Global Markets

Equities declined for the most part in the holiday shortened first week of the new month and quarter. Investors were upbeat on Monday thanks to some favorable data from China over the weekend. However, investors were upset by the FOMC minutes Tuesday that gave no indication that QE3 was on the near horizon. At the same time, the European Central Bank did not mention any need at all for further monetary stimulus. While investors welcome indications that U.S. growth firmed in the first quarter, they are reluctant to let go of the stimulus that has played a key role in the bull market. But the corollary of the Fed’s perceived reticence is that the economy may be in less need of support. This then puts more emphasis on economic data not to disappoint.

Tensions in the Eurozone were revved up as yields bounced up for both Spanish and Italian debt on Wednesday. However, markets focused on Spain this time. Though the country is in recession and unemployment is soaring over 20 percent, markets are looking for still tighter budgetary constraints to curb debt.

In the holiday shortened week (ending Thursday), most indexes followed here were lower. Losses ranged from 0.2 percent (KLCI) to 4.8 percent (FTSE MIB). Advances ranged from 0.2 percent (Hang Seng) to 1.7 percent (Shanghai Composite).

Global Stock Market Recap

Europe and the UK

Although equities managed to stage a late rally in pre-holiday trading Thursday, mid-week losses were too large to overcome. Indexes were down across the board for the week. The FTSE was down 0.8 percent, the SMI lost 1.2 percent, the DAX dropped 2.5 percent and the CAC was 3.0 percent lower for the week.

Reasons for the declines were virtually the same as elsewhere in global markets — the FOMC minutes on Tuesday that dampened hopes for additional stimulus in the U.S. and a disappointing bond auction in Spain. The European Central Bank kept its policy interest rates unchanged for the fourth month in a row on Wednesday. Unlike the U.S., the region probably entered a recession in the first quarter, given the disappointing economic data thus far. Concerns over the sovereign debt crisis continue to linger.

Fears over Spain were reignited after the government said the country's debt levels would jump to their highest since at least 1990 as the economy sinks into recession and borrowing costs rise. Sentiment surrounding banks had deteriorated since concerns about Spain flared up again in February, when it shocked markets by saying it had missed its 2011 budget deficit target and a few days later set itself a softer goal for 2012. Those worries are reflected in the debt market where yields on 10-year Spanish government bonds crept higher on Tuesday.

Bank of England

As expected, the Bank of England monetary policy committee left its policy stance unchanged. The outcome means that its Bank Rate stays at 0.5 percent and the asset purchase program ceiling remains at Stg325 billion. There had been some limited talk that the QE bar might be raised in the wake of February's and March's split votes. However, there is much more speculation about a new round of QE in May once the existing ceiling has been reached. Recent economic news has been mixed with typically quite bullish business surveys contrasting with softer than expected data on retail sales, industrial output and the housing market. The MPC has, in the past, made its policy moves in the months when the quarterly Inflation Report is published. The next report will be published on May 16^th.

European Central Bank

As anticipated, the European Central Bank governing council left its key interest rates on hold. Accordingly, the benchmark refi rate remains at 1.0 percent and the rates on the deposit and marginal lending facilities at 0.25 percent and 1.75 percent respectively.

The post announcement press conference similarly contained no significant surprises. In terms of economic developments, ECB President Mario Draghi essentially reiterated what he said last time, pointing to stabilization in activity and reiterating that inflation, which is currently above target, will fall back over the policy relevant horizon. In fact, if anything, he sounded a little more hawkish on inflation prospects — but not to the extent that might impact policy any time soon.

There was no indication that the ECB is about to pull the plug on its emergency measures. According to Draghi, any talk of an exit strategy in the Eurozone is "premature" despite upside risks to inflation. This may not go down so well with the more hawkish governing council members but it will be a relief to financial markets where serious doubts linger about the durability of any recovery in Eurozone GDP. Germany's Bundesbank has led a push by central bankers from the Eurozone’s core for the Bank to begin preparing an exit from crisis measures that have seen it loosen the rules for tapping ECB funding operations. The ECB has pumped over €1 trillion into the financial system with twin three year funding operations, or LTROs, to head off a credit crunch that late last year risked exacerbating the crisis and jeopardizing the euro.

Asia Pacific

Equities were mostly lower in the holiday shortened week. Markets were pressured by Chinese banks struggling in Hong Kong. European sovereign debt concerns resurfaced after a dismal Spanish bond auction Wednesday. Six indexes followed here advanced on the week to Thursday while seven declined. Gains ranged from 0.2 percent for the Hang Seng to 1.7 percent for the Shanghai Composite which was closed for holidays the first three days of the week. The Taiex dropped 2.7 percent while the Nikkei was 3.1 percent lower. Trading volumes remained thin before the Easter holiday.

Investors were disappointed by the Bank of Japan’s first quarter Tankan on Monday. The results showed that businesses are still concerned about the yen's relative strength and are cautious about their business outlook amid uncertainty over global growth and concern about the Chinese economy. BoJ officials believe that corporate executives still regard the current yen exchange rate as too high to ensure profitable exports, even after the yen has depreciated in recent weeks.

