Global Markets

The week got off to a slow start — investors globally watched and waited to see what actions the Federal Reserve and European Central Bank would take when they announced their policy decisions on Wednesday and Thursday respectively. While the Fed left policy unchanged they did add a key sentence that captured the markets attention — “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” The ECB finally relented and lowered its key interest rate by 25 basis points but took no further steps to stir the Eurozone’s ailing economies.

The manufacturing PMIs

Economic data for the most part disappointed, especially updated purchasing managers’ indexes globally. While those in Europe steadied, they did so at abysmally low rates. And in the Asia Pacific region, the April manufacturing index for Australia slumped 8 points to a reading of just 36.7, and well below the historic average of 49, suggesting that the contraction of the Australian manufacturing sector deepened in April. The index has been below the 50 breakeven point in 27 of the past 31 months. The sector faces a number of challenges, particularly a loss of competitiveness due to the high Australian dollar.

In China, both the HSBC/Markit and the official CFLP reported slower growth albeit with readings barely above 50 and lower than March levels. The HSBC/Markit manufacturing PMI reading was 50.4, down from 51.6 the month before and slightly lower than the flash 50.5. The CFLP PMI reading was 50.6, below the March reading of 50.9. The reverse was true for Japan. The April index increased to 51.1 from 50.4 the month before. India's factory sector, which is mostly geared to domestic demand, lost further momentum in April to 51 from 52 the month before as output growth slipped to its weakest level in more than four years.

In the Eurozone, manufacturing continued to be in the doldrums. The final April PMI reading was just 46.7, slightly below 46.8 in March. Manufacturing was characterized by declining output (steepest yet in 2013), new orders and backlogs. Payrolls contracted for the 15th month in a row and both input costs and output prices fell. With the national PMIs in France (44.4), Germany (48.1), Italy (45.5) and Spain (44.7) all below 50, the signs are that all the larger economies are now struggling. Indeed, every reporting country returned a national PMI below 50 and each posted a multi-month low. The UK however, was a bright spot. Its PMI index registered a reading of 49.8, up from 48.3. And in the U.S. the PMI, as measured by Markit Economics, edged up to 52.1 from 52.

European Central Bank

As expected, the European Central Bank announced its first cut in key interest rates since July of last year. It reduced its key refi rate by 25 basis points to a new record low of 0.50 percent. At the same time, the marginal lending rate was trimmed by 50 basis points to 1.00 percent while the deposit rate, which was already at zero, remained unchanged. As a result, the official interest rate corridor has been narrowed to 100 basis points or only half the 200 basis point spread that the ECB used to regard as optimal.

Today's move comes amid increasing evidence that the Eurozone economy is still mired in recession. Recent disappointing data from Germany have raised doubts about its recovery prospects and compounded worries about the lack of any real momentum in most of the rest of the region. German unemployment hit yet another record high in March (12.1 percent). Moreover, the weakness of the real economy looks to be spilling over into prices with the flash measure of April HICP inflation plunging 0.5 percentage points to 1.2 percent, well short of the ECB's near two percent target.

However, just how much difference shaving another 25 basis points off rates will have when borrowing costs are already so low remains to be seen. In practice, any positive impact is more likely to be psychological — at least it suggests that the ECB is prepared to take action to stimulate growth. But with ECB President Mario Draghi having warned on more than one occasion about disruptions to the monetary transmission mechanism what benefits there are from the cut may well not be felt in the countries where they are most needed. The monetary transmission mechanism is the process through which monetary policy decisions affect the economy in general and the price level in particular. The mechanism is characterized by variable and uncertain time lags making it difficult to predict the precise effect of policy actions.

For those hoping for some major fresh initiatives concerning unconventional monetary measures, Draghi's post-meeting press conference was something of a disappointment. However, he did indicate that the monetary policy would remain accommodative for as long as needed which, while hardly explicit forward guidance along the lines of the Fed, should at least provide some reassurance that low borrowing costs are here to stay for some time.

Reserve Bank of India

As expected the Reserve Bank of India elected to cut the key policy repo rate by an additional 25 basis points to 7.25 percent. The reverse repo rate and the marginal facility rate, which together determine the official interest rate corridor, were lowered by the same amount and now stand at 6.25 percent and 8.25 percent respectively. However, in contrast to some speculation, the cash reserve ratio (CRR) was held at 4.0 percent. This is the third cut in the repo rate this year and follows evidence of a surprisingly sharp slowdown in Indian economic activity. Some had been hoping for a more aggressive move. However, the RBI signaled that scope for additional monetary easing is now quite limited with CPI inflation running at an elevated 10.4 percent in March and the current account deficit presently around 6.7 percent of GDP. The latter factor in particular was identified as a major constraint on policy. In its new 2013-2014 Monetary Policy Statement, the RBI said it expects the economy to expand 5.7 percent in the fiscal year just begun and will seek to reduce wholesale price inflation (6.0 percent in March) to 5.0 percent by March 2014.

