Global Markets

An onslaught of new economic data provided grist for investor decision-making last week. The data ran the gamut of the usual month-end Japanese numbers including consumer inflation and spending along with industrial production to the spate of European data including disappointing confidence surveys and uncomfortably high consumer and producer price data. German data also disappointed including a decline in German retail sales for a second month and an increase in the number of unemployed. There was also a slew of U.S. data — some pleased while some disappointed. Seemingly, the data deluge was overridden by easing commodity prices which sent equity investors to stocks previously shunned such as airlines and autos.

Government bonds sank to multi-month lows despite declining commodity prices. Lower prices failed to dispel investors’ concerns about mounting inflationary pressures. The yield on the 10-year U.S. Treasury bond briefly touched 4.14 percent, the highest since December, before easing back while the 10-year German bund yield climbed to 4.44 percent after having hit a 10-month high during the week. And in Japan, the 10-year Japanese government bond yield settled at a 10 month high of 1.8 percent before receding.

Commodity prices staged a significant retreat —oil prices fell about $5 in volatile trade on Thursday while gold hit a two-week low of $870 an ounce and copper fell below $8,000 a ton for the first time in two months. And in currencies, the U.S. dollar was up against both the euro and yen. The yen sank to a three-month low against the dollar as risk appetite improved once again.

On the week, eight of 13 Asian indexes declined. The FTSE and S&P/TSX Composite were also down for the week. Most indexes followed here were up for the month with the exception of the Hang Seng, Shanghai Composite, Sensex, KLSE Composite, Taiex, FTSE and Dow. Only three indexes are positive for the five months of 2008 — Taiex, S&P/TSX Composite and Bolsa. 

Global Stock Market Recap

Europe and the UK

The DAX and CAC ended the week and month on a positive note. However, the FTSE was not so fortunate as it meandered lower in its holiday shortened trading week to end the week and month on the negative side. The DAX recorded gains every day last week. As crude prices eased, investor concerns about the impact of high fuel costs on airlines and auto company profits eased as well. The disappointing decline in German retail sales did not appear to impact stock trading but did pressure the euro. The DAX was up 2.2 percent on the week taking the index to a 2.1 percent increase for May. Despite its recovery in April and May, the index is still down12 percent in 2008.

Like the DAX in Germany, the French CAC was up on the week. The CAC gained 1.6 percent after faltering on Tuesday. Investors absorbed news of higher than expected producer prices, glum sentiment surveys and a jump in the overall EMU harmonized index of consumer prices but did not focus on the negative. The index was up 0.4 percent after rallying 6.2 percent in April. The index is down 10.7 percent in 2008.

The FTSE declined in three of four trading sessions last week. Inevitably, positive trading in the morning was eroded by housing market gloom — house prices, according to Nationwide, declined 2.5 percent in May. Housing news more than offset gains elsewhere including an improved outlook for airlines thanks to easing oil prices. The FTSE was down 0.6 percent on the week and on the month. The index had gained 6.8 percent in April. It remains the best performer of the three indexes in 2008 — it is down 6.2 percent.

Asia/Pacific

Stocks markets across the Asia/Pacific region were mixed with eight of 13 indexes followed here declining on the week. The Nikkei index hit a five-month high, after the U.S. stocks extended their rally for the third straight session on Thursday. A pullback in oil prices and an upward revision of first-quarter U.S. GDP also boosted investor sentiment. Stocks on Friday were helped by a continued decline in crude oil prices during the Asian trading session. Australian stocks continued to be impacted by alternately rising and falling commodity prices and their effect on major producing companies.

Stocks in Japan were up thanks to more positive U.S. economic data and a declining yen which in turn boosted exporters’ stocks. This was despite a slew of soft economic data that showed consumer prices were up less than expected and the unemployment rate jumped. Industrial production declined for a second month in a row and household spending declined again. On the week, both the Nikkei and Topix gained 2.3 percent. Both indexes were also up for the month of May — 3.5 percent and 3.6 percent respectively — thereby reducing their declines so far this year to 6.3 percent and 4.6 percent.

