Global Markets

The situation in Greece is unraveling just when one thought the saga was all but over. After Greek leaders came to an agreement, finance ministers meeting in Brussels turned down the package and added conditions that Greece must meet to obtain the second tranche of funds. The package Greek leaders agreed to include a minimum wage cut and immediate public sector layoffs. But no agreement materialized for two reasons. First, because austerity promises have been broken consistently over the past, the finance ministers want the Greek parliament to enact the measures they have agreed to. Second, about €300 million in cuts need to be identified — miscellaneous does not work. Any vestige of trust between Greece and Europe is gone.

Now the Greek Parliament is expected to vote over the weekend on the austerity package and clarified cuts. The vote has been cast as a referendum on whether the country would remain a member of the Eurozone. The leader of one of the minor parties in Parliament said he can not support the deal. As the vote drew near, Greek premier Lucas Papademos was trying to shore up his coalition government after five ministers resigned in protest at the wage and pension cuts that international lenders have demanded before they will sign off on a €130 billion bail out package.

Demonstrations against the austerity programs are being held in Greece a day after the government reached a provisional deal with the so-called troika of foreign lenders — the European Commission, the European Central Bank and the International Monetary Fund — on the terms of a new loan program. But skeptical creditors have demanded additional cuts to cover a $430 million shortfall created by the refusal of political leaders to slash supplemental pensions. They also want parliamentary approval along with written commitments from the leaders of the three parties in Mr. Papademos’ coalition before additional financing is released. Finance Minister Evangelos Venizelos said that many countries expressed objections, based on the fact that Greece did not fully complete the list of additional measures required to meet targets for 2012.

While Asian indexes were up for the week (except the Jakarta Composite), equities in Europe, the UK, the U.S. and Canada were down for the week. The Bolsa managed to edge up 0.1 percent.

Global Stock Market Recap

Europe and the UK

With eyes firmly fixed on the ongoing Greek saga, equities were down last week. The final blows to stocks for the week came Thursday night and Friday morning. On Thursday night, Euro area finance ministers refused to approve a second aid package because of a lack of assurances by Greek party leaders that they will stick to their commitments after elections due as soon as April. The ministers asked Greece to turn its budget cuts into law and identify €325 million in spending reductions. On Friday, a leader in Greece’s coalition government said he would not support more spending cuts demanded by the region’s finance ministers. Greek Finance Minister Evangelos Venizelos said after the Brussels meeting that the parliamentary vote set to begin this weekend amounted to a ballot on euro membership. The FTSE lost 0.8 percent and the SMI was down 0.4 percent. The CAC and DAX dropped 1.6 percent and 1.1 percent respectively.

Things seemed to look up on Thursday. Sentiment was underpinned for much of the day on suggestions that the European Central Bank is willing to exchange its holdings in Greek government bonds with the European Financial Stability Facility at a discounted price, which would allow Greece to tap the first tranche of its second bailout. But the modest gains evaporated into the closing bell on concerns that the ECB had not yet decided on whether it would contribute to a Greek debt restructuring deal.

Economic news did not offer encouragement and continued to point to weakening European economic growth. For example, while German manufacturing orders rebounded 1.7 percent, it did little to compensate for November’s 4.9 percent decline. And German industrial production declined unexpectedly. Production dipped 2.9 percent from November, when it remained flat. In France, output slumped as well.

Bank of England

As expected, the Bank of England kept its key policy interest rate at 0.5 percent and increased its asset purchase program by £50 billion to £325 billion to bolster a fragile recovery and shield the country from fallout from the unresolved Eurozone debt crisis. The Bank's decision to buy government bonds comes despite signs the UK may avoid slipping back into recession and hopes that a deal for debt ridden Greece may yet materialize.

"Some recent business surveys have painted a more positive picture and asset prices have risen," Bank of England Governor Mervyn King said in a letter to Chancellor George Osborne, explaining the decision. "But the pace of expansion in the United Kingdom's main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries," he added.

A surprise jump in industrial production in December and an unexpected narrowing in the country’s trade deficit announced earlier on Thursday added to recent signs that the economy has picked up since the turn of the year. But Britain's leading macroeconomic think tank, NIESR, reiterated its recent forecast of an overall economic stagnation in 2012, saying output contracted 0.2 percent in the three months to January.

