Global Markets

Risk aversion, set off by Egypt’s political turmoil sent equities down in Europe, the UK and the United States Friday. Commodity prices such as gold and oil were up as were the safe haven currencies in the U.S., Japan and Switzerland along with U.S. Treasuries. Stocks were already down in the Asia Pacific region as investors had their first opportunity to react to the downgrade of Japan’s sovereign debt. Earlier in the week, markets were mixed as investors reacted to the avalanche of quarterly earnings reports and the stream of economic data and central bank decisions.

The UK and U.S., the first of the developed economies to release GDP data show growth going in opposite directions. The UK shocked and contracted in the fourth quarter while in the U.S., growth improved and was just about as expected. Part of the blame for the UK contraction was the horrendous December weather. However, as with all first estimates, the data are subject to (sometimes) extensive revisions since the releases are based on incomplete and estimated data.

The Bank of Japan, Reserve Bank of India and Reserve Bank of New Zealand held policy meetings during the week. Of the three, only the RBI increased rates because of inflationary woes. In Europe, the Norges Bank kept its policy interest rate at 2 percent. Investors were satisfied that the Federal Reserve left its policy interest rate range between zero and 0.25 percent and said it would continue its bond purchase plan (QE2) through June.

Stocks were mixed last week. Most equity indexes were up in Asia Pacific, but in Europe only the DAX survived Friday’s decline. In North America, only the S&P/TSX Composite gained on the week.

Global Stock Market Recap

Europe and the UK

Thanks to Friday’s declines the FTSE and CAC were down last week by 0.3 percent and 0.4 percent respectively. The DAX however, managed to increase by 0.6 percent on the week. Stocks in the region declined as protests against Egyptian President Hosni Mubarak’s 30-year rule intensified with clashes erupting in central Cairo and as news of continued civil unrest, curfews and fears of contagion emerged from Egypt. Egypt had been a stabilizing influence in the area.

An indicator of U.K. consumer confidence slumped to its lowest level in nearly two years in January as government austerity measures hit hard. January’s increase in the VAT sales tax rate to 20 percent from 17.5 percent was the single biggest reason for the slump. On Tuesday, the first estimate of GDP for the fourth quarter showed that the economy contracted by 0.5 percent on the quarter — a shock given analysts were anticipating a 0.5 percent quarterly increase. The major European markets ended lower, as traders reacted negatively to downbeat GDP data. The poor data reignited worries about a setback to global economic recovery, even as some positive earnings cushioned the weakness to some extent.

The Bank of England released the minutes from its January 13 monetary policy meeting which showed that policy makers remained split between keeping monetary policy unchanged and raising its benchmark interest rate. Of the nine BoE policy members, six voted to maintain its current monetary policy stance and interest rate of 0.5 percent, while two members voted in favor of increasing its interest rate — one suggested a 25 basis point increase and another calling for a 50 basis points increase. The final member voted for an increase to the central bank’s asset purchase program. Inflation has exceeded the Bank’s 2 percent inflation target rate for more than a year while economic growth has waned.

Asia Pacific

Last week ended on a decidedly sour note Friday. The Standard & Poor’s downgrading of Japan’s sovereign debt rating which was announced after markets closed here on Thursday, weighed on sentiment in the region. However, most indexes were up on the week with the exception of the Hang Seng (down 1.1 percent), Sensex (down 3.2 percent), KLCI (down 1.7 percent) and SET (down 2.5 percent). Friday’s sentiment was in contrast to that on Thursday when sentiment was one of optimism. Morale was lifted by Federal Reserve's maintenance of the low interest rate regime and of its bond purchase program.

On Thursday, Australian Prime Minister Julia Gillard unveiled a new levy to help fund reconstruction efforts in the aftermath of the devastating Queensland floods. Gillard said the one year tax, which will take effect from July, will apply to those earning over A$50,000 a year. Sweeping spending cuts on green programs and delays to infrastructure projects were also announced to account for the rebuilding costs, which Gillard put at A$5.6 billion. The tax will not apply to people directly affected by the floods. A report revealed that the massive flooding will distort economic growth and GDP will likely fall well below trend in the first quarter.

