Global Markets

Equities fluctuated as investors closely followed news from Greece where new leadership visited key players in its quest to reach an agreement with other members of the Eurozone and the European Central Bank regarding the country's bailout program. The finance minister ruled out accepting more bailout cash while hinting that he had a solution to end the confrontation with international creditors. At this writing, the two sides appear to be hardening their positions. Investors will pay close attention to the upcoming meeting of the Group of 20 finance ministers, on Monday, and the Eurozone finance ministers. The latter will hold an extraordinary meeting in Brussels Wednesday to map out a solution to the debt stand-off with Greece's new anti-austerity government before the country's bailout expires at the end of the month. The meeting is a day before a full EU summit.

Several central banks met during the week. The Reserve Bank of Australia surprised with a 25 basis point cut to its cash rate to 2.25 percent. The Reserve Bank of India refrained from changing its policy interest rate — it had reduced it in an intra-meeting move on January 15. The Bank of England kept its policy unchanged. Investors will learn more when the BoE publishes its Quarterly Inflation Report on Wednesday.

Reserve Bank of Australia

The Reserve Bank of Australia cut its key interest rate by 25 basis points to 2.25 percent. This is the first cut since August 2013 when the RBA reduced the rate to 2.5 percent. Most analysts expected the Bank to maintain its rate at 2.5 percent. However, for the past week Australia's markets have been anticipating the rate cut. The bank abandoned its long standing call for a "period of stability" in interest rates.

The RBA said the cash rate had been stable as the Board took time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad. However, taking into account the flow of recent information and updated forecasts, the Board judged "that, on balance, a further reduction in the cash rate was appropriate. This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target."

The Board noted that the Australian dollar had declined noticeably against a rising U.S. dollar over recent months, though less so against a basket of currencies. The Australian dollar continues to be above most estimates of its fundamental value, particularly given the recent significant declines in key commodity prices.

Regarding inflation, the Board noted that the CPI recorded the lowest increase for several years in 2014 thanks to the sharp decline in oil prices at the end of the year and the removal of the tax on carbon. Measures of underlying inflation also declined to around 2.25 percent over the year. "With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate." The Bank said that commodity prices and especially oil had continued to decline, in some cases sharply, and that the trends appeared to reflect a combination of lower demand growth and, more importantly, significant increases in supply.

RBA Quarterly monetary policy statement

The Reserve Bank of Australia cut its forecasts for 2015 GDP and lowered its inflation outlook, but the Australian dollar jumped as there was no explicit hint that interest rates would be cut further. GDP growth is forecast to remain a bit below trend over the course of this year, before picking up to an above trend pace in the later part of the forecast period as consumption growth improves, non-mining business investment lifts and LNG exports increase. It also sees inflation coming in lower than earlier forecasts. It now sees underlying inflation at 2.25 percent by mid-year, staying "well contained" within its inflation target of 2 percent to 3 percent. The RBA said the unemployment rate is likely to "rise a little further over coming quarters" as growth is below trend.

Reserve Bank of India

The Reserve Bank of India left its benchmark interest rates unchanged. The RBI had lowered rates just two weeks ago. The key repo rate was held at 7.75 percent and the marginal standing facility (MSF) rate and Bank Rate remained at 8.75 percent. There was also no move on the cash reserve ratio (4.0 percent).

However, with a view to boosting the supply of credit, the statutory liquidity ratio (SLR) of scheduled commercial banks was lowered by 50 basis points to 21.5 percent. The Bank also indicated that it would replace the export credit refinance (ECR) facility with the provision of system level liquidity with effect from February 7.

The RBI seemed relatively pleased with the way in which inflation has evolved in recent months and the Bank held out the promise of additional rate cuts should future CPI data imply continued disinflationary pressure. How much fiscal policy is tightened going forward will be critical, presumably all the more important now in the wake of recent upward revisions to historic real GDP growth. The RBI's own growth forecasts are broadly in line with the December Monetary Policy Statement but this could change once the fourth quarter GDP data become available on February 9.

Bank of England

As expected the Bank of England left its monetary policy unchanged. The Bank Rate remained at 0.5 percent and its asset purchase ceiling stayed at £375 billion. Having seen Martin Weale and Ian McCafferty drop their joint call for an immediate 25 basis point tightening in January, the likelihood of any surprises was always very low. As it is, a near certain unanimous vote to keep policy steady (the meeting's minutes are due on February 16) will have reflected further signs of a gentle moderation in UK economic growth and the continued weakness of consumer prices.

