Global Markets

Investors shifted their focus to the increasing flow of earnings reports and found them mixed. Companies that are disappointing investors are getting severely punished as their stock prices drop. Banks were hard hit in the U.S. As a result, equities were mixed at the end of a choppy week. Encouraging data releases helped to offset concerns about the health of the U.S. labour market. In the Asia Pacific region, most equities are down for the first half of January. However, in Europe equities continued last year's climb as did the U.S. Nasdaq.

World Bank raises its growth forecast

The World Bank, in its semiannual Global Economic Prospects, raised its forecast for global growth for the first time in three years as advanced economies — led by the United States — have started to pick up. The rosier outlook suggests the world economy is finally breaking free from a long and sluggish recovery after the global financial crisis.

The Bank predicted global gross domestic product will expand 3.2 percent this year, up from 2.4 percent in 2013. In June, it expected global growth to reach 3 percent in 2014. The bank said the global economy had come to a "turning point," as fiscal austerity and policy uncertainty no longer weigh as heavily on the richer economies. The bank expects stronger growth in the United States in particular — 2.8 percent in 2014, up from 1.8 percent last year.

However, the World Bank reduced its forecasts for developing countries to 5.3 percent for 2014 from the 5.6 percent it predicted in June. These economies grew 4.8 percent in 2013. Emerging markets have grown at their slowest pace in a decade for the past two years, after registering growth rates of around 7.5 percent before the global financial crisis hit in 2008. It was noted that the developing countries are moving into a new phase where they are growing at a rate much closer to their underlying sustainable rate of growth. The bank said that while risks to its global outlook, including a sharp rebalancing in China, a protracted Eurozone recovery and U.S. fiscal policy uncertainty, have not been eliminated — rather they have subsided.

The World Bank says that as the Federal Reserve cuts back its efforts to stimulate the US economy, tapering is likely to push up global interest rates which could hit developing economies. A World Bank economist acknowledged in a BBC interview that Brazil, Turkey, India and Indonesia are among the countries that could be vulnerable. However he also noted that the first concrete steps taken by the Federal Reserve to cut back its stimulus last month did not severely disturb the markets.

Global Stock Market Recap

Europe and the UK

European equities shook off their slow start to the year, helped by increasing optimism about economic growth prospects. The indexes were up four of five trading days. Investor sentiment received a boost from the stronger than expected increase in December British retail sales at week’s end. The FTSE was up 1.3 percent, the SMI gained 1.4 percent, the CAC added 1.8 percent and the DAX advanced 2.8 percent on the week.

The global growth momentum should strengthen further in 2014, largely due to improvements in advanced economies according to Managing Director Christine Lagarde of the International Monetary Fund. She said that the world economy had avoided a worst case scenario, thanks to the efforts of global policymakers over the past half decade. However, at the same time, she warned about underlying risks to global economic outlook. She said that global growth is still too low, too fragile and too uneven.

Asia Pacific

Equities gyrated between gains and losses as investors monitored a slew of mixed U.S. economic data and earnings reports. Given little local news, U.S. reports took a higher priority. Traders also were waiting for key Chinese data including fourth quarter 2013 gross domestic product and industrial production scheduled to be released on Monday this week.

While the Hang Seng added 1.3 percent on the week, the Shanghai Composite lost 0.4 percent and in the process slid to a five month low. The Hang Seng advanced four of five days while the Shanghai Composite declined three of five days. China suspended IPO approvals in October 2012 after a flood of new listings dragged on mainland stock markets in the prior years. The reopening of the IPO market has had a negative market impact, with the Shanghai Composite being Asia's worst performing market — already down 5.3 percent for the year. The People's Bank of China will adopt various tools to maintain appropriate liquidity according to Zhang Xiaohui, head of the monetary policy department. He said the PBoC intends to widen the issuance of interbank certificates of deposit and enhance the role of market forces in determining the exchange rate.

The Nikkei retreated three of the holiday shortened four-day week. As a result, the index lost 1.1 percent on the week. Japan's consumer confidence deteriorated unexpectedly in December according to a monthly survey conducted by the Cabinet Office. However, the Japanese government revised up its assessment of the economy for the first time in four months, citing signs of recovery on the back of improvement in household income and business investment. Exports have had a weak tone recently, but industrial production is expected to increase at a moderate pace.

