Global Markets

Equities sank last week despite end-of-week rallies based on possible fiscal stimulus to boost the sagging U.S. economy. And despite talk of foreign economies decoupling from the U.S., financial markets have been reacting — mostly negatively to virtually all U.S. news. This obviously suggests the ties are still very close. There was a lot of Fedspeak last week including testimony to the Joint Economic Committee by Fed Chairman Ben Bernanke. Equities were down in the U.S. anyhow — the overriding factor was the unsettling low reading of the Philadelphia Fed index which is regarded as the most reliable of all the regional Fed surveys. It sank to its lowest since October 2001. Asian markets on Friday were more receptive to the possibility of U.S. fiscal stimulus, however, and were positive for the most part on Friday after a dreadful week. European stocks, after a positive Monday, declined each day for the remainder of the week.

In his testimony to the Joint Economic Committee, Fed Chairman Bernanke acknowledged the growing downside risks to economic activity and reiterated that the central bank stood ready to take “substantive additional action” to support growth. Analysts said this meant a 50 basis point cut in U.S. interest rates was a near certainty at the Fed’s policy meeting on January 29 and 30. However, the litany of bad earnings and write-offs continued almost unabated during the week. Investors continued to focus on risk aversion and finding a safe haven as jitters and recession worries deepened in spite of the implied reassurances by the Fed that they will do all they can to draw a line in the sand and despite a stimulus package from Congress.

All indexes followed here were down on the week and the very new year.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX sought positive footing going into the weekend and got it briefly in Friday morning trading — only to lose it all later in the day in very volatile trading. All three indexes were down four of five trading days and have lost ground for the first three weeks of the new year. The FTSE fell below the 6000 level on the January 16^th for the first time since mid-August when it did so briefly at the height of the subprime crisis. In London, miners benefited from fresh merger speculation, but continued turbulence in the financial sector dragged the FTSE down. And surprisingly weak UK retail sales did not help improve sentiment.

Although Germany is thought to have lost momentum as 2007 ended, the gross domestic product was up 2.6 percent for the year thanks to strong exports and despite weak consumer spending and despite an increase in the value added tax on January 1, 2007. Economic performance has been driven by exports which were up 8.3 percent and more recently by investment. But in contrast, consumer spending fell by 0.3 percent in real terms for the weakest performance since 2002. The country also recorded its first public sector surplus since the unification of East and West in 1990. Although the official data show no discernable impact from the global financial market turbulence, the latest ZEW economic sentiment index paints a gloomy picture with index components falling to multi-year lows.

Asia/Pacific

All seven indexes in the Asia/Pacific region were down last week. All but the Hang Seng and Shanghai composite have lost ground all three weeks of 2008. Last week, stocks in Japan, Hong Kong, South Korea and Shanghai ended the week on a positive note Friday on speculation that U.S. tax breaks and interest rate cuts would avert a recession in their largest market. Most Asian markets rallied in Friday afternoon trading on hopes that the rescue plan would include a $150 billion economic package of both tax breaks and higher spending (it did). Japanese exporter stocks were up after the yen weakened against the dollar. A weaker yen boosts the value of the exporters' overseas sales when converted into the Japanese currency. The Nikkei closed below the 15,000 level on January 4, 2008 and has continued to sink throughout the month. And it closed below the 14,000 level less than three weeks later for the first time since the October 31, 2005.

Australian stocks extended their loosing streak for the 10th day and the longest losing streak in more than 17 years as nervous investors kept away from the market after U.S. stocks sank. Resources stocks were hit hard after gold and base metals prices dipped. The material and energy sectors weighed heaviest on the market amid concern that a U.S. recession would dampen demand for base metals.

Currencies

The yen climbed as high as ¥105.92 against the dollar as equities sank worldwide. The currency remains vulnerable to carry trade unwinding when equity prices decline, especially in higher interest rate countries. But the yen fell against the dollar and euro before the U.S. President George Bush announced his plan to stem U.S. economic weakening. On Friday, the yen slipped against both the euro and dollar after U.S. consumer confidence improved. This only underlined the importance that U.S. data continue to play in worldwide markets. Japan's low rates encourage carry trades, where investors get funds in a country with low borrowing costs and invest in another with higher rates, earning the spread between the two. The risk is that currency moves erase those profits.

The euro slid sharply midweek after indications that the European Central Bank had become less sanguine about growth prospects. This was interpreted as reducing the chances that the ECB would increase interest rates to fight inflation, which is currently 3.1 percent as measured by the harmonized index of consumer prices and is significantly above the Bank’s target of 2 percent. There were indications in speeches by Governing Council members that the ECB should be cautious given the widespread economic uncertainty. There were also hints that growth projections could be revised downward. However, ECB President Jean Claude Trichet continued to warn that he was prepared to act preemptively to prevent second round inflationary effects. Some analysts question whether the ECB would increase rates given that U.S. rates are heading further downward.

