Global Markets

After getting off to a dreadful start last week, equities righted themselves and managed to end on a mostly positive note. There is a basic fragility in investors’ appetite for risk and it doesn’t take much to send them fleeing into safe havens of bonds and the U.S. dollar. Trading sessions have been noted, especially in the U.S., for high volatility especially in the last hour of the trading day. On the week, equity indexes followed here in Asia/Pacific region were mixed while those in Europe, UK and United States were up.

There was a plethora of central bank meetings with two banks increasing rates while the rest kept their key interest rates on hold. The Reserve Bank of New Zealand increased rates (by 25 basis points to 2.75 percent) as did the Banco Central do Brasil (by 75 basis points to 10.25 percent). But the Bank of Korea kept rates steady (2 percent) as did the Bank of England (0.5 percent) and the European Central Bank (1.0 percent). Brazil’s is the fifth central bank to increase rates following Canada, Norway, Australia and New Zealand.

The week was highlighted by a very promising and welcome return to positive macroeconomic fundamentals after the shock of the disappointing U.S. employment numbers. Most of the good economic news emanated from Japan, Australia and China. China’s exports were up by almost 50 percent on the year to May. Imports were also stronger, boosting hopes that domestic and global demand are getting stronger. News that annualized first quarter GDP growth in Japan had risen by a greater than expected 5 percent also improved the mood, as did positive employment data out of Australia. An interest rate increase in New Zealand emphasized that economic recovery is well established.

G20 finance ministers, at the conclusion of last weekend’s meeting, said the recovery from the global economic crisis has been faster than expected, but significant challenges remain. The attending finance ministers and central bankers said excessive budget deficits should be tackled immediately. They did not come to any agreement on a global bank tax. The meeting sets the agenda for a summit of G20 leaders in Toronto on June 26^th and 27^th. The meeting’s communiqué made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX continued their weekly pattern of late — one week down, the next up. This was the up week, with the three gaining 0.7 percent, 2.9 percent and 1.8 percent respectively. The DAX moved to positive territory for 2010 while the FTSE is down 4.6 percent and the CAC down 9.7 percent on the year. After declining on both Monday and Tuesday, the FTSE and CAC rebounded for the remaining days of the week. The DAX wilted on Friday and closed marginally down on the day.

Thursday’s gains were boosted by mining and automotive stocks along with strong economic data from Australia, Japan and China. In Australia, the unemployment rate dropped and employment continued to increase while the seasonally adjusted annualized rate of GDP growth in Japan was marginally revised upward. And China’s exports surged, offering evidence that the world economic recovery still exists. And in the UK and Europe, both the European Central Bank and Bank of England left policy interest rates unchanged.

Bank of England

As expected, the Bank of England kept its key interest rate at 0.5 percent and at the same time left its total amount of quantitative easing unchanged at Stg200 billion. There was no accompanying statement which is normal operating procedure when policy remains unchanged. Monetary policy has been on hold since November 2009. The decision comes ahead of the emergency budget to be announced on June 22^nd.

The Bank’s inflation target is 2 percent. The decision for an unchanged rate comes despite the fact that inflation continues to stand substantially above target, thereby increasing the risk of undermining inflation expectations. And some monetary policy committee members have raised concerns that the level of spare capacity may not be as large as thought and thereby could prevent inflation from falling as sharply as has been anticipated. In the latest quarterly inflation report, the Bank said it believes the current inflation rate reflects several one-off factors that are likely to gradually disappear. Among these are the persistent weakness of sterling and the reversion of VAT to its prerecession level of 17.5 percent.

OECD recommended in its latest report that the BoE wait no longer than the final quarter of this year before moving and it expects interest rates to reach 3.5 percent by the end of 2011. But the immediate focus is on fiscal tightening. The intensification of the eurozone debt crisis is likely to further add to downside risks to growth.

The Bank of England decision is the first since the creation of Britain’s coalition government on May 11^th. Central bank officials have yet to see the full details of public spending cuts due to be announced by Chancellor of the Exchequer George Osborne to tackle the record budget deficit. The risk for the BoE is that the spending cuts, which will be announced in two weeks, will push the economy back into recession. Gross domestic product rose 0.3 percent in the first quarter, compared with 0.4 percent in the previous three months.

