US consumer spending ekes out gain but Japanese industrial production falls

Global economic data on Friday were mixed.

In the US, consumer spending rose 0.5 percent in August. However, after accounting for a 0.4 percent increase in prices, real spending rose just 0.1 percent.

Incomes rose 0.1 percent in August, matching the previous month increase. After adjusting for inflation, disposable income fell 0.3 percent, the weakest reading since November.

However, consumer confidence has since improved. The Thomson Reuters/University of Michigan consumer sentiment index rose to 78.3 this month from 74.3 in August.

Manufacturing continued to show weakness though. Another report on Friday showed that the Institute for Supply Management-Chicago's business barometer fell to 49.7 in September from 53 in August.

Data from the euro area were also mixed.

German retail sales rose 0.3 percent in August. This followed a 1.0 percent drop in July.

French consumer spending on goods fell 0.8 percent in August after having increased 0.4 percent in July.

And inflation in the euro area accelerated to 2.7 percent in September from 2.6 percent in August. The increase was partly attributed to an increase in the value-added tax in Spain.

Meanwhile, over in Japan, deflation remains the problem. A report on Friday showed that the core consumer price index there fell 0.3 percent in the year to August as overall consumer prices fell 0.4 percent.

More alarmingly, industrial production fell 1.3 percent to a 15-month low in August, according to another report on Friday. Furthermore, a survey by the Ministry of Economy, Trade and Industry showed that output was expected to fall 2.9 percent in September and stabilise only in October.

In another possible sign of stabilisation, the Markit/JMMA Japan manufacturing PMI rose to 48.0 in September from 47.7 in August.

On a more positive note, another report showed that Japan's unemployment rate fell to 4.2 percent in August from 4.3 percent in July.

Also, household spending in Japan rose 1.8 percent in August from a year ago, improving from the 1.7 percent increase in July.

Markets rise amid weak economic data

Markets rose on Thursday. Bloomberg reports:

Stocks rallied and commodities rebounded from a seven-week low as Spain pledged to cut its deficit and speculation grew that China’s government will do more to support economic growth. The dollar and Treasuries fell.

The MSCI All-Country World Index (MXWD) climbed 0.8 percent at 4:30 p.m. in New York, rebounding from its biggest drop since July. The Standard & Poor’s 500 Index advanced 1 percent, halting a five-day slump, and the Shanghai Composite Index jumped the most in three weeks. The S&P GSCI gauge of commodities gained 1.3 percent as oil rebounded, while the dollar weakened versus all 16 major peers. Spain’s 10-year bonds rose for the first time in three days, while U.S. notes halted the longest rally since 2008.

Investors shrugged off weak economic data on Thursday.

In China, industrial companies' profits fell 6.2 percent in August from a year earlier, the fifth consecutive decline and the biggest this year.

In the euro area, the European Commission's economic sentiment indicator fell to 85.0 in September from 86.1 in August.

The UK did report an upward revision to second quarter economic growth. GDP is now estimated to have fallen 0.4 percent last quarter instead of the previous estimate of a 0.5 percent fall.

However, in the US, second quarter growth was revised down to 1.3 percent from 1.7 percent.

And there were other negative data on Thursday on the usually-resilient US economy.

Durable goods orders plunged 13.2 percent in August, weighed down by a 34.9 percent fall in transportation orders. However, even excluding transportation, orders fell 1.6 percent.

Orders for non-defense capital goods excluding aircraft did rise 1.1 percent in August, partly reversing a 5.2 percent fall the previous month.

However, US pending home sales fell 2.6 percent in August, reversing the 2.6 percent rise in July.

Europe reports falling retail sales and confidence as Greeks and Spaniards riot

Economic reports turned negative on Wednesday.

In Europe, Italian retail sales fell 0.2 percent in July while the French consumer confidence index fell to 85 in September from 86 in August.

Weaker economic data in Europe has generally been accompanied by a moderation in inflation though. In Germany, inflation eased to 2.0 percent in September from 2.1 percent in August.

