Global Markets

Nerves got to investors for the better part of the week. Concerns about global growth surfaced once again and sent investors to seek safe haven assets. Angst about U.S. growth given FOMC minutes of its March meeting and its decision to forecast only two fed funds increases instead of four and the run up to China's data deluge next week added to the dour mood. Oh and don't forget, earnings season is upon us! And then there is the yen — despite efforts by the Bank of Japan to lower its value it continues to rise against the U.S. dollar and in the process it is making Japanese goods more expensive and cutting into exporters' profits.

Oil prices continued to fluctuate during the week. Each time a rumor surfaced that there might be a production agreement prices climbed. Disappointment led to a decline. However, prices were buoyed by data indicating that U.S. inventories declined — but one week does not make a trend. The world's largest oil producers are due to meet in Doha on April 17 to negotiate an output freeze — maybe.

The Reserve Banks of India and Australia published their latest monetary policy statements. The RBI eased while the RBA did not.

Reserve Bank of India

The Reserve Bank of India trimmed its benchmark lending rate as low inflation gave it more room to ease. Previously, the RBI had cut rates four times in 2015. The RBI cut its benchmark repo rate 25 basis points to 6.5 percent for the lowest rate in more than five years. The cash reserve rate was left unchanged at 4 percent. The reverse repo rate, meanwhile, was raised from 5.75 percent to 6 percent. RBI governor Raghuram Rajan left the door open to further easing, saying that the stance of monetary policy will remain accommodative. Further he said that the RBI will continue to watch future macroeconomic and financial developments. The RBI will respond with further policy action as data allow.

The RBI has had extra room to ease this year given the persistence of deflation, largely due to a slide in commodity prices. Rampant inflation has traditionally been the bane of Indian policymakers. But in March, the government and the central bank took a risk and agreed to set a consumer inflation target of 4 percent with a band of plus or minus 2 percentage points — the first such target set in India. Since then, amid the global commodity price rout, consumer price inflation has fallen. On the year, the CPI reading for last month was 5.18 percent — a couple of years ago, however, it was usually upwards of 7 percent.

Reserve Bank of Australia

The Reserve Bank of Australia as expected kept its policy repo rate at 2 percent for the 12th month. However, the RBA was concerned that a resurgent currency — the Australian dollar — could unsettle the economy's shift toward services-driven export growth. Reserve Bank of Australia Governor Glenn Stevens said a rebounding Aussie could "complicate" an economic adjustment that is under way. The most important market development since the last Board meeting on March 1 has been the surge in the Australian dollar.

Renewed currency woes reflect the Federal Reserve's caution on the speed of its policy tightening, a shift to negative rates in other economies and a jump in iron ore, Australia's biggest export. It could weigh on the labor market, which the central bank has cited as its key consideration, as well as burgeoning tourism and education industries that are boosting services' share of the economy.

Since the RBA's last meeting on March 1, data showed economic growth accelerated to 3 percent in the last quarter of 2015, the unemployment rate fell back to 5.8 percent after spiking to 6 percent in January and business conditions improved. At the same time, retail sales have stagnated, consumer confidence has eased and house-price growth has decelerated. The RBA has an inflation target range of 2 percent to 3 percent.

Global Stock Market Recap

Europe and the UK

Equities ended the week on a positive note. The indexes gyrated between gains and losses during as equities followed bounces in crude prices. Investors' risk appetite increased after Thursday night's (US ET) comments by Fed Chair Janet Yellen. Crude oil and metal prices recovered and stronger than expected German export data also contributed to the positive mood. The FTSE advanced 0.9 percent and the SMI added 1.7 percent on the week. The CAC and DAX retreated 0.4 percent and 1.8 percent respectively.

Remarks made by Federal Reserve Chair Janet Yellen during a panel discussion with former Fed chairs Ben Bernanke, Alan Greenspan and Paul Volcker on Thursday provided a boost to investor sentiment. Yellen described the "tremendous progress" that the U.S. economy has made since the financial crisis and shrugged off concerns about an economic bubble.

The Bank of France raised its growth estimate for the first quarter on the back of improved export demand for manufactured products and increased services activity that led to employment growth. Gross domestic product likely increased 0.4 percent in the first quarter, which was slightly stronger than the 0.3 percent expected earlier.

