Global Markets

China once again was in the spotlight last week — it released its monthly spate of new economic information Thursday (local time) while in the U.S., the quarterly onslaught of earnings reports continued to flow. Chinese President Hu Jintao’s visit to the U.S. also kept China front and center. Earnings releases also vied for investor attention last week. Since January 10, thirty-seven of the 51 companies in the S&P 500 have exceeded analyst estimates.

Analysts say that anything that hints that China will be tightening monetary policy to tame inflationary pressures from excess growth leads to a knee jerk sell off, especially of mining and resource companies. Demand from China has been a big factor in sending commodities prices surging. Companies that produce commodities, like the aluminum maker Alcoa, have been counting on that demand to continue.

Equities sank after China reported fourth quarter growth accelerated to 9.8 percent on the year as December industrial production and retail sales picked up. The acceleration adds to pressure on policy makers to keep raising interest rates. Prior to the data releases, the People’s Bank of China had already increased reserve requirements for banks for the seventh time. And in the last four months, it has raised interest rates twice. But analysts think that Chinese policy makers are behind the curve and need to act decisively if they are to curb inflation.

In Asia, only the Sensex managed to post a positive week and in Europe, the CAC advanced. And in North America, only the Dow, thanks to positive earnings reports, gained on the week.

Global Stock Market Recap

Europe and the UK

Despite the positive gains on Friday, the FTSE could only temper losses incurred on Wednesday and Thursday when the index had its largest two day drop in eight months. The index was down 1.8 percent for the week, effectively erasing all of its gains in 2011. The DAX slumped 0.2 percent but the CAC managed to rebound from Thursday’s losses and have yet another positive week, advancing 0.9 percent. Friday’s rebound was attributed to an unexpected boost in German business confidence to a record high while French business sentiment advanced to a three year high. The positive sentiment data was able to partially offset the previous day’s declines. Thursday’s drop was fueled by concerns that the Chinese government would lift interest rates to further calm inflation which sent basic resource and energy stocks south. Even better than expected U.S. jobless claims and housing data failed to offset investor risk aversity.

Investors have been encouraged that Portugal easily raised €750 million in a Treasury bill sale earlier in the week and ended up paying a lower interest rate than it had previously. The interest rate stresses on Portugal have eased over the last week amid mounting evidence that the European Central Bank has been buying up Portuguese bonds in the markets, which in turn reduces their yields. The Portuguese government debt agency said the yield on the 12-month bills was 4.03 percent, down sharply from 5.28 percent on the same bills last month. Demand was three times the amount on offer. Coming after a successful auction last week, Wednesday’s sale provided further evidence that the European debt crisis has eased a notch for now, after a concerted effort by European policy makers to be more proactive in their approach to the crisis.

Asia Pacific

Equities dropped last week amid concerns that China might tighten monetary policy measures yet again through interest rate increases to control inflation in the economy. Markets were depressed on Monday after the People’s Bank of China once again increased reserve requirements for banks to rein in inflation. The boosting of the reserve rate ratio strengthened expectations for further monetary policy tightening moves as investors awaited inflation and growth data due later in the week. There were fears that a possible slowing economic growth in China would dent demand for resources. Thursday’s (local time) release of inflation and growth data only confirmed investor fears and equities plunged as investors fretted that Chinese authorities would indeed act to curb inflation.

But it is not only China that needs to worry about inflation. For example, the Reserve Bank of India, which held its policy rate at 6.25 percent in December, is now forecast to increase rates three times by mid-2011, beginning with the January 25 policy meeting. The goal is to tackle soaring inflation, and specially food inflation which rose to a 23-week high of 18.32 percent in late December. But despite earlier sell offs the Sensex was the only index in this region to post a gain — 0.8 percent — last week.

In a week of relatively light other economic news, the Chinese data heavily affected market sentiment. But there was also earnings news and traders — after recent gains — took profits. For the week, the Nikkei and Topix were down 2.1 percent. The Hang Seng slid 1.7 percent while the Shanghai Composite dropped 2.7 percent. The All Ordinaries declined 1 percent.

