Global Markets

As May’s stock and bond market gyrations showed, traders are obsessively focused on every nuance of the Federal Reserve’s monetary policy plans. They monitor each and every new morsel of data and decide whether it will impact Fed plans to taper its quantitative easing and then they trade accordingly. In reality, the Fed is data driven but not by a single data point but a trend of improvement or not. Investors have been closely monitoring U.S. data after Federal Reserve Chairman Ben Bernanke said in the prior week that an improvement in data could trigger the Bank to start tapering its asset purchases in coming months. The bank currently buys bonds worth $85 billion a month and analysts have credited the aggressive easing strategy as one of the main reasons global equity markets in recent weeks have climbed to multi-year highs.

The Organization for Economic Co-operation and Development (OECD) trimmed its 2013 growth estimate for the world economy, citing further deterioration in the Eurozone. However, the organization expects global growth to accelerate next year helped by the ongoing support from accommodative monetary policies. The OECD warned, however, that future withdrawal of exceptional monetary policy measures could lead to instability in the financial markets. It sees the risk of potential growth rates being lower than currently estimated.

In its semi-annual Economic Outlook report, the OECD said world real gross domestic product will expand 3.1 percent in 2013 rather than the 3.4 percent estimated in November. This will be followed by a 4.0 percent expansion in 2014. Citing lingering effects of the debt crisis, the ongoing drag from fiscal consolidation and weaknesses in credit markets, the organization downgraded the Eurozone GDP outlook. It now said that the Eurozone will contract 0.6 percent in 2013 instead of slipping just 0.1 percent. But the Eurozone is expected to rebound next year, with GDP rising 1.1 percent.

Global Stock Market Recap

Europe and the UK

European stocks declined on Friday, weighed down by economic concerns in general and soaring unemployment — especially after the unemployment rate hit a fresh record of 12.2 percent in April, up from 12.1 percent in March. Equities were mixed on the week and all indexes except the IBEX managed to increase in May. Other data also contributed to Friday’s malaise — Eurozone May flash annual harmonized index of consumer prices accelerated for the first time in nine months. The flash estimate climbed to 1.4 percent from 1.2 percent in April — but still well below the European Central Bank's 2.0 percent inflation target. Adding to the gloom, German retail sales unexpectedly declined for the third consecutive month in April and French household expenditure on goods also retreated. Italy's unemployment rate climbed to its highest level on record to 11.9 percent in the first quarter from 11.4 percent in the previous quarter.

The FTSE declined for a second consecutive week for the first time since November 2012. The index declined 1.1 percent. However, the FTSE still climbed 2.4 percent in May, for a 12^th month of gains and the longest winning streak since the gauge was formed in 1984. The index last declined for the month in May 2012 during the global equity selloff in midst of the Eurozone crisis.

In Europe, the CAC slipped 0.2 percent and the SMI dropped 2.7 percent on the week. The indexes, however, were 2.4 percent and 0.5 percent higher for the month. The DAX was up 0.5 percent on the week and jumped 5.5 percent in May. The SMI has advanced each month since August 2012. However, both the CAC and DAX are up for three consecutive months. Equities declined after the Organization for Economic Cooperation and Development (OECD) slashed the global growth forecast. Equities were also hit hard by the OECD cutting its outlook on Eurozone growth.

Asia Pacific

Equities were mostly lower last week in volatile trading. A combination of caution ahead of Friday’s deluge of economic data in Europe and the U.S. kept investors wary.

The Nikkei gyrated throughout the week although it gained three of five days. The problem was that it dropped 3.2 percent on Monday and another 5.2 percent on Thursday for a weekly loss of 5.7 percent. The index retreated 0.6 percent for the month of May — its first monthly decline since July 2012. Equities continue to be tied to currency moves of the yen especially against the U.S. dollar and to a degree against the euro as well. When the yen rises in value, equities — and especially those of exporters — usually decline. A higher value of the yen cuts into exporters’ profits. Inflation data for April showed that the economy is still mired in deflation even though the key core consumer price index less fresh food improved to a decline of 0.4 percent on the year from 0.5 percent in March. However, industrial output was up for a fifth consecutive month.

