Global Markets

Equities were mixed last week as earnings reports dominated over sparse new economic data. Commodity prices soared sending crude oil prices over $120 a barrel for West Texas Intermediate crude. Crude prices were not the only ones on an upward trajectory. Food commodities such as wheat, corn and rice also hit record highs.

Rice which is a food staple for the most populous parts of the world triggered panicked buying and export limits by some rice producing countries. However rice prices eased after Thailand and Brazil said they would not curb exports easing concern about a global supply shortage. The price increases have spurred social unrest in some poor countries and prompted Wal-Mart to limit rice purchases to four bags a visit in all U.S. stores.

Crude prices were up as BP Plc prepared to shut down a North Sea pipeline that carries about 40 percent of UK’s oil output and Nigerian production was cut by violence and strikes once again. And late on Friday, crude jumped more than $3 after a U.S. military vessel fired on an Iranian boat in the Persian Gulf fuelling concerns about the possibility of an escalating confrontation between Washington and Tehran.

The economic data released revealed further declines in U.S. home sales as investors still try to find the bottom while confidence data in Germany and France was weaker than expected. On Friday, the University of Michigan consumer sentiment survey also was lower than expected. On the positive side, U.S. initial jobless claims unexpectedly declined even though noise usually dominates week to week moves, and durable goods orders were up if you exclude the volatile transportation sector.

On Tuesday, the euro touched a peak of $1.6018 after hawkish comments by European Central Bank officials dented expectations that eurozone rates could soon be on the way down. The Canadian dollar on the other hand was down after the Bank of Canada cut rates by 50 basis points to 3 percent as widely expected and delivered a dovish statement indicating further cuts to come.

On the week, four of the equity indexes in the Asia/Pacific region were down while stocks in Europe were up. In North America, stocks were down in Canada and Mexico but up in the U.S.

Global Stock Market Recap

Europe and the UK

Equities were up last week in volatile trading as some earnings reports were better than expected. However, business sentiment in France and Germany dropped sharply in the clearest signs yet that growth is beginning to soften. The latest drop in the Ifo index more than reversed the increases in the previous three months, and suggest the impact of a stronger euro, higher oil prices, a looming U.S. recession and global financial turmoil are finally taking a toll. However, earnings from Ericsson and Samsung ere better than expected and trumped the gloomy sentiment surveys. European markets were alternately dragged down and boosted by the financial sector as investors fretted that further write-downs and slowing earnings might force banks to raise capital by issuing new shares.

The FTSE ended a second week over the 6,000 mark even though UK stocks were buffeted by housing construction worries after the largest homebuilder by market value postponed construction on new sites after a sales decline. The index has out-performed both the CAC and DAX so far this year. While the FTSE has declined 5.7 percent, the CAC is down 11.3 percent and the DAX — 2007’s best performer — is down 14.5 percent.

Bank of England MPC minutes cause a stir

The Bank of England’s monetary policy committee was split three ways as the MPC voted six to three to cut interest rates to 5 percent at its April meeting. Two members wanted to keep rates steady at 5.25 percent while another voted for a bigger 50 basis point cut. Analysts said the split appears to be between those focusing on near term inflation and those on the impact that slowing growth will have on inflation. Those voting for unchanged rates argued that a premature cut might make the MPC look more worried about the housing market and domestic demand than about hitting the medium term inflation target and they would have preferred to wait until the Bank’s next Inflation Report in mid-May when it could communicate its thinking more fully. Most members felt the quarter point cut was warranted to prevent an excessive slowdown that could send inflation below target in the medium term. They also felt it was consistent with market expectations for gradual easing, a policy that reduces the risk of an unexpectedly sharp slowdown later on that would require a more vigorous response.

Asia/Pacific

Stock indexes were mixed on the week. However, most were up on Friday thanks to positive earnings reports from Samsung Electronics Co., Kia Motors Corp. and Air China Ltd and easing worries about the state of the U.S. economy. The Nikkei was up for the sixth week — its longest winning streak since December 2005. Stocks were boosted by the decline in the yen which helps exporters’ sales and repatriated profits. Data released by the Tokyo Stock Exchange showed that foreign investors were net buyers of Japanese stocks for a third consecutive week. For the week ended April 18, foreigners were net buyers of ¥200 billion worth of Japanese stocks.