Canada

As generally expected, the Bank of Canada again opted to leave its target for the overnight rate unchanged at the 1.0 percent level to which it was raised in September last year. The bank rate remains at 1.25 percent and the deposit rate at 0.75 percent. The explanatory text accompanying the interest rate announcement may have been a little softer than foreseen by some. In particular, while pointing to a somewhat stronger than officially expected recovery in the global economy, domestic economic developments were seen to be proceeding broadly as anticipated. Canadian real GDP is now seen growing 2.4 percent this year and 2.8 percent in 2012, only slightly higher than the respective 2.3 percent and 2.6 percent rates forecast in the October Monetary Policy Report (MPR). The monetary authorities are clearly concerned by the buoyancy of the Canadian dollar which was trading at its highest level in more than two years against its U.S. counterpart prior to the policy announcement. Underlying inflationary pressures are perceived as subdued, reflecting considerable excess capacity. As a result, core inflation is forecast to accelerate slowly back to 2 percent by the end of next year. The BoC felt it appropriate to leave intact a substantial degree of monetary stimulus.

Currencies

After pausing on Monday, the euro gained on its U.S. counterpart each day last week. On Friday, the euro extended its gains to $1.36 and holding near a two-month high as a reading of German business sentiment soared to its strongest ever level. Early gains in U.S. stocks, propelled by strong corporate earnings, helped the euro and other riskier currencies keep a buoyant tone. The German Ifo reading combined with French business sentiment which advanced to a three year high to reassure investors that the eurozone core is supporting the periphery countries which are struggling under the weight of sovereign debt. Despite lingering concerns over the region's sovereign debt, the euro is weathering the crisis so far.

Other higher-yielding currencies, including the Australian and Canadian dollars, also gained against the U.S. currency. The Canadian dollar was helped by strong domestic retail sales data for November. At week’s end, the U.S. dollar was down against the euro, yen, pound sterling and Swiss franc. The U.S. currency however, was up against the commodity currencies — the Canadian and New Zealand dollars while the Australian dollar was virtually unchanged.

Selected currencies — weekly results

Indicator scoreboard

Germany

January ZEW results showed that analysts’ assessment of current conditions was up 0.2 points at 82.8, the highest reading since July 2007. At the same time, expectations climbed more than 11 points to 15.4, their best performance since July. The jump in expectations was surprisingly steep (largest since August 2009) and points to growing confidence that the economic recovery at home is becoming progressively self-sustaining.

December producer prices were up 0.7 percent and 5.3 percent on the year. Excluding energy, prices were up 0.5 percent from their November level to stand 3.6 percent higher on the year. Once again the largest increase occurred in the energy sector where prices jumped another 1.5 percent on the month. Basics and consumer goods both saw a 0.5 percent advance while capital goods prices edged just 0.1 percent higher.

January Ifo measure of economic sentiment climbed to a new high of 110.3. The gain in the overall index was due to a 1 point increase in the expectations measure to 107.8. Current conditions were essentially unchanged at 112.8. Among the major sectors, manufacturing rose an additional 4.2 points to 27.7 and morale in construction jumped 9.5 points to minus 6.2. Sentiment in services also gained (an unadjusted) 3.1 points to 28.0. However, December's near-11 point surge in the retail area was almost unwound with the sub-index dropping a hefty 10.1 points to 14.0. Sentiment also weakened in wholesale, down almost 9 points to 17.3.

United Kingdom

December consumer prices jumped a record 1.0 percent on the month and were up 3.7 percent on the year. The latest surge was enough to lift the annual inflation rate by 1.7 percentage points above the BoE's target level of 2 percent. Core CPI was up 0.7 percent on the month and 2.9 percent on the year. The main upward pressure on the annual headline rate came from air transport, but this in large part is a function of the higher weight now attached to this category. There was also a 2.8 percentage point pick-up in the cost of fuel and lubricants, the largest jump for the period since 1996. Higher gas tariffs similarly had a positive impact as did food prices where a 1.6 percentage point gain constituted a record increase between November and December. Headline inflation would have jumped even more sharply but for weakness in furniture & furnishings where the 12-month rate declined by 1 percentage point to 2.5 percent.

December claimant count unemployment dropped by 4,100 after a revised 3,200 decline in November. The jobless rate on this measure once again held steady at 4.5 percent. By contrast, and not for the first time, the ILO statistics show joblessness over the three months to November rising a substantial 49,000. These figures also revealed a 69,000 slide in employment, the largest decline since June-August 2009. The unemployment rate on this basis was 7.9 percent.

December retail sales dropped 0.8 percent thanks to harsh weather that hit consumer demand hard. Annual growth in volumes fell to zero. Excluding fuel, sales declined a somewhat smaller 0.3 percent from November and were up 1.0 percent on the year. Food stores dropped 0.9 percent on the month while non-food fell 0.6 percent. Within the latter, clothing & footwear sales were off 2.0 percent and household goods contracted 0.9 percent. There was also a sharp 5.9 percent decline in purchases of fuel. However, non-specialized stores saw demand creep up 0.3 percent and the other stores category posted a 0.5 percent advance. Significantly, non-store retailing, which includes internet transactions, surged some 5.4 percent from November.

