Global economic data mixed with euro area near recession

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.

Italian bond yields rise, Spanish unemployment hits 15-year high

Europe's debt problem remained in the limelight on Friday after a disappointing debt auction by Italy. Reuters reports:

Italian government bond yields extended their rise on Friday after a disappointing debt auction suggested a euro zone rescue deal had not gone far enough to restore investor appetite for Italian debt.

Italy's sale of 7.94 billion euros of government bonds met lower demand than at previous auctions and the country paid the highest premium since joining the single currency to sell 10-year debt.

Bond yields were also up in Spain, which reported on Friday that its unemployment rate had risen to 21.5 percent in the third quarter, the highest in 15 years.

However, while Europe's debt problem is weighing down its economic outlook, reports on Friday suggest that other economies are performing somewhat better.

In the US, consumer spending rose 0.6 percent in September despite income rising just 0.1 percent. And consumer sentiment improved in October for the second month in a row, the Thomson Reuters/University of Michigan consumer sentiment index rising to 60.9 from 59.4 in September.

Consumer spending also improved in Japan in September. While household spending fell 1.9 percent from a year earlier, it was up 0.9 percent from August.

Japan's industrial production fell 4.0 percent in September. However, industrial production is expected to rise 2.3 percent in October and 1.8 percent in November.

Other data from Japan showed that the jobless rate fell to 4.1 percent in September from 4.3 percent in August while core consumer prices rose 0.2 percent in September from a year earlier.

Markets surge on Europe debt deal

Banks finally agreed to a 50 percent haircut on their Greek debt holdings on Thursday. Reuters reports:

Under the deal, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece's debt burden by 100 billion euros, cutting its debts to 120 percent of GDP by 2020, from 160 percent now.

At the same time, the euro zone will offer "credit enhancements" or sweetners to the private sector totalling 30 billion euros. The aim is to complete negotiations on the package by the end of the year, so Greece has a full, second financial aid programme in place before 2012.

While the purportedly voluntary nature of the deal could undermine confidence in the CDS market, on the whole, markets reacted very positively to the news. The S&P 500 jumped 3.4 percent on Thursday and the STOXX Europe 600 surged 3.6 percent. The yield on US Treasuries and German bunds rose while those on Greek, Italian and Spanish bonds fell. The euro surged the most in more than a year.

However, even as the debt deal boosted markets, economic data from the euro area were somewhat less encouraging. The European Commission reported on Thursday that its economic sentiment indicator slipped to 94.8 in October from 95.0 in September.

While markets were mostly focussed on Europe, policy-makers were also active elsewhere. The Bank of Japan announced further monetary easing on Thursday. It said that it would boost its asset buying fund by 5.0 trillion yen to 55 trillion yen while keeping interest rates unchanged.

The BoJ also announced on Thursday that it had cut its forecast for Japan's growth in fiscal year 2011 to 0.3 percent from a July forecast of 0.4 percent. For 2012, it lowered its forecast to 2.2 percent from 2.9 percent.

Growth seems less of a concern for the time being in the US. A report on third quarter GDP on Thursday showed that the US economy grew at a 2.5 percent annual rate, the fastest pace in a year. However, another report showed that pending home sales fell 4.6 percent in September.

Europe debt summit makes little progress

It looks like a concrete, comprehensive plan to resolve Europe's debt crisis is not quite ready. From Reuters:

Negotiations with Greece's private creditors on a second rescue package for Athens have broken down, throwing efforts to resolve the euro zone debt crisis into doubt despite progress in boosting the region's rescue fund to one trillion euros.

German sources said Chancellor Angela Merkel and French President Nicolas Sarkozy were now negotiating directly with representatives of the banking industry, on the sidelines of a euro zone summit, to try to forge a deal in which the banks will accept a writedown of at least 50 percent on their holdings of Greek government bonds...

The leaders earlier made progress on two other elements -- bank recapitalization and moves to scale up the size of the euro zone's 440 billion euro ($600 bln) bailout fund.

Stocks rose on Wednesday anyway, the S&P 500 rising 1.1 percent. However, commodities fell, led by oil and nickel. The euro ended little changed after declining earlier in the session.

US stocks were boosted by positive data on the economy. Durable goods orders excluding transportation equipment rose 1.7 percent in September. Orders for non-defense capital goods excluding aircraft rose 2.4 percent. Total durable goods orders fell 0.8 percent but this was better than an expected 1.0 percent fall. Another economic report showed that new home sales jumped 5.7 percent in September.

Prospects for Europe debt solution dim

Markets fell on Tuesday, the S&P 500 falling 2.0 percent, as hopes for a conclusive resolution of the European debt crisis diminished. Reuters reports the latter:

Prospects for a comprehensive deal to resolve the euro zone debt crisis at a summit on Wednesday look dim, with deep disagreement remaining on critical aspects of the potential agreement, including how to give the region's bailout fund greater firepower...

"The numbers are not yet finalized -- you have to have all parameters in place and see what is needed and what the leverage factor would be. It needs a lot of technical work to come up with a number," one EU official said, adding that discussions would continue on Wednesday to forge a pre-summit consensus.

