Global Markets

Investors were inundated with a barrage of new economic data. And what they saw was a mixed bag of results — typical of economies reaching this stage in a business cycle. Although stocks ended the first half of the year with a whimper thanks to a disappointing U.S. consumer confidence survey, there was little to complain about in overall second quarter performance which reversed first quarter losses and a lot more. Many global stock markets had their best quarterly performance in more than 20 years, with a sharp rally from March lows that was powered by hopes of economic recovery. Emerging markets benefited from renewed investor appetite for riskier assets as evidenced by the Shanghai Composite which gained 24.8 percent on the quarter. Stocks have been buoyed by news that indicates a slower pace of contraction along with more stable financial markets.

For the month of June however, the results were more mixed as many indexes declined, breaking their streaks of three consecutive months of increases. Most Asian indexes bucked the trend however, with only the Kospi and Sensex recording minimal declines while the Taiex fell back by 6.6 percent. The three European indexes were down for the month while in North America, only the Dow lost ground.

For the week ending on Thursday, equities in Asia were mixed while in both Europe and North American stocks were down.

All market data in today’s article are for the four days through Thursday. U.S. markets are closed on Friday.

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC gave back more than their gains earlier in the week on Thursday after the U.S. employment report showed that employment declined by more than analysts expected and the unemployment rate continued to rise — the June 9.5 percent rate equals the May rate in the eurozone. While most investors look to employment Fridays — the June report was released Thursday ahead of Friday’s Independence Day holiday. The report quashed hopes for a swift economic rebound even though employment lags in a recovery. Positive local economic news was overwhelmed by the report.

After gains in March, April and May, the three indexes were down in June. The FTSE lost 3.8 percent, the CAC was down 4.2 percent while the DAX dropped 2.7 percent. The results for the second quarter however show that all three were up over the close of the first quarter. Their gains however, were much more modest than most of the Asian/Pacific indexes and all but the Dow in North America.

Economic data are generally mixed especially around the turning point in a business cycle and this time is no different. There was some positive news however concerning the hard-hit manufacturing sector which mitigated some of the disappointing data in a heavy week for new economic news. Eurozone June manufacturing activity fell less than initially estimated according to the Markit manufacturing purchasing managers' index. The index for the eurozone rose to 42.6 in June from 40.7 in May. Similar good news came from the U.S. ISM manufacturing index — it also rose although it remains under the breakeven 50 level.

ECB keeps refinance rate at 1 percent

As expected the European Central Bank left its policy interest rate unchanged at 1 percent at today’s meeting as it waits for more data on the economy’s trajectory. It also left the deposit rate — the floor for euro money markets at 0.25 percent and the marginal lending rate — which is the ceiling at 1.75 percent. Analysts anticipate that the interest rates will remain unchanged for some time to come.

The ECB strictly adheres to its inflation target goal of not more than 2 percent inflation on the year. June flash harmonized index of consumer price index was down 0.1 percent mainly due to base effects of last year’s oil price spike. The Bank has not engaged in quantitative easing unlike the Bank of England and the U.S. Federal Reserve. The ECB began its liquidity injections into the financial markets about two years ago at the onset of the financial crisis. At that time it injected €95 billion overnight to help ease the tension and in the process, shocked market players. And last week, in its first ever offer of one-year funds, the ECB pumped €442.2 billion ($614.8 billion) into the eurozone banking system at an interest rate of just 1 percent. The total allotted was the largest yet provided in a single ECB operation. For the Bank however, the action was an extension of the policy it has pursued since Lehman Brothers failed last September.

During his post-meeting press conference, ECB President Jean Claude Trichet signaled that the Bank has no immediate plans to cut interest rates again and said the euro region’s economy will start to recover in the middle of 2010 after a period of stabilization. There are signs that the worst of the recession may be over. The contraction in Europe’s services and manufacturing industries is slowing and confidence in the economic outlook rose to a seven-month high in June. Still, the ECB predicts the eurozone economy will contract about 4.6 percent this year and 0.3 percent next. Trichet also said the ECB will make sure that recent stimulus measures do not boost inflation. “Once the macroeconomic environment improves, the governing council will ensure that the measures taken are quickly unwound and that the liquidity provided is absorbed,” he said. “Hence, any threat to price stability over the medium to longer term can be effectively countered in a timely fashion.” The ECB will begin its unorthodox program of buying mortgage and public sector debt-backed bonds on July 6. Trichet added that only bonds with maturities of between 3 and 10 years would be targeted.

