Global Markets

All indexes followed here with the lone exception of the Thai SET were down last week as a new wave of fear swept over investors. June losses are attributed to renewed worries over the health of Western banks and the possibility of more writedowns, record oil, slowing economic growth and ominous signs of worsening inflationary pressures. With one trading day left in June and the second quarter, all indexes followed here are down on the month.

The week was divided by Wednesday’s FOMC announcement. In the announcement, the Fed said they would keep their key fed funds target rate unchanged at 2 percent. Stocks were in vigil mode before the announcement — stocks in Asia and Europe were closed for the day leaving only North American markets to react. However on Thursday, after sleeping on the Fed announcement, investors had second thoughts about the statement’s inflation bias and sold stocks. Shares in financial companies and automakers were among the worst hit. Auto manufacturers were down as the consumer spending outlook worsened while banks sank on fears of further writedowns and rights issues.

Economic data did not help to improve the mood. U.S. consumer confidence data hit their lowest levels since the early 80s, while personal expenditure numbers reflected the government’s economic stimulus checks. The data also showed that consumers continued to hunker down, saving a much larger than usual 5 percent of their earnings. In the UK, economic growth in the first quarter was revised down to just 0.3 percent on the quarter, while mortgage approvals fell to a record low in May.

Inflationary pressures mounted as oil prices surged to new highs on comments from OPEC that oil might reach $170 a barrel over the summer giving the market a clear buy signal and prices obediently rose to a new record of over $142 a barrel for West Texas Intermediate in intraday trading.

Global Stock Market Recap

Europe and the UK

Equity markets calmed somewhat Friday after a panicky Thursday when the FTSE lost 2.6 percent and the CAC and DAX each lost 2.4 percent. On the week, the FTSE was the better performer — the index was down 1.6 percent while the CAC and DAX lost 2.5 percent and 2.4 percent respectively. The indexes plumbed the lows reached in mid-March. The causes of Thursday’s drop were the usual suspects — worries about consumer spending, ever climbing crude prices heightening inflation worries, poor corporate earnings reports and still more bad news from the banking sector. And new economic data didn’t change the mood. Sentiment surveys continued to plummet while in Europe, producer and consumer prices continued to escalate.

The European markets fell sharply Thursday thanks to climbing oil prices. Major industry users of crude such as airlines lost ground after oil prices climbed while banking stocks slipped after a bearish note from Goldman Sachs rekindled fears of further losses in the sector.

In economic news, French consumer sentiment was down for the sixth straight month and in the process, set a new record low as high inflation squeezed household's purchasing power. And in Germany consumer confidence also sank, to the worst level in more than two years. In both cases, soaring energy prices, which have driven the eurozone’s inflation rate to the highest level for 16 years, were blamed for consumers’ sour mood. And the flash purchasing managers’ index for the eurozone dropped to below the breakeven 50 level for the first time since July 2003 to show a contraction in activity while inflation pressures continued to mount. Separately, the Munich-based Ifo institute's business climate index also pointed to weaker German growth ahead to its lowest level since December 2005. Rising public angst about inflation will strengthen the European Central Bank’s resolve. The Bank is expected to raise its main interest rate by a quarter percentage point to 4.25 percent on July 3 to fight inflation.

Asia/Pacific

Asian stocks followed U.S. stocks south Friday after heavy losses in overnight trading. All indexes followed here with the exception of the Thai SET were down on the week. Losses ranged from 1.3 percent for the Malaysian KLSE Composite to 5.3 percent for the Indian Sensex. The Shanghai Composite dropped another 2.9 percent while the Hang Seng sank 3.1 percent. In Japan, the Nikkei lost 2.9 percent while the Topix dropped 2.7 percent. The sell-off was triggered across Asian equity markets after the Dow dropped to a 21-month low on grim recommendations by Goldman Sachs analysts to sell stocks of U.S. financial giant Citigroup and U.S. automaker General Motors. Warnings of additional subprime-linked losses on the part of U.S. financial institutions in turn dampened Japan's banking shares. Investors worried that heightened inflationary pressures might force the Fed to raise its key interest rate and in the process, sidestep the downside risks to the economy.