Reserve Bank of Australia

As expected, the RBA maintained its key policy interest rate of 4.25 percent where it has been since December 2011. Growth has been sluggish with fourth quarter growth edging up just 0.2 percent on the quarter — the slowest since the June quarter of 2009. And private final demand edged down 0.1 percent for the weakest result since the March 2010 quarter.

The economy is currently multispeed. While the states in which mining is a factor are growing rapidly, those with no exposure to mining are barely growing. A negative factor is the high value of the Australian dollar. Other negatives include a tightening of fiscal policy and a cautious consumer. In its statement, the RBA said that it has room to cut rates should demand weaken materially. The RBA said that output growth is somewhat lower than previous estimates. The announcement indicated that the next rate reduction hinges on an April 24^th report on first quarter inflation. Recent data show that the economy is probably growing slower than the RBA forecast. The RBA has an inflation target range of 2 to 3 percent.

In previous statements the trigger for a rate cut was deterioration in global conditions. With one exception, this concern is appropriately easing. That exception is around China where the outlook for growth is now described as "more measured and sustainable" rather than "robust" which had been used in the past. World growth continues to be described as below trend with Europe recording very weak outcomes and the U.S. only showing "a moderate expansion".

Currencies

The dollar was up against its major counterparts last week with the exception of the Canadian dollar and yen. The dollar rose as signs the U.S. economy is improving added to speculation the Federal Reserve will refrain from further measures to cap borrowing costs. The euro was pummeled once again by the sovereign debt woes in Europe — this time it was Spain. The currency weakened against the dollar after demand declined at a Spanish bond auction, adding to concerns that the region is struggling to overcome its sovereign debt crisis. The euro dropped to a three week low against the yen after the European Central Bank kept its main refinancing rate at a record low 1 percent.

Selected currencies — weekly results

Indicator scoreboard

EMU

March final manufacturing PMI declined to 47.7, down from 49 in February. Manufacturing output fell across the region for the first time in three months as new orders dropped at an accelerated rate. Export orders dropped for the ninth consecutive month while the second consecutive decline in headcount was disturbingly widespread and more marked than any other time during the last two years. Input prices rose at their sharpest rate in nine months but, as testimony to the sluggishness of domestic demand, prices charged rose only marginally. Germany was the major surprise on the downside with its PMI sliding back below the 50 mark to 48.4, a 3-month low and conditions in France were no better with the index there falling an unrevised 2.4 points to just 47.6. Even more worryingly, Spain saw a faster pace of deterioration (44.5 after 45.0 in February) while in Italy conditions worsened at much the same pace as last time (47.9 after 47.8).

March services PMI improved to a reading of 49.2, but still below the key 50 growth threshold. New orders declined for the seventh month in a row and at a slightly faster pace than in February. Net job losses were reported for the third straight month, notably in Italy and Spain. Input prices continued to rise (3-month high) but weak demand again kept a lid on service sector charges. However, business expectations were up for the fifth month running and at their highest level in eight months. Regionally, France recorded just a 0.1 point gain to 50.1 while Germany posted a 0.7 point decline to 52.1. In Spain the index was up more than 4 points but at 46.3, remained uncomfortably short of the growth mark, and Italy edged just 0.2 points higher to a still low 44.3. The composite output index was 49.1, slightly lower than the February level and a 3-month low. For the first quarter, output averaged 49.6, up 2.4 points from the fourth quarter of 2011 but still indicative of at best, only stagnation in the Eurozone real GDP.

February joblessness edged up to 10.8 percent from 10.7 percent the month before and the eighth consecutive monthly increase. The number of people out of work increased a further 162,000 and now stands at 17.134 million. National unemployment rates continue to reflect sharply diverging economic fortunes among the member states. While the German rate posted a fifth successive reading of just 5.7 percent, Spain saw another 0.3 percentage point jump to a frighteningly high 23.6 percent. The French rate also held steady at 10.0 percent but in Italy joblessness was up another couple of ticks at 9.3 percent. Portugal similarly registered a 0.2 percentage point increase to 15.0 percent.

February producer prices excluding construction were up 0.6 percent and 3.6 percent on the year. Energy costs once gain did much of the damage, up a further 1.2 percent from their January level. Excluding energy the PPI would have risen a more modest, albeit still quite firm, 0.4 percent on the month and 1.7 percent on the year. Intermediates were 0.6 percent higher while consumer goods were up 0.3 percent increase and capital goods were 0.2 percent higher.

