Global stocks gain in 2012 thanks to quantitative easing

Despite all the anxiety over sovereign debt in Europe for most of the year and then the so-called fiscal cliff in the United States towards the end of the year, global stock markets managed to put up a good performance in 2012.

With just one trading day left in the year, the Morgan Stanley Capital International All-Country World Index is up 12.58 percent from the start of the year. The table below shows the gains made by the major stock markets around the world according to the Morgan Stanley Capital International indices.

	Percentage gain
	Local currency (percent)	US dollars (percent)
USA	11.63	11.63
Japan	18.85	6.21
UK	6.42	10.62
Germany	25.24	27.55
France	15.28	17.41
China	18.43	18.65

The strong gains by stocks were achieved not only despite European sovereign debt concerns and potential US fiscal tightening but also despite weak global economic growth.

While the US economy maintained growth through the first three quarters of the year, the eurozone economy contracted 0.2 percent in the second quarter and 0.1 percent in the third quarter, which means that the latter has technically fallen into recession. Japan's economy can also be said to have fallen into recession after contracting 0.03 percent in the second quarter and 0.9 percent in the third quarter. China's economy also slowed in 2012.

There is no mystery to what fuelled markets in 2012 in the face of so many headwinds: quantitative easing by central banks.

The Federal Reserve launched its initial round of asset purchases in 2009 during the last recession and has continued to add to its purchases since, the most recent boost coming earlier this month.

The Bank of Japan, which had begun quantitative easing way back in 2001, also expanded its asset-purchase programme this month, its third increase in four months.

The European Central Bank introduced its own form of quantitative easing under the Long Term Refinancing Operation in December last year in response to the sovereign debt crisis, and followed that up with a pledge by President Mario Draghi in July this year to “do whatever it takes to preserve the euro”.

Government bonds are the direct beneficiaries of quantitative easing, but the depressed bond yields that result have forced investors to reach for return in higher-risk equities, thus pushing up prices of the latter.

However, while quantitative easing has boosted stock prices around the world, it has not prevented recession in Europe and Japan, although it may have helped keep the US economy growing.

It remains to be seen how much quantitative easing will help markets as well as the real economy going forward.

US economy shows more signs of growth

Friday brought yet more signs that the US economy is continuing to grow.

A report from the National Association of Realtors showed that its pending home sales index rose 1.7 percent in November to 106.4, the highest level since April 2010.

The MNI Chicago Report’s business barometer rose to 51.6 in December from 50.4 in November.

US stocks fell on Friday though. The S&P 500 lost 1.1 percent, its fifth consecutive day of decline, as investors continue to focus on the lack of progress on the budget.

US unemployment claims fall, new home sales rise, Japanese industrial output falls

US economic data on Thursday were mostly positive.

Applications for unemployment-insurance payments fell by 12,000 to 350,000 in the week ended 22 December. The four-week moving average fell to 356,750, the lowest since March 2008.

New home sales rose 4.4 percent in November to a 377,000 annual pace, the highest since April 2010.

However, the Conference Board’s consumer confidence index fell to 65.1 in December from 71.5 in November.

Japanese economic data on Friday were mixed.

Industrial output fell 1.7 percent in November, reversing the 1.6 percent gain in October, which had been the first increase in four months. However, manufacturers surveyed by the government expect output to rise 6.7 percent in December and 2.4 percent in January.

Also signalling weakness for Japanese manufacturing was the Markit/JMMA manufacturing PMI, which fell to 45.0 in December, a 44-month low, from 46.5 in November.

More positively, Japan's unemployment rate fell to 4.1 percent in November from 4.2 percent in October while household spending rose 0.2 percent in November from a year earlier.

However, the core consumer price index, which excludes volatile fresh-food prices, fell 0.3 percent last month, pushing the 12-month rate down to -0.1 percent.

US home prices rise, yen falls

US home prices continued their rebound in October. The S&P/Case-Shiller home price index increased 4.3 percent from October 2011, the biggest 12-month advance since May 2010.

Meanwhile, in markets, the yen was making the news. From Bloomberg:

The yen slid to a 16-month low against the euro before data tomorrow that may show a decline in Japan’s consumer prices, fanning speculation Prime Minister Shinzo Abe will push the central bank to boost cash infusions.

The currency held near the lowest since 2010 versus the dollar after Abe said in a media briefing yesterday that “bold’ monetary policy is one of the three pillars of his economic measures. Implied volatility on U.S. stocks jumped to a five- month high yesterday, supporting demand for safer assets.

US economy maintains expansion

Recent data indicate that the United States economy has continued to grow in the fourth quarter.

Purchasing managers' surveys in the fourth quarter have been giving a mixed picture of the US economy.

The Institute for Supply Management's manufacturing PMI fell to 49.5 in November, the lowest since July 2009, from 51.7 in October. The fall below 50 indicated contraction in US manufacturing activity.

However, the ISM's non-manufacturing index rose to 54.7 in November from 54.2 in October, indicating continued growth in the services sector.

Furthermore, contradicting the ISM data, Markit's purchasing managers' survey showed that its US manufacturing PMI rose to 52.8 in November from 51.0 in October, indicating an acceleration in manufacturing activity.

Markit's flash estimate of the manufacturing PMI for December showed another jump to 54.2 this month.

A report from the Federal Reserve Bank of Chicago last week suggests that growth has indeed accelerated recently. Its national activity Index increased to +0.10 in November from -0.64 in October, pushing the three-month moving average to -0.20 in November from -0.59 in October.

The value of the three-month average in October had been the lowest since November 2009. It was also close to -0.70, the value at which the Chicago Fed says indicates an increased likelihood of a recession.

November's increase takes the average away from that value and suggests that the economy is probably continuing to expand.

US economy accelerates, stocks fall

The US economy accelerated in November, with the Chicago Federal Reserve reporting that its national activity Index increased to +0.10 in November from -0.64 in October. The three-month moving average increased to -0.20 in November from -0.59 in October.

Other US data on Friday were mostly also positive.

Consumer spending rose 0.4 percent in November after having fallen 0.1 percent in October. After adjusting for inflation, consumer spending rose 0.6 percent, the largest increase since August 2009.

Personal income rose 0.6 percent in November, the most since February, after a 0.1 percent increase the prior month.

Another report on Friday showed that durable goods orders rose 0.7 percent in November. Orders for non-defense capital goods excluding aircraft rose 2.7 percent after a revised 3.2 percent gain in October.

However, the Thomson Reuters/University of Michigan consumer sentiment index fell to 72.9 in December, the weakest since July, from 82.7 in November. Bill McBride thinks that the decline in sentiment is probably related to concerns over the so-called “fiscal cliff”.

Indeed, concerns over the budget pushed stocks down on Friday after House Republican leaders scrapped a plan to allow higher taxes on top earners. The Standard Poor’s 500 Index fell 0.9 percent and the MSCI All-Country World Index fell 0.8 percent.

BoJ increases monetary stimulus, US growth revised up

The global monetary easing continued on Thursday with the Bank of Japan expanding its asset-purchase programme for the third time in four months. The asset-purchase fund was increased from 66 trillion yen to 76 trillion yen.

Meanwhile, most US data on Thursday were positive.

Revised data show that the US economy grew at a 3.1 percent annual rate in the third quarter, the fastest pace since late 2011.

Existing home sales surged 5.9 percent in November to a seasonally adjusted annual rate of 5.04 million units. It was the fastest sales pace since November 2009.

However, the Conference Board's index of US leading indicators fell 0.2 percent in November.

There were mixed data from Europe.

In the euro area, the European Commission's consumer confidence indicator rose to -26.6 in December from -26.9 in November.

However, in the UK, the GfK NOP consumer confidence index plunged to -29 in December from -22 in December. This comes after flat retail sales in November.

