Global Markets

Despite a mixed bag of economic news, stocks forged ahead last week with all the indexes covered here gaining on the week. First quarter gross domestic product data for Europe and Japan were better than anticipated, which gave investors a chance to exhale. But on the other hand, U.S. data — and especially consumer sentiment data — continued to show that the consumer is depressed. Crude oil prices continue to set records. Global equity markets started the week on a positive note as financial stocks were lifted by better news from two major international banks and oil retreated from yet another record high. On the week, all indexes were up — the gains ranged from a low of 0.3 percent (Shanghai Composite) to 4.6 percent (Taiex).

Canada’s S&P/TSX Composite

Something of a rarity occurred in equities last week — the Toronto S&P/TSX Composite index hit several new intraday and closing new highs. On Friday it closed at a record 14,984.2, just a whisker under the 15,000 level. The index continued to climb despite a report showing widespread declines in manufacturing. Both mineral companies and financial stocks provided the lift as commodity prices continue to reach new highs. On the week, the index was up 3.2 percent and is currently up 8.3 percent for 2008.

Freight costs adding to the inflationary mix

The freight cost for basic commodities such as iron ore or grains continues to surge, reaching a fresh all time high on Friday. The result places new inflationary pressures on countries which import large amounts of natural resources such as China and India. The Baltic Dry Index which measures shipping costs, rose to 11,459 points boosted by a combination of strong demand for commodities and traffic jams at ports. This surpasses its previous peak of 11,039 points reached last November. The daily cost for the largest dry bulk vessels — known as “Capesize” and used to ship iron ore — surged for the first time above the $200,000 level, almost doubling the rate of a year ago.

Shipping brokers said that although agricultural commodities and fertilizers are less important in volume than iron ore, the strong global demand for foodstuffs is panicking countries to build up stocks and is further exacerbating the tight shipping market. The surge in consumption of basic commodities has led to congestion in key ports such as those in Australia and Brazil. This has forced vessels to wait to be loaded and has reduced the global fleet capacity available at any time.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were up last week. On Friday, the FTSE hit its highest level since early January, driven by merger and acquisition news and earnings that met with investors’ approval. British Energy announced that it had received a number of takeover proposals which were under review including some priced at a premium. There were rumors about other FTSE components as well. And British Airways noted that it would be paying its first dividend in seven years and said that full year profits doubled — they were boosted by trans-Atlantic traffic despite soaring fuel prices and the disastrous Terminal 5 launch. UK equities hesitated mid-week following the bleak Bank of England Inflation Report and mixed economic data. But on Thursday, investors once again were buying equities.

Stocks in Europe were also on an uptick last week as earnings were better than expected and mergers and acquisitions are still taking place. Investors were also buoyed by first quarter gross domestic product reports that as a whole were better than expected. The CAC and DAX were up mid-week, thanks to tamer than expected consumer price data from the U.S. and retail sales data that showed sales excluding autos increased much more than expected.

On the week, the CAC, DAX and FTSE were up 2.4 percent, 2.2 percent and 1.6 percent respectively. Thus far in 2008, the FTSE is down 2.4 percent while the CAC is down 10 percent and the DAX is down 11.3 percent.

Bank of England inflation report

May’s Inflation Report brought sobering news about the state of the British economy. In it the monetary policy committee said that Britons should not expect another cut in interest rates for at least two years. The Bank warned that inflation would rise far above its previous forecasts and persist at levels well above the government’s target until early 2010. Further, Bank governor Mervyn King said the consequence of price increases would be a squeeze on real take-home pay, which in turn will slow consumer spending and output growth, perhaps sharply.

Presenting the latest UK quarterly forecasts, the Bank said inflation was likely to rise above 3 percent over the next few months and remain more than one percentage point above its 2 percent target. This, the governor said, would force him to write a “number of open letters to the chancellor over the next year.” The independent Bank of England is required to explain to the government every three months how it will bring inflation back under control when inflation deviates by more than one percentage point from target. The Bank’s inflation projections do not return to the 2 percent target until early 2010, suggesting it has no room for rate cuts until then, even though the UK economy will slow sharply.

