Global Markets

Equities were decidedly mixed last week as investors focused on central bank meetings in the Eurozone, UK and Australia. No policy changes were announced. Data from China during the week painted a picture of a recovering economy with PMI surveys indicating improved growth. And both exports and imports advanced according to the latest merchandise trade data. Elsewhere, PMI data in Europe showed a steadying, and in some cases an improved outlook.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its key cash rate at 3.0 percent. At its last meeting in December, the board lowered the rate by 25 basis points to 3.0 percent. The RBA now has cut its cash rate by a total of 175 basis points since November 2011. According to RBA governor Glenn Stevens’ statement, the board decided that it was prudent to leave the cash rate unchanged. Less inflationary pressure affords scope to ease policy further should it be necessary. It was noted that commodity prices have firmed over recent months. The Bank said that the near term outlook for non-residential building remains ‘subdued.’

Many analysts expect a rate cut in March. Since the meeting, the RBA received another employment report. It will also receive the latest updates on wages and (crucially) firms' investment plans. A key objective of RBA monetary policy has been to support a rebalancing of spending towards non-mining investment as mining investment begins to fall. The CAPEX Survey is expected to cast considerable light on prospects for an improved non-mining investment outlook, while also giving an insight into the timing and level of the peak in mining investment.

European Central Bank

As universally expected, the European Central Bank once again elected to leave the key refi rate at 0.75 percent and the deposit and marginal lending facility rates at zero and 1.50 percent respectively. Amid increasing — although at this stage still tentative — signs of stabilization in the Eurozone economy, the decision to retain the status quo was widely anticipated.

Also as expected, ECB president Mario Draghi's post meeting press conference contained little fresh insight into the ECB’s view of how the economy will evolve this year. It did not offer anything new on the Bank's position on its money market operations. The official growth forecast is still seen as subject to downside risk but, by contrast, the early repayment of LTRO funds was viewed as evidence of improving sentiment in financial markets.

Perhaps more significantly, Draghi's opening remarks made no mention of the exchange rate despite some speculation that the ECB might have become concerned by the euro's recent appreciation. However, in response to questioning, he commented that current levels of both the nominal and real effective exchange rates are close to their long run averages. This may not be what the ECB would prefer given the weakness of Eurozone domestic demand, but it also suggests that for now at least, the level of the single currency is not a major factor in setting monetary policy.

Bank of England

The Bank of England’s monetary policy committee left its key Bank Rate at 0.5 percent where it has been for almost four years. The asset purchase ceiling remains at the Stg375 billion level to which it was raised in July last year. The Committee also noted that the Asset Purchase Facility's holdings of the March 2013 gilt would mature at the time of the Committee's next meeting. To this end, it voted to reinvest the cash flows of £6.6 billion associated with the redemption, essentially preventing any unwanted balance sheet shrinkage.

The economy provisionally contracted by a disappointingly steep 0.3 percent on the quarter in the fourth quarter, but after allowing for temporary disruptions to North Sea oil supply, the downturn was much as officially expected and probably did not worry the BoE unduly. Recent labour market data have surprised on the upside, the housing market has strengthened somewhat and the PMI and CBI surveys have all pointed to some kind of rebound in activity in January. Moreover, inflation (2.7 percent in December) is still above the BoE’s 2 percent inflation target.

Meantime, Mark Carney, the current Bank of Canada Governor and BoE Governor elect, spent much of Thursday morning testifying before a UK Treasury Committee. Having previously hinted that he might favor a switch in policy in favor of targeting nominal GDP, he seemed to backpedal somewhat by emphasizing that altering the inflation target would be very difficult and indicating that the merits of changing the policy framework have yet to be assessed. He clearly prefers a flexible approach to inflation targeting. Mr Carney’s term as Governor begins in July and will run for five years instead of the usual eight years. But Carney, who will be the first foreigner to run the Bank in its 318-year history, used a question and answer session with MPs to play down speculation that he would rapidly press for bigger changes at the bank. After taking over at the Bank of Canada in 2008, Carney earned a reputation for protecting his home country from the global financial crisis.