"The leaders will agree on the options tomorrow, but whether it will be an agreement with all details remains to be seen. I think it will be challenging -- it will be very difficult to agree on everything."

Ironically, European economic data were among the more positive ones on Tuesday. French consumer confidence rose in October and German consumer confidence is expected to rise in November.

However, Italian consumer confidence fell to the lowest in more than three years in October. Italian retail sales in August had been flat.

Consumer confidence also fell in the US. The Conference Board's consumer confidence index fell to 39.8 in October, the lowest level since March 2009. Another report from the US showed that home prices were little changed in August.

Under the circumstances, policy-makers around the world have mostly been anxious to keep economies growing, with China now ordering state-owned banks to increase lending to small businesses, a reversal of previous tightening moves.

One of the few exceptions to the current policy trend is India. AFP/CAN reports another rate hike from the Reserve Bank of India on Tuesday:

India's inflation-fighting central bank on Tuesday raised interest rates by a quarter-point, the 13th hike since March last year, while warning of a further economic slowdown this year...

The latest rise of 25 basis points takes the RBI's repo rate at which it lends to commercial banks to 8.50 percent and increases the reverse repo -- the rate it pays banks for deposits -- by the same level to 7.50 percent.

This could be the last rate hike for a while though.

"The likelihood of a rate action in the December mid-quarter review is relatively low," RBI Governor Duvvuri Subbarao said in a statement on the bank's website.

"If the inflation trajectory conforms to our projections, further rate hikes may not be warranted."

Eurozone PMIs show economy in danger of recession

There were some contradictory economic data for the euro area on Monday.

Industrial orders rose 1.9 percent in August, rebounding after a 1.6 percent fall in July.

However, flash data from purchasing managers surveys are pointing to a possible recession for the euro area, according to Reuters:

The euro zone's private sector tipped further into decline in October, according to business surveys on Monday that showed the bloc's economy is in serious danger of lurching from stagnation into outright recession...

The composite PMI ... fell sharply, from 49.1 in September to 47.2 this month...

The flash services PMI fell to 47.2 this month from September's 48.8 while the manufacturing PMI slipped to 47.3 in October from 48.5 last month.

In contrast, a similar report for China eased recession fears there. The flash HSBC PMI rose to 51.1 in October from 49.9 in September. It was the first time the PMI has been above 50 since June.

The US economy also appears to have improved. The Chicago Fed National Activity Index increased to minus 0.22 in September from minus 0.59 in August. The three-month average increased to minus 0.21 in September from minus 0.28 in August. The Chicago Fed says that this suggests that growth was below its historical trend in September.

Europe delays decision, Japan's trade moves back into surplus

Reuters reports that some progress was made in resolving Europe's debt crisis over the weekend.

European Union leaders made some progress toward a strategy to fight the euro zone's sovereign debt crisis on Sunday, nearing agreement on bank recapitalization and on how to leverage their rescue fund to try to stop bond market contagion.

But final decisions were deferred until a second summit on Wednesday and sharp differences remain over the size of losses private holders of Greek government bonds will have to accept.

So we will have to wait for Wednesday for something more concrete.

In the meantime, there was positive news from Japan on Monday, which reported that exports rose 2.4 percent in September from a year earlier. Exports had risen 2.8 percent in August.

Imports rose 12.1 percent but this was down from the 19.2 percent increase in August. As a result, the trade balance moved into a surplus of 300.4 billion yen in September after having seen a deficit in the previous month.

Business confidence falls in Germany and France, private Greek debt holders face bigger haircut

Business confidence in the two largest eurozone economies deteriorated in October.

In Germany, the Ifo business climate index fell to 106.4 in October from 107.4 in September. It was the fourth consecutive decline and left the index at a 16-month low.

In France, Insee's index of sentiment among business leaders in the manufacturing sector fell to 97 in October from 99 in September. The overall index fell to 95 from 96.

Investors' confidence, however, has been relatively better in recent days. Stocks rose on Friday, the S&P 500 rising 1.9 percent to close at the highest level since 3 August while the Stoxx Europe 600 Index climbed 2.5 percent.

However, Europe's debt problems are far from over. Reuters reports the latest developments on Greece's debt crisis.

Euro zone finance ministers threw Greece a lifeline on Friday by agreeing to approve an 8 billion euro loan tranche that Athens needs next month to pay its bills.

But the European Commission, European Central Bank and International Monetary Fund -- the so-called troika -- issued a gloomy report on Greece's ability to pay its debts.

Among three scenarios it examined, the only one that would reduce Greece's debt pile to 110 percent of GDP -- a level still regarded as high -- was one in which private bond holders agreed to a 60 percent haircut.

And problems could spread to other eurozone economies. Again from Reuters:

Standard & Poor's will likely lower the credit standing of five European nations, including top-rated France, by one or two notches if the region slips into recession and government borrowings increase, the rating agency said in a report...

A worst-case economic scenario would also likely prompt the recapitalization of numerous banks in Spain, Italy, and Portugal, S&P said, adding that current support mechanisms may not be sufficient if conditions deteriorate beyond expectations.

US leading index rises, eurozone consumer confidence falls

Economic data on Thursday were mostly positive in the US but less so in Europe.

