Global Markets

Volatility from earlier in the week subsided Friday. But the damage was done and most indexes declined on the week. Investors continued to focus on central bank stimulus plans. Investors sold when the Bank of Japan left policy unchanged and did not add to its current largesse. And with the Federal Reserve meeting looming on June 18^th and 19^th, talk of tapering continues to make traders wary of risk. China’s less than impressive data for May contributed to unease about growth there going forward while in Japan, a slight upward revision to first quarter growth bolstered morale.

The Bank of Japan was the latest central bank to cause angst among investors as it chose not to provide fresh stimulus to boost the economy. Japan's announcement closely followed the European Central Bank and Bank of England saying last week that, for the time being, they were unwilling to do more to help the economy. And meanwhile, U.S. Federal Reserve officials have been openly discussing when would be the best time to start trimming the U.S. asset purchase programs which involve spending $85 billion a month on Treasury and mortgage backed bonds.

World Bank lowers its global growth estimates

The World Bank lowered its global growth forecasts Thursday, citing the deeper than expected recession in the euro area and muted growth in developing countries. Releasing the June edition of the Global Economic Prospects, the lender said it now expects the world economy to grow 2.2 percent this year, down from its January forecast of 2.4 percent growth. However, growth is expected to strengthen to 3.0 percent in 2014 — its January report predicted growth of 3.1 percent. The outlook for 2015 was unchanged at 3.3 percent. The Bank expects the euro area to contract 0.6 percent this year compared with the previous projection of a 0.1 percent decline. The report said that economic activity is being held back by weak confidence and continued banking sector and fiscal restructuring. The euro area economy is expected to improve gradually, with  gross domestic product rising 0.9 percent in 2014 and 1.5 percent in 2015.

The report expects sluggish growth from high income countries, with the euro area remaining weak but finally emerging from recession and Japan gaining some momentum from the government’s aggressive fiscal and monetary measures after a decade of malaise and stagnation. The bank raised its estimate of 2013 growth for Japan to 1.4 percent from its earlier prediction of 0.8 percent. The United States is expected to be relatively strong among the world’s rich nations. Even so, the World Bank, which is responsible for encouraging development around the globe, anticipates that the American economy will grow only about 2.0 percent this year, in line with its performance over the last three years.

There is an imposing risk from the United States and other high income economies — the end of extremely accommodating monetary policy. The scaling back of the Federal Reserve’s quantitative easing, for instance, might lead to higher interest rates around the world, the report noted. Businesses in many countries have eagerly taken advantage of low rates to embark on major projects relying on longer-term loans, like construction projects. That has created conditions ripe for higher losses from loans that no longer make sense if interest rates rise and demand eases.

Bank of Japan

As expected the Bank of Japan’s monetary policy board left its key interest rate range at zero to 0.1 percent. The MPB also left its asset purchase program unchanged. The BoJ will buy JGBs at an annual pace of ¥50 trillion and will raise the monetary base at an annual pace of ¥60 trillion to ¥70 trillion. There was no change to its funding operations.

According to the MPB, the economy is expected to return to a moderate recovery path, mainly against the background that domestic demand increases its resilience due to the effects of monetary easing as well as various economic measures. Growth rates of overseas economies are expected to gradually pick up, albeit moderately.

Since April, the Bank of Japan has embarked on monetary stimulus on an unprecedented scale in a bid to jolt the Japanese economy out of 15 years of deflation which is part of a wider economic growth push introduced by Prime Minister Shinzo Abe. Under Haruhiko Kuroda, its new governor, the central bank pledged to double Japan’s money supply in two years through aggressive purchases of government bonds and other assets. It also committed to a target to hit 2 percent inflation over the next two years, a goal that some economists say is overly ambitious in a country that has seen prices fall for 15 years.

Reserve Bank of New Zealand

The Reserve Bank of New Zealand left its Official Cash Rate (OCR) unchanged at 2.5 percent where it has been since March 2011. At the same time, the RBNZ offered forward guidance. It said that it expects to keep the OCR unchanged given its outlook through the end of the year. In his post meeting statement, Reserve Bank Governor Graeme Wheeler said that despite its recent decline, the NZ dollar remains overvalued. He reiterated the RBNZ will seek to intervene in the foreign exchange market where appropriate. The New Zealand dollar or kiwi duly declined on his comments.

