Global Markets

Economic data did not provide the reassurance that investors were seeking last week as one major release after another came in below analysts’ expectations. While the purchasing managers’ surveys showed growth, they also showed signs that growth was slowing. And unemployment continued to remain at stubbornly high levels as employers remain sufficiently wary of the recovery to put off hiring. On the week, all indexes followed here were down with the exception of the Thai SET.

Equities declined at the start of the new quarter as risk appetites continued to evaporate and investors expressed serious concerns about the prospects for global economic growth following a drumbeat of negative economic news. Analysts pointed out that there has been a major shift in expectations for the U.S. economy — suddenly everyone is talking about renewed recession. Aside from the factory numbers, home sales continued to contract following the removal of a tax credit and the job market remains weak. However, incentives of any kind distort data once they are removed. And while it is typical for manufacturing growth to subside at this point of a recovery cycle, it is disconcerting to see consumer confidence and with it retail sales, also slipping at just the moment when households need to take over for industry as the economy’s engine.

G20

The Group of 20 communiqué on June 27^th urged all member countries to follow “growth-friendly fiscal consolidation plans”. They should halve their deficits by 2013 and stabilize the ratio of debt to gross domestic product by 2016. An exception was made for Japan, which can finance its large, persistent borrowing from domestic sources. G20 officials said there would be no formal sanctions for governments breaking the deficit pledge though. Nor is it likely to provoke much change in policy, since G20 countries are already on course to hit those targets. The public message was that they should move towards fiscal consolidation while keeping domestic demand going in the short run and at a pace determined by each country’s circumstances. The communiqué said that there is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. It also said that there is the risk that failure to implement consolidation where necessary would undermine confidence and hamper growth.

Global Stock Market Recap

Wanting to forget the first half of year

Global equity markets suffered their worst first half since 2008, while top-tier government bonds and gold have reaped solid returns. Market performance during the first six months is a tale of two quarters as equities and commodities enjoyed a strong start to the year, only to falter sharply in April when the debt problems in the eurozone erupted and risk aversion came to the fore as doubts about the sovereign debt of Greece, Spain, Portugal and Italy rattled investors. The euro, global equities and non-German government bonds in the eurozone were hit hard by selling as investors sought havens — gold, the dollar, the Swiss franc and U.S. Treasuries.

Debt concerns in the eurozone and the adoption of austerity measures in Europe and the UK came as Chinese economic activity — which sharply boosted its economy in 2009 — is slowing. And recent U.S. data have shown the economy is weakening thanks in part to weak private sector job creation.

Despite the widespread equity selloff, stock indexes in many countries remained positive as the second quarter ended. In the Asia/Pacific region, the Kospi, Sensex, Jakarta and KLSE Composites, the PSEi and SET were positive for 2010. And in Europe, the DAX managed to barely stay positive. The worst first half performer was the Shanghai Composite which plunged by 26.8 percent followed by the CAC — it lost 12.5 percent. Stocks in Australia and Japan were not far behind. The All Ordinaries dropped 11.4 percent and the Nikkei swooned by 11 percent in the first six months of the year.

Global Stock Market Recap — 2010 Quarterly Results

Europe and the UK

The FTSE and CAC rebounded on Friday but not enough to recover the heavy losses incurred earlier in the week — the DAX closed marginally lower on Friday. For the week, the FTSE sank 4.1 percent while the DAX was down 3.9 percent and the CAC plunged 4.9 percent. Trading seesawed from positive to negative and back again. The three indexes managed to scrape out a positive close to June, but it was insufficient to bail out the FTSE which lost 5.2 percent or the CAC, down 1.8 percent. The DAX was virtually unchanged. The global growth slowdown was the universal theme for investor risk aversion along with worries about the end of an ECB loan program and its impact on eurozone banks.

Worries about the health of eurozone banks contributed to the sharp decline in stock markets around the world as around 1,100 banks prepare to repay €442 billion in one year loans they borrowed from the ECB last June. Fears that the Bank was scaling back emergency support to eurozone banks too soon sparked sharp declines in financial markets Tuesday, with the euro tumbling to an eight-and-a-half year low against the Japanese yen. But banking stocks rallied after the ECB said it will lend banks €131.9 billion for three months. Bankers warned that the ECB’s decision not to renew one year loans to financial institutions had stoked concern about the ability of some eurozone banks to access interbank borrowing markets for funding. Banks across the eurozone and especially in Spain have found it hard to secure liquid funding in commercial markets. The ECB wants to wean banks off its emergency funding program. It is worried that providing additional 12-month loans would distort financial markets.

