Global Markets

The year got off to a rocky start for equities with all but one of the indexes followed here down for the month. Only the Jakarta Composite managed a positive January. For the week, losses ranged from 1 percent for the Dow to 4.5 percent for the Shanghai Composite. And for January, losses ranged from 8.8 percent for the Shanghai Composite to 1.1 percent for the KLCI. Again, only the Jakarta Composite gained — it was up 3 percent for the month.

Equities were pretty rocky during the week as risk aversion was the prevailing theme. There were both positive and negative factors.

• Investors were still reacting to the previous week’s moves by China to reign in rampant growth. And with that brought fears that the nascent global recovery would be weakened.
• Ben Bernanke’s reappointment as Fed chairman looked to be in trouble. But after much political rhetoric, he was confirmed on Thursday for another four-year term.
• And of course, everyone vigils the FOMC meeting announcement. Markets were pleased that there was no change in policy and it maintained its promise to keep rates exceptionally low for an extended period. There was one dissention to the decision which got a lot of attention.
• Profits continue to be in the spotlight with many companies beating analysts’ estimates and as usual, some disappointing. But the commotion over Apple’s new iPad had Asian companies counting the ways they would benefit from the new product.
• In his State of the Union address, U.S. president Barack Obama reiterated that the worst of the crisis is over for the economy, but the devastation from it still exists. He stressed jobs creation and also proposed a three-year freeze on government spending to tackle deficits. He also seemed to tone down his verbal assault on banks.
• There was a spate of mixed new economic data that made investors wary of the strength of the current recovery.
• Concerns about Greece’s dire fiscal situation and whether the European Union would bail the country out sent the euro to a six-month low against the U.S. dollar.

Global Stock Market Recap

Europe and the UK

Equities here as elsewhere were down last week. The FTSE lost 2.2 percent, the CAC was down 2.1 percent and the DAX declined by 1.5 percent. The week's losses added to the index's January losses — 4.1 percent, 5.0 percent and 5.9 percent respectively. Growth insecurities combined with burgeoning debt problems in four eurozone countries, which have been newly named ‘PIGS’ for Portugal, Ireland, Greece and Spain, pressured investors and they sought refuge out of equities. All four countries had long booms based on cheap credit that have now ended rather spectacularly. Now their public finances have deteriorated raising concerns as to whether they will be able to service their debt.

Analysts were disappointed when UK gross domestic product barely increased in the fourth quarter after six quarters of contraction. But like other early estimates — including those in the U.S. — there will be revisions aplenty next month. But London equities also were negatively affected after Standard & Poor’s said it no longer classified the UK banking system as low risk and among the most stable. But S&P said that the report was not new, and that newswires had published flashes from a report that had been published previously.

In Europe, key sentiment data continued to improve. The German Ifo improved as did the EC consumer and business confidence survey data. Inflation remains below where the European Central Bank would like to see it while consumer spending was up in France but unchanged in Italy. Fourth quarter GDP data will not be known until February 12 when the flash estimates will be released.

Asia/Pacific

Equities in this region were hard hit last week as all of them declined with the exception of the Jakarta Composite which broke even. The region recorded its worst weekly decline since the early March 2009 nadir. Losses were hefty ranging from 4.8 percent for the Kospi, 4.5 percent for the Shanghai Composite, 4.2 percent for the Topix to a decline of 2.3 percent for the PSEi. The main culprit for the decline was investor reaction to the initial measures taken by China to reign in growth and the affect this will have on the fragile global economy. Neighboring countries especially are concerned about the impact it will have on their national economies. Stocks were down overall four days of five as investors fretted over the quality of the recovery and reduced demand from China. Stocks in commodity nations such as Australia were down 3.7 percent on the week.

For the month (and the year so far), only Jakarta registered a gain — 3 percent. Chinese equities plummeted however, with the Shanghai Composite sinking 8.8 percent and the Hang Seng not far behind, declining by 8.0 percent. The Taiex dropped 6.7 percent.

In Japan, the Bank of Japan monetary policy board met and left policy and its economic assessment essentially unchanged. And the last week of the month brings a deluge of new economic data in Japan. Consumer prices continued to decline while household spending was up on the year but retail sales were down. And although the unemployment rate edged downward, it was the result of more workers leaving the labor force rather than an increase in jobs. Industrial production continues to benefit from rising exports. The Nikkei was down 3.7 percent while the Topix lost 4.2 percent on the week.

