Global Markets

Equities were mixed on the week. And with one more trading day left in October, the indexes were also mixed. The gyrations in stocks primarily were the result of earnings results. But even through most analysts expect no action from the Federal Reserve at its FOMC meeting Wednesday, it was still on investors' radar. Traders will be parsing the FOMC's statement for guidance to the December FOMC meeting.

Both U.S. and UK third quarter gross domestic product surprised on the positive side — both grew more than expected. The U.S. advanced at an annualized pace of 2.9 percent (or 1.5 percent when compared with the same quarter a year ago). The UK grew at an annualized pace of 2.0 percent (or 2.3 percent when compared with the same quarter a year ago). While the U.S. uses annualized rates as its standard of measure, the UK does not. Rather its growth rate is a comparison with the previous year. Markets exhaled in the UK but in the U.S. it was interpreted to mean that a Fed interest rate increase was all but a given in December.

Global Stock Market Recap

Europe and the UK

European equities were mixed on the week. Investors were cautious before next Wednesday's FOMC meeting even though most analysts do not expect a change in policy a week before the U.S. presidential election. However, at the same time, they will be looking for guidance for the December meeting. The continued selloff in global bonds also was of concern. And corporate earnings continued to be a mixed bag and many reports have yet to be released. On the week, the CAC (up 0.3 percent), MIB (up 0.9 percent) and IBEX (up 1.1 percent) advanced while the FTSE (down 0.3 percent), DAX (down 0.1 percent), OMX (down 0.4 percent) and SMI (down 1.6 percent) retreated. With one trading day left in October, all the indexes are positive for the month with the exception of the SMI.

Bank of England governor Mark Carney in testimony to a House of Lords committee said that he will announce his decision concerning the length of his term as governor before Christmas. He will announce whether he intends to remain in his post for his full eight-year term or the five years that was originally agreed to when he became governor. He said that the decision will be "entirely personal". Speculation has been rife about whether the governor will stay in his post until 2021 following a series of recent critical comments about the negative impact of low interest rates and quantitative easing — particularly on savers. Sterling declined in anticipation of his testimony.

The UK, France and Spain posted their respective first estimates of third quarter gross domestic product. On the year, the UK was up 2.3 percent, France was up 1.1 percent and Spain jumped 3.1 percent. And Eurozone October economic confidence jumped to its highest level thus far this year, as the region weathered the uncertainty from the 'Brexit' vote. British retailers reported the strongest increase in sales volume in a year in October according to the latest Distributive Trades Survey from the Confederation of British Industry. About 40 percent of retailers expect sales volume to increase, while 19 percent said they declined, giving a balance of plus 21 percent compared to minus 8 percent in September.

Asia Pacific

Equities were mixed last week. Stocks began the week on a positive note but retreated as the week progressed. Japan led the regional gains with the Nikkei and Topix adding 1.5 percent and 2.0 percent respectively. Among the indexes that were lower, the All Ordinaries retreated 2.6 percent followed by the Hang Seng, down 1.8 percent. In any case, mixed earnings reports also affected the indexes' trajectory. Major economic data were updated in both Australia and Japan.

Japan began releasing its key end of month economic data at week's end. September consumer prices continued to be in deflationary territory, declining 0.5 percent on the year. And household spending continued its decline as well. The unemployment rate slipped to just 3.0 percent. In a recent article, it was noted that the population over the age of 65 now outnumbers those under the age of 14. And now Japan is looking to import workers to fill the gap.

In Australia, inflation picked up with the third quarter consumer price index increasing 1.3 percent from the same quarter a year ago after increasing 1.0 percent in the second quarter. With a Reserve Bank of Australia monetary policy announcement slated for the beginning of the week, chances of an interest rate move from the current 1.5 percent faded. The RBA has an inflation target range of 2 percent to 3 percent. Although the CPI readings improved, they were still below the RBA's inflation target range.

The Shanghai Composite and Hang Seng went in opposite directions last week. The Shanghai Composite increased 0.4 percent on the week while the Hang Seng retreated 1.8 percent. China's industrial profits increased at a slower pace in September, figures from the National Bureau of Statistics showed Thursday. Industrial profits grew only 7.7 percent year-on-year in September after expanding 19.5 percent in August. The increase in August was the fastest in three years.

With one trading day remaining in the month of October, Japan's Nikkei and Topix are far outperforming the rest of the indexes followed here. On the down side, the PSEi has lost the most closely followed by the All Ordinaries.