Since the MPC's January deliberations there have been further indications of a pick-up in wage growth which were masked in some of the inflation gauges by the slump in oil prices. However, from such a low starting point this is hardly a worry at this stage. Annual average earnings were still rising at only a 1.4 percent annual rate in the fourth quarter.

Consequently, with the pound already uncomfortably strong, the housing market well off its highs and a general election just three months away, it would take some significant shocks in the upcoming economic data to force the BoE to change direction anytime soon. The Bank will update its view of how the economy is performing with the Quarterly Inflation Report to be published on February 11.

Global Stock Market Recap

Europe and the UK

European equities were up last week despite investors' nervousness regarding Greece's sovereign debt problems. The FTSE was up 1.5 percent, the CAC gained 1.9 percent, the DAX advanced 1.4 percent and the SMI added 2.4 percent. The SMI was up for a third week as the index continues to recoup losses incurred after the Swiss National Bank ended its support for the Swiss franc's cap against the euro. The DAX advanced for a fourth week. The FTSE closed at 6,853, shy of its all-time record of high of 6,950 reached in December 1999.

Greek Prime Minister Alexis Tsipras pledged to "put an end once and for all" to the EU's austerity policies, despite pressure from European leaders. In a speech to his left-wing parliamentary group, Tsipras said Athens was no longer open to being told what to do. "Greece won't take orders any more, especially orders through emails. Greece has its own voice and is no longer the miserable partner who listens to lectures to do its homework." In a meeting at Berlin on Thursday, German Finance Minister Wolfgang Schaeuble rejected Greek government's bridge funding proposal and insisted that the troika — the EU, the ECB and the International Monetary Fund — is indispensable to the bailout program. The stand-off between Athens and its Eurozone partners intensified uncertainty over future aid to Greece after its current rescue program expires at the end of February.

Economic data were mixed during the week. Key was the January PMI reading. Although the manufacturing PMI increased to  51.0 from December's 50.6, the overall performance was still only sluggish. Manufacturing production rose at its fastest pace in half a year, underpinned by moderate gains in both new orders and backlogs. Employment was up for a fifth successive month but, while the rate of jobs growth was in line with December's 8-month high, gains were still only mild. Tumbling oil prices were reflected in the steepest drop in input costs in five and a half years and paved the way for a fifth successive decrease in factory gate prices which saw their sharpest fall in a year and a half. The best performing country was Ireland (PMI 55.1) ahead of Spain (54.7) and the Netherlands (54.1). Germany (50.9) was disappointingly close to the 50 expansion threshold and both France (49.2) and Italy (49.9) were in negative growth territory. The mixed results suggest little real change in the performance of the region's manufacturing sector at the start of the year.

Asia Pacific

Most equity indexes advanced last week. The exceptions were the Shanghai Composite (down 4.2 percent), Sensex (down 1.6 percent) and Nikkei (down 0.1 percent). All indexes were affected by the situation with Greece. The All Ordinaries extended gains to a 12th consecutive session Friday and closed the week up 4.0 percent. Equities advanced thanks to the Reserve Bank of Australia's interest rate cut on Tuesday. In its quarterly monetary policy statement, the RBA cut its forecast for GDP growth and inflation this year and said the Australian dollar still remains high.

The Shanghai Composite gyrated both in intraday and interday trading, retreating eight of the last 10 days of trading. The index jumped over 2 percent early in the session after the People's Bank of China (late on Wednesday during global market day) lowered banks' reserve requirement ratio by 0.5 percentage points to 19.5 percent from February 5 in a bid to boost liquidity and counter slowing in the country. The index ended 1.2 percent lower on the day. On Friday, equities were under pressure on profit taking amid speculation the PBoC's announcement late Wednesday to cut reserve requirement ratio by 50 basis points will not be enough to encourage banks to lend more. However, with the Lunar New Year approaching on February 19, some analysts question whether the PBoC would act before the extended holiday.

The Australian market's ascent has been fueled by aggressive central bank action by the European Central Bank and Japan, among others, which has enticed investors out of the world's bond markets to hunt for higher yielding but riskier assets such as equities. The share prices of three of the four biggest Australian banks have reached record highs in the past few days as the RBA became the latest to cut interest rates. A number of other factors have combined to make Australia's share market — a favorite of foreign investors and homegrown pension funds because of the country's relatively high dividends — especially attractive in recent days. The Australian dollar, which not long ago deterred some foreign investors because of its strength, has fallen by almost 20 percent since the middle of last year, giving a boost to the earnings of some of the country's biggest companies. Many traders have already positioned themselves to exploit that trend ahead of a spate of earnings reports due this month.

