Global Markets

As commodity prices wend their way higher, attention is firmly focused on inflationary pressures and their potential damage to growth. Crude futures for both West Texas Intermediate (WTI) and Brent are above $100 a barrel and are climbing as the turmoil in the Middle East and North Africa (MENA) continues. Investors have not been able to put these worries behind them on an intermittent basis, making for volatility in equities and currencies. Even on Friday, despite a fairly good on-target U.S. employment report (employment was up, unemployment rate down but average wages unchanged), equities were down on unease over the violence in Libya and the climb in crude.

Inflation worries were exacerbated Thursday after the European Central Bank all but announced that there would be an interest rate increase when next they met on April 7^th. Price increases have now topped the Bank’s 2 percent inflation ceiling for three consecutive months. Elsewhere in emerging markets, inflation is already a problem with central banks such as the Reserve Bank of India and People’s Bank of China increasing rates to fight inflation stemming not only from energy but from food prices as well.

The equity indexes in Asia Pacific region were up on the week along with those in North America. But UK and Europe indexes declined thanks to Friday’s losses.

Global Stock Market Recap

Europe and the UK

Equities swooned Friday to end a volatile week. Talk of higher interest rates pressured stocks although it did not seem to affect them on Thursday when positive U.S. economic data offset the possibility of an interest rate increase from the ECB in April. Friday’s losses turned a positive week into a negative one. The DAX edged down 0.1 percent while the FTSE was 0.2 percent lower. The CAC dropped 1.2 percent on the week. The week’s batch of positive economic data — especially the manufacturing PMI reports — were buried under inflation worries as the price of oil increased above the $100 a barrel mark. Rising eurozone consumer and producer price data added to worries that growth would slow because of higher prices, not to mention higher interest rates. But traders’ attentions continued to focus on oil prices and MENA unrest.

European Central Bank

As universally expected, the European Central Bank left its key interest rate at 1 percent amid building inflationary pressures. The ECB has an inflation target ceiling of not higher than 2 percent. February flash harmonized consumer price index was up 2.4 percent when compared with the same month a year ago. This was the third consecutive month that the HICP was above the Bank’s inflation target. However, the core HICP which excludes energy and unprocessed foods remains benign with an increase of 1.2 percent in January. At the same time, producer prices were up 6.1 percent on the year in January.

ECB President Jean Claude Trichet heightened the rhetoric on inflation more than expected at his post meeting press conference. Trichet indicated that the Bank could increase interest rates as soon as the next policy meeting on April 7^th, but at the same time is not poised to embark on a series of increases. Trichet said that the choice of the phrase 'strong vigilance' to describe the ECB's policy posture was in line with the Bank’s past communications practice. The comment refers to the tradition by which the use of the phrase 'strong vigilance' heralded a rate increase at the next scheduled meeting.

Trichet said "My understanding of the Governing Council is in line with the assessment that an increase in interest rates in the next meeting is possible. We are never precommitted. Our decision will be taken by the Governing Council [based on] incoming data. It is not certain. It is possible." Trichet said that the decision to deploy the 'strong vigilance' signal had been taken because the balance of risks to price stability had now moved to the upside on the basis of the ECB’s analysis. The strong indication that an increase will come in April shocked markets which were not expecting an increase until late this year.

The ECB also announced that its staff projections for inflation and economic growth in the eurozone were up slightly from December. The Bank now expects consumer prices in a range of 2.0 percent to 2.6 percent in 2011 and 1.0 percent to 2.4 percent in 2012. The ranges for gross domestic product were 1.3 percent to 2.1 percent in 2011 and 0.8 percent to 2.8 percent in 2012.

Trichet also said the central bank would carry on providing unlimited funding for banks at its three month operations for the next three months and would keep full allotment at its weekly and one month operations until at least July 12. By signaling its readiness to raise rates while keeping support in place for banks, the ECB tailored its policy to address growing inflation pressures while keeping in place measures to help lenders in weak peripheral eurozone states.

