Global Markets

Earnings season opened last week with the expected tepid to disappointing results. But it was GE’s disappointing results on Friday that sank European, UK and North American stocks. Earnings shared center stage with the several central banks that met during the week. The Banks of Japan, England and the European Central Bank did the expected. While the Bank of Japan and ECB kept policy unchanged, the Bank of England lowered its key rate by the expected 25 basis points to 5 percent.

Globally, central banks are taking widely varied approaches to combating the twin threats of slowing growth and rising inflation. The U.S. Federal Reserve, which has already cut its fed funds target rate by three percentage points since August, is expected to cut by another 25 basis points later this month. Iceland's central bank raised its key rate by 50 basis points to a record 15.5 percent Thursday to support its fragile currency and tame persistent inflation pressures while South Africa's central bank raised its key rate by 50 basis points to 11.5 percent. And commodity prices continued to climb with crude oil trading over $110. Nymex West Texas Intermediate set a new record of $112.21, surpassing its March peak of $111.80, in intraday trade.

Investors reacted to Bank of England and ECB interest rate decisions by selling the pound sterling. Forecasts that economic weakness would spread much wider than the housing and financial sectors in the UK sent sterling to a new record low against the euro at £0.8029. A new record was set on Friday as well. The ECB maintained its 4 percent interest rate with no sign that they will be cutting the rate soon. President Jean Claude Trichet’s comments about excessive volatility in currency markets tamped some of the euro’s gains.

Stocks for the most part had a positive Monday but weakened thereafter. Interest rate decisions provided the backdrop to much of Thursday’s trade although concerns over fragile credit markets were never far away after Lehman Brothers said it was liquidating three investment funds. Equity and credit markets struggled mid-week as the slowing global economy, the health of investment banks and record oil prices kept investors on edge. As the week ended, most indexes in Asia/Pacific region were up while only the S&P/TSX Composite edged up in North America. All other indexes declined.

Global Stock Market Recap

Europe and the UK

After a healthy increase on Monday, it was all down hill from there. The FTSE, DAX and CAC ended the week lower, depressed by earnings, credit market unease, depressing growth forecasts from the IMF and interest rates. While the rate cut in the UK — the third since December — led to a muted market response, some traders had been looking for a larger than 25 basis point cut as an antidote to the slumping housing sector. European stocks were also down after the ECB said inflation risks are elevated and credit turmoil may affect economic growth more than expected.

Stocks had been positive in early Friday morning trading taking a cue from positive trading in Asia until GE announced its disappointing results. The company also lowered its annual forecast leading to worries that earnings will continue to deteriorate. On the week, the FTSE, DAX and CAC were down 0.9 percent, 2.4 percent and 2.1 percent respectively.

Bank of England

The Bank of England lowered its key interest rate by 25 basis points to 5.0 percent as expected by the financial markets. The Bank previously had lowered rates at its February 2008 meeting. Although the Bank has now lowered its interest rate a total of 75 basis points since December 2007, it still has the highest interest rate among the G7 countries. While fourth quarter 2007 growth estimates were still on the robust side, recent monthly data have indicated that the economy is slowing as a combination of past rate increases take hold and the global credit crunch shows signs of impacting key sectors, especially housing. However, inflationary pressures also exist in the economy putting inflation targeting bank in somewhat of a dilemma. At 2.5 percent on the year, CPI continues to be above the Bank’s 2 percent inflation target.

In its statement the Bank said that it expects inflation to continue to go up this year, reflecting the continued impact of higher energy and food prices along with the recent depreciation of sterling on import costs. Such pressures are already evident in producer input costs and pricing intentions. However, the monetary policy committee thinks that inflation will eventually ease. However, to ensure that inflation meets its target in the medium term, the MPC will need to balance two risks — on the upside, above target inflation could increase inflation expectations and on the downside, the disruption in financial markets could lead to an economic slowdown that may sufficiently sharp to pull inflation below the target.

