Euro area to boost rescue fund as economic confidence weakens

Eurozone ministers took another step on Tuesday towards resolving the debt crisis. Reuters reports:

Euro zone ministers agreed on Tuesday to ramp up the firepower of their rescue fund but couldn't say by how much and raised the possibility of asking the IMF for more help after Italy's borrowing costs hit a euro lifetime high of nearly 8 percent...

The 17 ministers agreed on a detailed plan to insure the first 20-30 percent of new bond issues for countries having funding difficulties and create co-investment funds to attract foreign investors to buy euro zone government bonds.

Confidence in the eurozone economy has been weak though. The European Commission's economic sentiment indicator fell to a two-year low of 93.7 in November from 94.8 in October.

In contrast, confidence in the US continues to recover. The Conference Board's consumer confidence index rose to 56.0 in November from 40.9 in October.

There were mixed data from Japan on Tuesday. The jobless rate jumped to 4.5 percent in October from 4.1 percent in the previous month but household spending continued to improve, falling just 0.4 percent in October from a year ago compared to a 1.9 percent decline in September.

Markets rally, OECD growth projections and US credit rating outlook cut

After two weeks of declines, markets started this week with a strong rally. The S&P 500 rose 2.9 percent while the STOXX Europe 600 rose 3.8 percent. Italian 10-year yields fell 3 basis points to 7.23 percent.

While investors unwound some of their bearishness on Monday, OECD economic projections are still catching up with the deteriorating outlook. In the OECD's latest economic outlook, member nations are collectively projected to grow 1.9 percent this year and 1.6 percent next year, down from 2.3 percent and 2.8 percent predicted in May.

The OECD says that the euro area is already in a "mild" recession, and its debt crisis represents the "key risk" to the world economy.

Data from the US on Monday suggest that its economy is doing better, with new home sales rising 1.3 percent in October.

However, the US has its own debt problem. On Monday, Fitch Ratings maintained its AAA credit rating for the US but lowered the outlook to negative, citing the recent failure by a congressional committee to agree on a deficit reduction plan.

Equities move back towards lows as debt crisis worsens

The rally in equities that had started around late September and early October has broken down rather dramatically over the past two weeks.

The Standard & Poor's 500 Index closed on Friday at 1,158.67. Over the last two weeks, it fell 8.3 percent and is now 15.0 percent below its 2011 peak of 1,363.61 on 29 April.

The STOXX Europe 600 Index closed on Friday at 221.54. Over the last two weeks, it fell 8.1 percent and is now 23.9 percent below its 2011 peak of 291.16 on 17 February.

The lows set in September and October are now potential support levels for the indices. The S&P 500's Friday close left it 5.4 percent above its low of 1,099.23 on 3 October. The STOXX Europe 600's Friday close was just 3.1 above its low of 214.89 on 22 September.

Driving equities lower, of course, is the European debt crisis.

The debt crisis in Europe has taken a serious turn for the worse, with the core eurozone countries now being swept into the maelstrom as well.

Belgium's credit rating was cut one level to AA+ by Standard & Poor's on Friday.

The yield on Italy's 10-year note hit 7.26 percent last week despite the European Central Bank being in the market to buy Italian bonds.

A debt auction by Germany last week saw bids for just 3.889 billion euros out of a maximum target of 6 billion euros. Germany's 10-year bund yield rose 30 basis points to 2.26 percent last week.

The rise in bund yields amid falling stock prices is unusual. Throughout the development of the debt crisis, bund yields had mostly moved in the same direction as stock prices, reflecting the former's safe haven status.

The divergence of this relationship from its recent past suggests that Germany is no longer perceived as a safe haven. Indeed, there may no longer be a safe haven in the euro area.

Italy's borrowing cost jumps, Belgium's credit rating cut

There was no respite for Europe as the week drew to a close.

Italy's borrowing cost jumped at Friday's debt auction. Italy paid 6.504 percent to sell 8 billion euros of six-month bills, almost twice the 3.535 percent a month ago and the highest since August 1997.

Meanwhile, another eurozone sovereign rating has been downgraded. Standard & Poor's cut Belgium's credit rating one level to AA+ on Friday.

Despite the continued deterioration in the sovereign debt situation, European stocks managed to advance on Friday, the STOXX Europe 600 Index rising 0.7 percent to 221.54. That still left the index down 4.6 percent this week.

US stocks fell though. The S&P 500 declined 0.3 percent to 1,158.67 to end the week down 4.7 percent.

Economic data released on Friday were not any kinder to Europe. Italian retail sales fell 0.4 percent in September, its fourth consecutive monthly decline. Meanwhile, Insee's consumer confidence for France fell to 79 in November, a level not seen since the last recession, from 82 in October.

Europe did not have a monopoly of negative news on Friday. Japan reported a return to deflation as consumer prices excluding fresh food fell 0.1 percent in October.

