Global Markets

As I write, the finance ministers and central bankers from the Group of 20 countries are holding a meeting in Horsham, south of London that will set the agenda and pave the way for the summit meeting on April 2 in London. But as the preparations have gone forward and the global downturn intensifies the diversity of opinions on policy actions between the U.S. and Europe have widened. Despite analysts’ skepticism, the goal at this weekend’s meeting is to try to reach a consensus and propose concrete actions. Among the thorniest issues are how much fiscal stimulus is still required and what is still needed to put the banking sector on its feet.

The gap of opinion on stimulus seems to be widening with Europe including Germany and France saying they do not have to add additional stimulus to that already undertaken and the U.S. who says more is needed. European governments are reluctant to add to tax cuts already granted and increase spending that they fear would cause budget deficits to balloon to dangerous levels. In refusing to deepen indebtedness, almost all European Union governments have sent a clear signal that protecting Europe’s monetary union is no less important to them than ending the world recession. The G-20 represents more than 80 percent of the global economy, comprising the G-7 long-industrialized nations and key emerging market economies such as China, India, Russia and Brazil.

Merchandise trade data from Germany, France, UK, China, Canada and the U.S. showed exports and imports as well, still declining. The data indicate the lack of demand in the global economy which was reinforced by the record-breaking slide in German manufacturing orders and output. But some economic indicators showed signs of stabilizing and even surprised on the high side — U.S. retail sales and consumer sentiment. Japanese equities were boosted by signs of new stimulus from the beleaguered government and a weakening yen helped exporters gain as the end of the fiscal year approaches.

Stocks, especially in Europe and North America cut into their year to date losses last week. Three Asia/Pacific region indexes were down while the remaining increased on the week. Gains ranged from 0.4 percent for the Topix to 14.0 percent for the Bolsa. Both the Nasdaq and S&P 500 gained over 10 percent for the week.

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC rebounded smartly last week despite gloomy export and industrial output data. Rather, oversold banking and resource stocks were snapped up by bargain hunters. Equities were also boosted by expectations of more economic stimulus from Japan along with assurances from China that it could add stimulus at any time and reaffirmed its growth target of 8 percent for this year. A few analysts pointed to some stabilization of the larger financial institutions in addition to greater market liquidity. The FTSE, CAC and DAX gained 6.3 percent, 6.8 percent and 7.8 percent respectively.

Bank of England buys gilts

The Bank of England plunged into its quantitative easing program last week as investors flocked to sell government bonds or gilts to the Bank as it launched an unprecedented program to expand the money supply and hopefully resuscitate the economy. The Bank was overwhelmed with offers to sell the bonds by some of the country’s biggest investment groups. The Bank was pleased with the result of the so-called reverse auction, in which investors sell their bonds rather than buy them from the authorities. The Bank’s goal is to buy up to £75 billion over the next three months.

The Fed is watching the Bank’s moves closely. The Fed has been by buying corporate assets rather than its own government bonds. However, the BoE’s announcement has had a much quicker and more dramatic impact on yields than the Fed’s move.

Swiss National Bank now using non-conventional monetary policy

At their quarterly meeting, the Swiss National Bank, citing sharp economic deterioration and a risk of deflation, lowered the target for the three-month Libor range to zero to 0.75 percent. The range had previously been set at zero to 1 percent. In addition, the SNB took other aggressive monetary easing measures that include intervention in the currency markets to prevent further appreciation of the Swiss franc. The currency weakened significantly against other major currencies including the U.S. dollar and euro. The Bank said it was aiming to gradually bring the Libor down to the lower end of the new target range, which would be approximately 0.25 percent. The base rate was previously at 0.5 percent. “The temporary narrowing of the Libor target range, which now stands at 75 basis points compared with the usual 100 basis points, is due to the fact that a negative Libor is not technically possible” the SNB said in a statement.

In a bid to prevent further appreciation of the Swiss franc against the euro, the SNB said it will increase liquidity substantially by engaging in additional repurchase operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange markets. The Swiss central bank last intervened in foreign exchange markets in early 1990s.

