Global Markets

Global equities were mixed last week as sovereign debt woes continue to take their toll on investor confidence. As the continuing drama surrounding the Greek bailout package continues, markets players — not known for their patience — are restive about the length of time that it is taking to resolve this issue. The Federal Reserve did soothe nerves on Wednesday by leaving policy unchanged while upgrading their outlook for the economy a bit.

Worries came and went as investors could not totally ignore continued good earnings results. These provided a soothing balm to counteract the market’s sovereign debt irritant. And for once investors seemed to be diverted from their usual FOMC vigil as the Fed was trumped by the downgrading of Greece (again), of Portugal and of Spain by ratings agency Standard & Poor’s. S&P’s moves crystallized the concerns that have been intermittently roiling markets during recent months — namely the fear that Greece’s fiscal problems represent a harbinger for sovereign debt crises elsewhere.

All North American and European indexes covered here were down last week while six of 13 were down in the Asia/Pacific region. In April, geography mattered. The FTSE, CAC and DAX were down in Europe while only the Bolsa lost ground in North America. In Asia, five of 13 were down on the month.

Global Stock Market Recap

Europe and the UK

Stocks here ended the week and month on a down note as investors were reminded that volatility and surprises can still occur. Sentiment was buffeted by the Greek crisis and the downgrading of debt for Greece, Portugal and Spain did not help at all. The FTSE, DAX and CAC gave back previous April gains to end the month down 2.2 percent, 0.3 percent and 4.0 percent respectively. On the week, the three were down 3.0 percent, 2.0 percent and 3.4 percent.

As with the euro, stocks here fluctuated on the outlook for a solution for the Greek crisis as it continues to crawl to a conclusion at a snail’s pace. A saving grace was the better-than-estimated earnings reports that at times managed to overshadow concern that the credit crisis would spread through the euro region. Sovereign debt concerns are being offset by strong earnings but investors continue to focus on which country will be next to be downgraded.

While notables such as European Union Economic and Monetary Affairs Commissioner Olli Rehn and German Chancellor Angela Merkel said that they were confident discussions on the aid package for Greece will conclude in the coming days, investors are a notoriously impatient bunch. Financial markets across central and eastern Europe have been shaken by the latest developments in Greece, as skittish investors flee not only troubled parts of the eurozone but also economies that have so far avoided contagion from the Greek crisis.

Fears that Greek debt crisis would spread to other eurozone nations intensified Wednesday when Spain suffered a debt downgrade from Standard & Poor’s and sent the euro to fresh lows against the dollar. The downgrade, by one notch from AA plus to AA, dealt a blow to Spain’s frantic efforts to avoid contagion from Greece and followed S&P downgrades of Greece and Portugal.

Asia/Pacific

Equities were mixed last week as April came to a close and nerves were stretched by the ongoing Greek drama and the downgrading of both Spain and Portugal. However, stocks did end the week and month on a positive note Friday. Higher oil and commodity prices also lifted market sentiment while traders preferred to adopt a cautious approach ahead of U.S. GDP data which was released after markets here closed for the week. However, the damage had already been done.

Six of 13 indexes followed here were down on the week. Five indexes were down on the month. The All Ordinaries, Hang Seng and Taiex are now down on the year thanks to last week’s selloff. The Shanghai Composite is by far the worst performer — it was down 3.8 percent on the week, 7.7 percent on the month and is now 12.4 percent below its 2009 close. Analysts wonder how an economy that is growing at such a rapid pace has such a poor performing equity market.

In Japan both the Nikkei and Topix managed to gain on the week as many investors closed positions in advance of the financial markets closures for the Golden Week holidays. Investors were buoyed by the Bank of Japan’s statement that said it would be necessary to strengthen the foundations for economic growth and that it was considering further easing measures to support the economy. But Japanese investors were not alone in turning cautious and moving to the sidelines while awaiting more clues about the strength of global economic recovery. Fears of contagion effect of the debt crisis were partly offset by better than expected earnings from U.S. companies and by Federal Reserve resolve to keep the interest rates low for an extended period.

