Global Markets

Equities were mixed on the week. Holidays in the Asia Pacific thinned trading volumes. In Europe, continued concerns regarding Ukraine along with mixed earnings reports weighed on risk taking. In the U.S., earnings also weighed with technology showing the most weakness this year.

Three central banks — Reserve Bank of Australia, Bank of England and European Central Bank — met and left their respective policies unchanged. And yet, the reasons behind the decisions differed widely along with expectations of what their next policy moves will be. The three are watching their exchange rates with the U.S. dollar closely as the Federal Reserve continues to reiterate its intention to keep monetary policy extremely loose for the foreseeable future. The RBA is trying to make the Australian economy more balanced now that the mining sector has peaked. The BoE is watching and waiting as the economy gathers strength. In contrast, the ECB may need to loosen its monetary policy to combat the threat of deflation.

Reserve Bank of Australia

As widely expected, the Reserve Bank of Australia left its policy cash rate on hold at 2.5 percent where it has been since August 2013. In previous announcements and recent speeches, RBA Governor Glenn Stevens has made it clear that policy would remain unchanged. And in its Statement on Monetary Policy (SoMP) released a few days after its policy meeting, the RBA made it clear that its policy interest rate would not change in 2014.

The Board deemed that the most prudent course is a period of stability in interest rates. Inflation is seen as consistent with the RBA's inflation target range of 2 percent to 3 percent. The lower than expected first quarter CPI result clearly eased some of the pressure for the RBA, effectively negating the concerns seen following the fourth quarter 2013 upside surprise. The RBA noted that public spending is scheduled to be subdued going forward. It also said that the decline in the exchange rate has helped to balance growth. However, given the Australian dollar's recent rebound, the help will be less than before. The exchange rate remains high by historical standards.

In its SoMP, the RBA increased its growth forecast for the year to June 2014 from 2.75 percent to 3.0 percent, acknowledging the stronger than expected growth for the fourth quarter of 2013 and the expected 1.0 percent increase in the first quarter of 2014. However the Bank did not raise the December 2014 growth forecast. The implied growth pace in the second half of 2014 in the February SoMP (around 0.6 percent per quarter) has been retained.

Bank of England

The Bank of England's monetary policy committee left its key Bank Rate at 0.5 percent. It also left its asset purchase ceiling at Stg375 billion. The decision was wholly expected under the Bank's forward guidance structure and is all but certain to be followed by another vote to maintain the status quo next month. As economic data continue to improve, investors will increasingly be building in an interest rate increase. However, at the same time the MPC will be cautious because of the rising value of the pound sterling.

The provisional 0.8 percent quarterly growth rate in real GDP growth over the first three months of the year was a tick weaker than expected by the MPC at the time of last month's meeting but was up from the 0.7 percent pace of the previous period. However, CPI inflation slowed further to 1.6 percent in March and despite some gentle acceleration, earnings growth remains subdued. Against this backdrop the main issues for policy at the moment are the buoyant (overheating') housing market, weak non-mortgage lending and an increasingly strong exchange rate.

To this end, the next BoE Quarterly Inflation Report (QIR) which will be published on May 14 will be watched closely for its commentary on the housing market for clues as to whether cooling measures in addition to the recently introduced Mortgage Market Review initiative are likely. The QIR can also be expected to re-emphasize the MPC's worries about the overvaluation of sterling which has risen to close to five year highs against the dollar and, on a trade weighted basis, is up around 12 percent against the lows seen in March 2013. Sustained strength here could certainly help to delay the first Bank Rate increase of the anticipated upcoming tightening cycle.

European Central Bank

While investors looked to see if/when the RBA and BoE will increase their policy interest rates, the ECB is being monitored to see if the Bank will ease its policies.

Amid only limited speculation about some form of additional monetary accommodation, the ECB again announced no change in key interest rates Thursday. The benchmark refinance rate stayed at 0.25 percent while the rates on the deposit and marginal lending facilities are held at zero and 0.75 percent respectively.

Since the ECB's April meeting both headline and core inflation have provisionally recovered all of their respective March losses so Thursday's decision not to cut rates was probably a little easier to arrive at than last time. There have also been additional and very welcome signs of a pick-up in first quarter Eurozone real GDP growth.