Wheeler expects housing price inflation to reach 10 percent by the first quarter of 2014. This is due to Canterbury area rebuilding after the devastating earthquake in February 2011. The RBNZ lowered its growth forecast for the year through March 2014 to 3.0 percent from 3.3 percent and left its projection for the following year at 2.8 percent. However, it lifted its inflation forecast for 2014 to 1.9 percent from 1.7 percent. Inflation is not projected to reach 2.0 percent — the midpoint of the Bank’s inflation target range — until the second quarter of 2015.

Global Stock Market Recap

Europe and the UK

Equities here retreated for the fourth consecutive week. Investors continue to be nervous about the possible tapering of bond buying by the Federal Reserve. The continuing stream of depressing economic data gave risk takers second thoughts. However, Friday’s marginal gains on a Wall Street Journal story that Federal Reserve Chairman Ben Bernanke will act soon to quell investor fear on stimulus tapering did little to boost the equity indexes. The FTSE lost 1.6 percent, the CAC slid 1.7 percent, the DAX lost 1.5 percent and the SMI dropped 1.9 percent on the week.

Germany's court in Karlsruhe held a two day hearing to decide whether the ECB's bond buying program, called the Outright Monetary Transactions (OMT), violates German law. European Central Bank Executive Board Member Joerg Asmussen warned against discussions on altering the EU treaty as well as the ECB’s mandate to secure price stability. The success of the ECB’s bond purchase program will have no impact on the ruling whether the measure was constitutional or not, the German Constitutional Court said on Tuesday. ECB President Mario Draghi said in an interview with German television that “not a single cent has been spent” on the program, but just the existence of such a mechanism is mainly responsible for the easing fears of the Eurozone breaking up. After the OMT announcement last summer, government bond yields for struggling countries such as Spain and Italy have come down significantly. A decision is not expected until the fall, after German elections.

Asia Pacific

Equities dropped in volatile trading last week. Investors were roiled by the very hint that the Federal Reserve might begin to taper its bond buying program. Japan’s equities were particularly volatile, jumping 4.9 percent higher on Monday only to sink 6.4 percent Thursday and recover 1.9 percent Friday. The Nikkei tends to fluctuate inversely to the value of the yen. Yen increases in value against the U.S. dollar inevitably lead to Nikkei declines and vice versa. The index dropped 1.5 percent for the week. A higher yen has a negative impact on the competitiveness of the country’s major exporters as well as exporters’ repatriated profits.

The BoJ’s decision to stand pat at its meeting appeared to come as something of a disappointment to the markets given the recent volatility in equities and Japanese government bonds. There had been widespread rumors that the Bank would extend the maturity of its longer term funds supply facility to two years to ease pressure on JGB yields. But the lack of action should not have come as a surprise. The BoJ’s massive balance sheet expansion that was announced at the start of April is barely underway. Governor Kuroda had stated from the start that he wanted to avoid the incremental policy employed by the BoJ’s previous leadership, thus downplaying the likelihood of changes to policy on a monthly basis.

Elsewhere, equities in Australia advanced in a holiday shortened week. The All Ordinaries was 1.0 percent higher and the only index of those we follow in this region that gained for the week. Investors continue to be fixated on future Federal Reserve policy. For example, after Thursday’s plunge, Asian stocks rebounded as upbeat U.S. data eased global growth worries and reports suggested that the U.S. Federal Reserve would quell investor fears on quantitative easing at its June 18^th and 19^th policy meeting. At least on Thursday, investors seemed to believe that the exit from stimulus will be slow and gradual to keep interest rates low as long as possible.

Currencies

The U.S. dollar declined against its major counterparts but the week’s story was the movements of the currency against the yen. On Thursday, the yen surged, strengthening beyond 94 per dollar for the first time in two months, as Japanese investors cut holdings of overseas bonds and stocks for a fourth week and the World Bank lowered its global growth forecast.

Japan's currency and its stock market have long had a tight inverse relationship, as a weaker yen means higher earnings for Japanese exporters. The yen declined nearly 23 percent against the dollar from the start of November to late May, as a new government came into power and set off massive monetary easing by the Bank of Japan. The yen's slide corresponded with a massive 75 percent rally for the Nikkei over the same period. Now that trade is unraveling.

