Global Markets

Investors took time out from monitoring earnings reports and instead turned their attention to the plethora of new economic data. Rather, their focus was on growth. Data from Europe in the form of purchasing managers surveys were lower than expected across the board with most member states showing contracting manufacturing activity. Europe was not alone with sagging PMI indexes. Australia’s plunged as well. However, the U.S. as measured by the ISM survey was higher on the month signaling the strongest factory activity since last June.

The Reserve Bank of Australia surprised analysts and lowered its key interest rate by 50 basis points to 3.75 percent. Forecasts were for two 25 basis point reductions — one in May and the second in June. However, the deteriorating economy in Europe did not spur the European Central Bank to action. Rather the ECB maintained its 1.0 percent key interest rate and gave no indication of providing further ease to the member states’ economies.

While most European and U.S. equities were already lower for the week, the indexes swooned Friday when U.S. employment growth did not meet expectations. Traders ignored the hefty upward data revisions to February and March and focused only on the headline number. Little notice is given to the downward pressure from shrinking government employment.

On the week, most indexes in the Asia Pacific region were up on the week. Only the Nikkei which traded for only two days and the Sensex declined. All indexes were down in Europe, UK and North America.

Global Stock Market Recap

Europe and the UK

Equities declined as weak economic data combined with investor unease about the upcoming elections especially in Greece and France on Sunday. Voters will have an opportunity to express their dissatisfaction with the draconian austerity measures that have been put in place. With the economies sliding into recession — we will know how bad it is when the first quarter flash growth data are released on May 15^th — and unemployment soaring to record heights, the populace is expected to express its dissatisfaction with the leaders by voting them out of office. On the week, the FTSE, CAC, DAX and SMI slid 2.1 percent, 3.2 percent, 3.5 percent and 1.0 percent respectively.

Economic data raised the spectre of even slower global growth and not only on the Continent but also across the pond as well. Investors here reacted strongly to the sub-par employment report Friday and sold along with investors in the U.S. During the week, PMI indexes for both manufacturing and services slid in the Eurozone while unemployment soared to a record high of 10.9 percent.

S&P raised Greece’s long term foreign and local currency debt ratings to 'CCC/C' from 'selective default' following the completion of the "distressed" debt exchange. The outlook on the long term rating is 'stable' reflecting S&P's view of the government's stated commitment to improving its fiscal track record. But the firm kept Greece firmly in the junk category with a CCC rating and warned that a deep recession, unpredictable elections on May 6 and popular anger against austerity could threaten Athens' efforts to put its finances back on track.

European Central Bank

As universally expected, the ECB kept its key interest rates unchanged at the conclusion of its Governing Council meeting. The meeting this month was held in Barcelona against a backdrop of strong local protests about the Spanish government's austerity drive. The benchmark refinance rate remained at its current record low of 1.0 percent while rates on deposit and marginal lending facilities are unchanged at 0.25 percent and 1.75 percent respectively.

At his press conference ECB President Mario Draghi was somewhat more cautious about the Eurozone economy than he was at his April press conference but certainly less so than expected by most. In particular, having again reiterated the view that the first quarter data were consistent with a stabilization of economic activity, the surprising weakness of the second quarter business surveys to date were essentially dismissed as just an indication of the high level of uncertainty that surrounds the economic outlook. It would seem that the ECB has made no significant adjustment to its growth forecasts.

There was also no indication that the ECB would make any new adjustment to policy to help those EMU states currently suffering the steepest economic downturns. Rather, Draghi emphasised the need for structural reforms and emphasised that monetary policy needs to be focused upon the region as a whole. Draghi emphasised once more the need to avoid the potential second round effects of high commodity prices and therefore the need to keep inflation expectations anchored. Inflation is still seen holding above target this year before falling below 2 percent in 2013 with medium term risks broadly balanced.

The bottom line is that speculation about a possible rate cut at some point over coming months received no boost from today's press conference. The ECB is sticking to its guns. However, many will likely interpret Draghi's comments as evidence that the central bank is falling behind the curve and that the failure to provide some form of additional monetary stimulus now will simply prepare the ground work for more significant easing in the future.

Asia Pacific

Although equities ended the week on a dour note, most of the indexes in this region were positive in this holiday strewn week. The Nikkei which was closed for three of five trading days lost 1.5 percent and the Sensex was down 1.8 percent. As is usually the case, traders turned cautious as they usually do as the week progressed. That is especially the case when it is the first week of the month and the U.S. employment report looms after markets here are closed for the week. Adding to the end of week caution were national elections on Sunday in Greece and France.

