Global Markets

Comments by the leaders of the Federal Reserve, Bank of England and European Central Bank could leave watchers a bit confused. While all are 'data dependent', the Fed and the BoE look to increase rates and begin the process of normalizing monetary policy. However, the ECB is looking in the opposite direction to increase stimulus to combat its lack of inflation and tepid growth. However, so far, talk has been the dominant feature.

Meanwhile, hard core economic data are being parsed. Friday's October U.S. employment report ended some fence sitting by analysts. The gain in employment topped the most optimistic expectations and odds for a Fed interest rate increase soared to over 70 percent from about 50 percent. Employment jumped 271,000 and wages climbed 0.4 percent indicating that inflation is not dead, contrary to many opinions. Equities reacted mildly to the release but the U.S. dollar and bond yields soared.

On the week, most equity indexes advanced.

Global Stock Market Recap

Europe and the UK

All indexes covered here advanced on the week with the sole exception of the FTSE which slipped 0.1 percent. The CAC was up 1.8 percent, the DAX gained 1.3 percent and the SMI advanced 0.4 percent. At week's end, the stronger than expected October U.S. jobs report convinced most investors that the Federal Reserve will begin increasing interest rates in December. Meanwhile, economic data in the Eurozone was disappointing, with weaker than expected German and British industrial production readings for September.

Eurozone manufacturing remains worryingly sluggish according to the latest purchasing managers' surveys. The data point to annual growth in manufacturing output of only about 2 percent despite the substantial amount of policy stimulus already provided by the ECB. Germany and France are concerns and without some improvement here it is difficult to see the goods producing sector providing Eurozone GDP growth with much of a lift over coming months. Taken together with another deflationary update on producer price pressures, there is nothing here to knock speculation about another wave of ECB easing before year-end.

The EU Commission's updated Autumn Economic Forecast report will boost speculation about a fresh wave of ECB easing in December. In addition to growth downgrades to Germany this year and next (now 1.7 percent and 1.9 percent respectively), a negative revision to France in 2016 (1.4 percent from 1.7 percent) has increased the risk of the Hollande administration missing the 3 percent budget deficit/GDP target. At the same time, the Greek recession is now seen extending into 2017 with growth in 2016 slashed from the previously expected 2.9 percent to minus 1.3 percent. The Commission lowered its medium-term Eurozone inflation forecast. At 0.1 percent, this year's rate is unchanged from the April projection but the 2016 call has been cut by a full 0.5 percentage points to just 1.0 percent. Even in 2017 the forecast is only 1.6 percent.

The National Institute of Economic and Social Research (NIESR) lowered its UK growth projections and expects the Bank of England to raise interest rates at the start of 2016. NIESR downgraded growth forecast for this year to 2.4 percent from 2.5 percent and that for next year to 2.3 percent from 2.4 percent. For 2017, it estimated 2.6 percent expansion. The institute said the BoE is likely to lift interest rates at the start of 2016 and then gradually by 50 basis points a year, reaching 2 percent by the end of 2018.

Bank of England still on hold

The monetary policy committee announced no changes to either Bank Rate (0.5 percent) or QE (Stg375 billion) at its November policy meeting. The outcome was widely expected and most attention was always going to be on the voting pattern and what the new Quarterly Inflation Report (QIR) had to say. The minutes of the meeting showed that this month's decision again masked a lone call from Ian McCafferty for an immediate 25 basis point increase in the Bank Rate. His familiar rationale is that the output gap has closed and the medium term risks to inflation were on the upside. However, the majority remained cautiously content with the existing stance. The minutes indicated that the stock of QE will be maintained at Stg375 billion until Bank Rate has risen to around 2.0 percent. To this end, maturing gilts will continue to be reinvested.

The BoE's new Quarterly Inflation Report (QIR) shows a marginally softer growth profile and slightly higher medium term inflation than in August. However, the adjustments are unlikely to have any immediate implications for monetary policy. Real GDP is now seen expanding 2.7 percent in 2015 and 2.5 percent next year, both rates just slightly lower than their respective August projections. Near-term official inflation expectations have been trimmed to 2.06 percent in two years' time and 2.22 percent at the end of 2018. However, risks to the new forecasts were seen to be on the downside over the first two years because of possible international developments.

