Global Markets

Investors balanced the grave political upheaval in Egypt with mostly better than expected earnings reports and economic data as the week unfolded. But the conflicting signals from the U.S. employment report left investors and analysts alike puzzled and unsure after a week of surprisingly strong data that pointed to strengthening economic growth. Traders continued to keep a wary eye on the turmoil in Egypt but the increasing violence did not appear to impact market direction. Most indexes were up for the week.

Global Stock Market Recap

Europe and the UK

Equities advanced last week despite concerns about the unfolding situation in Egypt thanks to positive earnings and mostly positive economic data. The FTSE was up 2.0 percent on the week while the CAC gained 1.1 percent and the DAX advanced 1.6 percent. In economic data, purchasing managers surveys of both manufacturing and services showed stronger growth in Europe and the UK. And in the U.S. the recovery seemed more secure with many economic indicators beating consensus forecasts. Friday’s U.S. employment report, however, left market participants on both sides of the pond puzzled and there was little reaction in the equities markets to it.

European traders had their own issues to watch, however. There was a meeting between the region’s leaders Friday. They were supposed to be meeting to discuss energy policy, but markets will be looking for any signs of further progress on plans to strengthen the eurozone’s financial defenses. Watchers said the market understood that the plans under discussion were not yet final, but that investors would nevertheless like to see a progress update. Germany and France are at odds over possible bond buybacks and a “competitiveness pact,” which is German Chancellor Angela Merkel’s condition for strengthening the safety net for debt-strapped countries.

European Central Bank

As expected the European Central Bank left its key interest rate at 1 percent where it has been since May 2009. The ECB left the deposit rate — the floor for euro money market rates — at 0.25 percent and the marginal lending rate — the ceiling — at 1.75 percent.

The latest reading of the flash harmonized index of consumer prices showed that inflation was up at an annual rate of 2.4 percent in January — significantly above the ECB’s target of 2 percent. After saying they saw no inflationary risks, ECB members had increased their inflation rhetoric saying that while risks are balanced they could move to the upside. ECB President Jean Claude Trichet blamed the spike in inflation on higher energy prices and expects the pressure to ease later this year. European factories are still not operating at capacity and unemployment remains high in most countries.

At his press conference Trichet sounded much less hawkish about the Bank’s interest rate intentions than he has recently. The euro declined in part on his comments Thursday. He toned down remarks he made just last month about potentially raising interest rates to combat inflation. Those comments had been a key catalyst in the euro's recent rally as traders priced in a rate increase later this year. However, with the toned-down stance, market participants backed off those expectations and sold the euro. The ECB is dealing with a two-speed recovery. The ECB must deal with sovereign-debt problems and weak economies in countries like Greece and Ireland while ensuring inflation in the area doesn't pick up too quickly.

Asia Pacific

Markets in the region were mixed for the week with many closed for the Lunar New Year celebrations several days last week. The markets in China, Hong Kong, Singapore, Malaysia, Taiwan and South Korea were closed for holidays. Asian markets continue to be optimistic about the sustainability of the global economic recovery. And easing concerns about the unrest in Egypt also helped to lift market sentiment.

The Nikkei and Topix were up 1.8 percent for the week amid improved business sentiment in the United States. Thursday’s merger plan by Nippon Steel and Sumitomo Metal Industries also boosted the indexes. The two companies will merge, creating the world’s second largest steelmaker. The deal is valued at about ¥2 trillion. The Nikkei topped 10,500 for the first time since January 19^th. According to Bank of Japan monetary policy board member Hidetoshi Kamezaki, the economy is likely to emerge from its economic lull shortly and is on track to emerge from its deflationary spiral.

The All Ordinaries advanced 1.8 percent for the week as well after the Reserve Bank of Australia kept its key interest rate at 4.75 percent. According to the purchasing managers’ survey, manufacturing contracted for the fifth consecutive month while the service sector contracted for the third consecutive month. The declines are largely due to a drop in new orders and weaker household spending after the recent flooding in Queensland and Victoria as well as higher borrowing costs. The Reserve Bank of Australia said the recent floods in Queensland and Victoria will cut around 0.5 percentage points from growth this year and will raise inflation by 0.25 percentage points in this quarter.

