Global Markets

Last week’s data deluge especially in Europe provided for no light at the end of the tunnel. Data were mostly worse than anticipated, especially German manufacturing orders and EU sentiment. While the beginning of the week was bereft of data, the second half more than made up for it. Typically, little if any economic data are released during the end of year holiday period — it all gets pushed into the first several days of the New Year.

Growing indications of a global recession compounded by a traumatized financial sector loomed in the background as trading for 2009 got underway. And despite that, equities began trading in the first week of the new year with optimism — but it did not last long. The big question facing investors is whether aggressive actions by many of the world’s central banks will staunch the flow and whether fiscal stimulus can revive the moribund economies.

However, virtually everyone one agrees that this time is different. The reasons simply stated are the credit crunch, the battered banking sector and the severity of their impact on the real economy. There are worries about the bond market with the deluge of new issuance from the U.S. Treasury and Japan to fund bailouts and stimulus packages. While most of Japan’s bonds are usually absorbed at home, there are indications that the Ministry of Finance will be reaching out to foreign buyers as well.

On the week, stocks in the Asia/Pacific region were mixed while stocks in Europe, the UK and North America were down on the week.

Global Stock Market Recap

Europe and the UK

After two positive days last week, it was down hill from there with the FTSE, CAC and DAX declining 2.5 percent, 1.5 percent and 3.8 percent respectively. As to be expected, Friday’s U.S. employment report sent the three indexes lower. But Europe and the UK did not need to import negative data and news — they had their own to fret over. German banks especially continued to suffer after Thursday’s news that the government would take a 25 percent stake in Commerzbank, injecting a further €10 billion into the country’s second largest bank to cover its acquisition of Dresdner Bank from insurer Allianz.

Stocks also declined on dismal retail sales reports especially from the U.S. where Wal-Mart cut its fourth quarter earnings outlook. The FTSE was down despite the Bank of England’s policy interest rate cut to a record low of 1.5 percent Thursday. Investors bailed out on fears over the sinking British and U.S. economies and especially after U.S. stocks declined in reaction to the horrendous U.S. employment report.

The blitz of negative national economic data did not help either. For example, the intensely watched German manufacturers’ orders and industrial output data deteriorated much more than anticipated while the country’s trade surplus withered reflecting sinking overseas demand. And in the UK there was no respite from gloom either. Eurozone economic sentiment hit a record low while unemployment climbed to a two year high, putting pressure on the European Central Bank to cut interest rates at their meeting this week.

Bank of England cuts rates again

The Bank of England monetary policy committee cut interest rates 50 basis points to 1.5 percent as it continues to aggressively try to breathe life into the sinking economy. Since the joint rate cut with the Federal Reserve and other central banks in October, the MPC has reduced rates by 300 basis points. Analysts’ expectations ranged from unchanged to a 100 basis point cut. Since its creation in 1694, the Bank’s rate has never been below 2.0 percent. At its previous meeting in December, the Bank cut rates by 100 basis points to 2 percent for the first time since 1951, after which the economic outlook continued to deteriorate.

Now the main question appears to be whether the BoE will pursue the U.S.-like strategy of 'quantitative easing' or buy up frozen assets in an effort to pump liquidity into the financial markets. The Bank‘s own credit conditions survey recently pointed to ongoing tightness, adding to the argument that banks continue to limit lending to consumers and businesses and fuelling speculation that cash injections into the financial system may be the only way to unfreeze the market system.

In its statement, the MPC noted that business surveys suggest that the pace of contraction in activity increased during the fourth quarter and that output is likely to continue to fall sharply during the first part of this year. It said that the outlook for investment, both business and residential, has deteriorated. The Bank also suggested that the dramatic series of rate cuts since October were having a limited impact and that the monetary authorities may have to use other measures to encourage lending to business and consumers. They said that credit availability to both business and households had tightened further which points to the need for further measures to increase the flow of lending to the non-financial sector. It noted that the recent decline in the pound sterling could help exporters limit the global slowdown’s impact.

