Global Markets

Equities were mixed as the pace of earnings news picked up. At the same time, disappointing U.S. economic data provided a damper on investors’ responses to better than anticipated earnings reports. Markets also kept a wary eye on sovereign debt auctions in both Spain and France. French market participants were particularly cautious in the days before the first round in the French national elections on April 22^nd.

The IMF held its spring meetings last week. Among the events was the release of the latest World Economic Report. The report said that global growth is slowly improving as the U.S. recovery gains traction and dangers from Europe recede. However, risks remain elevated and the situation is very fragile. The report represents an improvement from January, when IMF officials warned that the global economic recovery was in danger of stalling. Since then, European leaders have worked on a plan intended to restrain deficit spending. New governments in Spain and Italy have committed to reforms and spending cuts. And the European Central Bank has lent more than $1 trillion to the region's banks.

According to the WER, the global economy is on track to expand this year by 3.5 percent and by 4.1 percent in 2013, up slightly from 3.3 percent and 3.9 percent growth respectively that the IMF forecast in January. At that time market concerns were rampant that Greece could default and at the same time, Italy and Spain were facing budget crises. The report said that it expects the U.S. to expand 2.1 percent this year while Europe is likely to contract 0.3 percent. The IMF is sanguine on the outlook for China, leaving its growth forecasts unchanged at 8.2 percent this year and 8.8 percent in 2013.

No doubt, the unseasonably warm winter weather in virtually the entire U.S. will spur discussions amongst analysts for some time to come. Usually, weather especially in the U.S. because of its size can be written off because it will affect only certain parts of the country and be offset by others — however this year was different. Some of the questions to be answered in the coming months include — did the unseasonable winter distort the typical winter to spring transition' Will savings on heating fuel for example translate into higher retail sales going forward' Were more cars bought during the winter months, borrowing sales from normal spring months because of the mild winter' Stay tuned…

Global Stock Market Recap

Europe and the UK

Equities began and ended the week on a positive note. Better than expected earnings helped lift the indexes. Trading had been choppy during the week as economic data, earnings, bond sales, the imminent French presidential election and rumors all played a part. German sentiment indicators however, showed improvement in April according to both ZEW and the Ifo surveys. The FTSE was up 2.1 percent, the DAX gained 2.5 percent and the SMI was 2.7 percent higher. The CAC was virtually unchanged on the week.

Equity investors watched Spanish and French bond auctions closely Thursday to see if borrowing costs for the two countries increased. France saw strong demand for its debt, but the country's five year borrowing costs increased. Spain also saw strong demand for its debt Thursday, but borrowing costs continued to rise amid increasing concerns that the country may be forced to seek a bailout.

Spanish stocks plunged Wednesday as the level of bad loans in the country's troubled banking sector continued to rise. The country’s bad loans reached an 18-year high in February, according to the Bank of Spain. About 8.16 percent of loans held by banks in February were non-performing, the highest level since October 1994. The IBEX tumbled 4.0 percent Wednesday but was 2.9 percent lower on the week.

According to a report by Germany’s leading economic research institute, the economy is expected to grow at a slightly faster pace than estimated in 2012, as the risks surrounding the global economy have receded. The gross domestic product is forecast to rise 0.9 percent this year, slightly faster than the previously projected 0.8 percent growth. For 2013, the institute forecasts 2.0 percent growth.

Bank of England minutes

Minutes of the April monetary policy committee showed another split vote over what to do with quantitative easing. However, in contrast to the February and March outcomes, only David Miles wanted a more aggressive stance, repeating his previous calls for a Stg25 billion increase in BoE asset purchases to Stg350 billion. There was the usual unanimity over keeping Bank Rate at 0.5 percent. Adam Posen, seen by many as the leading dove on the committee, switched his February and March votes for a Stg25 billion QE increase and voted with the majority for no increase. It should be noted that even Miles indicated that his decision was finely balanced.

The apparent shift in sentiment would seem to reflect new concerns that inflation might not decline as quickly as previously thought together with increasing confidence in economic prospects, the latter based largely on surprisingly upbeat business surveys and information from the bank's own regional agents. Still, members also noted that credit conditions were tightening.

