Global Markets

Several central banks applied the scalpel to interest rates again last week — that is all except the European Central Bank which decided to wait until March even as the economy tumbles down around them. Bank Indonesia, Norges Bank and the Bank of England all cut their key rates by 50 basis points to 8.25 percent, 2.5 percent and 1 percent respectively. The Reserve Bank of Australia cut its key rate by 100 basis points to 3.25 percent.

New data continued to be unremittingly bad. In Germany for example, manufacturers’ orders and industrial output plunged for the fourth consecutive month while Canadian and U.S. job losses took one’s breath away. And UK industrial output also continued to sink. And earnings continued to disappoint for the most part. Nevertheless, equity investors kept their eyes firmly focused on the Obama administration’s stimulus package as it laboriously made its way through Congress. Most equity indexes were up for the week with the exception of the Topix, STI, Sensex and All Ordinaries.

Some signs of an easing in credit conditions were evident in the Fed’s latest Senior Loan Officer Survey, which indicated that banks had become more willing to make new loans in the first quarter. But at the same time, demand for credit by companies dropped sharply with a net 60 percent of banks reporting a fall in business loans.

Global Stock Market Recap

Europe and the UK

Despite dreadful economic data, equities managed to gain last week as investors focused on the U.S. stimulus package’s progress through the Congress. There were no surprises from the Bank of England or the European Central Bank. While the Bank of England continued to cut its interest rate to record low levels, the ECB bided its time awaiting new forecasts that would be available in March.

Stocks were weighed down on Monday thanks to poor U.S. economic data and weak corporate results. However, things turned around for equities on Tuesday and except for a slight sag on Thursday, they managed to post positive results for the week. The FTSE gained 3.4 percent while the CAC was up 5.0 percent and the DAX soared by 7.1 percent. Economic data from Germany were particularly bad with both manufacturers’ orders and industrial production plunging. And on Friday, equity investors chose to ignore the dire U.S. employment report, preferring to focus on the future and the likelihood that the poor data would apply pressure to Congress to pass the stimulus package without much more debate. Analysts said that the markets have already written off poor employment data for the first half of the year and are focusing on the period beyond that when the stimulus packages should kick in.

European Central Bank

As widely expected, the European Central Bank left its key interest rate at 2 percent, preferring to postpone any further interest rate cuts to March when the new staff forecasts will be available. ECB president Jean Claude Trichet has repeatedly said that when the ECB reduced its rates in January, the move already took into consideration an expected further decline of economic activity and inflation later in the year. Trichet has said that February is not considered “an important meeting for policy making.”

Official borrowing costs have fallen by 225 basis points since early October. But Trichet’s comments after the latest meeting suggested it would be only a temporary pause and that the governing council was taking an increasingly open stance towards possible future policy options. A fundamental question for the ECB has been whether it should follow the Federal Reserve and Bank of England in cutting interest rates close to zero. Last month, Mr Trichet warned about the dangers of falling into a “liquidity trap” in which monetary policy became ineffective. But it has become clear that not all council members agreed.

Since the January meeting, both economic activity and inflation levels have dropped off sharply. However, some sentiment indicators including the PMIs and the German Ifo have recovered slightly, raising hopes that they may be finally bottoming out. However, they do little to gloss over the fact that the eurozone is experiencing the sharpest recession in its history.

Trichet has already warned that next month’s staff forecasts are likely to show substantial downward revisions from the current gloomy forecasts. He said the central bank would take the fresh data into consideration when reviewing rates that month. Despite easing inflationary pressures and what would appear to be a long and deepening recession in the euro zone, analysts believe that the cut in March, expected at 50 basis points, would likely be the final one for a while. Bank watchers will be listening carefully to Trichet’s statement at his press conference that follows today’s meeting for clues to future ECB moves.

Bank of England

As expected, the Bank of England monetary policy committee lowered its key interest rate by 50 basis points to 1.0 percent — a record low in the Bank’s 315 year history. Currently rate cuts are not being passed on to consumers as the central bank attempts to bring rates to near zero levels and focus on a "quantitative easing" strategy. However, there is considerable debate about whether it will ultimately go that far.

Since its last meeting, the MPC has received a continued stream of data showing just how weak the economy was in the fourth quarter including a contracting GDP and soaring unemployment. While some surveys show some stabilization of demand at low levels, it is not enough to contain rising unemployment.

