Global Markets

Equities were mixed last week. The U.S. dollar rallied while the pound sterling tumbled and bond yields jumped. Shares advanced at the beginning of the week only to retreat as the week progressed. However, most indexes remained higher for the week. Investors retreated from risk as they waited for Friday's U.S. employment report. Fed speakers also created pressures as they advocated an increase in the fed funds rate. The pound sterling resumed its fall that began June 23 after the country voted to leave the European Union — aka Brexit. The U.S. employment report was sturdy but missed analysts' estimates. Employment increased 156,000 while the unemployment rate inched up to 5.0 percent from 4.9 percent last time thanks to a higher participation rate. Note — there are two more employment reports before the December FOMC meeting.

IMF lowers its growth forecasts yet again

In what has become a near annual tradition, the IMF trimmed its outlook for global growth again this year, calling the recovery from the financial crisis still "weak and precarious". The organization lowered its U.S. forecast to 1.6 percent from 2.2 percent it predicted just three months ago. It did say the U.S. would grow 2.2 percent in 2017. Britain's post-Brexit vote growth forecast has been nudged up slightly from the IMF's July outlook with growth expected to increase 1.8 percent this year but slow to 1.1 percent in 2017. In Japan, despite policy makers throwing the sink at low growth and low inflation, real GDP is set to expand by just 0.6 percent this year and 0.7 percent next.

IMF Chief Economist Maurice Obstfeld described the state of Eurozone inflation as "not a satisfactory state of affairs", with the fund expecting inflation to average just 1.1 percent next year. With consumer prices expected to remain below target and core inflation also stubbornly nowhere near its 2 percent target, the IMF recommends "the European Central Bank should maintain its current appropriately accommodative stance." Regarding China, annual GDP has already slowed to its lowest level since 1990, with the IMF now expecting growth to fall to 6.2 percent next year from 6.6 percent this year.

Global Stock Market Recap

Europe and the UK

European equities were mixed last week. The FTSE posted the largest gain — 2.1 percent — while the CAC was virtually unchanged and the DAX and SMI both lost 0.2 percent. Shares were buffeted by currency moves and an unsettled bank sector still feeling the impact of the Deutsche Bank fine by the U.S. regulators. Investor sentiment was not helped by another set of downward revisions to growth prospects by the IMF. The indexes were down three of five days. On Friday, the 'flash crash' of the pound sterling sapped investors' risk appetite (except for the FTSE). The weaker than expected U.S. employment report also had a negative impact on investor sentiment.

According to European Central Bank President Mario Draghi, stimulus measures that have been put in place have worked and monetary policy transmission across the euro area has improved. But the governing council stands ready to deploy all measures at their disposal to defend growth and bring inflation back to the 2 percent target. "Our very accommodative monetary policy stance provides the impetus that is necessary for the euro area recovery to strengthen and for inflation to gradually return to levels that we consider consistent with our objective," Draghi said in his statement presented at the International Monetary and Financial Committee meeting in Washington, DC.

Speculation about the future of European Central Bank stimulus buffeted the region's equity markets. Lenders posted their biggest three day gain in a month following a Bloomberg report that the European Central Bank has had discussions about how to end its asset purchase program. A winding down of stimulus measures could bring a respite to the beleaguered banking industry after concerns about profitability in a low-rate environment turned them into this year's worst performers. The ECB is assessing the future of its quantitative easing, and minutes of its September meeting showed policy makers remain committed to doing what is needed to revive inflation.

Speaking to the delegates at her Conservative Party's annual conference on Sunday, British Prime Minister Theresa May confirmed that Article 50, the trigger for the official start of the Brexit process, will be invoked by the end of March 2017. No exact date was given so it could be as early as January. Once the button is pressed, the UK will have two years to negotiate the future shape of its relationship with the European Union. Positions seemed to have hardened during the week's pre-negotiating rhetoric.

