Global Markets

Focus globally last week was on appointment of new Bank of Japan governor and the Italian election — and the resulting political gridlock. Fed Chairman Ben Bernanke’s Congressional testimony also received rapt attention from investors. The Chairman relieved investors’ fears saying that QE was not going to end soon. ECB President Mario Draghi also reassured financial markets that stimulus, thanks to lower inflation, would not end soon. It was astonishing to me that markets paid no attention to U.S. fiscal gridlock given the complete absence of visible progress. A heavy dose of global economic data also gave investors something to think about.

Global Stock Market Recap

Europe and the UK

Equities were mixed for both the week and the month of February. A number of weaker than expected economic reports weighed on investors — manufacturing data from China and the UK disappointed while Eurozone unemployment climbed to a record high. While markets managed to recover some ground Friday afternoon following some better than expected U.S. economic data, investors continued to be cautious ahead of the looming spending cuts in the U.S. expected on March 1^st. On the week, the FTSE was up 0.7 percent while both the SMI and DAX gained 0.6 percent. The CAC retreated 0.2 percent. The Italian MIB dropped 3.4 percent in response to the weekend’s election results. In February, the FTSE and SMI were up 1.3 percent and 2.7 percent respectively while the CAC and DAX were down 0.3 percent and 0.4 percent. The MIB plunged 8.7 percent.

The European markets finished in positive territory Thursday, despite the lingering uncertainty created by the Italian election. The reasons for the brighter spirits among investors were comments from ECB President Mario Draghi who indicated that monetary stimulus would be continued. Also, U.S. Federal Reserve Chairman Ben Bernanke defended the Fed’s quantitative easing policy during his testimony before Congress. Mr Draghi indicated that the ECB is in no hurry to exit stimulus as he anticipates inflation to be significantly below the Bank's 2.0 percent target this year giving room for maintaining an accommodative monetary stance. ECB policymakers are "far" from considering an exit from the current accommodative stance.

Weighing on investors all week was the outcome of the Italian election. The results failed to produce an outright winner. However, more than that, a surge in support for the anti-austerity parties left the real possibility of a hung parliament. The center-left alliance led by Democratic Party chief Pier Luigi Bersani received 29.54 percent of the lower house vote, almost exactly the same as Berlusconi’s rightist Freedom Party/Northern League grouping which won 29.18 percent. At the same time, although Bersani also won the national vote for the Senate, he failed to secure a majority. With so-called bonus seats allocated according to regional voting, its looks as if Berlusconi has done enough to take the upper house. The support of both chambers is needed to pass vital reform legislation. The dramatic swing against further fiscal tightening was highlighted in the relative performances of the anti-establishment Five-Star Movement under comedian Beppe Grillo (who has campaigned for a return of the lira) and previous PM Mario Monti’s technocrat grouping. While the former remarkably secured more than 25 percent of lower house votes and nearly 24 percent of the upper house, Monti’s shares were less than 11 percent and only just over 9 percent respectively. And any new government that excludes Monti will struggle to convince the markets that it will be fiscally responsible. The new parliament convenes on March 15^th.

Asia Pacific

Although the name of the newly nominated Bank of Japan chairman had been bandied about for about a week, the official naming of Asian Development Bank President Haruhiko Kuroda was welcomed by financial markets. In addition to Mr Kuroda, a longtime advocate of inflation targeting, the academic Kikuo Iwata, a harsh critic of past BoJ policies, and Hiroshi Nakaso, a senior BoJ official in charge of international affairs, were selected as deputies. The nominees need the approval of both houses of parliament. Voting is expected to take place around March 15 given a customary procedure to wait 10 days after submission. Mr Abe has said he wants passage before March 19 when current governor Masaaki Shirakawa and his deputies are due to step down. That would avoid a vacancy in the top posts as occurred five years ago when the opposition controlled the upper house and voted down the government's picks one after another. The parliament will conduct hearings for each nominee ahead of the vote to explore their views on monetary policy.

For the week, most equities advanced with the exception of the STI and PSEi which recorded minor declines while the Sensex dropped 2.1 percent. On the plus side, the Jakarta Composite jumped 3.5 percent, the Nikkei and Shanghai Composite climbed 1.9 percent and the All Ordinaries were 1.3 percent higher on the week. For the month of February, the Shanghai Composite was down 0.8 percent while the Hang Seng tumbled 3.0 percent and the Sensex plunged 5.2 percent. However, the Nikkei jumped 6.8 percent as the yen slid and optimism about the new Bank of Japan leadership and the Prime Minister’s policy initiatives boosted investor morale about the sagging Japanese economy. The yen remains the critical determinant, and stock prices remain very sensitive to foreign exchange levels.

