Europe and the UK
In contrast to Asian indexes discussed below, the FTSE, CAC and DAX regained a positive stance for the year on Friday after an across-the-board rally. The stocks that dragged the FTSE down all week, mining stocks, were the stocks that supported Friday's rally. However, like the Asian rally, it was too little, too late to salvage the week. The three indexes followed here fared better than their Asian counterparts. The FTSE reached its 2006 high back on April 21st when the index soared over the 6100 mark and was up 9.1 percent. The DAX peaked a few days later on April 26th with a gain of 12.9 percent. The CAC, however, did not peak until May 9th, about the same time as most of the Asian indexes. Its biggest gain in 2006 is 12.7 percent. Now the FTSE is up 0.6 percent and the DAX and CAC by 1 percent.

Bank of England rate 4.5 percent for 10th month
For the 10th month, the Bank of England kept its key interest rate at 4.5 percent. Following its usual practice, the Bank did not release a statement explaining its decision. Bank of England watchers will have to wait until the meeting's minutes are released on June 21st. Most recent data on April manufacturing output were weak and disappointed analysts who had been optimistic for a turnaround in manufacturing. While some of the weakness was caused by the volatile energy sector, the decline contradicted the much more buoyant impressions of recent business surveys.

European Central Bank rate up by 25 basis points to 2.75 percent
As expected, the ECB increased their key interest rate by 25 basis points to 2.75 percent. Some of the more hawkish analysts had hoped for a 50-basis-point increase. At his press conference following the Governing Council meeting, Bank president Jean Claude Trichet said interest rates remained low and further increases could be needed. Further he said that inflation risks were on the upside. The ECB has an inflation ceiling of 2 percent and the most recent reading of the harmonized index of consumer prices showed that prices were up 2.5 percent on the year. The ECB staff projects consumer prices to rise 2.3 percent this year and 2.2 percent in 2007. Previously, the Bank had forecast inflation of 2.2 percent this year and next. Trichet's remarks added to the downward pressure on equities where investors are increasingly concerned that global borrowing costs will keep climbing while $70 oil adds to inflationary pressures. And growing economies will finally give companies some latitude for price flexibility, adding even more upward pressure on prices.

Asia/Pacific
Asian equities rebounded on Friday but it did little more than pare the week's huge losses. The rally in Tokyo was weak as investors did what they usually do - watch the U.S. economy very closely. And while it was a very slow week for U.S. economic news, the Fed chairman's hawkish comments on Monday sent chills through investors who fled equities, preferring the safe haven of bonds. Since the first week in May, equities have been on a downward track as the graph below illustrates. For example, the Hang Seng, the best performer covered here, was up by 16.3 percent on May 8th. At Friday's close the index was still positive and up 5.1 percent. In contrast, the Kospi hit its peak so far this year on May 11th when it was up 6.2 percent. Now it is down 10.4 percent since its year-end close. The all ordinaries had fared better. On May 11th it was up 12.9 percent. On Friday it was up 4.6 percent. Both the Nikkei and Topix have lost considerable ground since their May 8th highs when they were up 7.3 percent and 6.4 percent respectively. Now they are down 8.4 percent and 9.2 percent respectively.

Reserve Bank of Australia maintains its 5.75 percent interest rate
The Reserve Bank of Australia kept its policy overnight cash interest rate target at 5.75 percent after surprising in May with a 25-basis-point increase after inflation hit the top of the RBA's target range of 2 to 3 percent. The Bank increased rates three times between November 2003 and March 2005 to curb surging home prices and household debt. As a result, the economy subsequently expanded 2.5 percent in 2005, its slowest pace in four years as home building and consumer spending cooled.

Currencies
The dollar dropped after the weaker-than-expected payrolls report on June 2nd, but not for long. After the employment numbers, the dollar fell because traders decided the Fed would finally pause in its interest rate increase cycle. But they were forced to do a quick about face. After Fed chairman Bernanke expressed his concerns about inflation, the dollar began to climb on the expectation that the Fed would continue to increase rates at least at their June meeting. And as each new Fed speaker concurred with the chairman, the dollar gained more strength amid expectations that there would be further monetary tightening. Even though the ECB increased rates the expected 25 basis points, the euro was pressured because it did not increase rates by 50 basis points as had been discussed. Also contributing to euro weakness were comments from EMU politicians who warned of the dangers emanating from a strong euro. The dollar also benefited from risk aversion. Analysts said that the prospect of higher interest rates globally is causing people to rethink their positions in stocks and emerging markets.

The yen weakened as the equity sell off continued in Japan. Since currency traders focus on interest rate differentials, the poor stock performance translated into further doubts whether the Bank of Japan will finally increase interest rates this summer.

The ups and downs of the Canadian dollar
On Thursday, the Canadian dollar dropped as commodity prices sank, taking the currency with it. Traders were concerned that a global slowdown would hurt demand for the currency. Higher commodity prices helped the Canadian dollar gain thanks to higher prices for nickel and zinc, while its oil sands in Alberta contain the largest crude deposits outside the Middle East. The drop in prices made the Canadian dollar vulnerable to short-term losses. These losses could be exacerbated by a global sell-off in equities and concerns on inflation. After hitting 91.44 U.S. cents on May 31st, the currency was down to 89.86 U.S. cents.

But Friday was another day. The currency shot up on a spectacular employment report that showed the economy gained almost 97,000 jobs in May - all full time. Thursday's losses were forgotten and the currency regained its poise.