The Bank’s stance on monetary policy appears similar to that of the European Central Bank. Mr. King contrasted his position – and its focus on controlling inflation – with that of Ben Bernanke of the U.S. Federal Reserve. The blame for higher inflation, Mr. King said, lay with surging energy and food prices, along with higher import prices resulting from falls in sterling. The Bank expects another 15 per cent rise in domestic gas and electricity prices in coming months.

Asia/Pacific

All Asian/Pacific stock indexes followed here gained last week. Australian mining stocks were up on speculation China will expand acquisitions of overseas mining companies to secure resources to feed its burgeoning economy. And a boost from favorable U.S. equity trading cannot be discounted either after the S&P 500 vaulted to a four month high on Thursday. Even though the Nikkei was down on Friday, the index managed to gain on the week, reversing the previous week’s losses and then some. The Nikkei was down despite a better than expected GDP report and some favorable profit forecasts from a major bank and general contractor.

Chinese shares were also down on Friday as investors fretted about the earthquake’s impact on growth and its worryingly high inflation rate. Chinese mining companies are scouring the globe for resources. These companies want to buy assets in Australia and Canada to meet rising domestic metals demand. Rising imports of raw materials into China have also led to record shipping rates.

Technology companies and airlines contributed to the gains in Asian stocks, especially after Sony Corp. and NEC Electronics Corp. forecast earnings that beat estimates and Qantas Airways Ltd. averted a strike. During the week, The Nikkei and All Ordinaries climbed to four-month closing highs, despite weakness in the financial sector and oil prices holding near to record high levels.

In Australia, the federal budget predicts a surplus of A$21.7 billion, representing 1.8 percent of GDP in fiscal 2009, following cutbacks in spending in some areas and increased revenue from the booming resources sector. The government forecast that gross domestic product growth would slow to 2.75 percent in the year to June 2009 from 3.5 percent in fiscal 2008 as domestic demand cools.

People’s Bank of China

The People’s Bank of China lifted reserve requirements for the fourth time this year as it tries to cool inflation. The requirement was lifted to 16.5 percent of deposits from 16 percent effective on May 20. The Bank emphasized that the purpose of the move is to manage banking sector liquidity conditions, and to guide proper expansion pace of money and credit aggregates, which is in line with its tighter monetary policy stance. It also reflects the PBoC’s intention to absorb excessive domestic liquidity arising from the rapid increase in foreign exchange reserves.

Currencies

The dollar was down against the euro but up against the yen last week. On Friday, the U.S. dollar dropped after a decline in consumer sentiment combined with a surge in crude oil prices to a new record increased concerns about U.S. growth. The U.S. dollar, which had risen from a record low of $1.6019 against the euro on April 22, was down for the second week. The euro has traded in a range of $1.53 to $1.56 per euro in May after setting new highs in April. The currency continues to be under pressure from most major currencies. For example, the Australian dollar touched a 24-year high against its U.S. counterpart as crude oil pushed prices of other commodities higher. High commodity prices are affecting consumer confidence, casting a shadow on economic growth. The yen was down last week as stability on global equity markets boosted risk appetite and prompted investors to abandon the haven of the low-yielding yen.

The Canadian dollar closed at parity with the U.S. dollar on Thursday night as crude prices continued to climb. Commodities account for about half of Canada's exports. The currency is attracting investors as the economy benefits from rising demand for metals, wheat and oil from emerging economies such as India and China. Canada is the world's largest producer of uranium and the second-biggest exporter of natural gas. The oil sands in Alberta contain the largest crude deposits outside the Middle East.

The pound sterling dropped to a three-month low against the dollar last week as the gloom surrounding the UK economy deepened. Retail sales were down while the April consumer price index soared 3 percent on the year — this is significantly above the Bank of England’s 2 percent inflation target. The inflation news dented any hopes that the Bank would lower interest rates at their June meeting. Bank governor Mervyn King warned that consumer price inflation might rise above 4 percent in the second half and would stay above 3 percent for more than three months. The pound fell to a three-month low of $1.9361 against the dollar on Wednesday. However, sterling recovered some poise on Friday after data showed US consumer confidence had fallen to its lowest level in 28 years in May.

