Global Markets

Investors received answers to their most pressing concerns of the week — what would the FOMC say and how Scotland would vote on its independence referendum. The FOMC left its monetary policy unchanged. It also kept its key wording — considerable time — when describing how long the fed funds rate range would remain zero to 0.25 percent.

There was a lot for investors to absorb Wednesday. The Federal Reserve released its post meeting announcement, updated quarterly forecasts (or the 'dot plot') and Chair Janet Yellen's quarterly press conference. The FOMC also released a statement on policy normalization principles and plans. The latter describes how the FOMC plans to go about returning policy to pre-financial crisis mode. The FOMC members forecast key economic variables along with their individual expectations of the fed funds rate to 2017.

Regarding Fed forecasts, the average forecast for the fed funds rate at the end of 2015 is 1.38 percent, compared to the June forecast for 1.13 percent. Fourteen participants see the first rate increase as appropriate in 2015, up from 12 at the June FOMC meeting.

On Thursday, Scotland voted on a referendum on whether it would leave the UK. The results yielded a surprisingly comfortable victory to remain part of the UK. The margin of victory for the 'No' vote was 55.3 percent to 44.7 percent. Accordingly, Scotland will remain an integral part of the United Kingdom. For financial markets the result will come as very real relief given the narrow gap between the opinion polls and the large number of undecided in the run-up to the vote. Shortly after the result became clear, the pound hit a 2-year high against the euro and a 2-week peak against the dollar. The currency retreated later in the market day.

Global Stock Market Recap

Europe and the UK

European stocks edged slightly higher on Friday with little to no fanfare over Scotland's decision to stay within the United Kingdom. However, markets had already priced in the 'No' vote over the past few days. After an initial relief rally early in Friday's session, stocks gave back most of their gains by the afternoon. For the week, the FTSE and SMI both added 0.5 percent, the CAC advanced 0.4 percent and the DAX gained 1.5 percent.

In post decision trading, London equities advanced led by Royal Bank of Scotland after Scottish voters rejected independence. The vote prompted a relief rally from investors who had been concerned the United Kingdom might break apart. Companies based in Scotland, those with Scottish clients and companies with significant exposure to Britain's North Sea oil industry also gained. Scotland's vote against independence ended a skittish two weeks for the FTSE, which dropped sharply when one poll unexpectedly showed a lead for the pro-independence side.

With the referendum out of the way, attention now will swing back to UK monetary policy. The Bank of England earlier this year was widely expected to be the first major central bank to raise interest rates as the economic recovery continued to strengthen. Uncertainties over the Scottish referendum had threatened to derail those expectations. Now, expectations are for intensified discussions at the BoE over when to increase the Bank Rate.

Swiss National Bank

At its quarterly Monetary Policy assessment, Swiss National Bank left its target corridor for 3-month CHF Libor at zero to 0.25 percent. The SNB said it will continue to focus on the lower end of the band. At the same time, the exchange rate floor for the local currency was also reaffirmed at EUR/CHF1.20. The outcome was in line with most market expectations although, in the wake of the ECB's September ease, there had been some speculation about a possible cut in interest rates below zero.

The decision to keep policy on hold was taken despite the SNB's acknowledgement of a marked worsening in the economic outlook, particularly with regard to the global economy but also at home. Swiss real GDP is now seen expanding 1.5 percent this year, down 0.5 percentage points from the June prediction. Weaker demand is duly reflected in the new inflation projection which, on the basis of no change in interest rates and a gradually depreciating Swiss franc, shows the CPI running at an annual rate of just 0.3 percent in the first quarter of 2016, half the rate seen last time. By the first quarter of 2017, inflation (0.9 percent) is still expected to be less than 1 percent and 0.5 percentage points less than forecast in June. Deflation risks are still building.

In the light of these latest economic forecasts the SNB must have been tempted to lower its interest rate target. The fact that it opted to maintain the status quo is probably due to the buoyancy of the housing market where activity, despite slower mortgage lending last quarter, continues to grow at a dangerously rapid clip. Consequently, for now at least, the SNB will simply continue to reiterate its commitment to intervene as necessary to prevent additional currency appreciation while promising that it stands ready to take additional monetary measures as required.

