Global Markets

Equities were mixed globally last week. Investors certainly had a plethora of data, both economic and from earnings, to consider in the first week of the new month. Four central banks — the Reserve Banks of Australia and India and the Banks of England and Japan — announced their respective monetary policy decisions and while reasons differed, their policies were unchanged. It should be noted that all central banks by their nature are data dependent — it is not the exclusive provenance of the Fed. However, investor focus is on the Fed because of the market's fixation on the timing of the first rate increase. Employment reports from Australia and Canada besides the all-important U.S. report also garnered attention. Earnings continued to influence the direction of stock indexes as well.

On the week, most indexes followed here were down. Losses ranged from 3.7 percent (All Ordinaries) to virtually unchanged (IBEX down 2.5 points). Increases ranged from 0.2 percent (Bolsa) to 2.2 percent (Shanghai Composite).

Global Stock Market Recap

Europe and the UK

Equities ended the week on a down note leading to a mixed performance for the week. The FTSE, CAC and DAX were up 0.3 percent, 1.4 percent and 1.6 percent respectively while the SMI retreated 0.2 percent. The markets got off to a weak start Friday following the release of some disappointing German economic data. The situation did not improve after the release of the U.S. employment report, which was largely in line with expectations. The U.S. report always gets close scrutiny but given that the Federal Reserve is on the verge of increasing its fed funds rate, the data were parsed with extra scrutiny. Given that the Fed is data driven, each data release moves the market's odds of a Fed move.

The FTSE initially received a boost Thursday after fewer than expected Bank of England officials voted for a rate increase, leading investors to bet that borrowing costs will remain at record lows for longer. The central bank forecast only a slow pick-up in inflation, which now sits at zero. Most economists taking part in a poll expected two members of the Monetary Policy Committee to vote for a rate increase while some had expected three. The prospect of continued low interest rates boosted rate sensitive sectors such as house builders and property related stocks. But they pared gains slightly after BoE Governor Mark Carney later said that the whole MPC was moving closer to a rate increase.

Bank of England

As expected, August's Bank of England monetary policy meeting produced the expected vote for no change in either the Bank Rate (0.5 percent) or asset purchase ceiling (£375 billion). However, for the first time in 2015, the decision was not unanimous with one of the two principal hawks, Ian McCafferty, renewing his former call for an immediate 25 basis point tightening. The market consensus had been for two, if not three, members to opt for higher interest rates. For the first time, the BoE released meeting minutes and its Quarterly Inflation Report at the same time as its policy announcement.

The minutes showed that the latest drop in oil prices together with the ongoing strength of sterling have prompted a more cautious assessment of how inflation will unfold next year and this was enough to keep the majority of MPC members happy to maintain the policy status quo. The recent jump in wages growth came as a surprise but its significance was diminished to some extent by the impact of volatile bonus payments and a step-up in productivity.

The Bank's new Quarterly Inflation Report (QIR) shows CPI inflation creeping higher but, at only 1 percent, still well below its 2 percent medium term target in the first quarter of 2016. Thereafter, it is expected to rise to 2.0 percent in two years' time and to 2.14 percent by the third quarter of 2018. The underlying assumptions include the Bank Rate increasing from 0.5 percent presently to 0.7 percent in the second quarter of 2016 before moving up to 1.2 percent in the first quarter of 2017 and 1.7 percent three years ahead. In other words, the current policy stance is essentially appropriate to ensure the attainment of the Bank's price stability goals.

More generally, the MPC expects UK growth to slow but remain firm on the back of rising real incomes and improving productivity. The overall picture should be seen positively by international investors which, much to the chagrin of the BoE, argues in favor of a sustained overvaluation of the pound.

Asia Pacific

Most equity indexes retreated last week. Investors were cautious amid mixed U.S. earnings combined with continued weakness in commodity prices. As always in the first week of the month, investors were on edge ahead of the release of U.S. employment data that will provide fresh input to the Federal Reserve's decision making process on whether to increase the fed funds rate. Only the Nikkei (up 0.7 percent), Shanghai Composite (up 2.2 percent) and the Sensex (up 0.4 percent) advanced on the week.

