Global Markets

Equities were volatile last week. At the beginning of the week investors fled from risk which took global equities down from 2014 highs. But then investors changed their collective minds on Wednesday and stocks soared. The exception (there always is one) was the Shanghai Composite that climbed while others sank and then reversed and skittered lower when others rallied. On Friday, investors were wary as they usually are prior to the release of the U.S. employment report.

The week was loaded with key economic data including the December flash harmonized index of consumer prices for the Eurozone and industrial output data for Germany, France and the UK. All disappointed. The flash HICP slid into negative territory — it was down 0.2 percent on the year after rising 0.3 percent in November. This puts more pressure on the European Central Bank to begin quantitative easing as soon as its meeting on January 22. November industrial output was down in Germany, France and the UK. The UK's decline was attributable to the hefty 3.7 percent drop in mining and quarrying.

Oil prices also added to investors' nerves. While lower prices potentially help consumer via cheaper gasoline and fuels to heat their homes, the balancing factor is the negative impact on corporate profits and capital spending.

Most equity indexes retreated on the week. Gains ranged from 0.3 percent (Hang Seng) to 2.4 percent (PSEi). Losses ranged from 0.1 percent (Kospi) to 6.1 percent (IBEX).

Global Stock Market Recap

Europe and the UK

European markets finished well into negative territory Friday and for the week following the gains of the two previous sessions. A number of factors weighed on investor sentiment including weak German industrial production data and the mixed results of the U.S. December employment report. After declining the first two days of the week, the indexes rallied mid-week to recover all losses and then some. However, they retreated again Friday. On the week, the FTSE was down 0.7 percent, the CAC declined 1.7 percent and the DAX lost 1.2 percent. However, the SMI, despite declining three of five days, managed to gain 1.4 percent for the week.

The highly anticipated U.S. jobs report for December was released during Friday afternoon trading and while employment grew more than expected, investors were disappointed by a slowdown in wage growth. The results paint a mixed picture regarding the outlook for monetary policy and when the Federal Reserve will begin to increase its fed funds rate from its current range of zero to 0.25 percent.

Economic data that were outright disappointing included a negative flash reading for December's harmonized index of consumer prices along with declining industrial output in Germany and France. UK industrial production slipped in November due to a slump in the oil and gas extraction sector, while manufacturing rebounded from the prior month. The HICP has steadily been declining leading to expectations that the ECB will introduce some sort of quantitative easing program as soon as its January 22 meeting. The negative reading (down 0.2 percent on the year) was the first since 2009. The euro dropped to a nine year low on the news.

Adding to the volatility in European stock markets in the past days are nerves ahead of a January 25 election in Greece. Investors are concerned that if the Syriza party leads the next government, the risk of a sovereign default for Greece will increase and the country could leave the Eurozone. Syriza has promised to end austerity and renegotiate the country's debt.

Bank of England

As widely anticipated the Bank of England monetary policy committee kept its Bank Rate at 0.5 percent and its asset purchase program ceiling at Stg375 billion. Recent UK economic news has been mixed offering something for the MPC's doves and hawks alike. Thus, while most areas of the economy seem to have lost at least some momentum and inflation has slowed to just 1.0 percent, the labour market has continued to tighten and wages have begun to accelerate, albeit from historically very low levels.

In its November Quarterly Inflation Report (QIR), the Bank's base case forecast put annual CPI inflation at 1.02 percent this quarter before a rise to 1.43 percent by year-end. In practice, the collapse in oil prices makes a clear sub-1 percent rate seem all but assured in the current period. The BoE will stress the importance of looking through such (presumably) temporary distortions but with deflation a growing global risk any calls for a higher Bank Rate should land on largely deaf ears for some time.

Asia Pacific

Equities were mixed last week as the indexes gyrated from day to day. At week's end, five indexes advanced and seven retreated. The Shanghai Composite was most volatile, soaring 3.6 percent on Monday only to drop 2.4 percent on Thursday. And on Friday, the index briefly surged more than 3 percent before reversing and ending the day in negative territory. On the week, the index added 1.6 percent. The Sensex was down three of five days, losing 3.1 percent on Tuesday and rebounding 1.4 percent Thursday — not enough to offset losses. The index declined 1.5 percent on the week.