Still, the focus recently has been on anti-austerity riots in Greece and Spain, which has become increasingly violent. Spanish bonds fell on Wednesday, pushing the 10-yield back above 6.0 percent, while the IMF and the EU clashed over Greece's bailout prospects.

In the US, the recovery in new home sales failed to make further progress in August, falling by 0.3 percent. However, the July annual sales rate was revised higher to 374,000, the highest since April 2010.

US consumer confidence jumps, European confidence steady

US economic data on Tuesday were positive. The Conference Board’s consumer confidence index rose to 70.3 in September, the highest level in seven months, from 61.3 in August. Home prices have also risen, with the S&P/Case-Shiller composite 20 index rising 1.2 percent in July from a year earlier, the biggest 12-month increase since August 2010, and the Federal Housing Finance Agency’s home-price index rising 0.2 percent in July.

And in the supposedly-weak manufacturing sector, the Richmond Fed's manufacturing index rose to 4 in September from -9 in August, the third consecutive regional survey to show an improvement.

European data on Tuesday were also relatively good. An indicator of French industrial confidence was unchanged at 90 in September while German consumer confidence is also expected to hold steady in October. The Italian consumer confidence index rose to 86.2 in September from a revised 86.1 in August.

Chicago Fed index falls to level at start of last recession

The week's economic reporting started on a weak note.

In the United States, the Chicago Federal Reserve reported on Monday that its National Activity Index fell to -0.87 in August from -0.12 in July. The index’s three-month moving average fell to -0.47 in August from -0.26 in July. According to the Chicago Fed, the three month average suggests that economic growth in August was below its historical trend.

The three-month average in August was its lowest since June 2011. The reading was also the same as when the economy last entered recession in December 2007.

Also on Monday, the Ifo Institute reported that its Business Climate Index for Germany fell to 101.4 in September from 102.3 in August, its fifth consecutive decline. The September reading is the lowest since February 2010.

Global trade to slow amid eurozone debt crisis

As the global economy slows, so will global trade. AFP/CNA reports the latest trade growth projection from the World Trade Organisation:

The World Trade Organization (WTO) on Friday slashed its 2012 global trade outlook, citing the eurozone debt crisis and weak growth in the US and China as key factors behind the downgrade.

Global trade is now expected to grow 2.5 per cent in 2012 compared with a previous forecast of 3.7 per cent, the WTO said in a statement released in Singapore.

It also cut its global trade growth outlook for next year to 4.5 per cent from 5.6 per cent.

The eurozone sovereign debt crisis was cited as a key factor beyond the slowdown, and despite the European Central Bank's latest bond-purchase plan, the crisis may have to get worse before it can get better. From Bloomberg:

Italy and Spain won’t request bailouts unless a new surge in bond yields leaves them shut out of markets, as no government will voluntarily accept conditions imposed for the aid, a senior Italian government official said.

“There won’t be any nation that voluntarily, with a pre- emptive move, even if rationally justified, would go to an international body and say, ‘I give up my national sovereignty,’” Gianfranco Polillo, undersecretary of finance, said in an interview in Rome late yesterday. “I rule it out for Italy and for any other country.”

Manufacturing contracts in China and euro area, Chinese stocks tumble to lowest since Feb 2009

China's manufacturing activity contracted for an 11th consecutive month in September, according to HSBC on Thursday. Its preliminary manufacturing PMI rose to 47.8 this month, a small improvement from 47.6 in August.

Asian markets reacted badly to the report. The Shanghai Composite Index led the losses, tumbling 2.08 percent to 2,024.84, its lowest close since February 2009. Hong Kong stocks fell 1.20 percent while Japanese stocks fell 1.57 percent.

Things were worse in the euro area, where Markit's flash composite index fell to a 39-month low of 45.9 in September from 46.3 in August. The manufacturing PMI rose to 46.0 in September from 45.1 in August but the services PMI fell to 46.0 from 47.2.

In further bad news for the euro area on Thursday, the European Commission reported that its consumer confidence index for the region fell to minus 25.9 in September, the lowest since May 2009, from minus 24.6 in August.

