Global Markets

While everyone was away for the last week of summer, a plethora of new economic data combined to confirm second quarter gloom (especially in Europe) and a weak start to the third quarter. And in the U.S., data confused many as some releases such as durable goods orders and the upward revision to second quarter gross domestic product (albeit two months old) painted a picture that appeared to be too good to be true. These positive results were offset on Friday as the July personal income and consumption data showed that with the rebates spent, income declined while spending was weak. At times there was a disconnect between the data and market reaction given thin volatile holiday trading. Consumer sentiment seems to have bottomed in the U.S. while elsewhere, and especially in Germany, it continues to decline.

Market participants continue to react more to U.S. data than their own regional data. For example, when U.S. GDP data were revised upward, equity investors celebrated — one off events such as the tax rebates enabled consumers to spend while exports were up more than originally estimated.

Investors kept a wary eye on Hurricane Gustav. A visit from Gustav is expected sometime around the U.S. Labor Day holiday for the oil-producing Gulf of Mexico areas of the U.S. including the hard hit regions of Louisiana, Mississippi and Texas. At this writing, the offshore production platforms are being shut down in preparation for this storm. However, initially oil prices eased as analysts decided that the U.S. government would use the strategic petroleum reserves to offset losses. Crude oil spot West Texas Intermediate prices were over the $115 point Friday (3 PM ET).

On the week, stocks were up in most of the Asia/Pacific region with the exception of the Kospi and Shanghai Composite. Equities were up in Europe, the UK and Canada. For August, the picture was mixed with most Asian/Pacific indexes down while only the DAX declined in Europe and the Bolsa in North America. For the eight months of 2008, all indexes have a double digit loss with the exception of the S&P/TSX Composite — it is down about a half of a percentage point.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were positive on the week in thin trading and despite weak European and British data. And on Friday they did not follow U.S. stocks south after weak income and spending data and despite gloomy sentiment data. In Europe, most data were released on Thursday and Friday. Investors focused on an exceedingly upward revised U.S. GDP report rather than on their gloomy domestic data and bought financial stocks even though the U.S. data are now two months old. GDP benefited from rebate checks and a larger than originally estimated increase in exports — both one time factors. And in Europe, stocks were up on better than anticipated earnings reports.

UK stocks were up on the week and month. The FTSE posted its first monthly gain since April and the best performance among the world's largest equity markets. Despite all the wailing and woe about the sinking economy, British shares managed to gain 4.2 percent in August. The CAC was up 1.9 percent on the week and 2.1 percent on the month. However, although the DAX was up 1.3 percent for the week, it declined 0.9 percent for the month. For 2008 so far, the FTSE, CAC and DAX are down 12.7 percent, 20.2 percent and 20.4 percent respectively.

Asia/Pacific

Asian/Pacific stocks ended the week on an upbeat note Friday, thanks to the bigger than anticipated upward revision to U.S. second quarter growth. The data combined with Thursday’s drop in crude oil prices buoyed investors. The Sensex surged 3.7 percent and the Nikkei gained 2.4 percent, its biggest one-day gain in three weeks.

In Japan, equities were down on both Tuesday and Wednesday as investors remained cautious ahead of the deluge of key U.S. and Japanese economic data scheduled for release on Thursday and Friday. The indexes ended the week sharply higher with the Nikkei rising above the 13,000 level and gaining 3.2 percent while the Topix was up 3.1 percent for the week. Thursday night’s data deluge indicated that industrial production and housing starts were up while the unemployment rate edged back down to 4 percent. And while the CPI jumped on the year, most if not all the increase was attributable to energy and raw material costs.

The Japanese government announced on Friday a stimulus package worth about ¥11.7 trillion ($107.8 billion) aimed at boosting the faltering economy by easing the negative impact from soaring energy and raw material costs. The package, the first since 2002, centers on assistance in the form of government-backed loans and tax breaks for smaller companies and households suffering from higher gasoline and food prices. But financial market watchers appeared unimpressed, noting that the emergency program may not be sufficient to reverse the slowing economy. They said that while the package would generate some favorable effects such as improved consumer sentiment and easier availability of funds for small and midsize companies, economic indicators are unlikely to show improvement anytime soon.

