Global Markets

Currency movements — and those surrounding the Japanese yen — were a focus of market participants last week. The yen has declined in value against the U.S. dollar and euro along with its Asian counterparts since candidate and now Prime Minister Shinzo Abe has been pressuring the Bank of Japan to expand its quantitative easing as a means to weaken the yen.

Equities were mixed globally. A combination of mixed earnings reports saw gains offset by declines when news did not match analysts’ expectations. Economic data also were mixed with news especially from Europe and Japan depressing. U.S. data also combined the good with the bad.

Global growth disappointed investors. Thursday’s data for Japan and the Eurozone surprised on the downside. In Europe, fourth quarter GDP contracted at the fastest rate since the collapse of Lehman Brothers four years ago. Both strong and weak countries fell short of expectations. For the Eurozone as a whole, GDP has now declined five consecutive quarters with the latest a drop of 0.6 percent from the previous period. On the year, GDP has contracted for four quarters in a row and was down 0.7 percent in the latest quarter.

Germany and France, the Eurozone’s two biggest economies, both saw output shrink. German GDP declined 0.6 percent in the period while France contracted 0.3 percent compared with the previous three months. This was Germany’s first quarterly contraction since the fourth quarter of 2011. The steep German decline reflected a sharp drop in net exports and investment in plants and machinery.

Although business surveys have been much more upbeat, the weakness underscores how the recent appreciation of the euro could threaten an export led recovery. France has contracted three of the last four quarters and was down 0.3 percent in the latest period. On the year, GDP declined 0.3 percent. Italy’s economy contracted 0.9 percent — also more than expected — and its sixth consecutive decline. On the year, GDP dropped 2.7 percent for its fifth consecutive fall. Spain slid 0.7 percent and was down 1.8 percent from a year ago.

The European data followed a surprise drop in fourth quarter GDP in Japan. Consensus forecasts expected the economy to grow — instead it contracted for the third consecutive quarter. GDP declined 0.1 percent on the quarter or at an annualized rate of 0.4 percent. GDP edged up 0.1 percent on the year.

Global Stock Market Recap

Europe and the UK

Equities sagged at week’s end following the release of weaker than expected GDP results on Thursday and the unexpected drop in UK retail sales Friday. Larger than expected economic contractions, especially those in Germany and France, weighed on investor sentiment. Thursday's session also was negatively impacted by some mixed earnings reports. The FTSE was up 1.0 percent while the CAC was up 0.3 percent and the SMI was 1.4 percent higher.

Professional forecasters surveyed by the European Central Bank have lowered their view on growth and inflation outlook for the euro area, according to a quarterly survey published in the latest ECB bulletin. Real GDP growth expectations for 2013 were lowered to zero from 0.3 percent growth forecast previously while the outlook for 2014 was reduced to 1.1 percent from 1.3 percent. The main factor behind the downward revision for 2013 is the fourth quarter's weaker than expected economic activity.

Bank of England quarterly Inflation Report

The BoE's latest Inflation Report shows a widely anticipated — but still decidedly embarrassing — upward revision to November's forecast inflation profile. In particular, on the basis of unchanged quantitative easing (Stg375 billion) and the market's interest rate assumptions, annual CPI growth is now thought likely to remain above its 2 percent target rate over the next two years. This compares with a projected dip below this level in the third quarter of 2014 last time. Inflation is not projected to fall below 2 percent until the end of the three year outlook period. The upward adjustment was attributed to one off factors, notably increases in administered prices and sterling depreciation. This allows the BoE to maintain that its current policy stance is in keeping with its remit despite the anticipated persistent CPI overshoot.

At the same time, the monetary policy committee (MPC) downwardly revised its growth forecast and now looks for a modest 1.9 percent annual rate in two years' time. The new forecasts are based upon the Bank Rate remaining pegged at 0.5 percent through end-2014 before rising just gradually to 0.8 percent by the fourth quarter of 2015. On top of the latest revisions, the new report acknowledges a wide range of views among MPC members regarding the main factors driving growth and inflation. This will leave financial markets all the more dubious about the usefulness of the exercise as a whole and still further in the dark about exactly what monetary policy is focusing upon.

