Global Markets

Global equity indexes were mostly lower on the week. Once again the indexes gyrated inversely with crude oil prices. Equities especially in Europe and the U.S. tumbled Friday after the employment situation showed slower jobs growth in January. However, investors ignored the underlying strengths in the report.

Markets are pricing in lower expectations for further rate increases from the U.S. Federal Reserve this year, weakening the dollar while at the same time providing a lift to commodities. But mixed messages from Fed officials were creating some concern. According to analysts, what is worrying the markets is that some Fed policy makers believe that recent developments aren't sufficiently serious or persistent to warrant a material change in the Fed's outlook and view on the gradual path of the rate hike cycle.

The perception of the U.S. January employment report differed between economists and market players. While economists saw many strong points in the report, markets chose to dwell on the headline employment number that increased a below expectations 151,000. However, what seemed to have been missed is the further decline in the unemployment rate to 4.9 percent, the increase in manufacturing employment and the increase in hours worked and wages. Meanwhile, analysts continue to weigh each data point against the odds of when the Federal Reserve might increase the fed funds rate again.

Reserve Bank of Australia

As anticipated, the Reserve Bank of Australia left its cash rate unchanged at 2.0 percent. The RBA cut rates twice in 2015 — in February and May — to stimulate the economy as it transitions from a decade of booming mining exports and high commodity prices. However, the Bank did not rule out further easing, saying that continued low inflation may provide the scope for easier policy should that be appropriate to support demand. The RBA's inflation target range is between 2 and 3 percent.

In its February statement on monetary policy released a few days after its policy meeting, the RBA kept its key growth and inflation forecasts for 2016 about the same as the November statement. For 2017, there has been a modest reduction in forecast growth from a range of 3.00 percent to 4.00 percent to 2.50 percent to 3.50 percent for the year. The underlying inflation forecast of 2 percent to 3 percent was unchanged. Reflecting the stronger than expected GDP report in the September quarter, growth for the December 2015 has been increased from 2.25 percent on the year to 2.50 percent. That implies GDP growth in the December quarter will be around 0.5 percent to 0.6 percent from the previous quarter.

Reserve Bank of India

As expected the Reserve Bank of India left key interest rates on hold. The benchmark repo stays at 6.75 percent and the reverse repo at 5.75 percent while both the marginal standing facility rate and Bank Rate remain at 7.75 percent. There was also no change in the cash reserve ratio which was held at 4.0 percent.

Having seen most measures of inflation accelerate broadly in line with its own forecast since its last meeting in December, pressure on the RBI for a new round of cuts was relatively limited. Moreover, even if the monetary authority had wanted to ease again, the widespread investor switch out of emerging markets since the Fed's December fed funds rate tightening effectively precluded a move anyway.

Nonetheless, the central bank acknowledged the slowdown in the global economy and also noted that activity at home was below what was expected over the medium term. An unrevised official forecast for a 7.4 percent rise in Indian GDP in 2015/16 was seen as subject to downside risks. However, the RBI is clearly determined to meet its 6 percent January 2016 inflation target and wants to see how the implementation of the VII Pay Commission award impacts prices going forward.

Bank of England

As widely expected the Bank of England's monetary policy committee made no changes to its monetary policy. The Bank Rate remains at 0.5 percent and its asset purchase ceiling at Stg375 billion. More significantly arch hawk Ian McCafferty, for some time now the lone dissenter in favor of an immediate 25 basis point rate increase, voted with the pack. This makes the chances of any near-term tightening all the more remote. Speculation about a more restrictive policy had already been pushed increasingly further into the distance since the MPC last met in January and financial markets now anticipate no move until into 2017.

Governor Mark Carney's comments suggested that the monetary authorities had become much more cautious about the outlook for growth at home and abroad and saw increased risk of lower inflation near-term. The Bank chief also reiterated the importance of stronger wage gains as a trigger for a rate increase but the annual rise in headline average earnings has fallen sharply from 3.0 percent in September to just 2.0 percent in the latest data. Indeed, the minutes suggest that it was the deceleration here that forced McCafferty to pull his tightening vote. Fourth quarter GDP growth (0.5 percent) was in line with the BoE's expectations but business surveys have subsequently found firms significantly less optimistic about prospects over the coming year. As a result, the Bank's forecast has been downgraded accordingly.

Global Stock Market Recap

Europe and the UK

Equities retreated across the board last week. On Friday, both the highly anticipated January U.S. employment report showed weaker than expected job growth and German factory orders disappointed. Investors were also confronted by a large number of corporate earnings results. The FTSE retreated 3.9 percent, the CAC declined 4.9 percent, the DAX tumbled 5.2 percent and the SMI lost 4.3 percent.

A European Central Bank governing council member said that the ECB is ready to add more stimulus at its March meeting if needed, but only after a thorough study of available data in order to avoid reacting hastily to temporary developments. He said that ECB policymakers required a "more comprehensive view on data". Furthermore, policymakers should not jump immediately on events which might or might not prove to be long lasting.

