Global Markets

Markets ended in a whimper after waiting all week to find out what would happen in Greece. The U.S. employment report loomed as well. Most equity indexes were down on the week. Losses ranged from 3.3 percent and 2.5 percent (IBEX 35 and FTSE MIB) to 0.3 percent (Jakarta Composite and KLCI). However, the Nikkei jumped 1.6 percent while the SMI advanced 0.6 percent. The Nasdaq was 0.4 percent higher while the S&P 500 edged up 0.1 percent.

On Friday, Greece said that 95.7 percent of bondholders would participate in its debt swap after it used an option to force investors to participate. The government said holders tendered €152 billion of Greek law bonds — or 85.8 percent — in response to the offer to swap their holdings. Eurozone finance ministers held a conference call in which they agreed to release up to €35.5 billion in bailout funds to help fund the debt swap.

Eurozone ministers approved the €130 billion rescue. While French President Nicolas Sarkozy declared the Greek problem had been settled, Germany said that any impression the crisis was over "would be a big mistake". Markets sharply marked down the value of new Greek bonds to be issued to the creditors, reflecting the risk of paralysis after elections which are expected to be held this spring and doubts about whether Athens can bring its debt to a more manageable level by 2020.

The International Swaps and Derivatives Association met to consider a “potential credit event” relating to Greece. A request was made following Greece’s use of collective action clauses in its domestic law bonds. These clauses were retroactively inserted into bond documentation after the country passed a law allowing it to force all private investors into restructuring regardless of whether they were willing to participate. The Determinations Committee for Europe, convened by ISDA, voted unanimously that a restructuring credit event had occurred, triggering compensation owed to holders of CDS protection on Greek debt. One auction will be held to settle relevant CDS contracts on Greece on March 19^th. The decision ends months of speculation that Greece’s default might not set off the swaps, a result that could have undermined their role as insurance against debt defaults. However, doubts about the instruments’ viability may continue, since European officials initially shaped the Greek debt restructuring to avoid activating them.

Central Banks leave policies unchanged

The Reserve Banks of Australia and New Zealand, the Banks of Canada and England and the European Central Bank each met last week and announced that there would be no policy changes. The chart to the left shows the relative interest rates for the banks below. They range from a 4.25 percent high for the Reserve Bank of Australia to 0.5 percent for a low at the Bank of England. Of the banks below, only the Bank of England has an asset purchase program although by and large, monetary policy has been easy across the board.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its key monetary policy interest rate at 4.25 percent where it has been since December 2011. The key reason that no change was anticipated is that Governor Glenn Stevens has expressed comfort with the current level of lending rates given the economy. The RBA is struggling to balance a slump in non-mining industries and a resource driven investment boom. Australian manufacturing shrank to 8.6 percent of the economy in the first three months of last year and in the past three years households have saved at the highest rate on average in more than two decades. The RBA recently cut its forecast for gross domestic product growth to 3.5 percent from its earlier estimate of 4.0 percent. That would still be Australia’s strongest gain since 2007.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its official cash rate (OCR) at 2.5 percent. The RBNZ signaled it may leave interest rates at a record low for much of this year as a surging currency eases inflation and diminishes the prospect of higher borrowing costs. The Bank has left the cash rate unchanged since March 2011 to allow the economy to recover after the nation’s deadliest earthquake in 80 years in Christchurch and the surrounding Canterbury province. The recovery has been slow amid concerns that Europe’s debt crisis would spill over into weak global demand for exports, which make up 30 percent of New Zealand’s economy. Unlike counterparts in Australia and elsewhere in Asia, the RBNZ has not cut borrowing costs because earthquake rebuilding is expected to boost growth and stoke inflation in coming years.

Bank of England

The Bank of England left its monetary policy unchanged as widely expected. The bank rate, which has not changed for three years, remains at 0.5 percent and the target for the Bank’s asset purchases financed by central bank money remains at Stg325 billion. By and large the UK economy has outperformed expectations so far this year with the first quarter shaping up relatively well. Certainly in recent weeks, talk of yet more QE once the current round ends in May has become a good deal less vocal. Nonetheless, with two MPC members calling for a Stg75 billion, rather than the Stg50 billion, increase in QE in February, speculation about a shift to a still easier monetary stance at some point is unlikely to dissipate any time soon. The Bank has forecast a choppy recovery this year, with growth likely to be distorted by an extra public holiday to mark Queen Elizabeth's Diamond Jubilee as well as an influx of tourists for the London Olympics.

