Global Markets

Equities were mixed with those in the Asia Pacific region mostly declining on the week while those in Europe, the UK and the U.S., advancing. While investors paid active attention to earnings and the economic data available, assessments — especially in Asia — on the impact of the People’s Bank of China’s surprise interest rate increase Tuesday continued throughout the week. And lurking in the not so distant background was the ongoing Egyptian drama unfolding in Cairo and elsewhere. The climax — at least for now — was Friday when Hosni Mubarak finally stepped aside.

For the week, losses ranged from 5.9 percent for the Taiex to 0.2 percent for the S&P/TSX Composite. Gains ranged from 0.2 percent for the All Ordinaries to 2.1 percent for the DAX.

Global Stock Market Recap

Europe and the UK

Equities gained last week despite being buffeted by the cross currents of mixed earnings, economic data and the escalating Egyptian situation. The Chinese interest rate increase also weighed as investors considered potentially slower growth from that part of the globe. On the week, the FTSE was up 1.1 percent, the CAC gained 1.3 percent and the DAX jumped 2.1 percent.

Two major mergers between equities exchange operators were announced. The London Stock Exchange announced a deal to buy Canada's TMX, which owns the Toronto Exchange. Following on its heels, the Deutsche Börse said it was in discussions to acquire NYSE Euronext in an all stock transaction that would create the world's biggest exchange operator hosting publicly traded companies worth about $15 trillion.

The choice of successor to ECB President Jean Claude Trichet when his term expires in November was thrown into confusion when Bundesbank President Axel Weber resigned effective April 30. The loss of the front-runner to replace Trichet opens the race to succeed him. Weber’s exit erodes the prospect of ensuring that the post goes to a German, one who might lift domestic faith in the euro damaged by last year’s bailouts of imprudent members.

Bank of England

As expected, the Bank of England’s monetary policy committee left its key interest rate at a record low of 0.5 percent. The Bank, with a 2 percent inflation target, has been under mounting pressure to increase its interest rate with inflation almost double its target despite fading growth. The committee also left its QE ceiling at Stg200 billion. This meeting’s deliberations were based on new quarterly economic forecasts which will be released on Wednesday in the quarterly Inflation Report. BoE governor Mervyn King has said that inflation may accelerate to more than 4 percent before easing as government spending cuts and slower economic growth curb price pressures. Inflation rose to 3.7 percent in December, hitting an eight-month high. It has stayed above the 2 percent target for 13 straight months and is expected to exceed 4 percent thanks to an increase in the VAT at the first of the year.

Asia Pacific

Equities were mostly lower in the wake of the People’s Bank of China interest rate increase that greeted celebrants as they returned to their desks after the Lunar New Year holidays. But it was not only the rate increase that upset investors — the ongoing simmering upheaval in Egypt weighed. Concerns were heightened over Egypt as President Hosni Mubarak continued to defy calls to quit. His departure occurred after markets here were closed for the week.

Equities were up on the week in Japan and Australia. The Shanghai Composite also gained after investors returned on Wednesday from their five day Lunar New Year holiday. The Nikkei was up 0.6 percent while the All Ordinaries advanced 0.2 percent. Among those on the downside were the Taiex (down 5.8 percent), the Kospi (down 4.9 percent) and the Hang Seng (down 4.5 percent).

The Kospi was down on continued foreign selling and expectations that the Bank of Korea will raise its key policy rate in March — it surprised and left its key interest rate at 2.75 percent at Friday’s meeting.

After the two exchange merger announcements in Europe, the news fuelled hopes that the Australian government would approve a proposed merger between Singapore Exchange and ASX.

People’s Bank of China

The People’s Bank of China increased its policy interest rates for the third time since mid-October. The one year lending rate was increased 25 basis points to 6.06 percent while the one year deposit rate is now 3 percent from 2.75 percent. The previous interest rate increase occurred on December 25, 2010. The Bank had previously increased the reserve requirements for the eighth time since the beginning of 2010. The Bank moved on the last day of the week long Lunar New Year holiday and before a report next week that may show January consumer prices jumping 5.4 percent on the year.

Currencies

The U.S. dollar was up against all of its major counterparts except the Canadian dollar last week in volatile trading. Continuing turmoil in Egypt combined with emerging market inflation boosted U.S. dollar demand. The dollar was also getting support from the recent surge in U.S. Treasury yields, which reflected increasing optimism about growth in the economy. Analysts said that the combination of rising inflation, interest rates and political concerns were weighing on many emerging markets. This in turn was providing support for the dollar. The euro declined after the European Central Bank was forced to purchase Portuguese bonds as sovereign debt woes resurfaced. The ECB had temporarily suspended its bond buying program last month.

The Australian dollar fell below parity with the greenback after Reserve Bank of Australia governor Glenn Stevens said financial conditions are on the “firm side” and the bank had judged it “sensible of late” to leave interest rates unchanged. The key interest rate is 4.75 percent in Australia, compared with as low as zero in the U.S. and Japan, and has been attracting investors with higher-yielding assets.

