Global Markets

Equities seesawed through the week. On one day investors, buoyed by earnings, set aside risk and on the next fretted about sovereign debt. Investors have been spoiled for much of the first quarter earnings season. Companies from a range of sectors have beat expectations and reinforced the belief that the global economic rebound is here to stay. On Thursday, however, there were some disappointing earnings reports that shook confidence. And strong reports on Europe’s manufacturing and service sectors were trumped by heightened worries about Greece. The mood darkened after another plunge in the price of Greek sovereign bonds as investors feared default. The yields on 2-year notes at one point pushed above 10 percent after Moody’s again downgraded Greek debt.

The Bank of Canada left its key policy interest rate unchanged while the Reserve Bank of India increased its policy rate for the second time in a month. The Swedish Riksbank is preparing to increase rates while the Reserve Bank of Australia remains hawkish. And in China, authorities are increasingly frustrated by speculative excess.

The IMF revised its forecasts upward for 2010 global growth to 4.2 percent and 4.3 percent in 2011 noting that the recovery, though unsynchronized, has been faster and stronger than expected. The forecast of 4.2 percent by purchasing power parity is more than one percentage point higher than its October 2009 forecast, reflecting upward revisions in most economies, especially the U.S., EU and emerging market economies. Advanced economies will underperform but emerging and developing economies, outside of emerging Europe and the CIS, will recover more strongly. However, the IMF thinks that global restocking will account for a significant portion of growth, which may prove temporary.

On the week, equities were mixed. Five of 13 indexes were up in Asia while only the DAX was up in Europe. All five North American indexes were up on the week.

Global Stock Market Recap

Europe and the UK

On Friday, Greece gave in to what many market participants had say was the inevitable — the Greek Prime Minister George Papandreou formally requested activation of the EU/IMF rescue plan. The prime minister said that the two waves of austerity measures introduced by the government over the past few months had failed to convince the markets that Greece would get its finances under control or be able to avert defaulting. He added that by requesting the aid, it “will send a strong message to the markets that the EU is not playing their game and will not leave its currency at risk.” The announcement means that money from the IMF can be expedited once the board of the fund has approved the terms. The fund is expected to provide €12 billion, according to EU officials.

The announcement helped lift stocks in Europe and the UK after they swooned on risk aversion in previous days. However Friday’s rally did not prevent the FTSE and CAC from ending the week lower. The DAX, however, did manage to gain on the week.

Equities drooped Thursday after Eurostat said that Greece's budget deficit in 2009 was larger than previously forecast and Nokia reported first quarter profit that missed analysts' estimate. Greece's budget deficit was 13.6 percent of the gross domestic product in 2009, bigger than the previous estimate of 12.7 percent. A year ago, the country had a deficit of 7.7 percent of GDP.

Lost in the concerns about Greece was a spate of new economic data that show overall improving conditions. Both the ZEW and Ifo surveys in Germany were up more than expected for example. And flash PMI surveys indicated that both services and manufacturing industries expanded more than anticipated in April as an export-led recovery prompted companies to step up production.

Bank of England releases minutes

In minutes released for the April 8^th meeting, the monetary policy committee appeared relatively optimistic about the prospects for growth in the first quarter. The committee said that the climb out of recession that began in the final quarter of last year looked likely to have continued into 2010 in spite of the withdrawal of government stimulus measures and a harsh snowy winter. As expected, the committee voted unanimously to keep interest rates at 0.5 percent and not to extend the £200 billion already pumped into the economy via its quantitative easing program. But the committee reiterated its increased concern over the strength of inflation in spite of the still depressed economy. Inflation expectations had nudged upwards, after oil and some other commodity prices rose substantially during the previous two months.

The MPC remains concerned about the threats to growth emphasizing the surprisingly limited support that international trade is offering to the economy in spite of a plunge in the pound sterling. Net trade subtracted 0.5 percentage points from growth in the last six month of 2009 — imports picked up more quickly than exports.

