Global Markets

Economic data released last week continued to show a leveling off from what not too long ago seemed a plunge into the abyss. New data were consistent only with a slowing pace of contraction rather than a return to meaningful growth. In both Canada and Australia employment was up in April, defying forecasters’ gloomy projections. In the U.S., employment was down less than anticipated, in part due do to government hiring for the upcoming census. And purchasing managers indexes — with many at all time lows — showed signs that declines in index levels may be over for now. And investors were particularly cheered by the bounce in China’s CLSA PMI which managed to climb sharply to 50.1 — just over the breakeven point of 50 and signaling expansion in Chinese manufacturing sector for the first time in nine months.

On Thursday, the U.S. finally released the results of the ongoing stress tests for 19 large banks. Investors breathed a sigh of relief — that the test results were finally released and that 10 of the 19 had to raise a total of ‘only’ $75 billion in extra capital. The remaining nine were given a clean bill of health. Overall, the verdict was far more upbeat than many in the industry had feared when the tests were first announced in February. Banks in need of new capital must give regulators their plans for raising the money by June 8, and raise it by November.

Also on Thursday, both the European Central Bank and Bank of England announced further moves to ease economic conditions. The ECB lowered its key interest rate to 1 percent while the Bank of England expanded its quantitative easing program. The ECB also said it was ready to embark on an asset-buying program that could include about €60 billion of covered bonds.

For the week, all indexes followed here increased. Now only the Dow is down below its end of year level as a rising tide of optimism lifted stock markets and commodities amid growing hopes for an early recovery in the global economy. The dollar weakened while commodity linked currencies rose and credit spreads tightened further as risk appetite continued to strengthen.

Global Stock Market Recap

Europe and the UK

Equities rose vigorously last week with all three key indexes — FTSE, CAC and DAX — now above their end of 2008 levels. Although European stocks declined two of five days, the FTSE was up all four days in a holiday shortened trading week. The week was highlighted by the European Central Bank and Bank of England meetings combined with what seemed to be an eternally long vigil for the stress test results. By the way, much of the economic data released during the week showed clearly that the economies are no longer in free fall but are leveling out.

The FTSE has rallied 30 percent from this year’s low on March 3 on optimism that the worst of the global recession may be over. Economic reports showed UK consumer confidence jumped by the most in almost two years while employers in the U.S. cut fewer jobs than estimated in April. The Bank of England said it will increase the size of its asset purchase program by £50 billion ($75 billion) to £125 billion pounds and left its key interest rate unchanged at 0.5 percent. But the Bank’s decisions had little impact on the market which was impressed by Bank’s observation that there were now signs that the pace of economic decline had begun to slow.

The CAC and DAX both gained. Again, economic data especially from Germany showed an increase in March manufacturing orders while industrial production was unchanged after plunging for eight straight months. The indexes were also bolstered by data from China that showed an expansion in the manufacturing sector for the first time in nine months. On the downside, the European Commission forecast that the eurozone economy would contract by 4 percent in 2009 and 0.1 percent in 2010.

ECB cuts its interest rate, will offer enhanced credit support

As expected, the European Central Bank lowered its key interest rate by another 25 basis points to 1 percent. The ECB has now cut rates by 3.25 percent since October 2008. With its strict inflation target of 2 percent, the Bank has seen its inflation measure sink to a year on year increase of 0.6 percent in April from a high of 4.1 percent in July 2008. M3 money supply growth has dropped to a 5.6 percent growth rate from a high of 12 percent in November 2007. Producer prices continue to fall, posting their sharpest drop on the year for 22 years in March. This is adding to the pressure on the ECB to loosen monetary policy. The ECB was not expected to follow the Bank of England and Fed in launching its own asset purchase programs. European banks are already benefiting from those in the U.S. and UK.

In his press conference that followed the announcement, ECB President Jean Claude Trichet said that the ECB will proceed with its enhanced credit support approach and will provide longer term refinancing operations with a maturity of 12 months. Trichet also announced that the Bank will buy around €60 billion euro-denominated covered bonds issued in the euro area. Technicalities would be decided in the June meeting. While stating that the present level of interest rates was appropriate, Trichet steered clear of ruling out further rate cuts. He said that the governing council was not committed to a 1 percent interest rate floor as some members had urged ahead of the meeting. Rather he said that they had not decided that the new interest rate level was the lowest level. He noted that the latest policy decisions were taken unanimously.

