Global Markets

The week revolved around intermittent bouts of risk aversity and Fed chairman Ben Bernanke’s semi-annual testimony before two Congressional committees on Wednesday and Thursday. The latter, formally called the Humphrey Hawkins testimony — and still referred to by its ‘old name’ — brings Fed watchers to the fore looking for monetary policy clues. Mr Bernanke had already telegraphed the key points of his testimony well in advance so there were no surprises. He confirmed that the Fed intends to keep interest rates at a very low level for an extended period.

However, investors worried about Greece’s fiscal problems and the possibility of their spread to other members of the EMU who are experiencing their own deficit problems such as Portugal, Spain and Italy. The euro took a beating on these worries with the dollar and yen benefiting in intraweek trading. Disappointing economic data did not help market sentiment. The German Ifo saw an ebbing of confidence and in the U.S. both the consumer confidence and consumer sentiment measures saw an erosion of spirits. With labor markets remaining vulnerable, it is not surprising that consumers are wary.

Periodic fits of insecurity easily tipped equities from positive to negative and back again as investors tried to figure out which was worse — poor U.S. economic data or the Eurozone's fiscal mess. The removal of monetary stimuli, growth uncertainty and the possible contagion from any Greek default or bailout have been the three factors that have weighed most on investors throughout February.

Stocks were down in North America and Europe while in Asia, equity indexes were mixed at week’s end. However, for the month of February, all North American indexes followed here were up for the month as was the FTSE. In Asia, eight of 13 indexes were up. However, for the two months of 2010, only the Jakarta Composite managed to be higher than its end of 2009 level.

Global Stock Market Recap

Europe and the UK

Stocks rebounded Friday but not enough to offset losses from earlier in the week. The FTSE edged down 0.1 percent but losses by the DAX and CAC were much larger. The CAC lost 1.6 percent while the DAX lost 2.2 percent. The FTSE outperformed both the CAC and DAX in February, gaining 3.2 percent. The CAC and DAX lost 0.8 percent and 0.2 percent respectively. In 2010, the FTSE is down 1.1 percent while the CAC and DAX have swooned by 5.8 percent and 6.0 percent.

The FTSE was boosted by a larger than expected upward revision to fourth quarter gross domestic product and by positive mining company forecasts. The index has gained 5.8 percent since February 5^th as companies including Barclays Plc and Royal Bank of Scotland Group Plc have reported better-than-expected results and have fed expectations that a global economic recovery will further fuel profits. Both the DAX and CAC however, have been hit by the turmoil surrounding Greece’s fiscal woes and weak sentiment.

On Tuesday, Bank of England governor Mervyn King told parliament that the country’s future growth depends on the world economy. That is why, despite consumer prices rising by 3.5 percent on the year — and above the BoE’s 2 percent inflation target — Mr King refused to rule out fresh quantitative easing. The current high inflation rate is the result of the recent increase in value-added tax and to a lesser degree, the high price of oil. Risks remain on the downside because of slowing growth. The fiscal deficit of nearly 13 percent of output must be reined in. The state, whose expansion prevented a fall into a long depression, will decline as a source of demand. Mr King said he was concerned that there was little evidence of a pick-up in the country's merchandise trade in spite of the pound’s weakness.

Asia/Pacific

Equities were mostly positive last week. And the four indexes that were down barely declined — they were down less than 0.25 percent each. For the month of February, the disparity between winners and losers was larger. The SET gained 3.6 percent on the month with the PSEi was up 3.1 percent. The biggest losers were the Taiex and Jakarta Composite, down 2.7 percent and 2.4 percent respectively. Despite the monthly decline, the Jakarta Composite is up 0.6 percent so far in 2010 and the only one of the indexes followed here to be in positive territory. The Hang Seng greeted the first trading week of the Year of the Tiger with an impressive 3.6 percent gain on the week and 2.4 percent increase in February.

Asian markets were shaken Thursday as possibile rating downgrades threatened to exacerbate the Greek debt crisis. This overshadowed positive U.S. results after Fed chairman Bernanke said that interest rates will be maintained at lower levels for an extended period. After fretting about the global recovery, Asian markets were boosted by better than expected Japanese data for retail sales and industrial production at week’s end. Retail sales were positive on the year for the first time in 17 months while industrial production was up for the 11^th consecutive month.

Several Asian countries are reporting unexpectedly strong growth for the fourth quarter of 2009. Malaysia reported growth of 4.5 percent when compared with the previous year. Hong Kong also beat forecasts with a 2.3 percent increase over the previous quarter. And Taiwan announced a jump of 9.2 percent from a year ago. The announcements followed reports from China (up 10.7 percent) and Japan (4.6 percent) triggering revisions in 2010 growth forecasts. The strong GDP rebound in the fourth quarter owed much to a big rise in exports as shipments to China soared.

Currencies

The euro was volatile last week — the currency was sold as new wrinkles in the Greek fiscal woes appeared while those of other countries on the periphery of the eurozone continued to pressure the currency. The currency was also weakened by a lower than expected Ifo confidence reading in Germany. However despite the intra-week gyrations, the currency ended with virtually no change (to up slightly) against the U.S. dollar but down against the yen for the week. The yen’s gains were broad-based as Japanese exporters sold euros over worries about Greece. Safe haven flows following disappointing U.S. data pushed the yen still higher.

