Global Markets

With the dawning of a new quarter, risk once again reasserted itself and investors looked ahead to earnings reports with dread. Latent worries about banks resurfaced as well as investors faced the prospects of what those earnings reports might reveal. Overseas equities, especially in Asia, in large part took their cue from U.S. market behavior. Despite risk concerns, equities were mixed at the close of business on Thursday (most markets are closed on Friday).

Several Asian/Pacific central banks met last week with the Reserve Bank of Australia — one of the few central banks that has substantial wiggle room left — lowering its key rate by 25 basis points to 3 percent. However, the Bank of Japan, which made its announcement shortly before the RBA, does not have wiggle room. As a result, it resorted to expansion of its non-traditional policies regarding loans — it widened the range of collateral it would accept — as it tries to dig Japan out of its deep recessionary hole. And for the Bank of England, interest rate change was not on the table — rather the results of their quantitative easing program were under review.

Most indexes followed here were up on the holiday-shortened week. Gains ranged from 4.4 percent (Sensex) to 0.4 for the STI. Six indexes were lower on the week with losses ranging from 2.3 percent (Jakarta Composite) to 0.4 percent (SET).

Global Stock Market Recap

Europe and the UK

The CAC and DAX were up two of four trading days, gaining 0.5 percent and 2.4 percent respectively on the week. The FTSE however, lost ground three of four days and was down 1.1 percent on the week. Banks and resource stocks sparked the increases. On Thursday, stocks climbed after Wells Fargo & Co. reported earnings that beat analysts’ estimates and base metal prices increased. The FTSE has rebounded about 13 percent from 2009 lows after banks reported a positive start to the year, the U.S. government unveiled plans to rid financial firms of toxic assets and the Federal Reserve said it will buy Treasuries and bonds backed by mortgages. In addition, the Bank of England said it will keep buying gilts (government bonds) to fight the recession.

European stocks extended their positive run to five weeks thanks to optimism that government measures to rescue lenders and revive the economy are working. As in the UK, banks and resource firms led the advance on Thursday as many analysts opined that the ‘worst’ was over. Adding to optimism was the ¥15.4 trillion ($154 billion) stimulus package that was announced Thursday in Japan. And in Germany, Chancellor Angela Merkel's cabinet approved plans to raise available subsidies to €5 billion euro for new low-emission vehicle buyers who scrap their old cars.

Bank of England does the expected

As expected, the Bank of England left their key interest rate at an historic low of 0.5 percent. The Bank had aggressively cut rates by 450 basis points since October. Last month, the monetary policy committee announced its first quantitative easing program. This involves the BoE undertaking a program of asset purchases of £75 billion over the next three months which will be financed by created central bank money.

The aim is to boost the supply of money and credit and thus raise the rate of growth of nominal spending to a level consistent with meeting the 2 percent inflation target in the medium term. Since quantitative easing began in March, the MPC has spent just over £21 billion in purchasing securities — just under £19 billion of that in gilts (government bonds) and the remainder in corporate bonds and some commercial paper.

Asia/Pacific

Asian/Pacific stocks were up on the week for the most part with the exception of the All Ordinaries, Shanghai and Jakarta Composites and the SET. Australian stocks were down on the week even though the Reserve Bank of Australia shaved another 25 basis points off their key lending rate to 3 percent. Although boosts from positive overseas data offset a poor employment report Thursday, it was not sufficient to recoup the losses incurred earlier in the week.

In Japan, the Nikkei and Topix were up on the week and gained sharply Thursday in anticipation of the government’s new stimulus package. The ¥15.4 trillion ($154.55 billion) stimulus package — the fourth in less than eight months — includes both spending and tax cuts. The first three packages have a combined value of ¥75 trillion including ¥12 trillion in actual spending. The most recent package includes emergency steps to generate jobs and help corporate finances along with strategies to reinforce Japan's competitiveness. It also includes a reduction in taxes on gifts of financial assets — a move aimed at encouraging seniors to give some of their savings to their children for the purchase of big-ticket items such as homes. The package is expected to be approved by the Cabinet on Friday (April 10).

February machinery orders posted a surprise gain for the first time in five months boosting investor morale. They were up 1.4 percent rather than sinking 6.9 percent as expected by analysts. And earlier in the week, the Bank of Japan continued to broaden its non-conventional market activities. Automakers were also up after the U.S. Treasury announced that automakers GM and Chrysler have launched auto supplier support programs backed by U.S. government funds. Financial stocks were up following reports that the major banks in the U.S would pass the stress test.