Global Stock Market Recap

Europe and the UK

Although equities finished the week on a positive note, they declined on the week. Political uncertainties in Spain from an unfolding scandal and in Italy from looming elections elevated uncertainties and weighed on investor sentiment. The FTSE was down 1.3 percent, the CAC dropped 3.3 percent, the DAX retreated 2.3 percent and the SMI slid 0.3 percent. Shares rebounded from Thursday’s losses after China released positive merchandise trade and inflation data and the U.S. reported a much narrower than anticipated international trade deficit.

EU leaders agreed to a seven year budget after over 25 hours of negotiations that cuts spending for the first time, bowing to UK Prime Minister David Cameron’s insistence on thrift. The budget for 2014 to 2020 is €960 billion, down from an original proposal of €1.047 trillion and less than the €994 billion spent in the current budget cycle. The spending plan requires approval of the European Parliament, a body that has indicated it does not intend to be a rubber stamp.

Equities declined on Thursday after both the European Central Bank and the Bank of England made no change to interest rates. ECB President Mario Draghi stated that he sees a gradual recovery later in the year as domestic demand will be underpinned by an accommodative monetary policy stance. Bank of England Governor designate Mark Carney said the bank should ultimately exit unconventional monetary policy measures in a manner that reinforces public confidence. The exit should not disrupt the gilts markets as such disruption could lead to sharp movements in a range of asset prices and even threaten financial stability.

Asia Pacific

Equities were mixed last week even though most finished on a positive note after China's merchandise trade data beat estimates and provided fresh evidence of an upswing. China's exports soared 25 percent in January from a year earlier, while imports jumped 28.8 percent on robust domestic demand.

The Nikkei dropped 0.3 percent last week after 12 consecutive positive finishes — the longest such streak since 1959. The Nikkei was hit by a strong yen and earnings disappointments from Sony and Suzuki Motor.

The All Ordinaries was 1.0 percent higher on the week as investors shrugged off the Reserve Bank of Australia's GDP growth downgrade and comments by the ECB chief on the euro's recent strength. The RBA downgraded its 2013 growth forecast to between two to three percent from its previous forecast of 2.25 to 3.25 percent, blaming the strong Australian dollar and the downturn to the mining investment boom. Inflation is expected to remain comfortably within the RBA’s two to three percent target band over the foreseeable future.

The People’s Bank of China signaled that it would pay special attention to inflation, as it sees rising risks to domestic prices from global liquidity and labor shortage. An economic recovery together with demand growth as well as surging capital inflows will increase consumer prices in a faster manner, the PBoC noted in its fourth quarter monetary policy report.

Bank of Japan Governor Masaaki Shirakawa said on Tuesday that he had offered to step down on March 19^th, three weeks before the end of his term. He explained that he had offered to step down early to time his departure from the bank with those of his two deputies, whose terms end March 19^th so that a structure with a new governor and two deputy governors can start simultaneously. He had been under intense government pressure to take bolder steps to resuscitate the deflationary economy. Prime Minister Shinzo Abe is expected to replace Mr. Shirakawa, who has long preached caution on monetary policy, with a successor who is more open to easier monetary policy. During his five year term, Mr. Shirakawa resisted calls from successive governments to be more aggressive, warning that loose money would only lead to unchecked government spending and runaway inflation. Mr. Shirakawa also argued that the government, not the Bank of Japan, needed to do more to encourage economic growth through structural reforms and other growth policies.

Currencies

The U.S. dollar was up against all of its major counterparts with the exception of the pound sterling last week. The euro slid against the U.S. dollar and the yen after European Central Bank President Mario Draghi signaled Thursday that further interest rate cuts remain a possibility. The yen gained for a third day against the euro after Draghi suggested yesterday the recent appreciation of the euro may damp inflation, a signal that further interest rate cuts remain a possibility. Draghi’s comments yesterday came after the euro surged to a 2 1/2-year high against the yen during the week amid signs the European debt crisis was easing.

The yen jumped the most in almost two years against the dollar after Japanese Finance Minister Taro Aso said the pace of the currency’s recent slide has been too rapid. Aso told parliament the government had not anticipated a sudden move to around ¥90 per dollar. Japan’s currency has tumbled 18 percent in the past six months in anticipation of the greater monetary stimulus as advocated by Shinzo Abe, who became prime minister in December. The yen’s decline has spurred criticism abroad, with Aso’s South Korean counterpart complaining about the risk to his nation’s exports and Russia last month warning about the potential for reciprocal action to drive down exchange rates. Finance ministers and central bank governors from the Group of 20 nations are scheduled to meet in Moscow this week.

