Global Markets

With few economic indicators to weigh, investors focused on the growing flow of earnings reports. Cheers erupted when losses were smaller than expected, especially from financial institutions. The dollar fluctuated with equities — when investors shied away from risk, the dollar gained and when equities rose, dollar lost ground against the yen and euro.

Most equity indexes ended the week in an upbeat mood after a choppy week with little new economic data except in the UK and an onslaught of earnings reports. And lurking in the background was the inevitable approach of U.S. bank stress test reports which undoubtedly will continue to test investors’ nerves. Conflicting signals on the health of the global economy and the banking sector left U.S. and European equities jittery and there was indeterminate trading at times. Good news came on the banking front as first quarter profits at Credit Suisse beat expectations and Barclays of the UK pledged to resume dividend payments in the second half of this year.

IMF outlook dour

According to the International Monetary Fund’s (IMF) interim forecast contained in its World Economic Outlook, the global economy is expected to contract sharply this year and recover only sluggishly in 2010. With global economic activity now projected to decline 1.3 percent this year — the first such decline in more than six decades — a return to growth is likely to take longer than previously anticipated according to the IMF. At the same time, it called on governments to sustain or even increase fiscal stimulus. World growth in 2010 is expected to be just an anemic 1.9 percent. The IMF’s assessment provides a sobering counterpoint to excitement over “green shoots” of recovery seen in some recent economic data. The fund blamed the worsening prospects on the intensifying vicious circle between the ailing financial sector and the shrinking real economy. Even among the details of a largely cautionary report, IMF officials saw some signs of hope, largely because of the forceful fiscal and other steps taken by the United States, some European governments and China.

Global Stock Market Recap

Europe and the UK

Equities turned adversity into a positive as investors staged an end of the week rally. After steep losses earlier in the week, both the FTSE and CAC managed to add another week to their string of gains while the DAX inched down 0.1 percent. And baring any disasters this week the three will be up for the month of April and the second month in a row.

The FTSE recorded an impressive gain given the slew of new economic news along with the government’s budget message and Bank of England meeting minutes. Investors were distracted Friday by new merger news that more than offset a larger than anticipated contraction in gross domestic product for the first quarter. The drop — 1.9 percent on the quarter — was the largest in three decades. However, there are hints that the rate of decline in GDP may be starting to ease. For example, March retail sales volumes were up a surprising 0.3 percent — an advance driven by clothing and food sales that may show that the consumer is not dead.

In Europe, two major German surveys — the ZEW and Ifo — showed signs that sentiment is leveling off. Both the CAC and DAX struggled to recoup sizable losses that occurred on Monday and to a lesser extent on Thursday. And on Friday, French consumer spending surprised on the upside, helping the CAC end in positive territory. European stocks were also boosted by Credit Suisse first quarter report which reported profits.

Bank of England minutes

According to the minutes of the April meeting, the monetary policy committee voted unanimously to keep its bank rate unchanged at a record low of 0.5 percent and decided to keep its asset purchase amount at £75 billion. But the MPC said that although there remained a high degree of uncertainty over the appropriate scale of asset purchases necessary to keep inflation at target in the medium term, the members agreed that there had been no material change in the conditions since their March decision on the necessary scale and timing of asset purchases. The MPC noted that gilt yields (UK government bonds) had declined and early indications pointed to improved conditions in the corporate bond and commercial paper markets.

Turning to the economy, the MPC said that UK economic growth risks remained on the downside. However, recent surveys are signaling that the recession may be moderating. The Bank also said the drop in the pound sterling could encourage strong net trade. The Committee expects inflation to fall below the Bank's 2 percent target in the second half of this year — it is currently up 2.9 percent on the year.

Asia/Pacific

Asian/Pacific equity indexes followed here were split last week with many of the emerging market indexes recording increases on the week while the major indexes declined. Some investors took profits after recent gains but others braced for more news on the methodology of “stress tests” for U.S. banks. Although several major companies have reported better than expected results, investors preferred to wait and watch ahead of the weekend. There was little U.S. economic data to provide guidance last week — the major report of the week, durable goods orders, was released after markets here were closed on Friday.

