Global Markets

No new news Friday left investors to ponder the future based on a continuing stream of previously released U.S. data that were weak to negative. Unemployment is creeping up and regional output is slipping while housing remains in the doldrums. However, industrial production was up more than anticipated — but some analysts opined that this was a dead cat bounce. Investors sold equities and sent government bond yields falling into uncharted territory. Analysts say low long yields are consistent with a very long period of near-zero short rates, low or negative inflation and lackluster returns on riskier assets which in turn increase demand for government bonds. Trading has also entered a summer lull, exacerbating any moves. Volumes over the past five sessions were the lowest since last December.

There was some good news in Europe — the Bundesbank raised its 2010 gross domestic product growth forecast to 3 percent from 2 percent. And in the UK, shoppers had a surprisingly spry July, even as growth in public borrowing slowed more than expected thanks to improved business tax receipts. Stocks were down in Europe but mixed in the Asia/Pacific region and North America on the week.

Global Stock Market Recap

Europe and the UK

Equities here followed U.S. equities downward on Thursday and Friday. Stocks were dragged down by primarily by disappointing U.S. economic data. As a result the FTSE, CAC and DAX all ended the week lower. On the week, the FTSE was down 1.5 percent, the CAC lost 2.3 percent and the DAX dropped 1.7 percent. The FTSE and DAX were down three of five days while the CAC was down four.

European stocks sank to their lowest level in a month. A retreat in auto and construction related companies offset takeover activity in the energy industry. Equities continued to fall in reaction to U.S. jobless claims data and the Philadelphia Fed manufacturing survey. But low volume in the market exacerbated investor moves. On Friday, the French government cut its growth forecast to two percent in 2011 from the previous estimate of 2.5 percent while the Bundesbank raised its estimate of German growth to three percent from its previous 1.9 percent estimate.

Economic data were light during the week. However, UK data were better than expected with retail sales up by a surprising 1.1 percent and orders as reported by the Confederation of British Industry (CBI) improved. In other good news for the UK, the budget deficit shrank at a faster than anticipated rate in July — another sign along with retail sales that the economic recovery could be improving. But the good news here Thursday was more than offset by the spate of dreadful U.S. data. Jobless claims unexpectedly increased to their highest level in nine months and the Philadelphia Fed reported an unexpected contraction in manufacturing activity in its Mid-Atlantic region.

Asia/Pacific

Equities were decidedly mixed last week — most of the major indexes dropped while those of the emerging countries gained. The SET, PSEi and KLCI were up 3.7 percent, 3.6 percent and 2.6 percent respectively. The Nikkei was down 0.8 percent while both the All Ordinaries and Hang Seng lost 0.4 percent. Market focus swirled around weakening economic conditions in the U.S. and in Japan. And in Australia, investors were reticent to commit before the Saturday national election. Indications are that the election is too close to call.

But the picture in Japan remains dour. On Monday, second quarter GDP grew by a mere 0.1 percent — far below analysts’ estimates. This combined with renewed fears that the U.S. economy may be heading into a "double dip" recession spurred safe haven buying in less risky assets such as gold, yen and U.S. and Japanese government bonds. Speculation is rife that Prime Minister Naoto Kan and BOJ Governor Masaaki Shirakawa will meet Monday — or sometime this week — to discuss issues on how to deal with the yen's recent surge.

Japanese government bond yields marked fresh multi-year lows as investors resorted to safe haven assets on the view that further monetary easing steps by the Bank of Japan would not stem the yen's rise. Speculation is growing that the government will pressure the BoJ to loosen monetary policy even more, including a possible extension to its fund-provision programs.

Japanese investors are buying foreign bonds at a record pace as excess cash, the strong yen and low domestic yields prompt investors to look for higher returns elsewhere. The Ministry of Finance said that institutional investors bought a net ¥2,178 billion ($25 billion) in bonds issued overseas last week, the most since 2001 when records began. Analysts and traders estimate that the majority of the buying is taking place in the U.S. Treasury market as well as other stable dollar markets such as Canada and Australia. Investors also purchased a net ¥8.0 billion in foreign stocks last week. Foreign investors sold a net ¥40.3 billion in Japanese stocks and also purchased a net ¥219.1 billion in Japanese bonds and notes last week. But these hefty outward flows have not managed to cap the ascent of the yen.

Currencies

The dollar gained last week against the commodity currencies of Australia and Canada. Traders fretted about weakening global growth prospects and fled to the safe havens of the U.S. dollar, Japanese yen and Swiss franc. The dollar was down against the latter two.

The euro slid against the dollar, the yen and the Swiss franc. The yen remained short of the 15-year high set earlier in the month against the dollar. Many analysts think that lackluster trading conditions will continue for the rest of the month.

Verbal intervention thus far has done little to stem the yen’s rise. The probability that the Bank of Japan will intervene in the currency markets for the first time since March 2004 has risen of late. The strengthening of the yen and its misalignment from economic fundamentals is increasingly likely to spur government response according to analysts. The government is facing pressure to aid the economy after the yen’s climb to a 15-year high of 84.73 against the dollar on August 11^th raised concern that exporters’ earnings could weaken and deflation might deepen.

The Australian dollar was down not only on dimming growth prospects elsewhere but on the possibility of a hung parliament in the country’s national election Saturday (August 21). Opinion polls point to a close race between the two leading parties, incumbent Julia Gillard’s Labor party and the Liberal-National party coalition led by Tony Abbott. That has raised the possibility of a hung parliament, a prospect generally viewed as bearish for a country’s currency because of the political uncertainty it creates.