Sweden’s Riksbank raised interest rates for the first time since the financial crisis two years ago, but said the eurozone debt crisis was likely to dampen growth and reduce the need for further increases in the longer term. The Riksbank said that the robust recovery in the Swedish economy merited a rise to 0.50 percent from a record low of 0.25 percent, though two of six board members had wanted to hold rates. The Bank, however, cut its forecast for growth in 2011 and 2012, saying austerity measures by Europe’s indebted governments would hurt the export dependent economy, “which means that the repo rate in the longer term will not need to be raised as much as was previously assumed.”

Asia/Pacific

Worries about global growth and especially in China and the United States dominated so it was not surprising that all indexes followed here were down last week — with the exception of the Thai SET. Losses ranged from 0.3 percent (STI) to 5.5 percent (Nikkei). Trading tapered off Friday as investors began vigiling the U.S. employment report that would be released after markets in this part of the world had closed for the week. Following five days of losses for most indexes, some buying interest in beaten down stocks surfaced but trading remained lackluster.

June wasn’t the disaster for equities here as it was elsewhere. Only five of 13 indexes were down with losses ranging from 0.6 percent for the Taiex to a hefty 7.5 percent for the Shanghai Composite. The SET was up a healthy 6.2 percent to lead those indexes that gained in June. The Sensex gained 4.5 percent while the Jakarta Composite followed with an increase of 4.2 percent. But on the downside, losses were hefty — in addition to the Shanghai Composite decline, the Topix swooned by 4.4 percent and the Nikkei slumped by 4 percent. The All Ordinaries dropped 2.9 percent while the Taiex was down a modest 0.6 percent.

Investors bailed out of stocks on the heels of weaker purchasing managers’ index reports for South Korea, Taiwan, India, Australia and China that confirmed indications the region is seeing an easing of the recent growth surge. The monthly PMI report for Japan, published on Wednesday, told a similar story. However, the overall level of factory activity continued to expand in all six countries, suggesting that manufacturers may be experiencing a return to more normal rates of growth rather than heading for contraction.

Late Friday afternoon, the Reserve Bank of India increased its short-term lending rates by 25 basis points. The RBI’s borrowing or reverse repurchase rate is at 4 percent, while its lending or repurchase rate, is at 5.5 percent. Inflation, which surged to 10.2 percent in May had been driven by surging food prices after last year’s drought and has spread to non-food, manufactured items in recently as many firms’ have run into capacity constraints after several years of limited capital investment.

Currencies

Sentiment shifted last week. Now the dollar is down and the euro is up. Tensions last week included the July 1 expiration of the European Central Bank's Long Term Repo Operation, which was expected to push eurozone short term yields higher and make funding more difficult and expensive. But weak U.S. economic data and the prospects that the Federal Reserve would remain on hold longer than previously expected eventually sent traders to the euro where yields are higher than in the U.S. Weaker economic data — especially in the U.S. — led to widespread deleveraging. That meant that many long held positions were reversed.

Earlier in the week, the euro dropped to a record low against the Swiss franc and hit its lowest level in 8½ years against the yen as worries over the health of the eurozone financial system escalated. In addition to the worries surrounding the expiry the ECB's financing program, concerns over European banks grew after the Bank for International Settlements warned that they faced an incredibly challenging refinancing task. The euro was also hit by fresh concerns over the fiscal health of countries on the periphery of the eurozone including Spain.

According to the IMF, central banks pared their euro holdings in the first quarter of the year and likely cut them even further in the second quarter as the sovereign debt crisis worsened. As the eurozone has grappled with the debt crisis, the value of the euro has dropped about 12.5 percent versus the dollar since the start of 2010.

Selected currencies — weekly results

Indicator scoreboard

EMU

May M3 money supply was down 0.2 percent on the year. The drop left the three month average, a measure preferred by the ECB, unchanged at minus 0.2 percent. On the year, the increase in lending to the private sector inched up to a very subdued 0.2 percent. Within this, loans to non-financial corporations dropped 2.1 percent after a 2.6 percent contraction in April while borrowing by households was up 2.6 percent following a 2.5 percent increase in the previous month. Lending for house purchases accelerated to a 3.1 percent annual rate from 2.9 percent previously but loans to non-financial intermediaries (excluding pension funds and insurance corporations) slowed to 0.5 percent from 2.3 percent. On the liabilities side of banks' balance sheets, depositors' preference for liquidity is reflected once again in a relatively firm 5.2 percent annual gain in narrow money M1, within which overnight deposits were up 4.6 percent. By contrast other short term deposits fell 3.8 percent and short term marketable instruments were off 1.6 percent.

