Global Markets

Equities advanced but the rally that has taken many indexes to recovery highs showed signs of fatigue as the week wound down. However, the majority of indexes followed here were up on the week with the exception of the Kospi and Bolsa. In the Asia Pacific region, both the Reserve Bank of Australia and Bank of Korea lowered their key interest rates and joined their counterparts in the U.S., Europe and Japan in easing monetary policy.

Currencies in Japan, Australia and New Zealand captured traders’ attention. In Japan, after hovering below the 100 yen to the U.S. dollar, the currency weakened and crossed that barrier — equities there soared. In Australia, the Reserve Bank of Australia lowered its key interest rate in part to offset a painfully high Australian dollar. And in New Zealand, the Reserve Bank of New Zealand admitted to intervention in the foreign exchange market to lower the New Zealand dollar or Kiwi. The combined actions drove the U.S. dollar higher against all of its major counterparts.

The dollar's move above ¥100, a much-watched key level, has long been anticipated as the Bank of Japan unveiled aggressive monetary policy plans early last month aimed at boosting growth at home by spurring lending and weakening the Japanese currency. The dollar was recently trading at ¥101.54.

Reserve Bank of Australia

The Reserve Bank of Australia decided to lower its key interest rate 25 basis points to 2.75 percent, a record low. It was the seventh rate cut since November 2011. The RBA cash rate’s previous low was 2.89 percent in January 1960. The rate has been at 3.0 percent since December 2012. Most recent economic data have been weak including March retail sales. In addition, first quarter consumer prices were at the mid-point of the RBA inflation range, increasing 2.5 percent on the year. The board noted that growth was close to trend in 2012 but was a bit below trend in the second half and the below trend performance seemed to be continuing into 2013. Employment, although growing, is increasing slower than the labour force.

The board said it decided to use some of its scope mentioned in previous announcements to ease and to encourage sustainable growth. It noted that inflation over the next one to two years is expected to be consistent with its inflation target range of 2 percent to 3 percent. It noted that the demand for credit remained relatively subdued while the Australian dollar remains at historically high levels for the past year and a half. The high currency is crippling the nation's manufacturers and exporters, while rate sensitive sectors such as consumer spending and home building have been slow to respond to previous cuts by the bank.

The RBA joins global counterparts in embracing record low rates in an economy where inflation is contained, mining spending is predicted to crest and credit growth remains subdued. Governor Glenn Stevens is aiming to rebalance growth as mining regions in the north and west thrive and manufacturers in the south and east struggle. Both the European Central Bank and the Reserve Bank of India lowered borrowing costs in a bid to bolster flagging growth. And in Japan, the Bank of Japan and the government have announced spending plans and asset purchases and promised measures to attract investment in a bid to combat deflation and reignite growth.

In its latest quarterly statement on monetary policy, the Reserve Bank of Australia slashed its inflation outlook but warned growth may remain subdued due to strong currency, fiscal tightening and a peak in mining boom. The central bank now expects consumer prices to rise 2.25 percent in the year ending June 2013, slower than the 3 percent increase predicted in February. Core inflation is expected to be at 2.25 percent, lower than 2.5 percent projected three months earlier.

Bank of Korea

The Bank of Korea joined central banks in Australia, Europe and India in cutting interest rates as a weak Japanese yen dims the outlook for South Korea’s exports and record household debt weighs on consumption. Governor Kim Choong Soo and his board lowered the benchmark seven day repurchase rate by 25 basis points to 2.5 percent. The decision came after a four to three vote by the board against a cut last month, which showed the deepest division among policy makers since 2006. Thursday's cut, which brought the BoK’s policy rate to its lowest level since early 2011, was a surprise for the market. The won slid against the dollar while stocks and bonds soared. The export reliant economy has been stymied by the weak Japanese yen which makes Japanese products less expensive relative to Korean ones in export markets. And shrinking global demand was already causing pain.