Asia Pacific

Equities were mixed last week. Disappointing U.S. economic data and a slowdown in China depressed demand and gave rise to new worries about the global growth outlook. Mixed earnings results also played a part in keeping investors cautious. Investors here too kept a wary eye on Europe. The Nikkei, Kospi, KLCI and Taiex were 0.8 percent, 1.7 percent, 0.7 percent and 3.6 percent lower respectively. Gains ranged from 2.1 percent (SET) and 2.0 percent (Shanghai Composite) to 0.2 percent (STI).

The Peoples Bank of China vowed during the week to increase supply of liquidity to the financial system, through measures including the reduction of banks' reserve requirements. Xinhua reported late Wednesday, citing an interview of an unnamed central bank official that the PBoC is considering options including reverse repurchase operations and commercial banks reserve requirement rate reductions in order to release additional cash to the system. No action had as yet been taken though.

Reserve Bank of Australia minutes

The Reserve Bank of Australia released the minutes of its April 3^rd meeting. At that time, its key policy interest rate was kept at 4.25 percent where it has been since November 2011. The RBA said that it would be prudent to evaluate inflation before adjusting policy. First quarter consumer prices are scheduled to be released on April 24^th. Members said that there is a case for easing if inflation moderates on slower demand growth. Data showed that output growth was somewhat below trend in 2011 and that the labour market softened during the year. Both the participation rate and average hour declines point to a soft labour market. Members noted that the deposit rate was a key determinant of funding cost pressures on banks. In addition, the exchange rate remains high despite an easing in the terms of trade. It also noted the likelihood of significant fiscal tightening ahead.

Reserve Bank of India

The Reserve Bank of India cut its key repo interest rate — the rate at which the RBI lends to commercial banks — by 50 basis points to 8 percent. It was the first rate reduction in three years as the Bank tries to stimulate growth and boost investment. The Bank had increased interest rates 13 times since March 2010. The move reflects a shift in the Bank’s policy from focusing exclusively on reining in inflation — which at 6.89 percent remains high — to reviving the country’s slowing economy. The bank also doubled to 2.0 percent, the borrowing limit for banks at the marginal standing facility which provides emergency funds to banks at one percentage point above the repo rate in a move that will boost liquidity in the system. The decision, announced by the RBI’s Governor Duvvuri Subbarao, comes after China, Brazil and Indonesia moved to ease liquidity, as emerging economies try to shield themselves from the European debt crisis.

Mr Subbarao said that space for further rate cuts was very limited — he warned that the economic environment remained challenging and stressed that monetary policy alone would not be enough to reignite investment. For this to happen, the government needed to cut subsidies, reduce the current account deficit and unblock the supply-side bottlenecks that had hit growth.

Currencies

The dollar was down against all of its major counterparts with the exception of the yen. The yen declined after the Bank of Japan authorities stepped up verbal intervention ahead of the April 27^th monetary policy decision. BoJ Governor Masaaki Shirakawa renewed his pledge Thursday to continue "powerful" monetary loosening to eradicate the nation's stubborn deflation, adding to the growing view the bank may announce further easing measures at its policy meeting. The yen declined after his comments. The currency was not helped by Japan’s widening trade deficit which hit ¥4.41 trillion for the fiscal year that ended on March 31^st. The BoJ shocked markets in February when it announced aggressive easing measures and an inflation target of 1.0 percent.

The euro continued to be very sensitive and fluctuate along with investors’ concerns about French, Italian and Spanish bond yields. The euro was supported against the U.S. dollar and the yen after IMF Managing Director Christine Lagarde said that Spain is not in need of the fund's support. The interview followed a positive Spanish bond auction and earlier comments from Lagarde that she expects the IMF resources to expand significantly this week. The single currency, however, remains vulnerable to the European debt situation.

Selected currencies — weekly results

Indicator scoreboard

EMU

February seasonally adjusted merchandise trade balance was in surplus by €3.7 billion after January’s revised €5.3 billion. However, this was the sixth successive surplus in as many months. The smaller surplus masked a fourth consecutive monthly increase in exports (2.4 percent) which hit a new record high. Average exports in January/February were up 4.6 percent when compared with the fourth quarter mean. Imports jumped 3.5 percent on the month and annual growth was 7.0 percent. Nonetheless, without Germany's contribution (€10.5 billion), the bottom line for the entire region would, as usual, have been firmly in the red and while France (€0.9 billion) again kept its head above water, fresh deficits in Italy (€1.2 billion), Portugal (€0.3 billion) and Spain (€3.7 billion) will do nothing to ease concerns about their competitiveness.

