Global Markets

Anticipation is often worse than the actual event. However, on Friday, the U.S. employment report — the one that investors had been dreading all week — turned out to be pretty much as analysts expected. Investors were relieved by what they thought showed a leveling off of job losses and ignored the soaring unemployment rate. Initially equities in the U.S. and Europe rallied, but the gains eroded rather quickly and then dropped. The U.S. dollar’s safe haven status took the brunt of the pressure prior to the release — investors sold the currency during the night prior to the report’s release in anticipation that the report would be even more terrible than expected. The dollar remained down against the euro but virtually unchanged against the yen.

On Wednesday, stocks rallied on the bank of China’s anticipated economic stimulus plan — but stocks could not hold the momentum — especially after no details were forthcoming. During the week, corporate news combined with the continuing stream of miserable economic data to depress equities while at the same time enhancing the U.S. dollar’s safe harbor status. Wednesday’s rally was gone as quickly as it happened. And a mounting stream of reductions in dividend payments contributed to heightened investor pain.

Six central banks made rate announcements during the week and — only one — the Reserve Bank of Australia left its rate unchanged, at 3.25 percent. In Asia, the central banks in India, Indonesia and the Philippines cut rates to 5.0 percent, 7.75 percent and 4.75 percent respectively. In Europe, the European Central Bank cut its interest rate to 1.5 percent while the Bank of England cut to 0.5 percent as did the Bank of Canada. As central banks follow the Federal Reserve in taking their key rates closer to zero, attention is shifting from rate cuts to alternative steps policy makers can take to shore up struggling economies. The Fed lowered its key rate to just above zero in December and last year began purchasing some short-term corporate debt, among other measures, to try to unclog credit markets. And the Bank of England began buying short-term corporate debt directly, financing its purchases with government bonds.

On the week, all equities indexes were down with the exception of the Shanghai Composite, PSEi, Taiex and Jakarta Composite.

Global Stock Market Recap

Europe and the UK

European and UK stocks swooned for the fourth week in a row. The FTSE, DAX and CAC managed to rally on Wednesday along with everyone else but lost ground otherwise. And even though both the Bank of England and European Central Bank cut their key interest rates as expected, the revised forecast for the EMU economy said the economy could shrink by more than 3 percent this year. And U.S. data certainly did not provide a boost — factory orders continued to tumble while unemployment continued to soar. The immediate response to the miserable U.S. employment report Friday was phew, it wasn’t worse than expected. But those gains eroded quickly.

In London, traders mulled the implications of the unconventional measures proposed by the Bank of England in the latest phase of the recession battle. It said it would spend £75 billion in new money under the terms of its asset buying program. The funds were earmarked to buy medium and long maturity conventional gilts in the secondary market, the start of its attempt to use quantitative easing to stave off the worst effects of the recession. Otherwise known as printing money, quantitative easing will allow banks to borrow more funds from the central bank and so inject funds into the economy and restore the flow of credit. But it will only work if banks loosen their lending criteria and a measure of business confidence returns. The policy also needs to be monitored closely as increased money supply coupled with falling production could lead to demand outstripping supply and hyperinflation.

Bank of England bites the bullet

As expected the Bank of England lowered its key interest rate by 50 basis points to 0.5 percent, bringing it in league with the Bank of Japan and Federal Reserve with rates at or below 0.5 percent. It is a new low in the Bank’s 315 year history. Until a few month’s ago, the Bank’s interest rate had never been below 2 percent. The Bank also launched a £75 billion ($105.5 billion) program to pump money into the economy as policy makers struggle to temper the impact of a deep recession. The Bank has now cut rates in each of the last six months for a total of 450 basis points. In its statement, the monetary policy board suggested that further rate cuts could be “counter productive” by inducing banks to hoard rather than lend funds.

The BoE plans to purchase assets with newly created money in the next three months. It can purchase a wide range of securities, but suggested they will focus mostly on government debt for the first three months. Prices of UK government bonds — or gilts — soared on the news. The Bank of England's shift is the latest in a series of moves by U.K. policy makers to stem what is threatening to be a deep and prolonged recession. It is the first European central bank to begin using quantitative easing in an effort to stimulate demand.