European Central Bank

As expected the European Central Bank kept its key refinance interest rate at 1.0 percent while the rates on the deposit and marginal lending facilities stay pegged at 0.25 percent and 1.75 percent respectively. At his press conference, ECB President Mario Draghi explained the decision to maintain the status quo on interest rates by reference to further evidence of stabilization in the Eurozone economy and the fact that recent macroeconomic data had been generally consistent with the central bank's own expectations. Nonetheless, by conceding that underlying monetary growth remains subdued and that downside risks to the economy are still substantial, Draghi ensured that financial markets will continue to contemplate a possible further cut in official interest rates at some point.

The monetary authorities' concerns about the general health of the European banking sector were highlighted in the announcement that there will be an additional relaxation of rules that govern the assets the ECB will accept from struggling Eurozone banks as collateral. Market talk of such a move had become increasingly vocal so the statement was hardly a major surprise.

The first of the two 3-year lending operations (LTROs) pre-announced last December saw banks borrow some €489 billion and the second tender is due later this month. The success of the December auction did much to help avert a major credit crunch and expectations are high that this month's LTRO will be at least as well received. Such a prospect will have made the central bank's decision to leave policy rates on hold all the easier to reach.

Asia Pacific

Although ending on a downbeat note, equities were up for the week with the exception of the Jakarta Composite which declined 2.6 percent. Downward pressure, in addition to Greece, was exerted by the string of Chinese data that had been adversely skewed by the Lunar New Year holidays when business shut for a week. Gains ranged from 0.1 percent (All Ordinaries and Hang Seng) to 2.4 percent (Taiex). With little new economic data until the end of the week, investors followed — and traded — on developments in Europe.

The Shanghai Composite advanced 0.9 percent in the week for a fourth weekly gain, its longest winning streak since mid-July. The index has rebounded 6.9 percent this year on speculation the Peoples Bank of China will further cut lenders’ reserve requirement ratios to spur growth. The PBoC announced a cut in reserve ratios on November 30^th — the first reduction since 2008 — after boosting them and interest rates last year to cool inflation that accelerated to its fastest pace in three years in July. China’s January trade surplus unexpectedly ballooned to $27.3 billion from $16.5 in December, as imports sank 3.3 percent on the month due to weak domestic demand in the New Year holiday shortened month.

The Bank of Korea left rates unchanged at 3.25 percent as expected. In the associated commentary the Bank acknowledged increased downside risks to its growth forecasts, with potential shocks from Europe, higher oil prices and slowing emerging market growth noted. On the other hand, they noted firmer outcomes from the U.S. and a picture of inflation that it still not entirely comfortable.

Reserve Bank of Australia

The Reserve Bank of Australia unexpectedly kept its key interest rate at 4.25 percent after lowering it at its previous two meetings in November and December. The RBA does not meet in January. Most analysts expected the RBA to lower its rate by 25 basis points to 4.0 percent. Employment has declined in four of the last six months while retail sales have been treading water. However the RBA in its statement said that growth and inflation are close to trend. Interest rates are lower given their two previous moves and were now near average.

The Bank indicated that the downside risks around the situation in Europe were the primary concern. However, it noted that the acute financial stress on European banks was alleviated in late 2011. In his post-meeting statement, Governor Glenn Stevens noted that “much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made.” The RBA said that should demand weaken materially, there was scope for easing rates going forward. For now, monetary policy is appropriate.

The Reserve Bank of Australia released its quarterly Statement on Monetary Policy Friday. It revealed only a modest change in the forecasts relative to the November statement. The only real changes were a reduction in the year average growth forecast for 2012 from 4 percent to 3.5 percent and the through the year forecast to June 2012 from 4 percent to 3.5 percent. The RBA points out that there has been significant progress made in settling these markets mainly because of the efforts of the European Central Bank. However the key sentence is: "as in previous forecasts it also assumes that a disorderly outcome is avoided. This remains the major downside risk for the global economy." In discussing the prospects for the domestic economy there is a general admission that the Bank is quite uncertain as to the relative impact of a booming mining sector and a high exchange rate. The Australian dollar slid against most of its counterparts after the statement’s release.

Currencies

After peaking on Thursday, the euro fell from a two month high against the dollar as European finance ministers withheld an aid package necessary to prevent the Greek economy from collapsing. The currency slid from the highest since December against the yen after the leader of one of the Greek government’s supporting parties said he could not back an austerity accord needed to secure the bailout. Analysts said that Europe is taking a tougher stance because Greece has been underachieving on its previous commitments. The euro has rallied against the dollar from the January low of $1.2624 amid speculation Greek lawmakers would satisfy demands from the European Commission, European Central Bank and International Monetary Fund to receive the aid package.

