Global Markets

Stocks gained for the most part in a trading week shortened by holidays in many markets. Major economic data primarily originated in China and the U.S. But investors acted as though the good news was sprouting in the northern hemisphere’s spring season. While some earnings reports were better than analysts expected, economic data from the U.S. belied green shoots optimism. Grim economic data was offset by better than expected profits by companies such as Goldman Sachs and Johnson & Johnson. Positive comments by President Barack Obama and Federal Reserve Chairman Ben Bernanke helped limit the losses.

U.S. data were uniformly bad with the exception of initial jobless claims data that were skewed by the holiday shortened Easter/Passover week. But data on retail sales, industrial production and housing for example, showed no respite in sight despite the green shoot rhetoric from Fed and administration officials. However the contraction in factory activity in the mid-Atlantic region did slow in April according to the Philadelphia Fed survey. Another promising sign that the recession’s severity may be fading came from Nokia who said that mobile telephone destocking, as shops run down inventories before putting in new orders, had bottomed in some markets.

Equity and credit markets added to their recent gains last week with many stock markets recording a sixth consecutive weekly rise as signs of stabilization in global economies and financial institutions gave investors greater confidence. In the Asia/Pacific region, all indexes covered here except the Topix are now up for 2009. However the FTSE, DAX and CAC remain down while in North America, the Dow and S&P 500 are below their 2008 year-end levels.

Global Stock Market Recap

Europe and the UK

The DAX and CAC were up for the sixth week thanks to earnings that beat analyst expectations. The FTSE was also up for the week after faltering the previous week. There was a paucity of new economic data in Europe and the UK so investors looked to Chinese and U.S. data for direction. But the disappointing data there were trumped by earnings that remarkably were better than analysts’ estimates. The FTSE continued its climb over the 4,000 mark following well received first quarter results from Citigroup and JPMorgan. However, unlike equities in the Asia/Pacific region, all three indexes are still below their end of 2008 marks. The indexes wavered on Wednesday after a cocktail of poor earnings reports from UBS and Rio Tinto combined with poor U.S. industrial production data to depress investor spirits.

Asia/Pacific

Prospects of a dim light at the end of the tunnel gave rise to investor optimism and stocks were up in the holiday shortened week with the exception of Japan, South Korea and Taiwan.

Both the Nikkei and Topix ended in positive territory Friday following U.S. indexes which posted gains led by financial and technology related stocks on expectations that the economy will begin to recover sooner than expected. Profit taking trimmed the gains in Australia and Hong Kong, while in South Korea, the Kospi ended down for the week. Investors seem to be cautiously optimistic despite the downward risk.

The more important data for the region were released on Thursday (local time). A slew of reports from China showed that economic growth in the first quarter slowed to 6.1 percent on the year from 6.8 percent in the fourth quarter of 2008. (See Indicator Scoreboard below for details.) This led to mixed results in trading for the day.

On Thursday, Japan's Ministry of Finance reported that overseas residents purchased a net ¥114.5 billion in Japan stocks for the week of April 5 through April 11, their second straight week as net purchasers. However, foreigners sold a net ¥169.3 billion in Japanese bonds and notes for the week, after having been net buyers the week before. Meanwhile, Japanese residents remained net buyers of foreign-based stocks, purchasing a net ¥7.9 billion. They also acquired a net ¥818.3 billion in foreign bonds and notes, after having been sellers of a revised net ¥2.113 trillion in the previous week.

Currencies

The yen and euro were down against the U.S. dollar last week. Euro softness was attributed to concerns about a divided ECB governing council on policies going forward. Economic data for the eurozone have been abysmal and the rate of decline appears to be accelerating. For example, euro area industrial output is now 18.4 percent below that of last year — the largest drop since 1986 when the series began.

ECB President Jean Claude Trichet said that the Bank must do everything possible to boost confidence and that policy uncertainty would postpone a recovery. However, ECB council member Axel Weber said that the ECB should not cut its policy interest rate below 1 percent — it is currently 1.25 percent. He said if the interest rate falls below 1 percent, banks will have no incentive to lend to each other, paralyzing interbank lending. This puts him at odds with other governing council members who say borrowing costs must drop close to zero. As a result, markets are worried about policy measure uncertainty. Despite this uncertainty however, the ECB is expected to begin some sort of quantitative easing program as soon as its May meeting.

With equities climbing, the carry trade is making a comeback — that is, borrowing funds in low-interest rate currencies such as the Japanese yen and depositing them into stable high yielders like the Australian dollar. However, now investors are looking to profit even more from emerging countries such as Brazil, Indonesia and even Russia as fear recedes. A risky proposition indeed!

Selected currencies — weekly results

Indicator scoreboard

EMU

March harmonized index of consumer prices was up 0.4 percent and 0.6 percent when compared with last year. Excluding food, drink, tobacco & energy, the HICP was up 1.5 percent on the year while omitting just energy and seasonal foods it was also up 1.5 percent. Annual inflation rates dropped in all EMU states except Cyprus where it climbed 0.3 percentage points to 0.9 percent. The steepest decline was in Luxembourg where a positive rate of 0.7 percent turned into a minus 0.3. Prices also were down on the year in Ireland (0.7 percent), Spain (0.1 percent), and Portugal (0.6 percent).

