Global Markets

Investors were bombarded with economic data at week’s end with many indicators giving their first glance at January. And what investors saw were indications that the global economy was improving — especially in China and the U.S. and even in the Eurozone. For January, only the Kospi and KLCI declined. However, the picture for the week was decidedly mixed.

January manufacturing PMIs

Globally, most manufacturing PMIs improved even though many remain below the growth/no growth level. While readings tended to be above the breakeven level outside the Eurozone — that is in the U.S., UK, India and China — they are below it in Europe. Although the readings have improved in Europe, they still indicate contraction, albeit at a slower rate.

For example, the Eurozone PMI was up both on the flash estimate and December’s reading to 47.9 — an 11 month high. Production contracted for the 11th successive month but its rate of decline was the softest since March 2012. The fall in new orders also eased sharply, notably with regards to exports, while backlogs were down for the 20th month in succession. Employment decreased for the 12th time in as many months and, worryingly, at the quickest pace since last October. Regionally, only Germany (49.8) showed any signs of life. Spain improved (46.1) while France plunged (42.9).

In China, the Markit/HSBC PMI climbed to a reading of 52.3 in January, up from 51.5 in December, signaling a modest improvement in operating conditions in the Chinese manufacturing sector for the third successive month. The CFLP also released its PMI which showed that manufacturing had eased in January to a reading of 50.4 from 50.6 in December and increasing for the fourth consecutive month. The official PMI is generally seen as reflective of state owned companies while the HSBC version is a better proxy for the private sector. Analysts cautioned against reading too much into the PMI numbers because economic data in China is always heavily distorted at the start of the calendar year as the lunar New Year approaches.

Global Stock Market Recap

Europe and the UK

Equities were mostly lower last week with only the FTSE and OMX in positive territory. The FTSE was 1.0 percent higher on the week while the OMX gained 1.5 percent. Elsewhere, the CAC, DAX and SMI were down 0.1 percent, 0.3 percent and 0.5 percent respectively. The picture is different for January however. The SMI was 8.3 percent higher on the month while, the FTSE was up 6.4 percent, the CAC gained 2.5 percent and the DAX advanced 2.1 percent. The OMX was up 5.8 percent.

Data were mixed for the week. But the highlight would have to be Friday’s January PMIs that showed an improvement in the beleaguered Eurozone manufacturing sector. Even though they are still contracting, the declines have lessened. Investors were calmed by improvements elsewhere including China and the United States. Earnings were mixed but many companies beat lowered expectations.

The European markets ended the week on a positive note Friday. The Chinese manufacturing sector expanded for the fourth consecutive month, providing a boost to mining stocks. U.S. economic data were largely positive, with a surprisingly strong upward revision to consumer sentiment and a larger than expected increase in the ISM manufacturing index. Although U.S. employment increased slightly less than expected annual revisions elevated employment levels from those originally posted. The data went a long way in offsetting the decline in the first estimate of U.S. growth in the fourth quarter. Economic activity in the U.S. unexpectedly contracted at an annualized rate of 0.1 percent after surging up by 3.1 percent in the third quarter.

Asia Pacific

Most equities advanced last week and in January. With a slew of economic data to be released, investors traded cautiously as they waited for key Chinese and U.S. data. Japanese shares continued to rally as the yen sank in value against the euro and U.S. dollar. Exporters advanced — a lower value of the yen makes Japanese products more competitive while increasing repatriated profits. The Nikkei was up 2.4 percent for the week and 7.2 percent for the month of January. The last time that the Nikkei rallied for 12 consecutive weeks was in 1959. That rally lasted 17 weeks.

The Shanghai Composite rallied Friday after a report from the National Bureau of Statistics and the China Federation of Logistics and Purchasing (CFLP) showed the official PMI measuring China's manufacturing sector performance stood at 50.4 in January, down slightly from 50.6 in the previous month but still marking the fourth month of expansion in a row. The Markit/HSBC PMI showed that China's manufacturing activity expanded at a faster pace than initially estimated. The Shanghai Composite was up 5.6 percent for the week and 5.1 percent for the month as data continued to point toward a recovery.

The All Ordinaries was a standout market in January — up 5.1 percent for the month — its best January since 1994. It was up 1.7 percent for the week in a holiday shortened trading week.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand kept its policy overnight cash rate (OCR) at 2.5 percent. With economic indicators of many of the country’s trading partners improving, Reserve Bank governor Graeme Wheeler noted that global growth is expected to recover in 2013. He also noted that financial market sentiment is positive and contributing to lower funding costs and some lower interest rates for New Zealand households and businesses.