Asia/Pacific

Asian markets ended in negative territory on Thursday as traders preferred to exercise caution ahead of the key U.S. jobs report later in the day. Most of the markets opened in positive territory but drifted into the red or trimmed their gains awaiting key signals regarding a global recovery from the U.S. And as it turned out, they were correct to be wary of the U.S. employment report numbers, which were weaker than expected. For the week ending on Thursday, results were mixed with seven indexes down and six higher.

Three of 13 indexes within the region declined in the month of June — but all recorded impressive gains for the second quarter. The All Ordinaries was up 11.8 percent for the lowest gain on the quarter while the Sensex soared by 49.3 percent for the biggest gain. The SET, STI, Hang Seng and Kospi all had gains over 35 percent.

Japanese investors were inundated by new economic data and especially the latest Tankan during the week. While merchandise trade data continued to show shrinkage of global trade, it, along with other sectors of the economy, appear to be stabilizing albeit at low levels. Industrial production continues to recover. The decline in consumer prices which renewed the specter of deflation was attributed to the sharp drop in energy prices on the year — something that is placing downward pressure on inflationary measures elsewhere as well. The Tankan report was pretty much as expected although the capital expenditure plans for fiscal 2009 were lower than previously reported.

However, China's Shanghai Composite Index continued its northward march — the index is up 68.1 percent making it the best performing large stock market in 2009 and leaving it nearly halfway back to its October 2007 peak of 6,092. Like other economic indicators in China, such as sharply rebounding car sales and surprisingly robust gross domestic product growth, the stock markets here have vastly outperformed expectations. The market’s buoyancy has led some commentators to talk of another asset bubble. Analysts who follow the Shanghai market closely are divided over how great that risk is.

Currencies

The week was heavily data dependent and as such the dollar fluctuated as the need for a safe haven ebbed and flowed. The yen, euro and pound sterling were down against the dollar as trading ended on Thursday. The pound sterling lost ground after final first quarter GDP plunged more than previously estimated. That was just after sterling hit an eight month high against the dollar on Tuesday. This was the worst quarterly GDP drop since 1958 and took the annual rate of contraction to a 61 year low.

On Thursday, both the dollar and yen advanced against the euro after the U.S. employment report showed that employers cut more jobs last month than economists forecast, paring demand for higher-yielding assets. And the euro extended its declines against the dollar after ECB's Trichet said that a “phase of recovery” for the region will probably start in the middle of 2010. The dollar had climbed earlier against the euro after China renewed its call for a stable dollar and damped speculation the nation is seeking talks on a new international currency at July’s Group of Eight meeting.

Selected currencies — weekly results

Indicator scoreboard

EMU

June economic sentiment improved for the third month to a reading of 73.3. It was the highest since November last year (76.6) and up 3.1 points from a slightly firmer revised level in May. The recovery reflected modest gains in most of the index components. Consumer confidence rose 3 points to minus 25 while industrial morale edged up one point to minus 32. In addition, sentiment in services climbed in 3 points to minus 20. However, construction was unchanged (minus 34) while retail confidence slid a couple of points (minus 16). Among the larger EMU states, sentiment was up 3.2 points in both France (80.7) and Germany (77.6). Italy saw a smaller 1.1 point rise (80.2) while Spain improved by 1.5 points (75.1). Most smaller members also registered gains.

M3 money supply for the three months ending in May was 4.5 percent. When compared with May of last year, money supply growth was up just 3.7 percent. Leading the deceleration was the key lending counterpart which saw borrowing by the private sector drop to a 1.8 percent annual rate, down from 2.3 percent in April and 3.2 percent in March. Annual loan growth to households dropped 0.2 percent with lending for house purchases declining a further 0.3 percentage points to minus 0.5 percent. The weakness of M3 continues to contrast with narrow money (M1) where annual growth held relatively firm at 7.9 percent.

June flash harmonized index of consumer prices edged down 0.1 percent when compared with last year. As usual, no information was provided regarding the details of the HICP but oil price effects will no doubt have been the key driving force behind the slippage in the 12-month headline rate.

May producer prices excluding construction dropped 0.2 percent and was down 5.8 percent on the year and a record annual decline. Prices fell on the month in all of the main sectors with the exception of energy which was up 0.2 percent. Intermediates were the weakest, registering a 0.3 percent decline while capital goods and nondurable consumer goods dipped 0.2 percent and durable consumer goods edged down just 0.1 percent.