It was a dreary August for most Asian stock indexes followed here. Only the All Ordinaries along with the PSEi, Taiex, SET and Sensex gained on the month. Data were mixed last week with many indexes salvaging a positive week in Friday’s trading thanks to upbeat U.S. data overnight. The best Asian/Pacific performers last week were the Hang Seng, up 4.3 percent, and the All Ordinaries, up 4.1 percent. In August, the Philippine PSEi was up 4.3 percent while the Shanghai Composite sank by 13.6 percent. Japanese stocks are the best performers in the region so far in 2008. The Nikkei is down 14.6 percent while the Topix is down 15 percent. The worst performer is the Shanghai Composite — that index is down 54.4 percent.

Asian central bank decisions

On Monday, the Malaysian Central Bank left its key interest rate at 3.5 percent. In its post-meeting statement, the Bank’s said: “Since the previous MPC meeting, the global economy has weakened further with growing evidence of a deterioration of economic performance across a number of the developed economies. This has been the outcome of financial stress, tight credit conditions, asset market weakness and the impact of higher energy and commodity prices. There are also now signs of moderating growth in several emerging economies." Although the move was expected, some analysts thought the Bank would increase rates in an effort to ease the 8.5 percent annual inflation rate reported in July.

On Wednesday, the Bank of Thailand increased its key interest rate by 25 basis points to 3.75 percent. The move is the second consecutive rate increase after the Bank announced its intentions to tackle building inflationary pressures. In July, the CPI soared by 9.2 percent on the year while core inflation advanced 3.7 percent. Nevertheless, the Bank affirmed that the new rate would be supportive of economic growth.

Currencies

The U.S. dollar gained on most currencies last week, as weak economic news elsewhere offset some soft U.S. data and rising energy prices as Hurricane Gustav neared the oil producing areas of the Gulf of Mexico. While the dollar gained on the euro, the yen was up against the dollar on the week. The dollar came under pressure earlier in the week as oil prices rose and investors took profits after the currency’s recent strong run. And the dollar failed to gain support from reports that the U.S., Japan and Europe made an intervention plan in March to rescue the dollar after the collapse of Bear Stearns. The dollar has jumped about 6 percent against the euro since the start of August after hitting an all time low in July of $1.6038. Analysts say that the dollar’s comeback is not so much a vote of confidence in the U.S. economy as it is a realization that the credit crisis after-effects are spreading beyond the U.S. more quickly than previously thought.

Sterling

The pound sterling’s August swoon was its worst monthly decline against the dollar since the UK left the Exchange Rate Mechanism in 1992. Sterling has so far dropped 8.2 percent in August, compared with its plunge of 13 percent in September 1992 and a further 8.6 percent that October. Sterling’s weakness should help stimulate exports somewhat. The currency has declined against the euro as the outlook for the economy has continued to deteriorate. House prices continue to decline and the gloom was compounded as the Confederation of British Industry said UK retail sales plunged to their lowest level in 25 years in August.

Selected currencies — weekly results

Indicator scoreboard

EMU

M3 money supply annual growth for the three months ending in July eased to 9.6 percent from 10 percent in the previous three months. For July, M3 edged down to 9.3 percent from 9.5 percent growth on the year. Private lending also declined, dropping to 9.4 percent from 9.9 percent in the previous month. The ECB maintains a reference growth rate for M3 of 4.5 percent.

August economic sentiment dropped to a new 5 year low at 88.8 points. The August decline reflected a 2 point drop in sentiment in industry (to minus 10) that more than offset a one point improvement in consumer confidence (to minus 19). There were modest gains in morale in services (3 from 1) and construction (minus 13 from minus 14) but retail fell once again (minus 11 from minus 9). Overall the changes are insignificant but current levels underline the sluggishness of eurozone economic activity.

July unemployment rate held steady at 7.3 percent for the fourth month. Unemployment in Germany and France edged down according to Eurostat. The number of eurozone jobless rose by 25,000 in July to 11.372 million, some 59,000 more than a year earlier. In Spain, unemployment has been rising since last autumn, triggered by the meltdown in construction. The jobless rate jumped 0.3 point in July to 11.0 percent, bringing the rise over the past year to 2.8 points.

August flash reading of the harmonized index of consumer prices eased to 3.8 percent when compared with last year and down from 4 percent. As usual with the flash estimate, no component details were supplied by Eurostat but from previously released national data it is clear that lower food and, especially, weaker energy prices provided the main downward pressure. Regionally amongst the larger states, inflation fell from 3.5 percent to 3.3 percent in Germany and from 5.3 percent to 4.9 percent in Spain.