Asia/Pacific

Declining indexes were in the minority with many of the indexes regaining the previous week’s losses. Most indexes were up for the week with the exception of the Shanghai Composite, KLSE Composite and PSEi. In Japan, both the Nikkei and Topix were down three days of five with the Topix threatening to fall below the 700 level, before rebounding. The Nikkei gained 5.5 percent on the week while the Topix improved a tepid 0.4 percent.

Major markets in the region were up as hopes of a revival in the global economy strengthened after the U.S. markets rallied mid-week on better-than-expected retail sales data that offset weaker economic data from China. The U.S. data combined with encouraging comments from major U.S. banks over the past few days revived and fortified hopes of a turnaround in the global economy.

On Friday, Japanese Prime Minister Taro Aso ordered a third spending plan aimed at easing a recession that is vying to be the country’s worst since the end of World War II. GDP has declined for three consecutive quarters and is expected to match the fourth quarter’s 3.2 percent decline on the quarter — that’s an annualized rate of 12.1 percent. Aso, whose approval rating is at an all-time low, has announced ¥10 trillion ($102 billion) of spending since becoming prime minister six months ago. However political haggling has delayed implementation of prior stimulus plans. Finance minister Kaoru Yosano said the government will also inject ¥121 billion yen into three regional banks and discuss ways to support the stock market after the Nikkei 225 Stock Average tumbled to a 26-year low during the week. Japan’s ability to spend is limited by its public debt, which at more than 170 percent of GDP is the world’s largest.

Reserve Bank of New Zealand continues to lower rates

As expected, the Reserve Bank of New Zealand cut its policy interest rate by 50 basis points to a record 3 percent low in an attempt to steer the economy out of its worst recession in 22 years. The RBNZ official cash rate or OCR was at a high of 8.25 percent for a year through June 2008. Since then, the Bank has cut its rate by 5.25 percent. New Zealand’s recession is in its fifth quarter, making it the most prolonged contraction since quarterly records began in 1987. Exports are slowing, companies are firing workers and consumers have cut spending as a global slowdown deepens. In addition to the rate cuts, the government has launched a stimulus package that includes reducing income taxes and road and school-building programs to generate jobs. However, the stimulus hasn’t yet kick-started demand. Spending on debit and credit cards fell for the second straight month in February, excluding fuel purchases. And variable home-loan interest rates are at a seven-year low but have not sparked interest in the property market. Home-building approvals slipped to a record in January and house prices slumped 8.9 percent in February from a year earlier.

In his statement, Reserve Bank Governor Alan Bollard acknowledged the deteriorating state of the world economy amid the ongoing losses and extreme volatility in the international financial markets. He said that could remain dominant throughout 2009 and that the timing and extent of global recovery remain highly uncertain. In addition to the interest rate drop, there has also been a large amount of fiscal stimulus. These policy changes, together with the sizeable exchange rate depreciation, are expected to act to support the New Zealand economy. He said that the RBNZ expects to see activity hitting a trough in the middle of this year and then gradually picking up thereafter.

Currencies

Foreign exchange markets were shaken by the Swiss National Bank announcement that it would intervene to halt the Swiss franc’s rise. The currency’s safe-haven status had been heightened by the recent market turmoil and had helped the currency jump by about 9 percent on a trade-weighted basis since July, coming close to its record high around SFr1.43 against the euro in recent weeks. The SNB said the franc’s strength represented an “inappropriate tightening of monetary conditions” as it battled the country’s swooning economy. Traders confirmed that the SNB had been active in the market, selling Swiss francs against the euro and the dollar at progressively lower levels. This was the first intervention by a major central bank since 2004 when the Bank of Japan sought to weaken the yen. The move sparked fears that other countries could follow suit.

The yen was down against the euro but up slightly against the dollar as trading ground to a close on Friday. The yen was down against most of its major counterparts on speculation that the worst of the banking crisis may be over, which reduced demand for the yen as a refuge. The decline was despite the traditional annual influx of repatriated earnings prior to March 31, the end of the Japanese fiscal year. This demand was offset by data showing the Japanese economy spiraling deeper into a recession which eroded demand for the currency.

