Global Markets

A geopolitical crisis in Ukraine derailed markets at the beginning of the week but not for long, as investors’ attention quickly shifted to the steady flow of global economic information. On Friday, the bullish mood after the release of the U.S. employment report was tempered, however, by caution over the unfolding of events in Ukraine. The employment report bolstered expectations that the Fed will continue to reduce its economic stimulus measures. But in Europe, markets remained on edge after Crimea’s parliament accelerated plans to secede and join Russia.

On the week most equity indexes followed here advanced. Among those that declined, losses ranged from 0.2 percent (KLCI) to 3.5 percent (DAX). Increases ranged from 3.8 percent (Sensex) down to 0.1 percent (Shanghai Composite).

There were four major central bank meetings during the week — policies remained unchanged. Below is a summary of their announcements.

Reserve Bank of Australia

As expected, the RBA left its key interest rate unchanged at 2.5 percent where it has been since August 2013. In its statement, the Bank said that inflation is expected to be consistent with the Bank’s inflation target range of 2 percent to 3 percent. It expects unemployment to increase further before it peaks. A key point was the view about the Australian dollar. The board said that although the exchange rate remains high by historical standards, the lower Australian dollar will assist in achieving balanced growth. The RBA noted that there are tentative signs of improvement in investment intentions.

Regarding the domestic economy, it noted that recent information suggested slightly firmer consumer demand and foreshadowed a solid expansion in housing construction. Some indicators of business conditions and confidence have shown improvement and exports are rising. Data subsequently released showed a much larger than forecast increase in January retail sales and a significant international trade surplus. At the same time, resource sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative. Public spending is scheduled to be subdued. Growth is expected to strengthen over time, helped by continued low interest rates and the lower exchange rate.

Bank of Canada

As widely anticipated the Bank of Canada again left key interest rates on hold. The target for the benchmark overnight rate stays at 1.0 percent while the deposit rate and Bank Rate remain at 0.75 percent and 1.25 percent respectively. Its neutral policy bias was also unchanged.

Since the BoC’s January deliberations, the economic news has been mixed but distorted by the December/January power cuts and ice storms. To this end, even if a move had been a realistic possibility, the Bank might well have opted to keep the status quo until underlying trends became clearer. As it is, the BoC's statement indicates that while the current picture may be somewhat clouded, the Bank on balance sees the economy evolving much as it did in January. That could be interpreted that the next move on interest rates will be a function of the upcoming data.

Bank of England

The Bank of England made no changes to policy at the conclusion of its March monetary policy committee meeting. The Bank Rate remains at the 0.5 percent level, to which it was last cut five years ago, while its asset purchase ceiling remains at £375 billion. Since the last meeting in February, the economy has shown further signs of solid growth, particularly in the shape of very robust business surveys.

However, inflation has fallen to below 2 percent for the first time since November 2009, annual average earnings growth is still less than 1 percent and unemployment, at 7.2 percent in the three months to January, is an extra tick above its former 7.0 percent knockout threshold. Against this backdrop the vote was little more than a formality. A number of MPC members have intimated that market speculation about a move in the first half of next year does not seem unreasonable at this time. Risks are still that it comes somewhat sooner.

European Central Bank

The European Central Bank left its key interest rates on hold at its March meeting. The benchmark refinance (refi) rate stays pegged at 0.25 percent and the rates on the deposit and marginal lending facilities remain at zero percent and 0.75 percent respectively. The outcome was generally expected although with deflation risks still very real, a significant minority had anticipated another cut in the refi rate.

Hopes that ECB President Mario Draghi would announce some new unconventional measures, notably curtailing the sterilization of bond purchases made under its Securities Market Programme (SMP), proved wide of the mark. No such action was forthcoming, at least in part due to the relatively short duration of those bonds still involved in the programme and hence, the potentially limited impact of such a move.

However, an idea of just how close the ECB must have come to cutting the refi rate is apparent in the ECB's new economic forecasts. These show the harmonized index of consumer prices inflation at just 1.0 percent in 2014 (compared with the 1.1 percent forecast in December) and 1.3 percent next year (unchanged from December). More significantly, the first projection for 2016 is only 1.5 percent even though it was a slightly higher 1.7 percent in the fourth quarter 2013. In other words, on the basis of an unchanged monetary stance, inflation is still not expected to meet its near-2 percent target over the policy relevant horizon. Meantime, growth forecasts still point to a very sluggish recovery with real GDP seen up an unchanged 1.2 percent in 2014 and also up an unrevised at 1.5 percent in 2015. The 2016 forecast is 1.8 percent.

