Global Markets

Four major central banks met last week and for the first time in what seems to be a long time, there were no new easing measures — traditional or nontraditional. The Reserve Bank of Australia kept their key interest rate at 3 percent while the Bank of England with its interest rate at 0.5 percent, did not expand its current bond purchase program. The European Central Bank indicated it has no immediate plans to increase its asset-purchase plan or cut interest rates further as the economy shows signs of recovery. Its main interest rate is 1 percent. And the Bank of Canada kept its key lending rate at a record low of 0.25 percent and cautioned that its strengthening currency could “fully offset” recent improvements in financial markets and consumer confidence which in turn would prolong the recession.

Important economic data were released virtually everywhere except in Japan. The long awaited first quarter gross domestic product data for Canada and Australia were released and were truly a tale of two countries. While the first quarter Canadian GDP contracted, Australia’s shocked because the economy actually grew in the first quarter. And employment in both the U.S. and Canada was down, but the U.S. data were not as bad as expected. The unemployment rates soared in the EMU, France, the U.S. and Canada with the first quarter French unemployment rate vaulting to 8.7 percent while in the eurozone, it jumped to 9.2 percent in April. Similarly, the May unemployment rates in the U.S. and Canada were up to 9.4 percent and 8.4 percent respectively.

Equities seesawed their way through the week. A surge in risk appetite sent equity and commodity prices sharply higher Monday as a string of positive data releases rekindled hopes that the worst might be over for the global economy and overshadowed General Motors’ bankruptcy filing. The more optimistic mood about the global economy also helped drive commodities prices sharply higher. U.S. crude oil climbed over $70 a barrel while copper touched a seven-month peak above $5,000 a ton, with other base metals also rising strongly.

For the week, only the Kospi and Taiex were down. Now only the Dow remains below its 2008 closing level.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were up last week as trading seesawed both during and between each day. It was their third consecutive weekly gain. While the CAC and DAX improved their 2009 performances to up 3.8 percent and up 5.6 percent respectively, the FTSE once again crept above the breakeven point to be up 0.1 percent for the year.

After starting the week and month with hefty gains, equities were down for the most part on Tuesday and Wednesday after weaker than expected U.S. economic data dampened spirits. EMU GDP data on Wednesday had a decidedly depressing effect on investor morale and the indexes sank heavily. However, all three indexes regained their poise and ended the week on a favorable note.

With commodity prices on the rise, the indexes which were already supported by rallying miners were boosted even more after a better-than-expected reading on U.S. employment. Even though employment declined for the 17^th consecutive month, job losses were significantly under analysts’ expectations. However, the unemployment rate jumped to 9.4 percent thanks in part to teenagers entering the job market and finding no jobs available. However, investor focus was on the employment number.

On Thursday, the ECB estimated that eurozone real gross domestic product is now expected to contract between 5.1 percent and 4.1 percent in 2009. In March, the ECB had forecast the economy to contract between 3.2 percent and 2.2 percent in 2009.

Bank of England

As expected, the Bank of England left its key interest rate at 0.5 percent for the third month after lowering it to that level in March. It left its asset purchase target at Stg125 billion for its quantitative easing policy and said it would take two months to complete. At its last meeting in May, it raised its asset purchase target to Stg125 billion from the then level of Stg75 billion. Since its last meeting, service industries expanded for the first time in a year in May and both Nationwide Building Society house price index and Halifax house price index unexpectedly jumped, stoking optimism that the slump is easing while the squeeze on credit persists.

While the bank’s decision last month was unanimous, some policy makers did favor spending the full authorized total of Stg150 billion and the panel said it will seek permission to print even more money than the maximum if needed. Minutes of today’s decision will be published on June 17. Bond yields have risen as investors demand higher returns to compensate for a surge in government borrowing, muting the impact of the Bank’s purchases.