Both the Nikkei and Topix were down on the week as traders cut their long positions ahead of the release of earnings reports from major Japanese firms expected this week. Exporters were down after the Japanese yen strengthened against the U.S. dollar. Foreigners bought less of both Japanese stocks and bonds, according to data from the Japanese Ministry of Finance's report on international transactions in securities for the week ending April 17.

The South Korean market was up for the week even though investors took profits after a three day rally on Friday. In economic news, gross domestic product unexpectedly expanded by 0.1 percent in the first quarter of 2008 compared to the previous three months, indicating that the economy could possibly be averting a technical recession. Analysts had been expecting a 0.8 percent quarterly decline following the 5.6 percent decline in the previous three months.

Reserve Bank of India interest rate edges down by 25 basis points

The Reserve Bank of India once again cut its key repurchase interest rate by 25 basis points to 4.75 percent and a record low. Since September, when the key rate was 9 percent, the RBI has cut 425 basis points (4.25 percent). The Bank also lowered its reverse repurchase rate to 3.25 percent from 3.5 percent. Economic growth is expected to ease to 6 percent in the fiscal year that started April 1 from 7.1 percent in the previous 12 months. The Bank’s efforts to stimulate growth are being hampered by the reluctance of commercial lenders to pass on rate cuts and the government’s inability to increase spending during the election that is currently taking place.

Canada

The Bank of Canada lowered its key interest rate by 25 basis points to 0.25 percent. Rates now have been cut a cumulative 425 basis points since its easing cycle began in December 2007. The Bank promised to maintain the rate at this level until at least the end of the second quarter of 2010 conditionally on the inflation outlook. The outlook for inflation and growth has been marked down significantly. In particular, the Bank expects GDP to contract 3.0 percent in 2009 before growing 2.5 percent. It also expects prices to fall this year.

The Monetary Policy Report released on Thursday offered few concrete details about what the Bank of Canada would do to stimulate economic conditions further. Rather it leaves the door open for the Bank to determine both the size and type of assets which it could purchase by expanding the balance sheet. Any announcement to use the facilities would be made at upcoming rate decisions. Otherwise, the report reiterated most of what was said at Tuesday's rate decision, saying the Canadian recession is expected to be “deeper than anticipated”, and that inflation is expected to return to target in 2011.

Currencies

After hitting highs earlier in the week, the U.S. dollar sank against both the euro and yen but it was up against the pound sterling. Trading has been particularly choppy against the euro recently as economic prospects in both the U.S. and eurozone remain murky amid mixed economic data. A better than anticipated German business survey outlook helped to bolster the euro.

On Monday, amidst the swoon in equities, the dollar continued rise against the euro but came under heavy pressure against the yen as renewed concerns about the global economy led to another bout of risk aversion. Safety hunters have been switching between the dollar and yen over the past few months. But the dollar reversed direction after better than expected earnings and economic reports from the U.S. sparked risk appetite, prompting investors to ditch the relative safe haven of the dollar and move into higher yielding currencies.

Selected currencies — weekly results

Indicator scoreboard

Germany

April ZEW survey followed the same pattern as seen in recent months with current conditions continuing to deteriorate while expectations of recovery gain a firmer footing. The assessment of economic conditions deteriorated to plumb a new record low at minus 91.6. However, at the same time the expectations index jumped more than 16 points to 13.0, its first month in positive territory since July 2007.

March producer prices dropped 0.7 percent and were down 0.5 percent when compared with last year. The fifth monthly drop in a row was primarily a function of cheaper energy prices which dropped 1.4 percent. Excluding energy, prices dropped 0.5 percent on the month and 1.4 percent on the year. Among the other main product categories, capital goods prices were unchanged on the month and up 1.5 percent on the year. Consumer goods declined 0.2 percent on the month and were 1.0 percent weaker from a year ago while basics slumped a monthly 0.9 percent or a hefty 3.9 percent from March 2008.

April Ifo composite index edged up to 83.7 from 82.2 in the previous month. Both current conditions (83.6 from 82.7) and expectations (83.9 from 81.6) posted gentle gains. This suggests that stabilization in present economic conditions is now starting to complement growing optimism about the future. The improvement in the former was the first of any size since October last year while expectations have now increased for four months in a row. Confidence improved in manufacturing (minus 38.0 from minus 42.9) followed by services (minus 7.0 from minus 10.0). There were also gains in retail and in wholesale. The only decline was registered in construction.

