Global Markets

Economic data vied with earnings for investor attention especially when the two went in opposite directions. Last week’s data was mixed. In the U.S. there was good and bad news while in Europe, sentiment improved but unemployment was up. And in Japan, a record decline in consumer prices pointed to the reemergence of deflation but industrial output improved for the fourth month. Investors focused on the news that seemed more pertinent at the moment. For example, on Tuesday, disappointing corporate earnings and disappointing consumer confidence data helped sink U.S. and European equity markets as investors’ recent appetite for risk finally showed signs of faltering. However, this quickly reversed as the next set of earnings and data became available. Analysts said that the underlying investor mood remained cautiously optimistic given the positive effect of recent earnings releases and signs that Asia was recovering faster than Western economies. And upbeat comments from central bank officials in Australia and China about their countries’ economies underpinned the positive view of the region.

Equities, after declining in the first part of July, regained their poise and were up for the month. All indexes followed here registered healthy gains. The Shanghai Composite gained the most on the month — 15.3 percent closely followed by the PSEi, Jakarta Composite and STI. The Topix was on the low end of the gains — up 2.2 percent. For the week, gains ranged from a high 6.3 percent (Jakarta Composite) to a low of 0.6 percent (Nasdaq).

A note on U.S. GDP data

On Friday, the U.S. released its advance gross domestic product report which included, along with the first estimate of the second quarter, major five year revisions. In short — one needs to relearn history. And relearn history is definitely the case here. The contraction in the previous quarters was larger than originally estimated which is bad news. However, the second quarter contracted less than expected which is good news. It should be emphasized that the estimates are made on incomplete data which become available later and contribute to revisions that become a part of the preliminary and final releases. As the Bureau of Economic Analysis notes, the data are based on incomplete data and therefore subject to extensive revision.

There is a difference between initial U.S. GDP data releases and those of just about everywhere else. While the UK leads industrial nations in releasing GDP data, detail is minimal. They like other countries generally release an overall growth/contraction number and stay away from the detail contained in the U.S. report because of the sketchiness of the data. It should be noted that EMU second quarter GDP data (along with member states) will not be available until mid-August and then only on a flash basis — no detail until the preliminary releases a week to 10 days later. Japan’s first estimate will be released around that time as well. Australia and Canada do not release GDP data until two months after the quarter’s end.

Global Stock Market Recap

Europe and the UK

After a negative start to July, the FTSE, CAC and DAX rebounded the last three weeks of the month to record impressive monthly gains. The indexes were up 8.5 percent, 9.1 percent and 10.9 percent respectively. All three are now above their December 31, 2008 closes thanks to their recent gains. The three were also up last week despite daily declines on Tuesday and Friday.

After rising for 11 consecutive sessions, the FTSE failed to extend its winning streak to a record-breaking 12^th straight session Tuesday as profit taking set in after a disappointing U.S. consumer confidence survey. The mining sector was hardest hit by the selling. The FTSE declined again on Friday after revisions to U.S. GDP data showed a sharply increased level of contraction in the first quarter. Although the U.S. economy shrank by less than forecast in the second quarter of 2009 — by 1 percent annualized rate against consensus predictions of a 1.5 percent decline — traders looked nervously at the revised readings for the first three months of the year. The first quarter’s contraction had been revised to a decline of 6.4 percent from the original 5.5 percent reading. Friday’s slew of disappointing earnings reports did not help to bolster equities and gains melted away. This was in contrast to earlier in the week when both European and British equities were up thanks to upbeat earnings from companies such as BT Group, Alcatel-Lucent and Volkswagen.

Asia/Pacific

Equity indexes in the region continue to rise. All Asian/Pacific equity indexes ended the week and the month on a positive note. Monthly gains ranged from 2.2 percent (Topix) to 15.3 percent (Shanghai Composite). Weekly gains ranged from 6.3 percent for the Jakarta Composite to a low of 1.2 percent for the Shanghai Composite. And all are up by double digits for the year. The gains have been fueled by increasing optimism about the global recovery. Friday’s equity gains came before the release of U.S. GDP data that initially upset investors elsewhere on its release.

The Nikkei was up on satisfactory earnings and the positive performance of U.S. stocks. And the All Ordinaries ended at a nine-month high, led by banks, energy and metal stocks while the Sensex ended at a 52-week high. The Nikkei was also helped by company forecasts that increased confidence that the Japanese economy is showing signs of bottoming out despite Friday’s economic data that registered a record drop in the CPI on the year and a higher unemployment rate. However, data released earlier in the week for industrial production showed the fourth month of improved output. Better-than-expected earnings from Sony Corp and others as well as a weakening yen against the dollar lifted trader sentiment.

Reassuring policy comments from the People’s Bank of China helped calm nervous investors on Thursday. Responding to reports that China’s largest state-owned commercial banks would rein in lending, the vice-governor of the Bank said it would maintain appropriately loose monetary policy to maintain economic momentum. The Shanghai Composite which had plunged 5 percent for its biggest decline in eight months rallied and recouped some of the previous day’s losses. Investors were fearful that the PBoC would soon start dismantling its loose monetary policy. But analysts opined that the statement did not guarantee that the PBoC would not start to remove some of the accommodation in monetary policy.

