Global Markets

The monthly vigil for the U.S. employment situation report filled last week with optimists in the fore, expecting an employment gain. Reality was somewhat different however as employment was down by an estimated 85,000 in December after a minimal gain in November. Aside from the instant trigger reaction to sell the dollar, the markets were down for most of the day but otherwise reasonably well behaved. Equities in Europe and the U.S. oscillated between positive and negative in Friday trading. As trading wound down, the UK and Europe opted to remain positive as did equities in the U.S. On the whole though, investors appear to have started the year and the decade with renewed appetite for risk. On the week, all equity indexes followed here in Asia, Europe and North America with the exception of China’s Shanghai Composite were up.

The U.S. was not the only country to report labor market data Friday. In Canada, employment disappointed as it edged down 2,600 after a stunning 79,100 increase in November while the unemployment rate remained at 8.5 percent. But in the eurozone, the unemployment rate continued to rise. The November reading was 10 percent for the first time since August 1998.

The currency markets had to contend with comments on both side of the globe. In Europe, the euro was roiled by the Greek fiscal crisis and whether the nation would be bailed out by the European Union. The euro tumbled after ECB executive board member, Jürgen Stark, said that the EU would not save Greece from its fiscal problems. The euro later recovered thanks to favorable economic news. Late in the week, Japan’s new finance minister Naoto Kan set off a storm by stating he favored a lower yen to the U.S. dollar — in effect using verbal market intervention to affect the currency’s exchange rate with the dollar. He also said that businesses would prefer a yen/dollar exchange rate of ¥95 to the U.S. dollar. Japan scrambled Friday to stem the damage with Mr Kan recanting and saying that the market should determine exchange rates.

Global Stock Market Recap

Europe and the UK

Stocks in Europe and the UK were up for the first week in January. However, as is usually the case, many investors chose to wait until the U.S. employment data were released on Friday. Although investors were disappointed with the report’s results, stocks reversed steep loses to close on a mildly positive note. On the week, the FTSE was up 2.2 percent while the CAC gained 2.8 percent and the DAX, 1.3 percent.

Investors withstood a barrage of new economic data as issuers strove to catch up from December’s data dearth during the two holiday weeks. For the most part, it was positive as manufacturing PMIs showed growth for the major countries. The U.S. was not the only country with disappointing labor market data though. EMU unemployment rate climbed to 10 percent and as a reflection of the weak labor market, November retail sales continued to swoon. However the EC economic survey showed that confidence continues to climb. And a composite output index that measures both manufacturing and services activities edged up to 54.2 in December from 53.7 in November.

Bank of England waiting until February

As universally expected, the Bank of England’s monetary policy committee voted to keep rates unchanged at 0.5 percent and to continue with its £200 billion quantitative easing program as further signs of stabilization emerged across the economy. The Bank has signaled that it intends to make major monetary policy decisions only when updated forecasts in its quarterly inflation report are available. The next report is due in mid-February. February, therefore, could see the first change in the Bank’s monetary stance since the decision in November to increase the scale of quantitative easing. The committee said that it expected to spend the remaining money over the next month. The MPC’s decision to carry on as planned came amid further signs that the economy is on a path to recovery, albeit a shaky one.

Asia/Pacific

Asia/Pacific indexes followed here began the New Year on a positive note with the exception of the Shanghai Composite which lost 2.5 percent on the week after the People’s Bank of China moved to tighten liquidity. This led to fears that further tightening measures will occur sooner than expected. Gains ranged from 0.4 percent for the Sensex to a hefty 3.7 percent for last year’s worst performer the Topix. On Friday, stocks were up thanks to a combination of a positive U.S. equity performance on Thursday and a positive outlook for the U.S. employment situation report which would be released after markets were closed for the week here.

Japanese stocks were up after the new finance minister, Naoto Kan, verbally intervened in the currency markets saying he favored a weak yen. This pushed up exporters’ stocks on anticipation of higher profits. However, on Friday he back tracked from his earlier statement saying that markets should decide currency levels.

People’s Bank of China signals tightening

On Thursday, the People’s Bank of China sold 3-month bills at a higher interest rate for the first time in 19 weeks after saying its focus for 2010 will be to control the record expansion in lending and curb price increases. Stocks were down across Asia, and oil declined on concern growth will slow in China. Analysts interpreted the move as a signal that the PBoC is tightening liquidity saying that the rising yield will be used to prevent excessive growth in bank lending. The move could signal that the PBoC would be raising reserve requirements or its benchmark interest rates — or both — soon.