The Nikkei closed lower for the seventh straight session on Friday. The plethora of economic news released did nothing to ease investor nerves about the state of the economy. Inflation, spurred by energy prices, was up more than expected while consumers continued to show a lack of interest in shopping. Industrial production was up after declining for two. On the economic front, foreign investors were net buyers of Japanese stocks for the sixth straight week last week, according to preliminary figures from the Ministry of Finance. Overseas investors bought a net ¥34.2 billion yen worth of Japanese stocks in the week to June 21. Foreign investors were net sellers of medium-to-long-term Japanese bonds for the first time in four weeks.

Central Bank of the Republic of China (Taiwan)

The Central Bank of the Republic of China (Taiwan) increased its policy interest rate to a seven year high and ordered lenders to increase their reserves in order to contain inflation. The Bank increased the discount rate on 10-day loans by 12.5 basis points to 3.625 percent from 3.5 percent. This move has been the 16th increase since the third quarter of 2004 when the central bank started increasing rates. They also announced increases in so-called reserve ratios on deposits effective July 1, meaning commercial banks have fewer funds available to lend. The Taiex index of shares slipped 0.6 percent to 7,811.80. The island's currency was little changed at NT$30.383. The 10-year government bond yield rose 2 basis points to 2.687 percent. The spread with U.S. fed funds target rate is now 1.625 percentage points, which may further attract foreign investment to the island's higher yields. Taiwan's dollar has risen 6.7 percent this year against the U.S. dollar.

Currencies

Both the yen and euro gained against the U.S. dollar last week after the Federal Reserve left its fed fund target rate unchanged at 2 percent despite mounting inflationary pressures. Analysts said that although the post-meeting statement was more biased towards inflation, it merely reflected views of various FOMC members’ remarks. They said that there was little sign that the Fed would act to reinforce comments from Fed Chairman Ben Bernanke who earlier this month spoke of the Fed’s desire to see the dollar strengthen in order to fight inflationary pressures from soaring commodity prices. This was in stark contrast to recent comments from ECB president Jean Claude Trichet who has cemented expectations that the ECB would raise interest rate by 25 basis points to 4.25 percent after its July 3 meeting. Mr, Trichet told the European Parliament that the central bank was on a “heightened state of alertness” over inflation.

Analysts say that the yen could be in for a tough time going forward as foreign exchange investors shift their focus away from the turbulence on global asset markets and carry trade transactions towards interest rate differentials. For example, the yen dropped to a record low against the euro, during last week. Analysts say the move reflects the ECB’s anticipated interest increase to 4.25 percent on July 3 which will widen the spread further while the Bank of Japan is widely expected to keep rates on hold at 0.5 percent well into next year.

Selected currencies — weekly results

Indicator scoreboard

EMU

May M3 money supply was up 10.5 percent when compared with the same month last year. For the three months ending in May, M3 was up 10.4 percent. This is its weakest growth since March 2007. The moving average is the preferred measure of the ECB, which has a reference growth rate of 4.5 percent for M3. Money supply growth has been above 10 percent since January 2007. After reaching a growth rate of 12 percent in October and November, the rate of growth has steadily declined thanks in part to a slowdown in bank lending. There was also a dip in growth in the key M3 counterpart, lending to the private sector, which slowed to 10.4 percent from 10.6 percent in April and 10.8 percent in March.

June economic sentiment declined to 94.9 from a revised 97.6. Confidence in industry declined to minus 5 from minus 2 in May while consumer confidence edged down to minus 17 from minus 15. Morale in services edged a tick higher to 9 from 8. However, both the retail sector and construction were down to minus 4 and minus 11 respectively. By country, sentiment was down in Germany (101.5 from 103) as well as France (98.5 from 101.2), Spain (73 from 79.2) and Italy (95 from 95.1). Overall this report indicates that sentiment is eroding in most EMU countries.

Germany

June Ifo business sentiment sank to a reading of 101.3 from May’s 103.5. Both current conditions and business expectations contributed to the overall decline. Current conditions declined to 108.3 from 110.1 while business expectations dropped to 94.7 from 97.2. Among the major sector diffusion indexes, only construction managed to increase in the month. All other components declined with the manufacturing sector sinking from a plus 15 reading in May to 8.2 in June. The retail sector declined to minus 6.5 from minus 4.4 in the prior month.

