Global Markets

Equities were mostly lower last week. They swooned at the beginning of the week on signs that China’s economy had weakened in January and on continuing concerns about emerging markets. A less than expected ISM manufacturing reading on Monday did not help. Up and down earnings reports from bellwether firms also moved the markets. But equities steadied and gained mid-week. Investors kept their cool Friday even when the U.S. employment report disappointed. The rationale here is that while the Fed will probably continue reducing its bond buying programs, it will continue to maintain its almost zero interest rate far into the future.

Reserve Bank of Australia

As widely expected, the Reserve Bank of Australia kept its cash rate unchanged at 2.5 percent where it has been since August 2013. Also as anticipated, the Board abandoned its easing bias and adopted a clear neutral bias removing any mention of a possible reduction in interest rates. Rather the RBA indicated that stable interest rates going forward would be the most prudent course for monetary policy. The announcement noted that inflation is expected to be higher than it forecast earlier but it remains within the Bank’s inflation target range of 2 percent to 3 percent. Should the Australian dollar weaken further, it will assist in achieving balanced economic growth. The RBA sees growth strengthening on low interest rates and a weaker currency.

The Australian dollar was around US$0.91 at the December meeting but had declined to US$0.875 before this meeting. The decline appeared to have placated governor Glenn Stevens. Unlike in December when the AUD was described as ‘uncomfortably high’, there was no reference to the level of the currency in this statement. Rather he said that if the current decline in the currency is sustained, the desired rebalancing of the economy will be ably assisted.

In its quarterly monetary policy report, the RBA increased its forecasts for both GDP and inflation, implying the economy is strong. However, the Bank would not loosen policy out of fear of runaway price increases. The outlook for the next year or so reflects the substantial decline in mining investment and planned fiscal restraint. At the same time, low interest rates are stimulating both prices and turnover in the established housing market as well as dwelling construction. Over time, these conditions can be expected to lead to higher consumption growth and provide support for non-mining investment. Despite solid growth, employment growth will only be moderate over the coming year as the economy rebalances. Underlying inflation is likely to be close to 3 percent over the year to June 2014, an upward revision from a 2.5 percent forecast in November.

Bank of England

To nobody's surprise the Bank of England’s monetary policy committee again left both the Bank Rate (0.5 percent) and its asset purchase program (Stg375 billion) on hold. It also offered no additional information on its forward guidance procedure that was expected by some in order reduce pressure on the monetary authority to tighten should unemployment continue to decline more rapidly than officially forecast.

Since its January meeting, the economic news has been somewhat mixed. Fourth quarter growth (0.7 percent) came in slightly below the Bank's forecast while inflation in December finally declined back to the 2 percent target while non-mortgage lending has remained soft. The pound is still uncomfortably strong against both the dollar and euro and the stock market has had some notable wobbles. However, the unemployment rate has dropped to within a whisker of its 7 percent knockout threshold, the housing market has continued to motor ahead and retail sales posted a record equaling monthly gain in December.

European Central Bank

As expected, the ECB left its key refi rate at its record low of 0.25 percent while the deposit and marginal facility rates remain at zero percent and 0.75 percent respectively.

Nonetheless, in addition to a back-up in money rates, recent weak data on inflation (flash 0.7 percent annual rate in January), retail sales (monthly 1.6 percent drop in December) and bank lending (annual decline of 2.3 percent rate in December) had sparked significant speculation about some further monetary easing through unconventional channels.

ECB President Mario Draghi's post-announcement press conference was a distinct anti-climax. He simply reaffirmed the previous meeting's economic assessment and, more importantly from a financial markets' perspective, reiterated January's forward guidance line. To this end the monetary authority remains prepared to take action should it become convinced that the current stance will not see inflation return to its near-2 percent target over the medium term — but sees no need to act just yet.

Global Stock Market Recap

Europe and the UK

Despite their slide at the beginning of the week, all but the DAX recorded gains last week. The FTSE and SMI declined on Monday and Tuesday but finished in positive territory the rest of the week. They were up 0.9 percent and 1.6 percent respectively. The CAC retreated one of five days and was up 1.5 percent on the week. The DAX retreated three of five days and ended the week virtually unchanged (down 4.56 points). Shares were boosted by the Bank of England and the European Central Bank’s policy decisions Thursday. Both central banks left their policies unchanged.

