Global Markets

Equities showed signs of life last week and rebounded from the previous week’s losses despite tepid to negative new economic data. Rather they rallied for the most part on earnings reports from major financial companies as well as other key market moving companies. Equity markets enjoyed strong gains as mergers and earnings kept investors focused. Four indexes — all in the Asia/Pacific region — were down on the week. The STI and All Ordinaries were virtually unchanged on the week. The Taiex, S&P/TSX Composite and the Bolsa are up 6.7 percent, 2.9 percent and 7.6 percent on the year.

The currency markets took center stage as price pressures in the eurozone pushed the dollar and pound sterling to record lows against the euro and oil reached fresh highs as investors backed crude as a hedge against inflation. Analysts said that while high eurozone inflation would rule out interest rate cuts from the European Central Bank, weak U.S. growth and the benign rise in U.S. consumer prices ensured further Fed interest rate cuts.

On gold and oil

In commodity markets, gold and oil are often used as hedges against inflation. The price for West Texas Intermediate soared over $116 a barrel on Friday, a new record. U.S. inventories unexpectedly fell and speculation that supply constraints would continue to push prices even higher contributed to the increase. Crude has gained about 21 percent so far in 2008. Renewed dollar weakness has contributed to higher prices along with fears about supply. For example, it was said that Russian oil production had peaked and might never return to current levels.

Global Stock Market Recap

Europe and the UK

The three equity indexes, despite their daily ups and downs, were positive at week’s end. The FTSE, CAC and DAX all responded favorably to major financial corporations’ first quarter losses. (And there were positive surprises from non-financial companies as well.) The market logic appears to be that with these losses behind them, financial firms will turn the corner as they regroup. The FTSE, CAC and DAX were up 2.7 percent, 3.4 percent and 3.6 percent respectively for the week. Banking stocks proved to be the major motivator of Friday’s increases after Citibank reported its losses along with huge cost cuts and on reports that the Royal Bank of Scotland is considering a huge rights issue to rebuild its capital reserves.

It should be noted that the week did not begin so rosy. On Monday, European stocks fell for a fifth day after Philips Electronics missed analysts' profit estimates, an unexpected loss at Wachovia weighed on banks and the Group of Seven finance ministers said prospects for the economy deteriorated. Analysts had forecast that earnings for European companies would shrink in 2008 for the first time in six years. G-7 finance ministers said prospects for the global economy have weakened and financial-market losses would continue.

Bank of England’s chief economist speaks!

Bank of England Chief Economist Charles Bean said monetary policy committee members are walking a ‘tightrope” as inflationary pressures continued to climb and the worldwide seizure of credit conditions exacerbates the economic slowdown. He said more aggressive action would have increased the risk of inflation remaining above its 2 percent target. Inflation as measured by the consumer price index was 2.5 percent in March. The Bank has cut their key interest rate by 25 basis points three times since the credit crunch unfolded last summer to its current 5 percent level. Mr. Bean noted that the monetary policy committee targeted CPI inflation, not house prices. He said if the credit crunch turns out to have a big impact on growth, inflation could undershoot the Bank’s target in the medium term. But it would be equally costly if the shock of higher global commodity prices leads to persistently high inflation.

His comments suggest that Mr. Bean is comfortable with the pace of interest-rate reductions so far. While speculation of falling rates to avert recession pushed the pound to a record low against the euro this week, Bean's remarks also suggest inflation may match the highest level in a decade this year. The pound has dropped 13 percent since July against a basket of the U.K.'s major trading partners and reached a record low of 80.99 pence per euro yesterday. The declines may be roughly equivalent to the effect of the pound's exit from the European Exchange-Rate Mechanism in 1992, he said.

Asia/Pacific

Equities were mixed last week as investors awaited earnings results from major financial firms. Stock markets across the Asia/Pacific region were mixed to end the week after U.S. equities’ tepid performance Thursday. While Australian and Chinese markets finished sharply lower, Japan and South Korea recouped most of their early losses to end in positive territory. However, the gains were limited as investors were cautious ahead of earnings announcement by Citigroup. At week’s end, the All Ordinaries and STI were virtually unchanged. The Sensex turned in the best performance, gaining 4.3 percent on the week, while the SET was up 2.2 percent. The Topix and Jakarta Composite trailed with gains of 2 percent each.

The worst performance was turned in by the Shanghai Composite as it closed at a 12 month low. The index was down 11.4 percent last week and now has dropped 49 percent from its October 16, 2007 peak of 6,124. Investors continue to fret about the possibility of more policy steps to rein in inflation which was up 8.3 percent on the year in March. Shares in Shanghai have plunged as sharply in the past six months as they surged during the first part of 2007. The index surged 141 percent between mid-February 2007 and the October peak. Some companies found speculating in the market more profitable than investing in new machinery. Shares on the bigger of mainland China’s two stock markets (the other is Shenzhen) are now worth pretty much the same as in early April last year.