With quarterly growth rates for Korea's gross domestic product stuck below 1.0 percent for nearly two years, the BoK had been under pressure to cut rates in coordination with government stimulus measures as President Park Geun-hye tries to revive the stalled economy. Parliament last Wednesday approved a supplementary government budget of 17.3 trillion won ($15.85 billion), aimed at creating jobs and supporting smaller businesses. But most of that will go to cover 12 trillion won in revenue shortfalls, limiting actual new spending to around 5.3 trillion won.

Bank of England

As expected, Bank of England's monetary policy committee left its policy unchanged as it waits for the arrival of its new governor, Mark Carney, in July. The MPC kept its key interest rate at 0.5 percent and the size of its asset purchase program at £375 billion. Following a surprisingly respectable provisional 0.3 percent quarterly increase in real GDP at the start of the year and early survey evidence of a decent April for the key service sector, the chances of any move were always slim. Indeed, the Bank's decision late last month to expand its Funding for Lending Scheme had already reduced the need for any further action anyway.

The economy has yet to display signs of a sustainable recovery and the increase in total output in the first quarter essentially just reversed the previous period's decline. As such, another round of quantitative easing remains a clear possibility although with the June MPC meeting the last to be overseen by current Governor Mervyn King before the arrival of his successor Mark Carney in July, any such change would be unlikely before August at the earliest. The meeting that month will coincide with the release of the Bank's quarterly Inflation Report and should also see the first official response from the BoE to the modification of its remit announced by Chancellor Osborne back in March.

Global Stock Market Recap

Europe and the UK

Most European stock markets hit 2013 records on Friday. The German DAX climbed to an all-time high Friday after upbeat merchandise trade data raised hopes Europe’s largest economy is picking up. Over the past week, most European indexes climbed to multiyear highs, as aggressive easing measures from central banks offset worries over sluggish growth globally. The FTSE was up 1.6 percent, the CAC gained 1.0 percent, the DAX advanced 1.9 percent and the SMI jumped 3.0 percent on the week.

Professional forecasters surveyed by the European Central Bank lowered their predictions for Eurozone's gross domestic product and inflation. The Quarterly Survey of Professional Forecasters, or SPF, was released by the ECB in its monthly bulletin. The forecasters now expect inflation in the region to be 1.7 percent this year, slightly below the 1.8 percent projected in the first quarter. The outlook for 2014 was revised down to 1.6 percent from previous expectations of 1.8 percent. The inflation outlook for 2015 was cut to 1.8 percent from 1.9 percent.

German economic data buoyed investors during the week. Both March manufacturing orders and industrial production gained — expectations were for both to decline on the month. And stronger April Chinese merchandise trade data also provided a positive push for equities. China's trade swung to a surplus in April, as exports posted a better than expected rise, easing some concerns about global demand and the health of the world's second largest economy. In the UK, March industrial and manufacturing output increased more than expected as well.

Asia Pacific

Equities advanced last week — that is all but the Kospi. Japanese shares rallied to a five year high after the yen breached the 100 yen to the US dollar mark for the first time since April 2009. Seoul shares tumbled on renewed concerns over risks posed by a weakening yen. The Asian market was trying to make sense of the sharp currency move given there was little economic news to prompt it. A reduction in U.S. jobless claims gave the dollar a small gain against the yen early in New York trading, but the real move started later in the session when the dollar spiked higher. The Nikkei index leapt 2.9 percent Friday and was up a hefty 6.7 percent on the week to its highest closing level since January 4, 2008 after the yen dropped past ¥100 per U.S. dollar.

China's annual consumer inflation accelerated more than expected in April while factory prices fell for a 14^th consecutive month, highlighting the dilemma facing the Peoples Bank of China as it balances support for the economy against the threat of rising prices. With global growth sputtering, the PBoC has limited room to move, unlike its counterparts in South Korea and Australia. Any easing could fuel property market risks, while tightening would hurt a nascent recovery after economic growth unexpectedly slowed to 7.7 percent in the first quarter from 7.9 percent in the previous three months. The PBoC said on Thursday that it will increase policy flexibility to support the economy, stressing the need to ward off inflationary risks even through the country's economic recovery remained tepid. April’s producer prices dropped 2.6 percent for the 14^th consecutive month of declines from the previous year and sharper than the 1.9 percent drop in March. Consumer inflation quickened to 2.4 percent in April from March's 2.1 percent due to higher food costs.