The euro hit a two month high against the dollar on Thursday after Greek policymakers agreed to an austerity package, but investors wondered whether the Greek deal will be enough to avoid a messy default. Details were scarce and investors wondered whether it will be enough to secure the funds, as well as what contribution the European Central Bank will offer in the restructuring of Greece's debt.

Greek Finance Minister Evangelos Venizelos said his Ecofin counterparts refused to approve a €130 billion aid package because the government fell short of austerity demands. George Karatzaferis, the leader of Greece’s Laos party, said he could not support an accord on cuts in its present form.

The big problem with the adjustment process is that growth has collapsed. Having massive wage cuts to regain competitiveness is not going to be fun for anybody to say the least. On the other hand, the other option is to have a disorderly default. Greek lawmakers will vote on measures to cut spending over the weekend which will be followed by another extraordinary assembly of the euro-area ministers which was set for February 15^th.

According to data released earlier this week, Japan sold a total of ¥1.02 trillion in currency interventions during the first four days of November. Japan used so-called stealth intervention in November as the government sought to stem yen gains that hammered exporters’ earnings. The unannounced intervention occurred after unilateral selling of a record ¥8.07 trillion on October 31^st when the yen climbed to a post World War II high of ¥75.35 against the dollar. Finance Minister Jun Azumi said he would not rule out any options to curb the yen’s appreciation and that he will take action whenever necessary. Intervention is defined as “stealth” when it’s done without any finance ministry announcement, he said.

The U.S. Treasury criticized Japan in a December report for unilaterally selling its currency in August and October, saying the country should focus on steps to “increase the dynamism of the domestic economy.” The yen sale in October was the biggest intervention on a monthly basis in data going back to 1991. The first intervention of 2011 was a ¥692.5 billion sale on March 18^th when the Bank of Japan led a coordinated effort with Group of Seven nations to counter a jump in the yen after a record earthquake struck Japan a day earlier, stoking speculation companies would repatriate overseas assets to pay for rebuilding.

Market observers say using clandestine yen selling is likely to be more successful for the BoJ than public intervention when the market is so determined to buy yen. Because the public efforts have been met with failure, analysts say Japan can save itself both money and credibility by conducting forays into markets that don't draw public attention. Analysts also point out that large-scale, public purchases of dollars merely deliver the yen at cheap levels to those who would buy it anyway.

Selected currencies — weekly results

Indicator scoreboard

Germany

December manufacturing orders rebounded from a revised 4.9 percent plunge in November with a stronger than expected monthly rise of 1.7 percent. Combined with favorable base effects, the partial recovery was enough to lift annual workday adjusted growth from a decline of 4.3 percent last time to zero. In December, orders were boosted by a 2.8 percent monthly jump in capital goods, although this failed to offset November's 6.5 percent drop. Overall basics were flat. Domestic orders dropped 1.4 percent on top of a 1.1 percent slide in November. Basics (down 5.1 percent) were especially soft and consumer & durables (down 1.8 percent) struggled too. However, capital goods gained 1.9 percent and remained in positive territory. The headline increase in orders was thus wholly attributable to stronger overseas markets (4.3 percent). Even so, within this group regional performances were very mixed with a 6.8 percent monthly drop in Eurozone demand after a 4.4 percent decline in November contrasting sharply with a 12.3 percent surge in non-EMU orders that more than made up for November's 10.0 percent collapse.

December industrial production dropped 2.9 percent on the month and was up 0.9 percent from a year ago. The year-end slump reflected broad based declines among the major product areas. Capital goods were down 3.6 percent from November while intermediates dropped 2.4 percent and consumer goods, 0.9 percent. Manufacturing declined 2.7 percent, energy was down 2.2 percent and construction collapsed 6.4 percent. The December contraction left total industrial output for the fourth quarter 1.9 percent below its third quarter level when it grew 1.5 percent.

December merchandise trade surplus narrowed from a slightly smaller revised €14.9 billion in November to a larger than expected €13.9 billion in December. The unadjusted data showed a surplus of €12.9 billion down from €14.9 billion last time. The minor deterioration at year end reflected a contraction in both sides of the balance sheet as exports dropped 4.3 percent from November and imports declined 3.9 percent. On the year, exports were up 5.0 percent, just behind a 5.4 percent annual rise in imports. Non-EU exports were up 14.7 percent on the year in contrast to a 3.3 percent decline in purchases from other EMU member states. On the month, exports increased a solid 4.3 percent — again wholly due to non-EMU demand (orders from the rest of the Eurozone were down nearly 7 percent). For the fourth quarter as a whole, nominal exports were down 1.1 percent from the third quarter while imports were down a slightly larger 2 percent.

