Global Markets

Central banks ruled the week along with commodity prices. While the results were benign from the Reserve Bank of New Zealand and Federal Reserve, they were not from the Bank of Japan. Although there had been talk of BoJ easing, it was expected closer to the end of the fiscal year in March. The BoJ surprised by lowering its key interest rate from plus 0.1 percent to negative 0.1 percent. The announcement occurred after a spate of disappointing December data including declines in household spending and retail sales along with a surprising drop in industrial output. And the CPI was virtually unchanged at zero.

However, global stocks gyrated during the week, driven by changes in crude oil prices and continued concerns about global growth. Uncertainty regarding the FOMC statement also hovered over investors. But rallies after the BoJ's announcement sent major indexes up for the week but they remained down for the first month of the year.

Bank of Japan

The Bank of Japan adopted negative interest rates in their first benchmark rate move in five years. It left its quantitative and qualitative easing program at its current level of buying ¥80 trillion a year. The BoJ adopted a benchmark rate of minus 0.1 percent, from a previous level of plus 0.1 percent. It is the first time they have moved interest rates since October 2010. The vote to introduce negative rates was 5 to 4. The BoJ said it would lower interest on excess reserves further if needed. The BoJ now says it can reach its 2 percent inflation around the first half of 2017.

Most economists had expected the BoJ to stay on the same course, although investors were looking to central banks for additional support given falling stock prices. Deflationary pressures — largely energy-related — and the risks they pose to the BoJ's inflation expectations are consistently cited as a likely motive for further easing.

In December the BoJ tweaked policy slightly when it announced it would extend the average maturity of government bonds in its portfolio — an effort to flatten out the yield curve — and also announced a new ETF purchase program. The BoJ said it would extend the average maturity of its government bond holdings to 7 to 12 years, from 7 to 10 years, and also established a program to purchase ETFs at an annual pace of about ¥300 billion, in addition to the current program in which it buys about ¥3 trillion of ETFs. The new scheme will begin in April.

The monetary policy board said that the core CPI was likely to continue to be about zero for now due to the decline in energy prices. It noted that the economy has continued to recover moderately and is likely to continue to do so. The BoJ said that output remains flat but CAPEX is on a moderate rising trend. It noted that private consumption has been resilient.

Federal Reserve

As expected, the Federal Reserve left its fed funds interest rate range at 0.25 percent to 0.5 percent where it has been since December 2015. However, markets were unhappy because the FOMC did not give specific guidance as to when they would next change its fed funds rate. In its statement issued after the FOMC meeting, the Fed said that it was concerned about weak global growth and wobbly financial markets, but it made clear that it still expected to raise interest rates "gradually."

Fed Chair Janet Yellen said after the December announcement that "the economic recovery has clearly come a long way, although it is not complete." The new policy statement suggested that the Fed's confidence in the economic outlook had since deteriorated. The Fed noted that some economic measuring sticks were doing well, like continued job growth and the revival of the housing market. On the other hand, it said domestic economic growth apparently slowed in the final months of 2015.

Some officials see little evidence that slow growth in the rest of the developed world, and problems in China and other developing nations, will interfere significantly with domestic growth. The United States, after all, is by far the largest consumer of its own goods. Others, however, argue that the risks are being understated. The divergence between the United States and its major trading partners has increased the value of the dollar, reducing demand for exports such as manufactured products and farm goods.

Global Stock Market Recap

Europe and the UK

Friday's rally changed weekly losses to gains for most of the major indexes as markets here followed Asian stocks higher after Bank of Japan's negative interest rate move. The FTSE was up 3.1 percent, the CAC added 1.9 percent, the DAX gained 0.3 percent and the SMI advanced 0.6 percent on the week. However, all indexes retreated in January with losses ranging from 2.5 percent (FTSE) to 12.9 percent (MIB). Crude oil prices also continued their recent recovery, with the Brent rising to around $34 a barrel. Trading was volatile, increasing or decreasing primarily with the price of oil. Friday's Bank of Japan announcement fueled investor optimism that other central banks and policymakers in China will keep pumping more credit into the system in order to prevent further market turmoil.

Thursday's declines were blamed on disappointing economic data with Eurozone economic confidence falling to a five month low. Investors were in a negative mood early, after another drop in the Chinese stock market. Investors had their first opportunity to react to Wednesday's Federal Reserve announcement on Thursday. In its statement, the Federal Open Market Committee (FOMC) acknowledged that economic weakness overseas is a threat to the U.S. recovery. The Fed did not completely rule out another rate increase at its March meeting.

