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.

China's economy shows signs of stabilising

A report on Thursday showed that China's economic growth slowed to 7.4 percent in the third quarter from 7.6 percent in the previous quarter.

However, other data indicated that the economy may be stabilising. Industrial production rose 9.2 percent in September from a year ago compared with 8.9 per cent in August. Retail sales rose 14.2 percent, up from 13.2 percent in August. Fixed-asset investments rose 20.5 percent in the first nine months of the year compared with 20.2 per cent in the first eight months.

“Judging from figures in the third quarter and particularly in September, the signs that the national economy is stabilising are clearer,” National Bureau of Statistics spokesman Sheng Laiyun said.

However, home prices in China slowed in September, although this too is probably welcomed by a government that has been trying to cool property prices. Prices in 31 out of 70 cities tracked by the government rose in September, down from 35 cities in August.

Elsewhere in the world, the UK reported on Thursday that retail sales rose 0.6 percent in September while in the US, the Conference Board's index of leading indicators rose 0.6 percent in September.

US housing starts surge, UK employment hits record high

The positive dataflow in the US continued on Wednesday with housing starts reportedly surging 15.0 percent in September to an annual rate of 872,000, the highest since July 2008. Building permits grew 11.6 percent to a 894,000-unit annual rate.

There was also good news from the UK on Wednesday. Claims for jobless benefits fell by 4,000 in September and the unemployment rate for June to August fell to 7.9 percent from 8.1 percent in the prior three months. The employment level rose to 29.590 million, the highest since records began in January-March 1971.

Even the euro area had positive data to report on Wednesday. Construction production rose 0.7 percent in August, the second consecutive increase after output had risen 0.1 percent in July.

Perhaps more significantly for the euro area, Spanish bonds rose on Wednesday, pushing the 10-year yield down 34 basis points to 5.46 percent, the lowest since 4 April, after Moody’s Investors Service kept the country’s credit rating at investment grade.

US industrial production and home builders sentiment rise, Spain retains credit rating

Tuesday brought more positive economic data from the US. Industrial production rose 0.4 percent in September after having fallen 1.4 percent in August. The National Association of Home Builders/Wells Fargo builder sentiment index increased to 41 this month, the highest since June 2006, from 40 in September.

Meanwhile, though, inflation in the US has accelerated. The consumer price index rose 0.6 percent in September for a second consecutive month.

In the euro area, consumer prices rose 0.7 percent in September but the 12-month rate of increase was unchanged at 2.6 percent. Euro-area exports rose 3.7 percent in August, more than reversing the 2.2 percent fall in July.

In the UK, the inflation rate fell to 2.2 percent in September, the lowest in almost three years, from 2.5 percent in August.

Markets were positive on Tuesday, boosted by the positive US economic data as well as news that German lawmakers were open to Spain seeking a precautionary credit line from Europe’s rescue fund.

In further good news for Spain, Moody’s retained its Baa3 rating for the country's bonds. However, the rating was assigned a negative outlook.

US retail sales rise as household debt payments fall

Monday provided more evidence that the consumer is helping to hold up US economic growth. Retail sales rose 1.1 percent in September, with electronics sales in particular rising 4.5 percent.

Bloomberg has an article saying that consumers' better financial health puts them in position to boost the economy.

Three-plus years into a recovery from the worst financial crisis since the Great Depression, Americans finally are getting their finances back into shape, Federal Reserve figures show. Household debt as a share of disposable income sank to 113 percent in the second quarter from a record high of 134 percent in 2007 before the recession hit. Debt payments on that basis are the smallest in almost 18 years, while the delinquency rate for credit cards is the lowest since the end of 2008.

“The household deleveraging process is largely over,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “Credit use should soon go from being a significant headwind to the economy to a tailwind.”

However, longer term, it is less clear that the deleveraging process is over.

Some economists, including Harvard University professor Kenneth Rogoff and former Fed official Nathan Sheets, say the deleveraging process still has years to run. While debt as a share of income has fallen from its peak, the second quarter’s 113 percent was above the 94 percent average since 1980.