One bright spot for the euro area, however, was that Spain successfully sold 4.8 billion euros of bonds on Thursday, the most since January.

Elsewhere in Europe, the UK reported a 0.2 percent fall in retail sales in August.

Even the more resilient US economy saw only mixed data on Thursday.

Markit's flash US manufacturing PMI held at 51.5 in September, the Philadelphia Federal Reserve Bank's business activity index improved to minus 1.9 this month compared with minus 7.1 in August and initial claims for state unemployment aid edged down 3,000 to 382,000 last week.

However, the Conference Board's leading economic index fell 0.1 percent in August after rising 0.5 percent in July.

Bank of Japan expands monetary stimulus as Japanese exports fall

Monetary policy easing from the world's major central banks continued on Wednesday.

This time, it was the Bank of Japan expanding its asset-purchasing fund by 10 trillion yen to 80 trillion yen. Interest rates were kept at between zero and 0.1 percent.

Thursday brought some justification for the latest easing. Japanese exports fell 5.8 percent in August from a year earlier and imports fell 5.4 percent. The trade balance came to a deficit of 754.1 billion yen in August, the second straight month that it has been in deficit.

Japan's trade could be impaired further by souring relations with China over a territorial dispute.

Meanwhile, China's economy is facing problems of its own. A report on Wednesday showed that foreign direct investment in China fell 1.4 percent in August from a year earlier.

While Asia's two biggest economies show signs of weakening, the US economy appears to be supported by the continuing recovery in housing. Existing home sales rose 7.8 percent in August to the highest rate since May 2010. Also, housing starts rose 2.3 percent in August. However, building permits fell 1.0 percent.

US homebuilder confidence at highest level in six years

Economic data on Tuesday were mostly positive.

In the US, confidence among homebuilders climbed in September to the highest level in more than six years. The National Association of Home Builders/Wells Fargo builder sentiment index rose to 40 this month from 37 in August.

Meanwhile, German investor confidence rose for the first time in five months in September. The ZEW's index of investor and analyst expectations rose to minus 18.2 from minus 25.5 in August.

And the inflation rate in the UK declined in August to 2.5 percent from 2.6 percent in July.

Also slowing is home price gains in China. Prices for newly constructed homes in China rose in 35 of 70 cities in August, down from 49 in July.

Stock market return/risk prospect at worst point in history

John Hussman, who has been negative on the stock market for several months, has become even more negative. From his latest commentary:

As of Friday, our estimates of prospective return/risk for the S&P 500 have dropped to the single lowest point we’ve observed in a century of data. There is no way to view this as something other than a warning...

And last week's Fed move will not help.

We continue to view QE as being of no real economic benefit, and though it has clearly affected financial markets, QE has typically boosted the stock market by little more than the amount it has lost over the prior 6 month period. That’s another way of saying that I doubt the Fed’s actions will be of much durable effect here at all...

Doug Kass also has little faith in QE3. From his latest commentary at Real Money:

I am skeptical that QE3 (i.e., open-ended purchases of mortgage-backed securities) will mollify the modified liquidity trap we are currently in, and I am skeptical that the labor market and/or real economy will feel any benefits from the recent Fed announcement. In fact, I see the unintended consequences of higher inflation and rising intermediate- to longer-term interest rates as, at the very least, diluting what the Fed is trying to accomplish.

Kass thinks the key issue may be declining corporate profits.

I believe the market's lifeblood and its ultimate fair market valuation importantly lie with the direction of U.S. corporate profits. As I mentioned previously, third quarter 2012 will represent the first drop in S&P earnings in three years... The bottom-up consensus for 2013 S&P profit growth is for gains of at least 10%, while the top-down estimates are at about 5% growth. But ... an outlier expectation of a decline in corporate profits of as much as 5% is more likely for next year.

In contrast, David Kotok thinks QE is positive for stocks. However, the impact on bonds is less clear. From his latest article:

... US treasury bond yields are expected to fall. But global sellers may have other things in mind. They now suspect the US dollar will weaken and therefore they want to exit their holdings. When they do that, the yields on those instruments will rise and the prices fall if the global sellers sell more in a given period than the Fed is buying...