Equities ended the week in a more positive mood Friday on expectations of easy money from central banks around the globe, while signs of stability in oil prices helped resource-heavy Australia lead the way. The rally in the region was broad, coming after a weak reading on inflation from Europe, which gives room for central banks in Asia to move more aggressively in easing. Also helping are expectations that the U.S. Federal Reserve will likely hold off lifting interest rates for a few months. This combination is expected to keep money flowing into riskier markets, including Asia's emerging markets, for now.

Early in the week, investors sold commodity related stocks as crude and other raw material prices dropped. Political concerns over Greece contributed to the selloff. However, when commodity prices appeared to stabilize, investors cheered the gains and once again took on risk. Rallies on the U.S. equity markets also helped to boost morale amid signs of resilience in the U.S. economy. Dovish comments from Federal Reserve officials and signs that the European Central Bank stands ready to take unconventional measures to contain the negative effect of low inflation also helped keep investors in a good mood ahead of the employment report due after markets here were closed for the week.

The Nikkei lost 1.5 percent. The index dropped on Monday and Tuesday and recovered only part of the declines despite gaining for three days. The end of the week gains were driven by optimism over the U.S. economy. The index continues to be heavily influenced by the yen's exchange rate with the U.S. dollar.

Currencies

The U.S. dollar advanced against the euro, pound sterling, Swiss franc and Canadian dollar but retreated against the yen and Australian dollar on the week. The euro extended its longest uninterrupted losing streak since its creation and fell below the $1.18 mark for the first time in more than nine years, to trade at about the same level as when it was introduced in January 1999. The common currency was first launched at an exchange rate of $1.1789 on January 4, 1999 and fell below that level before recovering in the early 2000s. The U.S. currency hit a fresh nine year high against its trading partners amid ongoing expectations that the Federal Reserve will soon raise interest rates in contrast with the Eurozone's easing stance.

The Canadian dollar

The currency weakened to a fresh five and a half year low Friday after the economy unexpectedly lost jobs in December. The loonie had been declining for much of the second half of 2014 as the biggest collapse in crude prices since the global financial crisis has cast a pall over its economy. Since the recession, many of the new jobs and investments have come from the oil rich province of Alberta. But with oil prices down more than 50 percent, the question is how big of a fallout a slowdown in the oil and gas industry would have on the wider economy.

For a second month running, Canada shed jobs while the overall unemployment rate remained unchanged at 6.6 percent. Although 4,300 people lost their jobs in December, all were part time positions while full time employment added a healthy 53,500. However, the overall loss stands in sharp contrast to the U.S. which added 252,000 during the same period.

Selected currencies — weekly results

Indicator scoreboard

EMU

December flash harmonized index of consumer prices fell below zero for the first time since October 2009 to minus 0.2 percent on the year. The flash HICP was down 0.5 percentage points from its final November reading. However, the weakness in headline prices was dominated by the collapse in oil costs and at least one underlying measure actually accelerated slightly. Excluding food, alcohol, tobacco and petrol the annual rate surprisingly edged up a tick to 0.8 percent, its first increase since August. Omitting just unprocessed food and petrol, the yearly change was steady at 0.7 percent. Non-energy industrial goods prices were flat on the year after a 0.1 percent drop in November and inflation in services was steady at 1.2 percent. The other main negative impact on headline prices, aside from oil, came from food, alcohol and tobacco where annual inflation slowed from 0.5 percent to zero.

November unemployment was up 34,000 on the month to 18.394 million. However the increase was small enough to leave the jobless rate unchanged at 11.5 percent for the fourth consecutive month. Among the larger countries, national rates rose 0.1 percentage point to a near record 10.3 percent in France and to a new high of 13.4 percent in Italy. Germany was unchanged at 5.0 percent and Spain edged lower to 23.9 percent, almost 2 percentage points below its reading in November 2013. Bottom of the jobless ladder was Austria (4.9 percent) while Greece (25.7 percent in September) remained at the top. The largest monthly change was in Lithuania, down 0.5 percentage points at 9.4 percent. Lithuania joined the single currency at the start of 2015.

