Global Markets

Equities were mostly lower in the Asia Pacific region but advanced in Europe and the U.S. even though they declined Friday. Good news was bad news in Australia where equities dropped on a much stronger than expected employment gain. Economic news from the U.S. for the most part was better than anticipated, but not from China leading investors to worry about the country’s growth. EU leaders meeting in Brussels pushed ahead on a bailout package for Cyprus and softened their rhetoric on austerity.

Global Stock Market Recap

Europe and the UK

Equities were up for the week even though most indexes slumped Friday. Investors kept a wary eye on Brussels where EU leaders were meeting. Among topics on the agenda was a bailout for Cyprus. The leaders called for strong measures to address the issues of worsening economic and labor market situation while thousands staged anti-austerity protests at the Belgian capital. The leaders closely analyzed the region's efforts to balance austerity, growth and employment. There were more calls for pro-growth policies, especially from France and Italy. There was an unusual urgency among leaders to address the unemployment problem, particularly among the youth, as they feared it could lead to serious social unrest. European Union leaders endorsed “structural” budgetary assessments, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits. Still, balanced budgets remained the goal and there was no talk of large scale spending programs or bond issues. The FTSE and CAC edged up 0.1 percent while the DAX advanced 0.7 percent and the SMI, 1.5 percent for the week.

Swiss National Bank

In its quarterly monetary policy assessment, the Swiss National Bank kept its key interest rates unchanged. The objective range for the benchmark 3-month Swiss franc Libor remains zero to 1.0 percent with the point target at zero. The SNB cut its forecasts for inflation and said it will take all necessary measures to keep the ‘high’ franc within the limit of 1.20 per euro that it introduced in September 2011, promising to buy foreign currencies in unlimited quantities as required.

The official inflation forecast was shaded lower. Prices in 2013 are now seen declining 0.2 percent and 2014 at an increase of 0.2 percent. Economic growth is expected to be 1.0 percent to 1.5 percent in 2013 but downside risks were thought to be considerable. February's decision to force banks to raise additional capital to counter imbalances in the mortgage market could add to these risks near term. The monetary authority also warned that renewed tensions in the Eurozone could not be ruled out and that both the global economic situation in general and sentiment in financial markets were still vulnerable.

So far the SNB has prevented any major breach of its lower target limit but current levels of the Swiss franc are still regarded as too strong. However, with the Swiss currency still regarded by many as a key safe haven asset, any such move will likely require a much more convincing increase in investors' risk appetites.

Asia Pacific

Most equity indexes were lower last week with the exception of the Nikkei, which was up for the fifth consecutive week. Elsewhere stocks retreated. Asian equities continued to weaken partly because of concerns over tightening measures in China.

The Nikkei was up 2.3 percent, ending at a four and a half year high last week. The main event was BoJ governor elect Haruhiko Kuroda and his deputies’ testimony before parliament followed by approval on Friday. The development means that the Bank of Japan will be under new management from March 20^th, which is widely expected to lead to the implementation of more aggressive monetary policy, perhaps as soon as the monetary policy board’s April 3^rd and 4^th meeting. The new governor’s term will start Wednesday (March 20), the day after outgoing Governor Masaaki Shirakawa resigns. Kuroda will fill out the remainder of Shirakawa's term, which ends April 8^th. He will thus need to be reconfirmed later for a full five year term. The opposition Democratic Party of Japan said in a news conference Thursday that the DPJ has yet to decide whether Kuroda should get a full term as governor.

In Australia, equities edged down 0.2 percent on the week. February’s employment report sent stocks lower — but not because it was a poor report. Rather, employment soared over 71,000 jobs leading investors to think that the Reserve Bank of Australia would not deliver the interest rate cut they would have liked.

The Shanghai Composite and Hang Seng retreated 1.7 percent and 2.4 percent respectively. Inflation data released over the March 9^th weekend showed a jump in inflation during February. This sent investors scurrying to sell as they envisioned tighter monetary policy. Markets in both Hong Kong and the mainland have been dragged down by a combination of economic concerns. An increase in inflation helped set a cautious trading tone for the week, while worries about Beijing's latest drive to control prices in residential property remained a persistent drag on the market. China’s consumer price index advanced at the fastest pace in 10 months. People’s Bank of China Governor Zhou Xiaochuan said monetary policy is “no longer relaxed” and is “neutral.”

