Global Markets

Economic data began the quarterly ritual of sharing the spotlight with the onset of earnings season. Markets vigil a lot of things — they vigil the FOMC announcement, ECB announcement then press conference and of course the U.S. employment situation report among others when it comes to economic data. But come the second week of the new quarter, investors vigil earnings reports as they try to make sense of what is happening in the economy and how it may impact their holdings. So far earnings results have been mixed — but so was the economic data released last week. The end result was that equities ended the week — mixed. On the week, three of 13 Asia/Pacific indexes followed here were down as were those in Europe and North America.

U.S. economic data disappointed with retail sales recording a surprise December decline while industrial production was up thanks to the cold weather that elevated utility output while manufacturing continued to languish. And perhaps those who were surveyed by the University of Michigan were suffering from the January blahs as the preliminary reading barely edged upward. The best economic news of the week was from Australia where employment was up for the fourth consecutive month while the unemployment rate continued to decline. But even here the good news was offset by a decline in home loans, the result no doubt of the Reserve Bank of Australia’s three interest rate increases.

The European Central Bank left policy unchanged as universally expected and the ensuing press conference did not produce any surprises. The People’s Bank of China decided to raise the amount banks must set aside in reserves, news which came after markets were closed on Tuesday. China's move, aimed at cooling an overheated economy and extending sustainable growth, raised fears that demand for resources and trade may be crimped.

Global Stock Market Recap

Europe and the UK

Equities were down last week as disappointing U.S. data depressed investors looking for further signs of growth. The FTSE was down 1.4 percent while the CAC lost 2.2 percent and the DAX swooned by 2.7 percent. Equities continue to be affected by U.S. data. On Friday for example, stocks were up prior to the release of disappointing manufacturing output and consumer sentiment data. They reversed direction and were down for the day. And earnings did not help despite a positive gravitational pull from strong Intel profits. But Intel's news was offset by disappointing results from JPMorgan — earnings per share were a penny under the whisper number — which sent equities lower.

On Wednesday, the German statistical agency surprised and said that the country’s recovery faltered in the fourth quarter and that GDP had plunged by 5 percent in 2009. (Fourth quarter flash GDP will not be available until mid-February). The announcement quashed hopes that a robust recovery here would stimulate growth elsewhere in the eurozone. The export dependent economy was one of the worst hit in the global financial crisis with exports and investment both plunging. Consumer spending was positive, however, rising by 0.4 percent thanks largely to government subsidies for new car purchases.

The UK, after 18 months of contraction, emerged in the fourth quarter from its deepest recession since World War II, according to the National Institute for Economic and Social Research. NIESR said it expects the contraction to be 4.8 percent for 2009 as a whole. Britain and Spain were the only two European Union countries still officially in recession at the end of the third quarter of 2009.

EBC stays on course

As expected, the European Central Bank left its key interest rate at 1 percent where it has been since May 2009. The EMU emerged from recession in the third quarter — GDP was up 0.4 percent on the quarter but growth remains 4.1 percent below a year ago. Growth is uneven among member states with Germany and France growing slowly while Spain among the larger states is still in recession.

In his post-meeting press conference, ECB President Jean Claude Trichet warned that the recovery would be bumpy. His caution was justified after the German statistical office reported that the recovery there had stalled in the fourth quarter. And Spain’s economy also shows few signs of a turnaround while analysts fear that the crisis over Greece’s public finances could have an impact on other Member States. Mr. Trichet, who was asked by reporters repeatedly about Greece’s attempts to tame its soaring budget deficit, indicated that the country cannot expect special treatment from the ECB. He also dismissed as “absurd” the suggestion that any country would leave the eurozone.

In December, the ECB pressed ahead with its exit strategy by announcing the end of offers of unlimited one-year loans and scaling back liquidity provisions. The provision of dollar liquidity is also expected to end after this month. Mr Trichet has so far insisted that the exit strategy from quantitative easing is being calibrated in line with improvements in financial markets and should not be seen as a monetary policy tightening.

Asia/Pacific

Ten of 13 indexes followed here were up last week. On Friday, traders preferred to exercise caution and lock in gains from the recent rally and ahead of the U.S. holiday on Monday. The All Ordinaries was down marginally on the week — 0.3 percent — a better than expected labour report failed to make up for a dour home loan report released earlier in the week. Also lower on the week were the STI (down 0.5 percent) and the Hang Seng (down 2.9 percent). The Hang Seng was down four of five days as traders took profits while at the same time China-related resource stocks dragged equities lower on concerns that recent tightening measures by the PBoC might impede economic growth. Property stocks also ended in negative territory on profit taking.