Mainland Chinese shares gyrated during the week closing lower three of five days. However, the losses were smaller than they have been in the past few weeks. The losses were more than offset by gains of 3.7 percent on Tuesday and 2.3 percent on Friday. The Shanghai Securities News reported that close to 300 Chinese funds were sitting on the sidelines with "ammunition" to enter the stock market. A Bloomberg report that the government agency tasked with buying stocks to prop up the market is seeking an additional 2 trillion yuan ($322 billion) in funds also bolstered confidence among investors at the end of the week. The Hang Seng was down 0.3 percent on the week. Further stability came as regulators introduced fresh measures including the reining in short selling and automated trading, on top of stock buying by government funds over the past month.

The Nikkei advanced three of five days, finishing the week on a muted but positive note after the Bank of Japan left its monetary policy unchanged while blaming zero inflation on weak energy prices.

Australian shares tumbled for four of five days as anxiety over earnings and indications that the Reserve Bank of Australia is unlikely to cut rates further in the near future led investors to dump banking stocks. The All Ordinaries dropped 3.7 percent on the week. The Reserve Bank of Australia's quarterly monetary policy statement noted improvement in the economy overall, though the RBA modestly downgraded its economic growth forecasts for the year to June 2016. Jobs data have improved while non-mining business conditions are "clearly above average", the bank said while raising its forecasts for inflation to 2.5 percent over the next 2 years.

Reserve Bank of Australia

Reserve Bank of Australia left its cash rate at 2 percent where it has been since May. The announcement said that financial conditions will let the RBA know if its current policy will foster growth. Further, it said that the currency — the Australian dollar — was adjusting to significant declines in key commodity prices. It removed language that "further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices", which had been a part of its commentary for a number of months.

The Bank expects inflation to remain within the RBA's inflation range of 1 percent to 3 percent even with the lower exchange rate. Domestic inflation pressures are contained on very slow labor cost increases. For all that has gone on in Greece and China over the past month, the RBA largely repeated what it said at the start of July. Despite fluctuations in markets associated with the respective developments in China and Greece, long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low. Members noted that the recent volatility in Chinese equity markets and potential spillovers from developments in Greece would require close monitoring.

In its August Statement on Monetary Policy, the RBA marginally trimmed its growth forecast. It now expects the economy to expand by 2.5 percent to 3.5 percent by December 2016. It had forecast growth of 2.75 percent to 3.75 percent in its May Statement. It also now forecasts underlying inflation to be between 2 percent and 3 percent by June and also December 2016. That is up from the May when it forecast underlying inflation would be between 1.75 percent and 2.75 percent at the same points. The reason for the lift in inflation is "primarily because the Australian dollar has depreciated further", but "domestic cost pressures are expected to remain well contained and underlying inflation to be around 2.5 percent over the forecast period."

Reserve Bank of India

As widely expected, the Reserve Bank of India left key interest rates on hold. Accordingly, the benchmark refi rate stayed at the 7.25 percent mark to which it was lowered in June and the reverse repo was held at 6.25 percent. Similarly the marginal standing facility (MSF) rate and Bank Rate remained at 8.25 percent. The RBI also made no change to the cash reserve ratio (4.0 percent).

The economic recovery at home was described as work in progress. On the positive side, the RBI now sees an increased likelihood of a good harvest following heavy monsoon rainfall in June, but business optimism has fallen since its June meeting and export industries have been hit by a combination of weak overseas demand and a significant depreciation by a number of key trading partner currencies. Moreover, capacity utilization is still low and a major contributor to soft corporate investment. However, there have been some recent indications of a pick-up in consumption.

