Global Markets

It turns out that investors had a good reason to be wary in the days leading up to Friday’s U.S. employment situation report. Regardless of some relatively favorable data earlier in the week in the U.S., the employment report wiped that away as investors continue to look to the U.S. as an engine for global growth. In a stark report, there was no change in August employment while the unemployment rate remained at 9.1 percent for a second month. At week’s end and despite Friday’s heavy losses, most equity indexes managed to hold onto gains — except the Shanghai Composite, Dow and S&P 500.

For the record, all equity indexes followed here were down for the month. Losses ranged from a mild 0.8 percent slide for the Bolsa and a 1.4 percent decline for the S&P/TSX Composite to a formidable 19.2 percent plunge for the DAX.

One of the few data series that mostly are comparable globally are the various purchasing managers’ surveys produced by Markit in conjunction with local sponsors. The net result here was that in August, the global manufacturing recovery appeared to have come to a grinding halt. In many countries, the surveys produced the lowest readings of manufacturing activity, orders and jobs since mid-2009 when the global economy was crawling out of recession. The current weakness came shortly after the crisis over the U.S. debt ceiling and continuing turmoil in the eurozone led to a loss of confidence in the sovereign debt of Italy and Spain. Purchasing managers’ indexes are far from perfect indicators of manufacturing health, but at the same time, they are closely watched for their tendency to deliver early warnings of problems ahead.

The two competing Chinese PMI indices both notched small increases but remained at levels far below those suggesting rapid growth. Japan’s PMI fell back to a three month low indicating a still-faltering recovery from the effects of the tsunami in March. The South Korean PMI fell below 50 for the first time since the recovery from the 2008 global financial crisis. And in the eurozone the PMI index dipped to 49. The same pattern followed for countries outside the eurozone with the PMI indexes in Switzerland, Sweden and the UK all declining below the 50 breakeven point as well. However, a bright spot was in the U.S. where the ISM manufacturing index showed slower growth rather than contraction.

Global Stock Market Recap

Europe and the UK

Despite Friday’s plunge that pared the biggest weekly rally since July, equities were up on the week. On Friday shares were already lower prior to the U.S. employment report and sank further after its release showed no employment change. On the week, the DAX managed to squeak by with less than a point gain after Friday’s heavy losses while the FTSE and CAC were up 3.2 percent and 2.0 percent respectively. For the month, the DAX plummeted 19.2 percent while the CAC lost 11.3 percent. The FTSE ended August 7.2 percent lower.

The week began on an upbeat note, but that unfortunately ebbed as the week wore on. Enthusiasm for stocks on Monday was driven by Ben Bernanke's comments in Jackson Hole that the FOMC would weigh options on monetary policy at its September meeting. Relief that damage from Hurricane Irene — except to those who experienced it personally — was not as bad as feared also helped boost equities. Also underpinning the positive tone was the U.S. personal income and spending report which showed that consumers spent more in July.

Confidence was sapped by a string of lackluster reports including one showing sentiment sagging for both business and the consumer. And the PMI reports for the eurozone and its members showed growth slipping for almost all members including Europe’s engine of growth, Germany. According to the ECB shadow council, a group of 15 economists and portfolio managers who watch economic developments and monetary policy in the euro area and issue recommendations each month, the data suggest the sharp slowdown in economic growth in the second quarter may continue into the third.

The sovereign debt situation continues to simmer especially after Greece said it could miss its budget deficit target due to the nation’s deepening recession. Also, talks between Greece and the European Union, International Monetary Fund and the European Central Bank regarding its budget deficit conditions that need to be met to qualify for the eurozone’s rescue funds have been put on hold until mid-September.

Swiss economic growth weakened in the second quarter, as exports slumped due to the surging value of the Swiss franc as investors seek a safe haven. Growth was the weakest since the second quarter of 2009. The gross domestic product expanded 0.4 percent on the quarter and 2.3 percent on the year after growing 0.6 percent and 2.5 percent on the year in the first quarter.

Asia Pacific

Equity indexes were up on the week with the exception of the Shanghai Composite. However, all were down for the month of August. The monthly losses ranged from 2.9 percent (All Ordinaries) to 11.9 percent (Kospi) as market participants worried about growth in the U.S. economy. Most equities were down on Friday as nervous investors moved to the sidelines ahead of the U.S. employment report that was released after markets here had closed for the week. Gains for the week ranged from the Kospi’s 5.0 percent to the All Ordinaries’ 1.2 percent. The Jakarta Composite was closed for the week.

The Shanghai Composite slid 3.2 percent as investors here were wary of further monetary tightening after the People's Bank of China said it would broaden banks' reserve requirements, including those used for margin trading purposes in an attempt to drain excess liquidity. The move is to be implemented in stages through mid-February.

