Global Markets

Equities were mixed, buffeted by surprise central bank moves and a slew of new economic data, especially from the Eurozone and the United States. Equities in the U.S. tumbled after a better than expected employment report which has raised expectations that the Fed will increase interest rates sooner than later.

Four central banks were scheduled this week — the Reserve Bank of Australia, the Banks of Canada and England and the European Central Bank. However, two others surprised markets — the People's Bank of China and the Reserve Bank of India — with unscheduled interest rate reductions.

European Central Bank

The European Central Bank left its interest rates unchanged. The key refi rate remains at just 0.05 percent between the deposit rate (minus 0.20 percent) and the marginal lending facility rate (0.30 percent). The main focus was ECB President Mario Draghi's press conference. Traders were listening for the anticipated particulars on how the quantitative easing program announced in January will work together with updated staff economic forecasts. With regards to the former, monthly bond purchases (private and public) totaling some €60 billion will begin on March 9 and, as previously signaled, run at least through September 2016 and longer if deemed necessary.

The new economic forecasts show a notably more optimistic view than in December. However, the midpoint of the harmonized index of consumer inflation is still seen below 2 percent throughout the projection horizon, now extended to 2017. This suggests that policy will retain a dovish bias. Expected growth has been revised up by 0.5 percentage points to 1.5 percent this year and by 0.4 percentage points to 1.9 percent in 2016. The first call on 2017 is 2.1 percent. Anticipated inflation has been shaved from 0.7 percent to zero this year on weaker oil prices but is put 0.2 percentage points higher at 1.5 percent in 2016. The following year is marked at 1.8 percent. Ironically the long awaited launch of quantitative easing comes just as the Eurozone economy has finally starting to show some signs of meaningful growth, notably in the key household spending sector.

Bank of England

The Bank of England monetary policy committee's March meeting concluded with the decision to leave policy on hold. The Bank Rate stays at 0.5 percent and its asset purchase ceiling at Stg375 billion. The meeting marked the sixth anniversary of Bank Rate being cut to its present record low of 0.5 percent. Economic developments since the February discussions have been somewhat mixed but generally in line with the familiar pattern of solid growth and low inflation. Retail sales were surprisingly soft in January but consumer confidence is high and the PMI surveys for construction, manufacturing and services all point to faster growth in mid-quarter. However, and notwithstanding further signs of a modest pick-up in both nominal and real wages, headline inflation has slipped to just 0.3 percent and so even further below the BoE's 2 percent medium term target. At the same time the pound's trade weighted index has risen by a further 3 percent and effectively tightened monetary conditions by itself.

Bank of Canada

Amidst some speculation about a second successive interest rate cut, the Bank of Canada's March monetary policy meeting left key interest rates unchanged. Accordingly, the target for the overnight rate stays at the 0.75 percent mark to which it was lowered at the January meeting and the deposit rate and Bank Rate remain at 0.5 percent and 1.0 percent respectively.

The unexpectedly rapid speed with which the central bank responded to tumbling energy prices at the start of the year meant that financial markets would not have been especially surprised had another 25 basis point ease been delivered. However, recent comments from Governor Stephen Poloz intimated that while benchmark rates could well go lower at some point, more time was needed to assess the effects of the January move.

Explaining today's decision the BoC pointed to recent economic developments at home and abroad essentially matching its own expectations. Moreover, while still looking for the bulk of the negative impact on Canadian gross domestic product of weaker energy prices to filter through over the first half of the year, risks around the anticipated inflation profile are now judged to be more evenly balanced. However, the sharp rise in oil price volatility has necessarily heightened uncertainty about the economic outlook and the BoC is clearly willing to adjust its stance as deemed necessary over coming months and quarters.

Reserve Bank of Australia

The Reserve Bank of Australia kept its key interest rate at 2.25 percent — many analysts were expecting another 25 basis point interest rate cut to follow February's 25 basis point reduction. According to Governor Glenn Stevens' statement, the "Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings."