Nonetheless, with actual inflation still well below the ECB's target of just below 2 percent, consumers' inflation expectations falling (April EU Commission survey), private sector bank lending and hence, M3, stubbornly weak and the trade weighted value of the euro more than 10 percent higher against its July 2012 low, near term easing speculation will persist. June's policy deliberations will take place with updated ECB economic forecasts on the table. This in itself will likely ensure that financial markets will be alert to possible new monetary measures — be they standard or unconventional — unless the data in the interim prove surprisingly robust.

At ECB President Mario Draghi's press conference he reiterated the downside risks to the economic outlook and the now standard forward guidance mantra about interest rates remaining at current or even lower levels over an extended period of time. There was also unanimous agreement about using unconventional measures if inflation stays too low for too long although exactly what constitutes too long remains unclear.

Global Stock Market Recap

Europe and the UK

The week was dominated by concerns about economic growth prospects, the Bank of England and European Central Bank policy announcements and corporate earnings. Investors also kept a wary eye on Ukraine. Regarding economic growth, a positive reading for the April PMI composite (54.0) cheered investors as did retail sales. However, industrial production in Germany, France and Italy contracted in March as did German manufacturing orders. However, in the UK, both the services and the composite PMI scored relatively high levels of activity — 58.7 and 59.2 respectively. March trade deficit narrowed while manufacturing output continued to push ahead.

As a result, equities were mixed last week with the FTSE slipping 0.1 percent from a 10 week high, the FTSE MIB declining 1.8 percent and the OMX down 0.4 percent. Stocks mostly retreated Friday amid disappointing corporate earnings and lingering concerns about the conflict between Ukraine and pro-Russian separatists. The CAC and DAX added 0.4 percent and 0.3 percent respectively. Equities rallied after European Central Bank President Mario Draghi said policy makers are prepared to take action in June. Investors expected the Bank of England to keep its policy unchanged as it monitors the strengthening growth in the UK.

Asia Pacific

Most equities indexes retreated in a week strewn with holiday closures. Investors focused on Chinese economic data for April in the form of merchandise trade and inflation. Investors also continued to keep an eye on the situation in Ukraine. Fed Chair Janet Yellen's mid-week testimony reiterating that loose monetary policy is here for a continued length of time eased concerns regarding U.S. monetary policy

The Nikkei lost 1.8 percent in a holiday shortened week. The index has been down in each of the four months this year after soaring 56.7 percent in 2013 mostly on the enthusiasm for Abenomics. The Nikkei continues to trade inversely to the yen. When the yen rises in value against the U.S. dollar, exporters inevitably retreat and when the yen weakens, exporters' stocks rise. The value of the yen impacts both the profitability and competitiveness of these Japanese companies.

Elsewhere, the All Ordinaries managed to edge up 0.1 percent on the week after the Reserve Bank of Australia left its interest rate on hold and employment increased more than anticipated by analysts. Investors here watched the updated Chinese data releases with interest given that China is its largest trading partner. Both Chinese imports and exports advanced in April when compared with a year ago against expectations that they would continue to decline. Consumer prices eased to an increase of 1.8 percent on the year while producer prices continued on their deflationary trend and were down 2.0 percent on the year.

The Bank of Korea left its key interest rate unchanged at 2.50 percent for the 12th straight month, citing signs of economic recovery at home and abroad. The BoK noted that inflation will gradually increase, although it will remain low for the time being due largely to the stability of agricultural prices. Elsewhere, India's Sensex was up 2.6 percent for the week on optimism that the Narendra Modi-led Bharatiya Janata Party (BJP) will form a centrist government after the mammoth national elections which are set to conclude on Monday. The results will be announced on May 16.

Currencies

ECB President Mario Draghi broke the euro's upward momentum Thursday when he signaled that he would be 'happy' to introduce fresh stimulus for the Eurozone economy when he and his colleagues on the ECB's Governing Council meet in June. Prior to his post meeting press conference remarks, the euro was nearing the $1.40 mark for the first time since late 2011. Within a matter of seconds, the euro sank below the $1.39 mark and continued to decline on Friday. (At this writing it is $1.3755.) Analysts cautioned that Mr Draghi's signal is one that the governing council needs to follow through on.

