Global Markets

Investors reacted to an avalanche of new economic data last week that gave them insight on global growth. While the data as usual were ‘mixed’, when combined with positive earnings reports and a dissipation of the tensions in Egypt, all equity indexes followed here were up for the week. New economic data in the U.S. covered every spectrum of the economy including the consumer, housing and manufacturing. In Europe, fourth quarter growth estimates were unveiled. And while the eurozone and its key member states expanded, they grew at a slightly slower pace than were forecast. Japan’s contraction in the fourth quarter was viewed as ‘temporary’.

Inflation on the producer level has picked up thanks to rising energy and food prices. However, the ability for producers to pass on increases varies from country to country. With the exception of the UK and the emerging economies, consumer price increases especially at core seem relatively benign. The jump in China’s producer and consumer price indexes led once again to an increase in bank reserve requirements by the People’s Bank of China.

However, despite equities’ advances, the unrest in the Middle East, the European debt crisis, and concerns over inflation and central bank tightening simmer in the background.

Global Stock Market Recap

Europe and the UK

Equities were up in Europe and the UK for the third week thanks to a combination of earnings and positive economic data. On Tuesday, investors got their first look at fourth quarter eurozone growth in most of its Member States (Check out the reports in the Indicator Scoreboard below.) While growth was slightly below consensus, the data were respectable. However, there are continuing concerns about the sovereign debt risks, especially ahead of the G20 meeting on Friday and Saturday. The FTSE was up 0.3 percent, the DAX gained 0.8 percent and the CAC jumped 1.4 percent.

In the UK, January’s 4 percent on the year reading for inflation is intensifying pressure for an interest rate increase. Investors looked to the Bank of England’s latest Inflation Report for guidance. The new report shows a widely expected positive revision to the CPI profile over the next few quarters. In fact for the first half of the forecast period the new projection is markedly higher than that shown in the November edition and is even somewhat firmer over the latter half. Still, as Governor Mervyn King pointed out, the Bank sees the likelihood of inflation being above or below target at the end of the 2-year policy horizon as being broadly equal.

The risk of an increase in official interest rates (currently at a record low of 0.5 percent) is clearly apparent in the new projections. Thus, the forecast made on the basis of no change to QE (Stg200 billion) and market interest rate expectations shows the CPI running at a 1.7 percent annual rate in two years' time. However, assuming no change in QE and a steady Bank Rate (0.5 percent), inflation is put slightly above its 2 percent target.

Asia Pacific

Stocks were up last week as optimism continued to increase about global economic recovery, with many indexes scoring impressive gains. The continuing stream of positive earnings reports also helped. For example, the SET jumped 4.8 percent while the Hang Seng and the Jakarta Composite advanced 3.4 percent and 3.2 percent respectively. The Nikkei was up 2.2 percent.

After markets closed here for the week, the People's Bank of China (PBoC) announced its second reserve increase of the year. The 50 basis point increase in the commercial bank reserve requirement takes effect on February 24. The ratio for large banks will be a record 19.5 percent. The Bank last adjusted the reserve requirement less than a month ago on January 20. It increased the ratio six times over 2010. The government has already raised its benchmark interest rates once this year and has also introduced many measures designed to tackle onshore inflationary pressure, including surging house prices. The move was expected. In January, consumer prices were up 4.9 percent after rising 4.6 percent on the year in December.

The Reserve Bank of Australia released the minutes of its February first meeting when it voted to keep its policy interest rate unchanged at 4.75 percent where it has been since November 2010. Since the RBA met two months ago, the devastating floods in Queensland have caused severe economic damage. After reviewing the global and domestic economies, board members noted that they had time to assess the balance of risks for policy and that their current stance remains appropriate. They said that the recent floods would have short term effects and medium term economic prospects were the same as before the floods. The RBA estimates that first quarter GDP could be as much as 1 percent below where it otherwise would have been. However, the rebound in coal output and the ramping up of reconstruction efforts will drive a robust expansion going forward. Indeed, the RBA now projects the economy will expand an impressive 4.25 percent on the year in the fourth quarter of 2011, a half percentage point stronger than it had forecasted in November.

