Global Markets

Equities were mostly higher last week as negotiators in the Greek crisis plodded along toward what hopefully will be some sort of resolution. Helping to lift share indexes were a plethora of better than anticipated economic data from the U.S. including continued improvement in weekly jobless claims and in the manufacturing sector.  

A second bailout is now expected to proceed when the Eurozone finance ministers meet on Monday after German officials scrapped an idea to pressure Greece by withholding part of the bailout and the European Central Bank developed a plan to protect its holdings of Greek bonds from the restructuring. Uncertainty was inflamed by the last minute idea of splitting the bailout in two. The German, Dutch and Finnish governments, deeply mistrustful of the Greeks, raised the idea on concern that that giving Greece the entire bailout now would allow politicians breathing room to back step on the spending cuts already approved by the Greek Parliament.

Most indexes were higher on the week. Gains ranged from 4.9 percent (Nikkei) to 0.2 percent (Shanghai Composite). The All Ordinaries, KLCI, IBEX 35 and Bolsa slid on the week. All indexes followed here are up so far in 2012.

Global Stock Market Recap

Europe and the UK

Equities traded primarily on the cantankerous and continuing negotiations surrounding the second Greek bailout. At week’s end, optimism won out as positive U.S. economic data outweighed jitters in the absence of resolution to the Greek sovereign debt crisis. After committing to further austerity measures earlier this week, Athens expects Eurozone finance minister to approve emergency aid that will avoid a potentially messy default for now on February 20^th. Investors remain wary. The FTSE, CAC, DAX and SMI were 0.9 percent, 2.0 percent, 2.3 percent and 1.7 percent higher on the week.

Equities fluctuated on the news about Greece. For example, they pared gains after a report circulated that Eurozone officials were considering delaying the second Greek bailout until after the country holds elections in April. The market had earlier hit six month highs after the Greek conservative party gave a commitment letter to the European Union and IMF on implementing the new austerity package.

Fourth quarter growth data also put a damper on equities. Of the major Eurozone countries, only France managed to post a positive growth number for the fourth quarter — up 0.2 percent. German, Spanish and Italian GDP contracted.

Moody's downgraded Italy, Spain, Malta, Portugal, Slovakia and Slovenia and warned about the triple-A ratings of UK, France and Austria. Spain was downgraded to A3 from A1, Italy to A3 from A2 and Portugal to Ba3 from Ba2, all with negative outlooks. Slovakia, Slovenia and Malta also had their ratings lowered. Adding to downbeat sentiment on Thursday was Moody's announcement saying that it is reviewing the credit ratings of some 114 European banks and financial groups, sparking another round of investor pessimism over Europe's economic prospects.

Asia Pacific

Equities — except for those in Australia (down 1.1 percent) and Malaysia (down 0.3 percent) — were up last week as better than anticipated U.S. economic data offset worries about Greece for the most part. A declining yen after the Bank of Japan expanded its asset purchase programs helped boost exporters. Sentiment improved following reports that the Greek bailout talks remained on track and that a second bailout package will be approved on Monday (February 20^th). Gains ranged from 0.2 percent (Shanghai Composite) to 3.1 percent (Sensex), 3.4 percent (Hang Seng) and 4.9 percent (Nikkei).

Shares in Japan rallied after the Bank of Japan’s move and solid U.S. economic data weakened the yen to a 3 1/2 month low against the dollar, helping lift exporters’ shares. The Shanghai Composite barely moved as investors are skeptical that Beijing will further ease credit and investment curbs to boost slowing economic growth.

Analysts noted that the upcoming Greek debt restructuring has been more than fully discounted by the markets. Despite optimism that a solution will be reached, investors continue to react to the situation there. Shares fell sharply Thursday as fresh concerns about the Greek bailout dampened risk sentiment after European officials delayed once again a bailout decision, now to February 20^th.

The Peoples Bank of China said in its quarterly monetary policy report that China still faces the risk of slower growth and higher inflation and that it can not let its guard down against inflation risks. Analysts noted that China is seriously worried about inflation and there is a risk there that it will raise interest rates.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. However, in a surprise move, the monetary policy board also increased its asset purchase program to ¥65 trillion from ¥55 trillion. The BoJ increased its long term JGB buying to ¥19 trillion from ¥9 trillion. The MPB also adopted a price stability goal of 1.0 percent for the CPI for now. The MPB said that “the economic outlook continues to entail high uncertainty regarding the prospects and outcomes of the European debt problem, the supply and demand balance of electricity and the effects of the yen’s appreciation.”

