Global Markets

Investors continued to obsess about the U.S. bailout programs including those for banks — and the government's growing stake in Citigroup. They are also fretting over how the stimulus will be spent and how the ever-expanding deficit will be repaid. And economic data provided a reality check and further evidence of a worsening global recession. GDP data confirmed the shrinking of the U.S., UK and German economies. In Europe, unemployment continued to climb and both business and consumer sentiment was bleak everywhere. And there appeared to be no stabilization in sight for U.S. and UK housing as sales and prices continued to drop.

Stock markets, initially positive after Fed chairman Ben Bernanke's signal that banks might not need to be nationalized faded amid U.S. Treasury Department's plan to “stress test” 19 of the largest banks. Investors continue to be skeptical of whether the bailout package would be able to stabilize the financial system.

On the week, most indexes declined. The few that did not included the Nikkei, Topix, Hang Seng, KLSE Composite, Taiex and the S&P/TSX Composite. In North America, only the S&P/TSX Composite was up on the week. For the month of February, the Shanghai Composite jumped 4.6 percent while the PSEi was up 2.6 percent, KLSE Composite gained 0.7 percent and the Taiex was up 7.3 percent. On the downside for the month, the biggest loser was the Dow, which was down 11.7 percent. It was closely followed by the DAX, which was down 11.4 percent.

Global Stock Market Recap

Europe and the UK

Banks and drug companies led Friday’s swoon in Europe and the UK after the U.S. lifted its share in Citigroup and U.S. budget plans elevated concerns about drug company profits. The FTSE fell to its lowest level in three months on Friday, as fears about the health of the world’s financial system intensified after the U.S. government increased its stake to 36 percent in Citigroup. The move was interpreted as creeping nationalism of the bank. The downward revision to U.S. GDP data added to fears about the global financial system. The weaker than expected data implies the U.S. is facing a much longer and deeper recession than previously thought and sent equities lower across the Atlantic as well.

German stocks were hit the hardest last week as a string of dreadful data only confirmed the dire state of the economy. And it wasn’t only German data that weighed on equities — dire reports from its primary export customers also contributed to the decline. Exports, a major contributor to growth, have plummeted thanks to recessions in these markets. DAX losses picked up steam in February. After dropping 9.8 percent on the month in January, the index sank 11.4 percent in February. The CAC followed a similar pattern. It was down 7.6 percent in January and 9.1 percent in February. The FTSE, despite heightened worries about the banking system, housing sector and sinking economy in general performed better than its two European counterparts. The index was down 7.7 percent in February following a loss of 6.4 percent in January. For the week, the FTSE was down three of five trading sessions while both the CAC and DAX were down four of five. The three were down 1.5 percent, 1.7 percent and 4.3 percent respectively.

Asia/Pacific

The region’s stock indexes continue to mirror U.S. index performance for the most part, sinking when the U.S. declines and vice versa. For example, stock markets across the region closed mostly higher on Wednesday following triple-digit gains on Wall Street overnight. Reassuring comments from Fed Chairman Ben Bernanke on bank nationalization plans eased investor worries, but gains were modest as investors remained cautious amid uncertainty over effective policy responses to the financial crisis.

However, not all indexes followed the U.S. lower for the week — the Nikkei, Topix, Hang Seng, KLSE Composite and Taiex were up as the U.S. continued to roll out stimulus and bailout plans. Initially, Mr Bernanke’s semi-annual testimony on the economy soothed investors, but that did not last for long. Wariness about more funds for Citibank along with proposed heavy changes to the health care industry dampened investor enthusiasm. But the continual outpouring of poor economic data reminded investors of the dire condition of the world economy and financial system.

In Japan, both the Nikkei and Topix were up on the week as fresh reports about Japan's stock-buying plan boosted investor sentiment. The indexes were even up on Friday after a slew of economic data underlined the dreadful condition of the economy. The horrible numbers were in line with market expectations. Exporters gained after the yen depreciated to its weakest level since November. A weaker yen will help repatriated profits when the fiscal year ends on March 31^st. Both indexes however were down for the second month of the year — the Nikkei was down 5.3 percent for the month while the Topix lost 4.7 percent to plumb long term lows. The Nikkei is the worst Asian performer so far this year, losing 14.6 percent in just two months while the Topix was down 11.9 percent.

Bank Negara Malaysia

On Tuesday, Malaysia's central bank lowered its key interest rate by 50 basis points to 2 percent, citing challenging economic environment after the financial crisis. This was the Bank’s third reduction in a row and is now down by 150 basis points since November 2008. In its statement, the Bank said the Malaysian economy has been adversely impacted by global developments. Exports and industrial production have declined steeply, while private investment activities have slowed down in recent months as businesses scaled back their spending. Consumer sentiment has also been affected by the weakening conditions in the labor market. They expect economic conditions to remain challenging in the coming quarter, posing risks of an economic contraction in 2009. However, the prospects remain intact for an economic recovery once global conditions stabilize.

