Global Markets

Uncertainty about second-quarter corporate earnings gripped investor focus. This, combined with new worries about the global economic recovery, sent many equity indexes to two month lows. The mood was fragile and risk aversion was heightened by cautious comments from the International Monetary Fund about global growth. Analysts said that investor focus was shifting from the inventory-led rebound to the sustainability of the upswing. Most analysts cited the July 2^nd U.S. nonfarm payrolls data having triggered a fresh bout of nerves. While the earnings bar has been lowered and might be met, investors are expected to focus on guidance and revenues for the rest of the year amid the uncertainty over prospects for a second half economic recovery. Thin summer volumes could exaggerate movements going forward. A growing mood of market uncertainty has left assets such as equities and commodities looking more vulnerable.

The Reserve Bank of Australia, as expected, left its key interest rate at 3 percent. The Bank of England also maintained the status quo, leaving their key rate at 0.5 percent and keeping the level of their quantitative easing program unchanged at least until August.

The yen soared to a five month high against the dollar and a seven week peak against the euro and government bonds gained ground as escalating risk aversion drove nervous investors away from commodities, equities and credit.

All equity indexes followed here in Europe and North America were down last week. In Asia, stocks were mixed with five of 13 indexes ending the week higher.

Global Stock Market Recap

Europe and the UK

The DAX and CAC were down for the fifth consecutive week while the FTSE was down for the fourth. They declined four of five days last week as investors honed in on the beginning of corporate earnings season. Falling commodity prices have hit mining stocks and in turn have dragged the indexes down. Banking stocks were down as well. The three indexes have now retraced all of their gains since the last week in April. Since the end of June, the FTSE has fallen almost 3 percent while the DAX and CAC are down about 5 percent.

Investors continue to be frustrated by the stubborn lack of clarity on the prospects of an economic rebound as economic data bounce from positive to negative and back again — typical of this time in a business cycle. Economic news revolved for the most part around industrial output data and merchandise trade. The good news emanated from Germany where manufacturing orders jumped more than expected and industrial production was up for a second month. UK output data on the other hand, disappointed those who thought output had stabilized. Industrial production was up in France and was unchanged in Italy. The German merchandise trade surplus improved while the UK and France saw their deficits narrow.

Bank of England leaves QE on hold

As expected, the Bank of England’s monetary policy committee left its key interest rate at 0.5 percent for the fifth month. It also maintained its current level of quantitative easing at Stg125 billion. The MPC estimated that it will take another month to use the entire amount. Any further decision about the amount of QE will take place at their August meeting and just prior to the release of their quarterly Inflation Report. Many analysts thought that the Bank would opt to increase its scale of purchases. Gilts sold while the pound sterling gained against the U.S. dollar after the announcement.

While the contraction in the first quarter was worse than previously estimated, recent second quarter evidence suggests the decline will be less severe. Among the most encouraging signs have been key CIPS/Markit purchasing managers’ surveys showing that the services sector expanded last month for a second month in a row, while manufacturing continued to contract, but at the slowest pace for 13 months. And the various house price surveys have been showing a leveling off in the decline and with some — but not all — showing an increase in prices.

Asia/Pacific

Equities for the most part were down last week amid doubts about the global recovery. On the week, eight of the 13 Asian/Pacific indexes followed here declined. Losses ranged from 0.5 percent (KLSE Composite) to 9.4 percent (Sensex). Gains ranged from 0.4 percent (STI) to 2.3 percent (PSEi).

The Nikkei continued to retreat from its June 12 high level of 10,135.82. The index has now closed lower everyday since July 1 and in the process recorded its lowest close since May 22^nd on Friday. The index has declined for three of the past four weeks. The reasons for the selloff stem around economic recovery doubts both at home and abroad and the sharp appreciation of the yen to a five month high. Exporters took a blow as a stronger yen not only makes Japanese goods more expensive overseas but also erodes repatriated profits. Dim prospects for their recovery weighed down overall sentiment in an economy that is heavily dependent on exports.

Economic data did not help. The Bank of Japan revealed that June corporate goods prices dropped by the steepest year-over-year pace on record mainly due to a dip in petroleum and coal prices and the prices of scrap and waste products. And shipping stocks declined following reports that service rates on container ships between North America and Asia suffered the first reduction in three years amid sluggish demand. Finally, the Cabinet Office revealed that May core machinery orders declined marking the third straight decline and signaling a continued slowdown in business activity as companies curtail capital spending.

