Europe and the UK
The FTSE, CAC and DAX reversed direction and were down last week as investors focused more on vacation than economic news. But the holiday season ends a week earlier in Europe than it does in the U.S. The UK traditionally returns to work after its August 28th holiday and the European Central Bank is meeting on Thursday. Oil prices once again influenced equities. The ongoing problems of BP at Prudhoe Bay, Alaska have hurt the company's stock and added downward pressure on the FTSE. Elsewhere possible mergers stirred investors as banks in Italy and the UK appeared to be candidates for combination. On Wednesday, the ZEW sentiment index dropped much more than expected, leading to a decline in equities. However, Thursday's Ifo index data had the reverse effect. Stocks in Germany rallied when the key indicator was down less than expected.

Asia/Pacific
Stocks changed direction last week and also were down in this region, reversing the previous week's positive readings. With little new economic news, investors focused on the U.S. housing market decline and durable goods data as they looked for direction from the U.S. economy. Durable goods orders were down overall but orders excluding transportation gained 0.5 percent and exceeded expectations. This convinced some investors the U.S. economy may avoid a slump. The U.S. is Asia's biggest export market and its economy is sometimes monitored more closely than domestic data.

The much anticipated recalculation of the Japanese CPI was released on Friday local time (Thursday night on the U.S. east coast). In addition to shifting the base year to 2005, the basket of commodities included in the index was changed and reweighted to better reflect today's consumer expenditures. The net effect was that recent price increases had been overstated. The new index lowered both the overall number as well as core. The Japanese core measure excludes only fresh food. Now a new core measure is available as well that also excludes energy prices.

The news brought into question the Bank of Japan's view that deflation within the economy was dead. But many at the BoJ along with some government officials think that the inflation trend is intact and the revision did not change the upward direction of prices. In addition, BoJ officials think that the CPI is a lagging indicator and thus good for confirming the latest trend but not suitable for laying out future policy changes, which have to look to the future.

Currencies
Both the yen and euro lost ground against the dollar last week. The euro was down after Wednesday's drop in the ZEW. This was interpreted to mean that Germany's improved economic growth could stall. This in turn would mean that the ECB would have to temper its desire to increase interest rates. But the dollar was also hurt as negative housing reports left traders unsure what the data meant for U.S. interest rate prospects. However the dollar later rebounded as some traders drew consolation from the fact that median U.S. house prices were up in July.

The yen sank Friday after the revised Japanese CPI showed that price increases were not as strong as previously thought. Investors think this will tie the BoJ's hands when contemplating further interest rate increases.

According to the IMF, strong central bank demand for the pound sterling has played an important role in the currency's surprisingly strong increase. Central banks have almost doubled their holdings of sterling to $115 billion in the past two years, allowing sterling to supplant the yen as the third most popular reserve currency behind the U.S. dollar and euro. Among those to increase their holdings have been Norway's Government Pension Fund and the Bank of Italy, the latter having increased the proportion of reserves held in sterling from zero in 2004 to 24 percent. The currency market has also been rife with rumors that Middle Eastern banks also are buying sterling assets.

Indicator scoreboard
EMU - June unadjusted merchandise trade balance edged into positive territory and posted a surplus of €2 billion. Imports were down 2.9 percent while exports were up 1.6 percent. However on a seasonally adjusted basis, the balance continued to be negative with a €1.1 billion deficit.

Germany - August ZEW investor confidence index dropped for the seventh consecutive months and sank to minus 5.6 from 15.1 in July. This is the lowest reading in five years. ZEW said the unexpectedly steep decline points to an economic downturn within the next six months. Investor sentiment has been hit by fears that a slower growing U.S. would dampen exports. But there were other more local factors as well including planned corporate tax changes, an increase in VAT next year and higher oil prices.

August Ifo declined to 105 from 105.6 in July. The decline was less than expected given the dramatic drop in the ZEW, which was released on Tuesday. While the current conditions index was unchanged at 108.6, expectations for the next six months declined to 101.5 from 102.6 in July. Ifo surveys about 7,000 firms in manufacturing, construction, wholesaling and retailing about their assessment of the current situation and their outlook six months from now.