The four indexes were up Friday even though they initially retreated after the weaker than expected U.S. employment report. However, they rebounded as U.S. markets advanced and Germany’s top constitutional court referred the decision on the legality of the European Central Bank's bond purchase program to the European Court of Justice. The court said the Outright Monetary Transactions (OMT) program probably overstepped the central bank's mandate.

Economic data were mixed with a plethora of merchandise trade and industrial production reports. December manufacturing orders and industrial output declined in Germany while the merchandise trade surplus hit an all-time high. In the UK, output continued to grow while the merchandise trade deficit narrowed more than expected.

Asia Pacific

Equities were mostly lower last week. Stocks plunged on Monday and Tuesday before steadying Wednesday and rebounding on Thursday and Friday. The reasons for the Monday and Tuesday retreats were to be found mostly in weaker than expected reading of China’s January manufacturing PMI indicating slower growth prior to the Lunar New Year holiday. The slightly weaker growth was confirmed in the January services and composite readings. The gains at week’s end were not enough to offset the losses incurred earlier in the week.

In Japan, the Nikkei sank 2 percent on Monday and plunged 4.1 percent Tuesday on a strengthening yen in addition to the Chinese data. So far this year, the Nikkei has retreated 11.2 percent after soaring a heady 56.7 percent in 2013. Trading reflects the value of the yen. Even firms that are primarily domestic in nature fluctuate inversely to the currency. When the yen rises, equities decline and vice versa. U.S. economic data also impact trading here. For example, on Friday, shares here rallied on both a weaker yen and the better than expected weekly U.S. initial jobless claims. Markets here were closed for the week prior to the release of the employment situation report Friday morning US ET.

Bank of Japan deputy governor Kikuo Iwata said that the BoJ would pursue its ultra-loose monetary policy until the 2 percent inflation target is achieved in a stable manner. While the consumption tax increase from 5 percent to 8 percent is likely to generate a swing in the economy's growth rates and negatively affect disposable income, the virtuous cycle that has already been working in Japan's economy would continue and the economy is likely to continue growing at a pace above its potential as a trend. Prime Minister Shinzo Abe will preside over the first increase to the sales levy since 1997 as he weighs the impact on growth against his need to rein in the world’s second biggest government debt burden. The premier is considering whether to raise the tax to 10 percent in 2015.

China's Shanghai Composite was up 0.6 percent Friday and for the week as trading resumed after a weeklong holiday. Investors shrugged off the results of the composite PMI. China's services sector grew at its weakest pace in almost 2-1/2 years in January, as firms secured a smaller volume of new business.

Currencies

The U.S. currency was mixed last week. It advanced against the pound and yen but declined against the euro, Swiss franc and the commodities currencies, the Canadian and Australian dollars. The U.S. dollar gyrated as each new piece of economic data was released. For example, on Monday, the dollar dropped the most in three weeks after the ISM manufacturing report showed that January manufacturing slowed. This added to speculation whether the economy is strong enough for the Federal Reserve to accelerate reductions in its asset purchase program.

The U.S. currency declined against most major peers after its biggest monthly gain in January since May 2013 as a global selloff of emerging market currencies prompted investors to seek the relative safety of haven assets. The euro strengthened against the dollar before the European Central Bank policy meeting on Thursday amid speculation that slowing inflation may prompt officials to consider additional stimulus. The euro also made a recovery this week, as the ECB kept policy unchanged at its monthly meeting while heavily hinting that action may be forthcoming in March.

Selected currencies — weekly results

Indicator scoreboard

EMU

January manufacturing PMI reading was 54.0 — a 32 month high — and 1.3 points above December’s final. Gains in output, new orders and backlogs were mainly responsible for the improvement which also reflected a modest increase in employment, its first advance in nearly two years and at its fastest pace since September 2011. However, price pressures were relatively muted with input costs increasing at their slowest pace in four months and factory gate inflation the weakest since last October. Regionally, nearly all of the reporting member states posted national PMIs above 50 with the notable exception of France (49.3) although the revised figure constituted a 4-month high. Germany (56.5) led the way ahead the Netherlands (54.8) and Austria (54.1). Italy (53.1) and Ireland (52.8) also saw positive growth but at slightly slower rates than in December. Of note, Spain (52.2) and Greece (51.2) registered 45-month and 65-month respectively highs.

