Global Markets

Market events last week were U.S. driven — beginning with Sunday night’s purchase of Bear Stearns by JP Morgan for $2 per share and a cut in the discount rate. In an extremely rare event — the last time the Federal Reserve acted on a weekend was in October 1979 just after Paul Volcker became Fed chairman — the Fed announced that the discount rate would be lowered by 25 basis points to 3.25 percent and just 25 basis points above the fed funds target interest rate. At the same time, the Federal Reserve Board created a new credit facility for primary dealers and approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days. The cut in the discount rate and the extension of the maximum maturity of discount window loans are intended to improve liquidity in the credit market. The Fed Board also authorized the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. Primary dealers are select banks and securities broker/dealers with whom the New York FRB conducts open market operations by trading U.S. government and select other securities. Currently, there are 20 primary dealers.

And on Tuesday, the FOMC surprised the financial markets by actually not giving them everything they wanted and cut the fed funds rate target and discount rate by 75 basis points instead of the expected 100 basis points. The fed funds target rate is now 2.25 percent and the discount rate is now 2.50 percent. The Fed cut rates due to a downgrade in its view of where the economy is headed.

In other parts of the world, Bear Stearns's collapse is more than just bad news for Wall Street, but also part and parcel of what may be going wrong with their own economies. Stock markets overseas seemed to take the Bear Stearns news harder than their U.S. counterparts. In Asia, benchmark indexes in India and Hong Kong for example, sank more than 5 percent each. In Europe, the Bear debacle looks like the ultimate warning of how bad the trans-Atlantic credit crunch can get. In Europe equities dropped to levels not seen since late 2005, and many of the losses came, as in the U.S., from banks.

On the week, stocks in Japan, South Korea and Taiwan gained as did those in the U.S. and Mexico.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were down last week after declining three of four days in the holiday shortened trading week. The indexes were hit by banks on concerns that there could be others to fall after Bear Stearns. Commodity producers were hurt by falling commodity prices after a run up earlier in the week. Tuesday was the only positive day as the indexes recovered most Monday’s losses after investors agreed that the sell off had been overdone after the Fed’s surprise actions on Sunday night. However, traders said there was little conviction behind the rally and most of the buying had been to cover short positions. This proved to be true as stocks were down on both Wednesday and Thursday before the four day weekend.

On Monday, European stocks sank to the lowest since 2005 after the Federal Reserve reduced its discount interest rate at an emergency Sunday meeting and JPMorgan Chase & Co. agreed to buy Bear Stearns for only $2 a share. The Fed rate cut on direct loans to commercial banks by 25 basis points to 3.25 percent is aimed at restoring confidence in financial markets hurt by asset writedowns and credit losses worldwide. On Tuesday, investors were reluctant to take action prior to the FOMC announcement which came after markets here closed.

The commodities sell off occurred as investors became convinced that economic growth would be weak. Therefore there was no reason to bid up the price of commodities or for them to remain at their recent highs. Both oil and gold sank. After recording a new high on Monday, gold in London has plunged 8.5 percent. Commodity prices have fallen off the cliff on concerns that the economic slowdown will reduce demand.

Bank of England explains

The Bank of England’s monetary policy committee voted to leave interest rates unchanged at 5.25 percent at their March 6 meeting. The MPC said it was balancing the risks of a sharper slowdown in growth against those of inflation remaining above the Bank’s 2 percent inflation target. The MPC felt that the risks on both sides had increased but the balance had not changed sufficiently to merit a rate cut. The committee pointed out that cutting rates for the second month in a row “might lead observers to think that the Committee was focusing on downside risks to demand at the expense of the medium-term outlook for inflation”. They added that this could lead to an exaggerated reaction in markets. The minutes said growth and inflation were so far evolving broadly in line with the central projection of the Bank’s latest Inflation Report forecasts, which assumes some further modest easing in official interest rates.

