Global Markets

The new quarter began on an upbeat note as the PMI indexes for manufacturing improved worldwide. For most equity markets, it was a shortened trading week in which trading was somewhat tentative in nature as investors squared positions for the end of the quarter while in Japan, March 31 marked the end of the fiscal year. However, investors in Europe and North America were left somewhat up in the air. With the U.S. employment situation report released on Friday when most markets were closed, investors have little recourse but to wait until Monday to trade on the news. This too is complicated given the Easter Monday holiday in many countries when markets will be closed as well.

After a dreadful January and mixed February, equities righted themselves in March. All indexes in Europe, the UK and North America were up on the quarter. In the Asia/Pacific region however, earlier losses especially in January could not be overcome despite impressive March gains. The Shanghai Composite, Hang Seng, STI and Taiex were down for the quarter. All indexes followed here were up last week and for the month of March.

The gains by equities were impressive despite the many headwinds that faced investors. And lingering sovereign debt fears were overcome by better than expected economic data. However, the worries have characterized the quarter are still affecting sentiment. Of more immediate concern, perhaps, is the market’s need for confirmation that the year long rally is not assuming a rosier economic scenario than is the case.

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC were up for the fourth consecutive quarter gaining 4.9 percent, 3.3 percent and 1 percent respectively. Within the first quarter, all three declined in January but the FTSE recovered in February and roared ahead in March. The DAX and CAC were down the first two months of the year but bounced back vigorously in March. The 4.9 percent gain for the FTSE was its best start to a new year since 2006.

And to begin the new quarter, the FTSE climbed to its highest level since June 2008 on Thursday thanks to strong showings across Asian markets and encouraging manufacturing reports worldwide. Not to be outdone, the DAX and CAC both hit 18 month highs for the same reasons. And the indexes got a renewed lift during the trading day Thursday after the U.S. ISM said that manufacturing had expanded at its fastest pace in more than five years.

Despite the exuberance of equity investors, many problems remain especially those regarding sovereign debt, uncertainty surrounding the general election in the UK and the pace of economic growth. Today’s sobering note in Europe was the decline and continued weakness in German retail sales. And with the slow recovery there has been even slower improvement in employment.

Asia/Pacific

Most Asian/Pacific equity indexes continued their streak of winning quarterly results. However, the Hang Seng, Shanghai Composite, STI and Taiex were down in the quarter just ended after three consecutive quarterly gains. Gains ranged from a heady 7.8 percent for the Topix and 7.3 percent for the SET to a bare 0.2 percent for the All Ordinaries and 0.4 percent for the Sensex. All indexes in this region were up in March with the Nikkei, Topix and SET rising by more than 9 percent. On the week, all except the PSEi were up.

The Nikkei and Topix ended the fiscal year on March 31 on an upbeat note. For the fiscal year 2009, the Nikkei was up 36.8 percent while the Topix was up 26.5 percent. On Tuesday, the Nikkei ended trading above the 11,000 level for the first time since October 2008. And on Thursday, the all important Tankan survey of business sentiment showed improvement for the fourth consecutive quarter for both large and small manufacturers. And the yen continued to ebb lower, boosting exporters’ spirits.

Currencies

The dollar was down last week as both the pound sterling and euro gained on better than expected economic news. In the UK, fourth quarter GDP data were revised upward for the third time while in EMU, better than anticipated manufacturing PMI numbers heightened growth expectations. However, on the downside was the decline yet again in German retail sales and continued concerns about the eurozone’s fiscal position in the light of the previous session’s sell-off in Greek bonds.

The U.S. dollar swooned against most major currencies Wednesday after a weak ADP employment report fueled concerns about Friday’s employment situation report. Lingering weakness in the jobs market has been a factor in prolonging the housing slump and has impeded a sustained recovery for the broader economy.

The yen fell to a three month low against the dollar Wednesday on disappointing industrial production and spending data. Traders said the yen was also undermined by the prospect of increased capital outflows as the new fiscal year began and new investment strategies were implemented by Japanese companies.

The dour data heightened expectations that monetary conditions here would remain loose for the foreseeable future in contrast to the U.S. where Treasury yields have risen in recent weeks. As a result, the yen dropped against the dollar as the prospect of low interest rates for an indefinite period of time has improved its relative attractiveness as a funding currency for carry trades.

