Global Markets

Most equity indexes advanced last week despite rather lackluster trading. There was little new economic data to stir investors as they awaited the onset of earnings season. The situation in Japan continues to be grave with strong aftershocks impeding cleanup progress particularly at the imperiled Fukushima nuclear plant. In Europe, Portugal succumbed and asked IMF and EU to help get its credit situation under control. And the conflict in Libya continued, affecting oil supplies from that nation. Concerns about Libya and Japan are keeping a lid on underlying optimism regarding the global economy.

The ECB, much to no one’s surprise, increased its policy rate to 1.25 percent while the Bank of England left its policy rate unchanged at 0.5 percent. In the Asia Pacific region, the People’s Bank of China increased its interest rates by 25 basis points — the one year deposit rate now is 3.25 percent while the lending rate is 6.31 percent. However, the Reserve Bank of Australia kept its key rate at 4.75 percent while the Bank of Japan lowered its outlook for the economy and kept its interest rate range of zero to 0.1 percent. It said it would provide ¥1 trillion in loans for the devastated northeast region of the country.

Investors have been watching the fiscal battle in Washington with analysts unsure how to quantify the economic and thus market impact of a government shutdown should agreement not be reached on the U.S. budget by midnight Friday. The dollar dropped Friday to a 15 month low as the negotiations wound on.

Global Stock Market Recap

Europe and the UK

Equities were up for a third week as investors put aside worries about sovereign debt and an increase in interest rates. Most were relieved — and not surprised — that Portugal gave way to the inevitable and asked for international help from the IMF and EU in resolving its credit problems after interest rates on debt issues soared. The country joins Greece and Ireland in requesting international financial assistance. Investors had priced in the ECB interest rate move. The Bank had long telegraphed that a rate increase was possible at its April meeting.

Equities traded within a narrow range during the week. The FTSE was up 0.7 percent, the DAX gained 0.5 percent and the CAC edged up 0.2 percent. There was little economic data of importance. Germany’s manufacturing orders soared in February far beyond analysts’ estimates. Service PMI data showed continued growth.

Bank of England

As expected, the Bank of England kept its key bank rate at 0.5 percent and its quantitative easing at £200 billion. The last change in interest rates was a 50 basis point cut in on March 5, 2009 while the most recent change in the asset program was on November 5, 2009. The Bank has an inflation target of 2 percent. Consumer prices soared 4.4 percent on the year in February — more than twice the inflation target. The BoE is likely to wait for more data before making any decision to lift interest rates. In the past, the monetary policy committee has acted after the completion of its quarterly Inflation Report. The next report is due in mid-May.

The Bank fears that raising interest rates too soon could damage an already weak economic recovery. Some economists said consumers were still getting used to government spending cuts coming into force this month as well as higher taxes and oil prices. The rate increase by the ECB could put additional pressure on the BoE to raise its own rate because it could weaken the pound and exacerbate inflation.

European Central Bank

As expected, the European Central Bank increased its policy interest rate by 25 basis points to 1.25 percent. The widely expected increase was warranted because of inflation risks, according to ECB President Jean Claude Trichet. The Bank has an inflation target of just below 2 percent. Inflation is currently 2.6 percent on the year.

The ECB said it would “do all that is deemed necessary to deliver price stability” and would act before higher inflation rates caused by oil and commodity prices fed through into broader cost pressures. Critics believe that raising borrowing costs could damage weaker economies like Portugal, which only a day earlier became the third country in the euro area to request an international bailout. The decision to increase rates was unanimous.

Mr Trichet suggested that another rate increase soon was not a foregone conclusion. “We did not decide today that it was the first of a series of interest rate increases,” he said. Analysts interpreted his remarks to mean that the ECB might wait several months before raising rates again.

Asia Pacific

Equity indexes followed here were up last week with the exception of the Topix. Gains ranged from 2.7 percent for the PSEi to 0.1 percent for the KLCI. The Nikkei was up for the week thanks to a rally Friday driven on relief that a powerful earthquake Thursday night had not inflicted much damage. Trading during the week had been lackluster with barely any new economic data available and the inevitable lull before U.S. earnings season begins. Even the increase in interest rates in China was taken calmly. The move had been expected but the timing — on a holiday — surprised and suggested that Chinese inflation may have increased again (data will be released Friday morning, local time).