Currencies

The U.S. dollar was mixed last week. It advanced against the yen, pound sterling and the Canadian and Australian dollars. It declined against the euro and the Swiss franc. The yen remained close to its weakest level against the U.S. currency in three months after a rise in U.S. bond yields and the release of economic data supporting the case for an increase in U.S. interest rates strengthened the dollar. The dollar has been strengthening on expectations that the Federal Reserve will increase its fed funds rate before the end of the year — that is, at its December FOMC meeting. The yield on the 10 year Treasury note climbed to its highest since June.

The jump in U.S. Treasury yields sent the Japanese yen down to its lowest since the end of July. However, the yen is still 14 percent higher since the end of December. Under its new policy framework unveiled last month, the Bank of Japan is keeping the 10-year JGB yield around zero. BoJ Governor Haruhiko Kuroda indicated late last week that the central bank might have to push back the timetable for achieving a 2 percent inflation rate (again), but he didn't signal that the BoJ was ready to deliver further interest rate cuts with the new framework in place.

Sterling retreated against the dollar, reversing a brief rally after the release of better than expected third quarter UK economic.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

October flash composite output PMI gained 1.1 points from its final September mark to 53.7, a 10-month high. The headline advance reflected improvements in both manufacturing (see graph on left) and service sector activity. The manufacturing flash PMI was up 0.7 points at 53.3 — a 30-month peak. Its services counterpart increased a larger 1.3 points to 53.5 — its best performance in nine months. Manufacturing output (54.4 after 53.8) achieved its strongest level in 10 months as new orders growth touched a 4-month high. New business inflows in services similarly recorded their best mark in half a year. At the same time, aggregate backlogs increased more sharply than at any time since May 2011. Against this backdrop, overall employment growth achieved a 3-month high as the strongest advance in manufacturing since May 2011 was accompanied by another moderate gain in services. The composite input cost rate climbed to a 15-month peak while output prices secured their first increase since August 2015. The rise in the latter was largely due to manufacturing where tariffs were raised at the fastest pace since June last year. Regionally, the flash composite PMI advanced sharply in Germany (55.1 after 52.8) but declined in France (52.2 after 52.7). Elsewhere, output growth across the rest of the region recovered from September's 21-month low but remained at one of the weakest rates seen over the last couple of years. The U.S. and Japan were added to graph for comparison.

September M3 money supply was up 5.0 percent, slightly lower than August's 5.1 percent reading. Private sector lending accelerated to a 1.8 percent yearly rate, up sharply from 1.3 percent in mid-quarter and its strongest reading since October 2011. Adjusted for loan sales and securitizations, the rate was 2.0 percent after a 1.7 percent print last time. Within this, loans for house purchase edged up to 2.4 percent rate but other lending slipped from minus 0.8 percent to minus 1.0 percent. Borrowing by non-financial corporations was unchanged (1.9 percent) while loans to non-monetary financial corporations (excluding insurance companies and pension funds) jumped from 1.8 percent to 4.7 percent.

October EU Commission's latest survey of Eurozone economic conditions showed an improvement in the region's economic sentiment (ESI) with a reading of 106.3, up 1.4 points from September's 104.9. The headline gain was driven by services where morale climbed 2 points to 12.0. However, confidence was also up in industry (minus 0.6 after minus 1.8) and construction (minus 14.3 after minus 15.6) as well as in the consumer sector (minus 8.0 after minus 8.2). The only sector not posting a rise was retail (unchanged at 0.4). Regionally among the larger member states, the national ESI made fresh ground in Germany (108.7 after 107.3), Italy (105.0 after 103.5) and Spain (107.6 after 103.5) but dipped in France (101.5 after 101.8). All four countries remained above the common 100 long-run average although France is still stubbornly close.

Germany

October Ifo reading was 110.5, up a full point from its unrevised September reading and at its highest level since April 2014. The increase reflected rises in current conditions and, in particular, expectations. The former rose 0.3 points to 115.0, the fifth advance in the last six months although monthly changes here have been quite small. Expectations were up a sharper 1.6 points at 106.1 after a 4.4 point jump last time. Both measures also registered their best respective marks since April 2014. At a sector level the picture was a little more mixed. While there were improvements in morale in manufacturing (16.7 after 13.3) and construction (10.2 after 9.3), there was also some deterioration in retail (7.8 after 7.9), services (32.1 after 32.3) and, more markedly, wholesale (9.8 after 11.6).