February industrial production excluding construction sank by 2.3 percent and is now down 18.4 percent when compared with last year. The February drop was the sixth monthly decline in a row. Production was down in every major sector on the month. Worst hit was durable consumer goods (down 4.3 percent) but capital goods (down 3.0 percent) also saw an above average decline. Nondurable consumer goods held up slightly better (down 1.4 percent) while the smallest decline was recorded by energy (down 1.0 percent). Most member states saw production weaken on the month. Italy (down 3.5 percent) led the way but Germany (down 3.2 percent) was not far behind. France held up better than most (down 0.5 percent) but the only gains were seen in Greece (1.7 percent) and Portugal (2.4 percent) where monthly swings tend to be quite erratic.

February seasonally adjusted merchandise trade deficit narrowed to €4.0 billion from €5.4 billion in January. Exports were up 0.5 percent while imports dropped 0.8 percent. However, despite the minor improvement in February, exports were still down 24 percent on the year, an even steeper decline than the 21 percent drop posted by imports. On an unadjusted basis the merchandise trade deficit was €2 billion.

Asia/Pacific

Japan

March corporate goods price index slipped 0.2 percent and was down 2.2 percent when compared with the same month a year ago. This was the seventh monthly drop. The annual decline can be attributed to plunging prices for petroleum & coal products (down 24.6 percent) and nonferrous metals (down 30.5 percent). Manufacturing as a whole declined 2.5 percent on the year. Information & technology prices dropped 5.1 percent while electronic components & devices declined 3.1 percent. For the fiscal year 2008 which ended on March 31, the CGPI was up 3.3 percent from fiscal year 2007.

February tertiary index dropped a greater than expected 0.8 percent and was down 2.7 percent when compared with last year. Seven industry groups declined while five increased. Those that declined were wholesale & retail trade (down 4.2 percent), eating & drinking places and accommodations (down 2.3 percent), learning support (down 7.3 percent) transport (down 1.3 percent), real estate (down 1.1 percent) and information & communications (down 0.1 percent). However, medical, health & welfare was up 1.3 percent while services were up 0.4 percent, finance & insurance gained 0.6 percent, compound services was up 0.8 percent and electricity, gas, heat supply & water edged up 0.3 percent.

China

First quarter gross domestic product expanded by 6.1 percent when compared with the same quarter a year ago. This was the slowest growth pace since the fourth quarter of 1999 when GDP increased by 6.0 percent. For the year 2008, GDP grew by 9.0 percent.

March industrial production was up 8.3 percent on the year after climbing 11 percent in February. Growth of industrial production represents the balance of goods demand from net exports, inventory accumulation, consumption and fixed investment. Seasonally adjusted, output was up 4.6 percent on the month.

Among the other economic data released included fixed-asset investment in urban areas, which is China's benchmark measure of capital spending. In March, it was up 30.3 percent on the year after increasing 26.5 percent in the first two months of this year and an indication that stimulus projects are coming online. Both consumer and producer prices were reported for March. On the year, consumer prices dropped 1.2 percent while producer prices sank by 6.0 percent. It was the second month of falling consumer prices while producer prices have been down for four consecutive months.

Americas

Canada

February factory shipments were up 2.2 percent but down 14.5 percent when compared with last year. In volumes, sales rose 2.6 percent from January. The mid-quarter bounce was dominated by motor vehicle & parts following widespread slowdowns and shutdowns at the start of the year. Motor vehicle manufacturers saw a nominal 34.5 percent monthly rise while parts sales were up an even larger 38.5 percent. Excluding this sector, sales declined 0.2 percent, their seventh decline in a row. The only other sizeable monthly increase was recorded by primary metals (3.5 percent). Among the other main categories, shipments fell sharply in petroleum & coal products (down 3.3 percent) and in chemicals (down 2.2 percent). New orders were up 8.6 percent while backlogs edged up by 0.1 percent.

March consumer price index edged up 0.2 percent and was up 1.2 percent when compared with last year. Core CPI excluding food and energy were up 0.3 percent and 1.4 percent on the year. The Bank of Canada’s preferred measure — the CPI excluding eight volatile items was also up 0.3 percent but up 2 percent on the year. On a seasonally adjusted basis, the overall CPI was down 0.3 percent from February. Dominating the decline was sharply lower shelter costs (down 0.5 percent). All other major categories were virtually unchanged on the month or posted relatively modest gains. On the year, shelter was up 2.1 percent, health & personal care gained 2.4 percent but declined in (down 6.2 percent). Food prices jumped 7.9 percent on the year while household furnishings were up 2.6 percent and recreation & reading were up 0.5 percent.

Bottom line

Dour economic data combined with better than anticipated earnings last week to give equities a boost. Stocks, except in Japan, Taiwan and South Korea gained on the week. For many indexes, it was the sixth consecutive positive week.

While there were many important data releases in the U.S. last week, the pace picks up elsewhere going forward. The Bank of Canada will announce its policy decision on Tuesday morning. Most analysts think the rate cutting cycle was completed on March 3 when the overnight rate was cut to 0.5 percent. During its rate cutting cycle, the Bank cut rates by a total of 400 basis points. The UK will release a slew of important reports including consumer prices, unemployment and the initial estimate of first quarter gross domestic product. And the Group of Seven finance ministers and central bankers will meet on Friday to continue their discussions of the financial crisis and plan for July’s summit in Italy.

Looking Ahead: April 20 through April 24, 2009

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