According to the Finance Ministry, the Japanese monetary authorities have not intervened in the foreign exchange markets for six years — the longest on record. The last time the ministry stepped into the markets via the Bank of Japan was on March 16, 2004. After the yen hit a 14 year high against the U.S. dollar late last year, speculation was rife that the new Democratic Party of Japan government might intervene to help protect the Japanese economy from further deterioration. A strong yen hurts exporters, the main drivers of the economic recovery — it makes their products more expensive abroad and erodes their overseas profits when they are repatriated. Japan's currency policy is controlled by the Finance Ministry with the BoJ acting as its agent.

In thin markets Friday, the dollar was up against all major currencies after the U.S. employment report showed positive employment gains and the prior two months were revised to show improvements there as well.

Selected currencies — weekly results

Indicator scoreboard

EMU

March EC economic sentiment index edged up to 97.7 from 95.9 in February. Industrial confidence climbed to minus 10 while consumer confidence remained unchanged at minus 17. Retail confidence advanced by 2 points to minus 6 while morale in construction was up 3 points to minus 25. Sentiment in services was unchanged. Regionally there were modest gains in France (1.4 points to 99.6), Germany (3.4 points to 100.4) and Spain (1.4 points to 91.5). However, by contrast Italy saw sentiment slip 1.5 points to 98.2.

March harmonized index of consumer prices was up 1.5 percent on the year after climbing 0.9 percent in February and at its fastest pace since December 2008. The pick-up in inflation has been prompted in no small way by a sharp acceleration in Germany where the annual HICP rate jumped 0.8 percentage points to 1.3 percent. However, provisional data here suggest that the increase was largely due to oil and seasonal foods in which case implications for the core rate should be only minor.

February joblessness rose a further 61,000 to nudge the unemployment rate to 10.0 percent from 9.9 percent in the previous month. National unemployment rates rose another 0.1 percentage point in both France (to 10.1 percent) and Spain (19.0 percent). However, job losses are slowing and the 61,000 lost positions in February was down from the 105,000 drop posted at the start of the year. This was reflected in Germany and Italy where jobless rates held steady on the month at 7.5 percent and 8.5 percent respectively.

March manufacturing PMI was revised up from the flash estimate of 56.3 to 56.6, its best reading in nearly four years. Germany was largely responsible for the modification with its own national index adjusted up 0.6 points from the provisional figure and 3 points from February to stand at a very healthy 60.2 and its highest level since April 2000. All the other larger EMU states similarly posted respectable improvements — the French index rose 1.6 points to a 40-month high of 56.5, the Italian index climbed 2.1 points to 53.7 for its best reading since June 2007, and the Spanish index gained 2.7 points to 51.8 for its best performance since August 2007. In terms of the eurozone as a whole, output and new orders both increased for the eighth successive month and at their fastest rates since June 2006 and June 2000 respectively. The capital and intermediate sectors seem to have performed especially well. At the same time, the new orders–to-inventory ratio climbed to just short of its record high, boding well for future output gains. About the only disappointing aspect of the survey was employment, which fell for the 22nd month in a row. However, even here the decline was at the slowest rate since August 2008.

Germany

March unemployment dropped 31,000 to reduce the jobless rate to 8.0 percent from 8.1 percent in February. Total unemployment stood at 3,382,000 in March. However, the headline figures are somewhat misleading, being biased down by a statistical distortion that lowered the number out of work by around 33,000. Excluding this special factor, the jobless total would have risen 1,400. Vacancies were up 6,000 after a smaller revised 3,000 decline in February. And lagging employment data showed a 7,000 monthly increase in February, the third consecutive gain and the fourth month in which payrolls have not fallen.

February retail sales were down 0.4 percent and were down 0.9 percent when compared with last year. Food, alcohol & tobacco sales increased 0.4 percent while non-food sales were 1.5 percent lower on the year. The unusually bad weather which affected much of Europe during the month almost certainly had some negative impact so it is probable that household spending was rather more robust than the headline figures suggest. According to recent Ifo surveys morale in the retail sector has improved significantly since the end of last year. Nonetheless, consumers clearly remain very cautious.

France

Fourth quarter gross domestic product was up 0.2 percent and down 0.3 percent on the year in line with the earlier flash estimate. There were a few minor revisions to the components. Household consumption was up 1.0 percent on the quarter (originally up 0.9 percent) while fixed investment shrank 1.3 percent (originally down 1.2 percent). Public sector spending growth was unrevised at 0.7 percent and inventory accumulation added a full percentage point to the bottom line (0.9 percentage points). The main change was to exports where the previous 0.5 percent quarterly advance was reduced to unchanged. With import growth adjusted just a tick weaker to 3.2 percent, net exports now subtracted 0.8 percentage points from growth versus 0.7 percentage points last time.