Asia/Pacific

Most equity indexes in this region slumped last week with only five of 13 indexes gaining. The Shanghai Composite sank 4.7 percent while the Hang Seng was down 2.8 percent as Chinese authorities continued to clamp down on the rampaging property sector.

The week began on a negative note. Over the weekend, the Chinese State Council told banks to stop loans for third home purchases in regions with excessive property price gains and to deny mortgages to homebuyers who cannot provide proof of local residence. Local governments have also been given discretion to limit the number of homes that can be bought within a certain period. Chinese stocks suffered their sharpest drop in almost eight months as a result of the government’s toughest steps yet to crack down on property speculation. The Shanghai Composite tumbled 4.8 percent.

But there were other downward pressures as the week began as well. Markets here plunged sharply on concerns about SEC's fraud investigation into Goldman. The Goldman announcement had been made on the previous Friday after markets were closed for the week in Asia. This pulled equities lower as did uncertainty over European flights following Iceland's volcanic eruption. In Hong Kong, stocks plunged following the Goldman charges. And of course the worries about Greece continued to influence risk takers.  

Reserve Bank of Australia minutes

The Reserve Bank of Australia’s minutes of the April 5^th monetary policy meeting noted that with forecasts suggesting that 2010 domestic economy growth would be around trend and that inflation would be around 2.5 percent — consistent with the medium term inflation target — interest rates would be expected to be close to average. Since lending rates were still a little below average, members expected that they would probably need to increase rates further in the period ahead. The Board concluded that the prospective rise in the terms of trade was now likely to be noticeably stronger than had been expected. And this was a factor suggesting that it might be prudent not to delay the rate adjustment. Members said that the economic outlook suggested that there was a case for a further step in the process of returning interest rates to more normal levels. They voted to increase the policy cash rate to 4.25 percent.

In a speech on Friday, RBA governor Glenn Stevens said the Bank is balancing the risk of faster inflation against keeping borrowing costs close “to normal” and renewed concern about Greek sovereign debt. He suggested that lending rates are already close to average and suggested that the first quarter CPI report that will be published this week will be a key factor in helping policy makers decide on their next move.

Reserve Bank of India

The Reserve Bank of India increased interest rates for the second time in a month and told lenders to set aside more cash as reserves as the Bank continues to try to slow the fastest inflation among Group of 20 nations. The RBI boosted the three policy rates by 25 basis points. Governor Duvvuri Subbarao said that while inflation is worrisome, “supportive liquidity conditions” are needed to help the government sell more debt. With the increases, the reverse repurchase rate is 3.75 percent, the repurchase rate is 5.25 percent with the cash reserve ratio at 6 percent. The action comes after consumer prices paid by industrial workers soared by 14.9 percent in February from a year earlier.

Canada

The Bank of Canada left its key interest rate at 0.25 percent for the 12^th month as expected. Many analysts expect the BoC to increase rates at either the June 1^st or July 20^th meeting, but the Bank left markets guessing which it might be. In its last interest rate statement on March 2^nd the Bank said rates would stay on hold until July unless the current inflation outlook shifts. The statement was omitted from last week’s post-meeting statement. The Bank has an inflation target range of 1 percent to 3 percent with a focus on the midpoint. March’s CPI (which was released after the meeting) was up a benign 1.4 percent on the year while the BoC's measure which excludes eight volatile items was up 1.7 percent.

The economy is growing with monthly GDP increasing for the five months through January and the important trade balance is once again in surplus. In its statement, the Bank said that the need for extraordinary monetary stimulus is passing and it dropped its pledge to hold its current policy rate of 0.25 percent through June given better than expected growth. The Bank also said that interest rate increases depend on the future inflation outlook. It now expects core inflation to ease in the second quarter. On the down side, the Bank pointed to the strong Canadian dollar, weak U.S. demand and low productivity in the major economies. The Bank said the extent and timing of monetary tightening would depend on the outlook for economic activity and inflation.