Asia/Pacific

Asian/Pacific stocks were mixed in the first full week of trading in 2009 after a slew of negative data reports dampened investor spirits. On the eve of the U.S. employment situation report, investors here were cautious — markets were closed prior to the release but were negatively influenced by Thursday’s mixed U.S. trading thanks to negative retail sales and corporate profit reports.

In Japan, the week began on a positive note but lost ground on Thursday and Friday after seven positive trading sessions. Bleak data provided fresh evidence of the weakening U.S. economic conditions and profits warnings from major companies emphasized the negative impact on the real economy. And a stronger yen dragged down exporters’ stocks. National economic reports did not help either! Japan's Cabinet office announced that the leading index declined to 81.5 in November from 85.2 in October and from 104.8 a year ago.

Japanese auto sales are sinking along with those in the U.S. The Automobile Dealers Association said that December vehicle sales in Japan dropped 22.3 percent on the year after plummeting 27.3 percent in November. Vehicle sales were down for the fifth straight month. The Japan Mini Vehicle Association reported that sales of mini vehicles were also down, dropping 6.7 percent on the year for the second straight month of decline.

The Kospi was up on the week but did not rally despite the Bank of Korea’s interest rate cut to a record low of 2.5 percent. The cut did not dissipate investor concerns over the sinking economy.

Indian markets were hit hard by a scandal uncovered earlier in the week. Revelations of a fraud at software services firm Satyam Computer Services sparked a rout in the company's shares and shook confidence in the broader share market after the company said that it had been inflating profits for several years. The Sensex was down 5.5 percent for the week.

Of the indexes followed here, seven were positive for the first week of the year while the remaining six declined. Gains ranged from 6 percent for the PSEi and 4.5 percent for the Jakarta Composite to 0.7 percent for the All Ordinaries. Declines ranged from 5.5 percent for the Sensex and 4.4 percent for the Hang Seng to a modest 0.3 percent drop for the Nikkei.

Central banks of Indonesia, Taiwan and South Korea cut rates

The Central Bank of the Republic of China (Taiwan) unexpectedly cut its key interest rate for the sixth time. It reduced its policy rate by 50 basis points to 1.5 percent and urged banks to increase corporate lending despite plummeting exports and feeble domestic demand. The unscheduled meeting occurred shortly after the finance ministry said December imports and exports plummeted. The global recession has badly hit Taiwanese technology companies — the island's largest employers —forcing them to freeze hiring, cut jobs and reduce wages as demand shrinks in major markets such as China and the U.S.

Bank Indonesia also surprised by cutting its benchmark rate by 50 basis points to 8.75 percent and at the same time saying that policy would be easing in the months ahead. Analysts had been expecting a 25 basis point cut. The rate cut followed on the heels of a government stimulus package of $6.6 billion. The moves aim to soften the impact of the global economic crisis on Southeast Asia's biggest nation. Bank Indonesia Deputy Governor Hartadi Sarwono told a post meeting press conference that the risk from inflationary pressures is milder when compared to the risks to economic activity. After peaking above 12 percent in September, inflation has cooled to around 11 percent with expectations that it will return to single digits by mid-2009. The stimulus package includes spending on roads, ports, airports and railroads and is intended to create jobs and reduce business costs due to the country's creaking infrastructure.

The Bank of Korea cut its policy interest rate by 50 basis points to a record low of 2.5 percent as its governor warned that the economy contracted in the fourth quarter. Bank of Korea’s governor, Lee Seong-tae said that monetary policy will be focused on improving market liquidity. The cut is the fifth in three months, adding up to a total of 2.75 percentage points. The country is facing a growing risk of recession as global demand cools for its electronics, ships and cars. The government said it will provide an additional Won50,000 billion in loans and credit guarantees to prop up small businesses in addition to an earlier Won140,000 billion stimulus package. However, the Bank’s governor said that Korean companies still faced considerable difficulties in raising funds because financial institutions continue to manage their funds very conservatively.