February producer prices edged up 0.1 percent and were up 1.0 percent when compared with last year. Oil prices were, once more, instrumental to the performance of the headline index with a 0.3 percent increase on the month constituting the strongest advance of any single category. The other industrial products sector saw prices rise 0.2 percent but most other areas registered either minimal gains or declines. Technology & machines were the weakest with prices down 0.4 percent from January. Overall manufactured goods prices climbed 0.1 percent on the month and were still down 1.4 percent on the year. Domestic producer price weakness contrasted with the import sector where prices jumped 0.7 percent on the month and 3.5 percent on the year.

Italy

February producer prices edged up 0.1 percent and were 0.4 percent higher on the year — the first positive annual rate since November 2008. Prices fell in a number of areas and the most significant boost to the headline index came from the energy sector where prices were up 0.6 percent on the month. Other smaller gains were seen in durable consumer goods (0.5 percent) and capital goods (0.4 percent). Weaker prices were witnessed in consumer nondurables (down 0.7 percent), which proved sufficient to ensure a 0.1 percent slide in overall consumer goods. Intermediates drooped by 0.2 percent.

United Kingdom

Fourth quarter gross domestic product growth was revised upward to 0.4 percent on the quarter from 0.3 percent in the previous estimate. However, on the year, GDP was down 3.1 percent. Among the major expenditure components, the latest change reflects a smaller revised drop in fixed investment, now down 2.7 percent against the previously reported 3.1 percent decline. Household spending was up an unchanged 0.4 percent from the third quarter while the advance in government final consumption was reduced to 1.0 percent from 1.2 percent. Total domestic demand increased by 0.8 percent on the quarter but was still down some 2.7 percent on the year.

Asia/Pacific

Japan

February retail sales jumped a much more than expected 4.2 percent when compared with last year. January’s retail sales were revised to an increase of 2.3 percent from the original estimate of 2.6 percent. February’s increase was the second consecutive gain in a row after sinking for 16 months in a row. However large retailers continued to see sales swoon. In February they were down 4 percent. Retail sales have improved thanks to government programs that provide incentives to consumer purchases.

February industrial production dipped 0.9 percent but was 31.4 percent above last year’s depressed level. This was the first monthly decline after 12 consecutive increases. Transport equipment, other manufacturing and information & communication electronics equipment declined. Commodities that contributed to the decrease included electronic & electric toys, active matrix LCDs (Liquid Crystal Devices) and large & small passenger cars.

February unemployment rate was unchanged at 4.9 percent. Employment declined by 25,000 on the month after increasing by 54,000 in January. The number of unemployed persons was 3.24 million, an increase of 250,000 or 8.4 percent from the previous year. The number of employed persons was 61.85 million, a decrease of 800,000 or 1.3 percent from the previous year.

February household spending slipped 0.5 percent on the year. Major categories were mixed. Leading the decline were education which was down 6.7 percent and transportation & communication which dropped by 6.3 percent. However furniture & household utensils gained 18.2 percent while the clothing & footwear category was up 6.1 percent.

The first quarter Tankan reading for large manufacturers was minus 14, an improvement from December’s minus 25. The small manufacturer reading improved to minus 30 from minus 41. Nonmanufacturing readings also improved. Large enterprises improved to minus 14 from minus 21 while small enterprises improved more modestly — to minus 31 from minus 34. The results for CAPEX or capital expenditures improved as well. In the first estimates for FY2010, overall CAPEX is forecast to be down 3.9 percent on the year after sinking 17.8 percent in FY2009. The outlook for CAPEX improved the most as would be expected with large enterprises given the improvements in merchandise trade — manufacturing expects to ease by 0.9 percent while nonmanufacturers will edge down 0.2 percent. At the other extreme are small enterprises which rely mostly on domestic demand. Manufacturing there expected CAPEX to drop by 17.9 percent after sinking 31.9 percent in FY2009 while nonmanufacturing is expected to decline by 19.9 percent after dropping 23.5 percent the year before.