On Thursday, the BoC released its monetary policy report and, as signaled in Tuesday's monetary policy press statement, the new MPR shows a more upbeat near-term outlook for the Canadian economy. As a result of this change of view, the BoC is no longer prepared to stand by its previous conditional commitment to keep the overnight target interest rate unchanged until the third quarter. Real GDP growth is now put at a seasonally adjusted annualized 5.8 percent in the quarter just ended, up significantly from the 3.5 percent printed in the January MPR. However, growth in the current quarter has been shaded from 4.3 percent to 3.8 percent and in the third quarter from 4.0 percent to 3.5 percent. Calendar year growth in 2010 is estimated at 3.7 percent and in 2011 at 3.1 percent.

The revised outlook for consumer prices shows a higher profile, but this in large part reflects the incorporation for the first time of the harmonized sales tax (HST), scheduled for implementation in July. Total annual CPI inflation is now forecast to accelerate from 1.7 percent in the second quarter to 2.4 percent in each of the next three quarters before returning to its 2 percent target rate by the second half of 2011.

Currencies

The euro was pummeled last week as investors focused on Greece once again. The euro fell below the $1.32 level in early Asian trading Friday (local time) but recovered and continued to rise to $1.3359 after the Greek government asked for help. The impetus for the plunge came from many sources — comments from Dominique Strauss-Kahn, IMF managing director, and an upward revision of Greece’s 2009 fiscal deficit which led to fears that the country would not be able to service its debt. And Moody’s downgraded the country’s sovereign rating and said that it might lower it further citing rising borrowing costs. Strauss-Kahn said that there was no silver bullet to solve the Greek budget deficit. He added to fears that the eurozone would struggle to resolve the fiscal crisis. Later, the currency was helped by better than expected German sentiment according to the Ifo.

While most of the pressure on China to begin appreciating its currency has come from the U.S., other developing countries are also beginning to be restive over the renminbi’s value. Indian and Brazilian central bank presidents have made the most forceful statements yet about the case for a stronger Chinese currency. And Lee Hsien Loong, Singapore’s prime minister, added that it was “in China’s own interests” with the financial crisis over to have a more flexible exchange rate.

Selected currencies — weekly results

Indicator scoreboard

Germany

March producer price index jumped 0.7 percent on the month and was down 1.5 percent on the year. Higher fuel costs contributed to the increase. Fuel costs were up 1.6 percent on the month but were still 5.5 percent lower than a year ago. Excluding energy, the core PPI was up 0.3 percent on the month, less than half the headline rate. Prices were mixed among the other major product sectors. The most significant gain was in basics which registered a 0.9 percent advance in February, but capital goods were up just 0.1 percent. Moreover, prices in the consumer goods category were off 0.1 percent on the month as a 0.5 percent decline in nondurables more than offset a 0.1 percent increase in durables.

April ZEW current conditions index rose a very solid 12.7 points to minus 39.2, while expectations were up 8.5 points at 53.0. The pick up in the current conditions measure was the largest monthly gain since January 2006 and constituted the 11th consecutive advance. Meanwhile, the bounce in expectations was the first gain of any size since the reversal that began in October last year. The latest improvement in analysts' assessments underlines the importance of the export sector which is seen as a lynchpin for sustained economic recovery over the rest of the year.

April Ifo business sentiment index climbed an impressive 3.4 points to 101.6. The gain reflected advances in both the current and expectations components. The former was particularly robust, up nearly 5 points at 99.3 while the latter rose 2 points to 104.0. The pick-up in economic activity was broad-based. Manufacturing confidence jumped nearly 8 points to 7.5 and increased from 9.8 to 15.0 in services. There were also sharp gains in retail (minus 3.7 from minus 12.3) and wholesale (5.0 from minus 3.7). The only sector to see a weakening in morale was construction, which slipped 1.4 points to minus 15.4.

France

March manufactured goods consumption jumped 1.2 percent and was up 2.5 percent on the year after having fallen sharply in both January and February. However, the March spurt still left sales for the quarter down 1.9 percent on the previous period when they were up 3.2 percent. March alone saw gains in all of the main expenditure categories. Textiles were up 3.5 percent while auto purchases were up 1.4 percent, household goods 0.9 percent and other products 0.4 percent.

