Global Markets

Most equity indexes were up last week with the exception of the Nasdaq. In a week packed with important economic data and central bank meetings, investors continued to look for clues to growth. Gains for the week ranged from 0.1 percent (Sensex) to 3.4 percent for the IBEX.

PMI roundup

Manufacturing PMIs for the major Asian and Europeans economies finished the first quarter on a weaker note, fuelling expectations that policy makers may be forced to act in coming months to prop up faltering growth. Readings in Europe eased while in China, they contracted for a third month. However, the U.S. PMI edged upward.

Although Eurozone output again grew across the board suggesting its recovery is becoming entrenched, the PMIs also revealed that factories were once more cutting prices. The Eurozone final manufacturing PMI reading was 53.0, below February's 53.2, while the output price sub-index, for the first time since August, dropped below the 50 mark that separates growth from contraction. Regionally, all member states registered PMIs above 50 with the exception of Greece which, at 49.7, posted a three month low. Ireland (55.5) was on top of the pile and there were multi-month highs for Spain (52.8), Italy (52.4) and France (52.1). However, Germany (53.7) recorded a four month low, albeit at the second highest level of the group.

In China, the final Markit/HSBC PMI gauge of factory activity contracted for a third consecutive month to an eight month low of 48.0 in March. However, the official CFLP survey, which is geared towards bigger, state owned firms, showed a marginal increase to 50.3 from 50.2. Last week, Premier Li Keqiang said Beijing had the necessary policies in place and would push ahead with infrastructure investment, after recent weak economic data and mounting signs of financial risks clouded the outlook.

In Japan, the closely watched Bank of Japan’s Tankan survey showed that business sentiment barely improved in the three months to March and was expected to sour this quarter following an increase in the sales tax from 5 percent to 8 percent that took effect on April 1. The tax increase took a bigger toll on corporate sentiment than the previous increase in 1997, highlighting the daunting challenge facing Prime Minister Shinzo Abe in his quest to shore up government revenues while at the same time, rescuing the country from years of deflationary stagnation. Japan's Markit/JMMA Manufacturing PMI pulled back further from January's eight year high as heavy snow in some areas curbed production. Big manufacturers and non-manufacturers in Japan expect conditions to worsen in the three months ahead, keeping alive expectations the Bank of Japan will boost its massive monetary stimulus to sustain its recovery.

European Central Bank

Amid considerable speculation about some form of additional monetary accommodation, the European Central Bank again announced no change in key interest rates. The benchmark refinance rate remained at 0.25 percent while the rates on the deposit and marginal lending facilities stayed at zero percent and 0.75 percent respectively.

With March inflation unexpectedly dropping to just a provisional 0.5 percent, the decision not to cut rates was no doubt a very close one. However, any hopes that unchanged interest rates might be accompanied by the introduction of fresh unconventional measures were disappointed as no such moves were announced. The rhetoric about the preparedness of the ECB to act should it deem necessary was rather more aggressive this time but there is clearly a growing worry in financial markets that the current forward guidance structure is starting to lose some credibility.

In any event, key to the decision was a majority view that additional data were needed before determining whether the weak March inflation number would impact the medium term HICP profile. Potential distortions caused by the timing of Easter may have exerted a significant downside bias last month but at this stage how much of an impact is unclear. Inevitably this will ensure that the April HICP report (flash due April 30) is even more important than ever.

Draghi said the risk of deflation remained limited and labeled the latest inflation figures hard to read, partly because Easter this year falls in April after coming in March last year, thereby delaying the impact of rising travel and hotel prices at a time when many people take a holiday.

Overall financial markets will probably see nothing in today's press conference to clarify what is becoming an increasingly clouded understanding of ECB monetary policy. The lengthening succession of promises to take action (conventional or non-standard) if thought appropriate to boost the economy and return inflation to target is looking increasingly tired and the risk for the central bank is that investor trust in the monetary authority becomes undermined with the all the attendant negative impact on asset prices that would necessarily entail.