A combination of factors has contributed to the yen's sharp rise. First, markets are unnerved by the prospect that the U.S. Federal Reserve will soon start exiting its quantitative easing program. That is causing flows into the yen, which still retains its status as a safe haven currency that traders flock to in times of uncertainty. And second, the Bank of Japan disappointed yen bears after its monthly meeting on Tuesday by failing to add to its easing programs.

The level of the currency on any given day might not matter so much if Japan were less dependent on exports for growth. But a package of structural reforms meant to unleash the domestic economy fell flat when unveiled last week as it failed to tackle issues like labor market rigidities and negligible immigration that are holding back growth. Until the Japanese government summons the political courage to make painful but necessary reforms, the country's stock market will be held hostage to the yen exchange rate.

Selected currencies — weekly results

Indicator scoreboard

EMU

April industrial production was up 0.4 percent but was down 0.6 percent from a year ago. April's monthly gain was attributable to a 2.7 percent monthly surge in the capital goods sector. However, while non-durables (0.7 percent) also advanced, durable goods slumped 2.7 percent and intermediates were only flat. Energy was down 1.5 percent after strong weather impacted increases in February and March. Regionally, hefty monthly increases in France (2.3 percent) and Germany (1.2 percent) lay behind the headline production gain although there was help too from Ireland (3.0 percent) and Slovenia (1.1 percent). Even so, the good news here was tempered by sizeable declines in Spain (0.9 percent), Portugal (3.6 percent), the Netherlands (4.3 percent) and Finland (5.1 percent).

May harmonized index of consumer prices edged up 0.1 percent and was up 1.4 percent from a year ago. Underlying inflation accelerated but it remains at historically soft levels. Excluding food, drink, tobacco & petrol the HICP was up an annual 1.2 percent, an increase of 0.2 percentage points from its April pace but still a 0.3 percentage point fall from April. Similarly, omitting just seasonal food & petrol the annual rate was also 0.2 percentage points firmer at 1.4 percent and without only unprocessed food & petrol, again 0.2 percentage points higher at 1.3 percent.

France

April industrial production (excluding construction) jumped 2.2 percent after a smaller revised 0.6 percent decline in March. What was the steepest monthly gain since May 2011 boosted annual production growth from a decline of 2.1 percent to a drop of 0.5 percent, its best performance since April 2012. Manufacturing output was up 2.6 percent on the month with all of the main production sectors making solid headway. There were especially robust monthly increases in food & agriculture (2.3 percent), transport equipment (5.7 percent) and in the other manufactured goods category (2.5 percent). Refining was up 1.6 percent, electronics & machines gained 0.7 percent and energy & extracted goods were 1.1 percent higher. Construction output, which fell 0.4 percent in March, expanded a more modest 0.2 percent.

Italy

First quarter gross domestic product was revised to a slightly steeper 0.6 percent quarterly decline in total output from an initial reading of minus 0.5 percent. On the year, GDP contracted 2.4 percent. Consumer spending was down 0.5 percent from the end of 2012 while capital investment was off 3.3 percent, within which transportation slumped 7.0 percent. Government consumption crept 0.1 percent higher but final domestic demand still subtracted 0.9 percentage points off headline growth. Indeed, the picture would have looked bleaker still but for inventory accumulation which boosted GDP by 0.3 percentage points, most likely at the expense of the current quarter. Foreign trade was also disappointing with exports falling 1.9 percent on the quarter, their sharpest reversal since the first quarter of 2009 while imports were down 1.6 percent. As a result, net exports knocked an additional 0.1 percentage points off economic growth.

April industrial production slid 0.3 percent to its weakest level since April 2009. The latest drop, which was the third in a row, followed a revised 0.9 percent decline in March and left workday adjusted growth down 4.6 percent. Production of capital goods climbed a healthy 1.2 percent from March but both consumer goods (down 0.9 percent) and intermediates (down 0.1 percent) registered fresh declines and energy (down 1.3 percent) similarly provided no support to headline growth.