The Sensex dropped a hefty 9.4 percent last week as a host of worries addled investors. The week began with plunging stocks after the nation’s budget forecast the 2009-10 fiscal deficit was set to expand by more than expected to 6.8 percent of GDP. The Sensex fell by 5.8 percent after the much awaited finance bill failed to meet expectations. A lack of fiscal consolidation measures also disappointed investors, who were hoping for structural reforms in pensions, insurance and foreign direct investment. The budget’s main emphasis was on “inclusive growth”, with increased spending on boosting state protection for farmers and improving infrastructure development. Investors calmed down after reading the budget’s ‘fine print’ but worries about the progress of monsoon rains and fears of a possible downgrade of the nation's sovereign rating by international rating agencies were negative for equities later in the week. And better than expected industrial production data did not offset investor concerns.

Reserve Bank of Australia

As expected, the RBA left its key interest rate, the overnight cash rate, at 3 percent for the third month as evidence mounts that the lowest borrowing costs in about 50 years along with government spending are helping the economy skirt the global recession. The RBA had slashed rates by 4.25 percent in six months between September 2008 and April 2009. Australia was one of few major economies to grow in the first quarter as government cash handouts and rate cuts stimulated consumer spending. However, recent reports indicate that growth may falter. For example, exports dropped to a 14-month low, bank lending fell, home building approvals declined and job advertisements tumbled for a 14th month. Bank governor Glen Stevens said that the smaller contraction than most probably reflects the country’s limited exposure to financial excesses that were the problem elsewhere. Despite leaving its interest rate unchanged, the Board acknowledged that the outlook for inflation allows them greater scope for monetary policy if needed.

Currencies

The dollar was up against the pound sterling and euro last week as investors shunned riskier assets and purchased the currency. The yen was up against the dollar and euro. The dollar gained even after a Chinese official called for the end of the dollar’s reign as the world’s reserve currency at the G-8 meeting in Italy. Initially the dollar slumped against the euro and sterling after the Chinese urged a reformed reserve currency system, threatening the dollar's safe haven status. There was no mention of the currency in a draft declaration on the international monetary system released Thursday.

The pound sterling rebounded on Thursday after the Bank of England surprised investors by announcing no expansion of its quantitative easing program. The pound had been under severe selling pressure during the week in anticipation of a QE expansion. But sterling was up after the Bank said it was on track to hit its existing £125 billion target later this month and would review the program in August. However, the currency eased downward again on Friday.

The yen also eased as nerves settled after a spike on Wednesday. The yen dipped as Takeo Kawamura, Japan’s chief cabinet secretary, said “excessive currency movement” was undesirable. The euro continues to fluctuate with risk appetite. After ebbing downward for the first three days of the week, the euro higher against the dollar Thursday as European stocks recovered some recent losses and sparked some risk appetite. However, the currency was down again on Friday as equities reversed direction and declined.

Selected currencies — weekly results

Indicator scoreboard

EMU

First quarter final gross domestic product was 2.5 percent and dropped 4.9 percent when compared with the same quarter a year ago. Revisions to the main GDP expenditure components were minor. The quarterly decline in consumer spending was 0.5 percent while the drop in fixed investment was 4.1 percent. Government spending was up 0.2 percent and inventories subtracted 0.9 percentage points from the bottom line. Exports were down 8.8 percent while imports dropped 7.6 percent.

Germany

May manufacturing orders soared 4.4 percent for the third increase in a row. However, the latest bounce left the annual decline at 29.4 percent. Both domestic orders (3.9 percent) and foreign orders (5.2 percent) gained. Within the former, capital goods led the way with a 6.5 percent increase. Basics were up 1.1 percent and consumer & durable goods were up 2.7 percent. Foreign orders were buoyed by the non-EMU bloc which posted an 8.2 percent gain. Within this group, capital goods climbed 9.2 percent, basics rose 7.2 percent and consumer & durables advanced 3.6 percent. EMU orders were up 1.2 percent — basics (3.0 percent) and consumer & durable goods (1.0 percent) both registered increases but capital goods edged lower (0.1 percent).

