Global Markets

Once again central banks proved their ability to move markets — this week it was the European Central Bank and the Peoples Bank of China. On Thursday, ECB President Mario Draghi made it clear in his dovish press conference that the governing council stands ready to adjust its asset purchase program according to needs and if needed. He said the ECB is "open to a whole menu of measures" and that cutting the deposit rate was considered. Indeed, "there were a few on the governing council" who pressed for action at Thursday's meeting. The market has got the hint, in spades. More QE is on its way.

The Peoples' Bank of China followed on Friday, announcing that they were cutting their key interest rate and lowering reserve requirements for big banks. The move precedes China's fifth plenum from October 26 to October 29 where leaders will announce a draft of their 13th Five Year Plan.

Meanwhile, analysts will be monitoring the upcoming FOMC and Bank of Japan meetings. While no move is expected from the Fed, there is the possibility that the BoJ might inject more stimulus.

Most equity indexes advanced on the week. The largest increases came in Europe after Draghi's remarks.

European Central Bank

As expected, the ECB signaled no changes to key interest rates at its October policy meeting. The benchmark refi rate remained at its record low of 0.05 percent and the rates on the deposit and marginal lending facilities were held at minus 0.20 percent and 0.30 percent respectively.

Since its last meeting, headline harmonized index of consumer prices dipped back below zero, retail sales stagnated and industrial production declined for the third time in four months. The more forward looking data have been less negative, but it is clear that Eurozone economic growth remains disappointingly sluggish and, in general, inflation expectations are still too low for comfort. To make matters worse, the global economy is not looking as healthy as it did just a short time ago.

Consequently, in the wake of ECB Chief Mario Draghi's apparent pump-priming at September's post meeting press briefing, a move on rates Thursday was at least a possibility. However, since the lower bound was (supposedly) already reached when the Bank last cut back in September 2014, much more probable was always going to be a boost to the €60 billion per month QE program.

In practice, Draghi indicated that lowering the deposit rate was indeed discussed, suggesting (not for the first time) that the current lower bound may not be the final one. More importantly, he also went about as far as he could without pre-empting the decision in saying that the December meeting would reconsider the policy stance. This would entail making full use of current QE flexibility regarding its size, composition and duration.

The tone of the press conference was dovish and while talking up the positive effects of QE to date, Draghi emphasized ongoing downside risks and the need to address them. Not surprisingly the euro weakened on the back of the announcement and looks likely to remain under downside pressure into December as speculation about more QE continues to build.

Peoples Bank of China

The Peoples Bank of China cut its policy interest rates for the sixth time since November in another attempt to jump start a slowing economy. The PBoC said it was lowering the one year benchmark bank lending rate by 25 basis points to 4.35 percent effective from October 24. The one year benchmark deposit rate was also lowered by 25 basis points to 1.50 percent. The move comes just days before China's fifth plenum from October 26 to October 29 where leaders will announce a draft of their 13th Five Year Plan, a sprawling blueprint that sets the direction for China's economic and social development.

China has this year pursued its most aggressive policy easing cycle since the 2008-09 global financial crisis as policymakers seek to invigorate an economy beset by weak demand and excessive industrial capacity. Earlier in the week, China announced that its third quarter growth slowed to 6.9 percent from a year ago after growing 7.0 percent in the second quarter. Weak inflation was evident in the September reading of consumer prices. The CPI increased 1.6 percent on the year after rising 2.0 percent in August. At the same time, producer prices deflated for a 43rd consecutive month, reflecting excess supply of housing materials and of raw materials and overcapacity in heavy industry. The PPI sank 5.9 percent from a year ago for a second consecutive month.

The PBOC also said it would also lower its reserve requirement ratio for banks by 0.5 percentage points, effective Saturday in a bid to boost liquidity and maintain stable credit growth. The official reserve requirement ratio for most large banks will fall to 17.5 percent after the cut takes effect. The PBoC also pushed ahead with its interest rate liberalization strategy by abolishing the ceiling on banks' deposit rates, giving them — in theory at least — complete freedom to set their own rates for savers.

Bank of Canada

October's policy announcement contained no surprises. Key interest rates were left unchanged — the target overnight rate stayed at 0.5 percent in the middle of the range set by the deposit rate (0.25 percent) and Bank Rate (0.75 percent). Justification for maintaining the status quo was provided in the Bank's new Monetary Policy Report. This showed a still cautious recovery in economic growth, with an upward revision to last quarter (now 2.5 percent annualized growth) effectively offset by a downward adjustment to the current quarter (now 1.5 percent). The economy is expected to expand a modest 2 percent next year and there is no return to full capacity until mid-2017.