The month of May saw a significant shift in funds as investors mulled the possibility that the U.S. Federal Reserve may begin to roll back its quantitative easing program, while the extreme Japanese market volatility witnessed especially over the past week raises questions about Prime Minister Shinzo Abe's program for his country's economic recovery. Over the past week the volatility has wiped out all of the Nikkei’s gains for May and more, amid rising skepticism about a rally that had been fueled largely by optimism over the policies of Prime Minister Shinzo Abe. Before last week's reversal, the Nikkei had shot 84 percent higher since November and 16 percent since early May. The yen had fallen by around 31 percent during the same period.

Elsewhere, equities dropped in Australia. The All Ordinaries lost 1.0 percent for the week and dropped 4.9 percent in May — its worst monthly performance since May 2012 when the European debt crisis sparked a selloff in stocks globally. Stocks have been weighed down by a number of factors including fading optimism over the economic recovery in China which is a key importer of Australian resources. Another factor is concern that the Federal Reserve could start to scale back its bond buying program which is reducing the attractiveness of the market's high dividend stocks.

The Shanghai Composite was up 0.5 percent on the week and 5.6 percent in May after declining in February, March and April. The Hang Seng, in contrast, slid 1.0 percent on the week and declined 1.5 percent on the month after increasing 2.0 percent in April.

India's Sensex edged up 0.3 percent on the week and was up 1.3 percent in May after rising 3.6 percent in April. The weekly increase occurred despite Friday’s 2.3 percent drop after the Reserve Bank of India indicated it has limited room for further monetary easing at its June 17^th policy meeting. RBI Governor D. Subbarao's hawkish comments on inflation, current account deficit and commodity price movements dented hopes for an interest rate cut. Weak GDP data also added to growth worries, dampening investor sentiment. India's gross domestic product expanded 4.8 percent annually in the first quarter after rising by a revised 4.7 percent in the fourth quarter of 2012. The GDP growth fell to a decade's low of 5 percent in the fiscal year 2012-13, much slower than the 6.2 percent expansion seen in 2011-12.

Currencies

Both the yen and euro were up against the U.S. dollar for the week despite declining on Friday. The currencies fluctuated on economic news and how it would impact Federal Reserve stimulus. The U.S. dollar has been rising in line with positive economic data after it was revealed earlier in May that some members of the FOMC had considered tapering the Fed’s bond purchases as early as June amid a recent spate of stronger data.

The yen edged lower against its major counterparts after Japan remained imbedded in deflation, the unemployment rate held steady and industrial production posted its largest increase in four months. These all added to the case for the Bank of Japan to continue with its strong monetary easing policies to lift the country out of deflation.

The euro weakened Friday on a slew of dismal economic reports including retail spending in Germany and record unemployment in the Eurozone and in Italy. This was in contrast to mostly stronger than expected U.S. data for consumer sentiment and the Chicago PMI. Earlier in the week, the U.S. currency benefitted from a better than expected consumer confidence reading and housing data. However, the currency retreated Thursday when first quarter GDP data were revised slightly lower (2.4 percent annualized growth compared with 2.5 percent originally) and jobless claims increased.

Selected currencies — weekly results

Indicator scoreboard

EMU

April money supply was up 3.2 percent from a year ago — up 0.6 percentage points from the March rate. The 3-month moving average preferred by the ECB was unchanged at 3.0 percent. However the acceleration in M3 was not attributable to the key private sector lending counterpart which was down 0.9 percent. Borrowing by households was up 0.4 percent from April 2012 and steady at March's rate, but within this loans for house purchase were a notch weaker at 1.2 percent. More significantly, lending to non-financial corporations saw its 12-month growth rate slide from minus 2.4 percent to minus 3.0 percent. This is a real worry. Borrowing by non-monetary financial intermediaries (excluding insurance companies and pension funds) was flat at a 0.6 percent annual rate.