European Central Bank

As expected, the European Central Bank voted to keep its key interest rate unchanged at 1 percent. The ECB left the deposit rate — which is the floor for euro money market rates — at 0.25 percent, and the marginal lending rate — which is the ceiling — at 1.75 percent. Economic data since the last rate setting meeting on May 7 have continued to signal a significant easing of recessionary pressures. For example, the latest European Commission Survey showed that economic morale improved again in May, taking the index to its highest level since November. And other surveys have improved as well including the German Ifo and ZEW, the Belgian National Bank survey, French industry and consumer morale, as well as Italian industry sentiment. However, a potential concern could be inflation — or rather the lack of it. Inflation slowed to an annual rate of zero percent for the first time on record.

The governing council, despite ECB President Jean Claude Trichet's efforts, continues to be undecided about the amount of covered bonds it will purchase. They said last month they would buy about €60 billion of these bonds. They have been split over whether to follow the Federal Reserve and Bank of England, which have cut their key rates to close to zero and are buying government and corporate bonds to fight the recession. The debate over how far the ECB should go reached the highest level of European government this week, with German Chancellor Angela Merkel backing the Bundesbank's view that asset purchases are a step too far.

In his press conference, Trichet indicated that the Bank has no immediate plans to increase its asset purchase plan or cut interest rates further as the economy shows signs of recovery. The ECB lowered its economic forecasts for this year and next. It now expects the 16-nation economy to shrink around 4.6 percent this year and 0.3 percent in 2010.

Asia/Pacific

Most Asia/Pacific region equity indexes ended the week on a positive note thanks to higher commodity prices. However, for the week, the Kospi inched down 0.1 percent while the Taiex dropped 1.8 percent after its 2.3 percent gain in the last week in May. However, as they usually are, traders were cautious before the U.S. employment report. The big company news of the week concerned the scrapping of the Rio Tinto deal with Chinalco and entering into an agreement with rival BHP Billiton for an iron ore project in Western Australia instead. This helped metal stocks advance and lifted the markets in the region.

Bank Indonesia lowered its key interest rate for the seventh consecutive month to 7 percent. The 25 basis point cut was to the lowest level since July 2005, when the measure was first introduced. The latest cut has resulted in a cumulative reduction of 250 basis points since December last year. The Bank said its economic growth estimate for 2009 continued to remain in the high range of 3 percent to 4 percent. In the first quarter, the country's GDP grew 4.4 percent, supported by consumption growth of both households and the government. However, the pace was much slower than the 5.2 percent witnessed in the final quarter of 2008.

Reserve Bank of Australia

The Reserve Bank of Australia has for the second month left its overnight cash rate at 3 percent as the signs increase that the recession is loosening its grip on the world economy. Since August 2008, the RBA has cut rates by a total of 425 basis points. GDP contracted in the fourth quarter. In data released after the meeting, GDP surprised and was up in the first quarter. However, the contraction is on course to be the mildest of the major industrial economies. The government launched a major stimulus program at the end of 2008 which gave retail sales a significant boost in January and again in March. Retail sales were up again in April while manufacturing’s contraction has eased. And home building approvals continue to gain. On the down side, business investment is tumbling and corporate profits are down. Australia is in a good position to take advantage of Chinese growth. It is a major supplier of commodities to China.

While official data showed that the country was not in recession, the RBA thinks it is. In its statement, the RBA said that the Australian economy had been contracting. Capacity utilization has fallen back to about average levels. With demand for labor weakening, growth in labor costs are beginning to fall. These conditions are likely to see inflation continue to abate over the next two years. The considerable economic policy stimulus in train in most countries is helping to contain the downturn and should support an eventual recovery. The turnaround is clearest in China and some other emerging countries. Recovery in the major countries is likely to take longer to begin and be slower when it does occur.

Canada

As expected, the Bank of Canada kept its lending rate at a record low 0.25 percent and renewed its vow to freeze borrowing costs until mid-2010 as the surging Canadian dollar hurts exporters and threatens to prolong the first recession in 18 years. The Bank also announced that it has no intention to purchase government or private securities. However, the Bank said that it would retain the flexibility to conduct monetary policy at low interest rates assuming inflation remains under control. The recession is probably easing but the return to growth is hobbled by the strength of the Canadian dollar which posted its biggest monthly gain in May in more than 50 years.

