Global Markets

Stocks were up in last week’s holiday shortened week despite concerns about the upward trajectory of interest rates in the UK and Europe. Investors also put aside concerns about higher crude prices and continued weakness in the credit markets. Rather, investors were positively inspired by new acquisition and merger deals especially in the hotel industry as well as the food and optics industries. And strong U.S. economic data, while sending government bonds into retreat, at the same time favored equities. U.S. employment was up slightly more than expected in June and included major upward revisions to April and May.

Both the Bank of England and the European Central Bank did the expected. The Bank of England increased its key rate to 5.75 percent while the ECB left its rate at 4 percent but left a clear signal that borrowing costs will increase — though it offered few clues as to when. While stocks faltered Thursday on the Banks’ decisions, they rebounded on Friday.

On the week, all equity indexes followed here were up. The Kospi was up 6.7 percent on the week while the Bolsa gained 4 percent. The Nikkei was virtually unchanged on the week.

Global Stock Market Recap

Europe and the UK

The CAC, DAX and FTSE were up for the second week as fresh merger and acquisition news in the leisure industry helped to bolster investor confidence which had been upset by recent credit market turmoil. Trading was light on Wednesday as the U.S. celebrated Independence Day. But there was also strength in oil services as crude prices continued to edge upward. But on Thursday, investor interest focused on interest sensitive stocks such as banks and utilities — stocks that would be affected by the Bank of England and ECB interest rate decisions. Stocks were down on the day only to rebound on Friday, thanks to favorable U.S. economic news and higher crude oil prices which benefited energy producers and suppliers.

Oil stocks gained sharply on Friday as Brent crude hit the $75 a barrel mark for the first time in nearly a year. Unrest in Nigeria, low inventories and a holiday spike in U.S. demand sent Brent crude to its highest level since August.

Both Bank of England and European Central Bank do the expected

The Bank of England increased its key interest rate to 5.75 percent from 5.5 percent on Thursday. At the same time the European Central Bank left its interest rate at 4 percent. However both banks appeared to indicate that further increases are forthcoming.

Borrowing costs are now at a six-year high after the Bank of England’s fifth increase since October 2006. Inflation as measured by the consumer price index soared to 3.1 percent in March, significantly above the Bank’s 2 percent inflation target. According to the minutes of the June Monetary Policy Committee meeting, the vote to keep rates unchanged was five to four, making Thursday’s outcome no surprise. In its statement, the MPC said the balance of risks to the inflation outlook in the medium term continued to lie to the upside. Some analysts think that is a clear sign that the Bank intends to continue raising rates. However, the impact of wavering consumer confidence on retailers and on the wider economy could be severe according to some analysts despite the fact that past rate increases have had little impact on spending. Households have preferred to save less as their real disposable income falls, rather than change their spending habits.

The ECB left its interest rate unchanged at 4 percent but continued to indicate that prospects for higher interest rates could be in the eurozone’s future. The ECB remains concerned about the price outlook. At his press conference following the Governing Council meeting, ECB President Jean Claude Trichet said that the Bank is closely monitoring inflation risks, a step down from previous statements that included the words "very closely." Inflation is currently hovering under the ECB’s 2 percent ceiling but money supply growth is more than double its reference point of 4.5 percent.

Recent eurozone economic data have beaten expectations and the ECB sees the region growing at a rate that is likely to fuel inflationary pressures. It remains concerned in particular by fast growth in money supply and credit data. Since December 2005, the ECB has lifted its main rate eight times by 25 basis points each. Inflation, at 1.9 percent, remains exactly within the ECB's target of an annual rate below but close to 2 percent.

Asia/Pacific

Stocks in Japan and the Asia/Pacific area reversed direction and were up last week after ending the first half of 2007 on a sour note. Stocks in Japan, however, continue to be the weakest in the region. The Nikkei was virtually unchanged on the week while the Topix edged up 0.3 percent. The lackluster Japanese performance is centered in autos and retailing. Retailers were hit by a report that Prime Minister Shinzo Abe is considering raising Japan's consumption tax. Elsewhere, the Hong Kong Hang Seng continues to track Chinese shares higher. And in South Korea, the Kospi continues to set new record highs.

