Global Markets

Most equity indexes advanced last week as investors chose to focus on growth prospects rather than actual economic data. Poor weather in the U.S. and UK were blamed for the disappointments. Investors are looking for growth to bounce back once the spring thaw sets in. On the week, eight of the indexes followed here retreated and 16 advanced. Losses ranged from 0.1 percent (Shanghai Composite and S&P) to 2.4 percent (Bolsa). Gains ranged from 0.2 percent (SMI) to 3.9 percent (Nikkei).

February flash PMIs mixed

February flash PMI data were mixed with the U.S. manufacturing index surging, the Chinese index contracting for a second month and the Eurozone edging lower.

In the Eurozone, the composite flash PMI balanced an improved service sector and a weakening manufacturing reading. The Eurozone flash composite was down to 52.7 from January’s final of 52.9. The modest increase in the service sector index, up two tenths to 51.7, was entirely explained by strength in Germany where the index added 2.3 points, correcting declines in December and January. Output trends in France (composite index 47.6) and Germany (56.1) continued to diverge and, more worryingly, at a faster rate this month. France — the only other Eurozone country for which a flash figure is available — experienced a more disappointing performance with the service sector index falling by 2 points to its lowest level since May 2013. The French manufacturing PMI was down by a similar margin as was Germany’s.

The service sector PMI has moved broadly sideways since September at a below average level. The decline in the Eurozone manufacturing PMI, however, comes after two strong months in December and January. The new orders and output sub-indexes are still well above the levels seen in 2013. It is too early to say whether the improving trend in the manufacturing PMI has come to an end, but the fact that the PMI is already at above average levels means it will find it difficult to rise substantially from here. Moreover, the weakness seen in the Chinese PMI, given its role in global manufacturing, indicates a possible further constraint on Eurozone manufacturing in the coming months.

Since reaching its peak in September 2013, the flash manufacturing index for China has declined steadily and has contracted both in January and now in February to 48.3, the lowest since July last year. The weakness was spread across the main components. Overall, the improvement in the PMI between July and October last year has now largely unwound.

In contrast to the contraction in China, the U.S. flash manufacturing PMI vaulted 3 points higher to 56.7, a nearly four year high that follows a depressed reading during the polar vortex of January.

Global Stock Market Recap

Europe and the UK

Equities were mixed last week with the FTSE outperforming all others in the region. For the most part, it was a quiet week for economic data except in the UK. The exceptions were the February flash PMI indexes for the Eurozone, Germany and France and the release of major price, labor market and retail sales in the UK. On the week, the FTSE jumped 2.6 percent, the CAC added 0.9 percent and the SMI 0.2 percent. However, the DAX lost 0.1 percent while the MIB and IBEX were 0.2 percent and 0.6 percent lower respectively.

Investors studied the spate of new UK economic data to reassure themselves that growth is continuing. Inflation remained under control in January with consumer prices slipping to 1.9 percent, just under the Bank of England’s inflation target of 2 percent. Claimant count unemployment rate remained steady at 3.6 percent while the ILO three month moving average through December edged up to 7.2 percent. The big disappointment of the week was the 1.5 percent drop in retail sales after a 2.5 percent jump the month before. The UK has also been experiencing atypical weather with flooding covering a large chunk of England.

Italy's new coalition government led by Matteo Renzi will formally take office on Saturday at a swearing-in ceremony at the Quirinale presidential palace. The announcement was made by the palace after talks between Mr Renzi and Giorgio Napolitano, head of state, following consultations this week with his coalition partners among eight centrist and centre-right parties. Pier Carlo Padoan, chief economist with the OECD, was named finance minister. He becomes Italy's fourth consecutive technocrat in that post.

Asia Pacific

Equities mostly advanced last week despite some mixed U.S. economic data and continuing concerns about China's growth. The Shanghai Composite and SET were, however, down with loses of 0.1 percent and 0.6 percent respectively. The Nikkei which gyrated during the week, managed to increase 3.9 percent. It gained 3.1 percent Tuesday after the Bank of Japan’s announcement. This was followed by a drop of 2.1 percent on Thursday. The Nikkei however, remains Asia's worst performer — down 8.8 percent so far this year.

The Nikkei continues to fluctuate inversely to the yen. For example, the yen declined against its major rivals Friday after minutes of the January 21 and 22 monetary policy board meeting showed some board members wanted the Bank of Japan to provide a clear explanation that it did not strictly set the timeframe for continuing quantitative and qualitative easing to end in two years. The BoJ minutes also showed that members are keeping a close watch on the downside risks to the recovery — particularly from commodity exporters, the European debt situation and the pace of the recovery in the United States. Fourth quarter growth disappointed while the merchandise trade deficit soared in January.

The Shanghai Composite retreated three of five days last week on concerns that the economy might be slowing after the February flash Chinese manufacturing PMI slid to a seven month low. The PMI contracted for a second month with a reading of 48.3 after January’s 49.6. A score below 50 indicates that activity contracted.