France

May household spending was up 2.0 percent and 3.1 percent when compared with last year. The monthly gain more than reversed losses incurred in March and April. Excluding autos, parts, tires & drugs, sales were up 1.5 percent and 1.8 percent on the year. Durable good sales leaped 2.8 percent and 7.3 percent on the year with autos soaring some 5.6 percent and 8.3 percent on the year. Household good sales were up 0.6 percent after gaining 1.1 percent in April while textiles jumped 4.3 percent after sinking 3 percent in March and 2.8 percent in April.

May producer price index shot up 1.3 percent, lifting the annual gain to 6.7 percent. As usual, the main driving force behind the monthly advance was energy without which (and agriculture) the core index was up 0.3 percent from April and 2.1 percent on the year. Energy prices increased 5.1 percent on the month and 20 percent on the year. Among the other major product areas, growth in agriculture & food prices was up 0.4 percent from 0.2 percent in April on the month, and constituting a hefty 9.3 percent gain on the year. Auto prices on the other hand edged up 0.1 percent and were up only 0.6 percent on the year. Capital goods prices rose a monthly 0.5 percent and 2.1 percent on the year while intermediates were up 0.3 percent and 3.1 percent from a year ago.

United Kingdom

Final first quarter gross domestic product was revised downward from previous estimates to its lowest in three years. On the quarter, GDP was revised to an increase of 0.3 percent from the original 0.4 percent estimate and to an increase of 2.3 percent from 2.5 percent when compared with the same quarter a year ago. The main reason for weaker growth was a downward revision to service sector growth due to late data returns. Service sector growth was revised down to 0.3 percent from the previously estimated 0.5 percent and 2.6 percent on the year. The implied deflator was up 0.8 percent on the quarter and 3 percent on the year. Activity in all production industries fell 0.2 percent on the quarter but this was heavily biased by a drop of 4.7 percent in mining & quarrying and a 1.3 percent decline in electricity & gas. Manufacturing was up 0.4 percent. Meanwhile, the agriculture, forestry and fish sector grew 0.6 percent. Household expenditures were up 1.1 percent and 3 percent indicating that in this sector for the first quarter at lease, growth remained firm. However, gross fixed capital formation dropped 1.5 percent on the quarter but was up 1.4 percent on the year.

Asia/Pacific

Japan

May unadjusted merchandise trade surplus was ¥365.6 billion, down 7.6 percent when compared with last year. Exports were up 3.7 percent on the year while imports were up 4.4 percent. The surplus continues to shrink due to surging oil prices and the strong yen. On a seasonally adjusted basis, the trade surplus edged up to ¥642.3 billion from ¥642.2 billion in April. Exports were up 4.1 percent while imports were up 4.5 percent. Exports to the U.S. were down 9.5 percent on the year but the decline was partially offset by exports to Asia which were up 8.1 percent. Exports to Western Europe edged down 0.3 percent. Imports from the U.S. sank 8.4 percent. Imports from Asia were also down by 3.8 percent while imports from Western Europe were down 6.7 percent. Imports of mineral fuels were up 40.1 percent within which petroleum soared by 53.4 percent on the year while petroleum products were up 11.1 percent. Exports of machinery were barely better than flat with an anemic 0.8 percent gain on the year while electrical machinery was up 2.4 percent. Transportation equipment exports were up 3.8 percent on the year.

May nationwide consumer price index jumped 0.8 percent and was up 1.3 percent when compared with the same month a year ago. Part of the reason for the increase is the re-imposition of the fuel tax which was temporarily withdrawn in political squabbling in April. Also grain mills increased the price of wheat by 30 percent after increasing it 10 percent in October. The increased costs will filter through to basic food items such as noodles and bread. Transportation & communication prices jumped 3.9 percent on the month and 2.9 percent on the year. Fuel, light & water charges were up 0.4 percent but jumped 5.5 percent on the year. Food prices were up 0.7 percent and 2.4 percent on the year. Prices for goods were up 1.5 percent and 2.5 percent on the year while services prices edged up 0.1 percent and 0.3 percent on the year. June Tokyo CPI, which is often considered an early look at national inflation, was up 0.3 percent on the month and 1.5 percent on the year. Excluding fresh food, the Tokyo index was up 0.2 percent and 1.3 percent on the year. However, excluding both food and energy, the index was down 0.1 percent but edged up 0.3 percent on the year.

