Global Markets

Last week can be divided into two parts — pre and post FOMC announcement and press conference on Wednesday. While equities were enthused by the news from the Fed, the U.S. dollar declined against all major counterparts to multi-year lows. Most equity indexes were up last week and for the month of April as well.

Measures of first quarter growth began to emerge. The UK rebounded and grew 0.5 percent on the quarter after sinking 0.5 percent in the fourth quarter of 2010. The U.S. grew 0.4 percent (or an annualized rate of 1.8 percent) on the quarter after expanding 0.8 percent (or an annualized rate of 3.1 percent). On the year, both countries were up 1.8 percent. Eurozone growth data will not be available for another two weeks.

Three central banks met last week and all maintained current policies. The Reserve Bank of New Zealand left its key policy rate at 2.5 percent as the country begins to recover from February’s devastating earthquake. The Bank of Japan left its policy rate at virtually zero and cut its outlook for the economy to reflect the magnitude of the March disastrous earthquake and tsunami. The Federal Reserve also left its Fed funds target rate at zero to 0.25 percent and said it would complete its $600 billion expansion of its balance sheet in June.

Global Stock Market Recap

Europe and the UK

Equities were up last week in a holiday shortened trading week. All markets were closed on Easter Monday while in the UK, markets were closed on Friday as well for the royal wedding. The FTSE was up 0.9 percent, the CAC gained 2.1 percent and the DAX advanced 3.0 percent. The three indexes were up 2.7 percent, 3.0 percent and 6.7 percent respectively for the month of April. Solid earnings helped boost equities. And on Thursday, stocks climbed as well when anemic first quarter growth in the U.S. figures cemented expectations the Federal Reserve will keep their key interest rate near zero for the foreseeable future.

Economic data were not as robust last week. Most worrisome was the continued uptick in inflation with the April flash HICP reading of 2.8 percent on the year while the unemployment rate in March remained at 9.9 percent for the third month and business and consumer confidence weakened in April. These negatives are bound to complicate this week’s ECB decision on whether to increase rates for a second time. And in the UK, the first estimate of first quarter GDP confirmed ongoing weakness in the economy.

Asia Pacific

Equities in this region were mixed both for the week and the month of April. While earnings cheered investors, headwinds from the ongoing crisis in Japan combined with rising inflation and the threat of higher interest rates dampened morale. On the week, seven of the indexes tracked here declined while six advanced. The Shanghai Composite led the declines with a drop of 3.3 percent. It was followed by a 2.4 percent drop by the Sensex and a 1.9 percent decline by the All Ordinaries. The Nikkei however, gained 1.7 percent while the Topix was up 1.1 percent. For April, equities were also mixed. The PSEi was up 6.5 percent while the SET gained 4.4 percent and the Kospi, 4.1 percent. The Topix and Sensex declined 2.0 percent and 1.6 percent respectively.

Friday’s regional decline came as investors turned jittery heading into the Labor Day weekend with many markets here closed on Monday. There are also concerns China may continue its practice of taking advantage of holidays to raise interest rates. Stocks were down in Australia after first quarter consumer prices jumped precipitating fears of an increase in interest rates this week. As the Australian dollar continues to soar, investors are concerned that corporate earnings will be adversely affected.

Wednesday’s Federal Reserve decision to end its $600 billion asset-purchase program as scheduled in June continued to be in focus, as investors mulled the impact in Asia. Some analysts are worried that U.S. money supply growth may halt while others said that the Fed's decision to maintain the size of its balance sheet after the end of QE2 by reinvesting proceeds from maturing securities would ease fears over liquidity in the region.

Standard & Poor's Ratings Services said Wednesday it has revised the outlook on its long-term rating on Japan to negative from stable, citing the risk of a downgrade if last month's earthquake causes the country's fiscal situation to deteriorate substantially more than expected. Before the disaster, S&P had lowered its rating to AA- from AA, saying the government appeared increasingly unable to win approval in parliament for long-term plans to rein in the budget deficit, equal to approximately 50 percent of annual spending for the current fiscal year.

Bank of Japan

As expected, the Bank of Japan left its policy interest rate range between 0 and 0.1 percent. The vote was unanimous. A proposal to increase asset buying by ¥5 trillion was defeated by a vote of eight to one. The BoJ will offer 0.1 percent one year loans to financial firms in the earthquake hit area with a limit of ¥150 billion per financial firm. The deadline for the new loan applications is October 31, 2011.

