Global Markets

Most equity indexes were up last week — no sovereign-related emergencies in Europe plus better than expected data from the U.S. helped offset dour flash second quarter GDP data from Europe and Japan. Investors are awaiting the end of the traditional August summer holidays in Europe for further progress on the European situation. The German Constitutional Court will return and give its ruling on the constitutionality of the Greek and Spanish rescue packages.

Global shares edged higher and the dollar rose on Friday after apparent support from German Chancellor Angela Merkel for European Central Bank intervention to calm the Eurozone’s debt troubles helped buoy investor sentiment for a second day. Merkel's comments on Thursday that ECB President Mario Draghi, who recently outlined conditional plans to buy bonds of troubled euro zone governments, were "completely in line" with European leaders came only shortly before the close of European markets. Speaking in Ottawa, Merkel urged the bloc to move swiftly toward a closer integration of fiscal policies. Germany's constitutional court is expected to deliver a ruling on September 12^th on the Eurozone’s permanent rescue fund.

Global Stock Market Recap

Europe and the UK

Equities advanced last week in thin, lethargic trading as investors awaited news of progress on the sovereign debt situation. Better than expected second quarter GDP data along with some positive economic data from the U.S. also boosted morale. The FTSE edged up 0.1 percent while the SMI gained 0.7 percent. The CAC and DAX were up 1.5 percent and 1.4 percent respectively.

The European markets gained ground on German Chancellor Angela Merkel's comments on Thursday. Merkel stated that Germany is committed to do everything it can to maintain the euro, which helped keep alive hopes that the ECB will take some decisive steps to reduce surging borrowing costs. The unexpected increase in U.S. consumer confidence on Friday provided further support.

German Chancellor Angela Merkel, speaking in Canada on Thursday, backed the ECB’s efforts to reduce borrowing costs in indebted countries, saying that Germany is “in line” with the ECB’s approach to defend the euro. “On many of these issues we feel we’re on the right track,” Merkel told reporters in Ottawa. Eurozone policy makers “feel committed to do everything we can to maintain the common currency.” Germany is facing calls from Italy and Spain to pool debt to bring down bond yields, from Greece to back an easing of its austerity timetable and from the ECB for politicians to take the lead in fighting the crisis. Merkel also faces domestic pressure from her coalition partners to refuse any more aid for Greece.

The Bank of England’s monetary policy committee was unanimous in maintaining quantitative easing at £375 billion at their August 2^nd meeting according to the minutes released on Wednesday. The decision to retain the interest rate at a record low 0.50 percent was also unanimous. The MPC said they will review the need for more measures in light of the impact of the recently announced credit boosting steps. The committee discussed whether it was appropriate to expand or continue with the program of asset purchases it had agreed at its previous meeting. The minutes suggest that the central bank is likely to provide more stimulus later this year.

European stocks climbed on Tuesday to their highest level in nearly five months as investors focused on better than expected second quarter German growth even though the Eurozone contracted. Gross domestic product data from Germany and France narrowly beat expectations. The German economy grew 0.3 percent on a seasonally adjusted basis, topping forecasts of a 0.2 percent increase while France's economy stagnated in the quarter but still topped expectations for a 0.1 percent contraction. Overall Eurozone GDP was down 0.2 percent.

Asia Pacific

Most equity indexes advanced last week in thin trading with the notable exceptions of the Shanghai Composite (down 2.5 percent), Hang Seng (down 0.1 percent) and PSEi (down 1.1 percent). Encouraging signs about the U.S. housing market along with German Chancellor Angela Merkel's voice of support for the ECB action to resolve the debt crisis helped improve investor risk appetite. Speculation was rife that the European Central Bank will soon buy Italian, Spanish and other troubled Eurozone countries’ sovereign debt to reduce their borrowing costs. The Nikkei was up 3.0 percent on the week while the All Ordinaries were 2.1 percent higher. Other gainers were up less than 1.0 percent.

Equities across the region have been rallying and are now trading at levels last seen in May, when a selloff eradicated many of the year's earlier gains. With markets riding high, investors are looking ahead to the next set of possible catalysts. Federal Reserve Chairman Ben Bernanke will give his annual speech in Jackson Hole at the end of the month, and there is a European Central Bank policy meeting in the first week of September. China manufacturing data for August will also be a key gauge of the Chinese economic health. Ms. Merkel said that Germany is "committed to do everything we can in order to maintain the common currency." Her comments were seen as supporting European Central Bank President Mario Draghi's vow to save the euro. Chancellor Merkel backed the European Central Bank’s insistence on conditions for helping reduce borrowing costs in indebted countries.