The Board continued to press for a lower exchange rate for the Australian dollar. It noted again that the currency "has declined noticeably against a rising U.S. dollar, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy." The Board noted that the economy is continuing to grow below trend with domestic demand weak. This has resulted in a gradually increasing unemployment rate. It said that the economy will continue to operate with spare capacity for some time.

Reserve Bank of India

The Reserve Bank of India surprised for a second time and cut interest rates by an additional 25 basis points at another unscheduled meeting. The second surprise move this year put the benchmark repo rate at 7.5 percent and was accompanied by 25 basis point reductions in the reverse repo to 6.50 percent and in the MSF rate and Bank Rate to 8.5 percent, all with immediate effect. However, the cash reserve ratio was again held at 4.0 percent.

The latest cut, which came somewhat ahead of most analysts' forecasts, was attributed by the RBI to low capacity utilization, weak real economy indicators and sluggish credit. It clearly indicates that the government's newly delivered annual budget was not seen as posing any inflationary risks and that the recently confirmed inflation targets would be undershot were policy not to be loosened again. The monetary ease also suggests that the RBI is more than a little dubious about the quality of the revised and rebased national accounts data. The move by the RBI came four days after Prime Minister Narendra Modi's government presented its first full budget since coming into power last May.

People's Bank of China

With growth slowing, the People's Bank of China lowered its benchmark interest rates for the second time in three months. Effective March 1, the one year bank lending rate will drop 0.25 basis points to 5.35 percent and that deposit rates also will be reduced by 25 basis points to 2.50 percent. The move comes as policy makers search for ways to stimulate the economy while also promoting overhauls aimed at allowing market forces to play a greater role in the country's development.

For the first time in two years in November, the government reduced interest rates. Earlier in February, it lowered the reserve requirement ratio, allowing banks to lend a larger share of their assets. The move on Saturday (February 28) to cut rates again was an effort to reduce corporate debt burdens and financing costs for borrowers and home buyers. In the fourth quarter of last year, growth dipped to 7.3 percent on the year — the slowest rate in more than two decades. And January's consumer price index slid to 0.8 percent on the year and the weakest since late 2009.

While investors were expecting Beijing to loosen monetary policy further after it cut rates in November for the first time in two years, then lowered the amount of money banks need to hold in reserve in February — the timing of the latest move, coming shortly after the Lunar New Year holiday, was earlier than expected.

The Chinese government set its economic growth target for 2015 at around 7 percent, the lowest in 11 years. Prime Minister Li Keqiang announced the new goal Thursday morning at the opening of the National People's Congress, the annual meeting of the country's legislature. China kept its growth target at 7.5 percent for the past three years, after lowering it from the longstanding target of 8 percent in 2012.

Global Stock Market Recap

Europe and the UK

Equities were mixed last week — the FTSE retreated while the CAC, DAX and SMI advanced. Results Friday were mixed as well following the release of the better than expected U.S. employment report for February. The report points to a Federal Reserve rate hike in the near future. The euro added to its recent weakness against the dollar with the European Central Bank going in the opposite direction. The FTSE lost 0.5 percent while the CAC, DAX and SMI added 0.3 percent, 1.3 percent and 0.7 percent respectively. The FTSE posted its highest ever close on Thursday. The FTSE has yet to hit 7,000, a key target for many traders, and some dealers said uncertainty ahead of Britain's general election in May could hinder the rally in the near term.

The European Central Bank announced Thursday that it will begin its bond purchases under a $1.1 trillion quantitative easing plan on March 9 and expects the impact from its stimulus measures to return inflation to the euro area next year. Britons' inflation expectations fell to its lowest level in more than 13 years and more people expect interest rates to remain unchanged over the next 12 months according to the results of a quarterly survey by the Bank of England.

Asia Pacific

Equities were mixed last week as investors responded to the higher European Central Bank economic growth forecasts for the Eurozone and after the Bank laid out its plans for bond purchases to combat deflation. ECB President Mario Draghi on Thursday said the ECB will purchase €60 billion of public and private sector assets every month until September 2016, or beyond if necessary to put the Eurozone back on track for sustained growth. The bond buying stimulus program begins on March 9. However, some investors were cautious as they waited for U.S. employment data that would be released after markets here were closed for the week.