Asia Pacific

Equities were mixed last week as investors waited for and then reacted to two key events — the FOMC announcement and the Scottish vote on independence. Losses ranged from 0.3 percent (Shanghai Composite) to 1.7 percent (All Ordinaries). Gains ranged from 0.1 percent (Sensex) to 2.3 percent (Nikkei). Scotland's vote against independence removed considerable uncertainty for markets, including what currency an independent Scotland would have used, as well as how the region's economy would fair in the event of a breakup. The Nikkei climbed above levels predating the global financial crisis, as the yen's continued decline boosted the outlook for Japan's manufacturing sector and the broader economy. The Nikkei closed at 16,321.17, its highest level since November 2007. A weaker yen is helping to improve the earnings of Japanese exporters as well as the value of foreign currency denominated assets at households.

The Japanese government downgraded its overall economic assessment for the first time in five months in September citing stagnation in private consumption growth. This was according to the monthly economic report released by the Cabinet Office. The Cabinet Office said that the Japanese economy is on a moderate recovery, but saw weakness in some areas. Previously, the government had said that the economy was on a moderate recovery trend and that the reaction after the last minute demand increase before a consumption tax increase from 5 percent to 8 percent was easing. The assessment concerning private consumption was changed with the government seeing a pause in private consumption. Nevertheless, the government said consumption is still on the increase. Meanwhile, the government retained its view on exports and industrial production, with the former qualified as showing a flattish trend while the latter was seen as weakening. Corporate profits were reported to be pausing. The government also said that the employment situation is improving steadily and that consumer prices are rising moderately, maintaining its views from the previous month.

The People's Bank of China will inject 500 billion yuan into the country's five major state owned banks as it moves to counter slower than expected growth. The cash injection follows a slew of weak economic data from earlier in the week, including a report showing foreign direct investment in China was at its lowest level in more than four years. The move by the People's Bank of China to inject a three month low interest rate loan is roughly on par with a 0.5 percentage point cut to the reserve ratio requirement for China's entire banking system. With more credit, China's big banks are expected to channel funds to public housing, private businesses and other areas important to the economy. Economists warned that the move may not be enough and that Beijing may face growing pressure to adopt broader based stimulus measures if momentum weakens further.

Currencies

The U.S. dollar was mixed last week. It gained against the euro, yen, Swiss franc and Australian dollar but retreated against the Canadian dollar and pound sterling. The pound, which slumped earlier this month when opinion polls suggested the referendum would be a close vote, rushed to a two week high of $1.6526 as results trickled in during Asian trading hours before declining to $1.6311. It also hit a high of more than two years against the euro before giving up those gains as well. The euro dropped to a fresh low for the year against the U.S. currency Friday. The euro was also weaker against the pound.

Analysts said that although the Scottish vote sharpened focus on sterling during the week, the bigger story for the foreign exchange market is the continued resurgence in the dollar. With expectations hardening that the Federal Reserve will tighten monetary policy, just as the European Central Bank does the opposite, most currency watchers expect the euro to stay under pressure. The euro has fallen about 7-1/2 percent against the dollar since early May, when Mario Draghi, the president of the ECB, made clear that the central bank would introduce more stimulus into the struggling Eurozone economy.

The Bank of Japan bought one year government debt at negative yields for the first time Friday as it demonstrated its determination to pump up the monetary base by whatever means is necessary in pursuit of its 2 percent inflation target. Although the purchases were unconfirmed, they are a mark of the BoJ's commitment to hit the aggressive targets set out last April when Governor Haruhiko Kuroda said he aimed to buy enough government bonds and other assets to double the base money to ¥270 trillion by the end of 2014.