European Central Bank

As expected the European Central Bank left its key refinancing rate at 1 percent where it has been since May 2009. In more normal times, the refi — or minimum bid — rate would be the lowest rate at which banks could seek ECB financing in competitive bidding at the ECB's main weekly refinancing operations. For now and until further notice (until October at least), it is the rate at which those refinancing agreements are fixed for all bidders. The ECB left the deposit rate — the floor for euro money market rates — at 0.25 percent and the marginal lending rate — the ceiling — at 1.75 percent. Monetary officials have repeatedly said that interest rates remain appropriate and that they do not see inflationary risks.

At his post meeting press conference, ECB President Jean Claude Trichet said the Bank will extend its offerings of unlimited cash and keep buying government bonds as it tries to ease tensions in money markets and fight the sovereign debt crisis. The ECB is buying state debt and pumping unlimited funds into the banking system as part of a strategy by European policy makers to stop the euro region from breaking apart. While Trichet refused to bow to some investors’ demands for more details on the bond purchases, he said the ECB plans to offer further help to banks struggling to raise cash in money markets.

The ECB raised its growth forecast for this year and cut it for 2011. The ECB expects the economy to expand around 1 percent in 2010 compared with a previous forecast of around 0.8 percent. It will grow about 1.2 percent in 2011, lower than an earlier projection of around 1.5 percent because of weaker domestic demand. The Bank also raised its inflation forecasts. Consumer prices are expected to climb around 1.5 percent in 2010 and 1.6 percent in 2011. That compares with a previous projection that inflation would be around 1.2 percent in 2010 and 1.5 percent in 2011.

Asia/Pacific

Equities in this region ended the week on a positive note but results were mixed for the week. The key driver was optimism that the global economic recovery will be sustained despite the lingering concerns about the eurozone. But indexes such as the Nikkei could not recoup Monday’s heavy losses which were compounded by further losses on Wednesday. Stocks in the region were lifted in part by hefty gains in the U.S. on Thursday. The strengthening of the euro against its U.S. counterpart and stability in the European markets also contributed to better sentiment. The three big losers were the PSEi and Topix, both down 2.7 percent, and the Nikkei which was down 2.0 percent. Only the All Ordinaries managed a gain of 1 percent. All other positive gains were below 1 percent.

Stocks in part were buoyed by Japanese data. GDP was up an unrevised 1.2 percent on the quarter but the annualized rate crept upward to a revised 5 percent. And the corporate goods price index was up both on the month and year, the latter for the first time in 17 months. April core private sector machinery orders were up sharply for the second straight month — orders were up 4 percent in April compared to the previous month, following the 5.4 percent surge in March.

China’s monthly data deluge

China released a potpourri of economic data Friday. Inflation in the form of the consumer price index exceeded the 3 percent inflation target and was up 3.1 percent on the year after rising 2.8 percent in April. This occurred at a time when wage pressures are intensifying. However, industrial production dropped to an increase of 16.5 percent on the year after soaring 17.8 percent the month before. This suggests that of the government’s tightening measures, including a clampdown on property speculation, are beginning to have an effect. The increase in urban fixed asset investment declined for the third straight month to 25.9 percent year-to-date, down from 26.1 percent the month before. The increase in the M2 money supply also moderated again, to 21 percent on the year from 21.5 percent, while retail sales were largely flat at an 18.7 percent increase.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand increased its policy interest rate for the first time in three years by 25 basis points to 2.75 percent. The increase is at odds with actions of other Asia/Pacific central banks (other than Australia of course) including Indonesia, Thailand and the Philippines, who have not changed their interest rates on concern that European fiscal woes may threaten the global recovery.

The RBNZ last changed rates in April 2009 when they lowered the official cash rate (OCR) to 2.5 percent, a record low. At its previous meeting, governor Alan Bollard said that interest rates were likely to be raised over the coming months provided the domestic economy continued to grow within the Bank’s forecasts. The RBNZ has an inflation target range of 1 percent to 3 percent. Inflation in New Zealand is expected to accelerate as growth picks up and the government introduces new taxes. Inflation is expected to soar to over 5 percent for the fiscal year ending March 31 according to Treasury forecasts. On May 20, finance minister Bill English announced that the sales tax rate would increase to 15 percent from 12.5 percent effective October 1, boosting all prices by slightly more than 2 percent. The government had previously increased taxes on tobacco, while a plan to levy carbon emissions will boost fuel and power costs from July 1.

