Global Markets

Most equity indexes advanced last week despite continuing concerns regarding Ukraine. The news from Ukraine was in part offset by better than anticipated economic data and the possibility of increased stimulus from the Chinese government to prop up its weakening economy. On the week, most indexes followed here advanced. Declines ranged from a loss of 0.3 percent (Shanghai Composite) to 2.8 percent (Nasdaq). Gains ranged from 0.1 percent (Bolsa) to 3.3 percent (Nikkei).

U.S. President Barack Obama and the leaders of six allied nations on Monday cancelled an upcoming Group of Eight summit meeting in Russia, as they sought to isolate Russian President Vladimir Putin from the international community after Moscow absorbed Crimea from Ukraine. The Group of Seven warned of coordinated economic sanctions that will have an increasingly significant impact on Russia which may already be heading toward recession. Instead of the planned G-8 meeting in Soshi, the Group of Seven will meet in Brussels in June. The G-7 leaders met in The Hague last week amid growing concern that Russia is building up its forces on the border with Ukraine.

It seems so long ago, but on Monday flash PMIs were released for China, the U.S., the Eurozone, Germany and France. However, the data remain relevant as the first data for the month of March. They showed a divergent pattern especially for manufacturing.

In China, the manufacturing PMI contracted further, dropping to a reading of 48.1 from a final 48.5 for February. The data suggest that China’s growth is continuing to slow. The weakness was broad-based with domestic demand softening further. Now analysts are expecting Beijing to launch a series of policy measures to stabilize growth.

The March flash manufacturing PMI for the U.S. eased a bit from a high of 57.1 to a still very healthy 55.5. The new orders reading was 58.0. Domestic orders were the center of strength as growth in export orders is only marginal. Output was steady and strong at 57.5 while employment growth remains moderate at 53.9.

The Eurozone flash manufacturing PMI slipped 0.2 points from its final February outcome to 53.0 — a three month low. However, the output sub-index actually edged a tick higher and, at a respectable 55.4, suggests industrial production enjoyed a good end to the first quarter. Moreover, new orders growth remained robust and backlogs were up for the sixth month in a row. Employment also continued to expand, albeit only very slowly. Input costs fell again — more sharply than in February. Deflation worries received a further boost with a decline in factory gate prices, their first in seven months.

Within the core group of countries, Germany’s economic recovery decelerated slightly faster than expected in March according to the flash PMI data. Manufacturing saw its flash PMI dip a point to 53.8, a 4-month trough although within this output (57.0) remained historically robust. The flash PMI showed the French economy returning to positive growth in March. The manufacturing PMI weighed in at a relatively robust 51.9, up more than 2 points from its final February level and a 33-month peak. Within this, output (52.8) made respectable headway and was supported by renewed growth in new orders, in part reflecting a pick-up in overseas demand.

Global Stock Market Recap

Europe and the UK

Equities were up last week. Investors were cheered by talk of Chinese stimulus and encouraging U.S. economic data. China vowed massive spending on infrastructure projects in a bid to jump start the economy. Europe's resource producers rallied on expectations for increased demand for building materials. The FTSE was up 0.9 percent, the CAC advanced 1.8 percent, the DAX jumped 2.6 percent and the SMI added 1.0 percent. China's economic health tends to affect the FTSE since miners account for almost 9 percent of the index.

However, concerns about the continued tensions over Ukraine continued to make investors cautious. The U.S. and the European Union imposed financial sanctions on Russian and Ukrainian officials as well associates of President Vladimir Putin, leaving open the threat of broader measures targeting Russia's energy and financial sectors.

Equities advanced thanks to renewed chatter about monetary stimulus from the European Central Bank. The ECB is thinking about moves to combat low inflation according to central bankers. Jens Weidmann, a member of the European Central Bank's Governing Council and President of the Deutsche Bundesbank, said that quantitative easing for the Eurozone is not out of the question. And in a Paris speech, ECB President Mario Draghi reiterated that the central bank will act if necessary to safe guard the region’s economy.