Cabinet Office monthly outlook

On Friday, the Japanese Cabinet Office maintained its key assessment of the Japanese economy for the second month. It said the recovery seems to be pausing citing a combination of weak business confidence and the increasing fear of a U.S. recession. Weak business sentiment is due to rising oil and raw material prices along with sluggish prospects for corporate capital spending. The Cabinet Office attributed the downgrading of business sentiment — the first in four months — mainly to the weak result of the Bank of Japan's quarterly Tankan survey that showed business sentiment among Japanese firms has further deteriorated on growing uncertainty over the global economy given the slowing U.S. economy and rising oil and commodity prices. It also underlined that more companies are becoming negative about increasing their capital investment.

In the short term, the report mentioned some positive aspects and said the Japanese economy is expected to get back onto a track of moderate growth against the background of gradual resolution of the impact of the revised Building Standard Law. One positive note is that housing starts, which had plunged to historically low levels following last summer’s introduction of tighter building regulation, has started to recover.

Currencies

The table below which lists the value of currencies against the U.S. dollar is being introduced this week and will be included in each week’s article.

Selected Currencies — Weekly Results

After sinking to an all time low of $1.5983 earlier in the week, the dollar rebounded against the euro after Citigroup’s first quarter results fueled speculation that financial firms would weather credit market losses. The yen was down on Friday against all major currencies as investors returned to higher yielding assets using the yen to fund their purchases (carry trade). The earlier euro rally was sparked by the stronger than anticipated increase in inflation — 3.6 percent and effectively eliminating any lingering hope that the European Central Bank would lower its 4 percent interest rate anytime soon. Interest rates in the eurozone exceed U.S. rates by 1.75 percentage points.

The pound sterling rebounded as well on speculation the Bank of England may take mortgages off lenders' balance sheets. Sterling also hit a life time low against the euro of 80.99 pence. On Friday, among the major currencies, the dollar posted its biggest gains against the yen and Swiss franc as traders moved away from the currencies regarded as havens in times of turmoil.

Indicator scoreboard

EMU

February industrial production was up 0.3 percent and up 3.1 percent when compared with last year. Intermediates output was up 0.3 percent, energy was up 0.5 percent and capital goods gained 0.9 percent. However, there were declines in both durable and non-durable consumer goods (both 0.4 percent), the former now weakening for the third month out of the last four. Outside of consumer durables (down 0.7 percent) all sectors show positive growth over the year with the most significant rise registered in capital goods (7.1 percent). Increases in energy (4.0 percent), intermediates (2.1 percent) and non-durable consumer goods (0.8 percent) were more modest.

March harmonized index of consumer prices was up 1.0 percent and 3.6 percent when compared with the same month a year ago. Core HICP, which excludes food, drink, tobacco and energy was up 2.0 percent on the year. Excluding only energy and unprocessed foods, the HICP was up 2.7 percent. Doing the most damage to the annual rate last month were food (6.2 percent from 5.8 percent), housing (4.4 percent from 4.0 percent), transport (5.6 percent from 5.4 percent) and energy (11.2 percent from 10.4 percent). No single expenditure category posted a deceleration and only clothing (1.0 percent) and education (9.6 percent) held steady. Regionally, the HICP was up 3.3 percent in Germany, 3.5 percent in France and 4.6 percent in Spain. 

Germany

April ZEW current conditions edged upwards to 33.3 from 32.1. However, expectations sank to minus 40.7 from minus 32 in March. To the extent that the survey results are heavily influenced by developments in the financial markets, the latest slide in expectations may not be quite as bad as it seems. Economic expectations were affected by extraordinary high price pressures. High rates of inflation reduce the available income of consumers and, hence, weaken private consumption. Low numbers of incoming orders of German companies point to slower growth in Germany as well.

March producer price index was up 0.7 percent and 4.2 percent when compared with last year. Energy prices climbed 1.5 percent with light heating oil (5.4 percent), diesel (5.4 percent) and heavy heating oil (2.0 percent) all registering especially robust gains. Over the year, energy costs are up 8.2 percent. Excluding this category, the PPI was up only 0.3 percent on the month and 4.2 percent on the year. Among the other broad sectors, prices showed moderate monthly gains for consumer goods (0.3 percent) and basics (0.3 percent) but were little changed for capital goods (0.1 percent). Meat prices (1.3 percent) jumped and would have been higher still but for weakness in poultry.

Italy

February merchandise trade deficit narrowed to just €41 million as strong monthly growth in exports (1.7 percent) easily outpaced a much more modest increase in imports (0.6 percent). Total exports were up 10.9 percent on the year, more than double the 5.3 percent gain seen in imports.

United Kingdom

March producer output prices jumped 0.9 percent and were up 6.2 percent when compared with last year and the fastest pace since May 1991. Around 0.3 percentage points of the increase was due to budget effects, and roughly the same impact is likely to be seen in the April data. Hence the categories showing the largest monthly advances were petroleum products (2.9 percent) and alcohol & tobacco (2.1 percent). Other price increases were quite subdued with food (0.5 percent) the most marked, followed by other products (0.4 percent). Transport, paper and metal products all were up 0.3 percent. The core PPI, which excludes food, drink, tobacco and petroleum products, was up 0.3 percent and 3.1 percent on the year. Producer input prices were up 1.8 percent and soared 20.6 percent on the year. The core index was up 1.5 percent and 9.6 percent on the year. Leading the monthly jump was crude oil (7.8 percent) which was well ahead of imported metals (4.0 percent) and imported chemicals (2.7 percent), both of which suffered from the declining value of the pound sterling. However, there were declines in fuel costs (1.5 percent) and other home produced materials (0.1 percent). Over the year, crude oil (62.5 percent) inevitably continued to dominate the headline gain with home food materials (33.4 percent) in hot pursuit. The smallest rises were in imported parts and equipment (7.3 percent) and fuel (7.6 percent).