The announcement of covered bond purchases was the day's biggest surprise. Trichet offered few details. He did explicitly deny that the ECB was embarking on quantitative easing, calling the program an extension of its "enhanced credit-support operation." He also emphasized that the purchases would be sterilized.

Bank of England expands its quantitative easing program

As universally expected, the Bank of England left its key interest rate at its all-time low of 0.5 percent. It also raised its asset purchase target to Stg125 billion from its current level of Stg75 billion. The monetary policy committee expects that it will take another three months to complete purchases and will keep the scale of the program under review.

In its statement, the MPC said that the world economy remains in a deep recession. “Output has continued to contract and international trade has fallen precipitously. The global banking and financial system remains fragile despite further significant intervention by the authorities. In the United Kingdom, GDP fell sharply in the first quarter of 2009. But surveys at home and abroad show promising signs that the pace of decline has begun to moderate.”

In discussing the British economy, the MPC noted that the CPI continued to be significantly above its 2 percent inflation target. It noted that the decline in sterling against other major currencies has continued to put upward pressure on inflation. But spare capacity has increased and the loosening in the labor market has contributed to an easing in wage pressures. The Bank expects the CPI to drop below the 2 percent target later this year, driven in part by diminishing contributions from food and energy prices. The MPC’s Inflation Report will be released on May 13 and will include the committee’s latest inflation and output forecasts.

Asia/Pacific

All Asian/Pacific equity indexes followed here recorded healthy gains last week and are now firmly entrenched above their 2008 close. Investors were relieved that the results of much awaited stress tests on 19 U.S. banks dispelled the uncertainty and speculation surrounding the health of the banking sector. Investors were relieved that there were no nasty surprises. And better than expected readings on the U.S. job market and sales at major retailers also offered some support ahead of the weekend.

The Nikkei and Topix were up last week — there were only two trading days. Markets had been closed for three days for the Golden Week holidays. The indexes played catch-up on Thursday as they tried to match gains that occurred earlier in the week elsewhere. And on Friday they were up, helped by investors’ positive reaction to the U.S. stress test results. The Japanese market rose to a six month high on broad-based buying amid hopes that the global economy may be bottoming. After the market close, however, Toyota reported a net loss of ¥436.9 billion ($4.4 billion) for the fiscal year to March 2009 and warned that it would plunge deeper into the red this year because of the global economic downturn.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its overnight cash rate target at 3 percent after lowering it by 25 basis points in April. The economy is contracting thanks to a slump in global demand for exports and weaker consumer spending. RBA governor Glenn Stevens has more scope to cut borrowing costs going forward to spur an economy he expects will recover later this year. Stevens and his board have reduced the overnight rate by a record 4.25 percentage points since early September.

The recession here has been much milder than elsewhere. Gross domestic product declined 0.5 percent in the fourth quarter from the previous three months (first quarter data will not be available until June 2). By contrast, the U.S. and UK economies both contracted 1.6 percent while Japan plunged by 3.2 percent when compared with the previous quarter. Recent reports support the view that lower borrowing costs and government spending are reviving the economy. Home loan approvals were up for a fifth month in February and consumer confidence jumped in April by the most since August. Business sentiment gained in March for a second month. And employment was up, surprising analysts who had predicted a further decline while the unemployment rate actually declined.

The RBA released its quarterly Statement on Monetary Policy on Friday. As expected it downgraded its projected growth forecast. The RBA said that the economy would contract by 1.25 percent for the year ending June 30 — a significant downgrade on its previous projection of 0.25 percent growth. It also cut its growth forecast for the following year to just 0.5 percent, down from 1.25 percent indicating a modest recovery following a short and relatively mild recession especially when compared with other developed countries.

Currencies

The U.S. dollar was a casualty of the currency market last week as investors sought risk as the equity market rally continued. The dollar was down against all major currencies. It was also a week that included the release of major economic data, monetary policy decisions and the official results of stress tests on U.S. banks. And oh yes — Friday’s release of the U.S. employment situation report for April. The euro was the main beneficiary of the dollar’s decline. The currency strengthened as some encouraging economic data from Germany fueled risk appetite. The euro added to multi-week highs against the dollar and yen and also rebounded against the pound sterling. The currency was buoyed on Thursday after the ECB said it plans to spend about €60 billion buying covered bank bonds in a bid to stem the eurozone's economic decline and cut its key interest rate by another 25 basis points to 1 percent.

