Riskier assets soared higher during the week as equities and petroleum surged forward and the dollar retraced. The Euro, the Aussie dollar, the loonie and the pound all presented solid returns.
On Monday, the markets focused on economic news out of Asia. A record rise in exports helped Japan’s current-account balance swing back to surplus in January, according to the government, adding to hopes that overseas demand will continue to support the nation’s economic recovery. January’s current account surplus or Japan’s net earnings from international trade and investment, stood at ¥899.8 billion ($9.95 billion) compared with a ¥132.7 billion deficit a year earlier, according to the Finance Ministry. The result represents the 12th straight month of surplus, while the rebound from the previous year ¥1.033 trillion is the largest since a ¥1.222 trillion recovery in March 1992.
Meanwhile, the nation’s bank lending in February, excluding that by Shinkin, or credit-union banks dropped 1.6% from a year earlier, according to the BOJ. Bank lending fell for the third month in a row in February as businesses continued to shy away from making new investments. The figure improved on a 1.7% fall in January, but still marks the third-straight month of decline. Weak lending from banks shows that Japan’s economic recovery lacks the necessary strength to prompt companies to borrow more capital to expand their operations. Firms have also reduced their reliance on bank lending as improving financial market conditions make it easier for them to raise money through selling bonds or issuing stocks if needed. The BOJ also said Japan’s money stock increased 2.7% on year in February, compared with a revised 3.0% rise in January. M2 includes cash currency in circulation and deposits held by the BOJ and other financial firms in Japan, excluding Japan Post Bank.
On Tuesday even as the equity markets continued to rally, market participants focused on the weakening UK economy. The economic data in the UK does not paint a pretty picture. The RICS February house prices (with the main index falling to a much weaker than expected 17% from 31%) was very disappointing. The January trade balance data was also a disaster for UK bulls, with the main deficit widening to a much worse than expected £7.98bn (vs. -£7billion previously and vs. -£7bn expected) while the non-EU trade gap widened to -£3.8billion (from -£2.6billion). This was the worse trade performance since August 2008 and resulted from a 6.7% monthly drop in exports while imports were down 1.6%. The slump in exports is disappointing at a time of sterling weakness but one should not forget that the UK main trading partner (the euro zone) recovery is extremely sluggish and a weaker currency will do little in the near-term if external demand is very weak to start with. Coupled with the negative adverse effects that the poor weather recorded in Q1 will have on GDP growth, the highly disappointing trade figures underline a further drag on economic activity.
On Wednesday, market participants were happy to see better than expected US inventory news. U.S. wholesalers’ inventories unexpectedly fell 0.2% in January, according to the Commerce Department, as surging demand pulled goods off shelves in the first month of the year. Wall Street analysts had expected inventories to rise by 0.2% in January. The unexpected decline followed a downward revision in December’s inventory level showing December inventories contracted by 1.0%, rather than the 0.8% drop originally reported. Sales by U.S. wholesalers in the first month of 2010 were up 1.3% to a seasonally adjusted $346.7 billion, the latest data showed. It was the tenth straight monthly increase in sales, according to the Commerce Department. Sales were particularly strong for cars and groceries. The decline in inventories is good news for the U.S. economy. As inventories are reduced, they will need to be replaced which creates more employment. The amount of wholesale goods on hand relative to sales was 1.10 in January, a record low. The inventory-to-sales ratio measures how many months it would take for a firm to deplete its current inventory. The ratio in December was 1.12.
In Asia, China reported stronger export and import figures for February than expected, with the net result of a smaller than expected trade surplus. In fact, February’s trade surplus of $7.6 billion is the smallest in a year and a bit more than half of the January surplus. In terms of global imbalances, the US trade deficit and the Chinese trade surplus have been roughly halved as a percentage of GDP over the last couple of years. In the US case, it seems largely cyclical and the growth differentials that we expected to close the output gap in the US before Europe and Japan will likely see the US trade deficit grow again, though from a lower base. In China’s case, the possibility of a structural shift is greater, though too early to tell. China’s exports rose 45.7% in February from the depressed year-ago levels. Yet this is more than twice the pace in January and may also have been distorted by the earlier lunar New Year. Imports jumped almost 45%, better than the 39.7% expectations, but well off the mind-boggling 85.5% pace reported in January.
Furthermore, Japan’s economy may be benefiting from the revival in its neighboring Asian economies, but domestic demand remains very sluggish and deflationary forces continue. February machinery orders were softer than expected at down 3.7% m/m (vs. +20.1% in December.) That put the yearly rate at -1.1% (vs. -0.6% expected). Machinery orders are a good proxy for business investment, so this disappointing January performance is not particularly promising for Q1GDP.
