Global Markets

Markets got ahead of themselves and as a result, staged a correction last week. Rather than ignoring dismal economic data, this time investors sold on the news. After three days of selling, equities in Europe and North America stabilized. U.S. and European stocks staged a tentative rebound on Thursday following the previous session’s sharp sell-off, although the underlying mood remains cautious as investors re-evaluate the outlook for risk.

A veritable blizzard of economic data descended on investors Friday and most of it was bleaker than expected. Europe released its flash gross domestic product estimates and those of Germany and the eurozone were below those of the U.S. and UK. Japan’s GDP estimate will not be available until mid-week and will probably be worse than the European estimates. Industrial production data in Europe also continues to be abysmal as manufacturers cut inventories down to a manageable size. And in the U.S., retail sales and jobless claims disappointed. But equity investors maintained their cool on Friday despite the data — they think the worst is now behind them.

And last week, ECB President Jean Claude Trichet said that the global economy is around the inflection point signaling that the global downturn had bottomed out. Some of the large economies can now put the recession behind them and look forward to renewed growth. His comments added weight because he was speaking on behalf of the world’s leading central bankers, not just for the eurozone. His remarks came as the Organisation for Economic Cooperation and Development (OECD) said there were signs of "a pause” in the economic slowdown in France, Italy, the UK and China.

Inflection points always churn out confusing signals — and therefore mixed interpretations. After nine weeks of almost uninterrupted gains, a correction was long overdue. Yet if more unambiguously bad numbers such as those of the last week emerge, a nasty new consensus could build. Investors had a reminder this past week that sometimes economic numbers can come out worse than expected. For two months, severe pessimism created low expectations that were regularly beaten by the data. Now new negative surprises emerged again. For example, on Wednesday, we learned that U.S. retail sales fell last month. They were not supposed to do that. And on Monday, Chinese exports were revealed to have barely risen in April. Now they are running at about the same level that was typical in late 2006. Again, they were supposed to bounce back rather more than that.

On the week, all indexes followed here lost ground with the exception of the Shanghai Composite, Sensex 30, PSEi and SET in the Asia/Pacific region.

Global Stock Market Recap

Europe and the UK

Equities finished the week on an indecisive note, not bad considering Friday's avalanche of negative economic news. Particularly bad were the spectacular declines in first quarter GDP as exports plunged and took industrial production with it. Country industrial output data confirmed the bleak scenario. Germany, though not suffering during the financial collapse last fall, was especially hard hit since it relies so heavily on exports for growth. And while most analysts think that the first quarter contractions are the nadir for this recession, the lingering effects on employment and consumer spending remain and will curtail growth.

The FTSE, CAC and DAX broke their strings of weekly increases and declined last week. The FTSE was down for the first week in five despite gains in the financial sector — but these were outweighed by greater losses in oil, telecoms and pharmaceuticals. The CAC’s decline broke a string of positive weeks extending back to March 6 and the onset of the rally. However, the DAX was down for the first week in three. All are now below year-end 2008 again after briefly rising above it in the prior week. Many analysts now believe a period of retrenchment could be under way after several weeks of chatter about green shoots.

Bank of England Inflation Report dour

Bank of England Governor Mervyn King eschewed the financial markets and business surveys’ optimism and said that both the short term and the longer term outlook for growth had deteriorated since their last quarterly Inflation Report in February. The future was highly uncertain, and the risks are weighted towards a relatively slow and protracted recovery. The governor said that banks would limit their lending and would remain risk averse because they could not afford losses that might result in their eventual nationalization. Mr. King stressed that growth and inflation projections could have a wide range of plausible outcomes rather than a single result. The Bank has wanted to move away from discussion of single forecasts for some time now. It has been estimated that the Bank’s central projection is for the economy to contract by 3.8 percent in 2009 and to grow by around 1.1 percent in 2010. This compares with the forecast, made in February, for 2.3 percent growth next year. Some economists at the time thought the Bank was being overly gloomy given the first-quarter pick-up in credit.

Asia/Pacific

Equities were mixed within this region last week but many posted their biggest weekly decline since March on worries that equity markets have risen too far, too fast. Almost all were up on Friday following sharp losses in the previous session. Better-than-expected Japanese machinery orders, strong clues from Wall Street overnight and renewed optimism about an early economic revival offered some support. However, the gains were modest as investors looked forward to the slew of economic data to be released after their markets had closed for the week. These data included U.S. industrial output and consumer prices and first quarter flash European gross domestic product.

