Global Markets

Equities were up worldwide as investors read the positive into economic data last week. Central banks in South Korea, New Zealand, the UK and Canada left their monetary policies unchanged and acknowledged that recovery would be slow at best. And both the Reserve Bank of New Zealand and the Bank of Canada have openly committed to keeping their key interest rates at current levels into the second half of 2010. The knowledge that a premature interest rate increase is not in the cards has been good news for equity markets. But investors and analysts alike have devoted much space opining about what might happen to the recovery when the stimulus packages go away.

Improved investor sentiment was sparked by reassurances from finance ministers and central bankers from the G-20 group of nations who pledged to continue policies aimed at supporting the global economy. This set the tone for last week. It boosted riskier assets such as emerging market stocks.

All equity indexes followed here were up last week, with many reversing the previous week’s losses. Gains ranged from 1.4 percent (PSEi) to 5.9 percent (SET).

Global Stock Market Recap

Europe and the UK

European and UK stocks recorded healthy gains recouping the previous week’s losses and then some. The FTSE, CAC and DAX were up 3.3 percent, 3.8 percent and 4.4 percent respectively. For the year the three are up 13 percent, 16.1 percent and 16.9 percent. The FTSE flirted with the 5000 level and managed to end the week above that mark at 5011.5 but still below the levels it held prior to the Lehman collapse at this time last year. The index is now about 43 percent above its March 3^rd low. The DAX is up 52 percent while the CAC is up 46 percent from the same date.

In Europe, ECB president Jean Claude Trichet restated the mantra of most policy makers — he said that the financial crisis is not yet over and that it was premature to even think about reversing expansionary monetary and fiscal policy. This was confirmed by the G-20 finance ministers and central bank governors after their meeting last weekend. They reiterated that fiscal and monetary policy would continue to be expansionary for some more time to come in an effort to minimize or eliminate the chances of a double-dip recession.

UK and German economic data dominated the week’s new information. In Germany, data were mixed with manufacturing orders climbing but not yet translating into higher industrial output. However, the trade surplus was up once again. And in the UK, manufacturing output was up signaling an improving economy. Exports gained more than imports in July and painted a picture of improving world trade prospects.

Bank of England

As expected, the Bank of England left its key interest rate at 0.5 percent where it has been since March. They also voted to leave quantitative easing at its current Stg175 billion level and will keep it under review. The Bank expects that it will take another two months to complete its QE program. Last month’s decision to expand QE was interpreted as a sign that the Bank is worried that the nascent recovery is weak and could peter out. Second quarter GDP contracted 0.8 percent and was much worse than forecast. That, combined with still tight credit for companies and individuals, encouraged the Bank to extend the QE. Money supply data show little evidence of improvement despite the Bank’s purchases. However, the economy is showing signs of improvement so far in the third quarter. Manufacturing output is up as are retail sales. And housing prices as reported by Halifax were up for the second month.

Analysts noted that the Bank signaled that the economy was on its way back to normality when it left monetary policy unchanged and felt no need to explain its decision. Prior to the financial crisis the BoE did not issue a statement except when there was a change in policy. The inaction quashed the possibility that the BoE would reduce the interest rate paid on money deposited with it by commercial banks or increase the rate of quantitative easing. Sterling rose 0.7 percent against its main trading partners’ currencies. Government bond markets stayed calm, with yields ending the day a touch lower. According to the National Institute of Economic and Social Research, whose clients include the central bank and the Treasury, the recession ended in May.

Asia/Pacific

All Asian/Pacific equity indexes tracked here were up smartly last week. The gains ranged from 1.4 percent for the PSEi to 5.9 percent for the SET. Equities were lifted by a combination of the positive U.S. stock performance and better than anticipated Chinese economic data which boosted morale about the global recovery. Some of the gains were dented by profit taking, a downward revision to Japan’s second quarter gross domestic product and disappointing Australian employment data.