European Central Bank

The ECB left its key refinance rate at 1.0 percent and the rates on the deposit and marginal lending facilities at 0.25 percent and 1.25 percent respectively. Economic news has hardly been upbeat since February’s meeting. ECB President Mario Draghi left little doubt that unless there was a relapse in the debt crisis, the Bank had now done all it planned to in terms of extraordinary measures and that governments and banks needed to take up the baton. At his press conference, Draghi alluded to upside risks to inflation over the near term but insisted that that over the policy relevant horizon, prices should behave in line with the ECB’s 2.0 percent target. The new inflation forecast of 2.1 percent to 2.7 percent this year is notably stronger than the 1.5 percent to 2.5 percent projected last time.

Bank of Canada

The Bank of Canada kept its main interest rate at 1.0 percent extending the longest pause since the 1950s. The Bank said there is less slack in the economy amid easing global tensions and faster domestic spending that may lift prices. The BoC said that inflation will be greater than it forecast in January because of reduced economic slack and higher oil prices, and that growth will be faster than projected in the January though March period because of unspecified temporary factors. Canada relies on exports for about 33 percent of its output, and higher interest rates could boost a currency that has traded around parity with the U.S. dollar, harming the country’s competitiveness. The bank reiterated that the “persistent strength” of the currency is a drag on the recovery.

Global Stock Market Recap

Europe and the UK

Equities rallied for a third day on Friday. While the indexes were able to recoup some of the losses incurred Monday and Tuesday, they were down on the week. The FTSE and CAC lost 0.4 percent while the DAX was 0.6 percent lower. The SMI however, managed to record a 0.6 percent gain.

Markets in Europe turned in their worst daily performance of 2012 on Tuesday as they extended losses from the previous session. The downturn was sparked by an announcement that China had reduced its growth target for the year to 7.5 percent. Prior expectations had been for 8.0 percent growth. However on Wednesday, markets reversed direction and finished modestly to the upside with investors awaiting the important developments expected before the week ended. Investors were reluctant to take up positions in assets, due to their increased risk. Nervousness over Greece was also a cause of weakness during Tuesday's session.

Asia Pacific

Equities were down for the week as the two day rally at the end of the week failed to compensate for losses incurred earlier. Markets slumped as investors were pessimistic about the outcome in Greece. The negativism was compounded by China's move to lower its growth forecast to 7.5 percent from the previous estimate of 8.0 percent.

Only the Nikkei gained as the yen slumped against its major trading partners. Investors here as elsewhere kept a careful eye on Greek bailout progress. At week’s end, markets were buoyed by data that showed China's inflation eased to a 20-month low in February and Greece announced that it won sufficient support from its private sector creditors to secure its second bailout package from the EU and the IMF. However, even though focus was primarily on Greece, markets were cautiously optimistic over U.S. nonfarm payrolls data due after markets here closed for the week.

The Nikkei briefly topped the 10,000 mark for the first time in seven months as concerns over the Greek debt crisis and its impact on the global economy abated. The yen slid in value against its major counterparts, boosting exporters’ earnings prospects as the fiscal year winds down to a close on March 31^st. Although equities in China and Hong Kong were down for the week, sentiment picked up after February’s consumer price index dropped to a 20-month low of 3.2 percent, sparking speculation that policy makers may signal further monetary easing.

At China's annual Parliamentary session, or the National People's Congress in Beijing, Premier Wen Jiabao lowered the nation's growth target for 2012 to 7.5 percent from the 8.0 percent expansion aimed for in recent years. The target is the lowest since 2004. The annual inflation target was set at 4 percent. The new growth forecasts, although in line with expectations, led to profit taking.

Currencies

The dollar advanced against all of its major counterparts last week, boosted by a positive employment report which dimmed prospects for further Federal Reserve stimulus. In Japan, the yen continued to slide, reaching a 10 month low against the U.S. dollar. Investors bought exporters’ shares on prospects of gains for repatriated profits when the fiscal year ends March 31^st and an improved price advantage on the country’s exports.