United Kingdom

April industrial production was up 0.1 percent on the month but down 0.6 percent on the year. Manufacturing dropped 0.2 percent and slid 0.5 percent from a year ago. The main driving force behind the monthly drop in manufacturing output was a 2.0 percent slide in transport equipment alongside declines in wood & paper products (3.2 percent) and basic metals & metal products (1.4 percent). On the positive side, pharmaceuticals advanced 13.8 percent (and alone added 0.6 percent to the overall monthly change), other manufacturing & repair gained 1.8 percent and coke & refined petroleum products added 2.2 percent. Elsewhere within total industrial production water supply & sewerage posted a 1.5 percent monthly gain, mining & quarrying expanded 0.9 percent and oil & gas extraction was up 0.6 percent. However, electricity, gas, steam & air declined 0.2 percent.

May claimant count unemployment was down 8,600 on the month following a steeper revised 11,800 decline in April. This measure has fallen every month so far this year and is down more than 46,000 since December. However, the monthly declines have been remarkably stable varying between 5,300 (February) and 11,800 (April) and so remain in line with broadly steady economic growth. The jobless rate in May held steady at 4.5 percent. The ILO figures told a similar story with the number of people out of work on this definition sliding 5,000 over the three months to April. This followed a 6,000 increase over the quarter ending January 2013. The unemployment rate here was also steady at 7.8 percent. Meantime headline average earnings growth jumped from a firmer revised 0.6 percent in April to 1.3 percent in May. However, this could be attributed to a sharp acceleration in the single month rate (3.3 percent from minus 0.3 percent), itself reflecting distortions caused by the timing of bonus payments. More significantly, headline regular pay posted just a 0.9 percent annual rate, only a tick up from March's record low.

Asia/Pacific

Japan

First quarter gross domestic product grew at an upwardly revised 1.0 percent. The preliminary estimate was 0.9 percent. On an annualized basis, GDP was 4.1 percent – upwardly revised from 3.5 percent. Forecasters expected growth to be unchanged from the preliminary estimate. Domestic demand was revised to a gain of 0.6 percent on the quarter from 0.5 percent. Within domestic demand, private demand was estimated at 0.7 percent, up from 0.5 percent last time. Private consumption was unchanged at 0.9 percent. CAPEX was revised to a contraction of 0.3 percent from the initial decline of 0.7 percent.

After soaring 14.2 percent in March, machine orders excluding volatile orders dropped a greater than expected 8.8 percent in April. This was the first monthly decline since January. On the year, orders were up 5.7 percent. Manufacturing orders slid 7.3 percent while non-manufacturing orders dropped 6.0 percent. Orders from overseas sank 19.9 percent after soaring 52.1 percent the month before. Orders for most sub-sectors of manufacturing dropped along with those for non-manufacturing sub-sectors. Total orders including volatile items also slid in April, down 14.2 percent after jumping 27.8 percent in March. The government continues to say it expects a gradual improvement.

May corporate goods price index edged up 0.1 percent on the month and was up 0.6 percent from the same month a year ago. It was the sixth monthly increase and the second on the year. While most categories were up for the month, most were still lower than a year ago. Food & beverage prices were up 0.7 percent on the year. Lumber & wood were up 7.2 percent and nonferrous metals were 8.5 percent higher than a year ago. However, categories including electronic components & devices, electrical machinery & equipment and information & communications equipment were lower.

Australia

May employment increased by 1,100 after increasing a revised 45,000 in April. For the five months of 2013, employment has increased by 99,700 jobs. The gain to employment was due to an increase of part time jobs which were up 6,400 to 3,509,600. The gain offset a decline of 5,300 in full time jobs to 8,153,600. Unemployment slipped to 5.5 percent from 5.6 percent the month before. The number of people unemployed declined by 3,600 to 682,900 in May. The seasonally adjusted labour force participation rate decreased 0.1 percentage points to 65.2 percent in May. The seasonally adjusted underemployment rate was 7.4 percent in May 2013. Combined with the unemployment rate of 5.5 percent, the latest seasonally adjusted estimate of total labour force underutilization was 12.9 percent.