The Bank concluded an annual two-day policy review on Wednesday with a lengthy statement that had particularly strong cautions against bank lending to sectors of the economy with overcapacity or excessive energy use. Regulators had already warned banks in late November to show more caution in lending and raise more capital to underpin the surge in lending.

Currencies

As to be expected, the dollar gyrated Friday thanks to the employment situation report. Before the report, the dollar was up against both the yen and euro on expectations that the U.S. would show a positive employment gain in December. The actual job loss — even though November was revised to a minimal employment gain — sent the dollar down, although it stabilized after an hour or two about mid-way between Thursday’s close and Friday’s high. Some analysts opined that the dollar dropped on the report because investors now see far less likelihood that the Fed will act upon rates anytime soon.

Despite this week’s fluctuations, a major trend from 2009 continued — commodity currencies continued to rise against the dollar. However the yen was roiled by the new finance minister’s remarks about the yen while the euro bounced around thanks to the debt crisis in Greece.

The yen was up against the dollar and virtually unchanged against the euro on the week. On Thursday it had dropped in value after Naoto Kan, the newly appointed finance minister, verbally intervened in the currency markets. He abruptly reversed his predecessor’s currency strategy immediately upon taking office Thursday with a call for a weaker yen. Mr Kan used his first press conference to express his support for a weaker yen and further stimulus measures to revive Japan’s economic health in a marked departure from his predecessor Hirohisa Fujii. The yen, which rose to a high of ¥86 against the dollar in late November, weakened on Mr Kan’s comments. However, on Friday he recanted and said that markets should decide currency levels. Mr Kan noted that many in the business community believe an appropriate level for the yen was about ¥95 to the dollar. Japan has not intervened in the foreign exchange market since 2004.

The Japanese economy suffered a plunge in exports last year after the global financial crisis, a fall accelerated by a sharp rise in the yen, particularly against the US dollar. In contrast to the yen’s surge, the won in South Korea, a competitor of Japan’s, has weakened, making Japanese products less competitive overseas.

Selected currencies — weekly results*

Indicator scoreboard

EMU

December manufacturing PMI climbed to a 21-month high with a reading of 51.6. Output was up for a fifth month in a row and at its fastest pace since September 2007. Production of investment goods led the way with consumer goods not far behind but output of intermediates slowed. New orders also fared well, albeit slightly down on the flash estimate and export orders posted their sharpest improvement since September 2007. Backlogs also increased for the second month running at their best pace since August 2007. All of the big four EMU states except Spain saw activity rates pick up. In France and Germany the PMI rose 0.3 points on the month to 54.7 and 52.7 respectively and in Italy it climbed 0.7 points to 50.8. However, in Spain the PMI remained resolutely below 50 at just 45.2.

December flash harmonized index of consumer prices were up 0.9 percent on the year. The latest ECB forecast put annual inflation between 0.9 percent and 1.7 percent in 2010 and between 0.8 percent and 2.0 percent in 2011. Among the larger EMU states, HICP accelerated by 0.5 percentage points in both Germany and Spain to 0.9 percent and 0.8 percent respectively. The annual rate in Italy rose a more modest 0.3 percentage points to 1.1 percent while France, as usual, did not provide any provisional data.

November producer price index edged up 0.1 percent and was down 4.4 percent when compared with last year. As usual energy prices dominated the on the year pickup. Prices in this sector jumped from a decline of 14.2 percent to a drop of 8.7 percent. Energy costs were up 0.8 percent on the month. Price developments in the other sectors remained generally subdued. Intermediates were down 0.2 percent on the month while nondurable consumer goods declined 0.1 percent. Both capital goods and durable consumer goods saw no change. As a result, the PPI excluding energy dropped 0.1 percent from October and was down 3.1 percent on the year.

November retail sales dropped 1.2 percent and were down 3.6 percent on the year. The limited breakdown by sector shows a 0.4 percent monthly slide in purchases of food, drink & tobacco and a hefty 1.6 percent slump in non-food demand that more than eradicated October's advance. Regionally the sales decline was widespread and led by Germany where volumes declined 1.1 percent on the month. Purchases also weakened in France (0.1 percent) and Spain (1.0 percent). Among the smaller member states the most notable declines were in Portugal (1.1 percent) and Slovakia (0.7 percent). There were no increases.

Third quarter final gross domestic product was up an unmodified 0.4 percent on the quarter for a 4.0 percent annual contraction. Private consumption was down 0.1 percent from the second quarter when it edged up just 0.1 percent and fixed capital formation dropped another 0.8 percent following declines of 5.4 percent and 1.6 percent respectively in the first and second quarters. Government consumption was up 0.6 percent, matching its second quarter pace. Exports were up 3.1 percent on the quarter which, with imports up 3.0 percent allowed the real foreign trade balance to add to overall growth. The most significant contribution however, came from business inventories where renewed stock building added 0.5 percentage points to the bottom line.