At the same time, the euro declined as the Greek situation appeared to be winding down. The euro weakened Friday for the first time in three days against the dollar after Greece said it triggered an option compelling investors to take part in its debt restructuring. Earlier in the week, the euro declined on poor economic data that showed contracting growth. Europe’s gross domestic product contracted 0.3 percent from the third quarter.

Selected currencies — weekly results

Indicator scoreboard

EMU

January retail sales were up 0.3 percent but were down 1.4 percent on the year. Sales of food, drink & tobacco were up 0.6 percent on the month while, excluding fuel, the other sectors on average recorded a 0.5 percent advance. The headline figures would have looked a good deal stronger but for a 1.6 percent monthly slide in German demand. France (2.1 percent) enjoyed a strong month and there were solid gains too in Finland (2.5 percent), Slovenia (5.5 percent) and Luxembourg (2.0 percent). However, sales were down 2.7 percent in Portugal reversing December's 2.3 percent bounce to stand 8.7 percent weaker on the year.

February services PMI reading was 48.8, down from 50.0 in January. February was the fifth month out of the last six in which services have seen activity contract. New business was down for the sixth month running but also at its slowest pace over the same period. Much the same applied to backlogs and weakness in the orders flow saw employment decline, albeit only marginally, for the second consecutive month. Business expectations over the coming year remained very low despite registering a fourth consecutive monthly improvement. Input prices extended their upward trend, but grew at their slowest rate in three months, and prices charged declined for the fifth time in the last six months. In Germany, services continued to expand albeit at a slower rate than in January (revised 52.8 from January 53.7), but the French index was revised slightly lower to 50.0, signaling stagnation last month. However, conditions were especially poor among the peripherals. The Spanish PMI slumped more than 4 points to just 41.9 while Italy saw a 0.7 point drop to 44.1.

Fourth quarter gross domestic product contracted an unrevised 0.3 percent on the quarter and up 0.7 percent when compared with the same quarter a year ago. The quarterly changes in the GDP expenditure components were characterized by weakness right across the board. In particular, a 0.4 percent drop in private consumption more than reversed the third quarter's 0.3 percent advance and gross fixed investment was down 0.7 percent, or more than twice the pace of decline seen previously. At the same time, fiscal tightening was apparent in a second successive 0.2 percent slide in government consumption. Business inventories were unwound further, subtracting another 0.2 percentage points from the bottom line. The slide in total output would have been significantly steeper but for the foreign trade sector. Export volumes fell 0.4 percent from the third quarter — but this followed a 1.4 percent spurt in the previous period and was overshadowed by a 1.2 percent decline in imports. As a result, net exports added 0.3 percentage points to quarterly growth, matching their contributions of both the second and third quarters. Regionally the majority of reporting EMU states saw their national GDP contract. Belgium (down 0.2 percent after down 0.1 percent) fell back into recession, joining Italy (down 0.7 percent after down 0.2 percent), the Netherlands (down 0.7 percent after down 0.4 percent), Portugal (down 1.3 percent after down 0.6 percent) and Slovenia (down 0.7 percent after down 0.4 percent). German output declined 0.2 percent, but this followed a 0.6 percent third quarter gain. The Spanish economy was down 0.3 percent (after only flat). This left just France among the larger states to record an expansion (0.2 percent after 0.3 percent).

Germany

January manufacturing orders plunged 2.7 percent after increasing 1.6 percent in December. On the year orders were down 5.0 percent. The drop was led by capital goods which were down 5.5 percent on the month. Consumer & durables sank 2.9 percent. The only major category registering positive monthly growth was basics where orders more than reversed December's 0.5 percent decline with a 1.9 percent advance. Weakness was concentrated in the overseas markets where demand was off 5.5 percent from December. However, domestic orders were 0.9 percent higher.