Second quarter gross domestic product was up 0.9 percent and 2.4 percent when compared with the same quarter a year ago. Gross capital expenditures provided the strength in the second quarter. They were up 3.5 percent after declining 0.6 percent in the first quarter. Equipment investment was up 2.5 percent while construction investment was up 4.6 percent. However, private consumption was down 0.4 percent. Domestic demand was up 0.9 percent.

France - Second quarter gross domestic product was up 1.1 percent and 2.6 percent when compared with the same quarter a year ago. In the first quarter, GDP was up 0.5 percent and 1.4 percent on the year. Private consumption was up 0.7 percent while business fixed capital expenditures were up 1.8 percent. However, imports shot up 3.3 percent while exports climbed 1.8 percent on the quarter.

Britain - Second quarter gross domestic product was up 0.8 percent and 2.6 percent when compared with the same quarter last year. Household expenditures were up 1 percent on the quarter and 2.4 percent on the year. Capital expenditures were up 0.9 percent and a robust 6.8 percent on the year. Government expenditures were up 1 percent and 2 percent on the year. Services output was up 1 percent and 3.6 percent on the year while manufacturing was up 0.6 percent and 0.8 percent on the year. However, industrial production was down, a reflection of a sharp drop in mining and quarrying activity. The GDP deflator was up 1.5 percent and 3.4 percent on the year.

Asia
Japan - July unadjusted merchandise trade balance was ¥860 billion. Exports were up 14.2 percent when compared with last year while imports were up 16.8 percent. Exports to the U.S. were up 13.8 percent while those to China were up 19.6 percent on the year. Exports to the European Union were up a more modest 1.1 percent. The seasonally adjusted trade surplus was ¥800 billion. Exports were up 3.2 percent while imports were up a much more modest 0.6 percent on the month.

June all industry index was up 0.1 percent after slipping by the same amount in May. The index was up 2.3 percent on the year. The index, which is considered a proxy for gross domestic product, is compiled from the tertiary index (which was released last week) plus the indexes of construction, agricultural & fishery industrial, the public sector and industrial output.

August Tokyo consumer price index was up 0.7 percent and 0.9 percent when compared with last year. Tokyo core CPI, which excludes fresh food only, as up 0.2 percent and unchanged on the year. The core excluding both fresh food and energy was up 0.2 percent but down 0.2 percent on the year. The nationwide CPI was down 0.3 percent and up 0.3 percent when compared with last year. Core CPI excluding fresh food was down 0.1 percent and up 0.2 percent on the year while the core that also excludes energy was down 0.1 percent and down 0.3 percent on the year. This report reflects changes to the index that are made every five years to better reflect spending patterns. For example, foods such as doughnuts and discount sushi were added as were flat screen TVs. However sewing machines for example were removed. The base year was changed to 2005 from 2000.

Americas
Canada - June retail sales edged down 0.2 percent and were up 5.8 percent when compared with June 2005. Auto sales were down 0.8 percent while general merchandise store sales sank by 1.4 percent. Excluding autos, sales edged up 0.1 percent and were up 7.6 percent on the year. Pharmacy and personal care store sales increased 1.4 percent while building & outdoor home supply sales were up 0.8 percent.

July consumer price index was up 0.1 percent and 2.4 percent when compared with last year. Core CPI, which excludes food and energy,was down 0.2 percent and up 1.4 percent on the year. Gasoline prices were up 4.6 percent while fresh fruit prices soared by 7.4 percent. However, auto leasing prices were down 1 percent while restaurant meals dropped by 0.7 percent. The Bank of Canada core CPI, which excludes eight volatile components, was down 0.2 percent and up 1.5 percent on the year. The Bank of Canada's inflation target range is 1 to 3 percent.

Bottom line
Investors struggled through the last vestiges of summer. And with little to stimulate them, the indexes followed here meandered throughout the week. What little economic news available was basically negative. In the U.S., two housing indicators declined more than expected while in Germany, the ZEW sentiment index sank much more than anticipated. However, analysts were cheered when the Ifo index dropped less than expected.