Asia Pacific

Equities advanced last week in cautious trading. Most of the gains occurred at the beginning of the week with losses at week's end subtracting from those advances. The Shanghai Composite was closed for the week for a national holiday. Gains ranged from a muted 0.2 percent (STI) to 2.5 percent (Nikkei). Equities retreated Friday as investors waited for the U.S. employment report which would be released after markets here closed for the week. A plunge in sterling to a 31-year low on anxiety over a possible 'hard' exit by Britain from the European Union also kept investors nervous. The Reserve Banks of Australia and India met and announced their respective monetary policies. Both were chaired by new governors.

Reserve Bank of Australia maintains the status quo

The Reserve Bank of Australia left its key interest rate unchanged at 1.50 percent. The meeting was the first chaired by Philip Lowe, who took over last month from Glenn Stevens. Lowe has indicated that he will retain the RBA's medium term focus for returning inflation to its target range of 2 percent to 3 percent. The post meeting statement was broadly similar to last month's, indicating that the change in leadership has not significantly changed the view of economic conditions.

The decision to leave policy rates unchanged was widely anticipated. Both 25 basis point rate cuts this year — in August and May — occurred at the policy meeting immediately after the publication of the quarterly CPI report, with officials clearly preferring to have the most recent inflation data at hand before making a change to policy settings.

Reserve Bank of India lowers rates

The Reserve Bank of India cut its repo rate by 25 basis points to 6.25 percent, while the reverse repo rate was lowered by the same amount to 5.75 percent. Other policy instruments were also lowered by 25 basis points, with the marginal standing facility rate and bank rate both now at 6.75 percent. This month's meeting was the first chaired by Governor Urjit Patel and was also the first for the newly constituted Monetary Policy Committee under a new policy framework announced earlier this year. Previously, monetary policy in India was determined solely by the RBI Governor acting on the advice of a technical committee of experts. The new six-member MPC consists of the Governor and two other RBI officials, as well as three external members appointed by the government. Policy settings are now decided by a majority vote, with the Governor having a vote in the event of a tie. The MPC is to meet at least four times each year.

The statement accompanying this decision noted a sharper than anticipated slowdown in global growth, but some recovery in commodity prices. Turning to the domestic economy, officials said that the outlook for the agricultural sector had improved after a relatively positive monsoon season, offsetting weakness in the manufacturing sector. They also noted that strong public spending, including higher wages for government employees, would likely support the growth outlook.

Currencies

The U.S. dollar rallied against all of its major counterparts last week. However, the news in the currency markets revolved around the sinking pound sterling after Prime Minister Theresa May's speech to her Conservative Party's annual conference on Sunday. At that time, she announced that the government would invoke Article 50 to begin the two year process of leaving the European Union. What began as a relatively modest decline for sterling picked up speed as the week progressed. And on Thursday, the currency fell to a 31-year low on fears of a "hard" exit by Britain from the European Union and Prime Minister Theresa May's comments on the impact of loose monetary policy, which some saw as a thinly veiled attack on the Bank of England.

May, in Wednesday's speech to Conservative Party delegates raised the issue of the side effects of ultra-low interest rates and money printing. Although her spokesman later played down suggestions that she was signalling changes ahead in monetary policy, it led to speculation the government is against further interest rate cuts, given the adverse impact on savings and pensions. The Bank of England's governor Mark Carney, whose five year tenure runs to 2018, has been criticized by some political figures, who say he tried to frighten the electorate into voting to stay in the European Union in a referendum held on June 23. British Finance Minister Philip Hammond tried to calm nerves, telling Bloomberg Television Thursday that he would like Carney to serve a full eight-year term at the BoE, rather than leave in 2018 as he originally agreed.

Early Friday morning in thin Asian trading, the pound sterling plunged suddenly in a 'flash crash'. It just as quickly made back most of its losses, puzzling currency trading experts but underscoring investor skittishness over Britain's prospects as it moves to break away from the European Union. The pound remained about 2.1 percent weaker compared with the dollar in early afternoon trading in London. While a fall of that degree is notable for a major currency, it paled in comparison to the pound's unexpected drop of more than 6 percent over a span of minutes in the thinly traded currency markets early in the Asian trading day. The Bank of England said that it was looking into the swift decline in the currency. But the central bank may have little room to act, as foreign currency trading is lightly regulated. Experts said they were hard-pressed to identify a single cause. But over all, they pointed to a general area of unease — Britain's vote in a referendum in June to leave the European Union. According to analysts, the depth of the collapse and speed of the recovery argue for algorithmic trading being the cause, perhaps exacerbated by trader error. However, fundamentals have been driving sterling lower.