Stocks in Shanghai and Hong Kong were down last week and for the month of May as investors try to assess the impact of the earthquake on the Chinese and companies — especially those located in Sichuan province. Shanghai stocks were up Friday led by financials and power stocks after oil prices declined and news that the government would ensure market stability. While the weekly declines were relatively modest (1.1 percent and 0.7 percent), the Shanghai Composite sank 7 percent in May and is now down 34.7 percent so far in 2008. The Hang Seng has been affected as well. The index dropped 4.7 percent in May and was down 11.8 percent for the year.

The Indian BSE Sensex index tumbled in the week, month and is down so far in 2008. Friday’s trading was negatively affected as investors awaited economic data on inflation and growth. India’s gross domestic product was up 8.8 percent when compared with the same quarter a year ago as the highest interest rates in six years discouraged consumer spending and investment. Inflation has doubled to 8.1 percent in just over the past four months. India’s official interest rate as set by the Reserve Bank of India is now 7.75 percent. The Sensex was down 1.4 percent on the week, 7 percent on the month and 19.1 percent so far this year.

Both the South Korean Kospi and Singapore STI were up last week — 1.3 percent and 2.3 percent respectively and in May when they gained 1.5 percent and 1.4 percent. The Kospi is down 2.4 percent in 2008 while the STI is down 8.3 percent. Among other markets, the Jakarta Composite lost 0.9 percent on the week but managed to improve by 6.1 percent in May. The Philippines PSEi dropped 0.8 percent on the week but gained 2.8 percent for the month.

Indonesia, OPEC’s only Asia/Pacific member, quit the oil cartel last week. The country is finally accepting its dramatic shift from an oil exporter to a consumer crippled by high prices. The decision is one of the strongest signals yet of the dramatic economic and social impact of $130 oil on Asia, the world’s engine of economic growth and oil demand. Indonesia’s energy minister explained that, as a net importer of oil, the country wanted world oil prices to fall while OPEC’s other members did not.

Currencies

The U.S. dollar gained against both the yen and euro last week as U.S. bond yields rallied after hawkish inflationary comments from the Federal Reserve speakers. Richard Fisher, Dallas Fed president said U.S. interest rates should be raised “sooner rather than later” if inflation expectations worsened and even if the economy continued to weaken. The comments sent U.S. Treasury yields to their highest level this year which in turn helped push the dollar towards a three-month high against the yen.

On Thursday, major Asian currencies were mixed against the U.S. dollar after the currency posted gains following the upward revision of the U.S. GDP. Many analysts expect the dollar to strengthen on heightened expectations that the Fed will keep interest rates at 2 percent for an extended time. Meanwhile, the yen continued to come under pressure as the fall in oil prices from the record levels hit on Tuesday boosted risk appetite. On Friday, euro had the wind knocked out of its sails after German retail sales declined for a second month while the number of unemployed climbed. But it recovered gradually during the day.

Rumors of currency market intervention by a variety of Asian central banks are expected to gather pace according to analysts. There have been reports that the Bank of Korea had entered the market to support the won last week. There have also been rumors of support action by the central banks of Taiwan, the Philippines and Indonesia.

Selected currencies — weekly results

Indicator scoreboard

EMU

May economic sentiment stabilized at 97.1, unchanged from April’s reading. However, the flat picture still leaves the index down some 14.5 points over the last year and masks a decidedly mixed performance among the various eurozone members. Industry confidence was steady at a minus 2 reading while the key consumer sector dropped to minus 15 from minus 12. Morale in services edged a tick higher to 8 and improved in construction to minus 10. The sharpest recovery was reserved for retail which improved to minus 1 from minus 5. In the aggregate, producers signaled a modest pick-up in recent output although there were declines in both orders and hiring plans. The sales price outlook for industry edged a little firmer and suggests that producers are still squeezing profit margins in order to retain market shares. Consumer price expectations were broadly stable and hint that worries about the impact of higher food and energy bills may now have peaked. By country, sentiment edged higher in Germany (103.0 from 102.8) and posted a much needed bounce in Italy (95.1 from 92.1). However, confidence in the Spanish economy continued to wane (79.8 from 80.7) and nosedived in France (99.8 from 103.1).