November unemployment was up for the fifteenth month in a row. The unemployment rate climbed to 10 percent with a further 102,000 losing their jobs following a larger revised 156,000 in October. Total unemployment now stands at 15.712 million, an increase of 3.041 million on a year ago and the highest level since August 1998. Jobless rates moved up in most EMU states. Ireland (up 0.4 percentage points to 12.9 percent) had a particularly poor month but Spain remained firmly at the top of the pile with a 0.1 percentage point increase to 19.4 percent. France and Italy both also recorded 0.1 percentage point gains to 10.0 percent and 8.3 percent respectively but Germany bucked the trend with a stable 7.6 percent rate.

EU

December economic sentiment was up 2.5 points to 91.3. The advance was led by industry where confidence rose 3 points to minus 16. However, there were also smaller gains in morale in the consumer sector (minus 16 from minus 17), services (minus 3 from minus 4) and retail (minus 10 from minus 11). The only decline in sentiment was registered in the construction sector which saw a 2 point fall to a lowly minus 28. Among the larger EMU states, sentiment rose nearly 2 points to 94.2 in Germany, by 2.9 points to 95.4 in Italy and by 1.2 points to 85.2 in Spain. However, the most significant advance was posted in France, up 4.2 points to 97.2. All other EMU members also saw morale improve with the exception of Greece, Portugal and Slovenia which registered declines and the Netherlands where it was unchanged.

Germany

December unemployment was down by 3,000 to 3.421 million. The decline, which followed a smaller revised drop of 1,000 in November, left the unemployment rate unchanged at 8.1 percent. December was the fifth consecutive month in which joblessness has fallen but, in line with much of last year, the latest figures were again distorted by the changes to methodology introduced in July. Excluding this impact, unemployment would have risen around 6,000. The relative resilience of the jobs market has been in large part due to government incentives aimed at encouraging companies to keep employees on their payrolls via subsidized shorter working weeks. However, this has been at the expense of productivity which has fallen sharply in recent quarters.

November retail sales excluding autos dropped 1.1 percent. On the year, sales were down 2.7 percent. At a sector level, for which only annual growth rates are available, food & drink purchases were down 2.3 percent while the other sales were off 2.9 percent.

November seasonally adjusted merchandise trade surplus was €17.4 billion, up from October’s balance of €12.7 billion. Exports were up 1.6 percent while imports sank by 5.9 percent. Exports have now risen for three consecutive months while imports have seen back-to-back declines. However, exports are still below last year’s level by 3.1 percent while imports are 14.8 percent weaker. On an annual basis, exports to the EMU bloc were down 4.4 percent but were up 2.9 percent to non-EU nations. Imports continue to show widespread losses with purchases from the other EMU countries off 7.9 percent on the year and from non-EU countries down 21.3 percent.

November seasonally adjusted manufacturing orders edged up by 0.2 percent after sinking a revised 1.9 percent in October. On the year, orders were down 1.3 percent. Domestic orders were up 1.4 percent after inching up 0.1 percent in October thanks to a 3 percent increase in capital goods orders. Consumer and durables were up 1.2 percent on the month. However basic goods orders were down 0.1 percent. Foreign orders dropped 1.0 percent as a 3.2 percent drop in non-EMU demand more than offset a respectable 2.0 percent increase in the eurozone. Overall foreign orders found support from just consumer and durables which surged 6.0 percent. However, orders for capital goods dropped 2.2 percent while basics dropped 0.6 percent.

November industrial output was up 0.7 percent but is down 8 percent on the year. Output was up in all sectors except energy where it fell 2.0 percent on the month. The strongest performer was consumer durables (up 2.5 percent) but both nondurables (up 1.6 percent) and intermediates (up 1.1 percent) also posted significant monthly advances. Capital goods (up 0.3 percent) were soft in comparison especially after dropping 4.2 percent in October. Overall manufacturing output was up 0.9 percent and construction climbed 0.7 percent after a 1.2 percent slide last time.

France

November merchandise trade deficit was €5.3 billion after recording an October deficit of €4.4 billion. The expansion of the deficit was due to a sharp 4.6 percent gain in imports while exports were up only 2.1 percent.