On Friday, experts also cited a report by The Financial Times on a speech given by President François Hollande of France on Thursday evening, in which he said that European Union officials should take a tough negotiating stance with Britain. Analysts also identified other factors. Trading in Asia has been lighter than usual, as China nears the end of a holiday week and Hong Kong begins its own holiday. Even under normal circumstances, trading in currencies is often lighter in Asia than in Europe or the United States. Other reasons for thin trading which often leads to moves being exaggerated include caution before the U.S. employment report that was released later in the global market day on Friday.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

September manufacturing PMI was 52.6, up nearly a full point from its final August reading and at a 3-month high. Production rose at a faster rate than in mid-quarter and new orders growth hit a 3-month peak which, in turn, prompted a fresh net increase in employment. Even so, the advance in backlogs was the steepest in 31 months. Input costs were up for a third straight month but factory gate prices were essentially unchanged to leave profit margins under sustained pressure. Across the region the best performer was Germany (54.3). Italy (51.0) also was above the 50 growth threshold but France (49.7) continued to struggle.

Germany

August manufacturing orders were up 1.0 percent on the month after increasing a revised 0.3 percent in July. On the year, orders jumped 2.4 percent after retreating 0.5 percent in July. This was only the second time since March/April 2015 that orders have achieved back-to-back monthly increases. The pickup was broad-based with basics up 1.7 percent, consumer & durables up 2.9 percent and capital goods up 0.3 percent. It was also wholly attributable to the domestic market where orders increased 2.6 percent although this reversed only part of the previous period's 3.2 percent drop. By contrast, overseas demand slipped 0.2 percent after a 2.8 percent bounce within which orders from the rest of the Eurozone surged 4.1 percent, compounding a 5.6 percent spike last time. Orders from the rest of the world were down 2.8 percent.

August industrial production jumped 2.5 percent for the best performance since January. It easily more than reversed July's unrevised 1.5 percent drop. It also boosted annual growth from minus 1.2 percent to plus 2.0 percent, similarly its highest mark since the start of the year. The rebound was led by capital goods where output climbed 4.7 percent from the previous month having plunged 4.0 percent last time. Consumer goods (3.3 percent) were not far behind and intermediates (1.6 percent) advanced as well. With energy expanding 1.1 percent, the only negative was construction which posted a 1.2 percent decline that wiped out July's 1.1 percent increase. Overall manufacturing output was up 3.3 percent after a hefty 2.5 percent drop in July.

France

August industrial production (ex-construction) jumped 2.1 percent from July. As a result, annual production growth climbed from minus 0.1 percent to 0.5 percent, its strongest reading since April. August's bounce was broad-based with just refining (down 1.0 percent) posting a monthly loss. Electronics & machines (7.4 percent) stood out but there were solid gains too in transport equipment (3.2 percent), food & agriculture (0.6 percent) and other manufactured goods (1.1 percent). Overall manufacturing output was up 2.2 percent after just a 0.2 percent decline last time. Elsewhere, energy & extracted goods were up 1.6 percent but construction dropped 2.6 percent following a 3.4 percent spike in July.

UK

August industrial production declined 0.4 percent on the month after an unrevised 0.1 percent gain in July and now shows annual growth of 0.7 percent, down sharply from the 2.1 percent posted previously. The manufacturing sector was stronger with a 0.2 percent monthly rise but soft enough to see its yearly growth rate slip from 0.7 percent to 0.5 percent. In terms of monthly changes, strength was most apparent in pharmaceuticals (2.2 percent) and transport equipment (2.5 percent) and combined these two subsectors more than accounted for the increase in overall manufacturing. However, other manufacturing & repair (down 2.1 percent) and electrical equipment (down 1.1 percent) had a negative impact as did rubber & plastics (down 0.7 percent). Total industrial production was hit by a 3.7 percent slump in mining & quarrying and a 0.2 percent decline in water supply although electricity & gas (0.2 percent) provided a partial offset.

