Global Markets

Employment situation release weeks are always difficult to write about simply because the first four days of the week don’t seem to matter. Last week was a little different though, because of two days of testimony by Fed Chairman Ben Bernanke and other administration and Fed officials who were involved in the Bear Stearns rescue effort. In addition, it was the end of the first quarter and the end of Japan’s fiscal year on March 31.

Stocks were up last week in North America, Europe, UK and Australia but were mixed in Asia. While the Hang Seng, Kospi, STI, PSEi along with the Nikkei and Topix gained, the remaining indexes declined for the week. As is usually the case, financial markets traded, albeit nervously, as mixed U.S. economic data ratcheted up investor tensions ahead of Friday’s employment situation report. Wednesday’s downbeat assessment of the U.S. economic outlook by Bernanke — he used the ‘r’ word — underlined investor tensions. Mr. Bernanke warned the Congressional Joint Economic Committee that the economy would not grow much in the first half of this year and could even contract “slightly”. He also said that ”much” of the needed economic and financial market adjustment had already taken place, which some market watchers interpreted as suggesting that the scope for further Fed interest rate cuts may be limited. However global equities maintained their upward momentum as investors appeared to brush aside these unsettling comments and instead remained hopeful that the worst might finally be over for the financial sector. But on Thursday, these worries were exacerbated once again by a weaker than expected jobless claims report.

For the record…

Stock indexes finished their worst quarter Monday in more than five years as investors continued to favor less risky assets. As a result of the declines many equity markets have over the last three months entered bear market territory — defined as a decline of 20 percent from recent peaks — as a result of deepening fears about a U.S. recession and continued credit markets concerns.

For the FTSE 100 and the S&P 500 indexes, this was the worst quarterly performance since the third quarter of 2002, when accounting scandals at Enron and WorldCom sparked a global equity sell off. The biggest decline in the quarter, however, was the Shanghai Composite index, which dropped 34.5 percent.

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC welcomed the new quarter Tuesday with enthusiasm after Monday's respective losses of 11.7 percent, 16.2 percent and 19 percent. This is the worst start to a year for the FTSE since it was launched 24 years ago in 1984. It had a worse quarter — the third in 2002 when it sank 20 percent. The indexes reported positive results for two weeks in a row — and only the second time this year that they have managed to string two positive weeks together.

UK and European equity markets started the second quarter with banks leading the gains as investors interpreted last week’s writedowns and rights issues by Lehman Brothers and UBS as a signal that banks were aggressively cleaning up their books and calmer waters might lie ahead. But gains remained fragile — it was unclear where the next blows to the financial sector would fall. While some investors are asking whether the worst is now over there is still a huge amount of restructuring ahead and the banking landscape is expected to look totally different in two years time.

The three indexes were down Thursday thanks to profit taking combined with earnings estimate cuts for banks and other companies amid concerns that the credit market mess might push the U.S. into recession — a fact acknowledged by Fed Chairman Ben Bernanke during his congressional testimony last week (and before the release of the employment situation report that showed a decline in employment for the third month along with a jump in the unemployment rate). On Friday, after paring pre-employment situation release gains, the three indexes resumed their climbs. The FTSE, CAC and DAX gained 4.5 percent, 4.4 percent and 3.1 percent respectively for the week.

Asia/Pacific

Asian/Pacific stocks indexes followed here were mixed on the week but several managed to improve on their end of quarter losses. The chief winners for the week were the All Ordinaries (up 4.9 percent), Hang Seng (up 4.2 percent), STI (up 4.1 percent) Kospi (up 3.8 percent), Nikkei (up 3.7 percent) and Topix (up 3.6 percent). For the record, only the Taiex managed to gain in the first quarter — but was down for the week. Midweek trading tracked moderate losses by U.S. stocks following Federal Reserve Chairman Ben Bernanke's comments that a recession is possible in the U.S. However, gains in the resources sector thanks to higher copper, oil and gold prices pulled the markets off their early lows.

As the week ended — and prior to the U.S. employment situation report — markets were mixed as investors traded warily. All Chinese markets were closed for a holiday on Friday. The Indian Sensex tumbled 6.3 percent on the week after declining three of five days and on Friday after inflation rose to a three-year high.