The dollar declined slightly against the euro, but the decline was tempered by speculation finance ministers and central bankers in the Group of 20 nations will fail to agree on measures to support the euro area’s economy.

The Bank of Korea held interest rates steady at 2 percent and ending a series of cuts that have reduced the policy rate from 5.25 percent since October. At present, Korea is intensely focused on supporting its currency, which has been in free-fall over a year. The dollar has risen more than 54 percent against the won in the past year, and the yen 63 percent. Rate cuts had been undermining the Bank’s intervention in the currency market to support the won.

Selected currencies — weekly results

Indicator scoreboard

EMU

January producer prices excluding construction dropped 0.8 percent and declined 0.8 percent when compared with last year. Energy prices dropped a further 1.5 percent on the month and now stand 2.7 percent lower on the year. Excluding this sector, prices fell a more modest 0.6 percent and were 1.5 percentage points slower than the pace at the end of last year. Outside of energy, prices fell on the month for both intermediate goods (1.2 percent) and nondurable consumer goods (0.6 percent). Against this, gentle increases were registered in the durable consumer goods sector (0.2 percent) and capital goods (0.1 percent).

January retail sales edged up 0.1 percent but were down 2.2 percent when compared with last year. The increase was fully accounted for by a 0.4 percent monthly rise in non-food purchases and the first increase in this sector since September 2008. Sales of food fell 0.3 percent, their fourth consecutive decline.

Germany

January merchandise trade surplus declined to €8.4 billion from an upwardly revised €11.0 billion surplus in December. Both exports and imports were down. Exports were down 4.4 percent while imports declined 0.8 percent. On the year, exports contracted 18.4 percent and imports were off almost 11.1 percent.Within these total figures, exports to the other EMU countries dropped 17.4 percent from a year ago and to non-EU countries fell a hefty 24.5 percent.

February producer prices were down 1.2 percent but were up 2.0 percent when compared with last year. Energy prices as usual had a major impact — they dropped another 2.5 percent on the month. Excluding energy, prices were down 0.4 percent on the month and up 0.2 percent on the year. Among the other major market groupings, consumer goods prices were down 0.4 percent on the month and edged up 0.1 percent on the year. On the same basis, basics were down 1.0 percent and 0.7 percent respectively. Capital goods bucked the trend with a modest 0.3 percent monthly gain that left prices in this sector 1.6 percent higher from January last year.

January manufacturing orders continued to plummet, dropping 8.0 percent and are down 37.9 percent when compared with last year. The latest slump reflected mainly weakness in overseas demand which dropped sank 11.4 percent on the month. Eurozone orders were down only 1.2 percent leaving the bulk of the foreign decline accounted for by the non-EMU bloc where demand simply fell of a cliff, down a dramatic 18.2 percent from December. Domestic orders slid 4.3 percent. By market sector, the worst performer was investment goods which slumped 9.1 percent. However, there were also very large declines in both intermediates (6.8 percent) and consumer goods (6.7 percent).

January industrial production excluding construction plunged by 7.5 percent and sank 19.3 percent when compared with last year. Outside of the energy sector, where activity jumped a monthly 3.2 percent following a 2.2 percent contraction in December, there were declines in output across the board. Most marked was in capital goods which saw a 12.3 percent nosedive while intermediates plummeted by 8.1 percent. Consumer goods were down 0.4 percent with durable goods declining 2.2 percent. Overall manufacturing production dropped 8.4 percent, compounding a revised 4.7 percent decline in December.

France

January merchandise trade deficit widened to €4.5 billion from €2.9 billion deficit in December. Exports dropped 6.7 percent on the month while imports were down 1.4 percent. The aircraft sector played a particularly important role with Airbus shipments declining to just 19 planes from 31 in the pervious month.

January industrial output excluding construction dropped 3.1 percent and sank 13.8 percent when compared with last year. Both construction and energy were up 0.5 percent and 2.5 percent on the month respectively. Elsewhere it was all grim news with electronics and machinery down 6.7 percent, transport equipment declining 5.7 percent and semi-finished goods 2.6 percent weaker. Refining output nosedived 15 percent while food & agriculture contracted by 2.5 percent and overall manufacturing slumped 4.1 percent.