Asia/Pacific

Stocks were volatile in this holiday shortened week. But equities in Japan, South Korea and Taiwan managed to gain — at least through Thursday. It is rare when Asia gets to react to policy moves in the U.S. before anyone else. That was the case last Sunday when markets in this region, opening for Monday morning trading, reacted to the surprise Fed moves and the Bear Stearns sale. Heavy selling of the dollar followed Sunday’s decision to cut its official discount rate by a quarter percentage point to 3.25 percent and to create yet another new lending facility to bolster market liquidity. Stocks plunged throughout the region. The Nikkei closed below the 12,000 mark for the first time since August 2005 thanks to a sharply stronger yen triggered by fears of a looming global credit squeeze.

But Tuesday was another day and stocks staged a rally. All Asian indexes followed here with the exception of the Australian, Shanghai and Philippines indexes. Fears that Bear would be the first of many investment banks to fail were held in abeyance, at least for now. On Wednesday, stocks here reverted to form and followed U.S. stocks north after the 75 basis point cut to 2.25 percent by the Federal Open Market Committee (FOMC) Tuesday afternoon (in U.S.). But the positive direction did not last and stocks mostly declined on Thursday as bargain hunters stepped in following early losses triggered by a slump in commodity prices and Wall Street's decline overnight. South Korea, Taiwan and China managed a late turnaround on the back a technical rebound in select sectors. Stock markets in Japan, India, Indonesia, Malaysia, Pakistan and Philippines were closed for a holiday on Thursday.

Bank of Japan is leaderless

The Japanese Parliament blocked selection of a new Bank of Japan governor leaving the job vacant while the Federal Reserve and other central banks fight to contain the deepening financial crisis. The five-year term of governor Toshihiko Fukui Bank of Japan ended on March 19. It now appears likely that the chairman’s position will remain vacant — possibly into the new fiscal year which begins on April 1. Masaaki Shirakawa will act as interim governor until the two political parties can agree on a candidate to fill the governor’s position. Economists call it a humiliating situation for a country that has been trying for years to assume an international political role commensurate with its $5 trillion economy. Some observers have pointed out that Japan has a lot to offer other central banks in the current crisis. Japan is the only major economy to have recently weathered a housing market meltdown and a banking crisis on a similar scale to the United States.

Currencies

After sinking earlier in the week, the dollar rallied against the euro as commodity prices sank. The precipitous drop in commodity prices began not long after the FOMC announcement. The Fed surprised investors by cutting interest rates less than anticipated. The full percentage point cut which many expected would have sent dollar’s value lower. With the dollar sinking, investors have turned to commodities which are likely to go up as the dollar declines. But with the Fed’s less aggressive move, the dollar reversed direction and has continued to gain. This led to fire sales of commodities as investors scrambled to get out of their positions. At 2:30 PM ET Thursday, West Texas intermediate crude was a few pennies over $100 while the June contract for gold was trading around $925 a troy ounce, down more than 8 percent since the beginning of the week.

The dollar was up against the currencies of commodity producing nations including Canada and Australia after raw materials including gold and oil tumbled for a second day amid speculation the global economy is slowing. The U.S. currency has rebounded almost 3 percent from a record low reached March 17. The euro dropped 1.1 percent to 153.1 yen, after touching the lowest since August. The yen continues to be below the 100 yen to the dollar level. This level is bound to hurt exporters’ profits and revenues.

Indicator scoreboard

EMU

January seasonally adjusted merchandise trade deficit was €2.0 billion, and slightly wider than the revised €1.8 billion shortfall in December. This was the second month in a row that the trade balance was in the red following 15 months of black ink. Nine eurozone countries were in the red led by the Netherlands (€8.6 billion) and Spain (€5.4 billion). Among the larger member states shortfalls were also registered by Italy (€1.2B) and France (€0.8B). As usual, the overall Eurozone performance would have been substantially worse but for a significant positive contribution from Germany (€6.6 billion), in this instance supported by modest amounts of black ink in Ireland, Austria and Finland. On an unadjusted basis, the trade deficit soared to €10.7 billion from €4.1 billion in December.