European Central Bank cuts but still has wiggle room

Shorty after the Bank of England’s announcement, the European Central Bank delivered on a much anticipated rate cut of 50 basis points to a record low of 1.5 percent. The ECB has been reluctant to take unorthodox steps such as quantitative easing in part because it has more room to lower its key rate further.

But governing council members have signaled recently that their resistance to unconventional moves is waning. The ECB could for example, expand the range of collateral the ECB accepts for the short-term loans it makes to banks, purchasing eurozone corporate debt directly or buying government bonds. The central bank also could lengthen the tenure of the loans it makes to banks from its current six months.

In his press conference, ECB President Jean Claude Trichet said that inflation will fall this year to levels not seen since the creation of the eurozone. He blamed the severe downturn as well as tumbling commodity prices. Expectations about future inflation rates still pointed to rates in the medium and longer term in line with its target. His comments highlighted the cautious tone adopted by the ECB as the recession continues to deepen. Mr Trichet suggested there could be further easing but declined to specify an interest rate floor. He was circumspect on possible use of additional non-standard measures.

Asia/Pacific

Despite the downward pressures on equities, several Asian/Pacific indexes managed to end the week with a gain. They included the Shanghai Composite which regained its positive footing after two negative weeks and the PSEi, Taiex and Jakarta Composite. The central banks of both the Philippines and Indonesia lowered their policy interest rates during the week.

Earlier in the week, stocks rallied. They were buoyed by expectations that China would announce additional economic stimulus measures. While assurances from China's Premier Wen Jiabao helped some markets extend the rally on Thursday, more sobering news on the global economy restricted big gains. Investors bought stocks linked to the Chinese economy on expectations of higher spending on infrastructure and manufacturing. But stocks tumbled Thursday after Chinese authorities failed to deliver a stimulus package as expected by many investors and the ECB and Bank of England cut interest rates to historic lows in response to a worsening recession.

Most equities took their direction from plunging U.S. stocks as the sell-off continued because of concerns about the health of the global economy. Investors were anticipating with trepidation the Friday U.S. employment report, released of course after the Asian close. Financial and resource stocks dragged indexes down.

In Japan, the Nikkei and Topix were up on Wednesday and Thursday before slumping again on Friday and for the week on profit taking as investors squared their positions ahead of the weekend. The Topix is currently at a 25 year low. Japanese investors fretted about a shortage of funds that could spark collapses in the automotive and electronics industries as the end of the fiscal year draws near on March 31^st. The Nikkei is down 19 percent this year, extending its 42 percent 2008 plunge. Japanese stocks were not the only target for investors wishing to unload equities. In Australia, stocks dropped sharply as financial and resources stocks dragged indexes to their weakest levels in almost six years.

Reserve Bank of Australia — interest rate is unchanged

The Reserve Bank of Australia left its key interest rate at 3.25 percent. The Bank had cut a total of 400 basis points prior to this meeting since August when its policy rate was 7.25 percent. Prior to the meeting, economists disagreed as to whether the RBA Board would cut rates or defer until their April meeting. Recent comments from RBA governor Glenn Stevens indicated that the Bank was comfortable with the amount of stimulus now in place to boost the economy. The announcement confirmed this impression. But the Bank did leave the door open for more action if needed.

Recent statements have indicated that the combination of expansionary monetary and fiscal policies in place would help to cushion the economy from the contractionary forces coming from abroad. More recent comments pointed to the end of the deep cuts seen in recent months and a move toward more gradual easing as the RBA gauges the impact of the previous cuts. The RBA has an inflation target range of 2 percent to 3 percent. Fourth quarter CPI — the most recent available — continued to show price pressures above the target range. Fourth quarter GDP, which was released the next day, surprised with a contraction of 0.5 percent on the quarter. This was the first decline since the fourth quarter of 2000. Unlike most other major central banks, the RBA still has rate cutting ammunition.