The UK economy climbed 0.5 percent on the quarter and 1.9 percent from a year ago. On an annualized basis, GDP was up 2.0 percent. French flash GDP was up 0.3 percent on the quarter and 1.3 percent from a year ago and also 1.3 percent on an annualized basis. In contrast, U.S. trailed both countries and was up only 0.7 percent on an annualized basis.

Asia Pacific

Equities were up last week in volatile trading. Only the Shanghai Composite retreated on the week (down 6.1 percent). However virtually all indexes were down in January — only the Jakarta Composite and SET managed to advance. For the week, gains ranged from 7.7 percent (PSEi) and 4.2 percent (Taiex) to 1.7 percent (Kospi). Monthly losses ranged from the Shanghai Composite's 22.6 percent and the Hang Seng's 10.2 percent drop to a 1.5 percent decline for the KLCI.

The Nikkei briefly dipped into negative territory Friday as investors assessed the broader effects of negative interest rates on the economy and exchange rates. Investors largely shrugged off a string of tepid data showing a bigger than expected drop in industrial production, sluggish retail sales, a decline in household spending and lackluster inflation. However, equities jumped after the BoJ announcement. The BoJ's monetary policy expansion came amid a sputtering domestic economy, stubbornly low inflation and turbulent global financial markets.

Once again the outsized fluctuations of the Shanghai Composite dominated for most of the week — that is until the Bank of Japan's surprising Friday announcement. Investors here were leery before the Federal Reserve announcement on Wednesday but rallied after it on Thursday. And on Friday, they soared at the thought of more easing from the BoJ. On Friday, the Shanghai Composite hit an intraday peak about a half hour before the market's close. Traders have been watching the market closely in final hour, because it has dropped on several occasions. Investors worry that Beijing isn't propping up shares through state-backed funds, which had jumped in during rocky sessions last year to buy shares.

In Chinese markets, the "2 o'clock phenomenon" is back — with a twist. On eight of the 14 trading days since January 11, the Shanghai Composite has moved more than 1 percent in the last hour before the 3 p.m. close. On six of those eight occasions, the market headed south. The pattern is reminding investors of last summer's Chinese equity market meltdown, when heavy outbursts of afternoon market activity were also frequent, usually following a calm morning and a long lunch break when stock markets are closed between 11.30 a.m. and 1 p.m. There is one key difference from the summer, though: Back then, shares often enjoyed a late rally thanks to Beijing's obvious intervention, as state-backed funds bought stocks to prop up the market. When this so-called "national team" of funds was more active in the market, it had a habit of snapping up stocks after 2 p.m., analysts say.

Investors drew some relief after the People's Bank of China said it would increase the frequency of open market operations between January 29 and February 19 to keep the banking system flush with cash around the Chinese New Year celebrations.

Currencies

The U.S. dollar was mixed last week. It advanced against the yen, pound sterling and Swiss franc but retreated against the euro and the commodity currencies — the Canadian and Australian dollars. The U.S. currency surged Friday after the BoJ's move. However, the yen has a ways to go to equal its late May 2015 value of about ¥125.

The Bank of Japan's surprise decision to adopt negative interest rates Friday could drive the dollar back up to ¥125 according to analysts. However, the extent of the impact of the BoJ announcement on the currency and fixed income markets will depend on how the Japanese, rather than foreigners, respond to negative rates. Japanese investors own more than 90 percent of the local government bond market and could increase their investment abroad in search of more attractive yields — a move that is likely to weigh on the yen. The BoJ's decision also damages the yen's appeal as a traditional safe haven, leaving the dollar as the currency market's safest bet during uncertain times.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

January EU Commission's economic sentiment index (ESI) was 105.0, down 1.7 points from a revised December reading to register a 5-month low. The headline drop was mainly due to worsening sentiment in industry (minus 3.2 after minus 2.0) and households (minus 6.3 after minus 5.7). However, confidence also suffered setbacks in both services (11.6 after 12.8) and construction (minus 19.1 after minus 17.6) and remained only flat in retail (2.9). Regionally among the larger member states, the national ESI in Germany (104.7) fell to its lowest level since last April and in Spain (104.7) saw its weakest outturn since February. Italy (107.8) declined to a 5-month trough but France (103.2) saw it highest print in three months. Household inflation expectations fell 1.3 points to 2.3, their softest mark since October 2015 and their second weakest in nine months. Manufacturers' expected selling prices were down a point at minus 4.2, their most depressed reading since March. The only respite came from services where future output prices were seen slightly higher (3.2 after 2.3) but even the pick-up here reversed only around a half of December's decline.

