International Perspective will be taking off next week. IP will return on January 2, 2009.

Happy New Year from all of us at Econoday!

Global Markets

International news was dominated by central banks once again as both the Federal Reserve and the Bank of Japan met and subsequently lowered their policy rates to near zero. The Fed slashed its fed funds target rate to a range of zero to 0.25 percent Tuesday and temporarily had the lowest policy rate of major central banks. It was even lower than the Bank of Japan and the Swiss National Bank which recently lowered its target range to zero to 1.0 percent with focus on the 0.5 percent midpoint. However, the Bank of Japan trumped the Fed and lowered its policy rate to 0.1 percent on Friday.

This was the last full week of trading for 2008 and as such many investors were wrapping up their trading for the year before the Christmas and New Year holidays. Economic data — which continued to be dreadful — were largely ignored. Rather investors focused on the Federal Reserve and Bank of Japan decisions as well as the proposed life line for the U.S. auto industry. Stocks were up in Asia, Europe and the UK. In North America, only the Dow was down on the week.

Crude prices — down the slippery slope

Crude prices continued their downward trajectory even though OPEC announced its largest supply cut in history in an effort to stabilize the market. OPEC said it would cut production by 2.2 million barrels a day. It had already cut production by 2 million barrels per day earlier this year. Analysts say that the continuing price decline reflects a vote of no confidence in the cartel’s ability to trim production. They think that the cuts are insufficient to balance plummeting demand.

Global Stock Market Recap

Europe and the UK

Even though equities declined Friday, the CAC, DAX and FTSE were up for the second consecutive week. However, the gains were minimal with the FTSE up 0.2 percent, the CAC up 0.4 percent and the DAX was up 0.7 percent. Commodity producers weighed heavily on the indexes. Investors are worried that the deteriorating global economy will sap demand for metals and oil. Stocks pared some of their losses after U.S. President George W. Bush finally announced the administration’s rescue plan for automakers and mollified concerns that the industry would collapse. In London, the downward pressure came mostly from mining stocks, but continued low oil prices and the weakness in sterling also weighed negatively on investor sentiment. Economic news, and particularly the German Ifo business climate index, showed a continued souring of sentiment on the continent. Earlier in the week, companies that generate a substantial portion of their sales in the U.S. gained on hopes that President-elect Barack Obama would step up efforts to end the U.S. recession.

Bank of England minutes revealed that the monetary policy committee had considered a larger interest rate cut which would have taken rates to the lowest level since the formation of the Bank. The Bank had reduced rates by 100 basis points. The MPC acknowledged that inflationary pressures had eased since its November meeting and that recession was evident. Sterling sank on the news as it was interpreted that the committee was prepared to continue to lower rates aggressively at its January 2009 meeting.

In an organizational move, the European Central Bank announced that they are postponing its switch to rotational voting until the number of nations in the European Monetary Union reaches 19. There are currently 15 EMU members, with Slovakia due to join on January 1, 2009. The ECB Governing Council availed itself of an article stipulating that the number of voting rights is limited to 15 and votes are to be rotated among the national central bank heads — but that the move could be postponed until there are 19 members.

Asia/Pacific

All Asian/Pacific indexes followed here were up last week. For most — the exception being the Shanghai Composite — it was their second positive week in a row. Equities were mixed on Friday after a negative ratings outlook for General Electric dented investor sentiment. This, combined with the Bank of Japan’s interest rate cut to 0.1 percent, negatively affected sentiment further. Energy stocks lost ground on weaker crude oil prices, as concerns about slowing demand outweighed OPEC's larger-than-expected production cut announced on Wednesday. Equities in the region responded favorably to Tuesday’s interest rate cut by the Federal Reserve to a historic low in an effort to perk up the sagging U.S. economy.

In Japan, equities were lower after the BoJ rate cut along with a government projection that the economy would not grow until at least 2010 fractured investor sentiment. The Cabinet Office said Friday that the government had downwardly revised its estimate for gross domestic product for the fiscal year ending March 2009. The government now forecasts the nation's economy to shrink 0.8 percent, down from its earlier estimate of 1.3 percent. The report also forecast no GDP growth at all for the fiscal year ending March 2010 — marking the first fiscal year of no growth in seven years — adding that deflationary pressures were likely to appear in that time.

Earlier in the week, the Nikkei and Topix shrugged off the miserable Tankan business survey data, following the U.S. government's announcement that it would consider using its $700 billion financial market rescue package to save the auto sector. The Tankan showed that business confidence among major Japanese manufacturers marked the steepest drop since February 1975 and reinforcing the view that Japan is in for a deep and prolonged recession.

The board members of the Reserve Bank of Australia wanted to take strong action on interest rates and then evaluate the situation, minutes from the board's December 2 monetary policy meeting revealed on Tuesday. The RBA responded with an interest rate cut of 100 basis points, slashing the bank's official cash rate target to 4.25 percent, its lowest level in six years, from the 5.25 percent level established in November.