Bank of Japan

The Bank of Japan maintained its policy interest range of zero to 0.1 percent and its program to buy securities at ¥5 trillion at its meeting on Monday and Tuesday. The monetary policy board also raised its growth forecasts for the fiscal year through March to 3.3 percent from 2.1 percent and predicted faster inflation as strength in overseas demand bolsters exports and pushes up commodity prices. The MPB forecast that consumer prices will increase 0.3 percent in the year starting April, higher than its October prediction of 0.1 percent. The Bank said that while inflation may unexpectedly accelerate if demand from emerging economies pushes up commodity costs, a government review of the consumer price index later this year will likely lead to a downward revision in the index. The BoJ has pledged to keep the current policy until it can see signs of stable price moves, which officials define as increases of around 1 percent.

Reserve Bank of India

The Reserve Bank of India increased its policy interest rates by 25 basis points to a two year high and signaled that there would be further increases ahead. Analysts had expected a 50 basis point increase. The repurchase rate is now 6.5 percent while the reverse repurchase rate is 5.5 percent. India joins South Korea and Thailand in raising rates this month after increasing them six times in 2010 — the most by any central bank in Asia. The move will buttress government efforts to cool inflation after Prime Minister Manmohan Singh unveiled plans to reduce food prices by importing onions from Pakistan and keeping a ban on exports of lentils and edible oils. RBI Governor Duvvuri Subbarao now expects its benchmark wholesale price inflation rate at 7 percent by March 31, up from its earlier prediction of 5.5 percent. He also said that the growth projection for the current financial year has been kept at 8.5 percent with an “upward bias.”

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand kept its official cash rate (OCR) at 3 percent for the fourth straight meeting in order to revive the economy. The earthquake that rocked the Christchurch region contributed to a contraction in New Zealand’s economy in the third quarter, forcing the Bank to hold rates while other Asia Pacific nations raised borrowing costs. RBNZ governor Alan Bollard has kept the OCR at 3 percent since July last year amid a slump in house sales and consumer spending. In the three months through September GDP edged down 0.2 percent on the quarter but was up 1.5 percent on the year.

At the last meeting, Bollard lowered his 2011 growth forecast to 2.5 percent from 3.8 percent. However, rebuilding the earthquake ravaged areas along with continued demand for the nation’s exports should buoy demand. Economists also expect a boost to tourism and consumer spending when New Zealand hosts the Rugby World Cup in September and October this year. Among the evidence for a recovery in growth, commodity export prices rose 23 percent last year to a record, according an ANZ National index. After adjusting for the New Zealand dollar’s 7.2 percent gain against the U.S. counterpart, prices rose 16 percent, boosting the incomes of farmers and manufacturers.

Currencies

Safe haven currencies including the yen, Swiss franc and U.S. dollar were up Friday as civil unrest spread in Cairo and other cities in Egypt. The yen was higher than it was before the downgrading of Japan’s credit rating by S&P on Thursday, which had caused the currency to slump sharply and briefly rattled the broader market. The currency often benefits from flight to safety flows at times of political strife and it was up against both the euro and its U.S. counterpart. On the week, the euro was virtually unchanged while the pound sterling and Canadian dollar slumped against the dollar. The dollar however, was down against the yen, Swiss franc and Australian dollar.

The outlook for sterling shifted sharply after fourth quarter UK gross domestic product data posted a 0.5 percent quarterly decline, blowing away expectations for an interest rate rise by the Bank of England any time soon. The country’s high rate of inflation had fueled talk of an imminent interest rate increase. Analysts noted that expectations for an early rate increase have been slowly been pushed back but has accelerated by the poor GDP data.

Selected currencies — weekly results

Indicator scoreboard

EMU

January economic sentiment was essentially unchanged as the index slipped 0.1 point from a slightly higher revised December level to 106.5. Morale in industry improved 1.1 points to 6.0 but dipped 0.2 points to minus 11.2 in the consumer sector. Construction saw a 0.5 point gain to minus 26.0 but services shed 0.4 points to 9.2 and, potentially of most significance, retail was down 4.4 points at 0.1. Regionally, sentiment declined 1.7 points to a still very firm 115.6 in Germany as confidence in the retail area slumped nearly 10 points to 6.6. Spain and Italy were essentially steady at 91.3 and 99.1 respectively and France posted a 0.8 point gain to 108.0.

