Global Markets

Most equity indexes were up last week even though they slumped on Friday. They retreated at week’s end in thin trading as new evidence of slowing global economic growth was revealed. Earnings reports in both Europe and in Asia Pacific were mixed. But investors focused on economic data — and especially the monthly outpouring from China. They were looking for more evidence that new stimulus packages would be forthcoming from the major central banks including the People’s Bank of China.

Last week’s slew of Chinese data dealt policymakers fresh blows as Friday’s merchandise trade and new bank lending data suggest that recent pro-growth policies have been slow to gain traction and that more urgent action may be needed to stabilize the Chinese economy. July exports were up just 1.0 percent from a year ago and new loans were at a 10-month low. These data added to Thursday’s data that showed factory output increasing at its lowest pace in three years and retail sales fading. The first hard data of the third quarter has led some analysts to question the strength of what was expected to be the start of a shallow rebound in the economy after growth had slipped for six successive quarters.

China is not alone in feeling the pressure. Earlier in the week, Taiwan posted a fifth straight monthly export decline in July, dragged down by double digit drops in shipments to China, Europe and the United States, while South Korea's July exports were the worst in nearly three years. Analysts said that the decline in July consumer inflation to a 30-month low of 1.8 percent should reassure policymakers they have some room to relax policy.

Global Stock Market Recap

Europe and the UK

Equities advanced last week despite ending the week on a decidedly dour note. Trading was light in midst of August vacation time in Europe. Daily fluctuations were under one percent (except the CAC on Tuesday). Investors here also kept a wary eye on China’s economic data. The data showed easing price pressures along with slowing industrial production and retail sales. The weak data opens the door for Beijing to loosen monetary policy further. But analysts do not expect easing until September, along with expected policy easing from the U.S. Federal Reserve. The FTSE, DAX, CAC and SMI advanced 1.0 percent, 1.1 percent, 1.8 percent and 0.3 percent respectively. Both the Italian MIB and Spanish IBEX rallied 3.0 percent and 4.3 percent.

Bank of England Inflation Report

The new Bank of England Inflation Report predictably paints a more downbeat picture of the UK economy than in May. In addition to a weaker revised growth outlook post Q3 2013, the new CPI projection, while nudged a little higher over the near term, still undershoots the 2 percent target over the key medium term horizon and by slightly more than last time. Combined, these factors are underpinning strong suspicions in financial markets that, notwithstanding the newly introduced Funding for Lending scheme (FLS), the latest £50 billion round of quantitative easing will not be the last.

The new forecasts show inflation below 1.7 percent in two years' time on the basis of unchanged QE of £375 billion and existing market interest rate expectations. The latter encompasses Bank Rate, currently 0.5 percent, at 0.3 percent by the end of this year and 0.2 percent by the second quarter of 2013. The CPI is thus seen to be well short of its 2 percent target and, moreover, risks to the projection are considered to be on the downside. This alone suggests that the current stance of policy is officially viewed as insufficiently loose.

The Bank's assessment of the real economy is decidedly cautious. The BoE clearly remains suspicious about the accuracy of the official data, notably regarding the construction sector. Consequently, despite a much worse than expected second quarter, real GDP growth is seen similar to the May forecast through the third quarter of 2013. However, thereafter the profile has been shaded lower.

The current round of QE announced in July is expected to take four months to run its course, potentially opening the door to a new round in November. The impact of the FLS remains to be seen but in the absence of a surprise bounce in economic activity, the report suggests that yet more BoE asset purchases are just a matter of time.

Asia Pacific

Equities advanced in light trading last week as hopes for further central bank stimulus boosted investor morale. However, risk appetite petered out after merchandise trade report from China pointed to slowing global growth as both import and export growth deteriorated. The Kospi jumped 5.3 percent on the week after the Bank of Korea kept its monetary policy unchanged.

The focus during the week was China’s monthly spate of new economic data. Lower inflation data served to reinforce expectations that Beijing will loosen its monetary policy further in the second half of the year to bolster growth. This was affirmed by lackluster retail sales and industrial output data while merchandise trade data underscore the impact of slowing global growth. The trade surplus narrowed sharply to $25.1 billion in July compared to a forecast $35.2 billion, while exports increased just 1.0 percent from a year ago against an expected 8.0 percent.

The Reserve Bank of Australia and the Banks of Japan and Korea joined the Federal Reserve, European Central Bank and the Bank of England in leaving their respective monetary policies unchanged at their policy meetings last week.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its key interest rate at 3.5 percent where it has been since June. The board appears to be in a wait and see mode after cutting rates by 50 basis points in May and 25 in June. Australia continues to have the highest benchmark interest rate among major developed economies even after the May and June rate cuts. Policy rates in New Zealand, Norway, Sweden, Canada and the euro area range from 0.75 percent to 2.5 percent. Rates in Japan and the U.S. are near zero. The RBA has an inflation target range of 2 percent to 3 percent.

