Global Markets

The euphoria from last weekend’s Chinese currency move quickly dissipated and equities were down for the most part last week. Asia/Pacific stock indexes followed here fared better than those in Europe and the Americas. Asia’s emerging nation indexes fared the best while those of the industrialized countries swooned over a combination of renewed sovereign debt worries in Europe and disappointing U.S. economic data that indicated slower recovery. A more sobering assessment of the benefits accruing to the global economy from China’s depegging of the renminbi and renewed concerns about the European banking system broke stocks’ 10 day winning streak.

In the U.S., the Federal Reserve changed its statement language to indicate that the FOMC has become more concerned about risks to the economic recovery because of Europe’s fiscal woes and because of some weak recent data. The federal funds rate remains at the current range of zero to 0.25 percent. The FOMC also repeated its statement that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period”. A widespread interpretation of the phrase is that the Fed will keep rates in their current range for at least another six months with many forecasters thinking it will not raise rates until the second half of 2011.

Investors were also in vigil mode as they awaited the G8/G20 meetings currently taking place in Toronto (G8 meets Friday and Saturday, G20 on Saturday and Sunday). Ahead of the G20 meeting, Jean Claude Trichet, president of the ECB, said he still believed that austerity measures rather than stimulus were appropriate, because “in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today”. But worries over the ability of countries to repay their sovereign debt would not go away.

Central banks provided a mixed picture of the global recovery. For example, minutes from the Bank of England’s monetary policy committee June meeting showed the first signs of dissent —one member had voted for a rate increase. However, Norway’s central bank, which had previously raised rates, said it was holding steady. It noted that “the turmoil in global financial markets is creating uncertainty with regard to economic developments,” adding that any further rate increases will come later than it indicated previously.

Global Stock Market Recap

Europe and the UK

After responding to the euphoria about the Chinese currency move, equities took a turn to the negative and were down four of five days. Banking stocks dropped amidst persisting concern about the region's sovereign debt crisis that may slow down the pace of the already anemic economic recovery. And once again, investors looked for clues to growth in the U.S. and weren’t particularly enamored with what they saw. Housing data were dreadful and far worse than analysts expected. The end to the housing stimulus package on April 30 distorted these data — but incentive programs, whether government or corporate sponsored, tend to borrow sales from the future and depress results after the programs end.

Little economic data were available in the region and investors shifted to U.S. data watching as well as political machinations in the run up to the G8/G20 meetings. In the UK, the new government unveiled its budget and the ECB noted that peripheral countries’ banks were borrowing heavily from it. The Federal Reserve’s statement at the conclusion of the FOMC meeting on Wednesday (after markets here were closed) did not elevate sentiment — the Fed lowered its expectations for economic growth saying that it continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends and stable inflation expectations will warrant low rates for an "extended period".

On the week, the FTSE sank 3.9 percent, the CAC plunged 4.5 percent while the DAX dropped a more modest 2.4 percent.

Bank of England minutes

Minutes of the Bank of England’s monetary policy committee meeting this month revealed one member had voted to raise interest rates. The minutes surprised investors by showing that Andrew Sentance had voted to raise rates by 25 basis points from a record low of 0.5 percent, the first call by an MPC member for monetary tightening since August 2008.

UK budget

The new government committed to larger public spending cuts than expected, helping to allay fears over the UK’s public finances and heightening confidence over its ability to hold on to its triple A sovereign credit rating. Analysts said the budget had reduced the likelihood of a sovereign rating downgrade or a wholesale loss of confidence in UK government debt but was not a panacea. The economy would continue to face significant risks ahead. The budget is likely to increase the Bank of England’s determination not to tighten monetary policy too early.

But the effects of the steep spending cuts and tax increases on economic growth will be felt most severely in 2011. GDP growth is expected to be lower both this year and next than forecast only a week ago by the Office for Budget Responsibility. In framing its forecasts for both output and the nation’s finances, the OBR noted that there was considerable uncertainty surrounding them. The OBR was careful to add that, in framing its forecast, it had concluded that the damping effects of the spending cuts and tax rises were temporary.

Asia/Pacific

Asia/Pacific equities were mixed last week with the major indexes declining while those of the emerging countries rising. The Shanghai Composite continued its pattern of up one week and down the next. Last week was the ‘up’ week. The initial exuberance exhibited on Monday after the People’s Bank of China’s announcement regarding the yuan evaporated almost immediately and equities receded as the week progressed as worries about sustaining the global recovery once again came to the fore. And at week’s end, traders went into pre-G20 meeting vigil mode and stayed on the sidelines awaiting the results of the weekend meetings.

The Nikkei and Topix dropped 2.6 percent and 2.0 percent respectively as the yen edged higher in flight to safety, currency appreciation that will hurt exporters. Earlier in the week, export data showed a weakening trend while core inflation dropped 1.2 percent on the year — the 15^th consecutive monthly decline. Real estate stocks declined on concerns about economic recovery.