The U.S. dollar was up against the euro, pound sterling and Swiss franc but retreated against the yen and the Canadian and Australian dollars. The U.S. currency declined to the mid-101 yen zone Wednesday in Tokyo on renewed risk aversion due to weak Chinese economic data and continued tensions in Ukraine. Dollar selling against the yen accelerated in the Tokyo afternoon session, briefly pushing the U.S. currency below the 101.50 yen line, as overall sell-offs in Asian stock markets, including Tokyo, intensified the risk averse mood.

The pound rose to the highest level against the dollar since August 2009 after the April services PMI expanded more than analysts forecast. Sterling climbed to $1.6992, touching the biggest gain since April 8. However, Thursday's euro turnaround took sterling and the Swiss franc with it.

Selected currencies — weekly results

Indicator scoreboard

Germany

March manufacturing orders dropped 2.8 percent and were up 1.4 percent from a year ago. The monthly decline was the first since October 2013. The decline was broad based with basics down 1.2 percent, capital goods off 3.6 percent and consumer & durables sliding 5.3 percent. The bulk of the decline was attributable to overseas demand which contracted 4.6 percent (consumer & durables down 9.9 percent). The drop here was mainly a function of Eurozone weakness which posted a 9.4 percent slump and within which capital goods plunged 13.9 percent and consumer & durables 13.3 percent. Domestic orders held up rather better, declining only 0.6 percent as a 1.0 percent increase in consumer & durables and a 0.6 percent increase in capital goods was more than offset by a 2.0 percent reversal in basics.

March industrial production unexpectedly dropped 0.5 percent on the month. The decline was the first drop of any size in 2014 and followed a slightly stronger revised 0.6 percent advance in February. Annual workday adjusted growth dropped from 4.7 percent to 3.0 percent. Weakness was relatively broad based and there were monthly declines in output of intermediate goods (0.9 percent), capital goods (0.2 percent) and construction (2.2 percent). However, it was not all bad news as consumer goods posted a 0.5 percent increase and energy was up 1.8 percent. Total manufacturing contracted 0.4 percent.

March seasonally adjusted trade surplus was €14.8 billion following a marginally larger revised €15.8 billion excess in February. The end of quarter black ink was the smallest since May 2013. The unadjusted the surplus was €16.4 billion, a €0.2 billion increase from last time. The headline deterioration in the adjusted data reflected a 1.8 percent monthly decline in exports, their third drop in the last four months that left overseas purchases at their lowest level since September. Imports also softened, declining 0.9 percent to their weakest mark so far this year. The annual increase in exports now stands at 1.9 percent while imports are 5.6 percent stronger on the year.

France

March industrial output excluding construction dropped 0.7 percent which was led by an equivalent decline in manufacturing. On the year, output dropped 0.8 percent. Industrial production was at its lowest level since October 2013. March's decline reflected monthly declines in most areas, notably food & agriculture (1.1 percent), energy & extracted goods (1.0 percent) and the other manufactured goods category (0.9 percent). Transport equipment (down 0.4 percent) also struggled while refining was only flat and electronics & machinery advanced just 0.1 percent. Construction posted a 0.5 percent contraction.

March seasonally adjusted trade deficit widened out from a larger revised €3.8 billion in February to €4.9 billion in March. The deterioration, which reversed most of the improvement registered in mid-quarter, will raise fresh concerns about the competitiveness of French industry and underlines the difficulties facing President Hollande in his bid to get the economy moving again. It was import strength rather than export weakness that did the damage in March. Purchases from overseas expanded a hefty and largely energy driven 3.4 percent on the month although even this failed to make up for February's 4.6 percent slump. Exports were up a more modest 0.6 percent but at €36.4 billion, were still 1.3 percent below their level at the end of 2013.