The RBA remained on hold despite second quarter inflation increasing only by 1.2 percent from a year ago. However, it does give the RBA latitude to cut rates further should they find it necessary. In its statement, the RBA said that monetary policy remains appropriate. It expects inflation to remain consistent with its target range while the unemployment rate remains low and with most indicators suggesting growth close to trend. The RBA noted that the Australian dollar remains high despite the weak global outlook and the decline in terms of trade. A domestic expansion is helping weather a global slowdown.

In its Statement on Monetary Policy, the RBA highlighted the exchange rate, global outlook and the labor market as downside risks. The growth forecast for 2012 was upgraded from 2.75 percent (in May) to 3.5 percent. However, this adjustment was attributed entirely to stronger than expected growth in the first quarter and a positive outlook for the second quarter given the partial data on retail sales and exports. Inflation forecasts were revised up a little, with underlying inflation in 2012 being estimated at 2.5 percent up from 2.25 percent. It is noted that by mid-2013 underlying inflation will be in the top end of the 2 to 3 percent range due to the impact of a carbon tax. As that effect works through, inflation is forecast to return to the middle of the band. There were no surprises in the global outlook with the major risks being identified around Europe. When compared to the May statement, global growth forecasts have been revised down and the weakness in Europe and the U.S. is now assumed to be dampening growth in much of Asia.

Bank of Japan

As expected, the Bank of Japan kept its policy interest rate at zero to 0.1 percent. At the same time, it left its asset buying fund unchanged at ¥70 trillion. The BoJ maintained that the economy is gradually recovering and would return to a moderate recovery path, buoyed by domestic demand tied to reconstruction from the Great East Japan Earthquake. The monetary policy board noted that overseas economies are showing a mild and limited improvement but have not as yet emerged from deceleration. It also noted that nervousness continues in global markets and the BoJ needs to watch developments there closely.

In its July monthly economic report, the BoJ said that the domestic economic outlook is "expected to return to a moderate recovery path as domestic demand remains firm and overseas economies emerge from the deceleration phase." Even though overseas demand has proved weaker than expected because of the European debt crisis and economic slowdowns in the U.S. and China, domestic demand is shoring up the economy. Given lingering uncertainty over the European problem, the BoJ said it will continue to closely watch international financial developments.

Bank of Korea

The Bank of Korea kept its benchmark interest rate at 3.0 percent and offered a less pessimistic economic outlook than the previous month, suggesting it may adopt a measured pace in seeking further monetary easing through the rest of the year. The decision to stand pat comes as the Eurozone crisis and slowing growth in China weigh on South Korea, which depends heavily on exports for growth. Domestic demand also remains sluggish. BoK Governor Kim Choong-soo did not provide any direction in regard to the bank's future rate moves, but added it would take "the most appropriate action in line with changing conditions." The Bank of Korea surprised in July when it cut its policy interest rate by 25 basis points. It was the first cut in more than three years. The central bank's latest forecast is for the domestic economy to expand 3.0 percent this year, but the BoK Governor has said there are risks that this may be too optimistic.

Currencies

The U.S. dollar was mixed against its major counterparts last week. The currency was up against the euro, Swiss franc and Canadian dollar, unchanged against the Australian dollar and lower against the yen and pound sterling.

The yen was up against other leading currencies as risk appetite faded following weak growth figures from China that spurred concerns about the health of the global economy. The currency was higher against the dollar, the euro and the Australian dollar after China revealed that export and import growth slowed in July.

Australia’s dollar declined from the strongest level in more than four months as the Chinese report damped the outlook for its exports. The data outweighed the Reserve Bank of Australia’s decision to raise its 2012 growth forecast on stronger than expected consumer demand. Australia’s currency was earlier undermined after the Reserve Bank of Australia sounded a note of caution in its monthly monetary policy report. The RBA said the “persistently high” level of Australia’s exchange rate could be having a negative effect on the economy, noting also the currency’s rise in recent weeks in spite of falling commodity prices and gloom on global economic growth prospects. The RBA stated that the popularity of the currency “may in part reflect increasing international demand for highly rated Australian dollar securities”.