The All Ordinaries was up for the second week, gaining 4.9 percent after the prior week’s impressive 4.2 percent gain. Investors were buoyed by the Reserve Bank of Australia’s decision to leave its key interest rate unchanged at 7.25 percent after two successive monthly increases. And softer than anticipated retail sales data combined with comments from RBA governor Glenn Stevens supported expectations that the Bank’s aggressive rate increases have come to an end. Governor Stevens said that the pause decision was appropriate taking into consideration the available domestic and international information. Stevens expects inflation to fall after showing an uptrend in the near term. The key mining section gained as stronger metals prices took hold and as optimism that the financial sector’s writedowns for bad assets may have peaked.

With the start of the new quarter most stocks rebounded on Tuesday. The exception was the Shanghai Composite which closed sharply lower on concerns about People’s Bank of China’s monetary policy. The bank reiterated late Monday that it will “decisively” implement a tight monetary policy, and added that curbing overly rapid price increases is a key task this year.

According to the World Bank, East Asian nations (excludes Australia and Japan) are successfully shifting exports away from the U.S. to other developing countries, Europe and the Middle East. Whether Asia's export-driven nations would be able to reduce their reliance on the weakening U.S. economy which is traditionally their biggest market has driven much of the recent debate over the global impact. The World Bank said that the shift was taking place faster than expected.

Nikkei, Topix sink in fiscal year

Japanese stocks sank on the last day of the fiscal year. For the fiscal year that ended on March 31, the Nikkei declined 27.6 percent while the Topix dropped 29.2 percent. A major chunk of the fiscal year losses occurred in the fourth quarter — or first quarter of the calendar year. The Nikkei lost 18.2 percent — the worst performance in the first quarter since 1990. The Topix was down 17.8 percent on the quarter. The quarter's decline extended a sell-off that began last summer, as concerns mounted that a U.S. housing slump would drag the country’s biggest export destination into recession.

RBA interest rate stays at 7.25 percent

As expected, the Reserve Bank of Australia kept its key interest rate at 7.25 after increasing it by 25 basis points each in their previous two meetings. The Bank has increased rates 12 times since May 2002. With inflation running at its fastest since 1991, the RBA has been aggressively increasing interest rates in an attempt to cool things down. Governor Glenn Stevens and his board has scope to delay further interest rate increases thanks to the decline in stock prices which are down over 15.5 percent so far in 2008, their worst quarter since the final three months of 1987 when it tumbled 41 percent. Consumer and business confidence have also slumped. Households are also paying more for mortgages after Australia's five largest banks boosted lending rates by more than the central bank this year.

Growth in the economy slowed to 0.6 percent in the fourth from the previous three months, when it expanded 1.1 percent. And unemployment at 4 percent is at its lowest in 33 years, and is driving up wages. Surging housing costs, as well as higher fuel and food prices, are forcing consumers and businesses to review spending plans. Core inflation surged to 3.8 percent in the fourth quarter, the fastest pace since 1991. The RBA has an inflation target range between 2 percent and 3 percent on average. Forecasts show that inflation is expected to remain above 3 percent until 2010 as Chinese demand for coal and iron ore prompts companies to expand and hire more workers.

Currencies

The U.S. dollar drooped Friday after the employment situation report showed that employment had declined for the third month and amid increasing concerns that the U.S. has fallen into a recession. The dollar declined against many major currencies including the euro as traders looked for the Fed to reduce its fed funds target rate by 50 basis points. However, the yen and Swiss franc strengthened on speculation the global economy will slow, encouraging traders to cut carry trade transactions in which traders get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate is the lowest among developed nations, compared with 2.75 percent in Switzerland, 5.25 percent in the UK and 7.25 percent in Australia.

The euro was down against most of the major currencies on speculation European economic growth will slow and the European Central Bank will lower its 4 percent main refinancing rate later this year. Among the bad economic news were declines in retail sales and manufacturing orders in Germany.

Central banks continue to hold nearly two-thirds of their reserves in dollars in spite of the weakness of the U.S. currency. According to the International Monetary Fund, all reporting central banks — with the exception of China — held 63.9 percent of their reserves in U.S. dollars in the fourth quarter of 2007, up slightly from 63.8 percent in the third quarter.