Selected currencies — weekly results

Indicator scoreboard

EMU

March industrial output was down 0.2 percent and down 2 percent when compared with the same month a year ago. Output for the first quarter was up 0.7 percent compared with a 0.2 percent gain at the end of 2007 but heavily dependant upon a 0.7 percent jump in January. The monthly decline reflected declines in all major sectors except energy (2.7 percent). Durable consumer goods were down 1.5 percent, capital goods were down 1.1 percent, non-durable goods lost 0.5 percent and intermediates edged down 0.2 percent. On the year growth rates slipped in all of the sectors with the exception of energy (5.8 percent) and are now negative for both durable consumer goods (3.2 percent) and non-durables (0.9 percent).

April harmonized index of consumer prices was up 0.3 percent and 3.3 percent when compared with the same month a year ago and 1.3 percent above the ECB’s inflation target of 2 percent. Core HICP which excludes food, drink, tobacco & petroleum slowed to 1.6 percent on the year from 2.0 percent in March. The main sectors helping inflation to decline in April were education (3.6 percent from 9.6 percent), recreation & culture (minus 0.4 percent from 0.6 percent), transport (4.8 percent from 5.6 percent) and energy (10.8 percent from 11.2 percent). This was more than enough to offset faster inflation in housing (4.8 percent from 4.4 percent) and alcohol & tobacco (3.2 percent from 3.1 percent).

First quarter flash gross domestic product was up 0.7 percent and 2.2 percent when compared with the same quarter a year ago. The pick-up in first quarter economic activity in the first quarter was strongly prejudiced by a remarkable 1.5 percent quarterly surge in German growth. The performances of the other larger states was notably more subdued with France (0.6 percent) relying upon exports for much its expansion and Spain (0.3 percent) almost slowing to a standstill. Italian data were not released. Among the smaller EMU countries, quarterly growth decelerated in the Netherlands (0.2 percent from 1.1 percent), Belgium (0.4 percent from 0.5 percent) and even turned negative in Portugal (minus 0.2 percent from 0.7 percent). As with all flash estimates, no details were available.

March merchandise trade deficit was €2.4 billion after recording a surplus of €1.6 billion in February. The deterioration in March reflected a 2.9 percent drop in exports and essentially flat imports. Over the year, exports now show a 1.0 percent contraction and clearly underline the damage to Eurozone industry being caused by the high level of the Euro. Annual growth in imports remained relatively robust at 7.0 percent but this was still well down on the 10.0 percent pace seen in February. As usual, the overall EMU performance was shored up by another sizeable surplus in Germany.

Germany

First quarter gross domestic product was up 1.5 percent and 2.6 percent when compared with the same quarter a year ago. As with all flash estimates few details of where the growth was generated in this report but the Statistics Office indicated that the main driving force was consumption, ahead of fixed investment. Net foreign trade appears to have had little impact.

France

First quarter gross domestic product was up 0.6 percent and 2.2 percent when compared with the same quarter a year ago. The main driving force behind the quarterly gain was exports which jumped an unsustainable 3.1 percent. Although imports also rose quite sharply (1.9 percent), the real foreign trade balance added fully 0.3 percentage points to growth. Within domestic demand there was a solid showing by investment (1.1 percent) but this was heavily dependent upon another large increase in business spending (1.8 percent). Worryingly, household consumption grew just 0.1 percent, down from 0.6 percent in the previous period.

Italy

March industrial output was down 0.2 percent and now is 2.5 percent below a year ago. Output dropped in all categories with the exception of energy, which was up 2.3 percent. Capital goods dropped 0.3 percent, intermediates fell 0.5 percent and consumer goods slumped 0.7 percent.

March merchandise trade gap widened out to €0.8 billion as exports fell almost 3 percent on the month while imports edged down just 0.3 percent. Total exports dropped 3.8 percent on the year with flows to the EU declining an even steeper 6.6 percent. Overall imports on the same basis dropped 2.5 percent, including a 6.6 percent drop in purchases from the EU. However, manufactured goods recorded a trade surplus of €5.5 billion but there were sizeable shortfalls on net trade in minerals (€5.6 billion) where energy was deeply in the red (€5.4 billion) and in agriculture and fishery products (€0.4 billion).

