Global Markets

Equities swooned last week under the burden of geopolitical risks, high oil prices, sovereign risk and some disappointing economic data. And then there was Friday’s earthquake in Japan — a magnitude 8.9, the worst in Japan’s history. On the week, only shares in the Philippines and Thailand advanced. Losses ranged from 4.5 percent (All Ordinaries), 4.2 percent (Topix) and 4.1 percent (Nikkei) to less than 0.1 percent (Jakarta Composite).

Over the last few weeks, developments in North Africa and the Middle East continued, and are likely going to continue, to be focal points. The big concern is that if the unrest spreads to the major oil producers such as Saudi Arabia, then the impact would send prices skyrocketing. It would stoke inflationary pressures while at the same time dampen growth.

Global Stock Market Recap

Europe and the UK

Equities in Europe and the UK dropped for the third consecutive week due to a myriad of problems. The ongoing geopolitical problems in the Middle East and North Africa have left investors unsettled given the region’s critical role as the worlds major oil supplyier. Rising prices have underlined the region’s significance. Both the FTSE and DAX sank 2.7 percent while the CAC dropped 2.3 percent. The indexes were down four of five days.

Investors were reminded once again of the continued problem of sovereign debt in the eurozone Thursday when Moody’s downgraded Spain’s debt rating by one notch to Aa2 from Aa1, with a negative outlook. Moody’s cited worries about the cost of the banking sector’s restructuring, the government’s ability to achieve its goals for reduced borrowing and the country’s grim growth prospects. Earlier in the week, Moody’s cut its credit rating on Greece’s government debt by three notches, taking the securities deeper into junk territory, and said the outlook was negative. Moody’s announcements put pressure on Portugal, which was able to sell $1.39 billion in bonds this week but at a sharply higher interest rate. The downgrades came ahead of a crucial meeting Friday of the 17 eurozone member state leaders. Traders are concerned that European leaders will not move to significantly increase in the size and scope of the bailout fund for struggling countries.

Worries about global growth also contributed to negative morale. China’s export growth slowed, raising concern that the global economic recovery will falter. However, the February data were distorted by Lunar New Year’s celebrations when businesses typically close down for at least a week and sometimes longer. And in Germany, January exports also unexpectedly declined but after increasing the two months before.

Bank of England

As generally expected, the Bank of England’s monetary policy committee again voted to leave policy on hold. The bank rate remains 0.5 percent where it has been since March 2009 and the quantitative easing ceiling stays at the £200 billion to which it was raised in November of the same year. Limited rumors that interest rates might be increased at this meeting proved to be unfounded. But speculation about a near term move is unlikely to dissipate any time soon. Three MPC members have already voted for a tightening in February and a number of others were clearly concerned by the persistent inflation overshoot. Inflation is currently double the Bank of England’s 2 percent inflation target.

Asia Pacific

Equities were already lower when Friday’s earthquake hit Japan just before markets closed for the week and added to the already negative sentiment. As in Europe and North America, the continuing geopolitical concerns in Libya and Saudi Arabia, fresh concerns about sovereign debt in Europe and global growth worries had already pushed stocks lower and the devastating earthquake and tsunami in northern Japan sent stocks even lower to end a dismal week. All the markets in the region except in the Philippines and Thailand, were down on the week. The heaviest losses were in Australia and Japan. The All Ordinaries plunged 4.5 percent while the Nikkei sank 4.1 percent and the Topix dropped 4.2 percent.

Investors reacted to the slew of Chinese data that were released. They were shocked that February exports dropped. However, Chinese data are typically distorted at this time of year because of the Lunar New Year’s celebrations when businesses close. It is typical for exports to grind to a halt during the week long Chinese New Year holiday while imports do not suffer as much in comparison. Furthermore, the holiday does not fall at the same time each year and that can distort the data as well. It should be noted that the data are for February while for the developed economies such as the U.S., Germany, France and the UK, trade data released last week (which held some disappointments as well) were for January. Both consumer and producer price indexes show that inflationary pressures continue to be unrelenting, suggesting that tighter monetary policy may be needed which adds to uncertainty.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand cut its official cash rate (OCR) by 50 basis points to 2.5 percent. The RBNZ is facing the task of facilitating rebuilding of Christchurch after the devastating earthquake last month. However, GDP growth in the second half of 2010 has proved to be weaker than expected and first quarter 2011 GDP is expected to contract. In its statement, the RBNZ cited slower growth ahead after the country’s deadliest earthquake in 80 years which sent the New Zealand dollar to a five month low. Governor Alan Bollard said that the Bank has acted preemptively in reducing the cash rate to lessen the economic impact of the earthquake and guard against the risk of this impact becoming especially severe. He continued to say that the Bank expects that the current monetary policy accommodation will need to be removed once the rebuilding phase materializes.