Reserve Bank of India

As generally expected the RBI left key interest rates unchanged at 8 percent for the fourth month. The reverse repo remains at 7.0 percent and the marginal standing facility rate and Bank Rate at 9.0 percent. The cash reserve ratio was also left unchanged at 4.0 percent.

The RBI reiterated its goal of reducing CPI inflation (8.1 percent in February) to 8.0 percent by January 2015 and then to 6 percent a year later. To this end, forward guidance from the central bank indicated that no near term policy tightening was envisaged so long as inflation follows the desired path. The decline in headline inflation in recent months was welcomed but core prices have proved stickier and the RBI is clearly keeping a wary eye on developments here.

In its updated macroeconomic forecasts, the RBI predicted real GDP growth to accelerate from slightly less than 5 percent in the fiscal year just ended to a central estimate of 5.5 percent in FY2014/15. However, it noted downside risks in respect of the current absence of any clear signs of a sustainable recovery in either manufacturing or services. The current account deficit was put at 2.0 percent of GDP last year.

Reserve Bank of Australia

It was no surprise when the Reserve Bank of Australia left its monetary policy unchanged and left its cash interest rate at 2.5 percent where it has been since August 2013. In its previous announcements and recent speeches, RBA governor Glenn Stevens has made it clear that policy would remain unchanged.

In his post-meeting statement, governor Stevens said that inflation is expected to be consistent with its 2 percent to 3 percent target range over the next two years. He also said that the decline in the Australian dollar (AUD) to date would assist in balancing growth but less so, given the recent increase. He also stated that the AUD remains high by historical standards. In fact, a higher AUD means monetary conditions have tightened a little, but RBA officials do not seem concerned. In a departure from March’s statement, Stevens said credit growth “is slowly picking up,” having said last month it “remains low overall.”

Global Stock Market Recap

Europe and the UK

Equities advanced last week thanks to the U.S. employment situation report and strong German manufacturing data. Talk of a big merger between cement makers Holcim and Lafarge also bolstered the major averages. Also helping to bolster investor morale were hints from the European Central Bank that it is moving closer to launching a program of quantitative easing. This pushed European stocks to a six year high and Italian bond yields to a euro era low. On the week, the FTSE was up 1.2 percent, the CAC gained 1.7 percent, the DAX added 1.3 percent and the SMI was 1.5 percent higher.

Investors were cautious during the week with the important European Central Bank announcement looming on Thursday along with the U.S. employment report on Friday. Gains during the week came after a string of U.S. data signaled that the economy continued to improve. Also buoying expectations over the week was that the ECB could introduce further stimulus measures to stave off dangerous lowflation. However, many analysts and investors correctly believed that it could be too soon for further steps. Reassurance from Federal Reserve Chair Janet Yellen on Monday — that low interest rates are still required to support the economy — continued to underpin sentiment across markets.

Asia Pacific

Despite the week’s ups and downs, all indexes in this region gained on the week. Advances ranged from 0.1 percent for the Sensex to 3.2 percent for the PSEi. The Nikkei was up 2.5 percent and the Hang Seng added 2.0 percent. Investors focused on the three central bank meetings scheduled during the week and the U.S. employment report. On Friday, trading was subdued prior to the U.S. employment report which would be released after markets here were closed for the week. Asian shares got a boost for a second week as Japanese stocks rebounded from last quarter’s slump and Hong Kong equities surged after China outlined economic stimulus plans.

Stocks in mainland China were higher on the week after Beijing's announced stimulus package. However, a number of Asian markets have had a tough 2014 so far — especially in China where the Shanghai Composite is down 2.7 percent for the year to date. In February and March, a total of $3.5 billion flowed out of China equity funds, according to EPFR data, as investors worried about rising risks of an economic slowdown and fears of corporate defaults.

China's State Council unveiled late Wednesday a series of measures to add stimulus including upgraded housing for low income households and tax relief for small businesses. The measures also included additional spending on railways, which resulted in a substantial boost for companies involved in rail construction. The picture for China was somewhat muddied after two differing reports on the state of the country's services sector in March. HSBC's China services PMI rose to 51.9 from 51 in February, but the official nonmanufacturing PMI slipped to 54.5 from 55 in February.