The Bank of Canada's policy meeting followed the Canadian national election which produced a surprisingly comfortable win for Justin Trudeau's Liberal Party. It took some 185 seats in the expanded 338 seat parliament. This was well above most forecasts and, crucially, easily enough to secure a comfortable working majority. For its part, the outgoing Conservative administration managed only 100 seats and the third placed New Democracy Party just 42. Trudeau is the first new prime minister in 10 years.

Global Stock Market Recap

Europe and the UK

Equities rallied Thursday and Friday — first when ECB President Mario Draghi hinted at further monetary policy easing and then when the Peoples Bank of China unexpectedly actually cut interest rates. The buying frenzy was less visible in the UK where the FTSE added 1.0 percent on the week. However, the CAC and DAX added 4.7 percent and 6.8 percent respectively. The SMI advanced a more muted 2.2 percent. Investors were also encouraged by strong earnings from U.S. technology companies.

Investors received an extra boost from the flash October composite PMI. It climbed to 54.0 from 53.6 in September. Analysts noted that the surprise improvement would be unlikely to cause any change in the European Central Bank's possible plans to boost stimulus in December, as strongly hinted by Mario Draghi Thursday.

Central banks of China and the UK agreed to extend the existing bilateral currency swap line between them for a further three years and raise its maximum value, citing continuing growth of renminbi trading in London. The PBoC and the BoE announced Wednesday that they signed an agreement to renew the existing reciprocal sterling/renminbi currency swap line for a further three years. The maximum value of the swap line was increased to RMB350 billion from RMB200 billion when the original 3-year swap was agreed in June 2013.

Asia Pacific

The Mario Draghi equities rally reached Asia on Friday with gains across the board. Friday's advances helped propel most indexes to gains on the week. The Peoples Bank of China made its policy moves after markets here were closed for the week. Gains ranged from 0.5 percent (Kospi) to 2.9 percent (Nikkei and Jakarta Composite). The KLCI and SET lost 0.3 percent and 0.2 percent respectively. The Shanghai Composite and Hang Seng added 0.6 percent and 0.4 percent on the week.

Earlier in the week, disappointing Chinese data sent equities lower. However the data also fueled speculation of policy moves by Beijing prior to the fifth plenum from October 26 to October 29. At the meeting, leaders will announce a draft of their 13th Five Year Plan. However, shares fluctuated from day to day as investors assessed the possibility of both ECB and PBoC moves. The ECB however produced only dovish rhetoric while the latter reduced rates.

Like Europe and also Japan, China is dealing with the pressure of disinflation, or increasingly weak price increases, which can cause companies to decrease investment and consumers to refrain from spending, pulling down the economy. Making loans cheaper by cutting interest rates is one way to fight these pressures. But the situation in China is complicated because its currency, the renminbi, is not freely traded and its value is tightly managed by the government. In August, China's central bank made the surprise decision to weaken the renminbi by the most in nearly two decades, a move that sent a wave of volatility through global stock markets.

Currencies

The U.S. dollar was stronger across the board last week. ECB Draghi's comments during his press conference sent the euro tumbling against the dollar. The implication of his remarks was that he was setting the stage for still more easing possibly as soon as December. The dollar was up sharply against the yen, pound sterling and Swiss franc as well. U.S. data helped too. Jobless claims continue to stay at record low levels and housing data continue to be robust.

According to Draghi, ECB policymakers held a very "rich discussion" regarding the various monetary policy tools that included interest rate cuts. "The strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2 percent in the medium term require thorough analysis," Draghi said in his introductory statement to the press conference. "In this context, the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting, when the new Eurosystem staff macroeconomic projections will be available."

More significantly, Draghi said the current stance of the Governing Council was not "wait-and-see", but more "work-and-assess". He also said that some policymakers wanted stimulus action on Thursday but added that it was not the general sentiment in the rate-setting body.

Selected currencies — weekly results

Indicator scoreboard

United Kingdom

September retail sales jumped 1.9 percent from August when they fell 0.4 percent in contrast to the 0.2 percent gain originally reported. This was their sharpest increase since January 2014 and boosted annual sales growth from 3.5 percent to 6.5 percent. Excluding auto fuel, purchases were up an only slightly smaller 1.7 percent on the month and now show a yearly rise of 5.9 percent. In practice the headline data were biased up by a particularly strong food sector where sales jumped 2.3 percent from August, in part reflecting increased consumption associated with the Rugby World Cup. Nonetheless, excluding auto fuel, non-food purchases were also robust, climbing a monthly 0.8 percent on the back of sizeable gains in household goods (4.7 percent), non-store retailing (3.4 percent) and non-specialised stores (1.7 percent). Textiles, clothing & footwear (down 0.9 percent) and the other stores category (down 0.6 percent) struggled. Auto fuel sales advanced 3.8 percent.