European bond yields rise, confidence improves in Italy and Germany

Markets continued to reel on Thursday. Stocks were modestly lower, the MSCI All-Country World Index edging down 0.2 percent.

However, European sovereign bond yields continued to climb. Italy's 10-year yield rose 14 basis points to 7.11 percent while Portugal's 10-year yield jumped 90 basis points to 12.21 percent after Fitch Ratings cut the country's credit rating to BB+. Even Germany saw yields rising, its 10-year yield climbing five basis points to 2.20 percent.

Economic data on Thursday were mixed.

Italian consumer confidence unexpectedly improved in November, Istat's consumer sentiment index rising to 96.5 from 93.3 in October.

Also improving in November was German business confidence, the Ifo index rising to 106.6 from 106.4 in October. German GDP growth for the third quarter was confirmed at 0.5 percent.

UK GDP growth for the third quarter was also confirmed at 0.5 percent but factory orders deteriorated further in November with the Confederation of British Industry industrial trend survey showing that total order book balance fell to -19 from -18 in October.

Europe's debt crisis and its inevitable impact on the rest of the world means that central banks are mostly now in easing mode. The People's Bank of China announced on Thursday that it will cut the reserve requirement ratio for more than 20 rural credit cooperatives nationwide by half a percentage point to 16 per cent.

US income and consumer sentiment up but other economic data weak

US personal income rose 0.4 percent in October, the biggest increase since March, according to a Commerce Department report released on Wednesday. With the personal consumption expenditure price index dipping 0.1 percent, real disposable income increased 0.3 percent in October, the largest gain since May 2010.

Personal consumption expenditure slowed though, rising just 0.1 percent.

Another report on Wednesday showed that US consumer sentiment continued its recovery in November though. The Thomson Reuters/University of Michigan consumer sentiment index rose to 64.1 this month from 60.9 in October.

However, US durable goods orders fell 0.7 percent in October, with orders for commercial aircraft plunging 16.4 percent. Excluding transportation, orders rose 0.7 percent. Orders for capital goods excluding defense and transportation fell 1.8 percent.

Manufacturing also appears to have slowed in China. An earlier report on Wednesday showed that HSBC's China purchasing managers' index dropped to 48.0 in November, the lowest since March 2009, from 51.0 in October.

The situation looks worse in the euro area, where industrial orders fell 6.4 percent in September, the biggest decline since December 2008.

There appears to have been little improvement since. The eurozone manufacturing PMI fell to 46.4 in November from 47.1 in October. A rebound in the services PMI to 47.8 from 46.4, however, helped the composite PMI rise to 47.2 in November from a 28-month low of 46.5 in October.

Prospects for improvement in the eurozone economy appear to be receding with signs on Wednesday that contagion in the debt crisis may now be starting to threaten even Germany. From Reuters:

The German debt agency could not find buyers for almost half a bond sale of 6 billion euros. That pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.

"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.

Disaster or not, the new securities were sold at a yield of 1.98 percent, down from 2.09 percent in October.

US third quarter growth cut, eurozone consumer confidence falls

The estimate for US third quarter GDP growth has been cut to 2.0 percent from 2.5 percent, according to a report on Tuesday from the Commerce Department. However, the cut was mainly due to a drop in business inventories. Excluding inventories, the economy grew at an unrevised 3.6 percent pace.

Unfortunately, the situation in Europe continued to deteriorate. On Tuesday, Spain sold three-month bills at an average yield of 5.11 percent, more than twice the 2.292 percent rate at the previous auction on 25 October. Belgium’s 10-year yield reached a nine-year high.

It is not just market confidence in eurozone sovereign debt that has declined. The European Commission reported on Tuesday that its consumer confidence index fell to minus 20.4 in November from 19.9 in October.

Markets fall as US debt committee fails

Markets fell sharply on the first trading day of the week with the MSCI All-Country World Index dropping 2.3 percent.

Markets fell as US lawmakers failed to agree on a plan to cut the budget deficit. Reuters reports:

Lawmakers abandoned their high-profile effort to rein in the country's ballooning debt on Monday in a sign that Washington likely will not be able to resolve a dispute over taxes and spending until 2013...

"Despite our inability to bridge the committee's significant differences, we end this process united in our belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve," Republican Representative Jeb Hensarling and Democratic Senator Patty Murray said in a joint statement.

There was no immediate impact on US credit ratings. Standard & Poor’s noted that $1.2 trillion in spending cuts will be triggered automatically while Moody’s Investors Service said the deliberations were “not decisive”.

Economic reports on Monday had been mixed.

US existing home sales rose 1.4 percent in October. The Chicago Fed National Activity Index rose to -0.13 in October from -0.20 in September but the three-month moving average fell to -0.27 from -0.16.

Earlier in the day, Japan had reported a trade deficit for October after exports fell 3.7 percent from a year earlier. Imports rose 17.9 percent in October from a year earlier.

Will the ECB print?