France

March consumption of manufactured goods gained 1.1 percent and was up 0.6 percent when compared with last year. The increase was led by sharply higher demand for autos (2.9 percent) and textiles (3.5 percent). Excluding the autos, sales were up 0.9 percent on the month but dropped 1.0 percent on the year. Household goods remained weak, declining 0.5 percent on the month but other products were essentially unchanged.

Italy

February seasonally adjusted merchandise trade deficit narrowed to €0.36 billion from €1.5 billion. Exports were up 0.6 percent while imports dropped 3.5 percent on the month. On the year both sides of the balance sheet contracted sharply with exports down 25.5 percent and imports sinking 23.8 percent. Annual declines in exports and imports were marked in all the main product groups. Within the decline in total exports, consumer goods were down 15.6 percent, with durables especially weak (down 27.0 percent) while capital goods dropped 26.7 percent and intermediates fell 29.3 percent. Exports of energy plunged 46.1 percent. On the import side, consumer goods held up rather better than most areas (down 7.8 percent) but there were heavy drops in capital goods (27.6 percent), energy (24.8 percent) and, in particular, intermediates (32.6 percent). The unadjusted merchandise trade deficit was €837 million.

United Kingdom

March consumer price index edged up 0.2 percent and was up 2.9 percent when compared with last year. The annual rate remains above the Bank of England’s 2 percent inflation target. The retail price index was unchanged on the month and was down 0.4 percent on the year. This was the first decline since 1960. The retail price index excluding mortgage interest payments (RPIX), which was the Bank’s former inflation measure, was up 0.2 percent and 2.2 percent on the year. On-the-year food & non-alcoholic beverage prices were up 10.5 percent, housing, utilities & fuels were up 8.6 percent and restaurants & hotels were up 3.1 percent. Prices were down for both transportation (2.0 percent) and communication (0.8 percent). Core inflation was up 1.7 percent on the year due to price gains in furniture and household equipment (3.3 percent), recreation & culture (0.8 percent) and in clothing & footwear (8.7 percent).

Average earnings for the three months to March edged up 0.1 percent when compared with the same three months a year ago — its weakest rate on record. In the year to February alone, earnings declined 2.1 percent, their second consecutive decline and easily their steepest ever drop. The latest sharp deceleration in large part reflected tumbling bonus payments. However, even excluding bonuses, the average earnings decelerated from 3.5 percent to 3.2 percent, also a new low since records were first published in 2001. Given the significance of bonuses to services after expanding by 1.8 percent in January, annual earnings plummeted to minus 0.1 percent. In manufacturing (1.5 percent from 1.9 percent), the slowdown was still significant but much less marked.

March claimant count unemployment was up by 73,700 to 1,464,100 and lifted the jobless rate to 4.5 percent from 4.3 percent in February. On the ILO measure, joblessness increased by 177,000 to 2.1 million in the three months to February. The increase was the largest since June 1991 and sufficient to boost the unemployment rate to 6.7 percent from 6.5 percent in the previous three months.

March retail sales volumes posted a 0.3 percent gain and were up 1.5 percent when compared with last year. The advance was concentrated in food stores which saw purchases rise 0.6 percent on the month. However, non-food demand was down 0.2 percent courtesy of a hefty 2.0 percent slide in household goods. Clothing & footwear were up 1.5 percent, non-specialized shops gained 0.2 percent and non-store retailing jumped an impressive 3.4 percent.

First quarter gross domestic product contracted by 1.9 percent and sank 4.1 percent when compared with the previous year. It was the steepest quarterly decline since 1973. Limited details are available in the preliminary release but among the main output sectors, the latest leg down in economic activity was wholly attributable to goods producing area. Output here declined 5.5 percent on the quarter (12.3 percent on the year) including a 6.2 percent (13.7 percent) slump in manufacturing. Mining and quarrying dropped a quarterly 3.4 percent while electricity, gas & water fell 1.9 percent from the previous period. The service sector declined 1.2 percent on the quarter following a 0.8 percent drop at the end of 2008. Production was down 2.1 percent on the year. Driving the quarterly decline was a 2.9 percent slide in transport, storage & communications but there were also drops in distribution, hotels & catering (1.2 percent) and in business & financial services (1.8 percent). With construction activity down 2.4 percent on the quarter, the only sector to see positive quarterly growth was agriculture (0.3 percent).