Germany

December manufacturing orders declined 0.5 percent but following a slightly stronger revised 2.4 percent gain in November. Annual workday adjusted growth slowed to 6.0 percent from an upwardly adjusted 7.2 percent rate last time. The monthly decline was attributable to a 2.2 percent drop in basics and a 2.0 percent contraction in consumer & durable goods. The only area of strength was capital goods which were up 1.0 percent, compounding the 3.6 percent increase posted in mid-quarter. Weakness was concentrated in the domestic market which saw a 1.6 percent slide from November and within which capital goods were down 2.5 percent, consumer & durables 2.1 percent and basics 0.5 percent. By contrast, overseas demand expanded modestly, courtesy of a 7.5 percent leap in Eurozone orders (non-Eurozone were down 3.7 percent). A monthly 0.4 percent overall gain was driven by a 2.9 percent jump in capital goods which proved more than sufficient to offset a 4.3 percent plunge in basics and a 1.9 percent drop in consumer & durables.

December industrial output was down 0.6 percent following an upwardly revised 2.4 percent monthly increase in November. The annual workday adjusted growth rate now stands at 2.6 percent. The latest reversal was essentially driven by a 2.5 percent drop in capital goods production. Intermediates posted a 1.0 percent advance and consumer goods (0.9 percent) were not far behind thanks to a 1.1 percent bounce in nondurables. Among the more erratic categories, energy was off 2.6 percent but construction climbed 0.5 percent.

December seasonally adjusted merchandise trade surplus narrowed from an upwardly revised €18.9 billion in November to €18.5 billion. However, the excess was the second largest of 2013. For calendar 2013 the surplus was €201.2 billion, up from €191.1 billion in 2012. December's headline reflected shrinkage in both sides of the balance sheet. Exports were down 0.9 percent on the month, their first decline since July, while imports were off 0.6 percent, their second successive contraction. Compared with a year ago, exports were up 4.6 percent and imports 2.0 percent stronger.

United Kingdom

December industrial production was up 0.4 percent and 1.8 percent from a year ago. Within this, manufacturing was up 0.3 percent from November and 1.5 percent from December 2012. Seven of the thirteen manufacturing sub-sectors saw monthly increases, the largest contribution to the overall sector advance coming from basic pharmaceutical products & pharmaceutical preparations which were up 4.5 percent. Coke & refined petroleum products gained 11.2 percent and food, beverages & tobacco 1.0 percent. The major areas of weakness were transport equipment, which was off 2.8 percent and textiles, apparel & leather products where production dropped 3.3 percent. Basic metals & metal products were down 0.6 percent. Elsewhere within total industrial production, mining & quarrying was up 2.9 percent from mid-quarter and oil & gas extraction 4.7 percent. However, water supply & sewerage slipped 0.2 percent and electricity, gas, steam & air conditioning contracted 1.3 percent.

December shortfall on global trade in goods narrowed surprisingly sharply to Stg7.7 billion. The deficit was more than Stg2 billion short of November's deficit and the smallest since July 2012. Excluding oil and other erratic items, the deficit was Stg7.8 billion, a decline of Stg1 billion from the mid-quarter result. Total exports were up 1.9 percent on the month, more than reversing November's 1.4 percent decline, but constituting only the first increase since August. Imports were down a sharp 4.7 percent, their third consecutive monthly decline. Net trade with the rest of the EU improved significantly as a 2.7 percent monthly increase in exports combined with a 4.7 percent drop in imports to reduce the bi-lateral deficit by Stg1.2 billion from November to Stg5.5 billion. There was also a marked reduction in the shortfall with the rest of the world which shrank from Stg3.1 billion in November to Stg2.2 billion.

Asia/Pacific

Australia

December trade surplus jumped to A$469 million after a revised surplus of A$84 million in November. Most analysts expected a deficit. Exports were up 3.7 percent while imports were 2.3 percent higher on the month. Non-rural exports were up 5 percent while rural goods soared 17 percent. The main components contributing to the increases in rural goods were cereal grains and cereal preparations (up 78 percent). The main components contributing to the increase in non-rural goods were other mineral fuels, (up 12 percent), metal ores and minerals, (up 2 percent), coal, coke & briquettes, (up 4 percent), metals excluding non-monetary gold, (up 17 percent) and transport equipment, (up 29 percent).

