Global Markets

The Federal Reserve, European Central Bank, the Bank of England and the Reserve Bank of Australia all kept their key interest rates unchanged at 2 percent, 4.25 percent, 5 percent and 7.25 percent respectively despite deteriorating growth and continued high inflation. It is one year since the advent of the credit crisis and the outlook continues to be grim. Data continue to point to slowdowns in Australia, the UK, EMU and the U.S. while Japan has also weakened and could declare a technical recession. Yet everywhere inflation is above its declared or implicit target, and likely to remain there for some time. However in Asia, central banks are moving to combat soaring inflation. Bank Indonesia and the Bank of Korea both increased rates last week to temper skyrocketing inflation.

Even though oil prices have eased, central banks are not ready to celebrate a victory over inflation. They have not lowered their guard and continue to work to prevent escalating prices from becoming imbedded in inflation expectations. But the dip in oil, which after surging all the way to $147 has fallen back about $30 from its peak, offers a glimmer of hope.

Central bankers had some tough decisions to make in their policy deliberations. As growth continues to slow, economies could benefit from a fillip provided by lower rates. But inflation continues to run above targets and it takes time for recent declines in oil prices to filter through the economy.

Reactions to post-meeting statements by central bankers played out in the foreign exchange markets where the dollar rose against virtually all major currencies including the pound sterling, Canadian and Australian dollars and the euro. And the list goes on. And lower crude prices also helped push the dollar up in value as well.

On the week, seven of 13 Asian equity indexes were down on the week with losses ranging from the Shanghai Composite’s 7 percent drop to the Kospi’s 0.3 percent decline. On the plus side, gains ranged from 2.9 percent (Taiex) to 0.6 percent (Nikkei). The DAX, CAC and FTSE were up for the week while in North America, only the S&P/TSX Composite was down. The U.S. dollar was up against all major currencies for the week.

Global Stock Market Recap

Europe and the UK

Investors were in vigil mode — first for the FOMC decision on Tuesday and later for the Bank of England and European Central Bank decisions on Thursday. And when all the central bank rhetoric had been parsed and equity investors had assessed the multiple actions (or inactions as the case may be), the FTSE, CAC and DAX were up for the week. The FTSE was up three of five days while the DAX and CAC were up four. The weekly gains were solid — the CAC jumped by 4.1 percent, the DAX by 2.6 percent and the FTSE by 2.5 percent.

The CAC and DAX were down Thursday after ECB President Jean Claude Trichet said economic growth would slow and a report showed U.S. jobless claims climbed to their highest level in six years. In his post-meeting press conference Trichet said that growth would be particularly weak through the third quarter. Recent economic data show that Europe has moved further along the road towards recession than the U.S. — and Trichet made no great attempt to deny it. He admitted that the data “point to a weakening of real GDP growth in mid-2008” and said directly that the bank no longer has a bias towards raising rates. He made obligatory commitments to fight inflation but the market drew the necessary conclusions — July’s rate increase was a “one-off” warning shot across inflation’s bow and there would be no more.

Bank of England

As expected, the Bank of England kept its key interest rate at 5 percent as growth continues to slow and inflationary pressures climb. The monetary policy committee last lowered interest rates at its April meeting. The MPC remains stuck firmly between a rock and a hard place — pulled in two directions by the conflicting trends of faltering growth and rising inflationary pressures.

Evidence has piled up that the economy is sliding into the grip of a serious slowdown, if not an outright recession. The first estimate of second quarter GDP edged up a mere 0.2 percent and 1.6 percent on the year, exhibiting this weakness. Recent economic data continue to weaken as the housing sector and with it, consumer confidence tumbles. And both the manufacturing and services sectors continue to weaken as well. Recently released data on industrial and manufacturing output declined more than expected while the purchasing managers surveys continue to exhibit lackluster performance as well.

The Bank’s 5 percent lending rate continues to be the highest among the Group of Seven nations while Japan's 0.5 percent is the industrialized worlds lowest. As usual, the Bank issued no statement with the decision. Bank watchers will have to wait two weeks for the minutes of the meeting. At the July meeting, there was a three-way split between monetary policy committee members on which direction interest rates should move, and economists say the Bank's quandary has worsened since then. On August 13, the MPC will release their quarterly Inflation Report giving their new forecasts for the economy.

European Central Bank

As expected, the European Central Bank left its key policy interest rate at 4.25 percent. The ECB increased their key rate by 25 basis points at its July meeting. The spread between U.S. and EMU interest rates is now 2.25 percent but there is only a 75-basis-point spread with the Bank of England. The latest flash reading for the harmonized index of consumer prices shows that inflation soared by 4.1 percent in July, the highest rate since statistics began in 1997 and double the ECB’s inflation target of below but close to 2 percent.

