Global Markets

Equities were down again as worries about a global economic slowdown escalated. Evidence of the slowdown was not only from the U.S. but ranged from declining industrial output in Germany and the UK to slower exports from China. The ongoing divisions within the eurozone countries and the European Central Bank on how to go about rescuing Greece did not help. Trading was choppy but mostly down. On the week, only the Nikkei and Topix managed to edge into positive territory.

There were numerous central bank meetings during the week. The Reserve Bank of Australia and the Reserve Bank of New Zealand kept their key interest rates at 4.75 percent and 2.5 percent respectively. The Bank of Korea surprised and raised its interest rate to 5.25 percent. The Bank of England bank rate remained at 0.5 percent. The European Central Bank also left its key interest rate unchanged at 1.25 percent but indicated that a rate increase could occur at their July meeting.

Investors sold equities after Fed Chairman Ben Bernanke gave no surprises on monetary policy in his Tuesday afternoon speech. He indicated that the economy is still below potential and accommodative policy is still needed. However, he sees the economy as temporarily softened by the tsunami and earthquake in Japan. Bernanke anticipates hiring to pick up from the pace in May. The Fed chief sees stronger job growth as critical for making sure the recovery is fully established. He offered no comments concerning quantitative easing. The Beige Book, which was released the next day, was somewhat more upbeat but failed to erase investors’ growth concerns.

OPEC meets — leaves quotas unchanged

Oil prices jumped sharply after OPEC, the producers’ cartel, failed to increase production after a fractious meeting. The news sent crude prices up with Brent crude up as much at $2.00 a barrel. Consumer countries have put pressure on the oil producers’ group to raise output after oil prices rose more than 20 percent since the start of the year. The International Energy Agency, which represents consumer countries, has said there is an urgent need for additional supplies from OPEC whose present constraints bind 11 members — Iraq is still exempt — to produce no more than 24.85 million barrels a day. In practice, the countries in the quota system produced 26.15 million barrels a day in April, according to the IEA.

Global Stock Market Recap

Europe and the UK

Equities skidded last week on concerns about growth. The CAC and DAX were down for the sixth consecutive week while the FTSE was down for a third week. The indexes lost 2.2 percent, 0.6 percent and 1.5 percent respectively. The week ended on a down note courtesy of China’s merchandise trade report for May. Exports were up less than expected which suggests that global demand is easing.

The Greek debt crisis is front and center as investors are worried that a solution will not be reached. The contretemps has escalated with the EU foreign ministers on one side and the ECB and Jean Claude Trichet on the other. Germany stepped up demands that investors share the cost of a second Greek rescue after Jean Claude Trichet rejected direct involvement by the European Central Bank. Politicians are trying to find a plan by the European Union summit on June 23^rd and June 24^th that would share the cost of a new rescue with bondholders. Trichet yesterday ruled out the ECB setting an example with its own assets. While the bank has said it could accept a plan in which investors voluntarily agree to buy Greek bonds to replace maturing debt, President Trichet said the ECB has no intention of rolling over its own Greek holdings. Sustained ECB resistance could leave politicians facing the prospect of asking their taxpayers to finance a Greek budget shortfall that may amount to €90 billion through 2014.

European Central Bank

As expected, the European Central Bank left its key refinance rate at 1.25 percent where it has been since April. In turn, rates on the deposit facility and marginal lending facility were kept at 0.50 percent and 2.0 percent respectively. Signs of slower eurozone growth this quarter were probably a key factor behind the decision not to add to April's 25 basis point tightening and a slight easing in the May headline inflation may also have helped to placate the more hawkish council members. Still, while an apparent cooling in the rate of expansion may have worked to defer a prospective rate hike, it will not deter the central bank's desire to normalize its policy stance.