Currencies

The U.S. dollar strengthened last week against the euro but lost ground against the yen and pound sterling. The dollar gained despite Friday’s atrocious employment report. However, the yen was up last week as it has been of late when investors show their adversity to risk and sell equities. And the euro, after peaking in mid-December, has gradually declined against the dollar as the influx of bad eurozone economic news escalates and with it the higher probability of an interest rate cut by the ECB especially now that inflation has fallen below the Bank’s inflation target.

With government officials threatening intervention should the yen become too strong, Bank of Japan governor Masaaki Shirakawa said that the Bank always keeps in mind the dampening effects of the strong yen when making monetary policy decisions. He said that it is desirable for exchange rates to reflect economic fundamentals even though exchange rates are set in the currency market. Clearly, exchange rates are on everyone’s radar in Japan!

Monetary policy is retaining some of its clout through exchange rates according to analysts. An example is the pound which climbed from near parity against the euro. Gathering gloom about the euro area’s economic prospects led foreign exchange dealers to factor in an early cut in European interest rates. But the hefty depreciation of around a quarter in sterling’s trade-weighted value since mid-2007 will still bolster the economy by making British producers more competitive both in foreign markets and at home. Sterling’s decline should blunt deflationary pressures that might otherwise exacerbate the credit crisis.

Selected currencies — weekly results

Indicator scoreboard

EMU

December flash harmonized index of consumer prices dipped below the ECB inflation target of 2 percent to 1.6 percent when compared with the previous year. The last time the HICP was below 2 percent was in August 2007. Although there are no component details provided in the flash release, national data clearly indicate that weaker energy costs were once again the key to the slowdown. Amongst the larger eurozone countries, the most marked decline in headline HICP inflation was in Spain where prices slowed by 0.9 percentage points to 1.5 percent but Germany also saw a 0.3 percentage point drop to 1.1 percent while the Italian rate eased to 2.3 percent from 2.7 percent.

November producer price index excluding construction tumbled 1.9 percent and was up 3.3 percent when compared with last year. Energy prices dominated the decline, sinking 5.1 percent on the month and reducing their 12-month growth rate to 6.6 percent from 18.3 percent in October and 25.0 percent in July. Excluding energy and construction, the core index fell 0.8 percent and was up 2.3 percent. Monthly declines within this sector were concentrated in intermediates (1.6 percent) and non-durable consumer goods (0.4 percent). Capital goods prices edged up just 0.1 percent on the month while durable consumer goods prices were unchanged.

November unemployment rate edged up to 7.8 percent from 7.7 percent in the previous month. This was in line with expectations and left the rate at a 23-month high. The jobless rate has edged up every month since July when it was 7.4 percent.

November retail sales were up 0.6 percent after sinking 1.0 percent in October. On the year, sales were down 1.5 percent. The monthly increase was roughly evenly split between the food, drink & tobacco sector (0.6 percent) and the non-food product area (0.5 percent). The increase also reflected stronger sales in Germany (0.7 percent), France (1.8 percent) and in Spain (0.4 percent). Italy did not supply any data. However, the advance was not uniform across the region. There were declines in Belgium (1.1 percent), Portugal (1.4 percent) and Finland (0.9 percent).

EU

December economic sentiment declined to a new record low of 67.1 from 74.9 in November. All major categories declined. Industry dropped 8 points to minus 33 while services declined 5 points to minus 17. Consumer confidence also declined 5 points to minus 30 while retail was down 6 points to minus 19 and construction dropped 3 points to minus 27. Regionally, sentiment was down in Germany, France Italy and Spain.

Germany

December unemployment rate remained at 7.6 percent for the fourth month. The number of unemployed climbed by 18,000 to 3.181 million after a cumulative decline of 47,000 over the previous three months. Vacancies declined by 9,000. All of the job losses last month occurred in the West where unemployment rose 19,000. The East saw a 1,000 drop in the number out of work.