Inflation was seen as having behaved much as expected in recent months. Projections compared with the June forecast are about 0.2 percentage points lower for the first quarter of next year, mainly reflecting softer crude oil costs and monsoon effects. Even so, risks to the 6.0 percent interim target are regarded as broadly balanced and the Bank noted uncertainty about how the increase in service sector taxes introduced in June would pan out. Inflation is expected to be biased down by base effects in July and August but the RBI will look at these in assessing underlying trends.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. It said it would continue to buy JGBs at an annual pace of ¥80 trillion. The vote to maintain its policy was 8 to 1. Once again, Takahide Kiuchi voted against the decision arguing that a reduced pace of purchases (¥45 trillion) was appropriate.

In its statement, the monetary policy board said that the economy continued to recover moderately and was likely to continue doing so. The MPB said that the core CPI was likely to continue to be about zero for now due to the decline in energy prices. It noted that private consumption has been resilient and exports were picking up. However, the BoJ sees risks to its outlook stemming from European growth and its debt problems. The MPB also cited developments in emerging and commodity activity economies.

Last week data showed that consumer prices grew at their slowest pace in two years in June. Core inflation, which excludes food prices, grew 0.1 percent from a year earlier while the headline consumer price index rose 0.4 percent from a year earlier — the smallest increase since June 2013. Last month the BoJ downgraded its growth and inflation forecast for 2015 but offered the market no concrete hint that it would ease monetary policy in the months ahead. The BoJ cut its GDP forecast to 1.7 percent growth, from 2 percent in April. It cuts its 2015 inflation forecast to 0.7 percent, from 0.8 percent.

Currencies

The U.S. dollar was up against all of its major counterparts with the exception of the Australian dollar for the week. However, on Friday, the dollar fell modestly against the yen and the euro following the solid July employment report. Investors have been driving the dollar higher in anticipation that the Fed will raise short term interest rates for the first time since 2006. Higher borrowing costs would boost the dollar's allure to investors searching for yield.

The currency's stumble follows a roughly three month rally on investors' expectations that the Federal Reserve will raise U.S. borrowing costs possibly as early as September. But it has also presented an opportunity for investors to take profits on the rally. The U.S. currency continues to fluctuate as each data point is analyzed for its impact on the Federal Reserve's interest rate decision. For example, during the week, the dollar was up against the euro and the yen after the Institute for Supply Management reported that the nonmanufacturing purchasing managers' index climbed to 60.3 in July from 56.0 in June. The number came in higher than expectations.

Also elevating the dollar earlier in the week, Federal Reserve Bank of Atlanta President Dennis Lockhart told The Wall Street Journal that only a "significant deterioration in the economic picture" would keep him from voting for the Fed to raise interest rates. Lockhart's hawkish view — he serves as a voting member of the Federal Open Market Committee this year — strengthened the case for dollar bulls, overshadowing some bearishness stemming from disappointing U.S. wage growth data released late last week.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

July final PMI report suggests business activity in manufacturing expanded at much the same rate as in June. At 52.4, the revised index was a couple of ticks higher than originally estimated and just 0.1 point below its final June's reading. Growth of manufacturing output was in line with March's 10-month peak for a second successive month, boosted by stronger new orders from domestic and overseas markets alike. Backlogs rose marginally and employment was up for an 11th straight month. Input costs climbed for a fifth month running but the increase was relatively shallow and there was only a fractional gain in factory gate prices. Nationally, the best performer was the Netherlands (56.0) ahead of Italy (55.3 and a 51-month high). Spain (53.6) also had a reasonable month despite hitting a 9-month low but the core again disappointed with both France (49.6) and Germany (51.8) either below or too close to the 50 mark for comfort. Also of note, the economic crisis in Greece was highlighted by a PMI of just 30.2, a new record low and some 7.5 points beneath the previous trough seen in February 2012.

Germany

June manufacturing orders followed a slightly steeper revised 0.3 percent monthly decline in May with a surprisingly strong 2.0 percent rebound in June. The increase lifted seasonally and workday adjusted annual orders growth from 4.7 percent to 7.0 percent, its strongest performance since January 2014. June's recovery was dominated by the capital goods subsector which posted a 3.7 percent monthly increase that easily more than offset May's 1.2 percent decline. However, both basics (down 0.4 percent) and consumer and durable goods (down 0.6 percent) saw fresh declines. The headline gain was wholly attributable to overseas demand as the domestic market shrank a monthly 2.0 percent on the back of across the board weakness. Within a 4.8 percent spurt in foreign demand, orders from the Eurozone were up 2.3 percent and from the rest of the world some 6.3 percent.