Currencies

The U.S. dollar reversed direction and was up against the euro, yen and pound sterling as the week wound to a close. Currency trading last week was marked at the beginning by U.S. Treasury Secretary Tim Geithner’s visit to China and ended with the better than expected employment data from the U.S. on Friday. The dollar continued to take a beating at the hands of most other major currencies on Tuesday and extended its multi-month lows amid optimism that the worst of the global recession was over. On Friday, the dollar lost ground at first as its safe haven feature was deemed not needed by traders after the employment report. However, there were second thoughts — as always — and the dollar regained some strength on improving growth prospects.

The pound sterling, after rising to a six month high on Tuesday of $1.6591 against the dollar sank as political uncertainty swirled around UK prime minister Gordon Brown when several of his cabinet ministers resigned and called for his resignation as well. On Thursday, a rumor that the prime minister had resigned sent the currency into a swoon — the rumor was denied. However, at this writing, the prime minister remains under siege — to be continued.

Selected currencies — weekly results

Indicator scoreboard

EMU

April unemployment rose by another 396,000 to almost 14.6 million. The increase lifted the jobless rate by 0.3 percentage points to 9.2 percent and its highest level since September 1999. Among the larger EMU states, jobless rates rose 0.1 percentage points to 7.7 percent in Germany and to 8.9 percent in France. Meantime, Spanish unemployment continued to soar, jumping a further 0.8 percentage points to 18.1 percent. All other members also saw unemployment rise with the exception of Austria where the rate declined by 0.1 percentage point to 4.2 percent.

First quarter estimate of gross domestic product was left at a record 2.5 percent quarterly contraction. GDP declined 4.8 percent when compared with last year. Weakness was broad based in all the key areas outside of government. In particular, fixed capital formation dropped a hefty 4.2 percent on the quarter, almost matching the 4.3 percent slump at the end of last year. Private consumption declined 0.5 percent following a 0.4 percent drop in previous period. Government consumption was unchanged on the quarter but inventories subtracted a full 1.0 percentage points. Exports slumped 8.1 percent and imports dropped 7.2 percent.

April producer prices excluding construction were down 1.0 percent and dropped 4.6 percent on the year. The latest monthly decline was again prejudiced by weaker energy costs which plunged another 3.0 percent. However, all of the other major categories declined albeit not matching the magnitude of energy. Intermediates were down 0.6 percent on the month and capital goods were off 0.2 percent. In the consumer sector both durable and nondurable goods prices edged 0.1 percent lower.

April retail sales were up 0.2 percent but were still down 2.3 percent when compared with last year. April was the first month since September 2008 that purchases have posted an increase and followed a markedly smaller revised 0.1 percent monthly drop in March (was down 0.6 percent). Food, drinks & tobacco sales jumped 1.1 percent on the month. However other purchases, excluding motor fuel, dipped 0.2 percent. The April advance reflected stronger monthly sales in a number of countries, crucially Germany where purchases rose 0.5 percent.

France

April producer prices dropped 0.9 percent and were down 6.4 percent when compared with last year. Other than coking refining products (up 4.5 percent) and transport materials (up 0.1 percent), prices declined on the month in all of the main categories. Declines were especially marked in utilities (4.2 percent) but prices also softened for electrical equipment, information technology & machines (0.7 percent) and food & drink (0.1 percent). The PPI for manufacturing industries alone dropped 0.1 percent.

First quarter unemployment was up by 310,000, lifting the number of people out of work to 2,455,000 and boosted the unemployment rate to 8.7 percent from 7.6 percent in the fourth quarter and its highest reading since the third quarter of 2006. Including overseas territories, the unemployment rate climbed another 1.1 percentage points to 9.1 percent, similarly its highest reading since the third quarter of 2006.