March harmonized index of consumer prices was up 1.3 percent on the month and 2.7 percent on the year. The core HICP, excluding food, drink, tobacco & petroleum, was up 1.6 percent on the year after 1.5 percent in February. But without only unprocessed food & energy and excluding just seasonal food & energy the rates were steady at 1.9 percent and 2.0 percent respectively. Regionally, annual inflation fell 0.2 percentage points in Germany to 2.3 percent and was 0.1 percent lower on the month at 1.8 percent in Spain. The French rate was up just a tick at 2.6 percent but Italy confirmed its provisional 0.4 percentage point spike to 3.8 percent. Top of the pile once again was Estonia (4.7 percent) while Greece, where the 12-month rate has fallen nearly 3 percentage points since March last year, was at the bottom (1.4 percent).

Germany

April ZEW current conditions index was up just over 3 points on the month at 40.7, while the expectations measure was 1.1 points firmer at 23.4, its fifth increase in as many months and the highest level since May 2010. The April results essentially suggest little change in analysts' assessment of where the economy is headed. The domestic recovery is on track but the pace is quite sluggish and the combination of high commodity prices and the on-going uncertainty over the outlook for the sovereign debt crisis continue to provide reason for caution.

April Ifo survey points to essentially stable business sentiment this month. At 109.9, the headline index was up just 0.1 points from the previous month's reading and 1.5 points firmer than at the start of the year. The lack of any real movement reflected stable expectations (102.7) and a minimal 0.1 point gain in current conditions (117.5). Similarly, confidence in most sectors saw no significant change although construction (minus 3.8 percent) dropped to its weakest level since December.

March PPI was up 0.6 percent on the month and 3.3 percent higher on the year. Most of the increase was again caused by the energy sector where a 1.3 percent monthly jump in charges followed a 0.5 percent gain last time. Prices here were 7.1 percent stronger than in March 2011 compared with a 6.9 percent annual increase in February. Elsewhere prices were better behaved, although a 0.4 percent monthly increase in basics was still on the firm side. Capital goods were up 0.2 percent while consumer goods were up 0.3 percent. The advance was wholly attributable to nondurable goods (0.3 percent) as durables were down 0.2 percent. The core PPI was up 0.3 percent from February and up 1.6 percent on the year.

United Kingdom

March consumer prices were up 0.3 percent on the month and 3.5 percent on the year. Core CPI was up 0.4 percent from February and 2.5 percent from a year ago. This was its first increase since October 2011. Annual inflation rates climbed markedly in certain areas, notably food & soft drinks (4.6 percent from 3.7 percent) and clothing & footwear (3.2 percent from 2.2 percent) and together these sectors added 0.2 percentage points to the monthly increase in the overall annual rate. However, it was not all bad news as partial offsets were provided by decelerating 12-month rates in housing, utilities & fuel (6.2 percent from 6.8 percent), furniture & household equipment (4.1 percent from 4.6 percent) and health (2.8 percent from 3.5 percent).

March claimant count unemployment was up 3,600 after a downwardly revised 4,500 increase in February. As a result the claimant count unemployment rate was 4.9 percent at the end of the quarter, unchanged from its revised February reading. The ILO joblessness dropped 35,000 in the three months to February — the first quarterly decline since the March through May period in 201l. Moreover, the unemployment rate also slipped 0.1 percentage points to 8.3 percent. Pay remains restrained with headline annual average earnings growth of just 1.1 percent in February, down 0.2 percentage points from its January rate. The fall essentially reflected weaker bonus payments (off 11.2 percent in the financial sector) but even regular pay was up just 1.6 percent, in line with its weaker revised pace at the start of the year.

March retail sales jumped 1.8 percent on the month and their best performance since January 2011. Annual growth in volumes was 3.3 percent, up more than 2 percentage points from last time. The threat of industrial action among petrol delivery drivers contributed to a 4.9 percent monthly surge in purchases of auto fuel but even excluding this sector, sales climbed 1.5 percent from February and were 2.8 percent higher on the year. Unusually warm weather seemed to be at least partly behind a particularly good period for clothing & footwear where demand jumped 2.3 percent from mid-quarter. However, most areas fared well and, outside of food (down 0.3 percent) there were solid gains across the board. Non-specialized stores (1.6 percent), household goods (0.9 percent), non-store retailing (1.8 percent) and the other stores category (6.2 percent) all posted hefty gains. Excluding fuel, overall non-food purchases were a sizeable 3.0 percent above their February level.