Reserve Bank of New Zealand

As anticipated, the Reserve Bank of New Zealand kept its official cash rate at 2.5 percent where it has been since April 2009. The RBNZ said that it expects to start increasing the OCR in coming months assuming the economy continues to evolve as anticipated. In its previous announcement on March 11, governor Alan Bollard said he expected to increase borrowing costs around the middle of the year as economic growth accelerates and inflation increases to the top of the Bank’s inflation target range of 1 percent to 3 percent. First quarter CPI was up 2 percent on the year. Recent economic data have pointed to weaker than expected domestic demand — retail sales swooned for the second time in three months in February while first quarter house sales declined 12 percent from the fourth quarter.

In his statement, governor Bollard acknowledged that the NZ economy was recovering broadly and that growth is predicted to pick up further through 2010. With growth in Asia strong, export commodity prices have increased. He noted that households remain cautious, with the housing market and household credit growth subdued. Similarly, business spending is weak and firms continue to reduce debt. Analysts said that the RBNZ statement gave the Bank enough wiggle room to begin increasing rates at either the June statement or July review depending on how the data evolve and the global backdrop.

Bank of Japan maintains status quo for now

As expected, the Bank of Japan’s monetary policy board left its key interest rate at 0.1 percent and left its credit program unchanged as it gauges the strength of the recovery and outlook for deflation. The BoJ introduced its bank lending program in December after the yen advanced to a 14 year high against the dollar. It doubled the facility, which provides three-month loans at 0.1 percent, to ¥20 trillion last month. While Shirakawa said the move was aimed at spurring the recovery, board members Miyako Suda and Tadao Noda opposed the decision, saying it wasn’t justified given the economy’s improvements.

The BoJ promised new efforts to support economic growth but it is unlikely to make the big changes to monetary policy demanded by its critics in Japan’s ruling party. The bank forecast an end to deflation next year, predicting that prices will rise by 0.1 percent in the year that starts April 2011 and it sharply increased its median growth forecast for this year from 1.3 percent to 1.8 percent.

The improved forecasts suggest that the Bank is increasingly confident about the strength of Japan’s recovery. The unusual promise of new policy measures suggests that the BoJ is concerned about political pressure ahead of the July upper house elections and wants to show its willingness to act to end deflation. The new measures are likely to be targeted at helping banks to lend more to companies rather than easing overall monetary policy. Bank governor Masaaki Shirakawa said that one model is a 1990s lending program under which banks that increased their lending could refinance part of the increase with the BoJ.

Some politicians in the ruling Democratic Party of Japan are pushing to include an inflation target in their manifesto for the July elections. The BoJ is opposed to an inflation target and does not support the use of radical monetary policy to counter deflation. Instead, Mr Shirakawa has argued that Japan needs structural reforms in order to raise the economic growth rate.

Currencies

Once again the euro was the chief victim for those concerned about the spread of systemic risk in the eurozone. The euro has suffered because of continued wrangling over the joint rescue package for Greece. The currency ebbed and flowed in concert with the progress made in talks to resolve the Greek situation. And the heightened visibility of debt woes in Spain and Portugal after the rating agency Standard & Poors lowered the countries’ debt ratings did not help. At one point, the euro plunged below US$1.32 to $1.31 per euro in intraday trading on Wednesday. The currency steadied and then rose from the one year low as fears eased. The euro gained on speculation that a joint rescue package for Greece from the International Monetary Fund and EMU countries was near and would be announced over the weekend. The euro is down over 7.0 percent so far this year against the U.S. dollar.

Selected currencies — weekly results

Indicator scoreboard

EMU

April economic sentiment was up 2.7 points to 100.6 and has finally moved back above its long run average (100). The latest rise in overall sentiment reflected gains in all areas except construction where morale was unchanged and still depressed at minus 25. Confidence in industry climbed 3 points to minus 7 and was up 2 points at minus 15 in the consumer sector. However, the best performers this month were services, up 4 points to 5, and retail which posted a 5 point advance to minus 1. Regionally, economic sentiment strengthened in all of the four larger EMU states. Germany saw a particularly healthy 4.3 point gain to 104.7 while France registered a 2 point rise to 102.5. Italy and Spain posted more modest increases of 1.5 points to 99.7 and 1.1 points to 92.6 respectively. The only countries to see sentiment weaken were Portugal (93.8 from 95.2), Slovakia (95.4 from 98.7) and Greece (69.1 from 69.6).