December EU Commission measure of economic sentiment (ESI) was unchanged at November's marginally weaker revised mark of 100.7. Stability in the headline index masked both a renewed deterioration in industrial confidence which slipped 0.9 points to minus 5.2 and an improvement in consumer morale which was up 0.6 points at minus 10.9. Elsewhere, sentiment in services gained 1.2 points to 5.6, retail was up 0.7 points at minus 5.3 in retail and construction was 0.8 points higher at minus 25.5. Among the larger economies, the national ESI rose in Italy (1.3 points to 97.5) and Spain (1.4 points to 105.6) but only held steady in Germany at 103.7 while France was down 1.6 points to 96.1. Accordingly, both France and Italy remain below the 100 long run average. Household inflation expectations resumed their downward trend. At 2.7 the survey's gauge was 3 points below its November reading, its steepest fall of 2014.

November producer prices (excluding construction) dropped 0.3 percent on the month and were down 1.6 percent on the year. Energy prices had a negative impact, falling 0.7 percent from October to stand 5.0 percent lower on the year after a 4.1 percent annual drop at the start of the quarter. Excluding this category the PPI was 0.2 percent lower from both October and November 2013. Elsewhere in the basket, intermediates were off 0.3 percent on the month and consumer non-durables 0.1 percent. Capital goods and consumer durables were flat. Regionally, national PPIs fell in all member states apart from Germany (flat on the month) and Slovakia (up 0.3 percent). The steepest declines were in Greece and Cyprus (1.4 percent) followed by Ireland (1.3 percent).

November retail sales were up 0.6 percent for a second month. Compared with a year ago, volumes were up 1.5 percent after climbing 1.4 percent the month before. The increase in headline demand reflected buoyancy in discretionary spending. Excluding auto fuel, non-food purchases were 1.4 percent higher on the month after a 0.9 percent increase in October. However, the latest advances came after a 2.1 percent slump in September. Elsewhere food, drink and tobacco sales rose 0.5 percent following a 0.1 percent reversal last time. Regionally there were solid monthly increases in France (0.8 percent), Germany (1.9 percent) and Spain (1.0 percent). The steepest decline was in Finland (2.0 percent.

Germany

December unemployment was down 27,000 after declining 16,000 in November. As a result, the jobless rate edged down from 6.6 percent to 6.5 percent, its lowest mark in more than 23 years. Moreover, there were fresh signs of additional strength to come as vacancies rose a solid 9,000 on the month, just 1,000 less than November's upwardly revised gain.

November manufacturing orders dropped 2.4 percent following an upwardly revised gain of 2.9 percent in October. On the year, orders were down 0.4 percent. The overall decline was dominated by the domestic market which recorded a sizeable 4.7 percent monthly contraction, although this still failed to offset a 5.9 percent jump at the start of the quarter. Within this, declines were broad-based with basics down 2.7 percent, capital goods 7.2 percent and consumer & durable goods 0.4 percent. Overseas demand held up rather better with a monthly drop of only 0.7 percent. Orders from the rest of the Eurozone increased 2.7 percent courtesy of a 9.1 percent spike in capital goods but non-EMU demand dropped 2.6 percent on the back of hefty contractions in capital goods (4.7 percent) and consumer & durables (8.2 percent).

November industrial production slipped a monthly 0.1 percent after a 0.6 percent increase at the start of the quarter to reduce annual growth from 1.3 percent to minus 0.6 percent, its weakest performance since August. However, what was the first contraction in production in three months was largely attributable to the more volatile sectors. Energy saw a 2.4 percent decline from October and construction was off 0.6 percent. Elsewhere the picture was rather healthier and within a 0.3 percent advance in manufacturing, capital goods were up 0.5 percent and consumer goods were up 0.6 percent. Intermediates edged down 0.1 percent.

November seasonally adjusted merchandise trade surplus was €17.7 billion after a slightly larger revised €20.8 billion excess in October. Unadjusted, the black ink stood at €17.9 billion, down from €22.1 billion last time. The adjusted November surplus was the smallest in three months and reflected a 2.1 percent monthly drop in exports, their third decline since July, and a 1.5 percent rise in imports, only their second increase in five months. Compared with November 2013, unadjusted exports were up 1.4 percent (to other EMU countries 2.2 percent) while imports were 1.7 percent firmer.