In New Zealand, recent data on business confidence and construction activity suggest growth is recovering from the softness in mid-2012. He noted that rebuilding in Canterbury in the wake of the devastating February 2011 earthquake is gathering momentum and its impact is expected to be felt more broadly in incomes and domestic demand. The RBNZ is monitoring house price inflation and watching household credit growth closely. Inflation is subdued and currently is just below the floor of the RBNZ’s inflation target range of from 1 percent to 3 percent. The low inflation rate reflects the impact of the overvalued New Zealand dollar. The high currency is directly suppressing inflation on traded goods while at the same time undermining profitability in export and import competing industries. The labour market remains weak and fiscal consolidation is dampening growth.

Reserve Bank of India

The Reserve Bank of India eased monetary policy to revive growth as inflation cools and the government curbs the budget deficit. The RBI lowered interest rates, from 8.0 percent to 7.75 percent, for the first time since April and cut the amount of deposits lenders must set aside as reserves. Governor Duvvuri Subbarao cut the cash reserve ratio to 4 percent from 4.25 percent, effective February 9^th, adding 180 billion rupees into the banking system. The Bank cut the inflation forecast to 6.8 percent and said there is space, albeit limited, to support a faltering economy.

India is the first major Asian economy to ease borrowing costs in 2013, after inflation moderated to a three year low and the government called for cheaper credit as it vows prudence in next month’s budget to damp price pressures. The central bank added that policy guidance will be “conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits.”

The rupee has strengthened about 3 percent against the dollar since mid-September, when Prime Minister Manmohan Singh began a policy overhaul to contain subsidies, lure foreign investment and speed up infrastructure projects. Singh is trying to revive an economy expanding at the weakest pace in a decade. Growth now is expected to be 5.5 percent in the year through March 2013, below an earlier estimate of 5.8 percent according to the RBI. That would be the slowest since 2002-2003. The prediction for benchmark inflation was cut to 6.8 percent from 7.5 percent. Finance Minister Palaniappan Chidambaram said he will stick to his target of narrowing the budget gap to 4.8 percent of gross domestic product in the 12 months through March 2014, from an estimated 5.3 percent this fiscal year. The current account deficit is expected to have widened in the quarter ended December. It was 5.4 percent of GDP in the previous three month period.

Currencies

The yen depreciated to its weakest level in two and a half years against the dollar and euro amid speculation Prime Minister Shinzo Abe will select a new Bank of Japan governor who will boost monetary stimulus. With the current governor’s term ending in April, speculation is rife about who will be selected to take Masaaki Shirakawa’s place. Economy Minister Akira Amari told reporters in Tokyo that Prime Minister Shinzo Abe may be narrowing the list of candidates. Amid government pressure, the BoJ doubled its inflation target to 2 percent and announced open ended asset purchases to begin in 2014. The yen declined for the 12^th week against the U.S. dollar after the unemployment rate increased while household spending declined in Japan.

The euro was up against the U.S. dollar after data showed manufacturing in the Eurozone contracted less in January than earlier estimated. The euro maintained gains as the European Central Bank said banks will repay €3.5 billion of its emergency three year loans next week. A total of 27 financial institutions will use the second opportunity for early repayment of the initial three year loan. Banks returned €137.2 billion of long term funds this week. The euro gained in January for a sixth straight month against the dollar, the longest winning streak since May 2003, as optimism increased that the worst is over in the sovereign debt crisis.

The pound declined the most in more than two years against the euro after an industry report showed UK manufacturing grew less in January than forecast, sapping demand for Britain’s currency as a safe haven. Sterling suffered its biggest weekly drop against the euro since June 2011 as a European report this week showed economic confidence improved in January, adding to signs the region’s debt crisis is easing.

Selected currencies — weekly results

Indicator scoreboard

EMU

December M3 money supply was up 3.3 percent from a year ago. The ECB’s favored 3 month moving average measure accelerated to 3.7 percent when compared with the same three months a year ago. However, private sector borrowing remained very subdued with lending down 0.7 percent on the year. Borrowing by households was up a sluggish 0.5 percent. Within this, loans for house purchase grew 1.3 percent. Lending to non-financial corporations weakened further, declining 2.3 percent from December 2011 following a 1.9 percent drop last time. Loans to non-monetary financial intermediaries were up an annual 0.7 percent, after a 1.4 percent drop in November.