The Bank has been confronted with slowing global trade, a strong currency and supply chain disruptions from severe flooding in Thailand. The combination took their toll on the Japanese economy during the final quarter of 2011 which led to a contraction. GDP dropped 0.6 percent on the quarter and 1.0 percent on the year. For the year 2011, which was overshadowed by March’s earthquake and tsunami that hit northeast Japan, the economy contracted 0.9 percent. The persistent strength of the yen also has weighed on Japanese companies. The Japanese currency has hovered at about ¥77 per dollar since July, compared with about ¥90 at the start of 2010 and ¥97 yen in mid-2009, putting an extra burden on exporters by making their goods more expensive for shoppers in the United States.

The BoJ for the first time also set what amounts to an inflation target, after nearly 20 years of deflationary pressure. Japanese politicians have recently stepped up their calls on the BoJ to take fresh action, with some renewing threats to change the law that gives the central bank independence from the government. Also adding pressure on the Bank was the Federal Reserve's decision last month to introduce a long run inflation goal of 2.0 percent. BoJ Governor Masaaki Shirakawa said that outside pressure was not involved in the Bank's decision. "The BoJ never succumbs to political pressure when it implements monetary policy," he said, though he added it does listen to a "wide range of opinions, including discussion in the parliament and among economists and market participants."

Currencies

Renewed hopes that Greece's European partners will agree to a deal on a second bailout by early next week bolstered the euro at week’s end. The currency had rebounded from below $1.30 in Thursday trading following reports that the region's leaders were on track to approve money aid to Greece next week. The euro strengthened in early Friday trading after Germany expressed confidence that the region’s governments will agree to provide Greece with funding for a second bailout package within days. But the currency pared these gains on concern a European Central Bank swap of Greek bonds for new ones may trigger rating cuts.

The yen slid against the U.S. dollar after the Bank of Japan said it would increase the size of its asset purchase fund, damping demand for Japan’s currency. Japan’s currency fell against all of its most traded counterparts after the Bank increased its asset purchase fund, expanding economic stimulus measures for the first time since October. The yen reached its lowest level against the dollar since November 1, when Japan was in the midst of conducting ¥1.02 trillion worth of unannounced intervention. The Finance Ministry released data last week showing Japan sold yen in the currency market during the first four days of November.

Selected currencies — weekly results

Indicator scoreboard

EMU

December industrial output dropped 1.1 percent on the month and 2.0 percent on the year. Capital goods production was down 0.8 percent while intermediates slid 0.7 percent. Durable consumer goods (0.2 percent) managed a small gain but nondurables were just flat and energy contracted 2.0 percent. Regionally, much of the damage was caused by Germany where output slumped 2.7 percent, but France (down 1.3 percent) also struggled badly. Italy saw a much needed 1.4 percent gain but its second successive increase still failed to make up for a near-5 percent plunge in September. Spain advanced 0.9 percent, only its first positive reading in four months. Among the smaller member states, Greece witnessed a 2.4 percent monthly decline while Portugal was down 1.6 percent.

December seasonally adjusted merchandise trade surplus was €7.5 billion in December, up from an unrevised €6.1 billion in November and the most positive result since May 2004. The unadjusted balance showed a surplus of €9.7 billion, a sharp turnaround from the €1.7 billion shortfall posted in December 2010. The year-end improvement in the adjusted balance was in part attributable to a 0.1 percent monthly rise in nominal exports but a 0.9 percent drop in imports was more significant. The weakness of domestic demand is underlined in the sharp slowdown in annual import growth which now stands at just 1.0 percent, well behind a 9.0 percent 12-month increase in exports.

Fourth quarter flash gross domestic product contracted 0.3 percent on the quarter but was up 0.7 percent on the year. As is usually the case with flash estimates, Eurostat provided no information on the GDP components but the national statistics showed a mixed, and generally poor, performance by the larger member states. Germany suffered a 0.2 percent decline on the quarter while Italy was down 0.7 percent and Spain 0.3 percent. However, by contrast, French GDP surprised on the upside by registering a 0.2 percent quarterly expansion. Among the smaller countries the news was pretty gloomy in the main. Belgium GDP was down 0.2 percent, the Netherlands dropped 0.7 percent (also now back in recession) while Portuguese output (down 1.3 percent) ominously shrank for the fifth consecutive quarter for an annual decline of some 2.7 percent. Worse still, Greek GDP was a hefty 7 percent lower on the year after a 5 percent annual drop in the preceding quarter.