May unemployment rose by a further 273,000 to more than 15 million — a new 10-year high. With April revised up by 0.1 percentage points, the rise in the number of people out of work was accompanied by a 0.2 percentage point increase in the unemployment rate to a higher than expected 9.5 percent. However, not all countries providing data registered an increase in their unemployment rates. Germany (7.7 percent), Belgium (8.2 percent), the Netherlands (3.2 percent) and Austria (4.3 percent) all saw no change. Among the other member states, the jobless rate jumped another 0.7 percentage points to some 18.7 percent in Spain and climbed 0.3 percentage points to 11.1 percent in Slovakia. Other increases were limited to between 0.1 percent and 0.2 percent.

Germany

June unemployment was up another 31,000. The increase was the eighth in a row and lifted the jobless rate to 8.3 percent from 8.2 percent in May. Changes to methodology helped to reduce the May increase by between 10,000 and 20,000 but even allowing for this, the increase was surprisingly small. Vacancies dropped a 12,000 following a decline of only 4,000 in May. Total joblessness this month stood at 3.495 million.

May seasonally adjusted retail sales excluding autos were up 0.4 percent but were down 0.8 percent on the year. The latest monthly advance was the third in succession. As usual category details are only provided on an annual growth rate basis and here one less shopping day in May this year makes for a misleadingly weak impression. On this basis, purchases declined across the board with declines especially marked in clothing and shoes (8.9 percent), special stores (5.5 percent) and furniture & household goods (3.6 percent). Total non-food sales were 3.0 percent lower on the year.

France

May domestic producer prices declined 0.2 percent and were down 6.7 percent from a year ago. With export prices declining by a similar monthly amount (0.3 percent) overall producer prices were down 0.2 percent from April and stood 6.1 percent lower on May 2008. Within the internal market, prices for consumer goods dropped 0.7 percent on the month with non-durables declining 0.2 percent and durables edging up 0.1 percent. The largest drop was in capital goods where prices slid 0.5 percent. Intermediates eased 0.1 percent and energy prices rose 0.1 percent.

United Kingdom

First quarter gross domestic product was revised to a steeper decline of 2.4 percent from the previous estimate of 1.9 percent. The new estimate marks the worst performance in more than half a century. The revisions also mean that recession was entered in the third quarter of last year and earlier than originally thought. On the year, GDP contracted by a revised 4.9 percent rather than the originally reported drop of 4.1 percent. The large revision was mainly due to added weakness in services where output dropped 1.6 percent or 0.4 percentage more than previously reported. Activity in the construction sector was similarly adjusted downward but the goods producing sector was revised stronger at minus 5.1 percent from minus 5.3 percent. Among the main GDP expenditure components, household consumption was nudged just a tick lower at minus 1.3 percent on the quarter but the drop in gross fixed capital formation was increased to 7.5 percent or nearly double the previous estimate. Total domestic expenditure declined 2.5 percent within which just about the only good news was a hefty amount of destocking which will go some way to addressing the inventory overhang.

Asia/Pacific

Japan

May industrial production was up by 5.9 percent but continues to be negative when compared with the previous year. On the year, industrial production was down 27.5 percent. The following industries gained on the month — transport equipment, electronic parts & devices and steel & iron. Commodities that gained on the month included large passenger cars, portable telephones and drive, transmission & control parts. Each month METI conducts a forecast survey of what manufacturers expect in the two months ahead. Production is expected to increase 3.1 percent in June and 0.9 percent in July. Shipments were also up in May, increasing by 4.5 from the previous month but dropped 30 percent from the previous year. Like production, shipments also gained for the third consecutive month.

May retail sales swooned for the ninth month as a worsening job market has forced households to cut spending. Sales were down 2.8 percent on the year for the second month. Large retailer sales sank 4.5 percent on the year after dropping 5 percent in the previous month.

May unemployment rate climbed to 5.2 percent from 5 percent in April and 4.1 percent from January. The unemployment rate is at its highest since September 2003. The number of unemployed persons now stands at 3.47 million, an increase of 770 thousand or 28.5 percent from the previous year. The employment data paint a gloomy picture as well. The number of employed persons declined by 1.36 million or 2.1 percent from a year ago. The employment rate was down 1.2 percent to 57.4 percent in May while the labour force participation rate swooned by 0.6 percent to 60.5 percent. The ratio of positions available to each applicant dropped to 0.44, the lowest since the survey began in 1963.