The All Ordinaries declined three of five days but were unchanged on the week. Trading responded to mixed U.S. economic data and earnings along with talk of an interest rate cut by the Reserve Bank of Australia when next it meets on February 4th. The Australian dollar came under pressure after the economy unexpectedly lost 22,600 jobs in December, increasing the odds of another rate cut by the Reserve Bank of Australia in the near future.

Currencies

The U.S. dollar was up against all of its major counterparts for the week. Recent economic data have supported the view the economy is improving enough to keep the Federal Reserve's stimulus reducing measures on track. Another plus for the dollar was that Treasury yields continued to hold at current levels.

The British pound was a star performer Friday after much better than expected December retail sales that jumped 2.6 percent on the month and were up 5.3 percent from a year ago. The latter was the fastest growth since October 2004.

The Australian dollar tumbled against the U.S. dollar to its lowest since August 2010 after a surprise drop in Australian employment raised the possibility of another cut in interest rates from the Reserve Bank of Australia. Investors reacted by reviving talk of another Reserve Bank of Australia interest rate cut from the current record low of 2.5 percent. The RBA has been talking the currency down from its elevated levels. Lower interest rates make a currency less attractive to investors seeking yield. At the same time, a cheaper Australian dollar would help exporters boost their profits amid a slowdown in demand from China, the biggest market for Australia's commodities.

Selected currencies — weekly results

Indicator scoreboard

EMU

November industrial output excluding construction was up 1.8 percent on the month — its strongest performance since May 2010 — after losing 0.8 percent in October. Annual workday adjusted growth was 3.0 percent, up from just 0.5 percent last time. The mid-quarter bounce was attributable to broad based monthly gains among the major production sectors. Capitals goods (3.0 percent) were especially robust although the increase here followed back-to-back declines in September and October. Durable consumer goods (2.2 percent) also fared well and there were smaller, but still significant, advances in nondurables (1.4 percent). Energy was up 1.8 percent. Regionally the headline jump was dominated by Germany where output rose a monthly 2.4 percent. However, reassuringly, the other larger members also made headway to varying degrees led by France (1.4 percent) ahead of Spain (1.0 percent) and Italy (0.3 percent). In fact for those countries supplying data, the only monthly declines were recorded by Estonia (1.0 percent) and Greece (2.2 percent).

December harmonized index of consumer prices was up 0.3 percent on the month and 0.8 percent from a year ago. The core index which excludes food, alcohol, tobacco and energy was up 0.7 percent, 0.2 percentage points short of its mid-quarter reading and a record low. The other underlying measures performed in similar fashion, both sliding 0.2 percentage points from their common 1.1 percent November rate to 0.9 percent. However, despite the decline in overall Eurozone inflation, some member states saw prices accelerate. In particular the annual rate climbed 0.3 percentage points to 1.2 percent in Belgium, 0.4 percentage points to 1.5 percent in Luxembourg, 0.7 percentage points to 1.0 percent in Malta and 0.5 percentage points to 2.0 percent in Austria which now shares joint top spot with Estonia. The headline data would have looked stronger but for a 0.4 percentage point decline to 1.2 percent in Germany. This was probably impacted to some extent by changes in the way that the German index was calculated last month so the January number will be watched especially closely to get a better feel of the true underlying trend.

United Kingdom

December consumer prices were up a monthly 0.4 percent and up 2.0 percent on the year. This was the first time that this level has been hit since April 2006 and the first time that inflation has not breached the target since November 2009. The deceleration occurred despite faster price gains in clothing and footwear, which saw a 1.6 percent annual rise after a 1.1 percent increase in November. Housing, utilities & fuel (3.7 percent after 3.4 percent) and furniture & household equipment (1.4 percent after 1.0 percent) also advanced. Inflation in communications (3.3 percent after 2.8 percent) also accelerated. However, strength here was more than offset by slower gains in food & non-alcoholic drink (1.9 percent after 2.8 percent), recreation & culture (0.8 percent after 1.1 percent) and miscellaneous goods & services (0.3 percent after 0.5 percent). Core inflation also edged lower to 1.7 percent.