Currencies

The U.S. dollar advanced against all of its major counterparts. The Australian dollar slid to about parity after the Reserve Bank of Australia lowered its key interest rate and cited the overvalued Australian dollar as one of the reasons for the move. The Japanese yen vaulted the ¥100 yen to one U.S. dollar Thursday and continued its slide on Friday. The euro weakened as well. Some attributed the higher dollar to the better U.S. economic performance compared to elsewhere. The Reserve Bank of New Zealand admitted to intervening in the currency market to bring down the value of the New Zealand dollar as well. For investors searching for yield, the higher official interest rates in Australia (2.75 percent) and New Zealand (2.5 percent) have an attraction. However, at the same time, the high value of their currencies has hurt their export industries and growth.

And then there is the case of the Japanese yen. For almost two decades, Japan’s economic fortunes have deteriorated, and little seemed to be done about it. But in the last few months, the nation’s new Prime Minister, Shinzo Abe, has pushed policy makers and other officials to take bold steps to revive Japan. Their handiwork was evident when the yen hit 100 to the dollar for the first time in four years. Normally a weakening exchange rate might be taken as a sign of decline. The yen has fallen nearly 14 percent against the dollar this year, and no currency has fallen more except the Venezuelan bolívar. In Japan’s case though, it is a sign that the policies put in place by Mr Abe and Bank of Japan Chairman Haruhiko Kuroda are starting to work. A weaker yen makes Japanese exports more competitive around the world. The most immediate effect of the weaker yen has been the increase in profits of major exporters.

For many countries, cash inflows would be a blessing. But incoming money has proved to be too much of a good thing in parts of the Asia-Pacific region, pushing currencies to uncomfortably high levels just as economic growth is tapering off. For many months, policy makers across the region have deployed a range of tools to try to dampen the adverse effects that can come when too much money flows into an economy. The latest example came Wednesday, when the Reserve Bank of New Zealand confirmed it had been selling New Zealand dollars on the currency markets in recent weeks to try to stem the sharp rise the kiwi has staged over the past two years. And the Reserve Bank of Australia hinted at its unease with the Australian currency’s strength — the Australian dollar is hovering near multiyear highs — which it cited as an important reason for an interest rate cut that took borrowing costs in the country to a record low.

Selected currencies — weekly results

Indicator scoreboard

Germany

March manufacturing orders were up 2.2 percent for the second consecutive month. On the year, workday adjusted orders were 0.4 percent lower. The latest surge was driven mainly by basics which jumped 3.6 percent from February after a 0.9 percent gain last time but capital goods (2.0 percent after 3.1 percent) also staged a healthy advance. However, consumer & durable goods disappointed with a 0.7 percent decline having already shown no growth in mid-quarter. Regionally the headline advance was split between a 1.8 percent monthly increase in domestic orders and a 2.7 percent gain in overseas demand. Within the latter, the Eurozone was up a surprisingly firm 4.2 percent, comfortably eclipsing the rest of the world's 1.9 percent gain.

March industrial production jumped 1.2 percent on the month but was 2.5 percent below its year ago level. Overall manufacturing was up a very healthy 1.4 percent from mid-quarter. Capital goods (2.1 percent) were particularly robust as were consumer durables (2.2 percent). There were respectable gains in both consumer nondurables (0.7 percent) and intermediates (0.6 percent). Energy expanded 4.0 percent leaving construction the only sector to post a decline — production here was down (a probably weather-hit) 4.5 percent on the month after a 0.3 percent drop last time.