European Central Bank

As anticipated, the European Central Bank governing council once again left its key interest rate at 4 percent. ECB President Jean Claude Trichet remains unswervingly committed to fighting inflation, in spite of expectations that eurozone growth will slow along with the rest of the global economy. This presents a dilemma for the Bank. The flash estimate of the harmonized index of consumer prices showed that the annual rate of eurozone inflation had climbed to 3.5 percent in March — the highest level since the data series started in 1997 and the seventh successive month that inflation has been above the ECB’s 2 percent price stability target. A major concern is the risk of second-round inflation effects – particularly given that the eurozone unemployment rate is at a record low of 7.1 percent. The ECB has stated that monetary policy issues are separate and apart from credit and liquidity problems facing the financial sector and will deal with them separately.

In his press conference, president Trichet emphasized the importance of keeping inflation under control. Further, he said that the 15 nation eurozone economy remained resilient despite eight months of volatility in financial markets that is rippling through much of the United States and now appears to be creeping into Britain. Trichet also said that by all measures, credit to companies in the eurozone appears healthy, though consumers have dialed back their borrowing. Mr. Trichet said that companies might be drawing on existing credit lines, or that they might be relying on bank lending because bond markets have turned so chaotic. Whatever the reason, he signaled that talk of a serious credit crunch in Europe is so far just that. Still, he acknowledged the great uncertainties surrounding the economic outlook in Europe and elsewhere by saying that tension in financial markets “may last longer than initially expected.”

In Iceland, the bank unexpectedly lifted interest rates by 50 basis points to 15.5 percent to shore up its currency and contain inflation. Inflation soared to a six-year high of 8.7 percent last month after the krona lost as much as 25 percent against the euro this year.

Asia/Pacific

Asian indexes fared better than those elsewhere as most ended the week on a positive note. The exceptions were the All Ordinaries, Topix, STI and PSEi. Gains ranged from 3.6 percent for the Taiwan Taiex and 3.0 percent for the Indian Sensex to 0.2 percent for Japan’s Nikkei and 0.3 percent for Thailand’s SET. The Australian All Ordinaries lost 2.8 percent, the Philippines PSEi was down 1.4 percent and the Singapore STI lost 0.9 percent.

For the most part, stocks began and ended the week with gains. Monday’s gains were in reaction to Friday’s North American results. On Friday, indexes here were buoyed by positive trading in the U.S. after unemployment claims dropped and discount retailers reported better than expected sales performances. However, markets in Australia, New Zealand and Malaysia did not participate in the rally.

On Wednesday, the Shanghai Composite led declines, slumping 5.5 percent, with large caps falling the most. The Shanghai Composite index’s declines accelerated in mid-afternoon, with the index closing down at 3,413.907, near the 11-month lows hit earlier this month. The index had been up five straight trading sessions before sinking on Wednesday. However, for the week the index managed to gain 1.4 percent.

Bank of Japan

The Bank of Japan kept its key interest rate at 0.5 percent amid concern that the economy is vulnerable to a recession. It was the first meeting chaired by deputy governor Masaaki Shirakawa who later was approved by the Diet as BoJ governor. Shirakawa has been acting governor since Toshihiko Fukui retired on March 19. Recent economic data have been mixed, with export growth and inflation accelerating while the Tankan showed that corporate sentiment sank to a four year low and production cooled.

With its bank rate at only 0.5 percent, the BoJ has little room to maneuver. In a parliamentary hearing on his nomination, Shirakawa said the Bank has no preconceptions about policy and would examine both upside and downside risks. He reiterated that the BoJ is ready to take flexible action. At the same time, he said it can take one to two years before the effect of policy emerges and the central bank needs to take longer term risks into account. The BoJ raised the key rate to 0.5 percent in February 2007. Some reports show the expansion is still intact. Export growth quickened in February as demand from emerging economies helped manufacturers ride out the U.S. slump. Wages rose for a second month, the first back-to-back gains since July 2006.

The Bank of Korea kept interest rates unchanged at 5 percent saying that economic growth may slow “significantly” and inflation would moderate. This fueled speculation that a rate cut could be in the bank’s future. The bank last adjusted rates in July and August 2007, with consecutive 25 basis point increases.