Many analysts think that the way to solve the euro area's debt problem is for the European Central Bank to buy up the sovereign debt of distressed countries. For example, Steve Liesman wrote last week:

Like a good horror movie, accepting the possibility for the Euro disaster to be averted at this point requires a healthy suspension of disbelief. In fact, so much disbelief must be suspended that it would make the Exorcist seem like a documentary.

The fix, of course, is for the European Central Bank to print money and monetize the debt.

He is not sure that this will happen though.

You can only believe in this ending to the story if you ignore the issue that it may be illegal. The treaties governing the creation and operation of the ECB say it is not supposed to buy sovereign bonds or do anything not in furtherance of its mandate, which is price stability...

However, John Hussman thinks that not only is it unlikely to happen, it might not even solve the problem.

Over the past week, we've heard all sorts of propositions that the European Central Bank (ECB) "must" begin printing money to bail out Italy and other countries, because "there is no other option." There are three basic difficulties with this idea. The first is that ECB buying might help to address immediate liquidity issues of distressed European countries, but it would not address long-term solvency issues, and would in fact make them worse. The second is that the ECB, under existing European treaties, has no such authority, and the prohibitions against it are very explicit. Changing that would be far more difficult than many market participants seem to believe, because it would require an explicit and unanimous change in the EU Treaties that AAA rated countries such as Germany and Finland vehemently oppose. The third difficulty is that even if the ECB was to buy the debt of distressed European countries with printed money, the inflationary effects would likely be far more swift than anything we've seen in the United States. This would not "save" the euro, but would simply destroy it by other means.

Meanwhile, as Europe's debt crisis drags on, yet another government has fallen. From Reuters:

Spain's center-right opposition stormed to a crushing election victory on Sunday as voters punished the outgoing Socialist government for the worst economic crisis in generations.

The People's Party, led by former Interior Minister Mariano Rajoy, won an absolute majority in parliament and is expected to push through drastic measures to try to prevent Spain being sucked deeper into a debt storm threatening the whole euro zone.

US leading index rises, Italian and Spanish bond yields fall

The Conference Board’s index of U.S. leading indicators rose 0.9 percent in October, the biggest jump since February, after a 0.1 percent increase in September.

The stream of positive US economic data recently has led economists to raise their forecasts for economic growth for the fourth quarter. From Bloomberg:

Economists at JPMorgan Chase & Co. (JPM) in New York now see gross domestic product rising 3 percent in the final quarter, up from a previous prediction of 2.5 percent. Macroeconomic Advisers in St. Louis increased its forecast to 3.2 percent from 2.9 percent at the start of November, while New York-based Morgan Stanley & Co. boosted its outlook to 3.5 percent from 3 percent.

“The incoming data on consumption, business spending and residential investment all point to GDP growth in the fourth quarter tracking 3.3 percent,” said John Herrmann, senior fixed-income strategist at State Street Global Markets in Boston.

One risk for the US economy comes from Europe's debt crisis.

The U.S. would not be able to “escape the consequences of a blowup in Europe,” Federal Reserve Chairman Ben S. Bernanke said in El Paso, Texas on Nov. 10. “The world’s financial markets are highly interconnected.”

Federal Reserve Bank of New York President William C. Dudley said in a speech yesterday that while recent economic reports have shown improvement, that shouldn’t be a signal for the Fed to relax its efforts to boost the economy...

“We also continue to face significant downside risks, mostly related to the stress in the euro zone,” Dudley said.

The risk of a "blowup" in Europe receded just a little on Friday after European Central Bank purchases reportedly helped push down Italian and Spanish bond yields.

However, the ECB would prefer that more action come from governments instead. Bloomberg reports:

European Central Bank President Mario Draghi pushed back against politicians and investors asking him to do more to end the sovereign debt crisis, expressing impatience with leaders’ failure to act.

The ECB would quickly lose credibility if it departed from its primary role of keeping prices stable, Draghi said in a speech in Frankfurt today. “Where is the implementation” of government pledges to bolster the region’s rescue fund, he asked. “We should not be waiting any longer.”

Economic data mixed, markets fall

Economic reports on Thursday were mixed.

In the US, applications for jobless benefits decreased 5,000 to 388,000 in the week ended 12 November. Housing starts fell 0.3 percent in October but this was much better than economists had expected, and building permits jumped 10.9 percent. However, the Federal Reserve Bank of Philadelphia’s general economic index decreased to 3.6 in November from 8.7 last month.

In the UK, retail sales unexpectedly rose 0.6 percent in October but Nationwide's consumer confidence index fell 9 points to 36 in October.

Markets were mostly weak on Thursday. Bloomberg reports:

U.S. stocks and commodities slid and the euro erased an earlier gain as concern grew that Europe’s debt crisis will worsen and lawmakers will fail to agree on plans to cut the American deficit. Treasuries gained.