In the US, existing home sales fell 3.0 percent in September but the Conference Board's index of leading economic indicators rose 0.2 percent last month, the Philadelphia Federal Reserve Bank's business activity index jumped to 8.7 in October from minus 17.5 in September and initial claims for state unemployment benefits fell 6,000 to 403,000 last week.

In the UK, retail sales rose 0.6 percent in September while gross mortgage lending rose 4 percent on the year in September. However, consumer confidence fell for a fourth consecutive month in September, Nationwide's consumer confidence index dropping to 45 from 48 in August.

Consumer confidence is also weak in the euro area. The consumer confidence index fell to minus 19.9 in October from minus 19.1 in September.

Confidence is likely to remain weak in Europe as long as its debt problems are not resolved. Thursday, though, brought rumour of yet another plan to resolve the crisis. From Bloomberg:

European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis by combining the temporary and planned permanent rescue funds, two people familiar with the discussions said.

Negotiations over pairing the two funds as of mid-2012 accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked a clash between Germany and France, said the people, who declined to be identified because a decision rests with political leaders.

That news apparently helped lift investors' confidence, US stocks and the euro recovering from earlier losses to finish the day with gains.

Doubts grow over Europe rescue amid more rating downgrades

Europe's debt problem remains a concern as WSJ reports growing doubts about its rescue plan.

Doubts grew about the effectiveness of a key proposal for stemming Europe's deepening debt crisis as it emerged that officials have ruled out a plan for the euro-zone's bailout fund to directly guarantee bond issues.

Instead, European officials are discussing a scenario in which governments issuing bonds would borrow from the bailout fund to guarantee a portion of the bond issues—a move that would increase debts for already troubled economies.

Meanwhile, the rating downgrades in Europe continue. Slovenia is the latest target of sovereign downgrades, its long- and short- term credit ratings being cut by Standard & Poor’s to AA-/A-1+ from AA/A-1+ on Wednesday.

On the same day, Moody's Investor Service cut the ratings of five Spanish banks and several regional governments, saying its two-notch downgrade of Spain on Tuesday lessens the potential level of support their national government could provide.

Economic reports on Wednesday were mixed.

Japan reported that its all industry activity index fell 0.5 percent in August, its first contraction since March.

In the US, the Federal Reserve reported that economic activity continued to expand in September. However, the Fed also noted that many Districts described the pace of growth as "modest" or "slight".

There was nothing modest or slight about the improvement in housing in September though. Housing starts jumped 15 percent to an annual rate of 658,000 units last month, the fastest pace in 17 months.

However, consumer prices were also up last month, rising by 0.3 percent over the previous month and pushing the 12-month increase to a three-year high of 3.9 percent.

But inflation is no longer the main concern of policy-makers. Wednesday saw Brazil's central bank easing monetary policy for the second consecutive meeting, the Selic rate being cut to 11.5 percent from 12 percent, even though inflation had hit a six-year high of 7.31 percent in September.

Stocks end higher despite China slowdown, higher inflation and Europe's debt crisis

Optimism returned to markets on Tuesday. Reuters reports:

World stocks and the euro edged higher, while the S&P 500 jumped 2 percent on Tuesday following another report on deals to bolster the euro zone's rescue fund...

Britain's Guardian newspaper reported France and Germany have reached a deal to enlarge the euro zone bailout fund to 2 trillion euros ($2.76 trillion) in a bid to contain the region's debt crisis. The rescue fund, known as European Financial Stabilization Facility (EFSF), is currently worth 440 billion euros...

The MSCI world equity index ended up 0.21 percent, reversing sharp earlier losses.

Asia had driven the early losses in stocks, the MSCI Asia Pacific Index falling 2.4 percent and the Hang Seng Index in particular falling 4.2 percent.

One reason for the fall in Asian stocks was a report from China showing that its economy decelerated to the slowest growth rate in two years in the third quarter. The National Bureau of Statistics reported on Tuesday that the economy grew 9.1 percent, down from 9.5 percent in the second quarter.

Meanwhile, there was good news for the US economy. The National Association of Home Builders reported on Tuesday that its housing market index rose to 18 in October from 14 in September.

However, the good news was tempered by another report that showed that inflationary pressures remain. US producer prices rose 0.8 percent in September, the most in five months, after being flat in August.

Certainly, inflation remains high in the UK. The Office for National Statistics reported on Tuesday that consumer prices rose 0.6 percent last month, taking the annual inflation rate to 5.2 percent, the highest since September 2008.

High inflation, though, is unlikely to trigger monetary policy tightening in most countries as long as Europe's debt problem remains unresolved.

Indeed, the latter seems to be getting worse. Tuesday saw Moody's cutting Spain's credit rating to A1 from Aa2.

Markets decline as Europe's debt crisis looks likely to drag on

Markets gave up some of their recent gains on Monday. The S&P 500 fell 1.9 percent while the euro fell 1.1 percent against the US dollar.

Markets declined after hopes for a quick fix to Europe's debt problem were shot down on Monday. Reuters reports some disappointing comments from Germany:

German Finance Minister Wolfgang Schaeuble warned on Monday against unrealistic expectations that this weekend's European Union summit can come up with a "definitive solution" to the euro zone's sovereign debt crisis.

