Global Markets

Investors focused on central banks last week and what they would do — if anything. The Reserve Bank of Australia, the Bank of England and European Central Bank all maintained the status quo. However, the Bank of Japan delivered stimulus — even more than the markets expected. The BoJ news was counterbalanced by a spate of weaker than expected data, and especially in the United States. While a discernible weakness in global growth was evidenced in the mostly dour PMI reports, Friday’s U.S. employment situation reports stunned. The report was much weaker than anticipated sending global equity markets that were open into a swoon.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its key interest rate at 3.0 percent where it has been since December 2012. Since its March meeting, key economic data releases have been positive. Specifically, February reportedly saw 71,500 jobs created — but much of the gain seems to have been due to sample rotation. January retail sales also beat expectations, but a downward revision to December took off the gloss. The RBA has been looking for more rebalancing of the economy towards non-mining investment given that a slowdown in mining investment had already been occurring. With inflation under control, the Bank continues to have more latitude in deciding policy.

In his statement, governor Glenn Stevens noted that there were indications that previous easing has had an expansionary effect on the economy and further effects can be expected going forward. The demand for credit has remained low. The peak in resource investment is drawing to a close. Global growth is forecast to be a little below average for a time, but the downside risks appear to be reduced. While Europe remains in recession, the United States is experiencing a moderate expansion and growth in China has stabilized at a fairly robust pace.

After the meeting, it was announced that governor Glenn Stevens would remain on after his term expires in September for three more years rather than the full term of seven years.

European Central Bank

The ECB left its benchmark refinance rate at 0.75 percent and the rates on the deposit and marginal lending facilities at zero and 1.5 percent respectively. ECB president Mario Draghi's press conference contained nothing new on either conventional or non-standard monetary policy instruments but his general tone was more dovish than in March. In particular, he stressed downside risks to the official forecast for a gradual economic recovery over the second half of the year and indicated that the monetary authority would be watching the data especially closely over coming weeks. This should be enough to support speculation that policy might be eased further before very long.

One reason why the ECB did not cut rates was its appreciation that the monetary transmission mechanism no longer works properly. Hence, while lending to the private sector for use as collateral to borrow from the ECB has worked well for some member states, it has had no impact upon others. A reduction in official rates would do nothing to help address this situation. Not surprisingly in the wake of the mishandling of the Cyprus crisis, Draghi made much of the need to create a full banking union and also, once again, put fresh pressure on EMU governments to enact structural fiscal reform.

Bank of England

As expected, the monetary policy committee left its Bank Rate at 0.5 percent and its asset purchase program ceiling at £375 billion. In recent weeks disappointing economic news had prompted some speculation about a possible increase in quantitative easing. However, the chances of any such move were probably wiped out by Thursday’s PMI report which pointed to a good March for the service sector and a probable rise in total output in the first quarter. However, the UK economy is stagnant and as such there remains a very significant risk of additional monetary accommodation at some point. The recently announced changes to the BoE's policy remit are unlikely to be of any real consequence until the release of the Bank’s Inflation Report in August when new leadership will be in place. However, financial markets will be paying attention to the real economy data all the more in the interim. For now there is no majority on the nine member Monetary Policy Committee to add to the £375 billion of government bonds it bought between March 2009 and October 2012. Although governor Mervyn King and two other MPC members backed restarting the BoE's asset buying program in February and March, there has been no sign of a softening in the opposition of the other six members, who are more concerned about inflation and sterling weakness.

Bank of Japan

Exceeding expectations, the Bank of Japan announced a plan for reversing chronic deflation and achieving its 2 percent inflation target in two years. The BoJ’s new leadership pledged to do "everything possible" to attain these goals. The Bank left its interest rate target at zero to 0.1 percent. However, the BoJ went further than expected. Its new governor, Haruhiko Kuroda, shocked markets with a radical overhaul of its policymaking — it adopted a new balance sheet target and pledged to double its government bond holdings in two years as it seeks to end nearly two decades of deflation. The scope of the changes drove the yen down and knocked the 10-year bond yield to its lowest in a decade. A number of countries, particularly emerging economies, have already complained about policies which drive currencies lower, threatening a destabilizing race to the bottom.

Mr Kuroda played down concerns his unprecedented burst of monetary stimulus would create asset price bubbles even as it delivered an immediate pay-off in global markets. The BoJ's strategy to reach 2 percent inflation within two years was viewed as a radical gamble to revive the economy. It will buy about ¥7 trillion of bonds per month, equivalent to about 1.4 percent of gross domestic product. By comparison, the U.S. Federal Reserve is buying $85 billion of bonds per month, about 0.6 percent the size of the economy. The BoJ will also increase purchases of exchange traded funds by ¥1 trillion per year and real estate trust funds by ¥30 billion per year.