Hints of European investor optimism were snuffed out as the darkening economic outlook registered across the continent and sent stocks and credit markets sliding. While market turmoil at the start of this year was sparked by a selloff in commodities and Chinese stocks, the reality of Europe's own woes hit home as companies reported dismal earnings, and policy makers and institutions lined up to cut economic forecasts and warn of further risks. The euro area is still struggling to recover nearly six years after it first bailed out Greece, while European leaders are trying to tackle their latest crisis and stem the inflow of refugees.

The European Commission on Thursday marginally downgraded its Eurozone growth and inflation projections as risks from the slowdown in China and other emerging markets, falling oil prices and the weak global trade escalate. Nonetheless, the euro area entered its fourth year of recovery and moderate growth is forecast to continue, driven by consumption. In the winter 2016 Forecast, the EU projected 1.7 percent growth for the euro area this year, a notch lower than the 1.8 percent estimated previously. However, the figure was better than the 1.6 percent growth estimated for 2015. The projection for 2017 was maintained at 1.9 percent.

Asia Pacific

A steep selloff this year in stock markets around the world has pushed shares in Asia to their cheapest levels since the 2008 global financial crisis. But bargain hunters haven't swooped in. Analysts and investors say Asian markets may have not yet hit bottom. Buyers remain jittery about tumbling oil prices, a slowdown in China and lack of clarity from central bankers over policy.

Equities were mixed last week with both the Nikkei and Hang Seng closing sharply lower. Investors continue to fret about signs of weakening Chinese growth along with volatile and sinking crude oil prices. The Nikkei succumbed to a rising yen. Concerns about the strength of the U.S. economy also worried traders. Trading at the end of the week was cautious prior to the release of the U.S. employment report Friday after markets here had closed for the week.

The Shanghai Composite was up 0.9 percent for the week before the weeklong Lunar New Year holidays beginning February 8. The Hang Seng however was down 2.0 percent on the week. Trading will resume in Hong Kong on Thursday. China is targeting a growth target of 6.5 percent to 7 percent for this year, slower than the objective of about 7 percent in 2015.

The positive impact of the Bank of Japan's decision to lower its interest rate into negative territory was short-lived. The Nikkei slid 4.0 percent on the week after the Japanese yen settled at a two-week high against the dollar. Analysts were expressing doubts about the efficacy of the Bank of Japan's new negative interest rate in stabilizing the currency. They noted that the BoJ had limits to what they could do. Until now, the view on the U.S. economy was that it was recovering, but the pace wasn't as fast as hoped.

The All Ordinaries ended the week with a gain of 2.1 percent thanks to a weakening U.S. dollar sparking a rally in crude and other U.S. dollar denominated commodities. However, the index still retreated 0.6 percent on the week. Equities here declined after the Reserve Bank of Australia kept official rates on hold as anticipated, choosing to wait and see if the recent financial turbulence will affect the domestic economy.

Currencies

The U.S. dollar dropped against all of its major counterparts including the euro, yen, pound, Swiss franc and Canadian dollar. However, it advanced against the Australian dollar. At week's end however, the dollar showed signs of stabilization after the U.S. employment report was released. Needless to say, the Bank of Japan and European Central Bank are not happy that weakened U.S. growth has boomeranged with U.S. currency weakening and yen and euro rising despite the banks' loose monetary policies. A series of weak U.S. reports especially referring to manufacturing has scared investors. But in the run-up to Friday's employment report, the dollar weakened even more Thursday creating a rally in commodities (priced in U.S. dollars) even though demand and supply had not changed.  

Many market participants entered 2016 with expectations that divergence in monetary policy between a tightening Fed and stimulative European Central Bank and Bank of Japan would lead the dollar higher. In December, Fed policymakers had projected four rate increases this year. Analysts have said dovish comments in an interview from New York Fed President William Dudley on Wednesday and recent weak U.S. economic data have reduced the likelihood of a steady pace of Fed rate increases.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

January manufacturing PMI matched its flash reading and, at 52.3, indicates only a moderate month for activity in the region's manufacturing sector. Output expanded at its slowest pace in four months while new orders recorded their smallest rise since last September. However, growth in backlogs and employment did accelerate on the month, the latter at its strongest rate in 17 months. Yet price pressures were as soft as ever. Regionally, the best performer in terms of national PMIs was Spain (55.4 and an 8-month high) ahead of Ireland (54.3) and Italy (53.2). Germany (52.3) was unchanged from December and comfortably above the growth threshold but France (50.0) eased to a 5-month low and indicated renewed stagnation.