Investors are pinning hopes on action from the Federal Reserve next month after consumer price data released came in flat for a third time in four months, as a small drop in energy costs offset a small increase for food and other items. The Fed signaled more easing steps at its July meeting, saying it was ready to act if growth and hiring stays weak and inflation is in check.

The Bank of Japan released minutes of the July 11^th and 12^th meeting. At that time they voted unanimously to maintain their zero to 0.1 percent interest rate range and left the scale of asset buying program at ¥70 trillion. Members cautioned that the BoJ should stay on alert for greater downside risk. The Bank should be ready to take action without ruling out any easing options. In particular, a few members said that Japan’s economy could be adversely affected if a substantial risk materialized from the European sovereign debt situation.

Currencies

The U.S. dollar was mixed last week as it gained against the Australian dollar and yen but declined against other major counterparts including the Canadian dollar, pound sterling, Swiss franc and euro.

The euro had been fairly resilient during the week and the peripheral bond market had recovered as well. However, the ECB has not yet clarified its position and is not yet acting as the lender of last resort. But on Friday, the euro incurred losses against the dollar after the Thomson Reuters/University of Michigan preliminary August consumer sentiment survey climbed to its highest level in three months. The dollar hit its highest level against the yen since mid-July.

The euro held fast to the week's tight trading range against the dollar as a lack of new Eurozone news and the quiet holiday season continued to quash volumes. There was, nonetheless, a reluctance among currency traders to push the euro higher, despite a softening in Spanish bond yields and continued optimism in equity markets. Analysts said the foreign exchange market remained on tenterhooks after the European Central Bank indicated it may buy sovereign debt under certain unspecified conditions and ahead of the Kansas City Federal Reserve’s Jackson Hole symposium (and Chairman Ben Bernanke’s speech on August 31^st). Market participants are looking for clues to a third round of U.S. quantitative easing.

Selected currencies — weekly results

Indicator scoreboard

EMU

Second quarter flash estimate of gross domestic product was down a less than expected 0.2 percent after stagnating in the first quarter. On the year, GDP was down 0.4 percent. Both the monthly and annual declines were less than expected by analysts. Moderate growth in some core countries partly offset the ongoing slump in the southern periphery. There were upside surprises with Germany posting a 0.3 percent gain and France remaining stable. However, increases in a few smaller economies were outweighed by declines in Spain (down 0.4 percent), Italy (down 0.7%), Portugal (down 1.2 percent), Belgium (down 0.6 percent), Finland (down 1.0 percent) and Cyprus (down 0.8 percent). Quarterly GDP gains were recorded in the Netherlands and Austria (both up 0.2 percent), Estonia (up 0.4 percent) and Slovakia (up 0.7 percent). As usual, Eurostat provided no information on GDP components with its flash estimate. Available data point to weakness on the expenditure side. Private consumption was no doubt again dampened by higher unemployment and fiscal tightening, especially in peripheral countries.

June industrial production was down 0.6 percent as expected after increasing a revised 0.9 percent in May. On the year, output was down 2.0 percent after dropping 2.6 percent the month before. Declines in intermediate, capital and consumer nondurable goods offset gains in energy and consumer durables. May’s revised rebound of 0.9 percent combined with April’s 1.1 percent decline plus the June figure resulted in a 0.6 percent quarterly output drop in the second quarter. Energy output was up 0.4 percent on the month, narrowing the annual shortfall to 0.4 percent. Intermediate goods production slid 0.4 percent and 3.7 percent on the year. Capital goods output declined 1.3 percent and 0.9 percent. However, consumer durables goods production continued to increase, gaining 0.2 percent to slow the annual decline to 2.0 percent. However, consumer nondurable output dropped 0.7 percent and 2.0 percent.

The final HICP data for July confirmed the steady 2.4 percent annual rate of the flash estimate. On the month the HICP slid 0.5 percent as expected. The many core indexes annual rates changed slightly from the previous month. The 12-month change in the HICP excluding food, drink, tobacco & petrol was up 1.7 percent. Both excluding just seasonal food & petroleum and without only unprocessed food & petroleum the rates were 1.9 percent. Food prices eased to a gain of 2.5 percent after 2.8 percent the month before. Alcohol & tobacco prices were 4.7 percent higher after 4.9 percent in June. Clothing prices jumped to an increase of 3.1 percent from 2.2 percent. Communications prices continued to decline, this time by 3.1 percent. Among the larger states, annual inflation slipped 0.1 percentage point to 1.9 percent in Germany. Spain increased by 4 percentage points to 2.2 percent. At 2.2 percent the French rate eased 1 percentage point while Italy saw its rate stay unchanged at 3.6 percent. Top of the pile was Malta (4.2 percent) while Greece (0.9 percent) remained at the bottom.