And in Australia, the All Ordinaries slumped by 2.9 percent on the week which was marked by government turmoil ending in a change in prime minister. Banks ended in negative territory on global economic concerns while mining stocks were in negative territory on concerns about the proposed resource super tax and global demand conditions. And banks ended in negative territory as they awaited more cues from the new PM, Julia Gillard and her policies.

However, the Hang Seng managed to climb 2 percent for the week even though it was down three of five days, Monday’s 3.1 percent gain in the wake of the mainland China announcement kept the index above water for the week. Fresh concerns about sustaining the economic recovery and weak closings across other markets in the neighborhood also affected market sentiment.

Currencies

The renminbi or yuan was up 0.5 percent on the week against the U.S. dollar after the previous weekend’s announcement that the People’s Bank of China would allow greater currency flexibility. The action by the Chinese occurred just a week before the G8/G20 meetings. There was mounting pressure from abroad to let the renminbi strengthen against the dollar — and its decision to begin at least a small increase could take some of the sting out of the issue. Before China pledged to promote currency flexibility, the issue was expected to dominate the Group of 20 talks. Now, the leaders are expected to focus on the debt crisis in Europe and financial regulation.

Many economists and U.S. politicians have argued that the renminbi’s value — which was held steady by the Chinese authorities over the past two years to bolster the Chinese economy during the global downturn — is artificially low, and that this gives Chinese exporters an unfair advantage over manufacturers in the United States. China has long signaled that any appreciation will be gradual and will come on its own terms rather than in response to international pressure.

The pound sterling was up last week bolstered by Tuesday’s tough UK Budget. It received a further boost by news of a split vote at the Bank of England’s monetary policy committee at its meeting earlier this month. Andrew Sentance, widely viewed as one of the more hawkish MPC members, broke ranks and voted for a 25 basis point interest rate increase. At one point on Thursday, the euro was at an 18 month low against the pound. The yen continued to climb against both the euro and the dollar thanks to safe haven demand.

Selected currencies — weekly results

Indicator scoreboard

Germany

June Ifo business sentiment index edged up to 101.8 from 101.1 in May. Current conditions climbed to 101.1 from 99.4 in the previous month. However, expectations were down to 102.4 from 103.7 in May. The ongoing good news from robust industry orders and output and the resilience of the labor market evidently outweighed concerns over the sovereign debt crisis and looming cutbacks in government spending. Manufacturing edged up to 10.5 from 10.1 while construction sentiment recovered to minus 17.1 after slipping to a four-month low of minus 20.4 in May. However, retail sales sentiment slumped a full two points to minus 10.1 for the month.

France

May household spending on manufactured goods rebounded with a stronger than expected 0.7 percent after sinking a revised 1.3 percent in April. Annual growth accelerated to 1.9 percent from 1.0 percent the month before. May’s increase was largely attributable a 3.6 percent monthly bounce in durable goods spending although even this still failed to make up for a 4.5 percent slump in April. Within this, households goods surged 7.3 percent with purchases of TVs especially robust ahead of the then looming World Cup. Some spending in this sector may well have been at the expense of June and July. However, auto demand edged down by 0.1 percent — it continues to be hit by the termination of government assisted programs. Purchases also declined in both textiles (1.6 percent) and the other products category (0.2 percent).

First quarter gross domestic product inched up an unrevised 0.1 percent and was up 1.2 percent on the year. There were some minor and largely insignificant changes to the GDP components but crucially consumption remained flat on the quarter. Gross fixed investment was revised down 0.1 percent to a steeper 0.9 percent and government spending was shaved by the same amount and now shows no growth at all. Exports saw the most significant adjustment, up 0.2 percentage points at 4.1 percent but with imports nudged 0.1 percentage points stronger at 2.1 percent, overall net trade still contributed a sizeable 0.4 percentage points to growth. Business inventories are now seen subtracting 0.2 percentage points from the bottom line versus previously 0.1 percentage points. At the margin, this should be seen as small plus for future output.

Italy

April retail sales were down 0.3 percent and dropped 0.2 percent on the year. The breakdown of the figures was not quite as bad as the headline data suggest being biased by a 0.7 percent drop in food purchases. Non-food sales slipped just 0.1 percent on the month. Still over the last three months non-food sales edged up a minimal 0.1 percent, underlining the sluggish state of the household sector. Non-food sales were up 0.2 percent on the year while food purchases sank 2.0 percent. The main areas of weakness were computer & telecommunications (down 3.3 percent), perfume & personal hygiene (down 0.5 percent) and clothing (down 0.3 percent). The most significant positive was recorded in furniture & household goods and electronics (both up 1.2 percent).

