Global Markets

U.S. events set the tone for markets last week. After plunging on Monday, equities showed every sign of continuing to decline when the Federal Reserve in conjunction with other major central banks including the European Central Bank managed to comfort troubled investors by injecting some liquidity into the credit markets Tuesday morning. It was a nice breather but did not last for long. The beleaguered U.S. dollar resumed its decline against virtually all major currencies and the specter of intervention in the foreign exchange markets once again resurfaced. A respite in equities continued into Wednesday in Europe and Asia but did not last in U.S. markets. Rising uncertainty led investors to flee equities in search of safety in gold and government bonds. It also prompted renewed selling of the dollar, which had made gains following the Federal Reserve-led injection of $236 billion to boost liquidity in global credit markets.

But the U.S. dollar continued to be pounded setting new record lows daily against the euro and reaching lows against the yen not seen since 1995. And as the dollar sank, gold prices touched $1,000 per troy ounce — and after hesitating, climbed above that level to end the week at $1003.50 (London PM Fixing). Meanwhile oil soared to a fresh record of $110.85 per barrel. The renewed dollar weakness came despite comments from ECB president Jean Claude Trichet about excessive currency movements. He said that ”on exchange rates, particularly against the dollar, I reaffirm that disorderly movements in exchange rates are undesirable from the point of view of economic growth.” And the Japanese Ministry of Finance made it known that they were watching the rising value of the yen carefully. Japan last intervened in the currency market in 2004. Possible intervention in the currency market has returned.

On the week, all Asian/Pacific and European stock indexes followed here declined. In North America, The Dow and Bolsa were up on the week and the Nasdaq was unchanged. The S&P 500 and S&P/TSX Composite were down slightly.

Global Stock Market Recap

Europe and the UK

Stocks in Europe and the UK were down three of five days last week. The FTSE, CAC and DAX were positive on Tuesday and Wednesday after the Federal Reserve’s announcement that it is taking steps to unblock credit markets in concert with other major central banks. This heartened investors and they bought financial stocks. But investors hesitated on Thursday after news that major investment company Carlyle Capital had defaulted on margin calls. Renewed fears of a possible U.S. recession combined with U.S. dollar weakness and new highs for crude oil and gold sank equities.

Stocks declined last week, primarily on Friday’s losses after the bail out of Bear Stearns by JP Morgan and the New York Federal Reserve (one of 12 regional Federal Reserve banks). This was followed by a spate of supportive comments from the Federal Reserve Board, Treasury Secretary Henry Paulson and President George Bush. Equities in Europe and the UK reversed earlier gains in Friday afternoon trading after the dramatic intervention to provide emergency funding to Bear Stearns. The move to provide funding for Bear came on the back of growing market concerns that it was facing significant liquidity constraints. The Fed, which normally loans only to banks, used a rare depression era lending regulation to facilitate the loan.

In the UK, public expectations of future inflation have reached the highest level on record, according to the Bank of England’s quarterly survey of attitudes to inflation. It showed people on average thought prices would rise 3.3 percent over the next year, the highest level in the survey’s seven year history and well above the Bank’s 2 percent inflation target. Respondents on average thought prices had risen 3.9 percent over the last year, also a series high, and nearly a third thought the current inflation rate was higher than 5 percent — the CPI was up 2.2 percent in January.

Asia/Pacific

All Asian/Pacific equity indexes followed here were down last week despite momentary jubilation on Wednesday (Asian reactions lag a day) as investors reacted to news that the U.S. Federal Reserve had injected liquidity into the credit markets. However, stocks went south on Thursday and were mixed Friday. Japanese exporters’ stocks were hit hard by the soaring value of the yen and on worries about global credit markets. Australian stocks were up Friday on the back of gains in the resources sector following higher crude oil and metal prices. Shanghai shares however were down four of five days on concerns about possible monetary tightening measures.

On Monday, Asian/Pacific stock markets tumbled as they tracked the sharp decline on Friday in U.S. equities that was tripped by the drop in February employment. Malaysian shares slumped 9.5 percent Monday after the ruling political coalition suffered its worst ever defeat in Saturday's general election.

The Shanghai Composite Index lost 7.9 percent on the week after a spate of economic data that were released during the week. China's fixed-asset investment grew 24.3 percent in the first two months of the year, even though the country was paralyzed by snowstorms that disrupted transportation and construction projects. And consumer and producer prices were high, affected by the snowstorm and the Lunar New Year holidays. The Shanghai Composite is down 24.7 percent since the start of 2008 and 31.6 percent from its October peak. Analysts point out that the declines demonstrate that the Chinese market is not as insulated from the rest of the world as had been hoped.

