. Meanwhile the dialogue continues — fortunately in a few days we will finally have an answer. The Reserve Bank of New Zealand meanwhile went in the opposite direction and cut its overnight cash rate by another 25 basis points to 2.75 percent. But the Banks of Canada and England left their respective policies unchanged.

The Bank of Japan meets before the Fed. Analysts wonder what the Bank of Japan will do if anything to combat the new wave of deflation which is pushing its commitment to 2 percent inflation further out into the horizon. And the FOMC meeting is finally here! Expectations are mixed so we will have to wait and see. The Swiss National Bank posts its quarterly monetary policy review.

Looking Ahead: September 14 through September 18, 2015

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