US housing starts fall but building permits rise

Economic reports on Wednesday were mixed.

In the US, housing starts fell 3.0 percent in November. However, building permits rose 3.6 percent to an 899,000 annual rate, the most since July 2008.

In another positive sign for US construction activity, the American Institute of Architects reported that its billings index rose to 53.2 in November, the highest level in five years.

In Japan, exports fell 4.1 percent in November from the previous year, but this was better than the 5.5 percent decline expected and the 6.5 percent contraction in October.

Also, Japan's leading index for October has been revised up to 92.8 from 92.5. In September, the index was at 91.8. The coincident index was revised up to 90.7 from 90.6 but remained lower than the 91.3 reading in September.

In the euro area, construction output fell 1.6 percent in October, the most in six months. However, in Germany, Ifo's business climate index rose to 102.4 in December from 101.4 in November.

Housing continues recovery in US and China

US housing continues to show signs of recovery, with the NAHB/Wells Fargo Housing Market index rising to 47 in December, its highest level since April 2006, from 45 in November, according to a report on Tuesday from the National Association of Home Builders.

China's housing market is also turning up. Home prices rose month-on-month in 53 of 70 major cities monitored by the National Bureau of Statistics in November, up from 35 in October.

Also rising is UK consumer prices. The UK inflation rate held at 2.7 percent in November, the same as in October.

UK house price inflation has slowed though. House prices rose 1.5 percent in October from a year ago compared with 1.7 percent in September.

Worldwide central bank easing has apparently helped global reflation, and that trend continued on Tuesday with central banks from Sweden, Turkey and Hungary all cutting interest rates.

IMF raises 2013 growth forecast

The IMF has raised its forecast for economic growth next year, based on an interview of managing director Christine Lagarde by Chile's La Tercera newspaper on Sunday. Reuters reports:

“The overall (global) outlook for 2013 is for growth of 3.6 percent on average. We believe emerging economies and low-income economies will expand 5.6 percent, while advanced economies will grow 1.6 percent,” Lagarde said, according to the newspaper.

However, growth in the US may be lacklustre for a while.

The Federal Reserve Bank of New York’s general economic index fell to minus 8.1 in December from minus 5.2 in November, according to a report on Monday. It was the fifth consecutive decline in the index.

Federal Reserve Bank of Richmond President Jeffrey Lacker sees weak growth extending into next year. From Bloomberg:

“My best guess is that growth will continue into next year at an annual rate of 2 percent and that beyond 2013 we should see growth begin to firm,” Lacker said to the Charlotte Chamber of Commerce’s annual economic outlook conference.

Economy shows improvement as Fed announces more stimulus

Preliminary readings from purchasing managers' surveys for December released last week showed improvement in the global economy.

In the United States, Markit's US manufacturing PMI jumped to 54.2 in December from 52.8 in November.

In the euro area, Markit's composite index rose to 47.3 in December from 46.5 in November. The services index rose to 47.8 from 46.7 while the manufacturing index rose to 46.3 from 46.2.

HSBC's China manufacturing PMI rose to 50.9 in December from 50.5 in November.

These preliminary readings suggest that the improvement we saw in November (see “Global economy shows acceleration in November”) has been sustained.

However, in his latest commentary, John Hussman maintains his pessimistic view of the global economy.

Strong leading indicators such as the CFNAI and the Philly Fed Index have been weak for many months, and the deterioration in new orders has moved from a slowing of growth to outright contraction in recent months. In the order of events, a slowing in real sales, personal income, and personal consumption expenditure typically follows – these are called coincident indicators. These growth rates generally only weaken materially once a recession is in progress, and reach their highest correlation with recession about 6-months into the downturn. That’s what we’ve begun to observe over the past few months, adding to our impression that the U.S. joined a global (developed economy) recession during the third quarter of this year.

Despite the improvement seen from the purchasing managers' surveys, the Federal Reserve announced yet more monetary stimulus at its monetary policy meeting last week.

Hussman, who has been critical of Fed policies in recent years, says in his latest commentary that monetary policy “has become a roach motel – easy enough to get into, but impossible to exit”. He said that if the economy eventually strengthens at some point past 2013, “the Fed would have to sell nearly $3 trillion” of US debt, and such a level of monetary tightening is likely to be disruptive.

Tankan shows weakness in Japan but rest of world report better data

Early on Friday, the Bank of Japan reported that its Tankan survey showed a fall in its sentiment index for large manufacturers to minus 12 in the fourth quarter from minus 3 in the third quarter.

Economic data for the rest of the day were better though.

The flash HSBC China manufacturing PMI rose to 50.9 in December from 50.5 in November.

Markit's composite index for the euro area rose to 47.3 in December from 46.5 in November. The services index rose to 47.8 from 46.7 while the manufacturing index rose to 46.3 from 46.2.

Inflation in the euro area fell to 2.2 percent in November from 2.5 percent in October.

The stream of better data continued with US reports. Industrial production rebounded strongly by 1.1 percent in November after having fallen 0.7 percent in October as a result of Superstorm Sandy. Markit's US manufacturing PMI jumped to 54.2 in December from 52.8 in November.

Meanwhile, consumer prices in the US fell 0.2 percent in November.

US retail sales rebound

The US economy is continuing to show its resilience. A report on Thursday showed that retail sales in the US rose 0.3 percent in November, rebounding from a 0.3 percent decline in October. Excluding autos, gasoline and building materials, retail sales rose 0.5 percent last month after having been flat the previous month.

Another report from the US on Thursday showed that producer prices fell 0.8 percent in November with energy in particular falling by the most since March 2009.

Recent Japanese economic data have not been so good but on Wednesday, a report showed that machinery orders rose 2.6 percent in October, the first increase in three months.

There has been little respite for the euro area though. On Wednesday, a report showed that industrial production fell 1.4 percent in October after having fallen 2.3 percent in September.

Fed unveils new tools, more monetary stimulus

The Federal Reserve introduced yet more policy measures after its latest monetary policy meeting on Wednesday. Bloomberg reports:

Chairman Ben S. Bernanke moved the Federal Reserve further into uncharted policy territory in combating joblessness by tying the bank’s interest-rate outlook to unemployment and inflation, while committing to an even faster expansion of the central bank’s balance sheet.

The actions on the eve of the Fed’s centenary year underscore Bernanke’s hallmark commitment to experimentation and forceful action, derived in part from his research showing too little monetary stimulus produced large economic costs for the U.S. in the 1930s and for Japan in the 1990s. He called the current state of the labor market, with unemployment at 7.7 percent, “an enormous waste of human and economic potential” and said the benefits of more bond buying outweigh the potential risks...

The additional Treasury purchases will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion of short-term Treasuries for an equal amount of long-term debt.

Despite the additional monetary stimulus, markets ended the day little changed.

U.S. stocks erased gains as optimism about the Fed’s additional asset purchases faded and investors focused on the budget deadlock in Washington. The Standard & Poor’s 500 Index closed up less than 0.1 percent at 1,428.48 in New York, after earlier climbing as much as 0.8 percent.

It was a similarly story in Asia today, with Japanese stocks rising 1.15 percent but most other markets making smaller gains. Chinese stocks even fell 0.36 percent.

Markets rise, German investor confidence jumps

Markets have been in buoyant mood recently, and that mood continued on Tuesday with the S&P 500 gaining 0.7 percent and the STOXX Europe 600 rising 0.3 percent to an 18-month high.

US stocks rose despite a report on Tuesday showing an increase in the US trade deficit in October following a 3.6 percent fall in exports and a 2.1 percent decline in imports.

However, another report on Tuesday showed that German investor confidence jumped in December, with the ZEW index of investor and analyst expectations rising to 6.9 from minus 15.7 in November.

Asian stocks were mixed on Tuesday though despite a report showing that Chinese bank lending rose to 522.9 billion yuan in November from 505.2 billion yuan in October.