Reserve Bank of Australia

As expected, the Reserve Bank of Australia kept its key interest rate at 4.75 percent where it has been since November. The RBA Board judged that the current mildly restrictive stance of monetary policy remained appropriate in view of the general macroeconomic outlook. The RBA has an inflation target range of 2 percent to 3 percent on average. Consumer prices were up 2.7 percent on the year in the fourth quarter.

The Board looked at the impact of Japan’s March 11^th earthquake, tsunami and ensuing nuclear crisis on the Australian economy. Japan is Australia’s second largest export market. They concluded that the disaster would have a noticeable effect on production in Japan in the near term, but the impact on the broader Asian region is expected to be limited.

The January and February floods which were the worst in 37 years were another factor that deterred another rate increase. Rains in Queensland flooded about 30,000 properties, shut coal mines, cut rail lines and damaged crops. An area was declared a disaster zone, including parts of the state capital, Brisbane.

Bank of Japan

As expected, the Bank of Japan left its policy interest rate range between zero and 0.1 percent. The vote was unanimous. The monetary policy board voted to adopt new funding tool for business financing. The BoJ will extend 1 year loans to banks at 0.1 percent. The Bank revised its economic outlook downward. It noted that the economy is under strong downward pressure mainly on the production side and would remain under pressure for some time. However the Bank expects that there would be a return to a moderate growth path. The earthquake has sharply dampened production facilities, disrupting the supply chain and constraining electric power supply. Exports and domestic private demand have been affected. They noted that the financial markets have been stable.

The Bank faces many imponderables given an economy that was roiled by the March 11^th disaster and ensuing nuclear crisis. The prolonged nuclear crisis, severe power shortages and supply chain disruptions are posing difficult issues for policy makers. Previously, the biggest problem was a lack of demand. Now with the crippled manufacturing and distribution systems, supply shortages are emerging as the main problem.

People’s Bank of China

Increasingly alarmed by an overheating economy, the People's Bank of China raised interest rates for the fourth time in five months. The PboC lifted its policy interest rates by 25 basis points effective on April 6^th. The one year deposit rate now is 3.25 percent while the lending rate moved to 6.31 percent. Previous rate increases occurred in October, December and February. While further tightening measures such as an interest rate increase were largely anticipated, the timing came as a surprise to many analysts, both for being earlier than expected and for falling on a national holiday. China's consumer price index rose 4.9 percent in February on the year, unchanged from January's 4.9 percent rise. While the central bank has a track record of raising rates on holidays, forecasters are never sure when to expect rate changes. The last two rate increases were on February 8^th, the final day of the weeklong Lunar New Year holiday, and December 25, 2010, Christmas Day, which isn't an official holiday in China.

Currencies

The U.S. dollar was down against all of its major counterparts last week except the yen as hopes faded that Republicans and Democrats in Washington could agree on a budget before midnight Friday.

Several Asian currencies were up sharply against the U.S. dollar, with the Korean won advancing to a two-and-a-half-year high and the Singapore and Australian dollars also posting sharp gains. Traders said broad dollar weakness and a resumption of the yen carry trade bolstered these currencies. China said on Friday that it will allow the yuan to be traded against a wider basket of currencies in the onshore foreign exchange market this year.

The rising currencies prompted a number of regional central banks to intervene as the dollar fell over the nation's budget woes and a rise in the euro spurred the region's currencies higher. The move follows Thursday's rate increase by the European Central Bank. It suggested to traders that world economic growth will continue to improve. That has investors looking to Asian currencies, which are perceived as higher-risk, higher-return investments. Central banks in the Philippines, Malaysia, South Korea, Indonesia, Thailand and India apparently bought dollars to keep the advance in their own currencies under control according to local traders.