Selected currencies — weekly results

Indicator scoreboard

Germany

June manufacturing orders dropped 1.7 percent on the month and are down 7.8 percent on the year for the worst drop since October 2009. The decline stemmed mainly from the domestic market which registered a disproportionately sharp 2.1 percent monthly contraction. Within this, basics were especially soft, falling 3.1 percent but capital goods as well as consumer & durable goods slid 1.6 percent and 0.2 percent respectively. Overseas orders were off 1.5 percent from May, again led by basics (down 3.5 percent). Regionally the decline was wholly attributable to the other Eurozone countries which collectively cut demand by 4.9 percent. However, this did follow a 7.8 percent surge last time. Non-Eurozone orders were up 0.6 percent on the month after a 0.5 percent dip in May.

June industrial production dropped 0.9 percent and was down 0.3 percent on the year. The poor June outcome was a function of broad based weakness. Consumer goods output was down 0.9 percent on the month, capital goods declined 1.6 percent and intermediates dropped 0.3 percent. With construction off 2.0 percent, the only bright spot was energy which registered a 1.2 percent gain.

June seasonally adjusted merchandise trade surplus was €16.2 billion, up from a slightly larger revised €15.3 billion excess in May and matching the 4-year high seen in April. The unadjusted balance was in the black by €17.9 billion compared with €15.6 billion last time. The improvement in the adjusted balance masked a contraction on both sides of the balance sheet. Exports were down 1.5 percent on the month while imports were off a steeper 2.9 percent. However, both declines followed unusually large gains in May (exports 4.1 percent and imports 6.2 percent) and provided for quarterly growth in real exports of 1.3 percent and in volume imports of 0.3 percent. This combination points to a positive contribution from net trade to real GDP growth in the second quarter.

France

June seasonally adjusted merchandise trade deficit widened out from a larger revised €5.5 billion in May to €6.0 billion in June, its highest level since February. The deterioration was attributable to a 1.9 percent monthly drop in exports, only partially offset by a 0.4 percent dip in imports. The decline in the former was particularly marked in the transport sector following several large contracts in May while the latter would have fallen more steeply but for the arrival of an oil drilling ship. The June data provide for a quarterly deficit of €17.4 billion, little changed from the €17.6 billion posted over the first three months of the year.

June industrial production was unchanged from the month before and was down 2.3 percent on the year. Manufacturing output edged up 0.1 percent on the month. However, for the second quarter as a whole, manufacturing posted a 1.2 percent quarterly decline, twice the rate of fall in overall industrial output for which a 0.6 percent contraction was still steeper than the first quarter's 0.4 percent drop. Within manufacturing, coke & refined petroleum products surged 13.6 percent and the other manufacturing products category saw a 0.5 percent gain. However, elsewhere there were monthly declines in food & drink (0.5 percent), transport equipment (1.7 percent) and electrical & electronic equipment (0.2 percent).

Italy

Second quarter gross domestic product dropped 0.7 percent on the quarter. The latest decline in total output followed an unrevised 0.8 percent drop in the first quarter and steepened the annual rate of decline from 1.4 percent to 2.5 percent, the worst performance since the fourth quarter of 2009. As is usual with the provisional data, Istat provided few details of what was the fourth consecutive quarterly contraction in the domestic economy. However, it did indicate that agriculture, industry and services all posted quarterly output declines.

June industrial production dropped 1.4 percent on the month and more than reversed May's slightly firmer revised 1.0 percent increase. As a result, annual workday adjusted growth dropped from a decline of 6.7 percent in mid-quarter to a drop of 8.2 percent, its second worst reading this year. The June slump reflected broad based weakness with all of the major output categories apart from energy registering fresh monthly declines. Capital goods output was down 1.2 percent, intermediates dropped 1.3 percent and consumer goods were off 1.4 percent. Energy posted a modest 0.3 percent advance.

United Kingdom

June industrial production dropped 2.5 percent on the month while manufacturing contracted 2.9 percent. Annual growth of both series slumped by 2.5 percentage points to a decline of 4.3 percent. The data were affected by distortions associated with the Jubilee festivities. Manufacturing was dragged down by monthly declines in 10 of 13 sub-sectors among which a 5.6 percent plunge in basic metals & metal products stood out as did an 8.0 percent collapse in rubber & plastic products. The other three sub-sectors actually managed modest advances. Total industrial production found some support from a 2.0 percent monthly gain in mining & quarrying and a 3.6 percent jump in oil & gas extraction.

