Global Markets

Equities plummeted as a seemingly never ending stream of profit reports illustrated vividly the pervasiveness of the sharp decline in the global economy. Unremittingly poor economic data underlined for investors why profits were so poor. Market players refocused on the financial sector once again as uncertainty over the new U.S. administration’s plans to shore up stricken banks contributed to the increased volatility. There was little U.S. economic data but what there were showed that housing starts haven’t reached bottom yet while jobless claims continued to rise. And in the UK, the economy’s weaknesses are apparent. It was the first of the major industrial countries to release its first estimate of fourth quarter gross domestic product. The data put the UK firmly in recession’s grip as GDP declined for the second consecutive quarter. Earlier China reported the slowest growth pace in seven years amid crumbling exports and a faltering housing market.

The Bank of Japan, with no place to go with its policy rate at 0.1 percent, opted to increase liquidity through various security purchasing measures. It also downgraded its outlook once again. And earlier in the week, the Bank of Canada lowered its policy interest rate as well — in addition to lowering its outlook for the economy. All indexes followed here were down last week with the exception of the Shanghai Composite.

On the week, losses ranged from 7 percent for the Sensex to 0.4 percent for the SET. The Shanghai Composite was up 1.8 percent for the week.

Global Stock Market Recap

Europe and the UK

Equities tumbled in the UK and Europe as earnings declined and dour economic data cast their gloom on investors. In London, the FTSE initially declined after the first estimate of fourth quarter gross domestic product suffered the biggest drop since 1980. This confirmed that the UK is in a recession for the first time since 1991. Declines were pervasive throughout the sectors reporting and it raised the prospect of a longer and deeper recession than previously forecast. Earlier in the week, the unemployment rate continued to climb. Fourth quarter GDP data for the eurozone will not be available until mid-February, but several of the larger member states are already in recession having declined in the second and third quarters.

Markets in Europe and the UK continued to decline thanks to lower than estimated corporate profits and gloomy outlooks going forward that accompanied them. Companies such as Nokia and Microsoft said that the ongoing global economic crisis would eat into corporate profits. The mood was not helped Thursday when U.S. housing starts fell to a record low, dashing hopes that the housing market was beginning to show a new bottom. And jobless claims continued to grow adding to the gloom. According to analysts, the latest bout of concern about banks in Europe and the UK was largely triggered by the UK government’s latest plans to bail out the sector. Some think the package is not large enough.

On the week, the FTSE, DAX and CAC were down 2.3 percent, 4.3 percent and 5.6 percent respectively.

Bank of England MPC meeting minutes

The Bank of England’s monetary policy committee voted eight to one to cut interest rates by 50 basis points to the lowest level since 1694 earlier this month. However, minutes from the meeting on January 7 and 8 revealed that the nine-member committee opted not to cut interest rates more aggressively because of the risks of further undermining sterling and confidence in the UK economy. They even considered leaving rates unchanged.

The minutes reveal that the MPC mulled keeping rates at 2 percent, because it was possible that policy measures already in train were having, and would have, a significant impact, and because of the stimulative effects of the depreciation in the sterling exchange rate and sharp falls in consumer price inflation. Ultimately, however, the worsening outlook for the UK economy that had emerged since the previous meeting combined with market expectations of a cut pushed members of the committee towards reducing interest rates. The minutes showed that a further sharp decline in the pound, a rebound in commodity prices, or faster than expected recovery might spur future inflation, but that the weakening prospects for growth left the risks to the downside.

Earlier in the week, the UK Treasury announced Monday it was giving the Bank of England the power to buy a wide range of asset backed securities. It also gave the MPC the power to carry out quantitative easing if it wishes. The Treasury said it was establishing a new facility for asset backed securities, which would be run by the Bank. They will be able to buy a very wide range of assets. In addition, the Bank will be able to use asset purchases for the purposes of meeting the inflation target — effectively quantitative easing.

Asia/Pacific

The bad news about earnings and economies continued to accumulate. Once again, all Asian/Pacific equity indexes followed here with the exception of the Shanghai Composite were down for the second week. The global recession is hurting profits of companies such as Sony and Samsung. Sony forecast its first annual loss in 14 years while Samsung recorded its first quarterly loss. And in Australia banks tumbled after a former central bank governor predicted a ‘longer’ recession for the country. Exporters such as Sony and Samsung that sell to the U.S. dropped after U.S. jobless claims matched the highest level since 1982.