United Kingdom

March global merchandise trade deficit was Stg7.4 billion and maintaining the essentially flat trend seen in recent months. Exports were up 0.4 percent while imports declined 0.3 percent. Excluding oil and erratics the picture was much the same with the red ink narrowing modestly from Stg7.2 billion to Stg7.1 billion. The bilateral goods shortfall with the EU widened out slightly but narrowed with non-EU countries. The decline in the latter was due to a respectable 1.9 percent increase in exports that followed a 4.7 percent jump in February, combined with a 2.4 percent drop in imports. The robust performance by the export community suggests that British industry is now starting to benefit from the previous sharp decline in the value of the pound.

April producer output prices jumped 1.4 percent and the largest monthly gain on record. Output prices were up 7.5 percent on the year, also a new record high. Core PPI (excluding food, drink, tobacco and petroleum) was up 1.0 percent on the month and 4.6 percent on the year. Petroleum products (2.3 percent), tobacco & alcohol (2.4 percent) and food (0.7 percent) led the surge in prices. However there were also sizeable gains in metal products (0.7 percent) and other products (3.6 percent), the latter reflecting especially sharp increases in the price of scrap steel. Over the year, the dominant factor behind the 7.5 percent rise in the overall index was petrol (25.4 percent), followed by food (9.3 percent), chemical products (8.9 percent) and other products (8.7 percent). Producer input prices were up 2.6 percent and soared 23.3 percent on the year. Increases were driven by crude oil (6.4 percent) but strong increases also occurred in imported metals (2.4 percent), imported chemicals (2.2 percent) and other home-produced materials (2.4 percent). Over the year, crude oil is up 62.6 percent followed by home food materials (32.3 percent), fuel (20.5 percent) and imported food materials (20.4 percent).

April consumer price index jumped 0.8 percent and is now up 3 percent when compared with last year. The 0.8 percent increase is the largest monthly gain since 2001. However, core CPI remains comfortably below the 2 percent Bank of England inflation target at 1.4 percent on the year. The most significant positive impact on the 12-month rate came from housing, utilities & fuels (5.4 percent) where changes to the way in which increases in energy costs are calculated had a major impact. There was also a particularly large jump in inflation in alcoholic beverages & tobacco (4.2 percent) largely due to higher duties. Outside of these sectors however, the performances were mixed. Other sizeable increases were seen in food (6.6 percent) and in furniture & household equipment (1.4 percent). Overall goods sector inflation accelerated to 2.3 percent from 1.7 percent while service sector prices jumped to 3.7 percent on the year from 3.4 percent.

Average earnings including bonuses for the three months ending in March were up by 4 percent, up from 3.7 percent in February. Average earnings, excluding bonuses were up by 3.8 percent in the year to March, unchanged from February. Pay growth (including bonuses) in the private sector was up 4.0 percent, compared with 3.8 percent for the public sector. Excluding bonus payments, private sector growth stood at 3.7 percent, compared with 3.9 percent for the public sector.

April claimant count unemployment climbed 7,200 — the largest monthly gain since April 2006 — but the unemployment rate remained at 2.5 percent for the sixth month. This is the first time that unemployment has risen over three consecutive months since June 2006. Vacancies during the latest three months managed to rise 6,700 but this is down on the pace seen in past months and consistent with a dwindling demand for new employees. There were 2.6 vacancies per 100 employee jobs in the February to April period, unchanged from the previous quarter. The ILO jobless rate held steady again at 5.2 percent in the three months to March. The quarterly rate matched the level seen over the closing months of 2007.

