Global Markets

After an exuberant start to the week, enthusiasm quickly faded as investors evaluated the latest set of economic data. At week’s end, the stock indexes covered here were mixed. Four of 13 declined in Asia including the All Ordinaries, Jakarta Composite, Taiex and Sensex. The All Ordinaries were hit by sinking commodity prices combined with a growing sense of the magnitude of the Queensland floods which are expected to cut into growth. And in India, the Sensex was roiled by rising inflation and prospects of higher interest rates from the Bank of India to combat it.

In Europe and the UK, equities were up for the week even though economic data were mixed. November retail sales slumped in both Germany and the EMU. On the bright side, German manufacturing orders soared albeit on foreign and not domestic orders. And in North America, U.S. equities gained on the week despite mixed economic data but those to the north and south of the border were down mostly on lower commodity prices.

The big event as always for the first week of a new month was the U.S. employment situation report. Employment increased a less than anticipated 103,000. The unemployment rate dropped to 9.4 percent thanks to a shrinking labor force.

Global Stock Market Recap

Europe and the UK

European equities were up last week thanks primarily to an enthusiastic start to the trading year. The FTSE was up 1.4 percent, the DAX gained 0.5 percent and the CAC advanced 1.6 percent. Enthusiasm was eroded by mixed economic data released during the week. In Germany, November manufacturing orders were up more than expected but industrial production sagged. Retail sales in Germany and the EMU both dropped. While manufacturing PMIs for the EMU and members improved, services were lackluster. U.S. data did not help after the economy added fewer jobs than forecast in December.

Continually lurking in the background are the euro area debt problems. Worries in the eurozone debt markets flared up after the European Union proposed a framework for dealing with bank and investment-firm failures that asks whether bondholders should share the burden in paying for future bailouts. This weighed on the euro and boosted the dollar and sent Portuguese Spanish interest rates higher.

Asia Pacific

While trading for the first day of the New Year was buoyant, investors became more cautious as the week progressed and they awaited Friday’s U.S. employment report. Stocks here Friday were also influenced by the weak closing in New York Thursday. Commodity related stocks led the decline in most of the markets as prices slumped.

On the week, most markets managed to end with modest gains. However those in Australia, India, Indonesia and Taiwan were down. The All Ordinaries dropped 0.7 percent, the Sensex plunged 4 percent, the Jakarta Composite sank 2 percent and the Taiex slid 2.1 percent. The Sensex was dragged down by commodity stocks, metals and bank stocks on interest rate concerns and rising inflation pressures. Investors think that the Reserve Bank of India will not wait until its regularly scheduled January 25 meeting to increase rates. Food inflation jumped to 18.32 percent on the year in the week ended December 25 from 14.44 percent in the previous week.

However, the Malaysia KLCI jumped 3.5 percent while the Nikkei and Topix in Japan each gained 3.1 percent. The Nikkei topped 10,500 for the first time in about eight months Thursday mainly due to buying by foreigners convinced that undervalued Japanese shares will benefit from a worldwide economic recovery. Since the introduction of QE2 by the Fed, the index has climbed 15 percent in roughly two months. A weakened yen has helped boost exporters’ shares as well. A weaker yen helps exporters compete more effectively abroad and bring home higher profits.

Foreigners were net buyers of Japanese stocks for eight straight weeks from the beginning of November through December, according to data from the Tokyo Stock Exchange. They led the recent rally, buying a total of ¥900 billion more than they sold during this period. Another factor making Japanese stocks attractive is that they lagged behind their foreign counterparts last year. The market here is populated by manufacturers that export their products and they are expected to benefit substantially from a stronger U.S. economy. However, many market participants remain cautious. Some are waiting until U.S. firms announce their 2010 results and Japanese companies release their earnings for the October through December quarter.

Currencies

The U.S. dollar rallied against most of its counterparts. The dollar gained as evidence mounted of an economic recovery and renewed investor interest in U.S. assets. The dollar has rallied as reports showed services industries expanded in December at the fastest pace in four years and employers added jobs for a third month. The dollar was also up against the yen, pound and Swiss franc. It was down slightly against its Canadian counterpart.

On Friday, the euro slipped to a three month low as Belgian and Irish credit default swaps reached a record and the cost of insuring the debt of Portugal and Italy rose. The U.S. dollar has been rallying against is major counterparts since mid-December when the Fed said the economic recovery is continuing and maintained a $600 billion program of debt purchases under the second round of quantitative easing. The dollar got an extra fillip when President Barack Obama signed into law an extension of tax cuts that were due to expire.

