Global Markets

Equities for the most part gained last week, with many indexes offsetting the previous week’s losses. Investors however, were still concerned about global growth prospects. That was vividly clear Thursday when equities plummeted on the less than optimistic FOMC forecast for U.S. growth. This combined with the Standard & Poor’s announcement that it had changed the UK outlook to negative (although its ratings were not changed) sparked fears that other economies with burgeoning deficits such as the U.S. might share a similar fate. S&P specifically cited the rising UK debt levels as a major concern.

A credit rating downgrade would make is more expensive to borrow on international markets and could jeopardize spending plans. Governments worldwide are borrowing more as they try to stimulate their economies. While the pound sterling sank briefly in an immediate reaction to the news it regained its poise and continued to rise in value to a new six month high against the dollar.

The Sensex celebrated the Indian election returns by soaring over 17 percent on Monday. Despite some profit taking later in the week, the index was up 14.1 percent for the week and is up 44 percent for the year. The Jakarta Composite gained 7.5 percent on the week. And the STI, despite dreadful first quarter gross domestic product data was up 4.9 percent for the week and is up 27.5 percent this year.

Global Stock Market Recap

Europe and the UK

Despite Thursday’s declines, the FTSE, CAC and DAX were up on the week. On Thursday, the FTSE gave back virtually all of the week’s gains after Standard & Poor’s cut its UK outlook to “negative” from “stable”. The decision by S&P raised the prospect that the UK could lose its current “triple A” credit rating. But S&P reaffirmed its UK long term and short term sovereign credit ratings. The revised outlook was based on worries about the big build-up in government debt. The news from S&P overshadowed strong retail sales data, which appeared to confirm the uptrend seen in recent surveys.

European markets were also down Thursday after the Federal Reserve trimmed its growth forecast and the S&P announcement. The S&P announcement resulted in a typical knee-jerk sell off in stocks and the pound sterling tumbled — but regained its poise later in the day. UK government bonds also sold off sharply in its initial response to the S&P cut. But following the successful five year gilt auction, the bond market calmed. Sterling also settled after an initial flurry of selling.

Improving economic news helped the DAX and CAC earlier in the week when the German ZEW economic sentiment indicator was up more than expected to its highest level since June 2006. And later in the week the EMU flash purchasing managers index improved as well. It rose to an eight month high, signaling the smallest output drop for the combined manufacturing and services sectors since September 2008.

Bank of England minutes

The minutes of the Bank of England’s monetary policy committee said that additional stimulus now might allow it to raise interest rates more quickly in the future. The minutes showed unanimous agreement to hold rates at 0.5 percent and to increase the Bank’s quantitative easing program by £50 billion. The MPC felt that too much stimulation would be easier to correct than too little. In March, an initial £75 billion was allocated out of the total £150 billion quantitative easing program which purchases gilts and corporate bonds in order to inject funds into the banking system. The MPC authorized Bank governor Mervyn King to write to Alistair Darling, the chancellor to request to increase the program above its current £150 billion if needed.

The committee noted that there were market expectations that the asset purchase program would be extended and that failure to do when the economic outlook suggested that more action was needed could harm public confidence in the recovery. In the absence of further monetary stimulus, there was a risk that inflation could “significantly undershoot” the 2.0 percent target in the medium term. The MPC decided to keep the maturities of the gilts it purchases under review.

Separately, the Bank released its monthly agents’ report on business and credit conditions around the country. This found that leading UK banks’ appetite for lending had increased a little although credit remained tight. There were also some signs of improvement on consumer spending, with contacts reporting the pace of contraction appeared to be slowing.

Asia/Pacific

Equity markets in the region were up for the most part last week. The exceptions were those in Japan, Australia and mainland China. Gains accrued early in the week were eroded amid concerns about the pace of the global economic recovery. Economic data released during the week continued to show the magnitude of declines in the first quarter of this year. Japan, Singapore and Taiwan all showed record contractions in first quarter GDP.