January flash harmonized index of consumer prices was up 0.4 percent on the year. However, January's rate was biased up by a record 1.5 percent monthly fall in the HICP in January 2015 and without this, inflation would probably have been flat at best. Base effects were particularly marked in the energy sector where the annual rate climbed 0.5 percentage points to minus 5.3 percent. However, this was partially offset by a 0.1 percentage point dip to 1.1 percent in the rate for food, alcohol & tobacco. Inflation in services edged a tick firmer to 1.2 percent maintaining a broadly flat trend, but non-energy industrial goods prices accelerated to a 0.7 percent yearly rate from 0.5 percent last time. Core inflation moved 0.1 percentage points higher with both the ex-energy, food, alcohol & tobacco and the ex-energy & unprocessed food rates weighing in at 1.0 percent.

Germany

January Ifo survey showed a surprisingly large deterioration in business sentiment. At 107.3 the headline climate indicator was down 1.3 points from its marginally weaker revised December reading and at its lowest level since June. The worsening reflected declines in both current conditions and, in particular, expectations. The former component dropped a relatively mild 0.3 points to 112.5 but this was still its weakest since last March. Expectations were off more than two points at 102.4, their sharpest decrease since June 2012 and a 5-month trough. Morale was down in all of the major sectors apart from wholesale (13.0 after 11.8) which reversed around half of December's decline. The manufacturing index (8.3 after 12.2) was below anything posted in 2015 and services (27.9 after 33.8) put in their poorest performance since July last year. Construction (minus 0.7 after 1.6 percent) moved back into negative territory for the first time since August. Retail (7.2 after 7.3) at least held up quite well.

France

Fourth quarter flash gross domestic product was up 0.2 percent and 1.3 percent on the year. The provisional GDP expenditure components showed final domestic demand adding a minimal 0.1 percentage points to the quarterly change in total output, down from 0.3 percentage points in the July to September quarter. The deceleration here was largely due to weakness in household consumption which dropped 0.4 percent, in part no doubt reflecting the effects of the November terrorist attacks in Paris. Seasonably warm weather also probably dented spending. By contrast, gross fixed capital formation was up 0.8 percent thanks to business investment which increased 1.3 percent. Housing investment (0.1 percent) was again soft but at least finally turned higher. Government spending was 0.4 percent firmer for a second successive quarter and inventories boosted growth by a further 0.5 percentage points having already added 0.6 percentage points in the previous period. A 0.6 percent advance in exports was swamped by a 1.6 percent increase in imports to see net foreign trade subtract 0.3 percentage points.

United Kingdom

Fourth quarter gross domestic product was up 0.5 percent from the third quarter and 1.9 percent from the same quarter a year ago. As usual with the first estimate, the ONS provided no details of the GDP expenditure components but the monthly data suggest that growth was based upon another solid increase in household spending. Net trade probably also provided a boost after subtracting a full percentage point from the quarterly expansion rate in the third quarter. With industrial production down 0.2 percent (manufacturing flat) and construction off 0.1 percent, the headline advance was essentially attributable to a 0.7 percent increase in service sector output, its best performance since the fourth quarter of 2014. Within this were healthy increases in distribution, hotels & restaurants (1.1 percent) and business services & finance (0.9 percent). Government expanded 0.3 percent. Elsewhere agriculture was up 0.6 percent following a 0.2 percent rise last time.

Asia/Pacific

Japan

December merchandise trade surplus was Y140.2 billion – expectations were for a deficit of Y446.2 billion. Both imports and exports contracted more than expected leading to the overall surplus rising to its highest level since March. Exports contracted 8 percent from a year ago, a steeper decline than both November's result of down 3.3 percent and forecasts for an 8 percent drop. Imports plunged 18 percent on the year after a 10.2 percent contraction in November. Forecasts were for an 8.3 percent decline. Imports and exports from and to the U.S. and European Union both shrank sharply in December, while trade with China also weakened.