The Standard & Poor’s 500 Index lost 1.7 percent to close at 1,216.13 at 4 p.m. in New York, with losses accelerating as it fell below levels watched by traders including its average over the past 100 days. The euro was little changed at $1.3459 after climbing as much as 0.6 percent. The S&P GSCI Index of commodities slid 2.9 percent, the most since September, as silver and gasoline tumbled at least 4.5 percent.

Concerns over contagion in Europe's debt crisis remain elevated after Spain and France had to pay higher yields at their latest debt auctions.

Spain sold 3.56 billion euros ($4.8 billion) of 10-year bonds at 6.975 percent, while France sold 3.33 billion euros of 2016 notes yielding 2.82 percent. Demand at Spain’s auction was 1.54 times the amount sold, the lowest since 2008, according to data compiled by Bloomberg.

Central banks dovish

The Bank of Japan left interest rates unchanged at 0.1 percent on Wednesday as widely expected. It warned that Japan's economy will "face an adverse effect from the slowdown in overseas economies and the appreciation of the yen as well as from the flooding in Thailand".

Somewhat less expected was a signal from China's central bank of a possible end to monetary tightening. From AFP/CAN:

"The People's Bank of China will at an appropriate time and in moderate degree pre-emptively adjust and fine-tune (the monetary policy)," it said in a statement, adding it would do so according to changes in the global economy.

There could also be further monetary easing in the UK after the unemployment rate hit 8.3 percent in the three months to September, the highest in 15 years, and the Bank of England cut its growth and inflation forecasts.

A 0.1 percent fall in consumer prices in October in the US also raises the probability of the Federal Reserve easing monetary policy.

Not that the US economy isn't growing. Other economic reports on Wednesday showed that industrial production grew 0.7 percent in October while the National Association of Home Builders/Wells Fargo housing market index rose 3 points to 20 in November, the highest reading since May 2010.

However, Fitch Ratings warned on Wednesday that US banks could be adversely affected by Europe's debt problem.

Indeed, the debt problem suggests that the European Central Bank itself could ease monetary policy again, notwithstanding the fact that eurozone inflation held at 3.0 percent in October.

Eurozone economic outlook dim

The eurozone economy barely grew in the third quarter. From Reuters:

The euro zone economy grew just 0.2 percent in the third quarter as solid growth in Germany and France was dampened by countries at the sharp end of the debt crisis and economists expect a slide into recession by early next year.

Growth from July to September was the same as in the second quarter, but the outlook for the last three months of 2011 is dim, with the region's deepening debt crisis weighing on sentiment and consumer confidence.

"The economic slump will accelerate in the coming months," said Christoph Weil, economist at Commerzbank. "We expect real GDP to already fall in the closing quarter of 2011 at a rate of 0.25 percent on the third quarter," he said...

"We expect the economy to contract significantly in Q4, and the recession looks likely to last into next year. The question of exactly how deep and long the recession is depends on whether policymakers act decisively to contain the crisis," said Nick Kounis, economist at ABN AMRO.

Meanwhile, the debt crisis shows no sign of abating. Italy’s 10-year yield climbed 37 basis points to 7.07 percent on Tuesday. Spreads of French, Belgian, Spanish and Austrian 10-year yields over bunds all climbed to euro-era records. Italian, Spanish, Belgian and French credit-default swaps also surged to records.

Contagion continues to widen. Edward Harrison notes that the default probability for Netherlands crossed the 10 percent threshold on Tuesday.

In stock markets, the STOXX Europe 600 fell 0.6 percent but the S&P 500 rose 0.5 percent.

US stocks gained partly as a result of positive US economic reports on Tueday. Retail sales rose 0.5 percent in October after having risen 1.1 percent in September. The New York Fed's general business conditions index rose to 0.6 in November from minus 8.5 in October. The producer price index fell 0.3 percent in October.

Inflation has also showed signs of moderating in the UK. A report on Tuesday showed that consumer price inflation eased to 5 percent in October from September's three-year high of 5.2 percent.

Italian, Spanish yields set euro-era records, eurozone industrial output falls

Italy has a new prime minister in former European Commissioner Mario Monti. However, investors remained cautious about the country, forcing Italy to pay a euro-era high rate of 6.29 percent to sell €3 billion worth of five-year bonds on Monday.

Investor nervousness was evident throughout financial markets on Monday. Stocks fell, both the S&P 500 and the STOXX Europe 600 losing 1 percent. The euro weakened 0.9 percent to $1.3628.

The Italian 10-year yield increased 25 basis points to 6.70 percent. Spain's 10-year yield also increased 25 basis points to 6.11 percent, pushing its spread versus German bunds to a euro-era record high.

Weak economic data added to the negative news from Europe. Industrial production in the euro area fell 2.0 percent in September, the biggest decline in 2½ years.

Japan's economy returns to growth

The Japanese economy grew in the third quarter as it recovered from the effects of the earthquake and tsunami in March.

The Cabinet Office reported today that the Japanese economy grew 1.5 percent in the third quarter. This marks a return to growth in real gross domestic product following three consecutive quarters of declines.

