Global Markets

With no central bank meetings, last week’s focus was on the increasing pace of corporate earnings reports. Investors also focused on the slew of U.S. economic data — and of course the debt ceiling which has replaced fiscal cliff as the two most disliked words. For most of the week, investors waited for Chinese data including fourth quarter gross domestic product that were released Friday local time. But not content with just earnings and economic data, they also projected ahead to the Bank of Japan meeting on January 21^st and 22^nd.

China boosted prospects for the global economy, while the yen hit new lows ahead of next week's Bank of Japan meeting. China's economy grew at a slightly faster than expected 7.9 percent in the fourth quarter of 2012, the latest sign it is pulling out of a post global financial crisis slowdown that produced its weakest year of economic growth since 1999. The positive news came on top of strong U.S. labor and housing market reports on Thursday, providing fresh impetus to a recent strong and broad financial market rally.

However, British retail sales posted a surprise monthly fall in December, dashing hopes that Christmas shoppers would provide a last-minute boost to an economy on the verge of another contraction. Like much of Europe, consumer spending in Britain has come under pressure from a combination of below inflation wage growth, worries about the economy and government austerity measures.

Expectations that the new Japanese government will pursue massive fiscal spending and push for more aggressive BoJ easing to drive Japan out of years of deflation and economic slump have spurred heavy yen selling since November. At its meeting, the BoJ is expected to consider removing the 0.1 percent floor on short term interest rates and commit to open ended asset buying until the 2.0 percent inflation target is reached.

A slow economic recovery in developed nations is holding back the global economy according to the World Bank as it sharply scaled back its forecast for world growth in 2013 to 2.4 percent from an earlier forecast of 3.0 percent. The World Bank cut its forecast as austerity measures, high unemployment and low business confidence weigh on economies in developed nations. Chancellor Angela Merkel’s government cut its growth forecast for Germany. Luxembourg Prime Minister Jean-Claude Juncker said the strength of the euro poses a threat to the region’s economy.

Global Stock Market Recap

Europe and the UK

Equities were mixed for the week — the UK, Switzerland and France advanced while Germany slipped. Investors traded on economic and earnings news. For example on Friday, markets received a boost in early trading from China’s fourth quarter GDP data and at the same time, investors were encouraged by some positive U.S. earnings releases. But the mood was soured by a surprise drop in U.S. consumer sentiment as well as UK retail sales data. For the week, the FTSE, SMI and CAC were up 0.5 percent, 2.5 percent and 1.0 percent respectively while the DAX edged down 0.2 percent.

The Bank of Italy slashed its economic forecast for 2013 citing the deteriorating external environment and the continuing weakness in domestic activity. The Bank now expects the Italian economy to contract 1.0 percent this year, rather than its earlier projection of 0.2 percent. Gross domestic product likely declined just over 2.0 percent in 2012.

Germany’s economy probably contracted in the fourth quarter of 2012. Gross domestic product may have dropped as much as 0.5 percent from the third quarter according to the Federal Statistics Office in a preliminary estimate. In 2012, growth slowed to 0.7 percent from 3.0 percent the previous year.

The ECB said in its monthly bulletin that the Eurozone economy will begin a gradual recovery later in 2013 because of accommodative monetary policy, together with significantly improved financial market confidence and reduced fragmentation.

The International Monetary Fund on Wednesday decided to release the next tranche of bailout money to Greece after the country successfully carried out a bond buyback and passed further budget measures to ease the country's debt load. After announcing the Executive Board's decision to disburse €3.24 billion to Greece, IMF Managing Director Christine Lagarde said "the program is moving in the right direction" though it initially encountered a delay in implementation due to a political crisis. Separately, the IMF granted a €838.8 million loan disbursement to Portugal, under a €78 billion bailout package approved in 2011.

Asia Pacific

Equities were mostly positive thanks to a rally on Friday after the U.S. and China both reported economic data that were better than expected. There were two main stories. In Japan, a combination of a sinking yen and hopes for dramatic easing from the Bank of Japan Tuesday energized investors. Anticipation of China’s growth data, which were not released until the Friday global market day, added to investor angst during the week but added to Friday’s rally. The Nikkei was up 1.0 percent while the Shanghai Composite soared 3.3 percent.

Upbeat jobless claims and housing reports from the U.S. and hopes that the Chinese recovery would continue into the first and second quarters of this year helped investors shrug off disappointing bank earnings. The Japanese yen hovered near two and a half year low against the U.S. dollar on continued speculation that the Bank of Japan will take bold monetary easing steps at its monetary policy board meeting on Monday and Tuesday to end deflation and achieve an inflation target of 2.0 percent as advocated by Japan's Prime Minister Shinzo Abe. Many analysts expect the Bank of Japan to take up open-ended purchase of government bonds and other assets in a bid to kick-start the economy.

China's Shanghai Composite rallied after the latest figures revealed the nation's economy grew 7.9 percent in the fourth quarter from a year earlier following seven straight quarters of slowdown. Industrial output grew by 10.3 percent on the year compared with forecasts for a 10.2 percent increase.