Indicator scoreboard

Indicator releases last week focused mostly on industrial production and merchandise trade. The euro’s strength made a dent in the EMU’s trade surplus while waning industrial production strength augurs of slower growth ahead. Most of the UK’s important economic data were released showing continued inflationary pressures both on producer and consumer prices. And while the labor market remained tight, retail sales waned reinforcing growth concerns for the UK and giving more ammunition for those who would like to see an interest rate cut from the Bank of England when they meet on February 7.

EMU — November industrial production was down by 0.5 percent but up 2.9 percent when compared with the same month a year ago. The monthly decline wiped out October’s 0.5 percent gain. Most major product groups were down with the exception of energy, which was up 0.4 percent. Consumer durable goods dropped 1.9 percent, capital goods were down 0.7 percent and intermediates lost 0.6 percent. Among the reporting countries, declines were particularly pronounced in Portugal (3.3 percent), France (1.5 percent), Spain (1.3 percent), Germany (1.0 percent) and Italy (0.9 percent). By contrast, there were appreciable gains in only the Netherlands (1.8 percent) and Greece (1.2 percent).

December harmonized index of consumer prices were up 0.4 percent and 3.1 percent when compared with last year. This was the fourth month in a row that inflation has exceeded the ECB’s 2 percent target. Average inflation for 2007 was 2.1 percent. Core HICP excluding food, drink, tobacco & petroleum was up 1.9 percent on the year while the core measure omitting just energy and unprocessed foods was up 2.3 percent. Of member countries, Slovenia had the highest rate of inflation (3.8 percent) followed by Greece (3.0 percent) and Spain (2.8 percent). The best performers were Finland, the Netherlands and France (all 1.6 percent).

November merchandise trade surplus narrowed to a smaller than expected €2.7 billion from a reduced €3.0 billion in October. The shrinkage reflected a 0.5 percent monthly gain in imports that more than offset a modest 0.3 percent increase in exports. Over the first 10 months of the year the largest contribution to the surplus was made by the U.S. where the bilateral surplus weighed in at €54.7 billion, down from the €57.6 billion registered during the same period of 2006 and only slightly ahead of the €53.3 billion of black ink posted with the UK. By far and away the largest negative impact on net trade came from China where a bilateral deficit of €72.9 billion in January to October 2006 expanded to a shortfall of some €91.1 billion during the same months of last year.

Germany — January ZEW survey expectations declined to minus 41.6 from minus 37.2 in December. Current conditions also declined to 56.6 from 62.5. The expectations index is now a 15-year low and well below its long-run average of plus 31.0. The survey shows an expected sharp slowdown in exports which, since net trade accounted for more than half of the entire expansion in German GDP last year, is disproportionately negative in the 2008 outlook. Two hundred seventy analysts and institutional investors participated in this month's ZEW Financial Markets Survey which is conducted on a monthly basis by the Centre for European Economic Research (ZEW), Mannheim. The participants were asked from December 24, 2007 to January 14, 2008 about their medium-term expectations concerning economic activity and capital markets.

Italy — November industrial production was down 0.9 percent and dropped 2.8 percent when compared with last year. The decline reflected broad-based weakness in all of the major output categories with the exception of energy, which was up 2.3 percent. Capital goods were down 2.1 percent while intermediates sank 1.3 percent, and a smaller decline in total consumer goods of 0.3 percent masked another sizeable downturn in durables of 2.7 percent.

United Kingdom — December producer output prices were up 0.5 percent and 5.0 percent when compared with last year. The annual rate is the highest since August 1991 (5.2 percent). The latest acceleration was once again largely a function of sharply higher food (0.9 percent) and gasoline (1.6 percent) prices with the latter now showing annual growth of some 20.5 percent. Core output prices jumped 0.4 percent and were up 2.5 percent on the year. Producer input prices were up a seasonally adjusted 0.5 percent (an unadjusted 1.0 percent) and 11.3 percent on the year. The latest monthly acceleration was mainly due to higher home food costs which were up 3.2 percent. Imported food materials (2.2 percent) were also significantly more expensive as were imported parts and equipment (1.7 percent) and imported chemicals (1.2 percent). The core rate rose 0.6 percent on the month to stand 3.7 percent above its year ago level.

December consumer price index was up 0.6 percent and 2.1 percent when compared with the same month a year ago. Core CPI which excludes food, beverages, energy & tobacco was up 0.6 percent but only 1.4 percent on the year. Transport jumped 1.7 percent on the month and 5.8 percent on the year. Food & non-alcoholic drinks were up 0.9 percent and 5.4 percent on the year. The clothing & footwear sector was down 0.8 percent and declined 3.9 percent on the year.