Bank of Thailand cuts rates again

The Bank of Thailand cut its key interest rate by another 50 basis points to 1.5 percent on Wednesday to support economic recovery and to safeguard price stability. The Bank has trimmed the rate by a cumulative 225 basis points since December 2008. In a statement accompanying the decision, the Bank said risks to growth increased while inflation was expected to decline further. Late in January, the bank had said it would continue easing monetary policy to support the economy days after it lowered economic growth estimate and inflation forecast for 2009 in its inflation report. Growth for 2009 was cut to zero to 2 percent from October 2008’s estimate of 3.8 percent to 5 percent. Thailand's inflation is expected to range from minus 1.5 percent to plus 0.5 percent in 2009.

Currencies

The dollar gained in February against its major trading partners — the pound sterling, euro, yen, Swiss franc and Canadian dollar — as investors took flight to the safety of the U.S. currency. Despite the deepening U.S. recession and the third government bailout of Citigroup, investors kept their trust in the dollar. Under the rescue proposal for Citigroup, the Treasury Department would convert as much as $25 billion of preferred shares into common stock. The government will make the swaps only if private holders agree to the same terms.

Drops in the yen and Swiss franc against the dollar in 2009 have left the dollar as the only safe haven refuge from economic turmoil. Japan’s crumbling economy combined with an end to the unwinding of the carry trade weakened the yen. The franc suffered from a deteriorating Swiss financial system and threats of intervention by the central bank to push the currency lower against the euro.

Not too long ago, one U.S. dollar bought you ¥90. Most expected the yen to keep climbing upward. Until very recently, the yen was purchased as investors fled risk — now it is sinking along with equities. There are several reasons for this. The repatriation of savings and the local currency has calmed as the popularity of overseas investment unwound. There is evidence that the Japanese are increasingly selling domestic equities and buying overseas bonds. And foreigners are also selling Japanese equities and bonds as well which puts further pressure on the yen. For many years while leverage was easily available, the “carry trade” — that is borrowing in yen at its low rates to park cash elsewhere — kept the yen cheap. But when the credit market turned, bringing the carry trade down with it, there was a prolonged period when the yen functioned solely as a perverse “safe haven,” gaining whenever volatility was rising.

Selected currencies — weekly results

Indicator scoreboard

EMU

M3 money supply for the three months ending in January cooled to 7.0 percent from 7.9 percent for the previous three months when compared with a year ago. For the month of January, M3 growth dropped to 5.9 percent from 7.5 percent in December. Private sector lending showed a similar deceleration with annual growth easing to 5.0 percent from 5.8 percent in December and 7.1 percent in November. The 12-month increase in lending to households was especially weak at just 1.2 percent, even lower than the 1.6 percent pace seen in December. Loans for house purchase eased to 1.0 percent from 1.5 percent while annual growth in lending to non-financial corporations decelerated to 8.8 percent from 9.5 percent.

January unemployment rate climbed to a 28 month high of 8.2 percent. The number out of work expanded by a further 256,000 to raise the total to more than 13 million. Increases in unemployment were widespread. The only exceptions were Austria and Finland where the rate held steady at 4.0 percent and 6.6 percent respectively. In Germany and France the jobless rate rose 0.1 percentage points to 7.3 percent and 8.3 percent respectively. Italy did not provide any data but the Spanish rate jumped another 0.5 percentage points to 14.8 percent.

January harmonized index of consumer prices was down 0.8 percent but was up 1.1 percent when compared with last year. This is the lowest annual rate since July 1999. Excluding food, drink, tobacco & petroleum the ECB’s preferred measure of core CPI inflation eased 0.2 percentage points to 1.6 percent. Excluding energy and seasonal food, the annual rate dropped from 2.2 percent to 1.8 percent and without energy and unprocessed food, the HICP was also 1.8 percent higher on the year after a 2.1 percent increase in December. Outside of energy (down 5.3 percent from down 3.7 percent), the sharpest slowdown in annual inflation occurred in clothing where prices dropped from 0.8 percent higher on the year to 0.6 percent lower. However, inflation also eased significantly in health (2.2 percent to 1.4 percent), food (3.2 percent to 2.6 percent), housing (3.6 percent to 3.1 percent) and in transport where disinflation became more entrenched (2.5 percent to 3.2 percent).

EU

February economic sentiment dropped to 65.4 from 67.2 in January and once again set a new record low. The latest drop was a function of further declines in morale in all sectors except retail, which edged up just 1 point to a still very soft minus 19. All of the other areas saw new all time survey lows. Industrial confidence was down 2 points to minus 36, consumer sentiment dropped 2 points to minus 33 while morale in services shed 1 point at minus 23. Sentiment in construction slipped 2 points to minus 32. Weakness was not just broad-based among the various sectors but also widespread across the region.