The Nikkei ended a six day winning streak Friday as it slid 1.2 percent on U.S. growth worries. With investors focusing on the U.S. employment report, they showed little reaction to the announcement of the cabinet by newly elected Prime Minister Yoshihiko Noda. Earlier in the week, Japan released many of its July economic indicators. Of note, industrial production data were weaker than expected as the slowdown in global growth and in turn its impact on Japan’s exports has cut into the country’s recovery from the March 11^th earthquake and tsunami.

Currencies

The U.S. dollar was up against the euro and pound sterling but declined against the Swiss franc. The dollar found support as investors sought a safe haven even though the dreadful employment report added to worries about the strength of the U.S. economy. The report raised speculation that the Federal Reserve would begin another round of quantitative easing.

The euro declined as concerns over eurozone growth and the region’s fiscal crisis weighed on the currency. The euro was pressured after the manufacturing PMI surveys across the region were weaker than expected. The weakness was pervasive and included the periphery member states as well as the core countries of Germany, France and Italy. This in turn, raised speculation that the European Central Bank might abandon its hawkish stance on interest rates at its policy meeting September 8^th and might even loosen monetary policy. Adding to the pressure on the euro were fresh worries over the eurozone debt crisis.

The Swiss franc was the biggest beneficiary as investors sought a safe haven from renewed concerns over eurozone government debt and growth. The franc was up — speculation receded that the Swiss National Bank would intervene directly in the market and sell the franc. Traders said the SNB, which had been active in the forwards market to drive down interest rates and suppress demand for the franc, had pulled back from the interest rate market, giving investors a green light to buy the currency.

Selected currencies — weekly results

Indicator scoreboard

EMU

August economic sentiment slumped nearly 5 points to a 15-month low of 98.3. The declines in confidence were broad based and widespread. Among the major sectors, consumer moral fell a sizeable 5.3 points to minus 16.5 and was down 3.8 points at minus 2.9 in industry. Retail saw a 5.1 point drop to minus 8.7 and services were off 4.2 points at 3.7. The only area to post an improvement was construction which managed a 1 point increase to a still very lowly minus 23.3, still its best reading of the year. Regionally, sentiment fell almost 6 points in Germany but registered much smaller declines in Italy (0.7 points) and Spain (0.3 points). France did not supply any data. Elsewhere, conditions improved in Greece (2.8 points) but remained very weak and fell sharply in both Portugal (5 points) and, especially, Cyprus (11.2 points). Across the region as a whole, sentiment was above its long-run average in just Estonia, Finland, Germany and Luxembourg.

August flash harmonized index of consumer prices was up 2.5 percent on the year for the second month. As with all flash estimates, no details are available. Regionally among the larger economies, inflation fell 0.2 percentage points to 2.4 percent in Germany and was 0.3 percent lower at 2.7 percent in Spain. Italian inflation disappointed however, edging up to 2.2 percent.

July joblessness across the region increased by 61,000 to 15.757 million — the consecutive second monthly advance. However, the increase was not enough to boost the unemployment rate which was unchanged at 10.0 percent following a small upward revision to the June rate. Conditions in the larger member states were mixed. While the jobless rate held steady at 6.1 percent in Germany and 8.0 percent in Italy, it rose 0.1 percentage points to 9.9 percent in France and was up 0.2 percentage points in Spain to 21.2 percent. Spain remains at the top of the EMU unemployment ladder while at the other end of the scale, the Austrian rate fell 0.2 percentage points to 3.7 percent.

August manufacturing PMI reading slipped below the 50 breakeven point to a reading of 49.0 — a two year low. Output fell for the first time in more than two years and new orders dropped for the third month in a row, reflecting weakness in both domestic and overseas demand. Moreover, the new orders/finished goods inventory ratio slumped to a 2 ½-year low and employment grew at its weakest pace in almost a year. Results for the larger members make especially worrying reading with only the national German index (revised down to 50.9) holding above the key 50 level. In France the PMI dropped 1.4 points to 49.1 (25 month low) while Italy was down 3.1 points at just 47.0 (24 month low) and Spain 0.3 points weaker at just 45.3 (19 month low). In France output fell for the first time since June 2009 and in Spain, production contracted more sharply than at any time since the same month. Against the backdrop of weakening output and demand, price pressure predictably continued to ease. Input costs registered their smallest increase in 21 months while factory gate inflation declined to a 17 month low.

Germany

July seasonally adjusted retail sales (excluding autos) were unchanged in July but this followed a sharply reduced 4.5 percent gain in June. Sales were up 1.5 percent on the year. Annual growth figures for the first seven months of the year showed total sales 1.0 percent higher over the same period in 2010 with food drink & tobacco 0.3 percent weaker but non-food purchases up 2.0 percent. Within the latter group, mail order (5.1 percent), furniture & household goods (2.5 percent) and the other assorted good category (3.7 percent) all posted above average increases.