Italy

February retail sales edged up 0.1 percent and were down 0.4 percent on the year. January sales were revised to a declined of 0.5 percent rather than the initially reported 0.1 percent increase. Food sector sales were up 0.3 percent. However, other sales were flat. The ongoing weakness of consumer spending is consistent with the recent declines posted in the ISAE consumer confidence surveys.

United Kingdom

March consumer price index was up 0.6 percent and up 3.4 percent when compared with last year. Higher fuel prices — the average cost of a liter of petrol hit a new record during the period — had the largest single impact on the headline rate. The jump here was responsible for annual inflation in the transportation sector surging to 11.1 percent, also an all time high. Prices for housing, utilities & fuel were up only 0.1 percent on the year. Annual inflation also accelerated significantly in the food & non-alcoholic drinks sector (2.1 percent from 1.3 percent) and in alcohol & tobacco (4.7 percent from 4.2 percent). At the same time deflation in the clothing area became less entrenched (minus 2.6 percent from minus 3.3 percent). Gains elsewhere were less significant although the 12-month rate in communications was up 0.3 percentage points to 4.9 percent. Core CPI was up 0.5 percent on the month and 3.0 percent on the year.

March claimant count unemployment declined by 32,900 and enough to lower the claimant jobless rate to 4.8 percent from 4.9 percent. The drop in the March claimant count followed a steeper revised slide of 40,100 in mid-quarter for the largest fall since June 1997. However, the supposedly more reliable but lagging ILO figures tell a rather different story. On this basis, joblessness rose 43,000 in the three months to February. This pushed the unemployment rate up 0.2 percentage points to 8.0 percent. It may be that this measure has yet to catch up with its claimant count counterpart but, if nothing else, the figures provide reason for caution. Annual average earnings growth in the three months to February jumped 1.5 percentage points to 2.3 percent and mainly reflected hefty bonus payments in the private sector where the headline rate jumped nearly 2 percentage points to 1.8 percent. Pay growth in manufacturing climbed 1.3 percentage points to 4.4 percent while service sector earnings accelerated from 0.5 percent to 2.0 percent. Excluding bonuses, overall earnings growth was 1.7 percent, up just 0.2 percentage points from the previous period and still historically very soft.

March retail sales were up 0.4 percent and 2.2 percent from last year. This followed a stronger revised 2.5 percent monthly advance in mid-quarter. Excluding fuel, sales were weaker still, up just 0.2 percent on the month for a 4.0 percent annual gain. The March increase reflected a meager 0.1 percent monthly rise in food purchases and a 0.3 percent increase in non-food sales. Within the latter, non-specialized store sales were up a solid 1.5 percent from February and the other stores category was not far behind with a 1.1 percent gain. However, non-store retailing edged up just 0.3 percent and the clothing & footwear sector saw sales slump 1.1 percent. Fuel demand rose 2.5 percent.

First quarter preliminary gross domestic product was up 0.2 percent and down 0.4 percent when compared with last year. This estimate shows that the relative softness was largely due to weakness in services, where output grew just 0.2 percent. By contrast, industrial production was up 0.7 percent. Within services, a 0.7 percent quarterly contraction in distribution, hotels & catering hit overall output especially hard and masked solid gains in both the transport, storage & communication area (0.6 percent) and business services & finance (0.6 percent). Output of government services was unchanged from the fourth quarter. Industrial production was supported by a 0.7 percent increase in manufacturing, itself compounded by a 2.5 percent bounce in utilities. Mining & quarrying also expanded by 0.7 percent but agriculture dropped 0.7 percent. Construction output similarly declined 0.7 percent. Initial fourth quarter data were revised higher in subsequent releases and it would be no surprise if this report underwent a similar modification.