Selected currencies — weekly results

Indicator scoreboard

EMU

December retail sales dropped 0.8 percent and were down 3.4 percent from a year ago. This was the fifth consecutive monthly decline. In the fourth quarter as a whole, purchases dropped 1.6 percent from the previous period when they slid 0.8 percent. For December alone, the underlying picture was even rather worse than the headline suggested as, excluding auto fuel, non-food sales were down 1.0 percent on the month. Purchases of food, drink and tobacco were 0.8 percent lower. Regionally, most member states declined on the month in household demand led by a 1.7 percent drop in Germany and a 2.2 percent slump in Spain. France edged down 0.2 percent. The only monthly gains of note were seen in Estonia (1.9 percent) and Luxembourg (2.2 percent).

December producer prices were down 0.2 percent and were up 2.1 percent from a year ago. All of the main sectors saw little movement in prices, the notable exception being energy where charges declined 0.8 percent from November to stand 3.7 percent higher on the year. Excluding this category, the PPI was steady at November's level and 1.6 percent firmer than in December 2011. Elsewhere intermediate and capital goods prices were steady on the month while durable consumer goods saw a 0.1 percent dip and nondurables a 0.1 percent uptick. Regionally all member states except Belgium (1.2 percent) and Finland (0.2 percent) posted monthly declines and among the larger four economies only Spain (2.7 percent) had an annual rate in excess of 2 percent.

January services PMI was revised up 0.3 points from the flash estimate to 48.6, just 0.8 points above its year-end level. The decline in business activity in services was the 12th in as many months but at least the slowest since last March. Inflows of new orders similarly fell at a reduced rate. However, the less negative picture was in large part due to a healthy expansion rate in Germany (55.7) which helped to mask further acute weakness in Italy (43.9), France (43.6) and for once, to a lesser extent, Spain (47.0). Although the composite output measure hit a 10 month high of 48.6 at the start of the year, it still points to a contraction in real GDP. And the diverging trends among the member states could prove a major problem for economic policy over coming months.

Germany

December manufacturing orders were up 0.8 percent on the month after an unrevised 1.8 percent drop in November. On a workday adjusted basis, orders were 1.8 percent lower on the year. The year-end bounce was wholly attributable to a stronger overseas market where orders climbed a monthly 2.4 percent thanks to a 7.0 percent surge in Eurozone demand (non-EMU down 0.4 percent). By contrast, domestic orders declined 1.2 percent courtesy of weakness in basics and consumer goods. Among the major product categories, overall capital goods (3.6 percent) registered a very solid monthly increase as did consumer goods (1.7 percent). However, basics saw a 3.6 percent decline.

December industrial production expanded a modest 0.3 percent on the month and declined 1.1 percent from a year ago. The headline data were a good deal stronger than first appearances suggest as overall production was biased down significantly by a likely weather-related 8.9 percent monthly plunge in the construction sector. Manufacturing output was up a very respectable 1.2 percent on the month. Consumer goods were up 3.9 percent from mid-quarter with nondurables surging 4.2 percent and durables up 1.9 percent, while capital goods advanced 1.9 percent. The exceptions were intermediates, which registered a 0.7 percent drop and energy which fell 3.4 percent.

December seasonally adjusted trade surplus widened out to a 3-month high of €16.8 billion in December, up from a larger revised €15.6 billion in November. The unadjusted surplus was €12.0 billion, down from €16.9 billion in mid-quarter. The surprisingly strong headline reflected in part a modest 0.3 percent monthly increase in exports but more importantly, a 1.3 percent decline in imports. The small increase in exports was the first since August and followed a hefty 2.2 percent drop in November to leave levels 6.9 percent lower on the year. At the same time, the contraction in imports was the second in as many months and the third drop in the last four. Annual imports were down 7.3 percent from a year ago.

France

December seasonally adjusted merchandise trade deficit widened out from an unrevised €4.3 billion in November to €5.4 billion in December. However, the year-end deterioration was not large enough to prevent the quarterly shortfall from narrowing to €14.6 billion from €15.9 billion in the July to September period. Exports in December were up 3.1 percent from November but were outpaced by imports which surged more than 5 percent. Both exports and imports hit their highest levels since August, the former boosted by strength in intermediates goods, aerospace and grain and the latter by increased demand for autos, mechanical equipment and clothing.