May industrial production soared by 3.7 percent after a 2.6 percent gain in the previous month. On the year, industrial production is down 17.9 percent. Excluding construction, output was up 4.2 percent but down 19.2 percent on the year. Manufacturing output climbed 5.1 percent on the month, offsetting a 3.1 percent drop in April. Within this group, capital goods production surged 8.3 percent and intermediates were up 4.3 percent. Consumer goods advanced by 0.6 percent. However, energy output sank 3.8 percent while construction was down by 3.2 percent.

May merchandise trade surplus widened by €1.3 billion to €10.3 billion as exports edged up 0.3 percent and imports declined by 2.1 percent. Exports have now weakened in six of the last eight months while imports have declined in seven of the last eight. The May surplus was the highest since the €11.0 billion registered at the end of last year but still nearly 32 percent less than achieved in the year ago period. In the year to May, total exports sank by 24.5 percent within which shipments to the EMU bloc dropped 23.5 percent and to non-EU countries 23.0 percent. On the same basis, total imports declined 22.6 percent with purchases by other EMU members dropping 22.3 percent and by non-EU countries 23.3 percent.

France

May merchandise trade gap narrowed to €2.7 billion from €billion in April. The improvement in May meant that the cumulative deficit for the first five months of the year was €18.9 billion or nearly 5 percent below the comparable figure for 2008. Exports were up a sharp 4.5 percent while imports were up a more modest 2.9 percent. The manufacturing shortfall contracted from €1.9 billion in April to €0.7 billion in May. This was largely attributable to a reduced deficit in machines, electronics & computers and a wider surplus on transport equipment.

May industrial production excluding construction jumped 2.6 percent but still left the level of output 16.3 percent lower on the year. The May advance was broad based. Manufacturing gained a healthy 2.4 percent from April with particularly hefty increases in refining (10.2 percent) and transport equipment (7.2 percent). More modest increases were posted by electronics & machinery (1.3 percent), food & agriculture (0.4 percent) and other manufactured goods (1.9 percent). Energy output jumped 4.4 percent. Construction edged down 0.3 percent.

Italy

May industrial output was unchanged after rising 1.2 percent in April. On the year, output was down 19.8 percent. The steady performance reflected very mixed results among the major output categories. Consumer goods jumped 2.8 percent reflecting a near 5 percent jump in nondurables that more than offset a 3.4 percent drop in durables. Energy also expanded by a sizeable 2.0 percent. However, capital goods output dropped 1.6 percent and intermediates lost 0.3 percent.

United Kingdom

May industrial production dropped 0.6 percent and is now down 11.9 percent when compared with last year. Manufacturing output sank 0.5 percent and was down 12.7 percent on the year. This was compounded by 2.1 percent downturn in mining & quarrying and a 1.8 percent drop in oil & gas extraction. The only source of strength was the utilities sector where production rose 1.0 percent. Among the major sectors, output was down in chemicals, metals and engineering. The declines were partially offset by gains in coke and textiles. Overall durable goods production was up 6.6 percent while nondurables dropped 0.9 percent. Capital goods and intermediates also tumbled. The report incorporates updated annual weights and seasonal adjustment factors as well as a shift from 2003 to 2005 as the base year.

May global merchandise trade gap narrowed to Stg6.3 billion from a slightly larger revised shortfall of Stg7.1 billion in April. This was the smallest deficit in almost two years. Both sides of the balance sheet declined with exports down 0.8 percent on the month and imports off 4.0 percent. All of the Stg0.8 billion improvement could be attributed to a sharp reduction in the bilateral deficit with non-EU countries where the deficit shrank from Stg4.2 billion to Stg3.3 billion. The shortfall with the EU held steady at Stg4.1 billion. For the first time since last September, net oil exports were in the black.

June producer output prices were down 0.2 percent and were down 1.2 percent when compared with last year. Chemical product prices sank by 3 percent — the largest decline since 1992. Metal products were down 0.4 percent and other products dropped 1.4 percent. Core output prices swooned 0.8 percent but inched up 0.1 percent on the year. Higher prices were led by petroleum products (3.9 percent) which easily eclipsed much smaller gains in tobacco & alcohol (0.5 percent) and paper (0.2 percent). Producer input prices jumped 1.5 percent but remained 11 percent below its June 2008 level compared with an annual decline of 9.4 percent in May. Crude oil prices soared 14.3 percent on the month. However prices declined in fuel (2.9 percent) closely followed by imported food materials (2.2 percent) and imported chemicals (2.0 percent). In addition there were lower costs in imported parts & equipment (1.9 percent), and imported metals (0.6 percent). Excluding food, drink, energy & tobacco, input prices dropped 0.5 percent on the month. The drop in large part reflects the sensitivity of the index to changes in the exchange rate as June was good month for the pound.