December retail sales were up 0.5 percent on the month and 5.7 percent from a year ago. In volume terms, sales were up 0.9 percent in the December quarter following an increase of 0.8 percent in the September quarter. Sales advanced in food retailing (2.5 percent), cafes, restaurants & takeaway food services (0.5 percent) and department stores (0.3 percent). These increases were partially offset by declines in other retailing (down 3.1 percent), clothing, footwear & personal accessory retailing (down 2.1 percent) and household goods retailing (down 0.2 percent). Sales increased in New South Wales (0.9 percent), Victoria (0.6 percent), Queensland (0.2 percent), Tasmania (1.8 percent), the Australian Capital Territory (1.3 percent) and Western Australia (0.1 percent). However, sales declined in the Northern Territory (down 1.5 percent) and South Australia (down 0.2 percent).

Americas

Canada

December industrial product prices were up 0.7 percent on the month following a marginally firmer revised 0.2 percent increase in November. Annual IPPI growth was 1.4 percent, up from 0.3 percent last time and in part reflecting positive base effects. December's monthly advance was largely attributable to a 2.0 percent bounce in energy & petroleum products and an equivalent spurt in chemicals & chemical products. Excluding energy & petroleum products, the IPPI was up 0.6 percent on mid-quarter and 0.4 percent from a year ago. Fluctuations in the local currency added 0.3 percentage points to the monthly gain. Raw material & fuel costs were up sharply although a monthly 1.9 percent gain made only a small dent in November's 4.1 percent slump. Crude energy was up 3.3 percent from the previous month which, combined with a 2.4 percent increase in logs, pulpwood, natural rubber & other forestry products and a 1.7 percent advance in metal ores, concentrates & scrap, did all of the damage. Excluding crude energy, the RMPI was up 0.3 percent on the month and was 6.2 percent weaker on the year.

December merchandise trade deficit widened out from a larger revised C$1.53 billion in November to C$1.66 billion at year-end. The much larger than anticipated shortfall reflected a 0.9 percent monthly increase in exports and a 1.2 percent increase in imports. Exports were 2.9 percent higher on the year while imports are up a stronger 7.1 percent. Within nominal exports the bilateral trade surplus with the U.S. rose from C$2.4 billion in November to C$2.9 billion. Moreover, the total real trade balance also improved somewhat with export volumes expanding 0.8 percent from November and imports declining 0.4 percent.

January employment increased 29,400. The participation rate slipped 0.1 percentage points to 66.3 percent to nudge the jobless rate a couple of ticks lower to 7.0 percent. Even so, this still left the rate 0.1 percentage points above its November low. Total employment was boosted by a 50,500 recovery in full-time positions while part-time jobs were down 21,100. However, the private sector shed 13,600 jobs while public payrolls advanced 14,700. The best performer was the self-employed sector where headcount was up 28,300. With an increase of 25,800, services dominated January's headline advance. The largest contributor was accommodation & food (17,000), just ahead of health care & social assistance (16,900) and professional, scientific & technical services (16,600). Other solid gains were seen in transportation & warehousing (15,200) finance, insurance, real estate & leasing (14,600) and educational services (11,500). However, retail trade was off almost 10,000 and there were steeper declines in business, building & other support services (25,400), public administration (16,000) and information, culture & recreation (12,300). Goods producing industries had a more subdued month and within an overall gain of just 3,600, manufacturing fell 6,800. Construction was up 6,700 while other areas were close to flat.

Bottom line

The Reserve Bank of Australia, the Bank of England and the European Central Bank kept their respective monetary policies unchanged. Economic data including various manufacturing and services PMIs were mixed geographically. German manufacturing orders and industrial production disappointed while output in the UK was slightly under forecast. U.S. employment was considerably under expectations but the unemployment rate continued to decline.

The outpouring of trade and output data continues next week. Australia’s labour force survey will be monitored given the RBA’s neutral policy stance. In Europe, the flash fourth quarter gross domestic product estimates will be closely studied in light of the recent spate of mixed economic news. And in the UK, the Bank of England’s quarterly Inflation Report will be parsed for signs of adjustment to its guidance in light of stronger than anticipated labour market improvements.

Looking Ahead: February 10 through February 14, 2014

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