August joblessness was down 8,000 on the month following a marginally smaller revised 10,000 decline in July. At the same time, the unemployment rate held steady for the second month in succession at 7.0 percent. Total joblessness stands at 2.951 million. Job vacancies were up another 5,000 after a 2,000 increase at the start of the quarter. The Labour Agency indicated that while there has been some loss of momentum, the demand for labour remains relatively stable at a high level. The unemployment figures followed the release of ILO data showing employment rising a further 33,000 in July to a record 41.096 million and an unchanged jobless rate of 6.1 percent.

Second quarter gross domestic product edged up an unrevised 0.1 percent on the quarter and was up 2.7 percent from a year ago. The minimal quarterly advance in total output followed a 1.3 percent spurt at the start of the year and a 0.5 percent increase at the end of 2010. The breakdown of the headline showed a sharp 0.7 percent quarterly contraction in private consumption that more than wiped out a 0.4 percent increase at the start of the year. Growth in government spending was steady at 0.2 percent but gross fixed capital formation slowed dramatically, up just 0.3 percent over the period after a 4.5 percent surge in the first quarter. Equipment investment rose 1.7 percent or 0.4 percentage points less than last time and construction investment shed another 0.9 percent. However, with inventories adding some 0.7 percentage points to the quarterly increase in GDP, overall domestic demand was up 0.4 percent compared with a 1.1 percent advance in the first quarter. Net exports subtracted 0.3 percentage points from the bottom line as export volumes expanded 2.3 percent but were outpaced by imports which were up 3.2 percent.

France

Second quarter mainland ILO unemployment rate edged down to 9.1 percent from 9.2 percent in the first quarter. This was the second consecutive decline and left the rate at its lowest level since the first quarter of 2009. Including overseas territories, unemployment also declined 0.1 percentage points to a 9.6 percent rate. In metropolitan France, the rate now stands 0.2 percentage points lower on the year and reflects some 2.580 million people out of work.

Italy

June retail sales were down 0.2 percent on the month to stand 1.2 percent lower on the year. The June drop was concentrated in the non-food sector where purchases declined 0.3 percent and now show an annual contraction of 1.8 percent. Food sales were unchanged on both the month and on the year. Within discretionary spending all sub-sectors showed lower purchases over the year to date with the exception of shoes & leather articles (0.3 percent), perfume & personal hygiene (0.5 percent) and hardware & household items (0.1 percent). The worst performing areas were electrical appliances (down 3.2 percent) and musical instruments (down 3.7 percent).

July producer prices were up 0.3 percent on the month and 4.9 percent on the year. July saw the first monthly advance since April and came after June's 0.1 percent gain was revised away to unchanged. However, headline prices only rose due to a 1.3 percent bounce in the cost energy. Although consumer goods prices crept up 0.1 percent from the end of last quarter, it was energy (1.3 percent) that dominated the headline increase. Capital goods charges were flat and intermediates slipped 0.1 percent. Excluding energy, prices were up 3.9 percent on the year.

Asia/Pacific

Japan

July unemployment rate edged up to 4.7 percent from 4.6 percent in June. Analysts expected the unemployment rate to be 4.6 percent. A stronger yen and the global economic slowdown are weighing on the outlook for the country’s anticipated rebound from the March 11 earthquake. Employment dropped 200,000 on the year to 59.73 million. On the month, employment was down 41,000. The number of unemployment was 2.92 million, a decline of 230,000. The results for whole Japan continue to exclude the three prefectures struck by the Great East Japan Earthquake in March.

July household spending dropped 2.1 percent on the year. Housing expenditures were up 16.2 percent while transportation & communication dropped 16.1 percent on the year. Culture & recreation spending was up 8.4 percent while furniture & household utensils were up 4.9 percent. Medical care slipped 1.5 percent while clothing & footwear expenditures slumped 1.9 percent on the year. 

July retail sales were up 0.7 percent on the year after increasing 1.2 percent in the previous month. This was the second consecutive increase. Large scale retailers were up 1.9 percent on the year. Within the sub-categories, motor vehicle sales plunged 18.3 percent on the year but the decline was offset with increases in machinery & equipment (up 9.9 percent), food & beverages (up 3.8 percent), fuel (up 1.6 percent) and fabrics, apparel & accessories (up 1.7 percent). Other gains were recorded by general merchandise, drugs & toiletries and other.