April M3 money supply was up 1 percent and 10.6 percent when compared with last year. The three month moving average which is preferred by the ECB eased to 10.7 percent from 11 percent when compared with the same three months a year ago. There was also a dip in growth in the key M3 counterpart, lending to the private sector which showed an increase on the year of 10.6 percent, down from 10.8 percent in March.

May flash harmonized index of consumer prices jumped to 3.6 percent when compared with last year from 3.3 percent in April. The latest bounce was almost certainly broad-based with national data from Germany (3.0 percent from 2.6 percent) and Spain (4.7 percent from 4.2 percent) registering significant gains. Although the flash EMU figures do not provide any details, local cost of living reports from Germany and Italy suggest that the bulk of the gain was due to higher energy costs.

April unemployment rate remained at 7.1 percent for the third month. However, the seasonally adjusted number of unemployed rose by 60,000 and warns that the next move in the jobless rate is more likely to be up than down. Across the region, unemployment rates rose in Ireland (5.7 percent from 5.6 percent), Spain (9.6 percent from 9.3 percent), Luxembourg (4.7 percent from 4.6 percent) and Austria (4.2 percent from 4.1 percent). The only declines were seen in Finland (6.0 percent from 6.1 percent) and Slovenia (4.0 percent from 4.3 percent) with other states registering no change.

Germany

First quarter gross domestic product was up 1.5 percent and 2.6 percent when compared with the same quarter a year ago. The driving force behind the upswing was gross fixed capital formation which surged 3.7 percent. Consumption, however, rebounded a meager 0.3 percent following a 0.8 percent slump in the fourth quarter of 2007. Government expenditures were up 1.3 percent but the combined impact of both these components was swamped by a hefty run-up in stocks which lifted headline GDP by 0.7 percentage points. Overall domestic demand grew 1.9 percent. Exports were up a solid enough 2.4 percent but with imports expanding by 3.5 percent, net exports still subtracted 0.2 percentage points having added 0.5 percentage points last time.

May unemployment rate remained at 7.9 percent for the third month despite an increase of 4,000 in the number of unemployed. The increase in joblessness follows several months during which the pace of decline had slowed and reflected small increases both the West (3,000) and East (1,000). Backing up the picture of weakening labor demand, vacancies fell another 6,000 on top of a 9,000 drop in April while payroll employment at the start of the quarter rose only 25,000 or less than half the pace seen in March.

April retail sales excluding autos sank 1.7 percent after revised March data showed an even steeper 2.2 percent decline. Volumes were down 1.0 percent on the year. March and April together show the largest monthly declines of any period since a 3.4 percent slump in May 2007. Total retail sales were down 3.3 percent and 5.1 percent on the year. The unadjusted data show that the bulk of the weakness was concentrated in the food area where sales fell 4.8 percent on the year. Non-food sales on the other hand rose 1.6 percent from April 2007 despite a double digit decline in purchases of clothing and shoes. Solid annual gains were registered by furniture and household items (3.4 percent), pharmaceuticals (2.9 percent) and other assorted goods (10.4 percent). There was also a healthy advance in mail order buying (9.3 percent).

France

April producer price index jumped 0.7 percent and 5.4 percent when compared with last year. As usual, the main driving force behind the monthly advance was energy without which (and agriculture) the core index would have risen just 0.3 percent from March while slowing from 1.9 percent to 1.8 percent on the year. The energy sector itself saw a monthly rise of almost 2 percent to stand 13.6 percent higher on the year. Among the other major product areas, growth in agriculture & food prices slowed to 0.3 percent on the month but still constituted a hefty 9.3 percent gain on the year. Auto prices on the other hand were flat for the second month in succession and were up only 0.6 percent from April 2007. Capital goods prices rose a monthly 0.4 percent while intermediates were up 0.7 percent from March and 3.0 percent from a year ago.

Italy

April producer prices were up 0.4 percent and were up 6.3 percent when compared with the same month a year ago. The electricity, gas & water sector (1.0 percent) posted another large monthly gain but was outpaced by both minerals (1.7 percent) and metals (1.9 percent). As a result, the increase in the PPI net of energy for once matched the 0.4 percent headline gain. Among the other major product groups, intermediates (0.9 percent) posted the strongest monthly rise followed by capital goods (0.3 percent). Prices of consumer goods on the other hand were unchanged from March and within this sector, prices of durables fell 0.1 percent.