Asia/Pacific

Japan

November tertiary index, which measures spending in the service sector, was up a seasonally adjusted 0.6 percent on the month after increasing a revised 0.3 percent in October. On the year, the tertiary index was up 2.0 percent. Four categories were up while eight were down. The increase was led by wholesale and retail trade which was up 3.3 percent on the month. Scientific research, professional & technical services gained 1.2 percent. On the downside, accommodations, eating & drinking services slid 2.5 percent while living-related & personal services & amusement services dropped 2.6 percent. Other losses ranged from a decline of 1.5 percent for miscellaneous services and a 0.2 percent dip for financial services.

China

Four quarter gross domestic product was up 9.8 percent when compared with the previous year. Analysts had expected an increase of 9.6 percent. For the year 2010, GDP was up 10.3 percent after growing 8.9 percent in 2009.

December consumer prices were up 4.6 percent after rising 5.1 percent in November. Analysts expected the CPI to increase by 4.4 percent. Food prices were up 9.6 percent after soaring 11.7 percent in November. Non-food prices were up a modest 2.1 percent. Urban CPI was up 4.4 percent while the rural CPI jumped 5.1 percent. Transportation & communication prices were down 0.7 percent on the year. For the year 2010, the CPI was up 3.3 percent.

December producer prices were up a higher than expected 5.9 percent. Analysts expected the PPI to increase by 5.6 percent after rising 6.1 percent in November. For the year, the PPI was up 5.5 percent. Raw material procurement, fuel and power prices were up 9.5 percent on the year while mining and exploration prices soared 12.6 percent. Ferrous metals and non-ferrous metals were up 11.2 percent and 15.9 percent respectively on the year. Consumer prices were up 3.5 percent.

December retail sales soared 19.1 percent on the year after jumping 18.7 percent in November. The gain was slightly lower than analysts' expectations for an advance of 18.6 percent. For the year 2010, retail sales were up 18.4 percent. In 2009, sales were up 15.5 percent.

December industrial output was up 13.5 percent when compared with the same month a year ago after increasing 13.3 percent in November. For the year 2010, output was up 15.7 percent when compared with the previous year. In 2009 output was up 11.0 percent on the year.

Americas

Canada

November manufacturing sales declined 0.8 percent on the month. The decline would have been steeper but for a bounce in prices as volumes dropped 1.4 percent. On the year, nominal shipments were up 6.2 percent while real sales rose 4.3 percent. The slide was due to renewed weakness in the auto sector where vehicles slumped 9.2 percent from October and parts declined 6.5 percent. Excluding this category, sales were up 0.2 percent on the month. Computers & electronic products were up 5.1 percent, beverage & tobacco gained 2.9 percent and leather & allied products increased by 3.7 percent. Petroleum & coal rose 1.0 percent as did chemicals while paper manufacturing advanced 1.6 percent and printing 1.2 percent. Shipments of clothing also fared well, rising 2.6 percent. On the downside, there were significant monthly drops in textiles (2.8 percent), primary metals (1.9 percent), non-metallic minerals (1.3 percent), machinery (1.1 percent) and miscellaneous manufacturing (1.7 percent). New orders were up 1.6 percent and 9.7 percent on the year.

November retail sales jumped 1.3 percent on the month and 5.3 percent on the year. The latest nominal advance reflected monthly increases in eight of the eleven sub-sectors. Among these, motor vehicles & parts purchases increased 2.7 percent. Excluding this category, sales would have been up a slightly more modest 0.9 percent. Gasoline demand was up 1.4 percent. Elsewhere building materials & garden equipment advanced 1.7 percent, food & beverage was up 0.8 percent and health & personal stores gained 1.4 percent. There were also solid performances in both clothing & accessories (2.4 percent) and sports & hobbies (1.7 percent). The main areas of weakness were electronics & appliances (minus 2.2 percent) and miscellaneous stores (minus 1.0 percent).

Bottom line

There was little new economic news last week except from China. An ever increasing pace of new corporate earnings reports kept investors occupied.

Both the Bank of Japan and the Federal Reserve meet this week. Neither is expected to make a policy change. Both the U.S. and UK will release their first estimates of fourth quarter growth. Inflation is expected to accelerate in Germany, Canada and Australia. However, deflation remains entrenched in Japan. Earnings reports will continue to be released.

Looking Ahead: January 24 through January 28, 2011

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