Global Markets

Economic data and corporate earnings made for gloomy reading last week. And while U.S. GDP data were not as bad as expected, the 3.8 percent annualized contraction was bad enough. There wasn’t any good news from Japan either. Industrial production there sank 9.6 percent in December after tumbling 8.5 percent in the previous month as weak demand boomerangs around the world, hurting exporting nations in Asia.

Global equity markets put in mixed performances, although a unifying feature was a strong showing from financial stocks, in spite of occasional wobbles. Equities were up on the week in the Asia/Pacific region — with the exception of the PSEi — and in Europe and the UK. Markets in Shanghai and Taiwan were closed for the week. In North America, U.S. stocks were down on the week but Canadian and Mexican shares gained. In January, the Shanghai Composite, Kospi and the KLSE Composite gained on the month.

Financial markets continue to be uncertain as U.S. efforts to stimulate the economy and stabilize the banking system were offset by new signs that the global economy continues to deteriorate. Miserable U.S., EMU and Japanese economic data continue to show that stimulus measures taken so far have had little or no effect.

Global Stock Market Recap

Europe and the UK

European equities enjoyed their best week since the year began as the continent’s banks surged on further government aid packages on both sides of the Atlantic. Hopes that the Obama administration’s plans to stabilize the U.S. financial sector will restore order to global markets combined with additional measures from the French and Dutch governments helped the financial sector to rebound after successive weeks of heavy selling.

The gains came despite discouraging economic data and earnings reports. Investors were buoyed by optimism that the Obama administration will swiftly work out a plan to mop up toxic assets from bank books and revive lending. In Germany, the Ifo survey showed that business confidence edged up from a record low in December. Meanwhile, results of the Distributive Trades Survey of the Confederation of British Industry showed that a balance of 52 percent of UK retailers expect sales volumes to decline in February, the weakest forecast since the survey began in July 1983.

Eurozone inflation eased to its lowest level since the launch of euro 10 years ago and is now under the ECB’s 2 percent inflation ceiling. Deteriorating economic sentiment and rising unemployment amid recession should put added pressure on the European Central Bank to cut interest rates again on Thursday.

The FTSE, CAC and DAX were up last week for the first time since the week ending on January 2. The gains — 2.4 percent, 4.4 percent and 3.8 percent respectively — helped ameliorate January’s losses. Even so, the FTSE, CAC and DAX were down 6.4 percent, 7.6 percent and 9.8 percent for the month.

Asia/Pacific

With Lunar New Year celebrations in full swing, many Asian/Pacific markets were closed for several days last week. Those in China and Taiwan were closed for the full week. Only the PSEi declined on the week. All others made considerable dents in losses incurred earlier in the month. However, even with last week’s positive results, losses in January ranged 9.8 percent for the Nikkei to 0.9 percent for the STI. Three indexes were up on the month — Shanghai Composite (up 9.3 percent), Kospi (up 3.4 percent) and KLSE Composite (up 0.9 percent).

Japanese and other Asian stocks were down Friday, stung by the record decline in Japan’s industrial production, lowered profit forecasts and the realization that the global recession could be deeper and longer than originally thought. Besides the plunge in industrial production, the jobless rate jumped to 4.4 percent from 3.9 percent and household spending dropped for the 10^th consecutive month. The consensus is that Japan is headed for its worst postwar recession. The Nikkei dropped 9.8 percent in January extending last year’s record 42 percent drop as the global recession smothered demand for Japanese cars and electronics. Mounting losses forced companies to fire workers in December, spurring the biggest jump in the unemployment rate in 41 years.

Parliamentary gridlock has stymied the ruling Liberal Democratic Party’s efforts to pass a ¥10 trillion ($111.2 billion) stimulus package. The Bank of Japan’s policy interest rate is now 0.1 percent giving the Bank little room to maneuver other than by purchasing corporate debt to ease the credit squeeze. In Japan the political problems and the ensuing gridlock means they are totally unable to stimulate the economy.

The slump may last more than three years and exceed the 1980 to 1983 downturn to become the longest on record, according to Hiroshi Yoshikawa, a Tokyo University professor who heads a government panel that dates the economic cycle. The panel said the recession began in November 2007.

Reserve Bank of New Zealand

The Reserve Bank of New Zealand cut its key policy interest rate by 150 basis points to a record low of 3.5 percent in an effort to revive an ailing economy. After increasing rates to 8.25 percent, the RBNZ began lowering rates in July and now has cut a total of 475 basis points. The economy, however, slipped into recession for the first time in more than a decade. The cut brings the official cash rate to its lowest since it was introduced in March 1999, and follows a similar-sized cut in December. In December the Bank said New Zealand was coming out of its recession, but now it is painting a much more negative picture. Business and consumer confidence have been crushed by the mounting global woes, and a sharply slowing domestic housing market has exacerbated a consumption downturn. The rate reduction also comes as strong domestic inflation pressures are finally easing, helped by lower fuel prices.

