Global Markets

The event of the week by any measure was the U.S. Federal Reserve’s Wednesday announcement that it would begin to buy longer term Treasuries — that is ranging between two and 10 years. The Fed’s primary objective is to lower intermediate rates. Equities initially cheered and bonds rallied while the dollar tanked against virtually all other currencies. In addition, the Fed said it would also buy agency mortgage-backed securities.

The Fed joins the Banks of England and Japan and the Swiss National Bank who already have implemented quantitative easing (QE) programs. However, no one knows how much QE will be needed — there are no historical data to use as reference. And much depends on the velocity of money — this is also an illusive number to pin down. In order to purchase these securities the central banks will be printing money. Investor concerns about possible deflation were replaced by inflation worries brought on by the Fed’s moves.

Elsewhere, the Bank of Japan left its key interest rate unchanged at 0.1 percent and said that it would step up purchases of Japanese government bonds. They had just announced plans to buy up to ¥1,000 billion of banks’ subordinated debt to boost their capital and support lending.

On the week, all equity indexes followed here with the exception of the Philippine PSEi and the Mexican Bolsa gained. The Topix was up 5.6 percent while the Nikkei trailed with a gain of 5 percent.

Global Stock Market Recap

Europe and the UK

Stocks in Europe and the UK were up for the second week despite investor indecision on Friday as stocks vacillated between positive and negative. On the week, the FTSE, DAX and CAC gained 2.4 percent, 2.9 percent and 3.2 percent respectively. European stocks were help by comments of prominent European Central Bank council member Axel Weber who said the bank would lower interest rates again and may offer banks longer-term loans in its refinancing operations. According to Weber, the ECB still has room to maneuver on interest rates which would be used. His remarks were contained in a speech in Berlin Friday.

Bank of England

The minutes of the March 4 to March 5 meeting revealed that the monetary policy committee — after a vigorous debate on the level of quantitative easing that would be needed to revive the economy — was concerned that too small a boost to the economy could cause markets to lose confidence in its ability to boost demand at all. The MPC unanimously agreed on £75 billion in asset purchases and concluded that the initial program of asset purchases needed to be on a scale large enough to demonstrate that the committee would do whatever was needed to boost nominal spending sufficiently to keep inflation at target in the medium term. The MPC agreed that the vast proportion of assets to be purchased should be government gilts and a very small proportion should be private sector assets — in part because the sterling corporate securities market is relatively small. But also, the purpose of the private sector purchases is not to inject cash into the economy but to reduce the spread between interest rates on corporate paper and that on risk-free government paper, as well as to improve the flow of credit.

The minutes also revealed that the committee voted unanimously to cut interest rates to 0.5 per cent but that there was considerable debate about whether a further half-point cut in the Bank rate was either desirable or useful, with some expressing concern about the impact on profit margins in the banking system.

Asia/Pacific

All indexes followed here save the Philippine PSEi were up last week. Most of the major indexes including the All Ordinaries, Nikkei, Topix, Hang Seng, STI, Kospi and SET gained for the second consecutive week. While there was some profit taking on Friday, investors — after the first rush of euphoria — were skeptical over the Federal Reserve and the Banks of Japan and England’s moves towards quantitative easing through printing money. They feared that the moves might lead to inflation down the road.

Financial stocks initially jumped on stabilization hopes which are vital for the global economy’s revival following the Fed’s announcement. However, they declined Friday thanks to profit taking. Some of the losses also could be attributed the sinking value of the U.S. dollar against most currencies after the Fed’s leap to QE. For example, the South Korean government, in an effort to arrest the sharp decline of the U.S. dollar against the won, eased the regulations governing overseas borrowing by public companies. A number of private companies are reportedly eyeing the overseas markets for borrowing following the weakening of the U.S dollar.

Japanese stocks were down Thursday, notwithstanding the U.S. Federal Reserve's announcement. Exporters fell as the yen gained sharply against the U.S. dollar, denting the value of export proceeds realized in yen while hurting repatriated profits just prior to the end of the fiscal year.

The World Bank cut China's 2009 economic growth forecast a full percentage point to 6.5 percent. The bank noted that its estimate is significantly lower than the potential growth, and the resulting spare capacity would lead to weaker market investments, lower job growth, and downward pressure on prices, among the other effects. At the same time, the World Bank pointed out that China was likely to outgrow most other countries, as its economic fundamentals remain strong enough to look beyond 2009.

Bank of Japan

As expected the Bank of Japan Monetary Policy Board left its key interest rate at 0.1 percent and focused on nontraditional policies to stem the economy’s collapse. As funding conditions tighten in the money market ahead of the fiscal year-end on March 31, the BoJ introduced additional steps to supply an ample amount of funds to financial firms. The board also decided to boost its JGB purchases to ¥1.8 trillion monthly and ¥21.6 trillion annually. In January the Bank started buying commercial paper to encourage lenders to boost short-term lending to companies. In February it announced plans to widen the program to purchases of corporate bonds with maturities of up to one year and ratings of at least ‘A’. Economic data have been much worse than anticipated. Exports continue to plummet along with imports. The decline in trade has hit industrial production harshly — it has declined about 10 percent in both December and January and machinery orders have plunged as well.