Global Stock Market Recap

Europe and the UK

Equities rallied for a second consecutive week. The better than anticipated U.S. employment report spurred on investors already heartened by the central bank stimulus that has supported equities over other assets. The day before, stocks got relatively little boost from the ECB’s interest rate cut to 0.5 percent. The U.S. employment data overshadowed the news that the Eurozone reduced its economic outlook for 2013. The FTSE was up 1.5 percent, the CAC gained 3.4 percent, the DAX advanced 1.5 percent and the SMI was 1.2 percent higher on the week.

Elsewhere, the MIB shot up 9.3 percent after a new Italian government was formed. Prime Minister Enrico Letta and his new cabinet were sworn in over the weekend following two months of political gridlock. Enrico Letta, Deputy Secretary of the center-left Democratic Party, was sworn in on Sunday as the head of a broad coalition government that includes the Democratic Party's main adversary, former Prime Minister Silvio Berlusconi's right-wing group. The cost of borrowing of 10-year Italian bonds declined to the lowest since late 2010 at an auction on Monday.

EU Spring forecasts

The European Commission said Friday that the Eurozone will contract more than expected in 2013 and budget deficits will decline more slowly. France, Spain, Italy and the Netherlands — four of the five largest Eurozone economies — will be in recession through 2013 with only Germany managing to eke out growth. The Commission revised down its projections from last February of a 0.3 percent recession and 1.4 percent growth respectively and said the Eurozone economy would contract 0.4 percent this year and grow 1.2 percent in 2014. The expectations underline a shift of focus from sharp fiscal consolidation in the first years of the sovereign debt crisis to economic growth. The only positive change against the February forecasts was Greece, where the economy is now seen contracting 4.2 percent this year, rather than the previous 4.4 percent. The Commission also said that the recovery of economic activity is expected to be too slow to reduce Eurozone joblessness which is expected to be at a record high of 12.2 percent.

Asia Pacific

Unlike markets in Europe, equities here were mixed last week as investors first awaited news from the Federal Reserve, European Central Bank and the Reserve Bank of India and then for the U.S. employment report. Traders were wary after a string of mediocre economic reports from the U.S. The Nikkei was down 1.4 percent on the week thanks in part to profit taking and a stronger yen that made exporters less appetizing. March inflation data showed that the Bank of Japan has a formidable task in front of it as it tries to reverse deflation and reach its 2.0 percent inflation target. The CPI excluding fresh food dropped 0.5 percent on the year.

The Shanghai Composite rebounded after a three day holiday to gain 1.3 percent on the week while the Hang Seng was 2.0 percent higher. The Sensex managed to post a 1.5 percent increase for the week even though equities dropped Friday after the Reserve Bank of Index cut its key repo rate by 25 basis points but left the cash reserve ratio unchanged, citing upside risks to inflation and a high current account deficit. However, RBI governor Subbarao said the central bank will endeavor to actively manage liquidity to reinforce monetary transmission.

Currencies

The U.S. dollar retreated against its major counterparts with the exception of the yen for the week. However, the dollar rose sharply against the Japanese yen on Friday after the better than anticipated employment report. The euro slid against the dollar following the jobs data but later clawed back its losses after separate data showed that the U.S. services sector grew at a slower pace in April, maintaining expectations that the Federal Reserve would continue to ease monetary policy to stimulate the economy.

The dollar had made gains earlier in the week after the Federal Reserve said it would continue buying bonds to stimulate growth for as long as necessary after the economy grew by less than expected in the first quarter. However, the euro declined against the dollar after ECB President Mario Draghi hinted at the possibility of a further rate cut and negative deposit rates in the future.

The pound sterling gained after the April services sector grew at its fastest rate in eight months according to the CIPS/PMI index. Despite losing ground after the U.S. jobs report, sterling touched $1.56 against the dollar, remaining close to its highest level in three months.

Selected currencies — weekly results

Indicator scoreboard

EMU

April EU Commission economic sentiment slid a disappointing 1.5 points to 88.6. This was its weakest reading since November last year. Consumer confidence (minus 22.3) was unrevised from its flash estimate and was 1.2 points stronger than in March. However, industrial confidence dropped a further 1.5 points to minus 13.8, its worst level since December, and there were declines in retail (1 point to minus 18.1), services (4.1 points to minus 11.1) and construction (1.4 points to minus 31.8). The broad based decline at the sector level was in large part reflected regionally across the larger EMU members and the national ESI was down 2.3 points in Germany, 2 points in France and 1.9 points in Italy. Within this group only Spain (up 0.9 points) broke the pattern but even here the improvement was too modest to be of any real consequence.