Germany

February Ifo business index edged down to 82.6 from 83.0 in January. However, the divergence between the trends in current conditions and expectations continued to widen. Weakening sentiment was again driven by current conditions which fell 2.5 points to 84.3, its fourth monthly drop in a row and its eighth decline in the last nine months. By contrast, expectations once again improved, gaining 1.4 points to 80.9 for its highest reading since October 2008. At a sectoral level, all indexes remained historically weak but there were modest improvements in morale in retail (up 2.2 points to minus 24.3), services (up 2.1 points to minus 6.5) and in construction (up 5 points to minus 24.5). Declines occurred in manufacturing (0.8 points to minus -42.8) and in wholesale (down 2.4 points to minus 27.8).

Fourth quarter gross domestic product contracted by 2.1 percent on the quarter and sank 1.7 percent when compared with the same quarter a year ago. The data confirm the weakness in private demand with gross capital investment sinking 2.7 percent on the quarter with equipment down 4.9 percent and construction down 1.3 percent. Private consumption edged down by 0.1 percent. Among the other components, government expenditure was unchanged from the third quarter but inventory accumulation added 0.5 percentage points to bottom line GDP. If sustained into the current period, excess inventory accumulation could be an issue that hinders economic recovery. Both sides of the international trade account contracted sharply with exports off 7.3 percent and imports down 3.6 percent.

February joblessness was up by 40,000 and down from a 59,000 increase at the start of the year. Even so, this was still enough to lift the number out of work to 3,311,000 and to boost the unemployment rate by another notch to 7.9 percent. The latest loss of jobs reflected a 34,000 decline in the West and a 6,000 drop in the East. Both drops were less than their respective 46,000 and 13,000 falls in January but swings in the monthly data can be large and the trend is clearly steeply higher. Indeed, job vacancies were down by 11,000.

France

January household purchases of manufactured goods jumped by 1.8 percent and were up 1.8 percent when compared with last year. The recovery was broad-based. Textiles were especially robust with purchases surging 4.7 percent on the month following a string of significant declines. However, durable goods rose a solid 2.7 percent with autos up 2.8 percent and household goods gaining 3.0 percent.

Italy

December retail sales were unchanged on the month and down 1.5 percent when compared with last year. For calendar 2008, sales dropped 0.6 percent, the worst performance since the data series began in 1997. Non-food sales were unchanged on the month but still down 2.7 percent on the year. Purchases of food edged down by 0.2 percent from November and declined 0.8 percent on the year. Among the non-food group, electrical appliances dropped 4.1 percent, video cassettes & CDs were down 3.6 percent, clothing sank 3.5 percent and photographic equipment swooned by 3.1 percent.

United Kingdom

Fourth quarter gross domestic product was down 1.5 percent on the quarter — the steepest decline since the second quarter of 1980. On the year, GDP was down 1.9 percent. Calendar year 2008 growth was just 0.8 percent, the worst performance since 1992. Household spending dropped 0.7 percent on the quarter and was down 0.2 percent on the year while gross fixed capital formation slumped a quarterly 2.3 percent and was 9.7 percent lower than a year ago. Total final domestic expenditures dropped 1.8 percent from the previous period and 2.3 percent from the fourth quarter of 2007. As depressing as these figures are, they would have been worse but for a 1.5 percent quarterly increase in general government consumption. By sector, industrial production sank 4.5 percent on the quarter, mainly on the back of a 5.1 percent nosedive in manufacturing. Services output was down 0.9 percent from the previous quarter incorporating a 2.3 percent drop in distribution, hotels & catering, a 1.1 percent decline in transport & communication and a 0.6 percent contraction in business services & finance. Government & other services declined 0.9 percent. Output from the agriculture, forestry and fish sector edged down 0.3 percent. The GDP deflator rose 0.7 percent on the quarter, boosting annual inflation from 2.2 percent to 2.7 percent.

Asia/Pacific

Japan

January unadjusted merchandise trade deficit widened 952.6 billion yen from 322.3 billion in December. Exports continued to plunge – they were down a record 45.7 percent on the year – for the fourth consecutive decline. Imports also dropped – they were down 31.7 percent on the year. It was the third decline for imports. Exports to the U.S. declined for the 17th month in a row. They were down 52.9 percent on the year. Exports to the EU were down 47.4 percent and slumped a record 46.7 percent with Asia. On a seasonally adjusted basis, the trade balance was in deficit for the seventh month. The deficit in January was 364.9 billion yen. Seasonally adjusted exports were down 10.4 percent on the month while imports tumbled 6.9 percent.