Asia/Pacific

Japan

April corporate goods price index was up 0.6 percent and 3.7 percent when compared with the same month a year ago. Analysts had expected an annual increase of 3.5 percent. Manufacturing industry products were up 0.5 percent for the second month and 3.4 percent on the year. The main culprit for the increase was iron and steel which soared 7.6 percent on the month and was up 15.6 percent on the year. Metal products were up 1.9 percent and 4.7 percent on the year. Petroleum & coal products were down 3.2 percent on the month but were up 19.6 percent on the year. Chemical & related products were also down on the month. Also included in this report are import and export prices. Export prices on a contract currency basis were up 2.5 percent on the year while import prices soared 22.6 percent. Corporate goods prices continue to increase but producers find it difficult if not impossible to pass these additional costs to the consumer.

First quarter gross domestic product was up 0.8 percent when compared with the previous quarter, 1.1 percent when compared with the same quarter a year ago and at an annualized rate of 3.3 percent. This was the third straight quarter that GDP registered a gain on the quarter thanks to robust exports and a pickup in private residential investment. External demand, or exports minus imports, contributed 0.5 point to GDP growth, and domestic demand added 0.3 point. On the quarter, private consumption was up 0.8 percent as was household consumption. Private residential investment was up 4.6 percent while private non-residential investment declined 0.9 percent.

China

April seasonally adjusted consumer price index was up 8.5 percent when compared with the same month a year ago. The CPI was up 8.3 percent in March. Food costs increased 22 percent from a year earlier. Meat prices climbed 48 percent last month. The government’s inflation target is 4.8 for 2008. Non-food prices were up 1.8 percent.

Hong Kong

First quarter gross domestic product was up 7.1 percent when compared with a year ago after increasing 6.3 percent in the fourth quarter of 2007. GDP grew at an annualized rate of 7.3 percent in the first quarter. Private consumption expenditure (PCE) grew by 7.9 percent in real terms in the first quarter of 2008 over a year earlier, compared with the 9.5 percent growth in the fourth quarter of 2007. Gross domestic fixed capital formation (GDFCF) recorded an increase of 8.9 percent in real terms in the first quarter of 2008, slightly larger than the 8.2 percent growth in the fourth quarter of 2007. Within the total GDFCF, expenditure on machinery, equipment and computer software increased by 6.0 percent in real terms in the first quarter of 2008, compared with the 8.5 percent increase in the fourth quarter of 2007.

April industrial production was up 15.7 percent when compared with the same month a year ago and after the post-snowstorm jump of 17.8 percent in March. Seasonally adjusted, industrial production edged down by 0.5 percent on the month after the 11.3 percent surge in March. Production in the major export related sectors such as textile and steel products continued to ease, rising at 12.2 percent and 11.7 percent respectively on the year. Electronics and telecom products recovered somewhat in recent months, rising 19.0 percent on the year. Meanwhile, production growth in machinery and general equipment industries has continued to outperform, expanding at 21.3 percent and 21.4 percent respectively.

Americas

Canada

March factory shipments plunged 1.7 percent and are now 7.7 percent below the same month a year ago. Eighteen of the 21 industries comprising the sector saw a monthly decline in March. Leading the drop were motor vehicles (6.2 percent) which were hit by the ongoing weakness of the U.S market as well as temporary factory closures. Chemicals also fared badly (down 3.0 percent) with shipping delays a major contributory factor but computers & electronics performed still worse (down 7.6 percent). On a more positive note, sales of aerospace products (17.0 percent) surged on the back of very robust demand while primary metals (2.9 percent) benefited from rising prices. However, there was a strong advance in new orders (2.9 percent) although this was concentrated in aerospace and without which there would have been a decline (2.2 percent). Backlogs (3.7 percent) were similarly boosted by the aerospace industry. Omitting this sector and unfilled orders would also have declined (0.2 percent).

Bottom line

Economic data last week were mixed. Better than expected GDP data from Europe and Japan vied for investor attention with declining industrial production and consumer sentiment in the United States. Equity investors who appeared to be judging results through rose colored glasses voted with their money and bought stocks. The result was a positive week for all those indexes followed here.

This week brings a Bank of Japan policy meeting. No change is anticipated in the Bank’s key interest rate of 0.5 percent. Minutes to both the FOMC and Bank of England monetary policy committee meetings will be released mid-week.

Looking Ahead: May 19 through May 23, 2008

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