June merchandise trade gap widened out sharply to Stg10.2 billion — nearly Stg2 billion larger than in May and at a new record high. The underlying red ink also climbed sharply to Stg8.5 billion from Stg7.1 billion last time. In line with most current UK economic statistics, the trade data are subject to the distortions associated with the Jubilee celebrations and the extra two bank holidays during the period are thought to have had a significant negative impact upon exports. Nominal exports followed a 5.5 percent monthly surge in May which, for similar reasons, contained an extra working day, with an 8.4 percent plunge. Cars and chemicals were especially badly affected. With 1.2 percent drop, imports extended their row of monthly declines to three. Regionally, the main area of deterioration was with the non-EU bloc. Here the deficit widened by Stg1.3 billion to Stg5.2 billion, again reflecting a sharp decline in exports (9.6 percent). Net trade with other EU countries worsened by a much smaller Stg0.5 billion to Stg4.9 billion (exports down 7.2 percent).

July input prices were up 1.3 percent on the month but were down 2.4 percent on the year. Output prices were unchanged from June and were up 1.7 percent from a year ago. Factory gate prices were boosted by a 0.8 percent monthly increase in clothing & shoes together with 0.3 percent gains in tobacco & alcohol and in computer & electronics. However, the increases here were offset by a 1.5 percent decline in chemicals & pharmaceuticals as well as smaller monthly declines in a number of the other sub-sectors. The core output price index was also flat on the month and up 1.3 percent from a year ago. Raw material & input costs were driven up by a 5.3 percent monthly surge in crude oil and a 4.1 percent jump in home food materials. Partial offsets were seen in imported metals & chemicals (down 1.6 percent and down 1.9 percent respectively) and in other imported materials (down 1.0 percent).

Asia/Pacific

Japan

June private sector machinery orders excluding volatile ones for ships and those from electric power companies were up a seasonally adjusted 5.6 percent but were down 9.9 percent from the same month a year ago. Manufacturing orders retreated 2.9 percent and dropped 16.2 percent on the year while nonmanufacturing orders (excluding volatile orders) were 2.6 percent higher and down 4.6 percent on the year. Orders from overseas dropped 9.8 percent on the month after edging up 0.3 percent in both April and May. Overseas orders dropped 11.3 percent from June a year ago. Total orders were up 7.4 percent but were 10.9 percent lower on the year. In the April through June quarter, private sector orders (ex volatile ones) were 4.1 percent lower on the quarter and were down 1.7 percent from a year ago. In the July to September period the total amount of machinery orders is expected to decrease by 1.7 percent and private sector orders, excluding volatile ones, are expected to drop by 1.2 percent from the previous quarter respectively. The forecast was basically made by summing up the figures from 280 machinery manufacturers.

July corporate goods price index was down a greater than expected 0.4 percent and was 2.1 percent lower on the year. Analysts expected no monthly change and the annual change to be down 1.6 percent. The annual drop was the largest since a 2.1 percent decline in January 2010. Dragging the index lower was petroleum & coal products which sank 5.6 percent on the month and 8.5 percent on the year. Chemicals & related products dropped 1.7 percent and 3.7 percent from a year ago while iron & steel was 0.4 percent lower on the month and down 8.5 percent from the same month a year ago.

Australia

July employment increased by a slightly better than expected 14,000 to 11,512,600. Full time employment was up 9,200 people to 8,073,700 while part time employment increased 4,800 people to 3,439,000. The seasonally adjusted unemployment rate was 5.2 percent, below the expected 5.3 percent by analysts. The number of unemployed was down 2,500 people to 635,100. The participation rate edged lower to 65.2 percent from 65.3 percent last time.

China

July consumer price index was up 1.8 percent from a year ago after increasing 2.2 percent last time. After hitting a peak of 6.5 percent, the increase in the CPI has steadily eased. On the month, the CPI edged up 0.1 percent. The index was up 3.1 percent for the seven months of 2012 compared with the same months a year ago. The urban CPI increased 1.9 percent on the year after increasing 2.2 percent in June while the rural CPI was 1.5 percent higher after 2.0 percent the month before. Food prices cooled to an increase of 2.4 percent from 3.8 percent in June. Non-food prices edged up to 1.5 percent from the previous 1.4 percent.

July producer price index dropped 2.9 percent from a year ago after sinking 2.1 percent in June. On the month, the PPI was 0.8 percent lower. Producer prices dropped 1.0 percent during the January to July period compared with the previous year. Most sub-categories accelerated their declines. For example, production materials dropped 3.9 percent after declining 2.9 percent in June. Raw materials procurement, fuel and power slid 3.4 percent after 2.5 percent. Consumer goods were up 0.4 percent after increasing 0.7 percent in June.