June seasonally adjusted merchandise trade surplus was a larger than expected record €10.5 billion following an upwardly revised May surplus of €6.8 billion. The unadjusted surplus was €14.9 billion, after a €7.1 billion in May. Exports jumped 2.4 percent while imports were unchanged after three months of declines. Compared with a year ago, exports climbed 14.9 percent and imports were up only 4.1 percent, another reminder of the weakness of the region's domestic demand. In nominal terms, on the quarter, exports gained 0.6 percent in the second quarter while imports slipped 1.7 percent.

Germany

The August ZEW survey indicates that analysts have become yet more cautious about the German economic situation even though expectations components posted further declines from their July readings. The current conditions index shed 2.9 points to 18.2. Expectations declined to a reading of minus 25.5 and down from July’s minus 19.6, for their weakest reading since the start of the year. Expectations have now worsened for four months in a row. ZEW said the decline in expectations "signals that financial market experts still expect the German economy to cool down throughout the next six months."

Second quarter flash gross domestic product was up 0.3 percent and 1.0 percent when compared with the same quarter a year ago. Positive contributions to growth were made by final consumption expenditure and by the balance of exports and imports. According to provisional calculations, the increase in exports was slightly larger than the increase in imports. Also, domestic consumption (by both private households and government budgets) was higher than in the previous quarter. This compensated for the decline in capital formation observed especially for machinery and equipment.

France

Second quarter flash gross domestic product was unchanged on the quarter and was up 0.3 percent from the same quarter a year ago. Gross fixed capital formation gained 0.6 percent, public sector spending advanced 0.5 percent and exports were up 0.2 percent. Within fixed capital formation, business investment was 0.7 percent higher, the household component was unchanged and the public administration t increased 0.9 percent. Detracting from growth were imports which were up 1.8 percent and private consumption which dropped 0.2 percent.

United Kingdom

July consumer price index was up 0.1 percent and 2.6 percent on the year after June’s monthly decline of 0.4 percent and increase of 2.4 percent on the year. July’s data were above consensus for the month and year. The higher prices were driven upward by higher transport prices and for clothing and footwear. Typically clothing and footwear sales fall sharply in July due to the summer sales, but this year the fall was less aggressive as sales had been brought forward to June. The fall of 2.6 percent between June and July was the smallest decline on record. There was also a large upward impact from transport with the largest upward impact in that category from airfares, where prices rose 21.7 percent on the month. This was mainly due to flights to Europe and long-haul. National Statistics said they did not know whether the Olympics had pushed up air fares in July but noted that domestic flight prices had remained stable. Core inflation, which excludes energy, food, alcoholic beverages & tobacco was down 0.3 percent and up 2.3 in July, up from 2.1 percent in June on the year.

July claimant count unemployment dropped by 5,900, possibly helped by the Olympics as the labour market continues to show resistance to an economy in recession. The claimant count unemployment rate was 4.9 percent. Analysts had expected an increase in claimant unemployment of 7,000. Without a change to the benefit system, the claimant count would likely have fallen even more on the month. The Olympics looks to have had some impact on the data with the claimant count in London alone falling 2,800 in July, making up the bulk of the decline. There was, however, another significant special factor. That is a change in the benefits regime which possibly boosted the claimant count and the fall would have been even greater without it. Cuts to lone parent income support mean more women have applied for Job Seekers Allowance increasing the claimant count for women which was up 1,600 on the month in July. The ILO unemployment data, which lag the claimant count, showed a decline of 46,000 in the three months to June compared with the previous three month period. By this measure the unemployment rate eased to 8.0 percent from 8.1 percent. Wage growth remained essentially unchanged. The headline annual rate ticked just a notch firmer to a still very subdued 1.6 percent

July retail sales volumes were up 0.3 percent and 2.8 percent on the year. Excluding fuel, sales were unchanged and were 3.3 percent stronger than in July 2011. Food store sales were up 0.4 percent on the month but non-food sales were down 0.5 percent. However, there were significant declines in clothing & footwear and household goods stores of 1.8 percent and 1.5 percent on the month respectively after rising the previous month. Department store sales were up 0.6 percent while other stores’ sales increased 0.8 percent. Non-store retailing & repair sales rose 1.4 percent. National Statistics said that anecdotal evidence from retailers suggested that the two days of the Olympics contained in the sample period had no discernible impact on retail sales.

Asia/Pacific

Japan

Second quarter preliminary GDP was up 0.3 on the quarter and 3.6 percent when compared with the same quarter a year ago. GDP was up at an annualized pace of 1.4 percent. The disappointing growth was attributed to slowing exports stemming from weaker global growth amid the Eurozone debt crisis. The preliminary gross domestic product data marked a sharp slowdown from the previous quarter's revised 5.5 percent annualized rate of expansion. It was the fourth straight quarter of growth. Second quarter domestic demand was up 0.4 percent while private consumption also increased 0.4 percent. Corporate CAPEX increased by 1.5 percent. However net exports edged 0.1 percent lower.