December retail sales dropped 1.1 percent from a year ago for a second month. Analysts expected sales to slip 0.1 percent. Among the categories that declined were general merchandise (down 0.8 percent), motor vehicles (down 2.1 percent), fuel sales (down 16.3 percent) and machinery & equipment (0.3 percent). However, sales of apparel were up 3.9 percent, food & beverage were 3.2 percent higher and medicine & toiletry were up 4.4 percent.

December's jobless rate was 3.3 percent for a second month as expected. The rate was up from 3.1 percent in October which was its lowest point in just over 20 years. The falling jobless rate comes courtesy of a shrinking labour force. In a sign that the labour market is tightening, the jobs-to-applicant ratio ticked up to 1.27 from 1.25. Employment was up 280,000 from a year ago after increasing only 80,000 in November. The labour force participation rate climbed to 59.5 percent from a year ago while the employment rate rose to 57.6 percent – both were up 0.2 percent.

December household spending dropped 4.4 percent from a year ago – analysts expected the decline to be 2.4 percent. This was the fourth consecutive decline in spending. Expenditures on clothing & footwear tumbled 16.8 percent from a year ago while spending on fuel, light & water charges retreated 10.7 percent. Education dropped 7.5 percent and culture & recreation was 3.9 percent lower. However, spending on medical care, food, furniture & household utensil gained.

Inflation continues to be far below the Bank of Japan's goal. December consumer price index was down 0.1 percent on the month but up 0.2 percent from a year ago. Excluding fresh food, the CPI was down 0.2 percent but up 0.1 percent on the year. So-called "core-core" inflation, the BoJ's preferred measure that excludes both food and energy prices, was up 0.8 percent from a year ago, down from November's 0.9 percent.

December industrial production contracted 1.4 percent on the month after retreating 0.9 percent in November. On the year, output was down 1.6 percent. The monthly contraction was the largest since May. In 2015, output declined in seven of 12 months. Among the industries that declined were general-purpose, production and business oriented machinery (down 2.9 percent), electronic parts & devices (down 3.5 percent) and transport equipment (down 0.9 percent).

Australia

December quarter CPI was up 0.4 percent after increasing 0.5 percent in the previous quarter. On the year, the CPI was up 1.7 percent after increasing 1.5 percent. The trimmed mean was up 0.6 percent on the quarter and 2.1 percent on the year. The weighted mean was up 0.5 percent and 2.0 percent. The most significant price increases this quarter were in tobacco (7.4 percent), domestic holiday travel & accommodation (5.9 percent) and international holiday travel & accommodation (2.4 percent). These increases were partially offset by declines in automotive fuel (down 5.7 percent), telecommunication equipment & services (down 2.4 percent) and fruit (down 2.6 percent). The increase of 0.1 percent for the housing group was the weakest since March quarter 1998.

Americas

Canada

November monthly gross domestic product was up 0.3 percent on the month following a poor October and even worse September. On the year, GDP was up 0.2 percent. Both the goods producing and service sector industries improved. The former saw output expand 0.4 percent, a figure matched by manufacturing. Utilities were up 1.0 percent and there were gains in agriculture, forestry, fishing & hunting (0.5 percent) as well as mining, quarrying, & oil & gas extraction (0.6 percent). Construction was flat. Services were pulled higher by solid monthly advances in wholesale trade (1.3 percent) and retail (1.2 percent) in addition to a solid increase in transportation & warehousing (0.8 percent). On the downside, arts, entertainment & recreation (minus 1.2 percent) had a poor month and a number of other subsectors posted small declines.

Bottom line

Markets rallied at week's end thanks to the Bank of Japan's move to negative interest rates. Investors however were frustrated by the FOMC statement that did not give specific guidance on the next fed funds increase. Economic data were mixed. December from Japan disappointed with industrial production, retail sales, household spending and exports declining. Germany's data disappointed but UK data did not. US data were mixed.

The first week of the month is always packed with important new economic information. The Bank of England and the Reserve Banks of India and Australia hold policy meetings. The three are expected to maintain the status quo. The BoE at the same time will publish its Quarterly Inflation Report. January PMIs will be reported. Labour force data for Germany, the Eurozone, Canada and the U.S. will be carefully monitored by investors.

Looking Ahead: February 1 through February 5, 2016

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