Germany

February producer price index jumped 0.7 percent and was up 3.8 percent when compared with the same month a year ago. Once again the latest monthly surge was led by energy (1.4 percent) with price rises for petroleum & natural gas (6.1 percent) and bituminous minerals (2.1 percent) particularly strong. Excluding energy, the PPI was up 0.5 percent and 2.7 percent on the year. Among the major categories, the largest increase was in basics (0.9 percent) which easily outpaced both consumer goods (0.4 percent) and capital goods 0.2 percent). Other significant increases within the more disaggregated data came in the food, alcohol & beverages sector (0.8 percent) where pork meat (1.5 percent) was up especially sharply. Over the year, prices for consumer goods were up 4.1 percent led by non-durables (4.5 percent) with basics higher by 3.2 percent and capital goods by just 0.8 percent. The overall energy index was 7.0 percent higher and food & drink up by some 9.2 percent.

Italy

January unadjusted merchandise trade deficit was €4.2B billion, the worst performance since the series was first compiled in 1991. Exports were up 12.0 percent while imports were up 12.3 percent when compared with the previous year. The major positive contributions to the bottom line came from mechanical appliances, clothing and coke & petroleum products. The largest deficits were posted in chemicals & synthetic fibers, transportation, electrical machinery and minerals.

Fourth quarter unemployment rate remained at 6 percent for the second quarter. The actual number of jobseekers fell 0.7 percent over the period to 1,474,000 while the number in employment dipped 0.2 percent to 23,281,000. The labor force contracted by 0.3 percent. Over the year, employment rose by 1.2 percent in the North, 3.0 percent in the center of the country and by 0.4 percent in the South. The weakest sector was agriculture which saw jobs plummet by 7.9 percent, followed by manufacturing where employment was down 0.6 percent. Services, however, saw growth of 2.5 percent while construction rose a more modest 2.0 percent.

United Kingdom

February consumer price index was up 0.8 percent and 2.5 percent when compared with the same month a year ago. A new methodology for accounting for changes to energy tariffs provided a significant boost to consumer prices. However, the latest spike puts the CPI some 0.5 percentage points above its 2.0 percent inflation target level. The impact of the new approach to tariffs which sees all of the increase in prices put into a single month as opposed to being spread over four months is apparent in the housing, utilities and fuels sector. Here, annual inflation jumped from 0.4 percent at the start of the year to 1.7 percent in February. The only other major sector to see a significant acceleration in prices was alcohol & tobacco which jumped from 2.2 percent to 2.9 percent. Annual inflation in most other categories was either essentially unchanged or, in a few instances, lower. Core CPI which excludes food, energy, alcohol beverages & tobacco was up 0.3 percent and 1.2 percent on the year.

January average earnings were up 3.7 percent following December’s increase of 3.8 percent. Excluding bonuses, average earnings were also up 3.7 percent. Public sector earnings accelerated by 3.5 percent but remain relatively subdued. Manufacturing showed a more robust increase to a 3.9 percent annual rate but developments in the real economy suggest that this will prove unsustainable.

February claimant count unemployment was down by 2,800. For the third month in a row, the jobless rate held steady at 2.5 percent, albeit down 0.4 percentage points from a year earlier. The February decline in the number of unemployed was the 17th consecutive drop and followed a slightly smaller revised drop of 9,100 (was 10,800) at the start of the year. The slowdown in the pace of decline in joblessness is supported by a very modest increase of just 1,600 in vacancies over the latest three months masking a 2,400 drop in finance and business services. On the ILO measure, the unemployment rate was 5.2 percent in the three months to January. This was unchanged from the previous month but down 0.1 percentage point from the three months to October 2007 and 0.3 percentage points below the comparable year ago level. The unemployment level in the latest three months was 1,610,000 or 23,000 lower than in the three months to October last year.

February retail sales were up a surprisingly robust 0.9 percent and 5.5 percent when compared with last year. January data were revised up from a 0.8 percent monthly rise to a 1.1 percent increase. Food sales were up a hefty and disproportionately large 1.6 percent while non-food sales advanced 0.5 percent. Within this latter sector, purchases were broad based outside of a notably weak period for household goods (down 4.2 percent). Hence, there were very healthy advances in sales at non-specialist stores (2.7 percent) as well as in both the clothing and footwear sector (2.5 percent) and other stores (1.6 percent). At the same time, non-store retailing saw demand grow 1.7 percent on the month.