February purchasing managers indexes for Japan and China painted a mixed picture for manufacturing. While the readings from China were weaker — barely above the 50 breakeven point — those from Japan were slightly stronger albeit still contracting. China’s official CFLP manufacturing PMI reading slipped to 50.1 from 50.4 the month before. The HSBC/Markit PMI slid to 50.4, down from 52.3 in January. Chinese officials blamed the Lunar New Year affect for the decline. In Japan, the index reading was 48.5, up from 47.7 in January. Panelists blamed ongoing declines in new order volumes for the latest decline in production.

Currencies

The U.S. dollar gained against all of its major counterparts as investors shied away from risk. The dollar led gains in world markets last month, beating global measures of bonds, stocks and commodities, as the threat of U.S. budget cuts proved no barrier to investors snapping up American assets.

Investors may seek the safety of haven currencies such as the dollar and yen as U.S. spending cuts take effect. The dollar’s advance underscores how investors are backing the U.S. to weather the effects of the spending reductions or sequestration that took effect March 1^st. While the non-partisan Congressional Budget Office said the cuts will wipe 0.6 percent off U.S. growth this year, home sales, consumer confidence and employment are improving at the same time that the Federal Reserve vows to continue its unprecedented support.

In intraday trading Friday, the euro fell below $1.30 for the first time in two months after reports showed that the Eurozone’s manufacturing sector contracted in February while unemployment climbed to a record. It was the fourth weekly loss against the U.S. dollar and the longest streak since June as signs the region remains stuck in a recession backed the case for the European Central Bank to cut interest rates. The euro slid against all but two of its 16 major peers in February.

The pound weakened through $1.50 for the first time since July 2010 after the PMI index showed that UK manufacturing unexpectedly contracted in February. Sterling dropped for the third time in four days against the euro as the Bank of England said mortgage approvals declined in January, signaling the housing market is struggling to recover. The pound has dropped the most of any major currency this year as speculation the Bank of England will need to add more monetary support to the faltering economy dampened demand.

Selected currencies — weekly results

Indicator scoreboard

EMU

January M3 money supply increased 3.5 percent from a year ago. The 3-month moving average measure preferred by the ECB slowed from 3.7 percent at year-end to 3.5 percent. The key private sector lending counterpart posted a 12-month contraction of 0.9 percent following a shallower 0.7 percent drop last time. Annual growth of household borrowing was unchanged at 0.5 percent and within this, loans for house purchase actually edged up to 1.4 percent, but declining borrowing by non-financial corporations accelerated by 0.2 percentage points to 2.5 percent. Lending to non-monetary financial intermediaries (excluding insurance corporations and pension funds) also weakened further with annual growth sliding from 1.0 percent in December to minus 1.0 percent.

February economic sentiment was up 1.6 points to 91.1, its third consecutive increase and its best reading in nine months. The headline increase reflected gains in confidence in industry (2.6 points to minus 11.2) and services (2.3 points to minus 5.4). There was also a smaller increase (0.3 points) in the consumer sector (to minus 23.6) as indicated in the flash report. However, both retail (minus 16.0 after minus 15.5) and construction (minus 29.8 after minus 28.5) suffered fresh setbacks. In addition to the ESI itself, all five components remain well below their respective long run averages. Regionally, sentiment was up in Germany (2.5 points), Spain (1.5 points), France (1.3 points) and Italy (0.3 points) but of the 17 EMU members, only Germany (102.0), Estonia (103.1) and Malta (101.8) posted values above the common 100 long run mean.

February flash harmonized index of consumer prices was up 1.8 percent on the year. No detail is available for flash releases. The January HICP which was released a day earlier dropped 1.0 percent on the month and was up 2.0 percent from a year ago. To a large extent the decline in the annual headline rate was mirrored in the core indexes. Thus, while excluding food, drink, tobacco & petrol the 12-month increase slowed by 0.2 percentage points to just 1.3 percent (lowest since August 2011), omitting only unprocessed food & petrol saw the rate slip a tick to 1.5 percent and without seasonal food & petrol the rate was also 0.1 percentage points lower at 1.6 percent. Regionally, headline inflation rates were down in most member states. The only exceptions were Estonia (3.7 percent after 3.6 percent), which remains at the top of the inflation ladder, and Cyprus (2.0 percent after 1.5 percent). Greece saw a decline of 0.3 percentage points which ensured its place at the bottom, one rung below Portugal (0.4 percent).

