Europe and the UK
The FTSE, CAC, and DAX rebounded from the previous week's debacle, but still have a long way to go to make a full recovery. The FTSE recovered 45 percent of its decline while the CAC recovered 39 percent and the DAX, 29 percent. The FTSE even overcame a 29 point drop in ex-dividends trading on Wednesday that threatened to deflate the index even more. And on Friday, they turned what began as a negative day into a positive one, thanks to the U.S. employment situation report that seems to be followed even more assiduously in Europe than in the United States. Friday's data reignited confidence that the U.S. economy is strong enough to continue to stoke profit growth. However, the employment report was not the only positive for the three indexes. Better-than-expected earnings and takeover prospects also helped stocks rebound from last week's rout.

The ECB does the expected
As expected, the European Central Bank increased its key policy interest rate by 25 basis points to 3.75 percent. At the press conference that traditionally follows its monetary policy meetings, ECB Bank President Jean Claude Trichet said interest rates are still supportive of economic growth. This suggested to analysts that interest rates could be increased again. Trichet said "given the favorable economic environment, our monetary policy continues to be on the accommodative side.'' The ECB continues to indicate it wants to curb inflation by removing monetary accommodation. This translates to taking interest rates to a level that no longer stimulates the economy. The EMU posted the fastest economic growth in six years in 2006, raising the risk that inflation will accelerate as companies increase prices and unions demand higher wages. The bank is concerned workers' demands for wage increases will reignite inflation as companies post record sales and profits. IG Metall, Germany's biggest labor union, is demanding a 6.5 percent pay increase for as many as 3.4 million workers, defying ECB calls for wage restraint. Another concern of the ECB is M3 money supply growth, which the ECB uses as a gauge of future inflation. The 3-month moving average was up 9.7 percent from a year earlier, the fastest pace in 17 years.

Bank of England does the expected also
The Bank of England left its policy interest rate at 5.25 percent for the second month. The Bank had increased rates three times in the past six months by 25 basis points each - in July and September 2006 and in January 2007. The Bank of England's inflation target is 2 percent, but inflation as measured by the consumer price index has been running well above that level for the past 10 months. The pause allows monetary policy committee members to assess whether the increases already in place are sufficient to cool inflation. According to the Bank's forecasts, one more increase could be needed to push inflation growth below the 2 percent level.

Investors had already pared expectations the bank would raise rates after retail sales dropped the most in four years, inflation slowed and concern about the U.S. economy helped spark a global stock-market rout. Higher borrowing costs have not yet cooled the U.K.'s housing market, which has helped power growth by encouraging consumers to borrow and spend more. And according to Mervyn King, Bank of England governor, wages present the biggest upside risk to the Bank's inflation forecast.

Asia/Pacific
Asian markets were mixed last week after Monday's poor start. The indexes continued the previous week's rout but began to stabilize on Tuesday. But gains during the rest of the week only made a dent in the index's losses. On Friday, stocks in the region were boosted by faster-than-expected growth in Japan's machinery orders. This was interpreted to mean that capital spending was alive and well. Japan's non-government machinery orders excluding shipping and utilities were up a seasonally adjusted 3.9 percent after declining in December.

Another key factor in Asian equity markets is the value of the yen. Exporters' stocks such as Toyota, Sony, Matsushita and Advantest gained on the yen's weakness. The Japanese currency strengthened last week during the rout in global stocks as investors shunned emerging-market assets, prompting an unwinding of trades financed by yen borrowing. A weaker yen means that Japanese exporters get more for their overseas sales when they are repatriated back to Japan. The Japanese fiscal year ends on March 31st so the yen's value will be critical to exporters' profits reports.

Reserve Bank of Australia on hold
As expected, the Reserve Bank of Australia kept its policy-making interest rate at 6.25 percent for the third straight meeting after raising it 25 basis points in November 2006 to stem inflation. Inflation has been above the RBA's 3 percent ceiling for three successive quarters despite three interest-rate increases in the past year (May, August and November 2006). The Bank's inflation target ranges between 2 percent and 3 percent. Higher borrowing costs have not put a lid on consumer spending as evidenced by fourth quarter gross domestic product data which were released last week (see Indicator Scoreboard below). The RBA does not issue a statement when no policy change is made. The RBA's 6.25 percent rate compares with 5.25 percent in both the U.S. and UK and 3.75 percent in the EMU.