Asia/Pacific

Japan

March unadjusted merchandise trade surplus was 11.0 billion yen. Analysts had expected another trade deficit on an unadjusted basis. However, the surplus was 99 percent below that of a year ago. Exports plunged 45.6 percent while imports sank by 36.7 percent on the year. Exports were down with all major trading partners with the exception of Switzerland. Exports to the U.S. were down 51.4 percent while imports dropped 27.6 percent on the year. Exports to the U.S. have dropped for 19 consecutive months. Similarly, exports to the EU dropped 56.1 percent and are down for the eighth month while imports shrank 32.8 percent. Exports to Asia were down 39.5 percent while imports dropped 30.2 percent. Exports of virtually all major products declined on the year with transport equipment plunging 58.4 percent. Also hard hit were machinery exports, down 47.1 percent and electrical machinery down 43.9 percent on the year. On a seasonally adjusted basis, the merchandise trade balance was in deficit for an eighth consecutive month. The deficit was 97.1 billion yen. On an adjusted basis, exports were up 2.2 percent on the month while imports were up 2.8 percent.

February all industry index sank 2.0 percent on the month as expected and plunged 9.2 percent when compared with last year. The tertiary index which is a major component of the all industry index surprised and was down 0.8 percent on the month and 2.7 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.

Australia

First quarter producer price index declined 0.4 percent, slightly less than the drop of 0.6 percent analysts expected. On the year, the PPI for final goods was up 4.0 percent. On the quarter, domestic prices were down 1.0 percent while import prices jumped 3.9 percent. On the year, both domestic and import prices were up 1.8 percent and 20.3 percent respectively. Building construction prices were down 1.6 percent on the quarter while petroleum refining and dairy product manufacturing sank 8.9 percent and 4.9 percent respectively. The declines were offset in part by price increases in industrial machinery & equipment manufacturing which was up 5.4 percent and tobacco product manufacturing which soared 12.8 percent.

First quarter consumer price index edged up 0.1 percent on the quarter after dropping 0.3 percent in the previous quarter. On the year, the CPI was up 2.5 percent and within the Reserve Bank of Australia’s inflation target range of 2 percent to 3 percent after jumping 3.7 percent in the fourth quarter. On the quarter, food prices jumped 2.2 percent while housing prices were up 0.9 percent and household contents & services were up 0.8 percent. However, transportation prices dropped 1.5 percent while recreation was down 1.1 percent. On the year, food prices and those for alcohol & tobacco were both up 5.7 percent while housing jumped 5.5 percent. Education was up 5 percent.

Americas

Canada

February retail sales were up 0.2 percent but down 5.1 percent when compared with last year. This was the second consecutive monthly gain. However, volumes were down 0.3 percent on the month. Excluding autos, sales were up 0.6 percent but were down 1.6 percent on the year. The latest monthly nominal gain was fuelled mainly by building & outdoor home supplies (up 3.0 percent) which in turn were supported by strong demand at home centers & hardware stores (up 3.3 percent). The only other increase of note was in food & beverages (up 0.7 percent) although general merchandise (up 0.4 percent) and pharmacies & personal stores (up 0.3 percent) also managed small gains. The sole area of significant weakness was furniture, home furnishings & electronics where purchases dropped 1.9 percent from January. Other declines were minor, including the recently very volatile auto sector where sales were off 0.3 percent.

Bottom line

Equities put aside Monday’s risk averse sentiments and by week’s end, most indexes followed here were up. However, an undercurrent of unease concerning the U.S. bank stress tests affected trading, which was choppy for the most part during the week. The plethora of UK economic data was dismal at best with only retail sales showing a glimmer of sunshine.

Both the Federal Reserve and Bank of Japan hold monetary policy meetings this week. One thing we can be confident of — there will be no change in interest rates. The fed funds interest rate target range is currently zero to 0.25 percent while the Bank of Japan’s key rate is 0.1 percent. Rather their statements will be read carefully by bank watchers looking to see if any additional non-traditional measures are being considered. Analysts will also look for any words of encouragement about their respective economies that could turn sparse green shoots into May flowers.

Looking Ahead: April 27 through May 1, 2009

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