Asia/Pacific

Japan

Japanese merchandise trade balance remained a deficit for the sixth month despite expectations that the balance would be a surplus. The deficit was Y114.5 billion after incurring a deficit of Y569.4 in August. On the year, imports plunged 11.1 percent while exports managed to edge up only 0.6 percent. Exports to China were down 3.5 percent but were up 5.1 percent to the EU from a year ago. Exports to the U.S. were up 10.4 percent. The seasonally adjusted deficit was Y355.7 billion. On the month, imports retreated 1.9 percent and exports declined 1.7 percent. Falling imports and wobbly exports indicate the economy continued to struggle at the end of the third quarter, reinforcing forecasts that the economy may have fallen into another recession. The figures are likely to increase calls for further stimulus from the Bank of Japan, though officials haven't offered any clues that such a move is at all likely.

China

Third quarter gross domestic product increased 6.9 percent on the year in inflation adjusted terms, down slightly from 7 percent in the first two quarters of the year. It was China's slowest pace of growth since 2009 in midst of the global financial crisis as growth in services failed to make up for weakness in manufacturing and property. Monday's figure suggests that China may struggle to meet the full-year growth target of "around 7 percent" that Premier Li Keqiang announced in March. The National Bureau of Statistics said last month that growth as low as 6.5 percent would be within the target range.

Retail Sales in September met expectations and increased 10.9 percent on the year after rising 10.8 percent in August. Sales were up 0.87 percent on the month. For the year to date, retail sales were up 10.5 percent from a year ago. Urban retail sales were up 10.7 percent after increasing 10.6 percent in August while rural sales were up 12.1 percent after 11.9 percent. Auto sales added 2.7 percent after jumping 5.2 percent the month before. Furniture was up 19.1 percent after increasing only 16.1 percent in August. Similarly, building & decoration materials climbed 23.2 percent after 20.7 percent.

Industrial output decelerated to 5.7 percent, the slowest since March, from 6.1 percent in August. Expectations had been a slowdown to only 5.9 percent. The decline in industrial activity reflects the same trends in overcapacity that have driven producer prices into deflation for 43 straight months. On the month, output was up 0.4 percent. For the year to date, production was up 6.2 percent. Motor vehicle production dropped 4.7 percent after sinking 6.5 percent in August. Auto production has declined for six consecutive months. Machinery however improved. It was up 7.9 percent after increasing only 6.9 percent in August.

Americas

Canada

August retail sales were up 0.5 percent on the month and followed a marginally firmer revised 0.6 percent increase in July. Sales have now risen for four months in a row and, compared with a year ago, mid-quarter purchases were up 2.8 percent after a 1.9 percent gain last time. Volumes performed even better and increased 0.7 percent from July when they advanced 0.3 percent. However, within the monthly rise in total nominal sales only four subsectors saw positive growth. Motor vehicle & parts climbed 2.0 percent and excluding this category and gasoline (down 0.6 percent), purchases was just 0.2 percent firmer. Elsewhere food & drink rose 0.5 percent, furniture & home furnishings increased 3.0 percent and clothing & footwear gained 0.3 percent but most other areas saw declines.

September consumer prices were down 0.2 percent and up 1.0 percent from a year ago. With weaker energy charges again a major factor, both the core indexes were rather firmer. Excluding food & energy the CPI rose 0.3 percent from mid-quarter, leaving its annual rate steady at 1.8 percent. At the same time, the Bank of Canada gauge which excludes eight volatile items climbed 0.2 percent, also ensuring no change in its previous 2.1 percent yearly rate. Seasonal factors were not a factor in September and after adjustment for these, the CPI still fell 0.2 percent on the month following no change last time. Similarly adjusted, prices less food and energy were also up 0.2 percent while the BoC measure edged just 0.1 percent firmer. Within the adjusted basket the main upward pressure came from recreation, education & reading, and food. Alcohol & tobacco were up but otherwise prices were either flat or posted just a minimal change, the only exception being transport (down 1.4 percent) where cheaper energy was again a key factor.

Bottom line

The surprise of the week was Friday's announcement by the People's Bank of China that it was lowering its interest rates and bank reserve requirements. Investors are now looking to China's fifth plenum from October 26 to October 29 where leaders will announce a draft of their 13th Five Year Plan. And the European Central Bank indicated after its governing council meeting that it is on the cusp of increasing its stimulus in its fight to raise inflation to its target of just below 2 percent.

There are hopes that after the ECB and PBoC, perhaps the Bank of Japan will feel less reluctant to take action when it meets next Friday, the day it is due to revise its economic and inflation forecasts. The BoJ will have the latest September data for consumer spending, output and prices that will be released during the week prior to its meeting The FOMC also meets next week and once again analysts will parse its statement for clues to when the Fed will actually increase the fed funds rate.

Looking Ahead: October 26 through October 30, 2015

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