Indicator scoreboard

EMU

March economic sentiment edged down for the 10th straight month to 99.6 from 100.2 in February. Confidence in both the consumer (12) and industrial (0) sectors were unchanged as was sentiment among retailers (1). However, services saw another small drop (9 from 10) and in construction confidence became a little more negative (minus 9 from minus 7). Among the larger nations the performances were notably mixed. Sentiment in Germany sentiment improved while in France it held steady. However confidence declined in both Italy and Spain.

March flash harmonized index of consumer prices soared 3.5 percent when compared with the same month a year ago. As with all flash reports, no details were available, but judging by the national HICP reports, the deterioration was widespread. German HICP inflation provisionally rose to 3.2 percent from 2.9 percent, in Spain to 4.6 percent from 4.4 percent and in Italy to 3.6 percent from 3.1 percent.

February producer prices were up 0.6 percent and 5.3 percent when compared with last year. The pick-up in mid-quarter was broad based outside of consumer durables where a modest 0.3 percent monthly gain reduced the 12-month change to 2.2 percent. The strongest monthly increase was recorded in energy (1.1 percent) where prices are now some 13.5 percent above their year ago level. However, even excluding this sector, the PPI was up 0.5 percent to stand 3.6 percent higher on the year. The other most significant monthly advance was in intermediates (0.8 percent) while capital goods and consumer durables (both 0.3 percent) lagged well behind the overall PPI gain.

February retail sales were down a surprisingly steep 0.5 percent versus January to stand 0.9 percent below their level a year ago. The monthly February decline effectively wiped out a slightly larger revised 0.5 percent gain in January, itself the first positive reading since September 2007. The latest monthly decline reflected a combination of drops in both food (0.2 percent) and non-food (0.8 percent). Sales in the food sector are now 0.9 percent down on the year while non-food is off 0.4 percent.

M3 money supply for the three months ending in February was up 11.4 percent when compared with the same three months a year ago. February M3 money supply was up 11.3 percent on the year. Underpinning the slowdown was a decline in growth in the key private sector lending counterpart to 10.9 percent from 11.1 percent and rounding off a generally favorable report for the monetary authorities was a deceleration in annual growth in narrow money (M1) to 3.7 percent from 4.3 percent.

February unemployment rate remained at 7.1 percent for the second month. Among the larger EMU countries reporting only Germany saw a decline in unemployment which dipped by 0.2 percentage points to 7.4 percent. In France the rate held steady at 7.8 percent while in Spain, it rose 0.2 percentage points to 9.0 percent. Italy failed to supply any data.

Germany

February retail sales excluding autos and petrol stations plummeted 1.6 percent with volumes 0.3 percent below their year ago level. The latest monthly drop was the largest since May 2007 (down 3.1 percent) and means that sales have fallen in five of the last seven months. Over the year, the main areas of weakness in volumes continue to be food, drink & tobacco (down 4.1 percent). Non-food sales are in positive territory (2.8 percent) with clothing & footwear (7.4 percent) and pharmaceuticals (4.5 percent) well ahead of the other main sub-categories.

March unemployment rate declined to 7.8 percent. Joblessness declined by 55,000. Seasonally adjusted, the level of unemployment now stands at 3,285,000. March data imply that unemployment has already fallen some 219,000 so far in 2008. However, the 55,000 drop in joblessness compares with declines of 74,000 in February, 90,000 in January and 76,000 in December last year. Moreover vacancies, while hardly especially weak, slipped another 3,000 last month.

February manufacturing orders dropped 0.5 percent but remain 5.4 percent above the level of a year ago. This was the third monthly decline in a row. January’s decline in orders may have been partly in reaction to changes made to depreciation rates on machinery and equipment introduced at the start of the year and the same issue may have had some impact on the February data. The entire February decline was attributable to overseas demand (down 1.2 percent) which saw all sectors outside of consumer and durable goods posting declines. Over the year, foreign orders were up 5.7 percent. Domestic orders were unchanged on the month with a rise in basics (1.1 percent) offset by drops in capital goods (0.5 percent) and consumer & durable goods (2.1 percent). Annual growth in the home component now stands at 5.1 percent.

