Europe and the UK
European and British indexes rebounded after three dreadful weeks and were positive for the first time since the week ending May 26th. A spate of positive earnings reports combined with merger and acquisition activity enabled the indexes to recover the previous week's losses and then some. The indexes also benefited from climbing oil company stocks on Friday. All three regained their positive stance when compared with 2005 year end levels. Investors in Europe are fretting about interest rates and not just those in the U.S. They are concerned that the ECB, in its desire to staunch inflationary pressures, will also curtail the economic recovery.

Bank of England minutes
The Bank of England's Monetary Policy Committee voted 7 to 1 in favor of keeping their policy interest rate once again at 4.5 percent at their June meeting. Only David Walton, who would later die suddenly, voted for an immediate 25 basis point increase. But the remaining committee members thought inflation would remain balanced with significant risks in both directions. The committee agreed that the biggest piece of news was the decline in equity prices and the rise in the pound sterling. But it was unsure how important these changes would be for inflation. The MPC also was uncertain about the pace of the U.S. slowdown and whether this would feed through to slower European economic expansion. But with the death of Walton the MPC lost its lone voice for an increase. There are now two vacancies on the MPC.

Asia/Pacific
Asian/Pacific indexes followed here lost some of their volatility last week, even though four of the six were lower. The Nikkei and Topix lost ground on four of five trading days, but were up on the week thanks to Thursday's hefty 3 percent plus gains. Investors are continually worried about higher interest rates and possible slower U.S. economic growth. Since the U.S. is their major export client, slower U.S. growth implies that their national growth would slow as well. And slower U.S. import growth suggests lower profits for exporters. As a result, exporters' stocks such as auto and electronics manufacturers were hit by selling.

Bank of Japan
Bank of Japan governor Toshihiko Fukui is under pressure to resign after it was revealed that he had invested in an activist fund of now indicted (for insider trading) investor maverick Yoshiaki Murakami. Fukui was not at BoJ at the time of his investment. He had not disclosed his investment, nor was he required to do so by the BoJ. But he started cashing out of the fund in February, as rumors of an inquiry into Murakami's activities began circulating. The Japanese media has come down hard on both Murakami and Fukui. Fukui has apologized and said he would donate all of the $200,000 he had currently invested in the fund to charity and would take a 30 percent pay cut over the next six months. At the same time he has hardened his tone on monetary policy and has intimated that zero interest rates could end as soon as July. However, opinion polls show that 40 percent of the people surveyed think he should resign because of lost trust. Fukui is currently serving a five-year term as governor, which is slated to end in March 2008. To be continued.

Since the Bank of Japan announced on March 9th the end of its quantitative easing - its policy of flooding the overnight money market with excess liquidity - JGB (Japanese Government Bonds) yields across the board have gone up. The yield on a 10-year bond, for example, jumped from 1.6 percent to almost 2 percent in mid-April. It has since receded to 1.8 percent at the end of trading on Friday. The move was seen as a sign that the Bank was preparing to tighten monetary policy further by ending its zero interest rate policy.

Currencies
The yen and euro were weaker last week, and the dollar stronger on expectations that U.S. interest rates would continue to climb. And since the currency markets focus on interest rate spreads, investors sold yen and euros and bought U.S. dollars. Many analysts feel the yen is currently undervalued given that the economy is growing and interest rates are expected to climb soon. The current interest rate spread between the two countries is 500 basis points. The yen's weakening in the past couple of weeks is being attributed to the slump in stock prices since mid-April and concerns about the now embattled BoJ governor Fukui.

Many currency traders worry that an increase in Japanese interest rates as soon as next month could set in motion a massive unwinding of yen-carry trades, that is borrowing in low interest rate Japan and investing in a higher interest rate country such as the U.S. or even the riskier emerging markets. Higher Japanese interest rates would increase costs making them less attractive. They say that unwinding these trades could sharply increase the value of the yen as the funds are removed from global asset markets and swapped back into yen to repay the loans.