"We won't have a definitive solution this weekend," the German minister told reporters in Duesseldorf...

"The chancellor has pointed out that the dreams building up that this package will mean everything will be solved and over by Monday cannot be fulfilled," said [Chancellor Angela] Merkel's spokesman Steffen Seibert.

"They are important working steps on a long path that will reach far into next year and on which more steps will have to follow," Seibert told a news conference.

Indeed, efforts to shore up the finances of peripheral eurozone countries may strain the core. Moody's warned on Monday that it may slap a negative outlook on France's Aaa credit rating if the costs of bailouts stretch its budget too much.

Economic data were mixed on Monday.

In the US, industrial production rose 0.2 percent in September while the Federal Reserve Bank of New York’s general economic index rose to minus 8.5 in October from minus 8.8 in September.

In Japan, industrial production rose 0.6 percent in August but the Japanese government downgraded its view of the economy in October for the first time in six months.

US avoids bear market and recession so far

Stocks in the United States pulled further away from bear territory last week as data showed that the economy has stayed away from recession.

Stocks in the US were up last week for the second consecutive week. The Standard & Poor's 500 Index rose 6.0 percent to close at 1,224.58 on Friday, its highest level since 3 August. The index has surged 11.4 percent since its recent low on 3 October. The market decline had looked on the verge of being declared a bear market that day after the S&P 500 closed at 1,099.23, 19.4 percent below its closing peak of 1,363.61 on 29 April.

European stocks also rose last week, their third consecutive week of gains. The STOXX Europe 600 Index rose 2.8 percent to close at 238.51 on Friday. The index has gained 11.0 percent since its low of 214.89 on 22 September but remains 18.1 percent below its peak of 291.16 on 17 February.

Asian stocks also rose last week. The MSCI Asia Pacific Index rose 3.4 percent to close at 116.82 on Friday. The index has gained 8.8 percent since its low of 107.35 on 5 October but remains 17.0 percent below its peak of 140.82 on 5 February.

The improved risk appetite among investors extended to commodities. The Thomson Reuters/Jefferies CRB Index of commodities rose 4.5 percent last week.

Investors remained mostly focused on developments on the European debt crisis. Concrete action to resolve the crisis was actually limited apart from ratification of a strengthened European Financial Stability Facility by Slovakia, the last country to do so. Still, the euro was able to rise 3.8 percent last week against the US dollar to $1.3882 and 4.4 percent versus the yen to 107.20 yen.

Improved investor confidence is likely to spill over into improved consumer confidence. So far, though, there is little evidence of that in the US, the Thomson Reuters/University of Michigan preliminary index of consumer sentiment actually dropping to 57.5 in October from 59.4 in September according to a report last week.

Still, weak consumer confidence does not appear to have affected actual consumer spending in the US too much. An economic report last week showed that retail sales rose 1.1 percent in September, the most in seven months, after rising 0.3 percent in August. Excluding autos, gasoline and building materials, retail sales rose 0.6 percent, the most since March, after rising 0.4 percent in August.

The strong retail sales report for September, which comes after positive purchasing managers' data the week before (see "Global growth held up by US but outlook still weak"), very likely means that the US economy avoided recession in the third quarter. Whether it can continue to avoid one is another matter.

The Economic Cycle Research Institute’s weekly leading index, which has been deteriorating over the past few months, fell again last week. The weekly leading index declined to 120.2 in the week ending 7 October from 120.5 the week before. The annualized growth rate fell to minus 9.6 percent from minus 8.7 percent.

Weak leading indicators do not bode well for the economy. However, the stock market is also a leading indicator and the recent turnaround in stocks provides some hope that a recession may yet be avoided.

Markets rise to extend week's gains

Stocks ended the week on a strong note. Bloomberg reports:

The MSCI All-Country World Index rose 1.4 percent, extending its weekly gain to 5.5 percent. The Standard & Poor’s 500 Index jumped 1.7 percent to 1,224.58, the highest level since Aug. 3. Google jumped 5.9 percent, rising a ninth straight day. Copper increased 3.1 percent as the S&P GSCI Index of materials climbed 2.4 percent today and 5.2 percent this week, its best advance of the year. Ten-year Treasury note yields rose six basis points to 2.25 percent. The euro was at $1.3881, up 3.8 percent this week.

US economic data on Friday were mixed. Retail sales rose 1.1 percent, the most in seven months. Also, business inventories rose 0.5 percent in August while import prices rose 0.3 percent in September. However, the Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 57.5 in October from 59.4 in September.

Meanwhile, inflation remains high in Asia. Inflation in India fell marginally to 9.72 percent in September from 9.78 percent in August. Inflation in China also fell marginally to 6.1 percent in September from 6.2 percent in August even as money supply grew at the slowest pace in a decade and new bank loans fell to the lowest in almost two years.

In the euro area, inflation accelerated to 3.0 percent in September from 2.5 percent in August.

However, inflation is not the main story in Europe at the moment. The sovereign debt crisis is. And that is what the G-20 will be focused on today. From Bloomberg:

Global finance chiefs will focus today on ways to fix Europe’s sovereign debt crisis as the region’s officials consider writing down Greek bonds by as much as 50 percent and establishing a backstop for banks.