A coda on the U.S. dollar
Some interesting news this week involved Russia, who along with China, Japan and the Middle East oil kingdoms are large holders of U.S. dollars. Every now and then analysts speculate whether these dollars will be converted to other currencies. Russia announced they had indeed shifted some of its central bank reserves out of the dollar, further eroding the currency's standing as the world's de facto reserve currency. Now 50 percent of Russian's foreign exchange reserves are in dollars, with 40 percent in euros and the remainder in sterling. Previously it was believed that just 25 to 30 percent of the reserves were in euros, with virtually all the remainder in dollars. While the dollar did not appear to be affected by the announcement, it does play into a perception that central banks are increasingly channeling fresh reserves away from the dollar to reduce potential losses if the dollar were to fall sharply as part of the process of reducing global economic imbalances.

Indicator scoreboard
EMU - May services purchasing managers survey reading was 58.7, up from 58.3 in the previous month. The indexes for input prices and prices charged were both up in May indicating that companies are regaining some pricing power. The composite index for manufacturing and services was 59, up from 58.7 in April. The higher the index reading is above 50, the faster the growth. The index is compiled by NTC Research of the UK.

April retail sales were up 1.4 percent and 3 percent when compared with last year. Food sales were up 1.1 percent while non-food sales were up 1.5 percent. Sales were up in all EMU countries except Spain where retail sales were down 0.6 percent.

Germany - April seasonally adjusted merchandise trade surplus was up to €12.5 billion from March's surplus of €11 billion. Exports were up 4.3 percent and were up 8.4 percent when compared with last year. Imports were up 2.5 percent and 13 percent from the year earlier.

April industrial production excluding construction was up 0.7 percent and 4.8 percent when compared with last year. Manufacturing output was up 0.9 percent and 5 percent on the year. Both consumer durables and nondurables soared by 4.3 percent and 2.5 percent. On the year they were up 6.7 percent and 3.3 percent respectively. However capital goods edged down 0.1 percent but were still up 4.3 percent on the year.

France - April seasonally adjusted merchandise trade deficit was €2.3 billion, larger than March's deficit of €1.8 billion. Imports were up 4.1 percent while exports were up 2.8 percent. Imports of unfinished and capital goods were up as were consumer good imports. Exports gained thanks to capital goods, which reached record levels.

April industrial production sank by 1.4 percent but was down 0.3 percent when compared with April of last year. Manufacturing output was down 0.7 percent and edged down 0.1 percent on the year. All sectors were down, especially autos, which were down 1.8 percent and 11.5 percent on the year. Consumer goods were down 0.8 percent while capital goods sank 0.4 percent on the month. Insee, the country's statistics agency, said that April's results should be viewed with caution given there were strikes during the month.

Italy - First quarter gross domestic product was up 0.6 percent and 1.5 percent when compared with last year. Private consumption was up 0.8 percent and 1.8 percent on the year while capital investment was up 1.7 percent and 3 percent on the year. Exports were up 2.5 percent while imports gained 1.6 percent on the quarter.

Britain - April industrial production dropped 0.5 percent and was down 1 percent when compared with last year. Manufacturing output was down 0.2 percent but up 0.5 percent on the year. Paper, printing and publishing declined 1.3 percent. Eight of 13 manufacturing sectors were down. The data were revised for the past seven years with the base year shifting to 2003.

April global merchandise trade deficit was virtually unchanged at Stg5.75 billion from March's Stg5.708 billion. The gap widened with non-EU countries but narrowed with EU members. Exports were down 1.3 percent while imports were down 0.9 percent. Excluding oil and erratic items, the deficit widened to Stg5.895 billion from Stg5.6 billion in March. Including services, the trade deficit was also virtually unchanged at Stg3.978 billion. The services surplus reading was Stg1.772 billion, up from March's Stg1.721 billion surplus.

Asia
Australia - First quarter gross domestic product was up 0.9 percent and 3.1 percent when compared with the same quarter a year ago. On an annualized basis, GDP was up 3.5 percent. Household expenditures were up 0.6 percent while both government spending and private business investment were up 0.2 percent on the quarter.

May employment increased by 55,900 jobs. Virtually all of the gain was in full-time employment which increased by 55,800. The unemployment rate dropped to 4.9 percent from 5.1 percent in the previous month. The number of unemployed declined by 20,500 to 521,300. The participation rate edged up by 0.1 percentage point to 64.5 percent.

Americas
Canada - May employment soared by an estimated 96,700 jobs and the unemployment rate dropped to 6.1 percent from 6.4 percent in the previous month. The unemployment rate is at its lowest since December 1974. All of the employment increase was in full time jobs which were up 151,000, the largest increase on record. This jump was due to new entrants to the labor market obtaining full-time employment and coincides with fewer people working part time. Although employment dropped by 22,000 jobs and education sank by 15,500 jobs, gains in finance, insurance, real estate & leasing jumped by 31,000 and in health care & social assistance by 23,000.

April merchandise trade surplus sank to C$4.1 billion from C$5.3 billion in March. Imports were up 1.2 percent while exports declined 2.3 percent. The trade surplus with the U.S. narrowed to C$7.9 billion from C$8.3 billion in the previous month. Auto products exports were down 8.4 percent while machinery & equipment down 3.2 percent. Exports were also down for forestry products and industrial goods. Energy imports were up 14.1 percent and accounted for most of the increase in overall imports.