Meanwhile, there was also good news from Europe on Monday, where Greek government bonds rose, pushing the 10-year yield 47 basis points down to 17.58 percent.

However, Japan on Monday published data showing that industrial production fell 1.6 percent in August, worse than the initially-reported 1.3 percent decline.

Bernanke defends QE as China restricts monetary stimulus

The Federal Reserve's quantitative easing often attracts criticism in the United States but Sunday saw him defending it to an international audience. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke tried to refute arguments the U.S. central bank’s record stimulus is causing destabilizing flows of capital to emerging-market economies.

“It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies,” Bernanke said today in prepared remarks for a seminar in Tokyo on the last day of International Monetary Fund annual meetings.

His comments contrasted with those of IMF Managing Director Christine Lagarde, who told the same audience that such easing is likely to cause large and volatile flows that risk leading to “overheating, asset-price bubbles and the build-up of financial imbalances” in emerging economies, even as she applauded Fed efforts to boost growth...

Brazilian Finance Minister Guido Mantega vowed in a statement delivered at the IMF’s annual meeting to do whatever is necessary to stop the “selfish” monetary policies of some developed nations from hurting his country’s economy...

Philippine central bank Governor Amando Tetangco said in an interview in Tokyo last week that he is “watchful” of the challenges to monetary policy in emerging markets presented by the Fed’s actions. China also expressed concern at the possible side-effects of quantitative easing.

Meanwhile, China may not be as eager to ease monetary policy. While a report today showed that China's inflation rate slowed to 1.9 percent in September from 2.0 percent in August, other reports over the weekend showed that the economy is not falling off a cliff. From Bloomberg:

China’s exports and money supply grew more than estimated in September, signaling that the world’s second-biggest economy may be stabilizing after a slowdown that began in the first quarter of 2011.

Overseas shipments increased 9.9 percent from a year earlier, the customs administration said Oct. 13 in Beijing. That was more than the 5.5 percent median estimate in a Bloomberg News survey of economists. M2 money supply gained 14.8 percent, the fastest pace since June 2011, a central bank report showed the same day.

Indeed, China's central bank appears to remain wary of asset and consumer price inflation.

... At an International Monetary Fund meeting in Tokyo yesterday, central bank official Yi Gang said that bubble risks remain in housing markets in major cities and stimulus will be restricted to an “appropriate” level...

Yi said yesterday that while this year’s inflation rate is “fine” and may be 2.7 percent for the full year, longer-term threats are from agricultural costs and prices for imported raw materials, commodities and energy, which can be driven up by global monetary easing.

US consumer sentiment highest in 5 years

Economic reporting for the week ended on a positive note.

In the US, the Thomson Reuters/University of Michigan's preliminary October reading of the consumer sentiment index came in at 83.1, the highest since September 2007 and up from 78.3 the month before. The Economic Cycle Research Institute's weekly leading index rose to 127.7 last week from 126.2 the previous week while its growth rate accelerated to 5.7 percent, its highest since May 2011, from 4.6 percent.

With the economy showing signs of buoyancy, inflation may be slow to fall. The producer price index rose 1.1 percent in September.

The euro area also had positive news on Friday, with industrial production showing 0.6 percent growth in August, the same rate as in July.

Meanwhile, Chinese bank lending fell to 623.2 billion yuan in September, down from 703.9 billion yuan in August. However, the September figure is still much higher than the 540.1 billion yuan reported for July.

Japanese machinery orders fall, US trade deficit widens, Brazil and Korea cut rates

Japanese data continued to indicate a weak economy on Thursday. Core machinery orders fell 3.3 percent in August, reversing much of the previous month's 4.6 percent increase. The consumer confidence index fell to 40.1 in September from 40.5 in August.

US data on Thursday were mixed. The trade deficit widened in August as exports fell 1 percent in August and imports decreased 0.1 percent. However, claims for jobless benefits fell 30,000 to 339,000 last week, the fewest since February 2008. Another report on Thursday showed that import prices rose 1.1 percent in September for a second month.