France

February producer price index was up 0.4 percent and 4.9 percent when compared with last year. The latest monthly gain was mainly concentrated in agriculture & food (0.6 percent) and energy (0.7 percent), within which fuels jumped by another hefty 1.4 percent. Excluding these sectors, prices were up a much more modest 0.3 percent to leave the annual change in the core rate at just 1.7 percent. Semi-finished goods (0.6 percent) also climbed sharply led by metals & metal products (1.1 percent) and chemical, rubber & plastic (0.7 percent). By contrast, all of the other major categories were markedly subdued.

Italy

February producer price index jumped 0.7 percent and 5.7 percent when compared with last year. Among the major sectors, prices for consumer goods rose a modest 0.3 percent on the month despite a 0.7 percent jump in durable goods but capital goods surged 1.1 percent and intermediates were up 0.5 percent. Energy climbed a hefty 1.7 percent on the month and now stands some 15.2 percent higher on the year. However, even excluding this sector, the PPI was up a still significant 0.5 percent on the month and 3.4 percent on the year. Overall manufactured goods rose 0.8 percent versus January and 5.7 percent on the year. Coke & petroleum were up 3.1 percent followed by mechanical appliances which were up 2.1 percent and other manufactured goods, up 1.1 percent.

Asia/Pacific

Japan

February industrial production was down 1.2 percent but was up 0.3 percent when compared with last year. This was the second month that industrial production declined as exports to the U.S. weakened thanks to the higher value of the yen and softening U.S. demand. Electronic parts & devices, pulp, paper & paper products and transport equipment were down as were semiconductor products machinery, active matrix LCD and metal oxide semiconductor ICD commodities. The report also included a forecast for the next two months. Production is expected to increase 2 percent in March but to decline 1 percent in April.

First quarter Tankan diffusion index for large manufacturers dropped to a reading of 11 from 19 in the fourth quarter of 2007. This is the lowest in four years. Small manufacturers dropped to minus 6 from plus 2 in the previous quarter. Business plans to decrease business investment by 1.6 percent in fiscal 2008. A year earlier they expected to increase capital spending by 2.9 percent for fiscal 2007. Large nonmanufacturing firms declined to 12 from 16 while small nonmanufacturers dropped to minus 15 from minus 12 in the previous quarter. The Tankan surveys more than 10,000 private companies nationwide about their earnings and capital investment plans with the latest report covering the period from February 26 to March 31. The contraction is because of the deteriorating business climate, which is being exacerbated by historically high oil prices and slowing overseas economies. Another major factor behind the bleak outlook is turmoil in financial markets. During the survey period, the Nikkei fell below 12,000 and the yen strengthened past 100 yen to the dollar. Prices have also been rising.

Australia

February retail sales surprised analysts and were down 0.1 percent after declining by the same amount in January. Analysts had expected sales to rise by 0.5 percent. Retail sales were up 5.8 percent when compared with the same month a year ago. Sales have been weakening over the past three months. Household goods declined 2.3 percent after dropping 1 percent in January. Food sales were up 0.3 percent after declining by 0.5 percent in January. Hospitality & services dropped 0.6 percent for the second month. However, clothing & soft goods however jumped 1.6 percent after edging up 0.1 percent in the previous month. Recreational goods were up 0.7 percent after soaring 3.4 percent in January. Clearly high fuel costs combined with high interest rates are having their effect in damping the exuberant consumer.

Americas

Canada

January monthly gross domestic product rebounded 0.6 percent after a stunning 0.7 percent drop in December. On the year, monthly GDP was up 2.2 percent. Monthly growth in January was led by the goods producing area where output was up a solid 0.8 percent, albeit only recovering a fraction of its 1.9 percent nosedive in December. In fact, manufacturing spurted a full 1.7 percent but overall goods production was held back by declines in utilities (0.6 percent) and agriculture, forestry & fishing (0.6 percent) and only a meager increase in construction (0.1 percent). Mining & oil & gas extraction, however, climbed a solid enough 0.7 percent. Overall energy output was up 1.1 percent. Service sector output expanded by 0.5 percent underpinned by a particularly impressive 2.8 percent jump in wholesale trade. Retail trade grew 1.2 percent, transportation & warehousing was up 1.0 percent and arts & entertainment and accommodation & food services both grew 0.6 percent. However, other areas were relatively subdued. Hence finance, insurance & real estate, and administrative services both rose just 0.3 percent while professional, scientific & technical services edged up only 0.1 percent. Output in the information and cultural industries actually fell 0.2 percent.