Thailand's central bank kept its key interest rate at 3.25 percent to help maintain economic growth after inflation held close to the fastest pace in 20 months and improving domestic demand weakened the case for a cut. The central bank uses core inflation, which was 1.7 percent from a year earlier in March, to help set monetary policy.

Currencies

The euro soared to record highs this week against both the pound sterling and the U.S. dollar. The euro touched a record high of $1.5912 against the dollar and an all-time peak of £0.8036 against the pound in intraday trading. However, the euro pared its gains Thursday after ECB President Trichet said he deplored the recent “excess volatility” in exchange rates. The pound fell to a record against the euro Tuesday after a report said house prices dropped 2.5 percent last month which added to the case for Thursday’s interest rate cut while the dollar's record came as crude oil prices climbed above $110 at mid-week.

China’s renminbi pushed through the trading barrier of Rmb7 to the dollar Thursday, a landmark that underlines the currency’s importance for China in curbing inflation and discouraging marginally priced exports. The currency’s rise coincided with the announcement that the government had revised gross domestic product in 2006 and 2007 to new highs because of an underestimation of the contribution of the service sector. The renminbi, which ended the day at Rmb6.9916 to the dollar, has now risen by about 4 percent this year, the fastest pace of appreciation since China dropped its dollar-peg in mid-2005 to move to a managed float.

Indicator scoreboard

EMU

Fourth quarter gross domestic product was up an unrevised 0.4 percent and 2.2 percent when compared with the same quarter a year ago. On the quarter, exports were revised upward to a gain of 0.6 percent while imports declined 0.3 percent. Among the other key components, weakness of household spending was confirmed in a 0.1 percent contraction in private consumption, a drop matched by government consumption. Gross fixed capital formation was up a solid 0.8 percent following an even more impressive 1.1 percent gain in the third quarter. Even so, this still left domestic demand flat over the period and up 1.9 percent on the year compared with an annual 2.1 percent in the previous three months. Among the larger EMU members, quarterly growth slowed across the board outside of Spain where the economy accelerated to 0.8 percent from 0.7 percent.

Germany

February industrial output was up 0.4 percent on the month for the third consecutive monthly gain. Overall annual growth slipped to 5.9 percent from a slightly softer revised 6.4 percent while in manufacturing output was up 0.3 percent and 6.3 percent on the year. Average production in January/February was an impressive 2.5 percent above the fourth quarter mean. Output for major categories was mixed. Hefty increases in both construction (3.7 percent) and basic goods (1.6 percent) contrasted sharply with declines in consumer nondurables (1.9 percent) and durables (0.2 percent) as well as capital goods (0.2 percent). Energy output was down 1.1 percent, the fifth monthly drop in a row and is now just 0.9 percent above its level in the same month of 2007.

February seasonally adjusted merchandise trade surplus was €16.4 billion, its best performance since 2007 high in November (€20.3 billion). The latest black ink followed an unrevised surplus of €16.1 billion at the start of the year and left the average for the first two months of 2007 at a solid €16.3 billion. Exports were essentially flat on the month while imports slipped 0.4 percent. Over the year, exports were up 9.0 percent with the lion share going to non-EMU countries (13.5 percent) reflecting relatively robust domestic demand in the likes of China. Exports to the EMU bloc (5.6 percent) are trending slower in line with an easing pace of economic growth across the region. Total imports were up 7.0 percent with EMU countries (8.6 percent) outstripping the rest (3.3 percent).

France

February merchandise trade deficit was €2.8 billion, down from the revised January deficit of €3.1 billion. Exports were up a modest 0.9 percent while imports edged down 0.2 percent. The largest negative impact came from the energy sector where the shortfall shrunk marginally to €4.4 billion from €4.5 billion in January. Other main areas of red ink were in trade in basic goods (€0.8 billion), consumer goods (€0.5 billion) and non-military industry goods (€0.5 billion). The largest surplus was produced by food stuffs (€0.9 billion) which just eclipsed capital goods (€0.8 billion).