On Wednesday, the Bank of Japan maintained its economic assessment by saying that economic conditions have deteriorated significantly in Japan. The BoJ repeated what it said last month. It reiterated its views that economic conditions are likely to continue deteriorating for the time being. The Bank said in its Monthly Report of Recent Economic and Financial Developments that financial conditions have remained tight.

Central Bank roundup

Bank of Japan

As expected, the Bank of Japan left its key interest rate at 0.1 percent. Recent economic data for exports and industrial production have been miserable while the Tankan hit record lows. The Tankan left no doubt that the downturn is pervasive throughout the economy. The BoJ instead focused on non-traditional measures to facilitate corporate financing. Their focus is on considering further steps that should help corporate financing, which is expected to become tighter in the coming months. The Bank expanded the range of eligible collateral for loans on deeds to the government and those with government guarantees. The bank also said it would take as collateral municipal bonds sold privately.

The Bank of Japan has taken action every month since Lehman’s bankruptcy in September 2008 and this meeting was no exception. Borrowing costs have fallen since December, when the bank cut the key rate to 0.1 percent and redirected its policy toward buying commercial paper and corporate bonds to spur lending and revive credit markets. The central bank said it will accept loans on deeds to municipal governments as eligible collateral and it also broadened the range of eligible collateral for loans on deeds to the government and those with government guarantees.

Reserve Bank of Australia

With opinion varying about what the Reserve Bank of Australia would do, the RBA chose to lower its key interest rate by 25 basis points to 3.0 percent. This is its lowest rate since March 1960 as it tries to gauge whether government spending along with low rates will keep the economy out of its first recession since 1991. To spur domestic demand and avoid a slump in the housing market, the RBA has cut interest rates by a total of 425 basis points since August when its policy rate was 7.25 percent. 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.

Australia continues to be one of the better-performing economies in the developed world and is well placed to benefit from a global recovery. However, recent data from Asian countries that serve as major markets for Australian goods have been dire and have reduced demand for Australia's major exports. The deepening global recession and slumping equity markets have forced central banks around the world to slash borrowing costs, including the RBA. By contrast, Australia's economy has outperformed its international counterparts because its financial system is in better shape, monetary policy is working and it had more momentum prior to the global financial crisis.

Bank of Thailand

On Wednesday, the monetary policy committee of the Bank of Thailand lowered the policy interest rate by 25 basis points to 1.25 percent. Economists had expected a reduction of 50 basis points. The central bank has trimmed the interest rate by a cumulative 2.5 percentage points since December 2008. The MPC said the severity and duration of the crisis remained highly uncertain and this would affect the Thai economy through a contraction of exports, while private domestic demand remained weak. However, the central bank expects public spending through the government's fiscal stimulus measures to offset the softening in private demand to some extent. Thailand's economy contracted at a record pace of 6.1 percent in the fourth quarter when compared to the previous quarter.

Bank of Korea

The Bank of Korea left its key lending rate at 2 percent but at the same time said there was still room to cut more. The Bank said that there were signs that the economy was leveling off after a rapid decline. Many analysts interpreted this as a signal that the Bank will not cut interest rates going forward — they have cut rates by 325 basis points since September. With rates at or near bottom, the Bank may turn its attention to alleviating bond market concerns about an anticipated rise in supply needed to fund the government’s pledged fiscal spending.

Currencies

Both the euro and yen were down against the U.S. dollar last week. The dollar rose against the euro by the most in three months on speculation that investors will shift funds to U.S. assets as the economic stimulus takes hold. The pound sterling was down against the U.S. dollar but up against the euro after the Bank of England said it will keep purchasing government bonds to inflate the economy. In Europe, German data continued to depress the euro — manufacturers’ orders continued to sink with abandon, dragging down industrial production — an ominous sign that the recession is deepening. Data from other countries did not offer a light at the end of the tunnel either.

The pound sterling’s slide against the euro has triggered concerns that the UK is seeking to gain a competitive advantage over its EU partners. Sterling has fallen by more than 25 percent on a trade-weighted basis since late 2007. Sterling’s plunge initially surprised and alarmed the UK authorities as it suggested a lack of international confidence in Britain. As the pound has stabilized a little in recent months, authorities now see the benefits of a lower currency, not in rising exports but in a rapid decline in imports contributing positively to economic growth.

The yen has dropped below the ¥100 to the dollar landmark for the first time since October and is weaker against the euro as well. This follows a period when the yen soared as carry trades unwound. A carry trade is one in which investors borrowed in yen at low interest rates and invested in higher yielding currencies. The strong yen that resulted might have contributed to the subsequent collapse in Japanese exports. But the yen is down in part because it is responding to economic fundamentals. If exports are falling, the currency should be expected to weaken.