Currencies

The U.S. dollar hesitated in its rally last week and was down against four of its six major counterparts. The currency retreated against the euro, pound sterling and the Canadian and Australian dollars. The U.S. dollar gained on the yen and Swiss franc.

New data published Friday by the Swiss National Bank suggest it bought around 60 billion Swiss francs (around $65 billion) worth of foreign currencies last month to blunt the surge in the Swiss franc's value even after the SNB removed a strict cap on the currency halfway through January. The SNB decided to scrap its cap on the franc on January 15, a move that sent the currency surging in value against the euro and the U.S. dollar. Analysts said purchases during the period suggest that the SNB has, and will continue, buying up foreign currencies on the open market to manage the relative value of the franc even after removing the cap. There has been widespread speculation that the Swiss central bank is now maintaining an unofficial corridor of 1.05 to 1.10 francs per euro.

While the Swiss abandoned their peg against the euro, Denmark's central bank cut its deposit rate for a fourth time in less than a month as it fights to keep its currency peg to the drooping euro. Although the euro has actually recovered a little over the past two weeks, the Swiss National Bank's decision to scrap the franc's cap against the euro has ramped up speculation that the Danes could be forced to follow suit. To ward off speculation, Danmarks Nationalbank has now trimmed its deposit rate deep into negative territory. It is now minus 0.75 percent. This was a bigger cut than previous rounds, and the central bank said it had also been intervening directly in the currency market to keep the Danish krone steady at around DKr7.45 to the euro. And just to reinforce the message, it published a rare statement on the speculation on its website. The fixed exchange rate policy is an indispensable element of economic policy in Denmark — and has been so since 1982.

Selected currencies — weekly results

Indicator scoreboard

EMU

December retail sales were up 0.3 percent in volumes on the month following a marginally larger revised 0.7 percent advance in November to lift annual growth of purchases from 1.6 percent to 2.8 percent, the best performance since the recovery in household demand started back in early 2013. Overall retail sales have now increased each month since September and the latest figures make for a fourth quarter increase of fully 0.9 percent from the July to September period when purchases edged up just 0.1 percent. The recent pick-up has been largely attributable to discretionary spending as, excluding food and auto fuel, sales have climbed almost 3 percent since the end of the third quarter. Over the same period, food, drink & tobacco purchases gained only around 0.5 percent. Regionally it was the usual mixed bag with strong monthly increases in Ireland (1.8 percent), Spain (1.1 percent), Austria (1.6 percent) and Slovakia (1.1 percent) contrasting with hefty drops in Estonia (1.7 percent), Latvia (1.3 percent) Portugal (3.8 percent) and Slovenia (1.5 percent). Among the other major economies, sales rose 0.5 percent in France and 0.2 percent in Germany.

Germany

December manufacturing orders rebounded 4.2 percent from an unrevised drop of 2.4 percent in November. Annual growth jumped from minus 0.5 percent to plus 3.4 percent, its best reading in five months. The monthly headline increase was driven by a 5.7 percent surge in capital goods that easily more than reversed November's 2.9 percent drop. Basics (2.8 percent) also enjoyed a good month but consumer & durables slipped 0.6 percent. Domestic orders expanded 3.4 percent from mid-quarter and reflected solid increases in all three main subsectors, notably consumer & durables (5.7 percent). Overseas demand was up an even more robust 4.8 percent, mainly thanks to a 7.6 percent spurt in capital goods that offset a 5.1 percent slump in consumer durables on the back of a 15.6 percent nosedive elsewhere in the Eurozone.

December industrial production edged a minimal 0.1 percent higher on the month and matched an upwardly revised gain posted in November to leave annual output growth unchanged at minus 0.4 percent. However, the underlying picture was somewhat brighter as the headline data were hit by a 2.9 percent monthly decline in construction. Manufacturing output expanded 0.5 percent after a 0.4 percent advance last time thanks to solid increases in both intermediates (2.0 percent) and consumer goods (1.4 percent). However, capital goods production dropped 1.2 percent and more than reversed November's 0.5 percent gain. Energy expanded 0.8 percent.

United Kingdom

December global goods trade gap widened out to £10.2 billion from an upwardly revised £9.3 billion in November. Exports edged just 0.1 percent higher on the month but imports were up a 2.7 percent as a jump in volumes more than offset a decline in oil costs. The shortfall excluding oil and other erratic items worsened as the red ink increased by £0.4 billion to £9.3 billion, matching its worst performance since July. Underlying exports fell 0.6 percent from November while imports were 0.8 percent firmer. The deficit with the rest of the EU was £6.4 billion, little changed from last time, but the shortfall with the rest of the world climbed £1.0 billion to £10.2 billion.