Stocks ... have the ability to adjust to the inflationary outcomes that this extraordinary Fed policy can deliver. American stocks can state their foreign earnings in US dollar terms. Therefore a weakening US dollar means they will report higher earnings. Thus stocks get a double kick from this policy. They benefit from the weak dollar earnings translation and they benefit from the Fed duration switch.

Global economy continues to lose momentum

Economic data last week indicated that the global economy as a whole continued to slow in recent months.

In the United States, data last week showed that its economy is probably still growing.

Retail sales there rose 0.9 percent in August, faster than the 0.6 percent gain in July. A 1.3 percent jump in auto sales, as well as higher gasoline prices, contributed to the increase.

However, excluding autos and gas, retail sales rose just 0.1 percent last month, well down from the 0.8 percent gain in July.

Nevertheless, a rise in the Thomson Reuters/University of Michigan consumer sentiment index to 79.2 in September from 74.3 in August suggests that US consumer spending remains resilient.

Worryingly, though, US exports fell 1.0 percent in July while industrial production fell 1.2 percent in August, the largest fall since March 2009. These data suggest that global economic weakness is having a negative impact on the US economy.

In contrast, in the crisis-stricken euro area, industrial production rebounded 0.6 percent in July after having fallen 0.6 percent in June.

Data for Japan last week were mixed.

Industrial production fell 1.0 percent in July after having risen 0.4 percent in June. Encouragingly, though, core machinery orders jumped 4.6 percent in July, just slightly less than the 5.6 percent increase in June.

Japan's services sector also provided mixed data. The Cabinet Office's economy watchers survey for August showed that its current conditions index fell to 43.6 last month from 44.2 in July while the future conditions index fell to 43.6 from 44.9. Both indices are at their lowest levels in more than a year.

However, the consumer confidence index, which had fallen in June and July, rebounded to 40.5 in August from 39.7 in July.

On the whole, though, last week's data were consistent with other recent data pointing to weak global economic growth.

Meanwhile, data from the Organisation for Economic Co-operation and Development suggest that the global economy is likely to continue to slow.

A report last week showed that the composite leading indicator for the OECD as a whole fell by 0.05 in July to 100.2. While the decline was small, it was the third consecutive decline in the indicator.

OECD composite leading indicators
	Ratio to trend, amplitude adjusted					Change from previous month
	2012					2012
	Mar	Apr	May	Jun	Jul	Mar	Apr	May	Jun	Jul
OECD area	100.4	100.4	100.3	100.3	100.2	0.04	0.00	-0.03	-0.05	-0.05
United States	100.9	101.0	100.9	100.9	100.8	0.08	0.01	-0.04	-0.06	-0.04
Euro area	99.7	99.7	99.6	99.5	99.4	-0.04	-0.06	-0.08	-0.10	-0.09
Japan	100.8	100.8	100.7	100.5	100.4	0.01	-0.06	-0.12	-0.15	-0.15

According to the OECD, the CLIs of the major economies show that the “loss of momentum is likely to persist in the coming quarters”.

US credit rating cut on QE3

While markets cheered the Federal Reserve's launch of QE3 on Thursday, a rating agency took a dimmer view of the move. From Bloomberg:

Egan-Jones Ratings Co. cut its credit rating for the U.S. one level to AA-, citing the potential for the Federal Reserve’s third round of large-scale asset purchases to weaken the dollar and drive up inflation.

U.S. debt to gross-domestic-product has risen to 104 percent from 66 percent in 2006, Egan-Jones said today in a report...

The Fed’s latest program will “stoke the stock market and commodity prices, but in our opinion will hurt the U.S. economy and, by extension, credit quality,” Egan-Jones said. “The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers, thereby reducing consumer purchasing power.”

The US dollar has already weakened since the Fed announcement of QE3, falling to a four-month low against the euro on Friday.

Meanwhile, US economic data on Friday were mixed.

Retail sales rose 0.9 percent in August, helped by a 1.3 percent jump in auto sales. However, higher gasoline prices also contributed. Excluding autos and gas, retail sales rose just 0.1 percent last month.