Germany

February manufacturing orders were up 0.3 percent after dropping 1.8 percent in January. On the year, orders dropped 6.1 percent after declining 6.0 percent in January. The modest February advance in total orders was built upon a 1.3 percent monthly gain in capital goods which proved more than enough to offset declines in both basics (down 0.3 percent) and consumer & durable goods (down 3.8 percent). However, a 1.7 percent increase in orders from overseas contrasted with a 1.4 percent decline in the domestic market where basics were down 4.6 percent. Orders from other Eurozone countries dropped 3.2 percent from January leaving their 2-month moving average growth rate at a depressing 4.6 percent lower. Outside of the EMU bloc, orders were up 5.0 percent on the month after a 7.6 percent slump last time.

February industrial production was down 1.3 percent and was down 1.0 percent on the year. Excluding construction, output was down 0.2 percent and inched up 0.1 percent on the year. February's decline was largely attributable to a 2.1 percent monthly decline in the consumer goods sector although intermediates were down 0.3 percent. Capital goods output was up a modest 0.3 percent while energy grew 1.6 percent. However, construction eclipsed January's 4.7 percent gain, slumping fully 17.1 percent. For the sector as a whole, average January/February production was 1.2 percent below the fourth quarter mean when it dropped 1.8 percent.

United Kingdom

February industrial production was up 0.4 percent and was 2.3 percent lower on the year. Manufacturing dropped 1.0 percent and was down 1.4 percent on the year. Output was lower on the month in nine of the thirteen reporting sub sectors. Transport equipment (down 2.0 percent) and rubber & plastics (down 2.7 percent) were especially weak while the most significant increase was posted by electrical equipment industries (4.6 percent). Among the more erratic industries, mining & quarrying output jumped 3.8 percent (oil & gas 4.6 percent) and energy supply was up 6.1 percent following cooler weather. Water & waste management saw a 1.3 percent increase from January.

Asia/Pacific

Japan

First quarter Tankan results were weaker than expected. Sentiment among large manufacturers was unchanged at minus 4. Analysts expected it to improve to a reading of minus 1 because of the easing fears about Europe and the continuing U.S. recovery. They also pointed to the yen’s decline against the dollar along with the equity rallies worldwide. The diffusion index is calculated by subtracting the percentage of companies reporting deteriorating business conditions from the percentage of those reporting an improvement. A positive figure indicates the majority of firms see better business conditions. The diffusion index for small manufacturers slipped to minus 10 from minus 8 the quarter before. It was expected to remain unchanged. Large nonmanufacturers reading improved slightly to plus 5 from plus 4 in the fourth quarter. Small nonmanufacturers remained unchanged for a second quarter. Capital investment plans in fiscal 2012 for large firms were unchanged. However, small firms said they expect CAPEX to decline 12.9 percent in the new fiscal year.

Australia

February retail sales crept up 0.2 percent about as expected and were up 2.0 percent from a year ago. The largest contributor to the monthly increase was other retailing (1.8 percent), followed by food retailing (0.3 percent) and department stores (0.7 percent). However, clothing, footwear & personal accessory retailing slid 1.4 percent, cafes, restaurants & takeaway food services declined 0.7 percent and household goods retailing was 0.5 percent lower. Predictably, the states with the largest increases were those that are growth the fastest including Queensland, Western Australia and South Australia.

February trade deficit narrowed to A$480 million from A$971 million in January. Analysts expected a surplus of A$1.1 billion. Exports slid 2.1 percent on the month but were up 5.8 percent on the year while imports dropped 3.9 percent on the month and were up 6.0 percent from a year ago. Exports were down across the board. Non-rural goods exports dropped 3.0 percent while rural goods exports declined 9.0 percent. Non-monetary gold was 43 percent higher. Services were down 3 percent. Imports of consumption goods were down 7 percent while intermediate and other merchandise goods slid 3 percent and capital goods were down 5 percent.  Non-monetary gold was 2 percent higher. Services slipped 1 percent.

Americas

Canada

March employment jumped 82,300 while the unemployment rate declined to 7.2 percent from 7.4 percent in February. It was full time positions (up 70,000) that dominated the headline gain with additions to part time headcount (12,400) lagging well behind. Private sector payrolls expanded 42,600 while the public sector advanced 20,900. The number of self-employed grew 18,800. The goods producing sector added a net 24,900 new positions, including an 11,800 advance in manufacturing and a near-9,000 increase in construction. Natural resources were up 6,100 but agriculture saw a 3,200 decline. Meantime, service sector employment increased 57,500. The gain here was dominated by health care & social assistance (31,500) and information, culture & recreation (28,300). Transportation & warehousing (10,700) also saw a moderate rise as did public administration (15,000). However, trade was down 10,800 and educational services lost 24,600 jobs.

Bottom line

The Reserve Bank of Australia, Bank of England and European Central Bank met and left their respective monetary policies unchanged. Economic data indicated slowing growth in Japan, Australia and Europe.

Investors will react to Friday’s U.S. employment report on Monday — most equity markets were closed on Friday. The Bank of Japan meets on Monday and Tuesday — no policy change is anticipated. China releases its major economic data during the week. Elsewhere, industrial production and merchandise trade dominate the data flow.

Looking Ahead: April 9 through April 13, 2012

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