North America
Bank of Canada maintains its 4.25 percent interest rate
As expected, the Bank of Canada kept its key policy interest rate at 4.25 percent. The Bank last increased its interest rate in May 2006. In its statement the Bank said that the global and domestic economies continue to be essentially unchanged. Inflation risks continue to be balanced and the recent global financial market volatility has not changed the Bank's view. The economy continues to operate at or just above capacity and should continue to do so for this calendar year. And inflation continues to be comfortably within the Bank's 1 percent to 3 percent inflation range.

Currencies
The currency story of the week once again revolved around the yen and carry trade. Stocks climbed as the yen dropped in value. The yen tumbled as a strong rally in global equity markets eased risk takers' fears that another bout of volatility could lead to further unwinding of carry trades. The turmoil in financial markets has benefited the Japanese currency over the past week as investors unwound carry trades, in which long positions in riskier high-yielding assets are funded by selling low-yielding currencies such as the yen. Some analysts opined that the relative calm in the currency and equity markets over the last few days might suggest that fears about the unwinding of yen carry trades were exaggerated, especially given the continued appetite of Japanese retail investors for overseas assets.

Indicator scoreboard
EMU - January retail sales dropped 1 percent and were down 0.1 percent when compared with the same month a year ago. The increase in Germany's value added tax at the first of the year was blamed for most of the decline even though analysts have scaled back their estimates of the impact of the higher tax. Non-food purchases sank 0.9 percent while food purchases were down 0.8 percent on the month.

Fourth quarter gross domestic product was up 0.9 percent and 3.3 percent when compared with the same quarter a year ago. Household consumption expenditures were up 0.6 percent and 2.1 percent on the year. Gross fixed capital formation was up 1.2 percent on the quarter and 4.8 percent on the year. Exports were up 3.7 percent and 9.8 percent on the year while imports were up 1.9 percent and 7.3 percent on the year.

Germany - January manufacturing orders declined 1 percent and were up 6.5 percent when compared with January a year ago. Foreign orders were down 1.9 percent while domestic orders edged down 0.1 percent. Consumer goods orders were up 1.7 percent thanks to foreign demand.

January industrial output excluding construction was up 1.7 percent and 7.3 percent on the year. The monthly increase was led by investment goods. Total output including construction was up 1.7 percent and 7.3 percent on the year. Manufacturing gained 2.2 percent and 8.9 percent on the year. The output gain was led by capital goods which were up 4.5 percent and 10.4 percent on the year. Consumer goods were down 0.3 percent but were up a modest 1.8 percent on the year.

January merchandise trade surplus climbed to €15.8 billion from €14.8 billion in December. Exports inched up 0.1 percent while imports dropped 1.5 percent. Exports to European Union countries, which make up almost two-thirds of total exports, soared by 14.3 percent when compared with last year. Exports to other countries were up 11.9 percent on the year. Imports from EU countries, which also account for roughly two-thirds of total imports, were up 12.1 percent on the year while imports from other countries were up 5.6 percent.

France - January industrial output was down 0.3 percent and dropped 0.6 percent when compared with last year. Manufacturing output dropped 0.5 percent and edged down 0.1 percent on the year. Semi-finished goods output dropped 1.2 percent, nearly erasing December's gain. All major categories were down with the exception of electronics. Consumer goods slipped 0.1 percent while capital goods output was up 0.4 percent.

January merchandise trade deficit widened to €2.8 billion from €2.6 billion in December. Exports dropped 1.1 percent after declining 0.6 percent in the previous month with all main sectors declining. Imports were down 0.5 percent with little change in December. The decline in the energy deficit could not be offset by gains in consumer and semi-finished goods sectors.

Italy - Fourth quarter gross domestic product was up 1.1 percent on the quarter and 2.8 percent when compared with the same quarter a year ago. Private consumption edged up 0.2 percent and 1.7 percent on the year. Fixed investment was the main driver in the fourth quarter. It was up 1.8 percent and 3.8 percent on the year with most of the strength coming from fixed investment in machinery which was up 1.6 percent and 3.6 percent on the year.