Exports helped drive the return to growth in the third quarter. Exports grew strongly by 6.2 percent, recovering from a 5.0 percent decline in the second quarter following the disruptions to the economy caused by the earthquake and tsunami in March.

The growth in exports enabled net exports to contribute 0.4 percentage point to third quarter growth, its first positive contribution in five quarters.

Domestic demand also contributed to growth in the third quarter as it increased by 1.0 percent.

The strong growth in the third quarter was, to a large extent, a rebound from the effects of the earthquake though. Other recent economic indicators show that growth is likely to slow in subsequent quarters.

Last week, another report from the Cabinet Office showed that its index of leading economic indicators fell 2.2 points in September, its second consecutive monthly decline. The index of coincident economic indicators fell 1.4 points in September.

Also last week, the Economy Watchers Survey showed that the diffusion index for current conditions rose to 45.9 in October from 45.3 in September but that is still significantly below its recent peak of 52.6 in July. Meanwhile, the index for future conditions fell to 45.9 in October from 46.4 in September, its fourth consecutive decline.

Meanwhile, a strong yen and a weak European economy are factors that are likely to weigh on the Japanese economy. Also, another natural disaster, this time flooding in Thailand which is seriously disrupting economic activity there, could have an impact on Japanese companies that have manufacturing facilities there.

So while the Japanese economy has largely recovered from the disruptions of the earthquake, its growth outlook remains fragile.

China new loans jump but working age population to shrink

Friday brought signs that China may be easing credit restrictions. The People's Bank of China reported that new loans issued by banks rose almost 25 per cent in October to 586.8 billion yuan from 470 billion yuan in September.

China is obviously concerned about the fallout from the European debt crisis. However, China has to be careful about raising debt levels in an economy where the working age population will soon start to decline. Mamta Badkar at Business Insider draws on a Nomura report to highlight these as well as other demographic statistics:

• China's population will peak in 2025.
• Its working age population will rise from 971 million in 2010 to 996 million in 2015 but then shrink to 960 million in 2030.
• Its old age dependency ratio will surge from 11.3 percent in 2010 to 23.9 percent in 2030.

Already, there are signs that China's factories are being hit by higher wages even as demand from Europe and the US slows.

This may be a sign that China's deflationary impact on the rest of the world is coming to an end.

Italy successfully sells debt but European economic recovery stalls

Markets remained nervous over Europe's debt problems on Thursday despite a relatively successful Italian government debt auction which saw 5 billion euros of one-year bills sold at a yield of 6.087 percent. The STOXX Europe 600 fell 0.4 percent but the S&P 500 managed to recover 0.9 percent.

US stocks were boosted by positive economic data on Thursday. The trade deficit shrank 4 percent in September after exports rose 1.4 percent while imports rose 0.3 percent. Initial claims for unemployment benefits fell by 10,000 to a seven-month low of 390,000 last week.

In contrast, data from Europe had been negative. French industrial production fell 1.7 percent in September while Italian industrial production plunged 4.8 percent.

The European Commission has acknowledged the worsening outlook for Europe in its latest economic forecast.

EU growth will remain at a near standstill during 2012 and return to slow growth in 2013. Unemployment is forecast to remain at the current high levels.

All main indicators point to a stalled recovery with considerable downside risks.

No economic growth is now expected in the current and coming quarters. Consequently, GDP is forecast to grow at a rate of only ½% in the EU and the euro area in 2012. Some acceleration is expected in 2013, when growth is set to reach 1½% in the EU and 1¼% in the euro area. While growth rates will differ across the Union, no group of countries will remain unaffected by the slowdown.

Despite the deterioration of the economic outlook in Europe, the Bank of England, which had expanded its quantitative easing programme last month, took no further action on Thursday at its monetary policy meeting.

Meanwhile, Asia's economy may also be slowing.

China reported on Thursday that its exports rose 15.9 percent in October from a year ago, down from 17.1 percent in September. Imports, though, rose 28.7 percent in October compared to 20.9 percent in September.

Japan, which had been recovering from the earthquake and tsunami in March, reported on Thursday that its consumer confidence index was unchanged in October from the previous month while core private-sector machinery orders fell 8.2 per cent in September.

Italian yields surge as wider contagion threatens

After holding up relatively well in recent day, stock markets finally succumbed to the worries over European debt on Wednesday. The S&P 500 plunged 3.7 percent, its worst drop in almost three months. The STOXX Europe 600 fell 1.7 percent.

The trigger for the declines was a surge in Italian bond yields. The 10-year yield rose 48 basis points to 7.25 percent and the two-year yield surged 82 basis points to 7.20 percent.

The situation looks dire, according to some analysts quoted by Bloomberg.

“The contagion effect is no longer a risk, it’s a fact in Europe,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview...

Italy may be “beyond the point of no return” in becoming the next victim of Europe’s debt crisis even if the government implements austerity measures to reduce debt, Barclays Capital analysts say.