Kuroda's predecessor, Masaaki Shirakawa, was not due to step down until April 8, but decided to leave office in mid-March so the government could appoint a new governor and two deputies at the same time. A procedural quirk means Kuroda was initially only appointed for the remainder of the Shirakawa's term, and now needs to be voted in again for a full five year term.

A global view of March manufacturing PMIs

Global manufacturing PMIs indicate that the sector is still in the doldrums. The March final manufacturing PMI for the Eurozone weighed in at 46.8, up slightly from its provisional reading but still more than a point below February’s. The downturn reflected deteriorating conditions in all of the region's reporting member states. Production contracted at its fastest pace so far this year, as new orders posted another hefty decline, their 22nd successive monthly drop. Demand was weaker in both the domestic and overseas markets and the ratio of new orders/finished goods inventories slipped to a three-month low. Job losses were reported for the 14th straight month with particularly steep rates of decline in France, Italy, Spain, the Netherlands, Ireland and Greece. The labour market would have worsened significantly more but the relative strength of Austria and Germany.

Elsewhere, China’s manufacturing PMI reading was 51.6 — up from February’s reading of 50.4 and signaling a modest improvement for the fifth consecutive month. Production increased for the fifth month in a row. In the U.S. using the Markit manufacturing PMI, output continued to expand at a solid rate with a reading of 54.6, slightly above February's 54.3. (The U.S. reading was somewhat at odds with the ISM manufacturing index which slipped to 51.3 from 54.2 the month before). In India, the manufacturing PMI dropped to 52 from 54.2 in February — the slowest pace of expansion in 16 months as power outages continued to hamper production. Finally in Japan, the March PMI climbed above the breakeven point of 50 to 50.4 from a contractionary 48.5 in February.

Global Stock Market Recap

Europe and the UK

Equities dropped last week thanks in part to mostly disappointing U.S. data that culminated in Friday’s employment report. Stocks were already lower on Wednesday and Thursday of this holiday shortened week. However, the decline also was due to dour European economic data that showed a deepening contraction in manufacturing. The FTSE lost 2.5 percent, the CAC and DAX dropped 1.8 percent and the SMI was down 2.2 percent. Although the U.S. recovery continues, the employment report served as a reality check showing that the pace of recovery is slower than expected.

The gloomier prospects for the Eurozone came at the same time that a run of soft data from the United States indicated that growth was slower than most thought. Thursday's increase in weekly jobless claims added to the case for a below forecast employment number on Friday. That dampened expectations of a recovery in corporate earnings in coming quarters and weighed on shares in British blue chips which earn around half their revenues in North America or continental Europe. Such stocks have been popular in recent months, with exposure to the United States seen as a bonus as Britain's domestic economy hovers on the brink of its third recession in four years.

Asia Pacific

Most equities declined last week amid a mix of political and economic news. On the political side, North Korea's escalating threats against its neighbors sapped risk appetite. Worries over U.S. growth given the mix of economic results during the week raised concerns about the strength of the recovery there as investors anxiously waited for the U.S. monthly jobs report due later in the global day on Friday. The Nikkei defied the downward trend, with the index climbing briefly above 13,000 for the first time since August 2008 on Friday, bolstered by a weaker yen after the Bank of Japan surprised everyone with aggressive qualitative and quantitative easing measures designed to erase deflation and achieve its inflation target of 2.0 percent in two years. It was not smooth sailing for the Nikkei. The index was down on Monday and Tuesday in advance of the Bank of Japan meeting but managed to gain 3.5 percent for the week and in the process hit its highest level since August 2008.

Australian shares prior to the employment report retreated on worries about the U.S. economic recovery. The All Ordinaries dropped 1.6 percent on the week. Market sentiment remained weak after the Australian Federal Government proposed to impose a 15 percent tax on pension fund earnings greater than A$100,000 (US$104,200) starting July 1, 2014. There was little reaction to the Reserve Bank of Australia’s decision to keep its monetary policy unchanged.

The Kospi extended its decline and was 3.9 percent lower due to foreign selling amid current escalating North Korean risks. After a series of escalating threats, North Korea has moved an intermediate range missile to its east coast, reports said quoting military sources. Meanwhile, South Korea is willing to pull out workers from the joint inter-Korean industrial complex in the North Korean city of Kaesong if it becomes dangerous for the workers.