United Kingdom

March industrial production slipped 0.1 percent and was up 2.3 percent on the year. Manufacturing output posted a 0.5 percent month gain after an unrevised 1.0 percent spurt last time. Compared with March 2013, the sector's production was up 3.3 percent, a 0.6 percentage point shortfall from February's rate due to unfavorable base effects. Within total manufacturing ten of the thirteen subsectors posted monthly advances. The largest contribution was made by basic pharmaceutical products & pharmaceutical preparations where production was up 4.2 percent and alone added 0.3 percentage points to the change in the sector's output. Food, drink & tobacco climbed 1.1 percent and transport equipment expanded 0.8 percent. On the downside there were declines in wood & paper products (2.4 percent), other manufactured machinery & equipment (1.8 percent) and basic metals & metal products (0.7 percent). Within total industrial production, electricity, gas & steam output was up 0.5 percent but mining & quarrying sank 2.8 percent and oil & gas extraction was off fully 5.0 percent. Water supply & sewerage was down 2.1 percent.

March merchandise trade deficit was Stg 8.5 billion following a slightly smaller revised Stg8.8 billion shortfall in February. The underlying shortfall which excludes oil & other erratic items also posted a modest decline, shrinking from a downwardly revised Stg8.1 billion in mid-quarter to Stg7.7 billion, its smallest since December 2013. The improvement in the headline data reflected a 4.9 percent monthly bounce in exports, thanks to the strength in manufactured goods, notably jewelry and cars. Imports were up 2.8 percent led by a sharp pick-up in aircraft purchases. Regionally the shortfall with the rest of the EU narrowed by Stg0.6 billion to Stg5.3 billion but widened with the rest of the world by Stg0.3 billion to 3.2 billion.

Asia/Pacific

Australia

March trade surplus declined to a less than expected A$731 million from a revised A$1.3 billion in February. This is the fourth consecutive monthly surplus following a run of 23 deficits that stretch back to January 2012. Imports slipped 0.1 percent on the month and were up 7.4 percent from March 2013. Exports declined 1.8 percent and were up 12.9 percent on the year. The Australian dollar rose 1.0 percent during the month. Non-rural goods exports declined 3.0 percent while non-monetary gold was down 4.0 percent. Rural goods exports were up 1.0 percent as were service exports. Imports edged down 0.1 percent. Capital goods were down 2.0 percent, consumption goods declined 1.0 percent and non-monetary gold dropped 12.0 percent. Intermediate and other merchandise goods were up 2.0 percent while services slipped 1.0 percent.

March retail sales were up a less than expected 0.1 percent on the month after increasing 0.3 percent in February. On the year, sales were up 5.7 percent. Food sales were up 0.5 percent while cafes, restaurants & takeaway food services added 1.1 percent. The increases were offset by declines in other retailing (down 1.1 percent), household goods retailing (down 0.3 percent), clothing, footwear & personal accessory retailing (down 0.3 percent) and department stores (down 0.1 percent). In volume terms, sales were up 1.2 percent in the March quarter 2014, seasonally adjusted, following an increase of 1.1 percent in the December quarter 2013.

April seasonally adjusted employment increased for a fourth consecutive month by a more than anticipated 14,200. The unemployment rate remained at 5.8 percent for a second month. The seasonally adjusted labour force participation rate slipped less than 0.1 percentage point to 64.7 percent as expected. The number of people employed increased by 14,200 to 11,572,900 in April 2014 (seasonally adjusted). The increase in total employment was due to increased male full time employment and female part time employment. Full time employment increased by 14,200 to 8,045,100 and part time employment was unchanged at 3,527,800. For the four months in 2014, employment increased 106,500. The number of unemployed declined 400 to 713,400.

China

April merchandise trade surplus was $18.46 billion, up from $7.71 billion in March and about as expected by analysts. Exports were up 0.9 percent on the year after declining 6.6 percent in March while imports were up 0.8 percent after sinking 11.3 percent the month before. Analysts expected exports to drop 3.5 percent and imports to decline 3.2 percent. For the four months in 2013, the trade balance was $35.25 billion. Exports to the U.S. were up 12.0 percent on the year while imports increased 3.6 percent. In March, exports to the U.S. were up just 1.2 percent and imports sank 11.6 percent. Exports to the EU improved to 15.2 percent from a year ago after increasing 8.8 percent in March. Imports were up 20.4 percent after increasing 12.2 percent the month before. At the same time, exports to Japan were up only 2.6 percent after increasing 11.0 percent in March. Imports declined 1.2 percent after slipping 0.7 percent the month before. On a seasonally adjusted basis, April exports were up 9.8 percent on the month after increasing 29.5 percent the month before. On the year, seasonally adjusted exports were up 0.7 percent after sliding 5.1 percent in March. Seasonally adjusted imports were up 5.4 percent after declining 2.8 percent in March. Seasonally adjusted imports were up 0.6 percent on the year after dropping 11.0 percent the month before.