Currencies

The U.S. dollar advanced against the euro, yen, pound sterling and Swiss franc. However, it declined against the Canadian and Australian dollars. The euro was down against the U.S. dollar after the ECB appeared to take a step closer to quantitative easing. At his post general council meeting, Mario Draghi gave the strongest signal yet that the ECB was prepared to undertake quantitative easing.

Meanwhile, the euro has been weakening against the dollar amid expectations that the European Central Bank would take measures to stoke growth in the Eurozone. The ECB on Thursday opened the door to easing measures such as a cut in interest rates or a bond buying program to stimulate the economy.

On Friday, the U.S. currency climbed to a fresh one month high against the euro as currency traders took the latest U.S. employment reading as confirmation of an improving economy. U.S. job creation in March was largely in line with estimates, suggesting that the Federal Reserve will continue trimming bond purchases every month, moves that have been supporting the dollar.

Selected currencies — weekly results

Indicator scoreboard

EMU

March flash harmonized index of consumer prices was up 0.5 percent on the year after increasing only 0.7 percent in February. It was the lowest rate since December 2009. The decline in the headline rate was mirrored in the core measure which excludes energy, food, alcohol and tobacco. The 12-month increase here dropped 0.2 percentage points to 0.8 percent, fully reversing its mid-quarter increase. Non-energy industrial goods inflation was 0.3 percent after 0.4 percent in February while the service sector rate slid from 1.3 percent to 1.1 percent. Food, alcohol and tobacco prices were up a yearly 1.0 percent or 0.5 percentage points less than last time but energy saw a 0.2 percentage point rise to minus 2.1 percent.

February jobless rate was unchanged at 11.9 percent with the number of people out of work declining 35,000 to 18.965 million. Among the big four member states, national unemployment rates rose 0.1 percentage points to 10.4 percent in France and to 13.0 percent in Italy. The German rate was steady at 5.1 percent and Spain saw a 0.2 percentage drop to 25.6 percent, its third decline in the last four months. Elsewhere, the Cypriot rate was up 0.2 percentage points at 16.7 percent but still shy of December's 16.9 percent peak while in Portugal the rate was unchanged again at 15.3 percent and in the Netherlands 0.2 percentage points higher at 7.3 percent.

February retail sales were up 0.4 percent on the month albeit following a downwardly revised 1.0 percent increase in January. Annual growth of purchases was 0.8 percent, unchanged from last time. Excluding auto fuel, sales of non-food products advanced a solid 0.8 percent on the month after a 1.1 percent gain last time. Food purchases were up 0.3 percent following January's 0.9 percent gain. The February improvement means that average volume sales in January/February were up 0.8 percent from their fourth quarter mean when they declined 0.5 percent compared with the October to December period. As usual, regionally performances were very mixed. Among the larger member states Germany posted a 1.3 percent monthly increase and France was up 0.4 percent. However, Spain slipped 0.1 percent. Elsewhere, there were more than decent increases in Malta (1.9 percent) and Austria (1.0 percent) but sizeable reversals in Estonia (down 3.4 percent), Portugal (down 1.1 percent) and Slovenia and Finland both (down 1.4 percent).

Germany

February retail sales volumes advanced 1.3 percent on the month. January's 2.5 percent increase was reduced to 1.7 percent but annual growth still climbed from 0.9 percent at the start of the year to 2.0 percent, its fastest pace since July 2013. In fact the first back-to-back increase in purchases since August and September put average sales in January and February at a very healthy 1.7 percent above their fourth quarter average. This suggests that household spending will make a sizeable contribution to real GDP growth this quarter.

February manufacturing orders were up 0.6 percent after a sharp downward revision to January’s gain to just 0.1 percent. On the year, orders were up 6.1 percent. The monthly advance was concentrated mainly in the domestic market where orders were up 1.2 percent. Within this, there were increases in basics (1.7 percent) and capital goods (1.4 percent). Consumer and durable goods dropped 2.3 percent but this reversed less than half the 4.9 percent jump posted at the start of the year. By contrast, foreign demand was weak, increasing just 0.2 percent from January with basic goods up 0.8 percent, consumer and durables 0.4 percent and capital goods down 0.2 percent. The limited monthly change in overall foreign orders nonetheless masked a sizeable split between the Eurozone and non-Eurozone regions. Orders growth in the former rebounded 5.9 percent after a 9.4 percent collapse last time while the latter was down 3.1 percent following a 3.9 percent increase in January.