Bank of Korea

The Bank of Korea increased its key interest rate by 25 basis points to 3.0 percent for the second time in 2011 as inflation hit a 27-month high. The Bank also raised the interest rate on soft loans to commercial banks by 0.25 percentage point to 1.50 percent. That rate is applied to special low interest loans which banks are expected to pass on to smaller firms. The decision was not unanimous. BoK governor Kim Choong-soo hinted afterward that the Bank would move only gradually going forward. The BoK became the latest Asian central bank to try to head off the inflation that has been fueled across the region by fast economic growth, loose monetary policies and soaring prices for food, oil and commodities. February consumer prices were up 4.5 percent from a year earlier. It was the second month that inflation was above the Bank’s inflation target range of 2 percent to 4 percent. Central banks in Vietnam and Thailand raised rates earlier in the week.

The Bank said South Korea's economy appears on track for solid growth in coming months, helped by exports and increasing investment in consumption and facilities. That leaves inflation as the top policy challenge, and fighting it means tempering demand-led inflation as the domestic economy grows strongly. Sales at the country's major department stores rose at their fastest pace on record in January.

Currencies

The U.S. dollar was up against most of its major counterparts last week. The currency slipped against the Canadian and Australian dollars. The yen was up on the week after the worst earthquake in gained after the worst earthquake in at least a century struck Japan, spurring domestic investors to buy the currency as a haven even as investors tried to figure out the potential economic consequences of the tremor. The yen slid against the dollar and other major counterparts in the immediate aftermath of the temblor and tsunami. But then it rebounded in a knee jerk reaction. Some traders said that the safe haven characteristics of the yen were protecting the currency. They also said that so-called repatriation flows were playing a big role in the yen's rise.

While the immediate impact of a natural disaster could be very negative for economic growth, thereafter, as the rebuilding effort begins, growth might rebound significantly. However, the earthquake is likely to deal a severe blow to the nation's overall economy. The section of the country that was hardest hit serves as a major hub for automobile, auto parts, energy and materials industries.

The Bank of Japan announced that its two-day policy board meeting originally scheduled for Monday and Tuesday, would be cut to one day and conclude on Monday. It did not give a reason for the decision, but the obvious explanation is that the bank wants to bring forward the policy announcement to accommodate additional measures in response to the earthquake.

The euro was pounded by the renewal of heightened sovereign debt problems after Greece and Spain were downgraded further by Moody’s and after Portugal was forced to pay a higher interest rate on a bond sale earlier in the week.

Selected currencies — weekly results

Indicator scoreboard

Germany

January manufacturing orders jumped 2.9 percent after sinking 3.6 percent in December. On the year, orders were up 16.3 percent. Growth was led by domestic orders which were up 4.5 percent, easily offsetting a 3.2 percent drop last time. Within this, basics (5.8 percent) were especially firm but capital goods (3.8 percent) were not far behind and consumer & durables (1.1 percent) also fared well. Overseas orders were up 1.6 percent on the month. Basics (3.3 percent) again outshone the other main categories as both capital goods (0.9 percent) and consumer & durables (0.6 percent) were up only modestly by comparison. Orders from other EMU states climbed 2.3 percent while non-eurozone demand expanded 1.3 percent.

January industrial production was up 1.8 percent and 12.5 percent on the year. Intermediates were up 5.3 percent and consumer goods advanced 2.8 percent. Output was dominated by a weather-related rebound in construction (36.3 percent). Excluding construction, output edged up 0.1 percent and was up 11.4 percent on the year. Manufacturing output gained 0.2 percent from December after a revised 1.0 percent increase last time. By contrast, capital goods production dropped 5.5 percent on the month but this followed a 5.6 percent spike at year-end. Energy output dropped 1.0 percent after a 1.3 percent advance in December. With weather having a major influence on the monthly profile, the two month comparison offers the most useful guide to the underlying trend. This shows a 0.8 percent increase in manufacturing output and a more modest 0.1 percent gain in overall industrial production.

January seasonally adjusted merchandise trade surplus narrowed to €11.8 billion from the revised December surplus of €14.2 billion. The deterioration was attributable to a combination of weaker exports (down 1.0 percent on the month) and higher imports (up 2.3 percent). However, on the year, both exports and imports were up just over 24 percent. Shipments to other EU countries were up 18.8 percent on the year and to non-EU countries, 30.8 percent. On the same basis imports grew 17.1 percent and 31.6 percent respectively.

France

January merchandise trade deficit swelled to €5.89 billion from €5.06 billion in December and constituted the most red ink since October 2008. Nominal exports rose 1.5 percent on the month while imports were up 3.4 percent. The deterioration implied a deficit of €15.24 billion over the last three months against a shortfall of just under €13 billion in the fourth quarter.