The euro’s decline was exacerbated by European Union discussions about spreading the cost of bank failures. The European Commission released a study report that once again returns to the idea of “burden sharing” in times of debt crisis. The bond market reads this as “haircuts,” something they don’t want to see.

Selected currencies — weekly results

Indicator scoreboard

EMU

December manufacturing PMI climbed to 57.1 from 55.2 in November. Regionally, economic momentum improved in most states with Germany once again leading the way with a 2.6 point increase to a near-record 60.7. Among the other larger EMU states, Italy posted a much needed 2.7 point advance to 54.7 and Spain was up 1.5 points at 51.5. The only loss within this group was France where the national index slipped from 57.9 to a still very respectable 57.2. Output expanded for the 17th consecutive month and at its fastest pace since July. Consumer, intermediate and investment goods production all picked up steam and capital goods achieved its second fastest growth ever. Orders advanced at their quickest pace since April and within this, exports hit a 7-month high.

December flash harmonized index of consumer prices climbed sharply to 2.2 percent on the year from 1.9 percent in November. December was the first month in which inflation has exceeded the ECB's 2 percent target level since November 2008. As with most flash estimates, no detail was available. However, national data suggest that higher commodity prices in general and more expensive food and oil costs in particular were largely, if not solely, responsible for the latest acceleration.

November producer prices excluding construction were up 0.3 percent on the month and 4.5 percent on the year. The latest pick-up was once again largely attributable to higher energy costs which jumped a further 0.9 percent on the month. Excluding this category, prices edged up just 0.1 percent from October although even this was sufficient to lift the 12-month core rate from 2.9 percent to 3.0 percent. Outside of energy, prices were subdued. Intermediates, durable & nondurable consumer goods all posted 0.2 percent monthly increases and capital goods charges were down 0.1 percent.

December economic sentiment was up 1.1 points to 106.2 from November’s revised reading of 105.0. The advance was led by the industrial and retail sectors which saw confidence gain 3.3 points and 6.1 points to 4.0 and 4.6 respectively. The bounce in the retail area will be especially welcome given the concerns about the impact of fiscal tightening and the bad weather. For the other sectors the picture was more mixed. Morale in construction held steady at minus 26.2 while consumer confidence dropped 1.6 points to minus 11. Regionally among the four largest EMU members, sentiment declined only in Spain (0.9 points). France (up 2.5 points) led the latest gain ahead of Germany (1.5 points) and Italy (0.8 points). In both France and Germany economic sentiment is above its long-run average.

November retail sales dropped 0.8 percent and edged up 0.1 percent on the year. The latest decline means that sales have declined in three of the last four months and will raise fresh concerns about the fragility of the household sector. Certainly, the November slide could not be attributed to swings in the more erratic items as non-food purchases excluding fuel also dropped 0.8 percent from October. With no data available for Germany and Italy it may be that the data will be revised higher in due course.

November unemployment fell by 35,000 but this followed a larger revised 96,000 increase at the start of the quarter. The jobless rate was unchanged at 10.1 percent. Among the big four economies, unemployment rates using Eurostat measures held steady in Germany (6.7 percent), Italy (8.7 percent) and Spain (20.6 percent). However, the unemployment rate edged up a notch in France (9.8 percent). Spain remains firmly at the top with a jobless rate of 20.6 percent.

The final estimate of third quarter gross domestic product was revised down by 0.1 percentage points to 0.3 percent and was up an unmodified 1.9 percent on a year ago. The details of the GDP expenditure components underline the sluggishness of overall domestic demand which was unchanged on the quarter. This in large part was due to a still very cautious household sector which saw consumer spending edge up just 0.1 percent, down from a 0.2 percent gain in the second quarter. Fixed capital formation was off 0.3 percent, although this was less of a concern following a 2 percent bounce previously. Government consumption rose 0.4 percent. Net exports added just 0.1 percentage points to quarterly growth as exports climbed 1.9 percent and imports advanced 1.4 percent.

Germany

December unemployment rate remained at 7.5 percent. However, the number of people out of work edged up 3,000 to 3,152,000. The December rise in joblessness followed a slightly shallower revised 8,000 decline in November. The disappointing headline figures may well reflect the effects of the particularly bad weather that hit much of the country during the month. Vacancies were up another 10,000 on the month, matching their November advance.