March M3 money supply edged down 0.1 percent on the year after a marginally smaller revised 0.3 percent drop in the year to February. The ECB's preferred 3-month moving average also edged a little firmer to minus 0.1 percent from minus 0.2 percent. Lending to the private sector contracted 0.2 percent on the year. Within this figure, growth in loans to non-financial corporations was unchanged at minus 2.4 percent but lending to households picked up from 1.8 percent to 2.2 percent. Most promisingly, the 12-month rate of lending for house purchase climbed 0.5 percentage points to 2.6 percent.

April flash harmonized index of consumer prices was up 1.5 percent on the year for the second month. Regionally among the larger EMU states, inflation was mixed with a decline in Germany (1.0 percent from 1.2 percent) contrasting with a minimal rise in Spain (1.6 percent from 1.5 percent) and a slightly more marked pick-up in Italy (1.6 percent from 1.4 percent). As with all flash estimates, no details were available. National statistics suggest that underlying inflation remained tame having edged up only marginally in March. Price pressures remain dominated by the oil market.

March unemployment climbed a further 101,000 to 15.808 million. Although the latest increase was almost double the 55,000 advance seen in February, the increase was small enough to leave the jobless rate at 10.0 percent. Not for the first time, Germany was the only EMU country to see the number out of work decline last month. In France, the rate held steady at 10.1 percent but in Italy it climbed 0.2 percentage points to 8.8 percent and in Spain it advanced 0.1 percentage points to 19.1 percent, the highest in the EMU bloc.

Germany

April total seasonally adjusted unemployment dropped 68,000 from March after a steeper revised decline of 42,000 in March. As a result, the jobless rate dropped 0.2 percentage points to 7.8 percent. The number out of work has declined every month so far in 2010, an increasingly optimistic view of the economy that finds support in a second successive 8,000 increase in the number of vacancies in April. Recent labor market data have been distorted by technical changes.

Asia/Pacific

Japan

March retail sales were up 4.7 percent on the year after rising 4.2 percent in February. This was the third straight month that sales posted an increase. Retail sales in part were pushed up by higher fuel prices. However, auto sales soared by 19.6 percent on the year after jumping a revised 14.8 percent in February. However, department stores sank even from the previous year’s depressed levels – this time by 5 percent after swooning 4 percent on the year in February.

March consumer price index was up 0.3 percent but dropped 1.1 percent when compared with last year. Core CPI excluding just fresh food was also up 0.3 percent and dropped 1.2 percent on the year. Excluding both food and energy, again the monthly gain was 0.3 percent but this core measure was down 1.1 percent on the year. On the month, only prices for furniture & household utensils and those for housing declined — 0.6 percent and 0.1 percent respectively. However on the year, most price categories declined with the biggest drops occurring for furniture & utensils (down 5.3 percent) and fuel, light & water (down 4.2 percent). Reading & recreation prices were down 2.7 percent. Prices for goods dropped 1.9 percent while services were down 0.5 percent on the year. April Tokyo CPI — considered a precursor to the national index — was up 0.2 percent but dropped 1.5 percent on the year. Core excluding food edged down 0.1 percent and sank 1.9 percent on the year. The BOJ says that downward pressure on prices from imported cheap goods from India and China are subduing prices while the rising price of commodities is working to moderate the contraction.

March unemployment rate edged up to 5.0 percent from 4.9 percent in both January and February. The number of unemployed persons jumped by 150,000 to 3.50 million. The number of employed was 62.10 million, a decline of 350 thousand or 0.6 percent from the previous year. The labor participation rate was 59.4, down from February’s reading of 59.6. The employment rate also declined – it was down from 56.5 percent to 56.2 percent.

March household spending jumped 4.4 percent when compared with last year after slumping 0.5 percent in February. On the year, expenditures were up for all categories with the exception of clothing & footwear (down 1.1 percent) and medical care (down 6.4 percent). Spending on housing jumped 18.5 percent on the year while furniture & household utensils soared by 16.1 percent. Other double digit gains were for transportation & communication which was up 13.2 percent, education which gained 10.3 percent and culture & recreation which jumped by 12.1 percent.