To this end financial markets will continue to anticipate the second tightening of the monetary screw. Upward revisions to the ECB's 2011 growth and inflation forecasts certainly support this view. In fact, the ECB's reference to the need for ‘‘strong vigilance'' will likely be interpreted as a strong signal that rates will be going up very soon, probably as early as July. Even so, the ECB indicated that it would adhere to its current policy of full allotment at fixed rates for its term money market operations, a clear signal that it remains very wary about the speed with which it thinks liquidity should be withdrawn from the system.

The ECB increased its 2011 inflation forecast to 2.6 percent from the 2.3 percent and left the forecast for 2012 at 1.7 percent. The eurozone economy is expected to grow 1.9 percent in 2011, up from the previous 1.7 percent projection. However, growth will slow to 1.7 percent in 2012, reducing its forecast from 1.8 percent.

Bank of England

As widely expected, the Bank of England’s monetary policy committee again opted to leave policy on hold this month. The bank rate remains at 0.5 percent where it has been since March 2009 and the quantitative easing target at Stg200 billion. Although the details of the vote will not be known until June 22^nd when the minutes are released, it seems virtually assured that it was a majority decision once more with at least some calling for higher rates.

Bank of England Governor Mervyn King’s push to keep interest rates at a record low may have strengthened this month as his top official for financial markets leads a defense against advocates for an increase. Paul Fisher said last week he wants to be sure the economy is over its “soft patch” before the key interest rate is increased and that officials who share his view should be more vocal. Investors have pushed back bets on the first rate increase to next year after factory and services growth slowed last month and data showed consumer spending plunged in the first quarter.

While the economy grew 0.5 percent in the first quarter, investment and consumer spending slumped the most in almost two years. Manufacturing expanded at the slowest pace in 20 months in May and services grew the least since February, according to Markit Economics Ltd., which said the data indicate economic growth this quarter may not exceed 0.3 percent.

Asia Pacific

Equities dropped last week on a combination of growth fears and the ongoing sovereign debt squabble in Europe. With little new economic data early in the week, investors looked backward to the disappointing U.S. employment report which was released after markets were closed for the week on June 3^rd. With little new U.S. data, investors then focused on Fed Chairman Ben Bernanke’s comments on Tuesday and the FOMC Beige Book Wednesday. Trading ended Friday on a sour note when China’s exports for May were below expectations and underlined the softening of global economic growth. On the week, only the Japanese indexes were in positive territory — the Nikkei and Topix edged up 0.2 percent and 0.1 percent respectively.

Along with the Reserve Banks of Australia and New Zealand, the Bank of Korea announced its policy decision on Friday. The Bank surprised, increasing its key interest rate by another 25 basis points to 3.25 percent. It was the BoK’s third increase this year to fight inflation that remains outside the Bank’s target range of 3 to 4 percent.

Japan released its second estimate of first quarter growth which was not revised as much as analysts expected. To see any improvement in first quarter contraction, one needs to go to the second decimal place. However, GDP was down 0.9 percent on the quarter or at an annualized rate of 3.5 percent. And in Australia, while the unemployment rate remained stable at 4.9 percent, employment was up a meager 7.800 jobs and well shy of expectations of 25,000 new jobs.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its key interest rate at 4.75 percent where it has been since November 2010. The RBA has an inflation target range of 2 percent to 3 percent. Consumer prices rose 1.6 percent in the first quarter and 3.3 percent on the year, the fastest pace since 2006 while unemployment has fallen to a two year low. Under the circumstances, the board felt that a mildly restrictive policy is appropriate. It said that CPI inflation will be close to target in next 12 months. The RBA has held rates for five meetings to allow the economy in Queensland to recover from floods in January that Prime Minister Julia Gillard called the nation’s most expensive natural disaster.

Australia’s economy contracted 1.2 percent in the first quarter, the most since 1991, as floods in the northeast slashed coal exports. Even so, the currency rose and bonds fell the most in almost four months after the data as investors focused on final demand, the broadest measure of spending by government, consumers and businesses which more than doubled from 0.6 percent in the final quarter of 2010. April retail sales advanced 1.1 percent from a month earlier, the biggest jump since November 2009 and almost three times more than the median forecast. Household spending accounts for 55 percent of Australia’s economy. Also weighing on consumers, the government said last month it will end 23 years of spending growth to help ease inflation pressure and support the return to a budget surplus.

