Global Markets

Investors in Europe and the U.S. could not decide if the European Central Bank's package of stimulus was positive or negative. At first, equities approved the smorgasbord of moves aimed at getting the harmonized index of consumer prices to near its 2 percent inflation target from zero and stir growth. Then doubts set in and equities tumbled to end the day lower. However, at week's end after having slept on it and contemplated the offering, equities once again rallied. And the euro, which gyrated rather violently Thursday steadied Friday. The problem apparently was that the ECB signaled it was unlikely to cut its negative interest rates any further. When the dust settled, most equity indexes were up on the week. The major exceptions were in Japan and China where domestic issues were of concern.

There were other positives during the week. Crude oil prices were up on the week. And on Friday, the International Energy Agency (IEA) said prices have bottomed due to lower output from the U.S. and other non-OPEC producers.

Euro traders were getting their breath back after a near 4 cent move for the currency following the ECB's announcements. ECB President Mario Draghi's suggestion there would be no further interest rates cuts overshadowed the ECB's easing package, prompting criticism that he had botched his communication. He was quick to note though that new facts could change the outlook and emphasized his willingness to adopt other radical measures, but by then the damage was done.

Global Stock Market Recap

Europe and the UK

Equities ended the week on a positive note, especially after Thursday's rout. Stocks gyrated during the week but especially Thursday in reaction to the European Central Bank's expanded stimulus program. Initially rallying after the ECB announcement, equities reversed direction and retreated on comments from Mario Draghi suggesting that rates had reached a bottom. On the week, only the FTSE did not manage to recoup earlier losses and was down 1.0 percent. The DAX edged up 0.1 percent and the SMI added 0.2 percent. The CAC recorded an increase of 0.8 percent. Both the MIB and IBEX outperformed gaining 3.9 percent and 3.2 percent respectively.

European Central Bank

Faced with an economy stubbornly resistant to revival, the European Central Bank escalated its stimulus in an effort to jolt the Eurozone into more growth and head off the threat of deflation. But only time will tell whether the new set of measures will impact the economy. But their sheer scope underscores the challenges that the ECB is up against in trying to formulate monetary policy with so many forces working against sustained economic growth in Europe.

The measures included an increase in the purchases of government bonds and other assets. The purchases will rise to €80 billion a month from the current level of €60 billion. In another unprecedented step for the Eurozone, the ECB will begin buying corporate bonds as part of the monthly asset purchases. The spending is meant to pump more money into the somnolent Eurozone economy. The central bank also cut its benchmark interest rate, the main refinancing rate, to zero, from 0.05 percent. It also lowered its deposit rate — the interest commercial banks receive for their holdings at the ECB — to minus 0.4 percent, from minus 0.3 percent. By charging banks more to keep deposits at the central bank and less to borrow from it, the governing council hopes to make it less attractive for commercial banks to hoard cash.

ECB President Mario Draghi noted widespread criticism that central banks had become powerless in the face of economic trends. "The best answer to this is being given by our decisions today," Mr. Draghi said. "We have shown that we are not short of ammunition." There has been considerable debate among economists about whether the central bank measures have done any good. There are also risks. For example, negative interest rates on central bank deposits could hurt bank profits.

ECB President Mario Draghi unleashed a bold easing package on Thursday, cutting rates and expanding asset buys, but undid the very stimulus he hoped to achieve by suggesting there would be no further cuts. That comment drove the euro to unwanted gains against the US dollar and prompted criticism from some that Draghi, who already in December disappointed markets by under-delivering, had once again botched his communication.

Markets initially cheered the package but reversed course after Draghi hinted the ECB was done cutting rates and ruled out a tiered deposit rate structure — a system of multiple rates already used in Switzerland and Japan to encourage lending to companies while also punishing banks that hold too much cash.

Asia Pacific

Most equity indexes advanced last week, helped by Friday's across the board rallies. Stocks shrugged off a subdued start to trading on anxiety about the dissipating power of global central banks to fight sluggish economic growth and boost inflation. The Nikkei retreated 0.4 percent on the week as stocks responded inversely to changes in the yen along with disappointing economic data showing that the economy contracted in the fourth quarter and producer prices continued to plunge.

