Global Markets

Equities were decidedly mixed last week — they were mostly lower in the Asia Pacific region, split in Europe and the UK and mostly higher in North America. There was some investor angst prior to the start of U.S. earnings season. However, the hesitation was followed by a rally after Alcoa met expectations. Major economic data releases occurred in Europe and China. Europe’s data — and especially Germany’s — disappointed, leading to expectations that the country contracted in the fourth quarter. China’s greater than expected exports signaled that the economy was stabilizing. But at the same time, the December consumer price increase dampened expectations that there would be more stimuli from the Chinese government to fortify growth. There was little new economic information from the U.S. Both the Bank of England and the European Central Bank chose to leave monetary policy unchanged.

ECB

As expected, the European Central Bank left its monetary policy unchanged with the key refinance rate remaining at 0.75 percent. There had been some limited speculation about a possible 25 basis point cut. Rates on the deposit and marginal lending facilities remained pegged at zero percent and 1.50 percent respectively.

Amidst some signs of stabilization in the region's economy and a marked improvement in sentiment in Eurozone financial markets the likelihood was always high that the ECB would be happy to do nothing. PMI and sentiment surveys that the ECB tracks closely do appear to have bottomed. However, current levels of all remain historically low and certainly not in line with any meaningful pick-up in economic activity. Fourth quarter real GDP most probably contracted again and the more forward looking indicators are pointing to little better to start the New Year.

Still, last September's announcement on Outright Monetary Transactions (OMTs) has, at least so far, offered some much needed reassurance to the investor community and sovereign bond spreads among the peripheral members have narrowed significantly. Earlier in the week, Ireland launched its first syndicated bond deal since its 2010 bailout and on Thursday, Spanish 10-year bond yields fell below 5 percent for the first time since last March.

All of this means is that the ECB is in a wait and see mode. However, doubts about the economy remain and a recent survey found a significant number of analysts expecting a 25 basis point cut in the refinance rate by March. Moreover, and perhaps more importantly, it remains to be seen how long the promise of OMTs can act as a substitute for their activation.

There was nothing particularly new in ECB Chief Draghi's press conference although markets did note that the decision on interest rates was unanimous. Inevitably he pointed to the recent slightly better news on some areas of the economy and improved confidence in the financial markets. However with credit growth subdued, Draghi also remained cautious about prospects for 2013 and emphasized that while risks to the Bank's inflation forecast are neutral, they are still on the downside in terms of economic growth. As such, he seemed to leave open the door to another possible reduction in the refinance rate over coming months.

Bank of England

As anticipated, the Bank of England monetary policy committee left its bank rate at 0.5 percent and its asset purchase program ceiling at £375 billion. Ahead of the release of the BoE’s next Inflation Report in mid-February the chances of a fresh loosening of the monetary policy reins were slim, especially with the Bank seemingly happy that its now 5-month old Funding for Lending Scheme (FLS) is having the desired impact. Their fourth quarter credit conditions survey showed a significant improvement in access to mortgage lending as well as (less marked) progress on the availability of corporate borrowing.

However, with the economy in some danger of a return to recession (triple-dip) and the demand for credit still very soft, additional quantitative easing at some point before current Governor Mervyn King is replaced by Bank of Canada Governor Mark Carney at the start of July remains at least a possibility. Financial analysts are currently split over the likelihood of any such move.

Governor King had warned in November that the British economy would continue its “zigzag” pattern and that the economic recovery would take some time. Manufacturing unexpectedly grew at the fastest pace in more than a year in December, helped by domestic demand, which raised hopes among lawmakers that Britain would steer away from a triple-dip recession. But the outlook was soon reversed and an unexpected contraction of the services sector in December, the first time in two years, again raised fears that the country might not be able to stave off another recession.