March industrial output was up a less than expected 0.3 percent after dropping 0.6 percent in February. Production has risen in 12 of the past 13 months on a seasonally adjusted basis. Production was up 28.8 percent from last year’s lows. Manufacturing was up 0.4 percent while the machinery industry was up 2.2 percent. Production was mixed by product. Autos were up 3.0 percent while electrical machinery soared 6.1 percent. On the down side, both fabricated metals and information & communication electronics equipment dropped 4.7 percent.

Australia

First quarter producer price index was up 1.0 percent after declining by 0.4 percent in the fourth quarter of 2009. On the year, the PPI edged down by 0.1 percent. The index dropped 1.5 percent on the year in the fourth quarter 2009. The increase on the quarter was mainly due to a jump in building construction prices which were up 0.6 percent, petroleum refining which gained 8.1 percent and electricity, gas & water which jumped by 3.3 percent. The gains were partially offset by declines in commercial fishing prices which dropped 12.2 percent and other food product manufacturing which was down 1.6 percent.

The consumer price index was up 0.9 percent in the March quarter and 2.9 percent on the year, slightly more than analysts forecast. In the last quarter of 2009, the CPI was up 0.5 percent on the quarter and 2.1 percent on the year. The weighted median was up 0.8 percent on the quarter and 3.1 percent on the year while the trimmed mean was up 0.8 percent and 3.0 percent on the year. Both are the Reserve Bank of Australia’s consumer price measures. On the quarter, both the trimmed and weighted median increased more than in the December quarter. However, on the year, both were lower. The RBA has an inflation target range of 2 percent to 3 percent on the year. RBA governor Glenn Stevens’ comments last week will ensure a massive focus on inflation data as the board considers whether to increase interest rates yet again at its monthly meeting next week.

Americas

Canada

February monthly gross domestic product was up 0.3 percent and 1.8 percent on the year. The monthly increase was built upon a solid 0.7 percent monthly jump in the goods producing sector. Within this, manufacturing output climbed an impressive 1.2 percent, compounding the 1.9 percent surge seen in January. Not surprisingly gains among the other sub-sectors were more modest with agriculture & forestry leading the way (0.7 percent) followed by utilities (0.5 percent) and then mining & oil & gas extraction (0.4 percent). Activity in the construction area inched up just 0.1 percent. Services edged up 0.1 percent. The Winter Olympics helped to boost accommodation & food services (2.1 percent) and the same factor very probably lifted output in arts, entertainment & recreation (6.1 percent). However, outside of retail trade (0.6 percent), most other sub-sectors struggled and there were declines in some areas, notably wholesale (1.4 percent).

March Industrial product prices unexpectedly dropped 0.4 percent on the month and declined 1.3 percent on the year. Most IPPI sub-sectors saw charges drop on the month with especially large declines registered in miscellaneous non-manufactures (4.5 percent), autos (2.0 percent), electricals (1.1 percent) and lumber (1.4 percent). Higher prices of note were limited to primary metals (1.6 percent) and petroleum & coal products (0.7 percent). Excluding this latter sector, prices fell 0.6 percent from February and were 3.8 percent lower on the year. March raw material and fuel costs jumped 0.8 percent on the month, largely courtesy of a 1.1 percent increase in the cost of mineral fuels. The only other monthly rise of significance was in animals and related products (2.4 percent). Easily the steepest decline in costs was seen in vegetable products (2.5 percent) although both ferrous materials (0.5 percent) and wood (0.3 percent) also posted small declines.

Bottom line

The spotlight last week focused on sovereign debt woes. It trumped even the results of the FOMC announcement on Wednesday. But the Fed’s steady as you go policy seemed to settle volatile markets. Economic data were scrunched into the end of the week. Data were mostly favorable. And earnings offered a positive counterpoint to the negative news flowing out of Europe.

The first week of a new month brings with it a new round of central bank meetings. Investors will be closely watching the Reserve Bank of Australia to see if they add another notch to its string of five interest rate increases. But the European Central Bank is expected to keep interest rates at 1 percent for some time given sovereign debt woes of its members. The Bank of England, which would normally meet Thursday, has postponed its monetary policy announcement until Monday, May 10 due to the national elections taking place on May 6. Japan's financial markets will be closed from May 3^rd to May 5^th for the Golden Week holidays.

Looking Ahead: May 3 through May 7, 2010

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