Asia/Pacific

Japan

April retail sales edged up 0.1 percent when compared with last year after increasing by 1 percent in March and 3.2 percent in February as households feel the pinch from rising energy costs and stagnant wages. Large scale retail sales also show a downward pattern in sales. They were down 0.6 percent on the year in April after increasing by 1.8 percent in March and 2.7 percent in February. Sales at department stores and supermarkets account for around 15 percent of total retail sales. The sales data validate growing doubts about the resiliency of Japanese consumers as prices escalate. Retail sales have grown the past eight months, though much of the increase is price related as consumers have been forced to pay more for staples, particularly food and fuel.

April household spending for households with two or more persons sank 2.7 percent, the most in 19 months, when compared with last year. This was a much greater drop than the 0.6 percent drop anticipated by analysts. Households cut back spending on food (down 3.1 percent), housing (down 7.2 percent), education (down 5.6 percent) and clothing & footwear (down 4.1 percent). Worker household spending dipped 0.6 percent on the year. When combined with yesterday’s retail sales report, the consumer continues to shy away from spending thanks to higher food and energy prices combined with sluggish earnings.

April nationwide consumer price index edged down 0.1 percent but was up a less than anticipated 0.8 percent when compared with the same month a year ago on a temporary drop in fuel surcharges. This was the seventh consecutive month of positive inflation readings. Core CPI excluding only fresh food was unchanged on the month and up 0.9 percent on the year. Excluding both food and energy, the CPI was up 0.2 percent and was down 0.1 percent on the year. Retail gasoline prices slumped in April from March after the government failed to win parliamentary approval for extending high fuel surcharges on gasoline and diesel oil. But it was only a short-lived relief for households as the government put the surcharges back in place in early May and crude oil prices continue to surge, pushing up gasoline prices. May Tokyo CPI which is often considered an early look at national inflation, was up 0.5 percent on the month and 0.9 percent on the year. Excluding fresh food, the Tokyo index was up 0.4 percent and 0.9 percent on the year. However, excluding both food and energy, the index was up 0.3 percent and 0.1 percent on the year.

April unemployment jumped to 4.0 percent from 3.8 percent in March. The ratio of jobs available to each applicant, a leading indicator of the job market, fell to 0.93 last month from 0.95, the lowest since March 2005. Companies are becoming reluctant to hire workers and increase wages as record oil prices and costlier raw materials eat into profits. A waning job market means consumer spending, which accounts for more than half of the economy, is likely to weaken in coming months.

April industrial production slipped 0.3 percent after sinking 3.4 percent in March for the second monthly decline. Analysts had expected industrial production to rise. Industrial production was up 0.6 percent when compared with last year. The industries that declined in April included electronic parts and devices, information & communication electronics equipment and transport equipment. Commodities that declined included large passenger cars, cellular telephones and active matrix LCDs (Liquid Crystal Devices). The Ministry of Economy, Trade and Industry left its assessment of industrial output unchanged at flat for the fifth straight month. It also said that manufacturers polled expect their output to rise 4.7 percent in May and decrease 0.9 percent in June. Shipments were up 0.7 percent in April.

Other Asia

Taiwan — April seasonally adjusted composite leading index remained unchanged at 109.4. Of the seven major components, three were up including the stock price index, the producer’s inventory and monthly overtime hours worked in industry and services. However, export orders, the monetary aggregate M1, building permits and the SEMI (Semiconductor Equipment and Materials International) book-to-bill ratio (which tracks global demand for semiconductor manufacturing equipment) all contributed negatively.

First quarter gross domestic product was up 6.06 percent when compared with the same quarter a year ago thanks to export growth despite the global slowdown and a moderate expansion in domestic demand. GDP was up at a seasonally adjusted annual rate of 3 percent after increasing 1.9 percent SAAR in the fourth quarter of 2007.

Hong Kong — April merchandise trade deficit narrowed to HK$16.2 billion. Exports were up 14.5 percent when compared with a year ago. Seasonally adjusted exports gained 5.7 percent on the month after gaining 4.5 percent in March. Imports were up 11.3 percent on the year or 2.3 percent on the month.