France

Fourth quarter GDP expanded an unrevised 0.3 percent on the quarter. Annual growth was 0.8 percent, also as indicated in the flash report, but the third quarter was adjusted a tick weaker and now shows a quarterly decline of 0.1 percent. Household consumption was up 0.4 percent from the previous quarter and within a 0.5 percent increase in overall gross fixed capital formation, private business investment was up 0.9 percent and government 1.0 percent but residential spending was down 0.4 percent. With public sector spending gaining 0.5 percent, final domestic demand advanced 0.4 percent following zero growth in the third quarter. Destocking subtracted 0.3 percentage points from the quarterly change in total output but this was almost offset by a 0.2 percentage point boost from net foreign trade as exports rose 1.3 percent and imports only 0.7 percent.

Asia/Pacific

Japan

February industrial production dropped 2.3 percent on the month. The decrease was the first one since November 2013. On the year, output was up 7.0 percent. Transport equipment dropped 5.8 percent on the month while general purpose, production and business oriented machinery lost 3.3 percent. Information & communication electronics equipment retreated 8.9 percent. Declining commodities included large passenger cars (down 6.1 percent), drive, transmission & control parts (down 7.2 percent) and engines for motor vehicles (down 8.3 percent). These factory output data are volatile, but the report may raise concerns. Some analysts had warned the Japanese economy was too fragile to support a sales tax increase and these numbers only bolster the argument. The report includes a survey of expectations for March and April. Industries are expecting output to pick up 0.9 percent in March.

First quarter Bank of Japan Tankan survey results were largely as expected. Large manufacturers’ sentiment edged up to a plus 17 reading from plus 16 last time. This was the fifth straight quarterly increase. Business investment plans by all firms for fiscal 2014 are projected to fall 4.2 percent from fiscal 2013, when capex plans were estimated to have risen 5.2 percent. Capex plans for the fiscal year through March 31, 2015 by large firms are projected to edge up only 0.1 percent compared with an estimated 3.9 percent increase in fiscal 2013 which just ended. Small businesses in contrast are expected to plunge 24.7 percent, down from 13.9 percent for the last fiscal year. Strong domestic demand before the April 1 sales tax increase from 5 percent to 8 percent boosted confidence among steel mills, lumber and wood product makers, construction firms and retailers. However, an expected contraction in the economy in the April to June quarter was reflected in projections for a sharp decline in confidence for June among car makers, wood product makers and retailers. The Tankan results showed no serious downside risk to the economy. However, both large and small companies are cautious about their sales and investment plans for the new fiscal year that began April 1. Many firms are cautious about the near-term outlook through June as strong demand for cars, electronics and luxury goods is expected to lose some steam after the sales tax increase.

Australia

February trade surplus was A1.2 billion, down from a revised A$1.4 billion in January. This was the fourth consecutive surplus after a run of 22 deficits from January 2012 to October 2013. Exports, notably resource exports, have been trending higher and imports have been soft. It should be noted that the higher Australian dollar placed downward pressure on both import and export prices. Exports were up 0.4 percent and 17.6 percent on the year. Non-rural goods were up 2 percent while rural goods lost 4 percent. Other mineral fuels and coal, coke and briquettes from the resource sector of the economy contributed to increased exports while among the rural categories, cereal grains and cereal preparations, and wool and sheepskins declined. Imports were up 1.1 percent on the month and 9.1 percent on the year. Capital goods imports jumped 15 percent while intermediate and other merchandise goods were 5 percent lower while consumption goods slipped 1 percent.