Bank of Japan

As universally expected, the Bank of Japan’s monetary policy board kept its key interest rate just above zero at 0.1 percent as it continues to battle deflation. The rising value of the yen has created more problems for exporters as it crimps competitiveness and reduces repatriated profits. Although GDP was up in the third quarter, falling wages, job losses and factory overcapacity are hampering spending and eroding prices. BoJ governor Masaaki Shirakawa said that the lending program unveiled in December could be increased should demand for it rise. The governor has also said that stamping out deflation is a crucial challenge and the Bank will continue with its near zero interest rate policy to help growth.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its official cash rate (OCR) at 2.5 percent and said that it would remain there until the middle of this year because inflation is likely to remain within its target range until at least 2012. Further, the RBNZ said that the economy remained consistent with its December projections. The economy emerged from recession in the second quarter of 2009. Fourth quarter GDP will not be available until March 24. The RBNZ has kept interest rates unchanged since April 2009. This has buoyed housing demand and helped New Zealand emerge from its worst recession in three decades. Consumer prices fell in the fourth quarter, damping expectations of an interest rate increase at its March meeting.

Currencies

A combination of risk aversion and growth worries sent the U.S. dollar up against most of its counterparts. The euro swooned to a six-month low against the dollar. It took the pounding as worries mounted in the currency markets over the finances of Portugal, Ireland, Greece and Spain — but especially Greece — and their ability to fund their deficits. Both the U.S. dollar and pound sterling were higher against the euro. Analysts expect that the pressure on the euro will continue as uncertainty persists over a potential bail-out for Greece. They said the single currency would be hurt by further deterioration in bond markets, not just in Greece, but in other countries as well.

The dollar also benefited from the positive reaction to U.S. President Barack Obama’s State of the Union address to Congress. And Friday’s better than expected fourth quarter GDP report also boosted the dollar.

Analysts said fears over further monetary tightening in China had depressed risk appetite and heightened fears about the prospects for a swift recovery in the global economy.

Selected currencies — weekly results

Indicator scoreboard

EMU

December M3 money supply edged down by 0.2 percent following a marginally steeper revised 0.3 percent fall in November. In turn, this lowered the ECB's preferred 3-month average growth measure to a new record low of minus 0.1 percent from a 0.6 percent rise previously. The key private sector lending counterpart was unchanged on the year after a 0.7 percent contraction in mid-quarter. Even so, the improvement was not broad-based with loans to households up 1.3 percent from 0.5 percent but borrowing by non-financial corporations falling 2.3 percent on the year after a 1.9 percent slide in November. Lending for house purchase increased to a 1.5 percent annual rate from 0.3 percent last time.

January flash harmonized index of consumer prices was up 1.0 percent on the year. A fall in Germany (0.7 percent from 0.8 percent) will have done much to hold the headline rate in check but most other member states probably saw their respective 12-month rates move higher. Inflation on average is now running at its fastest pace since February last year, but remains a full percentage point below the ECB's target level of 2 percent.

December unemployment rate edged up to 10.0 percent from the lower revised 9.9 percent in November. Although the 10 percent unemployment rate constitutes a new 11-year high, an 87,000 increase in the number of people out of work was a marked slowdown on the 153,000 and 93,000 gains seen in October and November respectively. Total joblessness now stands at 15.763 million. Unemployment rates rose in most EMU member states although both France (10.0 percent) and Germany (7.5 percent) saw no change. Joblessness in Italy was up 0.2 percentage points to 8.5 percent while the rate in Spain climbed another tick to a frighteningly high 19.5 percent. The only country to register a decline was Finland (down 0.1 percentage points to 8.8 percent).

EU

January economic sentiment climbed to 95.7 from a revised 94.1 in December. The pick-up in overall sentiment mainly reflected advances in industry, services and retail. Industrial and service sector confidence were both up 2 points at minus 14 and minus 1 respectively while retail jumped a surprisingly large 5 points to minus 5. However, consumer morale was unchanged at minus 16 and sentiment in construction fell for the second month in a row, down 1 point at a lowly minus 29. Regionally the larger states all saw sentiment improve with Italy leading the way with a 4.2 point gain to 101.4 followed by France and Germany (both up 0.6 points) to 99.2 and 96.1 respectively. Spain edged up just 0.3 points to 89.0. All of the smaller members similarly registered advances outside of Luxembourg which suffered a 6.7 point drop to 85.6, its lowest reading since September 2009.

Germany

January Ifo sentiment index climbed to 95.8 from 94.6 for its 10th consecutive monthly advance. The improvement in sentiment was driven by gains in both current conditions (up 0.8 points to 91.2) and expectations (up 1.7 points to 100.6). However, by sector the performance was much more mixed. There was a nearly 3 point bounce in manufacturing morale to minus 6.6 and confidence in construction was up more than 5 points to minus 21.5. By contrast, service sector sentiment slipped 0.6 points to 4.9 and retail lost 0.5 points to minus 12.8. Ifo sees further gains in both domestic demand and exports although to date it has been the latter that has provided the platform for recovery. Construction is also seen benefiting from the feed-through from earlier government economic stimulus initiatives. Nonetheless, the retail sector is seen as only stable and Ifo has major doubts over how the domestic economy will react as the fiscal packages are withdrawn.

