Global Markets

October was a very good month for equities despite the uncertainties surrounding monetary policy in many parts of the globe. Tensions gathered in the markets as one by one the major central banks made their pronouncements. It began on October 21 with the Bank of Canada and on October 22 with the European Central Bank. It continued this week as the hype built before the Federal Reserve announcement and continued with the Bank of Japan. The combination kept investors cautious. The Reserve Bank of New Zealand increased rates in 2013 and 2014 only to lower them three times in 2015.

Reserve Bank of New Zealand

As widely expected the RBNZ kept its overnight cash rate (OCR) unchanged at 2.75 percent. In his statement, Governor Graeme Wheeler said that decisions to lower the OCR further would be data dependent but he retained an easing bias saying that some further reduction in the OCR seemed likely. The RBNZ listed a number of factors it will be watching between now and its next scheduled meeting in December. They included uncertainty about U.S. interest rates, whether the recent rebound in dairy prices would be sustained, developments in the Auckland housing market and the exchange rate. Exchange rate developments were explicitly linked to interest rate decisions. The RBNZ said that if the NZ dollar sustained its recent increase, then a lower interest rate path than otherwise would be required.

Bank of Japan

Despite the risks of another recession and Japanese inflation far off a 2 percent target, the Bank of Japan decided to leave its policy unchanged. The BoJ 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 policy was 8 to 1. Once again, Takahide Kiuchi voted against the decision arguing that a reduced pace of purchases (¥45 trillion) was appropriate.

The BoJ downgraded both growth and inflation forecasts and pushed back the target date for achieving 2 percent inflation. When the BoJ launched its monetary easing program in April 2013, the goal was to hit 2 percent inflation within about two years. It has already pushed back that target and now says it will aim to hit it in the second half of fiscal 2016 — that is, between October 2016 and March 2017.

It now sees growth in the year to April 2016 at 1.2 percent, down from 1.7 percent. It downgraded its inflation (ex-fresh food) forecast to 0.1 percent from 0.7 percent. These downgrades follow similar cuts in July when it trimmed the growth forecast from 2 percent and carved the inflation outlook from 0.8 percent.

Federal Reserve

After much conjecture by market participants and analysts, the FOMC left its monetary policy unchanged. The Fed funds range remains at zero to 0.25 percent. However, despite its inaction, the FOMC wanted to make sure that investors understand that it could raise its benchmark interest rate in December — it just is not ready to make any promises yet. The Fed said that it would keep rates near zero for now as expected, but it added in an unusually explicit statement that it would consider raising rates at its final meeting of the year in mid-December. Fed officials are struggling to decide whether the economy can tolerate higher interest rates, as growth continues to wobble along rather than power ahead on a clear upward path. The Fed remains data dependent. There will be plenty of data to parse before the December meeting including two employment reports and a second estimate of third quarter GDP to mention just a few.

Global Stock Market Recap

Europe and the UK

Equities were mostly lower on the week but up for the month of October. Investors had a slew of economic data Friday. Most importantly, Eurozone consumer prices remained unchanged in October on the year, offering little relief to the European Central Bank policymakers who are increasingly concerned over the lack of inflationary pressure in the region and are willing to expand policy further in December. Adding to their worries, unemployment remained high despite a marginal decline in September. On the week, the FTSE lost 1.3 percent, the CAC was 0.5 percent lower and the SMI declined 0.3 percent. The DAX added 0.5 percent. In October, the indexes were up 4.9 percent, 9.9 percent, 5.0 percent and 12.3 percent respectively.

The ECB aims to keep inflation "below, but close to 2 percent". After leaving interest rates and the size of asset purchases unchanged earlier this month, ECB President Mario Draghi strongly hinted that the ECB may boost its stimulus in December as policymakers are increasingly concerned over the persistence of negative inflation.

The Riksbank — Sweden's central bank — held its key interest rate unchanged and boosted its asset purchases Wednesday, making its policy more expansionary as it prepares for a possible December expansion of the European Central Bank's stimulus. The Riksbank left its benchmark repo rate unchanged at minus 0.35 percent for a second straight session. The bank last lowered the repo in July when it cut the rate from minus 0.25 percent. The Executive Board also decided to extend the government bond purchasing program by an additional SEK65 billion. Purchases will total SEK 200 billion by the end of June 2016. Sweden, like the UK, is not part of the Eurozone and must consider ECB policy when adjusting its own.