January economic sentiment index posted a third successive increase, rising a modest 1.4 points and left the headline measure at 89.2, its highest level since June last year. The index reflected reassuringly widespread, if small, improvements across all of the major sectors. The strongest increase in morale was seen in construction followed by consumers. But industry only edged a little higher. Retail was similarly little changed and services gained just a point. However, hiring prospects were slightly better in all areas. Regionally among the larger member states, Germany (2.5 points) registered the most significant advance in confidence and although Spain (0.5 points) made some headway, Italy was unchanged and France (minus 0.3 points) declined. Once again, only Estonia was above the 100 long-run average.

January flash harmonized index of consumer prices eased to 2.0 percent from 2.2 percent in December when compared with a year ago. Softer energy inflation, which declined 1.2 percentage points to 3.9 percent, will have helped to dampen the overall picture but there were promising signs elsewhere too. In particular, non-energy manufacturing product prices were up 0.8 percent on the year after a 1.0 percent increase last time while inflation in services decelerated from 1.8 percent to 1.7 percent. Charges for food, alcohol & tobacco maintained a 3.2 percent annual rate.

December unemployment rate was unchanged at 11.7 percent from a downwardly revised November level. Unemployment across the region was up just 16,000 on the month at 18.715 million. This followed increases of 201,000 and 63,000 in October and November respectively and was the smallest increase in twenty-seven months. Among the larger EMU states, national rates (using Eurostat calculations) were steady in both Germany (5.3 percent) and Italy (11.2 percent) but edged up a tick to 10.6 percent in France. Somewhat surprisingly, the rate fell in Spain, albeit by just 0.1 percentage points and to a still frighteningly high 26.1 percent.

Germany

December retail sales dropped 1.7 percent for the fourth time in six months after increasing 0.6 percent in November. On the year, sales dropped 4.7 percent. The December data left purchases at their weakest level since May 2011 and made for a quarterly contraction of 1.1 percent following a 0.9 percent slide in the previous period.

January joblessness followed December's marginally smaller revised 2,000 decline with a surprisingly sharp 16,000 drop. The number of people out of work now stands at 2.916 million. The unexpected decline was large enough to reduce the unemployment rate from 6.9 percent to 6.8 percent. The cumulative decline in joblessness over December and January effectively reverses the increase seen in October/November and suggests that the labour market is holding its own. Vacancies dipped 1,000 at the start of the year but this was still an improvement from the 4,000 slide posted last time. The latest unemployment figures follow the earlier release of the December ILO report which revealed a 22,000 increase in payroll employment, up 1,000 on November's advance and a more marked improvement over the previous three months which saw an average gain of just 5,000.

France

December household spending on manufactured goods increased 0.3 percent on the month following a marginally smaller revised 0.1 percent drop in November. On the year, purchases were 0.6 percent below their level in December 2011. The latest gain was largely attributable to the auto sector which saw sales jump 4.6 percent from November as consumers brought forward their purchases in anticipation of higher pollution taxes at the start of 2013. However, household goods were down 0.4 percent on the month, textiles off 0.6 percent and other products just flat.

December producer prices slid 0.3 percent and were 1.6 percent higher on the year. The second consecutive monthly decline in prices was dominated by the energy sector where refined petroleum product prices were down 3.2 percent after a 3.0 percent slide in November. Weakness here was more than enough to offset small gains in food, drink & tobacco (0.3 percent), electrical equipment, machinery & information technology (0.3 percent) and transport materials (0.1 percent). The other industrial products category posted no change.

Asia/Pacific

Japan

December retail sales were up 0.4 percent from a year ago, slightly higher than the consensus for a gain of 0.3 percent. This was the second consecutive increase. November sales jumped 1.2 percent. Components however, were mixed. Car sales dropped 2.2 percent after slipping 0.5 percent on the year in November. Fuel sales were up 1.8 percent for a second month. Machinery sales slid 5.8 percent after slipping 0.3 percent the month before. Food and beverage sales were up for a fifth month with December sales increasing 1.2 percent.

December industrial production was up 2.5 percent but was down 6.4 percent from a year ago. This was the first monthly increase in industrial output since October on higher demand for automobiles as well as chip-making and other general machinery. Transport equipment was up 6.9 percent on the month while general equipment jumped 8.7 percent and electrical machinery was 7.3 percent higher. The commodities that contributed to the increase were large passenger cars, semiconductor products machinery and drive, transmission and control parts.