January unemployment rate edged up to 8.2 percent from 8.1 percent as the number of unemployment climbed by 6,000. The jobless increase would have been higher but for a 4,000 decline in the East. The West saw losses of 10,000. Total unemployment now stands at 3.429 million. Vacancies built upon an 11,000 increase in December with a 3,000 advance this month and the general resilience of payrolls throughout the economic downturn has been a surprise to all. This report follows the release earlier of the ILO employment data which showed a remarkably robust 35,000 increase in December, the second consecutive monthly rise. However, the phasing out of the government's short-term work program threatens to see job losses accelerate later in the year.

France

December consumer spending on manufactured goods jumped by 2.1 percent and was up 5.9 percent on the year, the steepest annual gain in more than two years. The main boost came from autos which built upon a 4.3 percent monthly jump in November with an even larger 9.1 percent surge this time. Textiles (2.0 percent) were also strong while the other products category (0.5 percent) saw a more modest advance. However household goods purchases edged down 0.1 percent on the month.

Italy

November retail sales were unchanged on the month and down 1.3 percent on the year. Food sales were up 0.5 percent while non-food purchases were down 0.2 percent. Details are only available on an annual basis and here negative growth rates were registered virtually across the board. The only exceptions were electrical appliances (up 9.2 percent), pharmaceuticals (up 1.6 percent) and photographic equipment (up 5.3 percent). Clothing (down 4.1 percent), shoes (down 4.7 percent), household goods (down 3.2 percent) and computer, telecommunications & phone equipment (down 2.5 percent) all saw hefty declines.

United Kingdom

Fourth quarter gross domestic product inched up by 0.1 percent on the quarter and dropped 3.2 percent on the year. No expenditure details are provided in the first estimate, but in terms of output the meager growth was equally split between services and the goods producing sector, both of which registered a minimal 0.1 percent advance on the quarter. Distribution, hotels and catering (0.4 percent) accounted for the lion share of the former although the government sector (0.2 percent) also posted a small gain. Within overall industrial production, manufacturing output rose 0.4 percent on the third quarter and mining & quarrying was up 1.0 percent. However, utilities output dropped 3.3 percent. Agricultural production was down 0.6 percent while construction was flat.

Asia/Pacific

Japan

December unadjusted merchandise trade surplus was 545.3 billion yen. This was the 11th consecutive surplus on an unadjusted basis. Exports were up for the first time in 15 months gaining 12.1 percent on the year. Imports on the other hand were down for the 14th month, dropping 5.5 percent. Exports to the U.S. were down 7.6 percent on the year and down for the 28th month in a row. However, exports to the EU, up for the first time in 17 months, increased a modest 1.4 percent on the year. Exports to Asia were up 31.2 percent on the year for the second increase in a row. On a seasonally adjusted basis, the trade surplus was 523 billion yen, up 1.2 percent on the month. Exports were up 2.5 percent while imports were up 2.6 percent in December.

December retail sales were down 0.3 percent on the year after sinking a revised 1.1 percent in November. The December decline was the 16th consecutive drop. The latest sales decline began in September 2008 and was the smallest since then. The decline came despite various government initiatives to stimulate personal spending such as cash handouts, rewards points and tax concessions. Sales of large scale retailers plunged an adjusted 4.6 percent.

December household spending was up for the fifth month, rising by 2.1 percent after gaining 2.2 percent on the year in November. On the year, spending on housing dropped 12.1 percent while fuel, light & water charges were down 1.3 percent. Spending on all other categories was up on the year. Transportation & communication spending jumped by 10.8 percent while medical care spending was up 9 percent and clothing & footwear were up 8.7 percent. Spending on furniture & household utensils were up by 5.6 percent. However, the outlook for spending remains bleak as jobs continue to be hard to find and deflationary pressures point to further erosion in nominal incomes.

December unemployment rate edged down to 5.1 percent from 5.2 percent in November. Employment was up by 13,000 on the month but down 1.7 percent on the year. The employment rate was down 1 percent to 56.3 percent while the labor participation rate edged down 0.5 percent to 59.2 percent. Although the unemployment rate edged lower, the reason it did not rise is because of the exodus of people leaving the labor force.

December industrial production was up by 2.2 percent from the previous month. This was the tenth consecutive monthly increase. On the year, industrial production was up 5.4 percent. Output increased in electronic parts & devices, general machinery, and other. Commodities that increased in the month included electronic & electric toys, analytical instruments and reaction vessels. Production is expected to increase 1.3 percent in January and 0.3 percent in February according to METI’s survey of production forecast.