January total industrial production rebounded 1.6 percent after sinking 2.6 percent in December. On the year, it was up 1.8 percent. Excluding construction, output was up 1.5 percent and 2.0 percent. Capital goods added 3.5 percent. Consumer durable goods were up a solid 2.3 percent but with nondurables slipping 0.4 percent, production of overall consumer goods edged just 0.1 percent higher. Intermediates slipped 0.2 percent from December but there were decent advances in both energy (1.7 percent) and construction (4.3 percent).

January seasonally adjusted trade surplus climbed to €14.2 billion and followed an unrevised €13.9 billion surplus in December. In unadjusted terms the surplus was €13.1 billion, after €12.9 billion at year end. Following their respective declines in December, both exports and imports performed well, the former up 2.3 percent on the month and the latter 2.4 percent. On the year, exports climbed 9.3 percent within which purchases by other EMU states increased a relatively modest 4.6 percent. Total imports were 6.3 percent above their year ago level.

United Kingdom

January industrial production dropped 0.4 percent on the month and is down 3.8 percent on the year. Manufacturing output edged up 0.1 percent and 0.3 percent on the year. Within manufacturing, six subsectors saw output increase on the month while seven reported declines. The main positive contribution came from pharmaceutical products where production jumped 6.0 percent and alone added 0.4 percentage points to the monthly change in overall manufacturing. There were also strong gains in both computer & electronics (5.1 percent) and basic metals (2.6 percent). By contrast, food, drink & tobacco dropped 2.5 percent. Total industrial production was undermined by a 1.2 percent monthly drop in utilities output as well as a 3.0 percent decline in mining & quarrying and a 3.3 percent drop in oil & gas extraction.

February producer input prices jumped 2.1 percent and were up 7.3 percent on the year. Output prices were up 0.6 percent, their steepest gain since last April, for an annual rate of 4.1 percent. Output prices were underpinned by monthly increases in most areas, notably food (1.8 percent), chemicals & pharmaceuticals (1.0 percent) and other manufactured goods (0.8 percent). Printing & paper saw the only decline (0.4 percent). As a result, the core index was up 0.5 percent on the month and 3.0 percent on the year. Input costs were hit by near-6 percent monthly surge in crude oil prices together with significant increases in home food materials (2.1 percent), imported metals (1.8 percent) and fuel (1.6 percent). The only partial offsets were provided by imported chemicals (0.2 percent), imported parts & equipment (0.1 percent) and other imported materials (0.2 percent).

Asia/Pacific

Japan

Fourth quarter gross domestic product was revised to a contraction of 0.2 percent from the original estimate of 0.6 percent. On an annualized basis, GDP was down 0.7 percent, an improvement over the initially estimated decline of 2.3 percent. On the year, GDP declined 0.6 percent. The upward revision was largely due to stronger domestic investment. Domestic demand was up 0.5 percent. Within domestic demand, private consumption, which accounts for about 60 percent of GDP, was revised up to growth of 0.4 percent from the previous quarter, compared with the initial estimate of a 0.3 percent gain. Private nonresidential investment was up a revised 4.8 percent from the original estimate of 1.9 percent. Gross fixed capital formation was revised upward to 2.5 percent from the original 0.6 percent.

China

February consumer price index eased to an increase of 3.2 percent on the year after jumping 4.5 percent in January. Analysts expected the CPI to increase 3.4 percent. The CPI slipped 0.1 percent on the month. Both the urban and rural CPIs were up 3.2 percent on the year. Food prices eased to 6.2 percent from a 10.5 percent the month before. Clothing prices were up 3.7 percent while household facilities were 3.8 percent higher. Other price categories either eased or varied little from the month before. Tobacco & alcohol prices were up 3.7 percent for a second month.

February producer prices were unchanged on the year after increasing 0.7 percent the month before. Analysts expected an increase of an increase of 0.2 percent. The PPI was up 0.1 percent on the month. Production materials prices slid 0.5 percent after rising 0.3 percent in January while consumer goods prices were up 1.7 percent after increasing 2.1 percent.

Australia

Gross domestic product in the December quarter was up a less than anticipated 0.4 percent on the quarter and up 2.3 percent on the year. The growth for the quarter was driven by a 0.5 percent contribution from final consumption expenditure, 0.3 percent contribution from inventories as well as from net exports. The increases were partially offset by a negative 0.2 percent contribution from both dwelling investment business investment. The industries that drove growth in the December quarter were financial and insurance services and manufacturing, each contributing 0.1 percent to growth in GDP. The terms of trade dropped 4.7 percent for the first time since September 2009. This was reflected in real gross domestic income, which declined 0.6 percent in seasonally adjusted terms for the quarter.