France

November industrial production (excluding construction) was down 0.3 percent and followed a marginally shallower revised 0.7 percent decline in October to leave output 2.6 percent lower on the year, its worst performance since May. The first back to back drop in production since December and January 2014 was attributable to sharp reversals in refining (down 5.7 percent), transport equipment (down 3.4 percent) and food & agriculture (down 1.6 percent). The other manufactured goods category also dipped 0.1 percent to leave manufacturing output down 0.6 percent on October when it contracted 0.1 percent. The only areas of strength were electronics & machinery (0.7 percent) and the more volatile construction (1.1 percent) and energy & extracted goods (1.2 percent) subsectors.

November seasonally adjusted merchandise trade deficit was €3.2 billion in November following a smaller revised €4.3 billion shortfall in October. Exports rose 0.6 percent on the month, their fourth consecutive gain, in large part on the back of a stronger aviation sector. However, pharmaceuticals, industrial machinery and metals all declined. Compared with November 2013, exports were up 4.4 percent. Meantime, imports declined a monthly 1.9 percent having already shown no growth in October and were 2.4 percent weaker on the year.

United Kingdom

November industrial production slipped 0.1 percent on the month following a steeper revised 0.3 percent drop in October. On the year, output was up 1.1 percent. However, the decline in overall industrial output masked a strong performance by manufacturing which posted a healthy 0.7 percent monthly increase, equaling its sharpest gain since February. The yearly rise in the sector's production was 2.7 percent, up from 1.7 percent last time. Within manufacturing ten of the thirteen subsectors recorded increased output. Among these other manufacturing & repair (1.8 percent) made the largest contribution. Weakness was most apparent in machinery & equipment which sank 3.1 percent. Elsewhere, mining & quarrying dropped a hefty 3.7 percent from October as crude petroleum & natural gas slumped 5.5 percent. Electricity, gas, steam & air conditioning was off 1.3 percent and water supply, sewerage & waste management decreased 0.4 percent.

November shortfall in goods trade was Stg8.85 billion after a slightly larger revised Stg9.84 billion deficit in October. Excluding oil and other erratic items the deficit was Stg8.60 billion, down from Stg9.20 billion last time and the least negative outcome since March. The headline improvement, which saw the red ink at its lowest level since June 2013, mainly reflected a Stg0.9 billion narrowing in the bilateral shortfall with non-EU countries to Stg2.6 billion. Net exports to other EU countries were in a Stg6.2 billion deficit, little changed from October's Stg6.3 billion. Total exports declined 0.4 percent on the month while imports were down 3.2 percent.

Asia/Pacific

Australia

November merchandise trade deficit was A$925 million, up from a downwardly revised deficit of A$877 million in October. Exports were up 0.6 percent on the month but were 1.3 percent lower from the same month a year ago. Imports were up 0.7 percent and up 1.4 percent on the year. Non-rural exports were up 3 percent while rural exports gained 6 percent. Non-monetary gold dropped 38 percent. The main component contributing to the rise in seasonally adjusted estimates for rural goods was cereal grains and cereal preparations. The main components contributing to the rise in seasonally adjusted estimates of non-rural exports were other mineral fuels and machinery. Intermediate and other merchandise goods imports were up 2 percent as were consumption goods. Non-monetary gold dropped 27 percent. A main component contributing to the rise in seasonally adjusted estimates was non-industrial transport equipment. Also contributing was fuels & lubricants.

November retail sales inched up 0.1 percent and were up 5.0 percent from a year ago. The monthly increase was the weakest since August. Sales were up 0.4 percent in October 2014 and 1.3 percent in September. Food sales were up 0.6 percent with supermarkets & grocery stores (0.7 percent) and other specialized food retailing (2.8 percent) but liquor retailing was down 2.3 percent. Household goods also were up 0.6 percent. Furniture, floor coverings, houseware & textile goods retailing and hardware, building & garden supplies were up but electrical & electronic goods retreated. Clothing, footwear & personal accessories were down 0.7 percent. Clothing retailing & footwear and other personal accessory retailing both were down. Cafes, restaurants & takeaway food services were up 0.8 percent.