The Shanghai Composite lost 2.2 percent on the week, spooked by dismal merchandise trade in February along with a rise in consumer inflation to 2.3 percent on the year after increasing just 1.8 percent in January. January/February economic data historically have been impacted by the Lunar New Year holidays. These data were no different. However, analysts interpreted the CPI data to mean that there was less of a chance of stimulus.

The National People's Congress continued on Monday after the country outlined over the weekend a growth range of between 6.5 percent and 7 percent for 2016, with 6.5 percent pegged as the baseline through 2020. That would be less than last year's 6.9 percent rate, the slowest expansion in a quarter century. The government also abandoned its trade target, underscoring the degree of uncertainty about prospects for global growth.

While the Reserve Bank of New Zealand delivered a surprise cut in interest rates, citing a weakening global outlook and tepid inflation expectations, the Bank of Korea and Malaysia's central bank left their key interest rates unchanged as expected.

Reserve Bank of New Zealand

The RBNZ did the unexpected and lowered its official cash rate by 25 basis points to 2.25 percent. Analysts had been divided over whether the RBNZ would stand pat or not on this occasion, after it left the door open to further easing following its last policy meeting in January.

Rate decisions from the RBNZ have attracted much attention in recent years. In March 2014 New Zealand became the only developed economy in the world to raise rates since the 2008 financial crisis. Policymakers followed through with three further increases, taking OCR from 2.5 percent to 3.5 percent within the space of five months. But the RBNZ went into reverse in 2015, easing in June, July, September and December.

The twin drivers of the New Zealand economy over the past decade have been dairy exports and tourists coming in. But both are facing headwinds. A weaker Aussie dollar, economic slowdown in China and falling dairy prices are all creating pressure. At the same time, economists fret that low interest rates are fueling an unsustainable house price boom in some areas and especially in Christchurch where the rebuilding after the massive earthquakes continues.

The policy guidance paragraph was: "Headline inflation is expected to move higher over 2016, but take longer to reach the target range. Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data."

The New Zealand dollar or Kiwi tumbled after the announcement.

Currencies

The US dollar declined against all of its major counterparts including the yen, euro, pound sterling, Swiss franc and the Canadian and Australian dollars in a volatile week of trading. Currencies have typically been responding to central bank rhetoric — and actual policy moves as well. One needs to look no further than this past week after the European Central Bank's stimulus moves. After the ECB acted, the euro declined but then soared and ended the week higher — that was not supposed to happen.

Another example of the currency doing the opposite of what was expected is the yen. The Bank of Japan surprised the market in January by announcing it would adopt negative interest rates. Yet, the yen has strengthened against the dollar since and two year inflation expectations as measured by consumer price swaps have dropped to the lowest since October 2014.

Unsettled by the price swings, foreign-exchange traders are now starting to question whether all this central bank action is worthwhile — and even whether policy makers need to retain their inflation targets in the current environment — particularly if their actions snowball into competitive devaluations referred to as a currency war.

Inflation targeting was first implemented by the Reserve Bank of New Zealand in 1990, according to the International Monetary Fund. It was adopted in the 1990s by Australia, Canada, Sweden and the UK. The euro area followed, with Ben S. Bernanke's Federal Reserve setting a price-growth target for the first time in 2012. And there is little evidence that policy makers in developed economies are preparing to extricate themselves from those targets or the policies intended to help achieve them.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

