Global Markets

Disappointing economic data that put into question rising optimism about world economic growth sent equities lower last week. Although the economic data calendar was relatively thin last week, there were key updates that affected the markets. For example, in the U.S., a string of new data on the housing industry was disappointing at the headline level, especially given the spring-like weather in the mid-west and east. But analysts caution that the best way to look at the trend in housing is by using a moving average which smoothes some of the month to month volatility. In Europe, the flash PMI indexes indicated manufacturing and services deterioration in France, Germany and the Eurozone. A key indicator in Asia — China’s manufacturing PMI slumped as well, indicating slower growth due to weak domestic spending and exports. Some analysts opined that people have been too optimistic regarding global economic recovery.

On the week, most indexes followed here were lower with the biggest declines occurring in Europe. Losses ranged from 4.9 percent (OMX Stockholm 30) to 0.1 percent (All Ordinaries).

Global Stock Market Recap

Europe and the UK

The disappointing flash PMI data from Europe and China helped send equities lower for the week. In Europe, worries that the economies here were not out of the woods and could still experience a recession once again came to the fore. The FTSE, DAX, CAC and SMI were 1.9 percent, 2.3 percent, 3.3 percent and 1.6 percent lower for the week respectively.

European services and manufacturing output contracted more than forecast in March. The flash composite index which is based on a survey of purchasing managers dropped to 48.7 from 49.3 in February. A reading below 50 means that the economy is contracting. The flash manufacturing indexes for Germany, France and the Eurozone were below 50 — analysts had been looking for readings above the breakeven point. For services, while Germany’s service PMI remained above 50, it was decidedly weaker than in February. The reading for France remained at 50 while the Eurozone recorded a reading below 50 for services.

Bank of England minutes

Minutes of this month's monetary policy committee meeting showed another split vote with the same two dissenters from the February deliberations (David Miles and Adam Posen) again calling for an extra Stg25 billion worth of quantitative easing. The monetary policy board voted unanimously to keep the Bank Rate at 0.5 percent. The majority of members saw recent data broadly in line with the BoE’s latest forecasts but there were clearly concerns about the possible impact of higher oil prices and even some reference to upward drift in pay settlements. This second factor has not been apparent in the latest underlying earnings data and so probably reflects information from the BoE's own regional agents. In any event, it will ensure a renewed focus on the labour market report each month.

UK budget

UK Chancellor of the Exchequer George Osborne unveiled his 2012-13 budget, which is broadly fiscally neutral. Forecasts from the Office for Budget Responsibility are little changed from last November. The budget has no significant implication for monetary policy and allows the BoE to maintain its super loose monetary policy, while at the same time doing something at the margins to shore up consumption and confidence.

The OBR raised its 2012 growth forecast to 0.8 percent from 0.7 percent and said that the economy would avoid a technical recession despite the still precarious funding situation in the Eurozone and deteriorating global growth prospects. Next year growth is forecast at 2.0 percent, down from 2.1 percent previously and the 2014 forecast is unchanged at 2.7 percent and then at 3 percent in 2015 and 2016. These projections are below the BoE's forecasts in the February Inflation Report for 2.76 percent in 2013 and 3.09 percent in 2014. The OBR acknowledged that the domestic UK economy began 2012 carrying ‘more momentum’ than previously expected and that the first quarter will see a positive growth result.

Asia Pacific

Equities were mixed as growth worries made investors reluctant to take on new risk. Several of the markets here recorded their biggest weekly losses for the year as fresh signs of an economic slowdown in China spooked investors. After rallying at the start of the year on upbeat data from the U.S. economy, China dented that mood with a recent string of negative data and even including a downgrading of its growth outlook for 2012. Thursday’s flash PMI which showed the manufacturing sector contracting roiled markets. Investors sold exporter and resource shares which would be most affected by the slowdown. Similarly bad news from Europe also underlined worries about global growth.