Finance ministers and central bankers from the Group of 20 will conclude talks in Paris, after people familiar with the matter said yesterday that euro-area governments are revamping their strategy to combat the debt turmoil which marks its second anniversary next week.

Singapore eases monetary policy as IMF downgrades Asian growth and European ratings suffer more cuts

Last week, the Bank of England eased monetary policy with inflation at 4.5 percent, more than twice its target.

Today, the Monetary Authority of Singapore went one better by easing monetary policy with inflation at 5.7 percent, a three-year high. Channel NewsAsia reports the latest MAS action:

The MAS says it will continue with the policy of a modest and gradual appreciation of the S$NEER policy band in the period ahead.

It adds that given the expected moderation in core inflation, the slope of the policy band will be reduced, with no change to the width of the band and the level at which it is centred.

The MAS move comes as the Singapore economy returned to growth in the third quarter, growing at an annualized rate of 1.3 percent after contracting by 6.3 percent in the previous quarter.

Elsewhere in Asia, the Bank of Korea had left interest rates unchanged on Thursday.

Asian central banks have mostly moved away from tightening action as economic prospects have dimmed. On Thursday, the IMF lowered its forecast for Asian growth to 6.3 percent in 2011 and 6.7 percent in 2012, down from 6.8 percent and 6.9 percent respectively in April's report.

Even China may not escape the slowdown. Data on Thursday showed that China's trade surplus narrowed in September as exports slowed sharply to a 17.1 percent year-on-year rise compared to 24.5 percent in August. Growth in imports also slowed sharply to 20.9 percent from 30.2 percent.

Meanwhile, another trade report showed that the US trade deficit narrowed slightly in August as exports fell 0.1 percent while imports were flat.

The debt situation in Europe is obviously weighing on prospects for the global economy as credit ratings continue to get cut. Standard & Poor's cut Spain's rating to AA- on Thursday, while Fitch cut the ratings for UBS, Lloyds and RBS and put many other banks on negative watch.

On a positive note, Slovakia formally approved the plan to bolster the European Financial Stability Facility.

Dow erases 2011 loss as Europe moves closer to bailout, UK unemployment at highest in 15 years

The Dow Jones Industrial Average has practically erased it loss for the year after climbing 0.9 percent on Wednesday to 11,518.85. It is now down just 0.5 percent for 2011.

European stocks also ended higher on Wednesday. The STOXX Europe 600 index rose 1.6 percent to close at 239.16.

The positive market performances came as European Commission President José Manuel Barroso outlined a plan to contain Europe's debt crisis and Slovakia moved towards approving a plan to boost the European Financial Stability Facility.

Europe also saw positive economic data on Wednesday. Industrial production in the euro area rose 1.2 percent in August, much better than a 0.8 percent decline expected by economists.

Industrial production data had not been as positive in the UK, which reported on Tuesday that manufacturing production fell by 0.3 percent in August. However, a jump in oil and gas output helped overall industrial production rise by 0.2 percent for the month.

Discouragingly for the UK economy, however, unemployment has risen to the highest in 15 years, the jobless rate rising to 8.1 percent in the three months through August from 7.9 percent in the three months through July.

Japan's machinery orders jump but current account surplus dives

Japan released positive data today, core machinery orders jumping 11.0 percent in August. This followed an 8.2 percent fall in July. Compared to a year earlier, core orders were up 2.1 percent in August.

Other economic data from Japan recently have been mixed.

On Tuesday, Japan reported a current account surplus of 407.5 billion yen for August, 64.3 percent less than a year earlier and its lowest level in more than two years. A 22.4 percent rise in imports swamped a 4.0 percent rise in exports, resulting in a trade deficit of 694.7 billion yen. Exports fell 0.7 percent compared to July.

Also taking a turn for the worse was service sector sentiment. The economy watchers index for current conditions fell to 45.3 in September from 47.3 in August, the second consecutive decline. The index for future conditions fell to 46.4 from 47.1.

Consumer confidence, however, continued its recovery from the March disaster, with the consumer confidence index rising to 38.6 in September from 37.0 in August.

China's stocks extend bear market as debt threatens economy

Investors have recently been mostly focused on Europe's sovereign debt problem and have pushed stock markets there into bear territory. However, China's stock market has been in bear territory for even longer.

The Shanghai Composite Index had hit 3,471.44, its peak for the current cycle, back on 4 August 2009. That came just five months after most of the rest of the world's stock markets began their cyclical bull phase.

On Monday, China's investors came back from a week-long National Day holiday to push the Shanghai Composite Index down 0.6 percent to 2,344.79. That leaves the index 32.5 percent below its cyclical peak and at its lowest level since April 2009.

While Europe has sovereign debt issues, China has local government debt problems of its own. Reuters reports:

China's local governments have piled up a mountain of bad debt, some of it to finance bridges to nowhere and other white elephant projects, which now threatens to constrict growth at a time when the global economy is sputtering. It is adding to other systemic risks in China, including a sharp downturn in the property market and a rapid rise in problematic loans.

Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered reckons as much as 8 to 9 trillion yuan will not be repaid -- or about $1.2 trillion to $1.4 trillion.