Bank of Japan regains honor of lowest interest rate

The Bank of Japan cut its key policy interest rate to 0.1 percent from 0.3 percent where it had been since October 31. The vote was seven to one. After the Federal Reserve cut the fed funds target to a range of zero to 0.25 percent on Tuesday, expectations for another interest rate cut in Japan escalated. Government officials also added pressure by asking the BoJ to do ‘more’. Prime Minister Taro Aso and Finance Minister Shoichi Nakagawa said that they want the Bank to inject more cash into the economy to help companies borrow. The Fed’s reduction brought the fed funds rate lower than Japan’s for the first time since 1993 and caused the yen to surge to a 13 year high, hurting Japanese exporters already reeling from collapsing overseas demand.

In addition to its main policy rate, the Bank cut its Lombard lending rate to 0.3 percent from 0.5 percent. The Bank has also decided to increase purchases of Japanese government bonds, including inflation-linked bonds, floating-rate bonds, and 30-year bonds. They also announced measures to buy commercial paper as well, and said it will consider buying other corporate debt products.

The Bank said that the economy is deteriorating and would likely worsen in the near term. They said that it would take time for the economy to recover. Furthermore, inflation may drop more than it already has because of the sharp decline in commodities prices.

In his press conference following the announcement BoJ governor Masaaki Shirakawa said that the rate cut does not imply quantitative easing, nor does it mean that the central bank is returning to zero interest rate levels. Shirakawa also said that the overnight rate at 0.1 percent will help protect the market mechanism. However, he added that he could not predict the chances of further cuts down the road. The governor added that the central bank has no plans to further increase its monthly purchase of government paper.

Currencies

The U.S. dollar dropped against both the euro and yen last week as central bank interest rate moves were reflected in currency values. After sinking earlier in the week after the Fed’s massive rate cut, the dollar rebounded after traders said the decline was too fast to be sustained. The euro also weakened after the European Commission said the region may suffer a sharp decline in growth next year. The dollar had declined almost 3 percent against the euro on December 17 — the day after the Fed lowered its fed funds target.

The pound sterling was also a big loser. Investors think that the Bank of England will follow the Fed with more aggressive rate cuts. Sterling also plumbed new lows against the euro after Bank of England minutes of its recent meeting revealed that the monetary policy committee had considered even deeper cuts than the 100 basis point reduction enacted. The currency was further undermined after the Bank’s deputy governor said a zero interest rate was possible and that the government was likely to pump billions more into the banking system. This increased expectations that the Bank of England would follow the Fed and adopt a quantitative easing approach to monetary policy. The pound hit a record low of £0.9556 against the euro on Thursday — putting parity with the euro firmly in view, before retracing some of its losses Friday.

The euro gained helped by hawkish comments from European Central Bank officials who suggested eurozone interest rates would remain on hold at its January meeting. Profit-taking following the euro’s recent strength accelerated after the ECB cut its overnight deposit rate by 50 basis points to 1.5 percent — a full percentage point below the main refinancing rate of 2.5 percent. Analysts suggested the move would rein in the single currency without the ECB having to take its main rate closer to zero.

The yen also maintained its strength despite the Bank of Japan’s interest rate cut on Friday which had been anticipated by the market. The yen continued to gain until finance minister Shoichi Nakagawa said that he has ‘the means’ to limit the yen’s rally. The last time Japan intervened on its own, it sold a record ¥20.4 trillion in 2003 and ¥14.8 trillion in the first quarter of 2004, when the yen strengthened to ¥103.42 per dollar. Japan hasn’t bought yen since 1998, when it spent ¥3.05 trillion as the currency reached a low of ¥147.66.

Selected currencies — weekly results

Indicator scoreboard

EMU

November harmonized index of consumer prices dropped 0.5 percent and was up 2.1 percent when compared with last year for its slowest pace since September 2007. Given the importance of the slump in energy prices (down 4.9 percent on the month), the performance of the various core rates was less impressive. Core HICP excluding food, drink, tobacco & energy index was up 1.9 percent on the year while excluding energy and seasonal food measure the rate was up 2.3 percent on the year. Annual inflation rates fell in most sectors especially transport, food and housing. Annual HICP inflation decelerated in all EMU states last month. Especially sharp declines were seen in Belgium (3.2 percent from 4.8 percent), Spain (2.4 percent from 3.6 percent), Cyprus (3.1 percent from 4.8 percent), Luxembourg (2.0 percent from 3.9 percent) and Slovenia (2.9 percent from 4.8 percent). However, even the smallest improvement (Ireland and the Netherlands) amounted to fully 0.6 percentage points.

