Global Markets

The buildup of tension in the markets was palpable as they awaited Friday morning’s remarks by Fed Chairman Ben Bernanke to central bankers including ECB President Jean Claude Trichet and Masaaki Shirakawa of the Bank of Japan in Jackson Hole, Wyoming. Needless to say, trading was tentative leading up to the speech. The reaction was bound to be biased simply because these are the dog days of August and volumes are low, so relatively small inputs can have a disproportionate impact on the market.

At first equities swooned, but then thought the better of it and rallied. Investors decided to focus on the glass half full side of Mr Bernanke’s remarks — namely that the threat of a double dip and deflation remains a distant proposition for now. And coupled with a softer-than-feared downward revision to U.S. second quarter growth data, equity markets rebounded from their lows.

Mr Bernanke’s words were interpreted as a signal that the Fed is not poised to take drastic action despite the lingering threat of a double dip recession. Mr Bernanke’s speech did not offer any idea when the current policy of ‘quantitative easing lite’ would become full-blown QE2. Bond traders said the back up in yields reflected disappointment that greater bond buying by the Fed was not imminent. Next week marks the end of the month, and that will fuel buying of Treasuries by money managers balancing their portfolios, while the August employment report also beckons.

Mr. Bernanke said he expects the economy to continue growing in 2011 and subsequent years, signaling that further Fed action may not be needed. He stressed that the Fed is ready to act, if needed, to bolster the economy and to avoid deflation, for which he sees no significant risks at this time. He said Fed officials haven't agreed on what would be a trigger for further action.

On the week, equities were mixed. In the Asia Pacific region, only three of 13 indexes tracked here were up. And in Europe, only the FTSE posted a weekly increase. In North America, U.S. indexes were down as was the Mexican Bolsa. Only the S&P/TSX Composite was up.

Global Stock Market Recap

Europe and the UK

Equities were up three of five days last week. Trading was choppy for the usual reason — it’s the end of August and volumes are low. Only the FTSE was up on the week. Both the DAX and CAC declined. While the indexes here had a tendency to follow US movements, they also managed to focus on local developments. The UK was buoyed by the upward revision to 1.2 percent growth in its second quarter GDP data in a week that was sparse on new economic news. And earlier in the week, Germany confirmed its buoyant gain of 2.2 percent. However, stocks here and elsewhere were dragged down by poor U.S. data mid-week for durable orders and both new and existing home sales.

Government bond yields in the US, UK and eurozone sank to fresh lows Tuesday as doubts over the global economic recovery intensified after the release of dreadful U.S. housing figures. Nervous investors also sought refuge in the perceived sanctuaries of the yen, Swiss franc and gold as equity and industrial commodity prices tumbled. It was noted that over the past year or so, the housing market had been artificially propped up by the homebuyer tax credit. But with the tax credit gone, a housing market recovery appears to be sometime away.

Asia Pacific

Most equity indexes were down last week thanks to bouts of investor nerves and the usual end-of-August low volumes that exacerbate moves. On the week, the STI was up 0.1 percent while the KLCI gained 1.1 percent and the SET was up 0.7 percent. Losses ranged from the Kospi which was down 2.6 percent to the Jakarta Composite which dropped 0.4 percent. With two trading days left in August, five of 13 indexes followed here are up while the remaining eight are declining. The biggest decline so far was suffered by the Nikkei, down 5.7 percent while the SET is up 5.2 percent. Trading ended the week on a cautious note ahead of U.S. growth data and Fed Chairman Ben Bernanke's speech.

Expectations of new measures to stem the rising value of the yen against the U.S. dollar and the euro lifted export related stocks for a second day Friday. In the usual spate of end-of-month economic data, unemployment edged down to 5.2 percent, employment was up while household spending was up for the second month on the year. The CPI showed no improvement in the continuing battle against deflation. It sank for the 17^th consecutive month.

Overseas investors continue to sell Japanese shares as the global economic outlook grows uncertain. The yen's surge is also encouraging them to sell. Foreign investors sold ¥55.5 billion more in shares than they bought during the week of August 16^th through August 20^th, becoming net sellers for a second straight week, according to data released Thursday by the Tokyo Stock Exchange. Their accumulated net sales since April reached ¥460.7 billion. Even retail investors who tend to buy on market dips are shunning stocks, recording ¥36.9 billion in net sales last week.