Global Stock Market Recap

Europe and the UK

Equities were volatile last week as investors retrenched amid fears of conflict between Russia and the West following the invasion of Ukraine last weekend. Also hurting equities was Thursday’s inaction on interest rates from the European Central Bank. On the week, the FTSE was down 1.4 percent, the CAC lost 0.9 percent, the SMI retreated 1.1 percent and the DAX tumbled 3.5 percent.

Russia said Ukraine must pay off almost $2 billion owed for natural gas on Friday and signaled supplies may otherwise be cut. The two countries have clashed over control of Ukraine’s Crimea region, where a majority of people speak Russian. Lawmakers in Moscow said they would accept the results of a March 16 referendum on Crimea joining Russia, while the Ukrainian Prime Minister said once again that his cabinet deems the vote illegal. Traders also pointed to new signs of tension between the United States and Russia after Russia's effective seizure of Ukraine's Crimea peninsula, as further weighing on stock markets.

February Eurozone PMI

February manufacturing was revised up a couple of ticks from the flash estimate to 53.2 but still declined 0.8 point from the final January reading of 54.0, itself a 32-month high. The results confirm an eighth successive month of positive growth in Eurozone manufacturing and, with the exception of France, a broad based improvement in economic activity. The best performing member state was the Netherlands (55.2) just ahead of Germany (54.8). Spain (52.5) posted a notable 46-month high and evidence here is building that the domestic economy is now well past the worst. France (49.7) recorded a five month high but was the only reporting country to register a sub-50 result.

For the region as a whole, manufacturing output, new orders and exports all were up for an eighth successive month and at moderately respectable rates despite, in all cases, losing some momentum from January. With backlogs up for a fifth straight month and stocks of finished goods down again, the near term outlook for production would seem at least cautiously positive. The main disappointment was again the labour market which saw only a sluggish increase in payrolls that failed to match the previous month's gain. Inflationary pressures continued weak with average input costs declining slightly for the first time in six months and factory gate prices rising only marginally and at their weakest pace since last October.

Asia Pacific

Equities mostly advanced last week as investors waited for U.S. employment data due in the global market day on Friday. They were looking for further guidance to future Federal Reserve policy. Risk sentiment continued to improve amid receding concerns over the perceived situation in Ukraine. Also on the near horizon for investors is the Bank of Japan meeting with some traders hoping that the Bank will announce more monetary easing measures prior to the increase in sales tax from 5 percent to 8 percent coming in April.

Among the indexes covered here, the Hang Seng lost 0.8 percent while the Kospi and KLCI were down 0.3 percent and 0.3 percent respectively. Gains on the week ranged from 3.8 percent (Sensex) to 0.1 percent (Shanghai Composite). Investors also were waiting for the monthly slew of key Chinese data that will be released this weekend. The Nikkei added 2.9 percent on the week after the yen softened to its lowest level since January.

The Sensex gained for the fourth straight session on Friday to end at a new high as surveys predicted that a new government led by the main opposition Bharatiya Janata Party would come to power after national elections, boosting hopes of a revival in economic reforms. The index was up 3.8 percent for the week after sinking on Monday because of the Russian action in Ukraine.

Narendra Modi, the prime ministerial candidate from the Bharatiya Janata Party, is perceived as being more business friendly and more decisive by the business community. He is expected to take policy measures that would help cut through red tape and improve investor confidence. Some investors have expressed frustration over slow decision making by the ruling Congress party that they believe has stalled economic reforms and delayed important investments.

China’s National People’s Congress

Chinese Premier Li Keqiang kept the annual growth target unchanged at 7.5 percent for 2014. The target is identical to that set in the past two years. Now that the economy is maturing and the economy slowing from past years of over 10 percent growth, the target is becoming a more important signal of policy intentions. It was Mr Li’s first annual work report to parliament, coming at the end of his and President Xi Jinping’s first year in office as the country’s new leadership duo.

China’s other important economic targets for 2014 also matched those of 2013. Once again, the government said it was aiming for an average inflation rate as measured by the consumer price index of 3.5 percent and 13 percent growth in the broad M2 gauge of money. The government’s key criteria for assessing officials over the past three decades have been their record in delivering high speed growth. But Mr Xi has called for more attention to other factors, including environmental protection and debt control, when weighing up how well officials have performed.

Currencies

The yen and euro moved in opposite directions during this past week — the euro climbed to its highest point against the U.S. dollar in more than two years Friday while the yen retreated. The euro continued to build on strong gains after the European Central Bank's interest rate decision and news conference Thursday dimmed expectations for further monetary easing. The single currency surpassed $1.39 against the dollar for the first time since October 31, 2011, rising to a high of $1.3915 before a better than expected February U.S. labor market report fueled a broad based rally in the dollar. It should be noted that the euro’s rise could put pressure on import prices and on exports and could also depress inflation, which is already running below target. Thursday, Mr. Draghi said the euro's rise in the course of the past year had knocked nearly half a percentage point off the inflation rate.