Equities declined on the week in Japan. The Nikkei lost 0.4 percent and the Topix, 0.7 percent. First quarter gross domestic product data lived up to expectations and plunged 15.2 percent on an annualized basis. Despite the dreadful data, investors were sanguine. Data since the end of the first quarter have thus far shown that the economy has improved. The Bank of Japan also did the expected as the week ended. It left its key interest rate at 0.1 percent and broadened the range of securities that can be used for collateral when borrowing from the BoJ. The monetary policy board also lifted its outlook assessment. Exporters however were dragged down thanks to the strengthening yen and in particular from comments by Finance Minister Kaoru Yosano who said that the government will not intervene in the currency market.

Indian stocks enjoyed their strongest one day gain since 1992 Monday amid overwhelming investor confidence that the solid election victory by the Congress party would enable much needed reform. The rally activated the National Stock Exchange’s circuit breakers and trading was halted early for the day. The Sensex closed 17.2 percent higher at 14,272.63, its highest level in eight months. Since hitting its 2009 low on March 9, the index has soared 70.1 percent. For the week, the Sensex was up 14.1 percent.

Bank of Japan stays the course

As expected the Bank of Japan left its monetary policy unchanged. Its current key interest rate has been 0.1 percent since its December 2008 policy meeting. Since December, the BoJ has been buying commercial paper and corporate bonds to ease a funding squeeze for companies. It also increased its monthly government bond purchases in March. Now the Bank has expanded the range of eligible collateral to ensure financial market stability by further facilitating money market operations. It has decided to accept bonds issued by the governments of the U.S., UK, Germany and France as eligible collateral.

After a series of downgrades to its economic outlook, the monetary policy board raised its assessment for the first time since July 2006. The Bank said that the economic deterioration would moderate. It also said that although financial conditions are improving they still remain severe. They expect the economy to resume growth with price stability in the long run — however, uncertainty over the recovery remains high. Even though gross domestic product contracted at an annualized 15.2 percent pace in the first quarter and the steepest drop since records began in 1955, reports in the past month suggest growth may resume this quarter. Confidence among consumers rose to a 10-month high in April while March exports increased from a month earlier and factory production was up for the first time since September.

In his post meeting press conference, Bank of Japan Governor Masaaki Shirakawa said that the Japanese economy is no longer in a state of a freefall. He expects second quarter GDP to show a sharp rebound from the first quarter’s record contraction. But the governor also warned that the bank needs to watch whether downside risks to the economy will become sustained, or whether the negative feedback loop between the drag from the global credit crisis and the economic downturn will ease.

Currencies

The U.S. dollar was pummeled last week, falling against the euro, yen, pound sterling, Canadian dollar and other major currencies. One reason is that investors are seeing green shoots and are more willing to take on risk. They are buying equities and are no longer looking for a safe haven. Another concerns fears of ever-rising U.S. debt levels. With the recession, tax revenues have declined while spending has soared to support the various stimulus packages.

The euro climbed above $1.40 against the dollar for the first time since January on concern that U.S. creditworthiness has deteriorated and near-zero interest rates have made U.S. assets less attractive to investors. The yen touched a nine-week high against the dollar after Japan’s Finance Minister Kaoru Yosano said the government will not intervene in the currency market and the Bank of Japan raised its economic assessment.

Further pressure on the yen is mounting — overseas subsidiaries are expected repatriate their profits toward the end of June. The yen has been strengthening against the dollar since early April when it touched 101 yen to the dollar. On Thursday in Tokyo, the yen advanced to the low 94 level for the first time in about two months. The yen, used as a haven, generally faced selling pressure when investors' risk aversion eased and U.S. stock prices went up. But the yen is now being bought regardless of stock trends, with a revision to the Japanese tax codes seen as a contributing factor. Starting this fiscal year, overseas subsidiaries are exempt from taxes when they send profits and dividend income to their parents in Japan. Balance of payment statistics indicate that the repatriation to Japan of overseas funds increases in March, June, September and December — the quarterly book-closing months.