June tertiary index edged 0.1 percent and was up 1.3 percent from the same month a year before. Industries that advanced in June included finance and insurance (up 2.4 percent), miscellaneous services (up 1.3 percent), wholesale & retail trade (up 0.3 percent), accommodations, eating & drinking services (up 1.4 percent), information & communications (up 0.6 percent), real estate & goods rental & leasing (up 0.5 percent), living-related & personal services & amusement services (up 0.7 percent) and learning support (up 0.1 percent). The industries that declined on the month included scientific research, professional & technical services (down 4.1 percent), transport & postal activities (down 1.6 percent), electricity, gas, heat supply & water (down 1.8 percent), medical health care & welfare (down 0.3 percent) and compound services (down 3.2 percent).

Americas

Canada

June manufacturing sales dropped 0.4 percent for the fourth decline in the past six months. The drop reflected a 10.6 percent drop in sales of petroleum & coal products. Excluding petroleum & coal products, sales were up 1.1 percent. In June, 12 of 21 industries reported sales increases, representing approximately 60 percent of manufacturing. On the year, sales were up 6.9 percent. Sales of nondurable goods were down 2.7 percent while durable goods sales increased 1.6 percent. A number of factors contributed to the decline in petroleum and coal products including a 4.9 percent drop in prices, ongoing shutdowns at a number of refineries as well as lower volumes at other refineries. This decline reflected an 18.1 percent drop in imports of crude petroleum used as raw materials by Canadian refineries and a 2.9 percent decline in exports of petroleum and coal products in June. Transportation equipment sales increased 1.7 percent — the highest level since November 2007. Motor vehicle sales advanced 0.7 percent for the 11^th increase in 12 months. Sales of motor vehicles were up 40.2 percent on the year as the industry recovered from the supply chain disruptions related to the 2011 tsunami. Aerospace products & parts were up 2.2 percent while motor vehicle part sales advanced 1.1 percent. Machinery manufacturers reported a 5.2 percent increase following two months of declines. New orders advanced 1.7 percent largely as a result of an increase in aerospace product & parts. The increase was partly counterbalanced by the decline in petroleum & coal products. Unfilled orders were up 2.2 percent reflecting an increase in aerospace product & parts. Excluding this industry, unfilled orders dropped 1.8 percent as producers of machinery and computer & electronic products reported fewer unfilled orders.

July consumer prices slipped 0.1 percent and were up 1.3 percent following a 1.5 percent gain in June. The increase was led by higher prices for passenger vehicles, food purchased from restaurants, meat and electricity. Consumer prices rose for every major component in the 12 months to July, with the exception of clothing & footwear. Excluding food and energy, the CPI also edged down 0.1 percent and was up 1.3 percent on the year. The Bank of Canada’s preferred CPI excluding eight volatile items was down 0.3 percent and up 1.3 percent on the year. Food prices were up 2.1 percent on the year following a 2.0 percent advance in June. These two increases were the lowest annual gains in food prices since the beginning of 2011. Leading the July increase were higher prices for food from restaurants (up 2.4 percent), meat (up 5.3 percent) and cereal products (up 3.7 percent). In contrast, prices for fresh vegetables declined for the fifth consecutive month. Shelter costs were up 1.0 percent in the 12 months to July after increasing 1.3 percent the previous month. Increases for electricity prices, homeowner's replacement cost and rent were major factors leading to the July rise in shelter costs. Natural gas prices continued to fall on the year. Higher costs for telephone services and financial services led to price gains for the household operations, furnishings and equipment component. Prices for transportation were up 1.1 percent from a year ago after increasing 1.7 percent in June. The cost for the purchase of passenger vehicles increased 2.3 percent following a 3.9 percent rise the previous month. The only major component which declined was clothing and footwear (down 0.7 percent), led by price declines for women's clothing. Energy prices declined 1.2 percent after sliding 0.8 percent in June. On a seasonally adjusted basis, the CPI declined 0.1 percent after decreasing 0.2 percent the previous month.

Bottom line

The slew of preliminary gross domestic product estimates for the second quarter were mostly better than anticipated in Europe but disappointed in Japan. This upcoming week is a slow one with little new economic data available. The major event of the week will be the release of flash August PMI indexes for the Eurozone, France, Germany, China and the U.S. Last time, all but the U.S. manufacturing PMI were in contraction.

Looking Ahead: August 20 through August 24, 2012

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