Germany

Second quarter gross domestic product was down 0.5 percent and was up 1.7 percent when compared with the same quarter a year ago. Household expenditures declined 0.7 percent on the quarter while gross capital investment dropped 1.9 percent largely on the back of a 3.5 percent nosedive in construction investment. Equipment investment dropped 0.5 percent but other investments jumped 3.1 percent. Exports dropped 0.2 percent while imports declined a more significant 1.3 percent.

August Ifo economic sentiment dropped to 94.8, its weakest level since August 2005, from 97.5 in July. According to Ifo, economic sentiment fell below the 100 mark in July for the first month since December 2005. The latest results show a broad based loss of confidence with both the current index (by 2.4 points to 103.2) and the expectations component (by 2.9 points to 87.0) falling significantly. Among major output sectors, manufacturing sentiment slumped to minus 6.8 from 2.0 in July while retail declined to minus 21.4 from minus 20.5.

August unemployment rate eased to 7.6 percent from 7.7 percent in July. The number of unemployed dropped by 40,000 to 3,200,000. But vacancies continued to drop, down 2000 following an 8,000 decline in July. Seasonal adjustment around this time of year is invariably problematic and it may well be that the August decline in joblessness will, to some extent, have been at the expense of September.

Italy

July producer price index was up 0.5 percent and soared 8.3 percent — a record high — when compared with last year. Higher energy costs were largely to blame for the latest acceleration since excluding this sector, inflation fell a tick to 4.1 percent on the year. Electricity, gas & water prices jumped another 2.0 percent on the month and were up 20.3 percent on the year. Outside of chemicals (up 0.5 percent) and coke & petroleum products (up 1.2 percent), all other sectors posted below average monthly gains. Overall manufactured goods were up only 0.2 percent and there were declines in the prices of food, beverages & tobacco (0.2 percent), wood (0.2 percent), mechanical appliances (0.3 percent) and other manufactured goods (0.2 percent).

June retail sales declined 0.5 percent and were down 3.4 percent when compared with last year. The decline was led by the non-food sector where purchases declined 0.7 percent from May and 4.1 percent from a year ago. Food sales were off a more modest 0.2 percent on the month and 2.3 percent on the year. Within the non-food sector, there were especially marked annual declines in clothing (4.3 percent), shoes (4.6 percent), computers & telecommunications (5.0 percent) and perfume & personal hygiene (6.0 percent).

United Kingdom

August Nationwide house price index declined 1.9 percent and 10.5 percent when compared with the same month last year. The 10.5 percent decline is the largest since the survey started in January 1991. This is also the first double digit drop of any of the various UK housing surveys in the current downturn.

Asia/Pacific

Japan

July unemployment rate surprised analysts and edged down to 4 percent from 4.1 percent in June. However, employment dropped by 29,000 in July and 520,000 when compared with July a year ago as employers continue to cut jobs. The number of those out of work was up by 220,000, or 9.4 percent on the year. The labor participation rate declined to 60.3 from 60.6 on the year. The data, despite the slight dip in the unemployment rate, are emblematic of a troubled economy at the beginning of the third quarter and on verge of a technical recession after declining in the second.

July nationwide consumer price index was up 0.2 percent and 2.3 percent when compared with last year. But the core CPI excluding only fresh food surged to an increase of 0.4 percent and 2.4 percent on the year driven by high energy costs. The 2.4 percent increase was the highest since October 1997. Looking at components, fuel, light & water charges soared 2.3 percent on the month and 9.3 percent on the year. Transportation & communications prices jumped 1.4 percent and 5.2 percent on the year. An alternate core CPI measure, which excludes energy along with food, edged down 0.1 percent and managed to increase 0.2 percent on the year. Goods prices were up 0.2 percent and 4.3 percent on the year while services edged up 0.2 percent and gained 0.5 percent on the year. August Tokyo CPI, which often gives direction for the national index, eased to increases of 0.1 percent on the month and 1.3 percent on the year. Core pressures also eased to a modest 0.2 percent gain on the month and 1.5 percent on the year.

July real household spending declined a less than expected 0.5 percent when compared with last year. Expenditures on furniture & household items were up 13.6 percent on the year while housing expenditures jumped 9.0 percent. Workers household spending edged down 0.1 percent. The results come after the Bank of Japan downgraded its assessment of the economy earlier this month.