Sterling was the big loser. News that business investment in the UK fell in the fourth quarter of 2009 at a record annual rate of 24.1 percent added to the pressure on the pound, which is also at a four-month low on a trade-weighted basis. Downbeat comments from BoE governor Mervyn King that implied quantitative easing could be restarted if economic conditions warrant also weighed on sterling.

Selected currencies — weekly results

Indicator scoreboard

EMU

M3 money supply for the three months to February was down 0.1 percent when compared with the same three months a year earlier. Annual growth in the key private sector lending counterpart dropped to minus 0.6 percent from minus 0.1 percent. The slowdown here reflected businesses where loans to non-financial corporations slipped from minus 2.2 percent in December to minus 2.7 percent. Slightly more promisingly, lending to households picked up to a 1.6 percent 12-month rate from 1.3 percent last time. Lending for house purchase was up 1.8 percent on the month after a 1.5 percent gain at the end of 2009. Even so, consumer credit growth dropped 0.3 percentage points to minus 0.3 percent.

January harmonized index of consumer prices was up 0.8 percent and 1.0 percent when compared with last year. Excluding food, drink, petroleum & tobacco, the ECB's preferred measure, annual inflation declined by 0.2 percentage points to just 0.9 percent. Similarly, the HICP excluding seasonal foods and petrol saw its 12-month rate ease 0.2 percentage points to 0.8 percent while just omitting unprocessed foods and petrol the rate eased 0.1 percentage points to 0.9 percent. Among the major categories, annual inflation increased sharply in energy (4.0 percent from 1.8 percent) which in turn prompted a spike in prices in the transport sector (4.9 percent from 3.5 percent). However, most other areas saw their respective annual rates edge a little lower in response to sluggish domestic demand and/or high levels of excess capacity.

EU

February economic sentiment edged down a notch to 95.9 from a revised 96.0 reading in January. It was the first decline since its upswing began in April 2009. In line with the composite measure, confidence was little changed in most of the major areas — industry morale actually edged up to minus 13 while the consumer sector went the other way, losing a point to minus 17. Services gained 2 points to plus 1 while construction was unchanged at minus 29. However, retail posted a 4 point drop to minus 9 but this may just reflect the effects of the bad weather. Among the larger EMU states performances were mixed, although there were no significant moves.

Germany

February Ifo sentiment index slipped to 95.2 from 95.6 in January. However, this was still its second highest level since the turnaround started in April 2009. The minor drop in February was wholly attributable to the current conditions sub-index which lost 1.4 points to 89.8, its lowest reading since November and its first decline since June 2009. Expectations on the other hand crept a little higher, up 0.3 points to 100.9. Relative weakness this month was mainly due softness in the retail and wholesale sectors. The former saw sentiment slump more than 9 points to minus 22 while the latter was down in excess of 3 points at minus 7.8. However, in part this may well simply reflect unusually bad weather so special care needs to be taken in assessing underlying conditions. Other areas fared rather better with services morale up 1.9 points to 6.9 while construction morale was up 3.3 points to minus 18.1. There was also a very modest 0.1 point gain in manufacturing to minus 6.4

Fourth quarter gross domestic product was unchanged on the quarter and down 2.4 percent on the year — changed from the earlier flash estimate. Domestic demand contracted a disappointingly steep 2.1 percent from the third quarter when it grew 1.3 percent. By contrast, a 3.0 percent jump in exports combined with a 1.8 percent slide in imports saw net exports add 2 percentage points to quarterly growth having subtracted 0.6 percentage points last time. Within domestic consumption, the key private consumption component matched its third quarter performance with another 1.0 percent decline. This was compounded by a 0.7 percent drop in investment, reflecting a 1.5 percent contraction in equipment spending and a 0.5 percent drop in construction. The slide in total investment almost wiped out its 0.9 percent increase in the previous period. Government spending declined 0.6 percent on the quarter after a 1.2 percent advance in the third quarter. Just about the only good news was a sharp unwinding of business inventories. Overall de-stocking subtracted 1.2 percentage points from the bottom line, eroding much of the build-up (1.5 percent of GDP) seen in the third quarter.

February unemployment rate edged up to 8.2 percent. The jobless count was up by 7,000 for the month which took the total number out of work to 3.4333 million. Vacancies slipped 4,000 following a 2,000 increase in January, its first negative reading in the last five months. With government work schemes starting to draw to a close and many firms still reporting high levels of excess capacity, it seems likely that further increases in unemployment will be seen over coming months.

France

January consumption of manufactured goods sank 2.7 percent but was up 1.5 percent on the year. Much of January's weakness had to do with the auto sector where the expiration of government support programs contributed to a 16.7 percent monthly slump. The drop here followed increases of 10.7 percent and 5.3 percent in November and December respectively. By contrast household durables were robust, up 1.3 percent following December's modest 0.3 percent slide. Textiles also fared well, building on a year-end increase of 2.0 percent with another solid 1.6 percent advance.