Bank of Japan

As expected, the Bank of Japan left its policy interest rate range between zero and 0.1 percent and said it would maintain its very stimulative monetary policy until there is a clear sign of price stability. The vote was unanimous. The monetary policy board noted that the economy was gradually emerging from a pause to return to a moderate recovery path. In Japan, both exports and output have been showing signs of resumed growth in recent data. They said that economic growth rates are increasing again globally.

Fourth quarter GDP contracted 0.3 percent on the quarter and with it, Japan lost its place as the world’s second largest economy to China. The contraction is viewed as temporary. It was caused in part by the end of the government’s subsidy for fuel-efficient cars and a reduction in incentives to buy electronic home appliances. Exports are expected to be the main driver of growth going forward given the recoveries in Japan’s main markets. The Japanese export environment has improved thanks to strong Chinese and other external economies. The export-led economic recovery is predicted to have a knock-on effect on consumer spending.

The Bank of Japan raised its assessment of the economy to say it is gradually emerging from a slowdown, further signaling that no imminent monetary easing is on the horizon. A rebound in exports and output, driven by robust demand in fast growing Asia, has underscored the BoJ’s view that the economy is heading toward a moderate recovery after a mild contraction in the final quarter of last year.

The BoJ cut interest rates effectively to zero last year and set up a ¥5 trillion pool of funds to buy assets ranging from government bonds to private debt, aiming to support a fragile economy and pull Japan out of deflation. BoJ officials have said topping up the asset buying plan is a clear option if downside risks to growth materialize, although expectations of an imminent monetary easing have diminished on growing signs that Japan's economy will soon emerge from a lull.

Currencies

The U.S. dollar was down against its major counterparts last week as the possibility of higher interest rates in the eurozone and the UK sent investors to the euro and pound. The euro climbed to a one week high against the dollar on Friday after the ECB Executive Board member Lorenzo Bini Smaghi said the Bank may need to raise interest rates as global inflation pressures mount. The pound gained against the dollar amid speculation inflation may soon force the Bank of England to raise interest rates.

The pound sterling reached a two week high after UK retail sales soared 1.9 percent in January, far above analysts’ expectations. Pressure on the Bank of England to raise its key rate from a record low of 0.5 percent increased after January’s consumer price index jumped by 4 percent —double the BoE’s 2 percent inflation target. Bank of England Governor Mervyn King said the next day that inflation will peak this year and ease in 2012.

The Swiss franc rose against the dollar as Egypt said Iran was granted permission to send two naval ships through the Suez Canal. The dollar declined last week after the FOMC minutes from the January meeting showed that the Fed was dissatisfied with job growth. G20 finance ministers and central bankers opened a two-day summit in Paris in an effort to agree on a common approach to global economic imbalances.

Selected currencies — weekly results

Indicator scoreboard

EMU

December industrial output slipped 0.1 percent on the month and 8.0 percent on the year. On the quarter, output was up 1.7 percent after increasing 1.0 percent in the third quarter. Production in December alone was depressed by monthly falls in intermediates (1.3 percent), durable consumer goods (1.0 percent) and no-durable consumer goods (0.3 percent). Energy (2.4 percent) posted the strongest gain although capital goods advanced too (0.7 percent).

December seasonally adjusted merchandise trade deficit was €2.3 billion after a larger revised shortfall of €3.2 billion in November. The unadjusted deficit was €0.5 billion. Exports were down 0.4 percent while imports were off 1.1 percent. Annual gains nonetheless remained strong with exports up 20 percent and imports 24.0 percent. Germany made by far the largest positive contribution to the total but France also managed a small surplus. By contrast both Italy and Spain again recorded sizeable shortfalls.

Fourth quarter flash gross domestic product expanded 0.3 percent on the quarter and 2.0 percent when compared with the same quarter a year ago. As usual no details were provided to support the headline figures. Regionally, quarterly growth rates varied quite widely and if France (0.3 percent), Germany (0.4 percent), Italy (0.1 percent) and Spain (0.2 percent) all disappointed, at least their economies expanded in contrast to Portugal (down 0.3 percent) and Greece (down 1.4 percent).

Germany

The February ZEW expectations index was up 0.3 points to 15.7 — its best reading since July 2010. Current conditions jumped to 85.2 from 82.8 in January and its best reading since July 2007. The implications are that the German economy will continue to exhibit very good momentum over coming months and will likely remain at the forefront of the eurozone economic recovery.

