All 13 indexes followed here were up on the week after a lethargic Friday reflecting summer doldrums and little in the way of economic news.

Global Stock Market Recap

Europe and the UK
European stocks drifted lower Friday after a report showed U.S. consumer confidence declined more than expected and renewed worries about future U.S. economic growth. This gave investors an excuse to take profits after a mostly positive week. While markets in Asia were closed when the People's Bank of China increased its key interest rate by 27 basis points to 6.12 percent, those in Europe were not. Shares of mining and steel companies such as Anglo American Plc, the world's second largest mining company, and Mittal Steel Co., the world's largest steelmaker, declined on the news. Investors were concerned that slowing growth would cut demand for commodities. But on the week, the DAX, CAC and FTSE recorded healthy gains of 3.4 percent, 3 percent and 1.4 percent respectively.

Bank of England explains its rate increase
The Bank of England's Monetary Policy Committee voted six to one for a 25-basis-point interest rate increase to 4.75 percent earlier this month. David Blanchflower voted to keep rates unchanged according to the meeting's minutes. The minutes revealed the MPC does not expect to quickly resolve uncertainties surrounding its growth and inflation outlook. This created some doubt over whether the MPC will have enough information to hike rates again in November, as many analysts had expected. The minutes showed the MPC agreed that a rate increase would be needed, but debated whether an immediate increase was justified or whether to delay. However, most members agreed the increase in August would "not significantly exacerbate the downside risks."

In its quarterly "Inflation Report," the Bank of England indicated that it expects economic growth of 2.8 percent this year and 3.1 percent in 2007. If the economy performs as the Bank of England expects for the rest of the year, the UK will once again grow faster than its European neighbors. Even though the EMU grew 0.9 percent in the second quarter exceeding the UK's 0.8 percent pace, economists surveyed by the European Central Bank expect eurozone growth for the whole of this year to be about 2.2 percent.

Asia/Pacific
Asian/Pacific stocks were up last week bolstered in part by relatively benign U.S. producer and consumer inflation data. This was interpreted to mean that the pause in U.S. rate increases would continue and interest rates would probably remain at 5.25 percent. The Nikkei which ended the week above the 16,000 level for the first time since May gained 3.5 percent while the Topix jumped by 4 percent. Financial services and real estate stocks were the prime drivers although exports stocks benefited from U.S. inflation data early in the week.

Hong Kong closed in on a six-year high based on expectations that U.S. interest rates would remain at 5.25 percent. The Hong Kong dollar is pegged to its U.S. counterpart. Therefore, when interest rates increase in the U.S., they automatically go up in Hong Kong also. The interest rate sensitive property sub-index was a main driver.

PBOC increases interest rates
The People's Bank of China raised the one-year lending rate 27 basis points to 6.12 percent from 5.85 percent. At the same time, the one year deposit rate increased by 27 basis points to 2.52 from 2.25 percent. The Bank had previously increased its key lending rate by 27 basis points in April of this year, the first increase in 19 months. Since April it has twice increased the amount of money banks must set aside as reserves, effectively reducing funds available for lending. The Bank also ordered lenders to screen borrowers more carefully and also stepped up bond sales to drain money from the financial system. In April, the PBOC increased the lending rate without boosting the deposit rate. This made it more profitable for banks to lend because they did not have to pay a higher return to depositors. Investment in factories, real estate and roads did not slow after the April increase and is up about 30 percent in the first seven months of this year.

Bank of Korea changes its inflation targeting measure
The Bank of Korea left its inflation target range for 2007 through 2009 at 2.5 percent to 3.5 percent, the same as in the current period from 2004 through 2006. However, they changed their inflation measure to the headline consumer price index from the core that had been used since it adopted inflation targeting in 1998. The Bank has joined other central banks in using a broader inflation measure rather than focusing on core inflation which removes the effects of more volatile prices for petroleum and agricultural products.

Currencies
The dollar was weaker last week after inflation data confirmed the Federal Reserve's opinion that slowing growth was starting to impact inflation, supporting the Bank's decision to leave the Fed funds rate at 5.25 percent. Industrial production data disappointed and put downward pressure on the currency as well. The pound sterling weakened when minutes from the Bank of England elevated uncertainty surrounding another rate increase.

The yen jumped against the dollar and the euro on Friday in the wake of an unexpected interest rate increase by the People's Bank of China to cool growth. Japan's currency also gained against the pound sterling and the Swiss Franc on speculation higher borrowing costs would put upward pressure on the renminbi to strengthen. A strong Chinese currency could boost imports from Japan, the nation's largest trading partner, which in turn would boost the yen. The yen is often traded as a proxy to the renminbi. The yen also gained against the euro, having earlier hit a two-year low against the single currency.

Indicator scoreboard
EMU - Second quarter flash gross domestic product was up 0.9 percent and 2.4 percent when compared with the same quarter a year ago. As with all flash releases, no detail was available. The second quarter marked the fourth consecutive improvement in GDP.

