Global Markets

Three major central banks met last week and while all left their monetary policies unchanged, they provided little of the guidance investors are seeking. The nervousness that built during the week toward the release of the U.S. employment report was finally appeased by the better than anticipated May results. Investors continue to try to link the report results to future Federal Reserve stimulus policies. They want to know when the Fed will begin tapering its bond purchases. On the week, most equity indexes declined. At the same time, the U.S. currency dropped on Fed and growth worries.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its key interest rate unchanged at 2.75 percent. The RBA most recently lowered its rate at the May meeting. It reiterated that the inflation outlook provided some scope for further easing should it be needed. One of the main developments since the May meeting has been the rapid decline in the Australian dollar. However, the RBA noted that the currency remains high considering the decline in export prices over the last 19 months. The currency averaged about A$1.03 in the past two years, compared with about 73 cents in the prior two decades, spurred by the resource investment boom and near-zero interest rates in the U.S. and Japan. The RBA says some of its earlier rate reductions were aimed to help offset the drag on growth from the Aussie’s strength.

The statement contained a clear easing bias but at the same time, made it clear that the RBA was in assessment mode. The Bank wants to be clear on the need for further support for demand but also the degree to which the inflation outlook affords scope for further measures. The RBA has an inflation target range of 2 percent to 3 percent. Two percentage points of rate cuts in the past 20 months have boosted the property market, while the decline in the Australian dollar last month helped buoy manufacturing sentiment. Policy makers are trying to shift growth toward industries such as construction in the nation’s south and east to spur hiring as mining investment in the north and west is predicted to peak this year.

Bank of England

The Bank of England Governor Mervyn King's last monetary policy committee meeting concluded with the widely expected decision to leave the Bank Rate at 0.5 percent and the asset purchase program ceiling at £375 billion. July’s meeting will be chaired by the former Bank of Canada governor, Mark Carney who takes over from King on July 1. Positive news on the domestic economy since the May meeting has included stronger than expected PMI surveys, further evidence of a pick-up in housing market activity, another decline in (claimant count) unemployment and continued strength in new car registrations. More of the same should leave real GDP on course to meet the 0.6 percent quarterly growth rate forecast by the central bank in its May Inflation Report.

However, doubts about the strength and sustainability of the recovery remain and Thursday’s outcome was most likely another split decision. The MPC doves will point to fresh weakness in lending and retail sales as well as a surprisingly sharp drop in April inflation and the ongoing sluggishness of the Eurozone. To this end, speculation about more QE further down the road is unlikely to disappear altogether any time soon. The July MPC meeting is similarly unlikely to produce any policy changes but financial markets will be particularly interested in the August discussions. These will accompany the release of the next Inflation Report and the Bank's first official response to the modification of its remit announced in the March Budget.

European Central Bank

Having cut the key refi rate by 25 basis points to a record low of 0.5 percent just last month, few were expecting any further substantive policy announcements from the ECB. The ECB elected to leave its benchmark rate unchanged and similarly held the deposit and marginal lending facility rates steady at zero percent and 1.0 percent respectively. There had been some limited talk of a negative deposit rate.

Nonetheless, economic data over the last month or so have been generally disappointing and hopes for some additional future policy initiative, be it in terms of lower official borrowing costs or fresh unconventional measures, remain intact. Such speculation will not have been harmed by ECB Chief Draghi's press conference which essentially repeated the same line as in May and reiterated the previously stated willingness to keep monetary policy accommodative for as long as necessary. For now the ECB refuses to adopt a more explicit forward guidance policy along the lines of the Fed.

The Eurosystem staff updated its economic forecasts. Not surprisingly, compared with the ECB's March forecasts these show both weaker growth and lower inflation projections this year. However, the revisions are too small to be of any real significance and much the same can be said of 2014.

Manufacturing PMIs weak in May

While the sector performed a little better than originally reported for May, manufacturing continued to contract in Europe. For the Eurozone, the final May reading was 48.3, 1.7 points above April’s four month low. The contraction in business activity now extends for 22 months. Rates of decline in output and new orders both eased during the period with the former falling at its slowest pace since the start of the downswing 15 months ago and the latter dropping less sharply than in any month since June 2011. Nonetheless, domestic demand continued to be a problem and job losses were reported for the 16th straight month with payrolls shrinking in all the surveyed countries. Regionally, all the reporting member states registered multi-month highs although all remained below the 50 mark. Of note, Greece (45.3) and Spain (48.1) hit 23-month and 24-month peaks respectively but were still well short of the growth threshold. France (46.4) was also still uncomfortably outpaced by Germany (49.4).