Asian stocks rose on Friday as investors bought shares that stood to benefit the most from the expected global recovery. Investors were looking to buy riskier assets after a leading indicator of Japan’s economy was not as bad as expected. The data supported a theme in regional data that companies are replenishing depleted inventories as orders trickle in and the sharp decline in Asian exports slows. But consumer demand in the U.S. and Europe remains weak, and a sustainable global recovery is unlikely until confidence in those major markets returns.

The growing willingness of investors to take bigger risks for the prospect of higher returns is dependent to some degree on a steady diet of positive economic surprises. Negative ones, like lower-than-expected U.S. retail sales, sinking industrial output in Europe and climbing unemployment in the UK dent confidence.

Currencies

The yen continued to climb against both the euro and the U.S. dollar as investors sought a safe haven as equities declined. The U.S. dollar was also up against the sagging euro. The euro was under pressure on the heels of poor economic data for virtually all EMU member states.

Earlier in the week, the U.S. dollar was on the defensive after retail sales dropped and jobless claims increased by more than expected. The dollar was down against the euro Thursday at the close of New York trading as a reassessment of the recent rally in risky assets counterbalanced safe haven demand for the U.S. currency. Analysts said that the weak retail sales data brought into question whether the global economic slowdown had reached the bottom, fuelling demand for the safety of the dollar. Analysts said that the unusual pattern, in which bad U.S. data supported the dollar, continued.

In Japan, investors are returning to the carry trade, where they borrow funds in countries with low interest rates and invest in ones with borrowing costs that are higher. Investors abandoned carry trade last year as losses and writedowns on securities tied to subprime mortgages exceeded $1 trillion and the September bankruptcy of Lehman Brothers froze credit markets. Money managers retreated from higher yielding assets to the safety of government debt and the currencies that are easiest to trade.

A weaker yen would bolster earnings at exporters such as Toyota Motor Corp., which on May 8 reported its first annual loss in 59 years and cut dividends. Japan’s automakers sell about half of their vehicles overseas. Exporters said they can remain profitable as long as the yen trades at 97.33 per dollar or lower.

Selected currencies — weekly results

Indicator scoreboard

EMU

March industrial production sank 2 percent and was down 20.2 percent when compared with last year and down 7.9 percent on the quarter. Output in all categories declined. The weakest was intermediates (down 3.1 percent) but both energy (down 2.8 percent) and durable consumer goods (down 2.5 percent) fared little better. Nondurable goods output dropped 1.0 percent while capital goods were down 0.5 percent. However, weakness was not universal across the region. While there were heavy monthly declines in Italy (4.6 percent), Spain (3.5 percent) and Greece (1.7 percent) there were partially offsetting gains in Portugal (3.1 percent), Finland (2.2 percent), Slovenia (0.2 percent) and the Netherlands (0.1 percent).

First quarter gross domestic product plunged 2.5 percent and was down 4.6 percent when compared with the same quarter a year ago. As is usual with the flash estimate Eurostat provided scant details on the make-up of GDP. However, from the national data already available it is clear that weakness was reasonably broad-based with investment and exports in particular having a sizeable negative impact. By country, all the reporting states except Cyprus (unchanged) were down on the quarter. Among the larger members, Germany was down 3.8 percent, France 1.2 percent, Italy 2.4 percent and Spain 1.8 percent. The German contraction was the steepest of all. Other sizeable declines were posted by Austria (2.8 percent), Belgium (1.6 percent) and the Netherlands (2.8 percent).

April harmonized index of consumer prices were up 0.4 percent and 0.6 percent when compared with last year. Excluding energy, food, drink & tobacco the HICP was up 1.8 percent on the year. Omitting energy and unprocessed foods inflation the HICP was up 1.7 percent while without energy and seasonal foods it was up 1.7 percent on the year.

Germany

First quarter gross domestic product plunged a record 3.8 percent on the quarter and plunged 6.9 percent when compared with the same quarter a year ago. The latest contraction followed slightly larger revised declines of 2.2 percent on the quarter and 1.8 percent on the year at the end of 2008. No details of the GDP components were provided although it was pointed out that the bulk of the decline was due sharply weaker investment and exports. Household spending apparently managed a small gain.

France

March industrial production excluding construction dropped 1.4 percent and sank 15.5 percent when compared with last year. Manufacturing output dropped 1.1 percent largely due to a 2.1 percent slide in coke & refined petroleum products. However, there were also declines in food & drink (0.6 percent), electrical & electronic equipment (1.7 percent) and in other manufacturing (1.5 percent). The only sector to post an increase was transportation (1.3 percent). Over the quarter as a whole, industrial production contracted almost 7 percent.

