Global Markets

Investors focused all week on Federal Reserve Chairman Ben Bernanke’s Friday speech as analysts offered their opinions on what the Fed should or should not do given slowing economic growth. With few new pieces of economic information and earnings season virtually over, ideas flew far and wide.

Central bankers from around the world met in Jackson Hole, Wyoming, at the annual conference sponsored by the Federal Reserve Bank of Kansas City. It was just a year ago that Bernanke triggered financial rallies when he said the Fed was prepared to “do all that it can” to ensure economic recovery. This subsequently led to what is called QE2. This year’s meeting comes as the economy weakens and the unemployment rate remains above 9 percent. However, this year, Mr Bernanke offered no signs of further monetary policy easing.

Rather he said the Fed still has tools to stimulate the economy but did not provide details nor did he signal when or whether policy makers might deploy them. He said it was critical for the economy's health to reduce unemployment. Bernanke sought to reassure investors and the public that U.S. growth is safe in the long run and that the Fed still has tools to aid the recovery if needed. “Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.” He also said “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”

While expressing long-term optimism, Bernanke made plain the central bank found recent developments troubling, and he said the FOMC would expand its September meeting to two days from one to discuss its options. However, he also stressed that most of the burden for ensuring a solid foundation for long-term growth lay at the feet of the White House and the U.S. Congress. He said investor concerns over Europe's debt and political fights on the U.S. budget had harmed growth prospects.

Bernanke used a large part of the speech to urge Washington to put the U.S. fiscal position on a “sustainable path” without disregarding the “fragility of the current recovery.” Little guidance was given to the near-term policy outlook. ECB President Jean Claude Trichet is expected to speak on Saturday at Jackson Hole.

Global Stock Market Recap

Europe and the UK

Despite week-long volatility, equities managed to advance on the week. Investors were hoping to receive direction from the Fed chairman in his Friday speech. The speech did not give the markets what they wanted — further Fed policies to rejuvenate the U.S. Econoday — and as a result, equities initially declined Friday. However, they later rebounded as they looked ahead to the expanded FOMC meeting on September 20^th and 21^st. The FTSE was down one of five days and was up 1.8 percent for the week.

The German DAX was particularly volatile, especially Thursday. The index was hit by several unconfirmed market rumors. The DAX retreated 1.7 percent Thursday, rebounding from an earlier drop of 4.0 percent that occurred within a 15 minute span. Investors speculated Germany’s debt rating would be reduced — but this was denied by the three ratings services as they affirmed their current AAA assessments.

There was also speculation Germany would impose a short selling ban, which it did not. However, France, Italy and Spain did announce they were extending bans on short-selling of financial shares. Belgium's stock market regulator — which had imposed an indefinite ban two weeks ago — said it would lift the short-selling ban only when market conditions allow. Despite this, the DAX was up 1.0 percent on the week. The CAC gained 2.3 percent. The Swiss SMI and the OMX Stockholm 30 jumped 4.5 percent and 3.1 percent respectively.

There was little economic news as the summer vacation season wound down. Both the ZEW and Ifo surveys showed declines in sentiment. Flash August manufacturing PMIs for Germany and the eurozone both slipped, with the eurozone index falling below the 50 demarcation between growth and contraction.

Asia Pacific

Equities were volatile with most markets ending the week higher. Advances ranged from 0.5 percent (STI) to 3.1 percent (Shanghai Composite). With little new economic data, investors focused on Fed Chairman Ben Bernanke’s speech and what he might or might not say. Markets here were closed for the week prior to its delivery later in the global day. Technology stocks were affected by Steve Jobs resignation as Apple’s CEO. Generally, some companies that supply Apple declined while its competitors advanced. Positive earnings helped boost equities.

Shares in Japan continued to be affected by the high value of the yen against both the U.S. dollar and euro. Exporters were particularly hard hit. On Wednesday, Moody's downgraded Japan's sovereign debt rating. The rating on the nation's government debt was cut by one notch to Aa3 from Aa2, citing "weak" economic prospects that could hamper the government's ability to meet the deficit targets. The downgrade was prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession, the ratings agency said. Additionally, Moody's downgraded Japanese banks following the rating cut on Japan's sovereign debt. In addition, Japan is facing some ¥15 trillion-¥20 trillion in spending to recover from the March 11 earthquake and tsunami in the Northeast of the country.

The downgrade, made a little more than five months after the country suffered an earthquake, tsunami and nuclear crisis, came less than a week before Japan selects a new prime minister. Prime Minister Naoto Kan is stepping down, closing an unusual episode of a parliamentary drama that has dragged on for almost three months since he declared his intention to resign on June 2^nd. Japan has had five prime ministers since the resignation of Junichiro Koizumi in 2006. If Kan is to resign as expected on Tuesday, he will have stayed in office for a relatively long 449 days.

China’s flash August manufacturing PMI was better than anticipated with a reading of 49.8, up from July’s final of 49.3. Investors took this as a positive sign that growth appears to be stabilizing. A figure below 50 signifies contraction in factory activity, but it was much better than the markets had feared.

Currencies

Trading was volatile in the currency markets last week. The dollar was mixed against its major counterparts. On Friday, the dollar swooned as investors took assurance from the Fed chairman’s prediction that growth will resume and became less risk averse. This in turn sent stocks higher and dampened refuge demand. On the week, the dollar was up against the yen, pound sterling and Swiss franc but down against the euro and the commodity currencies, the Canadian and Australian dollars.