August trade deficit widened to Stg12.11 billion from a markedly smaller revised Stg9.51 billion in July. The underlying red ink, which excludes oil & other erratic items increased from Stg9.59 billion to Stg11.62 billion. The headline deterioration reflected a 0.2 percent monthly rise in exports that was comfortably more than offset by a 7.5 percent surge in imports. Net trade with the rest of the EU saw a record shortfall of Stg8.36 billion, up from Stg7.28 billion last time while the deficit with the rest of the world widened out from Stg2.22 billion to Stg3.76 billion.

Asia/Pacific

Australia

August retail sales were up 0.4 percent after a flat July. On the year, sales were 2.8 percent higher, up from 2.7 percent in each of the two previous months. The increase reflects a strong increase in department stores (plus 3.5 percent), with gains also recorded for cafes, restaurants & takeaway food services (plus 1.2 percent), food retailing (plus 0.3 percent) and household goods retailing (plus 0.2 percent). Other retailing was down 0.6 percent and clothing, footwear & personal accessory retailing was 0.4 percent lower.

August trade deficit narrowed to A$2.01 billion from a revised July deficit of A$2.12 billion, and was largely driven by changes in exports and imports of non-monetary gold, which have been volatile in recent months. Exports were basically flat on the month and rose 2.0 percent from a year ago. Most major categories of exports recorded positive growth in August, including rural goods, non-rural exports and services. These gains, however, were offset by a decline in exports of non-monetary gold, which rose sharply the previous month. Imports, meanwhile, fell 0.3 percent and were down 1.7 percent from a year ago. The fall in headline imports was driven by lower imports of consumption goods, capital goods and intermediate and other merchandise goods. Imports of non-monetary gold, however, rose sharply in August, largely offsetting declines in other categories of goods imports.

Americas

Canada

Canada's trade deficit narrowed from C$2.2 billion to C$1.9 billion in August. Expectations were for a deficit of C$2.6 billion. Exports increased 0.6 percent while imports were largely unchanged. Exports volumes rose 0.4 percent and prices edged up 0.2 percent. Import volumes increased 0.8 percent but were offset by a 0.7 percent decrease in prices. Exports to the U.S. decreased 1.6 percent to C$32.4 billion in August, while imports edged down 0.1 percent to C$29.9 billion. Consequently, Canada's trade surplus with the U.S. narrowed from C$3.0 billion in July to C$2.5 billion in August. Exports to countries other than the U.S. rose 7.7 percent -- the largest monthly increase since May 2014. Exports to the UK contributed the most to the gain. Exports to China, Norway, Switzerland and South Korea also increased. Imports from countries other than the U.S. were up 0.3 percent. Higher imports from the UK and the Netherlands were partially offset by lower imports from Mexico and India. As a result, Canada's trade deficit with countries other than the U.S. narrowed from C$5.2 billion in July to C$4.4 billion in August.

September employment was up 67,000 with most of the increase in part-time work. This was the largest gain in employment since April 2012. The unemployment rate was unchanged at 7.0 percent, as more people participated in the labour market. The participation rate rose to 65.7 from 65.5 in August. However, the gains were led by part-time employment, which was up 44,100 and was the driving force behind the third quarter job gains with a 58,000 advance following a 7,000 decline in the second quarter. Self-employed workers increased 50,100 increase over the month, the largest gain since June 2009, led health care and social assistance. Services employment jumped 55,500 and reflected widespread gains across industries. Goods producing sector employment increased 11,600 after increasing 10.800 in August. Manufacturing added 6,300 jobs, the most since February.

Bottom line

Equities were mixed last week. Investors' nerves were set on edge by remarks from UK Prime Minister Theresa May regarding Brexit and the Bank of England. The U.S. employment report was sturdy but missed estimates. The Reserve Bank of Australia maintained its monetary policy interest rate while the Reserve Bank of India lowered its repo rate. China's markets were closed all week for a holiday.

China returns from its holiday and begins releasing its key economic data including consumer and producer price indexes. Japan releases machinery orders that are a proxy for capital spending. And the Federal Reserve publishes minutes from its last FOMC meeting.

Looking Ahead: October 10 through October 14, 2016

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