Asia/Pacific

Japan

June corporate goods price index dropped 0.3 percent on the month and sank as expected 6.6 percent when compared with last year. The yearly drop was the largest decline on record. The monthly index has now declined for 10 straight months while the year on year change is down for six consecutive months. Virtually all components were down on the month with the major exceptions of petroleum & coal products which were up 2.6 percent and nonferrous metals which were up 0.8 percent. On the year, again, most components were down with the exception of pulp, paper & related products, which were up 2.9 percent and transportation equipment, up 5.3 percent. Downward pressure on the year stemmed primarily from a 41.7 percent plunge in petroleum & coal products and a 29.1 drop in nonferrous metals.

Australia

June employment dropped by 21,400, somewhat more than expected. Full time employment was down by 21,900 while part time employment edged up by 400. The unemployment rate edged up to 5.8 percent from 5.7 percent in May. The number of unemployed increased by 7,400 persons. The participation rate edged down to 65.3 percent from 65.5 percent in May. There was a large divergence in forecasts. Some analysts thought that since employment had surprised to the upside in the past two months, they expected an offset and June’s decline would be large. Employers until very recently were facing a shortage of skilled workers and would be eager to hold onto staff, particularly as the economic contraction in Australia has so far proved much milder than feared.

Americas

Canada

June employment dropped by 7,600 while the unemployment rate climbed to 8.6 percent from 8.4 percent in the previous month. The increase in the unemployment rate reflected an increase of 43,500 unemployed persons to a total of 1,591,900. Full time jobs declined by 47,500 while part time jobs jumped by 40,100. Total employees declined 44,600 on the month while self-employment rose 37,200. Private sector payrolls shrank 39,300. The entire decline was concentrated in the goods producing side where employment dropped 12,500. Within this, the only drop of any size was in manufacturing (25,700) and there were modest gains in construction (7,800), utilities (3,100) and agriculture (2,800). Services climbed a gentle 5,100 although performances varied quite significantly across the various categories. There were respectable gains in information, culture & recreation (26,200) and finance, real estate, insurance & leasing (20,500) but moderate losses in trade (17,100), business, building & other support services (13,800) and health care & social assistance (6,700). Most other areas saw little change. The participation rate was unchanged at 67.5 percent but the employment rate dropped by another 0.2 percentage points to 61.6 percent.

May merchandise trade deficit ballooned to C$1.4 billion. The deterioration reflected a monthly 6.9 percent drop in exports that easily more than offset a 3.5 percent decline in imports. Export volumes eased 4.1 percent but real imports were up 1.5 percent. Nominal exports to the U.S. market were especially weak, registering an 8.1 percent drop on the month. However, there drops in shipments to most areas including Japan (19.5 percent) and the EU (6.7 percent). Imports were similarly depressed across the board. Purchases from the U.S. dropped 3.3 percent, Japan 4.4 percent and the EU 3.4 percent. As a result, the bilateral surplus with the U.S. shrank from C$2.6 billion in April to C$1.5 billion while a deficit of C$0.6 billion with the EU widened out to C$0.7 billion. At the same time, a minor surplus with Japan turned into a small shortfall. Exports were weak across the board with especially hefty monthly drops in autos (12.4 percent), energy (10.6 percent), agriculture & fishing (8.7 percent) and industrial goods & materials (4.9 percent). All the main imports categories similarly posted monthly declines led by energy products (10.7 percent). Other particularly large declines were seen in forestry (9.4 percent) and automotive products (7.3 percent).

Bottom line

Both the Reserve Bank of Australia and the Bank of England left their monetary policies unchanged. Economic data — as is usually the case at this stage of the business cycle — continued to paint a mixed picture of the current state of the global economy.

The Bank of Japan meets next week. Any policy change here will be reflected in the Bank’s ongoing quantitative easing programs. Investors will pay close attention to the UK unemployment data on Wednesday while in Europe, the ZEW survey will monitor the latest business sentiment. And in the U.S., a plethora of key economic data — including consumer and producer prices, retail sales and industrial output — will garner investor attention.

Looking Ahead: July 13 through July 17, 2009

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