First quarter unemployment edged up to 8.4 percent from 8.2 percent in the previous quarter. The total number of people seeking work now stands at 2.11 million, up a relatively modest 48,000 on the fourth quarter of 2009. Regionally rates were up across the country with increases of 0.2 percentage points in both the North (to 6.1 percent) and in the South (to 13.0 percent) and of 0.1 percentage points in the central area (to 7.9 percent). Employment was up by 25,000 mainly due to a 32,000 increase in the North that more than offset a 26,000 decline in the South.

Asia/Pacific

Japan

May unadjusted merchandise trade surplus was Y324.2 billion, up from Y281.39 billion in May 2009. On the year, exports were up 32.1 percent while imports increased by 33.4 percent. On the year, exports are up for six months in a row while imports are up five months. Exports to the U.S. were up 17.7 percent on the year while exports to the EU were up 17.4 percent. Exports to Asia were up almost double those to the U.S. and EU. Exports to Asia jumped 34.4 percent while exports to China were up 25.3 percent. On a seasonally adjusted basis, the trade surplus was Y416.1 billion, down from April’s surplus of Y507.7 billion. On the month, exports were down 1.2 percent while imports were up 0.4 percent.

May national consumer price index was up 0.1 percent and down 0.9 percent on the year. Excluding only fresh food, the CPI was up 0.1 percent but down 1.2 percent – a tick less than the consensus. Excluding both food and energy, the CPI was unchanged on the month and down a steep 2.6 percent on the year. Goods prices were up 0.2 percent on the month while services were unchanged. They were down 0.7 percent and 1.3 percent respectively on the year. All price categories were down on the year with the exception of transportation & communication which was up 2.4 percent. The overall decline was no doubt impacted the cost of high school education made free starting from April. The June Tokyo CPI, which is considered a precursor of the national index was also up 0.1 percent and down 0.9 percent on the year. However, excluding fresh food the Tokyo CPI was down 0.2 percent and 1.3 percent on the year. And excluding both food and energy the index was down 0.2 percent on the month and 1.4 percent on the year.

Americas

Canada

May consumer price index was up 0.3 percent on the month. The CPI increase eased to 1.4 percent from 1.8 percent on the year. Core CPI excluding food and energy was also up 0.3 percent on the month and eased to an increase of 1 percent from 1.2 percent in April. The Bank of Canada’s core CPI which excludes eight volatile items was up 0.3 percent and was down a tick to 1.8 percent on the year. The Bank which has an interest rate target range of one percent to three percent uses its measure as a guide to setting its key interest rate. On the month, all categories were up with the exception of clothing & footwear (down 1.5 percent) and health & personal care which slipped 0.2 percent. On the year, six of the eight major components of the CPI recorded price increases with the exceptions of clothing & footwear (down 1.3 percent) as well as recreation, education & reading (down 0.2 percent). Transportation prices jumped by 4.1 percent on the year after increasing 6.2 percent in April. In addition to paying higher prices for gasoline and passenger vehicles, consumers paid 5.1 percent more for passenger vehicle insurance premiums. On a seasonally adjusted basis, the overall CPI edged down 0.1 percent on the month while the Bank of Canada’s core rate edged up 0.1 percent.

April retail sales dropped 2.0 percent while annual growth slowed to 6.6 percent from the previously reported 9.1 percent in March. The slide in nominal demand was almost matched by volumes which saw a 1.9 percent drop on the month. Monthly cash sales were hit mainly by the auto sector where purchases slumped 4.8 percent. Within this, new car dealers saw a 5.3 percent drop while used cars sales were off 4.4 percent. Sector performance would have been a good deal worse but for a 2.3 percent increase in demand for parts & accessories. However, even excluding autos, sales were down a hefty 1.2 percent from March. Declines among the sub-sectors were widespread with 10 of the 11 categories registering monthly declines. Among these the largest drop was witnessed in clothing & accessories where purchases fell 5.2 percent. Other significant declines were recorded in sporting goods & hobbies (3.2 percent), building materials & outdoor equipment (2.0 percent) and gasoline stations (2.0 percent). Food & beverage was down 0.5 percent while the only category to see sales advance was electronics & appliance stores (0.6 percent).

Bottom line

The week began on a positive note after China announced that it would allow its currency more flexibility but went downhill from there. The usual culprits — worry about the viability of world growth and Europe’s sovereign debt problems — sent investors scuttling to the sidelines. And they wanted to see what assurances would emerge from the G8/G20 meetings this weekend.

While there were few economic events last week, this week will make up for it. In Asia, the Bank of Japan will release its latest quarterly Tankan Survey on Thursday (local time). Also on the Japanese data agenda are the latest industrial production and unemployment data along with household spending and retail sales. In Australia, retail sales will also be front and center in the run up to the July 6 (local time) Reserve Bank of Australia monetary policy meeting. And in Europe, new purchasing managers’ indexes will give investors an idea of the strength of the manufacturing sector. And Germany and the EMU will release their latest unemployment data. And in the U.S. Friday is employment — no more need be said.

Looking Ahead: June 28 through July 2, 2010

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