Britain had emerged from a recession in the third quarter albeit growing slower than previously expected. Many British consumers are concerned that a 2.7 percent inflation rate, which is above the Bank of England’s own 2.0 percent target and the government’s ongoing austerity program, would squeeze their disposable income. Consumer confidence fell in December and the British retail Consortium called the holiday sales “underwhelming.”

Global Stock Market Recap

Europe and the UK

Equities were mixed last week with the FTSE and SMI gaining 0.5 percent and 1.8 percent respectively. The CAC slid 0.6 percent and the DAX lost 0.8 percent. Investors traded with their eyes on developments in China (read exports and consumer prices) and earnings reports (in the United States). Investors also noted the fresh round of stimulus spending worth ¥10.3 trillion to jump start the sagging Japanese economy. The measures will include spending on public works, disaster prevention and financial aid for small firms. The new measures are expected to add 2.0 percentage points to the gross domestic product and create about 600,000 jobs.

Economic data left a lot to be desired as statistics agencies caught up in releasing data from the holiday period. German data were particularly dismal — manufacturing orders and industrial output declined in November — and it is expected that the economy will have contracted in the fourth quarter. Exports were weaker due to low global growth. In the UK, manufacturing output declined unexpectedly in November in yet another blow to hopes of a recovery in the final quarter of 2012.

Asia Pacific

Most equity markets declined last week with the exception of Japan, Philippines and Taiwan. Friday’s slump occurred after China’s consumer price inflation quickened to a seven month high of 2.5 percent in December, limiting the room for further policy easing to support an ongoing economic recovery. Earlier in the week, shares rallied on better than expected December export data from China. Nerves played a role in weakness early in the week as investors here awaited the onset of the U.S. earnings season. There was a sigh of relief midweek after Alcoa met expectations.

Japanese equities have been in a zone of their own. The Nikkei was up three of five days and higher for a ninth consecutive week — the longest consecutive weekly climb since in 1988. The index hit a 23-month high after the government (on Friday) said it would spend ¥10.3 trillion to end deflation and lift the economy out of recession. Prime Minister Shinzo Abe announced that the new stimulus package will add 2.0 percent to the nation's real economic growth. The Nikkei average rose 1.4 percent to close above the 10,800 mark for the first time since February 21, 2011. At the same time, the yen tumbled to multi-year lows early in the session after official data showed Japan posted a current account deficit for the first time in 10 months in November, hurt by a dip in exports and higher energy imports. For the week, the Nikkei was up 1.1 percent.

The Council on Economic and Fiscal Policy held its first meeting in three and a half years in Tokyo, providing a venue for the government and the Bank of Japan to discuss monetary policy. Prime Minister Abe and cabinet members repeated their demand that the central bank adopt a 2.0 percent inflation target. While expressing an intention to cooperate, BoJ governor Masaaki Shirakawa asked the government to do its part by pursuing fiscal consolidation. Shirakawa explained what he believes is the ideal way to exit from deflation from the consumers' perspective — an economic recovery lifts wages and corporate earnings, pushing up consumer prices. For this cycle to begin, government efforts toward fiscal consolidation are also necessary.

Bank of Korea

As expected, the Bank of Korea held borrowing costs unchanged for a third month amid promises from incoming President Park Geun Hye to increase efforts to support economic growth and create jobs. Governor Kim Choong Soo and his board kept the seven day repurchase rate at 2.75 percent after a 25 basis point cut in October. The BoK decision follows plans from Park’s government to spend 72 percent of the budget in the first half of the year to aid a recovery. At the same time, the BoK reduced its forecast for 2013 growth to 2.8 percent from 3.2 percent, highlighting obstacles to a rebound that includes the won’s 27 percent rise against the Japanese yen in the last year. The decision was not unanimous. The Bank adopted a narrower target range for inflation through 2015, of between 2.5 percent and 3.5 percent. Consumer prices increased 1.4 percent from a year earlier in December, the slowest pace in four months.