June economic sentiment crept up to 98.7 from 98.4 in May. However, the modest rebound failed to make up for the 2.2 point loss recorded in May and so leaves the index below its recent April peak of 100.6. Morale in industry was steady at minus 6 and edged up just 1 point to minus 17 in the consumer sector. Retail also saw no change at minus 6 while construction continued to slip, down 2 points at minus 30. The only other rise was in services where confidence touched 4, up just 1 point from its May level. Among the larger EMU states sentiment climbed 4 points to 106.2 in Germany and climbed 2.3 points to 90.9 in Spain. Confidence also advanced 1.4 points to 97.2 in Italy. However, France posted a 2.3 point decline to 96.6, its weakest reading since November last year.

June flash harmonized index of consumer prices was up 1.4 percent on the year. As usual no details were provided but national statistics suggest that lower energy prices were the main cause of the first decline in the inflation rate since February. Core rates were very well behaved once again so underlying inflation pressures continue to pose no threat to ECB policy.

June manufacturing PMI reading was 55.6, unrevised from its earlier flash estimate. This was slightly lower than the May reading of 55.8 and a four month low. As indicated in the flash report, output growth actually accelerated but orders rose at their slowest rate so far in 2010. Moreover, the new orders/inventory ratio remained well below recent peaks suggesting that production rates may well be trimmed over coming months. Compounding the situation, export orders hit a four month low — they had been running at 10-year highs in recent months. Employment was up but only marginally and largely thanks to strength in the German market. Input costs also continued to rise and once again outpaced factory gate prices implying a further squeeze on profit margins.

May joblessness rose a further 35,000 to nearly 15.8 million. However, with the level of unemployment revised down by more than 100,000 in April, the jobless rate was unchanged at its lower amended April level of 10.0 percent. Among the larger EMU states, the unemployment rate fell 0.1 percentage points to 7.5 percent in Germany and was unchanged at 8.7 percent in Italy and 9.9 percent in France. By contrast, joblessness in Spain continued to climb, hitting 19.9 percent, easily the worst performing labor market in the eurozone.

May producer prices excluding construction were up 0.3 percent and were up 3.1 percent when compared with last year. Sector prices were up across the board with the only exception being energy which registered no change. As a consequence, the core PPI surpassed the headline with a slightly stronger 0.4 percent monthly increase, enough to push the 12-month underlying rate higher by 0.6 percentage points to 1.7 percent. The sharpest advance occurred in intermediates which saw prices jump 0.8 percent on the month after a 1.4 percent leap in April. Other areas were more subdued however, with nondurable consumer goods prices up 0.1 percent, durable goods up 0.2 percent and capital goods up 0.1 percent. The PPIs were up on the month in all reporting member states.

Germany

June unemployment rate was unchanged at 7.7 percent. However, the unchanged rate masked a further 21,000 decline in the number of people out of work. Although less than half the 49,000 average decline posted over the previous three months, the latest drop in unemployment confirms an ongoing pick-up in labor demand. Seasonally adjusted total joblessness now stands at 3.23 million. Moreover, vacancies also rose again, up another 6,000 to match their May advance.

May retail sales were up 0.4 percent on the month but were down 2.4 percent when compared with last year. The monthly increase was the first since February. On the year, purchases of food & beverages were down 5.3 percent while non-food demand was up just 0.1 percent. Within the latter, weakness was most marked in mail order (minus 6.7 percent), clothing & footwear (minus 1.6 percent) and in the other goods category (minus 3.6 percent). By contrast, furniture & household goods (4.9 percent) and other assorted goods (2.9 percent) posted respectable gains.

France

May producer prices were unchanged on the month and up 4.3 percent on the year. On the month, utilities prices sank 2.3 percent. Manufactured product prices were up 0.3 percent with marked increases in the cost of coking & refining products (0.9 percent), food & drink (0.5 percent) and electrical equipment & information technology (0.4 percent).

Italy

May producer prices were up 0.5 percent on the month and 3.8 percent when compared with last year. Prices have now risen every month since September last year. Prices were up for most of the main industry groups although capital goods (minus 0.1 percent) and nondurable consumer goods (0.0 percent) bucked the trend. The largest advance was in energy (1.3 percent) but intermediates (0.6 percent) were quite firm too. At the same time durable consumer goods prices rose 0.3 percent to ensure a 0.1 percent increase in overall consumer goods prices.

Asia/Pacific

Japan

May retail sales were up 2.8 percent on the year after soaring 4.9 percent in April. This was the fifth consecutive month that sales have risen. However, large retailer sales continue to swoon. They dropped an adjusted 4.0 percent on the year.

May household spending was down 0.7 percent for the second consecutive month when compared with last year. Spending declined for all subcategories with the exception of culture & recreation (up 5.3 percent), fuel, light & water charges (up 4.7 percent) and transportation & communication (up 7.7 percent). Among those subcategories that declined were furniture & household utensils (down 9.3 percent) and education (down 7.6 percent). Clothing & footwear dropped 2.7 percent while medical care was down 2.4 percent.

