Global Markets

Equities gained for the third consecutive month in May as economic data continued to present a mixed bag of results as one would expect at this stage of an economic cycle. Global sentiment continues to improve as governments almost everywhere continue to bolster their economies through massive fiscal stimulus spending. Investors focused on the government bond market sending yields in the U.S., Europe and Japan to six month highs as they worried about sky-rocketing issuance levels. Inflation concerns resurfaced and contributed their part to the bond sell-off as oil surged above $66 a barrel and the dollar weakened.

Data in the U.S., Europe and Japan showed limited signs of recovery. On the plus side was the surge in U.S. consumer confidence and Japanese exports and industrial output data. However, U.S. housing data along with the Chicago business activity report left little to cheer about. And Germany’s Ifo business sentiment survey offered a timely reminder that a recovery in the eurozone was still some way away. Meanwhile, the Baltic Dry Index of freight costs, closely watched as a barometer of economic conditions, hit a new high for the year.

All equity indexes followed here were up in May with gains ranging from 1.8 percent (All Ordinaries) to 28.3 percent (Sensex). Only the FTSE (down 0.4 percent) and the Dow (down 3.1 percent) are below their end of 2008 levels.

OPEC met on Thursday

The Organisation of the Petroleum Exporting Countries (OPEC) was the most upbeat about the global economy and the oil market since the start of the financial crisis that triggered a precipitous plunge in prices from a record $145.66 a barrel on July 11, 2008 (for NYMEX spot) to $30.81 on December 22, 2008. Although OPEC saw some ‘green shoots,’ they decided to leave its production level unchanged and bet that the global recovery would push oil prices to $75 to $80 a barrel. They cited a pick up in demand in the U.S. as well as in China, India and Asia as a whole. Oil prices immediately climbed to a fresh six-month high of more than $66 a barrel.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX ended both the week and month on the plus side. This was the third consecutive month of increases for the three indexes. Now, only the FTSE is slightly below its year end level — down by 0.4 percent. The week was capped on Friday with an improving view of the German and UK economies — in Germany retail sales were up as were house prices in the UK for the second of three months. Mining and oil stocks benefited from higher metals and crude oil prices last week. Banking shares waxed and waned as underlying anxiety about the financial sector resurfaced. Earlier in the week, equities slipped as concerns about mounting government debt and disappointing U.S. home sales data diminished hope that the global recession is easing.

Asia/Pacific

Asian Pacific equity indexes completed their third consecutive month of increases (only the KLSE Composite was down in March). May increases were impressive. Although the All Ordinaries gained only 1.8 percent and the Kospi, 1.9 percent, all other indexes gained more than 5.4 percent with the Sensex jumping a whopping 28.3 percent in May while the STI gained a ‘more modest’ 21.3 percent. For the first five months, the Sensex is up 51.6 percent while the Taiex is up 50.1 percent and the Shanghai Composite is up 44.6 percent. India’s performance in May had been propelled by the national election results which gave the Congress Party a majority and offered needed reforms. For the week though, the Hang Seng was up 6.5 percent while the Sensex jumped 5.3 percent. Most Asian markets showed an uneasy calm during the week given the geopolitical tensions surrounding North Korea's underground nuclear test along with its short-range missile tests.

In Japan, both exports and industrial output were up for the second month. Industrial output surged the most in 56 years thanks to the export rebound that is helping the country to emerge from its worst recession since World War II. While the production increase was the biggest since March 1953 — a year after the U.S. military occupation ended — output is rising from a very low base. Bank of Japan governor Masaaki Shirakawa said that the economy will resume growing this quarter after shrinking a record annualized rate of 15.2 percent in the first quarter of the calendar year. Stimulus spending by governments around the world totaling $2.2 trillion has helped to prop up demand from abroad. The yen gained on speculation funds will flow into Japan as the economy resumes growing after last quarter’s record contraction. For the week, the Nikkei was up 3.2 percent and the Topix, 2.5 percent.