The Shanghai Composite lost 2.1 percent as worries over growth and tighter liquidity kept investors on the sidelines. China will pursue an expansionary fiscal policy this year to withstand the downward pressure on the economy according to Chinese Finance Minister Lou Jiwei on Friday. The Hang Seng lost 1.7 percent on the week. A surprise interest rate cut by the People's Bank of China helped lift stocks in Hong Kong and Shanghai Monday, although expectations for Beijing to soon set a lower growth target for the economy this year kept a cap on gains.

Chinese Premier Li Keqiang said leaders were aiming for about 7 percent economic growth after a 7.4 percent expansion last year, the slowest in more than two decades. The fresh target this year was widely expected amid sluggish domestic demand and a slow recovery in the global economy. Leaders had targeted about 7.5 percent growth for last year.

The Nikkei added 0.9 percent as shares hit a fresh 15 year high, buoyed by encouraging comments from the European Central Bank on the outlook for Eurozone growth and inflation. It was the fourth consecutive week of gains, as hopes for robust U.S. jobs data later in the global market day Friday and signs of a brightening economic outlook for Europe boosted sentiment.

The Sensex was up 0.8 percent in a holiday shortened trading week. In the process the index briefly breached the 30,000 level on Wednesday for the first time ever when the Reserve Bank of India surprised investors with a 25 basis point repo interest rate cut. Traders were optimistic that the government's Budget proposals will increase corporate earnings and push growth. Meanwhile, the new "inflation targeting" mechanism is "credit positive" for India as it would increase the predictability and effectiveness of RBI's monetary policy in achieving the desired results.

Currencies

The U.S. dollar rallied Friday after the employment report indicating labor market strength has bolstered the argument for the Federal Reserve to raise interest rates for the first time since 2006. The U.S. currency rose against its major peers as employers added more jobs than forecast and the unemployment rate fell to the lowest level since 2008. Traders increased wagers on a rate increase by September. While the Fed has said it will be 'patient' on increasing borrowing costs, Chair Janet Yellen has said many times that timing is data dependent. The dollar reached the strongest level against the euro since September 2003. U.S. employers added 295,000 workers in February and the unemployment rate slid to 5.5 percent.

The European Central Bank, which cut rates to record lows, said Thursday it would begin buying bonds next week to avert deflation and spur economic growth. The Bank of Japan is making unprecedented bond purchases, and central banks from Sweden to Turkey to China have lowered borrowing costs. The euro declined below $1.10 Thursday for the first time in more than 11 years on Thursday after European Central Bank President Mario Draghi shed light on the parameters of the central bank's bond buying program aimed at rekindling economic growth in the region.

The Canadian dollar rallied Wednesday after the Bank of Canada kept its policy rate unchanged at 0.75 percent. The Loonie which declined against the dollar ahead of the decision reversed its losses to gains on the news. In a statement, the BoC said that oil prices were now "close" to the Bank's assumptions and its January policy action will "mitigate the negative effects of the oil price shock". The Bank's message has been unpredictable recently, sending the Canadian dollar on volatile swings so far this year. Just eight days ago, traders had been pricing in an 80 percent chance that the BoC would cut rates at Wednesday's meeting, but a speech by Stephen Poloz threw cold water on those expectations. The Bank shocked investors in January by cutting interest rates, becoming the first G-7 country to ease policy in the wake of the oil shock. However since then the price of oil has stabilized near $50 a barrel, the level on which the BoC based its most recent quarterly forecasts.

Selected currencies — weekly results

Indicator scoreboard

EMU

At 51.0, growth in February's manufacturing PMI was just a tick down from the flash estimate and unchanged from the final January figure. The rate of output expansion also matched January despite a minor pickup in new orders growth to a 7-month high. Disappointingly, the acceleration in total orders was wholly attributable to increased momentum in exports which helped to mask subdued domestic market conditions. However, employment crept higher for a sixth successive month and at its sharpest rate over the period. Backlogs were broadly unchanged. Price pressures predictably remained very weak and deflation in input costs was only slightly less than January's 5-1/2 year record. Factory gate prices decreased for a sixth straight month. Regionally, Ireland (57.5) was easily the best performer and indeed its PMI saw a 182-month high. Spain (54.2) was second in the ladder ahead of the Netherlands (52.2) and Italy (51.9). However, the core countries underperformed with Germany (51.1) registering only modest growth and France (47.6) again well into contractionary territory and, moreover, at the bottom of the international table.

