Global Markets

The key theme this week continued to be future central bank actions. With meetings of the Banks of Japan and Canada, European Central Bank and the Federal Reserve looming, investors continue to parse each data release as they try to guess what the banks will do at their respective meetings. While the Fed is expected to postpone its rate increase yet again, investors will be looking to the ECB and BoJ to increase their stimulus in light of poor inflation data and in Japan, dismal growth as well. While currencies gyrated during the week, equities were mostly higher as investor attention slewed to the onset of earnings season.

Global Stock Market Recap

Europe and the UK

Equities were mixed after losses early in the week made it difficult for some indexes to advance on the week. The FTSE lost 0.6 percent while the DAX edged up 0.1 percent and the SMI added 0.4 percent. The CAC was virtually unchanged. Stocks were boosted at the end of the week by a rally in the U.S. and a strong performance in Asia.

Traders are pricing in a possible reduction in the deposit rate for holding overnight deposits at the ECB. But ECB officials have declared that is too early to expand stimulus and President Mario Draghi said more than a year ago that rates have reached their nadir. Analysts are predicting changes to its bond buying program would come before any adjustment to more conventional monetary tools. The deposit rate was set at minus 0.2 percent in September 2014, after first being cut below zero in June of that year. Draghi said at the time rates had reached their "lower bound."

With inflation in the euro region once again negative, speculation has swelled that the ECB will tinker with policy, perhaps with the euro in mind. The currency's recent appreciation has added to downside risks for both the growth and inflation outlooks. ECB Executive Board member Yves Mersch said the central bank won't hesitate to act if the inflation outlook weakens over the medium term. Just last week, ECB President Mario Draghi said the current quantitative easing program has "surpassed our initial expectations." He also said it will take longer to reach the central bank's inflation goal due to the drop in oil prices. He said that the ECB is ready to expand its asset purchase program if needed.

The German government downgraded its growth outlook citing the slowdowns in China and other emerging economies. In the autumn forecast, the economy ministry said Wednesday real gross domestic product is set to grow 1.7 percent instead of the prior forecast of 1.8 percent. The economy is forecast to expand 1.8 percent in 2016, unchanged from previous projection. "The German economy continues to grow," Economy Minister Sigmar Gabriel said. It remains on track despite the dampened global economic outlook with weaker growth in China and commodity-rich emerging economies.

Asia Pacific

Most equities advanced last week with many indexes adding to gains in the previous week. While the week's increases did not match the positive gains of the week before (except for the Shanghai Composite) only the Nikkei, All Ordinaries, Jakarta Composite and PSEi retreated. The Nikkei declined 0.8 percent after jumping 4.0 percent and the All Ordinaries slipped 0.1 percent after a 4.3 percent gain. The Shanghai Composite added 6.5 percent on the week after a 4.3 percent increase the week before.

Investors reacted to data from the U.S. as they continued to parse every data release for clues to Federal Reserve policy. For example, fresh data suggested the annual core inflation in the U.S. rose a better than expected 1.9 percent in September, dampening expectations for a delayed rate increase by the Federal Reserve. While U.S. equities posted strong gains Thursday in the wake of upbeat inflation and jobless claims data, investors in Asia exercised some caution amid the recovery of the dollar and weak oil prices which continued to weigh on energy shares.

Chinese shares hit a seven week high as encouraging bank lending data helped ease concerns about the economy. Equities logged two consecutive weeks of gains for the first time since August as investors ramped up borrowing to buy stocks and expectations built for more government stimulus. Chinese banks issued 1.05 trillion yuan ($165.4 billion) worth of new loans in September according to the People's Bank of China, up from 809.6 billion yuan in the previous month as authorities stepped up efforts to achieve their 7 percent GDP growth for 2015. Beijing is known to increase spending during the fourth quarter to boost growth by year-end, and to announce measures ahead of its annual meeting where it discusses five year economic plans. This year, the Communist Party is scheduled to meet the last week of October.

The All Ordinaries slipped 0.1 percent on the week after bouncing up 4.3 percent the week before. Banks advanced Friday on expectations that a severe drought from an intense El Nino weather pattern and tentative signs of some slowing in the Sydney and Melbourne housing markets as indicated by the Financial Stability Review may force the Reserve Bank of Australia to cut interest rates.