Reserve Bank of Australia does the expected

The Reserve Bank of Australia, as expected, left its key monetary policy interest rate at 6.25 percent. It has remained at this level since November 2006 and is at a six-year high. The RBA’s three rate increases in 2006 have pulled inflation back into its target range despite a 33-year low in the jobless rate. Annual inflation declined to 2.4 percent in the first quarter. It was the first time in a year that it has been within the bank's target range of 2 to 3 percent. Australia's economic growth accelerated to 1.6 percent in the first quarter from the previous three months, the fastest pace in more than three years, buoyed by consumer spending and business investment. However, recent data show weakness in retail sales. The RBA’s policy interest rate compares with 5.25 percent in the U.S., 5.5 percent in the UK and 4 percent in the European Monetary Union.

Most economists expect the bank will wait until late this year or early 2008 before increasing rates again after comments last month by RBA Governor Glenn Stevens who said "additional time'' is needed before responding to inflation pressures from accelerating economic growth and the jobs boom. Reports Thursday showing that retail sales fell for a second month and building approvals slumped in May suggest the bank doesn't yet need to add to last year's three increases in borrowing costs.

Currencies

Canadian dollar nears 30-year high

The Canadian dollar continued to approach a 30-year high after the June employment report showed that Canadian employers added more jobs in June than analysts expected. This heightened expectations further for an increase in interest rates when the Bank of Canada announces its decision on Tuesday. The currency reached a 30-year high of 95.51 cents on June 29. The Bank of Canada last increased interest rates to 4.25 percent over a year ago in May of 2006. It is expected to do so Tuesday, bringing its key interest rate to 4.5 percent and 75 basis points below the U.S. federal funds rate of 5.25 percent.

Yen continues to ebb lower

The yen dropped to a new low against the euro and weakened against the U.S. dollar as higher interest rates elsewhere attracted Japanese investors. With the Bank of Japan’s interest rate at only 0.5 percent and not likely to go higher, the yen was down against all of the most actively traded currencies as investors continued to borrow in the country and seek higher returns overseas — a practice known as the carry trade. Bank of Japan Governor Toshihiko Fukui said at a branch managers' meeting that movements in consumer prices will hover near zero percent in the short term. The BoJ is expected to keep rates unchanged when it meets later this week.

The yen has dropped 13 percent against the Canadian dollar and New Zealand's currency this year. It has also fallen 11 percent versus Australia's dollar. Canada's benchmark interest rate is 4.25 percent. New Zealand's rate is 8 percent and Australia's is 6.25 percent.

Indicator scoreboard

EMU — May jobless rate edged down to 7 percent from 7.1 percent in April. The unemployment rate has been declining steadily since 2005. This equates with 11.8 million being unemployed in mid-quarter. The lowest jobless rate is again to be found in the Netherlands (3.2 percent), followed by Denmark (3.3 percent) and Ireland (4.1 percent). At the other end of the scale, unemployment in France, while falling, remains the highest at 8.7 percent. With the Euro area economy running at close to productive potential, the ongoing fall in unemployment probably poses the largest single threat to the region’s price stability. To date, wage agreements in the larger member states have not been a major worry for ECB policymakers but the risk is that shortages of skilled labor could force higher settlements in the future. 

May producer price index was up 0.3 percent and 2.3 percent when compared with the same month a year ago. Core PPI which excludes food and energy was also up 0.3 percent and up 3.4 percent on the year. Prices in the energy sector accelerated to 0.5 percent but are still 0.5 percent below their year ago level. Geographically, PPI inflation fell in France (1.4 percent from 1.7 percent), Italy (3.0 percent from 3.3 percent) and Spain (2.4 percent from 2.7 percent). It was up in Germany (1.9 percent from 1.6 percent) and the Netherlands (4.1 percent from 3.7 percent).

May retail sales were down 0.5 percent but up 0.7 percent when compared with last year. Food sales were down 0.3 percent while non-food sales sank 0.6 percent. As pre-warned in the national data, the driving force behind the May weakness was Germany where demand slumped 1.8 percent; more than enough to offset a solid 1.3 percent bounce in Spain and increases in a number of smaller states (Finland, Portugal and Slovenia). Austria, Belgium and Luxembourg all posted falls. The softness of actual retail demand contrasts markedly with confidence surveys which have been buoyed by the ongoing trend decline in unemployment.

Germany — May manufacturing orders were up a stronger than expected 3.2 percent after declining 1.6 percent in April. On the year, orders were up 11.2 percent. The data reflect substantial increases in all the main sectors on the month. Consumer goods were up 4 percent while capital goods were up 3.8 percent and basic goods, 3.2 percent. The broad-based sectoral gains were also mirrored in the geographical breakdown which showed significant gains in both domestic (2.2 percent) and overseas (4.4 percent) demand. The foreign recovery from April’s 2.0 percent decline is all the more impressive in the light of the euro’s record levels against the U.S. dollar.