Currencies

The dollar sank to yet another all time low against the euro and to a 12-year low against the yen after JP Morgan and the New York Federal Reserve agreed to provide emergency funding to Bear Stearns and signaled that credit market losses may widen. The dollar also plunged to below parity with the Swiss franc for the first time as traders speculated that the Fed will slash interest rates a full percentage point next week to keep a credit market crisis from triggering a recession.

The U.S. currency plunged to $1.5688 per euro, the weakest since the European currency's 1999 debut. The dollar is down about 7.3 percent in 2008 as the pace of decline accelerates. It was trading at about $1.5668 at 4:00 PM ET. The dollar sank to 99.57 yen, the lowest since October 1995. It was trading at about 99.29 at 4:00 PM ET. The dollar is down over 11 percent against the Swiss franc in 2008. The dollar’s decline has accelerated as the Federal Reserve has been forced to cut the fed funds target rate in an attempt to keep the economy growing — but at the same time lowering returns on dollar deposits.

Analysts are predicting a coordinated action by policy makers to stem the currency's slide. In intervention, central banks buy and sell currencies to influence exchange rates. Japanese Finance Minister Fukushiro Nukaga said today abrupt currency moves are bad for economic growth and Economics Minister Hiroko Ota said excessive currency movements are “undesirable” even though they reflect dollar weakness rather than yen strength. European Central Bank President Jean-Claude Trichet said on March 10 that the euro's surge concerns him.

Indicator scoreboard

EMU

January industrial output jumped 0.9 percent and was up 3.8 percent when compared with last year. All of the main product groups were up on the month with the most impressive advance posted by capital goods (2.7 percent). Durable consumer goods (1.9 percent) also beat the average increase and intermediates (0.8 percent) were only a fraction behind. Nondurable consumer goods (0.6 percent) achieved a more modest gain leaving just energy, down 2.9 percent, as the sole decliner. In terms of annual growth rates, capital goods (7.5 percent) again led the way followed by energy (5.0 percent) and intermediates (2.1 percent). Durable consumer goods (1.9 percent) and, in particular, nondurable consumer goods (1.1 percent) lag behind in respect of what was a generally sluggish household sector in 2007.

February harmonized index of consumer products was up 0.3 percent and 3.3 percent when compared with last year and a new record high. On an annual basis, the HICP excluding food, drink, tobacco and petroleum edged up a tick to 1.8 percent, while excluding energy and unprocessed foods, prices were similarly a notch higher at 2.4 percent. Over the year, the factors pushing inflation higher were food (5.8 percent from 5.4 percent), alcohol and tobacco (3.9 percent from 2.8 percent), clothing (1.0 percent from 0.5 percent) and education (9.7 percent from 9.4 percent). Working in the other direction were energy (10.4 percent from 10.6 percent), transport (5.4 percent from 5.6 percent), health (1.4 percent from 2.0 percent) and communications where disinflation became even more marked (3.1 percent from 2.9 percent).

Germany

January merchandise trade surplus edged up to €16.1 billion from €15.8 billion in December. The latest increase reflected a 3.8 percent monthly increase in exports, outpaced by an even stronger 4.2 percent gain in imports. The rise in exports was the largest in more than a year and the first increase in excess of 1 percent since August last year.

March ZEW economic expectations edged up to minus 32 from minus 39.5 in February. The index remains well below its long-run average (33.7). The current conditions index slipped 1.6 points to 32.1. While the magnitude of the decline was nothing like the scary 22.9 point drop seen in February, the fall was the ninth in succession and leaves current conditions at their weakest level since July 2006.

France

January merchandise trade deficit was €3.4 billion, down from December’s €4.0 billion. The lower deficit reflected a surprisingly strong monthly gain in exports (5.8 percent) that more than offset a solid increase in imports (3.3 percent). While the January shortfall was the smallest since August, the revised 2007 deficit of €39.6 billion was still a new record.

