Global Markets

It doesn’t take much to send a rally into the skids these days. Bad news can be discounted only so far before investors unload equities. Take Thursday for example. The recent rally in U.S. and European equities ground to a halt thanks to unsettling economic releases on both sides of the Atlantic. This shifted the focus back to fundamentals and sent investors scurrying for the safety of government bonds.

Yet by and large global equities kept a positive tone last week as oil prices continued to retreat. However, gains were limited by concerns about the global economic outlook and the financial system. On Thursday, U.S. financial stocks suffered their worst one-day fall in eight years even though corporate profits have not been as bad as feared. And hawkish comments from Federal Reserve officials strengthened the dollar as rate increase expectations escalated and the currency markets seemed to take a benign view of the U.S. economic outlook. Underlining global economic fragility, the Reserve Bank of New Zealand cut interest rates this week for the first time in five years.

For the week, while stocks were up in the Asia/Pacific, they were mixed in Europe and North America. The FTSE, Dow, S&P 500, S&P/TSX Composite and Bolsa were down on the week.

Global Stock Market Recap

Europe and the UK

While the DAX and CAC were able to salvage a positive gain last week, the FTSE was not so fortunate. Thanks to the pull of U.S. equities, the three indexes managed to reduce Friday’s losses ― and in the case of the DAX and CAC ― turn them into gains after better than expected U.S. economic data. The DAX gained 0.8 percent on the week while the CAC jumped 1.8 percent. The FTSE was down 0.4 percent. After an exuberant Wednesday, stocks gave back most of the gains on Thursday after Daimler cut its full year profit forecast and Ford posted a massive second quarter loss, while weakening metals and crude oil prices hit mining and energy stocks. And the indexes continued to slide after U.S. existing home sales fell more than expected. In Europe, the German Ifo business climate index sank more than expected to its lowest since September 2005.

Bank of England minutes show MPC split

The Bank of England said its monetary policy committee was split three ways on the direction of interest rates at its July meeting before it voted to leave interest rates on hold at 5 percent in what it said was a difficult decision. One member voted for a 25 basis point increase while another, for a 25 basis point cut with the remaining seven members voting for no change. The three-way division was the first of its kind since May 2006 as the Bank continued to struggle with the conflicting demands of slowing growth and stubborn inflation. Members argued that holding rates steady when the economy was slowing “was arguably already sending a strong signal of the MPC’s commitment to reducing inflation”.

Asia/Pacific

Despite heavy losses on Friday, all area equity indexes followed here were up on the week. Friday’s sharp declines snapped a four day rally that followed a sharp drop overnight in the U.S. as weaker-than-expected existing home sales data renewed concerns about the economy. Banking stocks tumbled following the lead from their U.S. counterparts, while a weaker U.S. dollar pressured export-oriented stocks. Investors here continue to follow U.S. events intently and take their lead from overnight trends in the U.S. markets. Both auto manufacturers and consumer electronic companies benefited from the drop in crude oil prices and the rising U.S. currency.

The Nikkei snapped a three-day winning streak to close nearly 2 percent lower as banks and exporters put downward pressure on the index. However, despite Friday’s 2 percent loss, the index still managed to gain 4.1 percent last week ― an indication of just how strong the rally had been earlier in the week. Indeed, gains ranged from 2.4 percent for the All Ordinaries to the Taiex’s 6.1 percent increase. On Friday, Australian stocks recorded the largest one-day decline in six months to close more than 3 percent lower after National Australia Bank raised its provision for bad debts. However, the All Ordinaries still managed to gain for the week. In Japanese economic news, the merchandise trade surplus tumbled while prices continue to show the unabated pressures from energy.

According to the Asian Development Bank, East Asia is suffering from a bad case of inflation and Asia’s governments must make curing inflation the priority by raising interest rates. East Asia has aggressively pursued growth for the last decade, but when faced with rising prices of fuel and foods, governments did not curb demand. Although some Asian central banks have started tightening monetary policy, the Bank said that it has been too little, too late. Inflation is now at record highs in South Korea and Malaysia. It has broken 25 percent in Vietnam. Wages are already rising to chase prices. In some countries, the course of action for central banks is relatively clear. In Indonesia, the Philippines and Taiwan, the outlook is for above-average growth and high inflation. Although their central banks have tightened recently, they still have negative real interest rates.