First quarter gross domestic product contracted by 1.2 percent and was down 3.2 percent when compared with the previous year. The data had been leaked earlier to the national press. The preliminary breakdown shows that weakness last quarter was in part due to hefty drops in exports (6.0 percent) and capital investment (2.3 percent). However, destocking was the biggest factor, knocking some 0.8 percentage points off the bottom line. This followed a 0.7 percent subtraction in the previous quarter. Private consumption however edged upward by 0.2 percent, on the quarter while public sector spending unchanged.

Italy

March industrial production plunged 4.6 percent and was down 23.8 percent when compared with last year. It was the 11th consecutive monthly contraction. Output was down 9.8 percent on the quarter for the weakest performance since the data were first compiled in 1991. Output was down across the board with the steepest monthly decline registered in intermediates (5.4 percent). Consumer goods (4.3 percent) and the capital goods sector (4.1 percent) were little better and energy (2.6 percent) also contracted sharply.

First quarter gross domestic product contracted by 2.4 percent on the quarter and was down 5.9 percent when compared with last year. The first quarter contraction was the fourth in a row, the fifth in the last six quarters and followed a larger revised 2.1 percent decline in the previous period. In line with most flash estimates there were few details provided but the Statistics Office did indicate that the GDP decline was broad-based with agriculture, industry and services all posting drops in output.

United Kingdom

March industrial production was down 0.6 percent and 12.4 percent when compared with last year. For the quarter, production was off 5.3 percent from the previous period, the worst performance since 1974. The March decline was heavily biased by weakness in the more erratic sector such as mining & quarrying which dropped 2.5 percent, electricity, gas & water which was down 2.8 percent and oil & gas extraction which contracted 3.1 percent. However, manufacturing output edged down just 0.1 percent but is down 12.8 percent on the year. Manufacturing output was down 5.5 percent on the quarter. In manufacturing, output was down in seven categories and up in five. Machinery & equipment dropped 3.9 percent and basic metals & metal products were down 1.5 percent. On the upside, paper, printing & publishing was up 1.6 percent. By market sector, output of consumer durable goods output slid 8.0 percent on the previous quarter but in the latest month, production was up 0.7 percent. On the same basis, nondurables climbed 0.3 percent on the quarter and were up 0.8 percent on the month. Capital goods were the weakest area with a quarterly decline of 8.9 percent and an annual decline in March alone of 16.7 percent. Intermediates & energy production dropped 6.6 percent on the quarter and 13.9 percent in the latest three months from a year ago.

March global merchandise trade goods deficit narrowed to Stg6.6 billion from Stg6.8 billion, the smallest deficit in two years. The improvement reflected a 0.5 percent drop in exports that was more than offset by a 1.4 percent decline in imports. The shrinkage in both sides of the overall balance sheet was mirrored in the excluding oil & erratics shortfall which showed the underlying deficit shrinking by almost Stg0.5 billion to Stg6.1 billion. Regionally, the bilateral shortfall with the non-EU declined to Stg3.3 billion and fully accounted for the improvement in the headline data. The deficit with the EU widened to Stg3.2 billion.

Average earnings for the three months ending in March dropped 0.4 percent when compared with the same three months a year ago. This is a new record low for the series. The deceleration was largely a function of bonus payments. Excluding bonuses, earnings were up 3.0 percent, their slowest pace since 2001. Including bonuses, earnings in the services sector sank 0.7 percent while manufacturing earnings were up 1.1 percent. Public sector pay was up 3.6 percent while the private sector was up 2.9 percent.

April claimant count unemployment was up by 57,100 to 1.51 million, the lowest monthly increase since last October. The latest increase lifted the jobless rate to 4.7 percent from 4.5 percent a month earlier. The ILO unemployment rate jumped to 7.1 percent for the three months ending in March from 6.7 percent for the previous three months. The total unemployment jumped to 2.22 million and the highest number of unemployed since 1996.

Asia/Pacific

Japan

April corporate goods price index was down 0.4 percent and plunged 3.8 percent when compared with last year. This was the eighth monthly decline. On the month, prices were down for all commodities with the exception of petroleum & coal products (up 4.6 percent), nonferrous metals (up 1.2 percent), ceramic, stone & clay (up 0.7 percent and transportation equipment (up 0.2 percent). The largest monthly declines were for pulp, paper & related products and electronic components & devices. While prices for the petroleum and nonferrous metals groups were up on the month they plunged 33.3 percent and 30.5 percent respectively on the year.