Asia/Pacific

Japan

The February tertiary industry activity index edged down 0.2 percent and was up 0.5 percent when compared with last year. The data were revised from January 2009. Wholesale and retail trade declined 3.1 percent on the month while finance & insurance dropped 1.9 percent and miscellaneous services sank 2.4 percent. Other categories that dropped in February included information & communications (down 0.9 percent), living-related & personal services & amusement services (down 1.3 percent), real estate & goods rental & leasing (down 0.6 percent). Industries that gained during the month included transport & postal activities (0.7 percent), medical, health care & welfare (0.6 percent), electricity, gas, heat supply & water (0.8 percent) and accommodations, eating & drinking services (0.1 percent).

March unadjusted merchandise trade surplus was ¥948.9 billion and larger than analysts expected. This was the 12^th consecutive trade surplus after recording a deficit in March 2009. Exports were up by 43.5 percent from a year ago while imports gained 20.7 percent. Exports were up for the fourth month in a row while imports were up three. The trade surplus for fiscal year 2009 was ¥4.23 trillion. On a regional basis, unadjusted exports to the U.S. were up 29.5 percent on the year. It was the third gain in a row. Exports to the EU were up 26.7 percent for the fourth monthly gain. However, exports to Asia, which were up for the fifth consecutive month, jumped 52.9 percent on the year. On the import side, imports from the U.S. edged up by a mere 2.6 percent on the year while imports from the EU gained 13.3 percent. Asian imports were up 16.5 percent. The seasonally adjusted trade surplus was ¥666.2 billion, up from ¥471.8 billion in February. On the month, exports were virtually unchanged while imports sank by 3.7 percent.

Americas

Canada

March consumer price index was unchanged on the month and up 1.4 percent when compared with last year. Core CPI excluding only food and energy dropped 0.3 percent and was up 0.9 percent on the year. The Bank of Canada’s preferred measure which excludes eight volatile items posted a 0.2 percent monthly dip and was up 1.7 percent on the year. On a seasonally adjusted basis, the CPI edged down by 0.1 percent on the month. Within this seasonally adjusted monthly decline, prices were down in shelter (0.1 percent) and in recreation, education & reading (2.0 percent). By contrast higher energy costs ensured a sizeable gain in transportations charges (0.3 percent) and food prices also climbed relatively sharply (0.4 percent).

February retail sales were up 0.5 percent and 6.4 percent on the year. The softer than anticipated headline in part reflected weaker prices as volumes were up 0.6 percent on the month. Special factors also probably played a role in the underperformance of sales. For a start, building and outdoor home supply stores saw sales slump 3.5 percent as some purchases that might have been made that month were brought forward by the expiry of the home renovation tax credit in January. The Olympics may also have had a negative effect in some areas if would-be consumers opted to stay at home and watch TV broadcasts of the event. But for a 2.9 percent increase in sales of autos and related parts, total sales would have edged down 0.1 percent on the month. The other area of marked strength was clothing & accessories where purchases jumped some 4.3 percent. There were also smaller increases in food & drink (0.5 percent), health & personal care (1.2 percent), general merchandise stores (1.0 percent) and miscellaneous stores (0.8 percent). But sales were down for furniture & home furnishings (3.5 percent), electronics (0.8 percent), and for books & music (1.9 percent).

Bottom line

Focus continued to swirl around Greece and its continuing tragedy. On Friday, the country formally requested activation of the EU/IMF rescue plan. The euro took the brunt of the pressure. It should be noted that any decision to materialize the offer would need approval from all 16 eurozone members, the European Commission and the European Central Bank. The Bank of Canada kept its key interest rate at 0.25 percent while the Reserve Bank of India raised its repurchase rate to 5.25 percent for the second increase within a month.

While other central banks prepare to normalize policy, analysts expect the FOMC to do little tampering with its post-meeting statement. In any event, it will be closely scrutinized for any change. And Japan will release its usual end of month slew of reports covering unemployment, consumer prices, retail sales and industrial production. The Bank of Japan will hold its semi-annual outlook meeting on Friday (local time).

Looking Ahead: April 26 through April 30, 2010

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