India’s Sensex index was the best performer in May. The index is at its highest since September 10, 2008. The index was catapulted upward in part by the stunning victory by the Congress Party and the government of Prime Minister Manmohan Singh in mid-May. Last week stocks jumped following the better than anticipated fourth quarter fiscal year 2008-2009 gross domestic product results. India’s economy grew 5.8 percent in the first three months of 2009 when compared with the previous year. The positive figures, propelled partly by the government’s aggressive fiscal stimulus measures as well as strong growth in construction, financial services and agriculture, sent the stock market soaring.

Currencies

The U.S. dollar was trounced last week as its safety appeal diminished. Economic data such as the rebound in Japan’s industrial production and exports is indicating that the global economy is stabilizing. The yen was down as higher-yielding currencies such as those that are commodity related attracted investors. The euro was up on the week as was the pound sterling. On the week, the yen was down against the dollar.

Analysts said the yen’s underperformance reflected the upward momentum in long-term yields outside of Japan. The yield on 10-year government debt in the US, Germany and the UK has increased by over 100 basis points, 60 basis points and 75 basis points, respectively, since the start of the year. In Japan however, the yield has climbed just over 30 basis points. One reason that the increase in Japan has been more muted is the heightened deflationary risks there.

The pound climbed to a six-month high against the dollar Friday after the May Nationwide house price index was up 1.2 percent supporting hopes that the economy could be stabilizing — it was the second increase in three months. The pound climbed to over $1.61 in U.S. trading and gained over 8.5 percent for May.

The euro was also up against the dollar. It gained just under 7 percent in May especially after a report showed that economic sentiment was also improving in the eurozone.

Selected currencies — weekly results

Indicator scoreboard

EU

May economic sentiment edged up for the second month in a row with a 2.1 point increase to 69.3. The majority of sectors saw modest improvements in morale with retail (up 5 points to minus 15) posting the most significant gain. Industry (up 1 point to minus 34) and consumers (up 1 point to minus 31) both managed minor advances while construction (minus 34) was unchanged from April. Among the larger EMU members, sentiment rose 0.9 points to 74.1 on Germany, 1.5 points to 76.1 in France and 5.3 points to 78.8 in Italy. Spain however, bucked the trend with a partial reversal of its April gain, falling 0.9 points to 71.0.

EMU

M3 money supply for the three months ending in April decelerated to 5.2 percent when compared with the same three months a year ago from 5.6 percent for the previous three months. For April only, M3 eased to 4.9 percent. The ongoing slowdown in M3 in large part reflects the weakness of private sector credit where annual growth dropped to 3.7 percent from 4.7 percent in March. Within this, the annual rate of loans to the private sector fell 0.8 percentage points to just 2.4 percent. Lending to nonfinancial corporations declined to a 5.2 percent annual rate from 6.3 percent while loans to households were essentially unchanged on the year following a meager 0.4 percent gain in the previous month.

May flash harmonized index of consumer prices was unchanged when compared with a year ago. The 0.6 percentage point decline from April means that inflation is now at a new record low and all but certain to fall into negative territory next month. As usual there are no component details provided in the flash estimate. However, national data suggest that while the driving force behind the drop in the headline rate was the spike in oil prices in the year ago period. Among the larger member states, inflation fell especially sharply in Germany (0.9 percentage points to minus 0.1 percent) and in Spain (0.7 percentage points to minus 0.8 percent) but also declined quite steeply in Italy (0.4 percentage points to 0.8 percent).

Germany

May Ifo index edged up to 84.2 from 83.7 in April. Current conditions inched down to 82.5 from 83.5 in the previous month for its seventh consecutive decline. Expectations increased to 85.9 from 83.9 for its fifth consecutive rise. Among the major sectors, sentiment was either unchanged or improved in all areas except construction where it dropped 2 points to minus 26.3. Services saw a 2 point gain to minus 5.0, retail jumped 4.3 points to minus 21.2 and wholesale rose 2.3 points to minus 28.3. Manufacturing held steady at minus 38.0.

