Risk appetite returned to markets last week as European leaders announced a plan to resolve the region's debt crisis but economic reports released over the week were mixed.
Stock markets enjoyed strong gains last week. The Standard & Poor's 500 Index rose 3.8 percent to close on Friday at 1,285.09, its highest level since 1 August. The STOXX Europe 600 Index rose 4.2 percent to 249.00 and has now recovered 15.9 percent from its low of 22 September.
The highlight of last week was no doubt the rescue plan put together by leaders of eurozone countries to tackle the debt crisis. The key elements of the plan include an agreement by private buyers of Greek bonds to accept a 50 percent loss on their investments, a plan to leverage the European Financial Stability Facility and a recapitalisation of the European banking sector.
Details of the package remain to be negotiated but investors were sufficiently appeased to push most markets up on Thursday and Friday after the announcement of the rescue plan. Stock markets rose in the US and Europe over the last two days of the week, with the S&P 500 rising 3.5 percent and the STOXX 600 rising 3.4 percent.
In rolling out its rescue plan, eurozone leaders also emphasised the need for fiscal consolidation by eurozone governments. Unfortunately, this is likely to weigh on economic growth in the short term.
As it is, the eurozone economy is already looking weak.
Last week, Markit's flash purchasing managers indices for the euro area showed that the economy may be contracting. The reading for the composite PMI fell to 47.2 in October from 49.1 in September. This was its second consecutive month below the 50 mark which signals contraction. Both manufacturing and services PMIs fell, the former to 47.3 in October from 48.5 in September and the latter to 47.2 from 48.8.
Chris Williamson, Markit's chief economist, said that the purchasing managers' data signal a "heightened risk" of the eurozone economy sliding back into recession.
In another indication that the eurozone economy may be contracting, the European Commission reported last week that its economic sentiment indicator for the area fell to 94.8 in October from 95.0 in September. The fall in October was the eight consecutive decline after the indicator peaked at 108.0 in February.
While the eurozone economy totters on the verge of recession, the United States economy appears to have regained some strength recently.
Last week, the Commerce Department reported that the US economy grew at a 2.5 percent annual rate in the third quarter, accelerating from a 1.3 percent rate in the second quarter. Accounting for most of the acceleration was consumer spending, which grew 2.4 percent in the third quarter compared with an increase of 0.7 percent in the second.
Whether consumers will continue to increase spending at this rate remains a question. Real disposable personal income decreased 1.7 percent in the third quarter.
Also, consumer confidence has been weak. The Conference Board reported last week that its consumer confidence index fell to 39.8 in October, the lowest level since March 2009, from 46.4 in September. The Thomson Reuters/University of Michigan consumer sentiment index did manage to rise to 60.9 in October from 59.4 in September but remains well below its high of 77.5 in February after sharp falls in July and August.
A report on durable goods orders released last week, however, showed that manufacturing remains in relatively good health. While overall durable goods orders fell 0.8 percent in September, this was mainly driven by a 26 percent plunge in aircraft orders following a 25 percent jump in August. Excluding transportation equipment, durable goods orders rose 1.7 percent in September while orders for non-defense capital goods excluding aircraft, a proxy for business investment, rose 2.4 percent.
One of the more pessimistic indicators for the US economy recently has been the Economic Cycle Research Institute's Weekly Leading Index. This index had been on a declining trend since hitting a peak in April and was among the factors that led to the institute forecasting an imminent recession last month.
However, this index gave a hopeful signal last week. The Weekly Leading Index rose 0.9 point to 121.3 for the week ending 21 October, its second consecutive weekly increase. The annualised growth rate for the index rose to minus 10.0 from minus 10.1, its first increase since July.
Data from Japan last week were mixed.
Japanese exports rose 2.4 percent in September from a year earlier, maintaining its recovery from the earthquake and tsunami in March.
The domestic sector is also recovering, with household spending rising 0.9 percent in September from the previous month.
Industrial production stumbled though, falling 4.0 percent in September. However, a survey by the Ministry of Economy, Trade and Industry showed that industrial production is expected to rise 2.3 percent in October and 1.8 percent in November.
So last week's economic data from the major developed economies showed that, the announcement of a rescue plan notwithstanding, the euro area remains the region facing the greatest risk of imminent recession.