However, the UK surprised and was up 1.1 points and above the breakeven point of 50, to 51.3 — its highest reading since March 2012. New orders were up for the third month in a row and were led by a solid recovery in the domestic market. Export orders also made some headway allowing the new orders/finished goods inventory ratio to surge to a 27-month high. This suggests that output may have to be raised over coming months in order to maintain stocks at the desired level. To this end, employment was up on the month.

In the U.S., the Markit manufacturing PMI edged slightly higher to 52.3 from 52.1 the month before. However the older ISM manufacturing index slumped to a reading of 49.0 from 50.7 in April — its first decline in six months.

In China, the HSBC China PMI showed total new orders and new export orders declined in May, highlighting weakness in both domestic and overseas demand. The index slipped to 49.2 last month, its worst performance since October. The HSBC PMI followed a similar government survey released on Saturday that showed a slight uptick but also pointed to falling orders from important export markets. However, Japan’s manufacturing PMI climbed to a reading of 51.5 from 51.1 in April. The latest reading was the best recorded for 21 months and was indicative of modest growth.

Global Stock Market Recap

Europe and the UK

Despite a rally on Friday after the U.S. employment situation report, equity indexes were down for the week. The report overshadowed the announcement that the Bundesbank had lowered Germany's growth forecasts. The Bundesbank said it expects German gross domestic product to grow 0.3 percent this year, weaker than 0.4 percent forecast in December. The indexes were down three of five days. The FTSE was down 1.7 percent, the CAC dropped 1.9 percent, the DAX slid 1.1 percent and the SMI declined 2.0 percent.

The FTSE dropped around 8 percent over the past two weeks after Federal Reserve officials, including Chairman Ben Bernanke, began discussing exit strategies to their quantitative easing program. Prior to the employment report’s release, investors worried that a strong labor report could push the Fed closer to scaling back its asset purchase program. Bernanke said last month that a tapering could begin in coming months if data continue to improve, fueling worries the $85-billion a month liquidity injection into the market may soon come to an end.

On Thursday, European stocks declined after European Central Bank President Mario Draghi disappointed investors hoping for further monetary policy action. European stocks spent the first half of the day edging higher. But the mood in equity markets soured after Mr. Draghi’s monthly press conference where nothing new was offered. Neither stocks nor sterling showed much reaction to the Bank of England’s announcement. Rather, investors are waiting for Mark Carney to begin his term as BoE governor on July first.

Asia Pacific

Equities dropped last week in volatile trading. Investors were reluctant to take on risk ahead of the U.S. employment report which would be released after markets here were closed on Friday and ahead of a deluge of economic data from China over the weekend. Conjecture about Federal Reserve policy has added volatility as traders try to prepare for a curtailment of Fed largesse. They assume that each new set of data will make or break a Fed decision. Among the major indexes here, the Nikkei dropped 6.5 percent, the Shanghai Composite lost 3.9 percent along with the Kospi, the All Ordinaries slid 3.8 percent and the Hang Seng retreated 3.6 percent.

The Nikkei has been particularly turbulent due to a volatile yen. The increase in the currency’s value sent exporters tumbling and the Nikkei to a new two month low. Trading was affected by worries over the future of Fed stimulus and disappointment with Prime Minister Shinzo Abe's growth strategy. The Nikkei’s volatility began with the 7.3 percent plunge on May 23^rd, a sharp shock that started a rout that has put the index down over 19 percent from its recent multi-year peak. The most recent sharp drop in Tokyo was brought about by disappointment over the Japanese government's growth policy, the so-called "Third Arrow" of economic revitalization. The market dropped 3.8 percent on Wednesday after Prime Minister Shinzo Abe unveiled the strategy.

Abe laid out a wide ranging growth strategy that he said would beat deflation, increase personal incomes and reboot an economy written off in recent years for its seemingly unshakable malaise. But his latest plan seemed to disappoint investors, and stocks slumped as he spoke. Initial enthusiasm over his program, dubbed Abenomics, of aggressive monetary easing, public works spending and economic overhauls had driven the stock market up by 80 percent from late last year, when Mr Abe began his campaign for office, through the middle of May. But optimism has waned in the past two weeks, as investors took stock of the risks and shortfalls that accompanied the bet to end longstanding deflation. Investors have also demanded more specifics on how exactly Mr Abe intends to encourage economic growth.