February flash harmonized index of consumer prices was down 0.3 percent on the year after sinking 0.6 percent in January. However, the less negative tone to overall HICP inflation was not mirrored in the two core measures. Hence, excluding food, alcohol, tobacco & energy as well as omitting just unprocessed food & energy, prices were up 0.6 percent from a year ago, unchanged from their January finals. Non-energy industrial goods inflation even ticked lower to minus 0.2 percent but services saw a 0.1 percentage point increase to 1.1 percent. Rather, the main boost to the headline rate came from both energy, where inflation climbed 1.4 percentage points to minus 7.9 percent, and food, alcohol & tobacco, where the rate jumped from minus 0.1 percent to 0.5 percent.

January unemployment dropped a sizeable 140,000 to 18.059 million. Following a downward revision to December, the slide was enough to shave another tick off the jobless rate which now stands at 11.2 percent, its lowest mark since April 2012. There was good news for all four larger economies as the national rate fell 0.2 percentage points to 23.4 percent in Spain and 0.1 percentage points to 10.2 percent in France, 4.7 percent in Germany and 12.6 percent in Italy. Germany was at the bottom of the jobless ladder, just beneath Austria (4.8 percent), while Greece (25.8 percent in November) remained firmly at the top above Spain and Cyprus (16.1 percent).

January retail sales (ex-autos) were up 1.1 percent on the month for the fourth increase in a row and the sharpest since May 2013. This follows a slightly firmer revised 0.4 percent gain in December. Annual growth of purchases climbed from 3.1 percent to a multi-year peak of 3.7 percent. January's bounce was not attributable to the more volatile sectors as, excluding auto fuel, non-food buying was up 1.2 percent from year-end, its second monthly advance in excess of 1 percent since October. Food, drink & tobacco sales were 1.0 percent firmer following a 0.2 percent advance last time. Regionally, the monthly headline spurt was led by Germany where sales jumped 2.9 percent but there were especially large gains too in Latvia (1.7 percent), Luxembourg (1.3 percent), Portugal (6.8 percent) and Slovenia (2.4 percent). The only reported declines were in Ireland (0.1 percent) and Lithuania (0.5 percent).

Fourth quarter gross domestic product was up an unrevised 0.3 percent and 0.9 percent higher when compared with the same quarter a year ago. Private consumption was up on the quarter by a relatively modest 0.4 percent, a rate matched by gross fixed capital formation. The former followed a slightly larger 0.5 percent increase in the previous period but the latter was an improvement on a zero rate last time. Government consumption was again 0.2 percent higher, in line with its rise in every other quarter of the year. However, inventory accumulation subtracted 0.2 percentage points from the quarterly change in real GDP, its second negative contribution in a row. Headline growth was supported by overseas demand and exports followed a 1.5 percent increase in the third quarter with a 0.8 percent advance. With imports rising only 0.4 percent, net exports added 0.2 percentage points. Regionally growth among the larger four member states was confirmed at their respective flash estimates. These showed quarterly increases in total output of 0.1 percent in France and 0.7 percent in both Germany and Spain. Italy was unchanged at 0.0 percent. Elsewhere Estonia posted a 1.1 percent rate, the strongest in the Eurozone, while at the other end of the performance spectrum Cyprus contracted a further 0.7 percent or more than double the third quarter pace.

Germany

January retail sales (ex-autos) jumped 2.9 percent following a larger revised 0.6 percent December increase. Unadjusted annual sales growth jumped from 4.8 percent to 5.9 percent, the fastest pace since June 2010. January's monthly increase was the fourth in as many months and left real purchases 3.4 percent above their fourth quarter average. Given the highly volatile nature of the data, the latest figures should be treated with due caution but their recent trend is consistent with the sharp pick-up seen in consumer confidence since last October.