So far in 2009, the gains have been impressive ranging from 10.6 percent and 17.9 percent for the Topix and Nikkei respectively to the Jakarta Composite’s 78.2 percent and the 68.6 percent gain for the Sensex. After recent losses, the Shanghai Composite is up 64.2 percent for 2009. And regional indexes such as the FTSE Asia-Pacific index are at their highest levels since the Lehman Brothers collapse a year ago.

China’s economy picks up the pace

The Shanghai Composite was among last week’s best performers on the back of upbeat economic data and positive sentiment over stimulus policies. The index was up 4.5 percent on the week. Strong economic data included industrial output growing at a faster pace, retail sales remaining strong and new lending accelerating in August. Earlier in the week, China’s premier Wen Jiabao said that the country would not scale back its economic stimulus at this stage.

Signs that the Chinese recovery strengthened were obvious in the slew of data released at week’s end. Industrial output was up 12.3 percent from a year earlier after climbing 10.8 percent in July. And retail sales were up 15.4 percent on the year after accounting for seasonal distortions stemming from the lunar new year. And annual urban fixed-asset investment growth was up 33.0 percent for the first eight months. The strong data immediately brought admonitions that policy makers should proceed cautiously to avoid pulling on the reins of monetary and fiscal policy too quickly even after a steady flow of assurances from Beijing that it would not exit from stimulus too soon.

The pickup in economic growth follows a 4 trillion yuan stimulus package, record lending and a rebound in property investment and sales that have offset sinking exports. August exports were down 23.4 percent on the year — the biggest drop in three months. Exports rose a seasonally adjusted 3.4 percent from July. However, consumer prices were down 1.2 percent while producer prices sank 7.9 percent on the year.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its official cash rate at a record low of 2.5 percent. The Bank, which cut its OCR to 2.5 percent at its April meeting, has cut interest rates from 8.25 percent — and the highest of the major countries — by 5.75 percentage points to the current level as the economy slumped into its worst recession in more than three decades. The Bank began cutting in July 2008.

After the July 2009 meeting, RBNZ governor Alan Bollard said that he could not rule out further rate cuts. That was omitted from his post-meeting statement this time. He did reaffirm however that he would not raise the OCR until late 2010 because he remains wary about the sustainability and pace of the recovery. However, in addition to signs of a global recovery the housing market is recovering (housing prices have increased four months in a row) as is confidence. Bollard said the economy requires further stimulus from low interest rates to combat rising unemployment even as the nation emerges from recession in the second half of this year.

The strength of the New Zealand dollar or kiwi could crimp a recovery. The currency has surged about 22 percent against its U.S. counterpart in the past six months. The gains cloud the outlook for exports and tourism, which together make up 40 percent of the economy. Finance Minister Bill English said that the currency’s gains are “out of line” with economic fundamentals and have hampered efforts to have growth driven by exports.

Canada

As expected, the Bank of Canada kept its policy interest rate at 0.25 percent where it has been since April. The Bank repeated its pledge to keep its interest rate at that level through the first half of 2010. It repeated its concerns about the strength of the Canadian dollar.

There are signs that Canada is pulling out of its severe recession — one that was mainly created by the precipitous drop in world trade. Canada recorded its first trade deficit in 50 years in December 2008. GDP declined for the third consecutive quarter in the second quarter, but recent monthly data indicate that the economy is improving. Housing starts are up as are monthly retail sales. Bank of Canada governor Mark Carney said only last weekend at the G-20 meeting that the global recovery and that of Canada (which is dependent on trade especially with the U.S.) is not yet established.

The BoC has an inflation target range of 1 percent to 3 percent but focuses on the 2 percent midpoint. There are clearly no signs of inflation in its latest data. What is a concern however is the value of the Canadian dollar which has been rising steadily. The Bank has been worried since April that the higher Canadian dollar would slow exports and suggested then that it could move into what it has avoided, quantitative and/or credit easing. The currency has gained about percent so far this year. The domestic economy is being supported by “stimulative” monetary and fiscal policy, improved financial markets, higher commodity prices and improved business and consumer confidence according to the Bank.