Asia Pacific

Equities advanced last week with the exception of the Shanghai Composite which was down 0.3 percent on the week. Investors spent the week wrapping up positions for the end of the month and quarter. Stocks received an end of the week boost from media reports that China would fast track infrastructure spending to spur growth. The Nikkei hit a two week high on window dressing activities as the fiscal year end on March 31 draws closer. Investor sentiment improved after Finance Minister Taro Aso said the government would bring forward the implementation of spending programs for the fiscal year starting in April.

The Shanghai Composite retreated on economic concerns as Premier Li Keqiang urged deepening reforms and economic restructuring to maintain the country's economic growth at a "reasonable pace." Li hinted that the government will speed up infrastructure projects and unveil targeted measures to counter the economic slowdown. Recent economic data have indicated a soft start to the year. Analysts are skeptical that the government’s growth target of about 7.5 percent wILL be reached. Earlier this month, the State Council, the executive body that Mr. Li heads, pledged to bring forward already approved infrastructure projects and accelerate budgeted spending and other measures to expand domestic demand. China's government typically speeds up approvals for big-ticket infrastructure projects when it believes the economy is flagging.

Currencies

Both the Indian rupee and Australian dollar have been increasing in value of late. Both the Reserve Bank of India and Reserve Bank of Australia will announce policy decisions this week.

Rupee

India's rupee strengthened to cross 60 to the US dollar on Friday following a rush of foreign investment into India's equity markets on increased optimism that a strong government will win the general election and hasten an economic recovery. The currency dropped sharply last year as a financial crisis swept across emerging markets and the Reserve Bank of India was thought to be selling dollars and encouraging remittances to prop the currency up.

Markets are betting on an election victory for pro-business Narendra Modi's Bharatiya Janata Party. Modi has for 13 years been the chief minister of Gujarat, a state that is often lauded as India's most investor-friendly. Along with the upcoming election, the currency may be reacting to improvements in India's external balances. The current account deficit has narrowed sharply to 0.9 percent of GDP in the three months to December from 1.2 percent in the previous quarter, partly thanks to a series of measures aimed at reducing gold imports.

Inflation eased in February and authorities forecast that economic growth will pick up from a decade low and deficits will shrink. The rupee’s advance is partially attributable to the credibility and transparency brought to monetary policy by Reserve Bank of India Governor Raghuram Rajan, who took office in September. Rajan, a former International Monetary Fund chief economist who is credited with presaging the 2008 global financial crisis, has raised borrowing costs three times to 8 percent to contain price pressures.

Australian dollar

The Australian dollar typically reacts to changes in China's economy. But this week, despite weakening signs of growth there, the Aussie climbed to a fresh four month high Friday. The trigger has been a raft of evidence showing Australia's economy is picking up with unemployment showing signs of peaking and prospects for the housing and construction sector looking brighter. Comments by Reserve Bank of Australia Governor Glenn Stevens also pointed to the health of the Australian economy, spurring the currency sharply higher.

The country is shifting away from its reliance on the mining sector, making it less sensitive to China’s declining commodity demand that buys up most of Australia’s exports. The currency barely budged as the prices of iron ore and copper, both big exports for Australia, collapsed in recent weeks after worries about slowing growth in China.

It is a sharp turnaround from last year when the currency dropped 12.6 percent, and some analysts forecast the world's fifth most traded currency will hover around US$0.80 against the U.S. dollar. The Reserve Bank of Australia had jawboned it lower through the year and at one point, warned it could intervene in the foreign exchange market to help the flagging economy.

Selected currencies — weekly results

Indicator scoreboard

EMU

February M3 money supply was up 1.3 percent on the year. However, the ECB's 3-month moving average measure was up 1.2 percent for a second month. Private sector bank lending was similarly stubbornly sluggish with a yearly decline of 2.2 percent essentially unchanged from the 2.3 percent drop posted at the start of the year. Within this, borrowing by households was down an annual 0.1 percent after a 0.2 percent contraction last time with loans for house purchase up 0.6 percent following a 0.5 percent gain in January. Lending to non-financial corporations saw a 3.0 percent yearly drop, a tick steeper than in the previous month, and lastly borrowing by non-monetary financial intermediaries (excluding pension funds and life insurance companies) dropped 10.6 percent after an 11.7 percent slide in January.