The Bank has made no secret of its belief that the normal effect of interest rates on the wider economy has been impaired. There are two reasons — the link between the official rate and other interest rates faced by companies and households is weaker than normal and even where interest rates are falling, the quantity of credit available to companies and households is restricted.

Asia/Pacific

Most equity indexes in this region were up last week, buoyed by hopes that the U.S. economic stimulus package and similar confidence boosting measures elsewhere across the world will ease the global slowdown. Traders also look forward to a bank rescue plan to be announced on Monday by Treasury Secretary Timothy Geithner. Investors largely ignored the spate of poor U.S. data that portrayed an economy mired deep in recession. Rather they focused on several months ahead when hopefully the stimulus packages will begin to help the stricken economies.

In Japan, the Nikkei was up on the week while the Topix edged downward. A stronger U.S. dollar against the Japanese yen helped buoy exporters’ stocks at week’s end. The Japanese market has been weighed down by losses in the financial sector after bleak corporate profits dampened investor sentiment.

Equities swayed during the week on heightened worries that the recession may be deepening following a string of dismal corporate earnings reports from major companies. Financials tumbled due to uncertainty about an economic stimulus plan for rescuing U.S. banks, while shipping stocks rebounded after a jump in the Baltic Freight index signaled improved dry bulk shipping rates and thus demand.

On the week, the All Ordinaries, Topix, STI and Sensex were down 2.0 percent, 0.4 percent, 1.8 percent and 1.3 percent respectively. Gains ranged from 9.6 percent (Shanghai Composite) to 1.0 percent (Nikkei).

Reserve Bank of Australia

As expected, the Reserve Bank of Australia lowered its key interest rate by 100 basis points to 3.25 percent. The RBA last lowered rates in December, also by 100 basis points. The Bank did not meet in January. The RBA has now cut rates by 300 basis points since September 2008. Today’s reduction pushes the benchmark rate to the lowest level since February 1964, according to figures provided by the Reserve Bank. Australia may be in its first recession since 1991 as consumer confidence wanes, house prices tumble and job losses are rising. A slump in global demand for exports along with rising unemployment and a contraction in business borrowing have increased pressure on the RBA to extend the biggest round of rate reductions in almost two decades. However, Australia’s benchmark rate is still among the highest in the developed world.

Recent reports show the nation’s jobless rate rose to a two-year high of 4.5 percent in December as companies slashed 43,900 full-time jobs, bank lending unexpectedly fell for the first time since 1992, manufacturing contracted in January for an eighth month and house prices dropped for a third straight quarter. The RBA has more flexibility to cut borrowing costs after the inflation rate eased in the fourth quarter by the most in 11 years. Consumer prices gained 3.7 percent from a year earlier, cooling from the third quarter’s 5 percent gain. The Bank said it expects inflation to fall back within its target range of 2 percent to 3 percent this year.

In its quarterly Statement on Monetary Policy, the RBA said the outlook had worsened considerably since its November report. The Reserve Bank cut its fiscal year (for year ending in June) growth forecast to 0.25 from November’s 1.5 percent. It also cut the calendar year 2009 forecast to 0.5 percent from 1.75 percent. Australia is rare in the developed world because it has yet to sink into recession. However, a sharp drop in business lending, weakening export revenues and reduced business and consumer confidence indicate a contraction is likely this year.

Bank Indonesia

Bank Indonesia once again lowered its key interest rate, this time by 50 basis points to 8.25 percent. Since November, the Bank has lowered rates by 125 basis points. In its statement, the Bank said that it has room to continue reducing rates with inflation no longer an issue. Bank Indonesia along with its colleagues in other Southeast Asian countries including the Philippines, Malaysia and Thailand have been slashing interest rates as demand for their exports vaporize.

Currencies

The dollar was down against the yen and euro after the Bureau of Labor Statistics reported that the U.S. unemployment rate was the highest in 16 years. The abysmal data is expected to spur passage of the economic stimulus package and in turn reduce the dollar's safe-haven demand.

The Australian dollar gained against the dollar as the Reserve Bank said in a quarterly statement that the “expansionary monetary and fiscal policies now in place will help to cushion” the economy from “contractionary forces.” However, the Canadian dollar was down after its employment report shocked with the number of jobs lost and the jump in unemployment.