Japan's economy contracts for second consecutive quarter

There were mixed data from Japan on Monday.

The Cabinet Office confirmed earlier figures that showed Japan's economy shrank 0.9 percent in the July-September quarter. However, data for the April-June quarter was revised down to show 0.03 percent contraction from 0.1 percent growth.

With two consecutive quarters of contraction, Japan's economy can be said to be in recession.

Another report on Monday showed that Japan's current account surplus fell 30 percent from the previous year in October.

The economic weakness has hurt consumer sentiment in Japan. The Cabinet Office's consumer confidence index for general households fell to 39.4 in November from 39.7 in October.

Providers of services, though, became more optimistic in November. The Cabinet Office's economy watchers survey showed that the diffusion index for current conditions rose to 40.0 last month from 39.0 in October while the index for future conditions rose to 41.9 from 41.7.

Elsewhere in Asia, China reported disappointing trade figures on Monday. Exports rose just 2.9 percent in November from the previous year, well down from 11.6 percent in October. Imports were flat in November compared to a 2.4 percent increase in October.

However, Germany's trade figures released on Monday surprised on the positive side. Exports rose 0.3 percent in October after having fallen 2.4 percent in September. Imports rose 2.5 percent after a 1.4 percent fall the previous month.

Global economy shows acceleration in November

Recent economic data indicate that the global economy improved in November.

Surveys of purchasing managers around the world showed an acceleration in global economic activity in November. The JPMorgan global all-industry output index rose to 53.7 last month from 51.0 in October.

JPMorgan Global All-Industry Indices
	October	November
Output	51.0	53.7
New orders	50.9	52.2
Input prices	57.6	54.9
Employment	50.8	50.0

Improvement in the purchasing managers' data from the United States helped drive the improvement in the global reading. Markit's US manufacturing PMI rose to 52.8 in November from 51.0 in October while the Institute for Supply Management's non-manufacturing index rose to 54.7 from 54.2.

However, clouding the picture for the US somewhat was another report from the ISM showing a fall in its manufacturing PMI to 49.5 in November, the lowest since July 2009, from 51.7 in October.

In the euro area, the contraction in the economy slowed in November. Markit's composite output index rose to 46.5 in November from 45.7 in October. The manufacturing PMI rose to 46.2 in November from 45.4 in October while the services business activity index rose to 46.7 from 46.0.

In China, the manufacturing PMI from the China Federation of Logistics and Purchasing and the National Bureau of Statistics rose to 50.6 in November from 50.2 in October while HSBC's China manufacturing PMI rose to 50.5 from 49.5.

However, there was some contradiction in the services sector data, where the official PMI rose to 55.6 in November from 55.5 in October but HSBC's services PMI fell to 52.1 from 53.5.

Despite the decline in the services PMI, the HSBC China composite output index rose to 51.6 in November from 50.5 in October.

Markit's composite output index for Japan also rose in November to 49.9 from 48.9 in October. The manufacturing PMI fell to 46.5 in November from 46.9 in October but the services business activity index rose to 51.4 in November from 50.0 in October.

Beyond the purchasing managers' surveys, there were other important economic reports last week.

In the US, a report on Friday showed that employment continued to increase at a relatively healthy pace in November. Nonfarm payrolls rose 146,000 last month and helped bring the unemployment rate down to 7.7 percent from 7.9 percent in October.

Also on Friday, a report from Japan showed that its index of coincident economic indicators fell 0.9 point in October. In its assessment of the economy, the Japanese government said the index was “worsening”. Indeed, the index has now fallen for seven consecutive months.

However, the index of leading economic indicators did provide an encouraging sign, rising by 0.9 point in October.

Finally, on Sunday, China reported that industrial production rose 10.1 percent in November from a year earlier, the fastest pace in four months. Retail sales and fixed-asset investment also accelerated in November while inflation rose to 2.0 percent from 1.7 in October.

Japanese economic data indicate possible recession

The Japanese government has given a weak assessment of its economy. Reuters reports:

Japan's government said on Friday that there was "a high possibility" that the economy has slipped back into a recession after an index of economic indicators fell for a seventh straight month in October...

The index of coincident economic indicators fell a preliminary 0.9 point in October from the previous month, the Cabinet Office said on Friday.

On a more positive note, the index of leading economic indicators rose 0.9 point in October.

Elsewhere in the world the economic data on Friday were mixed.

In the US, employment increased by 146,000 in November, helping bring the unemployment rate down to 7.7 percent from 7.9 percent in October.

However, the Thomson Reuters/University of Michigan preliminary consumer sentiment index fell sharply to 74.5 in December from 82.7 in November.

And in Europe, industrial production fell 2.6 percent in Germany and 0.8 percent in the UK in October.

ECB sees eurozone economy shrinking again next year

The European Central Bank left interest rates unchanged on Thursday after its monetary policy meeting but cut its growth and inflation forecasts for the eurozone economy. Reuters reports:

The European Central Bank pondered an interest rate cut on Thursday and predicted the euro zone economy would shrink again in 2013, leaving the door open to a possible reduction in borrowing costs early next year...

In the end, the ECB left its main interest rate at a record low 0.75 percent for the fifth month running despite new forecasts which suggest the euro area economy will contract next year as it has this. It left the deposit rate at zero.

The Bank of England also left monetary policy unchanged after its meeting on Thursday.

Economic data from Europe on Thursday were mixed. German factory orders rebounded 3.9 percent in October after having fallen 2.4 percent in September. However, the UK trade deficit widened in October as exports fell.

US services accelerate but private employment hit by Sandy

Economic data on Wednesday were mixed.

In the US, the Institute for Supply Management’s non-manufacturing index rose to 54.7 in November from 54.2 in October and factory orders rose 0.8 percent in October. However, employment in the private sector rose 118,000 in November according to ADP, down from 157,000 in October as a result of superstorm Sandy.

In the euro area, Markit's composite index rose to 46.5 in November from 45.7 in October after the services index rose to 46.7 from 46.0. However, retail sales in the region fell 1.2 percent in October.

Meanwhile, the services sectors in China and the UK slowed in November. HSBC's services PMI for China fell to 52.1 last month from 53.5 in October while in the UK, the Markit/CIPS services PMI fell to 50.2 from 50.6.

RBA cuts rate to low of last financial crisis

There were few major economic data on Tuesday but there were monetary policy decisions by two major central banks.

The Reserve Bank of Australia cut its official interest rate by 25 basis points to 3.0 percent on Tuesday. This move brought the rate down to the low last seen during the financial crisis in 2009.

In contrast, the Bank of Canada left its interest rate unchanged and maintained a bias towards higher rates.

Manufacturing contracts in Europe and possibly the US

Reports on Monday showed that manufacturing continued to contract in Europe in November but at a slower pace.

In the euro area, Markit's manufacturing PMI rose to 46.2 in November from 45.4 in October.

In the UK, the Markit/CIPS manufacturing PMI jumped to 49.1 in November from 47.3 in October.

Reports on US manufacturing on Monday, however, were contradictory.

Markit's US manufacturing PMI rose to 52.8 in November from 51.0 in October.

However, the Institute for Supply Management's manufacturing PMI fell to 49.5 in November from 51.7 in October. The November reading is the lowest since July 2009 and suggests contraction in US manufacturing activity.

Another report in the US on Monday showed that construction spending rose 1.4 percent in October, the most in five months, to an annual rate of $872.1 billion, the highest level in over three years.

China purchasing mangers surveys turn positive

China's economy appears to be regaining momentum, according to the latest purchasing managers' surveys.

A report today from HSBC showed that its manufacturing PMI rose to 50.5 in November from 49.5 in October, the first time since October 2011 that the reading has been above 50.

A report over the weekend by the National Bureau of Statistics had shown that the official manufacturing PMI rose to a seven-month high of 50.6 in November from 50.2 in October.