Asia Pacific

Equities here were up last week as investors came to terms with geopolitical risks in the Middle East and North Africa as well as the escalating price of oil. Gains ranged from a low of 0.7 percent (All Ordinaries) to a hefty 4.4 percent for the Sensex. The usual reticence to buy just prior to the release of the U.S. employment report was not visible on Friday — most indexes followed here advanced on the day. Only the Sensex succumbed to profit taking after a holiday-shortened week of positive trading and was virtually unchanged. Equities were boosted by a spate of better than expected U.S. and European economic data that indicated the recovery was intact and that their economies would be making more significant contributions to global growth.

Still, investors remained cautious with worries about Middle East turmoil and soaring crude oil prices lurking just under the surface. For example, losses in this region were particularly heavy Wednesday as worries over Middle East political turmoil intensified, sending crude oil prices higher. The declines followed steep overnight losses in the U.S. as investors fretted that rising energy costs would hurt the global economic recovery.

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. In January, the devastating floods in Queensland occurred causing severe economic damage. It shut coal mines, cut rail lines and affected as many as 30,000 properties in addition to ruining agricultural crops. Analysts think that the RBA may tolerate quicker inflation for now along with slower growth because the economy had already decelerated in the second half of last year after seven rate increases from October 2009 to November 2010. Retail sales released earlier increased a more than expected 0.4 percent on the month, thanks to food sales which soared 2.5 percent.

The floods, which also hit Victoria State, deluge probably boosted prices of goods from the region, having a short-term effect on food costs. The Bank has an inflation target range of 2 percent 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.

In his statement, governor Glenn Stevens said that a mildly restrictive stance is appropriate. The RBA expected inflation in the year ahead to be within its 2 percent to 3 percent inflation target range. The board noted that asset values were little changed in recent months and that overall credit growth remains subdued. They said that weather-related production losses were temporary.

Bank of Canada

As widely expected the Bank of Canada left its target for the overnight rate unchanged at 1.0 percent. Accordingly, the bank rate remains at 1.25 percent and the deposit rate 0.75 percent. The decision was explained by the Bank's assumption that, despite a stronger than expected recovery, there is still plenty of spare capacity in the local economy. This is seen as maintaining an effective lid on underlying pressures and as a result, core inflation excluding eight volatile items as measured by the Bank is expected to edge upward only gradually towards 2 percent by the end of next year.

Meantime, developments in the overseas economy since the last interest rate announcement in January were assessed as having been broadly in line with official expectations. However, the Bank still noted risks to the global economy, particularly the European recovery due to ongoing sovereign debts issues and the readjustment of banks' balance sheets. The announcement also once again highlighted the dangers posed to the Canadian export sector by the persistently strong Canadian dollar. This looks to be a key factor limiting the central bank's ability to adjust policy at this time.

Currencies

The U.S. dollar dropped against many of its major counterparts last week. While the currency was up against the Australian dollar and yen, it dropped against the euro, pound, Swiss franc and Canadian dollar. The euro leaped momentarily over $1.40 Friday morning after the employment situation report disappointed some traders. It had previously gained strength on Thursday after Jean Claude Trichet delivered a more hawkish statement accompanying the ECB decision to keep interest rates at 1 percent along with the possibility of a rate increase at its April meeting. He also warned that inflation risks were gaining. Ahead of the meeting, governing council members had expressed concern over rising input costs, particularly energy and raw materials, and the mounting pressure on companies to pass on these costs to consumers.

Selected currencies — weekly results

Indicator scoreboard

EMU

January final harmonized index of consumer prices was down 0.7 percent on the month and up 2.3 percent on the year. The January outcome followed a 2.2 percent annual increase in the index at the end of 2010. Core HICP excluding food, drink, tobacco & petroleum was up 1.1 percent on the year. At the same time both the HICP less unprocessed food & petroleum and the HICP less seasonal food & petroleum were up 1.2 percent on the year. On an annual basis, inflation rose most sharply in housing (4.5 percent from 3.8 percent), communications (minus 0.2 percent from minus 0.7 percent) and health (1.3 percent from 0.8 percent). However, prices decelerated in a number of sectors including clothing (minus 0.6 percent from 0.6 percent) and recreation & culture (minus 0.1 percent from 0.1 percent). Food inflation also slipped (1.5 percent from 1.8 percent). February flash HICP was up 2.4 percent. As with all flash estimates, no detail was available.