During the week, the euro fell to two-month lows against the dollar and the pound as investors worries grew about the euro’s exposure to central and eastern European problems. The worries were heightened after Russia’s credit rating was downgraded. Foreign exchange reserves have been under pressure as it defended the rouble in the face of falling oil prices and a capital flight from the country. However, the euro recovered as increasing risk appetite towards the end of the week tempered safe haven demand for the U.S. currency.

Selected currencies — weekly results

Indicator scoreboard

EMU

December producer prices (excluding construction) dropped 1.3 percent and were up 1.8 percent when compared with the same month a year ago. Energy prices were down 3.7 percent on the month and now show annual growth of just 2.1 percent. This sector continued to dominate the performance of the PPI as a whole but the core index still showed a 0.6 percent decline on the month and a 1.6 percent decline on the year. Intermediate prices dropped 1.2 percent and nondurable consumer goods were down 0.2 percent on the month. However, capital goods prices were unchanged and durable consumer goods edged 0.1 percent higher.

December retail sales edged down 0.1 percent and were down 1.7 percent when compared with last year. Non-food sales were down 0.4 percent and 2 percent on the year while food sales were up 0.2 percent but were down 1 percent on the year. By country, sales were down 0.2 percent on the month in Germany and 0.3 percent in Spain. However, declines here were dwarfed by a 6.9 percent collapse in Portugal and an even larger 9.0 percent slump in Slovenia.

Germany

December total retail sales were down 0.7 percent and down 3.5 percent when compared with last year. Excluding autos, sales were down 0.2 percent. The annual growth figures show that much of the weakness was concentrated in the food & beverages sector where purchases fell 1.5 percent on the year. Non-food sales on the other hand were up 0.5 percent over the same period helped by gains in clothing & shoes (0.4 percent) and pharmaceuticals, medical items & cosmetics (0.1 percent).

December manufacturing orders plunged 6.9 percent and are down 27.7 percent when compared with last year. The weakness was attributable to both the domestic and foreign sectors. Moreover, a 4.3 percent monthly drop in domestic demand reflected weakness across the board with basic goods down 3.8 percent, capital goods off 5.4 percent and consumer and durables 2.3 percent weaker. Foreign orders plummeted 9.4 percent. Basics dropped 6.3 percent together with a 12.0 percent crash in capital goods and a 4.3 percent contraction in consumer and durables. Overall orders from the Eurozone were down 15.2 percent courtesy of a remarkable 29.3 percent collapse in capital goods. Demand from the non-Eurozone area was down a more modest but still significant 5.1 percent with basics (down 12.0 percent) leading the way.

December industrial output declined 4.6 percent and is down 12.6 percent when compared with last year. All of the major sectors with the exception of consumer nondurables which surprised with a 1.6 percent gain dropped on the month. Capital goods output dropped 4.9 percent, consumer durables were down 7.2 percent, basics slumped 8.2 percent and energy contracted by 1.0 percent. Total manufacturing output shrank a whopping 5.3 percent on the month. By contrast, the erratic construction sector saw production grow 1.4 percent but gains here are likely to prove only temporary.

France

December merchandise trade deficit narrowed to €2.5 billion from a downwardly revised €6.0 billion shortfall posted in November. Exports rose 0.8 percent while imports slumped some 9 percent on the month, reflecting a combination of lower energy costs and weak domestic demand. The deficit on energy shrank from €4.5 billion in November to €3.7 billion but there was also a marked improvement in net exports of non-military industrial products. The auto industry saw its deficit narrow from €0.9 billion to €0.3 billion while the surplus on capital goods widened by almost €1.0 billion to €1.6 billion as exports rose and imports fell. The bilateral deficit with the eurozone narrowed while it was little changed with the U.S.