October seasonally adjusted merchandise trade deficit narrowed to €1.3 billion from September’s €4.4 billion deficit. The unadjusted balance returned to surplus for the first time since June with a €0.9 billion surplus. However, the improvement in the adjusted data reflected an even steeper decline in imports than in exports. Purchases from overseas slumped 4.6 percent on the month, swamping what would otherwise have been a sizeable 2.5 percent decline in exports. Germany, Ireland, Finland, Malta and Austria recorded surpluses with all other reporting deficits.

Germany

December Ifo economic sentiment declined to 82.6 — its lowest reading since the second oil crisis at the end of 1982 — from 85.8 in November. Both current conditions and expectations were down. The former dropped a hefty 6.1 points to 88.8 while the latter declined a more modest 0.8 points, but from an already exceptionally soft 77.6 in November. Most sectors saw conditions deteriorate further, especially in manufacturing where the diffusion index slumped from minus 29.5 to minus 40.2. The wholesale climate index slipped to minus 26.1 from minus 21.8, the service sector index fell to minus 14.5 from minus 7.3 and the construction index dropped from minus 30.2 to minus 30.5. Only retail managed a minor improvement.

November producer prices dropped 1.5 percent and were up 5.3 percent when compared with last year. Energy prices, down 3.3 percent on the month, were instrumental in the decline in the headline index from October’s 7.8 percent gain on the year. Excluding energy, prices were down 0.8 percent from their October level. This reflected declines in the cost of basics (1.6 percent) and consumer goods (0.6 percent), the latter weighed down by a 0.7 percent slide in nondurables. Capital goods prices edged up 0.1 percent on the month.

Italy

October unadjusted merchandise trade deficit narrowed to €74 million compared with a surplus of €461 million a year ago. Nominal imports were up 0.3 percent from October 2007 while exports dropped by 1.3 percent. The trade surplus with the EU bloc declined to €291 million from €767 million a year ago while the global shortfall over the first ten months of 2008 widened to €10.0 billion from €7.3 billion during January through October 2007.

Third quarter jobless rate held steady at 6.7 percent. The number of unemployed actually fell 15,000 while payrolls crept up 22,000. As a lagging indicator this report provides a very misleading impression of the Italian economy which is already in technical recession.

United Kingdom

November consumer price index edged down 0.1 percent and was up 4.1 percent when compared with last year. All of the other principal inflation gauges decelerated with the mortgage rate-influenced retail price index dropping 0.8 percent to reduce its annual rate by 1.2 percentage points to 3.0 percent and the formerly targeted retail price index excluding mortgage interest payments declining 0.4 percent to lower its 12-month rate from 4.7 percent to 3.9 percent. Sharply weaker energy prices were the main factor behind the continued softening in the inflation profile. The main upward pressure came from food & non-alcoholic beverages. Core CPI edged up 0.1 percent on the month and was up 2.0 percent on the year.

Average earnings for the three months ending in November were up 3.3 percent when compared with the same three months a year ago. Excluding bonuses, the earnings were up 3.6 percent. For the month of October, earnings jumped to 3.7 percent from 3.1 percent on the year. The jump reflected a bounce in the service sector. Services earnings growth was unchanged at 3.5 percent while in manufacturing the headline rate was also steady at 2.9 percent. Headline growth in the public sector edged a notch lower to 3.8 percent.

November claimant count unemployment posted its largest monthly advance since March 1991 and jumped 75,700 from October. The level of unemployment last month stood at 1.07 million while the jobless rate was up 0.2 percentage points to 3.3 percent. The ILO measure of joblessness climbed to 6.0 percent for the three months ending in October. This was its highest rate since the May quarter in 1999. Total unemployment rose 137,000 to 1.87 million.

November retail sales were up 0.3 percent and were up 1.4 percent when compared with last year. The monthly gain was evenly split between food (0.2 percent) and non-food (0.2 percent) retailers while non-store retailing was up 2.5 percent. Within non-food stores, purchases rose only in the household goods sector (3.9 percent) while declines were registered in clothing/footwear (0.1 percent), non-specialized stores (1.5 percent) and other stores (1.8 percent). Rapidly diminishing price pressures were confirmed in a slowdown in the retail sales deflator which dropped to a 0.2 percent annual rate from an already sluggish 0.7 percent pace in October.

Asia/Pacific

Japan

Fourth quarter Tankan large manufacturer diffusion index sank to minus 24 from minus 3 in the previous quarter. This was the fifth consecutive quarter that sentiment has deteriorated. The index for small manufacturers plunged to minus 29 from minus 17. The readings represent the percentage of companies saying business conditions are good minus those saying conditions are bad. Sentiment among large non-manufacturers also deteriorated to minus 9 from a reading of plus 1 in September. An important reading for analysts is the fixed investment or CAPEX index. This index was at its lowest since 2002. Major manufacturers’ capital spending for the current fiscal year to March 31, 2009 is forecast to rise 2.4 percent from a year earlier. But spending by all large firms is expected to slip 0.2 percent. All small enterprise firms’ capital investment plans are expected to drop 11.6 percent from a year earlier.