The yen declined against all of its 16 major counterparts as a draft report from a committee formed to help the health ministry decide on investment targets for the ¥128.6 trillion government investment fund said it should seek yearly returns of 1.7 percent plus the rate of pay increases for workers. The yen also weakened amid speculation tensions surrounding Ukraine will ease, reducing demand for safe haven assets.

Selected currencies — weekly results

Indicator scoreboard

EMU

Fourth quarter gross domestic product expanded an unrevised 0.3 percent from the third quarter and was up 0.5 percent on the year. The first look at the GDP expenditure components underlined the importance of external demand to economic growth with a 1.2 percent increase in export volumes adding 0.6 percentage points to the quarterly change in total output. With imports up a more modest 0.4 percent, the improvement in the external balance contributed 0.4 percentage points. By contrast, most components of domestic demand were relatively subdued. In particular, private consumption edged up a quarterly 0.1 percent for the second period in succession while government current spending contracted 0.2 percent after a 0.4 percent increase last time. Gross fixed capital formation expanded 1.1 percent which is more than twice the previous period's rate to contribute 0.2 percentage points to total economic growth. By country, the strongest performer was Slovenia where GDP advanced a solid 1.2 percent after a 0.4 percent gain in the third quarter. This was almost twice the rate achieved by the second fastest growing member, the Netherlands (0.7 percent). Among the big four countries, Germany posted a 0.4 percent increase, France was up 0.3 percent, Italy 0.1 percent and Spain 0.2 percent. The only quarterly declines were recorded by Estonia (0.1 percent), Finland (0.3 percent) and Cyprus (1.0 percent) where the economy closed 2013 still mired in deep recession.

January retail sales recovered strongly from a smaller revised 1.3 percent decline at year-end with a monthly 1.6 percent increase in January. Workday adjusted purchases were 1.3 percent higher on the year following a 0.4 percent decline in December. Excluding auto fuel, demand was especially strong, increasing 1.9 percent on the month to easily eclipse December's 1.1 percent contraction. Sales of food, drink and tobacco were 1.1 percent higher but failed to reverse in full the previous period's 1.6 percent drop. January's bounce put overall volumes excluding autos a healthy 1.0 percent above their fourth quarter average when they declined 0.5 percent. Regionally, the latest monthly increase was broad-based, led by a 2.5 percent jump in Germany. Estonia (4.6 percent) and Portugal (6.7 percent) registered even stronger gains and a number of other member states saw increases in excess of 1 percent. The only monthly declines of note were in Ireland and Malta (both 1.0 percent) and Latvia (0.6 percent).

Germany

January manufacturing orders climbed 1.2 percent on the month in January. The latest increase followed a smaller revised 0.2 percent drop in December and boosted annual workday adjusted growth from 6.1 percent to 8.4 percent. January's solid performance was led by a 1.6 percent monthly increase in the domestic market while overseas demand was up 1.0 percent. Within the former, consumer and durable goods were particularly strong, advancing 6.5 percent, easily more than reversing the year end's 1.1 percent contraction. Capital goods were also firm, gaining 2.5 percent although this only just offset December's decline. Basics were down 0.2 percent. The increase in overall foreign orders masked an 8.8 percent monthly slump from the Eurozone within which capital goods plunged 18.0 percent. The drop easily eclipsed the 6.9 percent increase posted last time. By contrast, non-Eurozone orders actually expanded 7.2 percent.

January industrial production was up 0.8 percent following a sharp upward revision to the December data which now show a 0.1 percent gain. As a result, the annual workday adjusted increase jumped from a revised 3.4 percent to 5.0 percent. However, January's monthly advance was not as broad-based as it might have been and would have looked a good deal weaker but for a 4.4 percent bounce in construction and a 1.1 percent gain in energy. Capital goods matched the headline increase but intermediates edged up just 0.2 percent and consumer goods dropped a sizeable 1.2 percent. Manufacturing output was up 0.3 percent after a 0.2 percent increase last time.

Asia/Pacific

Australia

Fourth quarter gross domestic product was up 0.8 percent on the quarter and 2.8 percent when compared with the same quarter a year ago. Growth for the quarter was driven by a 0.6 percent contribution from net exports and a 0.5 percent contribution from final consumption expenditure. Exports benefited from a weakening Australia dollar at the end of 2013. These increases were partially offset by a negative 0.3 percent contribution from gross fixed capital formation. The mining industry contributed 0.1 percent to GDP, as did the manufacturing, and rental, hiring and real estate industries. Final consumption expenditures were up 0.7 percent and 2.6 percent on the year. Gross fixed capital formation declined 1.2 percent and was down 2.4 percent from a year ago. The decline suggests that the slowdown in China, Australia's biggest trading partner, is preventing businesses from expanding.