Reserve Bank of Australia

As expected the Reserve Bank of Australia left its key interest rate at 4.75 percent where it has been since November 2010. Since the RBA met two months ago, the devastating floods in Queensland have occurred. The flooding caused severe economic damage. It shut coal mines, cut rail lines and affected as many as 30,000 properties in addition to ruining agricultural crops. Treasurer Wayne Swan has predicted a spike in food prices as the deluge’s estimated A$1 billion in farm losses alone lift fruit and vegetable costs.

The Bank has an inflation target range of 2 to 3 percent. The most recent quarterly consumer prices report showed that inflation had cooled in the fourth quarter to a rate of 2.7 percent on the year from 2.8 percent in the third quarter. Prime Minister Julia Gillard is proposing a one-time levy on taxable income of more than A$50,000 to help pay for flood reconstruction.

The RBA issued its updated forecast for the economy on Friday. The Bank said that the economy will expand more than previously forecast this year as flood rebuilding accelerates in the second half, putting pressure on the labor market and wages. “The recent floods will have a material effect on the near term profile of gross domestic product, with growth in the December and March quarters notably lower than would otherwise have been the case, followed by a strong recovery in the June quarter as coal production picks up and the rebuilding effort gets underway,” according to the RBA.

The RBA raised its annual growth forecast for 2011 to 4.25 percent, from a November prediction of 3.75 percent. Consumer prices will rise 3 percent this year, from a previous estimate of 2.75 percent. The bank said the inundation of Queensland is likely to cut 0.5 percentage point from GDP in 2010-2011 and add 0.25 point to inflation this quarter. The forecasts reflect an economy where surging shipments of iron ore and coal to China are boosting demand for workers, while a stronger currency lowers import prices and consumer spending weakens after seven interest rate increases from October 2009 to November 2010.

Bank Indonesia

Bank Indonesia unexpectedly raised its key interest rate for the first time in more than two years to 6.75 percent from 6.5 percent after inflation climbed to a 21-month high. Bank Indonesia’s governor Darmin Nasution said that the decision is aimed at curbing inflation expectations, which are being stoked by volatile food prices and an increase in global commodity costs including oil. The Bank maintained its inflation forecast for 2011 in the range of 4 percent and 6 percent and said the economy will probably expand by 6 percent to 6.5 percent during the year, according to the statement. Consumer prices were up 7.02 percent in January on the year and the most since April 2009. Core inflation was 4.18 percent in January, easing from 4.28 percent the previous month.

Currencies

The dollar was up against the euro and yen after the U.S. jobless rate fell to the lowest level since April 2009 and winter storms limited payroll gains. The euro’s decline was abetted by ECB President Jean Claude Trichet’s remarks concerning inflation on Thursday. Currency traders sold euros and put higher interest-rate hopes on the back burner. The euro fell 1.3 percent Thursday, the most since November. Trichet said inflation has been prompted “mainly” by rising energy and commodity costs, dimming prospects for a boost in the target lending rate from a record low 1 percent.

The Canadian dollar on the other hand touched a two year high against its U.S. counterpart after employment jumped more than four times economists’ forecasts. Statistics Canada reported that employment rose by 69,200, compared with the median forecast of 15,000. The jobless rate however, jumped to 7.8 percent from 7.6 percent. Full-time employment rose by 31,100 in January, and part-time jobs increased by 38,000.

The U.S. dollar got an extra boost from Fed Chairman Ben Bernanke's slightly more optimistic tone on the pace of the U.S. recovery, with the Fed chief issuing what investors interpreted as a more rosy assessment of the labor market. Bernanke said in a speech in Washington on Thursday that the U.S. needs to see faster job growth for a sufficient time before policy makers can be assured the economic recovery has taken hold.

Selected currencies — weekly results

Indicator scoreboard

EMU

January flash harmonized index of consumer prices rose from 2.2 percent at end of 2010 to 2.4 percent. The pick-up left inflation at its highest level since October 2008. Although the HICP remained above its near 2 percent annual growth target for the second month in a row, the immediate policy implications will be slight unless the core indexes signal a worsening in the underlying picture.