Currencies

The US dollar declined against other major currencies amid concerns over the health of the US economy after fewer jobs were created in March than expected. The euro climbed to a two week high of $1.3026 while the pound hit its strongest level in six weeks at $1.5327 after just 88,000 new U.S. jobs were created. The employment situation report is considered a key barometer for the strength of the economy. Thursday’s weekly jobless claims for the last week of March raised a red flag when they reached their highest level in four months at 385,000. The dollar declined on bets the employment data will bolster the Fed’s plan to continue buying bonds until there is a substantial improvement in the labor market.

Foreign currency analysts said investors should be encouraged to use the yen as a funding currency instead of the dollar after the Japanese currency staged a sharp slide on Thursday as the Bank of Japan announced radical measures to combat deflation and ease monetary policy further. Traders in the global forex market were taken by surprise by the scale of the BoJ’s policies. At this writing, the yen was at ¥97 Friday afternoon and was trading close to its weakest level in three-and-a-half years, erasing all the gains it made in the wake of the Cyprus bailout after concerns over Europe had increased demand for the haven currency.

Selected currencies — weekly results

Indicator scoreboard

EMU

February joblessness was up a further 33,000 on the month in February, leaving the unemployment rate unchanged at the 12.0 percent level to which the January rate was upwardly revised. The total number of people out of work now stands at 19.071 million, up from 17.296 million a year ago. Jobless rates continued to edge higher in both France (10.8 percent) and Spain (26.3 percent) but held steady in Germany (5.4 percent) and dipped a tick in Italy (11.6 percent). Cyprus saw its rate jump 0.3 percentage points to 14.0 percent while Portugal was unchanged at 17.5 percent and Ireland flat at 14.2 percent.

March flash harmonized index of consumer prices slipped to a 31-month low of 1.7 percent from 1.8 percent in February. However, the limited data provided with the provisional report suggested that the latest deceleration in the headline rate was essentially attributable to weakness in the energy market and that underlying developments were notably less favorable. Hence, while the annual increase in energy prices declined 2.2 percentage points to a 40-month low, non-energy products posted a 0.2 percentage point gain to 1.0 percent while services picked up 0.4 percentage points to 1.9 percent, their fastest pace since the start of last year. Inflation in the food, alcohol & tobacco sector was steady at 2.7 percent.

March composite PMI reading was 46.5, unchanged from its flash estimate but still more than a point short of its February reading and indicative of the steepest contraction in private sector output since last November. Within this, the service sector PMI weighed in at a final 46.4 but 1.5 points below its mid-quarter level. Among the larger four economies, all-sector output growth was especially weak in France (41.9, a 48-month low) and was little better in both Italy (44.9) and Spain (44.8). Germany (50.6) at least kept its head above water but even this was the worst performance so far this year. March saw the largest monthly fall in new orders in services since September 2012 together with further declines in backlogs and employment. However, business expectations climbed to a 2-month high with optimism hitting a 21-month peak in Germany and, somewhat surprisingly, 12-month and 11-month highs in Italy and Spain respectively. Input costs rose at their slowest rate since July 2010 while selling prices fell for the sixteenth consecutive month despite a small increase in Germany.

Germany

February manufacturing orders jumped 2.3 percent after dropping a revised 1.6 percent the month before. Annual workday adjusted orders were flat. The mid-quarter recovery was largely attributable to a 3.5 percent monthly bounce in capital goods that more than reversed January's 2.3 percent drop. However, basics (0.9 percent) and consumer & durable goods (0.1 percent) also advanced. The gain was almost evenly split between the domestic and overseas markets with the former expanding 2.2 percent on the month and the latter up 2.3 percent. Foreign orders were biased in favor of non-EMU countries (2.7 percent) but growth of Eurozone demand (1.6 percent) was also in positive territory. However, compared with February 2012, non-EMU orders were 2.7 percent higher while the EMU bloc recorded a 5.3 percent decline.

Asia/Pacific

Japan

The March Tankan large manufacturers’ index reading was minus 8 after minus 12 in the fourth quarter of 2012. Sentiment among major manufacturers marked the first increase in three quarters and was led by autos, general machinery and lumber/wood products, thanks to a gradual pickup in exports and industrial output. The weaker yen has boosted prospects for an export-led recovery while a sharp rebound in stock markets is supporting financial positions at many firms. Expectations for the June reading improved to minus 1. But capital investment plans by all firms for fiscal 2013 are projected to fall 3.9 percent compared with an estimated increase of 6.0 percent in fiscal 2012 just ended (revised down from 7.1 percent forecast in the December survey). The reading for small manufacturers slipped to minus 19 from minus 18 the quarter before. Non-manufacturers including construction, retailers, leasing and real estate services also improved. Looking three months ahead, manufacturers both big and small expect their sentiment to improve further while non-manufacturers foresee flat to slightly better conditions.