ECB minutes

The minutes of the ECB's March 9 and 10 governing council meeting confirmed a broad, it not unanimous, agreement regarding a 10 basis point reduction in the deposit rate (to minus 0.40 percent) as well as both a €20 billion increase in monthly asset purchases to €80 billion and the expansion of the asset purchase programme (APP) to include corporate bonds. Everyone seemed happy about launching a new round of targeted longer-term repo operations (TLTROs). However, discussions about the rate cut were intense.

There was considerable debate about the costs and benefits of taking interest rates further into negative territory. There also was much discussion over whether to introduce a larger cut and signal that the bottom to interest rates had been reached or deliver the 10 basis point reduction ultimately agreed upon and hold out the promise of more if needed.

Since last month's discussions, a number of senior ECB officials have seemingly tried to reawaken market speculation about the possibility of more interest rate cuts. For example, the ECB's chief economist Peter Praet reminded investors that monetary policy could be 'recalibrated' again should additional negative shocks occur. He also implied that securing a self-sustaining economic recovery would probably require more than just an accommodative monetary stance.

Asia Pacific

Equities were mostly lower on the week thanks to growth and earnings worries. The seemingly ever rising value of the yen also weighed on shares. Asian equities were mixed Friday amid worries that the Japanese yen's strong run threatens efforts to boost its economy. The Sensex lost 2.4 percent, the SET was down 2.2 percent and the Nikkei retreated 2.1 percent.

The Nikkei ended the week on a subdued note as the yen weakened slightly against the dollar in the wake of comments from Japan's Finance Minister and Fed Chair Janet Yellen. On Friday, Japanese Finance Minister Taro Aso warned against a rapid yen rise and vowed to take action if necessary. Ms Yellen touted the strength of the U.S. economy while speaking in New York alongside three of her predecessors — Ben Bernanke, Paul Volcker and Alan Greenspan.

Investors in the region have been worried about the ability of central bankers to boost growth when the global economy remains sluggish. That has been highlighted recently by the Bank of Japan's inability to guide the yen weaker through monetary easing. The Bank of Japan started imposing a minus 0.1 percent rate on some deposits held by commercial banks in February, meaning that those banks now have to pay a small fee when they add to their money parked at the BoJ. The financial sector has suffered amid worries that banks cannot pass on negative interest rate to their depositors and therefore will take a hit to their profits.

In China, a three month ban on large shareholders selling more than 1 percent of a company's total shares is about to expire, fueling worries of a barrage of selling pressuring the overall market. China's securities regulator announced the restriction on January 7 but didn't specify an expiration date. Back then, local investors were worrying about the expiration of a previous iteration of a selling ban. That one had been put in place last summer as part of massive efforts by the government to stem a stock-market meltdown that eventually sent shares down by almost half.

Currencies

The U.S. dollar advanced against the Australian dollar and pound sterling but retreated against its other major counterparts including the Canadian dollar, Swiss franc, euro and the yen. The Australian currency declined after the Reserve Bank of Australia, in its policy announcement Tuesday, cited the strength of the currency as impeding the restructuring of the economy. The pound sterling was down thanks to weakening economic data and the looming Brexit vote which will take place in June. The safe haven Swiss franc advanced but not like its haven counterpart, the yen.

It was all about the yen last week as investors sought safe havens. Analysts singled out two possible reasons for the yen's strength — renewed demand for haven assets and speculative positioning. However they point out that neither is entirely satisfactory at explaining the yen's resilience.

The rising yen is bad news for the Japanese economy as well as its equity market. A rebound of the U.S. dollar in Asian trading on Friday however, did not last for long even after Finance Minister Taro Aso declared Japan is ready to take action to combat yen volatility. He did not comment on whether this could mean market intervention.

The yen had surged Thursday against the U.S. dollar and other currencies as traders became increasingly convinced Japanese authorities would not intervene to weaken the yen ahead of the Group of Seven summit in Japan in May. Aso's comments partly fueled the dollar's rebound, as did traders' tendency to buy the currency back amid a lull in trading whenever it has fallen dramatically against the yen.

With traders still wary of additional U.S. interest rate increases that would likely make the dollar a more attractive buy against the yen, Federal Reserve chair Janet Yellen's comments aided the dollar. Yellen sounded broadly optimistic about the U.S. economic outlook in a speech in New York, walking back somewhat from cautious comments made last week on the prospect of further U.S. interest rate increases, causing the dollar to weaken.