Currencies

The dollar hit its highest level in intraday trading in more than two and a half years against the yen on Thursday, after the Bank of Japan said it was preparing to announce additional monetary easing after its monetary policy board meeting January 21^st and 22^nd.

According to the Nikkei in its Friday edition, the BoJ is expected to add an additional ¥10 trillion of easing, which would mark the first time in more than nine years that the Bank of Japan has made expansionary moves over two successive policy meetings. The move also suggests a victory for newly elected Prime Minister Shinzo Abe who has pledged to employ aggressive monetary and fiscal policy to deliver growth. News of impending easing sent the U.S. dollar above ¥90 for the first time since June 2010. Japan's currency had weakened earlier in the session after Economy Minister Akiri Amari said the yen's strength has been excessive and Tuesday comments in which he said the currency was falling too quickly were misinterpreted.

In the U.S., the dollar got a boost from stronger than expected weekly jobless claims along with housing data as traders bet that a recovering economy means the Federal Reserve may begin rolling back its accommodative credit policies sooner than expected. But the dollar was not strong enough to top the euro, which reversed two days of losses on well received government bond and Treasury bill auctions by some of the Eurozone's weaker states such as Spain and Ireland.

The euro's exchange rate is "alarmingly high" and is likely to affect the Eurozone economy which is showing signs of stability, according to Eurogroup President Jean-Claude Juncker on Tuesday. While speaking at the annual gathering of business leaders in Luxembourg, Junker warned that an overvalued euro is likely to threaten the economy that is reemerging from financial crisis. Junker's comments came just few days after European Central Bank President Mario Draghi's statement that the euro area may see a gradual recovery later in the year as there are some modest signs of stabilization.

The euro declined against the dollar Friday after a European Central Bank official said the ECB does not have a view whether banks should repay funds when the possibility comes up, dampening bets that short term interest rates will rise. The euro dropped from almost the highest since February 2012 after ECB Executive Board member Benoit Coeure said he does not expect repayments to affect the Eonia rate, an overnight interest rate for the interbank market.

Selected currencies — weekly results

Indicator scoreboard

EMU

November industrial production declined 0.3 percent and dropped 3.7 percent on the year. This was the third consecutive month that output has declined. Only capital goods (0.7 percent) saw a monthly expansion. Elsewhere it was all bad news with durable consumer goods down 1.1 percent on the month, nondurables 1.2 percent lower and intermediates off 0.3 percent. Energy also hit the bottom line, falling 1.6 percent from October. Regionally there was a third consecutive monthly drop in output in Italy (1.0 percent) and a fresh drop in Spain (2.5 percent). Both countries now show an annual rate of decline in excess of 7 percent. Germany (0.1 percent) and France (0.5 percent) managed modest monthly gains but for those member states providing data, just Malta (6.1 percent) and the Netherlands (1.1 percent) could boast an increase on the year.

November seasonally adjusted merchandise trade balance was in a record €11.0 billion surplus in November following a slightly larger revised €7.4 billion excess in October. The unadjusted surplus was €13.7 billion after a surplus of €4.9 billion last time. The improvement in the adjusted headline was partly due to a 0.8 percent monthly increase in exports, but more so to a 1.5 percent decline in imports. The weakness over Eurozone domestic demand was once again reflected in annual export growth of zero, some 5 percentage points short of the equivalent measure of exports.

December harmonized index of consumer prices was up 0.4 percent on the month and 2.2 percent on the year. The core rates remained subdued but were generally a touch higher than last time. Thus, excluding food, drink, tobacco & petrol, the HICP was up 1.5 percent on the year after a 1.4 percent annual increase in November while without just energy & seasonal food the rate crept up a tick to 1.7 percent. Omitting only unprocessed food and energy the 12-month change was steady at 1.6 percent. The main upward pressure on the annual headline rate came from hotels & restaurants where inflation accelerated from 1.7 percent to 1.9 percent. However, with seasonal pressures strong but volatile at this time of year, this could well prove short-lived. Elsewhere, most categories saw little change.

United Kingdom

December consumer prices were up 0.5 percent and 2.7 percent on the year. The main upward pressure on prices stemmed from a 2.0 percent monthly increase in housing, utilities and fuel costs, in large part reflecting the increase in energy tariffs announced by the major suppliers a couple of months ago. Food & non-alcoholic beverages (1.2 percent) also climbed quite sharply from November and there was a 1.3 percent monthly advance in furniture & household equipment. Most other categories were well behaved and in addition to a 0.1 percent monthly drop in the communications and in the recreation & culture sectors, clothing & footwear prices declined 1.5 percent and alcohol & tobacco was off 1.1 percent.