January unemployment climbed a steep 201,000, its sharpest increase since last October. As a result the unemployment rate hit 11.9 percent — a new record high and up 0.1 percentage points from December's upwardly revised 11.8 percent. The number of people out of work reached a new peak of 18.998 million, more than 1.9 million above the level a year ago. Regionally, national unemployment rates according to Eurostat calculations were up 0.1 percentage points in France (10.6 percent) and in Spain (26.2 percent) and jumped 0.4 percentage points in Italy (11.7 percent). Germany held steady (5.3 percent) and without the on-going strength of the demand for labour there, the overall picture for the Eurozone would look a good deal worse.

Germany

February unemployment was down 3,000 after a slightly smaller revised 14,000 decline the month before to leave the number of people out of work standing at 2.917 million. The unemployment rate held steady at 6.9 percent following an upward revision to the January level. The jobless rate has now been at this mark for five months in a row. Vacancies were off just 1,000, matching the drop seen last time.

January retail sales rebounded a hefty 3.1 percent following a steeper revised 2.1 percent monthly decline in December. Compared with a year ago, purchases were up 2.4 percent after a 3.7 percent drop last time. The January recovery was the fourth monthly increase in the last six months and put sales 2.0 percent above their fourth quarter average. This makes for a solid base to begin the current quarter and should see overall household spending making a larger contribution to real GDP growth than the 0.1 percent seen in the October to December period.

France

January household spending on manufactured goods was down 1.3 percent and was down 0.7 percent from a year ago. The January slump was largely due to an 11.7 percent plunge in auto demand after sales had jumped 5.6 percent in December in anticipation of an increase in taxes on higher polluting cars at the start of the year. Household goods were off 0.5 percent on the month while textiles followed a 0.4 percent drop in December with a 3.2 percent bounce. The other products category was unchanged after successive 0.1 percent increases in November and December.

United Kingdom

Fourth quarter gross domestic product growth was unrevised at a quarterly contraction of 0.3 percent. However, revisions to previous quarters (Q3 now shows a quarterly 1.0 percent increase) saw the yearly change in total output moved up from flat to 0.3 percent. The first look at the expenditure components revealed a 0.2 percent quarterly drop in domestic expenditure, in large part due to a 2.8 percent decline in gross capital formation. Within this, fixed investment was down 0.4 percent (business investment down 1.2 percent) and there was heavy destocking. However, consumer spending remained positive, expanding 0.2 percent from the third quarter when it grew 0.3 percent. Government final expenditure climbed 0.6 percent following a 0.5 percent gain last time. The other, small, negative impact upon quarterly growth came from net foreign trade. With exports falling 1.5 percent and imports off 1.2 percent, the combined effect subtracted 0.1 percentage points. In terms of output, manufacturing was down 1.3 percent on the quarter, its worst performance since the first quarter of 2009, while overall industrial production slumped 1.9 percent as the temporary closures of the Buzzard and other North Sea oil and gas fields prompted an 11.0 percent drop in energy extraction. Services posted a 0.1 percent quarterly dip, mainly due to declines in government (0.8 percent) and distribution, hotels & catering (0.5 percent). This masked a 1.2 percent advance on transport, storage & communications. Construction expanded 0.9 percent.

Asia/Pacific

Japan

January retail sales declined 1.1 percent when compared with a year ago. The drop was the first since October. Analysts expected sales to retreat 0.8 percent. Auto sales plunged 10.8 percent after declining 2.0 percent in December. Fuel sales were up 4.7 percent after increasing 1.9 percent. Retail machinery sales declined 6.0 percent after dropping 5.8 percent in December. General merchandise sales slid 3.0 percent.

January seasonally adjusted industrial production increased for a second month. Output was up 1.0 percent after a slightly revised increase of 2.4 percent in December. On the year, output dropped 6.5 percent for a second month. Industries that increased production were transport equipment (up 6.8 percent), iron & steel (up 6.0 percent) and information & communication electronics equipment (up 4.8 percent). Commodities that increased production were memory chips (up 77.5 percent), large passenger cars (up 5.4 percent) and drive, transmission & control parts (up 8.6 percent). According to the Survey of Production Forecast in Manufacturing, production is expected to increase 5.3 percent in February and to increase 0.3 percent in March.

January unemployment rate was 4.2 percent, down from 4.3 percent the previous month. This is the lowest rate since 2008 when the rate was 4.0 percent. The number of unemployed persons was 2.73 million, a decline of 180,000 or 6.2 percent from the previous year. The number of employed persons was 62.28 million, an increase of 170,000 or 0.3 percent from the previous year.