Still, Marc Chandler thinks that Italy actually has enough resources to pay its debt and that the problem is “primarily one of confidence not solvency”. Nevertheless, a “policy response must be forthcoming in short order or the contagion will overwhelm everything else”.

As it is French and Spanish bond yield spreads versus Germany joined their Italian counterparts in hitting record levels on Wednesday.

The debt crisis may already be hurting confidence in the real economy in France. The Bank of France's sentiment indicator for industrial activity fell to 96 in October from 97 in September while its index for the services sector fell to 95 from 96.

Meanwhile, outside Europe, there were mixed data on sentiment in Japan on Wednesday. The Cabinet Office's economy watchers survey showed that the sentiment index for current conditions rose to 45.9 in October from 45.3 in September. The index for future conditions, however, fell to 45.9 from 46.4.

Other reports on Wednesday showed that China's economy may already be slowing. Industrial production rose by 13.2 percent from a year earlier in October, its slowest rate of increase in a year. Inflation moderated to 5.5 percent in October from 6.1 percent in September.

Berlusconi's fall keeps markets up but global liquidity retrenchment coming

Markets mostly enjoyed another positive session on Tuesday. The S&P 500 rose 1.2 percent and the STOXX Europe 600 rose 0.9 percent.

Markets climbed after Italian Prime Minister Silvio Berlusconi said he would resign, raising hopes that a new leader will be able to solve the country’s debt crisis. Berlusconi's resignation offer came after he won a budget vote on Tuesday but failed to secure a majority.

Financial markets could face further stress though. Reuters reports a warning from the new head of the Financial Stability Board:

The new global financial regulatory policeman, Mark Carney, warned on Tuesday the world was "on the cusp of another retrenchment" in liquidity and urged careful management of European bank recapitalization...

But the withdrawal of global liquidity as European banks deleverage needs to be well managed in order to limit the effects on the economy, said Carney. He predicted "at least" a brief recession in the euro area.

Economic reports on Tuesday were mixed.

German exports rose 0.9 percent in September but imports fell 0.8 percent.

In the UK, industrial production was flat in September as manufacturing output rebounded 0.2 percent after falling 0.3 percent in August. However like-for-like retail sales values fell 0.6 percent in October from a year ago. The Royal Institution of Chartered Surveyors reported that the number of houses sold in England and Wales reached an 18-month high in October but prices fell.

Italy's bond yields jump, eurozone retail sales fall

Europe's debt crisis appears to be worsening, with Italy’s 10-year bond yield climbing 30 basis points to 6.67 percent on Monday. The euro fell, as did European stocks, but US stocks turned around by the end of the day to finish up.

Economic reports on Monday had also been negative.

In Europe, retail sales in the euro area fell 0.7 percent in August while German industrial production fell 2.7 percent in September, the biggest decline since January 2009.

The negative reports were not restricted to Europe. Japan reported on Monday that its index of coincident economic indicators fell 1.4 points in September while its index of leading economic indicators fell 2.2 points.

Global growth slows as eurozone economy contracts

Last week's data showed that the global economy probably decelerated further entering the fourth quarter, weighed down primarily by a eurozone economy that may be on the verge of a recession.

The JPMorgan global all-industry output index derived from surveys of purchasing managers around the world fell to 51.4 in October from 52.0 in September.

JPMorgan Global All-Industry Indices
	September	October
Output	52.0	51.4
New orders	51.4	50.5
Input prices	57.4	54.1
Employment	49.8	51.4

The decline in the global output index was driven by the euro area. The eurozone composite output index compiled by Markit plunged further below the neutral 50.0 threshold to a 28-month low of 46.5 in October from 49.1 in September. This was the sharpest fall in the index since November 2008. The eurozone manufacturing PMI fell to 47.1 in October from 48.5 in September while the services PMI fell to 46.4 from 48.8.

Chris Williamson, the chief economist at Markit, said that the October PMI data for the euro area suggests “a strong likelihood that the economy could contract in the fourth quarter” unless business picks up markedly in November, itself considered unlikely.

The weak outlook for the eurozone economy appears to be shared by the European Central Bank. Last week, it cut interest rates by 25 basis points. During the press conference following its monetary policy meeting, President Mario Draghi said that the economy was experiencing “slow growth heading towards a mild recession by the end of the year”.

In contrast to the euro area, the latest purchasing managers surveys in Japan provided positive signals on the economy. The composite output index rose sharply to 52.4 in October from 47.0 in September. The October reading was the first above 50.0 since February. A jump in the services PMI to 52.3 in October from 46.4 in September helped drive the increase in the composite index. The manufacturing PMI also rebounded in October, rising to 50.6 from 49.3 in September.

The surveys of purchasing managers in the United States also signalled growth in the economy in October, albeit at a slower rate. The Institute for Supply Management's manufacturing PMI fell to 50.8 in October from 51.6 in September while the non-manufacturing index dropped slightly to 52.9 from 53.0.