United Kingdom

December industrial output was down 1.7 percent and sank 9.4 percent when compared with last year. The latest data reflected broad-based declines in activity. Over the three months to December, output in the mining and quarrying sector fell 3.2 percent on the previous period while manufacturing was down 5.1 percent. Output of the electricity, gas & water supply industries was 0.1 percent weaker. By market sector, the fourth quarter saw falls in the output of consumer durables of 7.4 percent over the third quarter and 12.0 percent on the year. On the same basis, consumer non-durables were down 2.6 percent and 4.6 percent respectively. At the same time, capital goods output in the latest three months fell 5.6 percent on the quarter and 9.4 percent on the year while intermediate goods were down 4.8 percent and 8.2 percent respectively. Manufacturing output dropped 2.2 percent in December that left fourth quarter production 5.1 percent lower on the previous period. For December alone, production was a hefty 10.2 percent below its year ago level. Twelve of the thirteen reporting industries saw monthly drops in output in December. Particularly weak were the basic metals & metal products sector where production slumped 4.3 percent and machinery & equipment where output fell an even larger 5.0 percent. The food, drink & tobacco industry weighed in with a 2.3 percent drop.

January producer output prices were up 0.1 percent and were up 3.5 percent when compared with last year. The core index, excluding food, drink, tobacco & petroleum products, was up 0.4 percent on the month and 4.1 percent on the year. Among the main categories, the largest monthly increases were in transport (0.8 percent), food (0.7 percent) and tobacco & alcohol (also 0.7 percent). Other increases were quite modest with electrical & optical products the strongest at 0.5 percent followed by textiles & clothing and paper, both up 0.2 percent. Producer input prices were up 1.5 percent and 2.3 percent on the year. The monthly jump reflected sharply higher crude oil costs which rose some 9.0 percent on the month. Other increases were much less significant. Fuel prices were up 0.6 percent, home food materials 0.5 percent, and both imported parts & equipment and imported chemicals 0.2 percent. The only decline was in imported metals where prices dropped 1.4 percent from December.

Asia/Pacific

Australia

December merchandise trade goods and services surplus was A$589 million, a decrease of A$390 million on November’s revised surplus of A$979 million. The decline was primarily due to the drop in non-rural goods exports. Exports were down 3.1 percent with non-rural exports down 6 percent, other goods dropping 2 percent but rural goods up 7 percent. Services exports were up 1 percent. Imports were down 1.7 percent. Other goods imports plummeted 41 percent while intermediate and other merchandise goods dropped 7 percent. Capital goods imports were up 20 percent and consumption goods edged up 2 percent. The fall in other goods was driven by the non-monetary gold component, which fell 45 percent.

December seasonally adjusted retail sales were up 3.8 percent on government grants after increasing 0.4 percent in November and 1 percent in October. It should be noted that the full retail sample was reinstated from November 2008. All industries were up in December, with food retailing gaining 1.4 percent while department stores were up 8.3 percent, clothing & soft good retailing were up 5.8 percent and household good retailing was up 9.9 percent. Other retailing was up 2.6 percent while and cafes, restaurants & takeaway food services increased by 1.7 percent.

Americas

Canada

January employment contracted by 129,000 while the unemployment rate jumped to 7.2 percent from 6.6 percent. The job losses were mainly concentrated in full-time positions (113,900) and in the goods producing area. In particular, manufacturing employment nose dived 100,900 on the month. With agriculture down 8,400, utilities off 4,600, construction falling 4,400 and natural resources shedding 2,200, overall goods producing industries lost some 120,500 positions. Services fared rather better — they lost only 8,600. Worst hit was transportation & warehousing (29,900) but there were also significant declines in business, building & other support services (21,600) and public administration (11,900) and trade (8,100). Employment gains were at best modest although health care & social assistance (30,800) performed surprisingly well. The other main winners were finance, insurance, real estate & leasing (13,500) and accommodation & food services (11,800). Actual unemployment rose by 100,000 to 1,310,100 and in tandem with this, the employment rate fell 0.5 percentage points to 62.6 percent.

Bottom line

Poor economic data continued to pour in globally with little respite. As expected, Bank Indonesia, Reserve Bank of Australia, Bank of England and European Central Bank held their policy meetings with only the ECB refraining from lowering its policy interest rate. As the week progressed, investors monitored the progress of the U.S. stimulus package through Congress. Friday’s employment report served to remind lawmakers that they needed to approve a package as soon as possible.

Republican Senator Charles Grassley said Congress is on track to get an economic stimulus bill to President Barack Obama by this week. Treasury Secretary Timothy Geithner will announce a plan on February 9 to aid the nation’s banks that will likely emphasize guarantees of toxic assets over proposals to create an aggregator bank that would remove them from balance sheets, according to people familiar with the proposal.

Looking Ahead: February 9 through February 13, 2009

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