Germany's unadjusted trade surplus soared to its highest monthly level ever in June highlighting the country's growing competitiveness on the back of a weak euro. The trade surplus reached €24.0 billion as exports posted their biggest increase on the year since August 2011. Sales abroad jumped 13.7 percent, leading to a first quarter surplus of €123.7 billion, a steep increase from last year's level of 98.7 billion. The adjusted balance edged down from June's €22.6 billion to €22 billion. Here, exports were down 1 percent on the month and down 0.5 percent from a year ago. This was the first month since January that exports declined. Imports however surged 7.9 percent and 2.7 percent on the year. However, the monthly gain was down from May's import surge of 10.1 percent.

Industrial production in June tumbled 0.9 percent on the month after increasing a revised 0.2 percent in May. The monthly decline was the largest since last August. Despite relatively weak year ago data, the annual increase was only 1.2 percent after gaining 2.5 percent in May. The June reading means that the industrial sector's output in the second quarter remained unchanged at the previous quarter's level. Manufacturing dropped 1.4 percent on the month with all subgroups in negative numbers with the exception of energy which was up 2.3 percent after sinking 2.7 percent in May. Consumer goods were down 2.6 percent while construction tumbled 4.5 percent. Capital goods lost 2.6 percent while consumer goods and capital goods slipped 0.2 percent and 0.3 percent respectively. Intermediates slumped 1.3 percent.

France

June industrial output excluding construction slipped 0.1 percent after increasing 0.4 percent last time. Manufacturing output dropped 0.7 percent after gaining 0.7 percent last time. On the year, industrial output was up 0.6 percent while manufacturing was up 0.8 percent. Manufacturing output declined 0.5 percent over the last quarter while industrial output lost 0.7 percent. Output declined in mining, quarrying, energy & water supply, in the manufacture of transport equipment and more sharply in the manufacture of coke & refined petroleum products. Conversely, output increased somewhat in the manufacture of electrical & electronic equipment, machine equipment and in the manufacture of food products & beverages. Manufacturing output of the second quarter of 2015 increased compared to the second quarter of 2014 (0.8 percent on the year). For that same period, overall industrial output also was up (1.0 percent on the year).

United Kingdom

June industrial production declined 0.4 percent on the month after a smaller revised 0.3 percent gain in May. However, manufacturing output was up a meager 0.2 percent but only reversing a fraction of the 0.6 percent decline seen last time. Annual growth of the former slowed from 1.9 percent to 1.5 percent and of the latter, halved to 0.5 percent, its second weakest print since September 2013. The monthly increase in manufacturing output reflected gains in seven of the 13 subsectors. Within these, basic metals and metal products (4.9 percent) enjoyed the steepest rise while pharmaceuticals (down 10.7 percent) made the largest negative contribution. Among the more volatile subsectors of overall goods production, mining & quarrying contracted 3.8 percent, its first drop since February, and electricity, gas, steam & air conditioning was down 0.3 percent. However, water supply, sewerage & waste management output grew 0.5 percent.

The goods trade gap widened to Stg9.2 billion in June from May while the total trade gap widened to Stg1.6 billion from Stg0.9 billion. The May total trade gap was the narrowest for 23 months and the June widening was only a partial reversal of this. The total reflects a deficit of £9.2 billion on goods, partially offset by an estimated surplus of £7.6 billion on services and its narrowest since the second quarter of 2011. Total exports were Stg43.2 billion in June, down from Stg43.5 billion in May but the second highest since last December. Rising exports led to the UK's total trade gap shrinking in the second quarter to its narrowest since the second quarter of 2011. The total trade deficit was Stg4.8 billion down from Stg7.5 billion in the first quarter. The substantial narrowing in the deficit entails trade will make a positive contribution to second quarter GDP.

