Global Markets

Equity investors, in their efforts to make informed decisions, did not lack new economic data last week. There were growth data in the form of gross domestic product from the UK, U.S., Germany, Canada and India for example, along with monthly key data such as Eurozone money supply and lending and a slew of data from Japan. Investors in the U.S. and elsewhere tended to ignore disappointing U.S. data — they blamed it on the dreadful weather.

Six indexes retreated on the week while 17 advanced and one was unchanged. The Shanghai Composite lost 2.7 percent and the Bolsa was down 2.4 percent. The Sensex was the best performer, gaining 2.0 percent. In February, only the Nikkei and Bolsa declined. Monthly gains ranged from a high of 6.4 percent for the PSEi. The CAC added 5.8 percent and the FTSE MIB, 5.3 percent. The Nasdaq and OMX Stockholm 30 were 5.0 percent higher.

Global Stock Market Recap

Europe and the UK

Equities mostly advanced last week with only the FTSE ending slightly lower. However, for February all the indexes followed here rebounded from January’s losses. On the week, the FTSE retreated 0.4 percent but the CAC, DAX and SMI gained 0.6 percent, 0.4 percent and 0.5 percent respectively. For the month of February, the FTSE added 4.6 percent, the CAC was up 5.8 percent, the DAX gained 4.1 percent and the SMI was 3.5 percent higher. The monthly gain took the SMI to its highest level in six years.

Investors remained nervous and acted defensively about the potential for chaos in Ukraine. Traders kept close tabs on Ukraine, where the National Bank of Ukraine capped bank withdrawals and banned trading of certain currency contracts, as the acting President dismissed the army chief of staff and Russian troops and helicopters were dispatched to Crimea. Better than anticipated German retail sales and sentiment data helped soothe investors’ nerves.

Diminishing prospects of an interest rate cut by the ECB as early as its March 6th meeting was the biggest driver, thanks to a better than expected February flash harmonized index of consumer prices reading. Banking stocks retreated, the euro climbed above US$1.38 and government bond yields rose from their lows earlier in Friday's session.

Investors also reacted positively to Federal Reserve Chair Janet Yellen's testimony to the Senate Banking Committee on Thursday. She said the Fed would be on alert to make sure recent signs of weakness in the U.S. economy are due to cold weather and storms, and not signals of a more fundamental slowdown.

The European Commission forecast growth in the euro area at 1.2 percent this year and 1.8 percent next, after two consecutive years of contraction. However, that will not be enough to make much of a dent in Eurozone unemployment, which is seen hovering near record highs of 12 percent in 2014 and 11.7 percent in 2015. The commission raised its growth forecast for Spain in 2014 to 1 percent from 0.5 percent. However, Italy's growth prospects remain dim, with the commission projecting growth of 0.6 percent this year.

Asia Pacific

Equities were mixed last week. The Nikkei was down four of five days including Friday despite a raft of positive economic data. Major markets elsewhere ended mostly higher on the back of U.S. gains after Federal Reserve Chair Janet Yellen blamed unusually harsh winter for the recent spate of disappointing economic news. However, Ms Yellen said the FOMC will look closely at the issue at its March policy meeting.

Underlying sentiment remained cautious due to the ongoing political crisis in Ukraine and the weakness in the Chinese yuan. The currency’s decline highlighted concerns over tightening liquidity and bad debts in the Chinese financial system.

The Shanghai Composite lost 2.7 percent last week while the Hang Seng added 1.2 percent. However, in February, the former added 1.1 percent and the latter, 3.6 percent. The Nikkei was down 0.2 percent on the week and lost 0.5 percent in February — the only index followed here that retreated in this region on the month. Investors shrugged off a slew of positive domestic data. Industrial output climbed a seasonally adjusted 4.0 percent in January from the previous month, the consumer price index posted another gain, retail sales climbed 4.4 percent on the year and household spending was up 1.1 percent ahead of a looming sales tax increase in April. The jobless rate held steady at 3.7 percent while the February manufacturing PMI recorded a healthy reading of 55.5.