Australia

February retail sales dropped 1.4 percent on the month after rising 1.1 percent in January. Analysts had expected an increase of 0.9 percent. Sales were up 3.4 percent on the year. Department store sales and clothing, footwear & other personal accessories sales both swooned 3.9 percent. Food retails dropped 1.7 percent while household goods sank 1.3 percent and other retailing dropped 0.8 percent. However sales were up 1.8 percent in cafes, restaurants & takeaway food services.

February merchandise trade deficit ballooned to A$1.9 billion from A$1.1 billion in January. Exports slumped 1.4 percent while imports were up 2.4 percent. Exports of nonmonetary gold plunged 28 percent. Rural goods exports were up 2 percent while services edged up 1 percent. Non-rural goods were only slightly lower than the month before. On the import side, consumption goods were up 5 percent while nonmonetary gold was up 33 percent. Capital goods edged up by 2 percent and services climbed by 3 percent. Intermediate and other merchandise goods were down 1 percent.

Americas

Canada

February industrial product prices were unchanged from their January level and down just 0.6 percent on the year. Without exchange rate effects, the IPPI would have declined 0.3 percent on the month. Prices would have been rather firmer but for a 1.2 percent monthly drop in the cost of petroleum and coal products. Excluding this sector, the IPPI rose 0.2 percent from the start of the year and was off nearly 3 percent from February 2009. The strongest monthly gains were registered by lumber & wood products (1.7 percent) and pulp & paper products (1.0 percent) but motor vehicles & other transport (0.9 percent) also posted a strong gain. Weakness was most apparent in primary metals where prices fell some 2.1 percent on the month. The only other declines outside of energy were seen in miscellaneous non-manufactures (3.4 percent), fruits & vegetables (0.3 percent) and miscellaneous manufactures (0.2 percent). February raw material price index jumped 0.4 percent on the month, a gain largely attributable to a 2.0 percent advance in mineral fuel prices. Annual growth in the RMPI was a hefty 27.8 percent. Without the impact of minerals, the RMPI would have fallen 1.1 percent from January and risen a much smaller 6.8 percent from a year ago. Within the RMPI the steepest single rise in prices occurred in ferrous metals (4.6 percent) which easily outpaced animals & animal products (0.8 percent), vegetable products (0.2 percent) and non-metallic minerals (0.1 percent). The only decline in prices was in non-ferrous metals where charges tumbled 4.6 percent.

January monthly gross domestic product was up 0.6 percent and 1.3 percent on the year. January was the fifth consecutive month of positive growth and was led by a 1.3 percent jump in output from the goods producing sector. Within this, manufacturing surged 1.9 percent and was assisted by a 1.7 percent jump in the construction sector. Mining & oil & gas extraction also rose a significant 0.9 percent leaving agriculture, forestry & fishing to post the only decline (0.8 percent). Services output expanded a more modest 0.4 percent on the month, mainly thanks to sizeable contributions from wholesale trade (2.9 percent), retail (0.8 percent) and transport & warehousing (0.7 percent). Smaller advances were seen in information & culture (0.4 percent) and education services (0.2 percent). On the downside within services, activity contracted in accommodation & food (0.4 percent), administrative & waste management (0.3 percent) and in the other services area (0.1 percent).

Bottom line

Economic data last week were mostly positive with manufacturing as measured by the PMI indexes gaining worldwide. Japan’s Tankan showed improved sentiment for the fourth quarter but industrial production disappointed. In the U.S. the employment situation report was mostly positive although it was not quite as optimistic as analysts’ expectations.

This week brings a plethora of central bank meetings. Opinions are mixed on whether the Reserve Bank of Australia will once again increase its cash rate target after increasing it to 4 percent at its last meeting on March 2 — the fourth in the last five meetings. The Bank is almost certain to continue tightening but timing and speed are uncertain. The Bank of Japan is expected to leave its policy rate unchanged next week at 0.1 percent. With the recovery notably uneven and deflation well entrenched, it is unlikely to hike rates for the foreseeable future.

The Bank of England is expected to leave its official bank rate at 0.5 percent and its asset purchase target at £200 billion. The economy has barely exited recession and the recovery is expected to be very gradual. Although inflation is high the BoE believes this reflects transitory factors and expects inflation to fall below target over the medium term. The European Central Bank is also expected to leave its policy interest rate unchanged at 1 percent. The recovery is sluggish, inflation is well below its 2 percent threshold, and broad money growth has stalled. The fragile fiscal situation among many euro area economies may also keep the Bank on watch for downside risks.

Looking Ahead: April 5 through April 9, 2010

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