United Kingdom

December producer output prices were up 0.5 percent and were up 3.5 percent when compared with last year. Input prices edged up 0.1 percent and were up 6.9 percent on the year. Core output prices jumped 0.7 percent on the month and were up 2.6 percent on the year. The main culprit was the other manufactured goods sector, where charges spiked 1.2 percent on the month, in large part due to a surge in scrap metal prices. Transport prices also rose 1.2 percent. Input prices were almost held in check by a 2.2 percent decline in the cost of crude oil but weakness here was more than offset by a 0.8 percent increase in the price of imported parts & equipment, notably motor vehicle & trailers. Excluding food, drink, tobacco & petroleum, the input PPI was up 0.5 percent on the month and 1.0 percent on the year.

Asia/Pacific

Australia

November seasonally adjusted retail sales jumped 1.4 percent after rising a revised 0.4 percent in October. On the year, retail sales were up 7.3 percent. Sales jumped despite a rise in interest rates by the Reserve Bank of Australia and the withdrawal of federal government stimulus funding programs. Sales were up for all retail groups. Sales of clothing, footwear & other personal accessory retail items were up 2.5 percent while household goods retailing rose 1.7 percent.

November merchandise trade deficit improved to A$1.7 billion from a revised October deficit of A$2.8 billion deficit. Exports were down 1.5 percent but imports were down even more — dropping 3.1 percent on the month. On the year, exports plunged 27.5 percent while imports were down 18.6 percent. Non-rural goods exports dropped 3 percent with the other non-rural components (including sugar and beverages) down 15 percent. Coal, coke & briquettes dropped 5 percent while metals (excluding non-monetary gold) were down 14 percent. Non-monetary gold was down 3 percent. Rural goods were up 5 percent. On the import side, capital goods were down 8 percent, non-monetary gold sank 34 percent and intermediate & other merchandise goods were down 2 percent.

Americas

Canada

November industrial product prices jumped by 1.0 percent but were down 2.8 percent on the year. The annual increase was the strongest since June 2008. Exchange rate factors contributed 0.2 percentage points to the monthly increase. Prices would have been significantly softer but for a nearly 5 percent monthly jump in the cost of petroleum & coal products. Excluding this category, the IPPI would have risen 0.5 percent from October and declined a steeper 3.6 percent on the year. Of the 21 major product groups only one, miscellaneous non-manufactures, posted a monthly decline (1.6 percent). Raw materials price index continued to climb sharply — 2.2 percent on the month. With prices tumbling in the year ago period, the November bounce helped to produce the first positive annual growth rate (9.3 percent) in 14 months. Prices were buoyed on the month mainly by non-ferrous metals (4.8 percent). Mineral fuels were up another solid 2.1 percent but were also outpaced by vegetable products (3.8 percent). Ferrous materials rose 0.6 percent while animal & animal products climbed 0.9 percent.

December employment declined by 2,600 jobs while the unemployment rate was unchanged at 8.5 percent. The losses were incurred mainly in full-time positions (down 2,400) as part-time jobs were essentially unchanged (down 200). Private sector employment was up 4,300 but was offset by a 22,100 decline public sector positions. At the same time the number of self-employed climbed 15,200. Employment in the goods producing sector dropped 12,000, mainly due to 9,700 decline in manufacturing. Agricultural payrolls were down 4,900, in natural resources by 2,800 and utilities by 5,300 but the construction sector created a net 10,700 new positions. Service sector employment was up by 9,400 thanks to sizeable gains in health care & social assistance (35,300), professional, scientific & technical services (33,400), trade (19,000) and accommodation & food services (14,500). However, advances here were almost offset by job losses elsewhere, notably in business building & other support services (22,500), transportation & warehousing (23,900), public administration (21,600) and finance, insurance, real estate & leasing (16,800).

Bottom line

Dreams of positive employment growth have been postponed as U.S. employment declined in December. The positive note in the U.S. report was that the temporary employment sector — traditionally where businesses turn when they begin to ramp up hiring — increased for the fifth consecutive month. At the same time, November eurozone unemployment touched double digits for the first time since 1998. Analysts say that job creation in the eurozone generally takes longer than in the U.S. because markets here are more flexible than those in Europe. The unemployment rate would be much higher in Europe if it were not for government backed plans that offer support to companies putting workers on shorter hours. And in Canada, after a huge gain in November, employment was virtually unchanged in December.

The pace of new data calms somewhat next week with merchandise trade and industrial production taking the spotlight. The European Central Bank meets Thursday — and while no policy change is anticipated, analysts will parse every word of President Jean Claude Trichet’s press conference that follows the meeting. They want to know when the next policy change will occur.

Looking Ahead: January 11 through January 15, 2010

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