The Nikkei has been subject to increasing volatility. The Nikkei booked its most volatile week of the year in the week ending February 21 largely in response to strong U.S. manufacturing data and a higher dollar, both seen as positives for stocks. But there have been plenty of negative days as well. Overall, the Nikkei saw price swings of at least 1.5 percent on more than half of the trading days in February. And such swings have made many investors nervous, pushing up the Nikkei's implied volatility to nearly double the levels for the S&P VIX index and European indexes, such as Germany's DAX and France's CAC 40. Implied volatility, sometimes known as the fear index, demonstrates the level of concern among investors that the market may decline. Investor uncertainty is evidenced by the fact that after adding 57 percent in 2013, the Nikkei continues to rank among the world's worst performing markets in 2014, sliding almost 9 percent through the first two months of the year.

Australia’s All Ordinaries was up 4.0 percent in February even though it lost 0.6 percent last week. Stocks in Sydney have followed U.S. markets higher, while a strong local reporting season also helped sentiment.

Currencies

The yuan (or renminbi) posted its biggest weekly loss since China introduced its own foreign exchange market in 1994 as the People’s Bank of China ramped up its intervention to weaken the currency ahead of a key government meeting. The yuan has gone from being the most attractive carry trade bet in emerging markets to the worst in the space of two months as the PBoC’s efforts to weaken the currency has caused volatility to surge.

The PBoC sets a daily benchmark for the yuan and allows investors to push the currency's value 1 percent in either direction from that set rate. The Bank said recently that it plans to widen the trading range for the yuan in 2014 in an orderly manner. But with the currency having steadily appreciated for years despite a few blips, speculators have been pouring money into China in expectation of continued gains. The PBoC wants to drive down the currency's value to introduce wider two way trading swings, put speculators off balance and relieve pressure on the currency, according to the people close to the PBoC. The Bank is forecast to double the yuan’s trading band in the coming quarter as policy makers loosen exchange rate controls to promote greater usage of the currency in global trade and finance. The National People’s Congress annual gathering begins March 5. The PBoC said this week that the decline is a reflection of market forces and should not be over interpreted.

On Friday, the People's Bank of China stepped up its efforts to weaken the yuan by instructing big state owned banks to buy dollars aggressively in the mainland market, according to currency traders at both Chinese and foreign banks. The move caught the market by surprise and caused the yuan to register its biggest one day fall since its revaluation in 2005, when China dropped a decade long peg to the dollar. The increased intervention, according to people familiar with the PBoC's thinking, is part of the central bank's preparations to introduce more foreign exchange reforms.

Selected currencies — weekly results

Indicator scoreboard

EMU

January harmonized index of consumer prices was up 0.8 percent and was up 1.0 percent from a year ago. Annual core inflation as measured by the HICP excluding food, alcohol, tobacco and energy was 0.8 percent, a 0.1 percentage point acceleration from year-end. The other two underlying gauges told a similar story with the annual rate of both the excluding unprocessed food and energy index and the excluding seasonal food and energy index a tick higher at 1.0 percent. Regionally among the larger EMU states annual inflation rates eased in just Italy (0.6 percent after 0.7 percent) and were steady in France (0.8 percent), Germany (1.2 percent) and Spain (0.3 percent). The steepest decline was posted in the Netherlands (0.6 points to 0.8 percent) ahead of Austria (0.5 points to 1.5 percent) and Estonia (0.4 points to 1.6 percent). Outside of Greece (down 1.4 percent from down 1.8 percent) and Latvia (down 0.5 percent from minus 0.4 percent) No country registered an increase but an unchanged 1.9 percent rate in Finland was enough to see it take over the top spot from Estonia.