Fourth quarter gross domestic product was up an unrevised 0.3 percent on the quarter. However, annual growth was adjusted just a tick firmer to 1.6 percent. The GDP expenditure components painted a mixed picture of domestic demand. On the negative side, household consumption edged just 0.2 percent higher on the quarter after a 0.5 percent advance last time. More optimistically, gross fixed capital formation accelerated from 0.4 percent to a healthy 1.3 percent rate. Government final spending was up 0.6 percent, double its previous pace, while inventory accumulation added 0.1 percentage points to growth, down from 0.3 percentage points. Net foreign trade again had a negative impact. With exports up just 0.2 percent and imports 0.9 percent higher, net exports subtracted 0.3 percentage points, compounding a 0.4 percentage point hit in the previous quarter. A 0.3 percent quarterly economic growth rate in both France and Germany meant no pick-up from the third quarter pace and Italy slowed from 0.2 percent to a minimal 0.1 percent. Spain (0.8 percent) had another good quarter but confidence surveys have deteriorated quite sharply since to raise a serious question mark over the current period. At least Finland and Greece (both 0.1 percent) were revised up and so are no longer in technical recession.

Germany

January manufacturing orders slipped 0.1 percent on the month following a smaller revised 0.2 percent drop in December. Annual growth was still negative at minus 1.0 percent but up from minus 1.9 percent last time. January's monthly slip was wholly attributable to weakness in basics which fell a hefty 4.0 percent. By contrast, capital goods were up 1.7 percent and consumer & durables 3.9 percent. The domestic market was to blame for the headline decline as orders here decreased 1.6 percent, compounding a 1.5 percent contraction at year-end. Overseas demand expanded 1.0 percent after a 0.8 percent gain.

January industrial production jumped 3.3 percent on the month and the largest in at least six years. It followed a significantly smaller revised 0.3 percent decline in December. As a result, seasonally and workday adjusted annual growth jumped to 2.3 percent, a 5-month high. Construction (7.0 percent) recorded the sharpest monthly increase but all of the major production subsectors saw gains in output. Capital goods (5.3 percent) were especially robust but consumer goods (3.7 percent) also had a very good period. Expansion in intermediates (0.4 percent) was only modest by comparison and energy (0.1 percent) was virtually flat. Total manufacturing advanced a very healthy 3.2 percent following a 0.2 percent rise at year-end.

January seasonally adjusted merchandise trade surplus was €18.9 billion, down from a larger revised €20.3 billion in December and the smallest reading since November 2014. The unadjusted black ink was €13.6 billion, down from €19.0 billion at year-end. The fall in the surplus reflected a combination of weaker exports and stronger imports. A 0.5 percent monthly drop in the former was the second decrease in a row (and fourth in the last six months) and left unadjusted exports 1.4 percent below their level a year ago. By contrast, imports were up 1.3 percent from December, reversing much of that period's 1.6 percent decline, to stand 1.5 percent higher on the year.

United Kingdom

February industrial production was up 0.3 percent on the month and was up 0.2 percent on the year. The key manufacturing sector saw output expand 0.7 percent from January when it contracted a marginally sharper revised 0.3 percent. Eight of the 13 subsectors made headway led by other manufacturing and repair (4.8 percent) which alone accounted for nearly half of the overall rise. The steepest drop was in pharmaceuticals (5.9 percent). Elsewhere within total industrial production, a hefty 5.0 percent drop in mining & quarrying more than offset gains in electricity, gas, steam & air conditioning (4.3 percent) and water supply & waste management (1.1 percent).

The January deficit on global trade in goods weighed in at Stg10.29 billion following an upwardly revised Stg10.45 billion shortfall in December. The modest headline improvement masked a 0.1 percent monthly decline in exports, their fourth decline in a row, and reflected instead a 0.5 percent drop in imports, their fifth decrease since July. The deficit with other European Union countries was Stg8.1 billion, up from Stg7.4 billion in December and a new record high. However, the damage caused here was just more than offset by a Stg0.8 billion decline in the deficit with the rest of the world to Stg2.2 billion.

Asia/Pacific

Japan

Japan's economy did better than originally thought, with an assessment of GDP for the quarter trumping expectations that it would contract even more than originally stated. The second estimate of fourth quarter gross domestic product contracted slightly less than in the first estimate. GDP was down 0.3 percent on the quarter revised from 0.4 percent. On an annualized basis, GDP contracted 1.1 percent instead of 1.4 percent. CAPEX was revised upward to 1.5 percent on the quarter from 1.4 percent. Domestic demand was down 0.4 percent instead of declining 0.5 percent. Household consumption retreated an unrevised 0.9 percent.