Like the Bank of England the ECB is caught between a rock and a hard place — rising inflationary pressures and a rapidly slowing economy. Germany, the engine of growth for the EMU, has slowed rather dramatically and is forecast to have negative growth in the second quarter. Manufacturing orders were down for the seventh consecutive month while retail sales sank 2.8 percent in June. In his post-meeting press conference, President Jean Claude Trichet acknowledged that economic growth would be “particularly weak” through the third quarter suggesting that the governing council would be wary of increasing interest rates again to curb inflation.

While Trichet defended the July decision to increase interest rates as justified, he also said that risks to growth were materializing and overall “downside risks prevail.” Trichet said the ECB has “no bias” on interest rates. He removed a reference from his introductory statement to “moderate, ongoing growth,” and said the ECB would have a better idea of the economic outlook when it gets new staff forecasts in September.

In contrast with the Bank of England, the ECB makes its decisions by consensus and does not publish minutes after its meetings. Rather, to explain the governing council’s thinking, ECB President Jean Claude Trichet holds a press conference about 45 minutes after the meeting’s conclusion. At that time, he reads a prepared statement and then responds to questions from the press.

Asia/Pacific

Stocks were mixed in the region last week as investors fretted that the U.S. slowdown would curb demand for Asian made products. However, Chinese stocks in both Hong Kong and Shanghai tumbled in the run up to Friday’s start of the Olympic games in Beijing. Shanghai shares have now halved in value so far this year and have plunged 57.5 percent since the index peaked in October 2007. Analysts said that Chinese stocks were down Friday on worries about security issues disrupting events. Some market players were disappointed that the government refrained from announcing new market stabilizing measures before the games started. Shares in Hong Kong were very volatile — markets were closed on Wednesday due to a typhoon. On the week, the index lost 4.3 percent.

In Japan, the Nikkei gained on the week while the broader gauged Topix was down. The primary boost for stocks came from the yen’s decline to its weakest since January. The lower yen helps exporters’ repatriated profits while improving their pricing advantage overseas. The improvement came despite a dour succession of data and forecasts saying that the economy could be in a ‘technical’ recession because of slower U.S. growth.

According to the Cabinet Office, Japan's longest period of postwar economic expansion may have ended and underlined the possibility the economy has entered a contraction phase. While stopping short of declaring that the economy is technically in recession, the Cabinet Office expressed strong concerns over weak production and export figures against the backdrop of the slowing U.S. economy. The pessimistic view followed a recent series of disappointing economic readings and also came ahead of next week’s preliminary second quarter gross domestic product data amid market forecasts that Japan may have recorded negative growth in the first quarter of fiscal 2008 (or second quarter of 2008).

RBA

As expected, the Reserve Bank of Australia left its key interest rate at a 12-year high of 7.25 percent. The RBA, with an inflation target range of 2 percent to 3 percent, has been fighting rampant inflation. Second quarter consumer prices jumped 4.5 percent from a year earlier as gasoline prices spiked.

In its post-meeting statement, the RBA signaled it may cut borrowing costs for the first time in almost seven years as slowing economic growth cools inflation. The board said that with demand slowing, the scope to move towards a less restrictive stance of monetary policy in the period ahead was increasing. The Australian dollar declined as traders bet that the RBA would cut rates as soon as September. Retail sales, consumer confidence and house prices have all fallen since the RBA last raised the benchmark in March. The Bank had increased its key rate 12 times since it last cut rates in December 2001.

Bank Indonesia

Indonesia's central bank raised its benchmark interest rate for a fourth straight meeting to tame inflation running at the fastest pace in almost two years. The Bank increased the policy rate by 25 basis points to 9 percent. Asian central banks from Pakistan to the Philippines are in process of increasing borrowing costs as soaring fuel and food costs fan inflation across the region.

Consumer prices jumped 11.9 percent in July with food costs increasing 19.9 percent, the most in more than a decade. The Bank said that it would use all instruments at its disposal to tame inflationary pressures to bring inflation down to between 6.5 percent and 7.5 percent in 2009 from this year's range of 11.5 percent to 12.5 percent.

Bank of Korea

The Bank of Korea unexpectedly raised its key interest rate by 25 basis points to an eight-year high of 5.25 percent. It was the first increase in 12 months. The Bank said the fastest inflation in a decade poses a greater threat to the economy than slowing growth.