Fourth quarter flash gross domestic product was up 0.4 percent and 4.0 percent on the year. The annual rate is the highest since the end of 2006. As usual with the flash report, the Statistics Office provided no details behind the headline figures. However, almost certainly the expansion was held in check by the bad weather which, as the December industrial production made clear, hit the construction area especially hard.

January producer prices were up 1.2 percent and 5.3 percent on the year. Energy costs jumped a 2.3 percent from December and were responsible for much of the gain in the overall index. However, even excluding this category prices still climbed 0.6 percent on the month and were 4.0 percent higher on the year. The unusually large gain in the core PPI was mainly due to a steep increase in the cost of basics where a 1.2 percent monthly advance left prices 7.6 percent higher than a year ago. However, there was more reassuring news elsewhere as prices of both consumer goods (0.2 percent) and capital goods (0.3 percent) remained relatively becalmed.

France

Fourth quarter flash gross domestic product was up 0.3 percent and 1.5 percent when compared with last year. For calendar year 2010, real GDP expanded 1.5 percent following a 2.5 percent contraction in 2009. The relative weakness was largely due to a sharp unwinding of business inventories which subtracted 0.8 percentage points in the fourth quarter. Final sales grew 0.7 percent, almost twice the pace recorded in the third quarter. Among the other real GDP expenditure components, the key household consumption category was up 0.9 percent on the quarter. It was prompted by both the cold snap boosting energy demand and a surge in car purchases ahead of the January expiration of government support measures. Gross fixed capital formation slowed to 0.4 percent but this was partly due to a 0.7 percent decline in the public sector. Investment by businesses and households both grew 0.6 percent.

Italy

Fourth quarter gross domestic product edged up 0.1 percent and was up 1.3 percent on the year. The only supporting comments from Istat indicated that what little expansion there was stemmed from stronger activity in agriculture and services. Output in the goods producing sector declined.

United Kingdom

January consumer price index was up 0.1 percent on the month and 4.0 percent when compared with last year. In addition to higher fuel and food costs, January's data were also impacted by a 2.5 percentage point hike in VAT. Exactly how much of this increase was passed on by retailers last month is hard to determine. However, the CPIY which seeks to strip out the effects of indirect taxes registered an annual rate of 2.4 percent, up 0.4 percentage points from last time. In part this was due to the fact that VAT was also raised in January 2010. Core CPI posted a 0.4 percent decline on the month and was up 3.0 percent on the year.

January claimant count unemployment was up 2,400 for the first increase in four months. The claimant unemployment rate remained at 4.5 percent. On the ILO measure, joblessness in the fourth quarter jumped a sizeable 44,000 after a 9,000 drop in the previous period while employment fell by 68,000 jobs. The unemployment rate on this basis was 7.9 percent. Average earnings growth dropped from 2.1 percent in the three months to November to just 1.8 percent last quarter. The rise in earnings excluding bonuses was unchanged at 2.3 percent but this still constitutes an historically very low level.

January retail sales volumes jumped 1.9 percent from a notably weaker revised December decline of 1.4 percent. On the year, sales were up 5.3 percent. Excluding fuels, sales were up 1.6 percent and 5.3 percent on the year. The recovery was led by the non-food sector which saw demand rise 2.4 percent on the month. Outside of the other stores category (minus 1.0 percent) all the main sub-sectors registered solid monthly increases. Non-specialized stores (5.7 percent) fared especially well but there were unusually large advances too in clothing & footwear (3.4 percent), household goods (3.4 percent) and non-store retailing (2.7 percent). Fuel sales were up 6.1 percent from December.

Asia/Pacific

Japan

Fourth quarter gross domestic product declined a less than expected 0.3 percent on the quarter or at an annualized rate of 1.1 percent. This was the first contraction in five quarters. When compared with the same quarter a year ago, GDP was up 2.6 percent. Private consumption dropped 0.7 percent on the quarter after rising 0.9 percent in the third quarter. Corporate CAPEX was up 0.9 percent after jumping by 1.5 percent in the previous quarter. According to government officials, GDP was hit by weak exports and a high value of the yen. Net exports subtracted 0.1 percentage point. Domestic demand subtracted 0.2 percentage points thanks to removal of government consumption support to buy greener appliances. For the year 2010, GDP grew 3.9 percent after plunging 6.3 percent in 2009 and dropping 1.2 percent in 2008.