China’s March flash manufacturing PMI slid to a reading of 48.1 — a four month low — and down from February's 49.6. The output index declined to 48.1 from 50.2 the month before. Weakening domestic demand and slowing exports weighed on growth. However, all economic news was not negative. A positive data point was Japan’s surprising merchandise trade surplus in February. However, the Nikkei was down 1.2 percent for the week as the yen reversed direction and began to rise in value on safe haven concerns. Elsewhere, the Shanghai Composite was 2.3 percent lower while the Hang Seng slumped 3.0 percent on the poor mainland China data.

Reserve Bank of Australia minutes

The RBA released the minutes of its March 6 meeting. At that time, its key policy interest rate was kept at 4.25 percent where it has been since November 2011. The Board noted that there was ample scope to ease if downside risks materialized. At the same time the RBA noted that the risks here are less likely than before. Major banks passed on some of their higher funding costs but the increase was small. The RBA said that the weakness in some parts of the economy is being offset by mining and services strength. The unemployment rate is at a low level and inflation is consistent with the RBA’s inflation target range of 2 percent to 3 percent.

Currencies

The U.S. dollar declined against most of its major counterparts with the exceptions of the Canadian and Australian dollars. The yen was up against all of its major counterparts this week, paring its losses, as increased concern of slowing economic growth spurred investor appetite for safety. The yen softened on Friday after Tokyo importers took advantage of its broad rally the day before, while risk currencies like the Australian dollar were poised to end the week sharply lower on fresh concerns about the health of the global economy. The euro climbed against the dollar after falling for three days, prompting bets the move lower was overdone.

Bank of Japan Governor Masaaki Shirakawa said the Bank and the government share the same view on the economy, increasing concern the BoJ may increase stimulus measures to boost the nation’s economy, which would debase the currency. The Bank of Japan established an inflation target of 1.0 percent at their February 14^th meeting, replacing earlier wording that the central bank had an “understanding” of where consumer prices should go. It also said it would add ¥10 trillion of stimulus to the economy. The net effect of these moves lowered the value of the yen.

Selected currencies — weekly results

Indicator scoreboard

Germany

February producer prices were up 0.4 percent and 3.2 percent on the year. Prices were boosted by a 0.5 percent monthly increase in energy costs but outside of capital goods which were unchanged, most areas saw solid advances. Prices of basics were also up 0.5 percent while within a 0.4 percent overall increase in consumer goods costs, durables were up 0.3 percent and nondurables 0.4 percent. Excluding energy, prices gained 0.4 percent on the month matching their January increase. On the year, core PPI was up 1.6 percent.

United Kingdom

February consumer prices were up 0.6 percent on the month and 3.4 percent on the year. The main downward pressure on the annual rate came from a slowdown in price growth in electricity & gas (6.8 percent from 7.4 percent), recreation & culture (down 0.9 percent from down 0.5 percent) and transport (3.7 percent from 4.0 percent). Upward pressure was most apparent in alcohol & tobacco (8.3 percent from 6.2 percent) but 12-month inflation rates also accelerated in food (3.7 percent from 3.5 percent), furniture & household equipment (4.6 percent from 4.4 percent) and health (3.5 percent from 3.2 percent). The core CPI matched the monthly gain in the overall index and its annual rate dropped 0.2 percentage points to 2.4 percent.

February retail sales volumes dropped 0.8 percent on the month after a downwardly revised increase of 0.3 percent (from the original 0.9 percent estimate) in January. On the year, sales were up 1.0 percent. The steepest monthly decline since May last year reflected weakness across the board with the exception of non-specialized stores although even here, purchases were flat on the month. Worst hit was the other stores category where demand slumped 3.0 percent from the start of the year. There were sizeable declines also in clothing & footwear (1.2 percent) and household goods (1.0 percent) as well a smaller decline in non-store retailing (0.4 percent). Fuel sales were 1.0 percent weaker than in January. Excluding this area, non-food purchases were off 1.5 percent while food slipped 0.1 percent. Inflation news was also less than optimistic with the overall retail sales deflator up 2.4 percent on the year after a 2.2 percent increase last time and non-fuel prices 1.9 percent higher following a 1.8 percent increase in January.