The Shanghai Composite declined for seven consecutive days and was hard hit Friday ahead of an extended market closure for the Dragon Boat Festival (three days) and the release of May data for inflation, output and merchandise trade.

Currencies

If there was one word to describe foreign exchange markets last week, it was volatile. On Thursday, the U.S. dollar sank against the euro, yen and other currencies as investors called into question the strength of the U.S. recovery ahead of Friday’s tensely awaited employment situation report. The dollar dropped to its lowest level against the yen since April 16^th and briefly traded below ¥96. At the same time, the U.S. currency gave up about 1.5 percent against the euro, with the euro rallying to over $1.33 — its strongest level since Feb. 25^th. The dollar also gave up over one percent against the Canadian dollar, and saw big losses against other major currencies. However, the dollar recovered somewhat Friday after the better than expected employment report. Behind the dollar’s slide, traders said, was increasing nervousness regarding the strength of the U.S. economic rebound following a series of uneven data in the last few weeks

On Monday, the dollar fell below ¥100 for the first time since May 9^th after the disappointing ISM manufacturing report led investors to unwind bets that a recovering U.S. economy would continue to lift the currency. The yen's decline against the dollar since early November has been the dominant trend in foreign exchange markets this year, helping drive a rally in the dollar against many currencies in recent months. The dollar pushed past ¥100 in early May as investors anticipated that strong U.S. economic data would prompt the Federal Reserve to begin tapering its bond buying program. The prospect of a pullback sent Treasury yields soaring and led investors to buy dollars as they prepared for the Fed to tighten monetary policy.

The Australian dollar fell to the lowest level since 2011 as the nation’s shrinking interest rate advantage over its peers dampened the allure of the currency. The currency has been sliding since the Reserve Bank of Australia cut its key interest rate to 2.75 percent in May. Traders see the RBA lowering borrowing costs to 2 percent from its current record low of 2.75 percent. In Tuesday’s announcement, RBA Governor Glenn Stevens said that the inflation outlook may provide scope for further easing should it be required. The Australian dollar weakened after GDP grew 2.5 percent from a year earlier in the first quarter, boosting speculation the Reserve Bank will lower interest rates again. That was the slowest pace since the three months ended June 30, 2011.

Selected currencies — weekly results

Indicator scoreboard

EMU

April producer prices declined 0.6 percent and were 0.2 percent lower on the year — their first negative annual rate since February 2010. The latest decline was led by energy where costs were down 1.6 percent on the month (and 2.0 percent on the year). However, even excluding this sector, prices were off 0.2 percent from March and just 0.6 percent higher than a year ago. Intermediates were down 0.4 percent from the end of the first quarter to stand 0.3 percent below their level in April 2012. Capital goods prices crept a minimal 0.1 percent firmer on the month while consumer durables were flat and non-durables 0.1 percent weaker. Most EMU states saw prices slide on the month and there were particularly marked declines in Belgium (1.4 percent), Greece (1.3 percent), the Netherlands (1.3 percent) and Spain (1.1 percent). The steepest increase occurred in Estonia (only 0.2 percent).

First quarter gross domestic product was down an unrevised 0.2 percent on the quarter and down 1.1 percent from a year ago. Most key areas deteriorated from their respective fourth quarter levels. The only exception was household spending but even that crept up just 0.1 percent after a 0.6 percent drop last time. Gross fixed capital formation followed a 1.4 percent slide with an even steeper 1.6 percent contraction which alone took 0.3 percentage points off the bottom line, while government consumption was down 0.1 percent having held steady at the end of 2012. As a result, final domestic demand subtracted 0.3 percentage points from the quarterly change in total output. Inventory accumulation was unchanged. Exports declined 0.8 percent from the fourth quarter or 0.1 percentage point less than last time while imports were off 1.1 percent following a 1.2 percent decline. In sum, net exports boosted growth by 0.1 percentage point, in line with the previous period's contribution. As signaled earlier, weakness was widespread across the Eurozone with just Belgium (0.1 percent), Germany (0.1 percent) and Slovakia (0.2 percent) among the countries providing data achieving any quarterly growth at all. Cyprus (down 1.3 percent) continued to spiral downward at an alarmingly fast rate, and there were notable contractions too in Estonia (1.0 percent), Italy (0.5 percent) and Slovenia (0.7 percent).