Japanese stocks were down after Sony’s forecast of a larger-than-expected annual operating loss and the yen's appreciation against the U.S. dollar. With the yen’s strength against the euro and the U.S. dollar, investors fret that corporate earnings will be much worse than expected. When the yen rises in value repatriated profits decline.

Australian stocks tumbled to a five-year low battered by declines in banks and resource stocks on concerns about overseas banks and lower base metal prices. Poor U.S. housing and job market data and comments by a former central bank governor, Bernie Fraser, that the country is entering a prolonged and deep recession also weighed on the market.

In the fourth quarter, South Korea’s economy marked its biggest decline since the Asian financial crisis a decade ago thanks to declines in exports, corporate investment and consumer spending. GDP contracted by 3.4 percent on the year. For all of 2008, GDP was up 2.5 percent — the slowest rate of growth since the Asian financial crisis in 1998.

Taiwan markets were closed on Thursday and Friday. They will be closed all next week as will be China for the lunar new year. Hong Kong will be closed for the first three days of the week.

Bank of Japan moves to other measures

As expected the Bank of Japan kept its key interest rate at 0.1 percent as economic data continue to indicate that the economy is sinking. As evidence, the merchandise trade balance released prior to the Bank’s announcement, was in deficit for the fifth month on a seasonally adjusted basis as the impact of the higher yen combined with global weakness to cut demand for Japanese products. And other recently released economic data, such as industrial production and machinery orders, also were very weak, plummeting 8.5 percent and 16.2 percent respectively in November and underscoring the BoJ's economic view that the economy is worsening. The Bank lowered its forecast saying that economic conditions are deteriorating and will continue to do so going forward. Prices are weaker than forecast in October. The Bank lowered its forecast for 2009 to a decline of 2 percent for GDP but expects the economy to grow by 1.5 percent in 2010.

The BoJ is under increasing pressure to ease the credit crunch by directly buying corporate debt on its own account. Along those lines, the BoJ said it would buy commercial paper with a rating of A-1 and above along with other securities. The decision mirrors those of central banks elsewhere and highlights the BoJ’s concerns about corporate liquidity. After cutting its target interest rate to just 0.1 percent last month, the Bank of Japan has little room for further conventional action to support growth, while its efforts to ease access to credit for local companies appears to have had only limited effect.

Bank Negara Malaysia lowers interest rates again

Bank Negara Malaysia cut its key interest rate by 75 basis points to 2.5 percent. It also reduced the amount of money lenders need to set aside as reserves for a second straight meeting. The Bank said that stimulus policies were needed to prevent a contraction. The government is already planning a second stimulus package to add to its initial November package. The accelerating pace of the global recession has created greater urgency for action. Price increases have eased with the rate of inflation now at a seven month low of 4.4 percent. Bank Negara cut the statutory reserve requirement to 2 percent from 3.5 percent, effective February first.

Canada

As expected, the Bank of Canada cut its key interest rate by 50 basis points to 1.0 percent. Since the beginning of 2008, the Bank has now cut by 300 basis points. The pace of deterioration has escalated as commodity prices continue to tumble and economic data show signs of a steep decline. Until recently, the economy was held up by strong domestic demand, high employment and high export commodity prices. Exports have been hit hard by a combination of sinking commodity prices and evaporating demand especially from Canada’s primary markets in the U.S. and Europe.

In the Bank’s Monetary Policy Report released on Thursday, governor Mark Carney laid out a scenario for recovery that some economists consider overly optimistic. Signaling the economy is now in the most dramatic phase of the downturn, the Bank projected a sharp 4.8 percent annualized contraction in the first quarter. But the projected return to balance for the economy is expected to be faster than either of the recoveries following the 1981-82 and 1990-92 recessions though full potential won't be reached until mid-2011.