On the week, declines were led by the PSEi, down 4.7 percent and the Jakarta Composite, down 4.6 percent. Other than the Shanghai Composite, which soared 15 percent on the week, the Hang Seng was up 5.5 percent and the Sensex 30 was up 3.9 percent.

The South Korean Kospi was up 3 percent on the week thanks to favorable earnings reports but still lags its 2007 year end level by 3.8 percent. On the economic front, South Korean GDP grew at the slowest pace in more than 3 years in the first quarter as exports lost steam and construction investment dipped. First quarter GDP was up 0.7 percent and 5.7 percent when compared with the same quarter a year ago. Rising fuel costs combined with a deteriorating outlook for exports prompted companies to reduce investment, while record household debt is sapping consumer buying power.

The Shanghai Composite Index edged downward Friday after a week that saw the index hit its lowest level in more than a year and then post its largest one day gain in six years. The index gained 15 percent for the week with most of it coming on a 9.3 percent surge Thursday after the government slashed the stamp tax on share transactions. The index dropped from 6,124 points in October to below 3,278 Wednesday. Despite the slump, the benchmark index has still risen threefold since late 2005. The index is down 32.4 percent since the beginning of the year.

Canada

Bank of Canada cuts rates again

As expected, the Bank of Canada lowered its key interest rate by 50 basis points to 3 percent. The Canadian rate is now 75 basis points over the fed funds target rate of 2.25 percent. The Bank had previously lowered its policy rate at the December 2007, January and March 2008 meetings. The Bank has been lowering rates amid signs that the U.S., the destination for about 80 percent of Canada’s exports, could slide into recession. Although retail sales faltered, the consumer has been holding up pretty well while manufacturing shipments have pleasantly surprised in both January and February.

The Bank of Canada has an inflation target range of 1 percent to 3 percent but focuses on the 2 percent midpoint. Inflation as measured by the CPI has remained low, giving the Bank the latitude to adjust interest rates in response to changes in growth. Record crude oil prices have been boosting the economy and the Canadian dollar which has remained plus or minus parity with the U.S. dollar since the fall. Analysts said that the Bank’s post meeting statement was ‘dovish’ and pointed to further rate cuts ahead. The Bank also said that some further monetary stimulus will likely be required to achieve the inflation target over the medium term.

Bank of Canada’s monetary report released on Thursday said that the economy has been hurt by the U.S. downturn and continuing turmoil in global financial markets and is unlikely to get fully back on track until 2010. It said that the deterioration in economic and financial conditions in the U.S. would have a direct impact on the Canadian economy including fading export markets and higher credit costs. As a result, Canadian 2008 gross domestic product is now projected to grow by only 1.4 percent, down from the 1.8 percent growth foreseen in January’s report. Given the slowdown, the report reiterated that a further reduction to the Bank of Canada's overnight target rate is anticipated — but the timing is unsure — and noted that markets have already built in a further 25 basis point reduction. Unlike the inflation outlook elsewhere, the central bank expects inflation to remain tame for the outlook period. So far the Canadian housing market has defied the kind of meltdown seen in the U.S., but it forecasts that it is starting to cool.

On another issue, governor Mark Carney said the Bank may look into the value of releasing minutes from its monetary policy meetings. The European Central Bank and the Bank of Canada are the only major central banks that do not release minutes or the monetary policy vote in its decisions. Rather, decisions are made on a consensus basis rather than a formal vote. He said that research would need to uncover compelling evidence in favor of a change before they should alter the system that has proven so successful over the past 15 years. The Reserve Bank of Australia began to release meeting minutes with the start of 2008.

Currencies

The dollar extended its gains for a third day on Friday amid a growing conviction that the Federal Reserve’s easing cycle was coming to an end and the European economy was slowing. The FOMC would cut rates by 25 basis points next week to 2 percent. At one point during European trading, the dollar recorded a high of under $1.56. Earlier this week, the dollar hit a record low of $1.6018 against the euro in the aftermath of hawkish comments from ECB governing council members that boosted the single currency. At that time, the futures markets were evenly split between a 25 and 50 basis-point FOMC cut. Analysts said the dollar was also supported by falling commodity prices and stability on global equities markets that was feeding investor risk appetite.

The euro was pressured after Thursday’s lower-than-expected Ifo survey of business confidence. The data prompted a turnaround in eurozone interest rate expectations, with futures markets shying away from predicting further monetary tightening. The euro touched a three-week low against the dollar after a European Central Bank report said money supply growth slowed more than forecast last month. Slowing money supply growth could give the ECB some room to cut its 4 percent policy rate, which in turn would erode the appeal of euro.