Reserve Bank of New Zealand

As expected the Reserve Bank of New Zealand kept its policy official cash rate (OCR) at 2.5 percent where it has been since March 9^th. The Bank cut the OCR by 50 basis points to its current level after earthquakes in Christchurch in September 2010 and again in February hurt consumer confidence and spending. The RBNZ has an inflation target range of 1 percent to 3 percent. Consumer prices rose 4.5 percent in the year ended March 31, with about half of that increase reflecting one time government charges including a sales tax increase. A surging currency continues to contain inflation while the nation recovers from its deadliest earthquake in 80 years on February 22^nd.  Economic growth is expected to slow this year while inflation remains under control. This is allowing the RBNZ to refrain from following its counterparts in China, South Korea and Singapore who are tightening policy.

The economy will be buoyed by record-high commodity prices, and a rebound in household spending and employment, the Bank said. Rebuilding of Christchurch is expected to begin in 2012 and underpin the construction industry. Household spending is likely to grow “only modestly” because of high debt levels and government spending cuts. The RBNZ forecasts gross domestic product will expanded by 2.5 percent in the year ending March 31, 2012 and 4.6 percent the following year. Christchurch reconstruction will add about 2 percentage points to growth over 2012 and 2013.

Currencies

The U.S. dollar was up against all of its major counterparts as it benefited from a flight to safety. Weak industrial production data sent the pound sterling lower while the escalated disagreement on help to Greece sent the euro spiraling lower. Even a projected interest rate increase by the ECB sent the euro lower given signs of slowing growth in the eurozone. Events in Europe, however, are dominating market sentiment. According to economists, the real risk is whether Greece's woes infect the debt and economies of other euro-zone economies.

The ECB is adamantly opposed to a restructuring of billions of dollars in Greek debt, a move the Bank fears could unleash a wave of unintended consequences. However, analysts focused on a letter from German Finance Minister Wolfgang Schäuble that raised the specter of debt reorganization, adding that private contributors must make "quantified and substantial" contributions. Although the dollar is saddled by debt and economic concerns of its own, analysts view those issues as less immediate than the woes buffeting Europe.

Selected currencies — weekly results

Indicator scoreboard

EMU

April producer prices excluding construction advanced 0.9 percent and were up 6.7 percent on the year. Excluding energy, the PPI was up 0.4 percent and 4.4 percent on the year. As usual, energy did most of the damage with charges in this category gaining 2.0 percent from March and 13.3 percent on an annual basis. Regionally, national PPIs were up on the month in almost all EMU states, notably in Germany where prices were up 1.1 percent. The largest monthly increase (4.6 percent) was posted in Latvia. Sweden posted a fall of 0.5 percent.

April retail sales rebounded 0.9 percent after sinking 0.9 percent in March. On the year, volumes were up 1.1 percent. The limited breakdown of the April headline figures showed a 0.7 percent monthly increase in purchases of food together with a 0.8 percent advance in non-food sales. As a result, volumes were 0.4 percent above their first quarter average.

First quarter gross domestic product expanded an unrevised 0.8 percent on the quarter and 2.5 percent when compared with a year ago. The first look at the GDP expenditure components confirmed the anticipated sluggishness of private spending which, for the second consecutive quarter, grew just 0.3 percent from the end of last year. However, there was a solid recovery in gross fixed capital formation which registered a 2.1 percent gain having stagnated last time. Government consumption also picked up significantly, posting a quarterly increase of 0.8 percent following a 0.1 percent dip in the previous period. Inventory accumulation, which subtracted 0.1 percentage points from the bottom line in the fourth quarter, had a minimal impact. The foreign trade sector added just 0.1 percentage points to quarterly growth as exports rose 1.8 percent and imports grew 1.9 percent, both sides of the real trade balance expanding at slightly faster rates than at the end of last year. Regionally the economic recovery picked up some steam in most members. Germany (1.5 percent on the quarter after 0.4 percent) and France (1.0 percent after 0.3 percent) performed especially well but among the other larger states, both Italy (unchanged at 0.1 percent) and Spain (0.3 percent after 0.2 percent) struggled.