Italy

January producer prices dropped 0.8 percent and were 2.0 percent lower on the year. Prices for consumer goods were down 0.3 percent while durables dropped 0.3 percent and non-durables were 0.4 percent weaker. Capital goods prices edged up 0.1 percent but intermediates dropped 1.7 percent and energy costs were down 0.7 percent.

Revised fourth quarter gross domestic product contracted by 1.9 percent and was down 2.9 percent when compared with the same quarter a year ago. Both the quarterly and annual declines in total output were the third in succession and the former was the worst performance since records began in 1980. Private consumption slumped 0.8 percent on the quarter while capital investment collapsed a quarterly 6.9 percent. Government consumption was unchanged from the third quarter and GDP was boosted 0.4 percentage points by a clearly unwanted run-up in business inventories. Net trade also made a sizeable negative contribution to economic activity.

United Kingdom

January industrial production dropped 2.6 percent on the month and sank 11.4 percent when compared with last year. The latest monthly slide was caused by shrinkage in all of the main production categories with the exception of electricity, gas & water where output was unchanged. Manufacturing output nosedived 2.9 percent, but mining & quarrying, while always erratic, plunged an even steeper 3.0 percent. Manufacturing dropped 12.8 percent on the year. By comparison, oil & gas extraction dropped a relatively mild 0.7 percent. Production was down on the month in most manufacturing sectors with especially hefty declines in engineering (7.7 percent) and metals (3.5 percent). Textiles and clothing production was down 1.0 percent. There were small monthly increases in chemicals (0.3 percent) and in food, drink & tobacco (0.8 percent). By market sector, consumer durables output dropped 5.0 percent, capital goods were off 4.7 percent and intermediates declined 3.2 percent. Only consumer nondurables were up 0.5 percent.

January merchandise trade gap edged up to Stg7.7 billion from a revised Stg7.2 billion deficit in December. Total exports declined 4 percent on the month while imports were off 1 percent. The deterioration was largely matched in the underlying balance which showed the shortfall excluding oil & erratics edging up to Stg7.2 billion. The increase in the overall deficit reflected a renewed and sharp deterioration in net trade with non-EU countries where the bilateral shortfall jumped from Stg4.3 billion to Stg5.7 billion. This was driven by a 15.9 percent monthly slump in exports. Imports were off a relatively mild 3.4 percent. However, there was a significant improvement in net trade with the EU bloc where a 5.9 percent monthly jump in exports combined with a 1.7 percent drop in imports to narrow the deficit to Stg2.0 billion.

Asia/Pacific

Japan

February corporate goods price index was down 0.4 percent on the month. This was its sixth monthly decline in a row. On the year, the CGPI dropped a more than expected 1.1 percent. On the month, most index components were down with the exception of ceramic, stone & clay products. As would be expected, the largest monthly declines were registered by chemicals & related products (down 1.2 percent), petroleum & coal products and iron & steel (both down 1.4 percent). As would be anticipated, petroleum & coal products (down 23.5 percent) led the declines when compared with the previous year. It was followed by nonferrous metals (down 13.1 percent) and chemicals & related products (down 6.4 percent).

Revised fourth quarter gross domestic product was down 3.2 percent and down 4.3 percent when compared with the same quarter a year ago. Analysts had expected the quarterly decline to be revised to a decline of 3.6 percent for the quarter. On an annualized basis, GDP declined 12.1 percent. CAPEX or private non-residential investment sank a revised 5.4 percent on the quarter from the originally estimated 5.3 percent decline. Domestic demand edged down 0.1 percent on the quarter while private consumption dropped 0.2 percent on the quarter. Looking at the year as a whole, the dramatic turnaround in the economy is very evident. For the calendar year 2008 GDP declined 0.6 percent after growing 2.4 percent in 2007. CAPEX dropped 3.7 percent in 2008 after jumping 5.8 in 2007. Domestic demand dropped 0.8 percent after rising 1.3 percent in 2007.