Germany

February ZEW shows a significant improvement in analysts' view of both current and future economic developments. The current conditions measure was up a very respectable 11.9 points to 40.3, its largest gain since October 2010 and its highest level since September last year. Expectations performed even better, posting a 27 point jump (and that after a 32.2 point leap in January) to 5.4, its first positive reading since May 2011. ZEW pointed out that only 20 percent of respondents now anticipate a recession in Germany and those that do, see only a shallow downturn. Much of the optimism seems linked to the unexpected buoyancy of the labor market and consequent hopes that consumer spending may hold up rather better than previously anticipated.

Fourth quarter flash gross domestic product slipped 0.2 percent on the quarter — the first contraction in real GDP since January through March 2009. The third quarter was revised to show a slightly stronger 0.6 percent gain and lowered workday adjusted annual growth by 0.7 percentage points to 2.0 percent. As usual with the flash report, the Federal Statistics Office provided no details behind the headline figures but it did indicate that investment made the only positive contribution to quarterly growth and that net exports were a drag.

France

Fourth quarter gross domestic product expanded by 0.2 percent and was up 1.4 percent on the year. The quarter was supported by a 0.2 percent quarterly increase in household consumption and an unexpected 0.9 percent bounce in gross fixed capital formation. Within the latter, investment by business was up 1.4 percent, reversing its third quarter drop, while household spending edged 0.1 percent higher and public investment expanded 0.5 percent. Current government expenditures were up 0.2 percent for the second consecutive quarter. As a result, final domestic demand grew 0.3 percent on the quarter, a slight acceleration from the 0.2 percent gain posted previously. Inventories were run down quite substantially and shaved 0.8 percentage points off the bottom line. Net foreign trade had a sizeable positive impact (0.7 percentage points) as export volumes were up 1.2 percent on the quarter and imports declined 1.2 percent.

Italy

Fourth quarter gross domestic product dropped 0.7 percent after sinking 0.2 percent in the third quarter. On an annual workday adjusted basis real GDP was down 0.5 percent, its worst performance since the fourth quarter of 2009. The only details provided by Istat were that industrial output contracted, services were flat and agriculture saw positive growth.

United Kingdom

January consumer prices were down 0.5 percent on the month and up 3.6 percent on the year. Core CPI dropped 0.8 percent and was up 2.6 percent on the year. The 12-month growth rates of prices declined in most of the major categories and particularly steep declines were recorded in alcohol & tobacco (6.2 percent from 9.0 percent), transport (4.0 percent from 5.8 percent), restaurants & hotels (3.1 percent from 4.4 percent) and communication (4.9 percent from 6.6 percent). The only acceleration was seen in clothing & footwear (2.9 percent from 1.8 percent) and miscellaneous goods and services (2.9 percent from 2.7 percent).

January claimant count unemployment was up 6,900 on the month. The 11th consecutive rise followed a marginally larger revised 1,900 increase in December and left the jobless rate on this basis steady at 5.0 percent. The ILO data returned a 48,000 advance in joblessness in the fourth quarter, down significantly from a 128,000 jump in the previous period. The unemployment rate on this measure was steady at 8.4 percent. At the same time, wages remained very subdued with December headline average earnings growth just 2.0 percent. Annual growth of regular pay was also 2.0 percent in the quarter and has been trending sideways for some considerable time.

January retail sales jumped 0.9 percent and were up 2.0 percent on the year. Excluding fuel, purchases were up an even stronger 1.2 percent from December and now stand 1.9 percent higher on the year. Fuel sales dropped 1.7 percent. With food sales declining 0.3 percent on the month, it was the non-food (ex-fuel) sector that provided all of the momentum with a jump of 2.2 percent. Within this, household goods (4.8 percent) and the other stores category (5.9 percent) recorded particularly large gains and non-store retailing was not far behind (3.9 percent). Consequently, with non-specialized sales advancing also 0.6 percent, the only decline was in clothing &footwear (2.1 percent).