Selected currencies — weekly results

Indicator scoreboard

EMU

March producer price index excluding construction dropped 0.7 percent and was 3.1 percent below its year ago level. Energy prices dropped 1.7 percent on the month or 7.3 percent on the year. Most of the other categories also declined with intermediates notably weak, down 0.8 percent on the month and 4.1 percent from March 2008. Capital goods and nondurable consumer goods were also down 0.1 percent and 0.2 percent respectively. Excluding energy, prices fell 0.4 percent on the month and 1.7 percent on the year. The only exception in a picture of broad-based weakness was the durable consumer goods sector where prices edged up 0.1 percent and were up 1.8 percent on the year.

March retail sales dropped 0.6 percent and sank 3.4 percent when compared with last year. The slide was concentrated in the food, drink & tobacco sector where purchases dropped 1.4 percent on the month. In aggregate, the other sectors saw demand unchanged from mid-quarter.

Germany

March retail sales volumes excluding autos dropped 1.0 percent and were down 1.8 percent when compared with the same month a year ago. The monthly decline was the second in the last three months and the fourth in the last six. With the exception of pharmaceuticals, medical & cosmetics (up 0.6 percent) and mail order (up 3.2 percent) all of the main expenditure categories were down. Food & beverage demand was especially weak with volumes off 3.0 percent. The non-food sector was down 0.4 percent although within this sector there were particularly large declines in clothing & shoes (3.3 percent), furniture & household items (2.2 percent) and in the other goods category (8.9 percent).

March manufacturing orders were up 3.3 percent after declining for six consecutive months. Orders were 26.7 percent lower on the year. The monthly gain reflected a 5.6 percent increase in overseas demand which easily eclipsed a 1.1 percent increase in domestic orders. The monthly bounce in foreign orders was split quite evenly between the eurozone (6.1 percent) and non-EMU countries (5.1 percent). The best performer was the capital goods sector which built on February's 2.5 percent advance with a 9.1 percent jump. Basic goods were up 0.8 percent while consumer and durables were up 1.9 percent. The increase in domestic orders was fuelled by a 4.9 percent rise in the capital goods sector. However, both basics (1.6 percent) and consumer & durables (1.5 percent) also registered gains.

March industrial output stabilized and was unchanged in March after falling for six months in a row. However output is still 20.4 percent lower than last year. Output was supported by a sharp rebound in activity in the capital goods sector where production jumped 2.5 percent on the month following a 5.2 percent slump in February. Other areas to see positive growth were energy (0.1 percent) and construction (7.6 percent). However, all of the other major categories saw monthly declines. The weakest performance was in basic goods (down 2.4 percent) but consumer nondurables were almost as soft (down 2.3 percent). At the same time, consumer durables fell 0.9 percent after a larger revised 4.9 percent nosedive in February. Overall manufacturing output fell 0.4 percent on the month and 13.8 percent on the quarter.

March merchandise trade surplus reading was €8.9 billion, virtually unchanged from February’s surplus. The steady headline masked small monthly gains in both nominal exports (0.7 percent) and imports (0.8 percent). The increases were the first for both series since last September. Exports were still down 15.8 percent on the year while imports were 11.6 percent lower. Exports to the EMU sank 14.9 percent and were down 12.9 percent to non-EU countries. On the same basis, imports fell 10.7 percent and 12.0 percent respectively.

France

March merchandise trade deficit widened out by €0.8 billion to an unexpectedly large €4.9 billion in March. This left a first quarter deficit of €12.9 billion, up 18 percent from same period a year ago. The expansion in the gap reflected a combination of weaker exports (1.8 percent) and higher imports (0.7 percent). The shortfalls on both manufactured goods and energy widened by €0.2 billion to €3.2 billion and €3.0 billion respectively and were together responsible for the bulk of the headline deterioration.

Italy

March producer price index excluding construction dropped 0.7 percent and was 4.6 percent lower on the year. This measure has now fallen every month since July 2008. Within the domestic index prices for consumer goods were unchanged on the month as were capital goods prices. Rather, the decline was led by intermediates which dropped 0.7 percent from February and energy, which sank another sizeable 2.4 percent on the month and 14.8 percent on the year. Excluding energy, the PPI was still down 0.3 percent on the month and 2.2 percent on the year.