February manufacturing PMI was unrevised from the flash estimate at 59.0, close to an 11-year peak. Among the larger members, the German PMI rose 2.2 points from January to a record 62.7 and the French index 0.8 points to 55.7. Italy saw a solid 2.4 point gain to 59.0 but Spain edged up just 0.1 points to 52.1. Growth also accelerated among the smaller EMU states although Greece bucked the trend being the only member to indicate a contraction. Output rose at close to a record pace with both domestic and, especially, overseas demand providing plenty of impetus. Capital goods performed the best with growth hitting a new peak and there was a 10-year high in intermediates. By contrast the consumer sector remained a drag although even its expansion rate saw a 3 ½-year high.

January unemployment rate edged down to 9.9 percent. Revised declines in the numbers of unemployment to 73,000 in November and 81,000 in December were followed by a 72,000 drop at the start of the year to reduce the number out of work to 15.775 million. There were highly significant divergences between the member states. While joblessness has dropped 0.8 percentage points to 6.5 percent in Germany since June 2010, it has risen 1.2 percentage points to 20.4 percent in Spain over the same period. Similarly, Portugal has witnessed a 0.7 percentage point increase to 11.2 percent and even in Italy, the rate has climbed 0.3 percentage points to 8.6 percent.

January producer prices (excluding construction) jumped 1.5 percent and were up 5.3 percent on the year. As usual, energy prices led the way with another 3.2 percent monthly jump and now stand 12.5 percent higher than a year ago. However, even without energy, prices were up 0.8 percent on the month. This boosted annual growth in the core rate from 3.3 percent to 4.0 percent, its strongest 12-month rise since September 2008. The other main culprit was intermediates where prices climbed 1.5 percent on the month and were up 7.4 percent on the year. By comparison a 0.2 percent monthly increase in the price of both capital goods (annual 0.9 percent) and durable consumer goods (1.4 percent) looked tame. Nondurables were slightly firmer, up 0.4 percent from December but still a modest 2.0 percent on the year.

Fourth quarter gross domestic product was up an unrevised 0.3 percent on the quarter and 2.0 percent when compared with the same quarter a year ago. Household spending was up 0.4 percent on the quarter after edging up 0.1 percent in the previous period. Gross fixed capital formation dropped 0.6 percent on top of a 0.1 percent decline in the third quarter but developments here were almost certainly biased weaker by the bad weather in December. Government spending slowed to a 0.1 percent quarterly rate, down 0.3 percentage points from last time. Export volumes were up a modest 1.8 percent following a 2.2 percent increase in the third quarter. Imports lagged behind with just a 1.1 percent rise, resulting in a net contribution to the bottom line from the foreign trade sector of 0.3 percentage points. Inventories subtracted 0.2 percentage points from quarterly growth which suggests that current stock levels should not be a drag on output over the near-term.

January retail sales volumes were up 0.4 percent on the month and were up 0.7 percent on the year. Food purchases were up 0.1 percent while non-food excluding fuel sales were up 0.6 percent. By country, performances varied markedly. Germany saw a 1.4 percent rise on the month and there were very strong increases in Ireland (2.0 percent) and Slovenia (4.6 percent). However, purchases declined in a number of countries including Portugal (1.6 percent), Finland (0.3 percent), Austria (1.1 percent) and Belgium (0.9 percent).

Germany

February unemployment dropped a steep 52,000 after declining a larger revised 18,000 decline in January. The unemployment rate dipped to 7.3 percent from 7.4 percent. The number of people out of work now stands at 3.069 million, the lowest in almost two decades. Moreover, in addition to the robust performance in February, the outlook for the jobs market also improved with vacancies climbing 15,000 on the month, up 2,000 from their January gain.

January retail sales jumped 1.4 percent after rising 0.3 percent in December. On the year, January sales were up 2.6 percent. The January gain left purchases 1.2 percent above their fourth quarter average and at their highest level since last July. In part the bounce may be due to a rebound from bad weather that depressed spending in December.

France

January producer prices were up 0.9 percent and 5.6 percent on the year. The latest advance was once again dominated by higher energy costs. Following their 7.9 percent surge at the end of 2010, oil prices jumped a further 3.7 percent on the month and 30.6 percent on the year. Other industrial products category saw prices increase a relatively steep 0.9 percent on the month, largely due to sharp gains in chemicals (6.7 percent) and plastics (3 percent). At the same time, electrical equipment, information & technology and machinery charges were up 0.7 percent and food & drink posted a 0.5 percent advance. Transport prices edged 0.2 percent firmer but utilities were unchanged from December.