July consumer prices climbed 5.9 percent from a year earlier, overshooting the central bank's inflation target for the ninth month. The bank aims to keep inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009. Adding to the Bank’s concerns, the South Korean currency — the won — has declined about 8 percent against the dollar this year which has made imported goods more expensive and exacerbated inflation pressures. Import prices surged 49 percent in June from a year ago, the biggest gain in more than 10 years. The central bank is estimated to have spent more than $12 billion since the end of May to boost the value of the won and cool inflation.

Currencies

The dollar hit a five-month high against the euro, a 21-month high against sterling and a seven-month peak against the yen amid a growing conviction that the effects of the credit crisis were spreading across the globe. On Friday the dollar put in its strongest one-day performance for eight years against the euro. The dollar also advanced elsewhere, reflecting the positive shift in sentiment towards the currency.

The dollar showed limited reaction to Tuesday’s Federal Reserve decision to keep the fed funds target rate at 2 percent. Instead, it was Thursday’s comments from ECB President Trichet that were the catalyst for the move. In the post-meeting press conference, Mr Trichet warned that the eurozone economy would weaken substantially in the coming months. Traders bailed out of euro positions as ECB interest rate increases faded from view for the foreseeable future.

Analysts said the scale of positive sentiment toward the dollar was underlined by the fact that investors simply chose to ignore Trichet’s rhetoric on inflation and attempts to minimize the current economic weakness by claiming that the economy would recover before year-end. Over the week, the dollar rose about 3.2 percent against the euro to its strongest level since February.

Selected currencies — weekly results

Indicator scoreboard

EMU

June producer price index was up 0.9 percent and surged 8 percent when compared with last year. Once again it was energy (2.7 percent on the month, 21.4 percent on the year) that dominated the overall increase but even outside of this sector, prices rose a monthly 0.4 percent, lifting core inflation from 3.8 percent to 4.0 percent. The advance in the core index was driven by intermediates which rose 0.5 percent from May and 4.8 percent from the same month a year ago. Capital goods however, saw prices edge up just 0.2 percent on the month (2.4 percent on the year) while non-durable consumer goods climbed 0.3 percent (4.8 percent) and durable consumer goods were unchanged ( 2.3 percent).

June retail sales declined 0.6 percent and sank 3.1 percent when compared with last year. May’s originally reported 1.2 percent gain was revised downward to 0.5 percent on the month. The June decline reflected a 0.4 percent fall in food purchases compounded by a larger 0.6 percent slide in non-food demand. Over the year, food sales fell 4.4 percent while non-food purchases were off 2.2 percent. Regionally the monthly decline in total volumes was widespread and led by a 1.4 percent slump in Germany. Italy and France failed to provide any data but Spain dropped 0.5 percent and so extended the weakening profile seen every month so far in 2008. Other notable declines were registered in Austria (4.1 percent) and Portugal (2.3 percent). No member state managed a gain.

Germany

June manufacturing orders sank 2.9 percent and are now down 8.4 percent when compared with last year. Orders have declined every month since December. The latest decline was led by overseas demand which plummeted 5.1 percent on the month (14.1 percent on the year) compared with a relatively modest 0.6 percent drop in the domestic component (1.7 percent). Within the former category, there were declines across the board led by capital goods (6.1 percent). However, both consumer and durables (3.7 percent) and basic goods (3.8 percent) were almost as weak. Orders from the Eurozone were off 7.7 percent (with capital goods down 10.5 percent) and from the rest of the world, 3.1 percent. Within domestic orders, there were declines in capital goods (2.1 percent) and basics (0.3 percent) but consumer and durables posted a surprisingly respectable bounce back (3.1 percent).

June industrial production edged up 0.2 percent and was up 1.6 percent when compared with last year. Excluding construction, the ECB’s preferred measure, output was up 0.3 percent and 1.7 percent on the year. There was a very mixed performance among the sectors. There were increases in the output of both capital goods (1.4 percent) and consumer goods (1.0 percent) which together ensured a moderate 0.5 percent gain in overall manufacturing. Energy production fell 1.3 percent on the month while construction activity nose dived 2.1 percent.

June merchandise trade surplus jumped to €18.1 billion from €14.6 billion in May. Exports jumped 4.2 percent while imports edged down 0.1 percent. Over the year, total exports rose 7.9 percent incorporating growth to the EMU bloc of 5.9 percent and to non-EU nations of 11.7 percent. The annual gain in total imports was 5.3 percent, with purchases from EMU nations rising by 2.4 percent and from non-EU countries by 8.6 percent.