Canada

The Bank of Canada cut its key interest rate by 50 basis points to 0.5 percent due to the sharp slowdown in economic growth. This leaves the Bank with little wiggle room to move rates even lower. The economy contracted by a seasonally adjusted rate of 3.4 percent in the fourth quarter and an even larger contraction is expected for the first quarter of 2009. Canada benefited from the commodities boom and now weak demand is weighing on growth, the Canadian dollar and stock market. In its accompanying statement, the Bank said the rate will remain at this level or lower until the economy picks up. The Bank also said its next meeting which is scheduled for April 21 will reveal whether the bank will take unconventional measures such as quantitative easing.

The statement said the U.S. recession is challenging the Canadian economy, and that the global economy has to stabilize before Canada can see any real economic recovery. Nevertheless, the Bank said the underlying strength of Canada's economic and financial systems should guarantee a faster recovery in Canada compared to its international peers.

Currencies

While both the yen and euro fluctuated on the waxing and waning of the U.S. dollar’s safe haven status, both ended the week not far from last week’s close. The yen was down for the sixth consecutive week against the dollar while the euro was little changed. On Friday, the dollar and yen declined against all of their major counterparts as the pace of U.S. job losses slowed in February. This in turn reduced demand for the currencies as a refuge from global economic turmoil. Though the dollar dropped initially on Friday, it gradually rebounded as equities dropped.

The pound sterling lost ground on Thursday after the Bank of England outlined plans to stimulate the economy by using quantitative easing. The Bank cut rates as expected, but it was details of unconventional methods to stimulate the UK economy using quantitative easing that weighed on the pound. The Bank announced plans to undertake a program of asset purchases of £75 billion financed by the issuance of BoE reserves. It said it might take up to three months to carry out this program of purchases. Many worried that if investors become optimistic that the policy will work, it would come at the cost of growing concerns over long-term inflation and the currency would likely suffer accordingly.

Selected currencies — weekly results

Indicator scoreboard

EMU

February flash harmonized index of consumer prices edged up to 1.2 percent from 1.1 percent in January when compared with last year. As usual, no details were provided in the flash release but some of the national data suggest that core inflation was also likely little changed last month. The eurozone inflation rate is well below its 2 percent target.

Fourth quarter gross domestic product contracted 1.5 percent when compared with the previous quarter — the steepest decline in the 13-year history of the data. Total output was down 1.3 percent on the year. All of the main expenditure components of real GDP posted sizeable quarterly declines. The main loser was fixed investment which slumped 2.7 percent. Private consumption dropped 0.9 percent while government spending was down 0.6 percent. Net trade also had a major drag on growth. Exports plunged 7.3 percent and imports sank 5.5 percent.

France

Fourth quarter unemployment rate climbed sharply to 7.8 percent from 7.2 percent. Including overseas territories, total joblessness jumped to 8.2 percent from 7.6 percent. Within the overall unemployment figure, joblessness in both the 15-24 year old and 25-49 year old groups were up by 0.6 percentage points to 21.2 percent and 7.4 percent respectively. The unemployment rate for the over 49 year old category was unchanged at 5.2 percent.

January producer prices sank 2.0 percent and dropped 2.7 percent when compared with last year. Monthly declines were registered in all of the major categories except autos (up 0.1 percent). Energy was once again the weakest performer with prices down 3.6 percent, but softer underlying prices were reflected in a 1.2 percent fall in the core index that reduced its annual rate to just 0.1 percent from a downwardly revised 1.8 percent in December. Other sizeable declines were seen in agriculture & foods (3.1 percent) and intermediate goods (2.0 percent), the latter dragged lower by especially large drop in electrical goods (5.0 percent) and wood & paper (3.7 percent). Consumer goods prices dropped 0.7 percent despite steady prices in the clothing sector while capital goods were down a more modest 0.3 percent.

