Global Markets

Rather than celebrating that interest rates would remain at rock bottom for longer, investors sold shares and the U.S. dollar tumbled as investors worried about growth in the U.S. and in the global economy. While stocks in Asia were more resilient with only three of 12 indexes declining, all except the IBEX declined in Europe on the week. While the Dow and S&P edged lower, Nasdaq inched higher from a week ago.

Federal Reserve

The Fed held interest rates at record lows as concerns over an increasingly weak global economy overshadowed evidence of a resilient U.S. recovery. In maintaining its zero to 0.25 percent federal funds target range, the Bank warned that recent turmoil in the global economy may "restrain economic activity somewhat" as well as push down inflation in the near term. That line was among the biggest changes from July's policy statement, and seemed to be key to the decision to not increase rates. The U.S. dollar tumbled after the announcement but stabilized during Friday morning trading. Stocks dropped as well.

In the end, the Federal Reserve took the turmoil in international financial markets into account and left its policy fed funds rate unchanged at zero to 0.25 percent.

Global Stock Market Recap

Europe and the UK

Equities retreated Friday and in the process wiped out gains from earlier in the week and then some. The trigger for the selloff was found in the FOMC announcement late Thursday. For the first time, the Fed added the phrase that it was "monitoring developments abroad" to its statement, which now has investors concerned about the health of the global economy. The Fed cited concerns over global economic headwinds, volatility in the stock market and anemic inflation for their decision to leave its key interest rates unchanged. Markets have increasingly become worried about the sustainability of global growth and the Federal Reserve's reluctance to raise interest rates heightened those concerns. The FTSE slipped 0.2 percent, the CAC declined 0.3 percent, the DAX tumbled 2.0 percent and the SMI retreated 0.4 percent.

The week ended as it began with equities declining. The beginning of the week's plunge was attributed to the disappointing August data from China for industrial production and retail sales. But the rally midweek was fueled by investor hopes that the Federal Reserve would hold off on raising interest rates until December. However, investors' reaction was the opposite of what was expected.

Traders will be watching for the Greek election results to be held on Sunday. The race between Alexis Tsipras and Vangelis Meimarakis has narrowed to a dead heat, which will likely result in the need for the formation of a coalition government. Greeks will vote in the second general election this year. The outcome will determine whether Greece returns to stability, after agreeing to terms of the country's third multibillion-euro international bailout last month, or enters a new period of uncertainty.

The snap elections were called last month after the resignation of Prime Minister Alexis Tsipras, who came to power in January on a pledge to stop austerity. However, he capitulated to creditors' demands after months of grueling negotiations that destabilized the economy and led to the imposition of capital controls on Greek banks. Mr Tsipras quit in a bid to consolidate his grip on power following a rebellion by radical leftist lawmakers who oppose austerity and have since formed their own party. Although Greek opinion polls gave Mr Tsipras and his Syriza party a clear lead over rivals earlier this summer, many new surveys put Syriza virtually neck and neck with its main political opponent, the conservative New Democracy which led the coalition government that preceded Mr Tsipras's administration.

Swiss National Bank

The Swiss National Bank left its monetary policy on hold at its quarterly Monetary Policy Assessment (MPA). The target range for 3-month CHF LIBOR duly stays at minus 1.25 percent to minus 0.25 percent with the deposit rate pegged at minus 0.75 percent.

The decision was not unexpected in the wake of a surprisingly early return to positive GDP growth last quarter and, at least as important, recent losses of the CHF against the euro. Still, even if the real economy and the exchange rate have been better behaved of late, inflation continues to move in the wrong direction. At minus 1.4 percent, annual CPI inflation in August recorded its lowest reading since 1950. Moreover, the likelihood is that the CHF, which the SNB still sees as significantly overvalued, would be a good deal stronger but for the central bank making the most of seasonally thin markets and intervening to weaken the currency.

New economic forecasts acknowledge stronger than expected second quarter output but also heightened uncertainty about the global picture. As a result, domestic real GDP growth in 2015 is still put at around the 1.0 percent mark. However, largely on the back of weaker oil prices, inflation in 2015 has been marked down from minus 1.0 percent to minus 1.2 percent and in 2016 is seen a tick lower at minus 0.5 percent. A return to above zero inflation is still not anticipated before the start of 2017.

Asia Pacific

Equities were mixed last week. A singular focus was on what the Federal Reserve might or might not do at its Thursday FOMC meeting. Investors were upset Friday that the kept its fed funds rate at zero to 0.25, citing turmoil in international markets and slowing global growth, especially in this region. Despite the volatility only the Nikkei (down 1.1 percent), Shanghai Composite (down 3.2 percent) and STI (down 0.3 percent) ended the week lower. Of the 12 indexes followed here, only the Nikkei and Kospi remain positive so far in 2015. While the Federal Reserve's decision helped ease fears of capital flight from emerging markets, the inaction by the U.S. central bank and the degree of emphasis on global developments served to rekindle worries about weakness in both the U.S. and global economies.