April retail sales slid 0.5 percent following a slightly steeper revised 0.2 percent drop in March and left volumes 1.1 percent weaker on the year. What was the third consecutive monthly contraction saw purchases reach their lowest level in a decade. However, it was not all bad news as the headline figures were biased downward by the food, drink & tobacco sector where sales dropped 2.0 percent on the month. Non-food (ex-auto fuel) demand was up 0.6 percent from March although even this was only the first advance since the start of the year. Regionally it was the usual mixed picture. Most member states reported a monthly decline in total retail sales, including Germany (0.4 percent) and France (0.9 percent). In both of the core countries, purchases have fallen for three months in a row.

Germany

April manufacturing orders dropped 2.3 percent and wiped out March's minimally upwardly revised advance. On the year, workday adjusted orders were down 0.4 percent. Weakness was concentrated in the basics and capital goods sectors, the former registering a 1.9 percent monthly contraction and the latter a 3.6 percent decline. By contrast, consumer & durable goods saw a 7.5 percent jump. With a 3.2 percent slump, the domestic market dominated the monthly headline decline with basics (down 4.0 percent) and capital goods (down 3.2 percent) again showing special weakness. Foreign orders were down a more modest 1.5 percent within which demand from the rest of the Eurozone dropped 3.6 percent. Orders from the rest of the world slipped just 0.2 percent.

April seasonally adjusted trade surplus was €17.7 billion, €0.1 billion more than in March and reflected a second consecutive monthly expansion in both sides of the balance sheet. The unadjusted surplus was €18.1 billion, a drop of €0.8 billion from the previous month. Following a 0.6 percent increase in March, exports climbed 1.9 percent on the month. This was their strongest gain since May 2012 and left sales at their highest level since August last year. Imports followed suit with a 2.2 percent monthly increase that compounded March's 0.8 percent advance. However, this still left a shortfall of E0.8 billion from January. Compared with April 2012, exports were up 8.5 percent and imports 5.2 percent.

April industrial production jumped 1.8 percent and followed March's unrevised 1.2 percent gain to boost annual workday adjusted growth from minus 2.4 percent to 1.0 percent. Manufacturing output was up 1.5 percent on the month, largely thanks to a 4.0 percent spurt in capital goods. However, consumer goods edged up just 0.1 percent and intermediates declined 0.6 percent. Energy declined 1.5 percent but construction expanded a sizeable 7.7 percent as activity rebounded from a badly weather-hit March (down 4.2 percent).

France

First quarter unemployment on the ILO definition for the mainland was up 0.3 percentage points from a slightly lower revised fourth quarter base to a 15-year high of 10.4 percent. Including overseas territories, the rate was also up 0.3 percentage points at 10.8 percent. Since then, the monthly data have shown unemployment continuing to rise in April and the PMI surveys have warned of a further deterioration last month.

April seasonally adjusted trade deficit was €4.5 billion at the start of the quarter. The latest outcome matched a slightly smaller revised deficit in March and put the shortfall over the first four months of the year at €20.2 billion, down nearly 16 percent from the same period last year. With most categories enjoying a good period, exports were up a solid 4.1 percent on the month following a 1.6 percent increase in March to stand at their highest level since August 2012. Imports were up 3.8 percent on the month, more than reversing their March decline to achieve their highest level since October 2012.

United Kingdom

April shortfall on the global goods balance was a smaller than expected Stg8.2 billion, a significant improvement on a slightly larger revised Stg9.2 billion deficit in March. However, the decline in the red ink masked declines in both exports and imports, the former down 1.4 percent on the month and the latter off a steeper 3.4 percent. Moreover, around half of the shrinkage could be attributed to developments in the oil and other erratics balance where the deficit fell around Stg0.5 billion. Excluding this category, the shortfall narrowed to Stg7.3 billion from Stg7.7 billion last time with both export and import volumes weaker on the month. Over the last three months the underlying deficit has widened by some Stg1.6 billion. Exports to other EU countries were down again, falling 3.0 percent on the month following March's 1.0 percent drop. Even so, with imports sliding fully 7.0 percent, the bilateral shortfall still shrank by Stg0.9 billion to Stg4.8 billion and so accounted for nearly the entire drop in the headline red ink. At Stg3.4 billion, the deficit with the rest of the world saw just a minor improvement.