Germany

April manufacturing orders rebounded 2.8 percent following a revised 2.7 percent slump in March. The partial recovery put workday adjusted annual growth at 10.5 percent, or 0.4 percentage points above its March pace. Domestic orders were up 2.1 percent while overseas demand jumped 3.4 percent. Within the former, basics were up 1.7 percent, capital goods 2.4 percent and consumer and durables 3.9 percent. Overseas orders included a 2.6 percent monthly drop in basics together with a 6.6 percent increase in capital goods and a 3.4 percent advance in consumer and durable goods. Orders from the rest of the eurozone were up 0.7 percent from March.

April industrial production declined 0.6 percent on the month after rising 1.2 percent in March. On the year, workday adjusted growth was 9.6 percent. Output was down on the month in most of the major categories. The worst performer was capital goods where activity contracted 1.5 percent from its March level followed by consumer goods (down 0.2 percent), the latter reflecting a steep contraction in durable goods (0.8 percent). Intermediates edged up a minimal 0.1 percent. Among the more erratic sub-sectors, construction output plunged 5.7 percent on the month but energy was up 3.7 percent after a relatively mild 0.4 percent decline in March.

April surplus on merchandise trade narrowed from a downwardly revised seasonally adjusted €15.1 billion in March to €12.0 billion. The shrinkage was wholly attributable to a 5.5 percent monthly slump in nominal exports and would have been worse still but for a partially offsetting 2.5 percent slide in imports. However, the contraction in both sides of the balance sheet failed to reverse their respective surges in March which saw exports jump 7.2 percent on the month and imports advance 3.1 percent.

France

April seasonally adjusted trade deficit widened out to a record €7.1 billion as exports dropped 2.0 percent on the month to their lowest level since January and imports climbed 1.4 percent to a new high. The April red ink was in part attributable to the purchase of two jet aircraft which provided a sizeable boost to imports. Higher oil prices were also an important factor once more with the shortfall on energy increasing from €0.8 billion in March to €1.5 billion.

April industrial production (excluding-construction) dropped 0.3 percent on the month after a steeper revised 1.1 percent decline in March. On the year, output was up 2.6 percent, its slowest pace since December 2009. However, the headline output data were somewhat misleading, being heavily biased by a 7.5 percent slump in coke & refined petroleum products. By contrast, manufacturing posted a 0.2 percent gain, although this came nowhere close to reversing the 1.1 percent drop recorded last time. The strongest performing sub-sectors were food & drink, where output expanded 1.4 percent on the month and electrical equipment & machinery which saw a 1.3 percent advance. By contrast, there were small declines in both transport equipment and the other manufacturing category (0.1 percent). However, construction registered a 0.7 percent increase.

Italy

First quarter gross domestic product edged up an unrevised 0.1 percent and was up 1.0 percent on the year. The domestic expenditure components were soft with the key private consumption element up just 0.2 percent on the quarter and capital investment, up an even weaker 0.1 percent. Government spending grew 0.5 percent but the largest increase was attributable to overseas demand as export volumes climbed 1.4 percent. With imports increasing 0.7 percent, net exports added 0.2 percentage points to the bottom line. Inventory accumulation subtracted 0.3 percentage points.