Meanwhile, though, inflation in Europe is mostly moderating. In Germany, inflation slowed to 2.1 percent in September from 2.2 percent in August. In France, inflation slowed to 2.2 percent in September from 2.4 percent in August.

Slowing inflation means central banks will continue to ease monetary policy. On Wednesday, Brazil's central bank cut its benchmark interest rate for the tenth straight time to 7.25 percent, a record low. That was followed on Thursday by South Korea's central bank cutting its key interest rate by 25 basis points to 2.75 percent.

S&P downgrades Spain, markets fall

Standard & Poor’s downgraded Spain's credit rating two levels to BBB-, just one level above junk, from BBB+ on Wednesday.

However, economic data from Europe on Wednesday were surprisingly good. Industrial production jumped in August in France and Italy by 1.5 percent and 1.7 percent respectively.

In the US, the Federal Reserve's Beige Book reported that the economy expanded “modestly” last month.

Still, markets fell on Wednesday. The MSCI All-Country World Index fell 0.6 percent, its third consecutive decline. The S&P 500 also fell 0.6 percent to close at 1,432.63, its lowest level in a month.

UK third quarter growth fastest in five years

The UK economy grew 0.8 percent in the third quarter, the fastest pace in five years, according to the National Institute of Economic and Social Research. However, this was because the previous quarter had been distorted by June’s extra public holiday for Queen Elizabeth II’s Diamond Jubilee.

Economic data for August released on Tuesday suggest that underlying growth is probably weaker. Industrial output fell 0.5 percent, driven by a 1.1 percent fall in manufacturing output. The goods-trade deficit widened as exports fell 4.0 percent and imports rose 4.5 percent.

Meanwhile, Japan was able to report a rise in its current account surplus in August despite a third straight month of decline in exports when compared to a year ago.

However, Japan's economy remains weak, with the sentiment index from the economy watchers survey falling to 41.2 in September from 43.6 in August. The future conditions index fell to 43.5 from 43.6.

IMF cuts global growth forecast

The International Monetary Fund has cut its global growth forecasts to 3.3 percent for this year and 3.6 percent for next year from 3.5 percent and 3.9 percent respectively in its July forecasts.

Monday's economic reports, though, were relatively encouraging.

In China, HSBC's services PMI rose to 54.3 in September from 52.0 in August.

In Germany, industrial production fell 0.5 percent in August but exports increased 2.4 percent.

US and eurozone economies continue to diverge

Economic data released last week indicate that the United States economy probably continued to grow in the third quarter but the euro area probably fell into recession.

Surveys of purchasing managers around the world showed that global economic activity accelerated in September. The JPMorgan global all-industry output index rose to 52.5 last month from 50.9 in August.

JPMorgan Global All-Industry Indices
	August	September
Output	50.9	52.5
New orders	49.8	51.6
Input prices	56.2	58.0
Employment	50.9	49.9

The improvement in global output was mainly driven by the US. Manufacturing there returned to expansion in September with the Institute for Supply Management's manufacturing PMI rising to 51.5 from 49.6 in August, the first time since May that it has been above 50. The non-manufacturing index also rose to 55.1 last month from 53.7 in August.

In the euro area, manufacturing also improved in September with Markit's manufacturing PMI rising to 46.1 from 45.1 in August. However, the services business activity index fell to 46.1 last month from 47.2 in August. The weakness in services pulled the composite output index for the euro area down to 46.1 in September from 46.3 in August.

Chris Williamson, Markit's chief economist, said in his report on the purchasing managers' survey on the euro area that it “seems inevitable that the region will have fallen back into recession in the third quarter”.

It was a similar picture for Japan. In the previous week, a report had shown that the Markit/JMMA manufacturing PMI rose to 48.0 in September from 47.7 in August. However, a report last week showed that the services business activity Index fell to 48.9 in September from 49.3 in August. The composite output index for Japan fell to 48.4 last month from 48.6 in August.

Things were little better in China. Manufacturing improved in September but remained in contraction. The manufacturing PMI from the China Federation of Logistics and Purchasing and the National Bureau of Statistics rose to 49.8 in September from 49.2 in August while HSBC's manufacturing PMI rose to 47.9 from 47.6. The services PMI from the National Bureau of Statistics and China Federation of Logistics and Purchasing fell to 53.7 in September though from 56.3 in August.