Selected currencies — weekly results

Indicator scoreboard

EMU

February producer prices excluding construction dropped 0.5 percent and were down 1.8 percent when compared with last year. Energy prices declined another 0.7 percent on the month to stand some 4.5 percent weaker on the year. Excluding this sector, prices still eased however, with a 0.4 percent drop on the month and 1.0 percent below its year ago level. Intermediate prices were down 0.9 percent while nondurable consumer goods prices edged down 0.3 percent on the month.

February retail sales were down 0.6 percent and were down 4.0 percent when compared with last year. The entire monthly decline was attributable to the non-food sector — food purchases were unchanged on the month. Excluding fuel, sales were especially soft, declining 1.1 percent albeit following a relatively solid 0.8 percent rise at the start of the year.

Final fourth quarter gross domestic product was revised to a quarterly 1.6 percent drop and was down 1.5 percent on the year. For the calendar year 2008, GDP was up 0.8 percent. Gross fixed capital investment was revised to a decline of 4.0 percent from a drop of 2.7 percent while government spending was revised from a drop of 0.6 percent to an increase of 0.4 percent. Household spending which was previously reported as down 0.9 percent was revised to a decline of just 0.3 percent.

Germany

February seasonally adjusted merchandise trade surplus expanded to €8.9 billion from a revised €6.8 billion in January. Not for the first time there was  shrinkage in both sides of the balance sheet — exports declined 0.7 percent from January, their fifth fall in a row, while imports dropped a much larger 4.2 percent, their seventh consecutive monthly drop. Over the first two months of 2009, total exports were down 23.1 percent on the year. Within this figure, purchases by other EMU countries declined nearly 22 percent while sales to non-EU countries were off almost 23 percent. On the same basis, overall imports dropped 15.1 percent with inflows from the EMU bloc 13 percent weaker and from non-EU states 15.5 percent lower. The aggregated surplus for the first two months of the year was €15.6 billion and 55 percent smaller than in the same months of 2008.

February manufacturing orders dropped 3.5 percent and plunged 34.3 percent when compared with the same month a year ago. Orders have now dropped for six consecutive months and eight in the last nine. The latest swoon was led by the domestic component which dropped 5.7 percent on the month. Within this, consumer and durable goods were hardest hit with a decline of 9.2 percent but basics were not far behind, dropping another 7.9 percent. Capital goods orders were off 3.4 percent. Overseas orders declined a more modest 1.3 percent within which purchases from the other eurozone countries were down 3.7 percent, easily offsetting a gentle 0.5 percent rise from the non-EMU bloc. In contrast to domestic demand, total overseas orders were actually boosted by the capital goods sector (2.0 percent), although gains here could not mitigate fresh declines in both consumer and durable goods (down 8.2 percent) and basics (down 4.8 percent).

February industrial production sank 2.9 percent and was down 20.6 percent when compared with last year. Apart from construction which saw a 1.9 percent rebound (albeit after a 7.5 percent drop in January) all areas declined on the month. Weakest was durable goods (4.7 percent) but capital goods (4.5 percent) were close behind and nondurable consumer goods (3.4 percent), intermediates (1.9 percent) and energy (2.6 percent) all suffered badly. Overall manufacturing was down 3.3 percent.

France

February merchandise trade gap widened to €4.1 billion from a smaller revised €3.7 billion shortfall in January. Over the first two months of 2009, the cumulative red ink stood at €7.8 billion compared with €6.2 billion in the year ago period. Exports fell 1.5 percent on the month while imports declined 0.1 percent.

Italy

February industrial production sank 3.5 percent and was down 20.7 percent when compared with last year and the worst performance since the data were first compiled back in 1991. The February slide was the tenth monthly drop in succession and, predictably, reflected weakness in all the main product areas. Intermediate goods output was down 6.5 percent on the month while capital goods dropped 4.2 percent, consumer goods declined 1.2 percent and energy contracted 2.4 percent.

United Kingdom

February industrial production dropped 1.0 percent and plunged 12.5 percent when compared with last year. Weakness was broad based. Manufacturing output was down 0.9 percent and was 13.8 percent below last year. Electricity, gas & water were down 2.4 percent while mining & quarrying were off 0.9 percent and oil & gas extraction were 0.6 percent below the previous month. By market sector, consumer nondurables edged down 0.1 percent while durables dropped 0.4 percent, intermediates fell 1.4 percent and capital goods slumped 1.6 percent. Overall industrial production in the three months to February was down a remarkable 5.8 percent from the previous period. This was the largest such decline since March 1974. Eight of 13 manufacturing industries reported declines with transport equipment (down 3.7 percent) the worst hit as the auto industry continued to implode. Non-metallic minerals (down 3.7 percent) and basic metals & metal products (down 1.6 percent) also posted hefty declines and there were no significant increases in production.