China

April unadjusted merchandise trade surplus was $13.1 billion. Exports dropped 22.6 percent on the year while imports sank 23 percent. It was the sixth consecutive monthly decline in both exports and imports. Bilateral trade with the EU dropped 24.1 percent on the year but was up 8.1 percent on the month. Trade with the U.S. was up 9.9 percent on the month but was down 17.1 percent on the year.

April industrial output was up 7.3 percent when compared with last year. The data showed declining output in key heavy industrial sectors, with ferrous metals, raw steel and electricity all down on the year. For the first four months of this year, industrial production was up 5.5 percent on the year.

April consumer price index dropped 1.5 percent when compared with last year. This was the third consecutive month that prices declined. Consumer prices were down 0.2 percent on the month. Food prices declined 1.3 percent while non-food prices dropped a steeper 1.5 percent.

Hong Kong

First quarter gross domestic product plunged by a seasonally adjusted annual rate of 16.1 percent after sinking 7.4 percent in the fourth quarter of 2008. GDP dropped 7.8 percent when compared with the previous year. In seasonally adjusted terms, the severe contraction in exports and notable inventory destocking were the main drags on the overall economy, while domestic investment and consumption demand seems to be stabilizing at the bottom. Merchandise exports plunged an annualized 52.1 percent. Private consumption eased to a drop of an annualized 5.9 percent — an improvement from the previous quarter’s 8.5 percent decline. Fixed investment rebounded by an annualized 41.1 percent after plunging 46.5 percent in fourth quarter and 17.9 percent in the third.

Americas

Canada

March merchandise trade surplus was C$1.1 billion, up from C$0.3 billion surplus in February. However, the improvement reflected renewed weakness in both sides of the balance sheet. Overall nominal exports sank 1.8 percent on the month while imports plunged 4.4 percent. Exports declined for forestry products (4.1 percent) but there were also significant drops in machinery & equipment (3.4 percent), and autos (3.3 percent). Smaller declines were registered in energy (1.4 percent) and agriculture & fishing products (1.5 percent). The sole gain was recorded by other consumer goods (3.2 percent). Imports were dragged lower by energy where purchases slumped 18.4 percent. Other declines were less marked but still notable in industrial goods & materials (4.5 percent), machinery & equipment (4.5 percent) and other consumer goods (4.2 percent). The only rise of note was in autos (1.5 percent). The bilateral surplus with the U.S. was little changed at C$3.6 billion while a C$0.8 billion shortfall with the eurozone in mid-quarter was turned into a tiny surplus and the black ink with Japan crept up to C$0.2 billion.

March factory shipments sank 2.7 percent and were down 16 percent when compared with last year. Volume sales were down 2.4 percent on the month. Durable goods industries dropped 4.4 percent and in large part reflected a 32.4 percent slump in aerospace products & parts. At the same time, motor vehicle parts plunged 17.6 percent although this was offset by a 22.2 percent jump in motor vehicle sales. Primary metals were off 7.6 percent on the month. Nondurable goods sales decreased 0.9 percent with petroleum & coal (down 2.1 percent) and chemicals (down 1.5 percent) the main areas of weakness. Other aspects of the report were mixed — a 0.4 percent monthly drop in new orders contrasted with a 1.5 percent bounce in backlogs. Inventories slipped 1.7 percent but this was not sufficient to prevent the inventory-to-sales ratio edging up to 1.58 months.

Bottom line

Doubts sprouted over the prospects of an economic recovery as global economic data was worse than expected. This weakened investor risk appetite and equities were down. Poor industrial production data gave little evidence that the economy in Europe was bottoming. And first quarter estimates of GDP were awful. In the U.S. retail sales sank more than expected while jobless claims increased more than expected. And in China, exports were anemic while industrial production increased at a slower than expected rate.

The Bank of Japan monetary policy board meets next week and is expected to upgrade slightly its monthly assessment of the economy for the first time since July 2006 to reflect the slowing pace of the recession. The board is expected to change its outlook, which read “economic conditions are likely to continue deteriorating for the time being” in the April report, to a phrasing indicating that the economy will hit bottom or begin improving. Speaking in London last week, BoJ Governor Masaaki Shirakawa said the economy is expected to recover as the year goes on. Japan will release its first estimate of first quarter gross domestic product — it is expected to be horrific.

Looking Ahead: May 18 through May 22, 2009

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