Currencies

The U.S. dollar was soundly thrashed last week against all major currencies. In Japan, even a downward revision in second quarter GDP failed to arrest the yen’s climb against the dollar — it was up 2.6 percent. Analysts said that the recovery was on track — falling inventories were blamed for the downward revision. But these inventories eventually will have to be replaced and should provide the fuel for growth.

The driving force behind the dollar’s decline has been a growing conviction that the global economy was heading out of recession. This boosted risk appetite and global stocks and it hurt the dollar, stemming safe haven demand as investors sold the U.S. currency to fund investments in higher-yielding assets elsewhere. Improved investor sentiment was sparked by reassurances from finance ministers from the G-20 group of nations who pledged to continue with policies aimed at supporting the global economy following a meeting in London over the weekend.

Rising commodity prices are in part blamed for the dollar’s decline along with declining risk avoidance. In the past, when U.S. equities were up, so was the value of the dollar. But of late, it has been the reverse. Part of the explanation could be the ever widening investment opportunities around the world that are competing for funds that would have normally been invested in the U.S. For example, with the Reserve Bank of Australia’s current 3 percent interest rate putting a floor under the Australian dollar, investors are attracted by the earnings potential there especially when compared to U.S. interest rates which are at record lows with the fed funds rate in a range between zero and 0.25 percent.

Selected currencies — weekly results

Indicator scoreboard

Germany

July manufacturers’ orders were up 3.5 percent and were 20 percent below a year ago. The bounce was driven by domestic demand which jumped 10.3 percent on the month. Within this, capital goods surged 17.2 percent and basics were up 5.3 percent. However, orders for consumer and durable goods dropped 1.4 percent. Overseas orders declined 2.3 percent on the month, partially unwinding a near-7 percent leap in June. The overall decline was split between the eurozone (2.6 percent) and non-eurozone bloc (1.9 percent) with weakness most apparent in capital goods (minus 6.5 percent). Basic goods increased 5.1 percent but consumer and durable goods orders dropped 1.5 percent.

July industrial production was down 0.9 percent and was down 18 percent when compared with last year. The decline was mainly attributable to capital goods which slumped 3.2 percent on the month after a 0.9 percent drop in June. Energy was also sharply weaker, down 3.9 percent, although this followed an 11.1 percent surge in June. Intermediates grew 1.8 percent although consumer goods production was flat as a 1.2 percent gain in durables was offset by a 0.2 percent decline in nondurables.

July merchandise trade surplus widened to €12.4 billion — the best reading since October last year. The improvement reflected a 2.3 percent monthly increase in exports combined with unchanged imports. This was the third month in a row that nominal exports have posted positive growth but hefty earlier declines still left an annual decline of 18.7 percent. Imports were down an even larger 22.3 percent on the year. Exports to other EMU states sank 19.5 percent on the year while purchases by non-EU countries dropped 15.7 percent. On the same basis, imports were down 20.5 percent and 25.7 percent respectively.

France

July merchandise trade deficit narrowed to €1.3 billion from €3.5 billion in June. Exports jumped 9 percent on the month while imports were up just 1.0 percent. The cumulative shortfall for the first seven months of the year was €24.9 billion, down nearly 20 percent from the same period of 2008. In July alone, net exports of manufactured goods swung into a modest surplus of €133 million from June's €2.2 billion deficit.

July industrial production excluding construction edged up 0.1 percent and was down 12.9 percent when compared with last year. However, the July data were rather more robust than the headline statistics suggest since coke & petroleum output plunged 7.5 percent drop on the month. More significantly, manufacturing posted a solid 0.6 percent rise after a 0.2 percent increase in June. The electrical, electronic, computer & machinery sector recorded a 1.0 percent bounce in production, a pace matched by the ‘other’ industries category. Wood, paper & printing jumped 2.6 percent and chemicals were up 2.4 percent. Agriculture & food was up 0.6 percent. On the downside, there were declines in vehicle output (0.8 percent) and mining, energy & water (2.9 percent). Output in the construction industry was also down by 0.5 percent.