Selected currencies — weekly results

Indicator scoreboard

EMU

July harmonized index of consumer prices was down 0.3 percent but was up 1.7 percent on the year. Core HICP, which excludes energy, food, alcohol & tobacco, was up 1.1 percent on the year following an increase of 0.9 percent in June. Core prices excluding energy & unprocessed food prices — the ECB’s preferred measure — were up 1.0 percent. Transportation was up 4.5 percent on the year while alcohol & tobacco prices jumped 3.3 percent and housing prices gained 2.7 percent. However, communications prices dropped 0.8 percent, recreation and culture declined by 0.3 percent and household equipment was down 0.5 percent.

Germany

August ZEW current economic conditions surged to 44.3 — the highest level on record since 1991. Expectations sentiment, however, dropped to 14.0 from 21.1 — its lowest level since April 2009. ZEW surveys up to 350 financial experts. The indicator reflects the difference between the share of analysts who are optimistic and the share of analysts who are pessimistic for the expected economic development in Germany in six months.

July producer price index was up 0.5 percent and 3.7 percent on the year. Energy prices were up 1.3 percent on the month and 6.7 percent on the year. Excluding energy, the PPI edged up 0.1 percent and was up 2.4 percent on the year. Basic goods prices were up 0.2 percent and 5.5 percent on the year. Both capital and consumer goods inched up 0.1 for yearly increases of 0.2 percent and 0.6 percent respectively. Prices for food, feed & beverages were up 0.3 percent and 0.7 percent on the year.

United Kingdom

July consumer price index was down 0.2 percent but was up 3.1 percent on the year. Core CPI dropped 0.4 percent on the month and was up 2.6 percent on the year and its lowest rate since November 2009. Goods prices dropped 0.8 percent and were up 2.6 percent on the year while services prices were up 0.5 percent and 3.6 percent on the year. By category, clothing & footwear prices continued to decline, dropping 4.9 percent on the month and sinking 3.1 percent on the year. Prices also declined in furniture & household equipment (down 1.9 percent), recreation & culture (down 0.3 percent) and miscellaneous goods & services (down 0.5 percent). Prices for food & non-alcoholic beverages were up 1.0 percent for the largest monthly rise in July on record. Prices also were up for vegetables, mineral water, soft drinks & juices. Transportation costs were up 0.7 percent on higher airfares.

July retail sales were up 1.1 percent and 1.3 percent on the year. Excluding fuel, sales were up 0.9 percent and 2.4 percent on the year. Sales in non-food stores were up 1.8 percent and 4.1 percent on the year while food sales dropped 1.0 percent and were down 1.7 percent on the year. Clothing & footwear sales were up 0.9 percent in July while other stores gained 6.1 percent and non-store retailing increased 4.3 percent.

Asia/Pacific

Japan

Second quarter gross domestic product edged up 0.1 and up an annualized pace of 0.4 percent. When compared with the same quarter a year ago, GDP was up 1.9 percent. Domestic demand slumped 0.2 percent with private consumption unchanged on the quarter. Private non-residential investment was up 0.5 percent. Exports were up 5.9 percent while imports climbed by 4.3 percent. First quarter GDP was revised downward to a gain of 1.1 percent from the previous estimate of 1.2 percent.

June tertiary industry activity index crept up a weaker than expected 0.1 percent and was up 0.8 percent on the year. Information & communications dropped 3.5 percent on the month while finance & insurance sank 2.7 percent and transport & postal activities were down 2 percent. Also declining on the month were medical, health care & welfare, accommodations, eating & drinking services and compound services. However, wholesale & retail trade was up 1.2 percent and miscellaneous services (except government services) gained 2.7 percent. Other industries that were up in June included living-related & personal services & amusement services, real estate & goods rental & leasing, electricity, gas, heat supply & water and scientific research, professional & technical services.

Americas

Canada

July manufacturing sales edged up 0.1 percent and were up 12.7 percent on the year. Nominal sales have increased 11 of the past 13 months since the trough was reached in May 2009. Sales in constant dollars were up 0.7 percent and 13.4 percent on the year. However, manufacturing sales excluding motor vehicles, parts and accessories edged up 0.2 percent in current dollars, bringing the yearly rise in the measure to 7 percent. Nine of 21 industries were up on the month and accounted for about half of total sales. Sales were higher in the paper industry (4.8 percent), furniture (6.4 percent), fabricated metal products (2.0 percent) and chemical manufacturing (1.2 percent). Unfilled orders were up 1.3 percent while new orders were down 0.3 percent on the month.

July consumer price index jumped 0.5 percent and was up 1.8 percent on the year. Energy prices were a major factor in the increase — they soared 3.0 percent on the month and 7.9 percent on the year. Changes in consumption taxes also affected the index. Food prices were also up gaining 0.6 percent and 1.1 percent on the year. Prices of food purchased in both stores and restaurants were up thanks to higher prices for non-alcoholic beverages, eggs and dairy products while prices for fruits and vegetables declined. On the year, transportation prices were up 2.7 percent, health & personal care were up 2.8 percent and education & reading prices were up 0.8 percent. Core CPI excluding food and energy was up 0.5 percent and 1.3 percent on the year. The Bank of Canada core, which excludes eight volatile items inched down 0.1 percent on the month and was up 1.6 percent on the year.

Bottom line

Economic data disappointed last week. Japanese second quarter GDP edged up only 0.1 percent on the quarter while German sentiment drooped. U.S. data continued to be below analysts’ expectations. And in Australia, a close election looms and with it the specter of a hung parliament.

This upcoming week is light on economic data in Europe. However in Japan, the usual onslaught of month-end data begins with the trade balance, consumer prices and unemployment. Analysts will weigh the export data and its implications for growth closely. And in the U.S., second quarter revised GDP will get a closer look than usual — even though it is backward looking.

Looking Ahead: August 23 through August 27, 2010

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