Selected currencies — weekly results

Indicator scoreboard

Germany

December manufacturing orders dropped 3.4 percent after soaring 5.2 percent in November. On the year, orders were up a workday adjusted 19.7 percent after a 20.6 percent annual gain in the prior month. December itself was a reflection of weakness on the month in both the domestic (down 2.4 percent) and overseas (minus 4.2 percent) markets. Within the former, declines were widespread and led by consumer & durable goods (down 3.7 percent). Basics fell 2.9 percent and capital goods were off 1.8 percent. The slide in foreign demand was wholly attributable to the non-eurozone area where orders dropped 8.9 percent from November. Within this group, capital goods plummeted 15.5 percent, albeit following a 20.7 percent leap in mid-quarter. Consumer & durables dropped 3 percent but basics expanded a further 7.3 percent. By contrast, a 3.7 percent rise in orders from the other EMU members reflected gains in all the main categories. Hence, consumer & durables jumped 8.9 percent, capital goods climbed 4.8 percent and basics were up 1.2 percent.

December industrial output dropped 1.5 percent and was up 10.0 percent on the year. Excluding construction, output was unchanged on the month. Construction output plunged 24.1 percent. Intermediates dropped 3.1 percent from November and consumer goods were down 1.3 percent (nondurables were down 1.5 percent). However, capital goods were up 3.3 percent and energy edged up 0.3 percent.

December seasonally adjusted merchandise trade surplus was €13.9 billion following an upwardly revised €11.9 billion in November. The unadjusted balance showed an €11.9 billion surplus, down from €13.1 billion last time. Monthly exports were up 0.5 percent while imports dropped 2.3 percent. On the year, total exports rose 21.0 percent within which sales to other EMU states were up 20.9 percent. Purchases by non-EU countries expanded a slightly faster 21.2 percent. Total imports grew 26.8 percent on the year. For the calendar year 2010 as a whole, exports were up 18.5 percent and imports 20.0 percent.

France

December seasonally adjusted merchandise trade deficit widened to €5.05 billion. The monthly deterioration reflected a contraction in both sides of the balance sheet with exports down 4.5 percent from November and imports off 1.6 percent. Within the former, there were particularly marked declines in transportation equipment, metals, industrial machinery, pharmaceuticals and cereals.

December industrial production (excluding construction) was up 0.3 percent and was up 7.0 percent on the year. The headline data were somewhat misleading since positive monthly growth was wholly dependent upon a 3.2 percent jump in production of energy & extracted goods. Activity in manufacturing slipped 0.1 percent, led by declines in electronics & machines (1.1 percent), food & agriculture (0.7 percent) and in the other manufactured goods category (0.1 percent). However, there were sizeable gains in both transport equipment (2.7 percent) and refining 1.0 percent).

Italy

December industrial production was up 0.3 percent and 5.4 percent when compared with last year. The modest advance followed a stronger revised 1.3 percent increase in November. The December advance was built upon a 1.4 percent monthly rise in the production of consumer goods together with increases in intermediates (1.0 percent) and energy (4.7 percent).

United Kingdom

December merchandise trade gap surged to a new record high of Stg9.25 billion. The increase in the overall red ink reflected a 3.5 percent monthly jump in imports that easily more than offset a 1.5 percent advance in exports. The underlying shortfall which excludes oil and erratic items worsened from Stg7.38 billion to Stg8.18 billion, also the largest on record. For the year 2010, the trade deficit was Stg97.2 billion, up more than 12 percent from 2009 and also a new peak. However, the ONS warned that the bad weather in December probably hit activity at a number of major ports and airports and might have affected exports more than imports. At the same time, there was an unusually large increase in aircraft imports. This may have been due to a front-end loading of purchases to beat the January increase in VAT.

December industrial production was up 0.5 percent and 3.7 percent when compared with last year. Output from the utilities energy sector jumped some 6.1 percent on the back of the bad weather. Manufacturing slipped 0.1 percent for its first decline in eight months. On the year, manufacturing output was up 4.4 percent. The contraction in manufacturing was almost certainly due to the exceptional cold and heavy snow experienced by much of the country. Output declined in seven of the 13 sub-sectors but production of non-metallic minerals was especially badly hit, slumping 9.7 percent on the month, its steepest drop since 1979. This alone subtracted 0.3 percentage points off monthly manufacturing growth. Other hefty declines were recorded in chemicals & man-made fibres (3.1 percent) and machinery & equipment (2.8 percent). Food posted a 0.4 percent drop. On a more positive note, there was a strong increase in output in metals (3.1 percent) as well as more modest gains in textiles (0.6 percent) and engineering (0.5 percent).