Currencies

After closing below the $1.20 level for four days, the euro emerged to close above that level Thursday and Friday. The beaten down euro and sterling have made a comeback against the dollar over the past three sessions, bolstered by hopes that Europe can emerge from its debt crisis without suffering the dreaded double dip recession. Austerity measures taken across the Atlantic threaten to derail an economic recovery, but are seen as a necessary step to avoid defaults on sovereign debt.

The South Korean won dropped to a two week low against the dollar on Wednesday on speculation that the country’s authorities were set to introduce foreign exchange controls. Reports suggested South Korea planned to implement restrictions on banks’ currency forward trades as early as next week. But the finance ministry, which has said it would study ways to reduce the won’s volatility, said the government had not decided what type of restrictions to introduce or when to announce the measures. The won fell as investors looked to sell the currency ahead of the possible implementation of the measures. The won was also hamstrung by speculation that the Bank of Korea would not increase interest rates in spite of data showing better than expected jobs growth and bank lending.

The pound sterling lost ground Tuesday after the rating agency Fitch warned that the UK faced a formidable fiscal challenge in the coming months. Fitch said ‘the scale of the UK’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy.’ The comments came ahead of an emergency Budget which will be announced on June 22^nd.

Selected currencies — weekly results

Indicator scoreboard

Germany

April manufacturing orders were up 2.8 percent after soaring an upwardly revised 5.1 percent in March. On the year, working day adjusted orders were up 29.6 percent. The monthly increase was split between domestic (up 2.9 percent) and foreign (up 2.8 percent) components. Within the former, strength was especially apparent in basics which jumped 4.2 percent after a 3.8 percent rise last time. Capital goods also increased at a solid clip, up 2.2 percent on the month. The only decline was registered in consumer and durable goods where orders dropped 1.2 percent, albeit after a 6.3 percent surge previously. Overseas demand was similarly supported by basics which posted a 5.9 percent increase after a 5.8 percent bounce last time. Capital goods crept up a much more modest 0.5 percent and consumer and durables declined 2.2 percent. The entire gain in foreign orders was derived from non-eurozone countries where demand climbed 5.5 percent. By contrast, orders from other EMU states dropped 1.0 percent although this was hardly surprising as March witnessed a 9.6 percent leap.

April industrial production was up 0.9 percent after an upwardly revised 4.3 percent surge in March. On the year, workday adjusted output jumped 13.3 percent. Both energy (4.5 percent) and construction (2.6 percent) recorded hefty increases and masked declines in capital goods (1.0 percent) and consumer goods (1.2 percent). However, there were solid gains in both consumer durable goods (0.9 percent) and intermediates (2.8 percent). Overall manufacturing output was up 0.5 percent after a 4.0 percent increase last time.

April seasonally adjusted merchandise trade surplus edged up from a slightly smaller revised €13.0 billion in March to €13.1 billion. This was the third month in a row that the bottom line has expanded and the latest reading compares very favorably with the ¥9.4 billion surplus posted a year ago. The latest balance reflected hefty monthly declines in both sides of the balance sheet. Exports were down 5.9 percent, their first contraction since January, while imports dropped a still steeper 7.3 percent, their first drop since November last year. However, on the year, unadjusted exports were up a very respectable 19.2 percent while imports grew a firm 15.7 percent. Within the unadjusted data, non-EU countries continue to provide the lion share of export growth. Shipments to this area were up some 28.6 percent from a year ago or more than twice the rate of sales to other EMU states (13.2 percent). Imports tell a similar story with purchases from outside the EU up an annual 22.5 percent but from within the EMU bloc, up just 12.6 percent.

France

April seasonally adjusted merchandise trade gap narrowed marginally from a smaller revised €4.41 billion shortfall in March to €4.25 billion deficit. A 1.0 percent rise in nominal exports was almost offset by a 0.4 percent gain in imports and constituted the second worse performance so far this year. The latest shortfall was a disappointing 12.7 percent larger than the first quarter average and warns of a deteriorating trend in foreign trade at a time when the French government is hoping for exactly the opposite.