United Kingdom

April shortfall on merchandise trade was Stg7.4 billion, down just Stg0.3 billion from a marginally larger revised Stg7.7 billion in March. The modest improvement reflected a 0.1 percent monthly rise in nominal exports combined with a 0.9 percent drop in imports. Gains in oil, intermediate goods and non-oil fuels were largely responsible for the overall rise in exports while total imports were dragged lower by consumer goods and non-chemical semi-manufactured goods. Despite the minor advance in nominal exports, excluding oil and erratics, export volumes declined 2.6 percent from March, outpacing a 1.0 percent contraction in real imports. The deficit with other EU members edged down just Stg0.1 billion to Stg3.1 billion as imports fell slightly faster than exports while the deficit with non-EU countries narrowed from Stg4.5 billion to Stg4.3 billion with exports up 2.1 percent on the month and imports up 0.5 percent.

April industrial production dropped 1.7 percent on the month and was down 1.2 percent on the year. The decline reflected broad based declines among the main sub-sectors. However, the April figures look to have been biased down by the extra bank holiday in the month and some firms, particularly in the auto area, also cited supply problems connected to the Japanese earthquake. Outside of these effects, not quantified by the ONS, the picture would have been markedly brighter. Manufacturing output slumped 1.5 percent with ten of the thirteen reporting sub-industries posting declines and just three managing gains. The largest negative contributions were made by transport equipment, where production dropped 4.1 percent, and machinery & equipment industries which registered a 2.7 percent slump. However, basic metals were not far behind with a 2.0 percent monthly fall. The most notable positive contribution was made by food, drink & tobacco where activity expanded 0.9 percent. Among the more erratic sub-sectors, unseasonably warm weather saw production drop 4.9 percent on the month in utilities and there were smaller reversals too in both oil & gas extraction (0.3 percent) and mining & quarrying (0.5 percent).

May producer output prices edged up 0.2 percent and were up 5.3 percent on the year. Most of the main components registered relatively small changes last month and for once petroleum products saw a monthly decline (0.7 percent). Underlying output price inflation advanced 0.2 percent and 3.4 percent on the year. Excluding duties, output prices were running at a 5.4 percent annual rate, down 0.3 percentage points from last time. Producer input prices dropped 2.0 percent on the month and were up 15.7 percent on the year. The overall slide was driven by developments in the energy markets, in particular a 7.6 percent monthly slump in crude oil charges. This more than fully accounted for the headline monthly drop and helped to mask fresh increases in imported chemicals (1.0 percent) and other imported materials (1.0 percent).

Asia/Pacific

Japan

First quarter gross domestic product contracted an unrevised 0.9 percent and declined 0.7 percent when compared with the same quarter a year ago. The annualized rate was revised to a decline of 3.5 percent from the first estimate of 3.7 percent. Private non-residential investment or CAPEX was revised to a quarterly decline of 1.3 percent from the earlier estimate of a 0.9 percent drop. Domestic demand was revised to a decrease of 0.7 percent from the original 0.8 percent decline. Private consumption was unrevised at a quarterly drop of 0.6 percent.

April tertiary industry activity index rebounded 2.6 percent after sinking a revised 5.9 percent in March in the aftermath of the earthquake. On the year, the index was down 2.0 percent. Among the sectors that were up on the month were information & communications, which jumped 9.3 percent while wholesale and retail trade advanced 2.6 percent and living-related & personal services & amusement services gained 8.9 percent. Miscellaneous services were up 5.9 percent, accommodations, eating & drinking services climbed 5.2 percent and transport & postal activities were 2.5 percent higher. Among those sectors that declined were finance & insurance (down 2.4 percent) and electricity, gas, heat supply & water (down 2.6 percent). Real estate and goods rental and leasing were flat on the month.

May corporate goods price index edged down 0.1 percent on the month but was up 2.2 percent on the year. It was the eighth straight increase when measured from a year ago. The annual increase is due to continued high international commodity prices. Nonferrous metals were down 3.3 percent on the month but up 7.6 percent on the year. Petroleum & coal products slid 0.3 percent but jumped 14.9 percent on the year. Textile products were also down on the month (0.3 percent) but were up 3.9 percent from a year ago. Processed foods edged up 0.1 percent and 3.8 percent on the year.