December claimant count unemployment declined by 6,400 while the claimant unemployment rate was unchanged for the third month at 2.5 percent, a 15 year low. On the ILO measure, the unemployment rate over the three months to November declined to 5.3 percent from the previous three month period. The number of unemployed fell 13,000. Employment was up by a hefty 175,000, the largest increase since 1997.

Average earnings for the three months to November were up 3.9 percent. For the month of November only, earnings were up 4.0 percent. Private average earnings were up 4.2 percent and were up 3.3 percent in the public sector. Manufacturing edged a notch higher to 2.6 percent while services fell a touch to 4.2 percent.

December retail sales volumes were down 0.4 percent but were up 2.7 percent when compared with last year. Food sales edged up 0.1 percent on the month leaving the key non-food sector down 0.9 percent. While clothing sales (up 0.2 percent), non-store retailing (up 0.2 percent) and households goods (up 2.6 percent) all posted gains, these were more than wiped out by declines elsewhere. Especially poor was demand at department stores (down 4.3 percent) but other sales were also markedly weak (down 3.2 percent). Over the quarter as a whole, volumes rose a modest 0.4 percent, the smallest advance since the March quarter and within which non-food sales were only flat.

Asia/Pacific

Australia — December employment was up by 20,100 in a gain anticipated by analysts. It is the longest string of monthly job gains since 1980. Full time employment increased by 6,300 while part time employment was up by 13,800 jobs. Employment increased by about 261,300 in 2007 and 270,600 in 2006. The unemployment rate edged down to 4.3 percent from 4.5 percent in November. The number of unemployed dropped by 24,900.

Japan — December corporate goods price index was up a greater than anticipated 0.4 percent and 2.6 percent when compared with the same month a year ago. Record oil prices combined with a weaker yen lifted prices. Soaring import prices remain a key factor behind the overall index increase. Import prices on a yen basis were up a much greater than expected 3.9 percent and 12.6 percent on the year. Petroleum & coal products were up 3.4 percent and 24.4 percent on the year while nonferrous metals dropped 2.5 percent and were down 0.2 percent on the year.

November tertiary index was up 0.1 percent and 1.1 percent when compared with last year. Industries that were up included medical, health care & welfare (up 0.7 percent), eating & drinking places & accommodations (up 0.9 percent), learning support (up 3.1 percent) and electricity, gas, heat supply & water (up 0.8 percent). Offsetting these increases were declines in information & communications (down 1.2 percent), real estate (down 1.6 percent), finance & insurance (down 1.1 percent) and transport (down 0.7 percent). The 11 service industries tracked by the index account for roughly 60 percent of Japan's economic output. Among them are utilities, transport, telecommunications, wholesale and retail, finance and insurance, real estate, restaurants and hotels, as well as medical, health care and welfare.

Americas

Canada — November manufacturing shipments were up 1.1 percent but edged down 0.1 percent when compared with last year. Following seven declines in the last ten months, new orders leapt 8.1 percent from October while backlogs, which declined in both September and October, rebounded by 4.9 percent. The inventory/sales ratio again held steady at 1.30 months. However, with petroleum and coal products (7.7 percent) dominating the advance in shipments, it is no surprise that price factors had a big impact on the headline. Hence, in volume terms shipments actually edged down a disappointing 0.1 percent and so offer a much more pessimistic assessment of conditions in the sector. Other areas reporting higher cash value sales were primary metals (2.3 percent) and transportation equipment where motor vehicles rose 2.0 percent. By contrast there were marked declines in paper products (3.0 percent) and chemicals (1.7 percent). 

Bottom line

Last week was dominated by Fedspeak and talk of U.S. fiscal stimulus package. The plan was announced officially on noon Friday by U.S. president George Bush. Bush offered few concrete numbers for his proposed plan. The President said the plan must include tax relief, which would be based on income taxes, not payroll taxes, and also tax incentives for business investment. Bush echoed statements made by Federal Reserve Chairman Ben Bernanke on Thursday in his testimony to the Joint Economic Committee, calling for a quick, temporary plan and went a step further in suggesting the growth package should total about 1 percent of GDP. The details of the stimulus package likely will begin to be hammered out next week with meetings between the Administration and Congressional leadership.

Both the Bank of Canada and Bank of Japan meet this week. While the Bank of Canada is expected to lower interest rates by 25 basis points to 4 percent, the Bank of Japan is expected to remain on hold. Some analysts think that the next move by the BoJ will be a rate cut rather than the boost that has been anticipated for some time now given the lethargic state of the country’s economy. This week also brings the first estimate of UK fourth quarter gross domestic product. Needless to say, what little detail that will be available will be studied closely. And all market participants will be monitoring the development and progress of the U.S. stimulus package as it wends itself through the political process in an election year.

Looking Ahead: January 21 through January 25, 2008

Anne D Picker is the author of International Economic Indicators and Central Banks.