Japan's dreary economic data have stoked expectations that the Bank of Japan will introduce new easing measures at its next policy meeting on October 30. The Bank of Japan said it would keep its annual asset purchases unchanged earlier this month, despite a persistent battle to boost inflation and the latest economic data hinting at another recession. Foreign investors became net buyers of Japanese stocks, buying a net ¥521 billion ($4.38 billion) of Japanese stocks last week after eight consecutive weeks of net selling, according to data from Japan's Ministry of Finance.

Currencies

The U.S. dollar retreated against most of its counterparts as traders decided that the Federal Reserve would not increase its fed funds rate this year. It only advanced against the Australian dollar. Despite the week's increase, the euro declined against the dollar at week's end after a member of the European Central Bank suggested officials should use more policy instruments to raise the region's competitiveness. Consumer prices in the Eurozone September fell 0.1 percent on the year, turning negative for the first time since the ECB launched its program of government bond purchases in March and leading to suggestions that the central bank should step up the program which has weighed on the euro.

The dollar also received a boost from Thursday's U.S. jobless claims data, which showed the number of Americans filing for first-time unemployment benefits falling to match the lowest level in 42 years. Investors weighed the numbers against a week of uneven data which have raised doubts whether the economy is strong enough for the Federal Reserve to raise rates in coming months. Higher rates tend to strengthen the dollar, by making the currency more appealing to investors seeking yield.

The U.S. currency has had a tougher time since early August when expectations the Federal Reserve would increase rates this year first began to unwind. It is a sharp contrast to the second half of last year and the first quarter of 2015 when the dollar index — a broad measure of the currency — surged 25 percent on hopes that higher interest rates would help bring in more investment and capital into a strengthening U.S. economy. The recent swoon in the dollar — it is down about 3 percent since early August — may yet prove fleeting, but some foreign exchange strategists think it has further to go.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

August industrial production (excluding construction) declined a monthly 0.5 percent and slowed to a 0.9 percent increase on the year from 1.4 percent last time. Output has now only expanded once in the last five months. Performances differed quite markedly between the major production subsectors. Capital goods, nondurable consumer goods and energy declined while durable consumer goods and intermediates advanced. The monthly headline decline reflected a poor month for three of the four larger states. Germany (minus 1.1 percent), Italy (minus 0.5 percent) and Spain (minus 1.3 percent) all struggled leaving France (1.6 percent) as the only member of this group to register a gain. The majority of Eurozone countries posted declines although at least annual growth was positive in all except Estonia (minus 2.7 percent), the Netherlands (minus 8.9 percent) and Finland (minus 2.3 percent).

Germany

October ZEW survey was surprising — current conditions dropped 12.3 points to 55.2, their sharpest decline since October 2014 and their lowest reading since March and expectations were off an only slightly smaller 10.2 points at 1.9, their seventh consecutive decrease and their worst result in a year. The findings provide one of the first real looks at how the impact of the VW emissions scandal has hit confidence and if anything, there may even be some relief that the report is not weaker still. Nonetheless, with worries about the slowdown in business activity in the emerging markets also a major feature, it was significant that ZEW felt obliged to talk down the likelihood of Germany sliding back into recession. Not so long ago the domestic economy was supposed to be leading the rest of the Eurozone on the path to solid economic recovery.

United Kingdom

September consumer prices were down 0.1 percent on the month and were down 0.1 percent from a year ago. The main downward pressure on the change in the yearly rate came from clothing & footwear where prices rose a seasonally small 2.8 percent on the month compared with a 4.0 percent increase over the same period in 2014. This was the smallest September increase since 2008. The other main negative effects were provided by fuels & lubricants, which posted a monthly 2.9 percent decline after a 0.6 percent decrease last year and gas, which recorded a 2.1 percent drop compared with no change in 2014. Core CPI was up a monthly 0.1 percent and 1.0 percent on the year.

September claimant count unemployment increased by 4,600 following an unrevised 1,200 gain in August and constituted the third, albeit only small, rise in the last four months. The jobless rate on this definition was again unchanged at 2.3 percent where it has been since March. However, the ILO data were much stronger. These showed unemployment in the three months to August falling a healthy 79,000, the first decline in three months and large enough to see the jobless rate slip to 5.4 percent from 5.5 percent. However, wages were relatively restrained. The annual average earnings growth in the three months to August was 3.0 percent, up slightly from last time. Moreover, the minimal increase was essentially due to a 10.2 percent bounce in bonuses while regular earnings over the same period dipped from 2.9 percent to 2.8 percent. In fact for the month of August alone, regular earnings growth was just 2.5 percent, a drop of 0.4 percentage points from July.