March seasonally adjusted merchandise trade surplus was €17.6 billion in March. This was just €0.1 billion short of a larger revised excess in February. The unadjusted surplus was €18.8 billion, up €2.0 billion from last time. Both sides of the balance sheet showed positive growth at quarter-end. Exports expanded 0.6 percent on the month and imports were 0.8 percent higher. However, both gains failed to offset their respective February declines. Moreover, annual growth rates became more negative with exports down 4.2 percent on the year and imports off 6.9 percent. Sales to the other EMU countries (down 7.0 percent) were especially weak.

France

March industrial production (excluding construction) dropped 0.9 percent on the month in March following a minimally stronger revised 0.8 percent increase in February. However, with base effects significantly positive, annual output growth actually improved from a decline of 2.9 percent to a drop of 2.5 percent. Within the headline decline, the key manufacturing sector dropped 1.0 percent after a 0.8 percent advance last time and now stands 4.9 percent below its March 2012 level. Weakness was broad-based with only electronics & machines (0.5 percent) advancing on the month. Food & agriculture posted a 1.0 percent drop and there were reversals too in refining (3.2 percent) and transport equipment (0.1 percent) as well as in the other manufactured goods sector (1.6 percent). Energy & extracted goods were down 0.3 percent.

March seasonally adjusted merchandise trade gap narrowed from a downwardly revised €5.6 billion in February to €4.7 billion in March. This was the smallest deficit since July 2012. The improvement reflected both a 1.4 percent monthly increase in exports as well as a 1.1 percent decline in imports. The bounce in the former was in large part due to a sharp increase in sales of transport equipment, itself prompted by a ship delivery as well as record deliveries of Airbus aircraft. However, overall exports were still 0.7 percent short of their January level and 0.4 percent weaker on the year. Meantime, imports hit their lowest mark since last August.

United Kingdom

March industrial production was up 0.7 percent but was down 1.3 percent from a year ago. Manufacturing output jumped 1.1 percent but was still down 1.4 percent on the year. The surge in manufacturing activity was led by basic metals & metal products which climbed 2.8 percent on the month and computer, electronic & optical products which advanced 5.5 percent. On the downside, food & drink declined 1.0 percent and textiles & leather were off 1.5 percent. Elsewhere within the goods producing sector, oil & gas extraction dropped 1.8 percent on the month and water supply & sewerage was down 0.4 percent. A partial offset was provided by electricity, gas, steam & air conditioning which advanced 2.4 percent.

March global goods trade deficit was Stg9.1 billion, just Stg0.1 billion less than a smaller revised shortfall in February. Exports were up nearly 5 percent on the month after back-to-back declines in January and February but much of the good work here was undone by a 3.2 percent jump in imports. However, the underlying deficit (excluding oil and other erratic items) improved, narrowing from Stg8.3 billion in mid-quarter to stg7.7 billion. Exports on this basis were 5.3 percent stronger from February while imports were up 1.7 percent. The bilateral deficit with the EU increased by close to 13 percent to a disappointingly large Stg5.6 billion but elsewhere the position improved by more than 17 percent to Stg3.5 billion.

Asia/Pacific

Australia

March retail sales were down 0.4 percent after increasing 1.3 percent the month before. From a year ago, retail sales were up 3.2 percent. In volume terms, retail sales were up 2.2 percent in the March quarter after increasing 0.1 percent in the December quarter. The largest contributor to the monthly decline was footwear & personal accessories (down 4.2 percent) followed by household goods (down 1.5 percent), other retailing (down 1.0 percent) and department stores (down 0.1 percent). The declines were partially offset by increases in food retailing (0.8 percent) and cafes, restaurants & takeaway food services (0.2 percent).

March merchandise trade surplus was A$307 million after recording a deficit of A$111 million in February. The surplus was the first since December 2011. For the March quarter, the deficit narrowed to A$946 million. Exports were up 0.6 percent with both non-rural goods and rural goods exports increasing 1.0 percent. Non–monetary gold exports dropped 9.0 percent. Imports declined 1.0 percent. Within imports, capital goods dropped 11 percent while intermediate and other merchandise goods increased 3.0 percent. Non-monetary gold was up 8.0 percent. Consumption goods were up A$6 million but services debits declined A$27 million.