The Bank of Thailand increased its policy interest rate and signaled that further increases were on the way. The economy overcame political unrest to grow faster than estimated in the second quarter. The Bank increased the one-day bond repurchase rate by 25 basis points to 1.75 percent for a second consecutive meeting. The country’s exports jumped 46 percent in June from a year earlier, the most in more than 18 years, before cooling to a 20.6 percent pace last month.

Currencies

Will they or won’t they' That is the question. Will Japan and the Bank of Japan replace verbal intervention with real market intervention' The debate is a tug-of-war between the finance ministry and the cautious Bank of Japan. A report in Tokyo newspapers suggested that the BoJ may convene an extraordinary meeting to discuss some kind of monetary stimulus. However, with Bank governor Masaaki Shirakawa in Jackson Hole this weekend, it seems unlikely an extraordinary meeting would be held without him. The next regularly scheduled two day meeting is on September 6^th and 7^th. Analysts opined that the BoJ might consider additional easing measures before giving in to government pressure to intervene. It has been noted that no other countries have stepped up to offer any assistance in curbing their own currencies’ declines, so any BoJ intervention would likely be unilateral and probably ineffectual.

The yen has been the beneficiary of investors’ fears. On Wednesday, it soared to a 15 year of ¥83.57 to the U.S. dollar — its strongest level of the crisis and highest since 1995. The Japanese currency is also at a nine year high versus the euro.

The U.S. dollar mixed for the week. However, the currency did gain against the euro Friday after Mr Bernanke said the Fed is ready to support the faltering U.S. recovery, but stopped short of saying it will act. The dollar was down against the yen but held onto Friday’s gain as investors continued to speculate that Japanese officials might intervene to counter recent yen strength.

Selected currencies — weekly results

Indicator scoreboard

EMU

July M3 money supply growth was unchanged at 0.2 percent. The 3-month average measure preferred by the ECB edged just a tick higher and now stands at 0.1 percent. Annual credit growth extended to the public sector dropped from 8.1 percent in June to 7.6 percent while lending to the private sector accelerated from 0.5 percent to 0.9 percent. Within the latter category, borrowing by non-financial corporations picked up from a minus 1.6 percent 12-month rate to minus 1.3 percent. Loans to households were unchanged at 2.8 percent. Lending for house purchase crept up from 3.3 percent to 3.5 percent.

Germany

Second quarter gross domestic product expanded 2.2 percent on the quarter and was up a workday adjusted 3.7 percent when compared with the same quarter a year ago. The first look at the details reveals broad-based gains among expenditure components including a 0.6 percent quarterly advance in private consumption. Total investment was up 4.7 percent with construction (up 5.2 percent) leading the way ahead of equipment spending (up 4.4 percent). Government consumption increased 0.4 percent. Inventories added just 0.1 percentage point to the bottom line. Domestic demand grew 1.4 percent. The foreign trade sector provided a sizeable stimulus as an 8.2 percent quarterly rise in exports more than offset a 7.0 percent gain in imports to boost real GDP by 0.8 percentage points.

United Kingdom

Second quarter gross domestic product growth was revised a notch stronger to 1.2 percent on the quarter — its best performance since the start of 2001. On the year, GDP was revised upward to 1.7 percent, the highest since the first quarter of 2008. In terms of the expenditure components, household spending was up 0.7 percent on the quarter (1.0 percent on the year) while general government final consumption grew 0.3 percent (2.6 percent on the year). However, gross fixed capital formation shrank 2.4 percent (up 3.1 percent on the year) which, with inventory accumulation sharply higher and adding a full 1 percentage point to the bottom line, put growth in total domestic expenditure at 1.2 percent (2.9 percent on the year). Net exports had no significant impact. Output expanded an unrevised 1.0 percent on the quarter in the goods producing sector and was up 0.7 percent in services, down a couple of ticks from the provisional estimate. However, activity in the construction sector jumped a record 8.5 percent or nearly 2 percentage points more than reported last time. This underlines the impact that the especially bad weather had in the first quarter. Within the transportation area, air travel slumped fully 11 percent due to the effects of the Icelandic volcano eruption and strikes at British Airways.