March consumer price index was up 0.4 percent and 2.5 percent when compared with last year. Core CPI which excludes energy, food, alcoholic beverages & tobacco was up 0.4 percent and 1.2 percent on the year. The main areas pushing annual prices higher in March were housing, utilities and fuels (3.9 percent from 1.7 percent), health (3.5 percent from 3.1 percent) and transport (7.0 percent from 6.2 percent). However, the effects here were offset by declines in inflation in food and non-alcoholic beverages (5.5 percent from 5.6 percent), alcohol & tobacco (2.5 percent from 2.9 percent), clothing & footwear (minus 5.3 percent from minus 4.7 percent) and furniture & household equipment (0.5 percent from 1.7 percent). Other sectors were essentially flat.

February average earnings were up 3.7 percent and down from 3.9 percent in January when compared with a year earlier. Headline earnings growth in the private sector slipped to 3.7 percent from 4.0 percent but edged up in the public sector from 3.5 percent to 3.7 percent. Excluding bonuses headline earnings were up a slightly firmer than anticipated annual 3.8 percent in February.

March claimant count joblessness was down 1,200 after a revised decline of 2,800 in February. The unemployment rate nevertheless held steady at 2.5 percent for the fifth month. The ILO measure of joblessness revealed a steep 37,000 drop in unemployment in the three months to February. This left the jobless rate down 0.1 percentage point from the previous quarter at 5.2 percent. The level of unemployment stood at 1,610,000 in the three months to February while employment, which rose a respectable 153,000 over the same period, now stands at 29,508,000.

Asia/Pacific

China

First quarter gross domestic product was up 10.6 percent when compared with last year. Fourth quarter 2007 growth was 11.2 percent. First quarter growth slowed as the worst snow storms in 50 years closed factories, destroyed crops and delayed shipments, and U.S. demand for exports weakened.

March industrial production was up 17.8 percent when compared with last year. During the first quarter, industrial output was up 16.4 percent. The data showed overall industrial activities resumed to normal after the snow-storm disruption earlier in the quarter.

March consumer price index was up 8.3 percent when compared with last year, the highest rate since May 1996. However, the increase was less than February’s 8.7 percent which was a near 12-year high.

Americas

Canada

February factory shipments were up 1.6 percent but were down 2.3 percent when compared with last year. In volume terms shipments advanced 2.7 percent following an already solid 2.2 percent rebound in January. Though the majority of manufacturing industries (13 of 21) posted monthly increases, the gain was still heavily biased towards durables (2.6 percent) over the non-durable sector (0.4 percent). The main growth area was autos (11.7 percent) which recovered sharply from production slowdowns and shutdowns in December and early January. In addition there were particularly large gains in aerospace products and parts (11.6 percent) which saw their first increase since last November. Primary metals (1.4 percent) also fared well but the electrical equipment, appliance and components industry saw orders drop steeply (4.9 percent). Excluding transportation equipment, overall orders were up a much more modest 0.4 percent.

March consumer price index was up 0.4 percent and 1.4 percent when compared with last year. On a monthly basis, the main areas pushing prices higher were clothing & footwear (2.0 percent), transportation (0.7 percent) and recreation, education & reading (0.5 percent). Energy prices were also up a hefty 2.7 percent. Against this, there were declines in food (0.2 percent) and alcohol (0.2 percent). Total goods showed a 0.7 percent increase in prices but the headline index was kept in check by a much more modest advance in services (0.2 percent). However, over the year, goods prices are down 0.6 percent while service sector inflation stands at 3.3 percent. Excluding food and energy, the CPI was up 0.2 percent and 1.0 percent on the year.

Bottom line

Earnings dominated economic data last week. The exceptions revolved around inflation data because of the impact they have on central bank monetary policy. The eurozone’s harmonized index of consumer prices registered a surprise on the high side while the UK CPI maintained its status quo. Canada’s CPI remained well contained within its inflation target zone of 1 percent to 3 percent.

The Governing Council of the Bank of Canada meets this week to set monetary policy. Expectations are that the Bank will cut is overnight rate target by 50 basis points to 3.00 percent. This cut would be the fourth since this easing cycle began in December. The Bank of England releases the minutes of its April 10 Monetary Policy Committee meeting at which their key rate was reduced for the third time to 5 percent. The UK is the first of the group of seven to publish preliminary estimates for first quarter gross domestic product.

But in all likelihood the focus will continue to be on earnings as investors look for an end to the woes caused by the credit crunch and subprime losses.

Looking Ahead: April 21 through April 25, 2008

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