On Thursday, riskier assets continued to climb, help a quarterly Federal Reserve report that said U.S. households’ total net worth climbed 1.3% in the fourth quarter, to $54.18 trillion from the third quarter’s $53.49 trillion. For 2009 as a whole, net worth rose 5.4%. Household net worth is assets, such as home equity, minus liabilities, such as mortgage debt. A large chunk of the increase in net worth came from a drop in household debt, as an increasing number of financially stretched consumers defaulted on mortgage and credit-card debts. While the defaults are painful for families and costly to banks and investors, economists say they are also speeding the financial rehabilitation necessary for a return to robust growth.
The buoyant state of China’s economy was in the limelight Thursday in Asia. China is not just an externally driven economy, the strong February retail sales captured a very strong consumer sector, with a yearly growth rate beating expectations, at 17.9% y/y. February industrial production also impressed, with a 20.7% yearly rate, beating expectations. However, it is the February CPI that has caught most headlines, with a yearly inflation rate firming to a stronger than expected 2.7%, up from 1.5% previously. The data highlights overheating economic conditions, with the Jan/Feb reserve requirement hikes not filtering through to the economy just yet.
In Japan, the economic environment is not all that rosy and the final Q4GDP was revised down, to 0.9% (from 1.0%), with the deflationary forces yet again in the limelight as the GDP deflator stood at -2.8% y/y.
On Friday there was a plethora of data in the US for the market to absorb. Retail sales rose last month by 0.3%, according to the Commerce Department. With the Super Bowl early in the month, electronic store sales soared. Economists surveyed had forecast a 0.3% decrease. January retail sales were adjusted downward, to a 0.1% increase from a previously reported 0.5% gain. Excluding the car sector, all other retail sales rose 0.8%. Economists had forecast a 0.1% increase. Ex-auto sales in January rose 0.5%, revised from a previously estimated 0.6% gain. Retail sales data are an important indicator of consumer spending. Consumer spending represents some 70% of demand in the U.S. economy.
Unfortunately, Business inventories were on the soft side. Not only was the January reading flat, but the December series was revised to -0.3% from -0.2%. January wholesale and factory inventories had previously been released so the new information Friday was largely the 0.1% decline in retail inventories. Inventories added mightily to Q4 09 5.9% annualized GDP and some analysts dismiss the growth because of this phenomenon. However, a large part of the contraction was also due to inventories. The inventory cycle is still unfolding. The large swing in Q4 still is about the pace of inventory liquidation. It is a gradual process that can be stretched out for the next couple of quarters at least. As sales are increasing, the inventory to sales ratio is tightening.
Currencies:
In Japan, both the prime minister and the finance minister made a none-too-thinly veiled threat of foreign exchange intervention. One investment house was quoted on the wires late
Thursday suggesting the odds of intervention stood at 47%. The MOF is insistent on providing a deflationary fighting measure for the Yen.
The RBNZ left rates on hold (at 2.5%) and reiterated that rates would remain on hold until around mid-year but also signaled that the pace of tightening would be gradual. Governor Bollard stated that rate hikes may be less than in previous cycles and that growth is likely to be subdued relative to past recoveries including the RBNZ’s forecast for 4.4% y/y growth. Inflation is expected to remain within target and Bollard noted that financial conditions are tighter than the ODR would imply reinforcing his point that the ODR is likely to be hiked by less than in previous cycles.
Canada’s unemployment rate edged down 0.1 percent to 8.2 percent in February as 21,000 people started new jobs, Statistics Canada reported on Friday. The agency said there were 60,000 new full-time jobs filled in February, but 39,000 part-time jobs were lost. Analyst had expected an increase of 15,000 jobs and an unchanged unemployment rate at 8.3 percent. The Canadian dollar is breaking through support and now could make a run at par.
Commodities:
Crude Oil edged higher this week, rallying a little more than a dollar per barrel driven by dollar weakness, a strong equity markets. During the middle of the week, the Organization of Petroleum Exporting Countries predicted members will need to produce 28.94 million barrels a day to satisfy demand in 2010. OPEC projection is an increase of about 190,000 barrels a day more than last month’s projection. “Even taking into account the uncertainty regarding demand for OPEC crude, current OPEC production is likely to exceed market needs,” the Vienna-based secretariat said in the report.
OPEC increased its forecast for worldwide oil consumption in 2010 by 120,000 barrels a day to 85.24 million barrels a day. That represents growth of 880,000 barrels a day from 2009, 80,000 barrels a day more than it forecast last month. Consumption growth is driven entirely by developing economies and will remain sensitive to the pace of global economic recovery, according to OPEC.
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