Selected currencies — weekly results

Indicator scoreboard

EMU

August harmonized index of consumer prices were up 0.1 percent on the month and 0.4 percent from the same month a year ago. Core HICP (excludes food, alcohol, tobacco and energy) was up 0.3 percent on the month and 0.9 percent from a year ago. The main downward pressure on the yearly rate came from energy where prices were 2.0 percent lower on the year after a 1.0 percent decline last time. By contrast, non-energy industrial goods inflation was up 0.3 percent while the service sector rate was steady at 1.3 percent. Food, alcohol, tobacco and energy charges were off 0.3 percent on the year for a second successive month. Regionally the news was not good with Spain (down 0.5 percent) leading a pack of some six countries with negative annual inflation rates, up from four in July. Moreover, only two countries (Finland and Austria) currently post rates of 1.0 percent or higher, down from three last time.

Germany

The ZEW's current conditions gauge in September dropped 18.9 points to 25.4. The decline, which followed an already sizeable 17.5 point drop in August, was the third in a row and the steepest since August 2011. It also means that confidence in the economy has deteriorated to its weakest mark in more than a year. The expectations measure extended its downward run to nine months with a 1.7 point drop to 6.9, its lowest level since December 2012. ZEW attributed the latest worsening to rising uncertainty about the domestic and international economic picture with geopolitical factors, including the Scottish referendum, playing an increasingly important role. However, it is worth noting that only around 166 of the 234 survey responses were received after the ECB's September announcement of its new stimulus package. The post-meeting replies had a more positive bias than those received earlier so the results overall may provide a somewhat misleadingly soft impression.

United Kingdom

August consumer price index was up 0.4 percent on the month following a steep 0.3 percent decline in July. On the year, the CPI was up 1.5 percent. The main downward pressure on the yearly rate came from food & non-alcoholic drinks where prices slipped 0.2 percent between July and August compared with a 0.5 percent increase over the same period in 2013. There was also a smaller negative impact from furniture, household equipment & maintenance. Partially offsetting these effects was a 2.6 percent monthly rise in clothing & shoes costs, up from a 2.0 percent bounce in August last year. There was an additional boost from alcohol & tobacco where prices were 1.0 percent higher on the month when compared with a 0.1 percent drop in 2013. Other categories had little impact. The core CPI climbed a sharper 0.5 percent from July, enough to lift its 12-month rate from 1.8 percent to 1.9 percent.

August claimant count unemployment dropped 37,200 following a steeper revised 37,400 decline in July. As a result, the jobless rate declined 14th consecutive month and at 2.9 percent, now stands at its lowest level since September 2008. The ILO survey paints a similarly upbeat picture with a 146,000 slide in joblessness over the three months to July sufficient to reduce its unemployment rate to 6.2 percent, down from 6.6 percent in the three months to April. Moreover, for July alone the rate weighed in at just 5.9 percent, the lowest since August 2008. However, despite the ongoing improvement in the jobs market, pay remains very restrained. Positive base effects ensured acceleration in average earnings growth in the three months to July but at 0.6 percent, up from minus 0.1 percent last time, the rate was well short of the 1.5 percent annual inflation rate posted in August. Excluding bonuses, wages were up 0.7 percent, in line with the June outcome.

August retail sales were up 0.4 percent on the month and 3.9 percent on the year. Excluding auto fuel, sales were up 0.2 percent from the start of the quarter and 4.5 percent on the year. With food sales declining a monthly 0.7 percent, August's headline gain was wholly attributable to the non-food sector where demand was up a very healthy 1.6 percent, double the pace recorded in July. Non-specialized stores (2.1 percent) and clothing & footwear (2.9 percent) enjoyed a particularly robust period as did household goods (3.8 percent). However, non-store retailing declined 2.7 percent and the other stores category slid 1.3 percent. Fuel purchases rose 1.7 percent.

