Global Markets

Most equity indexes advanced last week thanks to a combination of mostly positive economic data from China and the U.S. as well as earnings that for the most part beat expectations. There were other events that bolstered investor sentiment as well including a temporary resolution to the U.S. debt ceiling in Congress along with actions taken by the Bank of Japan to further combat long standing deflation.

Flash PMIs show improvement

The new January flash PMI surveys provisionally suggest that the Eurozone real economy performed a little stronger than expected in January. With the flash headline indexes for both manufacturing (47.5) and services (48.3) slightly exceeding the market consensus, the composite output measure climbed 1 point to 48.2, its highest level in 10 months. However, the reading points to another decline in total Eurozone output for the month. Regionally the headline gains were essentially facilitated by better figures out of Germany which looks to have started 2013 on relatively sound footing. However, France appears to be in the midst of its steepest downturn since early 2009. And there remains a sizeable performance gap between the core and the periphery.

Despite the improvement, manufacturing continues to be characterized by the now longstanding combination of falling output, declining new orders and backlogs and shrinking payrolls. The rates of decline may have eased but manufacturing remains in negative territory. Services saw their smallest monthly drop in activity in the last 10 months but new business was down again as were backlogs. Particularly worryingly, the pace at which firms reduced headcount also accelerated, reaching the fastest rate since September. Input price inflation touched a two month low while service sector charges declined for the 14th time in as many months.

There are no composite data available for the U.S. and China. However, in contrast, the U.S. and Chinese January manufacturing PMIs seem robust when compared with those in Europe. China's January flash manufacturing PMI climbed to 51.9 from December's final of 51.5 and from December's flash estimate of 50.9. The index now stands at a 24 month high. This was the fifth consecutive monthly advance. The U.S. flash reading was 56.1, up from December's final of 54.0. The U.S. continues to lead in the strength of growth as measured by this indicator. However, other measures for the U.S., such as the regional fed surveys, indicate that growth is weaker as does the ISM manufacturing survey.

Bank of Japan

As widely expected the Bank of Japan kept its key interest rate range of zero to 0.1 percent. At the same time it left its asset purchase ceiling at ¥101 trillion. The ceiling was raised to that level at monetary policy board's December meeting. Also, under intense pressure from Japan's new government, it adopted a 2.0 percent inflation target. Two board members voted against the inflation target. It expects to hit the inflation target 'at the earliest possible time.' The Bank will report CPI developments to the government regularly.

A government spokesman said he saw no need to revise a law guaranteeing the BoJ's independence, a threat that had been hanging over the Bank unless it adopted bolder monetary policy. BoJ Governor Masaaki Shirakawa said the moves to ease policy in four of the past six months had been extraordinary, but he repeated his warning that the government must do its part to reflate the economy which has suffered four recessions since 2000.

Under the BoJ's current program, the Bank has pledged to supply ¥101 trillion by the end of 2013 by buying assets and issuing loans. From 2014, it will switch to an open ended commitment to buy assets. It will buy ¥13 trillion in assets each month. But accounting for redemptions, the total size of the program will increase by ¥10 trillion in 2014, a balance that will be maintained beyond 2014. The decision to adopt asset buying with no end date had exceeded market expectations, but stocks dropped and, after an initial selloff, the yen increased on investor disappointment that the expanded stimulus would not start until 2014.

The Bank of Japan decision to hold off on fresh monetary stimulus for a year puts pressure on the Abe administration to revive growth through fiscal measures and risks capping losses in the yen that aid export competitiveness. Governor Masaaki Shirakawa, whose term ends in less than 11 weeks, agreed to set the 2 percent inflation target urged by Prime Minister Shinzo Abe, while stopping short of immediate action to achieve it.

Global Stock Market Recap

Europe and the UK

Equities advanced last week, helped in part by a stronger than expected increase in German business sentiment and favorable news regarding bank repayment of long-term refinancing operations (LTROs). Comments from ECB President Mario Draghi also provided a boost to investor sentiment. The markets were largely able to shrug off a bigger than expected decline in British fourth quarter GDP. On the week, the FTSE jumped 2.1 percent, the DAX advanced 2.0 percent, the SMI was up 1.2 percent and the CAC was 1.0 percent higher.