December M3 money supply growth slowed from a revised 2.1 percent rate in November to 1.7 percent. However, the decline here still provided for a pick-up in the 3-month moving average measure preferred by the ECB from 1.4 percent to an as expected 1.6 percent. The figures reflected a slight deceleration in lending to the private sector (1.9 percent from 2.0 percent) within which 12-month growth in borrowing by non-financial corporations slipped to minus 0.2 percent from minus 0.1 percent. However, lending to the household sector grew 3.0 percent, up from 2.8 percent last time with loans for house purchase expanding 3.7 percent or 0.3 percentage points faster than in November. Stronger lending to households was offset by a sharp decline in borrowing by non-monetary financial intermediaries (excluding insurance companies and pension funds) which dropped from a 7.0 percent annual pace to 5.2 percent.

France

December consumption of manufactured goods advanced 0.6 percent on the month. However, following a sizeable monthly increase in the year ago period, annual growth decelerated from 1.5 percent to 0.4 percent. The December figures followed a slightly smaller revised 2.7 percent surge in November. Spending on durables jumped an impressive 3.6 percent on the month after a 6.1 percent leap in November. Car purchases (8.6 percent) were once again especially strong ahead of the curtailment of the scrappage scheme at the start of this month. By contrast, expenditure on household goods dropped 0.5 percent from November, mainly due to weakness in furniture and textiles. The other products category also saw demand decline.

United Kingdom

Fourth quarter provisional gross domestic product contracted by 0.5 percent on the quarter after growing an unrevised 0.7 percent in the previous period. This reduced annual growth to 1.7 percent. The data were heavily distorted by a prolonged period of bad weather that saw the coldest December on record. ONS is estimating that these effects hit the bottom line to the tune of 0.5 percentage points. Therefore, even without the snow the economy would still have stalled. Not surprisingly, the ONS also warned that the figures are much less certain than usual and more liable to revision. No details of the GDP expenditure components are provided in the flash estimate but the output figures show that the overall decline was mainly due to a 0.5 percent quarterly slide in the service sector. In turn this was the result of broad-based declines among the major sub-sectors. Activity contracted 0.5 percent in distribution, hotels & catering, 0.8 percent in transport, storage & communications and 0.7 percent in business & financial services. There was also a 0.2 percent drop in the government category. By contrast, industrial production expanded 0.9 percent from the third quarter with manufacturing up a healthy 1.4 percent. Utilities advanced 1.2 percent but the highly erratic mining & quarrying sub-sector dropped 2.5 percent. Elsewhere, construction, which is especially subject to the vagaries of the weather, slumped 3.3 percent while agriculture grew 0.3 percent.

Asia/Pacific

Japan

December unadjusted merchandise trade surplus was ¥727.7 billion, up from November’s revised balance of ¥161.1 billion. On the year, exports gained 13 percent while imports climbed 10.6 percent. Exports to China, up for the 14^th month, jumped 20.1 percent on the year in December. Exports to Asia were up 14.8 percent on the year. Exports to the EU advanced 9.7 percent while those to the U.S. jumped 16.5 percent. On a seasonally adjusted basis, the trade surplus was ¥707.3 billion, up from ¥536.0 billion the month before. Imports were up 3.0 percent on the month while exports jumped 5.7 percent.

December unemployment rate surprised and dropped to 4.9 percent from 5.1 percent in November. The number of unemployed declined by 190,000 from the previous year. Employment increased by 19,000 on the month and 50,000 on the year. However the labor force continues to shrink. On the year, the labor force dropped by 130,000 persons. The labor force participation rate edged down to 59.1 percent while the employment rate edged up to 56.4 percent.

December household spending dropped 3.3 percent when compared with last year. Clothing and footwear expenditures sank 11.3 percent while spending for transportation & communication dropped 11.0 percent. Housing jumped 10.8 percent on the year.