Asia/Pacific

Japan

Fourth quarter gross domestic product dropped 0.6 percent and was down 1.0 percent when compared with the same quarter a year ago. On an annualized basis, GDP contracted 2.3 percent. For the year 2011, GDP dropped 0.9 percent after expanding 4.4 percent in 2010. The massive earthquake and tsunami occurred in March of 2011 while the Thailand floods that caused a supply chain breakdown hurt output in the fourth quarter. The fourth quarter contraction was caused by a slump in net exports while gains in private consumption and Capex that supported domestic demand was largely offset by a drop in private sector inventories. Japan posted a trade deficit for the fourth straight month in December also because its imports of oil and gas have been rising sharply to make up for the loss of electricity generation from nuclear power plants.

December tertiary index was up 1.4 percent after sinking 0.6 percent in November. On the year, the index was up 1.1 percent. Cold weather boosted winter clothing sales. Wholesale & retail trade was up 4.3 percent, scientific research, professional & technical services gained 3.5 percent, medical, health care & welfare was 1.6 percent higher and Electricity, gas, heat supply & water advanced 4.1 percent. Also contributing to the rising index were transport and postal activities, living-related & personal services & amusement services, accommodations, eating & drinking services and real estate & goods rental & leasing. Those industries that declined on the month included information and communications, miscellaneous services (except government services etc.), learning support and compound services.

Australia

January employment jumped by 46,300 jobs to a total of 11,463,900. The increase in employment was driven by increased part time employment, up 34,000 people to 3,400,800, and an increase in full time employment, up 12,300 people to 8,063,100. The increase in seasonally adjusted part time was driven by an increase in female part time employment whereas the increase full time employment was driven by an increase in male full time employment. The unemployment rate edged down to 5.1 percent from 5.2 percent the month before. The number of unemployed was down by 15,300 people to 614,200. The labor force participation rate edged up to 65.3 percent from 65.2 percent.

Americas

Canada

December manufacturing sales were up 0.6 percent and were up 9.1 percent on the year. It was the fifth gain in the last six months. Volumes climbed 1.2 percent and were up 7.0 percent on the year. The headline increase in nominal shipments reflected monthly advances in twelve of the twenty-one reporting industries, mainly in durables goods. Notable among these were rubber & plastics (7.5 percent) alongside non-metallic minerals (2.3 percent), primary metals (2.7 percent) and transport equipment (3.7 percent).  Within transport, motor vehicles (2.9 percent) and parts (5.5 percent) fared especially well. Excluding autos and parts, sales were up 0.2 percent. Miscellaneous manufactures (8.8 percent) also enjoyed a very good month but there were sizeable declines in food 7 drink (4.1 percent), petroleum 7 coal (5.6 percent) and furniture 7 related products (1.8 percent). Elsewhere in the survey, the news was less positive. In particular, new orders dropped 2.8 percent (down 1.5 percent ex-autos) and backlogs were down 1.6 percent. However, with inventories shrinking 0.9 percent, the inventory/sales ratio shed 0.02 months to 1.29 months, comfortably low enough to signal no potentially threatening stock overhang.

January consumer price index was up 0.4 percent on the month and 2.5 percent on the year. Higher energy and food costs together with more expensive vehicle insurance and new car prices were largely to blame. Excluding food and energy prices the CPI was up a relatively modest 0.2 percent. The Bank of Canada’s preferred measure which excludes eight volatile items was also up 0.2 percent. On the year, they were up 1.6 percent and 2.1 percent respectively. Seasonally adjusted the CPI was up 0.5 percent from December, in large part due to a 1.3 percent spike in transportation costs. Elsewhere prices were generally much better behaved with all categories outside of alcohol & tobacco (0.4 percent) registering gains of no more than 0.3 percent.

Bottom line

Most equity indexes advanced last week as the U.S. continued on a growth path. However, fourth quarter gross domestic product contracted for the major Eurozone countries with the exception of France. The Bank of Japan surprised watchers and expanded its asset purchase program and initiated an inflation target.

Reserve Bank of Australia watchers will be looking to find out why the RBA did not lower its interest rate as expected at its February meeting. And Bank of England watchers will want to know if the expansion of the Bank’s asset purchase program to £325 billion was unanimous.

Looking Ahead: February 20 through February 24, 2012

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