Addressing the World Economic Forum in Davos, Draghi said that 2013 started with economic conditions showing a marked improvement, and financial markets experiencing a "relative tranquility". He said the Eurozone economy is set to start recovering in the second half of this year, though the positive contagion on financial markets has not yet started reflecting on the wider European market. The ECB chief, however, warned that the region's economic troubles are far from over, and much needs to be done to sustain growth momentum as the current stabilization is at very low levels.

The European Central Bank announced on Friday that next week banks will make more than forecast repayments of the three year emergency aid provided to them in late 2011. According to the central bank, 278 financial institutions will return €137.2 billion in 3-year loans at the first opportunity, which is on January 30. Economists had expected repayments in the range of €60 billion to €100 billion. In December 2011, a total 523 banks took €489 billion in three year loans. The ECB had provided three year loans to banks under the LTROs. The bank had carried out the first LTRO in December 2011 and a second one in February 2012, giving out more than €1 trillion in total.

Asia Pacific

Equities here were mixed with five indexes ending the week lower and seven advancing. After sliding the first three days of the week, the Nikkei staged a rally and managed to edge up 0.1 percent on the week. Equities in Japan continue to fluctuate with the value of the yen. When the yen rises in value as it did at the beginning of the week, stocks - especially those that are export oriented - decline. However, when the yen declines as it did on Thursday and Friday, stocks rally. The continued decline in Japanese consumer prices added to the case for further monetary stimulus from the Bank of Japan and cheered investors. Consumer prices excluding fresh food were down 0.2 percent from a year earlier. Investors also cheered positive economic data from China and the U.S. as well as signs of slow recovery in the Eurozone, helping offset worries about another North Korean provocation.

Elsewhere, the Shanghai Composite declined 1.1 percent while the Hang Seng slipped 0.1 percent. While the flash manufacturing PMI boosted investors' morale elsewhere, it did little for those here. Rather, investors took profits after the index hit an eight month high. In Australia, the All Ordinaries gained 1.3 percent for the week on the positive economic news.

South Korea's economy picked up in the fourth quarter as growth in private consumption helped offset weak exports. However, the pace of recovery was slower than expected, putting pressure on the Bank of Korea to ease monetary policy to underpin growth. Gross domestic product grew a seasonally adjusted 0.4 percent on the quarter after edging up 0.1 percent in the previous quarter. That marks the first acceleration in growth in three quarters - an indication that the economy may have bottomed in the third quarter. On the year, fourth-quarter GDP was up 1.5 percent, putting full-year growth at 2 percent - the slowest expansion in three years. South Korea's economy is more exposed than most in Asia to swings in global demand due to its relatively heavy reliance on overseas markets to drive growth. Its exports, which accounted for slightly more than half of GDP, declined in 2012 for the first time in three years as growth weakened in China, the country's largest export destination, and as the European debt crisis undercut the global economy. The Bank of Korea cut interest rate twice last year - in July and October - which brought the base rate to 2.75 percent. It has since kept the policy rate unchanged, but many analysts predict a cut next month or in March.

Currencies

The yen dropped to its weakest level since June 2010 after the December consumer price index excluding fresh food slid 0.2 percent from a year earlier. Earlier in the week, the Bank of Japan announced open-ended asset purchases beginning in 2014 and a 2.0 percent inflation target. The currency dropped for an 11^th straight week, the longest losing streak in data going back to 1971. Initially, the yen gained the most in eight months against the dollar after the Bank of Japan said it will conduct open ended asset purchases starting in January 2014, disappointing investors who expected bolder action sooner. The yen's weakness at the end of the week followed comments from Japanese Vice Finance Minister Takehiko Nakao who said in an interview with The Wall Street Journal Thursday that "Japan is closely monitoring developments in the currency market" and indicated that "appropriate action" would be taken if the Japanese currency resumed its strengthening trend. His comments serve as a stark reminder of the Japanese government's drive to pursue a weaker currency in attempt to resuscitate the economy.