Asia/Pacific

Japan

The producer price index was down 3.9 percent on the year as expected. September was the sixth consecutive month of decline. The declines have accelerated each month. On the month, the index lost 0.5 percent for the fourth consecutive decline. The continuing decline will certainly not make the Bank of Japan pleased – there is no sign of any upward price movement in the report. Petroleum products continue to drag down the index. This time they were down 26.9 percent from a year ago, slightly more than August's 26.6 percent decline. Prices for chemicals & related products declined 8.4 percent after 7.8 percent the month before. The pace of price decline also picked up for iron & steel, nonferrous metals and metal products. Prices did increase for general purpose machinery.

Australia

September employment was down 5,100, missing expectations of a 5,000 increase. The August gain of 17,400 was revised up to 18,100.  At the same time, the unemployment rate remained at 6.2 percent, despite a fall of 0.1 percentage points (based on unrounded estimates) from August 2015. The seasonally adjusted labour force participation rate decreased 0.2 percentage points (based on unrounded estimates) to 64.9 percent in September 2015 suggesting that fewer people were looking for work. The seasonally adjusted number of people unemployed decreased by 8,100 to 772,500 in September 2015. Full time positions fell by 13,900, erasing the 11,000 jobs created a month earlier. Part-time employment grew by 8,900 positions, slowing from the 7,100 uptick a month before. Monthly hours worked also declined.

China

Every month China's trade figures are reported in both the renminbi and U.S. dollar by the National Bureau of Statistics. The renminbi report comes out first, followed about an hour later by the more closely-watched U.S. dollar report. Since the August 11 devaluation of the renminbi there is a wider discrepancy between the two sets of data and it has taken on added significance. September imports, in renminbi terms, fell 17.7 percent from a year ago after dropping 14.3 percent in August. This is the 11th consecutive decline and the worst pace since May. But exports fell just 1.1 percent, holding up much better than expected. This is third straight decline and points to some stabilization. As a result of weakening imports but improving exports, the trade surplus surged to a record high. The surplus was Rmb376 billion. That was almost 30 percent higher than the August surplus. Low commodity prices, compounded by deteriorating domestic demand, are cutting the import bill. Exports have performed comparatively better but are also weak and are falling in year-on-year terms. The trade surplus in U.S. dollar terms was $60.3 billion. On the year, exports were down a less than anticipated 3.7 percent while imports plunged 20.4 percent.

September consumer prices were up a disappointing 1.6 percent from a year ago against expectations of a 1.8 percent increase. The CPI edged up 0.1 percent from a month ago. Year to day, the CPI is up 1.4 percent for a second month. Urban prices were up 1.6 percent while rural prices gained 1.5 percent. Food prices were up 2.7 percent after jumping 3.7 percent in August while nonfood prices gained 1.0 percent.

Producer prices deflated for a 43rd consecutive month, reflecting excess supply of housing materials and raw materials and overcapacity in heavy industry. As expected, the producer price index sank 5.9 percent from a year ago for a second consecutive month. On the month, the PPI retreated 0.4 percent. The index was down 5.0 percent year to date. Raw materials procurement, fuel & power dropped 6.8 percent while production materials were down 7.7 percent. Within production materials, mining & exploration plunged 21.2 percent after plummeting 20.9 percent in August. Consumer goods slipped 0.3 percent. Within consumer goods, food was unchanged while daily goods were down 1.0 percent.

Bottom line

Equities were mixed last week as investors continued to monitor economic data while at the same time checking out third quarter earnings reports. Most inflation data released during the week disappointed with the exception of U.S. core CPI which actually increased to 1.9 percent even though the headline CPI was unchanged. It was negative in the UK and Eurozone.

Global investors will head into a critical two week stretch of monetary policy meetings highlighted by the Bank of Canada on Wednesday, the European Central Bank meeting in Malta on Thursday and the Bank of Japan's on Friday. Some investors may shift their obsession with the next Fed policy move to the ECB's meeting in Malta on Thursday. They are looking for more ease from the Bank and will pour over every word that President Mario Draghi uses in his press conference.

Looking Ahead: October 19 through October 23, 2015

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