Global Markets

Equities sagged last week as the first earnings reports disappointed. Ongoing problems including Europe’s sovereign debt problems, post-earthquake woes in Japan and the Middle East/North African unrest eroded investors’ risk appetite. Another worry concerns monetary policy responses to escalating inflation which could hinder global growth. For example, China’s consumer prices were up the most in nearly three years, suggesting that the People’s Bank of China will need to tighten monetary policy again. The Reserve Bank of India is facing a similar situation. On the week, the Shanghai Composite (0.7 percent), the Kospi (0.6 percent), PSEi (0.3 percent and SET (0.2 percent) were up on the week. Losses ranged from 0.6 percent (Jakarta Composite and Sensex) to 2.9 percent (S&P/TSX Composite).

Global Stock Market Recap

Canada

As expected, the Bank of Canada maintained its overnight rate target at 1.0 percent. The Bank said that economic growth will slow, with auto production hampered by Japan’s earthquake and exports curbed by the nation’s strong dollar. The BoC reiterated that further increases would be “carefully considered.” The bank rate is 1.25 percent and the deposit rate is 0.75 percent.

The Bank has an inflation target of 1 percent to 3 percent. The latest reading of the consumer price index showed that inflation rose at an annual pace of 2.2 percent. Excluding eight volatile items such as gasoline, inflation slowed to a record low 0.9 percent pace as the cost of hotels dropped following last year’s Vancouver Olympics. January monthly GDP expanded 0.5 percent led by a surge in manufacturing. However, Canada unexpectedly lost jobs in March after five prior increases, as a record drop in part-time work outstripped the biggest rise in full-time positions in a year.

The Canadian dollar slid from a three year high against its U.S. counterpart after the Bank of Canada held its target lending rate at 1 percent at its meeting April 12^th and said currency appreciation “could create even greater headwinds” for the economy.

Europe and the UK

Although equities here ended the week on a positive note, it was too late to help the averages for the week. The indexes were down three of five days. The DAX drooped 0.5 percent, the FTSE slid 1.0 percent and the CAC finished 2.2 percent lower as earnings released thus far left investors unenthused. Sovereign debt issues, downgrades and tepid economic data all contributed to the lackluster week. Growth worries surfaced once again after Chinese consumer prices surged fueling expectations of further monetary tightening that could slow the country's growth.

Debt concerns were again in the spotlight as Moody's Investors Service cut its rating on Irish government bonds by two notches, citing the further weakening of the government's financial strength. Yields on Portuguese and Greek government bonds surged to records amid concern the countries may have to reschedule debt payments.

Asia Pacific

Most equity indexes in the region were down last week. Premonitions of strong Chinese inflation and growth data were confirmed on Friday after China reported that inflation increased faster than estimated leading to increasing speculation that the government will need to do more to contain growth. China’s economy grew 9.7 percent in the first quarter when compared with the previous year and the rate of inflation accelerated to 5.4 percent in March from a year earlier — the fastest pace since 2008. Concerns about higher commodity prices and corporate earnings also dented market sentiment as traders exercised caution. Moody's Investors Service cut its outlook on the Chinese property sector to negative from stable, citing a tough operating environment for developers due to policy tightening, rising interest rates, reduced bank lending and increased supply.

The Japanese government downgraded its assessment of the economy for the first time in six months, citing stagnant production, weak outlook for exports and harsh labor market conditions resulting from last month's devastating earthquake. In its monthly economic report, the Cabinet Office lowered its assessment of exports, production and household spending. "Although the economy is picking up, it is showing weakness recently," the government said in the report. The report also noted high unemployment in the economy. After the earthquake, exports are expected to decline despite recent signs of improvement. The disaster also made production stagnant due power shortages and disrupted supply chains. Earlier in the week, the Japanese nuclear agency revised the severity of the nuclear threats from Fukushima to a level of seven from five. This threat is similar to the threat of radiation leaks in Chernobyl, Russia in 1986.

Currencies

The euro declined against the U.S. dollar last week on concerns that the bailout for Greece may fail to prevent a default. However, the yen was up as traders bet that the Federal Reserve will maintain its low interest rate policy when it meets on April 26^th and April 27^th. In a speech during last week, Fed Vice Chairman Janet Yellen said that an increase in food and fuel costs will have only a temporary impact on inflation and consumer spending and warrants no reversal of record monetary stimulus. Since the Group of Seven intervention in the currency market to lower the yen, the currency has traded in a narrow range.

Selected currencies — weekly results

Indicator scoreboard

EMU

February industrial production (excluding construction) was up 0.4 percent and was up 7.4 percent on the year. The mid-quarter performance was restricted by a 0.6 percent monthly decline in energy sector output. However, production of intermediates increased 0.5 percent while capital goods were up 0.6 percent, consumer durables 0.4 percent and consumer nondurables a very solid 0.9 percent. Regionally developments were decidedly mixed. Thus while Slovenia and Portugal (both 1.7 percent) and Germany and Italy (both 1.4 percent) posted significant gains, there were sizeable declines in Slovakia (1.3 percent), the Netherlands (1.6 percent) and Greece (1.0 percent).