The euro rose to its strongest level against the dollar in 11 months as the European Central Bank said banks will pay back a greater amount of three year loans than analysts estimated, boosting short term borrowing costs. The euro gained for a seventh week

The pound sterling weakened against the U.S. dollar and euro after a preliminary report for fourth quarter GDP showed that the economy contracted and dampened demand for the British currency. Sterling declined to its weakest level in five months against the dollar, as the contraction left the country on the brink of an unprecedented triple dip recession.

Selected currencies - weekly results

Indicator scoreboard

Germany

January ZEW current conditions gained a modest 1.4 points to 7.1. However, the second successive monthly gain still left a level well short of readings seen over much of 2012 and almost 84 points short of the July 2011 high. As such the outcome hardly points to a robust first quarter. However, the increase in expectations was much sharper. Following December's sizeable 22.6 jump, the index advanced a further 24.6 points to 31.5, its best reading since May 2010. January tends to be a seasonally buoyant month for the survey which does not adjust for such factors so it would be dangerous to make too much out of the surge in expectations which are anyway volatile and, if nothing else, have yet to be fulfilled. Still, their recovery from the recent low of minus 25.5 in August has been impressive and will inevitably boost hopes that a probable dip in total output last quarter will prove only temporary.

January Ifo survey pointed to a further modest improvement in business morale this month. At 104.2, the headline sentiment index was up nearly 2 points from its December level, its third increase in a row and its highest mark since June 2012. The latest gain reflected a 0.9 point increase in current conditions to 108.0 and a more significant 2.5 point increase in expectations to 100.5. The latter has now risen a cumulative 7.3 points from its September low. Outside of wholesale, which saw a near-5 point decline, confidence measures gained ground in all of the major sectors. In particular, manufacturing was up a solid 5.5 points and construction 6.4 points. Retail rose just 0.1 points and services advanced 1.3 points.

United Kingdom

December claimant count unemployment was down 12,100 in December. The latest decline was the largest since August and followed a steeper revised 8,900 drop in November to leave joblessness at its lowest level since June 2011. The unemployment rate however remained at 4.8 percent, the fifth consecutive month that it has produced this reading. The ILO measure of joblessness posted its 10th consecutive quarterly decline. Over the three months to November, unemployment on this calculation was down 49,000, enough to reduce the jobless rate to 7.7 percent from 7.8 percent and its lowest level since March 2011. Headline average earnings growth in November was just 1.5 percent, in line with expectations but still 0.3 percentage points less than in October. Moreover, regular pay expanded at just 1.4 percent, also 0.3 percentage points short of its pace at the start of the quarter.

Fourth quarter gross domestic product contracted 0.3 percent on the quarter and was unchanged from a year ago. As usual with the provisional release the ONS provided no details of the key GDP expenditure components. However, in terms of output, services saw no change from the third quarter while industrial production dropped 1.8 percent - the latter essentially accounting for the entire decline in headline GDP. Much of the damage was done by manufacturing where output slid a quarterly 1.5 percent, knocking nearly 0.2 percentage points off GDP. However, mining and quarrying was badly affected by the temporary closure of the Buzzard oil field which was instrumental in a 10.2 percent slump in the sector's production, the steepest fall on record. This also subtracted 0.2 percentage points from quarterly growth. Elsewhere, construction saw a modest 0.3 percent quarterly advance following three successive hefty reversals. The other main negative impact came from government and other services which, at least in part due to the unwinding of the boost provided by the Olympics in the previous period, contracted 0.7 percent from the previous quarter. The largest positive contributions to quarterly growth came from distribution, hotels & catering (0.1 percentage points) and transport, storage & communications (also 0.1 percentage points).