The Bank faces many imponderables given an economy that was roiled by the March 11^th disaster and ensuing nuclear crisis. The prolonged nuclear crisis, severe power shortages and supply chain disruptions are posing difficult issues for policy makers. Previously, the biggest problem was a lack of demand. Now with the crippled manufacturing and distribution systems, supply shortages are emerging as the main problem.

Japan outlook

The Bank of Japan slashed its economic growth forecast in the aftermath of the earthquake and tsunami but refrained from announcing fresh steps to stimulate the economy — a sign that the Bank expects rebuilding activity to lead to solid growth again later this year. The Bank said it now expected the Japanese economy to expand only 0.6 percent in the fiscal year, which ends March 31, 2012. That is down from the rate of 1.6 percent the bank had forecast in January. Corporate profits are likely to fall significantly, and private consumption and business investment will remain weak for some time according to the BoJ.

Like other forecasters, the bank expects the Japanese economy to rebound once rebuilding gets under way in earnest and power supplies and the flow of components and spare parts in the manufacturing sector get back to normal. Unlike the situation during the global financial crisis, economies elsewhere are growing, meaning that international demand for Japanese goods remains solid.

In a bid to calm a near panic in the financial markets immediately after the earthquake, the BoJ flooded the markets with liquidity and expanded a program to purchase government and corporate bonds. This month, the bank announced a loan program totaling ¥1 trillion, or $12.2 billion, to help financial institutions in the disaster area extend reconstruction-related loans.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its key interest rate at 2.5 percent. Economic growth is expected to slow this year while inflation remains under control allowing the RBNZ to refrain from following its counterparts in China, South Korea and Singapore who are tightening policy. The Bank cut the official cash rate (OCR) in March by 50 basis points to its current level after earthquakes in Christchurch in September and again in February hurt consumer confidence and spending.

In his post-meeting statement, governor Alan Bollard said that the economy’s outlook was uncertain after February’s Christchurch earthquake. The OCR was cut at the previous meeting as insurance to help limit adverse effects. Business confidence, consumer spending and tourism activity all declined sharply following the earthquake. While confidence and consumer spending have since shown signs of recovery, many firms and households remain adversely affected in Christchurch. To date, activity in the rest of the country appears relatively unaffected, with housing market turnover and business investment beginning to increase. Trade remains robust but higher oil prices and the elevated level of the New Zealand dollar are both unwelcome and have had some dampening effect on economic activity. Bollard said, “Given the outlook for core inflation and continued economic disruption stemming from the earthquakes, the current level of the OCR is likely to remain appropriate for some time.”

Currencies

The U.S. dollar was down against all of its major counterparts last week reaching levels not seen in three years. A mixture of weaker than expected economic growth in the US, higher inflation and extended low interest rates from the Fed all contributed. The weak dollar continues to provide support for equities in addition to stellar earnings reports while gold and the Australian dollar have hit new highs while silver is closing in on its 30 year record.

The latest spark for selling the dollar, however, was lit by rating agency Standard & Poor’s last week, when it said that over the next two years there was a one in three chance of the agency downgrading the sovereign debt of the United States. Federal Reserve Chairman Ben Bernanke’s first press conference also contributed to the dollar’s decline after he said that QE2 would be ending in June as planned but the Fed would roll over maturing bonds to maintain the size of its balance sheet — nor is the Fed in any hurry to tighten policy. This stance contrasts sharply with many other central banks and explains why, since June, the dollar has fallen over 16 percent against its main rivals on a trade weighted basis. The Fed’s near zero interest rate policy has made the U.S. dollar an attractive source of funding for carry trades, where the dollar’s low yield has provided the funds to invest in riskier but higher yielding assets.

Selected currencies — weekly results

Indicator scoreboard

EMU

April flash harmonized index of consumer prices was up a 30 month high of 2.8 percent on the year after rising 2.7 percent in March. The acceleration reflected significantly faster price increases in three of the four larger EMU member states. In Germany inflation rose 0.3 percentage points to 2.6 percent while both Italy and Spain saw a 0.2 percentage point increase to 3.0 percent and 3.5 percent respectively.

April economic sentiment reading was 106.2, down 1.1 points from its March level. Among the main areas morale slipped 0.9 points to 5.8 in industry and fell 1 point to minus 11.6 in the consumer sector. In addition, retail and services both shed 0.4 points to 1.8 and 10.4 respectively. The only category to see an improvement was construction, where confidence edged up 0.8 points to minus 24.2. Regionally sentiment fell in all four large EMU states. Germany was down 0.9 points at 115.2, France slipped 0.8 points to 109.2, Italy was off 1 point at 100.2 and Spain down 0.9 points at 90.0. Among the smaller members, sentiment fell more than 4 points to 74.2 in Greece and declined 1.6 points to a lowly 87.1 in Portugal.