In more bad news for the BoJ, February producer price index dropped 0.2 percent on the month and tumbled 3.4 percent from the same month a year ago as expected. It was the 11th consecutive annual decline. Petroleum & coal prices continue to weigh on the index, declining 21.8 percent from a year ago. Nonferrous metals prices dropped 12.5 percent and chemicals & related products retreated 5.4 percent. However, prices for food, beverages, tobacco & feedstuffs managed an annual increase of 0.9 percent which was down from January's 1.2 percent revised increase.

China

February merchandise trade surplus was $32.6 billion, far below the consensus of $48.7 billion. Exports tumbled 25.4 percent from a year ago while imports sank 13.8 percent. The trade surplus with the U.S. was $14.48 billion. Exports dropped 23.1 percent on the year while imports were 14.2 percent lower. When measured in renminbi terms, the surplus was 210 billion yuan. Exports dropped 20.6 percent, the most on record while imports were down 8.0 percent. On a seasonally adjusted basis, exports sank 19.9 percent on the month in February after falling 15.9 percent in January. Imports were down 8.8 percent on the month after plummeting 21.6 percent in January.

February consumer price index was up a greater than expected 2.3 percent from a year ago – expectations were for an increase of 1.9 percent which was the increase in January. On the month, the CPI jumped 1.6 percent after increasing 0.5 percent last time. Urban CPI was up 2.3 percent while the rural index was up 2.2 percent. The jump in the overall CPI can be attributed to food prices. They were up 7.3 percent after rising 4.1 percent in January. Non-food prices were up 1.0 percent after rising 1.2 percent in January. Tobacco & alcohol jumped 5.8 percent after 3.6 percent.

February producer price decline eased to a drop of 4.9 percent on the year after sinking 5.3 percent in January. Expectations were for the PPI to decline 4.9 percent. On the month the PPI was down 0.3 percent after sliding 0.5 percent the month before. Just about every subcategory declined. Consumer goods were down 0.4 percent with food & related products and clothing prices rising. Mining & exploration plunged 18.2 percent after sinking 19.8 percent in January. Raw materials procurement, fuel, power declined 5.8 percent. Fuel & power dropped 10.0 percent after sliding 10.7 in January.

Americas

Canada

February employment was down 2,300 compounding January's 5,700 decline. With the participation rate steady at 65.9 percent, the jobless rate edged up 0.1 percentage point to 7.3 percent, its third increase in a row. The employment decline was wholly attributable to a 51,800 decrease in full-time jobs as part-time positions rose 49,500. The private sector advanced 15,200 and the number of self-employed was up 3,000 but the public sector shed 20,400. A 44,500 shakeout in services dominated the overall drop and there were sizeable declines in health care & social assistance (19,600), education (16,900), accommodation & food (1,200) and other services (14,900). Partial offsets were provided by trade (11,300), business, building & other support services (12,700), and, to a lesser extent, finance, insurance, real estate & leasing (6,500). Meantime, goods producing industries added 42,200 to their headcount, in part thanks to manufacturing (7,600) but largely due to buoyant construction (34,000). Agriculture (7,200) also made a contribution but natural resources (minus 8,900) struggled.

Bottom line

While the Bank of Canada maintained its 0.5 percent policy interest rate, the Reserve Bank of New Zealand did not. The RBNZ lowered its official cash rate by 25 basis points to 2.25 percent. The European Central Bank unveiled its much expected stimulus package that included larger bond buys and lower interest rates. In Japan, contraction was confirmed in the fourth quarter while producer prices tumbled yet again. China's merchandise trade data indicated weak global and domestic demand.

More central bank meetings will occur this week. The Bank of Japan, the Federal Reserve, the Swiss National Bank and the Bank of England announce their respective monetary policy decisions. All are expected to maintain current policies. Australia and the UK report labour market data. Japan releases February merchandise trade data and January machine orders. The latter is a proxy for capital expenditures.

Looking Ahead: March 14 through March 18, 2016

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