Indeed, higher gasoline prices also contributed to a 0.6 percent rise in the consumer price index in August, the biggest increase since June 2009.

In any case, consumer sentiment has since improved. The University of Michigan and Thomson Reuters preliminary consumer sentiment index rose to 79.2 in September from 74.3 in August.

Industrial production, though, fell 1.2 percent in August, the largest fall since March 2009. According to the Fed, Hurricane Isaac’s impact on output from the Gulf Coast region contributed 0.3 percentage points to the drop.

Fed announces QE3

The Federal Reserve finally launched the widely-anticipated QE3 after its monetary policy meeting on Thursday. Bloomberg reports:

The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

“We’re looking for ongoing, sustained improvement in the labor market,” Chairman Ben S. Bernanke said in his press conference today in Washington following the conclusion of a two-day meeting of the Federal Open Market Committee. “There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.”

Short-term rates will also be kept low for longer.

The FOMC also said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

Ironically, this comes as the Fed raised it economic projections. Growth is now forecast to improve to as much as 3 percent next year and as much as 3.8 percent in 2014, up from upper estimates of 2.8 percent and 3.5 percent in the previous forecasts, while unemployment is now forecast to fall to 6.7 percent to 7.3 percent by 2014 compared with 7 percent to 7.7 percent in the June projections.

Market response to the Fed move was predictably positive. The S&P 500 climbed 1.6 percent, oil rose 1.3 percent and gold jumped 2.2 percent.

German court clears bailout fund amid positive global economic data

The reports on Wednesday were mostly positive for the global economy.

In the euro area, a potential obstacle to the bailout of indebted countries was cleared. Reuters reports:

Germany's Constitutional Court gave a green light on Wednesday for the country to ratify Europe's new bailout fund, boosting hopes that the single currency bloc is finally putting in place the tools to resolve its three-year old debt crisis.

Another piece of good news for the euro area on Wednesday was a report showing that industrial production in the region rose 0.6 percent in July.

Elsewhere in Europe, there was also good news from the UK, where the number of people claiming jobless benefit fell by 15,000 in August, the largest in two years.

And earlier on Wednesday, Japan had reported that core machinery orders jumped 4.6 percent in July, the second consecutive monthly increase.

US exports fall, Chinese lending surges

It looks like the global economic slowdown is hurting US economic growth.

Data on Tuesday showed that US exports fell 1.0 percent in July. Exports to the European Union in particular fell 11.7 percent.

Imports fell 0.8 percent, thanks to a fall in oil prices.

If global economic weakness is hurting US exports, it is just as well that there was some positive data from China on Tuesday.

According to a report from the People's Bank of China, Chinese banks extended 703.9 billion yuan of new local-currency loans in August, a sharp increase from 540.1 billion yuan in July.

Also on Tuesday, China's Premier Wen Jiabao said that the economy is showing signs of stabilising and is on course to meet its 2012 growth target.

Economic data show weaker growth in China and Japan

Reports over the weekend had indicated that China's economy has slowed. While inflation accelerated slightly to 2.0 percent in August from 1.8 percent in July, industrial production grew just 8.9 percent in August from a year ago, down from 9.2 percent in July.

Monday brought further evidence of China's slowdown. Exports increased just 2.7 percent in August from a year ago while imports fell 2.6 percent.

Data from Japan on Monday also showed weakness. Second quarter GDP growth was revised down to 0.2 percent from an initial 0.3 percent. The current account surplus fell 40.6 percent in July from a year earlier as the trade balance fell into a deficit of 373.6 billion yen.

Service sector sentiment in Japan has also been weak, with the Cabinet Office's economy watchers survey showing that its index of current conditions fell to 43.6 in August from 44.2 in July. The future conditions index fell to 43.6 in August from 44.9 in July.

One positive for Japan, though, was a rise in the consumer confidence index to 40.5 in August from 39.7 in July.

No improvement in global economy

Data from purchasing managers' surveys and other reports last week indicated that there has been no improvement in global economic growth recently.