March joblessness fell a further 9000 to 15.596 million but the decline was too small to lower the unemployment rate from February's 9.9 percent. As usual labor market performance continues to vary significantly across the region when using Eurostat’s measure of unemployment. Thus, while the jobless rate fell 0.1 percentage point to just 6.3 percent and 4.2 percent in Germany and the Netherlands respectively, it rose another 0.1 percent point to a frighteningly high 20.7 percent in Spain. The rate also edged a tick higher to 8.3 percent in Italy while holding steady at 11.1 percent in Portugal.

March M3 money supply was up 2.3 percent on the year. The ECB’s preferred measure — the three month moving average — was up 2.0 percent after rising just 1.8 percent the month before. Despite the increase in headline M3 growth, the key bank lending counterpart slowed with its 12-month advance slipping a notch to 2.5 percent. However, within this, loans to non-financial corporations rose 0.2 percentage points to 0.8 percent while borrowing by households accelerated to 3.4 percent, up 0.4 percentage points from last time. Lending for house purchase strengthened significantly, weighing in at a 4.4 percent annual rate from 3.8 percent in February. The main cause of the deceleration in overall lending was a drop in loans to non-monetary financial intermediaries (ex-insurance corporations and pension funds) to a 5.7 percent annual rate, down some 3 percentage points from its mid-quarter pace.

Germany

April seasonally adjusted joblessness continued to decline with the number of people out of work dipping a further 37,000 to 2.970 million. However, in contrast to expectations, the latest decline was not quite large enough to lower the unemployment rate which held steady at 7.1 percent. Vacancies were up 13,000 after a 9,000 increase last time.

March retail sales excluding autos declined 2.1 percent on the month following a slightly steeper revised 0.4 percent drop in February. As a result, annual sales growth slumped from 1.5 percent to minus 3.5 percent, the first negative rate since October 2010. The unadjusted data show real sales declining on the year across all the major categories excluding just the other goods area (0.3 percent) and furniture & household goods (0.1 percent). Food, beverage & tobacco demand contracted 4.8 percent while non-food purchases were off 2.4 percent.

France

March household spending on manufactured goods declined 0.7 percent on the month but was up 2.6 percent on the year. The steepest monthly drop in sales since August last year was led by a 1 percent slide in durables, particularly autos where demand slumped 1.6 percent. Purchases of household goods also declined, off 0.6 percent on the month mainly due to a sharp drop in the furniture category. Textiles were down 2.2 percent while expenditure on other manufactured goods edged up 0.2 percent.

United Kingdom

First quarter provisional gross domestic product rebounded 0.5 percent after dropping 0.5 percent in the fourth quarter. On the year, GDP was up 1.8 percent. The report contains no details of the GDP expenditure components. In line with the previous period's results, the latest figures are subject to a number of distortions that make identifying the underlying thread even more complicated than usual. In particular, activity in the erratic construction and utilities sectors dropped 4.7 percent and 3.5 percent respectively on the quarter, the latter hit especially hard by a return to more normal weather conditions. Together these categories subtracted 0.4 percentage points from the bottom line. Partly as a result, overall industrial production was up 0.4 percent on the quarter but this masked a healthy 1.1 percent increase in manufacturing output where production now stands a respectable 4.8 percent higher on the year. The volatile mining and quarrying area saw a 0.4 percent contraction. Service sector output significantly grew a solid 0.9 percent led by a 2.7 percent bounce in transport, storage & communications. Business & financial services expanded 1.0 percent, distribution, hotels & catering was up 0.3 percent and government gained 0.7 percent.

Asia/Pacific

Japan

March retail sales sank 8.5 percent when compared with last year. Immediately after the March 11 disaster, consumers cut spending. Higher spending to stock up on food and water was more than offset by lack of spending elsewhere. All categories dropped in this first reading of retail sales after the earthquake with the exception of fuel. Auto sales plunged 32.8 percent on the year while machinery & equipment sank 17.3 percent. General merchandise sales were down 10.1 percent. Food & beverage edged down 0.1 percent while fuel sales gained 5.1 percent.

March unemployment rate was unchanged at 4.6 percent. The data exclude the three earthquake hit prefectures (Iwate, Miyagi and Fukushima). The number of unemployed was 3.04 million, a decline of 260,000 from the previous year. The number of employed was 59.28 million, down by 130,000 from the previous year. On the month, employment plunged by 460,000 from February while the number of unemployed increased by 10,000.