United Kingdom

February producer output prices edged up 0.1 percent and were up 3.1 percent when compared with last year and the slowest pace since September 2007. Core output prices excluding food, drink, tobacco & petroleum products were unchanged on the month and up 3.7 percent on the year. Petroleum product prices were up 0.9 percent while food prices were up 0.4 percent as were prices for tobacco & alcohol but all other increases. Producer input prices were up 0.6 percent and 0.5 percent on the year. Crude prices jumped 7.7 percent on the month while home food materials were up 1.1 percent and other imported materials were up 0.6 percent.

Asia/Pacific

Australia

January retail sales were up 0.2 percent and 5.9 percent when compared with last year. December retail sales had soared by 3.8 percent on the month after the government’s package of grants to pensioners and others before Christmas. Analysts had expected sales to drop by 2.5 percent on the month. In January, food retailing was up 1.5 percent while clothing and soft goods were up 0.8 percent on the month. Other retailing edged up 0.2 percent while cafes, restaurants & takeaway food services jumped by 2.3 percent. However, department stores sales were down 0.5 percent and household goods retailing dropped by 4.0 percent.

Fourth quarter gross domestic product contracted by 0.5 percent and was up by 0.3 percent when compared with the same quarter a year ago. This was the first quarterly contraction since the fourth quarter of 2000. Non-farm GDP contracted by 0.8 percent on the quarter. The largest negative contribution was from inventories which subtracted 1.6 percentage points. This was offset by positive contributions from imports (1.7 percentage points) and private business investment (0.2 percentage points). The main contributors to GDP’s decline were manufacturing, down 0.5 percentage points), property & business services, down 0.3 percentage points, and wholesale trade, down 0.2 percentage points. The decline was partly offset by a positive contribution from agriculture, forestry and fishing (0.2 percentage points).

January merchandise goods and services surplus climbed to A$1,453 million from A$417 million in December. The increase in the surplus was primarily due to the drop in goods and services imports, especially in capital goods and intermediate & other goods. Exports sank 5 percent. Non-rural exports plummeted 8 percent while rural goods were down 3 percent. The decline in non-rural goods was largely driven by the coal, coke & briquettes component, which fell 19 percent. Imports dropped and even larger percent – they were down 7.3 percent. Intermediate and other merchandise goods dropped 12 percent, capital goods sank 15 percent while consumption goods were down 3 percent. Other goods were up 30 percent. Services debits declined 2 percent. The Australian dollar edged down on the release.

Americas

Canada

Fourth quarter gross domestic product contracted by 0.8 percent and was down 0.7 percent when compared with the same quarter a year ago. All of the main private sector expenditure components declined. Personal consumption dropped 0.8 percent for the first time since the end of 1995. But even this was overshadowed by a hefty 3.9 percent slump in gross fixed capital formation. Government current consumption grew 0.7 percent but this was unable to offset the weakness elsewhere. In fact, final domestic demand was off 1.2 percent. Export volumes declined 4.7 percent on the quarter. Imports sank even more quickly with a 6.4 percent drop, in part reflecting a 19 percent nosedive in automotive products.

December monthly gross domestic product was down 1 percent on the month and dropped 1.2 percent when compared with last year. Most sectors of the economy posted declines. Overall goods producing output was down 2.0 percent, dragged lower by a 3.0 percent slump in manufacturing. However, other industries in this group fared little better with construction down 2.3 percent, mining, oil & gas extraction off 1.1 percent and utilities down 0.4 percent. Services dropped 0.5 percent. The drop was dominated by retail where purchases sank 3.5 percent from November while wholesale trade contracted 2.4 percent and transport & warehousing dropped 1.6 percent.

Bottom line

Several central banks with the exception of the Reserve Bank of Australia lowered their key interest rates last week and the Bank of England took a major step towards the use of quantitative easing to stem the economy’s recession. Economic data continued to be dire and gave little indication that a floor may have been reached.

Investors will be looking for a clue in the plethora of merchandise trade data on tap this week. Analysts will be looking to see if the free fall in exports has begun to taper off. Employment data in Canada and Australia will also be important to investors there. And finally the first revision of Japanese GDP data will be released.

Looking Ahead: March 9 through March 13, 2009

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