January industrial output excluding construction was up 0.5 percent and 2.7 percent when compared with last year. Manufacturing increased a solid 1.2 percent versus December and stands a respectable 3.1 percent up on the year. The monthly gain was led by another solid increase in the auto industry (1.8 percent) and supported by decent gains in both consumer goods (1.4 percent) where clothing & leather (2.5 percent) and printing & publishing (2.3 percent) were especially robust and semi-finished goods (1.2 percent) where minerals (1.5 percent) outperformed. Capital goods (0.8 percent) were boosted by a rebound in machinery (0.9 percent). However, there were declines in both food & agriculture (1.7 percent) and energy (2.3 percent) which was heavily impacted by a slump in utilities (3.0 percent).

Italy

January industrial output was up 1.3 percent and 0.5 percent when compared with last year. The monthly January bounce was led by energy (2.4 percent) and the consumer sector (0.8 percent) which picked up on the back of solid gains in both the durables and nondurables areas. Capital goods (0.9 percent) also did well but intermediates fell (0.6 percent). Manufacturing output was up 1.9 percent on the month with significant contributions from food, beverages & tobacco (4.9 percent), fabric & clothing (5.9 percent), furniture (5.5 percent) and electrical & optic machinery (3.5 percent). There were declines in coal and petroleum (3.3 percent) and non-mineral processing (0.5 percent).

United Kingdom

January industrial output was unchanged on the month and up 0.5 percent when compared with last year. Manufacturing output however was up 0.4 percent and 0.6 percent on the year. Undermining the headline index were hefty declines in both mining & quarrying (down 4.1 percent) and oil & gas extraction (down 2.6 percent) and the negative effects of these sectors were compounded by a smaller drop in electricity, gas & water (down 0.2 percent). Three-month changes in the main manufacturing industries paint a mixed but generally weak picture. The only gains of note are in chemicals & man-made fibres (1.1 percent) and engineering (0.7 percent). All of the other sectors show declines led by textiles, leather & clothing (2.6 percent), followed by basic metals & metals products (1.1 percent) and coke, refined petrol & nuclear fuels (1.0 percent).

January merchandise trade deficit was £7.5B despite a surprisingly large 6.6 percent jump in exports that easily eclipsed a 4.4 percent gain in imports. The deficit on trade in goods and services was £4.1 billion for the second month. The surplus on trade in services was £3.4 billion, also the same as in December. Excluding oil and erratic items, the volume of exports was 6 percent higher in January and the volume of imports was 1 percent higher. The bilateral shortfall with non-EU countries widened slightly but this was offset by an equivalent reduction in the red ink on net trade with EU states.

January producer output prices were up 0.3 percent and 5.7 percent when compared with last year. Core output prices which exclude food, beverages, tobacco and petroleum were up 0.2 percent and 3.0 percent on the year. The largest monthly increases among the component products were tobacco & alcohol (0.7 percent) food (0.6 percent) and other products (0.8 percent). Working in the other direction, there were drops in petroleum products (0.1 percent) and chemicals (0.4 percent). On the year, the biggest increases were registered by petroleum (23.4 percent) and food (8.4 percent). However producer input prices soared 1.7 percent and 19.4 percent on the year. Hefty increases in crude oil costs (3.3 percent) compounded by significant gains in imported metals (3.5 percent), imported food materials (3.3 percent) and other home-produced materials (3.2 percent) were the culprits. There were also marked rises in imported parts & equipment (1.0 percent) and other imported materials (1.5 percent). The only monthly declines were in fuel (1.3 percent) and home food materials (1.7 percent). On the year, crude oil (65.7 percent) and home food materials (33.9 percent) were responsible for the gains.

Asia/Pacific

Japan

The February corporate goods price index was up 0.4 percent and 3.4 percent when compared with last year. Manufacturing products prices posted a 0.3 percent gain for the second month and 3.4 percent on the year. Within manufacturing industry products, prices for nonferrous metals surged 2.8 percent and 5.4 percent on the year while iron & steel advanced 1.7 percent and 6.2 percent on the year. Textile products were up 0.9 percent and 2.9 percent on the year while processed foodstuffs prices were up 0.3 percent and 2.2 percent on the year. But prices for information & communications equipment dropped 0.5 percent and are down 6.3 percent on the year; and petroleum & coal products dipped 0.4 percent and were still up a sharp 28.8 percent at a yearly rate. The import price index firmed largely on higher metals and petroleum prices, rising 1.6 percent on the month and up 10.9 percent on the year.