March EU Commission's measure of economic sentiment (ESI) reading climbed to 102.4, up 1.2 points from an unrevised February reading and at its highest level since July 2011. Improvements among its component parts were broad-based with just the diffusion index for construction (down 0.3 points at minus 28.8) losing ground. Consumer sentiment, as already signaled in the flash report, was up a solid 3.4 points at minus 9.3 while industry managed a modest 0.2 point gain to minus 3.3 and retail advanced 0.4 points to minus 2.6. With services posting a 0.9 point increase to 4.2, all of the sectors excluding construction moved further above their respective long-run averages. Regionally there were gains in national ESIs in all of the four larger states. Spain (2.2 points) saw easily the steepest increase followed by more modest rises in Italy (1.3 points), France (0.7 points) and Germany (0.4 points). Italy's improvement saw its ESI (100.3) finally move back above the common 100 historical norm meaning that just France (96.6) among the group remained short of this mark.

Germany

March's Ifo overall sentiment reading was 110.7, down 0.6 points from its mid-quarter level but still the second highest reading since July 2011. Within this, current conditions were robust, gaining a further 0.8 points to 115.2 for their strongest print since April 2012. However, expectations declined for the second month in a row, a 1.9 point decline compounding February's 0.6 point drop to leave the measure at 106.4, still historically firm but its lowest level since October 2013. Among the major sectors, morale was up marginally in retail but deteriorated in all the other categories. Construction and, albeit to a lesser extent, wholesale both saw significant reversals but the slide in manufacturing was mild and left confidence at a healthy level.

France

February household spending on manufactured goods edged up 0.2 percent on the month following a slightly steeper revised 1.6 percent decline in January. Annual growth of purchases was 1.1 percent, up 0.6 percentage points from last time. The rebound was essentially attributable to a 5.1 percent monthly jump in the auto sector although even this failed to offset January's 7.6 percent slump prompted by changes to taxes on car pollution levels. Elsewhere it was depressingly poor news with declines in household goods (0.8 percent), textiles (0.3 percent) and in the other products category (0.2 percent). Total goods consumption was even weaker, registering a minimal 0.1 percent gain against the start of the year to yield an annual decline of 0.3 percent.

United Kingdom

February consumer price index was up 0.5 percent on the month to reverse the majority of January's largely seasonal decline of 0.6 percent. However, with base effects favorable, the annual inflation rate declined from 1.9 percent in January to 1.7 percent, its lowest reading since October 2009. February's data were heavily influenced by weakness in the more volatile categories of the CPI basket and significantly, the core index was up 0.7 percent on the month and 1.7 percent above January's annual rate. The decline in the overall yearly rate was largely attributable to the softness of energy costs. Transport costs subtracted more than 0.1 percentage points from the change in the 12-month CPI rate. Household energy bills followed a similarly beneficial pattern. However, clothing & footwear had a negative effect with prices here just 0.8 percent higher from February 2013. The main upward pressure came from furniture & household equipment and health.

February factory gate prices were unchanged on the month and 0.5 percent higher on the year. Raw material and fuel costs declined a monthly 0.4 percent and were 5.7 percent weaker than in February 2013. Within the output price basket, monthly changes were very limited. Petroleum products were down 0.4 percent while tobacco and alcohol and the other manufactured products category gained 0.3 percent, but elsewhere movements were insignificant. The core index edged 0.1 percent higher from January and was 1.1 percent firmer on the year after a 1.2 percent increase last time. The 0.4 percent monthly drop in total input costs was largely due to a 3.0 percent slump in fuel which alone subtracted nearly 0.3 percentage points. The other main negative contribution came from imported food materials where prices were down 1.9 percent. Other home produced materials saw a 1.1 percent increase but most other areas were relatively stable.

February retail sales volumes were up 1.7 percent from January when they declined a steeper revised 2.0 percent on the month. Excluding auto fuel, purchases posted a 1.8 percent monthly increase. On the year, total sales were up 3.7 percent and excluding auto fuel, sales were up 4.2 percent. February's surge was led by the food sector although even a monthly 2.1 percent jump in demand here failed to fully offset January's 3.8 percent slump. However, while rising a more modest 0.6 percent, excluding auto fuel non-food sales easily eclipsed their 0.1 percent dip at the start of the year. The main areas of strength were non-store retailing (7.9 percent) and the other stores category (2.9 percent). Auto fuel advanced 0.9 percent. Nonetheless, there were setbacks in household goods (down 1.1 percent) and, to a much lesser extent, in clothing and footwear (down 0.1 percent) and non-specialised stores (also down 0.1 percent).