The Canadian government is expected to announce a stimulus package next week and some analysts think the Bank will be reticent to ease monetary policy aggressively before seeing what the government has planned. The federal government is expected to announce that it will use budget measures to either extend lending guarantees or move to assist the auto leasing business. It may also allow banks into auto leasing.

Currencies

The yen neared its strongest level since 1995 against the dollar and was close to a seven-year high against the euro as concerns about the severity of the global slowdown spurred demand. The yen also strengthened to a record against the pound. Finance Minister Shoichi Nakagawa said he was on high alert against currency moves. He said that “we are watching financial markets very carefully and with a high sense of alert, and if necessary we must take prompt action in a broad sense.” The yen was up against all of the 16 most active currencies.

One reason for this is that the yen is seen a safe haven at a time of extreme nervousness in global markets and when the U.S., eurozone and the UK are all in recession or heading there. Analysts say the yen is benefiting from increasing concerns over the spillover from the credit crisis to the financial system. The strength of the yen could not have come at a worse time for Japan’s exporters. Global demand is slumping and the stronger yen, which makes Japanese products more expensive and eats into repatriated earnings, has generated shocks such as Toyota’s announcement it was likely to post its first loss in 70 years.

The pound sterling sank to a 23-year low against the dollar after the contraction in GDP was worse than expected by analysts. The British currency already had been down after the U.K. government’s plan for a second bank bailout in three months raised concern the nation’s budget deficit will keep widening. Bank of England Governor Mervyn King said this week officials may start buying assets within weeks, after cutting interest rates to the lowest level since 1694. The fall in sterling, which has halved in yen terms over the past 18 months, brought complaints from European politicians that the undervalued pound gives the UK an unfair advantage over the eurozone.

Selected currencies — weekly results

Indicator scoreboard

Germany

January ZEW expectations rebounded by 14.2 points to minus 31.0. However, the current conditions measure slumped again, losing a further 12.6 points to minus 77.1, its weakest level since December 2003 (minus 83.7). The recovery in the expectations index may well reflect hopes that the latest (second) stimulus package will have the desired effects, but even so the present level is well below its long-run average of around plus 27.

December producer prices tumbled 1.0 percent and were down 4.3 percent when compared with last year and its slowest pace since March (4.2 percent). Energy prices were down 2.3 percent on the month and once again had the largest impact on the overall index. Excluding this sector, prices declined by 0.5 percent, enough to reduce annual core inflation from 2.1 percent to 1.5 percent. The other major categories were somewhat mixed. Basics were down 1.1 percent on the month and consumer nondurables were off 0.4 percent. Against this, there was a gentle 0.2 percent gain in consumer durables while capital goods prices were unchanged.

France

December consumption of manufactured goods dropped 0.9 percent on the month and was down 1.7 percent when compared with last year. The only major spending category to register a monthly gain in December was autos which rebounded by 0.9 percent following successive hefty declines in both October and November. Excluding autos, sales dropped 1.5 percent on the month and were 2.0 percent down on the year. The largest monthly decline was registered in household goods which slumped 1.8 percent but textiles also performed particularly poorly with a decline of 1.2 percent. Other products were off 1.0 percent on the month.

Italy

November unadjusted merchandise trade deficit was €1.1 billion. The unadjusted deficit compares with a year ago shortfall of €0.3 billion and reflected further hefty declines in both exports and imports. Exports were down 13.3 percent to the rest of the world, the steepest drop since the series began in 1991. At the same time, a 10.7 percent decline in imports was the weakest performance since May 1996. Seasonally adjusted the shortfall weighed in at €1.7 billion.

November unadjusted retail sales were down 0.2 percent and sank 1.3 percent on the year. The latest monthly drop was concentrated in non-food which declined 0.4 percent decline and now is down 4.0 percent on the year. Food purchases managed to hold steady over the period but were still 1.3 percent below the same month in 2007. Within non-food retailing, annual growth rates are now strongly negative in all major categories. Books & paper (5.2 percent), perfume & personal hygiene (4.8 percent) and computer & telecommunications equipment (4.5 percent) were all especially weak. No single category shows an annual decline of less than 3.0 percent.