Australia

May employment increased by 7,800 after dropping a revised 29,400 in April. The unemployment rate remained at 4.9 percent for the third month. The number of people unemployed increased by 8,900 people to 592,800. The number of people employed increased to 11,440,500 in May. Part time employment was up 29,800 people to 3,413,500. This was offset by a 22,000 decline to 8,027,100 in full time employment. Monthly aggregate hours worked increased by 6.4 million hours to 1,601.1 million hours. The labour force participation rate was 65.6 percent, unchanged from April.

China

May unadjusted merchandise trade balance was $13.05 billion, up from April’s $11.42 billion. On the year, exports were up $19.4 billion after jumping 29.9 percent in April. Imports were up 28.4 percent in May after climbing 21.8 percent in April. For the five months January through May, exports were up 25.5 percent while imports were up a greater 29.4 percent. On a seasonally adjusted basis, exports were down 4.4 percent on the month after jumping 12.3 percent in April. Imports were down 4.5 percent after climbing 7.4 percent in April. On the year, seasonally adjusted exports were up 16.6 percent while imports gained 23.1 percent.

Americas

Canada

April seasonally adjusted merchandise trade balance returned an unexpected deficit of C$0.92 billion, widening from a revised C$0.42 billion shortfall in March. The deterioration reflected a 1.9 percent monthly decline in exports that more than offset a 0.6 percent contraction in imports. Exports to the U.S. were up 0.3 percent from March but the gain here was more than countered by declines elsewhere, notably to the EU (down 13.7 percent). At the same time, the real trade position also deteriorated as export volumes dropped 1.1 percent on the month while imports were up 1.0 percent. By category, nominal exports saw monthly declines in most areas although autos (1.0 percent), agriculture (9.9 percent) and energy products (0.6 percent) successfully bucked the trend. Machinery & equipment (down 7.8 percent), industrial goods & materials (down 3.8 percent) and forestry (down 4.8 percent) declined on the month. Imports were hit by weakness in autos which posted a decline of 8.6 percent on the month. Energy (down 3.1 percent) also was down but there were sizeable advances in industrial goods & materials (3.4 percent) and forestry (5.7 percent) as well as other consumer goods (2.3 percent).

May employment increased 22,300. With the number of people looking for work declining, the latest gain in headcount was enough to lower the jobless rate by 0.2 percentage points to 7.4 percent. The improvement was wholly attributable to a pick-up in activity in full time positions which were up 32,900. By contrast, part-time jobs dropped 10,600. It was the private sector that drove the May increase with net new positions up 37,100 compared with a 44,300 drop in the public sector. Self-employment expanded 29,500. However, at a sectoral level there was a slightly disappointing performance from the goods producing area which saw payrolls contract 14,900 and within which manufacturing declined 22,500. The losses in manufacturing and natural resources (down 2,800) were only to some degree offset by gains in utilities (7,000) and construction (3,300). Services added a net 37,200 new positions, mainly in trade which posted an impressive 34,400 advance. Professional, scientific & technical services (14,000) also saw good growth and there were similar sized increases in both health care & social assistance (14,100) and information, culture & recreation (14,500). However, transportation & warehousing cut 9,800 jobs and finance, insurance, real estate & leasing was down 3,500. The largest decline however, was in educational services (26,800).

Bottom line

A plethora of central banks met last week. The Reserve Banks of Australia and New Zealand, Bank of England and the European Central Bank kept their policy interest rates unchanged. However, the Bank of Korea increased its interest rate for the third time in order to combat inflation. There was little new economic information in the U.S. while in Europe and the UK, merchandise trade, industrial production and producer prices were released. The data showed that Europe and the UK are also hitting soft spots.

Only the Bank of Japan is on tap this week with no interest rate change anticipated. China will report its usual monthly slew of data including consumer and producer prices, retail sales and industrial production. The U.S. makes up for its quiet week last week by releasing a slew of economic data concerning housing, industrial production and consumer spending. Investors will no doubt keep a wary eye on the negotiations over Greece’s sovereign debt situation.

Looking Ahead: June 13 through June 17, 2011

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