Final estimate of fourth quarter GDP was unchanged at an increase of 0.7 percent and 2.7 percent on the year. There were a few changes among the major GDP expenditure components, most notably in net trade. The quarterly increase in exports was revised up from the previously reported 0.4 percent to 2.8 percent, their strongest gain in five quarters. At the same time, the 0.4 percent drop in imports was amended to a 0.9 percent contraction, their steepest decline in three quarters. Elsewhere, household consumption still shows a 0.4 percent quarterly advance while gross fixed capital formation was revised down from a 2.4 percent to a 1.9 percent quarterly rate. However, the current account deficit was still a worryingly large Stg26.7 billion, down less than Stg3 billion from the record registered in the third quarter. The persistently large red ink here continues to be a serious issue for policymakers seeking to achieve a major rebalancing of the UK economy.

Asia/Pacific

Japan

February consumer price index was unchanged on the month and up 1.5 percent from a year ago. Excluding fresh food, the CPI inched up 0.1 percent from January and was up 1.3 percent on the year. Excluding both food and energy, the CPI was up 0.1 percent and 0.8 percent. Energy prices which are affected by the depreciating yen jumped 5.8 percent in February on the year after climbing 6.3 percent the month before. Food excluding perishables was up 0.9 percent from a year ago. Electronics goods were up a healthy 6.3 percent and 4.7 percent. TVs gained 5.8 percent after 3.7 percent. Prices are reflecting the greater demand for goods prior to the April 1 increase in the sales tax from 5 percent to 8 percent.

February unemployment slipped to 3.6 percent from 3.7 percent the month before. The number of unemployment was down 450,000 to 2.32 million from a year ago. The number of employment persons increased 410,000 from the previous year to 62.83 million. The labour force participation rate was unchanged at 58.8 percent.

Household spending declined for the first time since August 2013, dropping 2.5 percent in February from a year ago. Most subcategories declined although furniture and household utensils soared 25.4 percent, no doubt reflecting buying in advance of the sales tax increase on April first. Fuel, light & water charges were up 10.2 percent and medical spending, 7.8 percent. Spending on food was down 2.5 percent while housing slid 0.3 percent. Transportation & communication spending was down 4.1 percent while spending on culture & recreation was 11.8 percent lower.

February retail sales were up for a seventh consecutive month but rose by a slower rate in February, indicating fewer consumers are rushing to make big purchases ahead of April’s sales tax increase. Sales were up 3.6 percent after jumping 4.4 percent in January when compared with the same months a year ago. Auto sales eased to an increase of 14.9 percent after soaring 21.2 percent the month before. Fuel sales were up only 0.4 percent after increasing 2.7 percent. Machinery sales jumped 11.2 percent after increasing 7.4 percent. Food and beverage sales were up 1.7 percent after increasing 2.1 percent in January.

Bottom line

Most equity indexes advanced last week despite worries about Ukraine and Chinese growth. Economic data in Europe were mixed while those from the UK were upbeat. February data from Japan on consumer prices, employment and retail sales added to equities’ weekly gains.

The Reserve Banks of Australia and India meet. No policy changes are expected. The European Central Bank also meets. ECB President Mario Draghi is sure to be questioned about additional stimulus to stem possible deflation. The Bank’s measure at 0.7 percent from a year ago is far below the Bank’s inflation target of just below two percent.

On April 1st, Japan’s national sales tax will increase to 8 percent from 5 percent — the first step of two (the next will be in October 2015.) The 3 percentage point increase is the first such increase since 1997. At that time, Japan immediately slipped into a recession, with GDP falling at a 4 percent annual rate and forcing former Prime Minister Hashimoto to resign. This time, it is expected that the economy will again shrink in the second quarter of 2014. But, with the benefit of a stronger consumer base (companies are raising wages to boost personal spending) and a stronger global economy, the negative effects should be short-lived. The government and the BoJ are ready to step in with more stimulus to soften the blow.

Looking Ahead: March 31 through April 4, 2014

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