In other words, the potential debt defaults could be even larger than the $700 billion U.S. bail-out programme during the 2008 crisis.

Apparently, banks have become concerned about the debts being piled up by local governments and the latter's ability to service those debts.

"Right now, most banks have cut off new loans to local government financing firms," said a senior executive at a medium-sized bank in Beijing, who declined to be named because he was not authorised to speak on the matter.

But that may not have stopped the lending.

Enter the "shadow bankers". These are the underground lenders and trust companies who extend credit to people and companies that may not qualify for loans otherwise. They then slice and dice those loans into investment packages, akin to what American banks did with sub-prime mortgages for much of the past decade.

Credit Suisse last week described the burgeoning growth of informal lending as a "time bomb" that posed a bigger risk to the Chinese economy than even the local government debt pileup.

The Chinese government is widely expected to bail out local governments though. And the big Chinese banks appear to be getting some help with state-run Central Huijin Investment buying their shares on Monday.

In contrast, smaller firms have to deal with debt problems largely on their own. From Xinhua:

According to a Xinhua investigation, at least 80 cash-strapped businesspeople in Wenzhou have skipped town or declared bankruptcy to invalidate more than 10 billion yuan (1.6 billion U.S. dollars) in debt.

Just last month, two local entrepreneurs in Wenzhou killed themselves by jumping off the buildings and another broke his leg in a similar suicide attempt.

Global growth held up by US but outlook still weak

Last week's data show that the global economy steadied somewhat in September, with weakness in the euro area and Japan more than offset by continued growth in the United States.

In the euro area, the Markit composite purchasing managers' index fell to 49.1 in September from 50.7 in August. The manufacturing PMI fell to 48.5 in September from 49.0 in August while the services PMI fell to 48.8 from 51.5.

Chris Williamson, the chief economist at Markit, said that the PMI for September provided “confirmation that the Eurozone recovery has ground to a halt” while a “steep drop in new business ... suggests that GDP will contract in the fourth quarter unless business and consumer confidence rallies in coming weeks”.

In Japan, recent data have been mixed. A report last week showed that Japan's index of coincident economic indicators rose to 107.4 in August from 107.1 in July, with the Cabinet Office assessing the economy as improving.

However, purchasing managers surveys in September were negative. Both the manufacturing and services PMIs came in below 50, indicating that economic activity contracted last month. The manufacturing PMI fell to 49.3 in September from 51.9 in August while the services PMI rose to 46.4 from 44.3.

The surveys of purchasing managers in the US, however, were more positive. The Institute for Supply Management's manufacturing PMI climbed to 51.6 in September from 50.6 in August while the non-manufacturing index dropped slightly to 53.0 from 53.3. Both indices remain above 50, indicating that economic activity continued to grow in September.

Another indication that the US economy continued to grow in September was the employment report on Friday which showed that non-farm payrolls increased by 103,000 last month, helping to keep the unemployment rate steady at 9.1 percent.

The performance of the US economy was enough to hold up growth for the global economy as a whole. The JPMorgan Global All-Industry Output Index rose to 52.0 in September from 51.5 in August, with US output hitting a six-month high.

JPMorgan Global All-Industry Indices
	August	September
Output	51.5	52.0
New orders	50.9	51.5
Input prices	58.0	57.3
Employment	50.9	49.9

The acceleration in global output may not be maintained though. David Hensley, Director of Global Economics Coordination at JPMorgan, said in the global PMI report that the pace of increase in global economic activity is still “very slow” and that a possible weakening of the labour market could provide a “constraint on future growth prospects”.

Indeed, leading indicators released last week for the US and Japanese economies were negative.

In the US, the Economic Cycle Research Institute's Weekly Leading Index fell to 121.2 for the week ending 30 September from 121.8 the prior week. The annualized growth rate fell to minus 8.1 from minus 7.2.

In Japan, the index of leading economic indicators fell to 103.8 in August from 104.6 in July.

So while the global economy may have maintained growth through the third quarter, there is a risk that it could deteriorate again in subsequent quarters.

US and Japan grow but Europe sees ratings lowered

The US economy continued to produce jobs in September. Non-farm payrolls rose by 103,000 in September. The unemployment rate held at 9.1 percent.

Japan also appears to have been growing recently. Its index of coincident economic indicators rose a 0.3 points in August. The index of leading economic indicators, however, fell 0.8 points.

The Bank of Japan is no doubt mindful of the fragility of Japan's recovery and kept its key interest rate unchanged on Friday while extending a 1.0 trillion yen loan programme for financial institutions in areas affected by the March 11 earthquake by six months.

The biggest threat to continued global growth is probably Europe, where sovereign credit ratings keep getting downgraded. On Friday, Fitch ratings downgraded the credit ratings of Italy and Spain. Spain's foreign and local currency long-term issuer default ratings were cut to AA- from AA+ while Italy's were lowered to A+ from AA-. The outlook for both countries is negative. Meanwhile, Belgium’s Aa1 local- and foreign-currency ratings were placed under review for a downgrade by Moody’s.

Sovereign ratings were not the only ones cut on Friday. Bank rating were also hit.