Asia Pacific

Equities were mostly positive last week — the exception was the Sensex (down 0.1 percent). Many markets were closed during the week for the Lunar New Year holidays with those in mainland China and Taiwan closed for the entire week. Markets slumped Friday as weaker than expected GDP results in the Eurozone led to renewed concerns about the global economy. Disappointing Eurozone data were bound to impact equities here that look to Europe as one of their major export markets. But the Eurozone was not alone. Japanese fourth quarter GDP surprised and contracted for the third consecutive quarter. Among the indexes that advanced on the week were the Nikkei (up 0.2 percent), All Ordinaries (up 1.3 percent), the Kospi (up 1.6 percent) and the Hang Seng (up 1.0 percent).

In Japan, stocks fluctuated along with the yen. When the yen rose in value against the U.S. dollar and euro, exporters retreated, dragging the Nikkei down with them. When the yen continued its descent in value, exporters advanced. A weaker yen makes Japanese products more competitive overseas while at the same time enhancing repatriated profits. The latter becomes more important as the fiscal year end (March 31^st) approaches.

Japanese stocks have soared about 30 percent in the past three months, responding to promises by the new government to jolt the economy out of its doldrums and beat deflation. So far, the spurt has been largely sustained by a weakening yen along with optimistic comments by politicians. The problem, veteran investors say, is the fleeting nature of previous rallies like the one between 2003 and 2006, when prices doubled on hopes that then Prime Minister Junichiro Koizumi would lift Japan's economy out of the doldrums. Shares plateaued after Mr Koizumi left office in 2006, then halved in value after signs of the global financial crisis began to emerge in 2007.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent and the ceiling for its asset purchases at ¥101 trillion where it has been since December. At its January meeting, the BoJ raised its inflation target to 2 percent under pressure from the government. Prior to the announcement, preliminary fourth quarter GDP data surprised, indicating that the economy contracted for the third consecutive quarter.

In its statement, the BoJ said that the Japanese economy appears to have stopped weakening while overseas economies have shown some signs of improvement. Further, Japan’s exports have been moderating while industrial output appears to have stopped falling. 

Current governor Masaaki Shirakawa submitted his resignation last week and will end his term with his two deputies on March 19^th. Now BoJ watchers are waiting for Japanese Prime Minister Shinzo Abe to name his choices for the new governor and the two new deputy governors. Since Abe's election, the rhetoric and initial follow through have raised expectations for change.

Governor Shirakawa defended the BoJ’s aggressive monetary expansion, saying it was aimed at reviving the economy not at weakening the yen, as the country came under fresh international criticism ahead of the G-20 gathering in Moscow. His comments came after data showed Japan's economy unexpectedly contracted in the fourth quarter, failing to escape a mild recession and playing into the hands of a government pushing for more radical stimulus measures that could cause the currency to weaken further. The yen's rapid declines, however, have stirred an international debate over whether Japan was effectively using money printing to steer the yen lower.

Currencies

The U.S. dollar was up against all of its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. However, the focus in the currency markets has been on the yen’s slide and to a lesser extent, the euro’s fluctuations. Japan’s monetary policy became the focus of the global currency tensions ahead of a meeting of G-20 finance ministers and central bankers that is taking place in Moscow (February 15^th and 16^th). Expectations that Tokyo will take firm action to combat deflation have led to a sharp sell-off in the Japanese yen, alarming the country’s trading partners. The yen weakened rapidly after the election of a new government in December. Japanese officials have stated that the country’s monetary policy is not intended to devalue the yen. The yen has slumped over the past three months as Prime Minister Shinzo Abe pressed the Bank of Japan to introduce additional stimulus measures that tend to weaken a currency.

An attempt to soothe global currency tensions backfired on Tuesday after the Group of Seven took the unusual step of issuing a public statement to address rising concerns over a fresh round of global ‘currency wars.’ The yen initially fell, as the statement appeared to support Japan’s efforts to reinvigorate growth. But the currency later rebounded after a G-7 official was quoted as saying the statement had been ‘misinterpreted’ and was instead intended as a warning to Japan. British officials, who brokered the statement, meanwhile insisted that the statement was “not about an individual country or currency”. The dollar gained further ground after the G7 statement was published in London on Tuesday. The statement — from finance ministers and central bank governors in the U.S., Japan, UK, France, Germany, Italy and Canada — said they would “consult closely” on any action in foreign exchange markets.