United Kingdom

December merchandise trade gap narrowed to Stg8.9 billion from Stg9.2 billion in November. The underlying (excluding oil and erratics) shortfall performed slightly better with November's Stg7.4 billion of red ink shrinking to Stg6.9 billion at yearend. Total exports rose a solid 3.0 percent on the month while imports were up 1.1 percent with oil purchases hitting a record high. The bilateral trade gap with the EU was steady at November's Stg4.7 billion but the shortfall with the rest of the world narrowed by almost Stg0.4 billion to Stg4.2 billion.

December industrial production was up 1.1 percent but down 1.7 percent from a year ago. Manufacturing output gained 1.6 percent and was down 1.5 percent on the year. The December figures mean that manufacturing output contracted 1.3 percent on the quarter while overall industrial production fell 1.9 percent, its steepest quarterly decline since January to March 2009. Having a major impact was the temporary closure of the Buzzard and other North Sea oil & gas fields which saw a record 14.1 percent slump in oil and gas extraction. Production in this area continued to return to more normal levels in December. Manufacturing output was boosted by an 8.0 percent monthly spurt in machinery & equipment not elsewhere classified together with a 5.6 percent jump in chemicals & related products. Food, drink & tobacco advanced 1.5 percent. Weakness in the sector was concentrated in wood & paper (down 1.4 percent), rubber & plastics (down 1.2 percent) and pharmaceuticals (down 0.8 percent).

Asia/Pacific

Japan

December private sector machinery orders, excluding volatile ones for ships and those from electric power companies, were up a seasonally adjusted by 2.8 percent. On the year, core orders were up 1.4 percent. For the quarter they were up 2.0 percent. The total value of machinery orders received by 280 manufacturers operating in Japan was down 1.6 percent from the previous month. In the October through December period it increased by 2.8 percent compared with the previous quarter. In 2012 the total amount of machinery orders fell by 4.3 percent while private sector orders, excluding volatile ones, decreased by 0.9 percent. In the January to March 2013 period, the total amount of machinery orders was forecast to rise by 10.5 percent and private sector orders, excluding volatile ones, were forecast to increase by 0.8 percent from the previous quarter respectively. This forecast was basically made by summing up the figures from 280 machinery manufacturers.

Australia

December seasonally adjusted merchandise trade deficit narrowed A$427 million from A$2.8 billion in November. Exports were up 2.6 percent on the month but were down 6.9 percent from a year ago. Non-rural goods exports were up 7 percent on the month while rural goods exports slid 1 percent. Services were down 2 percent. Imports dropped 6.2 percent on the month and were down 0.6 percent from a year ago. Capital goods imports dropped 19 percent while intermediate and other merchandise goods were down 4 percent and consumption good edged down 2 percent.

December retail sales surprised and slipped 0.2 percent on the month. Analysts expected an increase of 0.3 percent. It was the third consecutive monthly drop. On the year, sales were up 2.3 percent. Other retailing dropped 2.8 percent followed by cafes, restaurants & takeaway food services which were down 1.1 percent and food retailing slipped 0.1 percent. These declines were partially offset by increased clothing, footwear &personal accessory retailing (up 2.1 percent), household goods retailing (up 0.8 percent) and department stores (up 0.8 percent). Sales in New South Wales dropped 0.7 percent followed by Victoria which was down 0.2 percent, Western Australia which was down 0.3 percent and the Australian Capital Territory which was 0.8 percent lower. However, sales in Tasmania were up 2.0 percent, in the Northern Territory they were up 0.7 percent and in South Australia, up 0.1 percent. Queensland was relatively unchanged.

January employment surprised and was up a greater than anticipated 10,400 — analysts expected an increase of 8,000. The unemployment rate remained at 5.4 percent for the second month as expected. The number of people employed increased to 11,549,100 in January. The increase in employment was driven by part time employment, up 20,200 people to 3,450,700 and was offset by a decline in full time employment, down 9,800 to 8,098,400. The increase in total employment was mainly driven by an increase in female part time employment. The number of unemployed increased 2,000 to 659,600. The seasonally adjusted labour force participation rate slipped 0.1 percentage points to 65.0 percent in January.