July retail sales were up 1.9 percent when compared with last year. Retail sales have been positive for the past 12 months. Spending on food & beverages was up 3 percent while auto sales were up 1.1 percent and machinery equipment gained 6.1 percent. Fuel spending was up 3.6 percent. However sales at large retail stores were down 0.7 percent when adjusted for the change in the number of stores.

July industrial production surprised analysts and was up 0.9 percent after dropping 2.2 percent in June. On the year, output was up 2 percent on an unadjusted basis and 0.8 percent on a seasonally adjusted basis. The consensus thought that industrial output would decline by 0.5 percent. Transport equipment, electrical machinery and non-ferrous metals all contributed to the increase. On the product side, large passenger cars, large trucks and drive, transmission & control parts were also positive on the month. However, the Ministry of Economy, Trade and Industry (METI) maintained its overview by saying that industrial production has weakened.

Thailand

Second quarter gross domestic product was up 5.3 percent when compared with the same quarter a year ago after increasing by 6.1 percent on the year in the first quarter. Higher exports of rice and rubber failed to offset a decline in domestic spending. Exports, which account for about 70 percent of gross domestic product, were up 26.3 percent in the second quarter from a year earlier. On a seasonally adjusted basis, second quarter GDP was up 0.7 percent from the first quarter. Private consumption was up 2.4 percent from a year ago while total investment was up 1.9 percent.

Singapore

July unadjusted consumer price index was up 1.2 percent and 6.5 percent when compared with last year. The monthly increase was mainly due to higher accommodation costs and electricity tariffs. Food prices were up 0.7 percent and 8.5 percent on the year. Housing costs were up 4.0 percent and 12.5 percent on the year. On a seasonally adjusted basis, the CPI was up 0.4 percent on the month.

Americas

Canada

Second quarter gross domestic product was up 0.1 percent and 0.7 percent when compared with the same quarter a year ago. Among the major expenditure components, government spending was up 1.3 percent on the quarter while personal consumption was up 0.6 percent but fixed investment dropped 0.4 percent. Domestic demand was up 0.5 percent on the quarter. Exports dropped 1.5 percent while imports were up 0.6 percent. The other main point of note was the deflator which jumped 2.5 percent, the largest quarterly gain since 1982. The jump was biased by an 8.2 percent surge in export prices and to this end, paints a misleadingly grim picture of Canadian inflation.

June monthly gross domestic product was up 0.1 percent and 0.3 percent when compared with last year. Goods producing output was down 0.2 percent on the month but services were up by the same amount. Manufacturing was down 0.1 percent and declined 6 percent on the year. Wholesale trade recovered by 0.5 percent but energy slipped 0.6 percent.

July industrial product price index was up 0.4 percent and 6.8 percent above its level a year ago. Driving prices higher on the month were meat, fish & dairy products (0.9 percent), rubber & fabricated products (0.8 percent) and furniture 0.6 percent). However gains here were eclipsed by a 2.4 percent leap in petroleum & coal, without which the IPP would have risen just 0.1 percent. Declines were limited to textiles (0.1 percent), motor vehicles (0.2 percent), electrical & communications products (0.1 percent) and chemicals (0.2 percent). July raw materials price index was up 1.4 percent on the month and 28.9 percent on the year. As usual, mineral fuels led the charge with a 2.2 percent gain over June. Ferrous materials were also robust (2.7 percent) and there were smaller increases in non-ferrous metals (1.7 percent), animals & animal products (0.7 percent) and non-metallic miners (0.2 percent). Excluding mineral fuels, the RMPI was up only 0.2 percent on the month and was down 5.0 percent on the year.

Bottom line

Investors who were not on vacation were deluged with a mass of new economic data in Japan, the U.S., Canada and Europe. The data presented a mixed picture of the status of economic growth. At times, equity investors chose to ignore the data while at other times, they seemed to over react.

Although Monday is a holiday in the U.S., investors elsewhere will be focused in on the continuing outpouring of data, especially in Europe. Four key central bank meetings are scheduled for this week. The first up is the Reserve Bank of Australia which is expected to lower its key rate for the first time since December 2001 as slowing growth is trumping the inflation fight for now. On Wednesday, the Bank of Canada announces its rate decision. Analysts expect its key rate to remain at 3 percent. And on Thursday, the Bank of England and the European Central Bank will announce their rate decisions. Despite gloomy data in the UK and the sagging European economies, both are expected to leave their policy interest rates at 5 percent and 4.25 percent respectively. 

Looking Ahead: September 1 through September 5, 2008

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