January manufacturing PMI was revised up from a flash estimate of 56.9 to 57.3, a nine month high. The revisions were in part due to stronger performances from France (up 0.6 points to 54.9) and Germany (up 0.3 points to 60.3) and these two countries (along with Austria and the Netherlands) continue to lead region's economic recovery. However, Italy (56.6) saw a near-1 point gain from December to secure its best reading since June 2006 and Spain (52.0) improved 0.5 points, albeit to a still disappointingly soft level. Output expanded at its fastest pace since last April. The investment goods sector remained the dominant sector with activity rates in this area hitting record highs ahead of intermediates which secured a six month peak. By contrast the consumer sector was once again a drag with growth here slowing from an already modest pace.

December unemployment rate remained at 10.0 percent following a slight downward revision to the November level. The actual number of people out of work declined by 77,000 following a 68,000 drop in November. Regionally the disparities remain substantial despite some welcome improvements in the likes of Ireland (13.8 percent from 13.9 percent) and Spain (20.2 percent from 20.4 percent). The unemployment rates were unchanged at 9.7 percent, 6.6 percent and 8.6 percent in France, Germany and Italy respectively.

December producer prices (excluding construction) climbed 0.8 percent monthly following an unrevised 0.3 percent increase in November and boosted annual growth from 4.5 percent to 5.3 percent. The December bounce reflected higher prices in all the main sub-sectors but was once again dominated by energy where charges were up 2.2 percent from mid-quarter. Excluding this category, the PPI would have risen 0.3 percent on the month and 3.3 percent on the year. Among the other sub-sectors, prices advanced a relatively firm 0.5 percent on the month in intermediates but edged up just 0.1 percent in both capital goods and consumer goods.

Germany

December retail sales volumes dropped 0.3 percent following a smaller revised 1.9 percent slump in November. Purchases were down a 1.3 percent from a year ago. The December dip left sales for the fourth quarter 1.7 percent lower than in the previous period when they expanded 0.6 percent. Although spending on services probably held up rather better, the unexpected weakness of household demand last month may well prompt some downward revisions to forecasts for fourth quarter real GDP. However, the retail sector in Germany was hit hard by the particularly bad weather that affected large parts of the country during the month.

January joblessness dropped 13,000 on the month after increasing a revised 1,000 in December. The unemployment rate edged down 0.1 percentage points to 7.4 percent. The latest drop in joblessness reduced the number of people out of work to 3,135,000 and the good news in the headline figures was supported in a 16,000 jump in vacancies, up from a 10,000 gain at the end of 2010.

France

December producer prices jumped 1.0 percent on the month and were 5.4 percent higher on the year. As usual, the bulk of the monthly increase was attributable to more expensive fuel costs. Higher crude prices combined with euro weakness saw refining and coking prices climb a further 8.2 percent from mid-quarter on top of November's already sizeable 6.5 percent advance. Other categories were better behaved but there was still a 0.6 percent gain on the month in food prices while utilities costs increased 0.5 percent. Electrical equipment & information technology posted a 0.3 percent advance and transport materials edged up 0.1 percent.

Italy

December producer prices were up 0.6 percent and 4.6 percent on the year. Overall prices were buoyed on the month by a 2.0 percent jump in energy costs which are now 10.3 percent higher on the year. Elsewhere however, prices were much more subdued. Intermediates were up 0.4 percent and both consumer & capital goods charges edged up a modest 0.2 percent.

Asia/Pacific

Japan

December industrial production was up 3.1 percent and 4.6 percent when compared with the previous year. Among the industries that increased on the month are transport equipment, electronic parts & devices and iron & steel. The commodities that were up included large passenger cars, fixed capacitors, drive, transmission & control parts. According to METI’s Survey of Production Forecast in Manufacturing, production is expected to increase 5.7 percent in January but decrease 1.2 percent in February.

Australia

December seasonally adjusted goods and services balance was a surplus of A$1,981 million, down A$97 million on November’s surplus. Exports were up 0.4 percent to A$24,579 million. Both rural and non-rural goods were up 1 percent. Non-monetary gold dropped 10 percent while services were down 1 percent. Imports were up 0.8 percent to $22,598 million. Intermediate and other merchandise goods were up 8 percent. Non-monetary gold dropped 34 percent, capital goods declined 4 percent and consumption goods edged down 1 percent. Services also were down 1 percent.