Asia/Pacific

Japan

March unadjusted merchandise trade deficit was ¥82.6 billion. On the year, exports were up 5.9 percent while imports jumped 10.5 percent. It was the first increase in exports in six months. It was the 27^th increase in a row for imports. For the fiscal year 2011 which ended on March 31, the trade deficit was a record ¥4.4 trillion. The seasonally adjusted merchandise trade deficit was ¥632.3 billion. On the month, exports were up 1.2 percent while imports jumped 6.3 percent. On the year, exports were up 3.6 percent and imports, 13.1 percent. On an unadjusted basis, exports to Asia were up 0.5 percent on the year for the first increase in six months. However, exports to China dropped for the sixth consecutive month and were down 5.9 percent on the year. Exports to the U.S. were up for the fifth month in a row, jumping 23.9 percent. Exports to the EU were down 9.7 percent for the sixth drop in the row. On an unadjusted basis, imports to Japan from the U.S. were up 8.4 percent and from the EU, 10.6 percent on the year. Imports from Asia were up 5.9 percent and China, 3.9 percent.

February tertiary index was unchanged on the month and down 0.2 percent on the year. Scientific research, professional & technical services (up 6.3 percent), information & communications (up 1.7 percent), medical, health care & welfare (up 0.8 percent), living related & personal services & amusement services (up 1.0 percent), real estate & goods rental & leasing (up 0.3 percent) and compound services (up 1.6 percent) were higher on the month. However, offsetting these increases were declines in wholesale & retail trade and transport & postal activities both of which were down 1.4 percent. Finance & insurance dropped 1.0 percent, miscellaneous services (except government services etc.) lost 1.1 percent, electricity, gas, heat supply & water was down 0.4 percent and accommodations, eating & drinking services was 0.3 percent lower.

Americas

Canada

February manufacturing sales dropped 0.3 percent on the month and were up 6.3 percent from a year ago. Eleven of 21 industries saw a monthly decline in shipments but weakness was especially apparent in motor vehicles which posted an 8.7 percent drop. Parts & sales were down 7.2 percent. Excluding this sector overall sales would have climbed 0.9 percent on the month and risen 5.5 percent from February 2011. The other main areas of softness were food where sales were down 3.1 percent on the month together with chemicals (down 2.5 percent) and plastics and rubber (down 2.6 percent). Primary metals (down 0.6 percent) and computers & electronic equipment (down 2.4 percent) also disappointed. On the upside there were respectable monthly increases in petroleum & coal (3.0 percent) alongside non-metallic minerals (22.9 percent) and aerospace products (32.1 percent). The rest of the survey was rather more upbeat. In particular, new orders were up a solid 2.5 percent on the month and backlogs were up 1.9 percent, their first gain since November.

March consumer prices were up 0.4 percent and 1.9 percent from a year ago. Core prices excluding food and energy matched the overall monthly gain and the Bank of Canada’s preferred measure which excludes eight volatile items increasing a slightly smaller 0.3 percent, in line with expectations. Annual growth in both underlying gauges also reflected strong gains in prices March 2011 so that annual ex-food and energy inflation declined 0.2 percentage points to 1.5 percent and the BoC rate eased from 2.3 percent to 1.9 percent. Seasonally adjusted, the CPI was up just 0.2 percent from February. The steepest advances were posted by alcohol & tobacco (0.7 percent) and education & reading (0.4 percent). Transportation prices climbed 0.2 percent but housing operations, furnishings & equipment saw no change and both food (down 0.3 percent) and shelter (down 0.2 percent) were weak.

Bottom line

Equities were mixed last week as investors monitored earnings reports, sovereign bond issues in Europe and mixed economic data from the U.S. and elsewhere.

As is usually the case in the last week of the month, there will be a deluge of new economic data. Adding spice this time is a two day FOMC meeting followed by Chairman Ben Bernanke’s press conference. Investors will also be watching the outcome of the Bank of Japan meeting that takes place at week’s end. They will be watching to see what new easing policies the BoJ will announce to push the value of the yen down and inflation up. Peeks at first quarter growth data are on tap in the UK and U.S.

Looking Ahead: April 23 through April 27, 2012

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