Global Markets

Economic data swamped investors on Thursday and Friday as they looked for guidance to their investment’s future. And one needed to be two-handed to determine which way the U.S. and overseas economies were going. While second quarter U.S. growth was lower than anticipated, the Chicago purchasing managers survey edged above the breakeven point. On the other hand, jobless claims soared thanks to technical issues that will take some time to iron out. And in Europe, the flash harmonized index of consumer prices edged up to a record 4.1 percent on the year virtually ruling out any near term interest rate cut while unemployment was unchanged from the previous month. In Australia, a surprise trade surplus offset weaker than expected retail sales. And then it was Friday — and it was employment Friday! While U.S. employment dropped less than expected, the unemployment rate rose more than expected. But virtually all the purchasing managers’ indexes worldwide — including those in China, Japan, Australia, EMU and UK — continued to decline. As one would expect, equities were mixed on the potpourri of data.

No one was particularly sorry to see July end especially if you were an equity investor. Positive results were few and far between. Of the indexes followed here, the star performer was India’s Sensex, which was up 6.6 percent in July despite an aggressive central bank that increased interest rates. It was followed by the Philippine PSEi, up 4.8 percent, and the Hang Seng, which was up 2.8 percent. The DAX, Nasdaq and Dow also gained in July. For the seven months through July, North American indexes as a group outperformed those in Asia and Europe. Despite losing 6 percent in July, the S&P/TSX Composite is the best performer — down only 1.7 percent in 2008 even though the index experienced its worst monthly drop since November thanks to sliding commodity shares and oil prices that extended their declines.

For the week, in the Asia/Pacific region, five indexes — Hang Seng, Sensex, Jakarta Composite, KLSE Composite and PSEi — gained on the week while in the UK, the FTSE was virtually unchanged as was the Nasdaq in the U.S. The S&P 500 and S&P/TSX Composite also gained in North America.

Global Stock Market Recap

Europe and the UK

Both the CAC and DAX were down while the FTSE was virtually unchanged in a week of volatile trading. After sinking on Monday, the DAX especially, staged a recovery later in the week. But losses on both Monday and Friday, more than offset midweek gains. Aside from Wednesday’s impressive gain, the CAC was down for the rest of the week. Losses three of five days left the FTSE virtually unchanged for the week. On Thursday, the indexes declined after second quarter GDP data showed that the U.S. grew less than expected and following disappointing earnings reports. And in Europe stocks were hit by July’s record high gain in inflation. In the UK, a report showed that house prices continued to decline on a monthly basis. Adding to the gloom on Friday were the purchasing managers’ indexes — all were down on the month and all are below the 50 breakeven point with the exception of Germany which managed to stay above that level.

The DAX gained 1 percent in July while the CAC lost 1 percent and the FTSE tumbled 3.8 percent. The FTSE has lost ground in each of the past three months and five out of seven in 2008. The CAC was also down five of seven months while the DAX has declined for four months this year. The graph above shows the indexes’ performance through the end of July.

Asia/Pacific

Stock markets in this region were mixed last week on renewed worries about the strength of the U.S. economy thanks to weaker than anticipated second quarter growth along with a sell off in U.S. markets. Asian/Pacific markets were closed when Friday morning’s spate of U.S. data were announced. Five of 13 indexes were up on the week. The Philippines PSEi led the pack with a gain of 2.8 percent and was closely followed by the Sensex, up 2.7 percent. Losers were led by the Taiwan Taiex which was down 3.2 percent, followed by the Shanghai Composite, down 2.2 percent.

Four of 13 indexes were up for the month. The Sensex jumped by 6.6 percent in July despite rising inflation and along with it, interest rates, while the PSEi was up 4.8 percent. They were followed by the Hang Seng, up 2.8 percent and the Shanghai Composite, up 1.4 percent. Losses for the month were numerous and high. For example, the Thai SET was down 12 percent while the Taiex was down 6.6 percent. Other big losers included the Australian All Ordinaries, down 5.3 percent and the South Korean Kospi, down 4.8 percent. The graphs above show the indexes’ performance through the end of July.