Currencies

The dollar and yen were up against the euro as the global slowdown increased the appeal of the currencies as havens from the financial crisis. The euro was down after the flash harmonized index of consumer prices report showed the slowest inflation since 1999 and an increase in the unemployment rate to a two-year high.

The pound sterling bounced back from multi-year lows against the dollar and the yen as UK financial stocks recovered some poise. Concerns over the health of the UK financial system had caused banking stocks to plunge. This triggered a sharp sell-off in the pound, which hit a 23-year low of $1.35 against the dollar and a record trough of ¥118.78 against the yen on January 23. But sterling recovered this week as Barclays, the UK’s fourth-largest bank, issued an open letter in an attempt to restore confidence in the sector, saying its profits would outstrip forecasts.

The dollar and yen endured a rollercoaster of a week as risk appetite continued to dominate trading in the two currencies. Both weakened sharply in the first half of the week as stocks rallied on hopes that plans from the new U.S. administration would alleviate problems in the financial system. However, a sharp reversal later in the week boosted both currencies.

Selected currencies — weekly results

Indicator scoreboard

EMU

M3 money supply fro the three months ending in December was up 7.9 percent and down from 8.4 percent for the previous three months. For December alone, the annual money growth increased 7.3 percent, down from 7.7 percent in November. The deceleration in large part reflects the ongoing slowdown in private sector lending, itself a function of tighter lending standards and weakening demand. Loans to the private sector grew 5.8 percent on the year.

January flash harmonized index of consumer prices was up 1.1 percent on the year after increasing by 1.6 percent in November. This latest deceleration means that, in just six months, the 12-month growth rate for the HICP has dropped 2.9 percentage points from its 4.0 percent peak in July 2008. As with all flash releases no detail is available.

December unemployment rate inched up to 8.0 percent, a 25 month high, from 7.9 percent in November. In the larger EMU states unemployment edged up by 0.1 percentage points to 7.2 percent in Germany and by a whopping 0.7 percentage points to 14.4 percent in Spain. France and Italy did not supply any data. Elsewhere across the region jobless rates climbed higher in most member countries. The only exceptions were the Netherlands where the rate fell from 2.8 percent to 2.7 percent, Malta where it dipped to 5.7 percent from 5.8 percent and Finland where it was unchanged at 6.5 percent.

EU

January economic sentiment sank to a reading of 68.9. There were declines in all the major sectors. Industrial confidence edged down to minus 34 while consumer sentiment was down to minus 31. Construction dropped to minus 27. However retail held steady at minus 20. Services dropped 5 points to minus 22. With the exception of Spain sentiment fell in all of the larger EMU countries.

Germany

January Ifo sentiment edged up to a reading of 83 from 82.7 in December. The increase was not broad-based, reflecting instead just an improvement in the expectations component which was up 2.5 points to 79.4. The current conditions index continued to slide, falling a further 2 points to just 86.8. At a sectoral level, there were small gains in most areas except manufacturing where morale slipped from minus 39.9 to minus 40.1. Confidence in retail improved to minus 26.6 from minus 30.4 and in wholesale crept up to minus 25.3 from minus 26.1. Construction similarly posted a small increase of 0.8 points to minus 29.5. Services saw a rather more substantial gain with its diffusion index recovering nearly 6 points to minus 14.5, again thanks solely due to less pessimistic expectations.

January unemployment rate edged up to 7.8 percent from 7.7 percent in December. The increase reflected a 56,000 jump in the number of people out of work. This took the jobless level to 3.267 million. The increase was due to a combination of a 44,000 increase in the West and a 12,000 advance in the East. Moreover, as a pointer to things to come, vacancies fell another 10,000.

Asia/Pacific

Japan

December household expenditures for two-or-more-person households dropped 4.6 percent when compared with a year ago. Expenditures have declined in every month since March 2008. Worker household expenditures were down 4.1 percent on the year. Expenditures declined across the board with the exception of education which was up 2.5 percent. Declines were lead by housing, down 9.7 percent followed by clothing & footwear which were down 8.4 percent. Medical care expenditures dropped 7.6 percent. The data show that the consumer, who was always reluctant to spend, has stopped spending altogether.