The December consumer price index dropped 0.2 percent and was down 1.7 percent when compared with last year. Excluding food, core CPI was down 0.1 percent and 1.3 percent on the year. On the year, virtually all categories were down with the exception of transportation & communication and education were down on the year. Goods prices were down 2.7 percent while services were down 0.4 percent on the year. January Tokyo consumer prices dropped 0.5 percent on the month and 2.1 percent on the year. Core excluding fresh food was down 1 percent on the month and 1.4 percent on the year. In Tokyo goods prices plunged 4.2 percent while services were down 0.6 percent.

Australia

Fourth quarter producer price index dropped a surprising 0.4 percent and was down 1.5 percent when compared with last year. Analysts had expected an on-the-quarter increase of 0.3 percent. The PPI was expected to be soft thanks to the soaring Australian dollar which makes imports cheap. Domestic PPI was up 0.3 percent while import prices sank 5.2 percent on the quarter. On the domestic side, prices for other agriculture jumped 11.2 percent, building construction was up 0.3 percent and services to transport climbed 5.7 percent. The price increases were partially offset by price declines in petroleum refining (down 6.7 percent) and bakery product manufacturing (down 4.0 percent). The imports component dropped due to price declines for electronic equipment manufacturing (down 9.7 percent), motor vehicle & part manufacturing (down 2.7 percent), industrial machinery & equipment manufacturing (down 3.8 percent) and other manufacturing (down 9.0 percent). Prices were up for beverage & malt manufacturing and other food manufacturing.

Fourth quarter consumer price index was up 0.5 percent on the quarter after jumping by 1.0 percent in the third. On the year, the CPI was up 2.1 percent – it was up a milder 1.3 percent in the third quarter. The Reserve Bank of Australia has an inflation target range of 2 percent to 3 percent. The RBA has two measures of inflation – a weighted median which was up 0.7 percent on the quarter 3.6 percent on the year and a trimmed mean which was up 0.6 percent and 3.2 percent on the year. On the quarter, fruit prices soared by 15.9 percent while domestic holiday travel & accommodation jumped 6.6 percent. House purchase prices and rents each were up 1.0 percent, and beer was up 2.1 percent. Prices dropped for automotive fuel by 2.8 percent while audio, visual & computing equipment sank 7.1 percent and pharmaceuticals declined 5.3 percent.

Americas

Canada

November monthly gross domestic product was up 0.4 percent but remains 1.7 percent below a year ago. Growth was led by the goods producing sector where output was up a solid 0.6 percent on the month, its third consecutive monthly increase. Within this however, manufacturing was flat. Utilities contracted 1.8 percent but there were hefty increases in agriculture, forestry & fishing (1.6 percent), mining & oil & gas extraction (1.8 percent) and construction (1.1 percent). Services output grew a more modest 0.4 percent. Wholesale trade (2.4 percent) dominated the overall advance. Other notable, but much smaller, gains were posted by transportation & warehousing (0.5 percent) and finance, insurance & real estate (0.6 percent). Retail however dropped 0.8 percent.

December industrial product price index edged down 0.1 percent and was down 0.8 percent on the year. The latest decline reflected small monthly declines in most sectors. The only drop of note was in petroleum & coal products (down 1.4 percent) which also had the most important impact upon the overall index. Excluding this sector the IPPI would have been flat on the month and down 3.0 percent on the year. The raw material price index dropped 1.7 percent and was up 26.8 percent on the year. The RMPI was depressed by a 4.4 percent decline on the month in the cost of mineral fuels without which the index would have risen 1.1 percent from November and 6.5 percent from a year ago.

Bottom line

The Bank of Japan and the Reserve Bank of New Zealand left their policy interest rates unchanged at 0.1 percent and 2.5 percent respectively. While the BoJ kept the status quo, the RBNZ statement was a bit more hawkish.

There was an abundance of new economic data just about everywhere. Fourth quarter UK GDP disappointed while the U.S. estimate was above expectations. Sentiment data in the U.S. and Europe continued to climb. In Europe, economic data were overshadowed by the continuing debt crisis in Greece as analysts mulled whether the European Union would rescue the country.

The G7 finance ministers are scheduled for their routine winter session on February 5 and 6. Canada is the host for the G7 and G8 meetings in 2010. The meeting’s site is Iqaluit on Baffin Island in Nunavut where the average February temperature is minus 26.4 C (minus 15.4 degrees F). Although the G7 meetings have lost some importance given the G20 sessions, the finance ministers will have a lot to talk about as the global economic recovery progresses and international regulatory reform becomes a more pressing issue.

Looking Ahead: February 1 through February 5, 2010

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