United Kingdom

May producer output prices were up 0.4 percent and down 0.3 percent when compared with last year and the first annual decline since July 2002. Prices were buoyed over the month by the rising cost of petrol (1.6 percent). However, it was also weakness in this area on the year (down almost 20 percent) that provided the dominant force behind the negative headline rate. Higher excise duties stemming from April's Budget added about 0.1 percentage points to the monthly advance. The core index was up 0.2 percent on the month or 1.2 percent on the year. Most other product categories saw only minor changes on the month. Producer input prices were up 0.4 percent and were down 9.4 percent on the year. Over the month, the main positive impact came from higher crude oil prices (5.2 percent) which added a full percentage point to the overall index. It also dwarfed the next largest gain, posted by home food materials (0.8 percent). The only other increase was in imported parts and equipment (0.1 percent). Elsewhere there were sizeable monthly price declines in fuel (4.6 percent) and imported metals (1.6 percent). Minor declines occurred in prices for imported food materials, other home produced materials, imported chemicals and other imported materials.

Asia/Pacific

Australia

April seasonally adjusted retail trade increased by 0.3 percent, slightly lower than the consensus forecast. On the year, sales were up 6.8 percent. Sales were up 2.2 percent on the month in March and were down 2 percent in February. Clothing & soft good retailing was up 0.8 percent while household good retailing jumped by 3.9 percent. Other retailing edged up 0.1 percent but food sales inched down 0.2 percent. Department stores sank 2.8 percent while cafes, restaurants & takeaway food services were down 0.5 percent. Retail sales have been propped up by the government’s handouts to most taxpayers of nearly a thousand dollars.

First quarter gross domestic product was up 0.4 percent and also up 0.4 percent when compared with the same quarter a year ago and has avoided a technical recession. GDP had declined in the fourth quarter of 2008. First quarter non-farm GDP was up 0.5 percent on the quarter. Terms of trade sank 7.8 percent while real gross domestic income was down by 1.4 percent. The main positive contributors to expenditure on GDP were imports (1.6 percentage points), exports (0.6 percentage points) and household final consumption expenditures (0.3 percentage points). The largest negative contribution came from private business investment (down 1.1 percentage points). Both manufacturing and property & business services both subtracted 0.3 percentage points from GDP growth, while construction subtracted 0.2 percentage points. Household final consumption expenditures were up 0.6 percent for the quarter. Within household consumption, clothing & footwear was up 1.8 percent and food was up 1.1 percent. However, vehicle purchases dropped 1.4 percent while furnishings and household equipment declined 0.8 percent. Private business investment dropped by 6.1 percent largely reflecting a decrease in machinery & equipment investment (down 9.6 percent). Dwelling investment dropped 5.6 percent thanks to a 6.3 percent drop in new & used dwellings and a decline in alterations & additions (down 4.8 percent). Exports of goods & services were up 2.7 percent.

April merchandise trade balance was in deficit for the first time after a string of eight monthly surpluses. The trade deficit was A$91 million after a surplus of A$2.3 billion in March. Both exports and imports dropped. Exports plunged 11.3 percent while imports declined by 1.7 percent. Non-rural exports swooned by 12 percent while rural goods sank 11 percent and other goods sank 34 percent. Services, however, edged up 1 percent. The drop in non-rural goods largely reflected declines in the coal, coke & briquettes component which was down 15 percent and the metal ores & minerals component which dropped 10 percent. Prices declines were a driving force in the declines. The largest decline in other goods was in the non-monetary gold component, 37 percent. Imports of other goods plunged 35 percent mainly due to a drop in non-monetary gold which was down 32 percent. Both capital goods and consumption goods imports edged down 1 percent. Intermediate and other merchandise goods imports were up 2 percent.

Americas

Canada

First quarter gross domestic product was down 1.4 percent and dropped 2.1 percent when compared with the same quarter a year ago. Leading the decline was a 4.0 percent quarterly slump in gross fixed capital formation. This was compounded by a 0.8 percent drop in the key consumers' expenditure component and further aided by a 4.8 percent nosedive in exports. Government consumption was up 0.6 percent while imports dropped 6.4 percent. Non-farm inventories were drawn down for the first time since 2004.