May household spending inched up 0.3 percent when compared with last year – the first increase in spending in 16 months. Spending for furniture & household utensils soared by 10 percent on the year while spending for food, housing and fuel, light & water were up more modestly. Spending on education sank by 7.2 percent but transportation & communication spending declined 1.3 percent.

Second quarter Tankan for large manufacturing firm business confidence improved to a reading of minus 48 from minus 58 in the first quarter. The first quarter reading showed that business confidence had slumped to the lowest level in the 35 year history of the survey. This was the first improvement in 10 quarters, dating back to December 2006. However, small manufacturing firms that rely on domestic demand showed no improvement from the first quarter — confidence was unchanged at a reading of minus 57. Second quarter large non-manufacturing industries improved slightly, edging up to minus 29 from minus 31 in the first quarter survey — also the first gain in 10 quarters. Medium and small non-manufacturing industries barely edged upward as well. The Tankan diffusion index represents the difference between the number of companies reporting favorable business conditions and those reporting unfavorable ones. Capital spending for the fiscal year that began on April first for large enterprises is expected to contract by 9.4 percent on the year. Small enterprises expect capital spending to sink by 36.6 percent.

Australia

May retail sales were up 1.0 percent and were up 7.1 percent on the year. Sales had been up 0.3 percent in April and 2.2 percent in March. All industries, with the exception of household goods which were down 2.0 percent were up on the month. Industries with the largest increases were department stores (5.5 percent), clothing and soft good retailing (2.9 percent) and cafes, restaurants & takeaway food services (1.4 percent).

May merchandise trade deficit increased to A$556 million from a revised deficit of A$282 million in April. Exports were down 5.2 percent while imports declined by 3.8 percent. Within exports, non-rural exports were down 5 percent while other goods plunged 24 percent. Rural goods were down 3 percent while services were up 1 percent. The decline in non-rural goods largely reflects the drops in the coal, coke & briquettes component, down 15 percent, other mineral fuels component, down 7 percent and the metal ores a& minerals component which was down 2 percent. The largest decline in other goods was in the non-monetary gold component, down 27 percent. On the other side of the balance sheet, capital goods imports swooned by 14 percent, intermediate & other merchandise goods declined 7 percent and consumption goods edged down by 1 percent. Other goods were up 35 percent while services inched down by 1 percent.

Americas

Canada

April monthly gross domestic product edged down 0.1 percent and is down 3.0 percent when compared with last year. The monthly dip was led by the goods producing sector where output declined 0.5 percent. Within this, manufacturing sank a disappointingly large 1.0 percent while mining & oil & gas extraction dropped 0.7 percent. Construction edged 0.1 percent lower but output from agriculture, forestry and fishing was flat while utilities rose 0.6 percent. Services were unchanged for a second month. Declines in retail trade (0.6 percent) and administrative & waste management services (0.6 percent) were essentially offset by gains in wholesale trade (0.5 percent), arts, entertainment & recreation (0.8 percent) and finance, insurance & real estate services (0.4 percent).

May industrial product price index dropped 1.1 percent and was down 4.3 percent on the year. A strong Canadian dollar had an important impact. The price of coal and petroleum products jumped 5.2 percent on the month. Excluding this sector the IPPI fell 1.6 percent from April. The main areas of price weakness were motor vehicles & other transport (down 4.0 percent), pulp & paper (down 3.1 percent), primary metals (down 2.4 percent), electrical & communications products (down 2.3 percent) and lumber & wood products (down 1.9 percent). Machinery & equipment also declined significantly (1.5 percent). May raw materials price index jumped by 2.2 percent on the month but remained 31.6 percent lower than a year ago. The RMPI was dominated by a 6.2 percent monthly leap in the cost of mineral fuels without which the index would have fallen 1.0 percent from April. The only other sector to see a rise in prices was vegetable products (1.3 percent).

Bottom line

The European Central Bank as universally expected, left its policy interest rate at 1 percent as it shifted to other means of stimulating the moribund European economy. The plethora of economic data for the week was mixed as to be expected at this stage of the business cycle with much of the ‘good’ news offset by disappointing news.

Both the Reserve Bank of Australia and Bank of England meet this week — both are expected to leave their policy interest rates of 3 percent and 0.5 percent unchanged. The data deluge will also calm and give investors a chance to evaluate recent data more thoroughly.

Looking Ahead: July 6 through July 10, 2009

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