Surveys of purchasing managers around the world showed that global economic activity may have slowed again in August. The JPMorgan global all-industry output index fell to 51.1 last month from 51.7 in July.

JPMorgan Global All-Industry Indices
	July	August
Output	51.7	51.1
New orders	50.0	49.9
Input prices	51.7	56.0
Employment	49.6	51.0

In the United States, purchasing managers' surveys painted a mixed picture. The Institute for Supply Management's manufacturing PMI fell to 49.6 in August from 49.8 in July. However, its non-manufacturing index rose to 53.7 in August from 52.6 in July.

In the euro area, Markit's composite output index fell to 46.3 in August from 46.5 in July. The eurozone manufacturing PMI remained well below the neutral 50 mark even as it rose to 45.1 from 44.0. However, the services PMI fell to 47.2 from 47.9.

In China, manufacturing activity contracted in August. The manufacturing PMI from the National Bureau of Statistics and China Federation of Logistics and Purchasing fell below the 50 mark to 49.2 in August from 50.1 in July while HSBC's manufacturing PMI fell to 47.6 from 49.3.

China's services sector continued to grow though. The services PMI from the National Bureau of Statistics and China Federation of Logistics and Purchasing rose to 56.3 in August from 55.6 in July but HSBC's services PMI fell to 52.0 from 53.1.

In Japan, Markit's composite output index remained below the neutral 50 mark in August despite rising to 48.6 from 47.4 in July. The Markit/JMMA manufacturing PMI fell to 47.7 from 47.9 but the services business activity index rose to 49.3 from 47.5.

Beyond the purchasing managers' surveys, other economic data released last week also pointed to weakness.

The US employment report last Friday was disappointing with non-farm payrolls increasing by just 96,000 in August compared with 141,000 in July. A fall in the labour force helped push the unemployment rate down to 8.1 percent from 8.3 percent in July.

Another report on Friday showed that Japan's economy is weakening. The Cabinet Office's coincident index of economic indicators fell to 92.8 in July from 94.1 in June, its fourth consecutive decline.

Furthermore, a fall in the leading economic index to 91.8 in July from 93.2 in June, also the fourth consecutive decline, indicates that the Japanese economy is likely to weaken further in coming months.

This weakening in the Japanese economy follows growth of just 0.2 percent in the April-June quarter, according to a report from the Cabinet Office today. The growth rate was revised down from an initially-reported 0.3 percent.

Finally, a report in China over the weekend largely corroborated the data from the purchasing managers' surveys. Industrial production reportedly grew 8.9 percent in August from a year ago, down from 9.2 percent in July and the slowest rate of increase since May 2009. Fixed asset investment rose 20.2 percent between January and August compared to the year-earlier period, less than the 20.4 percent in the period from January to July.

However, retail sales in China held up in August, growing 13.2 percent from a year ago, up from 13.1 percent in July.

US August employment shows weak gain, Chinese stocks surge on massive infrastructure spending

The US August employment report on Friday was disappointing. Non-farm payrolls increased 96,000 last month, fewer than the downwardly-revised 141,000 increase in July and the 130,000 increase estimated by economists surveyed by Bloomberg.

A fall in the labour force, however, helped push the unemployment rate down to 8.1 percent from 8.3 percent in July.

Earlier on Friday, economic data from Japan had also been weak. Japan's leading economic index fell to 91.8 in July from 93.2 in June. The coincident index fell to 92.8 from 94.1.

Europe managed to provide positive economic data though.

German exports rose 0.5 percent in July and imports rose 0.9 percent. German industrial production rose 1.3 percent in July.

UK industrial production surged 2.9 percent in July, the most in 25 years, reversing the 2.4 percent fall in June.

And China has launched another round of stimulus. AFP/CNA reports:

China has approved a massive infrastructure package worth more than 1.0 trillion yuan ($158 billion), state media said on Friday, as the government seeks to boost the flagging economy.

The top economic planner, the National Development and Reform Commission, this week announced approval of 55 infrastructure projects ranging from subway lines to highways, reports said.

China's stock market, which had been falling recently, rallied strongly on Friday following the news, with the Shanghai Composite Index rising 3.70 percent.