China

January unadjusted merchandise trade balance was $29.15 billion, down from $31.62 billion in December. Exports were up 25.1 percent after increasing 14.1 percent the month before. Imports jumped 28.8 percent on the year after increasing only 6.0 percent in December. On a seasonally adjusted basis, exports were up 12.4 percent after rising 19.2 percent in December while imports were up 3.4 percent after increasing 11.0 percent the month before. Trade data in the first two months of the year is distorted by the timing of the Lunar New Year holiday, which fell in January in 2012 and is in early February this year, making the figures tough to interpret.

January consumer price index eased to an increase of 2.0 percent on the year from 2.5 percent in December. The index was up 1.0 percent on the month. The urban CPI also was up 2.0 percent but the rural index was up 2.2 percent on the year. Food prices eased from a 4.5 percent increase in December to 2.9 percent while non-food prices were virtually unchanged, up 1.6 percent. Other changes of note were clothing prices, up 2.5 percent after 1.9 percent the month before and recreation & education, up 0.5 percent after 1.1 percent.

January producer prices declined 1.6 percent on the year after dropping 1.9 percent the month before. On the month, the PPI was up 0.2 percent after retreating 0.1 percent in November and December. Raw materials procurement, fuel and power prices were down 1.9 percent on the year while production materials prices dropped 2.4 percent. Consumer goods prices were up 0.7 percent after a 0.5 percent increase last time.

Americas

Canada

January employment declined 21,900 — its first decline since July 2012 —following a monthly rise of nearly 31,200 in December. However, the jobless rate slipped to 7.0 percent from 7.1 percent as the participation rate dropped from 66.8 percent to 66.6 percent. This was the first time the jobless rate has been as low as 7 percent since December 2008. The jobs reversal was dominated by full time workers where 20,600 positions were lost. Part time employment was down just 1,400. Public sector payrolls sank 27,000, while the private sector headcount was off almost 19,000. Weakness here was partially offset by a near-24,000 increase in the number of self-employed. The goods producing sector recorded a decline of 17,100, dominated by a 21,600 slump in manufacturing. Utilities were down 11,300 but construction performed well, its payroll expanding 17,100. Services saw a relatively modest 4,800 drop with education (30,900) seeing the steepest decline ahead of finance, insurance, real estate & leasing (10,300). Elsewhere professional, scientific & technical services posted a 17,200 advance and accommodation & food was up 9,700. Most other sectors saw little change.

December seasonally adjusted trade balance recorded a smaller than expected C$0.90 billion deficit after a revised C$1.67 billion shortfall in mid-quarter. The headline improvement reflected a 0.9 percent monthly drop in exports that was more than offset by a 2.8 percent fall in imports. Exports to the US were down 4.0 percent from November which, with imports off 3.3 percent, saw the bi-lateral surplus narrow from C$3.8 billion in mid-quarter to C$3.5 billion. The improvement here combined with a near C$0.5 billion reduction in the bi-lateral shortfall with the EU essentially accounted for the decline in the overall deficit. Within the decline in overall exports, aircraft & other transportation equipment & parts slumped 13.2 percent on the month, energy products were off 6.9 percent and motor vehicles & parts were down 6.8 percent. On the upside, metal ores & non-metallic minerals surged 26.3 percent and metal & non-metallic mineral products were up 7.7 percent. Basic & industrial chemical, plastic and rubber products gained 3.2 percent. Imports were dragged lower by a 7.9 percent monthly drop in basic & industrial chemicals, plastic & rubber products together with a 6.8 percent drop in industrial machinery, equipment & parts and a 19.0 percent plunge in metal ores & non-metallic minerals.

Bottom line

Three central banks met and left their policy interest rates unchanged. The Reserve Bank of Australia left its key rate at 3.0 percent, the Bank of England kept its 0.5 percent rate while the European Central Bank’s rate remained at 0.75 percent as expected. Economic data centered on merchandise trade. China’s January trade data improved and showed both global and domestic recovery. Composite PMI indexes for the most part showed that activity was stabilizing and improving (except in France).

The Bank of Japan meets this week — no policy change is anticipated until a new governor is selected. The Bank of England releases its quarterly Inflation Report. Many Asian markets will be closed to celebrate the Lunar New Year. Mainland China’s financial market will be shut for the entire week while the Hong Kong market will be closed from Monday through Wednesday.

Looking Ahead: February 11 through February 15, 2013

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