In Australia, shares extended gains for a third day after RBA Governor Glenn Stevens presented an optimistic view about the Australian economy and said that the bank was "pretty content" with its current benchmark rate (2 percent). The All Ordinaries added 1.9 percent on the week. The Sensex also rallied for a second week, this time advancing 2.4 percent.

While most Asian equities reacted favorably to the Fed's decision — it helped ease fears of capital flight from emerging markets — stocks in Japan and Singapore retreated Friday. Nevertheless, gains were muted as the Fed's cautious stance as well as dovish comments from Fed chair Janet Yellen raised new questions about U.S. fundamentals and the strength of the global economy.

Some emerging-market central bankers even appeared frustrated with the Fed's postponement. Bank Indonesia Senior Deputy Governor Mirza Adityaswara reiterated previous comments by Indonesian policy makers that the earlier the Fed raises rates, the better it would be for emerging markets. "The dominant factor since 2013 that has been affecting the financial market stability in emerging markets is the uncertainty of the timing of the Fed rate increase," he said.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. It said it would continue to buy JGBs at an annual pace of ¥80 trillion. The vote to maintain its policy was 8 to 1. Once again, Takahide Kiuchi voted against the decision arguing that a reduced pace of purchases (¥45 trillion) was appropriate.

In its statement, the monetary policy board said that the economy continued to recover moderately and was likely to continue doing so. The MPB said that the core CPI was likely to continue to be about zero for now due to the decline in energy prices. It noted that the economy has continued to recover moderately and is likely to continue to do so. However, both exports and output have been affected by the slowdown in the emerging markets. It noted that private consumption has been resilient but capex remains weak.

BoJ Governor Haruhiko Kuroda has not offered a clear signal that he is on board with new easing. Less than three weeks ago he gave a speech emphasizing his optimism that a tight labour market would underpin inflation. But because of collapsing oil prices and weak demand, core inflation continues to look distant from the 2 percent goal, originally targeted for last April.

During his post-meeting news conference, Kuroda said that in the long run any increase in real income — like the kind which could result from recently proposed lower mobile phone bills — would help the bank to achieve its inflation target. In Kuroda's view, when specific goods and services decline in price, the trend leads to increased household purchasing power and that eventually helps to push up overall prices.

Currencies

The U.S. dollar was down against the pound, yen and the Canadian and Australian dollars on the week. The dollar was up against the euro and unchanged against the Swiss franc. The currency dropped to a three week low Friday before it recovered somewhat, a day after the Federal Reserve again kept interest rates on hold, as investors focused on the risks of the global slowdown to the U.S. economy. The Fed's inaction was largely expected. It was the dovish message, specifically the uncertain global growth outlook that could weigh on the U.S. economy that took the market by surprise. Investors had anticipated two scenarios — a Fed increase with dovish undertones, or no move, but with upbeat comments about the U.S. economy. The Fed decision largely disappointed those that wanted to get the process of normalizing rates going even at a gradual pace. The prospect of continued loose monetary conditions reignited investors' appetite for riskier currencies such as the Australian and New Zealand dollars, which gained sharply.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

August harmonized index of consumer prices was revised a tick lower to an annual rate of 0.1 percent, its weakest reading since April. It was unchanged on the month. Developments in core inflation were mixed. The annual flash rate for the HICP excluding food, alcohol, tobacco and energy was also nudged down 0.1 percentage point to 0.9 percent and wiped out half of the increase seen in July. However, the HICP without just unprocessed food and energy was unrevised at 0.9 percent, matching its July result. Excluding only seasonal food and energy, the rate was actually up a tick to 0.9 percent from July. As previously indicated, the main downward pressure on the change in the annual rate came from energy where prices were down 7.2 percent on the year after a 5.5 percent drop in July. However, this impact was essentially offset by a jump in inflation in the food, alcohol and tobacco subsector to 1.3 percent from 0.9 percent. The non-energy industrial goods rate was steady at 0.4 percent and services flat at 1.2 percent.

Germany

ZEW's September survey produced mixed results. On the positive side analysts have become slightly happier with the way in which the domestic economy is currently performing. However, expectations for future growth have been downgraded. The current conditions index rose nearly 2 points to 67.5, its third consecutive increase and its highest reading since April. Expectations on the other hand were down a surprisingly large 12.9 points at 12.1, their sixth straight decline and the sharpest over the period. This was also their weakest posting since November last year.

United Kingdom

August consumer prices were up 0.2 percent on the month but unchanged on the year. The main downward impact on the change in the 12-month rate came from transport prices which were up only 0.1 percent on the month this year compared with a 0.8 percent increase in August 2014. In particular, weaker motor fuel costs had a significant effect. There was also some downward pressure from clothing & footwear where prices climbed 1.5 percent on the month or 1.1 percentage points less than during the same period last year. The main positive impact came from furniture, household equipment & maintenance where this year's increase was 0.7 percentage points more than in 2014. Food & non-alcoholic beverages similarly provided a minor boost. The core CPI climbed a mainly seasonal 0.4 percent, a small enough advance to reduce the annual underlying inflation rate from 1.2 percent to 1.0 percent.