The Japanese market ended the week on a sharply lower note after posting gains for the previous two sessions. On Friday, the market extended its losses amid weakness throughout Asian equity markets and poor Japanese corporate earnings. For the week, the index lost 1.8 percent while the Topix dropped 2 percent. Data earlier in the week was weak, with employment down and unemployment up while industrial production deteriorated. The industrial production data showed the second straight quarter of decline for the three months through June, indicating that the Japanese economy, which had remained relatively flat until recently, might be entering a “delicate phase.”

The Shanghai Composite was positive on Friday after paring early losses, thanks to President Hu Jintao reiterating the government's intention to maintain steady and fast economic growth. But the gain was too little and too late and the index was down for the week. The index has lost 47 percent this year and is the worst performer among indexes followed here on concern rising fuel prices and accelerating inflation will hurt earnings.

Reserve Bank of India

The Reserve Bank of India once again raised it policy repurchase rate to 9 percent from 8.5 percent. It was the third increase in two months. India's move today was the sixth rate increase by an Asian central bank since late June as policy makers in the region grapple with soaring food and energy prices. The Philippine central bank has raised rates at its last two meetings, while Bank Indonesia has boosted borrowing costs for three straight months. Thailand raised its benchmark for the first time in two years and Pakistan followed suit. Governor Yaga Venugopal Reddy also raised the cash reserve ratio to 9 percent from 8.75 percent and indicated that monetary policy may need to be tightened further because of inflationary pressures. Stocks declined while the rupee gained.

Currencies

The dollar rose to a one-month high against the euro as a government report showed employers in the U.S. eliminated fewer jobs last month than analysts forecast. The euro weakened as June German retail sales dropped more than twice as much as forecast, and in the process, undermined the case for the European Central Bank to raise interest rates again this year. On Friday, the dollar pared its gain against the euro as crude oil rose after Israeli Deputy Prime Minister Shaul Mofaz said Iran, OPEC's second-largest oil producer, is on a path toward a “major breakthrough”' in its nuclear program. Unease about Middle East crude supplies acts as a catalyst for the dollar — pushing it lower — and crude prices — pushing them higher.

Sterling dropped close to a three-week low against the dollar Friday after weak manufacturing data stirred worries that the UK economy was falling into recession. The manufacturing purchasing managers’ index dropped from 45.9 in June to 44.3 in July. This is the third month in a row that the index has suggested contraction in the sector and is the lowest reading since December 1998. The survey also showed UK exports were failing to benefit from sterling weakness while employment in the sector dropped sharply.

On Monday, the Chinese renminbi recorded its biggest one day drop against the dollar since it was depegged from the U.S. currency in July 2005. The decline of the renminbi, which is tightly managed by the Chinese authorities, sparked speculation that China was moving away from using appreciation of the renminbi as a tool to combat inflation towards using a weaker currency to boost export-led growth. The People’s Bank of China noted in its latest Monetary Policy Report that containing inflation would take a “prominent position” in policy decisions. However, China’s Politburo said recently that it wanted to maintain “steady and relatively fast” economic growth.

Selected currencies — weekly results

Indicator scoreboard

EMU

July flash harmonized index of consumer prices was up 4.1 percent when compared with last year, a record high. As with all flash reports, no details are provided but national indexes suggest that higher energy costs were again largely to blame, although the food sector may also have added some pressure. Regionally among the big four member states, inflation rose in Spain (5.3 percent from 5.1 percent), in France (4.0 percent from 3.7 percent) and in Italy (4.1 percent from 4.0 percent) but held steady in Germany (3.3 percent).

June unemployment rate was unchanged at 7.3 percent to which the May rate was upwardly revised. This means that the 7.2 percent rate seen each month between December last year and April this year is likely to constitute the bottom in the current economic cycle. Most EMU members saw no significant change in their respective national jobless rates although Spain saw unemployment jump 0.3 percentage points to 10.7 percent. Germany bucked the trend with a 0.1 percentage point decline to 7.3 percent but national data suggest that this will prove only temporary.

EU

July economic sentiment declined to 89.5 from 94.8 in June. The 5.3 point monthly drop in sentiment was the largest this year and provides a clear warning that economic conditions may be deteriorating rather more quickly than generally anticipated. Confidence dropped by 3 points in industry to minus 8 and was down by 7 points in the more important services area to 1. The consumer sector saw morale weaken by 3 points to minus 20 while retail was down 5 points at minus 9. Confidence in construction declined 3 points to minus 14. Among the largest EMU countries, sentiment fell 4.2 points in Germany to 97.3, 4.9 points in France to 93.5 and a whopping 9.6 points in Italy to 85.4. The only big four member to buck the trend was Spain where sentiment rose 1.2 points but at 74.2, confidence has already slumped so far that the minor recovery this month is essentially meaningless.