Reserve Bank of New Zealand

As anticipated, Reserve Bank governor Graeme Wheeler kept the official cash rate (OCR) steady at 2.5 percent where it has been since March 2011. In its statement, the RBNZ said that it would keep the OCR at 2.5 percent for all of 2013. Governor Wheeler noted in his statement that the downside risks to global growth have receded in recent months and financial market sentiment has improved. Regarding the domestic economy, he noted that the economic recovery is uneven with demand and output expanding, but the labor market weak. Economic growth and inflation are being shaped by a range of forces. The Canterbury rebuild is gaining momentum and residential investment and business and consumer confidence are increasing. House price inflation is increasing and the Bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply.

Wheeler once again commented that the New Zealand dollar is overvalued and undermining the profitability in export and import competing industries. The worsening drought is creating difficulty in much of the country. Ongoing fiscal consolidation will also act to slow overall demand. Wheeler projects that the economy will grow at an annual rate of between 2 percent and 3 percent for the Bank’s forecast period. Inflation is expected to climb gradually towards the midpoint of their target range of 1 percent to 3 percent.

Bank of Korea

As expected, the Bank of Korea left the benchmark interest rate unchanged as a new government considers more fiscal support for the economy. Governor Kim Choong Soo and his board held the seven day repurchase rate at 2.75 percent after a 25 basis point cut in October. In its post meeting statement, the BoK said the economy is “expected to maintain its trend of modest improvement” in coming months. At the same time, fiscal tightening in advanced nations and changes in the yen’s value pose risks. A “moderate recovery” has been sustained since the fourth quarter of last year, although the improvement has been “faltering slightly.”

Currencies

The U.S. dollar declined against its major counterparts last week. The currency had been climbing higher against the world's major currencies after months of decline. The reversal was driven by the relative health of the U.S. economy. However, the dollar dropped to a one week low against the euro as a report showed U.S. inflation is contained, giving the Federal Reserve scope to maintain its monetary stimulus program. The Federal Open Market Committee meets Tuesday and Wednesday to review its quantitative easing program. The euro gained against 14 of its 16 major counterparts as European leaders paved way for a deal on financial assistance for Cyprus.

Currency trading is vulnerable to rhetoric — especially from central bankers. For example, on Friday, the pound advanced for a third day against the dollar after Bank of England Governor Mervyn King said policy makers aren’t trying to talk the British currency down, damping speculation they are seeking a weaker sterling to spur growth. Sterling headed for its biggest weekly gain in a month against the euro after King said in an interview that “markets determine the level of exchange rate, not us.” Earlier, the Japanese yen weakened on rhetoric from its new Prime Minister Shinzo Abe and testimony from the Bank of Japan’s newly designated governor.

Selected currencies — weekly results

Indicator scoreboard

EMU

January industrial production declined 0.4 percent after increasing a revised 0.9 percent the month before. On the year, output was down 1.3 percent. January's weakness was attributable to renewed monthly declines in capital goods (1.2 percent) and consumer durables (1.4 percent). Energy (down 1.0 percent) also struggled. However, intermediates edged up 0.1 percent and consumer non-durables were 0.9 percent higher. Only energy (0.9 percent) and consumer non-durables (3.1 percent) showed positive changes in output over the year. Most member states supplying data posted a monthly decline in industrial production. Both France (down 1.2 percent) and Germany (down 0.4 percent) suffered but at least Spain (0.6 percent) achieved its first increase since October. Finland (down 4.1 percent) endured a particularly poor period but both Portugal (3.5 percent) and Slovakia (1.8 percent) enjoyed solid gains.

February final harmonized index of consumer prices registered a 0.4 percent monthly increase and confirmed an annual inflation rate of 1.8 percent, its lowest level since August 2010. This is the first time that HICP inflation has been below its near-2 percent target since November 2010. In January prices declined (a seasonal) 1.0 percent on the month and were 2.0 percent higher on the year. Excluding food, drink, tobacco & energy, the annual inflation rate was 1.3 percent, unchanged from January, while omitting just unprocessed food & energy, it slipped to 1.4 percent. Without seasonal food & energy prices were up 1.5 percent on the year, also a 0.1 percentage point decline from last time. Annual inflation rates decelerated in the majority of member states, most notably in Malta (1.8 percent after 2.4 percent) and Italy (2.0 percent after 2.4 percent). However, Estonia saw its rate jump 0.3 percentage points to 4.0 percent ahead of the Netherlands (3.2 percent) and Slovenia (2.9 percent). Greece (0.1 percent) remained at the bottom, just below Portugal (0.2 percent).