August factory gate prices dropped 2.4 percent on the month after a steeper revised 1.2 percent decline in July to stand 13.8 percent lower on the year. At the same time, output prices were down 0.4 percent from July, their third consecutive decrease, and now show a yearly drop of 1.8 percent. Within the factory gate basket, the only monthly movement of note was in petroleum products where prices slumped 3.2 percent. The next largest absolute change was in food products (down 0.4 percent). As a result, the core index was unchanged on the month and just 0.1 percent higher on the year following a 0.3 percent annual rise at the start of the quarter. The drop in raw material and fuel costs was dominated by crude oil which posted a nearly 14 percent decline on the month. There were also significant monthly declines in imported food materials (2.9 percent), imported metals (2.4 percent) and fuel (1.0 percent). The only increase of any size was in imported parts & equipment (0.9 percent).

August claimant count unemployment was up 1,200 although this followed a near 2,000 negative adjustment to July which now shows a decline of 6,800. This left intact a shallow trend decline and was not enough to impact the jobless rate which held at 2.3 percent, as it has in every month since February. The lagging ILO measure of unemployment posted a 10,000 increase in the three months to July. However, the unemployment rate weighed in at 5.5 percent, down 0.1 percentage points from the previous period. Annual average earnings growth, a key element of the report for the BoE's MPC, was 2.9 percent in the three months to July, up from a stronger revised 2.6 percent pace in the second quarter and its largest gain in more than six years. However, the stronger than expected result was biased up by a 17.0 percent surge in July bonus payments, concentrated in the financial services sector. The regular earnings rate in the latest three months was 2.9 percent, just a tick higher than last time. Real earnings growth now at 3.0 percent is its strongest since June to August 2002.

August retail sales volumes were up 0.2 percent following an unrevised 0.1 percent increase in July. Excluding auto fuel they edged up 0.1 percent after a marginally smaller revised 0.3 percent gain last time. Compared with a year ago total sales growth was up 3.7 percent and non-auto fuel purchases gained 3.5 percent rate. However, the sluggish gain shown in the headline data masked a much stronger period for underlying demand. While food purchases fell a further 0.9 percent on the month, their third consecutive decline, when excluding auto fuel, non-food sales were up a solid 1.2 percent for their sharpest increase since April. Within this, textiles, clothing & footwear added 2.3 percent and the other stores category surged 5.4 percent. However, growth lacked balance and there were declines in non-specialized stores (1.6 percent), household goods (3.4 percent) and non-store retailing (1.5 percent). Auto fuel purchases increased 1.3 percent.

Asia/Pacific

Japan

August's merchandise trade deficit was a greater than anticipated ¥569.7 billion, much larger than July's revised deficit of ¥268.4 billion. It was the fifth consecutive month that balance was negative. On the year, exports were up 3.1 percent while imports retreated 3.1 percent. Expectations were for an increase of 4 percent for exports and a decline of 2.2 percent for imports. Exports to Asia were up 1.1 percent for the sixth straight increase. However, exports to China sank 4.6 percent for the first decline in six months. Exports to the EU slipped 0.2 percent for the first drop in nine months. Exports to the U.S. jumped 11.1 percent for the 12th straight increase. On a seasonally adjusted basis, the deficit was ¥358.8 billion, down marginally from July's ¥375.1 billion. On the month, exports were down 0.4 percent while imports slipped 0.6 percent. On the year, the former was up 4.8 percent while the latter slumped 3.6 percent.

China

August industrial production was up a less than expected 6.1 percent from a year ago after increasing 6.0 percent in July. For the year to date, output added 6.3 percent. On the month, production was up 0.53 percent. Motor vehicle production skidded 6.5 percent after sinking 11.2 percent the month before. Transport equipment added 5.1 percent, down from 7.7 percent in July. Machinery output eased to an increase of 6.9 percent after rising 7.5 percent in July. The data point to continued weakness across large swaths of the economy, heaping more pressure on the government to seek to further stimulate activity.

Retail sales improved to an increase of 10.8 percent in August, up from 10.5 percent in July. On the month, sales increased 0.86 percent. Year to date, sales were up 10.5 percent after increasing 10.4 percent in July. Urban sales were up 10.6 percent after rising 10.3 percent. Rural sales were unchanged with an increase of 11.9 percent. Grain and food sales eased to an increase of 14.9 percent after jumping 16.7 percent the month before. Auto sales improved to an increase of 5.2 percent after climbing only 2.5 percent in July. Oil & oil products continued to decline, this time down 8.8 percent.

Bottom line

Equities were volatile last week with weak Chinese economic data and the Federal Reserve's decision to leave its fed funds rate unchanged weighing on sentiment. Neither the Bank of Japan nor the Swiss National Bank changed its policy either. Data from Europe and the UK were mixed.

Next week is a light week in comparison to the one just passed. The main data event will be the release of September flash manufacturing PMIs. A second national election in Greece on Sunday will attract some attention. Greece of late has been overshadowed by declining growth in China along with its highly volatile stock market.

In the U.S. another vigil will begin as the countdown to another possible closure of the U.S. government comes closer. The fiscal year ends September 30. To date, there is no resolution on the many differences in sight.

Looking Ahead: September 21 through September 25, 2015

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