December retail sales were up 0.3 percent — the first increase since August. But due to base effects, annual workday adjusted growth slipped from 1.6 percent to 1.4 percent. December's modest monthly advance was mainly attributable to a 0.6 percent increase in purchases of food, drink & tobacco. Excluding auto fuel, non-food demand was up only 0.2 percent, just offsetting the previous period's decline and implying an essentially flat trend since the middle of the year. December would have looked a good deal worse but for a 1.3 percent monthly jump in France where purchases more than reversed a 0.6 percent drop in November that was probably prompted by the terrorist attacks in Paris. Among the other larger member states, sales were 0.2 percent weaker in Germany and just 0.1 percent stronger in Spain. Elsewhere, Portugal followed a 1.7 percent drop in November with an even steeper 1.8 percent decrease this time.

Germany

December manufacturing orders were down 0.7 percent on the month and were the first drop of any size since September. It followed an unrevised 1.5 percent increase in November. Compared with a year ago, orders were down 2.5 percent after a 2.2 percent gain in mid-quarter, mainly reflecting the impact of a 4.0 percent monthly surge in December 2014. Weakness was concentrated in basics and capital goods which decreased 2.0 percent and 0.5 percent respectively from November. By contrast, consumer & durable goods jumped 4.3 percent. Regionally, the decline was wholly attributable to the domestic market which contracted 2.5 percent as foreign demand expanded 0.6 percent.

Asia/Pacific

Australia

December's trade deficit expanded to A$3.5 billion from November's revised A$2.7 billion. Imports declined by 1.5 percent while exports were 4.7 percent lower.  Metal ores fell sharply, down A$0.9 billion on lower iron ore prices and fewer shipments. Coal was down A$0.2 billion, on lower volumes we suspect. Rural goods, unwinding a November spike, were down A$0.4 billion. Expectations were for a combined fall of A$1.1 billion but the actual combined declined was A$1.5 billion.

December retail sales were unchanged from November but up 4.2 percent from the same month a year ago. The reading follows gains of 0.4 percent in November and 0.6 percent in October. In volume terms for the December quarter seasonally adjusted sales were up 0.6 percent following a rise of 0.5 percent in the September quarter 2015 and 0.7 percent in the June quarter. In volume terms, household goods retailing added 2.5 percent, food retailing was up 0.3 percent and department stores gained 1.8 percent. Clothing, footwear & personal accessory retailing declined 1.1 percent, other retailing was down 0.5 percent and cafes, restaurants & takeaway food services was 0.5 percent lower.

Americas

Canada

January employment declined 5,700 following 22,800 gain in December — its second decrease in the last three months. With the participation rate unchanged at 65.9 percent, this was enough to nudge the jobless rate up a tick to 7.2 percent, equalling its highest mark since March 2013. January's employment decline reflected an 11,300 drop in part-time jobs that more than offset a 5,600 advance in full-time positions. However, the headline would have looked a good deal weaker but for an 18,700 gain in the public sector as the private sector shed 4,100 and the number of self-employed was down 20,200. At a sector level, goods producing industries recorded a 25,300 fall within which manufacturing was off 11,000. Agriculture (down 13,700) and construction (down 5,400) also had a poor month but there were small rises in utilities (3,300) and natural resources (1,400). Services added 19,700 jobs. Information, culture & recreation (15,800) and healthcare & social assistance (11,300) led the way ahead of trade (8,400) and other services (9,600). On the downside, there were sizeable decreases in both public administration (7,200) and transportation & warehousing (10,400).

December's deficit on merchandise trade was only C$0.59 billion, well down from a smaller revised C$1.59 billion shortfall in November. The improvement was driven by a 3.9 percent monthly rise in exports that more than offset a 1.6 percent gain in imports. The bilateral surplus with the U.S. widened from C$2.63 billion to C$3.19 billion as exports climbed 2.9 percent and imports advanced a smaller 1.3 percent. There was also progress on the real trade position as export volumes expanded 2.1 percent from November while imports gained only 1.5 percent. Within total nominal exports, increases were widespread with some ten of the eleven major reporting subsectors indicating stronger sales than in mid-quarter. Energy saw a 4.5 percent rise but this was dwarfed by a 26.4 percent surge in aircraft & other transportation equipment & parts thanks to a 64.4 percent leap in aircraft. Metal & non-metallic mineral products were also up 8.5 percent and consumer goods 6.4 percent. Motor vehicles & parts gained 4.6 percent. The only decline was in metal ores & non-metallic minerals (20.1 percent). For imports, nine of the eleven subsectors recorded increases led by energy (7.9 percent) and metal & non-metallic mineral products (5.4 percent).

Bottom line

The Reserve Banks of India and Australia along with the Bank of England maintained their policies. A slew of new economic data were released with a good chunk of it disappointing investors. Corporate earnings were mixed. U.S. data for the most part disappointed market players.  

The upcoming week is less busy on the economic side. Industrial production and Merchandise trade dominate the European calendar. But the highlight here will be the release of fourth quarter gross domestic product data. Chinese markets are closed for the week while Hong Kong is closed for three days.

Looking Ahead: February 8 through February 12, 2016

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