January M3 money supply was up 1.2 percent from the same month of 2013, up a couple of ticks from an unrevised December pace and but not enough to prevent the ECB's preferred 3-month moving average rate from dipping from 1.3 percent to just 1.2 percent. Private sector lending was again very soft, down 2.2 percent on the year after a 2.3 percent drop last time. Moreover, within this borrowing by households was down 0.2 percent following a 0.1 percent decline last time and loans for house purchases were up only 0.5 percent or 0.2 percentage points less than in December. Lending to non-financial corporations was off 2.9 percent after a 3.0 percent contraction at year-end and loans to non-monetary financial intermediaries (excluding insurance companies and pension funds) were down 11.1 percent, a 1.1 percentage point pick-up on its December rate. Narrow money (M1) growth accelerated from December's 5.7 percent rate to 6.2 percent but this was still short of November's 6.5 percent pace so the overall monetary picture remains ominously weak.

February EU Commission's economic sentiment index (ESI) edged up to a reading of 101.2 from a marginally stronger revised January reading of 100.9 — its highest level since July 2011. The ESI has now posted gains every month since May. February's tentative improvement was driven by a 1.3 point gain in morale in construction and a 0.4 point increase in industry although in both cases the advances left no net increase from their respective December levels. Elsewhere consumer sentiment (minus 12.7 percent) matched its flash estimate in declining a percentage point from January but confidence was up 0.8 points in services and 0.5 points in retail. Regionally, national ESI's rose 2.4 points in Italy (99.0) and 0.4 points in Germany (107.1). However, Spain was only flat (100.3) and France (96.1) registered a 1.4 point decline.

February flash harmonized index of consumer prices was unchanged at 0.8 percent from a year ago. However, the stable headline figure concealed an unexpected acceleration in underlying prices with the HICP excluding energy, food, alcohol and tobacco moving up from a 0.8 percent yearly rate at the start of the year to 1.0 percent, matching its fastest pace since September. Among the major HICP components, annual price gains in food, alcohol and tobacco slowed 0.2 percentage points to 1.5 percent but non-energy industrial goods posted a 0.4 percentage point rise to 0.6 percent and services edged up to 1.3 percent. The energy sector continued to have a negative impact on the overall rate with prices there sliding 2.2 percent following a 1.2 percent decline in January.

January unemployment was up by 17,000 on the month. However, the overall jobless rate held steady again at 12.0 percent while the rate for under-25's was similarly stable at 24.0 percent. Among the larger economies the jobless rate rose 0.2 percentage points to 12.9 percent in Italy and was up 0.1 percentage points to 10.9 percent in France. However, national rates were down 0.1 percentage points to 5.0 percent in Germany and by the same amount to 25.8 percent in Spain. There was also good news in Cyprus where the rate was off a surprisingly large 0.4 percentage points at 16.8 percent. Most other countries saw little change.

Germany

February Ifo survey overall business climate index was up 0.7 points to 111.3, its fourth monthly increase in a row and its highest level since July 2011. Current conditions were especially robust, gaining a full 2 points from January to 114.4 for their first back to back advance since July/August and their highest reading since April 2012. However, the expectations component slipped 0.6 points to 108.3, its first decline since October. Even so the forward looking measure still registered its second strongest level since March 2011. Confidence among the major sectors was mixed with manufacturing (up 2 points at 19.8) and retail (up 4.1 points at 8.4) both making renewed headway but construction (down 1.8 points at 0.7), wholesale (down 2.7 points at 12.6) and services (down 4.5 points at 21.0) posting losses.