December unemployment rate jumped to 4.4 percent from 3.9 percent in the previous month. Unemployment increased by 390,000 on the year or an increase of 16.9 percent. The ratio of jobs available to each applicant dropped for an 11^th month to 0.72. With exports plunging, companies have been cutting output and workers.

December national consumer price index was down 0.4 percent on the month and up 0.4 percent on the year. Both energy and lack of demand depressed prices. Core CPI which excludes only fresh food sank 0.5 percent on the month and inched up 0.2 percent on the year. On the month, prices for food, fuel, light & water, furniture & household utensils, clothing & footwear and transportation & communication were all down. Core which excludes both food and energy was unchanged on the month and on the year. Goods prices sank 0.9 percent on the month and were up 0.3 percent on the year while services edged up 0.1 percent on the month and 0.3 percent on the year.

December industrial production plummeted 9.6 percent after sinking 8.5 percent in November. On the year, industrial production was down 22.5 percent. Sinking exports have extracted a toll on manufacturing for exports and has forced output reductions and with them a reduction in the workforce. Industries that contributed to the decline were transport equipment, electronic parts & devices and general machinery. Commodities that contributed to the decline were large autos, active matrix LCDs and drive, transmission & control parts. In its forecasts for January and February, METI expects production to drop 9.1 percent in January and 4.7 percent in February.

Australia

Fourth quarter producer prices increased by 1.3 percent on the quarter and were up 6.4 percent on the year. This was an improvement over the third quarter when prices jumped 2 percent on the quarter. The index was up mainly due to price increases in industrial machinery & equipment manufacturing (12.8 percent), electronic equipment manufacturing (21.4 percent), other manufacturing (8.1 percent and other transport equipment manufacturing (17.4 percent). These price increases were partially offset by declines in petroleum refining (down 29.1 percent). Imported commodities were affected by exchange rate driven price increases. Intermediate commodity prices were up 0.9 percent and 9.5 percent on the year. The quarterly increases were mainly due to increases in coal mining (30.3 percent), iron & steel manufacturing (12.5 percent) and basic chemical manufacturing (14.6 percent). These increases were partially offset by price declines in oil and gas extraction (down 23.7 percent), petroleum refining (down 22.1 percent) and basic non–ferrous metal manufacturing (18.5 percent).

Fourth quarter consumer prices declined 0.3 percent but were up 3.7 percent when compared with the fourth quarter last year. This is the first quarterly decline in eight quarters. The data reflect the steep decline in petrol prices, though the rapid weakening in demand has also helped ease price pressures as well. On the year, inflation is still above the Reserve Bank of Australia’s 2 percent to 3 percent inflation target. Food prices were up 2 percent on the quarter and 5.6 percent on the year but transport prices were down 6.9 percent on the quarter and down 1.2 percent on the year.

Americas

Canada

December industrial producer price index dropped 1.9 percent and was up 2.5 percent when compared with last year. The major downward impetus was provided by the tumbling cost of petroleum & coal products which were down 18.1 percent on the month. Excluding this sector, the IPPI would have declined just 0.1 percent on the month and would have risen 6.5 percent on the year. The raw material price index plummeted 15.4 percent and was down 29.9 percent on the year. Prices of mineral fuels plunged 29.9 percent on the month and 47.7 percent on the year. Without this sector, the RMPI would have declined a much more modest 2.3 percent from November and stand 10.1 percent lower on the year.

November monthly gross domestic product dropped 0.7 percent and was down 0.8 percent when compared with last year. Output declined in both the goods producing and services sectors. Manufacturing was down 2.1 percent and 7.0 percent on the year. Construction was off 1.2 percent, utilities were down 1.1 percent and mining and oil and gas extraction dropped 0.5 percent. Output from the energy sector also shrank 0.5 percent. The only increase was in agriculture, forestry & fishing where output edged up 0.3 percent. The decline in the service sector was largely due to a 3.1 percent nosedive in wholesale trade. However, there were also notable declines in retail (0.5 percent), transportation & warehousing (0.7 percent) and administrative & waste management (0.4 percent).

Bottom line

The stream of economic data proved to be unremittingly bad last week. Data from the U.S. and Japan showed the depth of the decline.

The Reserve Bank of Australia meets for the first time in two months this week and is expected to resume its series of interest rate cuts. Its key interest rate is currently 4.25 percent. The Bank of England also is expected to cut rates again this week, this time to 1 percent from its current 1.5 percent level. However, the European Central Bank, despite the spate of negative economic data, is expected to leave its interest rate unchanged at 2 percent.

Looking Ahead: February 2 through February 6, 2009

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