Fourth quarter joblessness in mainland France on the ILO definition stood at 9.2 percent, down from 9.3 percent in the third quarter rate. Total unemployment, including overseas territories, was 9.6 percent, 0.2 percentage points lower than in the previous period. The fall in mainland joblessness was largely due to an increase in part time positions. Full time positions were essentially flat. The fourth quarter rate was the lowest since the third quarter of 2009 and equated with 2.602 million people being out of work.

Asia/Pacific

Japan

January seasonally adjusted industrial production was up a less than expected 2.4 percent after increasing 3.3 percent in December. Analysts had expected output to increase by 4.0 percent. On the year, output was up 3.0 percent. Contributing to the increase in output were transport equipment, general machinery and iron and steel. Commodities that mainly contributed to the increase are large passenger cars, semiconductor products machinery, drive, transmission & control parts. According to the Survey of Production Forecast in Manufacturing, production is expected to increase 0.1 percent in February and increase 1.9 percent in March.

January retail sales edged up 0.1 percent on the year after declining a revised 2.1 percent in December. This was the 10^th increase in the past 12 months. Analysts had expected sales to decline 1.6 percent. Auto sales plunged 19.4 percent on the year while machinery sales sank 9.1 percent. Fuel sales, reflecting price increases were up 11.9 percent. Shoppers rushed to retail stores before December 1st when the government halved the reward points it offers for buying TVs, air conditioners/heaters and refrigerators that require less power to operate. Subsequently, this has caused a pullback in sales of consumer electronics. Automobile sales have also slumped after rush purchases during the summer ahead of the government ending its subsidy program for buying energy-efficient vehicles in early September.

January unemployment rate remained at 4.9 percent for the second month. The number of unemployed declined by 140,000 to 3.09 million from a year ago. Employment declined by 90,000 to 62.04 million from a year ago. The labor force participation rate dropped to 58.9 from 59.2 while the employment rate edged down to 56.1 from 56.2 — both from a year ago.

January household spending dropped 1.0 percent when compared with the previous year. Spending on food was off 2.4 percent while clothing & footwear declined 3.7 percent and culture & recreation dropped 6.4 percent. On the upside, spending on housing was up 1.5 percent while fuel, light & water charges were up 2.2 percent. Other increases included medical care which was up 3.4 percent and education which jumped 9.5 percent on the year.

Australia

January retail sales were up a seasonally adjusted 0.4 percent on the month after increasing 0.2 percent in December. On the year, sales were up 1.8 percent. According to the ABS, January's outcome was influenced by flooding and cyclone conditions in the state of Queensland and some other areas. Aggressive price discounting in the face of what has been described as "intense" consumer caution towards spending may have also had an impact on the retail trade sector. Food retailing was up 2.5 percent while other retailing increased 2.1 percent and department stores advanced 2.3 percent. However, sales sank 4.6 percent for household goods. Clothing, footwear & personal accessory retailing sank 2.5 percent while cafes, restaurants & takeaway food services slipped 0.3 percent on the month. Recorded retail spending was also affected by very high levels of overseas internet shopping, taking advantage of the strong Australian dollar and tax-free imports.

Fourth quarter gross domestic product was up 0.7 percent on the quarter and 2.7 percent on the year. Final consumption expenditures were up 0.6 percent and 3.1 percent on the year. Gross fixed capital formation slumped 0.2 percent but was up 1.5 percent on the year. The growth was driven by a 0.8 percent contribution inventory changes, a 0.4% contribution from final consumption expenditure and a 0.3% contribution from gross fixed capital expenditure on machinery and equipment. The professional, scientific and technical services industry contributed 0.3 percent while finance & insurance services contributed 0.2 percent. Flooding in Queensland began in late December 2010. While the floods have had some effect on the December quarter estimates, it is expected that the more significant economic impact of this and floods in other states will be reflected in the estimates for the March quarter 2011.