December output prices slipped 0.1 percent and were up 2.2 percent on the year. Weakness was mainly apparent in the energy sector which saw the cost of petroleum products down 1.5 percent on the month. Other, smaller declines were seen in clothing, textiles & leather (0.3 percent) and computer, electrical & optical products (0.1 percent). There were no significant price increases on the month and the core index was unchanged from November and 1.5 percent higher on the year. Input prices were down 0.2 percent on the month and were up 0.3 percent from a year ago. Among the major sub-sectors crude oil costs were down 0.9 percent from November while imported chemicals slid 0.6 percent, in line with other imported materials. The main areas of strength were home food materials (1.8 percent) and imported metals (0.6 percent).

December retail sales slipped 0.1 percent and were up 0.3 percent on the year. Excluding fuel, purchases were down 0.3 percent and up 1.1 percent from a year ago. The yearend decline in overall volumes reflected mainly a 3.0 percent monthly drop in household goods. However, there were declines too in food (0.3 percent) and in the other stores category (1.0 percent). However, non-store retailing posted a 1.6 percent gain as did clothing & footwear (0.7 percent) and non-specialized stores (0.4 percent). Non-food demand was off 0.7 percent while fuel consumption was up 1.8 percent.

Asia/Pacific

Japan

November core private sector machinery orders which exclude volatile demand from electric utilities and for ships was up 3.9 percent on the month but down 3.8 percent on the year. The monthly increase far exceeded the consensus forecast for a 0.8% increase. Orders from manufacturers rebounded while orders from non-manufactures continued to expand amid emerging signs of a recovery in some key markets such as China. Orders from overseas, which are not part of core orders, jumped 17.0 percent on the month. It was the highest gain since a jump of 22.2 percent in August 2011, thanks to large orders for power generators, chemical machinery and trains.

December corporate goods price index was up 0.3 percent on the month but down 0.6 percent from a year ago to post its ninth straight decline from a year ago. The pace of decline continued to decelerate from a 0.9 percent decline in November due to higher costs of energy and nonferrous metals as well as smaller drops in iron and steel prices.

Australia

December unemployment rate edged up 0.1 percentage points to 5.4 percent in December. Employment slid by 5,500 to 11,538,900. The decrease in employment was driven by a decline in full time employment of 13,800 people to 8,112,500 and was offset by an increase in part time employment of 8,300 people to 3,426,400. The number of people unemployed increased by 16,600 to 656,400. The monthly seasonally adjusted aggregate hours worked series was down 1.1 million hours to 1,623.5 million hours. The seasonally adjusted labour force participation rate remained steady at 65.1 percent in December.

China

Fourth quarter gross domestic product was up 7.9 percent from a year ago. Analysts expected an increase of 7.8 percent. GDP was up 2.0 percent from the third quarter. For the year 2012, real GDP was up 7.8 percent after growing 9.3 percent in 2011.

December industrial output was up 10.3 percent from a year ago. Consensus was for output to grow 10.2 percent. Output was up 0.87 percent in December when compared with the previous month. For the year 2012, output expanded 10.0 percent after growing 13.9 percent in 2011.

December retail sales were up 15.2 percent when compared with the same month a year ago. Analysts expected sales to increase 15.1 percent. Sales were up 1.53 percent in December when compared with the previous month. Retail sales were up 14.3 percent in 2012, down from 17.1 percent growth in 2011. Real retail sales in 2012 were up 13.5 percent compared with 11.6 percent in 2011.

Americas

Canada

November manufacturing sales rebounded 1.7 percent and 0.5 percent on the year. In real terms, sales advanced a monthly 1.6 percent. The recovery reflected monthly increases in twelve of the twenty-one reporting industries with particularly strong gains in transportation (3.8 percent), primary metals (5.9 percent) and chemicals (3.9 percent). Miscellaneous sales also helped with a near-12 percent jump. Weakness was mainly apparent in clothing, which registered a 3.4 percent monthly drop, together with textile product mills (2.5 percent) and plastics & rubber (1.7 percent). New orders were up a hefty 6.2 percent from October and backlogs rose a sizeable 3.6 percent. Moreover, with inventories down 0.8 percent, the inventory/sales ratio fell 0.04 months to 1.31 months.

Bottom line

Markets were mixed last week as economic and earnings data vied for attention. Investors tried to anticipate what the Bank of Japan will do at its meeting at the beginning of the week. Most economic data were positive in the U.S. and China while those in Europe tended to disappoint.

The Bank of Japan meets the first two days of the week. As noted elsewhere, the monetary policy board is expected to add additional stimulus to shake the economy out of deflation and get it growing again. The BoJ and the Government reached a basic agreement Thursday on the substance of an upcoming joint statement on fighting deflation. The document will call for the BoJ to adopt a 2.0 percent inflation target, and charge the central bank's governor with reporting regularly on progress toward this objective. Elsewhere, the Bank of Canada is expected to leave its policy interest rate at 0.5 percent. Flash January purchasing managers’ indexes will be released for China, U.S., Eurozone, France and Germany and will give us our first look at January manufacturing data. The UK reports its initial fourth quarter GDP data.

Looking Ahead: January 21 through January 25, 2013

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