The table below summarizes last week’s currency moves.

Selected Currencies - Weekly Results

Indicator scoreboard

EMU

M3 money supply for the three months ending in March was up 11.1 percent when compared with the same three months a year ago. The gain in the three month rate which is the ECB’s preferred measure of money supply was the slowest rate of growth since July 2007 and still faster than the Bank would prefer. Its reference rate for money supply growth is 4.5 percent. In March, M3 was up 10.3 percent. Lending to the private sector dipped to 10.8 percent in March, down from 11.0 percent in February.

Germany

April Ifo business sentiment index declined to 102.4 from 104.8 in March. The drop reflected a sharp decline in the current index (108.4 from 111.5) accompanied by a slightly smaller dip in the expectations component (96.8 from 98.4). The decline was easily the steepest for any month in the last year and was led by a sharp decline in the retail sector where the diffusion index slumped from minus 0.9 to minus 10.9, its lowest level since January (minus 17.4). There were also drops in sentiment in wholesale (1.6 from 7.7) and in manufacturing (13.4 from 17.9) leaving just construction to post a minor advance (minus 20.0 from minus 21.8).

France

March household consumption of manufactured goods sank 1.7 percent on the month. The decline more than offset the 1.3 percent increase in February. Durables expenditures dropped 1.1 percent due mainly to a 1.5 percent decrease in automobile purchases. Expenditures on leather goods sank 7.9 percent in March compared to the prior month’s increase of 1.4 percent. However, purchases of other manufactured goods increased by 0.5 percent, following a decrease of 0.3 percent in the previous month. On the year total sales were up 1.2 percent. For the two months of the first quarter spending is 0.6 percent above the fourth quarter average.

Italy

February retail sales surprised and were up 0.3 percent and 2.7 percent when compared with last year. Sales were impacted primarily by rising food price inflation. The data easily exceeded consensus estimates. Analysts had expected retail sales to decline 0.1 percent and rise 0.6 percent on the year. Food sales were up 0.5 percent while non-food sales edged up 0.2 percent for the month. On the year, food prices surged 3.6 percent amid growing concern about their costs. However less consumer spending is expected as consumer confidence falters on worries about the economy and rising prices.

United Kingdom

March retail sales were down 0.6 percent but were up 4.6 percent when compared with the same month a year ago. Monthly sales in both January and February were revised upward. Over the first quarter, sales were up a very robust 2.0 percent from the previous period. The decline in March purchases reflected mainly a drop in sales at non-food stores (0.7 percent) although there was also a small drop in food (0.1 percent). The principal areas of weakness were non-specialized stores (down 2.5 percent), clothing & footwear (down 1.7 percent) and other stores (down 2.1 percent). However, household goods (up 3.1 percent) were surprisingly strong.

First quarter gross domestic product growth slowed to an increase of 0.4 percent and 2.5 percent when compared with the same quarter a year ago. Fourth quarter GDP was up 0.6 percent and 2.8 percent on the year. There were no details on the expenditure components available in the first GDP estimate but output data show that all of the quarterly gain was due to services where activity rose 0.6 percent on the quarter and 2.3 percent on the year. Within this sector, the most significant quarterly advances were posted by transport & communications (1.0 percent) and distribution, hotels & catering (0.9 percent). Increases in output in business services & finance (0.4 percent) and government (0.4 percent) matched the headline GDP gain. By contrast, the goods producing sector saw output contract, albeit due to sharp swings in the more erratic categories. Hence manufacturing (0.5 percent) fared modestly well, but there were hefty offsetting declines in mining & quarrying (5.2 percent) and electricity, gas & water (1.2 percent) to leave total industrial production down 0.1 percent on the quarter and up just 0.7 percent on the year. Construction output rose a quarterly 0.5 percent for an annual increase on 2.9 percent.

Asia/Pacific

Japan

February tertiary sector index sank 1.7 percent and was down 2.0 percent when compared with last year. This was much worse than the anticipated 0.6 percent decline. 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.

February all industry index plummeted 1.4 percent and sank 2.0 percent when compared with the same month a year ago. The all industry index was unchanged in January and up 0.6 percent on the year. Analysts had expected a decline of 0.1 percent after declines in November and December. The tertiary index, which was released earlier this week, sank 1.7 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.