Fourth quarter gross domestic product was up 0.4 percent unchanged from the flash release. Workday adjusted real GDP was 1.4 percent above its year ago level, also as previously indicated, and up from the third quarter's 0.6 percent rate. Unadjusted annual growth was 1.3 percent, 0.2 percentage points faster than last time. However, the relatively buoyant headline data masked disappointingly weak domestic demand which, with a quarterly contraction of 0.7 percent, more than reversed the third quarter's 0.6 percent advance. Private consumption (down 0.1 percent) posted its first decline of the year and government expenditure was only flat following a 1.2 percent advance last time. An ominous looking 3.8 percent slump in gross capital investment was wholly attributable to inventory adjustments which subtracted 0.8 percentage points from the quarterly change in total output. Investment in equipment and in construction both were up a respectable 1.4 percent, the latter in particular securing its third consecutive increase in excess of 1 percent. Consequently, quarterly real GDP growth essentially came courtesy of the strength of overseas demand. Hence with export volumes up 2.6 percent after a lacklustre 0.2 percent increase in the third quarter and imports just 0.6 percent firmer, net foreign trade added 1.1 percentage points and without which the economy would have contracted.

January retail sales rebounded a surprisingly strong 2.5 percent on the month and were the sharpest since February 2007 and followed a shallower revised 2.1 percent drop in volumes at the end of 2013. The jump left purchases 0.9 percent higher on the year after a 1.5 percent decline last time. January's recovery still means that sales have made no progress since last May but with the new level 1.4 percent above the fourth quarter average (when purchases fell 0.5 percent), 2014 has at least got off to a very solid start.

France

January spending on manufactured goods dropped 1.5 percent after three successive rises. The decline followed a stronger revised 0.8 percent increase in December but purchases were still at their weakest level since September last year. Compared with January 2013 volumes were up 0.6 percent or 1.3 percentage points less than the previous period's annual rate. January's slump was in large part fashioned by a 7.7 percent plunge in the auto sector although household goods were also off a sizeable 1.1 percent. Elsewhere the news was rather better with textiles up 1.9 percent from December and the other products category 0.5 percent to the good. Total spending on goods declined 2.1 percent from year-end to stand at its weakest mark since March 2008.

Italy

Fourth quarter unemployment rate was up 0.3 percentage points from an unrevised third quarter reading to post yet another unwelcome record high of 12.6 percent. The new rate is a full 1.2 percentage points above its year ago level. Moreover, the monthly figures just released suggest that conditions in the labour market deteriorated further in January when unemployment was up 60,000 (1.9 percent) to lift the rate by an additional 0.2 percentage points to a new peak of 12.9 percent. Today's data suggest that while the Italian economy is now expanding again (albeit only marginally) growth is too slow to have any real impact on the unemployment problem. Particularly worrying is the ongoing sharp climb in the number of youth unemployed which, at a 42.4 percent rate in January, was up 0.7 percentage points on the month and 4.0 percentage points from a year ago.

United Kingdom

Fourth quarter gross domestic product expanded at an unrevised 0.7 percent quarterly rate. Annual growth was nudged just a tick lower to 2.7 percent but was still the fastest since the first quarter of 2008. The calendar year increase in real GDP was 1.8 percent. Household consumption growth more than halved from the third quarter's 0.9 percent to 0.4 percent and government spending (0.3 percent) posted its smallest advance since the beginning of 2013. However, gross fixed capital formation was up a solid 2.4 percent, improving upon the previous period's 1.7 percent gain. With inventories subtracting 0.2 percentage points from the quarterly increase in real GDP, total domestic demand increased 0.3 percent. Net foreign trade improved markedly although this was mainly attributable to a 0.9 percent quarterly decline in imports, the steepest in three quarters. Export volumes were up, but only 0.4 percent and failed to get anywhere close to offsetting their 2.8 percent slump in the July through September period. Nonetheless, the turnaround was enough to see net exports adding 0.4 percentage points to the quarterly change in total output. Inflation developments were soft with the GDP deflator up just 1.7 percent on the year.