January industrial output excluding construction was up 1.0 percent on the month and 5.4 percent on the year. The start of year performance was stronger than first appearances suggest since the headline advance was held in check by a 4.0 percent monthly drop in energy output. Manufacturing posted a 1.8 percent jump and was 2.0 percent higher over the last three months. Within manufacturing, production of electronics & machinery was up 3.5 percent from December while food & agriculture gained 0.9 percent, transport equipment was up 0.6 percent and the other manufactured goods category 1.9 percent. Construction, which saw output slump a weather-related 5.9 percent in December, rebounded with a 7.9 percent advance.

Italy

January industrial output dropped 1.5 percent and was up 0.9 percent on the year. The January decline was the steepest monthly fall since September last year and left output at its weakest level since April 2010. The energy sector did much of the damage, posting a 5 percent slump from December, but there were monthly falls too in both intermediates (0.7 percent) and, in particular, consumer goods (2.3 percent). The only category to see production expand was capital goods (0.7 percent), although this failed to make back a 1.5 percent contraction last time.

Fourth quarter gross domestic product edged up an unrevised 0.1 percent and was up 1.5 percent when compared with the same quarter a year ago. Household consumption was up a modest 0.3 percent on the quarter while capital investment dropped 0.7 percent (transportation down 1.5 percent, construction down 1.3 percent). Government spending dropped 0.6 percent and a 0.5 percent increase in exports was easily more than offset by a 3.4 percent advance in imports. Net exports subtracted 0.8 percentage points from the bottom line. Higher inventory accumulation added a full percentage point to the quarterly gain in total output, a build-up that could well hit production in the current period.

United Kingdom

January merchandise trade gap narrowed to Stg7.06 billion and constituted the best outcome since February 2010. The improvement reflected a 5.4 percent monthly increase in exports combined with a 4 percent drop in imports and was in no small way due to a marked turnaround in the oil balance. This showed a surplus of Stg0.12 billion from December's Stg0.73 billion deficit courtesy of record oil exports. The underlying shortfall, which excludes oil and other erratic items, narrowed to Stg7.56 billion from Stg8.22 billion. Underlying export volumes jumped 6.1 percent on the month compared with a 1.9 percent advance in real core imports. Regionally, net exports to the rest of the EU advanced by around Stg1 billion to yield a bilateral shortfall of Stg2.9 billion while the deficit with the rest of the world shrank by just over Stg1.6 billion to Stg4.2 billion.

January industrial production was up 0.6 percent on the month and was 4.4 percent higher on the year. Manufacturing output was up 1.0 percent and 6.8 percent — its best performance in some 16 years — on the year. Overall industrial production was held in check by a 6.2 percent monthly contraction in utilities although there were increases in mining & quarrying (3.1 percent) and in oil & gas (2.2 percent). The January bounce in manufacturing output reflected advances in 10 of the 13 sub-sectors. The largest contributions were made by chemicals & man-made fibres (4.2 percent), other non-metal mineral products (9.9 percent) and electrical & optical equipment industries (2.7 percent). The most significant negative contribution came from basic metals & metal products where production dropped 4.3 percent.

February output prices were 0.5 percent higher on the month and 5.3 percent up on the year. This was the fastest annual rate since October 2008 and compared with a firmer revised 5.0 percent pace in January. Input prices were up 1.1 percent on the month or 14.6 percent from a year ago. However, core output prices edged just 0.1 percent above their January level, in turn providing for a modest dip in their annual rate from 3.2 percent to 3.1 percent. Once again the main thrust to the headline index was provided by the food and energy sectors, the former posting a 0.9 percent monthly increase in prices and the latter a 1.7 percent gain.

Asia/Pacific

Japan

February corporate goods price index was up 1.7 percent on the year. This was the largest increase since November 2008. The CGPI was up 1.6 percent the month before. On the month, the index was up 0.2 percent. On the year, petroleum & coal products jumped 11.5 percent after increasing 10.6 percent the month before. Iron & steel soared by 11.8 percent after climbing 11.6 percent in January while nonferrous metals spiked 12.2 percent after increasing 7.8 percent. Processed foodstuffs were up 3.2 percent while lumber & wood products rose 3.8 percent and textile products were up 4.0 percent. Information & communications equipment prices continue to fall, dropping 5.7 percent on the year after declining 5.2 percent the month before. The same is true for electronic components & devices. They dropped 4.6 percent in February after sinking 4.3 percent in January on the year.