Selected currencies — weekly results

Indicator scoreboard

EMU

December industrial production increased 0.7 percent on the month. However, the December advance only served to offset a steeper revised 0.7 percent decline in November. On the year, output was down 2.4 percent. The first monthly increase in production in four months was attributable to gains in both capital and consumer goods. The former recorded a 1.3 percent monthly increase while both durable and nondurable consumer goods climbed 2.0 percent. However, intermediates (down 0.2 percent) fell for the fourth time in as many months, energy was off 1.2 percent and in terms of annual growth, once again only energy (1.2 percent) was in positive territory. Regionally the majority of reporting member states saw output expand on the month — the only exceptions were Portugal (down 1.3 percent) and Slovakia (down 4.4 percent). Germany (0.8 percent) had a decent month as did Slovenia (2.7 percent), Finland (1.9 percent) and Ireland (8.5 percent) but France and Spain were only flat. Italy registered a much needed 0.4 percent increase.

Fourth quarter gross domestic product contracted 0.6 percent in period just ended following an unrevised 0.1 percent decline in the third quarter. The third drop in as many quarters left real GDP 0.9 percent lower on the year after a 0.6 percent annual decline last time. Member states Germany, France, Italy and Spain declined on the quarter. The smaller countries typically fared no better. In particular, the Portuguese economy shrank 1.8 percent on the quarter, Cyprus was down 1.0 percent and Finland off 0.5 percent. Belgium lost 0.1 percent and Austria was down 0.2 percent, in line with the Netherlands. Not for the first time, the strongest performer was Estonia which followed a 1.8 percent increase in the previous period with a 0.9 percent gain this time. Slovakia also managed a 0.2 percent advance.

Germany

Fourth quarter gross domestic product dropped 0.6 percent on the quarter. The decline followed an unrevised 0.2 percent increase in the third quarter. This was the first time that real GDP has not expanded since the fourth quarter of 2011 and saw annual workday adjusted growth slide from 0.9 percent to 0.4 percent. As usual the FSO provided few details behind what was the sharpest contraction in total output since the first quarter of 2009. However, it did indicate that a (somewhat surprising) small increase in household consumption and public spending was more than offset by weakness in net foreign trade and investment.

France

Fourth quarter real gross domestic product contracted 0.3 percent on the quarter and from a year ago. The fourth quarter decline followed an unrevised 0.1 percent advance in the previous three months and meant that the economy contracted in three out of four quarters last year. However, the disappointing headline was essentially attributable to destocking which subtracted 0.4 percentage points from quarterly growth. Final domestic demand was flat over the period with modest increases in household consumption (0.2 percent) and public sector spending (0.4 percent) offsetting fresh declines in investment by businesses (1.2 percent), households (0.8 percent) and public administration (0.9 percent). Net foreign trade had a second consecutive positive impact, but this time adding just 0.1 percentage points to the quarterly change in GDP as exports (minus 0.6 percent) fell more slowly than imports (minus 0.8 percent).

Italy

Fourth quarter gross domestic product dropped 0.9 percent on the quarter for its sixth consecutive decline. The drop followed an unrevised 0.2 percent reversal in the third quarter and was the steepest since the 3.6 percent plunge in the first quarter of 2009. Total output was 2.7 percent below its year ago level. Istat provided no details of the key GDP expenditure components but warned that agriculture, industry and services all saw output decline.

United Kingdom

January consumer prices were down 0.5 percent but were up 2.7 percent for a record fourth month in a row on the year. Clothing prices tumbled 5.4 percent from year-end and there was a hefty 2.3 percent slide in the cost of furniture and household equipment. Among a number of smaller monthly declines elsewhere, transport was down 0.6 percent and miscellaneous goods & services 0.7 percent. The only monthly increases of note were in drink & tobacco (4.3 percent) and communications (1.0 percent). As a result, the core CPI fell a relatively steep 0.9 percent from December which, even after a sizeable drop in the same month last year, was enough to lower the annual underlying rate to 2.3 percent.

January producer output prices edged up 0.2 percent on the month for a 2.0 percent annual rate, down 0.2 percentage points from December, while input costs climbed 1.3 percent on the month and were 1.8 percent higher on the year after a 0.5 percent annual increase last time. The latest increase in output prices followed an unrevised 0.1 percent monthly decline in December. The core index also advanced 0.2 percent on the month and was up 1.4 percent on the year. The increase in input costs, which was the steepest monthly increase since August, followed a revised flat reading in December and was largely attributable to a 3.1 percent jump in crude oil prices. Excluding food, drink & tobacco, the index was 0.9 percent firmer on the month and 0.6 percent higher on the year.