Currencies

The U.S. dollar slid against all of its major counterparts with the exception of the yen. The euro advanced after the European Central Bank kept its interest rates on hold and signaled a more positive outlook for the Eurozone. The euro climbed as ECB President Mario Draghi forecast that the region would return to growth this year and said the decision not to cut interest rates further had been unanimous. The euro had already received a boost after successful bond auctions in Spain and Italy, with both governments attracting lower borrowing costs for their short term debt than at previous auctions. The pound sterling also was up against the U.S. dollar after the Bank of England kept interest rates on hold and announced no further monetary easing plans.

At the same time, the Japanese yen declined against other major currencies after Shinzo Abe, Japan’s prime minister, reiterated his call for the Bank of Japan to implement a higher inflation target that would aid in weakening the yen. On Friday, the yen slid to the weakest since June 2010 against the dollar after Japanese Prime Minister Shinzo Abe’s government said it will spend ¥10.3 trillion in new stimulus efforts. The yen was headed for a ninth weekly decline, the longest losing streak since 1989, on speculation the Bank of Japan is also preparing measures to spur growth.

The Bank of Japan is expected to adopt the 2.0 percent inflation target advocated by Abe, doubling its existing goal of 1.0 percent, without setting a deadline for achieving it, according to people familiar with discussions within the BoJ. The BOJ meets on January 21^st and 22^nd.

Selected currencies — weekly results

Indicator scoreboard

EMU

November producer prices excluding construction were down 0.2 percent on the month but were up 2.1 percent on the year. Among the major components, energy slid 0.7 percent from October to lower its 12-month rate by 1.8 percentage points to 4.1 percent. However, even excluding this category, prices were down 0.1 percent on the month and steady at a subdued 1.5 percent annual rate. Intermediates matched the 0.2 percent headline decline while capital goods edged up 0.1 percent on the month. Regionally, national PPIs were particularly weak in Greece and Portugal, falling 0.9 percent and 0.6 percent respectively. However, most member states saw some softening in prices, the main exceptions being Belgium (0.6 percent) and Ireland (0.4 percent).

November unemployment climbed an additional 113,000 to 18.82 million, nudging the jobless rate another tick higher to 11.8 percent — a new record high for the Eurozone. However, the monthly increase in the jobless total was the smallest since August and offers hope that, even if any meaningful improvement is likely a long while away, the pace at which labour is being shed may be starting to ease. However, for some member states the latest figures continue to make grim reading, notably in Spain where a 0.4 percentage point increase in the national jobless rate to 26.6 percent was the steepest since July. Among the other larger countries, the rate in Germany held steady again at 5.4 percent but edged another tick higher to 10.5 percent in France. The only states recording a decline were Ireland (14.6 percent after 14.7 percent) and Slovenia (9.6 percent after 9.7 percent).

November retail sales edged up 0.1 percent on the month and were down 2.6 percent on the year. Excluding auto fuel, sales of food, drink & tobacco declined 0.3 percent on the month while non-food was stable. However, the stability of the latter followed a cumulative drop of more than 2 percent in the previous two months and indicates a disappointingly subdued underlying trend to household spending.

December economic sentiment increased 1.3 points to 87.0. The increase was the second in a row and left the headline index at its highest level since July. The modest improvement in overall sentiment reflected typically small advances in all of the main component categories bar retail where morale was down a further 0.9 points at minus 15.8. Regionally, confidence was up in all four larger states with Italy (2 points) leading the way ahead of Germany (1.0 points), France (0.4 points) and lastly, Spain (0.3 points). However, all remained comfortably the below the common 100 long-run average level. Indeed, across the entire region only Estonia, where sentiment gained 2.4 points to 101.8, managed to surpass this mark.