October tertiary industry index was up 0.4 percent on the month and was down 1.4 percent on the year. Those industries that contributed to the increase were information & communications, wholesale & retail trade, electricity, gas, heat supply & water, finance & insurance, medical, healthcare & welfare, learning support and compound services. Industries that declined in the month included transport, eating & drinking places & accommodations, real estate and auto maintenance.

October all industries index was down 0.5 percent and down 2.5 percent when compared with last year. Analysts had expected a decline of 0.9 percent on the month. The tertiary index which is a major component of the all industry index edged up 0.4 percent on the month but was down 1.4 percent on the year. The all industry index takes a reading of activity in the 11 service industries that comprise the tertiary index, along with activity in the construction, agricultural & fisheries industries, the public sector and industrial output. This index is considered a close approximation of gross domestic product growth as measured by industrial and service sector output.

China

November industrial production was up 5.4 percent from a year earlier. Electricity output sank by 9.6 percent while pig iron production plummeted 16.2 percent. Raw steel declined 12.4 percent and steel products tumbled 11 percent. Vehicle production dropped 15.9 percent and car output declined 10.1 percent.

Americas

Canada

October manufacturing sales were down for a third consecutive month, dropping 0.5 percent but were up 3.4 percent when compared with last year. The Canada/U.S. exchange rate as well as notable declines for petroleum and coal product prices affected October's results. The price of petroleum and coal products dropped 13.5 percent, reducing the value of sales in that industry. In constant dollars, manufacturing sales decreased 1.8 percent on the month, bringing constant dollar sales to their lowest level since December 2001. Eight of 21 manufacturing industries, accounting for about 40 percent of total sales, posted decreases. Petroleum and coal product sales sank 7.3 percent, largely due to lower prices. Petroleum and coal product sales have dropped for four consecutive months, and were 18.1 percent lower than the peak reached in June 2008. Unfilled orders posted an increase of 6.8 percent on the month entirely attributable to the rise of 13.9 percent in aerospace manufacturing, which in turn was due to changes in the exchange rate. Excluding the aerospace industry, unfilled orders decreased 0.3 percent on the month. New orders also increased, rising 8.8 percent after two months of decreases. Excluding the aerospace industry, new orders fell 1.5 percent compared with September.

October retail sales sank 0.9 percent and were up 4.1 percent when compared with last year. Excluding autos, sales were down 1.1 percent and up 6.0 percent on the year. Auto sector sales were down 1.5 percent and were heavily biased down by a 4.0 percent slump in the value of gasoline purchases. In volume terms, total retail sales actually edged up 0.1 percent on the month. Nominal sales declined on the month in furnishing & electronic stores (-2.1 percent), building & outdoor home supplies (-0.2 percent), clothing & accessories (-1.5 percent), general merchandise (-1.0 percent) and miscellaneous retailers. The only monthly gains were posted by food & beverage stores (0.1 percent) and pharmacies & personal care stores (0.6 percent).

November seasonally adjusted consumer price index was down 0.3 percent and was up 2.0 percent when compared with last year. Excluding food and energy, the CPI was up 0.5 percent and 1.6 percent on the year. However the Bank of Canada’s core measure which excludes eight volatile items was up 0.6 percent and 2.4 percent on the year. The deceleration in the headline annual rate was essentially due to sharply weaker gasoline prices which were down 14.4 percent on the year. Excluding only gasoline, the CPI accelerated from an annual rate of 2.0 percent in October to 2.8 percent, the fastest pace since May 2003. Most categories outside of transportation (down 3.0 percent from 1.6 percent) saw their respective 12-month inflation rates accelerate. A particularly marked rise was seen in food (7.4 percent from 6.1 percent), but there were also faster price gains in health & personal care (1.9 percent from 1.6 percent), household operations & furnishings (2.1 percent from 1.7 percent). Disinflation in the clothing & footwear sector was also somewhat less pronounced (2.4 percent from 2.8 percent). 

Bottom line

Economic data continued to show the deepening recession everywhere. In Japan, the Tankan showed that both the manufacturing and non-manufacturing sectors of the economy are in trouble while in Europe, sentiment indexes show unmitigated gloom. The Bank of Japan and the Federal Reserve both lowered their target interest rates to almost zero and announced broader purchase plans to ease the credit crunch.

Economic data will be light over the next two weeks as will trading as investors take time off. The euro will be 10 years old on New Year’s Day — and Slovakia will become the European Monetary Union’s 16^th member on that day.

From all of us at Econoday — a happy holiday season and a great 2009!

Looking Ahead: December 22 through December 26, 2008

Looking Ahead: December 29 through January 2, 2009

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