One of the reasons behind the rate cut of January 29th was to send the signal that the BoJ wants a weaker yen. The market rudely rejected this approach and caused the yen to appreciate again following a very brief correction. The BoJ accepted this provocation and did not add further measures. By doing so it drove speculative market participants into long-yen bets. It suddenly became clear: the BoJ will put up with a stronger yen — at least for the time being. The fact that the Japanese government and central bank reacted very meekly to the accelerating yen appreciation led to a further acceleration.  

Selected currencies — weekly results

Indicator scoreboard

Eurozone

February retail sales were up 0.2 percent on the month after increasing a revised 0.3 percent in January. Annual workday adjusted growth was lifted from 2.0 percent to 2.4 percent. Purchases have now risen for four consecutive months although gains have been typically quite modest. February's advance was wholly attributable to a 0.5 percent increase in spending on food, drink & tobacco. Excluding auto fuel, non-food demand contracted 0.2 percent, its first decline since last November. Regionally the overall monthly increase was held in check by Germany (down 0.4 percent) although this was largely offset by gains in France (0.6 percent) and Spain (0.2 percent). Elsewhere it was the usual mixed bag with solid increases in Portugal (2.7 percent) and Lithuania (1.1 percent) contrasting with sizeable drops in Estonia (2.2 percent) and Slovenia (1.4 percent).

Germany

February manufacturing orders dropped 1.2 percent on the month following an upwardly revised 0.5 percent gain at the start of the year. Annual growth was unchanged at 0.3 percent. The decline was dominated by a 7.3 percent monthly slump in consumer & durable goods although capital goods also declined a hefty 2.1 percent. Basic goods (1.7 percent) provided a partial offset. The weakness was at least concentrated in overseas demand and orders from here were down 2.7 percent from January when they increased 1.9 percent. This was the fifth contraction in the last six months and dictated by consumer & durable goods which collapsed 10.4 percent. Meantime, the domestic market returned to positive growth with a modest 0.9 percent advance although this came nowhere close to reversing the cumulative 2.3 percent drop recorded in December/January.

February industrial production declined 0.5 percent on the month and was up 1.2 percent on the year. Excluding construction, output dropped 0.7 percent on the month but was up 0.8 percent from a year ago. Outside of the volatile construction subsector (1.3 percent), monthly declines in output were widespread with only intermediates (0.1 percent) managing an increase in output. Both capital and consumer goods recorded a 1.0 percent decline and energy was off 1.8 percent.

February seasonally adjusted merchandise trade surplus was €19.8 billion, up from a slightly smaller revised €18.7 billion excess in January. The unadjusted surplus was €20.3 billion following €13.4 billion at the start of the year. The improvement in the adjusted headline was brought about via a 1.3 percent monthly increase in exports, their first advance since November, which more than offset a 0.4 percent gain in imports. Compared with a year ago, export growth was 1.4 percent or half the rate posted by imports and, within this, sales to other EMU countries rose 1.6 percent and to non-EU countries, 6.1 percent. However, both sides of the balance sheet remained well short of their respective record levels achieved in the second half of 2015.

United Kingdom

February industrial production was down 0.3 percent on the month which, following a smaller revised 0.2 percent gain in January, left output 0.5 percent below its level a year ago. The key manufacturing component saw a hefty 1.1 percent monthly drop which reduced its annual growth rate from minus 0.3 percent to minus 1.8 percent. The monthly slide in manufacturing reflected losses in eleven of the thirteen subsectors with a 2.9 percent drop in transport equipment having the largest negative impact. Sterling strength, despite the currency's recent losses, was cited as a key factor here. Metal products were also down 0.7 percent with crude steel reporting its lowest level of output since December 2008. On the upside pharmaceuticals registered a 7.2 percent surge and alone added 0.4 percentage points to the total monthly change. Overall goods production was boosted by a 3.6 percent increase in mining & quarrying and a 0.7 percent gain in electricity, gas, steam & air conditioning. However, water & waste management posted a 0.6 percent decline.

February deficit on global goods trade was Stg11.96 billion in February after a significant upward revision to January's deficit which now stands at Stg12.16 billion, just short of the record high. The monthly reduction in the deficit was attributable to a 1.3 percent increase in exports that more than offset a 0.3 percent rise in imports. However, underlying developments were much more negative. The core deficit which excludes oil & other erratic items widened from Stg9.69 billion to Stg11.13 billion as exports edged 0.2 percent firmer and imports surged nearly 5 percent. The shortfall with the rest of the EU was Stg8.6 billion, up from Stg7.8 billion last time and a new record high. Accordingly, the drop in the overall shortfall came from net exports to the rest of the world which recorded a deficit of Stg12.0 billion down from Stg12.2 billion in January.