May economic sentiment index climbed a modest 0.8 points to 89.4 but still 0.7 points short of its March reading. The improvement in the headline index reflected small gains in confidence in both the consumer and industrial sectors, the former up just 0.4 points at minus 21.9 and the latter up 0.6 points at minus 12.3. Consumer morale has now risen for four of the last five months but, in line with all the other sectors, remains well short of its long-run average (minus 13.2). Elsewhere, confidence in the retail sector gained 1.6 points to minus 16.8 and was up 1.8 points at minus 9.3 in services. However, construction saw a near-2 point drop to minus 33.6, its weakest level since last November. Regionally among the larger EMU states sentiment made ground in Italy (1.5 points), France (0.9 points) and Germany (0.6 points) and Spain (0.1 points) — but in all cases the improvement was only marginal and all remained well short of the common long-run mean (100).

May flash harmonized index of consumer prices was up 1.4 percent from a year ago. The annual rate was up 0.2 percentage point from its 37-month low last time but still 0.3 percentage points below its March reading and some eight ticks short of its level at the end of 2012. The data were in line with market expectations. The limited breakdown provided in the flash report showed a pick-up in annual rates in all the main sectors. In services, prices were running at a 1.4 percent annual rate, 0.3 percentage points higher than in April while non-energy manufacturing was a tick firmer at 0.9 percent. Energy inflation increased from minus 0.4 percent to minus 0.2 percent and food, drink & tobacco accelerated from 2.9 percent to 3.3 percent, its fastest pace so far this year. Recent volatility in the HICP has been heightened by holiday effects and a similar pattern will probably be seen in the core rates (due June 14).

April joblessness climbed a further 95,000 to 19.375 million. The increase, which followed an upwardly revised 65,000 increase in March, lifted the unemployment rate to 12.2 percent from 12.1 percent and yet another record high. France (11.0 percent) and Germany (5.4 percent) saw no change in their respective jobless rates but the rates in Italy (12.0 percent) and Spain (26.8 percent) crept another tick higher. Cyprus saw a positively alarming 1.1 percentage point leap to 15.6 percent and there were equally unwelcome increases too in Portugal (to 17.8 percent) and Slovenia (to 10.2 percent).

Germany

May seasonally adjusted joblessness increased for the third consecutive month. A 21,000 jump followed a slightly larger 6,000 increase in April although this was still too small to nudge the unemployment rate off its longstanding 6.9 percent level. The mid-quarter increase in the number of people out of work was in contrast to the payroll figures which, although a month behind, showed a 1,000 advance in April for the weakest performance since a 6,000 fall in September last year. Moreover, vacancies were down a further 7,000 in May, compounding the 10,000 decline reported last time. The data above use Germany’s definition of unemployment which differs from Eurostat’s.

France

April household spending on manufactured goods declined 0.4 percent and was up just 0.2 percent from a year ago. March spending was up a slightly stronger revised 1.3 percent. The April drop was essentially attributable to the food sector where demand contracted 3.3 percent on the month. Elsewhere the news was much brighter. Spending on durable goods was up a solid 1.0 percent with autos rebounding 1.8 percent after a 1.6 percent drop last time. Household goods expanded 0.7 percent and textiles finally showed some buoyancy, rising 1.5 percent following a cumulative drop of nearly 8 percent in February/March. The other goods sector also edged up 0.2 percent, matching its end of quarter gain.

April producer prices dropped 0.9 percent on the month and reduced annual PPI inflation from a lower revised 1.6 percent in March to just 0.6 percent, its slowest pace since February 2010. A 5.2 percent monthly slump in the cost of coking & refining products was accountable for much of the headline decline but weakness among the major categories was broad based. Within a 0.5 percent drop in overall manufactured goods, food, drink & tobacco prices were down 0.2 percent and transport materials & the other industrial products group 0.1 percent. There was also a hefty 2.4 percent slide in utilities. The only monthly increase in charges was in electrical equipment & information technology (0.6 percent).