France

December seasonally adjusted merchandise trade deficit widened out from a smaller revised €4.1 billion in November to €5.0 billion in December. The deterioration reflected a 2.7 percent monthly drop in exports that more than offset a 0.4 percent dip in imports. A number of categories saw a modest worsening in their respective trade positions but the bottom line found useful support in the transport sector where the surplus expanded to €1.7 billion. At €2.2 billion, the overall manufacturing shortfall was only around €0.1 billion larger than in mid-quarter. The December data provided for a fourth quarter deficit of €14.9 billion, an improvement on the €17.2 billion of red ink posted in the previous period.

December industrial production (excluding construction) was down 1.4 percent on the month wiping out an unrevised 1.1 percent gain in November. Output was 1.3 percent lower on the year and production in the fourth quarter down 0.8 percent from the previous period. Manufacturing output also dropped 1.4 percent from November, a reflection of weakness in all of its major sub-sectors outside of refining where activity expanded 0.6 percent. Electronics & machines (down 3.2 percent) performed especially poorly and there were significant declines in food & agriculture (down 1.2 percent) and in other manufactured goods (down 1.2 percent). Transport equipment (down 0.7 percent) fared little better. Completing a dismal picture, energy output contracted 1.3 percent on the month while construction was off 2.0 percent.

United Kingdom

December industrial production was up 0.5 percent but was down 3.3 percent on the year. Manufacturing output expanded 1.0 percent, its best performance since May. Compared with a year ago, manufacturing output was up 0.8 percent. The year-end gain in manufacturing reflected increases on the month in output in nine sub-sectors and declines in just four. The main positive contribution came from transport equipment industries where production was up 3.0 percent and from food, drink & tobacco (1.3 percent). By contrast, rubber & plastics posted a 2.5 percent drop. Even so, despite the strength of December manufacturing output for the fourth quarter was still down 0.8 percent from the previous period. Production for the goods producing sector as a whole was partially checked by declines in the mining & quarrying category (2.1 percent) as well as in water & waste management (0.1 percent) and in oil & gas extraction (2.7 percent). However, energy output grew 0.4 percent.

December trade gap narrowed sharply from a larger revised Stg8.9 billion in November to stg7.1 billion. The improvement produced the smallest shortfall since February 2010 and was attributable in part to a 0.9 percent monthly increase in nominal exports. However, much more important was a 4.6 percent decline in imports. A similar pattern was apparent in the underlying (excluding oil and erratics) balance which posted a deficit of Stg6.7 billion, down from Stg7.7 billion in mid-quarter. Regionally the bilateral shortfall with the EU was Stg3.4 billion and Stg3.8 billion with the rest of the world. For the fourth quarter as a whole, the shortfall was Stg6.0 billion, down sharply from the Stg9.8 billion registered in the previous period. This suggests that net exports should make a respectable contribution to fourth quarter real GDP growth and could point to an upward revision to the 0.2 percent quarterly contraction posted in the preliminary figures.

January input prices were up 0.5 percent and 5.4 percent on the year. Output prices also were up 0.5 percent and 4.1 percent from a year ago. Output prices were buoyed on the month by relatively sharp increases in petroleum products (1.1 percent) and alcohol & tobacco (1.6 percent. Other categories were much better behaved although clothing & footwear (0.7 percent) was disproportionately firm. The only decline was in metal, machinery & equipment (0.3 percent). Raw material and fuel costs were supported by a 2.1 percent monthly jump in crude oil prices which alone accounted for (more than) the entire increase in the overall index. Fuel (down 2.0 percent) and other imported materials (down 0.5 percent) provided a partial offset while most other areas saw relatively small changes.

Asia/Pacific

Japan

December core machine orders excluding volatile ones for ships and those from electric power companies dropped 7.1 percent on the month after soaring 14.8 percent in November. On the year, private orders were up 6.4 percent. For the October through December period, they were down 2.6 percent when compared with the previous quarter. Total machinery orders were down 7.2 percent in December but increased 10.0 percent in the October through December quarter when compared with the previous quarter. In 2011 year the total amount of machinery orders increased by 6.8 percent. Private sector orders, excluding volatile ones, were up by 7.8 percent. In the January through March 2012 period the total amount of machinery orders are forecast to increase by 9.9 percent and private sector orders are expected to increase by 2.3 percent from the previous quarter respectively.