France

Third quarter gross domestic product provisionally expanded 0.2 percent quarterly rate. The rebound, from an unrevised 0.1 percent contraction in the previous period, reduced annual growth from 1.3 percent to 1.1 percent, equaling its weakest mark since the fourth quarter of 2014. The quarterly increase in total output would have been much more significant but for a sizeable reversal in net external trade where a 0.6 percent rise in exports was swamped by a 2.2 percent jump in imports. Combined, the effect was to subtract 0.5 percentage points off quarterly growth following a 0.6 percentage point lift in the second quarter. The main boost to output only came from inventories which added 0.6 percentage points. Disappointingly, final domestic demand contributed only a minimal 0.1 percentage points, matching its meagre second quarter impact. Within this, household spending was only flat for a second successive quarter and non-financial business investment again declined 0.3 percent. More positively, residential investment was up 0.8 percent and government current spending gained 0.4 percent.

United Kingdom

Preliminary estimate of third quarter gross domestic product expanded 0.5 percent from the second quarter when it grew an unrevised 0.7 percent. Compared with a year ago, total output was up 2.3 percent, an improvement on the previous period's 2.1 percent print. The quarterly headline deceleration masked a very mixed picture within which service sector activity expanded a broad-based 0.8 percent, up from 0.6 percent last time and the best performance since the last quarter of 2015. Rather, the deceleration reflected a weaker industrial sector (down 0.4 percent after 2.1 percent) and a significantly worse performance by construction (down 1.4 percent after down 0.1 percent). Agriculture (down 0.7 percent after down 1.0 percent) shrank for a third successive quarter. The preliminary results rely upon less than 50 percent of actual hard data and so could well be revised next month.

Asia/Pacific

Japan

September merchandise trade surplus was ¥498.3, up from a deficit of ¥18.7 billion in August and larger than the consensus forecast for a surplus of ¥341.8 billion thanks to stronger exports. This is the sixth monthly trade surplus so far this year with the overall trade balance for 2016 also well in surplus. On the year, exports declined for the 12th consecutive month, this time by 6.9 percent and an improvement on the 9.6 percent drop recorded in August. Imports were down 16.3 percent and have now fallen for 21 consecutive months, mainly reflecting the impact of lower global oil prices. External demand remains weak for most of Japan's major trading partners, reflecting ongoing strength in the domestic currency. Exports to Asia (including China) and the United States both were lower for the seventh consecutive month, though this was partly offset by a small increase — the first in five months — in exports to the European Union.

September consumer price index was up 0.2 percent on the month but down 0.5 percent from the same month a year ago. Lower energy prices were again the main factor weighing on headline inflation, with fuel, light & water charges tumbling 6.2 percent on the year. Transportation & communication also declined. Core CPI excluding just fresh food dropped 0.5 percent on the year for a second month. Excluding both food and energy, the CPI was unchanged on the year.

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September household spending was down 2.1 percent on the year, an improvement from the 4.6 percent decline in August. The decline reflected big annual declines in spending on housing (minus 16.9 percent), clothing & footwear (minus 13.6 percent) and education (minus 4.2 percent). Some categories including furniture & household utensils (7.7 percent) and fuel, light & water charges (2.5 percent) advanced on the year.

Australia

Third quarter consumer price index increased 0.7 percent on the quarter, up from an increase of 0.4 percent in the three months to June. This is the strongest quarterly gain in the index since mid-2015. Annual inflation increased from 1.0 percent in the second quarter — its lowest level since 1999 — to 1.3 percent in the third quarter. The increase in headline inflation was largely driven by stronger price rises for food & non-alcoholic beverages, with the annual inflation rate for this category of spending increasing from minus 0.1 percent to 1.5 percent in the three months to September. Prices also rose at a faster rate for housing, clothing & footwear, furnishings, household equipment & services and insurance & financial services. Inflation rates were unchanged for education and declining for health, transport, recreation & culture, alcohol & tobacco and communication.

Bottom line

Equities were mixed last week globally — earnings reports were a prime mover. The U.S. dollar remained strong but declined against the euro and Swiss franc. UK, U.S., France and Spain reported third quarter growth — only France disappointed. In Japan, household spending continued to decline and the CPI remained in deflationary territory. Investors were cautious ahead of several central bank meetings.

While virtually everybody expects no policy change when the Fed announces Wednesday, at the same time they will be looking for explicit guidance for the much anticipated fed funds rate increase in December. No policy action is expected from the Reserve Bank of Australia, the Banks of Japan and England or the Federal Reserve although their respective statements will hopefully provide a guide to their current thinking regarding the health of their economies and prospective policy changes.

Looking Ahead: October 31 through November 4, 2016

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