January producer output prices jumped 1.0 percent on the month and 4.8 percent on the year. On the month output prices were boosted significantly by another hefty gain in petroleum products (3.2 percent) which alone accounted for more than 0.3 percentage points of the headline increase. There also were sizeable increases in chemicals & pharmaceuticals (2.4 percent), clothing & textiles (0.9 percent) and food (1.6 percent). The core index which excludes food, drink, tobacco and petroleum was up 0.7 percent from December and 3.2 percent on the year. Producer input prices soared 1.7 percent and 13.4 percent on the year. Input prices were dominated by a 4.6 percent monthly jump in the cost of crude oil which added more than 1.1 percentage points to the monthly change in the overall index. Imported metals (2.2 percent) also rose strongly as did imported food (2.1 percent) and the other imported materials category (2.2 percent). However, there were declines in the cost of both fuel (0.8 percent) and home food materials (0.1 percent).

Asia/Pacific

Japan

January corporate goods price index was up 0.5 percent on the month and 1.6 percent on the year. The monthly index has risen for the past four months and for the past five, on the year. Manufacturing industry products were up 0.6 percent on the month and 1 percent on the year. Within manufacturing, petroleum & coal products jumped 6.1 percent and 10.6 percent on the year. Chemicals & related products were up 1 percent and 1.2 percent on the year. Information & communication equipment edged down 0.2 percent on the month and was down 0.1 percent on the year.

Australia

December seasonally adjusted retail sales edged up 0.2 percent. This follows a rise of 0.4 percent in November and a decline of 0.9 percent in October 2010. On the year, sales were up 2.1 percent. Household goods retailing (1.5 percent), clothing, footwear & personal accessory retailing (2.7 percent) and cafes, restaurants & takeaway food services (0.8 percent) recorded the largest increases in sales in December. However, food retailing declined 0.5 percent, other retailing dropping 0.8 percent and department store sales sank 1.2 percent. For the December quarter in volume terms, retail sales dropped 0.3 percent following an increase of 0.5 percent in the September quarter 2010. In the December quarter, the seasonally adjusted volumes declined cafes, restaurants & takeaway food services (down 4.7 percent), other retailing (down 1.1 percent), clothing, footwear & personal accessory retailing (down 0.6 percent), food retailing (down 0.1 percent) and department stores (down 0.3 percent). Household goods retailing gained 3.1 percent in the quarter.

January employment was up by 24,000 to 11.442 million. The increase in employment was driven by an increase in part-time employment, up 32,000 to 3.419 million that was partially offset by a decrease in full-time employment, down 8,000 to 8.022 million. The unemployment rate was 5 percent. The number of unemployed increased by 8,900 to 606,500 in January. The labor force participation rate in January edged up 0.1 percentage point to 65.9 percent. The ABS noted that due to flooding in Queensland, operational difficulties were experienced in conducting the Labour Force Survey. There was a larger than usual number of households in the Queensland sample which could not be interviewed. While the disruption to survey operations will have slightly reduced the quality of some Queensland estimates, the impact on the estimates is not statistically significant for most series.

Americas

Canada

December international trade surplus was C$3.00 billion. This was the first time that nominal exports had exceeded imports since last February. The turnaround reflected a 9.7 percent monthly bounce in exports, barely dented by a 0.7 percent gain in imports. Real exports were up 6.6 percent from their November level while imports volumes edged just 0.3 percent higher. Cash exports to the U.S. expanded 10.8 percent on the month and were the main reason why the bilateral surplus jumped nearly C$2 billion to C$5.1 billion, the strongest showing since October 2008. Most export industries performed well compared with mid-quarter. In particular, energy (25.1 percent) enjoyed a bumper period and there were very healthy gains too in machinery & equipment (8.2 percent), industrial goods & materials (7.0 percent), agriculture & fishing (7.6 percent) and forestry products (7.0 percent). However, autos edged up just 0.1 percent and there was a decline in the other consumer goods category (0.8 percent). Imports were more mixed but again most areas witnessed some improvement. The largest monthly advances were recorded in agriculture (3.5 percent), energy (3.5 percent) and forestry products (3.4 percent). Much smaller increases were seen in industrial goods & materials (0.4 percent) and machinery & equipment (0.2 percent). Auto imports rose 0.8 percent.

Bottom line

Last week’s data focused on merchandise trade and industrial production. In Germany, both manufacturers’ orders and industrial output disappointed. In the UK, the trade deficit set a new record while producer prices jumped more than expected. UK manufacturing output showed the negative effects of December’s poor weather. Most traders were mesmerized by the pictures from Cairo and traded cautiously throughout the week. The People’s Bank of China increased interest rates again and sent equities tumbling in Asia.

With earnings season winding down, economic data will get close scrutiny. China will release its January data beginning on Monday with merchandise trade and follows on Tuesday with inflation data. This week brings a slew of fourth quarter 2010 gross domestic product first estimates. Japan leads off Monday (local time) followed Tuesday by the eurozone, France, Germany and Italy. In the UK on Wednesday, the Bank of England will release its quarterly Inflation Report. Also in the UK, the monthly labour report will be released for January. No doubt investors will continue to keep an eye on the situation as it unfolds in Egypt.

Looking Ahead: February 14 through February 18, 2011

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