For other countries, inflation is being made worse by exchange rate policies. In the most extreme case, Hong Kong’s strict U.S. dollar peg forces it to import American monetary policy. Matching the Federal Reserve’s recent rate cuts is causing it to overheat.

Bank of Japan monetary policy board minutes

The Bank of Japan said it would start releasing complete minutes of monetary policy board meetings but not until 10 years after the meetings have been held. They will start with minutes for meetings held between January and June 1998. Currently, the BoJ releases summaries of meeting discussions about one month after the meetings have been held. While these summary minutes refer to comments made by members generically, they stop short of providing the speakers' names or exact comments. The full minutes that the BoJ will start disclosing at the end of the month will include the speakers’ names and their individual remarks.

Reserve Bank of New Zealand

The Reserve Bank of New Zealand surprised analysts and lowered its official cash rate (OCR) to 8 percent from 8.25 percent. It was the first rate cut in five years. Analysts thought that the Bank would hold off until September given the high rate of consumer inflation at 4 percent. The Bank noted that it expects inflation to accelerate to an 18-year high this year and will not fall below the 3 percent limit of its target range until mid-2010.

Central Bank of Malaysia

Despite climbing inflation and upward revisions to the outlook for prices, the Central Bank of Malaysia kept its key interest rate unchanged at 3.5 percent Friday, surprising the majority of economists who were looking for an increase. Citing fears of second-round inflation effects, the Bank raised its inflation forecasts for 2008 to a range of 5.0 percent to 6.0 percent from 4.2 percent on the year. In its accompanying statement, the Bank said its primary concern is a pending economic slowdown and higher unemployment rates.

Currencies

The dollar gained strength last week against the pound sterling, euro and yen as crude prices declined and some earnings proved better than expected. The yen weakened after an unexpected increase in U.S. durable goods orders bolstered speculation that investors will buy higher-yielding assets funded in Japan. The dollar extended its gain as sales of new homes in June dropped less than forecast and a gauge of consumer confidence unexpectedly advanced this month. Traders raised bets that the Federal Reserve will increase borrowing costs in September. The euro dropped to a two-week low against the dollar as weaker-than-expected German economic data stirred fears that the eurozone was headed for a slowdown.

The pound sterling lost ground Thursday after a sharp decline in UK consumer spending heightened fears that the country is headed into a recession. Analysts said the news heightened the chances that the Bank of England will cut interest rates. On Wednesday sterling advanced after the minutes of the Bank of England’s monetary policy committee meeting revealed a three-way split on interest rates.

Selected currencies — weekly results

Indicator scoreboard

EMU

June M3 money supply slowed from 10.0 percent in May to 9.5 percent, its weakest reading since January 2007. As a result, the three-month moving average measure preferred by the ECB dipped to 9.9 percent from 10.1 percent in May and from its peak rate of 12 percent last December. Key to the slowdown was weaker private sector lending where the 12-month rate of increase eased to 9.8 percent from 10.5 percent. The annual growth rate of loans to non-financial corporations dropped to 13.6 percent from 14.2 percent in May and of loans to households to 4.2 percent from 4.9 percent. Lending for house purchases similarly fell to a 4.4 percent annual rate from 5.6 percent.

Germany

July Ifo business sentiment sank to 97.5 from 101.2 in June ― a 34 month low. The latest decline reflected steep drops in both the current component (105.7 from 108.3) and expectations (90.0 from 94.7). Every sector saw a marked worsening in morale led by retail (minus 20.4 from minus 6.7) which dropped especially sharply. Manufacturing (2.1 from 8.1), wholesale (minus 7.3 from plus 2.0) and construction (minus 23.3 from minus 19.0) all followed a similar path. The weakness of this report is consistent with the findings of both the ZEW and (flash) PMI surveys this month.

France

June consumption of manufactured goods was down 0.4 percent after jumping 1.7 percent in May. Sales were up 1 percent when compared with last year. The monthly drop in spending was led by autos (down 3.8 percent) which predictably unwound much of their May bounce to ensure sharply lower overall durable goods purchases (down 1.3 percent). Less autos and parts however, consumption actually edged up 0.1 percent. The only other decline was in other products (0.1 percent). However, there were solid gains in both sales of household goods (0.8 percent) and textiles (0.6 percent).