Another report today from the NBS showed that the official PMI for China's non-manufacturing sectors rose to 55.6 in November from 55.5 in October.

Moody's downgrades European Stability Mechanism as eurozone unemployment hits record high

Bloomberg reports Moody's move on Friday:

The European Stability Mechanism and European Financial Stability Facility were downgraded by Moody’s Investors Service, which cited a high correlation in credit risk present among the entities’ largest financial supporters.

The ESM was cut to Aa1 from Aaa, while the EFSF provisional rating was lowered to (P)Aa1 from (P)Aaa. Moody’s said in a statement today that would maintain a negative outlook on each.

Economic data from the euro area earlier on Friday had also been negative.

The unemployment rate in the euro area rose to a record 11.7 percent in October from 11.6 percent in September. Inflation slowed though to 2.2 percent from 2.5 percent.

Data on consumer spending in the euro area on Friday were negative. In Germany, retail sales fell 2.8 percent in October. In France, consumer spending fell 0.2 percent in October.

Just outside the euro area, however, UK consumer sentiment improved in November as the GfK NOP consumer confidence index rose to -22, the strongest since May 2011, from -30 in October.

Consumer spending in the US in October, though, was hit by superstorm Sandy, falling 0.2 percent. Income was flat in October.

In another report from the US on Friday, the ISM-Chicago business survey provided a mixed picture. The business barometer rose to 50.4 in November from 49.9 in October but the new orders index fell to 45.3, the weakest reading since June 2009, from 50.6.

US third quarter growth revised up, eurozone economic sentiment improves

A report on Thursday showed that US third quarter GDP has been revised up to 2.7 percent from 2.0 percent reported last month. Inventory accumulation and exports contributed positively to the revision but consumer spending was cut to a 1.4 percent growth rate from 2 percent.

Another report from the US on Thursday showed that pending home sales rose 5.2 percent in October.

There was also good news for the euro area on Thursday. The European Commission's economic sentiment indicator rose to 85.7 in November from 84.3 in October.

Fed says US economy expanding, new home sales fall

The US economy expanded at a “measured pace” recently, according to a Federal Reserve report on Wednesday. From Bloomberg:

“Consumer spending grew at a moderate pace in most districts, while manufacturing weakened,” the central bank said in its Beige Book business survey, which is based on reports from the Fed’s 12 district banks. “Contacts in a number of districts expressed concern and uncertainty about the federal budget, especially the fiscal cliff.”

However, new home sales in the US fell 0.3 percent in October.

Diane Swonk notes that the decline “was concentrated in the South and Northeast; both were affected by Superstorm Sandy at the end of the month”.

However, she also notes that new home prices “firmed a bit”. Mortgage applications for purchase also continued to move up last week, suggesting that “the market will show renewed gains once we get further away from the disruptions created by Sandy”.

OECD global growth forecast revised down but US economic data remain positive

The Organisation for Economic Co-operation and Development has cut its global growth forecast for this year. It said on Tuesday that the global economy would grow 2.9 percent this year, down from a forecast of 3.4 percent growth in May.

However, in the US, economic data on Tuesday remained mostly positive.

The Conference Board’s consumer confidence index rose to 73.7 in November, the highest since February 2008, from 73.1 in October.

The US housing market continues to recover, with the S&P/Case-Shiller index of home prices in 20 cities rising 3 percent in September from a year ago after advancing 2 percent in the year to August.

Durable goods orders were flat in October. However, orders for non-defense capital goods excluding aircraft rose 1.7 percent.

Europe and IMF reach Greek deal, Chicago Fed index falls below level at start of last recession

Reuters reports a positive development in the eurozone sovereign debt crisis.

Euro zone finance ministers and the International Monetary Fund clinched agreement on a new debt target for Greece on Monday in a breakthrough towards releasing an urgently needed tranche of loans to the near-bankrupt economy, officials said.

After nearly 10 hours of talks at their third meeting on the issue in as many weeks, Greece's international lenders agreed to reduce Greek debt by 40 billion euros, cutting it to 124 percent of gross domestic product by 2020, via a package of steps.

Economic data from the US on Monday were not as positive.

The Chicago Federal Reserve reported on Monday that its National Activity Index decreased to -0.56 in October from 0.00 in September. The index’s three-month moving average decreased from -0.36 in September to -0.56 in October.

According to the Chicago Fed, October’s three-month average suggests that economic growth was below its historical trend. Indeed, the October reading was the lowest since November 2009 and lower than when the economy last entered recession in December 2007.

Production-related indicators contributed -0.45 to the index in October, down from -0.06 in September. The Chicago Fed said that Hurricane Sandy negatively affected industrial production in October.

Treasury bears capitulate

Bloomberg reports: “Treasury Bears Capitulate as Fed Buying Meets Cliff Worry”.

Until last month, Donald Ellenberger, who manages $10 billion for Federated Investors Inc., shunned Treasuries as the U.S. economy improved and 10- year notes yielded less than inflation. Now, he can’t afford to stay out.

Ellenberger has plenty of company. Bond bears from Brown Brothers Harriman & Co. to T. Rowe Price Group Inc. are buying Treasuries though the 1.69 percent yield on 10-year notes is less than the rate of inflation and returns on the $10.9 trillion of marketable debt are the least in three years.

The combination of Federal Reserve efforts to stimulate the economy by buying bonds and the potential slowdown should politicians fail to avert the so-called fiscal cliff of tax increases and spending cuts has made Treasuries the debt that money managers have to own. Even investors who shun Treasuries don’t see 10-year note yields rising much above 2 percent.

The contrarian investor has to ask: Is this a sign of a top in US Treasuries?

Stocks up as German and French business confidence improves

Stocks finished the week up on Friday, with European shares in particular posting their best weekly gain so far this year after rising for a fifth day.

Positive European economic data on Friday contributed to the gains.

In Germany, the Ifo business climate index rose to 101.4 in November from 100.0 in October.

In France, Insee's manufacturing sentiment index rose to 88 in November from 85 in October.

In Italy, retail sales rose 0.1 percent in September.

And in the UK, the British Bankers' Association reported that mortgage approvals increased to 33,039 in October from 31,544 in September.

Eurozone economy continues to shrink but Chinese manufacturing returns to expansion

Reuters reports that the euro area faces its deepest downturn since early 2009.

The euro zone economy is on course for its weakest quarter since the dark days of early 2009, according to business surveys that showed companies toiling against shrinking order books in November.

Service sector firms like banks and hotels that comprise the bulk of the economy fared particularly badly this month, and laid off staff at a faster pace...

"The concern about the outlook is getting worse as we move towards the end of the year," said Chris Williamson, chief economist from Markit.

According to Markit's flash report on Thursday, the service sector PMI for the euro area fell to 45.7 this month, its lowest reading since July 2009, from 46.0 in October even as the manufacturing PMI rose to 46.2, its best showing since March, from 45.4 in October.

The composite PMI rose to 45.8 in November from 45.7 in October.

Markit said that the PMIs were consistent with the economy shrinking around 0.5 percent in this quarter, which would be the sharpest contraction since the first quarter of 2009.

Another report on the eurozone economy on Thursday showed that consumer confidence in the region deteriorated in November, with the flash consumer confidence index falling to -26.9 from -25.7 in October.

Meanwhile, however, China's economy continued to show signs of improvement. A report from HSBC on Thursday showed that its China manufacturing PMI rose to 50.4 in November from 49.5 in October. This indicates that manufacturing activity in China expanded in November for the first time in 13 months.

US economic data turn positive but Japan's trade deficit worsens

Wednesday's data showed that US economic indicators are coming out positive again as the effects of superstorm Sandy dissipate.