February retail sales eased to an increase of 0.2 percent after jumping 1.2 percent in January. The January increase was the strongest since the start of 2013. On the year, sales were up 4.9 percent. The largest contributor to the monthly increase was household goods retailing (2.0 percent), followed by other retailing (1.9 percent), cafes, restaurants & takeaway food services (0.1 percent) and clothing, footwear & personal accessory retailing (0.1 percent). These increases were partially offset by declines in department stores (down 4.7 percent) and food retailing (down 0.2 percent).

Americas

Canada

January monthly GDP was up 0.5 percent following a dismal, but weather impacted contraction in December. Annual growth was 2.5 percent. The full recovery from December's 0.5 percent monthly slide reflected rebounds in both the goods producing and service sectors. The former saw a 1.0 percent monthly advance, reversing the previous period's decline. Within this, manufacturing expanded 2.0 percent (down 1.9 percent in December) while mining, quarrying and oil and gas extraction was up 1.2 percent (down 0.7 percent) and construction 0.7 percent (down 0.8 percent). However, agriculture forestry and fishing fell 1.9 percent and utilities were off 1.1 percent. Service sector output was 0.3 percent firmer on the month, again reversing in full its December drop. By and large most subsectors saw limited changes but there were decent gains in retail (1.3 percent after minus 2.3 percent), accommodation and food (1.4 percent after minus 1.0 percent) and wholesale (0.7 percent after minus 1.5 percent). The only decline of any note was in arts, entertainment and recreation (2.9 percent).

February merchandise trade surplus was C$0.29 billion compared with a slightly larger revised C$0.34 billion deficit in January and was the first surplus of any size since September last year. The mid-quarter improvement reflected a 3.6 percent monthly increase in exports that more than offset a 2.1 percent gain in imports. The bilateral surplus with the U.S. widened to C$4.3 billion from C$3.9 billion last time with sales across the border rising 4.4 percent from January and purchases from the U.S. gaining 3.3 percent. Within the overall monthly increase in exports, aircraft & other transportation equipment and parts surged 13.7 percent, motor vehicles & parts were up 9.7 percent and metal ores & non-metallic minerals, 6.8 percent. There were also solid advances in metal & non-metallic mineral products (4.0 percent), industrial machinery, equipment & parts (4.2 percent) and electronic & electrical equipment & parts (3.0 percent). The only monthly falls were in farm, fishing and intermediate food products (6.8 percent) and forestry products and building and packaging materials (1.5 percent). Monthly import growth was built upon a 7.3 percent increase in energy together with a 4.4 percent rise in industrial machinery, equipment & parts and a 3.8 percent advance in metal & non-metallic mineral products. Consumer goods were down 0.6 percent and electronic & electrical equipment & parts, 0.3 percent.

March employment jumped 42,900, its best performance since last August. With the participation rate unchanged at 66.2 percent, the jobless rate edged a tick lower to 6.9 percent. However, March's employment gain was driven by the public sector where headcount was up 39,300. Private sector positions expanded only 3,900 while the number of self-employed dipped 500. Full time positions grew 12,800 and part time jobs were up 30,100. Having suffered in mid-quarter, services were wholly responsible for the headline increase in employment. Within a 58,500 gain for the sector as a whole, health care and social assistance (23,600) dominated ahead of business, building and other support services (15,400). Other smaller increases were seen in public administration (8,300), transportation and warehousing (7,200) and finance, insurance, real estate and leasing (5.200). Professional, scientific and technical services gained 5,700 and the other services category 7,900. The only declines of note were in retail (5,800) and information, culture and recreation (7,500). By contrast, goods producing industries saw payrolls drop 15,600 within which manufacturing was down 9,200. Agriculture declined 12,400 but elsewhere there were small gains, including a 2,700 increase in construction.

Bottom line

Three central banks met last week and left their respective monetary policies unchanged. Economic data were mixed but there were many positive signs for economic growth.

While less action packed, this week brings the first of two Bank of Japan policy meetings. Investors will be closely monitoring the Bank’s statement to see if it is moving closer to further easing to ward off the negative impact of the sales tax increase. Otherwise, merchandise trade and industrial output data dominate the European calendar while in Asia, China releases March consumer and producer prices and Australia, its labour market data. Earnings season begins in the U.S.

Looking Ahead: April 7 through April 11, 2014

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