July industrial production was up 9.2 percent on the year, down from 9.5 percent a month earlier. On the month, production was up 0.66 percent, down from 0.74 percent in June and 0.86 percent in May. Over the first seven months of the year, production was up 10.3 percent. Most areas saw output slow again and 12-month growth rates declined notably in chemicals (10.6 percent from 11.3 percent) and transport equipment (1.4 percent from 5.9 percent). Machinery (8.5 percent after 10.6 percent) also struggled. Communication (10.9 percent after 9.6 percent) and power & thermal (3.9 percent after 1.7 percent) bucked the general pattern, but overall the report was in line with an ongoing trend deceleration in production.

July retail sales were up 13.1 percent on the year and consistent with a monthly increase of 1.05 percent. These compare with rates of 13.7 percent and 1.29 percent respectively in June. Purchases over the year to date were up 14.2 percent or 0.2 percentage points less than last time. Within the headline annual increase, clothing eased from 20.2 percent to 18.4 percent and stationery fell from 25.0 percent to 18.9 percent. In fact all the major expenditure categories saw annual growth rates slow except sports & revelation (9.5 percent after 4.2 percent) and grain & food oil (unchanged at 16.8 percent).

July merchandise trade surplus declined to $25.2 billion from $31.7 billion in June. Exports were once again soft, rising just 1.0 percent on the year after an 11.3 percent annual increase last time. This was their worst performance for a non-holiday month since November 2009. Import growth eased from 6.3 percent to 4.7 percent. Not surprisingly, the Eurozone did much of the damage with export growth to this region slumping to decline of 16.2 percent on the year after just a 1.1 percent contraction in June. With imports from the EMU bloc up 5.3 percent after a 2.4 percent drop, the bilateral trade surplus declined by $2 billion to $10.8 billion. The surplus with the U.S. was $20 billion, down from $20.7 billion the month before.

Americas

Canada

June seasonally adjusted merchandise trade balance returned a third consecutive monthly deficit. At C$1.18 billion, the deficit was a little more than expected but only about C$0.25 billion above a slightly larger revised C$0.95 billion shortfall in May. The headline deterioration was attributable to renewed strength in imports which were up 2.3 percent on the month. Exports edged just 0.2 percent stronger. However, the volumes data were somewhat better with imports still outperforming with a 2.5 percent monthly gain but exports up a healthier 1.1 percent. Nominal sales to the U.S. climbed 2.2 percent from May but were partly offset by a nearly 5 percent drop in exports to the EU. With imports from across the border 3.0 percent to the good, the bilateral surplus with the U.S. slipped from C$3.23 billion in May to C$3.09 billion. The disappointing export performance reflected monthly declines in most categories, notably energy (3.5 percent) and agriculture & fishing (2.8 percent). Machinery & equipment was also 1.3 percent lower. However, autos sector sales were up 13.9 percent (volumes 13.2 percent). By contrast, imports were up from May almost across the board. Forestry products (7.7 percent) led the way but there were solid advances too in machinery & equipment (3.2 percent), agriculture & fishing (3.3 percent) and industrial goods & materials (2.3 percent). Auto imports were up 1.1 percent and the other consumer goods category 4.7 percent.

July employment declined by 30,400 following four consecutive gains employment — its steepest decline since last October. The jobless rate crept up a tick to 7.3 percent although this would have been higher but for a 0.2 percentage point dip in the participation rate. The disappointing employment figure essentially reflected just a shakeout in part time jobs (down 51,600) and masked a 21,300 advance in full time positions. There was a disproportionately large 13,500 drop in the public sector as private sector payrolls were down just 2,200. The biggest hit though was in self-employment where headcount dropped 14,800. Both the goods producing and service sectors struggled — the former shed a net 13,200 jobs and the latter 17,000. Within the factory sector manufacturing was down 18,400, natural resources 8,900 and utilities 1,900. Declines here were only partially offset by a 10,700 increase in construction and a 5,200 gain in agriculture. The slide in services was dominated by a 30,000 slump in trade together with a near-22,000 drop in professional, scientific & technical services. Public administration (down 17,000) and other services (down 11,700) were the other major losers. However, information, culture & recreation gained almost 24,000 and finance, insurance, real estate & leasing expanded 19,200. Other advances were seen in health care & social assistance (16,300) and education (16,300).

Bottom line

The Banks of Japan and Korea along with the Reserve Bank of Australia left their respective monetary policies unchanged. Investors focused on China’s data releases finding that the weaker July reports opened the door for further stimulus from the Chinese government and People’s Bank of China.

The highlights of this coming week will be the second quarter growth data from the Eurozone and Japan. The UK will be checking the minutes from the August Bank of England meeting for clues to upcoming policy. They will also be monitoring the latest consumer price index, labour force and retail sales data.

Looking Ahead: August 13 through August 17, 2012

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