December tertiary activity index dropped 0.8 percent. It was the first drop in three months. The index was up 1.8 percent when compared with last year. The decline was led by wholesale & retail trade which sank 3.2 percent and scientific research, professional & technical services which dropped 2.0 percent. Transport & postal activities were down 0.9 percent and compound services slid 0.3 percent. Partially offsetting these declines were accommodations, eating & drinking services (up 3.1 percent), miscellaneous services except government services etc (up 2.3 percent), finance & insurance (up 1.0 percent) and living-related & personal services & amusement services (up 1.3 percent). Also up on the month were medical, health care & welfare, real estate & goods rental & leasing, information & communications, learning support and electricity, gas, heat supply & water.

China

January consumer price index was up 4.9 percent on the year, lower than the 5.4 percent rate that analysts were expecting. The CPI was up 1.0 percent on the month after rising 0.5 percent in December. Overall food prices jumped 10.3 percent on the year after rising 9.6 percent in December. The primary reason is that the basket used to measure Chinese consumer prices has been reweighted. This helped to keep January's reading below market expectations. The National Bureau of Statistics confirmed that the basket used to measure the consumer price index was reweighted as part of a twice a decade review. Housing, medicine, entertainment and education account for a greater proportion of the newly reweighted basket at the expense of food prices. The NBS said it cut food weighting in the CPI basket by 2.21 percentage points while at the same time they raised housing by 4.22 percentage points.

January producer price index soared 6.6 percent on the year after rising 5.9 percent in December. On the month the PPI was up 0.9 percent after climbing 0.7 percent the month before.

Americas

Canada

December manufacturing sales rebounded 0.4 percent after dropping 0.6 percent the month before. Sales were up 6.2 percent on the year. Higher sales were registered by thirteen of the twenty-one reporting industries. The main boost to the monthly headline change came from primary metals (3.9 percent), chemicals (2.3 percent) and petroleum & coal products (1.5 percent). There were also solid advances in miscellaneous manufacturing (4.0 percent), electrical equipment (1.2 percent) and plastics & rubber (1.5 percent). Sales in the food sector rose 0.9 percent. The main area of weakness was transportation which saw sales slump 2.7 percent, largely due to a 16.6 percent nosedive in aerospace products & parts. Motor vehicles declined 1.2 percent. Other categories that declined included furniture (1.9 percent), computer & electronic products (3.0 percent) and clothing manufacturing (10.6 percent). New orders dropped 1.7 percent on the month and backlogs fell 1.5 percent. Inventories were unchanged.

January consumer price index was up 0.3 percent and 2.3 percent on the year. Both the core measures continued to indicate that, outside of the more erratic items, inflation is not a problem for the monetary policymakers. Excluding food and energy prices fell 0.1 percent on the month to leave their annual rate steady at 1.6 percent. At the same time the BoC's preferred measure was unchanged from December which in turn saw its 12-month rate edge lower to 1.4 percent. As usual, energy played an important role in the headline data with prices in this category rising 1.4 percent on the month. Gasoline prices jumped 3.5 percent. Food (0.8 percent) also provided another sizeable lift. Among the other major sub-sectors, household operations, furnishings & equipment registered a 0.3 percent advance and alcohol & tobacco prices were up 0.4 percent. However, clothing & footwear recorded a 1.0 percent drop and reading, education & recreation a 1.2 percent decline. Shelter posted a 0.1 percent monthly drop.

Bottom line

Last week was laden with new economic data including the first look at eurozone fourth quarter growth. In the U.S., the data covered every spectrum of the economy. Needless to say, data were mixed. But they were helped by mostly better than expected earnings reports as well as receding Egyptian worries. The combination sent equities up on the week. The U.S. dollar was down on interest rate expectations going forward.

This week begins with a holiday in the U.S. The data load is considerably lighter — with German Ifo survey scheduled for Monday and the second release of its GDP data on Thursday. A second reading of UK GDP is on tap as well on Friday. In Japan, merchandise trade and the CPI will be watched carefully.

Looking Ahead: February 21 through February 25, 2011

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