Australia

The February merchandise trade deficit was A$178 million. The deficit represented an improvement over the revised January deficit of A$1.2 billion. Exports were up 3.3 percent from the month before. Non–rural goods were 4 percent higher while rural goods exports jumped 7.0 percent. Net exports of goods under merchanting were unchanged while non–monetary gold dropped 10 percent. Services edged up 1.0 percent. The main components contributing to exports were coal, coke & briquettes, metals and metal ores & minerals. Imports slipped 0.9 percent. Capital goods were down 4.0 percent and non–monetary gold dropped 9.0 percent. Intermediate and other merchandise goods were up A$41 million while consumption goods were up A$3 million and services climbed $15 million.

February retail sales jumped 1.3 percent on the month and 4.6 percent from a year ago. Sales were up 1.2 percent and 3.2 percent on the year in January. The largest increase was food retailing (up 1.1 percent) followed by household goods retailing (up 1.6 percent), other retailing (up 1.6 percent), cafes, restaurants & takeaway food services (up 1.3 percent), department stores (up 1.6 percent) and clothing, footwear & personal accessory retailing (up 1.2 percent). Sales in New South Wales were up 1.4 percent. Sales also increased 1.9 percent in Queensland, 1.1 percent in Victoria, 1.8 percent in Western Australia and 2.6 percent in the Australian Capital Territory. However, sales in South Australia were down 0.4 percent, 1.4 percent lower in the Northern Territory and 0.6 percent lower in Tasmania.

Americas

Canada

March employment dropped 54,500 after a surprisingly robust February. The decline was the steepest decline since February 2009. At the same time, the jobless rate climbed 0.2 percentage points to 7.2 percent, its highest level since November. The drop in headline employment was dominated by a 33,600 decline in full time positions while part time jobs expanded 11,000. The private sector contracted by 85,400 jobs while the public sector saw a 7,700 decline. Overall employment would have looked a good deal worse but for a 38,700 gain in the number of self-employed. The goods producing sector recorded a 29,200 drop led by a disappointingly large 24,200 drop in manufacturing. Construction shrank 9,300 and utilities were off 4,000. Only partial offsets were provided by natural resources (5,600) and agriculture (2,600). Services trimmed their headcount by 25,300 within which accommodation & food was down 24,900 and public administration, 24,300. The only other decline of note was in other services (12,500). Elsewhere, monthly changes were relatively small although double digit gains were seen in both transportation & warehousing (12,100) and in professional, scientific & technical services (10,300).

February trade deficit was C$1.02 billion following a significantly upwardly revised C$0.75 billion shortfall at the start of the year. The latest deterioration was largely attributable to a 0.6 percent monthly drop in exports while imports were up 0.1 percent. The bilateral trade surplus with the U.S. narrowed from C$3.90 billion in January to C$3.40 billion as exports dropped 1.1 percent and imports expanded 0.8 percent. Within the overall monthly contraction in exports metal & non-metallic mineral products slumped 7.0 percent, electronic & electrical equipment & parts fell 5.2 percent and basic and industrial chemical, plastic & rubber were down 4.3 percent. On the bright side, metal ores & non-metallic minerals jumped 7.3 percent, motor vehicle & parts were up 5.6 percent and aircraft and other transportation equipment & parts advanced 2.3 percent. The minimal monthly increase in total imports occurred despite a 19.3 percent tumble in energy products, compounded by an 11.8 percent slide in metal ores & non-metallic minerals and a 15.0 percent reversal in aircraft & other transportation equipment and parts. A 10.3 percent increase in basic and industrial chemical, plastic & rubber products together with a 5.5 percent gain in motor vehicles & parts combined with other smaller increases to ensure a positive headline figure.

Bottom line

Three central banks preferred to keep their respective monetary policies unchanged, but the Bank of Japan startled investors by introducing a more expansive stimulus package than most anticipated. Economic data were mostly disappointing, especially data from the Eurozone. U.S. employment data also disappointed. Perhaps employers were holding back thanks to the looming sequester than lingered throughout the month.

This week is expected to be slower and calmer than last week even with the earnings season beginning in the U.S.  Most data releases revolve around industrial output and merchandise trade. China begins releasing its spate of March economic data including consumer and producer price indexes and international trade.

Looking Ahead: April 8 through April 12, 2013

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