January household spending was up 2.4 percent on the year. This was the first increase in spending since August when spending was up 1.8 percent on the year. Spending on housing dropped 6.9 percent while clothing & footwear sank 6.7 percent. All other major categories recorded gains on the year. Spending on education jumped 9.4 percent while spending on transportation & communication scored an 8.7 percent gain. Furniture & utensils expenditures were up 6.2 percent.

January consumer price index was unchanged on the month and down 0.3 percent. Excluding fresh food, core CPI was down 0.3 percent on the month and 0.2 percent from a year ago. A second core measure that subtracts both fresh food and energy was down 0.5 percent and 0.7 percent on the year. The three categories that showed an increase in prices were clothing & footwear (0.3 percent), education (0.4 percent) and fuel, light & water charges (2.9 percent). Among the price declines were furniture & household utensils (down 5.3 percent), food prices (down 0.7 percent) and culture & recreation (down 0.8 percent).

Americas

Canada

January industrial product prices were unchanged on the month for the second month. On the year, the IPPI was down 0.2 percent from a gain of 0.2 percent previously. At the same time, raw material and fuel prices rebounded 3.8 percent from December, reducing their annual rate of decline from 8.0 percent to a drop of 4.7 percent. The stability of the IPPI reflected increased prices in 10 major commodity groups, declines in eight and no change in the other three. The largest monthly gain was in lumber & other wood products (1.2 percent) followed by meat, fish & dairy products (0.9 percent) and petroleum & coal products (0.7 percent) but most other increases were only small. The main areas of weakness were chemical products (down 1.4 percent) and primary metals (down 0.6 percent). The surge in the RMPI was predictably due to higher mineral fuel costs, this time leaping 8.1 percent from year-end. Excluding this category, the RMPI would have risen just 0.3 percent on the month and advanced 0.5 percent on the year. Elsewhere within the basket, wood was up 1.5 percent on the month and ferrous metals gained 4.0 percent. Other changes were insignificant by comparison.

Fourth quarter gross domestic product was up 0.2 percent on the quarter and 1.5 percent from a year ago. On an annualized basis, GDP expanded 0.6 percent. In terms of the real GDP expenditure components household consumption was up 0.7 percent, also in line with its third quarter advance and ahead of a 0.5 percent increase in final government expenditure. Gross fixed capital formation followed a 0.5 percent decline with a 0.7 percent gain within which business investment climbed 0.6 percent and general government's gross fixed capital formation 1.4 percent. Final domestic demand was up 0.6 percent from the 0.2 percent increase in the third quarter. Inventories fell very sharply and subtracted more than 0.6 percentage points from the quarterly change in real GDP. A modest 0.3 percent quarterly increase in exports combined with a 0.3 percent decline in imports contributed almost 0.4 percentage points to the bottom line and was reflected in a limited C$0.8 billion narrowing in the current account deficit to C$17.3 billion. With regards to output, goods producing industries edged up 0.1 percent on the quarter that failed to reverse a 0.3 percent drop last time. Within this manufacturing was down 2.2 percent, its second consecutive quarterly decline. Services fared better, expanding 0.2 percent after a 0.4 percent increase in the third quarter. The increase here was largely due to finance & insurance (0.6 percent) and real estate, rental & leasing (0.5 percent). This helped to mask a 0.2 percent drop in retail trade and a 0.5 percent decline in transportation and warehousing.

December monthly real GDP was down 0.2 percent on the month to reduce annual growth to 0.8 percent, its first sub-1 percent reading in three years. The decline in total output was driven a 0.7 percent monthly drop in the output of goods producing industries, within which manufacturing was down a sizeable 1.8 percent and utilities off 1.9 percent. Partial offsets were provided by agriculture forestry & fishing, (0.5 percent), mining quarrying & oil & gas extraction (0.3 percent) and construction (0.2 percent). Services saw no change in activity despite a hefty 1.6 percent monthly drop in retail trade, a 0.6 percent decline in wholesale trade and a 0.8 percent contraction in arts, entertainment & recreation. The strongest increase was seen in finance & insurance (0.8 percent) ahead of accommodation & food services (0.5 percent) and information & cultural industries (0.4 percent).

Bottom line

U.S. sequestration and an Italian election didn't rattle the international markets which were buoyed by comments from ECB President Mario Draghi as well as Fed Chairman Ben Bernanke.  Economic data were mixed to disappointing in Japan, Europe and the UK.

This week brings five major central bank meetings — Reserve Bank of Australia, Banks of Japan, Canada and England and the European Central Bank. Canada and the U.S. will release their employment reports while Australia’s fourth quarter growth data are expected. Global service sector PMIs — the counterparts of those for manufacturing — will provide a snap shot of what is by far the largest part of the global economy.

Looking Ahead: March 4 through March 8, 2013

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