United Kingdom

December consumer price index dropped 0.4 percent and was up 3.1 percent when compared with last year. The 2.5 percentage point cut in VAT (alone worth 1.5 percentage points if passed on in full) combined with lower mortgage rates combined with further drops in energy costs ensured that all of the main inflation measures posted sizeable declines. Core CPI was down 0.3 percent and was up 1.1 percent on the year and well below the Bank of England’s 2 percent target level for the overall CPI. Among the main categories, the largest downward effect on annual inflation came from footwear & clothing where the VAT cut and heavy discounting had a major impact. Average prices in this sector plunged from 7.1 percent below their year ago level to 10.3 percent below. The other major effect came from transport costs which thanks to falling fuel prices were up a mere 0.1 percent. Other significant declines occurred in furniture & household equipment (0.8 percent) and recreation & culture (down 1.2 percent).

Fourth quarter preliminary estimate of gross domestic product sank 1.5 percent and was down 1.7 percent when compared with the same quarter a year ago. The data confirmed the slide of the economy into a technical recession for the first time since 1991. As with all early GDP reports, limited detail is available. Services declined 1 percent on the quarter and 0.7 percent on the year. The slide reflected particularly steep quarterly declines in distribution, hotels & restaurants (2.4 percent) and in transport, storage & communication (2.0 percent). Manufacturing nosedived with a 4.6 percent quarterly contraction that put output down 7.0 percent on the year. The construction industry contracted by 1.1 percent from the third quarter and by 0.8 percent on the year leaving just agriculture as the only sector to register any kind of expansion, edging up 0.1 percent on the quarter and 0.4 percent on the year.

December retail sales were up 1.6 percent and gained 4.6 percent when compared with last year. However, the statistics office warned that the 2.5 percentage point cut in the standard rate of VAT introduced in December makes the seasonally adjusted data highly uncertain and as a result, recommends using the unadjusted data as a more reliable guide. To this end, unadjusted volumes were up 1.8 percent in the fourth quarter from a year ago, down from 1.8 percent in November. The unadjusted monthly data for December alone show a huge 20.4 percent monthly leap, but this will reflect the especially strong seasonal factors that always swamp the raw data in the run-up to Christmas.

Average earnings growth for the three months ending in December decelerated to 3.1 percent from 3.3 percent in the previous period. The November deceleration reflected a sharp fall in bonus payments, excluding which headline earnings growth would have held steady at 3.6 percent. By sector, manufacturing earnings eased to 2.8 percent from 2.9 percent and in services to 3.4 percent from 3.5 percent. However, the slowdown was concentrated in the private sector which saw headline earnings growth slow by 0.3 percentage points to 2.9 percent while public sector wages accelerated from 3.8 percent to 4.0 percent.

December claimant count unemployment jumped sharply by 77,900 and boosted the jobless rate to 3.6 percent from 3.3 percent in the previous month. The rate was at its highest level since June 2000. The level of unemployment on this basis stood at 1.16 million. The ILO unemployment rate edged up to 6.1 percent in the three months to November from 6.0 percent in the previous period. Actual joblessness increased by some 131,000 over the latest period and by 290,000 over the year to stand at 1.92 million.

Asia/Pacific

Japan

November tertiary activity index dropped 0.9 percent and was down 2.4 percent when compared with last year. Industries that declined on the month included wholesale & retail trade, services, finance & insurance, real estate and transport. Industries that increased on the month included information and communications, electricity, gas, heat supply & water, compound services, eating & drinking places, accommodations and learning support. Medical, health care & welfare were unchanged. These data are too old to have an impact on the Bank of Japan’s decision later this week.

November all industry index dropped 2.1 percent after edging down 0.4 percent in October. The index was down 4.5 percent on the year. Analysts had expected a decline of 2.1 percent on the month. The tertiary index which is a major component of the all industry index dropped by 0.9 percent on the month and was down 2.4 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.

December unadjusted merchandise trade deficit was 320.7 billion yen. This was the third deficit in a row. On the year, exports plunged 35 percent while imports plummeted 21.5 percent. Exports dropped with all major trading partners. Exports to the U.S. dropped 36.9 percent while those to the eurozone sank 43.2 percent. Exports to China dropped 35.5 percent on the year. Imports were also down. Imports from the U.S. were down 20.5 percent on the year while those from the eurozone dropped 36.3 and from China, by 12.4 percent. On a seasonally adjusted basis, the trade balance was in deficit for the fifth month. The rising yen is only exacerbating the decline which combined with the recessions in Japan’s major markets is dragging down the domestic economy. The deficit in December was 148.8 billion yen and an improvement over November’s deficit of 387 billion yen. On the month, exports were down 10.7 percent while imports dropped an even greater 14 percent.