December household spending was down 0.7 percent from a year ago. The major declines were for housing and education, down 12.3 percent and 11.7 percent respectively on the year. Other declines were minor. Partially offsetting these declines was transportation & communication where spending jumped 9.0 percent on the year and fuel, light & water, up 3.8 percent.

December unemployment edged up to 4.2 percent from 4.1 percent the month before. This is the lowest rate since 2008 when the rate was 4.0 percent. The number of unemployed persons was 2.59 million, a decline of 170,000 or 6.2 percent from the previous year. For the year 2012, the unemployment rate was 4.3 percent compared with 4.6 percent in 2011. The number of employed persons was 62.28 million, a decline of 380,000 or 0.6 percent from the previous year.

Australia

December quarter producer prices were up 0.2 percent and 1.0 percent from a year ago. The quarterly increase was mainly due to increases in the prices received for petroleum refining & petroleum fuel manufacturing (up 5.0 percent) and motor vehicle & motor vehicle part manufacturing (up 1.0 percent). These increases were partly offset by declines in prices received for other agriculture (down 19.3 percent) and pharmaceutical & medicinal product manufacturing (down 4.0 percent). Intermediates prices were up 0.6 percent on the quarter and 1.7 percent on the year. The increase was mainly due to higher prices received for electricity supply; gas supply & water supply, sewerage & drainage services (up 6.9 percent) and petroleum refining & petroleum fuel manufacturing (up 6.0 percent). These increases were partially offset by declines in prices received for other agriculture (down 6.8 percent), sheep, beef cattle & grain farming and dairy cattle farming (down 6.7 percent) and coal mining (down 10.0 percent). Preliminary prices were up 0.6 percent and 1.4 percent on the year.

Americas

Canada

December industrial product prices were unchanged on the month and were up just 0.2 percent from a year ago. Of the 21 major commodity groups, six showed monthly gains while 11 declined and the remaining four were unchanged. The strongest increase was recorded by primary metal products (0.9 percent) reflecting increases in aluminium (2.6 percent), copper (3.1 percent) and nickel (6.0 percent). Wood products (1.0 percent) also saw a solid gain. The largest monthly decline was in motor vehicles and other transportation equipment (0.5 percent) which essentially offset the increases seen elsewhere. The exchange rate also had an impact and without the appreciation of the Canadian dollar, the IPPI would have increased 0.2 percent from November. Raw material and fuel costs dropped 2.0 percent and were 8.0 percent lower on the year. The entire monthly decline could be essentially attributed to mineral fuels which dropped 5.5 percent and without which, the RMPI would have risen 0.9 percent from November and gained 1.4 percent on the year. Apart from a 2.7 percent monthly increase in the cost of non-ferrous metals, most other categories saw relatively small moves.

November monthly gross domestic product was up 0.3 percent on the month and 1.3 percent on the year. November's pick-up in total output was largely attributable to a 0.6 percent increase in activity in the goods producing sector, within which manufacturing was up 0.7 percent. There were also decent gains in utilities (1.4 percent) and in mining, quarrying & oil & gas extraction (0.8 percent). Agriculture, forestry and fishing advanced 0.4 percent but construction was only flat. Service sector activity expanded a minimal 0.1 percent on the month, maintaining the very sluggish pace seen since August. Wholesale trade (0.7 percent) and retail trade (0.6 percent) performed relatively well and transportation & warehousing (0.4 percent) also made fresh ground. However, gains here were almost offset by declines in accommodation & food services (0.9 percent), arts, entertainment & recreation (0.3 percent) as well as a number of smaller declines elsewhere.

Bottom line

Equities were mixed last week. The slew of data indicated an improving but uneven global economic landscape. When revisions were taken into account, the U.S. employment report showed that employment growth was better than originally estimated. Other data — with the exception of fourth quarter GDP — showed a growing economy at a stable pace that even the FOMC acknowledged. Elsewhere, the data were mixed but biased towards the positive.

The Reserve Bank of Australia, Bank of England and the European Central Bank meet this week. Services PMIs will be released and investors will get a look at this part of the economy in January. Merchandise trade and industrial production dominate data releases. China releases merchandise trade and the consumer and producer price indexes for January.

Looking Ahead: February 4 through February 8, 2013

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