Bank of Japan

As expected the Bank of Japan left its policy unchanged at its monetary policy board meeting. The MPB continued its unanimous support in favor of continuing the quantitative and qualitative easing programs launched by the BoJ in April 2013 to stamp out deflation and achieve its inflation target. The BoJ kept its policy interest rate in the range of zero to 0.1 percent and will continue to conduct money market operations so that the monetary base will increase at an annual pace of ¥60 trillion to ¥70 trillion. The BoJ also extended special loan facilities set to expire next month, for another year. The BoJ raised the ceiling of pro-growth loans to ¥7 trillion from ¥3.5 trillion. The BoJ also extended pro-growth loan applications one year to March 2015.

The monetary policy board repeated that the economy continues its moderate recovery. The Bank remains confident that the economy can weather the pain of a sales tax increase from 5 percent to 8 percent in April without additional stimulus. The MPB was unfazed by recent signs of slowing growth, suggesting that any additional stimulus from the BoJ will be some time away. BoJ Governor Haruhiko Kuroda said the expansion was aimed at enhancing the transmission mechanism of quantitative easing by encouraging banks to boost lending instead of sitting on piles of cash.

Currencies

The U.S. dollar advanced last week against the pound sterling, yen and the Canadian and Australian dollars. It retreated against the euro and Swiss franc. The pound had its biggest weekly decline against the dollar in three months after retail sales dropped more than forecast, dampening optimism that the economy is gaining momentum.

The UK currency also declined against the euro for the week. Retail sales including fuel dropped 1.5 percent in January after climbing a revised 2.5 percent in the previous month. The annual inflation rate slowed to 1.9 percent from 2 percent. The jobless rate climbed to 7.2 percent in the fourth quarter from 7.1 percent in the three months through November. Minutes of the Bank of England’s meeting earlier this month showed the monetary policy committee agreed unanimously to keep its policy interest rate at 0.5 percent where it has been since March 2009.

Asian currencies had their worst weekly loss in almost three months as signs of a deeper economic slowdown in China and the Federal Reserve’s support for cutting asset purchases weighed on emerging markets. South Korea’s won led the declines as China’s manufacturing PMI, the nation’s biggest export market, declined to a seven month low. Thailand’s baht dropped as anti-government protests turned deadly.

Selected currencies — weekly results

Indicator scoreboard

Germany

February ZEW survey was mixed with a second consecutive marked improvement in analysts' assessment of current economic conditions contrasting with a second successive deterioration in expectations. The current conditions measure matched its January increase with another 8.8 point advance to stand at 50.0, its highest level since August 2011. Bar the odd wobble, this index has been on an essentially rising trend since August 2013. However, the outlook is now viewed rather less optimistically with the expectations gauge following a minor 0.3 point dip in January with a more pronounced 6 point drop this month to 55.7. However, the new reading is still well above last year's average (44.7) and easily high enough to signal a generally firm level of confidence. ZEW attributed the fall to increasing uncertainty about prospects for the emerging markets and warned that the drop should not be overstated.

United Kingdom

January producer output prices were up 0.3 percent and 0.9 percent on the year. January's monthly increase was mainly due to a 1.4 percent increase in the price of clothing, textiles & leather together with smaller gains in chemicals & pharmaceuticals |(0.6 percent) and the other manufactured goods category (0.5 percent). However, a 1.4 percent drop in petroleum products provided a partial offset. The core index was up 0.5 percent from December and 1.2 percent from a year ago. Input prices dropped 0.9 percent on the month and are 3.1 percent lower than in the same period of 2013. Crude oil (down 3.1 percent) alone subtracted almost 0.8 percentage points from the overall monthly change and there were significant declines in imported parts & equipment (0.6 percent) and imported food materials & chemicals (both 0.5 percent) alongside a number of other smaller declines.

January consumer prices dropped 0.6 percent and were up 1.9 percent from a year ago. This is the first time since November 2009 that the annual change has fallen below the Bank of England’s 2 percent inflation target. Core CPI was down 0.9 percent on the month and was up 1.6 percent, matching its lowest level since June 2009. Within the CPI basket the steepest monthly declines were in those categories most affected by the traditional January sales. Clothing & footwear dropped 5.4 percent while furniture & household equipment was off 3.1 percent. Most other subsectors also recorded declines of varying sizes leaving just food & non-alcoholic drinks (0.2 percent), tobacco & alcohol (3.1 percent) and health (0.6 percent) to post monthly gains.

January claimant count joblessness was down a further 27,600 following a slightly steeper revised 27,700 decline in December. The January slide means that unemployment on this measure has now declined for fifteen consecutive months and, at just 3.6 percent, the jobless rate was down for an eighth successive month and at its lowest level since December 2008. The ILO definition dropped 125,000 over the three months to December, a significantly sharper drop than the 48.000 decline posted in the previous period. However, this was not enough to prevent a surprise uptick in the unemployment rate to 7.2 percent. Strong gains in employment (193,000 in the fourth quarter) have not had any real impact on wages and average annual earnings growth last quarter was just 1.1 percent, up from 0.9 percent last time but still historically soft and, with CPI inflation running at 1.9 percent, indicative of an ongoing squeeze on real take home pay. Excluding bonuses earnings were up 1.0 percent, just 0.1 percentage points higher than in the September through November period.