Selected currencies — weekly results

Indicator scoreboard

EMU

March seasonally adjusted merchandise trade deficit narrowed to €2.1 billion from €2.9 billion in February. On an unadjusted basis, the surplus was €0.4 billion, up from a deficit of €2.3 billion a year ago. Seasonally adjusted exports were up 1.4 percent while imports climbed 0.6 percent. Annual growth on both sides of the balance sheet remained firmly negative however, with exports down 17.0 percent on the year and imports 18.0 percent weaker.

Germany

May ZEW economic expectations jumped to 31.1 from a 13.0 reading in April. The monthly bounce in expectations was the seventh in a row, the largest since February lifted the sub-index back above its long-term average of 26.2. However, the current conditions index showed another decline, albeit only a marginal 1.2 points, to minus 92.8, its lowest level since July 2003.

April producer prices dropped 1.4 percent and were down 2.7 percent when compared with last year. It was the sixth monthly decline in a row and was the most marked since November, while the annual drop was the most pronounced since June 1987. The bulk of the drop was attributable to sharply weaker energy prices which slumped another 4 percent on the month. Excluding this sector, the PPI was down a much more modest 0.2 percent from March but a still sizeable 2.0 percent on the year. The other main area of downward pressure came from basics where prices slipped 0.6 percent on the month. Amongst the other major categories, capital goods prices were unchanged while nondurable goods prices edged up 0.2 percent on the month.

Italy

March seasonally adjusted merchandise trade balance was little changed and in a small deficit of €126 million. The unadjusted trade was also almost flat with a minimal surplus of €82 million. Seasonally adjusted exports were down 2.9 percent while imports slumped by 3.3 percent. In unadjusted terms, all major export categories were down on the year. Intermediates were down 19.9 percent and capital goods dropped 19.7 percent but energy plunged 48.7 percent registering easily the steepest decline. Exports of consumer goods were down a relatively mild 7.4 percent on the year. Imports posted a similar performance with energy slumping 29.6 percent on the year, intermediates off 28.6 percent and capital goods down 14.7 percent. Imports of consumer goods fell just 1.6 percent from March 2008.

March retail sales inched up 0.1 percent but were down 2.3 percent when compared with last year. The advance was due to a 0.2 percent increase in non-food sales while the food sales contracted 0.2 percent on the month. Over the first quarter as a whole, total sales fell 0.9 percent from the previous period. On the same basis, food sales also dropped 0.9 percent while non-food was off a slightly smaller 0.8 percent. On an annual basis, sales fell sharply in all the main sectors.

United Kingdom

April consumer price index was up 0.2 percent and was up 2.3 percent when compared with last year. The deceleration in the CPI was to a large extent mirrored in the other inflation gauges. The retail price index edged up 0.1 percent and was down 1.2 percent on the year thanks to favorable mortgage interest payment effects. The retail price index less mortgage interest payments which formally used as the BoE’s inflation measure was up 0.4 percent and 1.7 percent on the year. Weaker energy costs were a key force lowering headline inflation. Core CPI was up 0.4 percent on the month and 1.5 percent on the year.

April retail sales were up 0.9 percent and were up 2.6 percent when compared with last year. The advance was led by the non-food sector where purchases were up a solid 1.5 percent on the month. Within this, non-specialized stores dominated with a 3.5 percent increase. Outside of the other stores sector (2.3 percent) other increases were much more modest with clothing and footwear sales up 0.3 percent and household goods up 0.2 percent. Non-store retailing fell 1.1 percent. Note that important changes in methodology concerning the calculation, price deflator and the base year were introduced with this report and have significantly altered the historic profile of retail sales. While having little impact on values, the net effect has been to lower the annual growth in volumes from 10.1 percent to 8.7 percent over the last three years.