January national consumer price index was down 0.6 percent and unchanged when compared with last year. Core CPI excluding only fresh food was also down 0.6 percent and unchanged on the year. However, excluding both fresh food and energy, the CPI was down 0.8 percent and edged down 0.2 percent on the year. Prices swooned by 8 percent on the month for clothes & footwear as retailers tried to entice consumers to buy by lowering prices. However food prices were up 0.4 percent on the month and 3.3 percent on the year. Prices for goods dropped 0.8 percent and 0.2 percent on the year while services prices edged down 0.2 percent on the month and were up 0.2 percent on the year. February Tokyo CPI was down 0.3 percent on the month but up 0.5 percent on the year. Core excluding only fresh food was down 0.1 percent but up 0.6 percent on the year.

January unemployment rate surprised and dipped to 4.1 percent from a revised 4.3 percent in December. The number of unemployed was 2.8 million, an increase of 210,000 from the previous year. The number of employed was up 26,000 on the month but declined by 290,000 on the year. The decline in the unemployment rate does not reflect the contraction in the labor force as firms cut back on production in an effort to reduce inventories.

January household spending sank 5.9 percent when compared with the previous year after dropping 4.6 percent in December. This was the eleventh straight month of decline. Real spending was down in eight of the 10 categories led by a 15.4 percent decline in transportation & communication and a 5.7 percent decline in fuel & water charges. Spending on culture & recreation was up 2.9 percent while spending on furniture and household utensils increased by 4.2 percent.

January retail sales dropped a less than expected 2.4 percent when compared with last year. However, the picture was much worse for large-scale retailers – sales there dropped 5.6 percent.

January industrial production plunged 10 percent after sinking 9.8 percent in December. On the year, industrial production was down 30 percent. This indicates that companies will fire more workers as the recession deepens. The magnitude of the decline is much bigger than in the past and the inventory adjustment has been very, very harsh as manufacturers attempt to work off excess inventories. Japan has become more dependent on exports for growth in the past decade, making it particularly vulnerable to the global recession. Manufacturers shipped 21 percent of their goods abroad in 2008, up from 16 percent a decade earlier, according to the Bank of Japan. Only two sectors managed to have positive results in January — cosmetics and information & technical electronics equipment for consumer goods.

Hong Kong

Fourth quarter gross domestic product was down 2.0 percent on the quarter after contracting 0.7 percent and 0.9 percent respectively in the third and second quarters. GDP declined 2.5 percent when compared with a year ago. On the year, private consumption expenditures dropped 3.2 percent while government consumption was up 2.6 percent. Gross domestic fixed capital formation contracted by 17.3 percent after growing by 3.2 percent in the third quarter. Total exports declined by 4.9 percent while imports of goods declined 6.4 percent. For the entire year, GDP was up 2.5 percent.

Americas

Canada

December retail sales slumped 5.4 percent and sank 6.4 percent when compared with last year. The monthly drop was the steepest in more than 15 years. Weaker prices were only partly responsible since volumes also declined a hefty 4.1 percent from November. Excluding autos, sales were down 3.2 percent on the month and 2.5 percent on the year. A record near-15 percent monthly drop in unit auto sales hit the headline especially hard. All of the other main areas saw sales weaker on the month —building & outdoor suppliers swooned 5.6 percent, clothing & accessories sank 3.7 percent and furniture, home furnishings & electronic goods declined 2.6 percent. At the same time, food & beverage purchases were down 1.0 percent, pharmacies & personal health care slipped 0.9 percent and general merchandise was off 0.4 percent.

January industrial product price index edged down 0.1 percent and was up 1.2 percent when compared with last year. The exchange rate effect was small, subtracting 0.2 percentage points from the monthly change. Petroleum & coal prices actually were up 1.6 percent on the month, the most significant single sector rise. Excluding this category, the IPPI would have edged down 0.2 percent from December although it would still have been up some 5.0 percent on the year. The largest monthly drop was posted in lumber & other wood products but there were also declines in pulp & paper, chemicals & chemical products and motor vehicles & other transport equipment. Raw material price index was up 1.4 percent but left the index 31.6 percent lower on the year. Mineral fuels led the index higher with a 2.8 percent increase in prices on the month. Without this sector, the RMPI would have risen only 0.6 percent from December although at the same time it would only have been 12.5 percent weaker on the year.

Bottom line

Equities continued to sink as investors remain despondent over the magnitude of the worldwide recession and the rising costs of staving off potential financial system failures. Data last week offered no encouragement — there was no light at the end of the tunnel.

Four major central banks meet this week — the Banks of Canada and England, the Reserve Bank of Australia and the European Central Bank. With most central banks rapidly running out of room to lower interest rates, statements on alternative monetary policy measures will be closely monitored.

Looking Ahead: March 2 through March 6, 2009

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