Asia/Pacific

Japan

January consumer prices were down 0.2 percent on the month and up 1.4 percent from January 2013. Excluding only fresh food, the index was down 0.3 percent on the month and up 1.3 percent on the year. Excluding both fresh food and energy, the core CPI dropped 0.5 percent from December and was up 0.7 percent on the year. Goods and services prices were up 2.2 percent and 0.5 percent respectively on the year. From a year ago, energy prices jumped 6.9 percent after increasing 6.8 percent a year ago. Food prices were up 1.3 percent while electronics goods were up 4.7 percent and TVs, 3.7 percent. Clothes and footwear edged up 0.3 percent. Among the major subsectors, only housing (down 0.3 percent) and medical care (down 0.4 percent) were down on the year.

January household spending was up 1.1 percent from a year ago. This was the fifth consecutive increase from a year ago. Spending was up for most subcategories. Housing jumped 14.4 percent on the year while clothing & footwear soared 19.4 percent. Food spending was up 1.4 percent while spending on furniture & household utensils was up 5.2 percent. However, on the down side, spending on education continues to slide, this time by 12.4 percent.

January unemployment rate was unchanged from December at 3.7 percent and the lowest level in six years since December 2007, when it was also at 3.7 percent. The pace of job creation from a year earlier decelerated to 340,000 from 910,000 in December but it still marked the 13^th consecutive annual increase. The number of unemployed declined 350,000, the 44th straight drop from year earlier levels.

January industrial production was up 4.0 percent on the month and 10.6 percent from the same month a year ago. The main drivers of the monthly gain were transportation equipment (up 8.0 percent), general purpose, production and business oriented machinery (up 9.6 percent) and chemicals excluding drugs (up 4.9 percent). However, the increases were below METI’s forecast mainly due to weaker than expected transportation vehicle output and general production machinery. Among the commodities that mainly contributed to the increase were large passenger cars, semiconductor products machinery and drive, transmission and control parts.

January retail sales were up 4.4 percent on the year. All subcategories advanced as consumers rushed to buy high ticket items prior to the increase in the sales tax from 5 percent to 8 percent in April. Autos were up 21.4 percent and machinery and equipment sales jumped 7.5 percent. Fuel sales were up 2.9 percent. Fabrics, apparel and accessories were 2.4 percent higher. Food and beverage spending was up 2.2 percent.

Americas

Canada

Fourth quarter gross domestic product was up 0.7 percent and 1.9 percent from a year ago. On an annualized basis, GDP increased 2.9 percent despite the combination of ice storms and power cuts taking their toll on the December data. In practice, the quarterly increase in real GDP was a respectable enough performance with total output having declined a surprisingly large monthly 0.5 percent at the end of the period. However, a 0.4 percentage point contribution from business inventories flattered the quarterly headline data and masked a much smaller 0.3 percent increase in final domestic demand, down a tick from the third quarter rate. Household consumption was up a solid 0.8 percent, a 0.2 percentage point acceleration from the previous period. Government spending (0.4 percent) also gathered pace but gross fixed capital formation dropped a disappointingly steep 0.9 percent within which residential investment was down 0.6 percent and expenditure on non-residential structures, machinery and equipment down 0.3 percent. Net foreign trade was a small plus factor despite a C$1.2 billion widening in the current account deficit to C$16.0 billion, the most red ink since the second quarter of 2012. Export volumes rose 0.4 percent having been flat in the third quarter while imports were up 0.2 percent.

Bottom line

Equities mostly advanced last week and for the month of February. Investors seemed to write off disappointing U.S. economic data to the unusually poor winter weather rather than weakening growth. In her testimony before the Senate Finance Committee on Thursday, Chair Janet Yellen appeared to reassure markets that the Fed plans to look closely at weather affects. Japan’s January data were mostly positive as consumers hurried to buy before the onset of an increased sales tax in April.

This coming week will be dominated by central bank speak. The Reserve Bank of Australia, the Banks of Canada and England and the European Central Bank will all announce policy decisions. Major data releases including manufacturing, services and composite PMIs and employment data in Canada and the U.S. will be closely monitored by investors.

Looking Ahead: March 3 through March 7, 2014

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