The yen's steady drop in recent weeks is encouraging the view that a turning point could finally be at hand for the currency after more than two years of strengthening against the dollar that has frustrated Japanese companies and politicians. The success of the intervention is partly explained by traders who now see a ceiling on yen strength, thanks to the threats of future intervention. That has given investors confidence to pile into carry trade bets, in which they borrow yen at very low interest rates and convert that cash into higher yielding currencies such as the Australian dollar. Another factor is Japan's weakened economic condition. Rolling electricity blackouts and nuclear fears are hampering manufacturing and exports.

Selected currencies — weekly results

Indicator scoreboard

EMU

February producer prices jumped 0.8 percent and were up 6.6 percent on the year. Excluding energy, where prices rose 1.2 percent on the month, the PPI was up a more modest 0.6 percent from January but this was still enough to boost the 12-month underlying rate from 4.0 percent last time to 4.5 percent. Prices in intermediates registered a 1.0 percent gain, its second straight increase of at least this magnitude. Prices in this sector now stand 8.1 percent higher on the year. Elsewhere things were subdued with capital goods and durable consumer goods prices up just 0.2 percent from January. Nondurables posted their second straight 0.5 percent increase. Regionally headline PPIs were up on the month in all 17 member states except Estonia (minus 0.1 percent) and Slovakia (minus 0.3 percent).

February retail sales edged down 0.1 percent on the month and edged up just 0.1 percent on the year. The latest dip means that sales have only risen once in the last six months and underlines the sluggishness of average household spending across the region. Purchases of food, drink & tobacco were unchanged for the second consecutive month and were 0.5 percent weaker on the year while non-food sales eased 0.1 percent from January and were 0.9 percent up on February 2010. Among the larger states, purchases dropped 0.3 percent on the month in both Germany and Spain and 1.1 percent in France.

Final fourth quarter 2011 gross domestic product was up an unrevised 0.3 percent and 2.0 percent when compared with the same quarter a year ago. Household consumption was up an unmodified 0.4 percent on the quarter, gross fixed capital formation declined a slightly smaller revised 0.5 percent and government spending edged up 0.1 percent, in line with the previous report.

Germany

February manufacturing orders surged 2.4 percent on the month to boost annual workday adjusted growth from 16.5 percent in January to 20.1 percent. Moreover, the latest advance followed an upwardly revised 3.1 percent monthly jump at the start of the year. The February bounce was due to a 4.5 percent monthly increase in capital goods orders as consumer and durable goods edged just 0.1 percent higher and basics slipped 0.3 percent. Regionally demand was roughly evenly split between the domestic market (up 2.6 percent on the month) and overseas (up 2.3 percent). Within the latter, orders from the other EMU states were up 3.2 percent after a 2.5 percent gain last time while the non-eurozone posted a 1.6 percent advance following a 1.3 percent increase at the start of the year.

February industrial production was up 1.6 percent and 14.8 percent on the year. The advance was broad based with all of the major sub-sectors registering monthly gains in excess of 1 percent. Capital goods led the way (1.6 percent) closely followed by consumer goods (1.4 percent) and intermediates (1.0 percent). Energy was up 1.2 percent from the start of the year and construction was up 3.4 percent.

February seasonally adjusted merchandise trade surplus narrowed by €0.4 billion to €11.4 billion as exports rose 2.8 percent on the month and imports climbed 3.8 percent. The mid-quarter reading constituted the smallest amount of black ink since May 2010. The unadjusted surplus was €12.1 billion, €0.6 billion lower than in the same month last year.

France

February seasonally adjusted merchandise trade deficit widened out to €6.55 billion after a larger revised €6.12 billion shortfall at the start of the year. The deterioration reflected a 2 percent monthly increase in nominal imports that more than offset a 1.1 percent advance in exports. Higher energy costs were a major factor in the import bill once again, but there were also sizeable gains in chemicals and metals. The deficit on trade in manufactures increased nearly €0.5 billion to €4.1 billion.