June industrial output was down 0.1 percent but was up 4.3 percent when compared with last year. Consumer durables, capital goods and nondurable consumer goods were down 1.5 percent, 0.9 percent and 0.2 percent respectively. However, both energy and intermediate goods output were higher, up 3 percent and 0.1 percent respectively.

July harmonized index of consumer prices edged down 0.1 percent but was up 2.4 percent when compared with the same month a year ago. This was the 14th month the index has been at 2 percent or higher. The European Central Bank's inflation ceiling is 2 percent. Core HICP excluding food, energy, alcohol and tobacco was down 0.4 percent and up 1.4 percent on the year.

Germany - Second quarter flash gross domestic product was up 0.9 percent and 2.4 percent when compared with the same quarter a year ago. As with all flash estimates, no detail was available.

July producer price index was up 0.5 percent and 6 percent when compared with last year. Energy prices were up 1 percent on the month and 15.6 percent on the year. Consumer durable goods were up 0.1 percent and 1.9 percent on the year. Excluding energy prices, the PPI was up 0.5 percent and 3 percent on the year.

Britain - July producer output prices were up 0.2 percent and 2.8 percent when compared with the same month a year ago. Core output prices which exclude food, tobacco, beverages and petroleum, were up 0.1 percent and 2.5 percent on the year. Petroleum product prices were up 0.8 percent while food prices were up 0.4 percent. Producer input prices were up 1.1 percent and 9.7 percent on the year. Crude oil prices were up 6 percent on the month while metal prices were up 2.3 percent. The latter reflected a 6.7 percent increase in gold and copper prices.

July consumer price index was unchanged on the month but was up 2.4 percent when compared with last year. Core CPI which excludes energy, food, alcoholic beverages and tobacco was down 0.2 percent but was up 0.9 percent on the year. The retail price index excluding mortgage interest payments was unchanged on the month but up 3.1 percent on the year. The monthly changes for both the CPI and RPIX were affected by furniture sales and lower prices for miscellaneous goods and services. The CPI remains above the Bank of England's 2 percent inflation target.

July claimant count unemployment was up by 2,000 and up 90,900 when compared with July of last year. The claimant count unemployment rate remained at 3 percent for the fifth month. The International Labour Organisation for the three months ending in June was up 92,000 on the previous three months and up 243,000 on the year. The ILO unemployment rate edged up to 5.5 percent from 5.4 percent in the previous month. Employment for the same three months was up 42,000 on the quarter and 240,000 on the year. The employment rate for people of working age was 74.6 percent, down 0.1 percent over the quarter and down 0.2 percent over the year.

Average earnings for the three months ending in June was up 4.3 percent. June average earnings were up 5 percent on the year. Excluding bonuses, earnings were up 3.9 percent on the year. The increase (including bonuses) is due to stronger growth in the manufacturing and services sectors, only partially offset by weaker growth in the public sector. Earnings growth (excluding bonuses) in the private sector was 4.2 percent, compared with 2.7 percent for the public sector. Including bonus payments, private sector growth was 4.6 percent compared with 3.4 percent for the public sector.

July retail sales volumes were down 0.3 percent but still up 4 percent when compared with last year. The decline, after three months of strong growth, was due to a drop in electrical products sales following the end of the World Cup. Household goods sales were down 3.4 percent while non-store sales were down 2.6 percent and non-food sales were down 0.5 percent. Food sales were up 0.4 percent. However, sales of textile, clothing & footwear along with non-specialized store sales were up 1.5 percent and 1 percent respectively.

Asia
Japan - June tertiary index dropped 0.6 percent but was up 2.2 percent when compared with last year. The tertiary index is a gauge of money spent on services including retailing and communications. Services, medical, health care and welfare, wholesale and retail trade, restaurants & hotels, and utilities contributed to the decline. Information & communications, postal services, learning support, and finance & insurance were up on the month.

Americas
Canada - June manufacturing shipments jumped by 1.9 percent and were up 0.9 percent when compared with last year. Gains are being made despite a rising Canadian dollar and increased global competition. Thirteen of the 21 manufacturing industries were up in June. Durables were up by 1.1 percent thanks to computers and electronic equipment. Transportation equipment was up 1.5 percent with auto up 3 percent. Nondurable shipments were up 2.8 percent led by increases in petroleum and coal products as refinery output returned to normal production levels following maintenance shutdowns in May. New orders were up by 2.5 percent and 0.2 percent on the year thanks to aerospace products. Unfilled orders edged up 0.1 percent and 4.6 percent on the year. Excluding aerospace, unfilled orders would have declined 0.9 percent.

Bottom line
The news last week was dominated by relatively benign U.S. inflation data and higher-than-expected flash GDP data from Germany and the EMU. On Wednesday, analysts got their chance to dissect the minutes of this month's Bank of England's interest rate increase as well as their optimistic forecast for growth in the latest quarterly Inflation Report. The good news was abetted by softening energy prices as Middle East dangers subsided.