Asia/Pacific

Australia

June retail sales were up a greater than anticipated 0.7 percent following an increase of 0.4 percent in May 2015. On the year, sales were up 4.9 percent. Low interest rates are boosting household spending. There were increases in household goods retailing, other retailing and cafes, restaurants & takeaway food services. Partially offsetting the increases were declines in clothing, footwear & personal accessory retailing, food retailing and department stores. June sales increased in New South Wales, Victoria, South Australia, Queensland, Western Australia, the Northern Territory and the Australian Capital Territory. Tasmania was relatively unchanged. In seasonally adjusted volume terms, turnover rose 0.8 percent in the June quarter 2015, following a rise of 0.6 percent in the March quarter 2015.

June trade deficit was A$2.9 billion, slightly below expectations of an A$3 billion deficit. This was the 15th consecutive month that the trade balance has been in deficit. Exports were up 3.3 percent on the month and 0.7 percent from the same month a year ago while imports were up 3.9 percent and 4.8 percent. Exports of non-rural goods were up 4 percent and non-monetary gold rose 28 percent. Rural goods slipped 1 percent. Imports of intermediate and other merchandise goods jumped 10 percent while consumption goods added 1 percent. Capital goods were down 1 percent while non-monetary gold declined 5 percent.

July labour force surprised with increases in both employment and unemployment. The unemployment rate jumped to 6.3 percent – expectations were an unemployment rate of 6.1 percent. The number of unemployed jumped 40,100. Employment jumped a much larger than anticipated 38.500 – expectations were for a modest 10,000 person increase. Both full time and part time employment contributed to the increase. Full-time employment added only 12,400 jobs to 8,170,400 and part-time employment was up 26,100 to 3,640,300. In the seven months through July, it is estimated that the economy added 162,900 jobs. The seasonally adjusted labour force participation rate increased 0.3 percentage points to 65.1 percent in July 2015.

Americas

Canada

The trade balance returned a deficit of just C$0.48 billion in June, a huge improvement on May's marginally larger revised C$3.37 billion shortfall. The deficit was the smallest since November 2014. June's turnaround reflected a 6.3 percent monthly increase in exports — their first since last December — and, to a much lesser extent, a 0.6 percent drop in imports. Sales to the U.S. were up 7.1 percent from May while domestic purchases from across the border were 0.9 percent weaker resulting in the bilateral surplus with the U.S. widening from C$2.15 billion to C$4.69 billion. Prices once again were quite volatile but even adjusted for these, overall export volumes rose 4.8 percent which, with imports down 0.9 percent, points to a sizeable improvement in the real trade balance too.

July employment surprised, increasing 6,600, slightly more than offsetting June's 6,400 decline. The participation rate was a tick lower at 64.7 percent, leaving the unemployment rate unchanged at a lower than anticipated 6.8 percent. The gain was in part time workers. They increased 23,900 while full time employment was down 17,300. In July, there were 19,000 more people employed in professional, scientific and technical services. Public administration employment rose by 9,000. Employment fell by 10,000 in finance, insurance, real estate & leasing in July. The number of self-employed workers increased 41,000 in July. Employment dropped 12,200 in the goods producing sector although within this manufacturing shed 4,600. Construction recorded an 8,300 decline and natural resources off 2,000 but utilities added 3,300 and agriculture was off 600.

Bottom line

Economic data swirled around the slew of global PMI reports, central bank announcements and of course the U.S. employment report. Actually, there also were employment reports from Australia and Canada. In Europe, industrial output and merchandise data for Germany, France and the UK were also reported. The Reserve Banks of Australia and India and the Banks of England and Japan kept their respective policies unchanged — all for different reasons.

The highlight this week in Europe will be the release of flash second quarter gross domestic product reports for the Eurozone, Germany, France and Italy. The UK posts its July labour market report. In the U.S., housing starts and industrial production will garner close attention for signs that could encourage the FOMC to begin normalizing rates.

Looking Ahead: August 10 through August 14, 2015

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