Japanese stocks were lifted to a 15 month high by foreign buyers. Analysts noted that since the business year for many foreigners begins in January, there is often a flow of new money into Japan at that time. In Japan for example, the new business year begins April 1. Positive results from Intel and increasing confidence that the global economy is recovering stimulated buying. Some analysts noted that the Nikkei was approaching the key 11,000 level thanks not only to technology stocks but also to large-cap blue chip stocks. Others noted that profit taking was weighing on the index as it approached that level.

PboC tightens credit

Asian markets were shaken mid-week after the People’s Bank of China shifted policy in order to restrain lending. Analysts said that this may foreshadow higher interest rates and even a relaxation in the yuan’s peg to the U.S. dollar. The PBoC raised the proportion of deposits that banks must set aside as reserves by 50 basis points starting January 18. It is estimated that the Bank’s decision will help remove about 300 billion yuan of liquidity.

Analysts moved their expectations for an interest rate increase from the second half of 2010. By moving ahead of the Federal Reserve, which plans to keep rates near zero for an extended period, pressure will rise to allow the yuan to appreciate for the first time since mid-2008. The yuan has been kept at about 6.83 per dollar since July 2008 after letting it appreciate 21 percent over three years.

Currencies

The yen was up while the euro was down against the U.S. dollar last week. The yen benefited after the Peoples Bank of China’s moved to tighten monetary policy. The move immediately stirred fears that global growth would slow and created safe haven demand for the yen. Commodity linked currencies such as the Australian dollar were down reflecting worries that demand for raw materials would decline as China reigned in growth. The Aussie dollar recovered mid-week however, after employment increased more than expected and unemployment was down a notch. The data raised the likelihood of another interest rate increase by the Reserve Bank of Australia when it meets in February which in turn stimulated demand for the currency.

The yen was up against the dollar and the euro as expectations of rate increases by the Fed and the ECB were dampened on lackluster economic data. The euro was also dampened by the fiscal crisis in Greece as well as ECB President Trichet’s comments that growth would be bumpy and moderate with further jobs losses.

Selected currencies — weekly results

Indicator scoreboard

EMU

November industrial production was up 1.0 percent but was down 7.1 percent when compared with last year. Production was supported by gains in all sectors with the exception of energy which contracted 2.2 percent. The strongest monthly performers were durable consumer goods and intermediates (both up 1.8 percent) followed by capital goods (1.1 percent). Nondurable consumer goods output was up 0.6 percent. Most EMU states saw production advance. Among the larger members, France posted the largest monthly increase (1.2 percent) ahead of Germany (0.7 percent). By comparison increases in Italy (0.2 percent) and Spain (0.1 percent) were quite modest. The most significant gain was registered by Slovenia (3.0 percent).

December harmonized index of consumer prices was up 0.3 percent and 0.9 percent when compared with last year. Core HICP excluding food, drink, tobacco and petroleum was up 0.4 percent and 1.1 percent on the year. Excluding just unprocessed food and petroleum HICP was up 1.0 percent on the year while omitting seasonal food and petroleum the 12-month rate crept up to 1.0 percent from 0.9 percent. On the month, the bulk of the increase in prices was attributable to seasonal factors. Accordingly there were especially large gains in the cost of air travel (6.4 percent), rail transport (1.7 percent) and package holidays (12.7 percent). However, clothing prices were down 0.5 percent and most other sectors were little changed. Inflation accelerated at year-end in all EMU members except Malta, the Netherlands and Slovakia.

November seasonally adjusted merchandise trade surplus narrowed to €3.9 billion from a revised €4.7 billion in October. The unadjusted surplus was €4.8 billion, a marked improvement on a €7.0 billion shortfall in the same month a year ago. The deterioration in the adjusted data reflected a 0.4 percent monthly decline in exports combined with a 0.3 percent advance in imports. However, on the year, exports were down 6.0 percent while imports sank by 15.0 percent. As usual, Germany (€8.2 billion) more than accounted for the entire surplus. Among the other larger EMU states, France, Italy and Spain all failed to make a positive contribution.