January seasonally adjusted trade balance was a surplus of A$1.433 billion after an upwardly revised surplus of A$590 million in December. Exports were up 3.7 percent while imports climbed 0.8 percent. Non-rural goods exports were up 3 percent while rural goods added 5 percent. The main components contributing to non-rural goods exports were metal ores and minerals (up 3 percent), other mineral fuels (up 6 percent), coal, coke and briquettes (up 2 percent) and machinery (up 6 percent). The main components contributing to rural goods exports were other rural, up 6 percent and meat and meat preparations, up 11 percent. Within imports, intermediate and other merchandise goods were up 8 percent and consumption goods were up 1 percent. Capital goods were down 9 percent and non-monetary gold dropped 27 percent.

January retail sales jumped 1.2 percent after increasing 0.7 percent in November and December. Sales were up 6.2 percent from the same month a year ago. Sales in cafes, restaurants and takeaway food services (2.0 percent), other retailing (1.9 percent), household goods retailing (1.5 percent), department stores (2.6 percent), food retailing (0.4 percent) and clothing, footwear and personal accessory retailing (1.1 percent) all contributed to the increase. Sales were up in New South Wales (2.1 percent), Victoria (1.0 percent), Queensland (1.2 percent), South Australia (0.6 percent), the Northern Territory (3.3 percent) and Tasmania (1.8 percent). These increases were partially offset by declines in the Australian Capital Territory (down 1.9 percent) and Western Australia (down 0.3 percent).

Americas

Canada

February employment declined 7,000 after January's 29,400 increase. The unemployment rate remained at 7.0 percent for a second month. The participation rate edged down by 0.1 percentage point to 66.2 percent. The contraction in headline employment was concentrated in part-time positions which were off 25,900. Full-time jobs were up 18,900. Moreover, private sector payrolls expanded a solid 35,200 and the number of self-employed was up 8,600 leaving a 50,700 slump in the public sector wholly responsible for the overall decline. The service sector saw a 25,900 drop in its payroll but goods producing industries gained 18,900. Within the former, the steepest decline was in healthcare & social assistance (27,500) closely followed by finance, insurance, real estate & leasing (24,600). There was also a sizeable decline in professional, scientific & technical services (17,500) and a smaller reversal in educational services (8,400). Weakness here was partially offset by respectable gains in information, culture & recreation (14,400), trade (13,400) and in the other services category (18,000). The goods producing sector was boosted by a 9,800 increase in natural resources and a 7,900 rise in agriculture. Manufacturing was up a more modest 5,000.

January seasonally adjusted trade gap returned a much smaller than expected deficit of C$0.18 billion. The shortfall, which followed significantly smaller revised deficit of C$0.92 billion at the end of 2013, was the strongest bottom line since the last surplus in September. The headline improvement reflected mainly a 1.6 percent monthly decline in imports and to a lesser extent, a 0.2 percent increase in exports. The former now stand 3.5 percent higher on the year and the latter, 5.0 percent. The bilateral surplus with the U.S. was C$3.6 billion, up from C$3.2 billion in December as a 0.1 percent monthly dip in exports was more than eclipsed by a 1.8 percent slide in imports. Within the overall nominal monthly export increase, the main areas of weakness were metal ores & non-metallic minerals and motor vehicles & parts. Other smaller declines were posted in aircraft, transportation equipment & parts, metal & non-metallic mineral products, industrial machinery, equipment & parts and basic and industrial chemical, plastic & rubber products. The only categories to see any significant growth were energy products and farm, fishing & intermediate food products. The steepest monthly decline within total imports was in metal & non-metallic mineral products ahead of aircraft, transportation equipment & parts. The best performing sectors were energy products and electronic and electrical equipment and parts.

Bottom line

Four major central banks met and left their monetary policies unchanged. The slew of services and manufacturing purchasing managers’ indexes showed that the global economy continues to expand. U.S. employment data reassured while Canada’s disappointed.

Industrial production and merchandise trade data will dominate the calendar during the week. China releases a slew of February data including consumer and producer prices, industrial output, retail sales and merchandise trade. Australia’s labour force survey will garner close scrutiny. However, the serious situation in Ukraine will no doubt attract investors’ attention.

Looking Ahead: March 10 through March 14, 2014

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