Asia Pacific

Equities were lower on the week but posted impressive gains for the month of October. The week ended on a muted note after the Bank of Japan did not introduce new stimulus for the flailing economy. However, investors were cautious as they continued to mull the potential impact of any U.S. rate increase on emerging markets. Oil price volatility and sluggish U.S. GDP data also served to keep investors on the sidelines heading into the weekend. October's momentum is a turnaround from the summer months when fears about China's slowdown rocked global markets. Despite the sharp rebound, investors wary of policy makers' limitations have said markets already have priced in the potential benefits of easing.

Risk sentiment was supported by the Peoples Bank of China's rate cut last week — its sixth in less than a year — and the prospect of more easing from the European Central Bank in December. There also had been speculation the Bank of Japan might expand its asset buying campaign at a policy meeting on Friday. However, the BoJ disappointed and left its policy unchanged.

The Shanghai Composite was down 0.9 percent on the week after the fifth plenum of the Chinese Communist Party endorsed a new five-year economic plan and said it would aim for "medium-high economic growth." The Hang Seng lost 2.2 percent on the week. The indexes however, were up 10.8 percent and 8.6 percent respectively in October. Even with Friday's slide, the Shanghai Composite capped its biggest monthly advance since April as the Chinese government took measures to end a $5 trillion rout and policymakers introduced stimulus to boost economic growth. It has been estimated that China's decision to end birth restrictions may boost retail sales by as much as 240 billion yuan a year starting in 2017.

The Nikkei was the only index of those followed here to advance on the week. The Nikkei added 1.4 percent on the week and 9.7 percent for the month. Shares hit a two month high as investors took the Bank of Japan's decision to leave its monetary policy in stride. The week's data deluge mostly disappointed with only September industrial production unexpectedly increasing. The consumer price index retreated for a second month while household spending declined.

Currencies

At noon Friday, the U.S. dollar was down against the euro, yen, pound sterling and Canadian dollar for the week. However, it gained against the Swiss franc and the Australian dollar. The dollar advanced mid-week prior to the FOMC announcement Wednesday afternoon (U.S. ET). However the gains eroded after the announcement. In October, the euro, yen and Swiss franc weakened against the dollar while the pound sterling was stronger.

The yen advanced, cementing its status as this week's best performing Group of 10 currencies after the Bank of Japan refrained from adding to its monetary stimulus and pushed back the time frame for reaching its inflation target. The yen strengthened against the U.S. dollar after Friday's decision to maintain its current stimulus package. BoJ Governor Haruhiko Kuroda pushed back the deadline to achieve stable 2 percent inflation to the six months through March 2017 and blamed falling oil prices for missing the existing target. With speculation building that the Fed is back on track to tighten policy in December, the yen's gains against the dollar may be short-lived.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

September M3 money supply was unchanged at 4.9 percent, following a minimally upward revised rate in August. This also left the 3-month moving average steady at 5.0 percent. However, loans to the non-bank private sector slowed quite sharply, registering a 0.6 percent yearly rate after a 1.0 percent last time. Lending to households actually edged a tick stronger to 1.5 percent and within this, loans for house purchase accelerated from 1.6 percent to 1.8 percent. The overall deceleration was attributable to a drop in borrowing growth by non-financial corporations by 0.3 percentage points to 0.1 percent and, in particular, a hefty decline in lending to non-monetary financial corporations (ex-insurance companies and pension funds) from 0.5 percent to minus 2.9 percent.

United Kingdom

The first estimate of third quarter gross domestic product edged down to a quarterly increase of 0.5 percent from 0.7 percent in the second quarter. On the year, GDP was up 2.3 percent after 2.4 percent. However, the slowdown in total output was largely due to weakness in the highly volatile construction sector where quarterly growth dropped from 1.4 percent to minus 2.2 percent. This was its worst performance since the third quarter of 2012 and alone subtracted 0.1 percentage points from total growth. Industrial production also cooled somewhat with a 0.3 percent advance after a 0.7 percent increase in the April to June quarter. Within output, manufacturing retreated 0.3 percent only to be offset by a 2.4 percent jump in mining & quarrying and a 1.2 percent increase in water & waste management. Nonetheless, relative underperformance here was mostly masked by the service sector which expanded a healthy 0.7 percent after a 0.6 percent increase last time. Agriculture was up 0.5 percent following a 0.4 percent advance previously.