Germany

January seasonally adjusted merchandise trade surplus was €15.7 billion, down from a minimally upwardly revised €16.9 billion at the end of 2012. Unadjusted the surplus was €13.7 billion after €12.1 billion last time. January's modest deterioration reflected a 1.4 percent monthly increase in exports that was more than offset by a 3.3 percent increase in imports, the latter posting its strongest performance since May last year. Compared with January 2012, exports were up 3.1 percent and imports 2.9 percent — in both cases the first positive annual growth rate since October. Exports to the other Eurozone members expanded just 0.4 percent on the year while sales to non-EMU countries were up 5.5 percent.

France

January industrial production (excluding construction) dropped 1.2 percent on the month. Even with December's 0.1 percent drop being revised up sharply to show a 0.9 percent increase (new base year 2010), the annual rate of decline in output still accelerated from 1.9 percent to 3.5 percent. Monthly declines in food & drink (3.8 percent) and transport equipment (6.9 percent) pushed the index lower. However, weakness was also apparent in energy & extracted goods (down 0.2 percent) as well as the other manufactured goods category (down 1.0 percent). A 13.5 percent slump in autos did much of the damage with demand more than reversing December's 8.8 percent bounce, itself attributable to buying prompted by increases in taxes on car pollution at the start of the year. Overall manufacturing output fell 1.4 percent from December while construction was off (a probably weather-affected) 4.0 percent.

Italy

Fourth quarter gross domestic product contracted an unrevised 0.9 percent on the quarter. The sixth quarterly decline in a row left total output 2.8 percent lower on the year and at its weakest level in nearly 13 years. The first look at the GDP expenditure components makes dismal reading with most of the major categories registering fresh quarterly declines. Private consumption declined 0.7 percent and gross fixed capital formation was down 1.2 percent. Together these subtracted some 0.6 percentage points from the quarterly change in total output. Inventories also had a significant negative impact, reducing the bottom line by a further 0.7 percentage points. Government consumption edged up 0.1 percent but the main positive impact on growth came from net trade. Here a 0.3 percent quarterly increase in exports combined with a 0.9 percent drop in imports to provide a 0.4 percentage point boost. In terms of output, industrial production was 2.2 percent weaker on the quarter and services 0.3 percent lower. This left just agriculture (0.6 percent) keeping its head above water.

United Kingdom

January industrial production dropped 1.2 percent and was down 2.9 percent from a year ago. Manufacturing dropped an even steeper 1.5 percent and was 3.0 percent lower on the year. Further distortions caused by disruptions to N. Sea oil fields (oil and gas extraction fell 4.3 percent from December) were again a factor and are likely to be so again over the next couple of months. The drop in manufacturing was mainly attributable to a 13.4 percent plunge in machinery & equipment, a category that has been especially volatile of late. This alone subtracted almost a full 1 percentage point off the monthly change in manufacturing output. On a more positive note there were some useful gains, notably food, drink & tobacco which expanded 1.2 percent on the month and wood, paper & printing where a 5.2 percent jump boosted production by more than 0.2 percentage points. Elsewhere within total industrial production, mining & quarrying posted a 2.4 percent monthly decline, water supply & sewage was down 0.2 percent and electricity, gas, steam & air conditioning grew 1.2 percent.

January merchandise trade gap narrowed to Stg8.2 billion. Both sides of the balance sheet were very weak. Exports dropped 3.5 percent on the month and imports were down an even sharper 4.2 percent. The headline improvement was wholly attributable to a sharp decline in the deficit on oil which shrank Stg1.5 billion to just Stg0.4 billion as imports collapsed 23.2 percent, their steepest fall since August 2008. Excluding oil and erratic items, the picture was decidedly worse with the deficit jumping from Stg6.9 billion in December to Stg7.5 billion as exports dropped 5.7 percent from year-end and imports slipped just 1.8 percent. The bilateral deficit with the EU was Stg4.9 billion, up from Stg4.6 billion last time while the shortfall with the rest of the world narrowed by almost Stg0.9 billion to Stg3.3 billion.