Germany

July unemployment rate was unchanged at 7.8 percent. Although the number of unemployed dropped by a surprisingly large 20,000, this was still significantly smaller than previous monthly declines and combined with a 9,000 drop in vacancies, confirms the picture of a gradually deteriorating labor market. The number out of work fell 9,000 in the West and 11,000 in the East, compared with declines of 20,000 and 16,000 respectively in June. Employment, which lags a month behind, remained in positive territory with a 13,000 gain at the end of last quarter but the trend here is similarly weakening.

June total retail sales plummeted 2.8 percent and 3.7 percent when compared with last year. Retail sales excluding autos and gasoline sank 1.4 percent and were down 3.9 percent on the year. The slide in non-food sales (1.8 percent) would have been steeper but for a rise in purchases of other assorted goods (2.5 percent). Sales of clothing and shoes (1.7 percent) and of furniture and household goods (2.5 percent) were well down on a year ago. Other goods (3.0 percent) and mail order (4.2 percent) were similarly very weak.

France

June producer price index was up 0.7 percent and soared by 7.3 percent when compared with last year. Another large increase in energy prices (2.1 percent) accounted for much of the latest monthly advance with the core index rising only modestly (0.4 percent) although even this was sufficient to boost the annual underlying rate from 2.1 percent to 2.4 percent. Among the other major sectors, semi-finished and capital goods prices both climbed 0.5 percent on the month. Jumps in metals (1.0 percent) and chemicals & rubber (0.7 percent) were largely to blame for the former while higher machine costs (0.6 percent) was the driving force behind the latter. Against this, consumer goods prices were unchanged from May with higher clothes prices (0.4 percent) offset by declines in drugs & healthcare (0.2 percent) and household durables (0.4 percent). Agriculture and food prices edged up by 0.1 percent.

Italy

June producer prices were up 0.8 percent and by 8.2 percent when compared with last year — the fastest pace recorded since the data series began in 2003 and 3.5 percentage points higher than seen at the end of last year. Inevitably the largest impact on the headline index came from energy which posted another hefty 2.0 percent rise on the month and now stands 23.8 percent up on the year. Net of energy, producer prices climbed a monthly 0.5 percent and an annual 4.2 percent. Among the other sectors, intermediates advanced a monthly 0.5 percent and capital goods 0.4 percent while consumer goods increased a relatively modest 0.3 percent over May.

Asia/Pacific

Japan

June unemployment rate edged up to 4.1 percent from 4 percent in May. Employment dropped by 13,000 on the month and 400,000 when compared with June a year ago. The recently released Tankan survey indicates that business confidence during the second quarter was at its lowest in five years. This appears to be flowing through to business hiring therefore limiting employment growth prospects. The employment environment is also being negatively affected by rising raw material costs, and companies are reluctant to increase personnel costs as well.

June household spending dropped 1.8 percent when compared with last year. Spending sank for clothing & footwear (down 13.8 percent) and medical care (down 11.9 percent). However spending on furniture & household utensils jumped 8.1 percent while education was up 5.1 percent and transportation & communication was up 4.5 percent. Worker household spending was down 2.1 percent on the year.

June retail trade data, up 0.3 percent on the year, surprised analysts who were expecting a decline of 0.2 percent. The lower expectations were based on the trend of softer sales as the economy slows and high energy prices crimp consumer purchasing power. However, sales at large scale retail stores sank 3.9 percent. Retail sales have been trending lower since December.

June industrial production declined 2 percent after increasing by 2.8 percent in May. When compared with last year industrial production edged up 0.2 percent. Industries that declined included transport equipment, general machinery and other industries. Commodities that contributed to the decline included large and small passenger cars and semiconductor products machinery. According to the Survey of Production Forecast in Manufacturing, production is expected to decrease 0.2 percent in July and to decrease 0.6 percent in August.