November seasonally adjusted merchandise trade surplus declined to €10.7 billion from €15.8 billion in October. Exports dropped 10.6 percent while imports were down 5.6 percent. On a non-seasonally adjusted basis, the trade surplus narrowed to €9.7 billion, sharply down from €19.4 billion reported a year earlier.

November retail sales excluding autos were up 0.7 percent but were down 3.0 percent when compared with last year. Detailed figures are only available for the annual growth rates. Real food, drink & tobacco sales sank 5.5 percent on the year while aggregate purchases elsewhere were down 1.4 percent. Within this latter group, the furniture & household sector was especially weak (down 3.7 percent) as were pharmaceuticals, medical products & cosmetics (down 3.6 percent). Mail order slumped 6.0 percent.

November manufacturing orders plummeted 6.0 percent and were down a massive 24.0 percent when compared with last year. The overall monthly decline was split between domestic orders, which nosedived 7.6 percent following a 6.4 percent drop in October, and overseas where demand fell 4.4 percent, compounding the previous 6.3 percent decline. Within the domestic sector, basic goods were down 9.6 percent on the month while capital goods were off 7.5 percent and consumer goods dropped 1.3 percent. Overseas orders were depressed almost equally by the eurozone (down 4.3 percent) and non-eurozone (down 4.6 percent) blocs. Foreign orders for basics slumped 9.4 percent (eurozone down a huge 13.1 percent) while capital goods dropped 1.6 percent and consumer goods declined 1.2 percent.

November industrial production plummeted 3.1 percent and sank 6.4 percent when compared with the previous year. The drop in output was the fourth in the last five months and reflected monthly declines in all of the major sectors outside of construction (flat). Overall manufacturing was down 3.5 percent with intermediates down 6.0 percent, capital goods down 2.2 percent and consumer goods off 1.1 percent. Energy production fell 0.2 percent from October.

France

November industrial production excluding construction dropped 2.4 percent and was down 9.0 percent when compared with last year. This followed a hefty 3.7 percent monthly decline in October. The drop was heavily prejudiced by an 8.1 percent collapse in auto production that left output levels in this sector down a whopping 35.9 percent on the year. Other sectors fared rather better although semi-finished goods witnessed a sizeable 5.6 percent contraction. Capital goods output dropped a further 0.5 percent while energy was down 0.3 percent and construction was off 0.2 percent. However, there were reasonable gains in both consumer goods (0.8 percent) and food & agriculture (0.6 percent). Total manufacturing production fell 3.1 percent and was down 11.0 percent from a year ago.

November merchandise trade deficit eased to €6.2 billion from €7.0 in October. The modest improvement reflected a monthly drop in exports (2.3 percent) that was outpaced by imports (down 3.9 percent). There were the usual sizeable shortfalls on basics (€1.8 billion), non-military industry (€3.0 billion) and autos (€0.8 billion), only partially offset by surpluses on food stuffs (€0.5 billion) and capital goods (€0.5 billion).

United Kingdom

November industrial output declined 2.3 percent and plummeted 6.9 percent when compared with last year. The manufacturing sector dropped 2.9 percent on the month and 7.4 percent on the year. Electricity, gas & water declined 1.5 percent from October but there were gains in the more erratic oil & gas extraction (2.0 percent) and mining & quarrying (2.9 percent).

December producer output prices were unchanged on the month and were up 4.7 percent when compared with last year. The flat performance on the month essentially reflected the impact of weaker energy prices being offset by increased prices of tobacco and alcohol courtesy of increases in excise duties. Excluding excise duties, the output price index fell 0.4 percent from November. Producer input prices were down 2.0 percent and were up 4.3 percent on the year. Weaker energy costs were again the driving force behind the monthly decline. Crude oil prices were 16.2 percent lower. Other declines were limited to imported metals (1.9 percent) and other home produced materials (0.3 percent). The largest monthly price gain was in fuel (2.2 percent) while imported chemicals (1.9 percent) and home food materials (1.1 percent) also posted notable increases.

