Global Markets

Equities were mixed last week as investors weighed a plethora of new economic data and first quarter earnings reports on one hand and the continuing political and economic woes in Europe on the other. In the mix were central bank announcements from the Federal Reserve, Bank of Japan and Reserve Bank of New Zealand. Only the BoJ altered its monetary policy.

Briefly, the FOMC left its monetary policy fed funds rate range at zero to 0.25 percent. And while it upgraded its outlook some, it maintained that the fed funds rate range would remain at this level until the end of 2014. Following a two day policy meeting, the Fed did not extend its bond buying program, but said it is prepared to do more to boost economic growth. Analysts interpreted the comments in a positive way given current economic uncertainties. The Bank of Japan increased the size of its asset purchase programs under pressure from the Japanese government. It left its key interest rate range at zero to 0.1 percent. The Reserve Bank of New Zealand kept its overnight cash rate (OCR) at 2.5 percent.

Global Stock Market Recap

Europe and the UK

After a very negative start, all indexes except the SMI managed to slog their way into positive territory for the week. The downgrade of Spain's credit rating and the weaker than expected U.S. GDP growth contributed to the SMI's weakness at the close of the trading week, dragging the index down 1.9 percent. The FTSE managed to eke out a 0.1 percent gain on the week while the CAC jumped 2.4 percent and the DAX was 0.8 percent higher.

Reasons for the poor start of the week were the dismal flash manufacturing PMI readings both in China and in Europe, all registering below the 50 breakeven point between growth and contraction. The results of the French election on Sunday also weighed on investors. But better than expected earnings from many major companies neutralized the impact of the poor economic data and sent equities into positive territory.

On the political front, French Socialist leader Francois Hollande won the most votes in the first round of the French presidential elections. The incumbent, Nicolas Sarkozy, came in second place. Hollande has based his campaign mostly on tax and spend programs, higher taxes for the rich and promises to cut the country's widening budget deficit. In the Netherlands, Prime Minister Mark Rutte resigned after budget talks broke down and he called for a new election. Although a budget agreement subsequently was reached, an election is scheduled for September.

After markets had closed Thursday in the U.S., S&P downgraded Spanish sovereign credit rating for the second time this year. The rating agency said it expects further deterioration of the country's public finances amid economic contraction and the need to support banks. S&P said it is lowering Spain’s long term and short term sovereign credit ratings to BBB+ and A-2 from A and A-1. The outlook on the ratings is negative. Meanwhile, Spanish Economy Minister Luis de Guindos said he expects foreign investors and real estate funds to help offload property assets from banks’ balance sheets and ruled out using public funds to shore up the industry.

Asia Pacific

Equities were mostly lower last week. Only the PSEi and SET advanced while the Kospi was virtually unchanged. Investors were concerned once again about European sovereign debt problems. Election results in France added to worries as did the resignation of the Netherland’s prime minister. Investors here also awaited the results of the FOMC meeting on Wednesday and the Bank of Japan meeting on Friday. The S&P downgrade of Spain's credit rating by two notches rekindled worries about the fragile state of the Eurozone economy. The week also began negatively here after the flash HSBC/Markit manufacturing PMI for April — although improved — still showed that activity was contracting in China.

According to the IMF’s Regional Economic Outlook report, renewed escalation in Europe's difficulties clearly puts this region's buoyant economic outlook at risk. Asian policymakers should be ready to shift gears and renew their tightening cycle as overheating pressures become evident. In the absence of adequate policy responses, a deeper recession in the Eurozone could cut two to five percentage points off growth in Asia, it warned.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. The vote was unanimous. Also as expected, it stepped up its monetary easing by bolstering its asset purchasing program from ¥65 trillion yen to ¥70 trillion yen while adjusting the terms to allow it to buy more government debt, and with longer maturities. Analysts noted, however, that Friday’s move was at the low end of expectations of an additional ¥5 trillion to ¥10 trillion of easing.

Before the announcement, market expectations had been building that the BoJ would underline its commitment to the “powerful monetary easing” as it was described by Governor Masaaki Shirakawa during a trip to the U.S. recently. Politicians within Japan have also been urging the BoJ do more to fight the nation’s chronic state of mild deflation, threatening to strip the bank of its independence should it fail to act aggressively. The slew of March economic data released prior to the Bank’s announcement, supported the case for continuing loose policy.

In February the BoJ surprised markets by adding ¥10 trillion to its asset purchasing program while adopting a firmer goal for inflation of 1 percent. Since then, though, the BoJ has kept its settings largely unchanged.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its key official cash rate (OCR) at 2.5 percent where it has been since March 2011. At the same time it removed all references to a tightening bias. The announcement was brief and said that it is no longer a given that the next move in the OCR will be up. It also noted that what happens with the exchange rate is crucial. A persistently strong New Zealand dollar could bring on a policy response. The OCR has been unchanged to allow the economy to recover after the nation’s deadliest earthquake in 80 years in Christchurch and the surrounding Canterbury province. Unlike counterparts elsewhere in Asia, the RBNZ has not responded to weak global demand by cutting borrowing costs because the Bank expects earthquake rebuilding will stoke inflation in coming years.