Markit's flash manufacturing PMI for November rose to 52.4 from 51.0 in October. Initial claims for state unemployment benefits dropped 41,000 to 410,000 last week. The final reading of Thomson Reuters/University of Michigan's November consumer sentiment index came in at 82.7, slightly up from 82.6 in October but down from a preliminary reading of 84.9.

Leading indicators are also positive. The Conference Board's leading economic index rose 0.2 percent in October, slowing from 0.5 percent in September. The ECRI's weekly leading index rose to 125.7 in the week ended 16 November from 125.2 the previous week but its growth rate fell to 3.8 percent from 4.3 percent.

Japan's economy, though, showed further signs of weakness on Wednesday. Japanese exports fell 6.5 percent from a year ago in October. Imports were also down 1.6 percent from a year ago. That still left Japan with a trade deficit of 549 billion yen, the worst trade figure for October since 1979, when comparable data became available.

BoJ monetary policy unchanged, US housing starts jump to 4-year high

The Bank of Japan ended its monetary policy meeting on Tuesday without introducing fresh stimulus measures. The policy rate was left between zero and 0.1 percent.

In the US, determined easing by the Federal Reserve appears to have helped the housing market recover. Housing starts rose 3.6 percent to a 894,000 annual rate in October, the highest since July 2008. Building permits fell 2.7 percent though.

Bill McBride notes that despite the increase so far, “starts in 2012 will still be the 4th lowest year since the Census Bureau started tracking starts in 1959”.

However, he also thinks that the recovery is sustainable and that the “growth in housing starts should continue over the next few years”.

Housing markets improve in US, UK and China, France's credit rating downgraded

The US housing market appears to have escaped the effects of superstorm Sandy.

The National Association of Realtors reported on Monday that existing home sales rose 2.1 percent in October. That helped to push the number of previously-owned homes on the market down 1.4 percent to 2.14 million, the fewest since December 2002. Inventory is now just 5.4 months worth of sales, the least since February 2006 and down from 5.6 months in September.

The improvement in the housing market is also evident from home builder sentiment. The National Association of Home Builders/Wells Fargo housing market index rose to 46 in November, the highest level since May 2006, from 41 in October.

Meanwhile, there were signs of recovery in the UK housing market in November. Rightmove reported on Monday that average asking prices were up 2 percent year-on-year, the highest annual rate of increase seen in November since 2007.

China's housing market also appears to be stabilising. Prices in 35 out of 70 cities tracked by the government rose in October, up from 31 cities in September and the first increase since July.

The reports on the euro area on Monday, however, were not as positive.

Construction output in the euro area fell 1.4 percent in September.

Italian industrial orders fell 4.0 percent in September.

Finally, Moody's Investors Service downgraded France's sovereign rating to Aa1 from Aaa on Monday. It maintained a negative outlook on the country's rating.

Euro area in recession, Japan to follow

Last week's data showed that the eurozone economy has fallen into recession while Japan looks likely to follow.

A report last week showed that real gross domestic product in the euro area fell 0.1 percent in the third quarter. It had fallen 0.2 percent in the second quarter. This means that the eurozone economy has now declined for two consecutive quarters, a widely-used definition of a recession.

Another report last week showed that Japan's economy contracted 0.9 percent in the third quarter. It had grown 0.1 percent in the second quarter.

While Japan's economy has not suffered two consecutive quarters of decline, the prospects are not good. A report in the previous week had shown that the index of leading economic indicators had fallen in September for the fifth month in six.

Last week's economic data from the United States were also mostly negative, with retail sales and industrial production falling in October and initial claims for unemployment benefits surging in the week ending 10 November. The weakness, though, was mostly attributed to superstorm Sandy, so it is unlikely to last.

Indeed, a report from the Organisation for Economic Co-operation and Development last week indicates that until the storm, the US economy had actually been stabilising. The composite leading indicator for the US rose to 100.9 in September from 100.8 in August, the second consecutive monthly increase.

The improvement for the US helped keep the composite leading indicator for the OECD area as a whole steady at 100.2 in September.

The indicators for the euro area and Japan, however, pointed to continued weakness for these economies. The CLI for the euro area stayed at 99.4 in September while the CLI for Japan fell to 100.2 from 100.3 in August.

US industrial production falls, recession risk rises

US economic data have been coming out negative in recent days, with superstorm Sandy not helping.

The trend continued on Friday, with the Federal Reserve reporting that industrial production fell 0.4 percent in October. The Fed said the storm is estimated to have cut industrial production by almost 1 percentage point.

Manufacturing output fell 0.9 percent but was little changed excluding the effects of the storm.

Capacity utilisation fell to 77.8 percent in October from 78.2 percent in September.

Based on the latest available data, including Friday's industrial production report, Dwaine van Vuuren has estimated that according to the NBER recession model, the probability of a US recession is now “in double-digit territory for the first time in this expansion” and that “unless the US Congress does something constructive with the fiscal cliff issue a recession is virtually guaranteed in very short order”.

However, van Vuuren also noted that leading indicators have provided a less pessimistic picture. He said that while these indicators show that recession risks are rising, “provided there are no external shocks . . . or self-inflicted debacles . . . then the economy should continue to pick itself up even if it languishes for a few more months as the effects of Sandy filter through”.

Euro area in recession, US jobless claims surge

For a second consecutive day, both Europe and the US released negative data on Thursday.

The euro area fell into recession after real gross domestic product fell 0.1 percent in the third quarter following a 0.2 percent decline in the previous quarter. Germany and France grew 0.2 percent but Italy contracted 0.2 percent and Spain contracted 0.3 percent.

Another report on Thursday showed that eurozone inflation slowed to 2.5 percent in October from 2.6 percent in September.

In the UK, retail sales fell 0.8 percent in October, more than reversing a 0.5 percent increase in September.

In the US, a report on Thursday showed that superstorm Sandy drove initial claims for jobless benefits up by 78,000 to 439,000 in the week ended 10 November, the most since April 2011.

Factory production in the northeast was also hit. The Philadelphia Fed’s economic index fell to minus 10.7 in November from 5.7 in October. The Federal Reserve Bank of New York’s general economic index indicated continuing contraction despite rising to minus 5.2 this month from minus 6.2 in October.

Another report on Thursday showed that the US consumer price index rose 0.1 percent in October.

Europe, US report negative economic data

The poor economic dataflow from Europe continued on Wednesday.

Industrial production in the euro area fell 2.5 percent in September, the most in more than three years. The worst performances came from Ireland and Portugal, which saw 12.6 percent and 12.0 percent declines in industrial output.

Meanwhile, crisis-stricken Greece saw its economy contract 7.2 percent in the third quarter from the previous year, worse than the second quarter's 6.3 percent contraction, while Portugal's economy shrank 0.8 percent in the third quarter from the previous quarter.

Data from the UK were mixed. The jobless rate dipped to 7.8 percent in the three months through September from 7.9 percent. However, the number of people claiming jobless benefit rose by 10,100 in October, the largest increase since September 2011, after a jobs boost from the Olympics faded.

Across the Atlantic, the US failed to provide the usual offset to the negative data from Europe. Retail sales fell 0.3 percent in October, partly due to the impact of superstorm Sandy.

Greece gets reprieve on deficit over IMF objection

Finance ministers from the euro area have given Greece two extra years to trim its budget deficit. Bloomberg reports:

In the latest compromise in three years of crisis fighting, creditors led by Germany opted late yesterday to keep money flowing to Greece instead of risking a default that could lead to the nation’s exit from the euro and stir more turmoil for the countries that remain in the single-currency bloc.

Greece has made “far-reaching decisions that go in the right direction,” German Finance Minister Wolfgang Schaeuble told reporters in Brussels today. He said Greece’s aid program can be re-engineered to plug a financing gap of as much as 32.6 billion euros ($41 billion) without costing creditors a cent.

The decision came despite objections from the International Monetary Fund's Managing Director Christine Lagarde.