March merchandise trade surplus was ¥1,118.6 billion, down 30.2 percent from the year ago balance of ¥1,602.6 billion. On the year, exports were up 2.3 percent while imports were up 11.1 percent. The decline in the surplus is thanks to a steep drop in the terms of trade due to soaring energy costs and the strong yen. On a seasonally adjusted basis, the trade surplus was up to ¥770 billion from ¥605.5 in February. Exports were up 6.4 percent while imports jumped 13.8 percent. Exports to the U.S. were down 11 percent on the year but the decline was partially offset by exports to Asia and Western Europe which were up 1.9 percent and 4 percent respectively. Imports from the U.S. were down 4.6 percent while imports from Asia jumped 9.2 percent and increased a weak 1 percent from Western Europe. Imports of mineral fuels were up 45.4 percent within which petroleum soared by 51.6 percent on the year while petroleum products were up 47.8 percent. Exports of machinery edged up a weak 0.6 percent on the year while those of electrical machinery dropped 9.7 percent. Transportation equipment exports were up 8.3 percent on the year.

March national consumer price index was up 0.5 percent and 1.2 percent when compared with the same month a year ago. Core CPI which excludes only fresh food was up 0.4 percent and 1.2 percent on the year. But the more telling core measure is the CPI which excludes energy as well as fresh food. That index was up 0.5 percent on the month but barely edged up 0.1 percent on the year. Clearly the latter measure defines the reason for higher prices, namely energy. Goods inflation was up 0.8 percent and 1.9 percent on the year while services prices climbed a more modest 0.2 percent and 0.5 percent on the year. April Tokyo CPI was up 0.3 percent and 0.6 percent on the year. Excluding only fresh food, this index was up 0.4 percent and 0.7 percent on the year. Excluding both food and energy, the CPI was up 0.3 percent on the month but was unchanged on the year.

Australia

First quarter producer price index soared 1.9 percent and was up 4.8 percent when compared with last year. The monthly increase was the most since the series began in 1998. Costs for construction (up 1.9 percent) and petroleum refining (up 10.5 percent) contributed in a large part to the increase. These increases were partially offset by price declines in electronic equipment manufacturing which were down 2.9 percent. Intermediate commodities were up 2 percent and 6 percent on the year while preliminary commodities increased by 2.3 percent and 6.9 percent on the year.

First quarter consumer price index soared 1.3 percent and 4.2 percent when compared with last year. The most significant contributors to the quarterly increase were automotive fuel which was up 5.4 percent, pharmaceuticals which jumped 13.1 percent, house purchases which were up 1.7 percent, rents and other financial services both gained 2 percent. Food prices were up 2.1 percent. However, furniture declined 3.6 percent, audio, visual & computing equipment was down 5.8 percent and domestic holiday travel & accommodations dropped 1.4 percent.

Americas

Canada

February retail sales dropped 0.7 percent for the first monthly decline since September 2007. Analysts had expected a decline of 0.1 percent. When compared with last year, sales were up 5.7 percent. Excluding autos, sales were down 0.3 percent and were up 5.6 percent on the year. Business was down virtually across the board with lower sales reported on everything from new and used cars to home furnishings and clothing and pharmacy products. Food and beverage stores held their own however. Sales in clothing & accessory stores were down 1 percent while pharmacy & personal care store sales slid 0.7 percent. General merchandise store sales edged down 0.2 percent and miscellaneous retailers (a category that includes sporting goods, music & hobby stores) dropped 0.7 percent. Sales in constant dollars declined 0.7 percent.

Bottom line

Retail sales data produced mixed results last week. While sales dropped in Canada, France and the UK, they rebounded in Italy for example. However, consumer and business sentiment continued to sour in Europe and the U.S. Inflation picked up in both Australia and Japan. The Bank of England monetary policy committee vote surprised bank watchers by the three way split in voting — an unsettling note going into May’s upcoming meeting.

The Federal Reserve and Bank of Japan are scheduled to meet this week. Consensus has it that the Fed will reduce rates — but by only 25 basis points to 2 percent and then indicate that they are going to pause. The possibility of a Fed pause in rate reductions has put a floor under the dollar, which hit an all time low against the euro last week. As for the Bank of Japan, no policy move is expected.

Looking Ahead: April 28 through May 2, 2008

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