First quarter gross domestic product contracted a seasonally adjusted 3.8 percent and was 6.9 percent lower on the year. Unadjusted, the annual decline was also unrevised, at 6.7 percent. The biggest negatives were investment, which fell a quarterly 7.9 percent on the back of a 16.2 percent slump in equipment spending and exports, which nosedived 9.7 percent. Among the other major components, private consumption edged up 0.5 percent from the previous period and government purchases rose 0.3 percent. With a significant unwinding of inventories subtracting 0.5 percentage points, domestic demand fell a quarterly 1.7 percent. Imports dropped 5.4 percent on the quarter.

May unemployed was up by only 1,000 to 3.456 million. The unemployment rate edged down to 8.2 percent from 8.3 percent in April. The data reflect a significant change in the way the Federal Statistics Office (FSO) calculate the figures. The next effect has been to make rises in joblessness look smaller and the declines larger. The FSO estimated that the impact on the seasonally adjusted figures would be in the order of 10,000 to 20,000 so the reported 1,000 increase in unemployment this month might be as high as 21,000 on the old basis. Vacancies similarly declined an unexpectedly small 2,000 after a 14,000 decline last month. The new methodology, which was applied for the first time this month, excludes from reported unemployment those undergoing job training and retraining measures at independent companies. The change in measurement may cloud the short-term pattern but the medium term upward trend in joblessness remains intact.

April retail sales excluding autos were up 0.5 percent but were still down 0.8 percent when compared with last year. It was the first monthly gain since December 2008. On the year, non-food sales were down 1.5 percent but clothing & footwear were up 6 percent. All of the other main categories registered declines with particularly hefty drops in mail order (9.9 percent), furniture & household goods (4.0 percent) and pharmaceuticals, medical items & cosmetics (3.6 percent).

France

April consumer spending on manufactured goods jumped 0.7 percent and was up 0.6 percent when compared with last year. The latest advance was dominated by autos sales which were up 3.7 percent. Excluding the auto sector, demand edged up just 0.1 percent. With household goods purchases up 0.8 percent, overall durable goods rose 2.1 percent. Textiles posted a 0.3 percent gain following a 3.6 percent surge in March and the other products category saw no change.

Italy

April domestic producer prices were down 0.5 percent and were down 5.3 percent when compared with last year. Total producer prices were down a slightly smaller 0.4 percent due to a modest 0.2 percent dip in export prices. The annual decline in the overall index was 2.1 percent. Within the internal market, prices dropped in all of the major categories. The most marked decline was in energy (1.0 percent) but intermediates (0.6 percent) also saw a larger than average fall. Consumer goods prices were 0.3 percent lower on the month and capital goods prices eased 0.2 percent. Excluding energy, prices were 0.4 percent weaker on the month and 2.5 percent down on the year.

Asia/Pacific

Japan

March all industry index dropped 2.4 percent after declining 2.3 percent in February. On the year, the index dropped 11.9 percent. The tertiary index which is a major component of the all industry index plunged 4.0 percent on the month and 7.1 percent on the year. The all industry index takes a reading of activity in the 11 service industries that comprise the tertiary index, along with activity in the construction, agricultural & fisheries industries, the public sector and industrial output. This index is considered a close approximation of gross domestic product growth as measured by industrial and service sector output. These data are old. As we already know, GDP plunged an annualized 15.2 percent in the first quarter.