April industrial production excluding construction was down 0.3 percent on the month after increasing a revised 1.3 percent in March. Output accelerated to 7.9 percent on the year. The headline decline was misleading being largely due to 5.2 percent slump in mining & quarrying. Manufacturing output was up 0.4 percent with solid increases in both electrical & electronic equipment and machine equipment (2.1 percent) and transport equipment (1.3 percent). With the other manufacturing category posting a 0.1 percent advance, the only declines were in the erratic coke & refined petroleum products area (2.5 percent) and in food & beverages (0.6 percent). Activity in construction contracted 2.2 percent.

Italy

First quarter gross domestic product was up a revised 0.4 percent and up 0.5 percent on the year. Both were 0.1 percent lower than the flash estimate. The first look at the details confirmed the lopsided nature of the recovery and in particular, the persistent weakness of domestic demand. Consumer spending was unchanged from the previous quarter (up 0.7 percent on the year). And although capital investment posted a welcome 0.6 percent gain (minus 1.2 percent on the year), government spending dropped 0.5 percent (minus 0.3 percent on the year) and net domestic demand failed to make any contribution to the bottom line. With inventories also having a negligible impact, a positive quarterly real GDP growth rate was only secured courtesy of overseas demand. Exports jumped 5.3 percent, easily outpacing imports (3.3 percent) to ensure a 0.5 percentage point contribution from net foreign trade.

April industrial production was up 1.0 percent after a revised increase of 0.2 percent in March. Annual workday adjusted growth accelerated from 7.0 percent to 7.8 percent. Outside of energy where production declined 0.8 percent on the month, gains in output were broad based. The consumer goods sector posted a 0.7 percent advance, capital goods were up 0.4 percent and intermediates jumped 1.8 percent.

United Kingdom

April merchandise trade deficit was unchanged from a slightly smaller revised Stg7.3 billion shortfall posted in March. However, the steady headline masked a Stg0.7 billion narrowing to Stg6.4 billion in the underlying deficit which excludes trade in oil and erratics. This erased most of the Stg1 billion deterioration seen in March. Both sides of the overall balance sheet recorded a modest contraction with nominal exports dropping 0.6 percent on the month and imports down 0.4 percent. To this end the National Statistics Office highlighted a small negative impact on air traffic from the Icelandic volcano eruption during the period. This could have affected up to 45 percent of exports to, and 35 percent of imports from, non-EU countries. Regionally exports to other EU countries were up 1.0 percent on the month but with imports up by 1.2 percent, the bilateral shortfall was essentially unchanged at Stg3.3 billion. The bilateral deficit with non-EU countries similarly held steady at Stg4.0 billion as exports dropped 2.5 percent and imports declined 2.1 percent.

April industrial production declined 0.4 percent but was up 2.1 percent when compared with last year. The key manufacturing sector performed just as badly with output also sinking 0.4 percent on the month for an annual increase of 3.4 percent. However, weakness in April came after two particularly strong months so some pullback was always a risk. More significantly, over the last three months manufacturing output was up a solid 2.5 percent (total industrial production 2.1 percent), its fastest pace since October 1998. For April alone, in addition to the contraction in manufacturing, there were declines in electricity gas & water (0.5 percent) and in oil & gas extraction (0.3 percent). Production in the mining and quarrying sub-sector was unchanged from March. Falling output was also apparent across most industries with just metals (1.0 percent) and chemicals (0.6 percent) managing to post an increase. Durable goods were down 0.6 percent, nondurables dropped 0.8 percent and capital goods declined 0.9 percent. Intermediates bucked the trend with a meager 0.1 percent rise.

May producer input prices declined 0.6 percent on the month and were up 11.2 percent on the year. Output prices were up 0.3 percent and 5.7 percent on the year. The advance in the output price index reflected widespread monthly gains among the main subsectors — there were increases in the cost of petrol (0.9 percent), tobacco & alcohol (0.9 percent), electrical & optical good (0.7 percent) and metals (0.7 percent). The only decline was in the other products area (1.1 percent). Even so, the core index edged up just 0.1 percent on the month and slipped to a 4.4 percent annual rate from 4.5 percent in April. Input prices were depressed on the month by weaker crude oil costs (6.7 percent) and a minor decline in the price of other home produced materials (0.1 percent). Partially offsetting increases were seen in imported chemicals (2.7 percent), home food materials (2.2 percent) and imported food materials (1.6 percent).