China

Fourth quarter gross domestic product growth slowed to 6.8 percent from 9.0 percent in the third quarter when compared with a year ago. For 2008, GDP slowed to 9.0 percent, its slowest pace since 2001, when GDP grew by 8.3 percent. GDP grew by a torrid 13 percent rate on the year in 2007. Industrial output was up 12.9 percent in 2008, decelerating sharply from the 18.5 percent growth recorded in 2007. The slump in exports has in turn dragged on fixed-asset investment and manufacturing activity.

Americas

Canada

November factory shipments dropped for the fourth consecutive month, declining by 6.4 percent and were down 4.3 percent when compared with last year. The decline in part reflected weaker prices in the petroleum and coal industries. However, volumes were down a 3.0 percent and reached their lowest level in nearly a decade. At the industry level, 12 of the 21 reporting manufacturing industries posted nominal declines with petroleum & coal (down 20.6 percent) especially soft. Primary metals (off 17.4 percent) nearly matched this decline while transportation equipment (off 3.9 percent) was dragged lower by a collapse in aerospace products & parts (22.5 percent). Chemical producers also saw sales off some 8.7 percent. Although aerospace helped to secure a 0.8 percent gain in backlogs, new orders slumped almost 13 percent, more than offsetting their 9.3 percent October bounce.

November retail sales sank 2.4 percent and were down 0.4 percent from a year ago. Heavy discounting and declining energy prices helped to depress the nominal sales but a 0.6 percent monthly drop in volumes was testimony to underlying weakness. Within a 7.1 drop in cash sales in the auto sector, gasoline stations declined 14.9 percent. Excluding this sector total purchases were essentially flat. Among the other major categories, there were relatively modest monthly declines in furniture, home furnishings & electricals (0.3 percent), clothing & accessories (0.2 percent), general merchandise (0.5 percent). Miscellaneous retailers also posted a decline (0.7 percent). On the upside, there were small gains in building & outdoor home supplies (0.1 percent), food & beverages (0.5 percent) and pharmacies & personal care (0.5 percent).

December unadjusted consumer price index dropped 0.7 percent but was up 1.2 percent when compared with last year. Core CPI was down 0.3 percent and up 1.5 percent on the year. The Bank of Canada’s preferred measure which excludes eight volatile items was down 0.4 percent on the month and up 2.4 percent on the year. Once again the main factor driving the annual inflation rate lower was weakness in the energy sector where prices were down 11.0 percent on the year. Prices also declined for shelter and household operations, furnishings & equipment. Disinflation also became more entrenched in transportation with prices down 6.1 percent from a year ago and in clothing, down 2.6 percent. Price increases were limited to the health & personal care sector. Overall, annual inflation in the goods industry turned negative (down 0.8 percent) while in services, prices were up 3.1 percent.

Bottom line

Three central banks met last week. The Bank of Canada and the Bank Negara Malaysia cut interest rates by 50 basis points and 75 basis points to 1 percent and 2.5 percent respectively. The Bank of Japan left its interest rate at 0.1 percent. Economic data were horrendous once again with the UK now in a recession and U.S. housing showing little inclination to stop plunging. Unemployment was up in the UK and U.S. and they are sure to be joined by Germany and the EMU this week when their data are released. And investors watched and listened as the 44^th U.S. president was inaugurated.

This week brings an avalanche of new economic data along with the end of the first month of trading for 2009. The FOMC will announce its monetary policy decision on Wednesday. While the FOMC will consider the latest Fed forecast, the details will not be available for three weeks. Needless to say, the FOMC’s statement will be parsed closely by all watchers.

We wish all observers of the Lunar New Year — the year of the Ox — a healthy, happy and prosperous new year!

Looking Ahead: January 26 through January 30, 2009

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