Fourth quarter gross domestic product dropped an unrevised 0.3 percent on the quarter but was up 2.5 percent when compared with the same quarter a year ago. GDP declined at a revised annualized rate of 1.3 percent. The initial estimate was a drop of 1.1 percent. On the quarter, domestic demand was down an unrevised 0.2 percent. Within domestic demand, private demand edged down a revised 0.1 percent from unchanged in the preliminary release. CAPEX was revised downward to an increase of 0.5 percent from the original 0.9 percent gain. Private consumption was revised downward to a decline of 0.8 percent from the original 0.7 percent.

Australia

February unemployment rate was unchanged at 5.0 percent. However, the number of employed declined by 10,100 to 11.413 million in February. The employment decline was driven by a drop in part time employment which was down 57,700 to 3.344 million. The decline in part time workers was partially offset by an increase in full time employment which was up 47,600 people to 8.068 million. The number of people unemployed was down by 500 people to 604,800. The labor force participation rate in February edged down to 65.7 percent from 65.8 percent in January.

China

February consumer price index was up 4.9 percent on the year for the second month. On the month, the CPI increased 1.2 percent after rising 1.0 percent in January. Overall food prices jumped 11.0 percent after rising 10.3 percent on the year in January. Non-food prices were up 2.3 percent after increasing 2.6 percent on the year in January.

February producer price index soared 7.2 percent on the year after rising 6.6 percent in January. On the month the PPI was up 0.8 percent after climbing 0.9 percent the month before.

February retail sales jumped 11.6 percent after soaring 19.1 percent on the year in December. This was significantly below analysts’ estimates for a gain of 19.0 percent. As usual, no January data are available because of the Lunar New Year.

February industrial output was up 14.9 percent when compared with the same month a year ago after rising 13.3 percent in December. Output increased at a greater rate than analysts expected which was an increase of 13.1 percent. As usual, no January data are available because of the Lunar New Year.

Americas

Canada

January merchandise trade surplus narrowed sharply to C$0.12 billion from a revised C$1.71 billion in December. The deterioration reflected a 5.3 percent monthly jump in imports that easily more than offset a 0.8 percent gain in exports. Export volumes held up a little better, posting a 1.0 percent monthly advance as prices dropped 0.1 percent. However, with real imports surging some 5.5 percent, the real trade position still worsened significantly. The import gain was led by autos which were up 16.2 percent in nominal terms from December. Energy products (13.8 percent) also made a major contribution and there was a small increase in machinery & equipment (1.8 percent). However, forestry products were down 4.2 percent on the month, agricultural and fishing products declined 0.5 percent, industrial goods & materials slipped 0.8 percent and other consumer goods edged down 0.5 percent. Exports were supported by a 16.3 percent leap in the auto sector, all in volumes. This was compounded by 3.8 percent gain in industrial goods & materials as well as a 2.5 percent increase in both energy and other consumer goods. By contrast there were declines on the month in agriculture & fishing (7.2 percent) and forestry products (7.4 percent). The bilateral surplus with the U.S. narrowed from C$4.30 billion to C$3.75 billion as exports rose 3.3 percent from December and imports climbed 6.5 percent.

February employment was up 15,100 while the unemployment rate remained at 7.8 percent for the second month. The employment increase was concentrated in part-time positions which were up 38,900 on the month. Full time headcount dropped 23,800. Moreover, without the benefit of a near-10,000 increase in public sector jobs and a 25,500 jump in the number of self-employed, overall employment would have declined as private sector payrolls declined by 20,000. Most of the new jobs occurred in the goods producing sector (13,900) as services (1,100) saw virtually no change. Within the former, manufacturing employment advanced a respectable enough 9,000 and construction gained 6,100. The other main sub-sectors were broadly stable. Services sector payrolls were boosted by strong increases in accommodation & food (15,300), health care & social assistance (17,800) and education (13,100). There were also more modest gains in finance, insurance, real estate & leasing (7,200) and information, culture & recreation (4,100). However, advances here were essentially offset by a hefty drop in business, building & other support services (34,500) together with much smaller declines in public administration (13,500), trade (3,600) and transport & warehousing (2,200).

Bottom line

Investors had to deal with numerous negative events last week including the escalation of violence in Libya, rising oil prices, sovereign debt issues in the eurozone and of course, Friday’s earthquake in Japan. Economic data were mixed with many indicators missing anticipated results. Equities in all major markets were lower on the week.

This week brings the abbreviated Bank of Japan meeting on Monday (local time) and the FOMC on Tuesday. In Europe the ZEW will be carefully monitored on Tuesday while in the UK, labour market statistics will be parsed carefully. But investor focus will continue to be on oil prices, geopolitical issues and of course the ongoing earthquake recovery in Japan.

Looking Ahead: March 14 through March 18, 2011

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