Asia Pacific

Most Asian Pacific equities advanced last week with Chinese shares continuing to rally on recent remarks by President Xi Jinping. The Shanghai Composite added 6.1 percent on the week while the Hang Seng was 1.0 percent higher. Chinese shares regained momentum, having crossed into a bull market, rising 20 percent since August 26, the bottom of what had been a volatile summer selloff for mainland equities. A bull market is defined as a rise of 20 percent from a recent low. Trading was muted at week's end as investors waited on the sidelines for the U.S. employment report which was released after markets here were closed for the week.

Most of China's gains came Wednesday when the Peoples Bank of China published an out of date statement a day earlier about a possible Shenzhen-Hong Kong trading link launching this year. The comments nevertheless fueled a frenzy of buying in local brokerages, some of which gained by the maximum 10 percent daily limit set by regulators for two straight days amid optimism that an influx of foreign cash would soon follow. Analysts estimate the Chinese government has spent hundreds of billions of yuan buying stocks to stabilize the market, though officials haven't disclosed the exact amount since they announced their massive intervention efforts in early July. The consensus is that authorities have held on to stocks, if not adding more to their portfolio.

The Nikkei extended gains for a third day as the yen continued to weaken against the U.S. dollar. Bank of Japan Governor Haruhiko Kuroda voiced optimism on the pace of economic recovery and reiterated that the BoJ will not hesitate to act if necessary to achieve the inflation target at the earliest possible time. The Nikkei added 1.0 percent on the week to close at a two month high.

The Nikkei's gains for the week come as investors continue to hold out hope that the Bank of Japan will introduce more stimulus soon, even though the BoJ held its monetary policy steady at its October 30 meeting. Hopes that central banks around the world would inject stimulus into their economies led Asian markets to their best month in more than six years in October. A high profile initial public offering of the state's mail delivery business, Japan's largest IPO in decades, also lured some investors to the market. Meanwhile, a weakening yen, as the U.S. dollar strengthens is a boon for Japanese exporters, whose goods become more competitive.

Australian shares rebounded Friday, but not enough to change the All Ordinaries' weekly 0.4 percent decline to a positive. In its quarterly statement on the economy, the Reserve Bank of Australia said easy policy and a lower currency would support growth. Overall, the statement was notably upbeat, though the RBA lowered its growth and inflation forecasts.

Reserve Bank of Australia

As expected, the RBA left its key interest rate unchanged at 2.0 percent. In its statement the Bank said that prospects for an improvement in economic conditions had firmed recently leaving it appropriate to keep its interest rate unchanged. Committee members also observed that the outlook for inflation may "afford scope for further easing of policy, should that be appropriate to lend support to demand." The Board will continue to assess the outlook and whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target. The RBA noted that the Australian dollar has been adjusting to the significant declines in key commodity prices. Inflation remains within the RBA's 2 percent to 3 percent target range but at a little lower level than expected.

In a speech Thursday, Bank of Australia Governor Glenn Stevens talked of further easing — something he had already done in the official statement earlier in the week. He argued that stimulative monetary policy had been contributing to the rebalancing of the Aussie economy. He noted that monetary policy is contributing to that rebalancing, consistent with its mandate, with a very accommodative stance. He also said that it seems likely that an accommodative stance will be appropriate for some time yet. Were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening. The rate of CPI inflation is clearly no impediment to easing. The housing market may be calming, lessening risks from that source, though by how much and how persistently is unknown. This was interpreted as a hardening of the view that lower rates aren't necessary given how upbeat the economy is.

Currencies

The U.S. dollar vaulted higher against all of its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. Although it was up earlier in the week, the strong employment report and the interpretation that the Federal Reserve will increase the fed funds rate at its December 16 and 17 meeting propelled the currency higher. Analysts, who had been predicting a rate increase perhaps in March or even June 2016, became converts to the idea that it could occur in December 2015. While currencies and bonds reacted strongly to the report, equities were rather sanguine.