“Debt sustainability of Greece has to be measured in 2020,” said Lagarde, who was French finance minister when the crisis started. “We clearly have different views. What matters at the end of the day is the sustainability of the Greek debt.”

Meanwhile, German investor confidence remains weak despite the actions taken to resolve the sovereign debt crisis. The ZEW index of investor and analyst confidence fell to minus 15.7 in November from minus 11.5 in October.

What did rise recently is UK inflation. Consumer price inflation rose to 2.7 percent in October from 2.2 percent in September.

The acceleration in UK inflation came as house prices fell at their slowest pace in more than two years last month. The Royal Institution of Chartered Surveyors' house price balance rose to -7 in October from -14 the month before.

Japan looks set for recession

Asia kicked off the data reporting week on a weak note.

Japan's economy contracted 0.9 percent in the July-September quarter following growth of 0.1 percent in the prior quarter.

A decline in net exports accounted for 0.7 percentage points of the contraction after exports fell 5.0 percent.

Private consumption fell 0.5 percent while capital expenditure fell 3.2 percent, the fastest pace of decline since the second quarter of 2009.

“The GDP data confirms that the economy has fallen into a recession,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “It is set for a second straight quarter of contraction in the current quarter.”

Meanwhile, in China, new local-currency loans by banks fell 14 percent in October from a year earlier.

And in India, industrial production fell 0.4 percent in September from a year earlier while exports fell 1.6 percent in October from a year earlier.

Markets fall in wake of US elections amid mixed economic data

Stock markets performed negatively last week.

In his market commentary, Doug Short noted that all eight indices that he tracks finished in the red last week. He noted that Japan's Nikkei 225 and Hong Kong's Hang Seng were the worst performers, losing over three percent, with the former falling back into the bear zone.

“The US presidential election took center stage of the world news media, and obviously the reelection of Obama was not what the market wanted,” he wrote.

Erik Swarts also noted the weak market performances but “found little merit in pinning the perceived surprise of short term market gyrations to an event as protracted as the US presidential elections”. Instead, he thinks that “the weakness in equities this past week was the byproduct of ongoing asset kinetics set in motion long ago”.

See his article for some charts of how several indices have been following the arcs of previous peaks.

Investors relying on economic data would have been given mixed signals last week.

In the US, the preliminary Thomson Reuters/University of Michigan consumer sentiment index for November showed a five-year high and exports hit a record in September.

In China, reports last week showed that industrial production, retail sales and fixed-asset investment all accelerated in October. A report over the weekend showed that exports rose 11.6 percent in October from a year earlier, up from 9.9 percent in September, while imports rose 2.4 percent.

However, European and Japanese reports last week showed continuing weakness in these economies.

In the euro area, Markit's composite index based on surveys of purchasing managers fell to 45.7 in October from 46.1 in September, staying well below the 50 mark. Other reports last week showed that retail sales in the euro area fell in September and German, French and Italian industrial production all fell in September.

In Japan, the index of coincident economic indicators fell in September for the sixth consecutive month. There is little respite in sight for the Japanese economy as the leading index also fell in September for the fifth month in six while the diffusion indices from the economy watchers survey and the consumer confidence index all fell in October.

China and US report positive economic data but Europe and Japan show more signs of deterioration

Worries over China's economy receded further after reports released on Friday.

Industrial production rose 9.6 percent in October from a year earlier, more than the 9.2 percent increase in September. Retails sales rose 14.5 percent in October compared with 14.2 percent in September. Fixed-asset investment excluding rural areas increased 20.7 percent in the first 10 months of 2012 from a year earlier compared with a 20.5 percent increase in the January-September period.

Inflation slowed to 1.7 percent in October from 1.9 percent in September.

There was also good news for the US on Friday.

US consumer confidence improved again in November. The Thomson Reuters/University of Michigan preliminary consumer sentiment index rose to 84.9, the fourth straight increase and the highest since July 2007, from 82.6 in October.

Also, with another report on Friday showing that inventories at US wholesalers rose 1.1 percent in September, third quarter GDP growth looks set to be revised significantly up from the initial estimate of 2.0 percent.

In contrast, the data from Europe on Friday were negative.

French industrial production fell 2.7 percent in September while Italian industrial production fell 1.5 percent.

Meanwhile, German inflation was unchanged at 2.1 percent in October.

The news from Japan on Friday was also negative, with the consumer confidence index for general households falling to 39.7 in October from 40.1 in September.

ECB and BoE maintain monetary policies, Japan reports negative data

Two major central banks concluded monetary policy meetings on Thursday without introducing any new monetary stimulus. The European Central Bank held its main interest rate at 0.75 percent while the Bank of England kept its main interest rate at 0.5 percent.

Economic data from Japan on Thursday were pretty gloomy.

The economy watchers' survey results released by the Cabinet Office showed weakening sentiment, with the current conditions index falling to 39.0 in October from 41.2 in September and the future conditions index falling to 41.7 from 43.5.

Another report from Japan showed that core machinery orders there fell 4.3 percent in September.

Meanwhile, lower exports in September helped push Japan's current account surplus down by 68.7 percent from a year earlier.

Trade data for Germany on Thursday were also not good. Exports fell 2.5 percent in September, the fastest decline since late last year. Imports fell 1.6 percent.

In sharp contrast, the US reported on Thursday that exports rose 3.1 percent to a record in September. With imports rising 1.5 percent, the trade deficit shrank 5.1 percent to the smallest since December 2010.

Obama wins, markets lose

US President Barack Obama won a second term on Tuesday but there was little celebration in markets. The S&P 500 fell 2.4 percent on Wednesday to 1,394.53, its lowest level since August. US yen-year yields fell 12 basis points to 1.64 percent.

The STOXX Europe 600 fell 1.4 percent on Wednesday, not helped by the European Commission cutting its growth forecast for the region to just 0.1 percent in 2013 from 1.0 percent.

Eurozone economic data on Wednesday were also negative.

Sales in the area fell 0.2 percent in September, reversing the 0.2 percent gain the previous month. Spanish retail sales plummeted 7.3 percent but sales in Germany and France rose 1.5 percent and 0.8 percent respectively.

Germany's industrial production fell 1.8 percent in September though. It was the sharpest drop since April.

Japan and Europe report negative economic data

There were lots of negative economic data on Tuesday.

Japan's index of coincident economic indicators fell 2.3 points in September, according to a preliminary reading from the Cabinet Office. The index of leading economic indicators fell 1.5 points.

Markit's composite index for the euro area fell to 45.7 in October from 46.1 in September. The index for services fell to 46.0 from 46.1 in September.

German factory orders fell 3.3 percent in September, the second straight drop and the biggest since September 2011.

UK industrial production fell 1.7 percent in September. While that was mainly due to maintenance work on oil and gas production facilities, manufacturing was also weak, growing just 0.1 percent after having fallen 1.2 percent in August.

Services slow in China, US and UK

Some of the major economies saw their services sectors slow in October.

Monday started off with HSBC reporting that its services PMI for China fell to 53.5 in October from 54.3 in September. While slower, the report showed that China's services activity continued to expand last month.

US services also expanded in October, albeit at a slower rate. The Institute for Supply Management's non-manufacturing index fell to 54.2 last month from 55.1 in September.

The UK services sector barely grew in October though. The Markit/CIPS services PMI fell to 50.6 last month from 52.2 in September.

US economy maintains growth at start of fourth quarter

The United States economy has been among the best performers among the developed economies in recent months and data last week suggest that that superior performance has persisted at least at the start of the fourth quarter, with the world's largest economy showing signs that it continues to grow even as the eurozone and Japanese economies continue to look troubled.

The US economy added 171,000 jobs in October, better than the 148,000 increase in September, better than the 125,000 increase estimated by economists surveyed by Bloomberg, and better than the 157,000 average monthly increase so far this year.