Australia

February’s unemployment rate jumped to a higher than expected 5.2 percent from 4.8 percent in January. However, employment surprised — instead of dropping by 25,000, it edged up by 1,800 jobs. Full-time employment decreased by 53,800 while part-time employment increased by 55,600. The number of unemployed was up by 47,100 to 590,500. The number of persons looking for full-time work rose by 44,400 to 426,000 while the number of persons seeking part-time work increased by 2,600 to 164,500. The participation rate edged up to 65.5 percent from 65.3 percent in January.

China

February consumer prices were down 0.6 percent and dropped 1.6 percent when compared with last year. Part of the decline was due to Lunar New Year distortions and the unprecedented snowstorm which had pushed up food prices last February. The annual decline was the first since December 2002. Food, which accounts for about a third of the CPI, dropped 1.9 on the year with pork plunging by 18.9 percent. Metal and oil prices are down because of weaker demand caused by the global slump.

February producer prices were down 1 percent and 4.5 percent on the year. The index was dragged down mainly by lower prices for oil and other commodities, but also by a glut of factory capacity and a shortage of demand from exporters and Chinese buyers alike.

February exports dropped by a record 25.7 percent when compared with last year while imports dropped 24.1 percent on the year narrowing the trade surplus to $4.84 billion from $39.1 billion in January.

Americas

Canada

February employment sank by 82,600 which in turn boosted the unemployment rate to 7.7 percent. Employment losses were concentrated in full-time positions (110,900) with part-time jobs posting managing a respectable gain (28,300). Payrolls declined 11,300 in the goods producing sector and were down a hefty 71,200 in services. Private sector employment dropped 30,400 while the pubic sector shed 24,200. However, jobs actually rose in manufacturing (24,700) and in agriculture (16,700) although even combined, gains here failed to offset a particularly large shakeout in the construction industry (43,200). Other smaller drops were registered in natural resources (8,300) and utilities (1,300). Service sector employment was hardest hit in the professional, scientific & technical services area (31,100) but there were also sizeable declines in trade (17,700), education services (14,700) and in health care & social assistance (14,600). The only increases in jobs occurred in accommodation & food (8,600), business, building & other support services (8,500) and transport and warehousing (1,200). The participation rate held steady at January's 67.4 percent but the employment rate shed 0.4 percentage points at 62.2 percent.

January merchandise trade deficit widened to C$0.99 billion from C$0.65 billion in December. The December deficit was the first in nearly 33 years. The deficit reflected declines in both exports and imports. Total exports dropped 9.0 percent on the month with especially heavy losses in shipments to the eurozone (18.0 percent) and to the U.S. (8.9 percent). Imports declined a slightly more modest 7.9 percent, again with the EU seeing the most significant drop (17.6 percent). However, in contrast to exports, imports from Japan proved surprisingly firm, up 23.6 percent on the month. The bilateral surplus with the U.S was C$3.0 billion but other regional bilateral balances were by and large little changed. Within exports, the hardest industry was the auto sector which registered a monthly slump of 34.5 percent. Forestry products (12.2 percent), machinery & equipment (6.8 percent) and industrial goods & materials (6.1 percent) also saw sizeable declines. Imports were also dragged lower by the auto sector which posted a 22.6 percent slide on the month. Industrial goods & materials (9.0 percent), machinery & equipment (8.9 percent) and energy products (6.9 percent) were the other major losers.

Bottom line

The week just passed showed a steadying in equities and gains that offset many of the previous week’s losses. Economic data also showed some bottoming in the U.S. but not elsewhere. The Canadian and Australian unemployment rates jumped in February. And exports declined especially in China. The Bank of England undertook its first round of quantitative easing by buying gilts while the Swiss National Bank lowered its interest rate range to virtually zero and intervened in the currency markets to reduce the value of the Swiss franc.

The Federal Reserve and Bank of Japan will announce their interest rate decisions this week — but with interest rates near zero at both banks, no change is expected. However, bank watchers will be eager to see if any other non-traditional policy moves will be made or implemented. Economic events of import will be U.S. industrial production and German investor confidence (ZEW) among others.

Looking Ahead: March 16 through March 20, 2009

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