Support for the euro had been fading fast following comments from European Central Bank president Mario Draghi last month that more monetary easing could be on the way. The euro has fallen against sterling as well as the dollar. The euro was thundering towards parity against the dollar until the middle of March when the Federal Reserve cautioned it would be raising interest rates more slowly than expected. But with monetary policies between the Fed and the ECB set to diverge sharply in the coming months, many analysts are once again expecting the euro to hit parity against the dollar over next 12 months.

Selected currencies — weekly results

Indicator scoreboard

Germany

September manufacturing orders tumbled 1.7 percent on the month following an unrevised 1.8 percent decline in August. This means that new business has declined fully 5.6 percent since June. Annual seasonally and workday adjusted growth was 0.9 percent lower, down from a positive 2.2 percent last time and the second worst result since February. September's disappointing headline was largely attributable to a second successive 2.9 percent monthly decrease in capital goods orders. However, consumer & durable goods also followed August's 0.9 percent decline with a further 0.4 percent drop and the overall picture would have looked worse still but for a modest 0.4 percent rise in basics. The geographical breakdown showed that overseas demand (down 2.4 percent) did most of the damage but the domestic component (down 0.6 percent) was still down for the fifth time in the last six months and now stands 4.4 percent below its March peak.

September industrial production excluding construction dropped 1.2 percent after a decline of 0.8 percent in August. Output has now declined in three of the last four months. On the year, output was up 0.1 percent from a year ago. Weakness was relatively broad-based and there were monthly decreases in intermediates (0.4 percent), capital goods (1.4 percent) and, in particular, consumer goods (3.2 percent). Energy managed a 0.4 percent gain but construction was down 0.9 percent. As a result, manufacturing output posted a 1.4 percent contraction having already fallen 0.6 percent last time.

United Kingdom

September industrial production declined 0.6 percent after increasing 0.9 percent the month before. On the year, output was up 1.1 percent. However, weakness in overall goods production masked a surprisingly sharp 0.8 percent monthly increase in manufacturing output, albeit after a minimally smaller revised 0.4 percent gain last time. The yearly decline eased from 0.9 percent to 0.6 percent. The monthly rise reflected increases in ten of the thirteen subsectors with other manufacturing & repair, up 3.5 percent, making the largest contribution. The steepest fall was in basic metals & metal products where output dropped 2.2 percent on the back of recent plant closures in the iron and steel industry. Otherwise, overall industrial production was boosted by a 0.6 percent monthly increase in electricity, gas, steam & air conditioning but hit by drops in water supply, sewerage & waste management (1.1 percent) and mining & quarrying (4.9 percent).

September shortfall on global goods trade narrowed to Stg9.35 billion after recording a downwardly revised Stg10.79 billion deficit in August and the smallest in three months. There was also better news on the underlying gap which excludes oil and other erratic items. This shrank from Stg9.37 billion to Stg8.56 billion, its best result since May. The headline improvement was due to a combination of stronger exports, up 2.4 percent on the month mainly thanks to chemicals, and weaker imports which were down 2.5 percent. Geographically, the reduction in the red ink was wholly attributable to net trade with non-EU countries. The deficit here fell from Stg3.8 billion to Stg2.1 billion. By contrast, the shortfall with the rest of the EU widened from Stg6.9 billion to Stg7.3 billion.

Asia/Pacific

Australia

September merchandise trade deficit was A$2.3 billion, down from a revised A$2.7 billion in August. Expectations were for a A$2.9 billion deficit. Exports were up 1.7 percent on the month after barely increasing 0.2 percent last time. Imports jumped 3.4 percent after retreating 0.7 percent in August. On the year, exports and imports were up 4.7 percent and 5.3 percent respectively. Exports of rural goods were up 1.0 percent mainly due to a 2 percent increase in other rural. Nonrural exports were up 4 percent. Contributing to the increase were metal ores & minerals (up 8 percent), metals excluding non-monetary gold (up 31 percent) and other nonrural (up 19 percent). Partly offsetting these increases was coal, coke and briquettes (down 9 percent). Imports of consumption goods were up 3 percent, non-monetary gold rose 47 percent and capital goods gained 2 percent. Intermediate and other merchandise goods slipped 1 percent.