April consumer price index slipped 0.3 percent on the month and was up a less than expected 1.8 percent from a year ago. The CPI was up 2.4 percent on the year in March. For the four months year to date, the CPI was up 2.2 percent when compared with the same months a year ago. The urban CPI eased to an annual increase of 1.9 percent from 2.5 percent in March. Rural CPI was up 1.6 percent on the year after increasing 2.1 percent the previous month. Food prices dropped to an increase of 2.3 percent after jumping 4.1 percent in March. Non-food prices were up 1.6 percent after 1.5 percent the month before. Clothing prices were up 2.3 percent for a second month while both household facilities and health care were up 1.2 percent for a second month as well. Tobacco and alcohol prices continued to decline, this time by 0.6 percent on the year.

April producer prices continued to decline, this time by 2.0 percent when compared with a year ago. This is less than March's drop of 2.3 percent. On the month, the index slipped 0.2 percent after 0.3 percent last time. For the four months this year, the PPI is down 2.0 percent for a second month when compared with the same months a year ago. Raw materials procurement, fuel and power were down 2.3 percent after dropping 2.5 percent last time. Production materials also dropped with mining & exploration prices down 6.1 percent and raw materials down 3.1 percent. Consumer goods slipped 0.1 percent on the year. Only food & related products and clothing prices were higher. The former edged up 0.1 percent and the latter, 0.7 percent. But durable consumer goods declined 0.8 percent.

Americas

Canada

March merchandise trade surplus was C$0.10 billion following a significantly larger revised C$0.85 billion surplus in February. The shrinkage in the surplus reflected a combination of weaker exports and stronger imports. Exports were down 1.4 percent on the month while imports were up 0.4 percent. Compared with a year ago, exports were 7.3 percent stronger and imports 6.1 percent. The bilateral surplus with the U.S. narrowed by more than C$1 billion as sales across the border declined 2.5 percent from February and imports rose 1.0 percent. Among the major nominal export categories, energy products dropped 7.9 percent on the month and forestry products & building & packaging materials were down 7.6 percent. However, gaining on the month were metal & non-metallic mineral products (up 8.0 percent) and aircraft & other transportation equipment & parts (up 8.3 percent). Imports were boosted by a 6.3 percent monthly bounce in basic & industrial chemical, plastic & rubber products and a 6.7 percent spurt in metal ores & non-metallic minerals. Energy declined 2.6 percent and electronic & electrical equipment & parts 3.7 percent.

April employment dropped 28,900 following March's 42,900 gain. The unemployment rate remained at 6.9 percent for a second month thanks to a decline in the participation rate to 66.1 percent from 66.5 percent. The downturn in employment was concentrated in full time jobs which slid almost 31,000. Part time positions were up 2,000. With both private sector payrolls tumbling 28,600 and the public sector headcount down 17,400, the headline data would have looked a good deal worse but for a 17,200 increase in the number of self-employed. With job losses of 16,200, goods producing industries dominated the overall decline in employment. However, while all the subsectors except construction (up 600) posted declines, manufacturing positions were off just 800. More pronounced declines were posted by both natural resources (6,800) and utilities (5,300). Service sector jobs were trimmed by 12,600 within which the steepest drop was recorded in accommodation & food (32,200) ahead of finance, insurance, real estate & leasing (19,400) and education (7,000). However, business, building and other support services added 26,100 jobs and trade increased 12,300.

Bottom line

Equities were mixed in a holiday shortened trading week. The Reserve Bank of Australia, Bank of England and the European Central Bank left their respective monetary policies unchanged. Economic data continued to be mixed.

Investors will read the Bank of England's Quarterly Inflation Report closely to look for hints in potential policy changes. Flash first quarter GDP for the Eurozone, France, Germany and Italy along with the first estimate for Japan will be tracked closely. China's April estimates for retail sales and industrial production will also be monitored for signs that the economy is recovering from its slowdown.

Looking Ahead: May 12 through May 16, 2014

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