The continued recovery in the job market has helped to boost consumer confidence in the US. The Conference Board's consumer confidence index rose to 72.2 in October, the highest since February 2008, from 68.4 in September.

US manufacturing also accelerated in October. The Institute for Supply Management's manufacturing PMI rose to 51.7 last month from 51.5 in September.

In contrast, Markit's manufacturing PMI for the euro area fell to 45.4 in October from 46.1 in September, indicating a contraction in the eurozone manufacturing sector for a fifteenth successive month.

Another indication of economic weakness in the euro area was the European Commission's economic sentiment indicator for the region, which fell to 84.5 in October from 85.2 in September, the eighth consecutive decline.

Another economy that showed weakness last week was Japan's. Industrial production there fell 4.1 percent in September and a survey of manufacturers showed that production was expected to decline by another 1.5 percent in October before rising 1.6 percent in November. Indeed, the Markit/JMMA manufacturing PMI fell to 46.9 in October, the lowest level in 18 months, from 48.0 in September.

Fortunately, another key economy, China's, has held up better.

Manufacturing in China improved in October. The manufacturing PMI from the China Federation of Logistics and Purchasing and the National Bureau of Statistics rose to 50.2 in October from 49.8 in September while HSBC's manufacturing index rose to 49.5 in October from 47.9 in September.

Services also improved. The services PMI from the China Federation of Logistics and Purchasing and the National Bureau of Statistics rose to 55.5 in October from 53.7 in September.

US employment accelerates, eurozone manufacturing deteriorates

Reports on the US economy on Friday were positive.

US employment growth accelerated in October. Nonfarm payrolls increased by 171,000 after a 148,000 gain in September. However, the unemployment rate rose to 7.9 percent from 7.8 percent as a result of a larger labour force.

US factory orders rose 4.8 percent in September, the biggest gain since March 2011. Excluding transportation, orders rose 1.4 percent. Orders for non-defense capital goods excluding aircraft increased 0.2 percent.

European data on Friday were not as good. Markit's manufacturing PMI for the euro area fell to 45.4 in October from 46.1 in September.

US manufacturing expands, consumer confidence highest in over 4 years

US economic data on Thursday showed that the economy entered the fourth quarter on a positive note.

US manufacturing expanded in October, with the Institute for Supply Management’s manufacturing PMI rising to 51.7 from 51.5 in September. Markit's manufacturing PMI dipped to 51.0 in October from 51.1 in September but still indicated expansion.

A report from the Conference Board showed that its consumer confidence index increased to 72.2 in October, the highest since February 2008, from 68.4 in September.

US consumer sentiment has been boosted by an improving labour market. Private employers added 158,000 workers in October, the biggest gain since February, according to ADP, and initial claims for state unemployment benefits dropped 9,000 to a seasonally-adjusted 363,000 last week.

Another report on Thursday showed that construction spending rose 0.6 percent in September.

There were also some better data coming out of China on Thursday. China's official manufacturing PMI rose to 50.2 in October from 49.8 in September while HSBC's manufacturing index rose to 49.5 in October from 47.9 in September.

The improvements in manufacturing in October bypassed the UK though. The CIPS/Markit manufacturing PMI fell to 47.5 in October from 48.1 in September.

Eurozone unemployment hits record high

There were mixed data out of Europe on Wednesday.

In the euro area, the unemployment rate rose to a record 11.6 percent in September from 11.5 percent in August. Another report showed inflation in the region cooled to 2.5 percent in October from 2.6 percent in September.

German retail sales rose 1.5 percent in September, the second consecutive monthly increase, but French consumer spending edged up just 0.1 percent in September.

Beyond the euro area, consumer confidence in the UK fell in October, GfK's index falling to -30, the lowest since April, from -28 in September.

Data out from the US on Wednesday did not show their usual buoyancy. The Institute for Supply Management-Chicago's business barometer rose to 49.9 in October from 49.7 in September but remained below the 50 mark. The index for new orders did rise though to 50.6 from 47.4.

BoJ announces more monetary stimulus as factory production falls

The Bank of Japan announced more monetary easing after its monetary policy meeting on Tuesday. The BoJ kept interest rates unchanged at between zero and 0.1 percent but said it would expand its asset-purchase programme by 11 trillion yen to 91 trillion yen.

The additional stimulus come as the economic growth forecast for the fiscal year to March was revised down to 1.5 percent, well down from an earlier 2.2 percent estimate. Prices are also forecast to fall 0.1 percent in the year to March instead of rise 0.2 percent.

The forecast downgrades also comes as a report on Tuesday showed that Japanese factory production fell 4.1 percent in September, while a survey of manufacturers showed that production was expected to decline by another 1.5 percent in October before rising 1.6 percent in November.

Corroborating evidence for the weakness in manufacturing came today from the manufacturing PMI, which fell to 46.9 in October, an 18-month low, from 48.0 in September.

The euro area was also hit by negative economic data on Tuesday.

The European Commission's economic sentiment indicator for the euro area fell to 84.5 in October from 85.2 in September.

Spain's economy contracted 0.3 percent in the third quarter.

The number of Germans out of a job rose by 20,000 in October, although the unemployment rate held steady at 6.9 percent.

Not for the first time recently, the US proved the exception to the negativity. A report on Tuesday showed that US home prices rose 2.0 percent in August from a year ago, the biggest gain since July 2010, according to the S&P/Case-Shiller index.

Still, there was not much cheer in the US on Tuesday after the devastation wreaked by Hurricane Sandy along the east coast.

US consumer spending and UK consumer credit rise

September was apparently a good time for consumers in the US and UK to spend.

A report on Monday showed that US consumer spending rose 0.8 percent in September while income rose 0.4 percent. After adjusting for inflation, spending rose 0.4 percent but disposable income was little changed.

In the UK, a report on Monday showed that consumer credit rose by 1.199 billion pounds in September, the strongest rise since February 2008. Mortgage approvals rose to 50,024 in September from 47,921 in August.

Japanese consumers pulled back in September though. A report today showed that although Japan's jobless rate stood unchanged at 4.2 per cent in September, household spending fell 0.9 per cent in September from the previous year after having risen 1.8 percent in August.

US third quarter GDP report shows no recession for now

According to the advance estimate from the Commerce Department, the US economy grew at a 2.0 percent annual rate, accelerating from the 1.3 percent growth rate in the second quarter.

Bill McBride thinks the US economy is likely to avoid a recession in the near future.

The key story is that residential investment is continuing to increase, and I expect this to continue (although the recovery in RI will be sluggish compared to previous recoveries). Since RI is the best leading indicator for the economy, this suggests no recession this year or in 2013 (with the usual caveats about Europe and policy errors in the US).

However, James Hamilton finds little encouraging in the third quarter GDP report.

The biggest boost to third quarter growth came from federal military spending, which all by itself added 0.64 percentage points to the 2.0% total growth. Possibly this represented spending in anticipation of sequestration to come, in which case it could be more than matched by a corresponding negative entry this quarter or next. Nonresidential fixed investment subtracted 0.1%-- not a huge drag, but a very worrisome development.

John Hussman goes one step further and says that the US economy is in “an unrecognized recession that started about mid-year” and that the growth rate reported for the third quarter is likely to eventually be revised downward.

US growth accelerates in third quarter as euro area reports mixed data

The US economy performed better than expected in the third quarter.

An advance estimate by the Commerce Department released on Friday showed that the economy grew at a 2 percent annual rate after having grown 1.3 percent in the second quarter. Economists surveyed by Bloomberg had estimated a growth rate of 1.8 percent for the third quarter.

In another piece of good news for the US economy on Friday, the Thomson Reuters/University of Michigan final consumer sentiment index for October came in at 82.6, the highest since September 2007, and up from 78.3 in September.