The unemployment rate climbed for the third month in May to 5.2 percent after rising to 5.1 percent and 5.0 percent in the two previous months. Analysts had expected the unemployment rate to drop back down to 5.0 percent. Employment dropped by 24,000 after sinking by 28,000 in April. On the year, the number of employed persons dropped by 0.7 percent while the number of unemployed declined by 0.4 percent. The employment rate was 57.0 percent, down 0.4 percent from a year ago while the labour force participation rate also was down by 0.4 percent to 60.1 percent.

May industrial production inched down by 0.1 percent for its first decline in three months. On the year, output was up 20.2 percent. Transport equipment, pulp paper & paper products and petroleum & coal products declined. Commodities that dropped on the month were large passenger cars, semiconductor products machinery and flat panel display products machinery. According to METI, output continues to show upward movement -- production is expected to increase by 0.4 percent in June and 1.0 percent in July.

Second quarter Tankan survey showed across the board improvement from the previous survey. The large manufacturing index reading climbed to plus 1 – the first positive reading since the second quarter of 2008 – from minus 14 in the previous quarter. Small manufacturing improved to minus 18 from minus 30 while medium sized manufacturing enterprises rose to minus 6 from minus 19. On the nonmanufacturing side, large nonmanufacturing enterprises rose to minus 5 from minus 14 while medium nonmanufacturing climbed to minus 13 from minus 21 and small firms increased to minus 26 from minus 21. Capital spending for all firms in fiscal year 2010 was revised upward to plus 0.5 percent on the year from a decline of 3.9 percent seen in the first quarter. Big firms see CAPEX up 4.4 percent compared with a decline of 0.4 percent previously while small firms see capital expenditures down by 15.5 percent – still an improvement from the decline of 19.4 percent seen in the first quarter. While the large firms benefited from the resurgence in exports, those firms that focused on the domestic economy did not fare as well.

Australia

May retail sales edged up a disappointing 0.2 percent after rising 0.6 percent in April. On the year, sales were up 1.2 percent after rising 1.9 percent on the year in April. Clothing, footwear & other personal accessory retailing sales were up 1.7 percent while department store sales were up 1 percent. Cafes, restaurants & takeaway food services gained 0.8 percent, other retailing was up 0.3 percent and food retailing increased 0.2 percent. Household goods sales slumped by 1.4 percent.

Americas

Canada

May industrial product prices were up 0.3 percent and 1.4 percent when compared with last year. The headline index was boosted by a 3.4 percent slide in the value of the local currency against its U.S. counterpart. This was reflected in a 2.3 percent jump in the cost of motor vehicles and other transport equipment, their largest monthly increase since November 2009. Pulp & paper prices, which were up 2.7 percent from April for their strongest rise since October 2008, were also heavily influenced by the weaker C$. More modest gains were recorded by chemicals & chemical products (1.2 percent) and lumber & wood products (1.7 percent). However, prices for primary metals dropped 2.9 percent while petroleum & coal products sank 2.3 percent. Excluding this latter sector, prices were up 0.7 percent from April, the most significant increase since October 2008. Raw material prices slumped 7.2 percent on the month for their steepest decline since December 2008 and their first drop of any size in five months. The annual rate of increase slowed sharply to 6.4 percent. Mineral fuels plunged 12.7 percent, excluding which the RMPI would have fallen just 1.5 percent from April and risen 4.4 percent on the year.

April monthly gross domestic product was unchanged after increasing by 0.6 percent in March. Monthly GDP had increased for seven consecutive months through March. On the year, monthly GDP was up 3.3 percent. Both the goods producing and service sectors saw activity grind to a halt. Within the former, manufacturing output posted a disappointing monthly decline of 0.3 percent and this was compounded by a 0.7 percent contraction in utilities. Offsetting increases were recorded in agriculture, forestry & fishing (0.4 percent), mining & oil & gas extraction (0.5 percent) and construction (0.1 percent). A 1.7 percent slump in retail trade was the main cause of the stagnation in services. However, there were also declines in arts, entertainment & recreation (1.8 percent) and in accommodation & food services (0.4 percent). The best performing sub-sector was wholesale (0.6 percent).

Bottom line

Economic data universally disappointed last week. Purchasing managers’ indexes continued to show growth but at lower levels while unemployment remains stubbornly high. While sovereign debt problems appear to have eased for the moment, they certainly have not gone away.

The Reserve Bank of Australia, the Bank of England and the European Central Bank will meet this week and keep their policies unchanged. Australian economic data show signs of slowing as the RBA’s five rate increases take effect. The economies in the UK and eurozone continue to be too weak for rate increases to be considered.

Looking Ahead: July 5 through July 9, 2010

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