February industrial product price index edged up 0.1 percent and was down 0.8 percent when compared with the same month a year ago. Exchange rate effects were important and excluding swings in the Canadian dollar, the IPPI would have risen 0.1 percent and would have been up 3.4 percent from the same month a year ago. The largest single monthly gain occurred in primary metal products (2.5 percent) which easily eclipsed an otherwise solid increase in meat, fish & dairy products (1.3 percent). On the downside, there was a significant decline in miscellaneous non-manufactures (12.5 percent) which were comfortably ahead of smaller declines in motor vehicles & other transport equipment (0.7 percent), lumber & wood products (0.7 percent) and pulp & paper products (0.5 percent).

February raw material price index was up 0.5 percent monthly and up a significant at 14.9 percent when compared with last year. The main positive impetus to the monthly change was vegetable products (12.9 percent) which easily outstripped all of the other main categories. Smaller increases were posted by non-ferrous metals (1.0 percent) and non-metallic minerals (0.3 percent). All of the other groupings saw declines, led by ferrous metals (1.2 percent) ahead of mineral fuels (1.0 percent), wood (0.4 percent) and animals and animal products (0.4 percent). Excluding mineral fuels, the RMPI was up 2.2 percent and 1.8 percent from the same month in 2007.

March employment was up 14,600 jobs while the unemployment rate jumped to 6 percent from 5.8 percent in February. Higher unemployment was due to a surge of new entrants into the labor market which saw the participation rate hit a new record high of 68.0 percent. The increase in payrolls was all part-time (34,200) while full-time jobs were significantly weaker (down 19,600) but there was an almost even split between the goods producing sector (7,800) and services (6,800). Within the former, manufacturing actually fell (9,400) but losses here were offset by gains in construction (9,600) and natural resources (6,600). Utilities saw a small gain in employment (1,200) but agriculture edged lower (300). The increase in service sector jobs was dominated by transportation & warehousing (19,900) which found support from business, building & other support services (10,200) and accommodation & food services (9,500). The main pocket of weakness was information, culture & recreation (down 24,300) although there were also declines in finance, insurance, real estate & leasing (12,900) and in other services (9,000). Overall private payrolls rose 20,300, public sector jobs were up 2,900 but self-employment contracted 8,600.

Bottom line

Both the Federal Reserve and new economic data dominated investor news last week. The two days of congressional hearings on Wednesday and Thursday covered the roles of the Federal Reserve, U.S. Treasury and the Securities and Exchange Commission in JPMorgan’s rescue of Bear Stearns. Economic data were mixed internationally. Declines in German retail sales and manufacturers orders were greeted with surprise. And in Asia, Japan’s Tankan showed a steep decline in business confidence. And the Reserve Bank of Australia indicated that they probably will not increase their key interest rate soon from its 7.25 percent level. Finally the U.S. employment situation report showed that employment declined for the third month, putting the country’s economy ever so closer to the precipice of recession.

The Banks of Japan and England along with European Central Bank meet this week. The Bank of England is expected to reduce its key interest rate to 5 percent from the current 5.25 percent on signs of a weakening economy and tight credit conditions. The Bank previously reduced rates in December and February. The European Central Bank given the surprise 3.5 percent jump in the flash harmonized index of consumer prices is expected to maintain the status quo and keep its interest rate at 4 percent where it has been since June 2007.

When the BoJ meets on Monday and Tuesday, it will meet without a permanent governor due to bickering among Diet members that has prevented the appointment of a successor to former central bank head Toshihiko Fukui. So far, the BoJ has been able to conduct business as usual. For now, deputy governor Masaaki Shirakawa is handling the governor's duties including serving on the government's Council on Economic and Fiscal Policy. The Bank is expected to maintain its 0.5 percent key interest rate despite the recent rash of negative economic data.

And the Group of Seven finance ministers will meet Friday. A presumed topic is the value of the U.S. dollar.

Looking Ahead: April 7 through April 11, 2008

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