BoE and ECB step up action to shore up economies

An inflation rate more than twice its target did not stop the Bank of England from announcing more monetary stimulus following its latest Monetary Policy Committee meeting.

From the BoE's news release on Thursday:

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £75 billion to a total of £275 billion.

The BoE justified its latest move by saying that the outlook for economic growth in the United Kingdom has deteriorated. According to the BoE, this made it more likely that inflation -- which was 4.5 percent in August -- will fall and undershoot the 2 percent target in the medium term. It also said that strains in bank funding markets as a result of euro-area sovereign debt concerns may inhibit the availability of credit to consumers and businesses.

The euro-area sovereign debt situation was also obviously a concern for the European Central Bank.

Like the BoE, the ECB announced after its monetary policy meeting on Thursday that it would keep interest rates unchanged. Additionally, it announced the launch of a new covered bond purchase programme which would see it purchase 40 billion euros worth of bonds starting next month. It would also offer banks unlimited 12 and 13-month loans and extend its unlimited funding of banks under its regular refinancing operations at least until July 2012.

In his statement to the press after the monetary policy meeting, ECB President Jean-Claude Trichet said that economic growth in the euro area is expected to be "very moderate" in the second half of the year, with risks to the outlook on the downside because of ongoing tensions in some segments of the financial markets in the euro area. Inflation, which was 3.0 percent in September, will stay above 2 percent over the coming months but decline thereafter.

I show below a chart of the spread between 10-year government bond yields and central bank rates in the UK and Germany. It is interesting to note that the BoE has launched its latest round of quantitative easing at a time when not only is inflation well above its target but the spread between the 10-year yield and the official bank rate is also quite wide by historical standards.

Still, the spreads have deteriorated sharply since early this year in both the UK and Germany, especially in the latter as a result of two rate hikes by the ECB. A narrowing term spread usually indicates a weakening economic outlook.

An economic report out from Germany on Thursday also provided an indication that the economy is weakening. German factory orders fell 1.4 percent in August after having fallen 2.6 percent in July, showing that the euro area's largest economy is struggling to maintain growth.

Eurozone economy looks headed for contraction

European stocks jumped on Wednesday, with the STOXX Europe 600 Index rising 3.1 percent, even as economic data suggest that the euro area may be headed for a recession.

Markit's eurozone services purchasing managers' index fell to 48.8 last month from 51.5 in August, its lowest reading since July 2009 and below an earlier flash reading of 49.1. The composite PMI fell to 49.1 from 50.7 in August, also its lowest level since July 2009.

Chris Williamson, chief economist at Markit, said that the steep drop in new business in particular "suggests that GDP will contract in the fourth quarter unless business and consumer confidence rally in coming weeks".

Another indication of a weak eurozone economy on Wednesday was a report that showed that retail sales fell 0.3 percent in August.

Elsewhere in Europe, though, the UK services sector performed better in September, the Markit/CIPS services purchasing managers' index rising to 52.9 in September from 51.1 in August. However, second quarter growth for the UK has been revised down to 0.1 percent from 0.2 percent.

The services sector also continued to expand in the US, albeit at a slower pace, as the Institute for Supply Management's non-manufacturing index fell to 53.0 in September from 53.3 in August. Also expanding last month was private employment, which increased by 91,000 according to ADP Employer Services.

The performance of the global economy, however, will depend a lot on actions taken to resolve the European sovereign debt crisis. The IMF has urged Europe to pump as much as 200 billion euros into its banks but German leader Angela Merkel says that Europe’s rescue fund will only be used as a last resort to save banks and that investors may have to take deeper losses as part of a Greek rescue.

US stocks up after late surge

US stocks made a big comeback in the final hour of trading on Tuesday, the S&P surging 4.1 percent in the final 50 minutes to end the session up 2.3 percent for the day. The rebound came in the wake of a report that European Union officials are examining how to recapitalize the region’s banks.

Earlier, the STOXX Europe 600 Index had fallen 2.8 percent after European governments hinted that bondholders may be saddled with bigger losses on Greek debt and Franco-Belgian lender Dexia raised concerns that it will need a second bailout.

To add to concerns for Europe, Moody's cut Italy's credit rating to A2 from Aa2 on Tuesday.

Among economic data out on Tuesday, US factory orders fell 0.2 percent in August but orders for capital equipment excluding aircraft and defense goods rose 0.9 percent.

In his testimony to Congress, Fed chairman Ben Bernanke said that the US economy is "close to faltering".

In the euro area, a faltering economy may be helping to relieve inflationary pressure. Producer price inflation slowed in August, with prices rising 5.9 percent from a year earlier compared to a 6.1 percent increase in July.

Under the circumstances, even the Reserve Bank of Australia, one of the most hawkish central banks coming out of the last global recession, may now be willing to cut interest rates. It left interest rates unchanged at 4.75 percent on Tuesday.

Markets tumble, global manufacturing shrinks

The week began poorly for markets around the world.

Stocks fell on Monday. The S&P 500 lost 2.9 percent to 1,099.23, falling to its lowest close since September last year, while the STOXX Europe 600 lost 1.1 percent. Asian stock markets had kicked off the decline on Monday, with the Hang Seng plunging 4.4 percent while the Nikkei 225 fell 1.8 percent.