March household spending sank 8.5 percent on the year as consumers cut spending after the March 11^th disaster. It was the sixth consecutive drop when compared with the previous year. Spending was down for all categories with the exception of medical care where spending was up 6.5 percent on the year. Housing expenditures dropped 16.5 percent while clothing & footwear spending sank 15.6 percent. Transportation & communication declined 14.4 percent while culture & recreation slumped 18.7 percent.

March consumer prices were unchanged on the month and up 0.3 percent on the year. Excluding only fresh food, the CPI was up 0.5 percent on the month and down 0.1 percent on the year. Excluding both fresh food and energy, the index was up 0.2 percent but down 0.7 percent on the year. Energy prices were up 6.3 percent on the year after rising 4.0 percent in February. Prices for goods were up 0.4 percent and 0.9 percent on the year while services were up 0.2 percent but dropped 0.7 percent on the year. Furniture & household utensils were down 0.3 percent on the month and 3.3 percent on the year. Education prices were unchanged on the month but swooned 13.0 percent on the year.

March industrial production plunged 15.3 percent and sank 12.9 percent on the year due to the March 11^th earthquake, tsunami and resulting electric problems. It was the first drop in five months. Although METI downgraded its view, it said that output is expected to recover gradually. The drop in output was led by autos, general machinery and chemicals. Commodities that mainly contributed to the decline were large and small passenger cars and drive, transmission & control parts. According to the Survey of Production Forecast in Manufacturing, production is expected to increase 3.9 percent in April and 2.7 percent in May.

Australia

First quarter consumer price index jumped 1.6 percent on the quarter after climbing 0.4 percent in the previous quarter. This is the largest quarterly rise in the CPI since June quarter 2006 when it increased 1.6 percent. On the year, the CPI was up 3.3 percent. The trimmed mean, the measure that the Reserve Bank of Australia uses as its measure of inflation, was up 0.9 percent on the quarter and 2.3 percent on the year. Prices were up for automotive fuel (8.8 percent), vegetables (16.0 percent), deposit and loan facilities (4.6 percent), fruit (14.5 percent) and pharmaceuticals (12.5 percent). Offsetting price declines were for furniture (6.2 percent), audio, visual & computing equipment (7.2 percent), milk (6.2 percent), overseas holiday travel & accommodation (1.6 percent) and motor vehicles (0.5 percent). Fruit prices increased by 14.5 percent in the March quarter mainly due to an increase of approximately 100 percent in banana prices due to shortages following floods and Cyclone Yasi. Vegetable prices increased by 16.0 percent, driven by price rises in cauliflowers, broccoli, lettuce, pumpkin and potatoes due to damages to crops as well as the usual seasonal price increases.

Americas

Canada

February monthly gross domestic product edged down 0.2 percent but was up 2.9 percent on the year. The decline was attributable to a 0.6 percent drop in output in the goods producing sector, itself reflecting a 1.6 percent monthly slump in manufacturing. Motor vehicles & parts saw an especially steep 7.5 percent drop but there were also sizeable declines in fabricated metals (2.7 percent) and machinery (3.3 percent). Activity in the construction sector edged up just 0.1 percent on the month while mining oil & gas extraction stagnated and agriculture, forestry & fishing shrank 0.3 percent. Services fared rather better. Wholesale trade (down 1.0 percent) was a major drag together with transport & warehousing (down 0.7 percent). Arts, entertainment & recreation (down 0.3 percent) similarly posted a decline but modest gains elsewhere, notably in retail (0.6 percent) ensured that overall service sector output was flat.

Bottom line

Three central bank policy boards met and left monetary policy unchanged. The slew of economic data released during the week was at best mixed. Both UK and U.S. estimates of gross domestic product growth disappointed. In the eurozone, unemployment remained at 9.9 percent while business and consumer sentiment waned.

Three central banks will meet this week — the Reserve Bank of Australia, Bank of England and the European Central Bank. Worrisome to all three is inflation. First quarter Australian inflation jumped making investors there wondering if another interest rate increase is in their near term future. The Bank of England has been contending with inflation running at a rate that is double its target of 2 percent. The ECB will not be pleased with the further increase in the harmonized index of consumer prices to 2.8 percent — above the Bank’s 2 percent threshold. The first week of the month brings the manufacturing and services PMIs — and of course, the U.S. employment situation report Friday.

Looking Ahead: May 2 through May 6, 2011

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