Germany

November manufacturing orders dropped 1.8 percent on the month and on a workday adjusted basis, were 1.0 percent lower on the year. November's slide was attributable to a 3.1 percent monthly decline in capital goods orders together with a 1.6 percent drop in consumer & durable goods. Basics saw a modest 0.2 percent rise. Domestic orders registered a 1.3 percent advance over October with basics (2.8 percent) and capital goods (0.8 percent) making renewed progress. By contrast, foreign orders slumped 4.1 percent on the month, although that was after a 6.6 percent surge last time. Demand from the rest of the Eurozone edged up 0.2 percent but was easily more than offset by a 6.5 percent plunge in orders from the rest of the world, albeit after an 8.0 percent jump at the start of the quarter.

November industrial production edged up 0.2 percent but was down 2.9 percent from its year ago level. A 3.3 percent monthly slump in energy output weighed on overall production. But thanks to a 1.4 percent bounce in capital goods and a 1.0 percent increase in construction, manufacturing alone was up a slightly stronger 0.4 percent. However, intermediates expanded just 0.2 percent and consumer goods were off 2.2 percent.

November seasonally adjusted merchandise trade surplus narrowed to €14.5 billion, down €0.4 billion from a smaller revised October reading to hit its lowest level since March. Unadjusted, the surplus was €17.0 billion, up from €15.7 billion last time. The deterioration in the seasonally adjusted headline reflected a contraction in both sides of the balance sheet with exports falling 3.4 percent on the month and imports off a slightly steeper 3.6 percent. As a result, exports are now at their weakest level since last January and imports at their lowest level since March. Compared with November 2011, purchases from overseas showed zero growth, in no small way due to a 5.7 percent drop in sales to the other EMU states. Exports to non-EU countries rose a comparatively healthy 5.6 percent. Imports were down 1.2 percent on the year despite a 1.1 percent increase in purchases from the rest of the Eurozone. Rather, the main area of weakness here was non-EU countries which saw sales to Germany drop 4.9 percent.

France

November seasonally adjusted merchandise trade balance returned a somewhat smaller than expected €4.3 billion shortfall in November following an unrevised €4.7 billion deficit in October. Exports declined 2.8 percent on the month while imports were off a steeper 3.4 percent. As a consequence, the former now stands at a five-month low and the latter at its weakest level since December 2010. Exports were dragged lower on the month by declines in intermediate goods and in energy, drink and computer & electrical equipment.

United Kingdom

November merchandise trade deficit narrowed to Stg9.2 billion. The limited improvement reflected a 2.9 percent monthly increase in exports that only just more than offset a 1.1 percent increase in imports. Excluding oil and erratic items, the deficit was Stg7.5 billion. Core exports were up 3.4 percent from the start of the quarter mainly due to solid gains in chemicals and intermediate goods while the equivalent measure of imports grew just 0.5 percent, largely accounted for by capital goods. The reduction in the overall red ink was wholly attributable to stronger net trade with the EU bloc. Here, exports expanded almost 9 percent on the month which, with imports rising at less than half that rate, saw the bilateral deficit shrink from October's Stg5.0 billion to Stg4.6 billion. By contrast, the shortfall with the rest of the world was essentially unchanged at Stg4.5 billion.

November industrial production was up 0.3 percent and was down 2.4 percent from a year ago. Manufacturing output was down 0.3 percent and 2.1 percent on the year. The partial recovery in total production reflected a record 11.3 percent monthly surge in activity in the oil and gas extraction sector. This in turn was attributable to the re-opening on the Buzzard oil field whose closure had had an even larger negative impact in September/October. Among the other more volatile categories water supply and waste management was up 0.6 percent on the month but energy output was off 4.1 percent. Manufacturing output was hit by a 2.7 percent monthly decline in basic metal & metal products together with declines in electrical equipment (6.4 percent) and computer, electronic & optical products (3.4 percent). By contrast, transport equipment advanced 3.1 percent and machinery & equipment gained 3.6 percent.