Asia/Pacific

Australia

December merchandise trade deficit was a less than expected A$436 million. This was the smallest deficit in nine months. Exports were up 1.4 percent on the month but down 4.1 percent on the year. Imports slid 0.7 percent in December and were down 2.8 percent from a year ago. Seasonally adjusted, the preliminary December quarter 2014 deficit was $2.557 billion, a decline from the September quarter 2014 deficit of A$3.865 billion. Exports were up 1.4 percent. Non-rural goods were down 2 percent while service exports were up 1.0 percent. Rural exports were up 10 percent. Other rural added 17 percent while cereal grains and cereal preparations were up 10 percent. Non-rural exports declined 2 percent with other mineral fuels and coal, coke and briquettes contributing to the drop. Metals, metal ores and minerals partially offset the decline. Imports of intermediate and other merchandise goods and capital goods both declined. Non-monetary gold along with consumption goods and services advanced. Fuels & lubricants and iron & steel declined. However, processed industrial supplies imports were higher.

December retail trade was up 0.2 percent on the month after edging 0.1 percent higher in November. On the year, retail trade was up 4.1 percent after increasing 5.0 percent in November. The largest contributor to the increase was clothing, footwear & personal accessory retailing (2.7 percent). Food retailing (0.3 percent) was the only other industry to increase in December. Other retailing and cafes, restaurants & takeaway food services were virtually unchanged while household goods retailing (down 0.4 percent) and department stores (down 0.9 percent) declined. Trade increased in Queensland (0.6 percent), New South Wales (0.2 percent), Western Australia (0.5 percent) and the Australian Capital Territory (0.4 percent). Victoria was relatively unchanged while there were declines in South Australia (down 0.4 percent), Tasmania (down 1.3 percent) and the Northern Territory (down 0.1 percent.). In volume terms, retail trade was up 1.5 percent in the December quarter following an increase of 0.9 percent in the September quarter.

Americas

Canada

December merchandise trade deficit widened out from a downwardly revised C$0.34 billion in November to C$0.65 billion. The deterioration reflected a 1.5 percent monthly increase in nominal exports that was more than offset by a 2.3 percent rise in imports. The real trade balance held up rather better with export volumes rising a solid 3.5 percent and imports up a more modest 2.8 percent. The bilateral surplus with the U.S. was broadly stable at C$3.1 billion as exports edged up 0.6 percent from mid-quarter and purchases from across the border climbed 0.8 percent. Within the monthly gain in overall nominal exports metal and non-metallic mineral products (13.1 percent), metal ores & non-metallic minerals (11.9 percent) and electronic & electrical equipment and parts (5.5 percent) all advanced. Industrial machinery, equipment & parts (4.6 percent) also performed well but energy slumped 10.3 percent. Imports were supported by sizeable monthly increases in energy (9.3 percent), farm, fishing & intermediate food products (8.0 percent) and metal & non-metallic mineral products 6.1 percent). The steepest decline was in metal ores & non-metallic minerals (down 15.6 percent) ahead of aircraft & other transportation equipment & parts (down 4.3 percent).

January employment was up 35,400 after dropping a steeper revised 11,300 drop in December. With the participation rate unchanged at 65.7 percent, the jobless rate dipped a tick to 6.6 percent. The headline improvement masked a 3,000 decline in full time jobs and reflected instead a near 10,000 advance in part time positions. With private sector payrolls up just 1,100 and the public sector down 6,700, the overall rise in employment was wholly attributable to a 41,100 jump in the number of self-employed. Goods producing industries created 9,700 net new positions within which manufacturing added 10,700 jobs and construction 4,700. Agriculture edged 1,500 higher as did utilities but natural resources fell 8,800. Services gained 25,700, dominated by professional, scientific & technical services (22,400) ahead of health care & social assistance (7,800) and educational services (6,100). On the downside there were relatively modest decreases in public administration (8,300), transportation & warehousing (5,900) and trade (4,200).

Bottom line

The Reserve Bank of Australia lowered its policy interest rate — equities rallied there. However, the Reserve Bank of India and the Bank of England maintained the status quo. Worries about growth in China, however, took their toll on Chinese shares. Economic data globally were mixed.

Scheduled central bank activity slows next week. The main event will be the Bank of England's Quarterly Inflation Report which will suggest the direction of monetary policy. However, with a national election scheduled for May, it is unlikely that any policy change will occur until June. Data are primarily focused on industrial output and merchandise trade data in Europe. In addition, flash estimates of fourth quarter gross domestic product will be released at week's end. China releases its inflation and merchandise trade data.

Looking Ahead: February 9 through February 13, 2015

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