March producer output prices edged up 0.1 percent and were up 2.0 percent when compared with last year. The deceleration in price increases reflected a 1.1 percent monthly decline in petroleum product prices which alone subtracted more than 0.1 percentage points from the headline. However, there were also more modest declines in electrical & optical goods (0.6 percent) and in the other products category (0.2 percent). The most significant monthly increase occurred in transport (0.6 percent) followed by chemicals (0.5 percent) and textiles & clothing and paper (both 0.4 percent). Core output prices were up 0.2 percent and 3.3 percent on the year. Input prices were up 1 percent but were down 0.4 percent on the year. The bounce in overall prices was driven by a 7.1 percent jump in crude oil costs. This alone accounted for more than the entire increase in the headline index. Other significant increases were seen in imported parts & equipment (1.6 percent), imported chemicals (1.6 percent) and imported food materials (0.8 percent). Imported metals (0.7 percent), home food materials (0.3 percent), and other imported materials (0.7 percent) all also saw gains.

February merchandise trade gap narrowed to Stg7.3 billion. The decline reflected a 2.4 percent monthly bounce in exports compounded by a 0.3 percent drop in imports. However, much of the improvement came via oil and erratics as the underlying deficit shrank by less than Stg0.1 billion to Stg7.1 billion. Net trade with the EU deteriorated significantly following the previous month's surprisingly sharp improvement with the shortfall widening out to Stg3.4 billion. By contrast, the deficit with non-EU countries declined markedly with January's hefty Stg5.6 billion shortfall replaced by a deficit of just Stg4.0 billion.

Asia/Pacific

Australia

March employment dropped by 34,700 to 10,771,800 and more than expected by analysts. Full-time employment declined by 38,900 while part-time employment increased by 4,200. The number of unemployed climbed by 52,900 to 650,900. The number of persons looking for full-time work increased by 28,500 to 460,400 while the number of persons looking for part-time work increased by 24,300 to 190,500. The unemployment rate jumped to 5.7 percent from 5.2 percent in February. The participation rate was unchanged at 65.5 percent.

Americas

Canada

March employment dropped by 61,300. Full time jobs sank by 80,000 while part time jobs were up 18,200. The jobless rate climbed to 8.0 percent from 7.7 percent in February. The entire employment decline took place in goods producing industries (62,600) and in the private sector (67,800). Within this former group, payrolls shrank some 34,200 in manufacturing alone. However, there were also declines in construction (18,200), natural resources (10,500) and agriculture (5,200). The only gain in jobs occurred in utilities (5,600). Service sector positions crept up 1,300 mainly thanks to rises in business, building & other support services (13,400), educational services (10,000) and other services (23,400). However, gains here were almost wiped out by a further shakeout in accommodation & food (15,200), finance, insurance, real estate & leasing (19,800) and trade (6,000). There were also small job losses seen in information, culture & recreation and health care & social assistance. The participation rate eased another 0.1 percentage points on the month to 67.3 percent while the employment rate fell 0.3 percentage points to 61.9 percent.

February merchandise trade balance returned to a surplus of C$0.13 billion after recording a deficit of C$1.2 billion in January. A 5.2 percent jump in exports comfortably eclipsed a 1.1 percent increase in imports. Key to the surplus was a 5.0 percent increase in exports to the U.S. With imports from the U.S. climbing only 3.7 percent, the bilateral surplus with the U.S. widened from C$3.0 billion to C$3.4 billion. Purchases by the EU fell 3.2 percent but there were gains in sales to other OECD countries (6.5 percent) and Japan (0.3 percent). Amongst the product groups, the largest single monthly export increase was posted by autos (19.8 percent) followed by machinery & equipment (8.4 percent) and forestry products (5.1 percent). Industrial goods and materials rose 3.2 percent while energy was up just 0.6 percent. Imports were supported primarily by machinery & equipment (3.7 percent) and autos (3.2 percent). There were marked declines in energy (7.8 percent) and forestry products (2.7 percent).

Bottom line

This past week featured a number of central bank announcements. The Reserve Bank of Australia along with the Bank of Thailand each lowered their key interest rate by 25 basis points to 3 percent and 1.25 percent respectively. The Banks of Korea, Japan and England kept their rates unchanged at 2 percent, 0.1 percent and 0.5 percent respectively. Employment in both Canada and Australia dropped while their respective unemployment rates soared.

Next week brings the Federal Reserve’s Beige Book which will give anecdotal evidence about the state of the U.S. economy in the run up to the next FOMC meeting. The international calendar is light but the pace of earnings reports will accelerate.

Looking Ahead: April 13 through April 17, 2009

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