February industrial production excluding construction was up 0.3 percent following a slightly firmer revised 0.6 percent increase the month before. Output was up 2.0 percent on the year. Manufacturing output was up 0.3 percent and 1.9 percent on the year. Most sub-sectors showed strength including capital goods (1.3 percent) where boats, aircraft, trains & motorcycles (1.7 percent), electrical & electronic goods (1.4 percent) and machinery (1.1 percent) recorded increases. Construction (0.5 percent), semi-finished goods (0.2 percent) and energy (0.6 percent) showed more modest advances as did consumer goods (0.2 percent) which were held back by a sharp drop in clothing & leather (2.4 percent) that partially unwound their January surge. The other major decline was in autos (1.9 percent) where production slumped after two successive months of solid gains. Output in the food and agricultural sector was up 0.4 percent on the month.

Italy

February industrial production was down 0.2 percent and down 1.1 percent when compared with last year. Industrial output has declined in four of the last six months. The contraction in output would have been notably steeper but for a 2.5 percent bounce in the energy sector. All of the other major categories posted declines with intermediates (1.7 percent) well ahead of drops in the production of capital goods (0.2 percent) and consumer goods (0.2 percent). Total manufacturing output shrank 0.3 percent from January and stands 1.8 percent lower on the year.

United Kingdom

February industrial production was up 0.3 percent and was up 1.3 percent when compared with a year ago. Manufacturing output was up 0.4 percent and 1.9 percent on the year. In addition to manufacturing, the other sector contributing to the increase in headline industrial production was electricity, gas & water where output was up 0.7 percent from January. However, there were declines in both mining & quarrying (1.2 percent) and oil & gas extraction (1.5 percent). By market sector, the largest increase was posted by durable goods (2.3 percent) ahead of capital goods (0.5 percent) and nondurables (0.3 percent). Intermediates on the other hand showed a small decline (0.1 percent). Within manufacturing, all of the main sub-sectors posted monthly gains with textiles & clothing (1.3 percent) notably robust, albeit following a period of marked weakness. There were also respectable rises in food & drink and chemicals & fibres (both 0.6 percent) as well as metals (0.5 percent) and engineering (0.4 percent).

February merchandise trade deficit was Stg7.5 billion, a modest improvement on a larger revised Stg7.9 billion deficit in January. The shrinkage in the shortfall was essentially due to a price-led surge in oil exports that produced a swing in the oil balance from a Stg0.5 billion deficit in January into a Stg0.1 billion surplus. The core deficit (excluding oil and erratics) narrowed by just Stg1.0 billion to Stg7.2 billion. Despite the bounce in oil, total exports fell 0.2 percent on the month while imports were off a much steeper 1.7 percent. However, both declines followed particularly large increases in January.

Asia/Pacific

Japan

February machine orders sank 12.9 percent after soaring 26.5 percent in January. Private sector machine orders dropped 15.7 percent but excluding volatile ship and electric power orders, they were down 12.7 percent. Manufacturing orders were down 13.2 percent almost reversing the gain in January while nonmanufacturing orders less volatile orders were down 13.2 percent after soaring by 25.9 percent in the preceding month.

March corporate goods price index was up 0.5 percent and 3.9 percent when compared with the same month a year ago. Manufacturing industry products were up 0.5 percent and 3.8 percent on the year. The main culprit for the large increase of course was energy. Petroleum & coal products were up 1.3 percent on the month but soared 29.7 percent on the year. Iron & steel prices up 8.4 percent on the year while pulp, paper & related products along with chemicals & related products were both up 5.6 percent on the year. However, prices for electronic components & devices were down 6.2 percent while electronic components & devices were down 2.7 percent on the year. Also included in this report are import and export prices. Export prices on a contract currency basis were up 1.4 percent on the year while import prices soared 21.6 percent, reflecting the high cost of imported fuels.