France — May merchandise trade gap widened to €3.0 billion. Imports edged down 0.4 percent but exports dropped by 2 percent. The drop in exports followed the previous dip in April. Although the three-month rate of change remains positive there are growing signs that the strength of the euro is beginning to hit the external trade sector. Over the year to date, the trade deficit now stands at €12.1 billion, up from €11.1 billion during the same period of 2006. By sector, the red ink on consumer goods was unchanged from April but the deficits on basic goods and, in particular, non-military goods both widened. There was also a sharp narrowing in the surplus on capital goods.

United Kingdom — May industrial output was up 0.6 percent and 0.6 percent when compared with last year. Most sectors were up with a strong rebound in electricity, gas and water (2.0 percent following April’s decline). Manufacturing output posted a 0.4 percent gain and was up 1 percent on the year. Oil and gas extraction rose a solid 1.6 percent and mining & quarrying jumped 1.2 percent. Within the main market sectors, durables were down 1 percent but all of the other sectors expanded robustly (non-durables and capital goods both up 0.6 percent and intermediates up 0.7 percent). Manufacturing’s 0.4 percent advance completed the third consecutive monthly gain for the first time since 2004 and put production at its highest level in nearly six years. Not for the first time, it was the engineering sector leading the way with a 0.6 percent increase that left annual growth at 2.2 percent. Food & drink was up 0.5 percent and other manufacturing was up 0.7 percent.

Asia/Pacific

Japan — First quarter Tankan survey for large manufacturers reading was 23 — unchanged from the first quarter of 2007. The index for small manufacturers was 6, down from 8 in the previous quarter. The index for large non-manufacturers was unchanged from the previous quarter at 22. The Tankan was conducted from May 28 to June 29. The Tankan is a diffusion index with zero as the breakeven point — positive numbers indicate that more companies are positive rather than negative. The survey of 10,839 firms of all sizes provides the most detailed picture of how Japanese industry sees business conditions over the next three to six months.

Australia — May retail sales edged down 0.1 percent after declining 0.3 percent in April. This was the first back-to-back monthly drop since the two months ended January 2000. On the year, May retail sales were up 5.7 percent. Damping sales in April and May, fuel prices averaged about A$1.26 a liter (the equivalent of $4.05 a gallon) which was almost 12 percent higher than at the start of the year. Clothing sales dropped 2.2 percent on the month while food spending edged down 0.1 percent. Spending on toy, book and sporting goods sales slipped 1.1 percent. Department store sales gained 1.8 percent.

May merchandise trade deficit was A$807 million, down from April’s A$916 million as exports climbed to a record on mining products. Farm exports, such as meat, sugar, wheat and wool, rose 0.1 percent. Shipments of non-rural goods, which include minerals, increased 4 percent. Services exports rose 1 percent. Goods and services imports were up 2.3 percent while capital goods soared 13 percent. Imports of intermediate goods, which include fuel, gained 1 percent. Imports of consumer goods declined 2 percent. Exports to China in the 11 months ended May 31 rose 29 percent from a year earlier. Exports to India gained 35 percent, exceeding the total for the year ended June 30, 2006. India overtook the U.S. as Australia's fourth-biggest export market in April. Japan, China and South Korea are the three largest.

Americas

Canada — June employment was up by 34,800 jobs while the unemployment rate remained at 6.1 percent for the fifth month in succession. Despite a sizeable increase in employment, the jobless rate held steady as the labor force expanded by 37,700. New full time jobs jumped by 62,600, more than offsetting the loss of 27,800 part-time places. This continues the trend seen since 2005. In contrast to May, last month’s gains were concentrated in services (72,300) while the goods producing sector witnessed a decline (-37,600) that more than wiped out the previous month’s near 16,000 rise. This lack of balance in employment conditions between the sectors has been a feature of 2007 during which job losses in manufacturing have slumped some 4.3 percent. Within services, there were sizeable gains in employment last month in the wholesale and retail trade sector (31,000), supported by solid increases in information, culture & recreation, accommodation & food services and construction & utilities.

Bottom line

Equities began the second half of 2007 on a favorable note as economic data continued to remain positive in the U.S. and elsewhere. The yen continued to be hard hit by the carry trade as the disparity between Japanese interest rates and those elsewhere widened and made investments outside of Japan more profitable.

Of the two central banks meeting this week, the Bank of Canada is expected to increase interest rates for the first time since May 2006. The Bank of Japan remains on hold as consumer prices continue to be unchanged.

Looking Ahead: July 9 through July 13, 2007

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