Asia/Pacific

Japan

July unadjusted merchandise trade surplus was ¥804.200 billion. The surplus was up 119.9 percent from July 2009's surplus of ¥365.668 billion. It was the 14th consecutive on-year increase. Exports were up 23.5 percent while imports were up 15.7 percent on the year. Exports have been up eight months in a row while imports have gained for seven months in a row when compared with the previous year. Export growth has slowed for five consecutive months, adding to risks in an economy already under threat by the yen’s surge to a 15-year high against the dollar. Exports to the U.S. were up 25.9 percent while imports gained 13.4 percent. Exports to the EU were up a more modest 13.3 percent while imports climbed 9.5 percent. Exports to Asia were up 23.8 percent with those to China rising 22.7 percent on the year. Imports from Asia were up 17.4 percent and from China, 14.4 percent. The seasonally adjusted trade surplus was ¥610.4 billion, up from ¥514.5 billion in June. Both exports and imports were down on the month. Exports were down 1.4 percent while imports were down 3.5 percent. Exports have been down four of the last five months.

July unemployment rate edged down to 5.2 percent – analysts had expected the rate to remain at 5.3 percent. This was the first monthly decline since January. Employment was up 21,000 on the month but down 260,000 on the year. The labor participation rate dropped by 0.3 percent to 59.7 percent while the employment rate inched up 0.1 percent to 56.6 percent.

July seasonally adjusted household spending jumped 1.1 percent when compared with last year. This was the second consecutive monthly increase. Analysts had expected spending to edge down 0.1 percent. Spending was mixed. Expenditures on housing and fuel, light & water charges declined 8.5 percent and 0.7 percent respectively. Spending was also down for culture & recreation (down 0.5 percent). All other spending groups were up on the year. Furniture & household utensils spending jumped 9.8 percent while clothing & footwear was up 4.4 percent. The transportation & communication category was up 4.9 percent while medical care rose 3.6 percent. Spending was underpinned by government programs rewarding purchases of energy efficient appliances and motor vehicles, household spending. The scorching weather triggered a surge in purchases of air conditioners and fridges, particularly those earning reward points. Spending on cold food and summer clothing also firmed during the hot weather. The concern though is consumers will pull back on spending if the rewards program is withdrawn as scheduled at the end of the year. The government is currently working on a stimulus package which is likely to include funding to extend the program.

July national consumer price index dropped 0.5 percent on the month and was down 0.9 percent on the year. Core CPI excluding just fresh food was down 0.3 percent and 1.1 percent on the year. It was the 17^th consecutive drop. Excluding both food and energy, the CPI dropped 0.3 percent and 1.5 percent on the year. Prices dropped for most of the major groups. On the month, food prices dropped 1.1 percent, clothes & footwear sank 3.6 percent and furniture & household utensils sank 0.6 percent. On the year, education prices plunged 13 percent, furniture & utensils dropped 4.5 percent and reading & recreation prices were down 1.5 percent. Goods prices were down 1.1 percent on the month and 0.6 percent on the year. September Tokyo CPI was up 0.4 percent and down 1.0 percent on the year. Core CPI was up 0.2 percent but down 1.1 percent on the year.

Americas

Canada

June retail sales edged up 0.1 percent and were up 3.8 percent when compared with the same month a year ago. However, not for the first time the weakness in cash purchases was attributable to falling prices. More significantly, volumes were up 0.9 percent from their level in May. Cash purchases were up on the month in five of the 11 sub-sectors. The most buoyant areas were electronics and appliances (5.1 percent), for which the football World Cup likely provided a boost, together with motor vehicles & parts (2.1 percent) and furniture & home furnishings (2.3 percent). Smaller advances were registered in sporting goods & hobbies (1.8 percent) and building materials & outdoor equipment (0.5 percent). Gains here were almost offset by declines elsewhere, notably gasoline stations (down 2.7 percent), health & personal care (down 1.0 percent), clothing & accessories (down 1.1 percent) and general merchandising (down 1.7 percent).

Bottom line

Both Germany and the UK reported solid growth in the second quarter while in the U.S., GDP received a significant downward revision. Two subjects captivated investors — whether the Bank of Japan would intervene to bring a halt to the soaring yen and what Fed chairman Ben Bernanke would say in his Jackson Hole speech. The BoJ did not intervene although the government ratcheted up its verbal intervention. And Bernanke acknowledged that growth was slowing but he did not see the dreaded double dip recession in the future.

While new economic data has only been dribbling out the last couple of weeks that will not be an issue this week. Both Canada and Australia will finally release their second quarter growth estimates. And in Europe, a host of new data will be released including unemployment and the August flash release for the harmonized index of consumer prices. And the European Central Bank begins the September round of central bank meetings. In the U.S., Friday brings the employment situation report.

Looking Ahead: August 30 through September 3, 2010

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