Another indication that the US economy continued to grow as it entered the fourth quarter was the employment report on Friday. Although the establishment survey showed that non-farm payrolls increased by just 80,000 last month, the household survey showed a gain of 277,000 jobs, helping to push the unemployment rate down to 9.0 percent from 9.1 percent in September.

So the Japanese and US economies appear to have continued growing at the beginning of the fourth quarter but the eurozone economy appears to be contracting and may be heading for a recession.

Eurozone economy shrinks

Bloomberg reports the October services and manufacturing PMI numbers for the euro area on Friday:

A euro-area composite index based on a survey of purchasing managers in both industries fell to 46.5 from 49.1 in September, London-based Markit Economics said today. That’s a 28-month low, the sharpest drop since November 2008 and below the estimate of 47.2 on Oct. 24. A reading below 50 indicates contraction...

The euro-area’s services indicator also dropped more than previously estimated in October, falling to 46.4 from 48.8 the previous month, today’s report showed. That’s the fastest pace since July 2009. The manufacturing gauge slipped to 47.1 from 48.5, indicating a contraction for a third straight month.

In another sign of the worsening economic conditions in the euro area, Germany reported on Friday that factory orders plunged 4.3 percent in September.

US economic data on Friday were somewhat more ambiguous. Non-farm payrolls increased by just 80,000 in October but the unemployment rate fell to 9.0 percent from 9.1 percent. Gains in non-farm payrolls in the prior two months were also revised up by 102,000.

Meanwhile, markets remained worried about Europe. Stocks in the US and Europe fell on Friday. The S&P 500 fell 0.6 percent while the STOXX Europe 600 fell 1.0 percent.

The yields on US and German government bonds also fell but the yield on Italy's 10-year bond rose to a euro-era high of 6.4 percent as the government asked for IMF surveillance of its debt-reduction programme even as it rejected an offer for financial assistance from the latter.

Markets rally as ECB cuts rates and Greece cancels referendum

Markets rallied again on Thursday. Bloomberg reports:

The Standard & Poor’s 500 Index added 1.9 percent to close at 1,261.15 at 4 p.m. in New York, resuming gains after turning lower following data on service industries that trailed estimates and the ECB president’s prediction that Europe may enter a “mild recession.” The Stoxx Europe 600 Index surged 2.1 percent, while the euro was up 0.5 percent at $1.3817. Oil rose 1.7 percent to top $94 a barrel as the S&P GSCI Index of materials increased 1.2 percent. The drop in 10-year Treasury notes sent yields up eight basis points to 2.07 percent.

There were good reasons for the rally.

The ECB cut its benchmark interest rate by 25 basis points to 1.25 percent after its monetary policy meeting on Thursday. New ECB president Mario Draghi said that "sluggish economic growth has the potential to reduce medium-term inflationary pressure in the euro area".

Perhaps more importantly, Greek prime minister George Papandreou has cancelled a planned referendum on the bailout package, which had been the trigger for the recent market turmoil.

Economic data on Thursday were mixed.

Growth in the UK services sector slowed in October. The Markit/CIPS services PMI fell to 51.3 in October from 52.9 in September.

China's service sector also lost momentum in October. The China Federation of Logistics and Purchasing's services PMI fell to 57.7 in October from 59.3 in September. However, HSBC's PMI rose to 54.1 in October from 53.0 in September.

In India, the HSBC-Markit PMI showed services activity shrank for a second consecutive month, falling to 49.1 in October from 49.8 in September.

In the US, the Institute for Supply Management's non-manufacturing index edged down to 52.9 in October from 53.0 in September but factory orders rose 0.3 percent in September after having risen 0.1 percent in August.

Europe cuts aid to Greece

Markets rebounded somewhat on Wednesday but the European debt situation remains precarious. Bloomberg reports that Europe has suspended aid payments to Greece.

European leaders cut off aid payments to Greece and said a referendum in five weeks will determine whether the debt-strapped nation becomes the first to exit the 17-country euro area.

Crisis talks ended in the French resort of Cannes late yesterday with German Chancellor Angela Merkel and French President Nicolas Sarkozy withholding 8 billion euros ($11 billion) of assistance and warning Greece it will surrender all European aid if it votes against a bailout package agreed upon only last week.

Eurozone economic data on Wednesday had been negative.

Manufacturing contracted even more in October than initially estimated. The Markit manufacturing PMI fell to 47.1 last month from 48.5 in September.

In Germany, the euro area's largest economy, the unemployment rate rose to 7.0 percent in October from 6.9 percent in September.

There was some good news in the UK on Wednesday though. The Markit/CIPS construction PMI jumped to 53.9 in October from 50.1 the previous month.

The US economy had also performed relatively well recently, allowing the Federal Reserve to leave monetary policy unchanged on Wednesday. However, it may be about to do more, according to Bloomberg:

Federal Reserve Chairman Ben S. Bernanke said unemployment is still “far too high” and the Fed may take further steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public.