April unadjusted merchandise trade balance was in surplus — most analysts had expected another deficit. The surplus was ¥69 billion. Exports were down 39.1 percent (they were down 45.5 percent in March) while imports sank 35.8 percent when compared with the same month a year ago. On a seasonally adjusted basis, the merchandise trade deficit was ¥52.1 billion and slightly larger than March’s deficit of ¥50.7 billion. Both exports and imports were up 1.9 percent when compared with March. Exports to the U.S. sank 45.9 percent on the year while imports from the U.S. were down 19.5 percent. Exports to the U.S. were down for the 20th month in a row. Exports to the EU were down 45.4 percent while imports from the EU were down 31.2 percent. Exports to Asia dropped 33.4 percent while imports were down 28.4 percent.

April national consumer price index was up 0.1 percent but down 0.1 percent when compared with last year as expected. Excluding fresh food, the CPI was unchanged on the month and edged down 0.1 percent on the year. Excluding both fresh food and energy, the CPI was down 0.2 percent on the month and down 0.4 percent on the year. For the month, the largest price decline occurred for medical care which dropped 0.5 percent. Reading & recreation dropped 0.6 percent. The major increase of note was for clothes & footwear which increased 4 percent. On the year, prices for food jumped 1.6 percent and education was up 0.8 percent. Leading the declines were transportation & communication which was down 2 percent and reading & recreation which dropped 2.2 percent. May Tokyo CPI which is seen as a precursor to the national index dropped 0.2 percent and 0.8 percent on the year. Core excluding food was down 0.3 percent and 0.7 percent on the year. Excluding food and energy, the index was unchanged on the month but dropped 0.9 percent on the year.

April unemployment rate jumped to 5.0 percent from 4.8 percent in March as expected. Employment dropped by 6,000 when compared with last year with the employment rate now at 57.2 percent. The ratio of positions available to each applicant dropped to 0.46 from 0.52, the lowest in a decade. The severe global economic slump has crippled demand for Japanese cars and electronics, leaving manufacturers with workers and factories they no longer need.

April retail sales were down 2.9 percent – somewhat less than analysts estimated – when compared with last year. In March, sales sank 3.9 percent. This was the eighth consecutive monthly decline. Large scale retailer swooned 5.0 percent after sinking 6.7 percent in March.

April real household spending dropped 1.3 percent when compared with last year after declining by 0.4 percent in March. Spending on food, medical care, transportation & communication, as well as culture & recreation were all down on the year. However spending on housing, furniture & household utensils and education all were down. Spending on housing was up 7.0 percent while education was up 7.5 percent and furniture & household utensils were up 2.7 percent. Household spending data confirm the retail spending data released earlier this week.

April industrial production was up 5.2 percent from the previous month and was down 31.2 percent when compared with last year. Most industrial groups were up including electronic parts and devices, chemicals (excluding drugs) and transport equipment. Commodities that increased on the month included large passenger cars, rolling stocks and steel bridges. According to the Survey of Production Forecast in Manufacturing, production is expected to increase 8.8 percent in May and to increase 2.7 percent in June. Those industries that are expected to contribute to the May increase include transport equipment, information & communication electronics equipment and electronic parts & devices. And in June, electronic parts & devices, iron & steel and electrical machinery are expected to contribute to the monthly increase.

Bottom line

Global economic data continue to paint a mixed picture although one that shows signs of stabilization. The good news from Japan for exports and industrial output overshadowed the poor domestic consumption data and a threat of deflation. Elsewhere sentiment continues to improve, especially in the eurozone and U.S.

Four major central banks will make policy announcements in the week — Reserve Bank of Australia, Bank of England, European Central Bank and the Bank of Canada. Recent signals from the real economy are unlikely to alter the ECB’s assessment of the economic outlook or the appropriateness of its monetary stance. The same holds true for the Bank of England although watchers will be looking for a progress report on its quantitative easing program. Bank of Canada watchers will be looking to see if the Bank moves towards a quantitative easing program of its own — a step not yet taken. Only the Reserve Bank of Australia, with a policy interest rate of 3 percent, still has the traditional policy alternative of lowering its interest rate.

Looking Ahead: June 1 through June 5, 2009

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