January total industrial production was up 0.6 percent on the month and up 0.8 percent on the year. However, the improvement in the headline data masked a much less impressive composition and the key manufacturing category saw production only flat at December's level. Capital goods were up a respectable 0.5 percent on the month but intermediates dropped 0.4 percent as did consumer goods. Rather, overall growth was led by the more volatile construction subsector where output jumped 5.0 percent. Energy was unchanged.

Switzerland

Fourth quarter gross domestic product was up 0.6 percent after increasing 0.7 percent in the third quarter. On the year, GDP was up 1.9 percent for a second quarter. However, private consumption was up only 0.3 percent or half the rate of the previous period and was easily outpaced by general government consumption which climbed a sizeable 1.9 percent. Investment was mixed with spending on equipment & software increasing a healthy 1.0 percent following a 1.4 percent gain last time but construction more than reversing the third quarter's 0.7 percent advance with a 1.4 percent decline. Inventories subtracted 0.2 percentage points from quarterly growth. Goods exports struggled and, excluding valuables, dipped 0.2 percent having risen a solid 5.0 percent in the third quarter. Exports of services expanded 0.6 percent but even this was only half the rate registered last time. Goods imports excluding valuables dropped 1.8 percent while services were up 0.5 percent.

Asia/Pacific

Australia

Fourth quarter gross domestic product was up 0.5 percent on the quarter and 2.5 percent compared to the same quarter a year ago. On the expenditure side, the quarterly increase was driven by net exports (0.7 percentage points) and final consumption (0.6 percentage points). These increases were partially offset by a decrease in inventories (down 0.6 percentage points). On the year, the largest contributors to total trend growth were mining (0.5 percentage points), financial & insurance services (0.5 percentage points) and health care & social assistance (0.3 percentage points). The largest detractor was professional, scientific & technical services (down 0.5 percentage points).

January retail sales disappointed and were up 0.4 percent against expectations that were for a 0.5 percent increase on the month. On the year, retail sales were up 3.6 percent. In December, sales gained only 0.2 percent on the month but were 4.1 percent higher on the year. The largest contributor to the increase was cafes, restaurants & takeaway food services (2.0 percent). Department stores (2.2 percent), other retailing (1.0 percent) and household goods retailing (0.7 percent) also advanced. These were partially offset by declines in food retailing (down 0.7 percent) and clothing, footwear & personal accessory retailing (down 0.1 percent). Online retail turnover contributed 2.8 percent to total retail turnover in original terms. Retail sales were up in Queensland (1.2 percent), Victoria (0.5 percent), Tasmania (1.9 percent) and Western Australia (0.1. percent). New South Wales was relatively unchanged. Sales declined in the Australian Capital Territory (down 1.9 percent), the Northern Territory (down 1.8 percent) and South Australia (down 0.1 percent).

January merchandise trade deficit nearly doubled from the month before as a lower Aussie dollar caused imports to accelerate faster than exports. The deficit widened to A$980 million from A$503 million in December. Imports were up 3.0 percent on the month but down 0.3 percent from a year ago while exports gained 1.3 percent but were 6 percent lower than the same month a year ago. Rural goods exports dropped 2 percent with cereal grains and cereal preparations contributing to the decline. Non-rural exports were up 2 percent with other mineral fuels, transport equipment, other manufactures and coal, coke and briquettes contributing to the increase. Partly offsetting these increases were metals (excluding non-monetary gold). Services exports declined with travel and transport contributing to the decline. Intermediate and other merchandise goods imports were up 4 percent while capital goods added 6 percent and consumption goods gained 3 percent.