Italy

Second quarter gross domestic product was down 0.5 percent and plunged 6.0 percent when compared with last year, unchanged from the earlier flash estimate. Investment contracted by a further 2.9 percent on the quarter with expenditures on machinery especially soft (down 5.9 percent). By contrast household spending rose 0.3 percent and government consumption grew 1.3 percent. The foreign trade sector also continued to decline with exports falling 3.7 percent from the first quarter and imports tumbling 3.0 percent.

July industrial production was up 1.0 percent on the month but plunged a still hefty 18.2 percent when compared with last year. The latest increase followed a smaller revised drop of 0.6 percent in June and constituted the third gain in the last four months. It was boosted by gains in most sectors although capital goods production declined 0.9 percent on the month. Consumer goods output was up 0.9 percent solely due to nondurables (up 1.1 percent) as durables fell steeply (down 1.6 percent). Other advances were registered by intermediates (1.1 percent) and energy (3.6 percent). All sectors still show sizeable declines on the year with capital goods (down 24.1 percent) and intermediates (down 25.3 percent) especially weak.

United Kingdom

July industrial output was up 0.5 percent but was down 9.3 percent when compared with last year. The advance was led by the manufacturing sector where output jumped 0.9 percent on the month but was down 10.1 percent on the year. Manufacturing output was up due to a strong monthly gain in vehicle production (10.4 percent), itself boosted by government scrapping incentives. The pick-up was broad-based with some eight out of 13 reporting industries posting increases while only four saw declines. The increases were more than sufficient to offset weakness in the more erratic sectors which saw mining & quarrying down 1.0 percent, utilities off 0.2 percent and oil & gas extraction falling 1.5 percent.

July global merchandise trade deficit was essentially unchanged at Stg6.5 billion following a slightly larger revised shortfall in June. Exports were up 5.0 percent on the month while imports were up 3.5 percent. The overall shortfall with the EU narrowed from Stg2.8 billion to Stg2.6 billion but was offset by a widening in the deficit with non-EU countries from Stg3.7 billion to Stg3.9 billion. Excluding oil and erratics, the shortfall narrowed to Stg5.5 billion, down from Stg5.8 billion last time and the smallest since March 2006. The improvement here reflected a 5 percent monthly jump in exports that easily eclipsed a 2 percent increase in imports. On the same basis, export and import volumes were up 5 percent and 2.5 percent respectively. A pick-up in the sale of cars, chemicals and semi-finished goods were largely responsible for the somewhat brighter picture.

August producer output prices were up 0.2 percent and were down 0.4 percent when compared with last year. Prices were boosted over the month by a 1.2 percent jump in petroleum prices which alone accounted for more than half of the total increase. Other categories were much better behaved in general although sizeable advances were registered by both chemical products (0.9 percent) and other products (0.8 percent). Prices of textiles & clothing, metal products and electrical & optical goods were all unchanged from July and there were declines in food (0.1 percent), tobacco & alcohol (0.6 percent), paper (0.3 percent) and transport (0.4 percent). Core output prices were up 0.2 percent on the month and were up 0.7 percent on the year. Producer input prices jumped by 2.2 percent and were down 7.5 percent on the year. Large swings in oil prices dominated the change in both the monthly and annual rates. Indeed, the 12-month rate will almost certainly continue to accelerate in coming months due to the hefty slide in energy costs in late 2008/early 2009. Crude oil prices jumped 9.4 percent from July. Other sizeable increases were seen in imported metals (4.1 percent), imported chemicals (1.4 percent) and other imported materials (1.2 percent). By contrast, declines were recorded in home food materials (1.9 percent), fuel (0.7 percent) and imported food (0.4 percent). Core input prices were up a more modest 0.9 percent on the month and were down 1.8 percent on the year.

Asia/Pacific

Japan

August corporate goods price index was unchanged on the month and down a record 8.5 percent for the second month on the year. Virtually all the major manufacturing product categories were down on the year with the exception of pulp, paper & related products (up 1.1 percent), ceramic, stone & clay (up 2.8 percent), transportation equipment (up 3.8 percent) and precision instruments (up 0.6 percent). As to be expected, the largest annual decline was recorded by petroleum & coal products which plunged by 42.9 percent. Nonferrous metals followed with a drop of 24 percent. Iron & steel prices were down 18.5 percent while chemicals & related products were down 13.2 percent. Agriculture, forestry & fishery products were down 5.5 percent while electric power, gas & water dropped 9 percent.