Australia

February merchandise trade deficit widened to A$3.29 million from A$2.35 million in January. Exports declined 4.2 percent while imports edged down 0.2 percent. Exports are down 0.5 percent while imports soared 11.5 percent when compared with the same month a year ago. Non–rural goods exports declined 7 percent while other goods dropped 1 percent. Rural goods were up 1 percent. Services were also down 1 percent. For rural goods exports, cereal grains & preparations were up 18 percent but were offset by declines in meat, wool & sheepskins. For non-rural goods, metal ores & minerals, coal, coke & briquettes and other manufactures were down. On the import side, consumption goods were down 2 percent while capital goods were up 7 percent.

March employment was up 14,800 while the unemployment rate edged up to 4.1 percent from 4 percent. Full-time employment increased by 5,300 to 7,637,900 and part-time employment increased by 9,500 to 3,043,800. This has been the longest hiring streak since the government began collecting monthly figures in 1978. The unemployment rate edged up as more workers entered the labor force. The number of unemployed increased by 13,800 to 453,200. The number of persons looking for full-time work increased by 19,900 to 312,900 and the number of persons looking for part-time work decreased by 6,100 to 140,200.

Other Asian indicators

China’s gross domestic product for 2007 was revised upward to 11.9 percent from 11.4 percent when compared with the prior year. When compared with the same quarter a year ago, GDP was up 7.2 percent after gaining 5.4 percent in the fourth quarter of 2007. GDP for 2006 was also revised upward — from 11.1 percent to 11.6 percent. First quarter GDP is expected to be released sometime in the next two weeks.

Singapore’s first quarter preliminary gross domestic product grew at an annualized rate of 16.9 percent the fastest pace since 2003. GDP was down 4.8 percent in the previous quarter. From a year earlier, the economy expanded 7.2 percent in the first quarter after growing 5.4 percent in the previous three months. February consumer price index was up 6.5 percent from a year earlier. 

Taiwan's consumer price index for March was up 4 percent when compared with last year, up from February’s 3.9 percent. Core CPI was up 3.1 percent on the year.

India’s industrial production for February was up 8.6 percent from a year earlier after gaining a revised 5.8 percent in January. Manufacturing, which accounts for about 80 percent of industrial production, gained 8.6 percent in February from a year ago. Electricity output rose 9.8 percent while mining grew 7.5 percent.

Malaysia’s industrial production for February was up 6.3 percent from a year earlier after gaining a revised 7.6 percent in January.

Americas

Canada

February merchandise trade surplus jumped to C$4.9 billion in as exports were up a solid 3.8 percent while imports dropped 2.0 percent. This was the largest surplus since May 2007 and in large part reflected a surge in trade with the U.S. which saw the bilateral surplus soar to some C$8.1 billion with imports down and exports sharply higher. In volume terms, overall exports were also up 3.8 percent on the month but real imports fell a smaller 0.8 percent. There were broad-based gains including particularly strong performances by automotives products (11.4 percent) despite worries about the slowdown in U.S. demand, and in forestry products (3.9 percent) and energy products (3.8 percent). Other sizeable gains were registered by other consumer goods (3.2 percent), industrial goods and materials (2.8 percent) and machinery & equipment (1.5 percent). The drop in imports was led by energy products (19.7 percent) which easily eclipsed declines in other consumer goods (2.6 percent) and forestry products (0.8 percent). Modest gains were seen in autos (2.7 percent) and industrial goods and materials (1.1 percent).

Bottom line

As earnings season began, it was apparent that there would be disappointments after the heady gains of not too long ago. The big disappointment was GE’s announcement on Friday that dragged down stocks in Europe and North America. Most economic data revolved around merchandise trade balances and industrial production. In Australia, employment continued to climb while consumer sentiment sank thanks to high interest rates and rising prices. The Banks of Japan and England and the European Central Bank all did the expected.

In the upcoming week, there is a heavy supply of U.S. and UK data. Key price data will be released in both countries plus many eurozone member states. With growth slowing and prices rising, central banks are increasingly finding themselves between a rock and a hard place.

Looking Ahead: April 14 through April 18, 2008

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