Indicator scoreboard
EMU - April unadjusted merchandise trade deficit was €2 billion compared with a deficit of €648 million in the previous month. Both imports and exports were down on the month, dropping 9.2 percent and 11.3 percent respectively. Imports were up 11 percent while exports climbed by 7 percent when compared with the same month a year ago. On a seasonally adjusted basis, the deficit was €900 million.

Germany - May producer price index was up 0.1 percent but was up 6.2 percent when compared with last year. The benign monthly change was due to lower petroleum and electricity prices. Excluding energy, prices were up 0.4 percent and 2.3 percent on the year.

France - May household spending on manufactured goods were up 0.6 percent and 5.6 percent when compared with the same month a year ago. Household equipment spending jumped 6.3 percent and 20.6 percent on the year as people purchased home entertainment systems prior to the World Cup. However, clothing sales sank 3.6 percent because of dismal May weather.

Italy - First quarter unemployment rate was 7.4 percent, down from 7.6 percent in the fourth quarter of 2005. The unemployment rate benefited from increased employment mainly due to the registration of employed foreigners combined with greater permanency in jobs for those over 50 years of age.

April retail sales were up 0.6 percent and 2.7 percent when compared with last year. The data reflected the positive effect from the late Easter that added to food sales, which were up 3.7 percent on the year. Foods sales account for about 40 percent of the overall index. Non-food sales were up 1.8 percent. The retail sales report is not closely watched because the data show little relationship with the spending data in GDP.

Asia
Japan - May merchandise trade surplus jumped to ¥840.6 billion from ¥402.8 billion in April. On an unadjusted basis, the surplus was ¥384.9 billion. Exports were up 0.9 percent while imports dropped 6.7 percent. From a year ago, exports were up 16.6 percent while imports climbed by 15.1 percent. Japan's trade surplus with Asia increased 25.5 percent and with the U.S., 23 percent on the year. Japan's trade deficit with China dropped 19.5 percent on the year.

April all industry index was up 1.3 percent and 1.8 percent when compared with last year. The index takes a reading of activity in 11 industries including service, construction, agricultural and fisheries industries, the public sector and industrial output. This index is considered a close approximation for gross domestic product growth as measured by industrial and service sector output.

Americas
Canada - May consumer price index was up 0.5 percent and 2.8 percent when compared with the same month last year. Core CPI which excludes food and energy was up 0.4 percent and 1.8 percent on the year. For May, upward price pressures came mainly from traveler accommodations and electricity. However the upward pressure was partly mitigated by lower prices for gasoline, automotive vehicles and natural gas. Seasonally adjusted CPI was up 0.2 percent and 2.8 percent on the year. Core seasonally adjusted CPI was up 0.2 percent and 1.7 percent. The Bank of Canada's core rate which excludes eight volatile items was up 2 percent on the year. The Bank has an inflation target range of 1 percent to 3 percent.

The Government of Canada recently announced that the rate in effect for the Goods and Services Tax (GST) will be reduced from 7 percent to 6 percent as of July 1, 2006. Since the price changes measured by the CPI take into account the value of the consumption taxes paid by Canadians, this 1 percent decrease will have an impact on the CPI. A rough estimation of the impact of this reduction on the level of the CPI suggests a decrease in the order of 0.6 percent. This estimation is based on the assumption that the entire amount of the decrease will be transferred to consumers and that the industrial structure that underlies the way that prices are determined will remain the same.

April retail sales were up 1.7 percent and 6.7 percent when compared with last year. Excluding the automotive sector, sales were up both 1.9 percent on the month and 1.9 percent on the year. The automotive sector including gasoline was up 3.6 percent because of soaring gas prices. Constant dollar sales were up 1.2 percent. Most sectors were up on the month with the exception of home centers and hardware stores - they edged down 0.2 percent after eight consecutive monthly increases.

Bottom line
After a respite with little economic news, things pick up again this week. Aside from new economic data, all eyes no doubt will be focused on the Federal Reserve's announcement after their FOMC meeting Thursday. Analysts and investors will be looking for those illusive hints of what the Fed's next move might be.