September retail sales were up 0.4 percent on the month and 3.7 percent from a year ago. Sales increased for household goods retailing (1.0 percent), cafes, restaurants & takeaway food services (0.9 percent), food retailing (0.3 percent), other retailing (0.4 percent) and clothing, footwear & personal accessory retailing (0.2 percent). However, department stores fell 2.0 percent. Sales increased in Victoria (0.8 percent), New South Wales (0.3 percent), Western Australia (0.5 percent), South Australia (0.3 percent), Tasmania (0.8 percent) and the Northern Territory (1.0 percent). Sales declined in Queensland (down 0.3 percent) and the Australian Capital Territory (down 0.1 percent). Online retail turnover contributed 3.3 percent to total retail turnover in original terms.

Americas

Canada

September merchandise trade deficit was C$1.73 billion, down from August's slightly larger revised C$2.66 billion red ink. The reduction reflected a 0.7 percent monthly increase in exports that only partially reversed August's 2.9 percent decline and a 1.3 percent drop in imports, their first fall since April. The nominal bilateral surplus with the U.S. was essentially stable at C$3.17 billion. The real trade balance also improved sharply as a 0.7 percent advance in export volumes combined with a 2.1 percent decrease in price adjusted imports. Within the monthly increase in total nominal exports the main areas of strength were consumer goods (4.6 percent), energy products (3.7 percent) and metal & non-metallic mineral products (3.2 percent). Metal ores & non-metallic minerals (1.4 percent) also had a good month but there were sizeable declines in motor vehicles & parts (3.7 percent), basic & industrial chemical, plastic & rubber products (2.0 percent) and aircraft & other transportation equipment & parts (1.7 percent). Imports were depressed by a 12.3 percent monthly slump in energy and a 14.3 percent drop in metal & non-metallic mineral products. Basic & industrial chemical, plastic & rubber products (5.2 percent) similarly fell heavily.

October employment surged 44,400 after a surprisingly firm, if distinctly lopsided, 12,100 increase in September. Moreover, despite a tick higher in the participation rate to 66.0 percent, its strongest reading since July 2014, the jobless rate still reversed the previous month's rise to slip to 7.0 percent. The overall jump in employment was primarily due to strength in part-time jobs which followed September's 74,000 leap with a 35,400 advance this time. Even so, full-time positions were up 9,000. There was also a more than healthy 41,300 bounce in private sector payrolls, complemented by a 30,500 gain in public sector headcount. A partial offset was provided by the number of self-employed which was down 27,300. At a sector level the headline gain was wholly attributable to services where employment increased 58,800. Within this, public administration added a sizeable 32,000 but trade was up 17,600, accommodation & food 12,900 and health care & social assistance 7,500. Declines were relatively mild and limited to information, culture & recreation (5,200), education (3,600) and business, building & other support services (2,100). Goods production laid off a net 14,400 despite a decent 6,500 increase in manufacturing. Construction (down 9,400) and natural resources (down 8,000) did most of the damage here.

Bottom line

Both the Reserve Bank of Australia and the Bank of England kept their respective policy interest rates at 2.0 percent and 0.5 percent respectively. The better than anticipated employment report sent the U.S. dollar up along with bond yields. Equities response was muted. Economic data were mixed during the week with industrial output data from Germany and the UK disappointing.

This coming week we get the first look at third quarter estimates of gross domestic product in the Eurozone. The data could very well impact the ECB's decision on whether to unleash new stimulus. China releases its spate of economic data including merchandise trade, consumer and producer prices, industrial output and retail sales for October. Analysts will no doubt continue to parse each piece of new economic data for its impact on the Fed's looming rate decision.

Looking Ahead: November 9 through November 13, 2015

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