ECB announces unlimited bond-buying

The European Central Bank announced its bond-buying plan on Thursday. Bloomberg reports:

European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup.

The program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said at a press conference in Frankfurt after the ECB held its benchmark rate at a record low of 0.75 percent. “Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”

The ECB also released a new GDP forecast for the euro area. It now sees the economy contracting 0.4 percent this year, worse than the previous estimate of 0.1 percent contraction.

Still, investors mostly focused on the bond-buying plan and were happy to push markets up. The STOXX Europe 600 surged 2.3 percent on Thursday while the S&P 500 jumped 2.0 percent to hit a four-year high.

Indeed, Edward Harrison says that the latest announcement amounts to an ECB monetisation of debt.

That’s very euro bank bullish. Not for Spanish and Italian banks, mind you, because their domestic economies are in a world of hurt. But German, French and Dutch banks just got a Draghi put on their sovereign bond assets – and that’s bullish.

Less upbeat on the ECB's move is Doug Kass, who says he plans to sell/short the news.

Not only is Europe slipping more rapidly into a deeper recession but the implementation of serious and effective longer-term policy responses remains unlikely. Band-Aid policy measures of providing liquidity (which aids the transmission of monetary policy) remain the operative palliative, and they will likely continue for some time to come. Easing and the temporary purchase by the ECB of sovereign debt from peripheral countries will not durably counter insolvency but, ultimately, the solvency problem will be addressed by a painful debt restructuring.

Another central bank in action on Thursday was Sweden's Riksbank. It cut its repo rate by a quarter point to 1.25 percent.

In contrast, the Bank of England's monetary policy meeting on Thursday ended uneventfully. The BoE's bond purchase programme was left unchanged, as was its interest rate, which was left at 0.5 percent.

While the ECB was probably the prime mover of markets on Thursday, positive economic data also probably provided a further boost.

In the US, the Institute for Supply Management’s non-manufacturing index climbed to a three-month high of 53.7 in August from 52.6 in July. ADP Employer Services reported that private employment increased by 201,000 in August, the most in five months. Claims for jobless benefits fell 12,000 last week to 365,000, the fewest in a month.

Even Europe had positive data to report. While eurozone second quarter contraction was confirmed at 0.2 percent, German factory orders rose 0.5 percent in July after having fallen 1.6 percent in June.

ECB meets as PMIs show greater economic contraction in euro area

The European Central Bank meets today for its monetary policy meeting amid reports that it is planning unlimited but sterilised purchases of government debt.

Some pressure to act at today's meeting would come from the weakness revealed in the latest data on the eurozone economy. From Bloomberg on Wednesday:

Euro-area services shrank more than initially estimated in August, adding to signs the 17-nation economy has slipped into a recession.

A gauge based on a survey of purchasing managers fell to 47.2 from 47.9 in July, London-based Markit Economics said today. That’s below an initial estimate of 47.5 published on Aug. 23. A composite index of both services and manufacturing fell to 46.3 from 46.5, also below an initial estimate.

Another report on Wednesday showed that retail sales in the euro area fell 0.2 percent in July.

Meanwhile, China's economy has also been showing signs of weakness, the latest being a decline in HSBC's services PMI to 52.0 in August from 53.1 in July.

Mixed economic data from US and UK

There were conflicting data on US manufacturing on Tuesday. The Institute for Supply Management's manufacturing PMI fell to 49.6 in August from 49.8 in July. However, Markit's manufacturing PMI rose to 51.5 from 51.4.

Helping to prop up manufacturing is demand for autos. US light-vehicle sales accelerated to a 14.5 million seasonally adjusted annualised rate in August, the best sales pace since August 2009. Car sales may have been boosted by lower lending standards for car loans.

However, construction spending fell 0.9 percent in July, the biggest decline in a year, after having risen 0.4 percent in June.

There has also been weaker construction activity in the UK, where the Markit/CIPS construction PMI fell to 49.0 in August from 50.9 in July.

However, the UK services PMI jumped to 53.7 in August from 51.0 in July.