On Tuesday, the BoJ said that its monetary policy board had decided to consider offering subordinated loans to banks totaling up to ¥1 trillion to boost their capital that has been depleted by falling stock prices and revive lending. The announcement is the latest move to help ease financial market strains on domestic commercial banks. Providing subordinated loans to banks is not a monetary policy issue, but rather falls under the Bank's role to ensure financial system stability. The Nikkei, which has lost almost half of its value since the beginning of 2008, has in turn decimated the value of equities held by banks. This has made it harder for them to maintain capital ratios and is limiting their ability to lend.

Currencies

The U.S. dollar tumbled against most major currencies including the euro, yen and pound sterling after Wednesday’s announcement that the Federal Reserve would purchase longer term Treasuries. Fed officials announced significant further expansion of the Fed balance sheet including $300 billion of longer-term Treasury securities over the next six months and an expansion of the mortgage debt purchase program to $1.450 trillion in total. While stocks and bonds reacted mainly on Wednesday, currencies continued to vibrate into Thursday. Analysts said that Wednesday’s drop was the greatest, on a trade-weighted basis, since the signing of the Plaza accord in September 1985. The dollar had rallied since last summer largely on the effects of deleveraging. The dollar stabilized and gained ground Friday as equities weakened and investors had second thoughts about risk-taking.

Selected currencies — weekly results

Indicator scoreboard

EMU

February harmonized index of consumer prices was up 0.4 percent and 1.2 percent when compared with last year. Core HICP which excludes energy, food, drink & tobacco was up 0.1 percent and 1.7 percent on the year. However, excluding just energy & seasonal foods, the HICP was up 1.8 percent and while omitting only energy & unprocessed foods inflation was up 1.7 percent on the year. On the year, both household equipment and health edged up 0.1 percent to 1.9 percent and 1.5 percent respectively. Price declines eased in transport (2.7 percent from 3.2 percent) and in communications (1.4 percent from 1.9 percent).

January industrial production dropped 3.5 percent and plunged 17.3 percent when compared with last year. It was the fifth monthly drop with the previous five months all revised weaker. All major sectors were down. Worst hit was the capital goods area where output slumped 6.0 percent. Intermediates declined 3.6 percent, durable consumer goods were off 2.6 percent and nondurable consumer goods fell 1.1 percent. As well as being broad-based, the drop in output was widespread with nearly all EMU states seeing production levels lower on the month.

Germany

March ZEW expectations index was up for the second month, this time to minus 3.5. However, current conditions dropped further to minus 89.4, its weakest level since September 2003. It seems that while confidence among analysts about economic prospects is steadily building, there is still worse to come before any recovery actually materializes. ZEW attributes the latest rise in expectations to lower ECB interest rates and softer commodity prices.

February producer prices were down 0.5 percent but were up 0.9 percent when compared with last year. A 0.6 percent monthly slide in energy prices was a key factor once again behind the weakness but even excluding this sector, prices were down 0.5 percent from January and also 0.7 percent lower on the year. Among the major market groups, only capital goods prices (0.1 percent) managed a modest rise. Basics were down 1.2 percent and consumer goods were 0.1 percent weaker, although within this latter figure durables were up 0.2 percent, almost offsetting a 0.2 percent decline in nondurables.

Italy

January industrial production was down 0.2 percent and dropped 15.4 percent when compared with last year. Goods producing sector was down 0.2 percent after slumping 2.5 percent in December. January was the seventh month in a row that the industrial sector has seen output contract and the annual decline constituted the worst performance since the data series began in 1991. All major sectors were down except capital goods where output was up 0.5 percent. The worst performer was the intermediates sector where output was down 2.0 percent from December but consumer goods (1.7 percent) fared little better. Activity in the energy sector fell 0.4 percent.

Fourth quarter joblessness jumped to 6.9 percent from 6.7 percent in the third quarter. The overall number of jobseekers rose 39,000 or 2.3 percent on the quarter to 1,731,000. Most on the increase took place in the north (33,000) while the center and south were little changed (5,000 and 1,000 respectively). As usual, regionally the unemployment rate was lowest in the north (4.1 percent) and highest in the south (12.2 percent).