Additional stimulus “remains on the table,” Bernanke said today at a press conference in Washington, declining to specify conditions that would prompt a move. “While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow.”

The Fed now projects that unemployment will average 8.5 percent to 8.7 percent in the final three months of 2012, up from 7.8 percent to 8.2 percent previously.

A report by ADP Employer Services on Wednesday showed that US private sector employment is continuing to grow though, rising by 110,000 in October following an increase of 116,000 in September.

Markets plunge, UK on brink of recession, Australia cuts rates

Markets fell sharply again on Tuesday as the fallout from Greece's proposal for a referendum on its bailout plan continued. The MSCI All-Country World Index fell 3.4 percent while the euro fell 1.2 percent against the US dollar.

Economic data on Tuesday were mixed.

In the UK, an acceleration in economic growth in the third quarter was not enough to ease concerns for the economy. From Reuters:

The economy is teetering on the brink of recession despite a solid performance in the third quarter, increasing pressure on the government to boost growth as renewed turmoil in the euro zone threatens to hit the country hard...

Gross domestic product grew by 0.5 percent on the quarter as business services and finance posted the strongest quarterly increase in four years, the Office for National Statistics said on Tuesday, a notch more than analysts had forecast...

However, the Purchasing Managers' Index (PMI) survey released earlier showed manufacturing activity in October fell at its sharpest monthly rate since June 2009 when Britain was still in recession...

"The third quarter is already history," said Chris Williamson of PMI survey-compiler Markit, which showed a slump in the manufacturing PMI index to 47.4 in October from 50.8.

The US economy appears to be holding up so far though. The ISM's manufacturing PMI fell to 50.8 in October from 51.6 in September, showing continued growth, while construction spending rose 0.2 percent in September.

Manufacturing in Asia also maintained growth in October. The China Federation of Logistics and Purchasing reported that its manufacturing PMI dropped to 50.4 in October from 51.2 in September but HSBC reported that its manufacturing PMI for China rose to 51.0 in October from 49.9 in September. India's manufacturing PMI rose to 52.0 from 50.4, its sharpest increase in three months.

Earlier in the week, Japan had reported a rise in its manufacturing PMI to 50.6 in October from 49.3 in September.

The weaker global economic environment has nevertheless induced many central banks to ease monetary policy recently. The Reserve Bank of Australia became the latest to do so on Tuesday, cutting interest rates for the first time since April 2009 to 4.5 percent from 4.75 percent.

Stocks see strong October gains trimmed

Allan Roth reports that October was the best month for US stocks in 24 years.

In spite of a down day, US stocks gained 11.5 percent in October, making it the seventh best month for the US stock market since data was tracked on the Wilshire 5000, the broadest measure of the U.S. stock market. October 2011 was the best month for stocks since January 1987 when stocks earned 12.8 percent

The strong performance came despite a sharp fall on the last day of the month. From Bloomberg:

Stocks retreated from an almost three-month high as Italian and Spanish bonds fell amid concern European leaders will struggle to raise funds to contain the region’s debt crisis. The yen sank from a post-World War II record against the dollar after Japan intervened in the market.

The MSCI All-Country World Index lost 3 percent at 4:24 p.m. New York time, trimming its monthly rally to 10 percent, still the most since April 2009. Deutsche Bank AG (DBK), BNP Paribas SA and Morgan Stanley (MS) dropped at least 8.6 percent. The Standard & Poor’s 500 Index slipped 2.5 percent, the most since Oct. 3. Italian five-year yields rose 13 basis points to 5.88 percent. German bunds and U.S. Treasuries advanced. The yen tumbled as much as 4.6 percent against the dollar, the most since 2008. Copper futures fell 2 percent.

Concerns over the European debt situation were revived after Greek prime minister George Papandreou announced a referendum on the financing plan put up by European leaders last week. This raised the possibility that voters could reject the plan, putting the bailout in jeopardy.

The fall in the yen followed another intervention by the Japanese government in the foreign exchange market.

Meanwhile, economic data on Monday highlight the dilemma continuing to face the European Central Bank's monetary policy. The inflation rate in the euro area held at 3 percent in October, the same as in the previous month. This came even as unemployment in the region rose to 10.2 percent in September from 10.1 percent in August.

Data from the UK on Monday also indicate a weak economy. Mortgage approvals fell to 50,967 in September from 52,347 in August, net mortgage lending rose by 0.3 billion pounds in September compared to 0.5 billion in August and Hometrack reported that house prices fell at the fastest monthly pace in eight months in October.

The US economy, though, appears to be holding up reasonably well. The Institute for Supply Management-Chicago's business barometer fell to 58.4 in October from 60.4 in September, indicating slower but continued growth in activity. The Dallas Federal Reserve Bank's general business activity index jumped to 2.3 in October from minus 14.4 in September.