February seasonally adjusted unemployment rate edged up to 5.2 percent from a revised 5.1 percent in January. Employment declined by 15,400 to 11,444,000 in February. Forecasts were for an increase of 5,000. The decrease in employment was driven by a drop in part time employment which was down 15,400 people to 3,380,400. Full time employment was unchanged at 8,063,600. The decline in part time employment was driven by a drop in female part time employment. The number of people unemployed increased by 16,400 people to 632,200. The labour force participation rate slipped 0.1 percentage point to 65.2 percent. The seasonally adjusted underemployment rate was 7.3 percent. Combined with the unemployment rate of 5.2 percent, the latest estimate of total seasonally adjusted labour force under utilization was 12.5 percent in February.

January deficit on goods and services was A$673 million after recording a surplus of A$1,325 million the month before — a turnaround of A$1,998 million on the surplus in December 2011. The outcome reflects a genuine deterioration, although the magnitude of the swing was exaggerated by the Lunar New Year, which this year fell in January. Exports declined 8.2 percent but were up 7.1 percent on the year. Imports slipped 1.1 percent and were up 17.5 percent on the year. Exports of non-rural goods were down 1 percent while rural goods dropped 5 percent. Exports of non-monetary gold slid 56 percent. Services were up 3 percent. Imports of intermediate and other merchandise goods were down 5 percent while capital goods slipped 1 percent. Consumption goods were up 3 percent and non-monetary gold was up 6 percent. Services imports advanced 2 percent.

Americas

Canada

February employment was down 2,800 while the unemployment rate declined to 7.4 percent. The decline in the unemployment rate was attributable to the 0.2 percent point dip in the participation rate to 66.5 percent. The decline in employment was concentrated in part time positions which saw a 12,000 decline. Full time jobs actually increased 9,100. With declines in both private (1,700) and public (13,400) sector payrolls the total headcount loss would have been much larger but for a 12,300 increase in the number of self-employed. Good producing employment was up a very modest 2,200 within which manufacturing advanced 6,800 advance and construction recorded a 14,000 gain. Natural resources also registered positive growth (6,800) but there were declines in both utilities (4,400) and agriculture (5,300). Services shed 20,700 positions but this masked very diverse performances among the major subsectors. Hefty losses in trade (37,400), transport & warehousing (21,900), health care & social assistance (21,700) and public administration (14,700) vied with solid advances in finance, insurance, real estate & leasing (41,200), business, building & other support services (15,800) and education (16,800).

January merchandise trade surplus was C$2.1 billion and followed a larger revised C$2.9 billion excess in December. The surplus reflected a 2.3 percent monthly decline in exports that more than offset a 0.6 percent dip in imports. The bilateral balance with the U.S. widened out slightly, up C$0.2 billion at C$6.1 billion but the improvement here was undermined by a C$0.4 billion deterioration in net exports to the EU. Among the main export product categories, industrial products slumped 11.9 percent on the month, a decline matched by machinery & equipment. The other consumer goods category (down 6.3 percent) also performed poorly. On the upside, energy products saw an 8.7 percent increase from December and autos were up 6.1 percent. Imports saw monthly declines almost across the board, led by energy (5.9 percent), industrial goods & materials (3.8 percent) and forestry products (3.0 percent). Machinery & equipment (down 1.7 percent) struggled as did agriculture & fishing (down 1.5 percent). However, autos enjoyed a good month, rising 7.0 percent.

Bottom line

Several central banks met and by and large left their respective monetary policies unchanged. Economic data were mixed with revised GDP data pointing to contractions in Japan and the Eurozone. PMI indexes also indicated continued softness in Europe.

Both the Bank of Japan and the Federal Reserve hold policy meetings. No change in policy is expected from either. It is a relatively light week for new economic data.

The U.S. moved to daylight savings time on Sunday, March 11^th.

Looking Ahead: March 12 through March 16, 2012

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