Asia/Pacific

Australia

November merchandise trade deficit was A$2.6 billion, after recording a deficit of A$2.4 billion in October. Exports were up 1.2 percent on the month but were down 8.8 percent from a year ago. Imports were up 1.8 percent and 5.0 percent from a year ago. Both non-rural and rural goods exports were up 2.0 percent while non-monetary declined 9 percent. Services exports edged up 1.0 percent. The main component contributing to services exports was travel, up 2 percent. Imports of intermediate and other merchandise goods were up 5 percent while consumption goods were up 3 percent with non-industrial transport equipment up 9 percent. Both non-monetary gold and capital goods imports were down but services advanced 2 percent.

November retail sales surprised and declined 0.1 percent – analysts expected sales to increase 0.3 percent on the month. On the year, sales were up 2.9 percent. The largest contributor to the monthly decline was household goods retailing (down 0.9 percent) followed by clothing, footwear & personal accessory retailing (down 0.6 percent) and department stores (down 0.4 percent).The declines were partially offset by other retailing (1.0 percent) and cafes, restaurants & takeaway food services (0.3 percent). Food retailing was relatively unchanged.

China

December merchandise trade surplus was $31.6 billion. Exports were up 14.1 percent from a year ago while imports were 6.0 percent higher. For the year 2012, the trade surplus was $231.1 billion. Exports were up 7.9 percent and imports were 4.3 percent for the full year. Exports to the EU for 2012 dropped 6.2 percent while imports edged up 0.4 percent. The U.S. has now replaced the EU as China’s top export destination. For the year, exports to the U.S. were up 8.4 percent while imports jumped 8.8 percent.

December consumer price index was up a greater than expected 2.5 percent from a year ago. Expectations were for a 2.3 percent increase. On the month, the CPI was up 0.8 percent compared with 0.1 percent in November. For the year 2012, the CPI was up 2.6 percent after jumping 5.4 percent for 2011. In December, food prices were up 4.2 percent while non-food prices were up 1.7 percent on the year. According to NBS, 60 percent of the monthly CPI increase was due to vegetable prices. Cold weather hit both vegetables and transport prices.

Americas

Canada

November merchandise trade deficit was C$1.96 billion following an upwardly revised C$0.55 billion deficit in October. The deterioration reflected a monthly 0.9 percent drop in exports, mainly due to a 19.4 percent slump in European demand, compounded by a 2.7 percent increase in imports. On the year, exports dropped 6.3 percent and imports were unchanged. However, exports to the U.S. market expanded a solid enough 3.9 percent from October and with imports growing only 1.7 percent, the bilateral surplus with the U.S expanded C$0.7 billion to C$3.34 billion. Within the monthly decline in overall exports, farm, fishing and intermediate food products followed a record high last time with a sizeable 14.6 percent drop. Metal & non-metallic mineral products (down 7.6 percent) also struggled and a number of other categories also recorded small reversals. However, basic and industrial chemical, rubber & plastic products (7.5 percent) as well as motor vehicles (6.6 percent) and transport equipment (4.4 percent) enjoyed a good month. Imports were boosted by solid monthly gains in metal & non-metallic mineral products (6.8 percent), metal ores & non-metallic minerals (5.1 percent) and basic & industrial chemical, rubber & plastic products (6.7 percent). Transport equipment (9.0 percent) and electronic & electrical equipment (5.6 percent) also performed well. However, energy was down 3.7 percent and industrial machinery and equipment slid 1.7 percent.

Bottom line

It was a mostly quiet week with no new news from either the Bank of England or the European Central Bank. The Bank of Korea also maintained the status quo. European economic data centered on monthly merchandise trade and industrial output data. German manufacturing orders and industrial output disappointed as did UK industrial and manufacturing output.

The spate of merchandise trade and output data continues this week. The pace of new data releases in the Asia Pacific region picks up as China releases its fourth quarter growth data along with key industrial production and retail sales data for December. Australia’s labour force survey will attract wide interest in the financial markets as well.

Looking Ahead: January 14 through January 18, 2013

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