United Kingdom

April producer output prices were up 0.6 percent and were up 1.2 percent when compared with last year. Core output prices were up 0.4 percent and 2.4 percent on the year. Increases in excise duties (mainly petrol) added around 0.2 percent to the output price index last month. Among the main components, the largest monthly increase was seen in petroleum products (4.3 percent). Prices for motor vehicles were up 0.8 percent, for precision & optical instruments 0.7 percent and for leather & leather products 0.6 percent. The only monthly price declines were registered in office machinery & computers (1.4 percent), fabricated metals (0.7 percent) and rubber & plastics (0.1 percent). Input prices were down 1 percent and 5 percent on the year. The bulk of the monthly decline was attributable to sharply softer fuel prices which fell some 8.2 percent thanks to a 17.5 percent slump in gas costs. However, home produced materials declined 0.6 percent and imported materials were off 1.0 percent on the month.

Asia/Pacific

Australia

March merchandise trade surplus was A$2.5 billion, up from February’s revised surplus of A$1.7 billion. The increase was primarily due to the fall in goods and services imports -- mainly in other goods and capital goods. Exports were virtually unchanged on the month. Rural exports were up 10 percent while other goods dropped 6 percent and non-rural goods edged down 1 percent. Services were up 1 percent. The increase in rural goods exports was largely driven by the cereal grains and cereal preparations component. Imports sank 3.2 percent. The 14 percent gain in consumption goods was more than offset by the declines in other goods (down 33 percent), capital goods (down 12 percent) and intermediate & other merchandise goods (down 3 percent. The decline in other goods was driven by non-monetary gold. Imports of textiles, clothing & footwear and non-industrial transport equipment were up for the month.

March retail sales jumped by 2.2 percent after dropping 2 percent in February. The consensus was for another monthly decline. On the year, retail sales were up 6.3 percent. All components were up for the month. Food was up 0.4 percent while department stores soared by 13.2 percent. Clothing and soft good retailing gained a healthy 6.4 percent and household goods retailing was up 1.3 percent.  Other retailing was up 1.5 percent and cafes, restaurants & takeaway food services were up 1.4percent. All states with the exception of the Australian Capital Territory were up on the month.

April employment surprised and increased by 27,300. Full time employment increased by 49,100 to 7,672,700 while part time employment decreased by 21,800 to 3,126,200. The unemployment rate declined to 5.4 percent from 5.7 percent in March. The number of unemployed declined by 35,300 to 614,600. The number of persons looking for full-time work was down by 17,800 to 443,500 and the number of persons looking for part-time work was down by 17,400 to 171,100. The participation rate edged down by 0.1 percent point to 65.4 percent.

Americas

Canada

April employment expanded by 35,900 while the unemployment rate was unchanged at its previous 7-year high of 8.0 percent. All of the gain in jobs last month was accounted for by the self-employed sector where employment jumped 37,000. The number of employees was down by 1,100 with public sector payrolls up 9,300 but more than offset by a 10,400 contraction in the private sector. Positions in the goods producing sector were up 800 while jobs in the service sector advanced 35,100. Within the former, employment was up 6,700 in manufacturing and 9,000 in agriculture. Against this, there were declines in construction (7,500), natural resources (4,100) and utilities (3,300). Services sector jobs were boosted mainly by gains in information, culture & recreation (17,100) and business, building & other support services (14,600). Payrolls also expanded in professional, scientific & technical services (5,300), accommodation & food (5,800) and health care & social assistance (3,800). The participation rate and the employment rate both edged up 0.1 percentage points to 67.4 percent and 62.0 percent respectively.

Bottom line

It was a busy week for investors as they awaited central bank announcements from the Reserve Bank of Australia, Bank of England and European Central Bank. But looming over investors as they have for weeks were the results of the much ballyhooed stress tests of U.S. banks. While most of the results were steadily leaked during the week, all eyes were fixed on Washington Thursday after markets had closed in the U.S. Economic data released during the week reinforced the opinion that the global contraction had reached its nadir and now there were signs of some leveling out — or green shoots.

This coming week will seem tame by comparison. Economic data in Europe will be focused on industrial output and flash releases of first quarter gross domestic product. The GDP data promise to be particularly ugly.

Looking Ahead: May 11 through May 15, 2009

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