April flash harmonized index of consumer prices was up 1.2 percent and down 0.5 percentage points from the final March reading. This was the lowest level in 37 months. The deceleration was in part a function of a weaker energy sector where prices this month were down 0.4 percent on the year after a 1.7 percent increase in March. However, there were clear signs of an easing in underlying price pressures. Annual inflation in the non-energy manufactured products area declined from 1.0 percent to 0.8 percent while the comparable rate in services declined a hefty 0.7 percentage points to a record low of 1.1 percent. Within the limited breakdown available, the only main product group to see any acceleration was food, alcohol & tobacco (2.9 percent after 2.7 percent).

March unemployment increased a further 62,000 on the month to a new record high of 19.211 million. As a result, the unemployment rate edged up to 12.1 percent and so also reached a new historical peak. Among the larger EMU states news was mixed with national unemployment rates steady in both Germany (5.4 percent) and Italy (11.5 percent) but up a notch in France (11.0 percent) and 0.2 percentage points higher in Spain (26.7 percent).

Germany

April joblessness was up 4,000 to 2.938 million. The increase followed a minimally smaller revised 12,000 increase in March and, once again, left the unemployment rate steady at 6.9 percent. The April data mean that joblessness (on this particular measure) has risen only 3,000 since the start of the year. Although this compares poorly with the declines posted during 2012, the signs are that at worst the labour market is probably just moving sideways. Most other EMU states would be more than happy to be in such a situation. Indeed, the more tardy ILO figures showed employment up a further 28,000 in March, its fifth successive monthly rise. Vacancies were down 10,000, compounding a 5,000 drop at the end of last quarter and suggestive of a potential easing in the demand for labor.

March retail sales declined 0.3 percent following a 0.6 percent drop in mid-quarter and left purchases an unadjusted 2.8 percent lower on the year. The March contraction was the third drop in the last four months. However, the sum of these came nowhere close to offsetting what is now estimated to be a 3.1 percent surge in January. As a result, sales in the first quarter were still a healthy 1.6 percent above the fourth quarter when they slipped 0.6 percent.

France

March household spending on manufactured goods jumped 1.2 percent on the month after a shallower revised 0.5 percent drop in February and left purchases 0.6 percent below their year ago level. Autos followed a 2.7 percent monthly bounce in mid-quarter with a 0.9 percent drop and total durable goods were down 0.5 percent. However, household goods saw a 1.2 percent gain and the other products category was up 1.2 percent. Textiles remained on a downward slope, declining 2.9 percent to compound February's 4.8 percent fall and have now contracted in five of the last six months. The other main areas of strength were energy (2.8 percent) and food (2.6 percent). Spending on overall goods was up 1.3 percent from February but after a poor start to the year, first quarter purchases were still 0.4 percent below the previous period when they dipped 0.1 percent.

March producer prices were unchanged on the month and 1.9 percent higher on the year. The latest figures followed a slightly stronger revised 0.5 percent monthly jump in February. The headline data were boosted by a 0.9 percent monthly increase in the cost of energy but this was essentially offset by a 3.9 percent decline in coking & refining product charges. Food & drink was up 0.4 percent and transport materials edged up 0.1 percent but there were small declines in electrical equipment & technology (0.2 percent) and in the other products category (0.1 percent).

Asia/Pacific

Japan

March household spending jumped 5.2 percent from a year ago and well above expectations of a 1.6 percent gain. This was the third consecutive month that spending has risen. Most sub-categories were up with the exception of education (down 7.6 percent), fuel, light & water charges (down 4.3 percent and furniture & household utensils (down 3.7 percent). Spending on housing jumped 23.7 percent while transportation & communication was 11.8 percent higher. Clothing & footwear was up 9.3 percent from a year ago.

March retail sales slipped 0.3 percent from a year ago. Expectations were for a 0.5 percent increase. Motor vehicles dropped 14.5 percent from a year earlier and its seventh consecutive decline. Machinery & equipment slid 2.1 percent. However, general merchandise increased 4.2 percent from a year ago while fabrics, apparel & accessories were up 5.8 percent. Drug & toiletry stores registered a 5.0 percent gain. Fuel edged up 0.3 percent.

March unemployment rate was 4.1 percent, down from 4.3 percent in February. The number of unemployed persons was 2.8 percent, a decrease of 270,000 from a year ago. Employment increased by 310,000 on the year to 62.46 million. The labour force participation rate was 58.9 percent while the employment rate was 56.3 percent.

March industrial production edged up 0.2 percent from the previous month and was down 6.1 percent on the year. Analysts expected an increase of 0.4 percent from a month ago. However, this was the fourth consecutive month in which production increased. Among the industries that increased were chemicals (excluding drugs) which were up 5.3 percent, electronic parts & devices which were up 4.7 percent and information & communication electronics equipment which was up 7.9 percent. Commodities that increased included active matrix LCDs (Liquid Crystal Devices) middle and small, parts & accessories of steam turbines and steel bridges. According to METI’s survey of production forecast in manufacturing, production is expected to increase 0.8 percent in April and to decline 0.3 percent in May.