Americas

Canada

First quarter gross domestic product edged down 0.1 percent — the first such decline since the second quarter of 2003. When compared with last year, GDP was up 1.7 percent. The decline in total output took place despite a 0.8 percent gain in consumers’ expenditures and a 0.6 percent increase in government spending. With gross fixed capital formation flat on the quarter, the main driving force behind the drop was a sharp run-down in inventories, particularly among vehicle manufacturers, which subtracted about 1.2 percentage points from the bottom line. The other main negative impact came from exports which fell 1.1 percent in response to weakening U.S. domestic demand and the soaring C$ exchange rate. Even so, imports dropped a still larger 2.6 percent ensuring that overall net trade had a positive impact on economic growth. By industry, the goods producing sector dropped 1.5 percent encompassing a 2.1 percent drop in industrial production and a 3.0 percent slump in manufacturing. Construction on the other hand saw output edge up 0.3 percent. Within services, a 0.5 percent quarterly gain reflected mainly a 1.1 percent jump in retail although finance, insurance & real estate were also up a solid 0.7 percent. The largest loser in this sector was transport & warehousing where production dipped 0.4 percent.

March real monthly gross domestic product declined 0.2 percent — the second monthly decline in succession. Most of the decline was attributable to the manufacturing sector where production fell 2.5 percent. Declines were widespread but motor vehicles and parts were particularly badly hit and accounted for about 40 percent of the slide in manufacturing output. Activity in wood, paper and non-metallic minerals also weakened and construction activity was down 0.2 percent despite a bounce in non-residential building. Energy expanded by 0.3 percent. Within the services sector, where output grew 0.3 percent, finance & insurance industries performed well (0.8 percent) but banking activity was essentially flat. Real estate agents recorded a fourth consecutive monthly decline, in part due to unseasonable weather. Wholesaling activity fell for a second month in a row (0.6 percent) but retail was up 0.2 percent, albeit only recovering part of its February losses.

April industrial product price index was up 1.4 percent and was the second successive month in which the index has risen by more than 1 percent and returned annual growth to positive territory at 1.0 percent. Overall finished goods prices were up 1.3 percent but still stand 0.4 percent below their year ago level while intermediates grew 1.4 percent on the month for annual growth of 1.8 percent. Not unexpectedly, the main boost to the headline monthly gain was petroleum & coal (7.9 percent) and without this sector the IPPI would have risen just 0.5 percent. The other significant increases were registered by printing & publishing (1.5 percent), metal fabricated products (1.3 percent), motor vehicles (0.8 percent) and pulp & paper (0.7 percent). Declines were seen in primary metal products (0.3 percent), fruit & vegetables (0.2 percent), knitted products & clothing (0.1 percent) and miscellaneous manufactures (0.1 percent) and non-manufactures (3.5 percent).

April raw material price index jumped 5.1 percent on the month to boost the annual change in the index to a record high of 22.5 percent. The entire monthly gain was attributable to mineral fuels which soared 10.4 percent over March and without which, the headline index would have fallen 1.2 percent. The other major contributors posted mixed performances. Thus increases were seen in the price of animals & animal products (0.5 percent) ferrous materials (4.4 percent) and non-metallic minerals (0.2 percent). However, by contrast there were declines in vegetable products (4.2 percent), wood (0.7 percent) and non-ferrous metals (2.3 percent).

Bottom line

The plethora of economic data last week provided a picture of most of the major economies. GDP data for the U.S. was revised upward while more detail was available for Germany. And Canadian GDP data surprised on the downside. Some U.S. data surprised on the positive side while data elsewhere provided a sobering note. However, investors appeared to have their eyes on commodities and reacted to a drop in prices there.

Last week was filled with economic data that will feed into this week’s central bank decisions. On the calendar are the Reserve Bank of Australia, the Bank of England and the European Central Bank. All three are expected to maintain their current interest rate levels of 7.25 percent, 5 percent and 4 percent respectively. Analysts will be closely watching for consumer prices from China trying to discern impact of the earthquakes on food prices.

Looking Ahead: June 2 through June 6, 2008

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