Italy

First quarter unemployment rose sharply with the seasonally adjusted rate climbing 0.5 percentage points from its revised fourth quarter level to 11.9 percent. The new rate compares with a 10.0 percent reading in the year ago period and reflects a dramatic deterioration in job opportunities for the 15-24 year old sector of the population. Data for the month of April shows the rate climbing another notch to 12.0 percent. Earlier this week at a conference in Paris, French, Italian and German ministers warned that if high youth unemployment is not addressed, young people will lose faith in their governments and the European Union.

Asia/Pacific

Japan

April retail sales slipped 0.1 percent from a year ago for the fourth consecutive monthly decline. On the positive side, motor vehicle sales rebounded 1.2 percent on the year after sinking 14.6 percent in March. However, fuel sales were down 1.7 percent after edging up 0.3 percent. Retail machinery sales dropped 4.8 percent after sliding 2.1 percent the month before. Food & beverages and drug & toiletry store sales were up 0.9 percent and 2.5 percent respectively.

April consumer price index was up 0.3 percent but down 0.7 percent from a year ago. The key core CPI that excludes only fresh food also was up 0.3 percent on the month but slid 0.4 percent from April 2012. This was the sixth consecutive month that prices declined. Excluding both fresh food and energy, the CPI was up 0.4 percent and down 0.6 percent. Goods prices edged up 0.2 percent on the month but were down 1.4 percent on the year while services were up 0.4 percent and unchanged on the year. Among the main categories, only fuel, light & water charges increased 2.4 percent from a year ago and education advanced 0.6 percent. However, prices for furniture & household utensils dropped 2.9 percent while culture & recreation were down 2.3 percent on the year. Food prices declined 0.7 percent. Core CPI for the Tokyo metropolitan area edged up 0.1 percent on the year in May in a sign of possible progress toward price growth. The figure for Tokyo-area consumer prices is an early indicator of price trends for the rest of Japan.

April unemployment rate was 4.1 percent, unchanged from March and the lowest level since August 2008. April employment was up 40,000 to a seasonally adjusted 63.01 million after declining 10,000 in March. The adjusted number of unemployed increased 1.5 percent to 2.71 million from 2.67 million in March. Industries that added workers included wholesale & retail trade, medical, health care & welfare services as well as scientific research, professional & technical services. However, manufacturing and information & communications cut jobs.

April household spending increased for the fourth month when compared with a year ago. Spending increased 1.5 percent after jumping 5.2 percent in March. The April increase was below expectations of a 2.9 percent jump. Among the main categories spending declined only for fuel, light & water, education and transportation & communications. More than offsetting these declines were spending on housing, furniture & household utensils, culture & recreation, medical care, and food.

April industrial production increased a greater than expected 1.7 percent for the fifth consecutive monthly increase. However, when compared with a year ago, output was down 3.7 percent. On the year, output has declined since June 2012. The monthly increase in output was due to higher auto output along with semiconductors and precision machinery. Among the industries that gained in April were transport equipment (11.8 percent), electronic parts & devices (2.3 percent) and precision instruments (14.6 percent). According to METI’s latest survey of factory operators, production is expected to be flat in May and drop 1.4 percent in June.

India

First quarter gross domestic product was up 4.8 percent from a year ago, slightly stronger than the fourth quarter 2012 upwardly revised 4.7 percent. However, over the 2012/13 financial year, total output expanded a modest 5.0 percent, some 1.2 percentage points down on the 2011/12 outcome and the weakest performance in a decade. Manufacturing growth edged up to a 2.6 percent annual rate from 2.5 percent and financial services accelerated from 7.8 percent in the October-December quarter to 9.1 percent, its best showing since the first quarter of the financial year. Construction (4.4 percent after 2.9 percent) also put in a respectable gain. However, agriculture (1.4 percent after 1.8 percent) slowed as did trade, hotels, transport & communication (6.2 percent after 6.4 percent) and community, social & personal services (4.0 percent after 5.6 percent). Moreover, the decline in mining & quarrying (3.1 percent after 0.7 percent) steepened.