Beyond the purchasing managers surveys, other economic data released last week also pointed to resilience in the US and weakness elsewhere.

In the US, the employment report on Friday showed that the economy added 114,000 jobs in September after having added 142,000 jobs in August and 181,000 in July. The average of 146,000 jobs added per month in the third quarter matches the average for 2012 so far.

The employment report also showed that the US unemployment rate fell to 7.8 percent in September from 8.1 percent in August. This brings the unemployment rate to its lowest level since January 2009.

In contrast, a report last week showed that unemployment in the euro area was 11.4 percent in August, having stayed unchanged since June. This is the highest unemployment rate since the data series started in 1995, showing a clear divergence from the trend of declining unemployment seen in the US.

Japanese data outside of the purchasing managers data were mixed. The index of coincident economic indicators fell 0.2 point in August but the index of leading economic indicators rose 0.6 point. The diffusion index for large manufacturers from the Bank of Japan's quarterly Tankan survey fell to minus three in September from minus one in June but the index for non-manufacturers was unchanged at 8.

US unemployment falls to lowest since January 2009

Economic data on Friday were mixed.

In the US, the unemployment rate fell to 7.8 percent in September. This was down by 0.3 percentage point from the previous month and its lowest level since January 2009.

The US economy added 114,000 workers in September while revisions added a combined 86,000 jobs to the prior two months.

In Japan, the index of coincident economic indicators fell 0.2 point in August. However, the index of leading economic indicators rose 0.6 point.

In Germany, factory orders fell 1.3 percent in August.

ECB, BoE and BoJ refrain from further easing measures

Despite three monetary policy meetings by major central banks over the past two days, there was very little new action.

In the euro area, the European Central Bank kept its main interest rate on hold at 0.75 percent on Thursday, with President Mario Draghi saying that the ECB will not start intervening in bond markets until governments like Spain request a bailout and agree to conditions.

The Bank of England also kept its policy rate unchanged at 0.5 percent after its monetary policy meeting on Thursday and announced no new bond buying.

And today, the Bank of Japan kept interest rates unchanged at between zero and 0.1 percent and announced no addition to its asset-purchase programme.

There was no monetary policy meeting in the US but the Federal Reserve did release the minutes to its last meeting, which appeared to signal a move towards linking its outlook for interest rates to specific economic conditions such as a decline in the unemployment rate.

Data on Thursday certainly did not suggest an imminent end to the current accomodative Fed policy. US factory orders fell 5.2 percent in August, the biggest decline since January 2009.

US services accelerate, rest of world deteriorates

Reports on Wednesday showed that the US economy remained relative buoyant in September. In fact, the Institute for Supply Management’s non-manufacturing index rose to 55.1 last month from 53.7 in August while ADP Employer Services reported that private payrolls increased 162,000 last month.

The same cannot be said of the rest of the world's economies.

Services industries from Asia to Europe cooled last month. The services PMI from the National Bureau of Statistics and China Federation of Logistics and Purchasing fell to 53.7 in September from 56.3 in August. In the euro-area, Markit's services PMI fell to 46.1 last month from 47.2 in August, pulling the composite index for the euro-area down to 46.1 from 46.3. The UK services PMI fell to 52.2 in September from 53.7 in August.

Euro-area retail sales did rise 0.1 percent in August though.

Still, the Asian Development Bank has lowered its 2012 growth forecast for Asia excluding Japan down to 6.1 percent, the slowest since 2009, from 6.6 percent.

RBA cuts interest rates, UK house prices and construction activity fall

The Reserve Bank of Australia cut interest rates by a quarter point to 3.25 percent on Tuesday. Reuters reports:

"The Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker," Reserve Bank of Australia (RBA) Governor Glenn Stevens said after the central bank's monthly policy meeting.

"The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative."

Data from the UK on Tuesday certainly pointed to weak growth.