Americas

Canada

Fourth quarter gross domestic product slowed to 0.6 percent on the quarter, down from the previous period's revised 0.8 percent. Annualized growth dropped from 3.2 percent to 2.4 percent while the yearly increase was 2.6 percent. The deceleration reflected a smaller increase in final domestic demand which was up 0.4 percent on the quarter or almost half the 0.7 percent rate registered in the previous period. The slowdown here was only partially attributable to household spending which eased to a 0.5 percent rate and masked a pickup in general government consumption from minus 0.1 percent to plus 0.5 percent. Weakness was most apparent in gross fixed capital formation which slipped 0.1 percent on the quarter (business investment minus 0.6 percent) after a 1.6 percent increase last time. Residential structures were only 0.4 percent firmer after a 3.0 percent increase previously. In fact, the quarterly increase in real GDP would have been a good deal less but for a 0.4 percentage point boost from business inventories. The external accounts had a significant negative impact as exports fell 0.4 percent on the quarter and imports advanced 0.4 percent. As a result, net exports subtracted nearly 0.3 percentage points. The deterioration here was mirrored in the overall current account deficit which widened out by C$4.3 billion to C$13.9 billion, the most red ink since the fourth quarter of 2013.

December gross domestic product was up 0.3 percent and 2.8 percent on the year. December's expansion was dominated by goods producing industries where output reversed November's 0.6 percent monthly decline. Manufacturing followed a 1.6 percent drop with a jump of 2.5 percent and there were smaller positive contributions from agriculture, forestry, fishing & hunting (0.4 percent) and construction (0.3 percent). Mining, quarrying, and oil & gas extraction was down 0.8 percent and utilities lost 1.1 percent. The service sector grew 0.2 percent from November largely thanks to strength in wholesale trade (1.6 percent), finance & insurance (1.3 percent) and transportation & warehousing (1.2 percent). Management of companies & enterprises also performed well (0.8 percent). The sharpest reversal was in retail trade (down 1.4 percent) ahead of arts, entertainment & recreation (down 0.5 percent).

January merchandise trade gap widened to C$2.45 billion — the fourth shortfall in a row and was up C$1.3 billion from December's sharply upwardly revised C$1.22 billion deficit and the largest since July 2012. January's deterioration was wholly attributable to a 2.8 percent monthly drop in exports as imports remained flat at their December level. Exports to the U.S. dropped 3.1 percent on the month which, with imports off just 0.1 percent, was enough to see the bilateral surplus with the U.S. nearly halve to C$1.21 billion, the smallest black ink since September 1992. Weaker prices had an important impact on both sides of the balance sheet and export volumes were only 1.3 percent lower on the month. Even so, with price adjusted imports down just 0.1 percent, the real trade balance still deteriorated. The overall monthly drop in nominal exports was dominated by energy which posted a hefty 14.7 percent decrease, their eighth straight decline. Elsewhere metal & non-metallic mineral products were off 8.6 percent and basic & industrial chemical, plastic & rubber products 1.8 percent. Partial offsets were provided by gains in farm, fishing & intermediate food products (4.5 percent), aircraft & other transportation equipment & parts (8.0 percent) and motor vehicles & parts (3.1 percent). Cash imports were also dragged down by energy (down 19.2 percent) but this was largely mitigated by increases in industrial machinery, equipment & parts (8.2 percent), electronic & electrical equipment and parts (9.3 percent) and aircraft & other transportation equipment & parts (9.0 percent).

Bottom line

Central banks dominated the news last week. As expected, the Reserve Bank of Australia, Banks of Canada and England and the European Central Bank left their respective policies unchanged. The ECB however, described how its quantitative easing program which was announced in January would function. Two banks — The People's Bank of China and the Reserve Bank of India — not on the calendar however, both lowered their respective interest rates by 25 basis points. Investors were awash with key economic data during the week as well. Numerous growth estimates were updated including those for the Eurozone and Italy while both Canada and Australia published their data for the first time. A slew of purchasing managers surveys were also posted with mixed results. And of course, the U.S. employment report was reported Friday. It was better than anticipated and sent U.S. stocks lower on anticipation of a Federal Reserve interest rate increase.

This coming week will be much quieter. In Europe, merchandise trade and industrial output dominate. In Asia, China's inflation data will draw attention. Japan's second estimate of growth will also be parsed carefully. And in Australia, labour force data will be studied for further signs of weakness.

Looking Ahead: March 9 through March 13, 2015

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