December factory gate prices were unchanged on the month following an unrevised 0.2 percent decline in November. Annual output price inflation was 1.0 percent, slightly higher than in mid-quarter but still historically soft. Monthly declines in food (0.5 percent) and paper & printing (0.2 percent) were largely responsible for offsetting increases in petroleum products (0.6 percent) and chemicals & pharmaceuticals (0.4 percent). The core factory gate price index showed a 0.1 percent monthly gain and a 1.0 percent annual rise, 0.3 percentage points above its November rate but again, soft enough not to jeopardize the 2 percent CPI inflation target. Input costs crept up 0.1 percent from November after a 0.7 percent drop last time. The monthly increase was small enough to see annual growth of costs slip from an already weak minus 1.0 percent to minus 1.2 percent. Monthly increases in fuel (1.1 percent), crude oil (1.8 percent) and home food materials (0.3 percent) were almost offset by broad-based declines elsewhere in the basket.

December retail sales jumped 2.6 percent on the month to match the steepest increase on record. On the year, sales were 5.3 percent for the best performance since October 2004. Excluding auto fuel, sales were even more robust, advancing 2.8 percent from mid-quarter to stand some 6.1 percent higher on the year. All of the major spending categories registered positive monthly growth and, excluding fuel, food purchases gained 2.4 percent — and more significantly — non-food demand 2.8 percent. Within the latter, non-specialized stores reported a record 8.7 percent leap, while non-store retailing was up 4.8 percent and the other stores area, 2.9 percent. Smaller increases were seen in household goods (0.8 percent) and clothing & footwear (0.1 percent).

Asia/Pacific

Japan

December corporate goods price index was up 0.3 percent on the month and 2.5 percent when compared with a year ago. On the year, the CGPI has now increased for nine consecutive months and has increased more than 2 percent for the last six months. Petroleum & coal products jumped 12.1 percent for a second month on the year while lumber & wood products were 15.1 percent higher after increasing 13.9 percent from a year ago. Nonferrous metals increased 6.1 percent, about the same as last month while iron & steel was 5.2 percent higher. Among the components, electronic components & devices (down 2.5 percent) and information & communications equipment (down 4.5 percent) retreated. Transportation equipment slipped 0.3 percent from a year ago.

November private machine orders excluding volatile orders for ships and from electric power companies jumped a much greater than expected 9.3 percent on the month. Analysts expected an increase of 1.4 percent. On the year, analysts anticipated an increase of 12.7 percent in contrast to the actual increase of 20.8 percent. Orders from overseas slumped 12.2 percent. Nonmanufacturing orders excluding volatile orders were up 8.1 percent after increasing 11.5 percent in October. Total orders were down 5.8 percent after declining 4.6 percent the month before. Orders from manufacturers rose 6.0 percent for the first increase in two months. The increase was led by large orders for power generating machines from paper mills as well as oil refineries.

November tertiary index was up 0.6 percent on the month and 0.9 percent from a year ago. Among the industries that contributed to the increase were wholesale & retail trade (up 1.5 percent), finance & insurance (up 2.1 percent), accommodations, eating & drinking services (up 2.3 percent), living-related & personal services & amusement services (up 2.3 percent), transport & postal activities (up1.0 percent) and real estate & goods rental & leasing (up 0.6 percent). Among the industries that declined were scientific research, professional & technical services (down 3.9 percent), information & communications (down 0.6 percent), electricity, gas, heat supply & water (down 0.6 percent) and compound services (down 2.1 percent).

Australia

December unemployment rate was 5.8 percent. The number of people unemployed increased by 8,000 people to 722,000. Employment dropped a much larger than expected 22,600 to 11,629,500. The decrease in employment was due to a decline in full time employment, down 31,600 people to 8,067,700. This was partially offset by increased part time employment, up 9,000 to 3,561,800. The decrease in total employment was driven by decreases in male and female full time employment and male part time employment. The seasonally adjusted labour force participation rate decreased 0.2 percentage points to 64.6 percent. For the year 2013, employment declined sharply. It was up 54,600 for the year after increasing 166,300 in 2012. The economy is shifting gears away from the mining boom and to a more balanced economy.

Bottom line

Equities were mostly up on the week in Europe and the U.S. but mostly lower in the Asia Pacific region. Investors monitored data releases mostly from the U.S. along with earnings reports from major corporations.

The Banks of Canada and Japan meet this week — no policy changes are anticipated. Aside from the increasing flow of earnings reports, flash purchasing managers’ indexes will give some insight to January growth.

Looking Ahead: January 20 through January 24, 2014

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