May unemployment rate was 4.0 percent, unchanged from the previous month. The number of unemployed increased by 120,000 or by 4.7 percent from the previous year. Employment declined by 210,000 from the same month in the previous year. The labor force participation rate edged down 0.1 percent to 61.1 percent, also on the year. The ratio of positions available to each applicant fell to 0.92, the lowest in more than three years. Companies are becoming reluctant to hire workers and increase wages as record oil prices and costlier raw materials eat into profits. A waning job market means consumer spending, which accounts for more than half of the economy, is likely to weaken in coming months.

May household spending for households with two or more persons sank 3.2 percent when compared with last year. This was a much greater drop than the 1.4 percent drop anticipated by analysts. On the year, households cut back spending on food (down 3.2 percent), housing (down 9.7 percent), clothing & footwear (down 4.9 percent) and medical care (down 11.2 percent). However, spending on furniture & household utensils and education were up on the year. Worker household spending dipped 0.9 percent on the year. The consumer continues to shy away from spending thanks to higher food and energy prices combined with sluggish earnings.

May retail sales edged up 0.2 percent when compared with last year after increasing by 0.1 percent in April and 1.0 percent in March as households feel the pinch from rising food and energy costs and stagnant wages. Large scale retail sales also show a downward pattern in sales. They were down 2.1 percent on the year in May after dropping by 2.2 percent in April. Sales at department stores and supermarkets account for around 15 percent of total retail sales. The sales data validate growing doubts about the resiliency of Japanese consumers as prices escalate. Retail sales have grown the past ten months, though much of the increase is price related as consumers have been forced to pay more for staples, particularly food and fuel.

May industrial production jumped 2.9 percent after edging down 0.2 percent in April and sinking 3.4 percent in March. Analysts had expected industrial production to rise by 2.4 percent. Industrial production was up 2.4 percent when compared with last year. Industries that increased production on the month included transport equipment, information & communication electronics equipment and electronic parts & devices. Commodities that added to the increase in industrial production included large passenger cars, cellular telephones, drive, transmission & control parts. The Ministry of Economy, Trade and Industry said that production is expected to decline 0.9 percent in June and rebound by 2.2 percent in July.

Taiwan

May seasonally adjusted unemployment rate fell slightly to 3.89 percent from 3.92 percent in April. Total employment rose at a seasonally adjusted annual rate of 5.2 percent when comparing the three months to May with the previous three month. Industrial as well as service sectors contributed to overall labor market improvement.

Singapore

May consumer price index was up 0.2 percent and was up 7.5 percent when compared with last year. Food prices increased by 0.8 percent and 9 percent on the year reflecting higher prices for rice, cooked food, cooking oil, fresh fish and vegetables. Transport & communication prices went up 0.6 percent mainly due to higher gasoline and auto prices. Higher accommodation costs raised housing cost by 0.5 percent. Excluding accommodation costs, the CPI edged up 0.1 percent.

Americas

Canada

May industrial product price index was up 0.6 percent and 2.4 percent when compared with last year. The increase was almost entirely due to a boost in prices for petroleum and coal products, which jumped 8.2 percent. Excluding energy, prices were weak, declining 0.5 percent after five straight monthly increases. Excluding energy, the IPPI was down 1.7 percent on the year. Prices for primary metals, motor vehicles & other transportation equipment, chemicals, and electrical & communications products also declined.

May raw materials price index jumped 3.1 percent and soared 27.1 percent when compared with last year. The monthly increase is below those of 5.0 percent in April and 6.7 percent in March. May’s increase was mainly driven by strong prices for mineral fuels, which rose significantly for a third consecutive month. If mineral fuels are excluded, the RMPI would have fallen 1.9 percent, a steeper decline than April's drop of 1.5 percent. Mineral fuels jumped 6.8 percent and are up 66.5 percent on the year. Vegetable products were down 1 percent but still are up 40.7 percent on the year.

Bottom line

Last week, economic data confirmed alarming inflationary trends in Europe and Asia and with them, the virtually universal disgruntled mood of consumers and businesses. The Fed did the expected, although some fed watchers tried to over-parse the post-meeting statement in their efforts to interpret future Fed actions.

Next week we will find out if the ECB really will increase their key interest rate to 4.25 percent. Because of slowing growth and despite inflationary pressures, the Reserve Bank of Australia is expected to keep its key rate at 7.25 percent. Oh yes, it is a holiday shortened week in the U.S. All markets will be closed on Friday July 4 for the Independence Day celebration.

Looking Ahead: June 30 through July 4, 2008

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