The RBNZ has an inflation target range of 2 percent to 3 percent. Consumer prices were up 1.6 percent on the year in the March quarter which gives the Bank flexibility without worrying about prices. In his statement, Reserve Bank Governor Alan Bollard noted that inflation is restrained and is expected to stay near the middle of the Bank’s target range.

Currencies

The U.S. dollar was down against all of its major counterparts last week as the Federal Reserve continued its guidance for no change in the fed funds rate until late 2014. Mixed economic data did not help. For example, durable goods orders plunged more than anticipated and first quarter GDP grew less than expected even though some components were positive. While equities managed to offset data disappointments to a large part, the currency was less forgiving. Even S&P’s downgrade of Spain did not lift the dollar against the euro. Nor did the Spanish unemployment rate — it increased to an 18-year high of 24.4 percent in the first quarter, from 22.9 percent in the previous three months.

The yen gained amid concern that the new Bank of Japan stimulus announced on Friday local time will not be enough to boost the nation’s growth. However, slightly disappointing U.S. data — as long as it’s not too disappointing — is risk supportive according to traders because you have hope that the Fed will ease for a third time.

The pound rose for a 10th day against the dollar, the longest winning streak since June 1992, as investors sought the relative safety of UK currency after S&P cut Spain’s credit rating. Sterling climbed to the strongest in almost 22 months against the euro as signs the region’s debt crisis is worsening dampened demand for European assets.

Selected currencies — weekly results

Indicator scoreboard

EMU

April economic sentiment deteriorated to 92.8 following a marginally higher revised base of 94.5. It essentially left the headline index back at its December level, wiping out all of the limited improvement seen earlier in 2012. Renewed weakness was apparent in most areas, notably in industry where confidence dropped almost 2 points to minus 9 and in services which saw a 2.1 point slide to minus 2.4. Retail morale actually crept 0.6 points higher to minus 11.4 but fell 0.8 points in the consumer sector to minus 19.9 and was off 0.7 points at minus 27.4 in construction. Sentiment in all areas was below its long run average. Regionally confidence was lower on the month in most member states, particularly in Italy which posted a decidedly unwelcome 5.7 point decline. Germany registered a more modest 1 point dip but this followed a steeper drop in March and left sentiment at its lowest level since last November. However, Germany was the only country with sentiment above its long run average. Elsewhere among the larger economies, Spain registered a 1.8 point decline while France was off just 0.4 points.

France

March total consumer spending was off 2.9 percent on the month. A 3.0 percent slide in energy consumption, at least in part reflecting seasonally warm weather, had a significant impact. However, for the quarter as a whole, overall purchases still crept up 0.2 percent from the previous three months, just 0.1 percentage point less than in the previous quarter. March consumer spending on manufactured goods dropped 1.1 percent on the month and slid 1.9 percent below their year ago level. For the first quarter, purchases were down 0.5 percent from the fourth quarter of 2011. Autos jumped 2.3 percent while household goods edged up 0.2 percent. However, textiles sank 2.5 percent.

United Kingdom

First quarter gross domestic product was down 0.2 percent on the quarter and virtually unchanged when compared with the same quarter a year ago. As usual with the initial estimate, the ONS provided no details of the GDP expenditure components but the output data showed a 0.1 percent quarterly advance in services against a 0.4 percent decline in industrial production. Within the latter, manufacturing was down 0.1 percent from the fourth quarter. However, much of the damage was caused by the construction sector which saw a 3.0 percent slump on the quarter, matching the previous period's decline. This looks somewhat at odds with the survey data and there is a good chance of an upward revision to this area in due course. Indeed, the meager gain in services looks suspiciously low too.

Asia/Pacific

Japan

March consumer price index was up 0.5 percent on the month and on the year. Excluding only fresh food, the CPI was up 0.5 percent and 0.2 percent for the second consecutive increase on the year. Energy costs were up 5.7 percent on the month and 5.2 percent from a year earlier. Electricity charges were up 6.9 percent from a year earlier while retail gasoline costs were 4.9 percent higher on the year. Television prices jumped 2.3 percent. Excluding both food and energy, the CPI dropped 0.5 percent on the year.

March unemployment rate remained at 4.5 percent for a second month. The number of unemployed persons was 3.07 million, a decline of 150,000 or 4.7 percent from the previous year. The number of employed persons was 62.15 million, down 230,000 or 0.4 percent from the previous year.

March household spending was up 3.4 percent from the previous year. Spending was up for all categories with the exception of housing which was down 2.2 percent from a year ago. Spending on furniture & household utensils was up 15 percent on the year while clothing & footwear jumped 10.2 percent. Education expenditures were up 10.4 percent while culture & recreation was 9.1 percent higher on the year.