United Kingdom

Average earnings for the three months to January were up 1.8 percent when compared with the same three months a year earlier. In January alone, growth turned negative with earnings falling 0.2 percent below their year ago level, the first annual decline on record. The slowdown was in large part a function of weaker bonuses as the 12-month growth rate in the ex-bonus measure dipped just 0.1 percentage points to 3.5 percent. The slowdown in total headline earnings was mirrored in the private sector where growth slipped to 1.4 percent from 2.9. Manufacturing fell from 2.3 percent to 1.9 percent while private services decelerated to 1.3 percent from 3.4 percent. By contrast, earnings in the public sector held steady at 4.0 percent.

February claimant count unemployment surged a record 138,400 and boosted the jobless rate by 0.5 percentage points to 4.3 percent, its highest level since March 1999. The total number out of work now stands at 1,391,000. The ILO measure of joblessness showed a 165,000 jump in unemployment in the three months to January. The increase took the number out of work to 2,029,000 and above the 2 million mark for the first time since 1997. At the same time, the unemployment rate climbed to 6.5 percent.

Asia/Pacific

Japan

January tertiary industry index was up 0.4 percent but down 3.5 percent when compared with last year. The industries that were up on the month included information & communications, medical, health care & welfare, postal services, real estate, learning support, electricity, gas, heat supply & water and wholesale & retail trade. Eating & drinking places, finance & insurance, accommodations, transport, services for amusement & hobbies and advertising were down.

January all industry index was down 1.7 percent. On the year, the index was down 8.5 percent on the year. The tertiary index which is a major component of the all industry index surprised and was up 0.4 percent on the month but was down 3.5 percent on the year. The all industry index takes a reading of activity in the 11 service 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.

Americas

Canada

January manufacturing shipments dropped 5.4 percent and were down 15 percent when compared with last year and their weakest in nearly ten years. In real terms, the monthly fall was even steeper with volumes off 6.4 percent from December. The latest nominal decline was the sixth monthly drop in a row and reflected drops in 14 of 21 manufacturing industries. In particular, transportation slumped a record 27.3 percent, prompted by a collapse in both motor vehicle sales (46.3 percent) and parts (27.1 percent) as plant closures took their toll. The other major area of weakness was primary metals (10.5 percent), where shipments where declining global demand has been compounded by falling prices. By contrast, there were some gainers. Of note, petroleum & coal products were up 7.2 percent on the month, the first increase of any size in seven months and food also posted a gain (4.4 percent). Unfilled orders were down 3.0 percent while new orders slumped 6.7 percent on the month. Moreover, with inventories rising 1.2 percent, the inventory/sales ratio jumped 0.1 months to 1.61 months, well above the levels at which manufacturers would feel comfortable.

February consumer price index was up 0.7 percent and 1.4 percent when compared with last year. Core CPI excluding food and energy was up 0.5 percent and 1.3 percent on the year. The Bank of Canada’s preferred measure of consumer prices which excludes eight volatile items also was up 0.5 percent on the month but up 1.9 percent on the year. Prices were up for transport (1.5 percent), food (0.5 percent) and recreation, education & reading (0.6 percent). Other areas showed only minor gains with housing operations & furnishings posting the largest increase at just 0.2 percent. The jump in annual inflation was mainly due to a smaller pace of decline in energy costs (8.8 percent from 10.9 percent), which in turn reduced disinflation in transportation (5.8 percent from 7.5 percent). In addition, inflation in the food sector edged higher (7.4 percent from 7.3 percent). Against, that, 12-month rates eased in shelter (3.0 percent from 3.3 percent), health & personal care (2.5 percent from 2.7 percent) and alcohol & tobacco (1.9 percent from 2.2 percent).

January retail sales were up 1.9 percent after plunging 5.2 percent in December. However, sales were down 5.8 percent when compared with last year. Heavy discounting was clearly a major factor boosting demand since nearly all of the monthly increase could be attributed to volumes which were up 1.8 percent. The headline recovery was led by a sharp monthly rebound in the auto sector led by a 6.4 percent nominal bounce in new car sales. Gasoline station purchases were up 2.6 percent but used vehicles were down 1.8 percent. Excluding the auto sector, sales were up 1.3 percent on the month in cash terms but fell 2.1 percent on the year. Among the other main market groupings, pharmacies & personal care fared well with demand up 2.0 percent while clothing was up an even stronger 3.0 percent. At the same time, food & beverage sales increased 2.1 percent. However, weaker sales were still seen in furniture, home furnishings & electronics (0.7 percent), building & outdoor home supplies (1.4 percent) while general merchandise purchases were flat on the month.

Bottom line

Both the Federal Reserve and the Bank of Japan embarked on new non-traditional methods after their policy meetings last week. Both left their interest rates at near zero and announced additional quantitative easing measures. Equities and bonds responded positively while the U.S. dollar plunged against most major currencies.

Going forward, new economic data will be on the light side — the calm before the storm of data that engulfs around the first of the month along with the critical central bank meetings in Europe and the UK.

Looking Ahead: March 23 through March 27, 2009

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