Italy

May retail sales edged up 0.2 percent and were up just 0.1 percent when compared with last year. The latest monthly gain was split between the food (0.3 percent) and non-food (0.2 percent) sectors although over the year, only the former (2.2 percent) showed any growth reflecting sharp gains in food prices during the period. Annual non-food purchases declined 0.7 percent.

United Kingdom

June retail sales plunged 3.9 percent on the month more than offsetting May’s record gain of 3.6 percent. Sales were up 2.2 percent on the year. The recent volatility make interpreting the underlying picture far from easy but over the latest three months, volumes rose 0.6 percent. Within volumes, food sales were down 0.2 percent leaving a solid 1.1 percent increase in the key non-food sector to account for all of the headline gain. In June alone, food stores slumped 3.6 percent on the month but were eclipsed by a 4.5 percent nosedive in the non-food sector. Outside of non-specialist stores (up 0.4 percent), all areas saw hefty declines led by clothing & footwear (6.9 percent) and household goods (5.0 percent). Purchases at other stores and non-store retailing were down 4.4 percent and 0.5 percent respectively.

Second quarter preliminary gross domestic product edged up 0.2 percent and was up 1.6 percent when compared with the same quarter a year ago and the slowest pace since the start of 2005. The preliminary report does not provide details on the expenditure components of GDP but the output breakdown shows that the services sector was wholly accountable for the small increase in output. A 0.2 percent quarterly increase here reflected mainly a 2.2 percent jump in transport, storage & communications although there were smaller gains in distribution, hotels & catering (0.2 percent), business & financial services (0.4 percent) and government (0.4 percent). Industrial production contracted 0.9 percent on the quarter and some 6.8 percent on the year. Quarterly declines were widespread across the industrial sector with manufacturing down 0.4 percent, electricity & gas 0.5 percent lower and mining & quarrying 0.9 percent weaker. Construction fell 0.7 percent and agricultural output was flat.

Asia/Pacific

Japan

May all industry index was up 0.4 percent about as expected. On the year, the index was unchanged. The tertiary index, which is a major component of the all industry index, was released last week to show a decline of 0.2 percent in May. The all industry index takes a reading of activity in the 11 industries that comprise the tertiary index, along with activity in the construction, agricultural & fisheries industries, the public sector and industrial output. This index is considered a close approximation of gross domestic product growth as measured by industrial and service sector output.

June merchandise trade surplus was ¥138.6 billion, down from ¥1.236 billion a year ago. The surplus was 88.9 percent below that of a year ago. Imports were up 16.2 percent while exports were down 1.7 percent on the year. Exports to the United States dropped 15.4 percent while imports from the U.S. were up 10.7 percent. Exports also dropped with Western Europe. They were down 10.3 percent but imports were up a marginal 2.3 percent on the year. All major categories of exports declined on the year with machinery down 6.9 percent, electrical machinery down 4.6 percent and transport equipment down 3.9 percent on the year. In contrast on the import side, most major categories except machinery and electrical machinery were up on the year. Mineral fuels soared by 57.5 percent while transport equipment was up 10.7 percent. Manufactured goods were up 5.5 percent and chemicals jumped by 8.9 percent on the year.

June nationwide consumer price index was up 0.5 percent and 2 percent when compared with last year and the fastest pace in about a decade. Higher prices have been discouraging households from spending and slowing economic growth. Core CPI which excludes fresh food was up 0.4 percent and 1.9 percent on the year after climbing 1.5 percent on the year in May. However, the core CPI which also excludes energy was unchanged on the month and inched up 0.1 percent on the year. Fuel, light and water charges jumped 1.4 percent in the month and soared 6.8 percent on the year. Goods prices were up 3.7 percent on the year while services prices gained just 0.4 percent. July Tokyo CPI which is often considered a harbinger of the national index edged down 0.1 percent on the month and was up 1.6 percent on the year. Excluding only fresh food the index was up 1.6 percent on the year, however, when energy is also excluded, prices were up a mere 0.3 percent.

Australia

Second quarter final stage producer price index increased a less than expected 1.0 percent in the second quarter and was up 4.7 percent when compared with the same quarter a year ago. The increase reflects a rise of 1.4 percent in the price of domestically produced items offset by a decline of 1.0 percent for imported items. Price increases were led by petroleum refining (up 8.2 percent), meat & meat product manufacturing (up 3.1 percent), non-building construction (up 2 percent) and building construction (up 1.6 percent. Prices for other agriculture sank 7.3 percent while electronic equipment manufacturing was down 6.4 percent. Intermediate prices were up 2.7 percent and 7.1 percent on the year while preliminary stage prices were up 3.5 percent and 8.5 percent on the year.