Asia/Pacific

Japan

January core private sector machinery orders (excluding volatile demand from electric utilities and ships) dropped 13.1 percent – analysts expected a decline of 1.7 percent. On the year these orders declined 12.5 percent. This was the first monthly decline since September 2012. Orders were hit by sharp downturn in orders from makers of chemicals, metals and telecom equipment. Despite the latest downturn, core orders are expected to increase 0.8 percent in the first quarter of 2013, according to the forecast compiled by the Cabinet Office a month earlier. Total orders were down a monthly 3.0 percent. Orders from overseas were down 4.8 percent. Manufacturing orders were down 13.2 percent while non-manufacturing excluding volatile orders was 6.3 percent lower.

February corporate goods price index was down 0.1 percent from a year ago as expected. This was the 11th consecutive drop. For the month, the CGPI was up 0.4 percent. This was the third consecutive increase. Among the subcategories, petroleum & coal products were up 8.7 percent from a year ago while nonferrous metals were 6.7 percent higher. However, iron & steel plunged 8.2 percent and information & communications equipment slid 6.9 percent.

January tertiary index slid 1.1 percent on the month and was down 0.2 percent on the year. Among those contributing to the decline were wholesales & retail trade which slumped 3.5 percent, scientific research, professional & technical services declined 6.6 percent, miscellaneous services (except government services etc.) declined 2.2 percent, electricity, gas, heat supply & water dropped 2.4 percent, real estate & goods rental & leasing slid 0.9 percent and finance & insurance was down 0.8 percent. However, information & communications edged up 0.2 percent, learning support was up 0.6 percent and living-related & personal services & amusement services were 0.1 percent higher.

Australia

February employment soared 71,500 to 11,628,300. The unemployment rate remained at 5.4 percent for a third month. The increase in employment was due to an increase in part time employment, which was up 53,700 to 3,510,800. Full time employment was up 17,800 to 8,117,400. The number unemployed increased by 400 to 660,000. The ABS reported a seasonally adjusted labour force participation rate increase of 0.3 percentage points to 65.3 percent in February. The seasonally adjusted underemployment rate was 7.1 percent. Combined with the unemployment rate of 5.4 percent, the latest estimate of total seasonally adjusted labour force under-utilization was 12.5 percent.

China

February consumer price index was up 3.2 percent from a year ago. On the month, the CPI was up 1.1 percent. The inflation data were distorted by the Chinese New Year which fell in January in last year and February this year. Urban CPI jumped 3.2 percent while rural CPI was 3.2 percent higher. This contrasts to January’s increases of 2.0 percent and 2.2 percent respectively. Food prices soared 6.0 percent after an increase of 2.9 percent the month before while non-food prices were up 1.9 percent after an increase of 1.6 percent.

February producer price index declined 1.6 percent for a second month from a year ago. On the month, the PPI was up 0.2 percent for a second month. Production materials were 2.4 percent lower on the year, unchanged from January. Consumer goods were up an unchanged 0.7 percent from a year ago. 

Industrial output for combined January and February was up 9.9 percent from a year ago. The Chinese New Year holiday typically distorts the data series at the beginning of the year. On the month, output was up 0.8 percent. Ferrous metal output was up 11.4 percent after rising 12.2 percent in December. Machinery was up 9.8 percent after increasing 10.7 percent. Steel products advanced 14.2 percent after 13.5 percent in December. Motor vehicle output jumped 12.4 percent after increasing 5.3 percent in December.

January and February retail sales were up 12.3 percent from a year ago. Sales were up 1.0 percent on the month. Urban retail sales were up 12.1 percent while rural sales were 13.4 percent higher. Most sub-category sales were lower at the beginning of the year than in December. An exception was home appliances which were up 16.7 percent after December’s 9.7 percent increase. The Chinese New Year holiday typically distorts the data series at the beginning of the year. Clothing sales were up 9.4 percent after jumping 16.4 percent in December. Auto sales were only up 6.9 percent after rising 9.0 percent in December.

Bottom line

While economic data from the UK and Europe were weaker than expected, most U.S. data improved. The Swiss National Bank, Reserve Bank of New Zealand and the Bank of Korea left their respective monetary policies unchanged. Data from China showed that inflation picked up while increases in output and retail sales disappointed.

The data highlights for this week will be flash manufacturing PMIs from China, the Eurozone, France, Germany and the United States. The Federal Reserve holds a two day meeting to be followed by the Fed President’s quarterly press conference.

Looking Ahead: March 18 through March 22, 2013

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