Commodities also fell on Monday, with oil falling $1.59 to $77.61 a barrel, the lowest settlement since September last year.

The market tumble was primarily driven by Greece's admission that it will miss its fiscal deficit target this year, putting its rescue in jeopardy.

Weak global manufacturing data also did not help. The JPMorgan Global Manufacturing PMI fell in September to 49.9 from 50.2 in August. It is the first time since June 2009 that the index has fallen below the 50 mark. Markit's eurozone manufacturing PMI fell to a final reading of 48.5 in September from 49.0 in August.

Manufacturing performed better elsewhere in the world though.

In the US, the Institute for Supply Management’s manufacturing index climbed to 51.6 last month from 50.6 in August. Other data from the US on Monday also came in positive, with September vehicle sales and August construction spending both rising.

The UK also saw its manufacturing PMI rise to 51.1 in September from 49.4 in August.

And at the end of last week, China reported that the manufacturing PMI compiled by the Federation of Logistics and Purchasing rose to 51.2 in September from 50.9 in August, somewhat contradicting HSBC's manufacturing PMI which had stayed unchanged at 49.9.

Yet another positive on Monday came from Japan. The Tankan survey showed that the index of sentiment at large manufacturers rose to 2 in September from minus 9 in June.

Global economy looking weak in third quarter

The third quarter ended last week. Economic reports over the week showed that global economic growth is likely to have been weak in the quarter.

Last week, the United States Commerce Department revised its estimate of the second quarter gross domestic product for the US economy to show an annualised growth rate of 1.3 percent from 1.0 percent. The revised growth rate is still weak, however, and more up-to-date data last week indicated that growth probably remained weak in the third quarter.

On Friday, another Commerce Department report showed that consumer spending was flat in August after accounting for inflation. This followed an increase of 0.4 percent in July, so consumer spending in the third quarter still looks likely to see growth when compared to the second quarter.

A report earlier last week from the Chicago Federal Reserve showed that its National Activity Index decreased to minus 0.43 in August from 0.02 in July, with the three-month average edging down to minus 0.28 from minus 0.27. According to the Chicago Fed, this suggests that growth in national economic activity was below its historical trend.

In the euro area, the European Commission reported last week that its Economic Sentiment Indicator declined 3.4 points in September to 95.0. Since hitting its peak in February, this indicator has declined for seven consecutive months. According to the EC, the decrease for September reflects broad-based cross-sector deterioration in sentiment, with particularly strong losses in confidence in industry and services.

In Japan, the Ministry of Economy, Trade and Industry reported last week that industrial production rose 0.8 percent in August. This was the fifth consecutive month of increase after it had plunged in March following the earthquake and tsunami. A survey of production forecasts by the ministry showed that production was expected to fall 2.5 per cent in September before rebounding 3.8 per cent in October. That should still leave overall third quarter production significantly above that in the second quarter.

The expected fall in industrial production in September shows that Japan's recovery remains fragile though. In line with that forecast, the Markit/JMMA manufacturing purchasing managers index fell back below the 50 mark to 49.3 in September from 51.9 in August.

Amid mixed economic data, ECRI sees recession

There were plenty of economic data on Friday, all pointing in different directions.

Early in the day, Japan reported that industrial production rose 0.8 percent in August, maintaining its recovery from the March earthquake and tsunami. However, household spending fell 4.1 percent in August from a year earlier, worse than the 2.1 percent decline in July. Core consumer prices rose 0.2 percent in August while the jobless rate declined to 4.3 percent from 4.7 percent.

While Japan's industrial production rose in August, the manufacturing PMI fell to 49.3 in September from 51.9 in August, indicating that the recovery may have stalled.

HSBC's manufacturing PMI for China also came in below 50 in September but the final reading of 49.9 was the same as in August and higher than the flash estimate of 49.4.

In Europe, German retail sales slumped 2.9 percent in August, the biggest drop since May 2007, but French consumer spending on manufactured goods climbed 0.2 percent in August after declining 0.2 percent in July.

For the euro area as a whole, inflation accelerated to 3.0 percent in September from 2.5 percent in August while the unemployment rate stayed unchanged at 10.0 percent in August.

US data were also mixed. Consumer spending rose 0.2 percent, slowing from a 0.7 percent increase the prior month as income decreased 0.1 percent. Consumer spending was flat after taking into account a 0.2 percent rise in prices.

However, the Institute for Supply Management-Chicago's business barometer rose to 60.4 this month from 56.5 in August and the Thomson Reuters/University of Michigan index of consumer sentiment climbed to 59.4 from 55.7 in August.

Pockets of positive data notwithstanding, ECRI's Lakshman Achuthan sees a recession for the US economy. From Bloomberg:

“The U.S. economy is tipping into a new recession,” Achuthan, the group’s chief operations officer in New York, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “You have wildfire among the leading indicators across the board. Non-financial services plunging, manufacturing plunging, exports plunging. That is such a deadly combination.”

Investors may be thinking the same thing. Stocks fell sharply on Friday, led by a 2.5 percent fall in the S&P 500. The MSCI All-Country World Index fell 2.3 percent.