January corporate goods price index slipped 0.1 percent on the month and was up 0.5 percent when compared with the same month a year ago. The annual increase continued to weaken after increasing 2.8 percent in July and was softer than December’s 1.2 percent increase. The index was dragged down on the year by nonferrous metals (down 9.4 percent), information & communications equipment (down 9.1 percent) and electronic machinery & equipment and electronic components & devices, both of which slumped 1.4 percent. Prices for petroleum & coal products jumped 5.6 percent while pulp, paper & related products increased by 2.6 percent.

China

January consumer prices were up 4.5 percent on the year after increasing 4.1 percent in December. On the month, the CPI was up 1.5 percent after increasing 0.3 percent the month before. The Chinese New Year holiday fell in January this year, but in early February in 2011, and this base effect appears to have boosted headline prices. On the year, urban prices were up 4.5 percent and rural were 4.6 percent higher. Food prices jumped 10.5 percent after climbing 9.1 percent in December. Non-food prices were up a benign 1.8 percent after increasing 1.9 percent the month before. Other price categories either eased or varied little from the month before. Tobacco & alcohol prices were up 3.7 percent after increasing 3.9 percent. Clothing prices were up 3.7 percent after jumping 3.9 percent.

January producer price index was up 0.7 percent on the year, pretty much as expected by analysts. In December the PPI increased 1.7 percent on the year. In January, producer prices slipped 0.1 percent after declining 0.3 percent the month before. On the year, production materials prices eased to an increase of 0.3 percent from 1.4 percent last month. Within this category, mining & exploration prices eased to an increase of 6.2 percent from 9.4 percent the month before. Consumer goods prices also eased, gaining 2.1 percent after 2.5 percent in December. Within this category food prices were up 3.5 percent after 4.3 percent the month before.

Australia

December retail sales edged 0.1 percent lower. On the year, sales were up 2.6 percent. Food sales dropped 0.7 percent while cafes, restaurants & takeaway food services declined 1.8 percent. These declines were offset by increases in clothing, footwear & personal accessory retailing (3.5 percent), department stores (1.1 percent) and household goods retailing (0.2 percent). Turnover was relatively unchanged in other retailing. In volume terms, sales rose 0.4 percent in the December quarter 2011, seasonally adjusted pretty much as expected, following an increase of 0.5 percent in the September quarter 2011. Sales drooped despite a second rate cut from the RBA. Sentiment slid sharply in the month on concerns about Europe and job security. With 30,000 jobs lost in November and December, household incomes were also under pressure.

Americas

Canada

December merchandise trade surplus was C$2.7 billion. The year-end improvement reflected a 4.5 percent monthly jump in nominal exports that easily outpaced a 0.8 percent increase in imports. Shipments to the U.S. were up a solid 5.3 percent, almost twice the pace of Canadian imports from the region (2.8 percent) and, as a result, the bilateral surplus weighed in at C$5.5 billion, almost C$1 billion above its November level. Annual growth of total exports was 12.5 percent or 1.6 percentage points higher than the comparable increase in imports. A number of industries enjoyed solid overseas demand, notably machinery & equipment which registered a 9.2 percent monthly jump in sales, autos (6.7 percent) and the other consumer goods category (6.8 percent). All sub-sectors saw exports gain from November with agriculture & fishing products (3.8 percent) and industrial goods & materials (also 3.8 percent) performing notably well too. Imports were held in check by a 7.5 percent monthly slump in energy. However, forestry products (8.5 percent), industrial goods & materials (2.6 percent) and autos (3.6 percent) all were higher.

Bottom line

With the Greek situation still very much unsettled, equities in Europe and the U.S. slumped Friday. Of the three central banks that met — the Reserve Bank of Australia, Bank of England and the European Central Bank — only the Bank of England adjusted monetary policy by increasing its asset purchase program. Economic data in Germany, Japan and China disappointed.

The Bank of Japan meets this week with no change in policy anticipated. The pace of new economic data picks up with both Australia and the UK releasing labour force information. Flash GDP estimates for the fourth quarter are on tap for the Eurozone. And of course, eyes will be glued to the next episode of the Greek tragedy.

Looking Ahead: February 13 through February 17, 2012

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