Second quarter consumer price index increased by 1.5 percent and was up 4.5 percent when compared with the same quarter a year ago. The gain was higher than the 1.3 percent rise in the first quarter. The 4.5 percent annual change is the largest since the fourth quarter of 1995. Prices for deposit & loan facilities soared by 9.5 percent, automotive fuel jumped by 8.7 percent, rents by 2.2 percent and hospital & medical services by 4.0 percent. Prices also increased for house purchases, furniture and spirits. However, these increases were partially offset by declines in prices for other financial services (down 2.9 percent), fruit (down 7.4 percent), vegetables (down 6.5 percent), domestic holiday travel & accommodation (down 2.0 percent) and electricity (down 1.4 percent).

Hong Kong

June consumer price index was up 6.1 percent when compared with last year after climbing 5.7 percent in May. Food prices rose 11.3 percent from a year earlier and utility costs increased 7.4 percent. Rents climbed 6.3 percent. Excluding the food and housing component, prices were up 2.6 on the year from May’s 1.8 percent, reflecting higher costs for transportation and utilities due to elevated external energy and commodity prices.

Taiwan

June seasonally adjusted unemployment rate fell slightly to 3.88 percent from 3.89 percent in May. Total employment for the three months through June was up 5.3 percent when compared with the previous three months. Both the industrial and service sectors contributed to the overall gain.

Singapore

June unadjusted consumer price index was down 0.3 percent but was up 7.5 percent when compared with last year. The monthly decline was due mainly to lower service & conservancy charges (rebates were given in June). Clothing & footwear declined thanks to price deductions for the Great Singapore Sale. However food prices jumped by 0.6 percent as did those for recreation. On a seasonally adjusted basis, the CPI was up 0.4 percent on the month.

South Korea

Second quarter gross domestic product was up 0.8 percent and 4.8 percent when compared with the same quarter a year ago.

Americas

Canada

May retail sales were up 0.4 percent and 2.8 percent when compared with last year. In volume terms sales were up just 0.1 percent on the month. Outside of gasoline stations (up 2.4 percent) the only other sizeable monthly advance was posted by building & outdoor home supplies (up 0.7 percent) which easily beat the headline increase thanks to a spurt in demand at specialized building and materials & garden stores (up 1.0 percent). Elsewhere, there were meagre rises in sales at furniture, home furnishings & electronics stores, at pharmacies & personal care stores and at miscellaneous retailers. On the downside there were declines in purchases at clothing & accessories stores (0.7 percent) and general merchandise stores (0.2 percent). Excluding autos, sales also rose 0.4 percent from April and were up 4.8 percent on the year.

June consumer price index jumped by 0.7 percent and was up 3.1 percent when compared with last year and up sharply from May’s 2.2 percent increase on the year. Core CPI excluding food and energy was unchanged on the month and up 1.2 percent on the year. The Bank of Canada’s core inflation measure which excludes eight volatile items was up 0.1 percent and 1.6 percent on the year. On a monthly basis, the main driving force behind the latest jump was of course energy which saw another hefty increase in gasoline prices that propelled overall energy costs up 4.4 percent from May. Outside of food (up 1.0 percent) and the fuel price-hit transportation sector (up 1.8 percent), the other main categories were all much better behaved. Prices for household operations, furnishings & recreation and for education & reading were unchanged while health & personal care and alcohol & tobacco both posted very modest gains. Clothing & footwear (down 0.5 percent) continued to decline.

Bottom line

Stocks were mixed in Europe and North America last week. But Asian/Pacific stocks were up on the week. There was both good and bad news in the limited economic data that were released. In the U.S. existing home sales were terrible while new home sales were much better than expected. Business confidence was down in Germany while consumer sentiment staged a mini-rebound in the U.S. In Japan, inflation was high while the merchandise trade surplus sank on weak overseas sales. The Reserve Bank of New Zealand lowered its key interest rate for the first time in five years.

The last week of the month as always, contains a full slate of data. A first view of U.S. second quarter growth is on tap as are the manufacturing purchasing managers’ surveys. There will also be unemployment data from Germany and the EMU. And we will learn if the easing in crude prices continues.

Looking Ahead: July 28 through August 1, 2008

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