Asia/Pacific

Japan

February corporate goods price index was up 0.2 percent on the month and 0.6 percent on the year as expected. The CGPI has increased for 17 consecutive months when compared with the year before. Manufacturing industry products were up 0.2 percent both on the month and year. Among the major sector price changes on the year were petroleum & coal product prices (up 5.7 percent), pulp, paper & related products (up 3.0 percent) and chemicals & related products (up 1.9 percent). On the down side, nonferrous metals slid 8.5 percent after dropping 9.4 percent the previous month. Information & communications equipment saw prices sink 7.2 percent after a 9.3 percent drop the month before.

January core machinery orders were up a greater than expected 3.4 percent on the month and 5.7 percent on the year. The increase was led by orders for electricity machinery along with those for automobiles and other transport equipment. Offshore orders, which are not part of core, jumped 20.1 percent on the month on large orders for chemical plant machinery. The total value of machinery orders received by 280 manufacturers operating in Japan increased by 21.6 percent on the month. Machinery orders are widely regarded as a leading indicator of corporate capital investment. Core orders exclude those from electric power companies and those for ships, which are often a source of volatility in the overall data due to their large sizes.

February unadjusted merchandise trade surplus was ¥32.9 billion. On the year, exports slid 2.7 percent while imports jumped 9.2 percent. This was the fifth consecutive on the year drop for exports while imports registered their 26^th consecutive increase. Exports to the U.S. were up 11.9 percent while imports were up 4.3 percent. However, exports to the EU dropped 10.7 percent while imports were 8.7 percent higher. Exports to all of Asia were down 6.6 percent while imports climbed 5.8 percent. Exports to China (down 13.9 percent) dropped for the fifth month in a row. Imports slipped 0.5 percent. On a seasonally adjusted basis, the merchandise trade deficit was ¥313.2 billion. Exports were up 2.9 percent on the month but dropped 7.2 percent on the year. Imports were down 0.4 percent on the month and were 5.2 percent higher on the year.

Americas

Canada

January retail sales were up 0.5 percent and 4.7 percent on the year. Volumes were up just 0.3 percent from December but this extended their run of monthly gains to six. The entire headline gain in nominal demand was attributable to the auto sector which, following a miserable year-end, saw sales surge 3.7 percent on the month. Purchases at new car dealers were up 4.6 percent. Excluding autos & parts, sales dropped 0.5 percent on the month and were up a modest 2.7 percent from January 2011. Only four other subsectors managed monthly increases, led by general merchandise (1.7 percent). Clothing & accessories (0.6 percent) were boosted by a 4.2 percent jump in purchases of shoes and there were advances too in health & personal care (0.9 percent) and furniture & home furnishings (0.1 percent). Weakness was most apparent in building materials & garden equipment which recorded a 5.2 percent monthly decline but electronics & appliances (down 3.4 percent) fared little better. Food & drink slid 0.9 percent and gasoline 0.1 percent.

February consumer prices were up 0.4 percent and 2.6 percent on the year. Excluding food & energy the CPI was up 0.3 percent and 1.7 percent on the year. At the same time, the Bank of Canada’s preferred measure which excludes eight volatile items was 0.4 percent higher than at the start of the year for an annual gain of 2.3 percent. Seasonally adjusted, the CPI edged up 0.1 percent as did the core excluding food and energy. The BoC core was up 0.2 percent. Clothing & footwear increased 0.8 percent while transportation was up 0.5 percent. However, most other areas were well behaved and shelter costs were down 0.2 percent.

Bottom line

Equities took a respite and were mostly lower on lackluster trading. Disappointing economic data during the week from China, Europe, the UK and U.S. provided reasons to worry about global economic growth. Minutes from the Reserve Bank of Australia and the Bank of England provided the reasons why their policies remained unchanged at meetings earlier this month.

While there was limited albeit new data last week, investors will be inundated this week as is usually the case during the last week of the month and the end of the first quarter of 2012.

Looking Ahead: March 26 through March 30, 2012

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