January producer price index was up 0.7 percent and was up 0.4 percent on the year. The January spike was primarily the result of a steep increase in the price of fuel. The cost of coking & refining products surged 6.1 percent from December and 32.2 percent on the year and dominated the change in the headline PPI. However electrical equipment, information & technology gained 0.6 percent, food, drink & tobacco along with the other industrial products category were up 0.4 percent. Utilities' prices were down 0.2 percent on the month and were down 1.7 percent from a year ago while overall manufacturing prices were up 0.8 percent from December and 0.7 percent from January 2009.

Italy

December retail sales were unchanged for the third month in a row but were down 0.4 percent on the year. For 2009 as a whole, purchases fell 1.6 percent, their worst performance since the data were first compiled in 2001. In December, food purchases dropped 0.5 percent while non-food purchases edged up 0.3 percent. On the year, sales were up 6.7 percent for magnetic media & music followed by electrical equipment which was up 5.4 percent. Clothing was up 3.3 percent and games gained 3.4 percent. However, gains here only weighed against declines in footwear, leather goods & travel (down 2.5 percent), pharmaceuticals (down 1.3 percent) and stationery (down 1.4 percent).

January producer price index was up 0.6 and down 0.3 percent on the year. Energy prices, up 2.4 percent from December, dominated the headline advance. Intermediates were up 0.5 percent while capital goods prices edged up just 0.1 percent on the month. Consumer goods were unchanged as a 0.5 percent rise in durables was offset by a 0.1 percent drop in nondurables.

United Kingdom

Fourth quarter gross domestic product was revised upward to 0.3 percent from its surprisingly low provisional estimate of 0.1 percent. However, on the year GDP was down 3.3 percent. From the production side, the revisions reflected larger gains in both industrial output and services. The former was revised to show a quarterly increase of a 0.4 percent (previously 0.1 percent) while service sector activity is now put at up 0.5 percent (previously 0.1 percent). Stronger performances here were only partially offset by a hefty downward adjustment to construction to a decline of 1.0 percent from unchanged. On the expenditure side, household spending was up 0.4 percent compounded by a 1.2 percent increase in general government final expenditure. However, gross fixed capital formation slumped a further 3.1 percent. As a result, total domestic expenditure, which grew 0.5 percent on the third quarter, would have negative but for inventories which added 0.5 percentage points to the bottom line. Net exports subtracted 0.2 percentage points from the quarterly rate.

Asia/Pacific

Japan

January unadjusted merchandise trade surplus was ¥85.2 billion and a vast improvement from last year’s record deficit of ¥956 billion. This was the 12th consecutive surplus. Exports were up 40.9 percent on the year while imports were up 8.6 percent. For exports, it was the second increase in a row but for imports it was the first increase in 29 months. Exports to the U.S. were up 24.2 percent while imports increased by 7.8 percent on the year. Exports to the EU were up 11.1 percent but imports from there declined by 1.3 percent. Exports to Asia leapt 68.1 percent while imports were up a modest 5.6 percent on the year. On a seasonally adjusted basis, the trade surplus was ¥728.4 billion after recording a ¥655.9 billion surplus in December. January’s surplus was the 10th in a row. Exports were up 8.6 percent on the month while imports gained 8.2 percent.

January consumer price index was down 0.2 percent and down 1.3 percent for the 12^th consecutive decline on the year. Core CPI which excludes fresh food sank 0.6 percent on the month and was down 1.3 percent for the 11^th straight drop on the year. The biggest declines were for fuel, light & water, which plunged 5.8 percent on the year followed by furniture & household utensils, down 5.5 percent. Food prices swooned 1.9 percent on the year. A second core CPI which also excludes energy dropped 0.8 percent on the month and 1.2 percent on the year.

January industrial production was up a greater than expected 2.5 percent and is now up 19.8 percent on the year as the recovery in exports continues. It was the eleventh monthly increase in a row. The industries that contributed to the increase were transportation equipment, chemicals excluding drugs and fabricated metals. Commodities that were up included large passenger cars, drive, transmission & control parts and bearings. According to METI, production is expected to decline by 0.8 percent in February but rebound 1.6 percent in March.

January retail sales were up 2.6 percent when compared with last year. This was the first increase since August 2008. A reason for the increase was the 12.9 percent jump in auto sales after December’s increase of 14.5 percent. However, with government initiatives winding down the strength of sales going forward is not a certainty. Large retail store sales were down 4.6 percent on the year.

Bottom line

The Greek fiscal crisis continues to addle investors. So-so economic data are worrisome as is waning sentiment in both Europe and the U.S. While U.S. fourth quarter GDP was revised upward slightly, housing data were distinctly negative. German data showed no growth in the quarter.

Investors will have plenty of new information to absorb next week. There are central bank meetings in Canada, Australia, the UK and the EMU. The Reserve Bank of Australia could increase its interest rate for the fourth time in this cycle to 4 percent. The Banks of Canada and England along with the European Central Bank are expected to leave their interest rates unchanged. And there will be plenty of new data that should give an indication of just how growth is progressing in the first quarter of 2010.

Looking Ahead: March 1 through March 5, 2010

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