UK house prices fell 0.4 percent in September according to Nationwide. So despite the 1.1 percent bounce in August, house prices are now 1.4 percent below last September's level.

As house prices fall, construction activity contracted. The Markit/CIPS construction PMI rose to 49.5 in September from 49.0 in August, remaining below 50 for a second consecutive month.

Another report on Tuesday from the British Chambers of Commerce showed that firms are scaling back investment and hiring plans.

Manufacturing returns to expansion in US but recession looms in euro area and Japan

US manufacturing ended its contraction in September, according to a report from the Institute for Supply Management on Monday. The latter's manufacturing PMI rose to 51.5 last month from 49.6 in August. It was the first time since May that the PMI has been above 50.

Another index of US manufacturing released on Monday also pointed to expansion. Markit's manufacturing PMI fell to 51.1 in September from 51.5 in August. The September reading, however, was the lowest in three years.

Another report from the US on Monday showed that construction spending fell 0.6 percent in August, the largest drop since July last year.

In the euro area, the manufacturing contraction eased a little in September as Markit's manufacturing PMI rose to 46.1 from 45.1 in August.

Despite the improvement, Chris Williamson, Markit's chief economist, said in his report on Monday that it “seems inevitable that the region will have fallen back into a new recession in the third quarter”.

Further evidence of recessionary conditions in the euro area was another report on Monday showing that unemployment in the euro area hit 11.4 percent in August, the same as in June and July after those months’ figures were revised higher. That is the highest unemployment rate since the data series started in 1995.

Elsewhere in Europe, the UK's economic reports on Monday were mostly negative. Manufacturing shrank again in September with the CIPS/Markit PMI falling to 48.4 from 49.6 in August. Mortgage lending dropped by 276 million pounds last month, the sharpest decline since December 2010.

Chinese manufacturing did improve in September but remained in contraction. The manufacturing PMI from the China Federation of Logistics and Purchasing and the National Bureau of Statistics rose to 49.8 in September from 49.2 in August.

Finally, the Bank of Japan's quarterly Tankan survey found sentiment among large manufacturers fell to minus three in September from minus one in June, increasing fears that the economy may be entering a recession.

Global economy looking weak in third quarter

Reports last week suggest that the global economy continued to weaken in the third quarter.

In the United States, the latest estimate of second quarter gross domestic product released last week showed that the economy grew 1.3 percent, less than the previous estimate of 1.7 percent.

There has probably been no improvement in the third quarter. A report from the Chicago Federal Reserve at the beginning of last week showed that its national activity index fell to -0.87 in August from -0.12 in July.

The three-month moving average of the index fell to -0.47 in August from -0.26 in July. That is its lowest reading since June 2011. It is also the same as when the economy last entered recession in December 2007.

Recent economic weakness in the US has been driven by manufacturing and data last week suggest that this will continue. Durable goods orders plunged 13.2 percent in August. This was mainly due to a 34.9 percent fall in transportation orders. However, even excluding transportation, orders fell 1.6 percent.

However, consumer spending may help to keep the economy growing in the third quarter. Although real personal consumption expenditures rose just 0.1 percent in August, consumer sentiment improved in September. The Conference Board’s consumer confidence index rose to 70.3 in September, the highest level in seven months, from 61.3 in August, while the Thomson Reuters/University of Michigan consumer sentiment index rose to 78.3 last month from 74.3 in August.

If US economic data last week looked weak, it was no better elsewhere.

In the euro area, the European Commission's economic sentiment indicator fell to 85.0 in September from 86.1 in August. It was the seventh consecutive fall in the indicator and brings it down to the lowest level in three years.

Data last week painted a similar picture for the Japanese economy. Industrial production there fell 1.3 percent to a 15-month low in August, with a survey by the Ministry of Economy, Trade and Industry showing that output was expected to fall again by 2.9 percent in September before stabilising in October.

Finally, in China, HSBC's manufacturing purchasing managers index rose to 47.9 in September from 47.6 in August. While an improvement, it was the 11th consecutive month that the index has stayed below 50, indicating contraction in the manufacturing sector.

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.