Asia/Pacific

Japan

December merchandise trade deficit was €641.5 billion. Exports dropped 5.8 percent from a year ago while imports climbed 1.9 percent. It was the seventh consecutive drop for exports and a second import increase on the year. Japan's exports to Asia dropped 5.6 percent for the seventh consecutive drop. Exports to China plunged 15.8 percent, also for the seventh drop in a row. Exports to the EU slid 11.1 percent for the 15th straight drop. Even exports to the U.S. were down for the first time in 14 months. They were down 0.8 percent. On a seasonally adjusted basis, the trade deficit was €800.7 billion. The seasonally adjusted balance has been negative since March 2011. On the month, exports were up 2.4 percent while imports were up 1.2 percent. On the year, exports were down 2.5 percent while imports were up 2.9 percent.

December consumer price index was unchanged on the month and down 0.1 percent on the year. Core excluding fresh food only, was down 0.1 percent and was 0.2 percent lower from a year ago. Core excluding both food and energy slipped 0.1 percent on the month and dropped 0.6 percent on the year. Most sub-categories were down on the year. Recreational durable goods were down 2.1 percent after dropping 4.3 percent in November. Furniture & household utensils were down 1.9 percent. However, energy costs jumped 3.4 percent and November's 3.5 percent increase.

Australia

Fourth quarter consumer prices were up 0.2 percent and were up 2.2 percent when compared with the same quarter the previous year. The CPI in the previous quarter had jumped 1.4 percent on the quarter and 2.0 percent on the year. The most significant price increases in the quarter were for domestic holiday travel & accommodation (up 6.2 percent), automotive fuel (up 2.6 percent) and rents (up 0.8 percent). Offsetting the price increases were declines in prices for vegetables (down 5.7 percent), audio, visual & computing equipment (down 4.3 percent) and pharmaceutical products (down 3.5 percent). The trimmed mean was up 0.6 percent on the quarter and was up 2.3 percent from a year ago while the weighted mean was up 0.5 percent and 2.3 percent on the year.

Americas

Canada

November retail sales were up 0.2 percent on the month and 1.4 percent from a year ago. This was the fifth consecutive month of rising retail sales. With prices weak, volume sales were up a healthy 0.8 percent on the month. However, the nominal headline gain reflected monthly increases in only four of the 11 reporting subsectors. Motor vehicles & parts dominated, climbing a solid 1.8 percent (new cars 1.6 percent) and without which purchases would have dropped 0.3 percent. Elsewhere, electronics & appliance stores were up a robust 8.9 percent, most likely boosted by the timing of new product releases, while furniture & furnishing expanded 3.9 percent with sporting goods & hobbies up 1.4 percent. However, the strong gains were almost offset by declines in all of the other major categories. In particular, gasoline was down 2.3 percent, building material & garden equipment slid 1.4 percent, clothing & accessories were off 1.3 percent and general merchandise was 0.6 percent lower.

December consumer prices dropped surprisingly sharp 0.6 percent on the month and were up 0.8 percent on the year. The unexpected weakness of overall prices was matched by the underlying measures, both of which also dropped 0.6 percent from their respective November levels. This left the Bank of Canada's preferred index running at a 1.1 percent annual rate and the excluding food and energy index steady at 0.9 percent. On a seasonally adjusted basis, the total CPI slipped 0.1 percent on the month while both the BoC and ex-food and energy cores edged 0.1 percent firmer. Within the adjusted basket, the main downward pressure stemmed from monthly declines in clothing & footwear (3.6 percent) and transportation (1.2 percent) but there were also sizeable declines in recreation, education & reading (0.8 percent) as well as in household operations, furnishings & equipment (0.4 percent). In addition, there were smaller reversals in food (0.2 percent) and in health and personal care (0.1 percent) while the cost of shelter was unchanged.

Bottom line

The Bank of Japan partially filled market expectations when it adopted a two percent inflation target but disappointed by not adding to its asset purchase plan until 2014. The Bank of Canada as expected left its key rate at 1.0 percent where it has been since September 2010. Economic data indicated an improvement in the global economic picture.

The FOMC holds a two day meeting this week - no policy changes are expected. There is an outpouring of new economic data globally. Investors will be looking to see if the fledgling sprouts of improvement continue. The exception here is Japan where the country is mired in contraction thanks in part to weak global demand for its exports.

Looking Ahead: January 28 through February 1, 2013

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