China

Consumer inflation came in below expectations in May, helped by easing food prices. May consumer price index dropped 0.6 percent on the month and was up 2.1 percent from a year ago. In April, the CPI was up 2.4 percent. For the five months of 2013, the index was up 2.4 percent for a third consecutive month. The urban CPI was up 2.1 percent from a year ago after increasing 2.4 percent in April while the rural CPI was up 2.2 percent, easing from 2.4 percent the prior month. Food prices eased to an increase of 3.2 percent after jumping 4.0 percent in April. Non-food prices were up 1.6 percent for a second month.

Producer prices continued to decline. They have been in deflationary territory since March 2012. May producer prices slid 0.6 percent and 2.9 percent from a year ago. For the five months of 2013, the PPI was down 2.1 percent. Production material prices dropped 3.8 percent on the year while consumer goods edged up 0.1 percent. All categories of production prices dropped as did ferrous and non-ferrous metals, fuel and power and chemical materials. Companies continue to struggle as they fight widespread industrial cover capacity along with weak domestic and global demand.

May unadjusted merchandise trade surplus was $20.43 billion, up from $18.16 billion in April. However, exports increased just 1 percent from a year earlier, down from a 14.7 percent rise in April. Imports dropped 0.3 percent after expanding 127 percent the month before. The plunge in exports resulted in part from the government’s crackdown on inflated trade invoicing, used by companies to circumvent China’s capital controls in recent months. But the declines were much steeper than forecast. Analysts said the crash in imports was particularly worrying, a sign of spluttering domestic demand. Exports with the U.S. declined 1.6 percent after slipping 0.1 percent in April while imports dropped 1.5 percent after jumping 19.4 percent the month before. Exports to the EU slid for a fourth consecutive month, this time dropping 9.7 percent while imports sagged 5.2 percent. In trade with Japan, exports were virtually unchanged while imports plunged 13.8 percent. Both imports and exports have declined for four consecutive months.

May industrial production was up 9.2 percent from a year ago after increasing 9.3 percent in April. For the five months of 2013, output was up 9.4 percent. It was 0.62 percent higher on the month after increasing 0.87 percent a month ago. Most sub-categories gained less than they did in April. For example, motor vehicle output declined to 15.7 percent, down from 18.3 percent in April. Transport equipment was up 0.5 percent in May after 1.5 percent in April and 4.8 percent in March. Power and thermal output slid to a gain of 3.1 percent after 5.5 percent a month earlier.

May retail sales were up 12.9 percent from a year ago after increasing 12.8 percent in April. For the year to date, sales were up 12.6 percent. On the month, retail sales were up 1.17 percent. Urban and rural sales were up 12.6 percent and 14.8 percent respectively. Spending on home appliances jumped 21.5 percent from 15.3 percent in March. However, furniture sales slipped to an increase of 21.1 percent from 22 percent the month before and household non-durables gained 14.3 percent after 15.2 percent. Auto sales sagged to a 9.7 percent gain on the year from 13.0 percent.

Americas

Canada

April manufacturing sales dropped 2.4 percent on the month — the fourth drop in the last five months — after a steeper revised 0.6 percent decline in March. On the year, sales dropped 3.3 percent. Volumes performed little better with a 1.6 percent monthly drop that left a 3.5 percent shortfall from April 2012. Sales were down on the month in thirteen of the twenty-one reporting industries with petroleum & coal products (down 8.8 percent) especially soft. Primary metals (down 8.7 percent), transportation (down 1.7 percent) and food (also down 1.7 percent) did most of the rest of the damage. However, there were some bright spots, notably wood products, which recorded a 4.9 percent bounce, and computer & electronics (7.1 percent). Elsewhere in the survey the news was generally disappointing with new orders down 0.9 percent from March and unfilled orders slipping 0.1 percent. At the same time, business inventories were up 0.6 percent, enough to boost the inventory/sales ratio by 0.04 months to 1.43 months, its highest reading since October 2009.

Bottom line

The Bank of Japan joined the Bank of England and the European Central Bank and left its monetary policy unchanged early in the week. The lack of new stimulus sent equities lower and the yen higher. Industrial production data were generally lackluster in Europe and inflation subdued globally.

The main event next week is the FOMC meeting followed by Fed Chairman Ben Bernanke’s quarterly press conference. Analysts will be looking for any clues that might tell them when the Fed might begin tapering its stimulus.

Looking Ahead: June 17 through June 21, 2013

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