Americas

Canada

November monthly gross domestic product was up 0.4 percent and 3.0 percent when compared with last year. The advance was largely built upon a 0.5 percent monthly increase in service sector activity as the goods producing area posted a minimal 0.1 percent rise in output. Within services there were particularly large monthly gains in wholesale (1.5 percent) and retail trade (1.4 percent). They were supported by strength in finance, insurance & real estate (0.6 percent) and accommodation & food (0.4 percent). Most other sub-sectors managed small increases in output with just professional, scientific & technical services seeing a decline (0.1 percent). By contrast the goods producing sector was hindered by a sharp and second consecutive contraction in manufacturing (0.8 percent) due in large part to temporary plant shutdowns for retooling in the auto trade. The slide here was compounded by a further decline in construction (0.4 percent). Excluding autos and related parts industries, manufacturing was down only 0.2 percent. As it is, the combined losses were more than offset by advances in mining and oil & gas extraction (1.3 percent), utilities (1.5 percent) and agriculture (0.2 percent).

December industrial product price index was up 0.7 percent and 2.9 percent on the year. The raw materials price index surged 4.2 percent on the month to stand 13.2 percent higher on the year. The bounce in the IPPI was due to a 4.0 percent monthly spike in petroleum & coal product prices excluding which the headline index would have risen 0.4 percent on the month and 1.6 percent on the year. However, there was also a sizeable gain in primary metal products (1.7 percent). Heavy demand for precious metals was also a major feature and silver & platinum prices were up 9.4 percent from mid-quarter. By comparison most other categories were relatively subdued although chemicals (0.9 percent) saw a significant increase too. Price declines were limited with motor vehicles & other transport equipment registering the steepest decline (0.4 percent). At the same time raw material costs were inflated by a 5.6 percent monthly leap in mineral fuels, without which the RMPI would have risen 2.9 percent from November. The headline index was also supported by a 6.3 percent spike in vegetable prices and a 3.9 percent gain in the cost of non-ferrous metals. Animal & animal products rose 2.0 percent while ferrous metals group (minus 0.4 percent) was the only sub-sector to report a drop.

January employment jumped by 69,200 on the month after a stronger revised 30,400 gain in December. However, with the labor force expanding by 106,400, the jobless rate edged up to 7.8 percent from 7.6 percent. The overall advance in employment was roughly evenly split between full-time (31,100) and part-time (38,000) positions. Public sector payrolls grew 26,400 while the net increase in private jobs was 22,700. Self-employment was up 20,100. Most of the headline gain in jobs occurred in services (49,400) although there was also an addition to the headcount in the goods producing side (19,700). Within services there was a sizeable increase in business, building & other support services (33,700). The rise here was supported by advances in health care & social assistance (15,200), information, culture & recreation (13,400) and public administration (19,900). Other gains were seen in trade (8,300), professional, scientific & technical services (8,900) and education (10,100). However, there were job losses in both transport & warehousing (31,900) and accommodation & food services (25,900). The increase in goods producing employment was mainly due to a 13,200 jump in agriculture. Manufacturing payrolls was up 4,000, construction was up 2,700 and natural resources, 1,500. Utilities shed 1,700 positions.

Bottom line

Both the European Central Bank and Reserve Bank of Australia left their key interest rates at 1 percent and 4.75 percent respectively. Bank Indonesia increased its rate by 25 basis points to 6.75 percent. This was the first rate change since August 2009 when the Bank lowered its rate to 6.5 percent. Economic data including manufacturing and service purchasing managers surveys around the globe buoyed hopes for continued economic recovery. The U.S. employment report left analysts confused. However, the shadow of the turmoil in Egypt kept market participants muted throughout the week.

This week, European economic data focuses on industrial output and international trade balances, especially those from Germany. The Bank of England announces its policy decision on Thursday — no change is expected to its 0.5 percent policy rate. It is Australia’s turn to release labor market data Thursday morning (local time). It is a quiet week for new U.S. data.

Looking Ahead: February 7 through February 11, 2011

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