German consumer confidence is also improving. GfK said on Friday that its consumer confidence index for Germany will rise to 6.3 in November, the highest in five years, from 6.1 in October.

Other eurozone economic data on Friday were mixed though.

French consumer confidence deteriorated in October, INSEE's consumer confidence index falling to 84 from 85 in September.

In Italy, Istat's composite business confidence climate index increased to 76.6 from 76.0 in September.

But in Spain, the unemployment rate hit a record high of 25 percent in the third quarter amid a series of spending cuts by the government.

In contrast, Japan is providing a fresh round of fiscal stimulus. The government on Friday approved a US$5.3 billion cash injection to boost the economy.

The stimulus comes as a report on Friday showed that Japan's core consumer prices fell 0.1 percent from a year ago in September.

UK economy returns to growth, US growth improves

The UK economy rebounded in the third quarter, thanks to the Olympics.

The Office for National Statistics reported on Thursday that the economy grew 1.0 percent after having shrunk 0.4 percent in the second quarter. The statistics office estimated that Olympics ticket sales accounted for a fifth of the increase while economists estimate that a rebound from the output lost due to an extra holiday in June to celebrate the Queen's Diamond Jubilee added another 0.5 percentage points.

US economic data on Thursday were mixed.

The Chicago Federal Reserve reported that its National Activity Index rose to 0.00 in September from -1.17 in August. The index’s three-month moving average increased to -0.37 in September from -0.53 in August.

A report from the Commerce Department showed that durable goods orders jumped 9.9 percent in September, the biggest gain in more than two and a half years, after having plunged 13.1 percent in August, the largest decline in three years.

A surge in aircraft orders drove the increase in September. Excluding transportation, new orders for durable goods rose 2.0 percent in September. Orders for non-defense capital goods excluding aircraft were flat.

Another report on Thursday showed that pending home sales in the US rose 0.3 percent in September after having declined 2.6 percent in August.

Fed policy unchanged as US new homes sales jump

The Federal Reserve made no change to monetary policy on Wednesday. It noted that the economy is still growing modestly and unemployment remains elevated.

Housing in the US, meanwhile, continues to recover. A report on Wednesday showed that new home sales rose 5.7 percent to a 389,000 annual pace, the highest since April 2010.

There was also good news for US manufacturing on Wednesday. A preliminary reading from Markit showed that its US manufacturing PMI rose to 51.3 in October from 51.1 in September.

Manufacturing in China also showed signs of improvement. A preliminary report from HSBC on Wednesday showed that its China manufacturing PMI rose to 49.1 this month, the highest level in three months, from 47.9 in September.

However, there was no relief for the euro area. Markit's composite index for the euro area fell to 45.8 in October, the lowest in more than three years, from 46.1 in September. The manufacturing index fell to 45.3 from 46.1 while the services index edged up to 46.2 from 46.1.

Germany was also hit, its manufacturing index falling to 45.7 in October from 47.4 in September and its service index falling to 49.3 from 49.7.

Further evidence of deterioration in Germany's economy came from the Ifo institute, who reported on Wednesday that its business climate index fell to 100.0 in October from 101.4 in September.

Markets fall, Spanish economy contracts in third quarter

Markets fell on Tuesday, with the MSCI All-Country World Index falling 1.5 percent.

European stocks were hit especially hard, with the STOXX Europe 600 Index falling 1.7 percent.

European economic data were mostly negative.

The Bank of Spain reported that the Spanish economy shrank 0.4 percent in the third quarter, the same rate as in the second quarter.

An index of confidence among French factory executives fell to 85 in October, the lowest since August 2009, from 90 in September.

In Belgium, the business confidence index fell to -13.5 in October from -11.6 in September.

However, the eurozone consumer confidence indicator edged up to -25.6 in October from -25.9 in September.

Outside the euro area, the number of mortgage approvals for house purchases in the UK increased to 31,175 in September from 30,683 in August.

US stocks outperform as Fed easing pushes valuations above historical norms

Bloomberg reports that US stocks are beating every major asset class for the first time in 17 years.

The Standard & Poor’s 500 Index has rallied 14 percent in 2012, beating Treasuries, corporate bonds, commodities, the dollar and equities in Asia and Europe, data compiled by Bloomberg show. The last time that happened, in 1995, the S&P 500 was posting the biggest annual advance of the last five decades. With a price-earnings ratio close to today’s level, the index gained another 93 percent in the next 2 1/2 years.

However, Brett Arends says stocks may actually have become expensive by historical standards.

Over the past 130 years, U.S. stocks on average have traded at about 17 times mean earnings for the previous 10 years—a measure known as the "Shiller Price/Earnings Ratio" after Yale economics professor Robert Shiller, who tracks the data. Today the market is about 22 times those earnings, a level associated with frothy markets such as 1929, the mid-1960s, and most of the period from 1995 to 2008.

Another measure, "Tobin's q," also suggests stocks might be in dangerous territory. Tobin's q, named for the late Nobel economics laureate James Tobin, measures stock valuations against the cost of replacing companies' assets. Right now the reading is 0.92, about 50% above the long-term historical average. Stock returns from these levels have usually been subpar.

Barry Ritholtz says that the Federal Reserve's quantitative easing has “made riskless assets much less attractive” and “forced managers into equities beyond what is normally prudent”.

The Fed’s impact on asset prices will eventually attenuate. Those of you who are playing along at home, make sure you have some set of parameters to alert you to evidence of when the Fed’s punchbowl has gone non-alcoholic so you can reduce your equity exposure substantially.

We continue to get closer to that point, but we are not quite there yet . . .

Japan's economy shows weakness as exports fall again

Japan's exports fell again in September, adding to the weak trend in Japanese economic indicators recently.

Today, the Finance Ministry reported that Japan had a trade deficit of 558.6 billion yen in September after exports fell 10.3 percent from a year earlier while imports rose 4.1 percent.

It was the fourth consecutive year-on-year decline in exports, the third consecutive monthly trade deficit and the first trade deficit for the month of September since 1979.

Exports to the economically-troubled European Union dived 21.1 percent.

Exports to China, with whom a territorial dispute has recently flared, fell 14.1 percent.

Exports to the United States managed to rise, albeit by just 0.9 percent.

The latest weak trade figures followed a report last Friday showing that the coincident index of economic indicators fell to 93.5 in August from 93.8 in July, the fifth consecutive monthly decline.

The leading index did edge up to 93.2 in August from 93.0 in July, though, after having declined for the previous four consecutive months.

The broad trend in Japan's economic indicators, though, remains clearly down.

US existing home sales fall, markets drop

A report from the National Association of Realtors on Friday showed that US existing home sales fell 1.7 percent in September. This was in line with expectations though.

Significantly, the median price rose 11.3 percent from a year ago, the biggest year-over-year gain since November 2005, and the supply of existing homes fell 3.3 percent to 2.32 million, the fewest for any September since 2002. Supply now constitutes 5.9 months of sales, the lowest since March 2006.

Despite the fall in sales, Bill McBride sees this as a “solid report” due to the decline in inventory.

Markets did not positively on Friday though. From Bloomberg:

U.S. stocks slid the most since June and Treasuries rose as companies from General Electric (GE) Co. to McDonald’s Corp. and Microsoft Corp. posted results below estimates and euro-area leaders failed to discuss aid for Spain at a summit. Metals and oil led a slump in Commodities.

The Standard & Poor’s 500 Index fell 1.7 percent at 4 p.m. in New York, its worst drop since June 21, as GE, McDonald’s and Microsoft lost at least 2.9 percent. The Stoxx Europe 600 Index declined 0.8 percent, paring its advance this week to 1.7 percent. Ten-year Treasury yields fell seven basis points to 1.76 percent after rising for four straight days. The euro weakened against the dollar for a second day while copper and oil dropped more than 2 percent.