March harmonized index of consumer prices was up 1.4 percent on the month and 2.7 percent on the year. All three core measures showed unexpectedly robust gains. Thus, excluding food, drink, tobacco & petroleum the annual underlying inflation rate rose 0.3 percentage points to 1.3 percent. At the same time both the HICP without seasonal foods & petroleum and without unprocessed foods & petroleum jumped 0.4 percentage points to 1.5 percent. Regionally annual headline inflation rates rose in most member states.

Germany

April ZEW survey was mixed with the current conditions index up 1.7 points to 87.1 but the expectations measure shed 6.5 points to 7.6 — its weakest since December. The drop in expectations looks a little ominous but in practice constituted only a small dip from the previous month's survey responses collected after news of the Japanese earthquake (9.1). Still, ZEW highlighted growing concerns about political instability in parts of the Middle East and worries over the outlook for commodity prices. However, the latest improvement in the assessment of current conditions to its highest level since July 2007 is testimony to the ongoing buoyancy of German economic activity.

France

February industrial production excluding construction was up 0.4 percent and 5.6 percent on the year. The monthly increase reflects a 0.7 percent increase in manufacturing. Food production was unchanged while auto production was up 1.0 percent. Construction slipped 0.1 percent.

Italy

February industrial production was up 1.4 percent and 2.3 percent on the year. Manufacturing output was up 1.2 percent on the month, within which food & drink was up 1.6 percent, chemicals gained 1.2 percent but coke & refined petroleum products were down 7.9 percent.

United Kingdom

February merchandise trade deficit narrowed to £6.78 billion. The decrease in the red ink was due to the combination of a 1.3 percent monthly rise in exports and a 2.2 percent decline in imports.

March consumer prices were up 0.3 percent on the month and 4.0 percent on the year. Core CPI was up 0.3 percent on the month and 3.2 percent on the year. The deceleration in both measures was attributable to a record drop in food & non-alcoholic drink.

March claimant count increased by 700 but the unemployment rate remained at 4.5 percent. The ILO count indicated a 17,000 decline over the 3 months to February. The drop in the latter was sufficient to reduce the unemployment rate to 7.8 percent, its lowest level since the third quarter of last year. February average earnings posted annual growth of just 2.0 percent, down from an unrevised 2.3 percent rate in the previous period. Moreover, the ex-bonus rate also slipped a notch to 2.2 percent.

Asia/Pacific

Japan

March corporate goods price index was up 0.6 percent on the month and 2.0 percent on the year. It was the sixth consecutive month of increased prices. The March annual increase is the largest since November 2008. On the year, the CGPI was led by higher petroleum and coal products, iron & steel, nonferrous metals and processed food stuffs. Petroleum & coal products jumped 17.3 percent after increasing 11.7 percent the month before. Iron & steel soared by 11.0 percent after climbing 11.6 percent in February while nonferrous metals spiked 9.8 percent after increasing 12.3 percent.

Americas

Canada

February merchandise trade surplus dropped to C$33 million from C$382 million in January. Both exports and imports declined, led by lower volumes of automotive products and energy products. Exports fell 4.9 percent while imports decreased 4.0 percent. After four consecutive months of growth, exports fell as a result of volumes declining 5.2 percent. Although volumes declined in all sectors, those of energy products (-8. percent) and automotive products (-12.4 percent) were the main contributors to the decline in overall exports. Import volumes fell 4.3 percent. As was the case with exports, falling volumes of automotive products (-12.4 percent) and energy products (-12.7 percent) accounted for most of the decline in the value of imports. Canada's trade surplus with the United States increased from C$4.1 billion in January to C$4.6 billion in February. Canada's trade deficit with countries other than the United States widened from C$3.8 billion in January to C$4.5 billion.

February manufacturing sales declined 1.5 percent and were 8.9 percent higher on the year. Volumes performed worse, posting a 2.3 percent drop. Real shipments were 5.6 higher than in the same month in 2010. Sales were lower in 15 of the 21 reporting industries. However, the headline decline was largely attributable to the transportation area which registered an 8.8 percent slump, itself due to a near-11 percent nosedive in motor vehicles and a 7.9 percent drop in motor vehicle parts. Elsewhere there were sizeable monthly drops in aerospace products (11.3 percent) and machinery (4.5 percent) and smaller declines in fabricated metals (2.1 percent), non-metallic minerals (2.8 percent) and food (1.4 percent). On a more positive note, gains were seen in petroleum & coal (2.6 percent) and miscellaneous manufacturing (23.1 percent). However, new orders were 2.6 percent weaker on the month and despite a 0.3 percent dip in inventories, the inventory/sales ratio rose 0.02 months to 1.31 months.

Bottom line

Earnings season began last week and left investors flat. Economic data were mixed with industrial production showing modest increases. Consumer price data from Europe and China showed inflationary pressures building. The Bank of Canada, as expected left its policy interest rate at 1 percent.

The all important Ifo survey is on tap for Germany this week along with producer prices. Japan’s merchandise trade data for March along with February’s tertiary industry index are on the calendar along with quarterly producer price data in Australia. Canada posts consumer prices and retail sales. There is a respite from central bank news other than the Bank of England’s monetary policy committee meeting minutes for April 7^th.

Looking Ahead: April 18 through April 22, 2011

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