Australia

March quarter producer prices for final demand excluding exports were up 0.3 percent on the quarter and 1.6 percent from the same quarter a year ago. Prices received for building construction were up 0.8 percent on the quarter, other agriculture jumped 5.1 percent and petroleum refining & petroleum fuel manufacturing was 4.2 percent higher. The gains were partially offset by declines in the prices received for pharmaceutical and medicinal product manufacturing (down 4.8 percent). Intermediate demand prices were unchanged on the quarter and up 1.5 percent on the year. Prices received for oil & gas extraction were up 4.9 percent, motor vehicle & motor vehicle part manufacturing gained 2.5 percent and other agriculture was 3.7 percent higher. However, prices received for printing &printing support services retreated 4.9 percent and electrical equipment manufacturing slid 3.9 percent. Preliminary demand prices were up 0.2 percent on the quarter and 1.5 percent on the year. Prices received for oil & gas extraction gained 4.9 percent, metal ore mining were up 3.6 percent and other agriculture were up 4.5 percent. Partly offsetting the increases were declines in the prices received for sugar & confectionery manufacturing (down 9.1 percent), printing & printing support services (down 4.4 percent) and coal mining (down 2.6 percent). Now that the PPI report is released after the consumer price report this report is of limited interest.

Americas

Canada

March industrial product prices edged up 0.1 percent on the month and were up 0.9 percent on the year. The third consecutive monthly increase was broad based with 15 of 21 reporting categories showing higher prices. Motor vehicles & transport equipment (0.9 percent) had the largest monthly impact but there were also strong gains in pulp & paper (1.0 percent) and wood products (0.9 percent). The exchange rate similarly had a positive impact and without this effect the IPPI would have fallen 0.3 percent on the month. On the downside, the headline index was restricted by a 1.8 percent monthly decline in the cost of petroleum & coal products, without which it would have risen a monthly 0.3 percent. Raw material & fuel costs were down 1.7 percent on the month. The decline was primarily due to a 1.9 percent drop in mineral fuels and without this effect the RMPI would have declined a smaller 1.3 percent. Elsewhere within the basket, non-ferrous metals dropped 2.7 percent and animal & animal related products were off 1.7 percent.

February monthly gross domestic product was up 0.3 percent and was 1.7 percent higher than a year ago. The mid-quarter expansion came largely from a surprisingly robust performance by the goods producing sector where output grew a solid 0.9 percent on the month after a 0.3 percent advance last time. Within this, manufacturing followed January's 0.6 percent increase with an even more robust 0.8 percent gain. Elsewhere, utilities expanded 0.4 percent, construction 0.2 percent and agriculture, forestry & fishing 0.5 percent. There was also a 2.2 percent surge in the erratic mining, quarrying and oil & gas extraction sub-sector. By contrast, service sector output was up just 0.1 percent from the start of the year within which only arts, entertainment & recreation (3.3 percent) and transport & warehousing (0.5 percent) registered any real strength. Most other categories recorded relatively small monthly changes, the main exceptions being accommodation and food & management which saw declines of 1.0 percent and 0.5 percent respectively.

March merchandise trade balance returned a seasonally adjusted surplus of C$24 million following a larger revised C$1.25 billion shortfall in February. This was the first monthly surplus since March last year. The sharp improvement reflected a 5.1 percent monthly increase in exports that more than offset a 1.7 percent advance in imports. Annual growth of both series now stands at 2.3 percent. All of the main export categories made headway from February, led by a 13.2 percent jump in metal ores & non-metallic minerals. Energy products were up 3.9 percent, basic & industrial chemical, plastic & rubber products were up 4.1 percent and industrial machinery, equipment & parts 4.6 percent. There were also solid gains in electronic & electrical equipment (8.4 percent) and motor vehicles & parts (6.1 percent) as well as in aircraft and other transportation equipment & parts (13.4 percent). Imports were boosted by a 15.1 percent monthly increase in metal ores & non-metallic minerals, a 7.5 percent bounce in energy products and a 5.8 percent gain in metal & non-metallic mineral products. Aircraft & other transportation equipment & parts were also up 15.8 percent.

Bottom line

Both the European Central Bank and the Reserve Bank of India cut their policy interest rates last week — and both disappointed investors because they did not do more. Most economic data disappointed globally with the exception of the U.S. employment situation report.

The Reserve Bank of Australia and the Bank of England meet. Economic data mainly consists of industrial production and merchandise trade data for March. Services PMIs in Europe will be watched to see if any part of the European economy is growing. Key labour force reports will be closely watched in Australia and Canada.

Looking Ahead: May 6 through May 10, 2013

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