Stocks in mainland China were up 2.3 percent in a holiday shortened week — thanks in part to improving manufacturing and services PMI data. Also helping sentiment for Chinese stocks was news that the China Securities and Exchange Commission and the mainland stock markets would lower costs for stock transactions beginning on June 1.

Reserve Bank of Australia

The Reserve Bank of Australia surprised and lowered its key policy cash rate by 50 basis points to 3.75 percent rather than the expected 25 basis points. Analysts had expected the rate decline to be over two meetings. The RBA’s interest rate had been at 4.25 percent since December 2011. Inflation data coupled with weak growth persuaded the board to lower the rate 50 basis points. The cut was also needed to deliver the appropriate borrowing rates.

Data for the March quarter showed that consumer prices edged up just slightly in the March quarter with the annual increase below the mid-point of the RBA's 2 percent to 3 percent inflation target range. The CPI was 0.1 percent higher on the quarter after remaining unchanged in the previous quarter. On the year, the CPI was up 1.6 percent. The board expects inflation to remain in the 2 percent to 3 percent range.

In its Statement on Monetary Policy (SoMP) the RBA substantially reduced its inflation and growth forecasts and the case for further interest rate cuts going forward appears to be strong. In the February SoMP the Bank forecast underlying inflation in the year to December 2012 at 2.5 percent. That has now been reduced to 2.0 percent. Also in the February SoMP, the Bank predicted that GDP growth in the year to December 2011 would be 2.75 percent. The number subsequently was 2.3 percent. Growth in 2012 is now forecast to be 3.0 percent, down from the 3.0 percent to 3.5 percent in February.

The RBA cut growth and inflation forecasts as weak job and housing markets keep price gains in check, and as the local currency slid toward its biggest weekly drop of the year. The downward revisions reflect risks of renewed European instability as austerity measures aimed at stemming the debt crisis push euro area economies back into recession.

Currencies

The U.S. dollar was up against all of its major counterparts with the exception of the yen as investors became risk averse on weak global economic data and the upcoming elections in France, Greece, Italy and Germany. The yen gained against all of its major counterparts as investors sought safety. The euro was down against the dollar as France and Greece prepared for elections May 6, spurring bets their commitment to austerity may flag.

France and Greece hold elections Sunday, with French voters casting ballots in the final round of the country’s presidential race and Greeks set to decide on a new parliament. Francois Hollande, the Socialist challenger for the French presidency, has called for a re-negotiation of the budget pact crafted by European leaders in March, saying it needs to place more emphasis on growth. In Greece, neither of two major political parties that have supported the nation’s international bailouts is likely to win an outright majority. Local elections will test Italy’s political pulse and voters in a northern German state will test Chancellor Angela Merkel’s coalition.

The vote in Greece, the epicenter of the euro crisis, may amplify the mutiny against the wage and spending cuts and tax increases that are conditions for drawing on financial aid and staying in the currency. The biggest risk for markets is that in Greece may not get a government and it becomes completely unclear whether or not Greece will be able to comply with its austerity program.

Selected currencies — weekly results

Indicator scoreboard

EMU

March broad money growth came in at a 3.2 percent annual rate while M3 expansion for the ECB's preferred 3-month moving average was 2.8 percent when compared with the same three months a year ago. However, while borrowing by governments jumped from a 5.6 percent annual rate to 7.3 percent, the key private sector lending counterpart remained decidedly sluggish, rising just 0.6 percent on the year after a 0.8 percent increase in February. Growth of loans to households halved to 0.6 percent within which lending for house purchases dropped 0.7 percentage points to just 1.1 percent. At the same time, borrowing by non-financial corporations was up only 0.3 percent or 0.3 percentage points less than in February. This left just a pick-up in lending to non-monetary financial intermediaries (ex-pension funds and insurance companies) from 0.8 percent to 2.0 percent to underpin total private sector loan demand.

April flash harmonized index of consumer prices was up 2.6 percent on the year after increasing 2.7 percent in March. The deceleration leaves headline inflation above the ECB's near-2 percent target level although the extent to which the underlying rate might be misbehaving will not be known until the publication of the core indexes on May 16.

April manufacturing PMI was revised to a weaker 45.9 from the flash estimate — a 34-month low. Production declined in the larger four member states for the first time so far this year and for the region as a whole, it was down for the second month running. Weakness in demand was apparent at home and overseas and saw job losses climb to their highest level in more than two years. Order books shrank alarmingly and backlogs continue to be run down. Input costs still rose quite significantly but factory gate inflation slowed. Regionally, apart from confirmation of a surprisingly weak performance by Germany (45.9) most interest is in the EMU peripherals and here the news is decidedly grim. In particular, the national index slumped more than 4 points to just 43.8 in Italy and was down a couple of points to a lowly 43.5 in Spain. Greece fared even worse with its PMI losing a further 0.6 points to 40.7. Such readings can only fuel concerns about the scope for the countries respective governments to meet their fiscal objectives.