Australia

June retail sales gave back all of May’s 0.9 percent increase and declined by 1 percent. On the year, sales were up 3.2 percent. All industries except household good retailing (up 0.8 percent) and hospitality & services (unchanged) declined in June. The largest declines were in department stores (down 5.2 percent) and clothing & soft good retailing (down 5.0 percent). Retail sales have now declined in four of the six months of 2008. As elsewhere, consumers have been hit by rising gasoline prices that surged to a record earlier this month and have forced curtailment of spending.

June merchandise trade surplus was A$411 million after recording a deficit in May of A$253 million. Exports were up 2 percent while imports were down 0.9 percent. The surplus was primarily due to the strong increase in exports, mainly in non-rural and other goods. Non-rural exports and other goods exports were up 3 percent while rural goods exports dropped 4 percent. Services exports were up 1 percent. As to be expected the increase in non-rural and other goods was driven by coal, coke & briquettes, which were up 21 percent. Imports declined thanks to drops in intermediate & other which were down 5 percent and consumption goods which declined by 2 percent. However capital goods imports jumped 9 percent while services were up 1 percent.

Hong Kong

June retail sales volume was up 4 percent when compared with last year and 11.6 percent in value terms. Seasonally adjusted retail sales volume edged up 0.4 percent on the month after falling for three consecutive months. For the second quarter as a whole, retail sales contracted by a seasonally adjusted annual rate of 6.1 percent in volume terms.

Americas

Canada

June industrial product price index jumped 1.3 percent and was up 5.4 percent when compared with the same month a year ago. Coal & petroleum products soared 6.1 percent on the month. Excluding this category, prices would have risen only 0.6 percent or just 0.4 percent on the year. Other significant monthly increases were registered by fruit, vegetables, feed & other food products (1.5 percent), lumber & other wood products (1.5 percent), pulp & paper (1.1 percent), chemicals & chemical products (2.1 percent) and motor vehicles & other transport equipment (1.0 percent). The only monthly declines were seen in primary metals products (1.1 percent) and miscellaneous non-manufactures (4.8 percent). June raw materials price index soared 4.4 percent and was up 31.9 percent on the year. Inevitably, the surging cost of mineral fuels (8.4 percent) lay behind the latest monthly leap. Indeed, the same category now shows a 12-month growth rate of 76.8 percent. Excluding mineral fuels, the RMPI declined 1.4 percent on the month and dropped 6.2 percent on the year.

May monthly gross domestic product edged down 0.1 percent but was up 0.6 percent when compared with last year. The goods producing sector declined 0.5 percent — all components were down with the exception of manufacturing which edged up 0.1 percent. Mining & oil and gas extraction (down 1.2 percent), utilities (down 1.3 percent) and agriculture & fishing all posted significant declines. Total energy was down 0.9 percent. Overall services were unchanged as small changes in output among the main sectors effectively cancelled each other out. The only notable rise was in arts, entertainment & recreation (1.6 percent).

Bottom line

Data released last week paint a picture of weakening economies in Europe, Asia/Pacific, the UK and the U.S. There was little to cheer in Friday’s purchasing managers’ surveys while German and Australian retail sales data released earlier were quite weak indicating consumer retrenchment. U.S. growth disappointed but employment, although down for the seventh month, contracted less than expected and stirred a mini-rally that did not last very long.

This week is all about central banks. The first announcement will come from the Reserve Bank of Australia (12:30 AM ET Tuesday) which is expected to keep its key interest rate at 7.25 percent because of continuing inflationary pressures and despite weakening growth. The statement that is issued with the announcement will draw close scrutiny especially from those who follow interest rate spreads. Later on Tuesday (2:15 PM ET) the Federal Reserve will announce the outcome of its FOMC meeting. No rate change is expected from its current 2 percent fed funds target rate although analysts will certainly parse every word of the accompanying announcement. The week ends on Thursday when the Bank of England (7:00 AM ET) will make its announcement followed 45 minutes later by the European Central Bank (7:45 AM ET). Neither is expected to make a policy change given inflationary pressures of 5 percent and 4.25 percent respectively. While no statement will be forthcoming from the Bank of England, analysts will listen closely to ECB’s president Jean Claude Trichet’s press conference that follows after the Governing Council meeting.

Looking Ahead: August 4 through August 8, 2008

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