Asia/Pacific

Australia

November trend retail sales edged up 0.1 percent and were up 1.9 percent when compared with last year. Sales were up 0.2 percent in each of the preceding three months. Food and other retailing were up 0.7 percent and 0.6 percent respectively. However, department store sales were down 0.4 percent while clothing & soft good retailing declined by 0.3 percent. Household good retailing dropped 1.0 percent and cafes, restaurants & takeaway food services were down 0.3 percent. Chains & other large retailers increased by 0.3 percent and 5.1 percent on the year. Retail sales continue to limp along but have not yet shown the softness exhibited elsewhere.

November merchandise trade surplus was A$1,448 million, down from October’s revised surplus of A$ 2,960 million. The decline was primarily due to a drop in exports which were down by 3.6 percent. The decline occurred mainly in non-rural and other goods. Non-rural goods dropped 4 percent thanks to sinking metal ores and minerals exports which were down by 13 percent. Other goods plummeted 11 percent and rural goods edged down 1 percent. Imports were up 2 percent. Consumption goods were up 2 percent while intermediate and other merchandise goods were down 4 percent. Other goods were up 67 percent. The decline in intermediate and other merchandise goods was driven by a 24 percent drop in fuels & lubricants.

Americas

Canada

November industrial product price index dropped 2.6 percent and was up 5.9 percent when compared with last year. Petroleum and coal products were once again the dominant factor in this report with a monthly price drop of 10.4 percent. Nonetheless, there was sufficient weakness in other areas to secure a 0.4 percent decline excluding energy. Primary metal products were down 6.7 percent while chemicals & chemical products were down by 2.2 percent. The main price gains were registered in motor vehicles & other transport equipment (1.9 percent) and electrical & communications products (1.0 percent). November raw material price index plummeted 13.4 percent and plunged 16.8 percent on the year. The monthly decline was led by mineral fuels which slumped an additional 22.8 percent. Excluding mineral fuels, the RMPI would have declined 2.8 percent on the month and 7.6 percent on the year. Other monthly declines were more subdued but still significant in ferrous materials (5.4 percent) and non-ferrous metals (8.5 percent). Animal and animal product prices dropped 1.0 percent from October.

December employment dropped 34,400 jobs while the unemployment rate jumped to 6.6 percent from 6.3 percent in November. Job losses were concentrated in full-time employment where payrolls dropped 70,700. Part-time jobs partially offset the decline and increased 36,200. Private sector losses amounted to 59,400 compared with a 20,500 increase in public sector employment. The goods producing sector shed 39,400 positions with losses especially heavy in construction (44,300). Other declines were minor. Manufacturing jobs increased by 8,900. Service sector employment edged up 5,000 thanks to a solid increase in transportation & warehousing (23,4000 and more modest advances in the finance, insurance & real estate sector (12,200), information, culture & recreation (8,100) and public administration (9,100).

Bottom line

Investors were brought back to the real world with a data deluge that was almost uniformly bad. The Bank of England along with several Asian/Pacific central banks cut interest rates while many governments unveiled new stimulus packages. In the U.S., President-elect Obama expanded on the stimulus package that he would like the Congress to approve by mid-February.

The European Central Bank meets Thursday after being presented with an array of dreadful data that show the eurozone in recession. And the flash harmonized index of consumer prices has dropped from an above inflation target (2 percent) high of 4.1 percent in July to 1.5 percent in December. Analysts think the ECB governing council will reduce the policy interest rate by 50 basis points to 2 percent. In the U.S., the Federal Reserve’s Beige Book will give a regional briefing on economic conditions. And in Australia, the employment report will give an idea of how the global slowdown is affecting that economy.

Looking Ahead: January 12 through January 16, 2009

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