January balance on goods and services was a surplus of A$1,875 million, down from December’s surplus of A$2.018 million. Exports were down 4.1 percent while imports dropped 3.8 percent. Non-rural goods dropped 8 percent while rural goods were down 2 percent. Non-monetary gold was up 38 percent and net exports of goods under merchanting were up A$5 million. Services exports were up rose A$10 million. Imports of intermediate and other merchandise dropped 11 percent, non-monetary gold dropped 26 percent and consumption goods edged down 1 percent. Capital goods were up 3 percent while services gained 2 percent. Economists said weather disruptions to coal production in flood-hit eastern Australian states would have been offset by higher prices and a lift in export volumes and prices for iron ore out of Western Australia.

Americas

Canada

Fourth quarter gross domestic product was up 0.8 percent and 3.2 percent when compared with the same quarter a year ago. On an annualized basis, GDP was up 3.2 percent. Among the GDP expenditure components, household spending was up 1.2 percent on the quarter after increasing 0.7 percent last time, while gross fixed capital formation expanded 1.4 percent after a 2.3 percent gain in the third quarter. Government consumption increased 0.8 percent, well ahead of the 0.2 percent increase seen previously and final domestic demand was up 1.2 percent or 0.3 percentage points faster than in the previous period. Most of the boost to headline growth came from exports which surged 4.0 percent on the quarter and easily more than reversed a 0.4 percent decline in the third quarter. Real exports of crude petroleum jumped 30 percent to a record high but autos dropped nearly 6 percent. By contrast, imports were up just 0.1 percent. In terms of output, the goods producing sector expanded 0.5 percent on the quarter, down from a 0.8 percent increase last time but within this, manufacturing contracted 0.8 percent. Services saw output grow 0.9 percent with wholesale trade up 1.7 percent and retail up 1.0 percent, a rate matched by finance, real estate & renting. Information technologies advanced 1.6 percent.

December monthly GDP expanded 0.5 percent on the month to sustain annual growth at 3.2 percent. The advance was built upon a robust 0.8 percent monthly gain in goods producing output. Within this manufacturing production expanded 0.6 percent while agriculture, forestry & fishing grew 1.0 percent and mining & oil & gas extraction gained a very solid 2.0 percent. Utilities output was also up 1.0 percent but construction, probably hit by the weather, declined 0.3 percent. Services output was up 0.4 percent from November, largely thanks to a 1.3 percent bounce in wholesale trade and a 1.0 percent increase in transportation & warehousing. Accommodation & food services (0.8 percent) and information & cultural industries (0.6 percent) also held up well. Most other areas posted small gains but retail trade declined 0.4 percent after a 1.5 percent bounce last time.

January industrial product price index was up 0.2 percent and 2.7 percent on the year. The raw materials price index gained 0.3 percent and was 9.6 percent higher on the year. Output prices were boosted by a 2.2 percent jump on the month in petroleum & coal charges. Without this the IPPI would have been unchanged from December and only 1.7 percent firmer on the year. Outside of miscellaneous non-manufactures (3.0 percent), most other sub-sectors were relatively well behaved. Primary metals saw a 0.8 percent monthly advance and food were up 0.5 percent but many areas posted monthly declines including autos (0.8 percent), miscellaneous manufactures (0.7 percent) and pulp & paper (0.3 percent). Input costs were kept in check by a 2.8 percent monthly slide in mineral fuels without which the RMPI would have risen 2.8 percent from December and 14.4 percent from a year ago. Vegetable products (4.6 percent), animals & animal products (2.5 percent), ferrous materials (2.0 percent) and non-ferrous metals (3.7 percent) all saw strong monthly price increases.

Bottom line

Three central banks met and all three left interest rates unchanged for now. New economic data released during the week were mostly positive. The manufacturing PMIs were especially strong. Climbing oil prices and tensions in the Middle East and North Africa proved to be a distraction from the otherwise good news. The reaction to the U.S. employment report was mixed with traders looking for an employment increase of over 200,000 instead of the 192,000 reported.

This week promises to be quieter on the economic data front. The Bank of England holds its policy meeting on Thursday. Most economic data from Europe and the UK revolves around industrial output and foreign trade. Australia’s labour report is on tap. From Japan, revised fourth quarter GDP data will be released along with its corporate goods price index. China releases its spate of economic data including industrial production, retail sales and both the consumer and producer price indexes. However, markets will continue to focus on oil prices and geopolitical events.

Looking Ahead: March 7 through March 11, 2011

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