January retail sales dropped 0.6 percent both on the month and year. Although purchases of auto fuel were particularly weak — down 2.0 percent from December — even excluding this sector sales slid 0.5 percent on the month and were up just 0.2 percent from January 2012. However, a number of categories are likely to have been hit hard by heavy snowfall, a view supported in the slump in the demand for petrol. Discretionary sales held up quite well. While excluding fuel, purchases of food were down 1.6 percent on the month while non-food saw a 0.6 percent increase. This was due to a bounce at non-specialized stores (1.6 percent) although clothing (0.4 percent) and the other stores category (0.8 percent) both helped. However, there were monthly declines in household goods (0.3 percent) and non-store retailing (0.5 percent).

Asia/Pacific

Japan

December tertiary index was up a greater than expected 1.4 percent. The index was up 0.7 percent from a year ago. Finance and insurance was up 4.1 percent, electricity, gas, heat supply & water gained 4.9 percent and scientific research, professional & technical services was 2.8 percent higher. Miscellaneous services (except government services etc.) advanced 2.0 percent, real estate & goods rental & leasing was up 0.7 percent and information & communications edged up 0.5 percent. Industries that declined on the month included accommodations, eating & drinking services, living-related & personal services & amusement services, transport & postal activities, wholesale & retail trade, medical, health care & welfare and compound services.

January corporate goods price index was up 0.4 percent on the month but was down 0.2 percent from a year ago. On the year, the CGPI has now declined for 10 straight months. However, the pace of decline continued to decelerate on rising commodity prices and higher import costs brought on by the weaker yen. The slower drop in January was due to higher costs of energy (gasoline, naphtha, factory fuel oil) and nonferrous metals as well as smaller drops in iron and steel prices.

First estimate of fourth quarter GDP contracted 0.1 percent on the quarter. This was the third consecutive quarterly decline. On an annualized basis, GDP was down 0.4 percent. Third quarter GDP was revised to a decline of 1.0 percent on the quarter from 0.9 percent. On an annualized basis, third quarter GDP was revised to a 3.8 percent drop from a 3.5 percent slide. On the quarter, domestic demand contributed 0.1 percentage point while net exports subtracted 0.2 percentage points. Private consumption was up 0.4 percent, contributing 0.3 percentage points. However, CAPEX dropped 2.6 percent on the quarter, subtracting 0.3 percentage points. Private inventories also subtracted 0.2 percentage points while public investment was up 1.5 percent, adding 0.1 percentage points.

Americas

Canada

December manufacturing sales dropped 3.1 percent, their sharpest decline since May 2009. Sales were 3.9 percent lower on the year. Volumes were equally soft, declining 3.8 percent from their November level. December's slide was driven largely by a 9.1 percent monthly plunge in transportation, itself mainly attributable to a 15.4 percent collapse in motor vehicles. Excluding this sector, shipments were down a significantly smaller, but still sizeable, 1.8 percent. Sales were weaker on the month in sixteen of the twenty-one reporting industries. Among these, notable setbacks were seen in chemicals (4.2 percent), fabricated metal products (4.0 percent), petroleum & coal (2.2 percent) and computer & electronics (5.9 percent). The upside was essentially limited to gains in wood products (1.8 percent) and miscellaneous manufactures (0.7 percent). Elsewhere within a generally disappointing report, new orders slumped 4.4 percent on the month but backlogs climbed 2.6 percent. With inventories down 1.0 percent, the inventory/sales ratio rose 0.02 months to 1.34 months but remained close to recent levels.

Bottom line

Investors focused on the currency markets and in particular, the decline of the yen against the euro and U.S. dollar. As expected the Bank of Japan left its monetary policy unchanged at the BoJ waited for the appointment of the new governor and his two deputies. Economic data especially in Japan and Europe disappointed.

Given the declines in GDP, flash PMI indexes will get close attention when they are released Thursday. The German ZEW and Ifo surveys will be in focus given the decline in fourth quarter GDP as investors look for signs of recovery.

Looking Ahead: February 18 through February 22, 2013

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