Asia/Pacific

Japan

September retail sales surprised and declined 0.2 percent on the year. It was the first decline since March when sales plummeted 9.7 percent. Motor vehicle sales slipped 0.1 percent for their first decline since March. However fuel continued to drop, this time down 15.4 percent — the last time fuel sales increased was in September 2014. Machine sales also declined 2.1 percent after two positive gains. Positive notes can be found in fabrics, apparel and accessories — they were up 4.7 percent after increasing 4.3 percent last time. Food & beverage sales were virtually unchanged at an increase of 3.4 percent. It remains to be seen whether the Japanese economy fell into another recession in the third quarter, but these data suggest a key aspect of the Japanese economy — consumption — is far from firing on all cylinders.

September industrial production advanced for the first time in three months. Output was up 1.0 percent on the month but down 0.8 percent from a year ago. Chemicals except drugs were up 5.4 percent, electronic parts & devices were up 6.0 percent on the month and electrical machinery also added 5.4 percent. Production is expected to increase 4.1 percent in October with gains in general-purpose, production & business oriented machinery, transport equipment and electrical machinery. The unexpected strength could help keep the Japanese economy out of a recession in the third quarter. Either way, it adds to the case for holding policy steady when the BoJ meets Friday.

September consumer prices were up 0.1 percent and unchanged from a year ago. Excluding fresh food, the CPI was unchanged and slipped 0.1 percent on the year. Excluding both fresh food and energy, the index edged up 0.1 percent and was up 0.9 percent from September 2014. The latter index has taken on added importance this year as Bank of Japan Governor Haruhiko Kuroda argues that monetary stimulus is indeed pushing up prices; it is just hard to see because the collapse in commodities has clouded the view. The forward looking data for Tokyo in October suggest domestic inflationary pressures did not gain momentum this month. Excluding food and energy, inflation fell to 0.4 percent from 0.6 percent a month before.

Fears that Japan's economy fell into a recession in the third quarter can only have been heightened by the September figures on Japanese household spending. September household spending, a proxy for consumption, was down 0.4 percent from a year ago after a 2.9 percent gain in August. Spending slowed on household goods, utilities and housing. Retail sales data released earlier in the week offered a preview of the slowdown. They rose just 0.7 percent.

September unemployment rate remained at 3.4 percent. In July, the reading was 3.3 percent – the lowest level of unemployment since April 1997. Job availability held steady, too. The job to applicants' ratio was flat in September at 1.24. This is the highest level of job availability since January 1992, and suggests the unemployment rate could still decline in coming months.

Australia

Third quarter consumer price index was up 0.5 percent on the quarter and 1.5 percent from the same quarter a year ago. The CPI was up 0.7 percent and 1.5 percent in the second quarter. The trimmed mean was up 0.3 percent and 2.1 percent while the weighted mean was 0.3 percent and 2.2 percent higher. The most significant price increases were in international holiday travel & accommodation (4.6 percent), fruit (8.2 percent) and property rates & charges (4.6 percent), The increases were partially offset by declines in vegetables (down 5.9 percent), telecommunication equipment & services (down 2.0 percent) and automotive fuel (down 1.7 percent). The Reserve Bank of Australia has an inflation target range of 2 percent to 3 percent. Overall inflation is now below the RBA's range while the trimmed and weighted means are just above the range's lower limit.

Bottom line

The Reserve Bank of New Zealand, Federal Reserve and the Bank of Japan each left its monetary policy unchanged for differing reasons. Economic data were mixed globally.

The upcoming week promises more central bank policy announcements, this time from the Reserve Bank of Australia and the Bank of England. Manufacturing and services PMIs for October will be posted. In Germany key manufacturing orders and industrial productions will be carefully read while in the UK, output and merchandise trade will draw analysts' attention.

Looking Ahead: November 2 through November 6, 2015

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