Americas

Canada

April industrial product prices dropped a steep 0.8 percent and were unchanged on the year. The raw materials price index plunged 2.2 percent and sank 1.9 percent from a year ago. The IPPI was held in check by a 3.0 percent monthly drop in the price of petroleum & coal products and without the benefits of this, would have declined 0.4 percent from March and risen 0.5 percent on the year. Other areas of weakness were primary metals, which were off 2.8 percent on the month and miscellaneous manufactures, which dropped 1.0 percent. The exchange rate also shaved 0.2 percentage points off the monthly change. There were no really significant monthly gains with the strongest, 0.4 percent, limited to rubber, leather & plastic products and chemicals. At the same time the RMPI was weighed down by a 2.5 percent monthly decline in mineral fuels, excluding which the index would have fallen 1.8 percent from March and 1.1 percent on the year. Non-ferrous metals (down 4.7 percent) and vegetable products (down 1.5 percent) were also very soft on the month and there were no increases of note.

First quarter gross domestic product was up 0.6 percent on the quarter for its best performance since the third quarter of 2011. Annualized growth accelerated to 2.5 percent and the annual rise in total output picked up to 1.4 percent from 1.0 percent at the end of last year. However, final domestic demand was up only 0.1 percent on the quarter, a sharp deceleration from the 0.6 percent increase recorded in the previous period. What growth there was here stemmed mainly from a 0.2 percent increase in consumer spending and a 0.5 percent gain in general government consumption. Elsewhere, domestic demand was disappointingly soft with gross fixed capital formation down 0.3 percent, wiping out almost half of its fourth quarter advance. Within this business investment was also down 0.3 percent and government fixed capital formation off 0.5 percent. Inventories, which subtracted some 0.7 percentage points in the fourth quarter, added just over 0.1 percentage points to the quarterly change in real GDP this time. Headline growth would have looked a whole lot worse but for a more than useful helping hand from foreign trade. With sales overseas expanding 1.5 percent on the quarter and imports up only 0.3 percent, net exports boosted the quarterly change in real GDP by almost 0.4 percentage points.

March monthly gross domestic product was up 0.2 percent and 1.7 percent from a year ago. March was a good month for goods producing industries in general although manufacturing output was disappointingly down 0.2 percent from February following a 0.7 percent increase last time. Utilities saw a 2.1 percent monthly jump and mining, quarrying & oil & gas extraction was up 1.2 percent. Construction was flat but agriculture, forestry, fishing & hunting expanded 0.4 percent. Services lagged behind with a 0.2 percent monthly gain attributable to relatively minor increases across most sub-sectors. The best performer was company & enterprise management, where output was up 0.8 percent on the month, followed by retail trade (0.5 percent). Finance & insurance, and real estate & rental & leasing recorded a 0.4 percent advance. The only decline was in wholesale trade (down 0.2 percent).

Bottom line

Trading was volatile during the last week of the month as investors weighed the likelihood that the Federal Reserve may begin tapering its bond buying soon. Economic data for the U.S. continued to be mixed. The Eurozone continued to post dour data including record high levels of unemployment. In Japan, investors continued to trade equities on the value of the yen.

The first week of a new month is always loaded with new economic information and June is no exception. There are three major central bank meetings — the Reserve Bank of Australia, the Bank of England and the European Central Bank. In addition, there are a slew of purchasing managers’ indexes globally that are followed quite closely by international markets. International trade and labour market data are also in the forefront.

Looking Ahead: June 3 through June 7, 2013

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