March retail sales soared 10.3 percent on the year. All sub-categories were up with the exception of machinery & equipment which was down 12.0 percent on the year. Motor vehicle sales soared 50.4 percent from a year ago. Fabrics, apparel & accessories were up 15.5 percent on the year. Other category increases included general merchandise (7.5 percent), fuel (6.2 percent) and food & beverage (3.3 percent).

March industrial production was up 1.0 percent on the month and was 15.5 percent higher on the year. The increase was led by the auto industry, amid easing concerns about global growth and the yen's rise. METI's latest survey of firms' forecasts showed that overall production is expected to rise 1.0% on the month in April before dropping 4.1 percent in May (first estimate). Based on the latest data and the outlook for the next two months, METI maintained its overall assessment saying: "Industrial production has been picking up." Transportation equipment including automobiles was up 2.7 percent from the previous month and information & technology equipment gained 7.3 percent.

Australia

First quarter producer prices for final stage commodities were down 0.3 percent on the quarter and up 1.2 percent on the year. The quarterly drop was due mainly to declines in the prices received for other agriculture (down 17.7 percent), building construction (down 0.2 percent) and industrial machinery & equipment manufacturing (down 2.4 percent). The declines were partially offset by higher prices for electricity, gas & water supply (2.1 percent) and tobacco product manufacturing (7.8 percent). However, intermediate state commodities were up 0.3 percent and 2.8 percent on the year. Petroleum refining prices were up 3.1 percent, structural metal product manufacturing was up 3.4 percent and road freight transport was 1.0 percent higher. Offsetting these increases were declines in prices for metal ore mining (down 3.3 percent) and coal mining (down 4.5 percent). Preliminary stage prices edged up 0.1 percent and were up 3.4 percent on the year. Prices were up for petroleum refining (3.4 percent), oil & gas extraction (0.9 percent) and property operators & developers (0.7 percent). Prices dropped for coal mining (down 4.5 percent) and metal ore mining (down 4.7 percent).

First quarter consumer price index edged up just 0.1 percent. On the year, the CPI was up 1.6 percent. In the fourth quarter, the CPI had been unchanged on the quarter and up 3.1 percent from the year earlier. The RBA’s preferred measures of inflation — the weighted and trimmed means — were well within the inflation target range of 2 percent and 3 percent. The weighted mean was up 0.4 percent on the quarter and 2.1 percent on the year. The trimmed mean was up 0.3 percent and 2.2 percent. The most significant price rises in the quarter were for pharmaceutical products (14.1 percent), secondary education (7.7 percent), automotive fuel (2.5 percent), medical & hospital services (2.1 percent), tertiary education (4.7 percent) and rents (1.0 percent). The most significant offsetting price declines were for fruit (down 30.0 percent), international holiday travel & accommodation (down 4.8 percent), furniture (down 6.0 percent), audio, visual & computing equipment (down 6.3 percent) and domestic holiday travel and accommodation (down 2.0 percent).

Americas

Canada

February retail sales edged 0.2 percent lower, largely offsetting the gain in January. New car dealers accounted for most of the decline. In volume terms, retail sales declined 0.6 percent. Excluding sales of motor vehicles and parts, retail sales rose 0.5 percent, recovering some of their 0.8 percent decline in January. Lower sales were reported in 5 of 11 subsectors, representing 57 percent of total retail sales. Motor vehicle & parts dealers were down 2.4 percent, partially offsetting the increase in January. Elsewhere, food & beverage stores declined for a second month, edging down 0.2 percent. Sporting goods, hobby, book & music store receipts (down 1.0 percent) declined for a third month in a row, reflecting lower sales at sporting goods stores. After dropping for three month, sales at gasoline stations rose 1.7 percent in February, reflecting higher prices at the pump. Sales at building material & garden equipment & supplies dealers increased 2.2 percent, partially offsetting January's decline. Sales at clothing and clothing accessories stores (up 1.3 percent) advanced for a fifth consecutive month. Higher sales at clothing stores accounted for these gains.

Bottom line

The Reserve Bank of New Zealand, Federal Reserve and Bank of Japan met and announced their respective monetary policies. Neither the Fed nor the RBNZ made policy changes but the Bank of Japan expanded its asset buying program. Many better than anticipated earnings reports trumped disappointing economic data for the most part. Eurozone sovereign debt woes once again were being carefully watched around the globe.

The Reserve Bank of Australia and the European Central Bank meet this week with the RBA expected to cut its key interest rate from 4.25 percent. The ECB is expected to keep its 1.0 percent rate. April manufacturing and services purchasing managers indexes are on tap. The week culminates with the release of the U.S. April employment situation report on Friday.

Looking Ahead: April 30 through May 4, 2012

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