December consumer price index was down 0.3 percent on the month and was unchanged on the year. Core CPI excluding only fresh food was unchanged on the month but down 0.4 percent on the year. The Core which excludes both food and energy was also unchanged on the month but dropped 0.7 percent on the year. Prices for goods dropped 0.7 percent but were up 0.8 percent on the year while services were up 0.1 percent on the month but swooned 0.8 percent on the year. On the year, education prices plunged 13.0 percent and furniture & household utensils dropped 3.5 percent. However, water, fuel & light prices were up 2.6 percent.

December retail sales were down 2.0 percent on the year after increasing 1.3 percent in October and 0.7 percent in May. Machinery sales dropped 9.4 percent after soaring a revised 48.4 percent in November. Fuel sales gained 4.8 percent after a revised gain of 8.3 percent. Auto sales continued to sink, dropping 24.1 percent after plummeting 26.6 percent in November. After two positive months, large store sales were down 1.8 percent. For the year 2010, retail sales were up 2.5 percent after dropping 2.3 percent in 2009.

Australia

Fourth quarter producer price index edged 0.1 percent and was up 2.7 percent when compared with last year. The increase in final stage prices was due to an 18.3 percent increase in agriculture combined with a 0.8 percent rise in building construction and an 8.6 percent jump in accommodations. These increases were partially offset by declines in prices received for industrial machinery & equipment manufacturing (down 3.2 percent) and electronic equipment & appliance manufacturing (down 7.1 percent). Intermediate prices were unchanged on the quarter and up 3.3 percent on the year. Price increases for electricity, gas & water supply and basic non-ferrous metal manufacturing were offset by declines in prices received for coal mining and basic chemical manufacturing. Preliminary stage commodities were up 0.1 percent on the quarter and 3.8 percent on the year.

December 2010 quarter consumer prices were up 0.4 percent and were up 2.7 percent when compared with the same quarter a year ago. In the September quarter, the CPI was up 0.7 percent and 2.8 percent on the year. The most significant price increases this quarter were for fruit (up 15.5 percent), vegetables (up 11.4 percent), domestic holiday travel & accommodation (up 3.8 percent) and automotive fuel (up 2.1 percent). Offsetting these increases were price declines for pharmaceuticals (down 6.2 percent), deposit & loan facilities (down 1.3 percent), motor vehicles (down 1.0 percent), audio, visual & computing equipment (down 4.8 percent) and motor vehicle repair (down 1.9 percent).

Americas

Canada

December consumer price index was unchanged on the month and up 2.4 percent on the year. Core CPI excluding just food and energy dropped 0.4 percent on the month and was up 1.6 percent on the year. The Bank of Canada’s preferred measure which excludes eight volatile items declined 0.3 percent and was up 1.5 percent on the year. Gasoline prices surged 13 percent on the year or nearly 6 percentage points more than in the 12 months to November. Overall energy costs were 10.5 percent more expensive than at the end of 2009. Seasonally adjusted overall consumer prices gained 0.3 percent from November. Within this, clothing & footwear climbed 0.8 percent and transportation costs were 0.4 percent higher. Food prices gained 0.3 percent and shelter 0.2 percent. Recreation, education & reading prices advanced 0.3 percent as did health & personal care but household operations, furnishings & equipment were flat.

Bottom line

Investors became risk averse at week’s end on a combination of events. Economic data and earnings were mixed and disappointing, while political unrest in Egypt rattled investors and sent them to safe havens before the weekend. Of the many central bank meetings held last week, only the Reserve Bank of India increased its policy interest rate while the Bank of Japan, Reserve Bank of New Zealand and Norges Bank left policy unchanged.

As is usually the case in the first week of a new month, investors will be inundated with new economic data even while the earnings season continues unabated. The data range from the slew of purchasing managers surveys for both manufacturing and services that are released for countries around the world to the U.S. employment situation report on Friday. The Reserve Bank of Australia holds its first policy meeting in two months on Tuesday (local time) while the European Central Bank meets Thursday. The Lunar New Year celebration begins mid-week. It is the Year of the Rabbit.

Looking Ahead: January 31 through February 4, 2011

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