January retail sales dropped 1.5 percent but were 4.3 percent higher on the year. Excluding auto fuel the picture was much the same with purchases also 1.5 percent lower on the month and up 4.8 percent from the start of 2013. January's setback reflected a 3.4 percent monthly drop in food purchases. Excluding fuel sales of non-food items was up 0.4 percent although even within this there were marked declines in clothing & footwear (3.5 percent) and non-store retailing (2.7 percent) as well as at non-specialist stores (2.3 percent). Household goods jumped 5.3 percent and the other stores category was up a strong 2.7 percent. Fuel sales were 1.6 percent lower.

Asia/Pacific

Japan

Fourth quarter gross domestic product was much weaker than forecast. On the quarter, GDP was up 0.3 percent, significantly lower than the 0.7 percent forecast. Similarly, on an annualized basis, GDP was up 1.0 percent. Forecasts were for an annualized increase of 2.6 percent. From a year ago, GDP was up 2.7 percent. Consumer spending which accounts for about 55 percent of GDP was solid prior to the April sales tax increase from 5 percent to 8 percent and the continued effects of fiscal stimulus. Spending increased 0.5 percent for a 0.3 percentage point contribution to growth. People have been bringing big purchases forward to avoid the extra tax. CAPEX was up 1.3 percent on the quarter for a 0.2 percentage point contribution. Net exports subtracted 0.5 percentage points for the second consecutive quarter of negative contribution. The weaker yen has not boosted exports as much as expected earlier.

January merchandise trade deficit soared to Y2.79 trillion, a record. It surpassed the current record deficit of Y1.634 trillion in January 2013. It was the 19^th straight month that the balance was negative. The reason for the deficit can be found in the high pace of imports reflecting strong demand for durable goods ahead of the April sales tax increase from 5 percent to 8 percent. The New Year's holidays tend to slow exports at the start of the year. Exports were up 9.5 percent from a year ago while imports soared 25 percent. Exports to the U.S. were up 21.9 percent from a year ago while those to the EU were up 20.2 percent. Exports to Asia were up 5.8 percent and to China, 13.1 percent. The seasonally adjusted deficit jumped to Y1.818.8 trillion from Y1.259 trillion in December. Exports were down 3.5 percent on the month while imports were up 4.7 percent.

Americas

Canada

January consumer price index was up 0.3 percent and was up 1.5 percent when compared with last year. Excluding food and energy, prices were up 0.2 percent from December and were up 1.2 percent on the year after a 0.9 percent annual increase last time. Meanwhile, the Bank of Canada's preferred gauge which excludes 8 volatile items was up 0.2 percent on the month and 1.4 percent on the year. Seasonally adjusted, the CPI climbed 0.2 percent from year-end. On the same basis, both the excluding food and energy and the BoC measure was up 0.2 percent. Within the adjusted basket the main upward pressure was felt in recreation, education & reading where prices were up 0.8 percent on the month and in shelter, which saw a 0.5 percent advance. Elsewhere, prices were much better behaved although clothing & footwear followed a sizeable 0.5 percent gain in December with a 0.3 percent increase this time. The only decline was in transportation (0.4 percent).

December retail sales were down 1.8 percent on the month and down 2.2 percent from a year ago thanks primarily to bad weather. For the year 2013, sales were up 3.4 percent, but the level of sales was still the weakest since June 2013. Not surprisingly, the decline in nominal demand was mirrored in volumes which were off a slightly steeper 2.2 percent from November and now stand 2.8 percent higher on the year. Within overall nominal sales, nine of the subsectors reported lower purchases on the month. The largest drop was in motor vehicles & parts (3.2 percent). Excluding this category sales were off 1.4 percent. Elsewhere, building material & garden equipment & supplies slumped 8.2 percent as the adverse weather took its toll and other hefty reversals were seen in electronics & appliances (13.1 percent) and home furnishings (6.1 percent). Sporting goods, hobbies & books were off 4.0 percent and general merchandise 1.9 percent. Food & beverages were flat leaving only health & personal care (1.3 percent) and gasoline stations (3.5 percent) to register monthly gains.

Bottom line

The Bank of Japan left its monetary policy unchanged. Data for fourth quarter GDP disappointed while the merchandise trade deficit continued to balloon. China’s flash manufacturing PMI contracted for a second month while Eurozone data were lackluster.

Japan releases its spate of January economic data including unemployment, consumer prices, retail sales and household spending. Revised estimates of fourth quarter GDP will be released in Germany and the UK. Canada posts fourth quarter GDP. February consumer and business sentiment in the EU along with Germany’s Ifo should give a picture of European confidence.

Looking Ahead: February 24 through February 28, 2014

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