April services PMI reading was 46.9, down from 49.2 in March. Weakness was apparent in most areas of the survey with new business especially badly affected. Payrolls were trimmed for the fourth month running, notably among the EMU peripherals and business confidence in the future declined to a 3-month low. Input cost inflation eased to a 5-month trough but margins continued to be squeezed as inadequate demand kept a lid of service provider charges. Regionally there was even more gloomy news out of both Italy (43.2) and Spain (42.1). Among the larger members, the German service sector (52.2) at least still showed weaker but positive growth, however, the downturn in France (42.5) is now even more marked than originally thought.

March joblessness was up a further 169,000 to take the number of people out of work to a new EMU record of 17.365 million. The jobless rate also hit a new high of 10.9 percent, up a tick from February. Regionally, 0.3 percentage point increase to 24.1 percent in Spain and to 15.3 percent in Portugal will inevitably attract much attention but a 0.2 percentage point gain in Italy will not go unnoticed. Data on Greece is only as recent as January and shows a 21.7 percent rate, up 0.5 percentage points from December.

March producer prices (excluding construction) posted a 0.5 percent increase on the month after an unrevised 0.6 percent gain in February. On the year, producer prices were up 3.3 percent, the slowest pace since June 2010. Energy prices were up 1.4 percent from mid-quarter (8.5 percent on the year) and so once again dominated the monthly change in the overall index. Excluding this sector, prices were up 0.2 percent from February and 1.5 percent on the year. The price of intermediate goods was relatively firm, up 0.3 percent on the month, but consumer nondurables were 0.2 percent higher, capital goods just 0.1 percent and consumer durables were flat.

Germany

April seasonally adjusted joblessness was up 19,000 following a smaller revised decline of 13,000 in March. The second increase in the number of people out of work in the last three months left the unemployment rate unchanged at the 6.8 percent level to which March was upwardly revised. Vacancies slipped 1,000 from the end of last quarter and provide further warnings signs about the strength of the domestic labor market. The FSO data follow the release earlier today of ILO statistics for March that showed unemployment up 10,000 to 2.38 million and an unchanged jobless rate of 5.6 percent. However, the same report also contained a further 37,000 increase in employment to a new record high of 41.459 million.

Americas

Canada

February monthly gross domestic product was down 0.2 percent and up 1.6 percent on the year. The decline reflected solely weakness in the goods producing area where output was off 1.0 percent from January. Manufacturing, down 1.2 percent, did most of the damage although there were hefty declines also in utilities (1.9 percent), mining & oil & gas extraction (1.6 percent) and in agriculture & fishing (1.0 percent). The only sub-sector to see an increase was construction (0.5 percent). Service sector activity was 0.1 percent higher on the month. Much of the increase here was attributable to wholesale trade (1.5 percent) as the next largest monthly advance was just 0.4 percent (finance, insurance & real estate). On the downside, transportation & warehousing (down 0.9 percent) and retail trade (down 0.4 percent) were particularly poor performers.

March industrial product prices were up 0.2 percent and up 0.9 percent on the year. The modest headline gain was in large part driven by a 1.8 percent monthly increase in petroleum & coal prices. Excluding this sub-sector the IPPI would have fallen 0.1 percent from February and risen just 0.4 percent on the year. Elsewhere charges were much better behaved with fruit & vegetables (0.8 percent) and other wood products (0.7 percent) posting the next most significant monthly gains. Weakness was most apparent in primary metals (down 1.0 percent) and miscellaneous non-manufactures (down 1.4 percent). Motor vehicles & other transport equipment saw a 0.1 percent monthly dip. Raw material and fuel costs dropped 1.6 percent on the month, led by a 3.6 percent slump in mineral fuels and without which the RMPI would have gained 0.3 percent. Outside of a 1.6 percent monthly increase in the cost of vegetable products, most other areas saw little change. Base effects saw annual RMPI drop 5.6 percent.

Bottom line

The Reserve Bank of Australia acted forcefully and cut its key policy rate by 50 basis points to 3.75 percent. However, the European Central Bank left its policy unchanged despite increasing calls for action. Economic data disappointed for the most part.

The Bank of England holds its monetary policy meeting. Investors will be anxiously awaiting the outcomes of Sunday’s elections. France will choose a president, Greece a parliament, there are mayoral elections in Italy and a regional election in Germany. The Greek election has the potential to have the most impact on financial markets. Neither of the two major parties, New Democracy and Pasok, has sufficient support to win a majority according to the polls.

Looking Ahead: May 7 through May 11, 2012

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