Asia/Pacific

Japan

January tertiary index was up 0.7 percent and 0.6 percent when compared with last year. This was the first increase in two months. The rebound was underpinned by the first increase in wholesale, financial and telecommunications sectors in three months. The 11 service industries tracked by the index account for roughly 60 percent of Japan's economic output. Among them are utilities, transport, telecommunications, wholesale and retail, finance and insurance, real estate, restaurants and hotels, as well as medical, health care and welfare.

January all industry index was unchanged on the month and up 0.3 percent when compared with last year. Analysts had expected an increase of 0.1 percent after declines in November and December. The tertiary index, which was released earlier this week, was up 0.7 percent. The all industry index takes a reading of activity in the 11 industries that comprise the tertiary index, along with activity in the construction, agricultural & fisheries industries, the public sector and industrial output. This index is considered a close approximation of gross domestic product growth as measured by industrial and service sector output. Overall, weak job creation continues to hamper household incomes and thus consumer spending, while that in turn is dampening investment and production in the domestic economy.

Hong Kong

February consumer price index was up 6.3 percent on the year, up significantly from January’s 3.2 percent increase. There were a number of one-off factors that led to the increase including the waiver of public housing rentals for February 2007 (which had led to a low base of comparison), the rate concession for January to March 2008 and the waiver of public housing rental for February 2008. Food prices were higher and were largely distorted by lunar new year effects and the decades strong snowstorms in China.

Americas

Canada

January factory shipments rebounded 1.3 percent after sinking 3.7 percent in December. In real terms the latest increase was a more impressive 2.0 percent for the first increase since October. Sixteen of the 21 reporting industries were up with both durables (1.8 percent) and non-durables (0.8 percent) recording monthly gains. The main driving force was the auto sector which saw sales stage a partial recovery (4.5 percent) from the dramatic decline registered in December (25.6 percent). Other notable increases were seen in food and manufacturing. In particular, machinery sales were up a solid 5.8 percent although this followed three consecutive declines while higher grain prices and record oilseed production helped to push food sales up 1.3 percent. Conversely, there were marked declines in aerospace products and parts (4.1 percent) and in the chemical sector (1.4 percent), led by petrochemicals and fertilizers. New orders jumped by 2.9 percent as did backlogs which added a monthly increase of 3.6 percent.

February consumer price index was up 0.4 percent and 1.8 percent when compared with last year and below the Bank of Canada’s inflation range of 1 to 3 percent midpoint. Core CPI was also up 0.4 percent on the month but up 1.3 percent on the year. The Bank of Canada core CPI which excludes eight volatile items was up 0.5 percent and 1.5 percent on the year. There were marked gains in prices of clothing and footwear (2.1 percent) and recreation, education & reading (1.2 percent). Other more modest increases were seen in household operations & furnishings and food & shelter (0.3 percent). Energy prices were up 0.3 percent. The only decline of note was in transportation (0.5 percent). Over the most recent 12 months, the strongest increases in prices have occurred in energy (9.7 percent) followed by transportation (2.5 percent) and alcohol & tobacco products (2.1 percent). By contrast, prices for clothing and footwear were 1.4 percent below their year ago level.

Bottom line

Last week’s news was dominated by the Fed’s surprise moves and their aftermath. Little other news caught investors’ attention for the most part. In Japan, the bickering of its two main political parties prevented the selection of a successor to former governor Tashihiko Fukui whose term expired Wednesday. And in the UK, analysts diced and sliced the minutes of the monetary policy committee meeting for clues to future policy moves. And in economic data, both the U.S. and UK consumer price indexes were above the comfort level or in the case of the Bank of England, its inflation target.

Data for the upcoming week gives us the final revisions to fourth quarter gross domestic product data in France, the UK and the U.S. And in Japan, the usual spate of economic indicators for the last week of the month will be released including the CPI, household spending, industrial production and the labor markets.

Looking Ahead: March 24 through March 28, 2008

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