Asia/Pacific

Japan

August merchandise trade deficit eased to a better than anticipated ¥948.5 billion. The better than expected performance came as exports, which have not been growing despite the boost to manufacturers' profits from the weak yen, were down 1.3 percent from a year ago after sinking 3.9 percent in July. Meanwhile imports, which had been rising due to the higher cost of imported energy tied to the decision to turn off nuclear reactors after the 2011 Fukushima disaster, were down 1.2 percent on the year. Exports to Asia were down 0.6 percent on the year while those to China slipped 0.2 percent. Exports to the U.S. were down as well, dropping 4.4 percent on the year. However, exports to the EU were up 5.6 percent. The seasonally adjusted deficit was ¥924.2 billion, down from July's ¥1.321 billion. On the month, exports were virtually unchanged while imports were down 1.4 percent.

New Zealand

Second quarter gross domestic product was up 0.7 percent on the quarter thanks to strong growth in service industries. On the year, GDP was up 3.9 percent. Services account for about two-thirds of the economy with all 11 services industries increasing on the quarter. The biggest increases were in industries that include advertising, employment services and software development. Overall, services increased 1.4 percent, the highest growth since the December 2006 quarter. Business services (up 4.2 percent) were the main driver, although accommodation & food services increased 3.0 percent. These increases were partly offset by a 3.1 percent drop in primary industries, where agriculture, forestry and mining all were down. GDP growth for the year ended June 2014 was 3.5 percent. This was the highest annual growth since the September 2007 quarter. The expenditure measure of GDP was up 0.5 percent in the June 2014 quarter. Domestic demand (spending & investment) increased 2.2 percent, while exports declined and imports advanced. On the year, GDP on this measure was up 3.3 percent.

China

August industrial production was up a much less than anticipated 6.9 percent from a year ago pointing to a deepening economic slowdown. Output was up 9.0 percent in July vs an expected increase of 8.7 percent. The annual increase was the weakest since 2008 when the economy was buffeted by the financial crisis. On the month, output edged up 0.2 percent after gaining 0.62 percent in July. For the year to date, industrial production was up 8.5 percent, down from July's 8.8 percent increase. Output for all sub-categories was below those in July.

August retail sales were up 11.9 percent, lagging forecasts of 12.1 percent and July's 12.2 percent. Growth in car sales was off sharply, suggesting consumers are more cautious. On the month, sales were up 0.92 percent. For the year to date, sales were up 12.1 percent. Urban sales gained 11.8 percent after 12.1 percent from a year ago. Rural retail sales were up 12.8 percent after 13.2 percent last time. Auto sales were up only 5.3 percent on the year after climbing 8.1 percent in July. Oil & oil product sales deteriorated to an increase of 7.7 percent from 11.3 percent in July. Household nondurables were little changed from last time, adding 12.0 percent after 12.2 percent in July.

Americas

Canada

August consumer prices were unchanged on the month and were up 2.1 percent on the year for a second month. However, underlying prices were surprisingly strong. Core CPI excluding food and energy was up a monthly 0.4 percent, its sharpest increase since February. This was enough to lift its yearly rate by 0.5 percentage points to 2.0 percent, its highest level since March 2011. Similarly, an even steeper 0.5 percent gain in the BoC's core measure left it 2.1 percent firmer on the year, up from 1.7 percent last time and its first reading above 2 percent since April 2012. The seasonally adjusted the headline index was up a monthly 0.1 percent while the excluding food and energy and the Bank of Canada gauges advanced 0.3 percent and 0.2 percent respectively. Within the adjusted basket the main upward pressure came from household operations, furnishings & equipment where prices jumped some 1.3 percent and alcoholic beverages & tobacco products (0.9 percent). Partially offsetting declines were posted by food and shelter (both 0.2 percent) and clothing & footwear (0.4 percent).

Bottom line

The Scots voted to remain part of the UK. The Federal Reserve kept its policy interest rate unchanged and continued to reduce its bond purchases. The Swiss National Bank also left its policy interest rate unchanged. Economic data from the UK indicated that growth is continuing — unemployment continues to decline and retail sales are increasing. Both consumer and producer prices do not give any sign of price pressures.

This week's data highlights will be the flash manufacturing PMIs for the Eurozone, China, Japan and the United States. Japan's August consumer price index will be studied for any sign of increased inflation.

Looking Ahead: September 22 through September 26, 2014

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