Fourth quarter second preliminary estimate for real gross domestic product was up an unrevised 0.9 percent. Annualized, however, the fourth quarter was nudged down incrementally to 3.5 percent from the prior estimate of 3.7 percent. Year-on-year, GDP was revised down marginally to 1.7 percent from the initial estimate of 1.8 percent. The deflator was unrevised at down 1.3 percent year-on-year. Real GDP component revisions were mixed. A key component, private nonresidential investment or CAPEX, was revised down to a quarterly gain of 2.0 percent from the initial estimate of 2.9 percent. Overall domestic demand was nudged down to a quarterly gain of 0.4 percent for a second quarter from the initial estimate of 0.5 percent.

Australia

February employment advanced a sharp 36,700 following an upwardly revised 31,400 boost the month before. The unemployment rate dropped to 4.0 percent from 4.1 percent in January and reached the lowest rate since 1974. Full time employment was up by 47,700 but part time employment decreased by 5,800. Unemployment fell by 16,800. However, the participation rate was unchanged at 65.2 percent.

China

January-February industrial production was up 15.4 when compared with last year. While domestic demand remains robust, industrial activity growth has remained soft in recent months given the further slowdown in global demand. Snowstorms disrupted transportation and local shortages of power and energy supply hurt industrial production.

February producer price index inflation accelerated to the fastest pace in more than three years in February after blizzards disrupted fuel supplies. Producer prices were up 6.6 percent on the year after climbing 6.1 percent in January. Producer price inflation has accelerated for seven straight months.

February merchandise trade surplus narrowed 64 percent to $8.56 billion from a year earlier. It was the first drop in almost a year as snowstorms disrupted shipments and U.S. demand weakened. Exports were up 6.5 percent, the slowest pace in almost six years. Imports increased 35.1 percent for the biggest gain in more than three years on higher prices for commodities such as crude oil, iron ore and soy beans.

January-February retail sales were up 20.2 percent when compared with last year. Sales remained largely stable in spite of the snowstorm which might have dampened consumer's sentiment. Given the high volatility associated with the Lunar New Year holidays, the National Bureau of Statistics did not release the individual monthly figures for January and February separately.

February consumer price index spiked to a new 11-year high of 8.7 percent when compared with last year. The increase was almost wholly driven by higher food prices on the back of Lunar New Year holidays and snowstorm effect. Non-food and core CPI were up 1.6 percent and 1.0 percent respectively on the year.

Americas
Canada

January merchandise trade surplus improved from a 10-year low of C$3.2 billion in December to C$3.3 billion at the start of 2008. The improvement reflected a solid 3.6 percent increase in nominal exports that more than offset a 1.0 percent rise in imports. However, both sides of the balance sheet were inflated by rising prices and in volume terms, exports dropped 0.6 percent while imports slipped 0.7 percent. The bilateral surplus with the U.S. widened to C$6.2 billion while the deficit with the rest of the world narrowed to C$2.9 billion, largely thanks to a strong import demand from China and India.

Bottom line

Much of the week’s news centered on the ongoing credit crunch. And it was a busy week for the Federal Reserve. On Tuesday along with other major central banks, the Fed added liquidity to credit markets to the tune of $236 billion. And on Friday, the Federal Reserve Bank of New York in conjunction with JP Morgan bailed out — at least for now — Bear Stearns. The last time the U.S. authorities intervened so directly to prop up a significant financial institution was in the late 1980s, when the Resolution Trust Corporation was established to wind down the savings and loans banks. The dollar’s rapid decline brought words of caution from both European and Japanese officials.

Economic data last week focused on industrial production and merchandise trade. For Canada, the merchandise trade report showed their trade surplus recovering from December’s 10 year low. And in Europe, Germany’s surplus also grew and France’s deficit narrowed despite the high value of the euro. For the U.S. however, the trade gap widened.

Japan continues to await the appointment of a new Governor of the Bank of Japan. With the present governor’s term expiring on March 19, the appointment is caught up in political wrangling between the two major political parties. The governor and two deputies are appointed simultaneously. Both houses of parliament have now approved Masaaki Shirakawa as BoJ deputy governor and he would likely become acting governor if a replacement for Mr Fukui was not in place. Although no real monetary policy issues are pending, the yen’s relentless surge against the dollar further undermines an economy that many believe is already in recession. The lack of a governor will make it difficult for the central bank to make any bold policy decisions.

Oh yes. The Federal Open Market Committee meets on Tuesday. Analysts are expecting an interest rate cut of 75 to 100 basis points. The current fed funds target rate is 3 percent.

Looking Ahead: March 10 through March 14, 2008

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