First quarter gross domestic product declined 1.9 percent and dropped 4.1 percent when compared with the same quarter a year ago. By sector, output in the service sector was down 1.2 percent and 2.2 percent decline from a year ago. By contrast, industrial production plunged a hefty 5.3 percent on the quarter. The expenditure components confirmed the anticipated weakness in most areas. In particular, gross fixed capital formation slumped 3.8 percent on the quarter (down 8.3 percent on the year) while household spending was off 1.2 percent (down 2.8 percent). Government consumption edged up 0.3 percent from the fourth quarter but with inventories falling a record Stg6.02 billion — which alone subtracted 0.6 percentage points from the bottom line — total domestic expenditure sank 2.0 percent (down 4.9 percent). Net exports were modestly positive, adding just 0.1 percentage points to quarterly growth.

Asia/Pacific

Japan

First quarter gross domestic product plunged 4.0 percent when compared with the previous quarter and sank 9.7 percent when compared with the previous year. On an annualized basis, GDP plummeted 15.2 percent. For the fiscal year which ended on March 31, GDP declined by 3.5 percent. Fourth quarter GDP was revised to a decline of 3.8 percent from the previous estimate of a 3.2 percent drop. The worst ever quarter for the Japanese economy previously was a 3.4 percent drop at the beginning of 1974. All private sectors of the economy declined with the only minimal gains coming from government consumption. Private demand contracted by 3.4 percent on the quarter. Private nonresidential investment contracted by a further 10.4 percent on the quarter after contracting 6.7 percent in the previous quarter. Private residential investment dropped 5.4 percent after growing by 5.5 percent in the previous quarter.

March tertiary index plunged 4.0 percent and sank 7.1 percent when compared with last year. Eight industry groups declined while 3 increased. Those with the largest declines were wholesale & retail trade (down 7.1 percent), information & communications (down 11.4 percent), medical, health & welfare (down 3.1 percent), transport (down 1.1 percent) electricity, gas, heat supply & water (down 1.4 percent). Services, real estate and finance & insurance also declined. Eating & drinking places & accommodations were up 1.4 percent, compound services were up 2.2 percent as was learning support.

Americas

Canada

April consumer price index edged down 0.1 percent and was up 0.4 percent when compared with last year. Excluding food and energy, the CPI edged up 0.1 percent and was up 1.2 percent on the year. At the same time, the Bank of Canada’s preferred measure which excludes eight volatile items, also crept up 0.1 percent on the month and was up 1.8 percent on the year. Seasonally adjusted, the CPI was down 0.3 percent on the month, underlining the significance of seasonal factors in April. Within this, the main factor pushing prices lower was a 1.0 percent decline in the cost of shelter. All other major categories generally saw small gains although above average increases were recorded in housing operations & furnishings (0.5 percent) and in clothing & footwear (0.5 percent).

March retail sales were up 0.3 percent but down 4.8 percent when compared with last year. It was their third consecutive monthly increase. Softer prices had a dampening effect upon the headline and helped to mask a more robust 0.7 percent monthly increase in volumes. The main impetus behind the nominal bounce was the auto sector where new car dealers saw demand jump 3.6 percent while the sector as a whole registered a 0.5 percent increase. Without this category, overall retail sales would have fallen 0.2 percent on the month and 1.9 percent from a year ago. Sales were also up for food & beverages (0.9 percent), pharmacies & personal health care (0.5 percent) and general merchandise (0.1 percent). By contrast, purchases declined for furniture, home furnishings & electronics (0.2 percent), building & outdoor home supplies (0.6 percent) and clothing & accessories (0.5 percent).

Bottom line

The Bank of Japan raised its assessment of the economy for the first time since 2006. This was after the first quarter GDP report showed that the economy contracted at an annual rate of 15.2 percent. In the UK, news was dominated by the S&P announcement that it was lowering the country’s credit outlook to negative — although it did maintain its current credit ratings. Investors worried that the U.S. could be next given its soaring debt levels.

Investors will closely monitor the EU consumer and business surveys — they will be looking to see if sentiment continues to improve as expected. And in Japan, key data on industrial production, merchandise trade, consumer prices and retail sales will be released. Investors will pay close attention to output and export data for signs of economic improvement.

Looking Ahead: May 25 through May 29, 2009

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