November manufacturing orders jumped 5.2 percent and were up 20.6 percent on the year. The monthly increase was largely due to external demand as overseas orders surged 8.2 percent while the domestic component rose a relatively modest 1.5 percent. Significantly, the bounce in foreign orders was wholly attributable to the non-EMU bloc which registered a stellar 14.8 percent monthly leap following a 2.1 percent increase last time. By contrast, orders from within the Eurozone declined 1.4 percent from October and that after a 0.9 percent slide at the start of the quarter. Within overall overseas demand, capital goods orders were up some 13.5 percent while basics rose 1.2 percent and consumer & durables fell 3.9 percent. The monthly increase in domestic orders was relatively evenly spread between the main sectors. Capital goods were up 2.4 percent, consumer & durables gained 1.0 percent and basics advanced 0.8 percent.

November industrial production posted a 0.7 percent monthly contraction. However, the decline followed an even stronger revised 3.0 percent October gain and left workday adjusted output up a still substantial 11.1 percent on the year. Capital goods output dropped 0.6 percent on the month but that followed a 4.6 percent bounce last time while a 0.7 percent slide in intermediates only dented a 2.6 percent start of quarter jump. Activity in the energy sector was off 2.4 percent and so wiped out more than half of October's 4.2 percent increase while construction followed a 3.1 percent advance with a 1.1 percent drop.

November merchandise trade surplus narrowed to €11.8 billion. The reading was €2.4 billion below an unrevised strong October and the weakest result since June. The unadjusted surplus was €12.9 billion. However, the decline reflected renewed expansion in both sides of the balance sheet.

Americas

Canada

November industrial product price index was up with a second successive 0.5 percent monthly increase. Annual growth slipped to 2.1 percent from 2.4 percent in October. The advance was largely due to a 3.9 percent monthly jump in petroleum & coal product prices. Excluding this category, prices were up just 0.2 percent from October and 1.6 percent on the year. Outside of miscellaneous manufactures (8.7 percent), primary metals (0.7 percent) and meat, fish & dairy products (0.5 percent), prices were either little changed on the month or somewhat weaker. Motor vehicles & other transport equipment saw the steepest decline (0.4 percent), itself reflecting mainly a 0.5 percent appreciation in the value of the local currency. The raw material price index surged 3.5 percent from their October level, principally on the back of a 7.0 percent bounce in mineral fuels. On the year, the RMPI was up 6.8 percent after a 5.7 percent gain last time. Excluding mineral fuels, the headline index rose a much more sedate 0.6 percent on the month but was up 11.1 percent on the year. Other sizeable monthly increases in prices were recorded in vegetable products (3.2 percent) and non-ferrous metals (2.1 percent). However, gains here were partly offset by falls in animals and animal products (2.5 percent) and ferrous metals (1.4 percent).

December employment was up by 22,000 jobs while the unemployment rate held at 7.6 percent for the second month. Full time positions more than accounted for the headline gain in employment, rising 38,000 in contrast to a 16,100 decline in part time jobs. Private sector payrolls were up a solid 52,500 and public sector headcount expanded 7,400 but there was a sizeable 38,000 drop in the number of self-employed. Job creation was concentrated in the goods producing sector. Here, some 40,800 net new positions reflected a 65,700 surge in manufacturing together with more modest gains in natural resources (7,700) and utilities (2,600). Partial offsetting declines were registered in construction (27,100) and agriculture (8,000). Services shed nearly 19,000 jobs as retail lost 22,400 and health care & social assistance 23,900. There was also a significant downsizing in business, building and other support services (18,300). However, transport & warehousing employed an extra 44,500 and professional, scientific & technical services added 6,100. Payrolls also edged higher in accommodation & food (3,500) and in the other services area (4,600). Most of the other main groupings were little changed.

Bottom line

Investors welcomed the New Year and then waded through a heavy load of new economic data. Predictably, the data were mixed. In Europe for example, manufacturing PMIs pleased as did German manufacturing orders. However, services PMIs were weaker than expected. Retail sales dropped as did German industrial production. And in the U.S. the employment report disappointed as did retail sales but the manufacturing and services ISMs pleased.

The Bank of England and the European Central Bank are meeting Thursday. While no change is expected by the ECB of its 1 percent rate, a spirited debate is going on about the direction of British interest rates. With inflation running over one percentage point above the BoE’s inflation target, some analysts fear that the Bank will lose credibility if it does not increase rates to fight inflation. But in the end, the BoE is expected to leave its interest rate unchanged at 0.5 percent.

Looking Ahead: January 10 through January 14, 2011

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