Asia/Pacific

Japan

First quarter gross domestic product increased an unrevised 1.2 percent and was up 4.2 percent when compared with the same quarter a year ago. The seasonally adjusted annual rate was revised upward to 5.0 percent from the original estimate of 4.9 percent. Capital spending was revised down to an increase of 0.6 percent on the quarter from the preliminary 1.0 percent estimate. Domestic demand was up an unrevised 0.6 percent. Private consumption was revised up a tick to 0.4 percent. Exports were unchanged at an increase of 6.9 percent on the quarter while imports were up a more modest 2.3 percent.

May corporate goods price index was up 0.1 percent and 0.4 percent on the year. It was the sixth straight increase on the month and the first price rise in 17 months on the year. Prices on the month were mixed while on the year, most declined. Petroleum & coal products prices were up 3 percent on the month and 30.1 percent on the year while nonferrous metals dropped 3.8 percent on the month but were up 18 percent on the year. Processed foodstuffs were unchanged on the month and were down 1.4 percent on the year.

Australia

May unemployment rate declined to 5.2 percent from 5.4 percent in April. Analysts had expected a decline to 5.3 percent. Employment increased by 26,900 to 11.057 million. In April, employment increased by 35,300. The rise in employment was driven by an increase in full time employment which was up by 36,400 people to 7.780 million. It was offset by a drop of 9,400 people to 3.277 million in part time employment. This was the ninth consecutive month that the number of people employed full time increased. The number of people unemployed decreased 25,400 people to 600,900. The participation rate in May decreased 0.2 percentage points to 65.1 percent.

Americas

Canada

April merchandise trade balance swung back into a modest C$0.18 billion surplus following a marginally revised C$0.24 billion shortfall last month. The improvement reflected a contraction in both sides of the balance sheet with nominal exports down 1.0 percent on the month and imports off a larger 2.2 percent. However, annual growth rates for both remain strongly positive at 8.9 percent and 6.4 percent respectively. The real trade balance strengthened slightly as export volumes gained 0.4 percent on the month, twice the pace of imports. Regionally, the bilateral surplus with the U.S. was essentially unchanged at C$3.8 billion as cash exports expanded 0.7 percent from March and imports increased 0.9 percent. However, the bilateral deficit with the EU widened out by C$0.2 billion to C$0.8 billion as exports slumped 23.4 percent on the month and imports dropped only 14.3 percent. Flows here may well have been affected by fallout from the Icelandic volcano in April.  Within the headline slide in exports there were monthly declines in agriculture & fishing (5.7 percent), energy (2.6 percent), industrial goods & materials (3.0 percent) and other consumer goods (1.7 percent). But the weakness here was almost offset by increases in machinery & equipment (4.6 percent), autos (1.6 percent) and forestry products (2.0 percent). Total imports were undermined by an 8.8 percent nosedive in industrial goods & materials, compounded by declines in other consumer goods (6.0 percent) and machinery & equipment (1.2 percent). 

Bottom line

Most stock indexes covered here were up last week as they recovered from the previous week’s declines. New positive economic data helped push the disappointing U.S. employment report into the past and along with it, the intense risk aversity. The euro took the brunt of the punishment as it sank to new four year lows before stabilizing in mid-week. Many central banks met but only the RBNZ and the Banco Central do Brasil increased interest rates. The Banks of England and Korea and the European Central Bank left their policy rates on hold.

The Bank of Japan meets at the beginning of this week. The Bank of Japan's policy board is likely to discuss making about ¥2 trillion to ¥3 trillion available to banks to lend to companies, initially offering a relatively small amount so it can gauge corporate demand for bank loans. The new lending plan is aimed at alleviating a problem that has dragged on Japan's economic recovery — banks putting the priority on fixing their balance sheets and not lending to smaller companies that need funds. The central bank's policy board has been ironing out the details of the lending scheme for two months.

Looking Ahead: June 14 through June 18, 2010

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