United Kingdom

February industrial production dropped 1.2 percent and was up 2.4 percent on the year. Manufacturing output was unchanged on the month and up 4.9 percent on the year. The lack of any monthly improvement in manufacturing reflected output drops in nine of 13 sub-sectors that offset increases in the other four. In particular, there was a 4.5 percent plunge in the other manufacturing industries sub-sector and a 0.7 percent drop in chemicals & man-made fibres. The largest increase was posted in the transport equipment area (1.2 percent) and machinery & equipment category (1.3 percent). Outside of manufacturing, the disappointing figures for total industrial production reflected hefty drops in two of the more volatile categories. Oil & gas extraction slumped nearly 8 percent on the month, at least in part due to oil rig maintenance, while mining & quarrying shed more than 7 percent. To make matters worse, utilities output also dropped 2.1 percent as temperatures rose more quickly than accommodated by seasonal adjustments.

March producer input prices were up 3.7 percent on the month after a stronger revised 1.4 percent gain in February and are 14.6 percent higher on the year. Output prices climbed 0.9 percent on the month and 5.4 percent on the year, the fastest pace since October 2008. The surprisingly steep advance in output prices was largely attributable to another hefty 3.9 percent jump in petroleum products. This alone added nearly 0.5 percentage points to the monthly change. However, outside of alcohol & tobacco (1.2 percent), the other sub-sectors were much better behaved and the core index was up a 0.4 percent on the month and 3.0 percent on the year. Input costs were similarly dominated by the energy sector with a 9.8 percent monthly leap in crude oil worth 2.6 percentage points of the overall 3.7 percent monthly rise. Nonetheless, there were also relatively sharp increases in imported metals (2.2 percent), imported chemicals (1.7 percent) and imported parts and equipment (2.1 percent).

Asia/Pacific

Australia

February merchandise trade balanced plunged to a deficit of A$205 million from January’s surplus of A$1.433 billion. Exports dropped 2.4 percent on the month but were up 12.1 percent on the year while imports increased by 4.9 percent and 8.1 percent on the year. Exports of non-monetary gold dropped 45 percent and non-rural goods declined 2 percent. Rural goods advanced 12 percent while net exports of goods under merchanting were unchanged. Imports of intermediate and other merchandise goods gained 12 percent, capital goods were up 2 percent, non-monetary gold jumped 19 percent while consumption goods were up A$11 million. Services debits were up 2 percent.

March employment increased by 37,800 people. The unemployment rate edged down to 4.9 percent from 5.0 percent as expected. The number of employed people was 11.457 million in March, driven by an increase in full time employment, up 32,100 to 8.106 million and an increase in part time employment, up 5,700 to 3.351 million. The number of unemployed declined by 10,200 people to 592,900. Labour force participation rate was 65.8 percent up from 65.7 percent in February.

Americas

Canada

March employment declined by 1,500 jobs. The overall drop in jobs was wholly attributable to a 92,100 decline in part time positions. Full time employment jumped a very solid 90,600. While public sector headcount dropped by 27,200 jobs, private sector payrolls grew 8,300. The unemployment rate edged down to 7.7 percent from 7.8 percent in February. Job losses were restricted to the service sector which shed a total 20,500 positions. The drop here was largely due to a near-20,000 slump in retail although there were sizeable declines in health care & social assistance (17,300) and information, recreation & culture (11,200). There was a more limited dip in finance, insurance, real estate & leasing (6,600). Partially offsetting this weakness were gains in accommodation & food services (36,200) and professional, scientific & technical services (9,100). By contrast, the goods producing sector saw employment expand a respectable 19,100. However, manufacturing posted a disappointing 9,400 decline leaving construction (24,300) to account for most of the headline increase. Utilities (4,500) and natural resources (2,300) made small contributions while agriculture saw a fresh decline (2,600).

Bottom line

It was a light week for new economic data but a heavy week for central bank activity. The People’s Bank of China and the European Central Bank increased their interest rates while the Reserve Bank of Australia and the Banks of Japan and England kept policy rates unchanged. The U.S. budget situation remains unresolved as the clock ticks toward midnight.

The pace of new economic data picks up in Europe, the UK and the U.S. The UK reports unemployment and consumer prices while in Germany, the April Zew survey is on tap. February industrial production will be released for France, Italy and the eurozone. In the U.S. numerous key indicators are on tap. Their releases could be affected by a government closure. Earnings season begins on Monday.

Looking Ahead: April 11 through April 15, 2011

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