France

November industrial production was up 1.1 percent and was down 3.8 percent when compared with last year. Growth was led by manufacturing which climbed an impressive 1.6 percent, in large part thanks to a 5.3 percent surge in transportation equipment and a 2.5 percent bounce in electronics & machines. The other goods sector gained a solid 1.2 percent. On the downside however, there were declines in production in refining (4.6 percent) and in food & agriculture (0.7 percent). Construction also slipped 0.4 percent on the month.

Italy

November industrial production edged up 0.2 percent and is down 9.1 percent when compared with last year. Energy output sank 2.7 percent while capital goods production edged up 0.3 percent on the month. Intermediates output was up 0.8 percent while consumer goods jumped by 1.2 percent.

United Kingdom

November global merchandise goods deficit was Stg6.8 billion, down from a marginally downward revised Stg7.0 billion shortfall in October. There was little change in either side of the balance sheet with nominal exports edging up 0.1 percent on the month while imports slipped 0.8 percent. The underlying deficit which excludes oil and other erratic items also saw a limited decline with the red ink contracting Stg0.2 billion to Stg6.1 billion. All of the improvement could be attributed to trade with non-EU countries where net exports were down by Stg3.0 billion. The deficit with the EU bloc widened by Stg0.3 billion to Stg3.8 billion.

November industrial production was up 0.4 percent but was down 6.0 percent on the year. Manufacturing output was unchanged on the month and down 5.4 percent on the year. Within the overall production index, industries were mixed. Utility output sank 3.5 percent but mining & quarrying posted a hefty 5.9 percent surge and oil & gas extraction was up an even larger 7.2 percent. Within manufacturing, only six out of 13 sub-sectors saw production expand on the month with transport leading the way. By market group, there were monthly declines in consumer durables (2.0 percent) and consumer nondurables (0.2 percent) but capital goods (0.7 percent) and intermediates plus energy (0.7 percent) registered gains.

Asia/Pacific

Japan

December corporate goods price index edged up 0.1 percent and was down 3.9 percent when compared with last year and an improvement over November’s 5.0 percent plunge. Monthly changes were split between gains and losses with iron & steel prices swooning by 0.9 percent on the month and sinking 19.2 percent on the year. Petroleum & coal product prices were up 0.8 percent and up 0.5 percent on the year, clearly an improvement over November’s 13.5 percent drop as favorable base effects influence the yearly result. Despite some improvement, prices declined for the 12 months.

Australia

December employment increased a greater than expected 35,200 to 10.906 million. This was the fourth consecutive month of employment gains. At the same time, the unemployment rate edged down to 5.5 percent from 5.6 percent in November. Both part time and full time employment increased. Part time employment was up by 27,900 persons to 3.271 million while full time employment was up 7,300 persons to 7.635 million. The number of unemployed declined by 10,600 to 639,400 and the participation rate was unchanged at 65.2 per cent.

Americas

Canada

November merchandise trade deficit was C$343 million after recording a surplus of C$503 million in October. Nominal imports jumped 3.9 percent and easily offset the 1.1 percent increase in exports. In volume terms, imports were up 2.7 percent while prices were up 1.1 percent. The fifth consecutive monthly gain in exports was all due to prices as volumes were unchanged. Exports to the United States rose 2.0 percent while imports, which increased 3.8 percent, accounted for almost two-thirds of the gain in overall imports. As a result, Canada's trade surplus with the United States narrowed to $3.2 billion in November from $3.5 billion in October. Net trade with both Japan and the EU were little changed. The strongest performing export sector was energy which surged 6.2 percent on the month, easily beating the other consumer goods category (4.2 percent) which was in second place. Agriculture and fishing products were up 3.5 percent and forestry products gained 2.5 percent but all other areas posted declines. Imports were also supported by energy (13.1 percent) ahead of automotive products (9.4 percent) and machinery and equipment (4.3 percent). The only decline was in industrial goods and materials (2.9 percent).

Bottom line

Mixed earnings reports combined with mostly disappointing economic data pressured equities downward. All equity indexes followed here in North America and Europe were down on the week while in Asia, three of 13 declined. The European Central Bank, much to no one’s surprise, left its policy unchanged while the People’s Bank of China increased bank reserve requirements.

The Bank of Canada meets Tuesday with no change in policy expected. And on Thursday, analysts will study their Monetary Policy Report for clues to future policy. There is a relatively light schedule of new economic data with the ZEW in Germany getting heightened attention on Tuesday. Markets are closed in the U.S. for a holiday on Monday.

Looking Ahead: January 18 through January 22, 2010

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