March monthly gross domestic product was down 0.3 percent and was down 2.4 percent when compared with last year. Manufacturing was down 1 percent on the month while construction declined by 0.3 percent. The energy sector shrank 1.9 percent. Services were unchanged on the month in large part thanks to a 0.4 percent gain in finance & insurance. Wholesale trade declined 0.7 percent.

April industrial product prices dropped 0.5 percent and were 2.2 percent weaker on the year. The index was significantly depressed by the strength of the Canadian dollar without the benefits of which prices would have risen 0.3 percent on the month. Among the major product categories, prices fell most steeply in miscellaneous non-manufactured products (8.2 percent) but there were also significant monthly declines in pulp & paper (2.3 percent), motor vehicles & other transport equipment (2.2 percent) and electrical & communications (1.2 percent). The only major monthly increases in prices were in primary metals (2.8 percent) and petroleum & coal products (1.5 percent). Excluding the latter, the IPPI would have dropped a slightly larger 0.6 percent on the month. April raw materials price index dropped 0.5 percent and plunged 31.2 percent when compared with last year. Prices for mineral fuels dropped 2.5 percent on the month and were the key factor behind the overall decline. Excluding this category, the RMPI would have risen 1.4 percent. Other marked price drops occurred in ferrous materials (3.1 percent) and wood (2.1 percent). Against these declines, prices were up for vegetable products (1.1 percent), animal & animal products (0.3 percent) and non-metallic minerals (0.3 percent).

May employment dropped by 41,800 after increasing by 35,900 In April while the unemployment rate jumped to 8.4 percent from 8 percent in April. Unemployment is now at its highest in 11 years. Job losses last month were concentrated in full time positions which dropped 58,700 — but part time employment actually rose 17,000. The decline was also largely among the self-employed (32,000), the same category responsible for the April employment increase. Employees declined only 9,800. Private sector payrolls shrank 36,500 while public sector jobs rose 26,700. Performances by sector were very mixed. Goods producing industries saw employment decline by 66,000 while services expanded 24,200. Within the former, all areas declined but the total was dominated by manufacturing which fell a hefty 58,400. Services registered payroll gains in a number of industries. Public administration led the way (19,000) but trade (111,800), information, culture & recreation (6,200) business, building & other support services (2,100) and professional, scientific & technical services (1.1 percent) also posted modest advances. These increases more than offset declines in transportation & warehousing (15,700), finance, insurance, real estate & leasing (9,200), health care & social assistance (5,100) and accommodation & food services (6,600). The number out of work rose 83,800 and now stands at 1,548,400. The participation rate edged up 0.1 percentage point to 67.5 percent while the employment rate fell 0.2 percentage points to 61.8 percent.

Bottom line

Four central banks met and left their respective monetary policies unchanged. However, Bank Indonesia continued to lower its key interest rate to an historic low. The last major countries released their first quarter GDP data and to (almost) everyone’s surprise, Australia’s economy grew in the first quarter unlike virtually everyone else.

Citigroup and General Motors, once two of the components of the Dow Jones Industrial Average, will be removed from the index on June 8. They will be replaced by Travelers, the insurance company formerly owned by Citigroup, and by Cisco Systems, the maker of networking equipment. GM, which on Monday filed for bankruptcy, and Citigroup, the recipient of $45 billion of U.S. taxpayer aid, are the first companies to leave the Dow since AIG was removed in September 2008. Their shares have lost more than 90 percent since the start of 2007.

This week, many countries will unveil their latest trade data and investors will be looking to see if exports are no longer in freefall but have stabilized. At the same time, industrial production in many export-reliant countries will also be released. These data suffered from the backlash of plummeting trade — these data will also indicate whether the worst is really over. And the U.S. Federal Reserve’s Beige Book will be released in preparation for the next FOMC meeting. Obviously it will be scoured as analysts look for those green shoots!

Looking Ahead: June 8 through June 12, 2009

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