April employment rebounded by a surprising 50,100 after dropping a revised 31,200 in March. Analysts expected employment to increase by 11,000. The unemployment rate edged down to 5.5 percent from 5.6 percent the month before. The number of people employed is now 11,663,200. Both full time and part time employment increased. Full time employment was up 34,500 to 8,159,700 people and part time employment increased 15,600 people to 3,503,500. The number of people unemployed decreased by 2,700 people to 685,300.The seasonally adjusted labour force participation rate increased 0.2 percentage points to 65.3 percent in April.

China

China’s merchandise trade data provided an upward surprise. April merchandise trade balance jumped to a surplus of $18.16 billion from a deficit of $0.88 billion in March. The surplus was larger than the $14.0 billion expected by analysts. Both exports and imports were up more than expected. Exports were up 14.7 percent from a year ago after increasing 10.0 percent the month before. Imports were up 16.9 percent after climbing 14.1 percent in March. For the year to date, the surplus is $61 billion compared with $19.3 billion in 2012.

April consumer price index was up a greater than expected 2.4 percent from a year ago after increasing 2.1 percent in March. Analysts expected the CPI to increase 2.2 percent but inflation remains well below the official full year target of 3.5 percent. On the month, the CPI edged up 0.2 percent. For the year to date, the index was up 2.4 percent. Both the urban CPI and the rural CPI were 2.4 percent higher from a year ago. The increase in the CPI was blamed on higher vegetable prices which were reflected in food prices. They jumped 4.0 percent after increasing 2.7 percent last time. Non-food prices were up a mild 1.6 percent after increasing 1.8 percent in March. The only category to decline was transportation & communication which was down 1.1 percent from a year ago.

April producer price index dropped 2.6 percent from a year ago after sliding 1.9 percent in March. Market expectations were for a 2.2 percent decline. On the month, the PPI was down 0.6 percent. For the year to date, producer prices are down 2.0 percent. Most price categories were down by a greater amount in April. Production material prices dropped 3.5 percent from a year ago after declining 2.7 percent in March. Raw materials prices dropped 4.8 percent after sliding 3.2 percent the month before. However, consumer goods prices edged up 0.3 percent from a year ago after increasing 0.5 percent in March.

Americas

Canada

March employment rebounded with an increase of 12,500 from the surprisingly sharp 54,500 slide in March. The jobless rate held steady at 7.2 percent. Full time jobs increased 36,000 and were partly offset by a 23,600 decline in part time positions. However, employment growth was restricted to the public sector (34,200) as the private sector headcount contracted 20,000 while the number of self-employed fell 1,700. It was the goods producing sector that more than accounted for the overall rise in new jobs. A 24,500 advance here was dominated by manufacturing which saw a solid 20,600 increase and utilities chipped in with a 4,000 gain. Other sub-sectors were essentially flat. Services had a poor month, shedding 12,000 workers on the back of significant declines in trade (down 15,800), transportation & warehousing (down 20,700), business, building & other support services (down 15,700) and other services (down 18,700). Partial offsets were provided by finance, insurance, real estate & leasing (12,800), professional, scientific & technical services (11,000) and health care, culture & recreation (18,200).

Bottom line

Equities continued to advance last week while central banks including the Reserve Bank of Australia and the Bank of Korea reduced interest rates to spur on their respective economies and at the same time lower their currencies to reduce the pain for their export industries. The U.S. dollar exhibited strength against all of its major counterparts. The Japanese yen crashed through the 100 yen to a dollar barrier and continued to slide.

First estimates of first quarter growth will be released for Japan, the Eurozone and many of its member states. Investors will continue to keep an eye on currency moves especially with the U.S. dollar.

Looking Ahead: May 13 through May 17, 2013

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