Second quarter gross domestic product was revised downward to an increase of 0.6 percent from the original estimate of 0.9 percent on the quarter. On an annualized basis, GDP was revised to an increase of 2.3 percent from the original estimate of 3.7 percent. On the year, GDP was down a revised 7.2 percent – the original estimate was a decline of 6.5 percent. Most of the major components were revised downward. Private non-residential investment or CAPEX was revised to a decline of 4.8 percent from the earlier estimate of a drop of 4.3 percent on the quarter. Private consumption was revised to an increase of 0.7 percent from an initial reading of 0.8 percent on the quarter. Private residential investment (housing) dropped 9.5 percent, unchanged from the prior estimate. Net exports contributed 1.6 percent to GDP.

Australia

July seasonally adjusted retail sales were down 1 percent after declining 0.8 percent in June. Analysts expected sales to slump as the earlier boost from government cash handouts to consumers wane. Sales were up 5.2 percent when compared with last year. Food sales were down 1.9 percent while household goods sank 3.6 percent. Clothing, footwear & personal accessory retailing slipped 0.6 percent. Department stores were up 2.5 percent while other retail gained 0.8 percent and cafes, restaurants & takeaway food services gained 1 percent. On an unadjusted basis, sales were up 2.3 percent on the month. Chains and other large retailers increased 3.2 percent and the estimate for smaller retailers increased 0.8 percent.

August unemployment rate remained at 5.8 percent for the third month. Employment was down by 27,100 to 10,763,600. The entire decline was in full time employment which declined by 30,800 to 7,553,800 while part time employment edged up by 3,800 to 3,209,800. The number of unemployed decreased by 2,100 to 663,600. The number of persons looking for full-time work declined by 8,800 to 488,100 while the number of persons looking for part time work increased by 6,600 to 175,500. The participation rate declined to 65.1 percent from 65.4 percent in the previous month.

Americas

Canada

July merchandise trade balance deteriorated to a deficit of C$1.4 billion after recording a surplus of C$37 million in July. Nominal exports were up 3.3 percent but imports jumped by 8.3 percent. The real balance also worsened as monthly export volume growth of 5.9 percent was eclipsed by an 8.7 percent increase in imports. The nominal deficit reflected a narrower surplus with the U.S. which dropped nearly C$1.3 billion to C$1.9 billion. Net trading positions with the other OECD countries deteriorated relatively mildly. Within the overall rise in nominal exports, shipments to the U.S. were up 2.5 percent on the month while those to the EU were up 1.2 percent. Purchases by Japan climbed 11.4 percent. However, increases here were more than offset by a 9.9 percent increase in imports from the U.S. combined with a 0.3 percent increase in goods purchased from the EU and a 5.2 percent gain in imports from Japan. Exports were boosted by solid advances in machinery & equipment (10.8 percent) and automotive products (10.8 percent). Indeed, the only major categories not to see an increase were energy (down 3.2 percent) and agriculture & fishing products (down 3.1 percent). Imports were buoyed by a surge in energy products (18.6 percent) together with strong gains in both machinery & equipment (10.9 percent) and autos (18.7 percent). The only area to see a decline was agriculture & fishing (3.5 percent).

Bottom line

Equities continued to climb to new highs for 2009 while the dollar sank to its lowest in a year against most major currencies. And gold rose above $1,000 an ounce. Economic data was mixed. UK output was up as were producer input and output prices but in Japan the corporate goods price index sank by 8.5 percent — a record decline. In Australia both retail sales and employment which were expected to increase, declined instead.

The Bank of Japan meets at the beginning of the week. No policy change is expected as the Bank and everyone else cautiously awaits the new political leadership and their economic policies. And in Australia, analysts will be looking to examine the Reserve Bank of Australia’s meeting minutes as the search goes on for clues to when the RBA might increase its key interest rate.

Looking Ahead: September 14 through September 18, 2009

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