July industrial production was up 0.6 percent and dropped 1.5 percent on the year. It was the fourth consecutive monthly advance. Transport equipment was up 5.3 percent on the month while information & communication electronics equipment jumped 15.7 percent. General machinery was up 0.6 percent. Commodities that contributed to the increase were small passenger cars, cellular telephones and drive, transmission & control parts. According to METI’s Survey of Production Forecast in Manufacturing, production is expected to increase 2.8 percent in August and decline 2.4 percent in September.

Australia

July retail sales were up 0.5 percent and 1.4 percent when compared with last year. Sales were down 0.1 percent in June. Food sales were up 0.8 percent while other retailing advanced 1.9 percent. Sales in cafes, restaurants & takeaway food services gained 1.1 percent and department store sales were up 1.2 percent. Household goods were unchanged. However, sales were down 4.2 percent in clothing, footwear & personal accessory retailing.

Americas

Canada

July industrial product price index slid 0.3 percent on the month but was 5.1 percent higher than in July 2010. The raw material price index was 1.2 percent lower on the month for an annual increase of 19.4 percent. The slide in the IPPI was the third in as many months and primarily the result of lower charges for chemicals (2.6 percent) and motor vehicles & other transport equipment (1.3 percent). Pulp & paper (1.1 percent) was down as well. The main offsetting moves were seen in primary metal products (up 1.2 percent) and petroleum & coal products (up 0.5 percent). Excluding the latter, the IPPI would have fallen 0.5 percent from June. Even so, without the benefits of favourable exchange rate developments, the total index would have risen 0.2 percent on the month. The decline in the RMPI was led by mineral fuels where prices fell 2.2 percent from June. Without this impact, the headline index would have edged just 0.1 percent lower on the month and risen 16.9 percent on the year. The other main areas of weakness were vegetable products, where costs dropped 2.5 percent on the month, and wood (down 2.5 percent). Other sub-categories posted gains of between 0.1 percent and 1.3 percent.

June monthly gross domestic product was up 0.2 percent and 2.0 percent on the year. Monthly growth was evenly split between the goods producing and service sectors. However, within the former, manufacturing output contracted 0.1 percent, its third successive monthly decline. Utilities (down 0.7 percent) also lost ground as did agriculture, forestry & fishing (down 0.1 percent). However, weakness in these areas was more than offset by a 0.7 percent jump in mining and oil & gas extraction and a 0.6 percent increase in construction activity. Services were supported mainly by a 1.0 percent gain in retail trade although arts & entertainment also performed well (1.6 percent) and there were a number of smaller advances elsewhere including accommodation & food services (0.6 percent) and the financial sector (0.4 percent). The most significant declines were in transportation & warehousing (1.1 percent) and wholesale trade (0.3 percent).

Second quarter gross domestic product slid 0.1 percent on the quarter and was up 2.2 percent when compared with the same quarter a year ago. This was the first absolute decline since the second quarter of 2009. The deceleration was largely a reflection of a 2.1 percent quarterly slump in real exports which, when combined with a 2.4 percent rise in import volumes, left a major drag from the foreign trade sector. In nominal terms the overall current account deficit widened by C$5.3 billion to C$15.3 billion, its worst performance since the third quarter of 2010. Among the other major GDP components, personal consumption was up 0.4 percent on the quarter having stagnated in the previous period and despite a 2.0 percent drop in purchases of autos. The gain here was matched by government current spending but a much steeper increase was seen in gross fixed capital formation (2.0 percent) which almost matched its impressive 2.2 percent surge of the first quarter. Spending on machinery & equipment (7.0 percent) was especially robust, as was investment in computers & other office equipment (13.0 percent). Inventories however, made only a small positive contribution to the bottom line. Within the income accounts, pre-tax corporate profits dropped 2.2 percent on the quarter after a 4.6 percent gain previously and personal disposable income was up 0.5 percent following a 0.8 percent advance. The GDP deflator was up a quarterly 0.5 percent, or half the rate seen in the previous period, and the deflator for final domestic demand just 0.3 percent firmer after a 0.7 percent first quarter gain.

Bottom line

Equities were mostly up last week despite a spate of disappointing economic data ranging from the many purchasing managers indexes to the U.S. employment report. However, the score for equity indexes for the month of August was a different matter — they dropped on European sovereign debt woes, the aftermath of the long drawn out battle in the U.S. over debt ceiling legislation and weakening global economic growth.

Next week brings a plethora of central bank meetings plus the U.S. Federal Reserve’s Beige Book. The Reserve Bank of Australia, the Banks of Canada, Japan and England and the European Central Bank will announce monetary policy decisions. None of the five are expected to change current policy interest rates. A host of new economic information about industrial production and merchandise trade are on tap. At week’s end, China releases its monthly barrage of data.

Looking Ahead: September 5 through September 9, 2011

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