France

June merchandise trade gap widened to €5.6 billion as exports edged up 0.5 percent and imports jumped 2.8 percent. As a result, the red ink over the first six months of the year swelled to €24.4 billion, a rise of more than 54 percent from the same period in 2007. The latest deterioration reflected another hefty shortfall in energy (€6.0 billion) but there were also deficits on consumer goods (€0.8 billion), capital goods (€0.2 billion) and basics (€0.9 billion). The shortfall on non-military industrial goods was €2.3 billion. As usual, the only surplus of any note occurred in food stuffs (€0.9 billion).

Italy

June industrial output inched up 0.1 percent but was down 2.1 percent when compared with the same month a year ago. Performance was mixed in the major production sectors. On the plus side there were respectable output gains in consumer goods (1.9 percent) and intermediates (0.5 percent). Energy production was also sharply higher (2.1 percent). However, on the downside activity in the capital goods area contracted (0.8 percent) for the third decline in the last four months. Within a 0.2 percent monthly rise in total manufacturing output there were solid gains in fabric & clothing (6.9 percent), wood (4.3 percent), coal & petroleum (4.8 percent) and iron & metal (3.4 percent). Against this there were sizeable declines in leather (4.2 percent), machines & machinery appliances (1.2 percent) and transport vehicles (1.3 percent).

Second quarter flash gross domestic product was down 0.3 percent and was unchanged when compared with a year ago. The decline was the second in the last three quarters and so while not technically putting Italy in recession, effectively underlines the weakness of economic activity. As with all flash releases few details are available other than industry output was down, agriculture was up and services were unchanged.

United Kingdom

June industrial production declined 0.2 percent and was down 1.6 percent when compared with last year. The decline would have been worse but for gains in mining & quarrying (0.7 percent, electricity, gas & water (2.2 percent) and oil & gas extraction (0.7 percent). Among the major market sectors, only intermediates (0.4 percent) managed to gain ground. Declines were registered elsewhere led by capital goods (1.2 percent) ahead of durables (0.3 percent) and non-durables (0.1 percent). Manufacturing output dropped 0.5 percent and was down 1.3 percent on the year. The declines in production were widespread with 12 out of 13 subsectors in negative territory on the month. The most marked declines occurred in engineering (1.0 percent), followed by other manufacturing (0.6 percent) and food & drink (0.5 percent). The only increase in output was achieved by coke & petrol industries (6.9 percent).

Asia/Pacific

Australia

July employment was up by 10,900 jobs. The gain was the slowest since the March increase of 2,900 jobs. June’s employment gain was revised down to 22,200 from the previous estimate of 29,800. All of the increase was in full-time employment. Full-time employment increased by 53,700 while part-time employment decreased by 42,800. Employment has been up in six of the seven months in 2008. The unemployment rate remained at 4.3 percent from the upwardly revised June level. However, the number of unemployment was up by 5,700 persons. The number of persons looking for full-time work increased by 7,200 but the number of persons looking for part-time work decreased by 1,500. The participation rate remained steady at 65.3 percent.

Taiwan

July consumer prices were up 5.92 percent when compared with a year ago after the government ended caps on power prices and tropical storms led to an increase in food costs. This is the biggest increase since September 1994. Prices were up 4.97 percent in June.

Americas

Canada

July employment was down 55,200. The decline was largely concentrated in part time employment where 48,100 jobs were lost. Full time employment slipped 7,100 suggesting that core jobs are only being yielded quite slowly at this stage. Employment in the goods producing sector fell 17,800 led by a sharp decline in manufacturing (32,300). Other losses were small and limited to utilities (1,200) and natural resources (1,000). Both agriculture (6,400) and construction (10,300) posted gains. Within services, the brunt of a 37,300 drop in payrolls was borne by business, building & other support services (30,100) although there were also quite hefty falls in trade (19,300), education (27,400) and professional scientific & technical services (15,300). More optimistically, there were respectable jobs gains in accommodation & food (22,400), health care & social assistance (14,300) and transport & warehousing (5,700). Unemployment rate slipped to 6.1 percent, although this essentially reflected people, particularly youth, leaving the labor force. Actual unemployment fell 18,900 to 1,105,200 but still stands 22,100 or 2.0 percent above its year ago level.

Bottom line

Central bankers in Australia, the U.S., the UK and EMU met last week and shifted focus to the downside risks for growth. The four banks left their interest rates on hold. However, the central banks of Indonesia and Korea were not that sanguine about inflationary pressures — both increased their key rates. The dollar was the chief beneficiary of falling commodity prices and lower growth expectations abroad.

Next week first estimates of second quarter growth data will be released for a slew of countries including Japan, Germany and other European countries. Expect to see declines in gross domestic product abound.

Looking Ahead: August 11 through August 15, 2008

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