Eurozone leaders in talks to resolve debt crisis as Moody's downgrades ratings outlook

Bloomberg reports the latest moves to resolve the European debt crisis:

European leaders are stepping up shuttle diplomacy this week as they brace for their central banker’s plan to defend the euro from bond-market turmoil.

European Union President Herman Van Rompuy is traveling to Berlin for talks with German Chancellor Angela Merkel today as Italian Prime Minister Mario Monti welcomes French President Francois Hollande to Rome. They were all given a hint about what may be in store when European Central Bank President Mario Draghi told officials yesterday he would be comfortable buying three-year government bonds to bring down borrowing costs for nations in financial distress.

However, even as European leaders try to rescue the ailing countries, confidence in the fiscal health of the stronger economies has also declined. From Reuters:

Moody's Investors Service has changed its outlook on the Aaa rating of the European Union to negative, warning it might downgrade the bloc if it decides to cut the ratings on the EU's four biggest budget backers: Germany, France, UK and Netherlands...

"The negative outlook on the EU's long-term ratings reflects the negative outlook on the Aaa ratings of the member states with large contributions to the EU budget: Germany, France, the UK and the Netherlands, which together account for around 45 percent of the EU's budget revenue," the ratings agency said.

Manufacturing contracts in China and Europe

The message on China's manufacturing sector has become one of unambiguous weakness.

Over the weekend, the China Federation of Logistics and Purchasing and the National Bureau of Statistics reported that the government's manufacturing PMI fell to 49.2 in August from 50.1 in July. Today, HSBC reports that its manufacturing PMI fell to 47.6 in August, the lowest since March 2009, from 49.3 in July.

China's services sector did better in August. The National Bureau of Statistics reported today that its services PMI rose to 56.3 last month from 55.6 in July.

Meanwhile, manufacturing in the euro area improved in August but remained in contraction. Markit's manufacturing PMI for the region rose to 45.1 last month from July's three-year low of 44.0.

Similarly, in the UK, the Markit/CIPS manufacturing PMI jumped to a four-month high of 49.5 in August from 45.2 in July, which had been the lowest level since May 2009.

Fed may be ready for more stimulus but economic weakness mostly lies elsewhere

Another round of quantitative easing may be coming from the Federal Reserve. From Bloomberg on Friday:

Federal Reserve Chairman Ben S. Bernanke, lamenting the suffering caused by unemployment of more than 8 percent and defending his unprecedented actions, made the case for further monetary easing.

“The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke said today in a speech to central bankers and economists at an annual forum in Jackson Hole, Wyoming.

The case for further stimulus in the US is not clear though. Among data released on Friday, the Institute for Supply Management-Chicago's business barometer fell to 53.0 in August from 53.7 in July and orders for non-defense capital goods excluding aircraft fell 4.0 percent in July.

However, a 54 percent surge in aircraft orders pushed total factory orders up by 2.8 percent last month, the biggest gain in a year. Also, the Thomson Reuters/University of Michigan consumer sentiment index rose to 74.3 in August, a three-month high, from 72.3 in July.

Elsewhere in the world, the economic data on Friday looked weaker.

In the euro area, the unemployment rate was unchanged at 11.3 percent in July, the highest since the data series started in 1995. This is even as inflation accelerated to 2.6 percent in August from 2.4 percent in July.

Germany, the region's largest economy, has not escaped the economic weakness. Retail sales there fell 0.9 percent in July.

Earlier on Friday, Japan had also released several weak economic reports.

The Markit/JMMA Japan manufacturing PMI fell to 47.7 in August from 47.9 in July. Weakness in manufacturing was corroborated by data from the government, which showed that industrial production fell 1.2 percent in July and has been forecast to rise just 0.1 percent in August before falling again by 3.3 percent in September.

Other reports from Japan on Friday showed that core consumer prices were down 0.3 percent in July from the previous year while the unemployment rate was unchanged at 4.3 percent. Household spending rose 1.7 percent in July from a year earlier but declined 1.3 percent from June. Housing starts fell 9.6 percent in July from a year earlier.