Asia/Pacific

Australia

February retail sales were relatively unchanged following a 0.3 percent increase in January 2016. On the year, sales were up 3.3 percent. Household goods retailing (0.4 percent), department stores (0.4 percent) and clothing, footwear & personal accessory retailing (0.1 percent) advanced on the month. Food retailing was relatively unchanged. The increases were offset by declines in cafes, restaurants & takeaway food services (down 0.2 percent) and other retailing (down 0.1 percent). Regionally there were increased sales in Victoria (0.4 percent), New South Wales (0.2 per cent), the Australian Capital Territory (1.0 percent) and South Australia (0.3 percent). Sales were down Queensland (down 0.4 percent), Western Australia (down 0.6 percent), the Northern Territory (down 1.6 percent) and Tasmania (down 0.5 percent).

February trade deficit ballooned to A$3.4 billion from the revised A$3.1 billion in January. Exports edged down 0.2 percent on the month and were down 2.0 percent from the same month a year ago. Imports slid 1.2 percent on the month and dropped 8.5 percent on the year. Exports of rural goods were down 5 percent. Among the categories that declined were other rural, cereal grains & cereal preparations and meat & meat preparations. Exports of non-rural goods were up 2.0 percent. The main components contributing to the increase were metal ores & minerals, other non-rural (including sugar & beverages) and metals (excluding non-monetary gold). For imports, intermediate & other merchandise goods declined but consumption goods, non-monetary gold and capital goods increased.

Americas

Canada

February merchandise trade deficit was C$1.91 billion after an essentially unrevised C$0.63 billion shortfall in January. The increase was the first since October and made for a much larger than expected deficit as exports slumped 5.4 percent on the month while imports fell only 2.6 percent. The bilateral surplus with the U.S. narrowed from C$3.81 billion to C$2.68 billion as sales across the border dropped 5.6 percent and purchases declined 2.7 percent. The real trade position also worsened significantly as exports volumes decreased 2.2 percent and price adjusted imports fell 1.2 percent. Within the monthly change in total nominal exports consumer goods collapsed 14.3 percent. Other hefty drops were recorded by energy (14.4 percent), industrial machinery, equipment & parts (8.1 percent), basic & industrial chemical, plastic & rubber products (6.8 percent) and forestry products & building & packaging materials (6.4 percent). However, aircraft & other transportation equipment & parts (25.2 percent) were very strong and metal and non-metallic mineral products (3.0 percent) also had a good month. Import weakness was also widespread and led by energy (down 29.7 percent) ahead of metal ores & non-metallic minerals (down 9.2 percent) and metal & non-metallic mineral products (down 4.8 percent).

March employment jumped 40,600 and was the largest since October 2015. With the participation rate unchanged at 65.9 percent, the unemployment rate slid 0.2 percentage points to 7.1 percent, matching its lowest reading since November. Jobs growth was led by full-time positions which gained 35,300 and part-time employment which added 5,300. Private sector payrolls advanced a sizeable 65,100 so the total gain would have been larger still but for a 2,600 drop in the public sector and a 22,000 decline in the number of people self-employed. The employment increase was not well balanced as a 74,700 jump in services headcount contrasted markedly with a 34,100 contraction in goods producing industries. Within the latter, manufacturing shed 31,800 and construction was down 5,500. Only agriculture (3,800) recorded an increase of any size. The surge in services was dominated by health care & social assistance (24,900) and supported by accommodation & food (17,700), professional, scientific & technical services (12,200) and other services (9,900). Other monthly changes were relatively small although public administration decreased 4,600.

Bottom line

Equities were mixed as investors vacillated between risk on and risk off. Investors seeking a safe haven continue to push the yen higher. The Reserve Bank of India lowered its policy interest rate while the Reserve Bank of Australia did not. Most European economic data disappointed.

The Banks of Canada and England announce their respective monetary policies while the Federal Reserve publishes its Beige Book in anticipation of its FOMC meeting in the last week of April. The upcoming week will see the release of key data from China including March consumer and producer price indexes, industrial production, merchandise trade and retail sales along with first quarter gross domestic product.

Looking Ahead: April 11 through April 15, 2016

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