Australia

April retail sales were up 0.2 percent after sinking 0.4 percent in March. On the year, sales were up 3.1 percent. The largest contributor to the monthly increase was food retailing (0.5 percent) followed by clothing, footwear & personal accessory retailing (1.8 percent), cafes, restaurants & takeaway food services (0.5 percent) and other retailing (0.1 percent). These increases were partially offset by declines in department stores (down 2.0 percent) and household goods retailing (down 0.6 percent). By state, New South Wales advanced (0.6 percent) followed by Victoria (0.3 percent), the Australian Capital Territory (1.0 percent), South Australia (0.2 percent) and Queensland (0.1 percent). However, sales declines in Western Australia (down 0.8 percent), Tasmania (down 1.0 percent) and the Northern Territory (down 1.6 percent) partially offset the increases.

First quarter gross domestic product was up 0.6 percent on the quarter and 2.5 percent when compared with the same quarter a year ago. Growth for the quarter was driven by a 1.0 percent contribution from net exports and a 0.3 percent contribution from household final consumption. These increases were partially offset by a minus 0.9 percent contribution from public investment and a minus 0.4 percent contribution from changes in inventories. The industries that drove growth in the March quarter were finance, mining, transport and retail. The finance industry contributed 0.2 percent to GDP while the other industries each contributed 0.1 percent to the increase in GDP.

April seasonally adjusted trade balance was a surplus of A$28 million, down from A$555 million in March. Exports were down 1.2 percent from March and declined 1.3 percent from the same month a year ago. Non-rural goods exports declined 3 percent while rural goods were up 2 percent. Services were down 1 percent. Imports were up 0.9 percent but dropped 4.5 percent on the year. Capital goods jumped 16 percent and non–monetary gold was 18 percent higher. Intermediate and other merchandise goods slid 4 percent while consumption goods were down 6 percent. Services imports were 2 percent higher.

Americas

Canada

April merchandise trade deficit widened out to C$0.57 billion. Exports slipped 0.2 percent on the month and were 3.9 percent higher on the year while imports were up 1.2 percent from March, their fourth consecutive increase and 3.5 percent stronger than in April 2012. However, the bilateral surplus with the U.S. was little changed at C$3.87 billion as monthly gains in exports (1.8 percent) and imports (1.9 percent) essentially cancelled each other out. Rather, the damage was caused by a sharp worsening in trade with the EU where the surplus narrowed by more than C$0.6 billion as exports slumped 9.2 percent from March and imports jumped 9.4 percent. Within the overall monthly decline in exports, metal ores & non-metallic minerals (13.8 percent) were especially weak and there were declines too in farm, fishing & intermediate food products (2.9 percent), energy products (1.7 percent) and industrial machinery, equipment & parts (5.0 percent). Aircraft & other transportation equipment & parts (down 2.7 percent) also struggled. However, some industries fared much better although the only monthly rise of note was in metal & non-metallic mineral products (10.6 percent).

May employment jumped 95,000 while the jobless rate slipped to 7.1 percent from 7.2 percent in April. Full time jobs climbed 76,700 while part time positions were up 18,200. Headcount in the private sector expanded a solid 94,600 while a public sector payrolls were up just 6,600 despite a probable short-term boost from hiring connected with the general election in British Columbia (May 14). By contrast, the number of self-employed dropped 6,200. The increase in employment was dominated by a 64,700 increase in services. Strong gains were registered in trade (27,200), business, building & other support services (21,300), accommodation & food (14,300) as well as in the other services category (21,500). However, there were sizeable setbacks in professional, scientific & technical services (down 17,600), health care & social assistance (down 10,000) and public administration (down 11,000). The goods producing side added a net 30,200 new jobs despite a 14,200 drop in manufacturing. The volatile construction sector (42,700) more than accounted for the entire increase although natural resources (3,300) also managed a small gain.

Bottom line

Three central banks chose to leave their respective policies unchanged. Economic data were mixed. Eurozone data disappointed while the UK surprised with positive readings. Data from the U.S. was mixed. Market tensions grew as the Friday release of the U.S. employment report approached. Although market players sighed with relief, equities were mostly lower for the week and the U.S. dollar slid.

The Bank of Japan meets and investors will be looking to see if the Bank makes adjustments to its current easing program. Elsewhere, industrial production will be highlighted in Europe while labour market reports from Australia and the UK will be closely studied.

Looking Ahead: June 10 through June 14, 2013

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