Britain - January industrial production edged up 0.1 percent and was up 0.4 percent on the year. Electricity, gas and water output was up 0.6 percent while mining and quarrying output was up thanks to a 1.7 percent increase in oil and gas extraction which was up because of the opening of the new Buzzard oil facility in the Forties oil terminal in the North Sea. However, manufacturing output slipped downward by 0.2 percent and was up 0.2 percent on the year. Ten of 13 manufacturing sectors were down on the month. On the positive side, machinery and equipment output was up 1.7 percent. These data were available to the Bank of England's Monetary Policy Committee prior to this week's meeting.

Asia
Australia - January merchandise trade deficit narrowed to A$876 million from A$1.38 billion in the previous month. Exports were up 1.9 percent. Farm shipments, such as meat, sugar, wheat and wool, declined 1 percent but non-rural goods shipments, which include coal and manufactures, increased 3 percent. Services exports rose 1 percent. Imports were down 0.8 percent. Capital goods imports, which include business machinery and vehicles, dropped 3 percent. Imports of intermediate goods, which include fuel, decreased 1 percent. Imports of consumer goods gained 0.2 percent.

Fourth quarter gross domestic product was up 1 percent and 2.8 percent when compared with last year. Final consumption expenditures were up 0.8 percent and 3.5 percent on the year while gross fixed capital formation jumped 2.5 percent and 4.2 percent on the year. The chain price index reflected inflationary trends seen in both the CPI and PPI - it was up 4.3 percent on the year.

Americas
Canada - February employment was up by 14,200 jobs. The unemployment rate eased down to 6.1 percent from 6.2 percent in January. Full-time employment grew by 10,500 jobs and part-time employment by 3,700 jobs. Manufacturing employment dropped by 34,700 jobs after six months of relatively little change. Services producing sector added 48,500 jobs with 18,000 new jobs in finance, insurance, real estate and leasing, and 16,000 more jobs in health care and social assistance.

January merchandise trade surplus climbed to C$6.3 billion from C$5 billion in the previous month. Exports were up 0.9 percent while imports dropped 2.8 percent. The trade surplus with the U.S. jumped to C$8.7 billion from C$7.9 billion in December. Exports to the U.S. were up 0.4 percent despite declines in the export of energy and auto products. Imports from the U.S. sank 2.9 percent. The declines were pervasive. Exports excluding those to the U.S. were up 2.6 percent on strong demand for metals, drilling equipment and fishing vessels. Imports from countries other than the U.S. sank by 2.6 percent.

Bottom line
Of the four central banks that met last week, only the ECB, much to no one's surprise, increased their key interest rate to 3.75 percent. It remains below the policy rates of New Zealand, Australia, U.S., UK and Canada. Japan of course, remains significantly below the ECB rate. Australia's GDP growth surprised market watchers when it increased about double analysts' expectations. Overall, new economic data presented a mixed bag with French and UK industrial production data disappointing followers.

The U.S. moved its conversion to Daylight Saving Time ahead three weeks and by doing so has created a smorgasbord of changes in release time availability for international data. For the next two weeks, European indicators will be available one hour later in the U.S. For example, UK indicators, normally available on the East Coast at 4:30 AM, will be available at 5:30 AM. A reminder - Europe and the UK will change their clocks in two weeks - on Sunday, March 25th. Release times will then revert back to normal. UK data will once again be available at 4:30 AM.

For those who follow Australian events, the sub-content returns to standard time on March 25th, at the same time that Europe changes its clocks to Daylight Savings Time. This means that Australian availability will go through a two step conversion instead of one. On March 11, Australia data will be available one hour later - at 8:30 PM the night before the scheduled release time locally. When Australia returns to standard time, data will be available at 9:30 PM the night before for a total of a two hour change.

Japan does not observe Daylight Saving Time. Indicators from there will be one hour later the night before on the U.S. East Coast.

I think that's clear!

Looking Ahead: March 12 through March 16, 2007