China

December consumer price index was up 1.5 percent on the year as expected. The CPI was up 0.3 percent on the month. For the full year 2014, the CPI was up 2.0 percent. Food prices were up 2.9 percent from a year ago after increasing 2.3 percent in November. Non-food prices were up 0.8 percent after increasing 1.0 percent last time. Urban prices were up 1.6 percent after increasing 1.5 percent while rural prices were up 1.3 percent for a second month. Transportation & communication prices were down for a fourth month, this time by 1.4 percent after declining 0.8 percent in November and 0.3 percent in the prior two months. Housing prices eased to an increase of 1.0 percent after 1.4 percent in November.

The December producer price index slid 3.3 percent from a year ago after dropping 2.7 percent in November. The PPI has been declining since February 2012. On the month, the PPI declined 0.6 percent. For the full year 2014, the PPI was down 1.9 percent. The National Bureau of Statistics of China attributed the decline in the PPI to the fall in global oil prices. All subcategories declined with the exception of clothing & related products, which was up 0.6 percent and consumer daily goods where prices were unchanged on the year. Overall consumer goods retreated 0.2 percent. Food & related products were down 0.3 percent and durable goods were down 0.6 percent. Production materials dropped 4.3 percent while raw materials procurement, fuel and power were 4.0 percent lower.

Americas

Canada

November trade deficit expanded to C$0.64 billion from C$0.33 billion in October. The nominal deterioration reflected a 3.5 percent monthly drop in exports that more than offset a 2.7 percent decline in imports. Net trade with the U.S. was also worse off as exports contracted a monthly 2.6 percent and purchases from across the border shrank 2.1 percent. As a result, the bilateral black ink fell from C$3.2 billion to C$2.9 billion. Within the monthly decline in total cash exports, energy dropped 7.8 percent, mainly due to weaker prices. Metal & non-metallic mineral products also slumped, down 8.3 percent, and metal ores & non-metallic minerals dropped an even steeper 11.5 percent. Other key areas of weakness were industrial machinery, equipment & parts (down 3.5 percent) and electronic & electrical equipment & parts (down 2.9 percent). The best performing subsectors were farm, fishing & intermediate food products (up 8.2 percent) and basic & industrial chemical, plastic & rubber products (up 4.8 percent). Most import categories, as they did on the export side, suffered monthly reversals, notably metal ores & non-metallic minerals (down 12.6 percent) and aircraft & other transportation equipment & parts (down 18.7 percent). Energy was down just 2.7 percent.

December employment declined 4,300 after sliding 10,700 in November. The participation rate was down a tick at 65.9 percent while the jobless rate held steady at 6.6 percent. However, the decline in overall jobs was misleading as, with an increase of 53,500, full time positions posted a more than solid increase. Part time jobs were down 57,700. Net hiring in the private sector edged up 5,100 while the public sector expanded a marginally stronger 5,500. The number of self-employed was down 14,900. The goods producing sector added 22,100 jobs. Within this manufacturing dropped 18,300. Construction gained 12,600, agriculture was up 14,700 and natural resources advanced 10,200. Utilities added 2,800. Services underperformed with a decline of 26,400 dominated by a 32,800 slump in accommodation & food. The slide here was exacerbated by additional decreases in other services (13,500) and professional, scientific & technical services (13,200). However, trade grew 10,500 and transportation & warehousing 11,500. For the year 2014, the economy added 185,700 jobs.

Bottom line

Equities were mostly lower on mixed economic data. Concerns about the political situation in Greece and sliding oil prices kept investors on edge. They continue to wait for action from the ECB to add stimulus to boost the Eurozone economy while at the same time they wait for the Federal Reserve to finally increase interest rates.

The economic data load for this upcoming week is much lighter. Inflation and labour market data will be the focus. Investors will continue to wait for the election in Greece on January 25, just three days after the key ECB meeting.

Looking Ahead: January 12 through January 16, 2015

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