The Swiss franc slid against all its major counterparts after Bernanke stopped short of signaling further stimulus. The currency also extended a third weekly loss against the euro on speculation Swiss policy makers will introduce new measures to cap its gains. The franc tumbled in Friday afternoon trading on speculation Swiss banks may begin charging for deposits in francs. UBS said it may levy a temporary excess balance fee to stem the inflow of francs into its customers’ cash clearing accounts.

The Swiss National Bank has taken a number of steps in recent months to counter the currency’s gains. It boosted liquidity in money markets and increased the cash available to banks after the franc’s appreciation made the nation’s exports less competitive. The Swiss manufacturers’ association said this week the country may face serious economic damage unless a “clear weakening” of the currency begins soon.

Selected currencies — weekly results

Indicator scoreboard

EMU

July M3 money supply was up 2.0 percent on the year. The three month moving average was 2.1 percent — marginally firmer than last time. Loans to the private sector were up 2.4 percent on the year, down from 2.5 percent at the end of the second quarter. Lending to households decelerated to a 3.0 percent 12-month rate from 3.2 percent in June within which borrowing for house purchase was down 0.4 percentage points to 3.9 percent. Loans to non-financial corporations grew 1.6 percent, up from 1.5 percent last time, while lending to non-monetary financial intermediaries (excluding pension funds and insurance corporations) showed an unchanged annual pace of 3.5 percent.

Germany

August Zew expectations index lost more than 22 points, its steepest fall since July 2006, to a minus 37.6, the lowest level since December 2008. At the same time, the current conditions measure was off in excess of 37 points to 53.5, its lowest reading since August last year. ZEW attributed its findings to reaction to much weaker than expected second quarter GDP growth, increased fears of recession in the U.S. and its ratings downgrade and general caution about eurozone debt developments.

August Ifo economic sentiment slid to a reading of 108.7 from 112.9 in July. The decline reflected drops in both the current conditions and expectations components. The former was off 3.3 points at 118.1, its lowest reading since January, while the latter was down almost 5 points at 100.1, its sixth consecutive drop. All of the major sectors saw morale deteriorate further this month. The manufacturing diffusion index shed 7.6 points to 15.7 while retail was off 8.9 points at 1.6. Wholesale was down 10.9 points at 7.1, services 5.6 points at 19.7 and construction was 5.7 points lower at minus 6.4.

United Kingdom

Second quarter gross domestic product was up an unrevised 0.2 percent over the first three months of the year and 0.7 percent up on the same period in 2010. There were no changes to service sector output which still shows a 0.5 percent quarterly expansion, dominated by distribution, hotels& catering (0.8 percent) and business services and the financial sector (also 0.8 percent). However, industrial production was shaded 0.2 percentage points weaker (down 1.6 percent) with manufacturing now thought to have contracted 0.5 percent against the 0.3 percent drop previously reported. Today's figures will attract less attention than usual as changes to the way in which the data are compiled have delayed the release of the key GDP expenditure components until October.

Asia/Pacific

Japan

July consumer prices were unchanged on the month and up 0.2 percent on the year. The CPI base year has been updated from 2005 to 2010 and reviewed the basket of goods and services used for calculating the main consumer price measure. Core CPI excluding fresh food was also unchanged on the month and edged up 0.1 percent from a year ago. Excluding both fresh food and energy the CPI slipped 0.1 percent on the month and dropped 0.5 percent on the year. Energy prices were up 0.8 percent and 6.1 percent on the year. Food prices were up 0.1 percent and 0.3 percent. Clothes & footwear dropped 3.3 percent on the month but were up 0.3 percent on the year. Goods prices slipped 0.3 percent and were unchanged on the year while services were up 0.3 percent and 0.4 percent.

Americas

Canada

June retail sales were up 0.7 percent and 4.6 percent on the year. However, the third consecutive monthly increase in total sales was dominated by the auto sector where heavy discounting saw purchases of motor vehicles and parts jump 3.4 percent from May. Excluding this category, cash sales actually declined 0.1 percent and the same sector lay behind an apparently healthy 1.6 percent bounce in overall volume sales. Elsewhere the story was very mixed. On the positive side there were respectable gains in building material & garden equipment (2.1 percent) and sporting goods & hobbies (1.9 percent) as well as more modest advances in furniture & home furnishings (0.4 percent), food & drink (0.3 percent) and general merchandise (0.1 percent). However, relative strength here was offset by declines in electronics & appliances (3.0 percent), gasoline (1.3 percent), miscellaneous stores (2.4 percent) and health & personal care (0.2 percent).

Bottom line

New economic information was sparse and largely discounted as investors trained their focus on Fed Chairman Ben Bernanke’s Jackson Hole speech. In the end, he did not give the markets what they were hoping for — more stimulus. Rather he offered reassurance that the Fed had many tools left to its disposal if needed.

The pace in new economic information picks up this week as vacationers in Europe return home. The beginning of a new month brings purchasing managers’ surveys around the globe. Japan produces its spate of monthly data including industrial production, unemployment and consumer spending. Prime Minister Kan is expected to make his departure official. On the U.S. East Coast, people will be assessing the damage and picking up after a visit from Hurricane Irene.

Looking Ahead: August 29 through September 2, 2011

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