Reserve Bank of New Zealand on hold again

As expected the Reserve Bank of New Zealand kept its official cash rate at a record low 2.5 percent as signs of a recovery in the housing markets and improving business confidence indicate that the recession is ending. The Bank, which cut its OCR to 2.5 percent at its April meeting, had cut interest rates from 8.25 percent — the highest of the major countries — by 5.75 percentage points to the current level as the economy slumped into its worst recession in more than three decades. The Bank began cutting rates in July 2008. Bank governor Alan Bollard said on April 30 that he was unlikely to raise rates until late 2010 because of the outlook for global growth. He said he couldn't rule out further reductions. He reaffirmed those statements again.

GDP has declined for five consecutive quarters due to high interest rates which had put a crimp into spending. The decline was exacerbated by the global credit crunch. Data for the second quarter 2009 will not be available until September 22 (local time). In its statement, the Bank voiced concerns about the rising value of the New Zealand dollar. They said it could crimp a recovery. The NZ dollar has strengthened about 15 percent against its U.S. counterpart in the past three months. The rising exchange rate erodes the local dollar value of meat, cheese and butter exports, which make up 30 percent of the economy. The statement also said that despite signs of a leveling off in economic activity, the economy remained weak and the outlook was highly uncertain.

Reserve Bank of India worries about inflation

The Reserve Bank of India kept its key repo interest rate at 4.75 percent on a forecast that inflation would pick up in the second half of this fiscal year to reach 5 percent by the end of March 2010. The prediction in the Bank’s first quarter monetary policy review is higher than earlier expectations and considerably above its medium term goal of 3 percent inflation. The RBI said it wanted to contain perceptions of inflation in the range of 4 to 4.5 percent in the months ahead. The repo rate, the RBI’s key lending rate, is at its lowest level in nine years after successive cuts since October. The Bank also issued a conservative growth forecast for the Indian economy, warning about continued uncertainty over the global outlook. It predicted GDP growth of 6 percent, lower than last year’s growth of 6.7 percent and below a government forecast of about 7 percent for 2009/10. Economists warn that agriculture is a threatening supply-side constraint. Food price inflation has hardened. Of particular concern is the effect of poor monsoon rains on the agricultural sector, upon which the government is relying to lead the domestic recovery. The monsoon rainfall is about 20 percent below normal levels.

Currencies

Although both the yen and euro fluctuated during the week, at week’s end the euro was up marginally while the yen was virtually unchanged. However, the pound sterling soared as rallying equities combined with better than anticipated housing data drove the currency higher. Relatively encouraging economic reports and some decent corporate earnings news from around the globe fueled renewed risk appetite and helped global equities rally.

The percentage of Japanese foreign trade conducted in yen is rising — this may have contributed to the currency's recent appreciation against the dollar. According to data compiled by the Ministry of Finance, yen-denominated trade accounted for 24.6 percent of Japanese imports in the first six months of 2009, up 3.9 percentage points from the preceding six months and the highest figure since the first half of 2004. The ratio of dollar-based imports fell 4.6 points to 70.1 percent, due in part to the sharp drop in mineral resource prices. Crude oil and iron ore transactions are typically settled in dollars. Yen-based trade accounted for 40.2 percent of exports, up 0.8 point from the previous six months while the ratio of dollar-denominated trade slipped 0.6 point to 49.2 percent.

Selected currencies — weekly results

Indicator scoreboard

EMU

M3 money supply growth for the three months to June decelerated to 4.1 percent from 4.6 percent for the previous three months when compared with a year ago. For June, M3 growth eased to 3.5 percent from 3.7 percent in May. The June data constitute the eighth month in a row in which money growth has fallen and once again reflected weakness in the key private sector lending counterparties. Annual growth here dropped to 1.5 percent from 1.8 percent. Within this, loans to non-financial corporations decreased by 1.6 percentage points to 2.8 percent and lending for house purchases fell to zero from 0.5 percent in May. At the same time, the annual rate of consumer credit was unchanged at minus 0.7 percent while the 12-month rate of other lending to households dropped to 1.6 percent, 0.3 percentage points off the mid-quarter pace.

July flash harmonized index of consumer prices dropped 0.6 percent on the year and a new record low. For those countries supplying data, declines in annual inflation rates were widespread. Among the larger EMU members the rate fell 0.7 percentage points to minus 0.6 percent in Germany and by 0.7 percentage points to minus 0.1 percent in Italy. In Spain the rate dropped 0.4 percentage points to minus 1.4 percent. Not surprisingly, all three readings were fresh historic lows.

June unemployment rate edged up to 9.4 percent from a revised May rate of 9.3 percent. The June rate was a 10 year high. The number of unemployed was up further 158,000 following an 186,000 increase in May. Total unemployment now stands at 14.896 million, some 3.17 million higher than a year ago. Changes in German accounting methodology combined with a variety of government employment initiatives across the region have meant that joblessness has typically risen more slowly than expected this year. Nonetheless, a rising trend remains firmly intact a number of industries have warned of a probable acceleration in the pace of layoffs as unit labor costs spiral.

EU

July economic sentiment gained 2.8 points to a reading of 76.0 for its fourth consecutive monthly gain. All sectors except construction (unchanged at minus 33) registered modest advances this month. Morale in the consumer sector rose 2 points to minus 23 and also gained 2 points in both industry to minus 30 and in services to minus 18. Retail confidence outperformed with a 4 point increase to minus 13. Among the larger EMU states Spain led the way with a 3.9 point rise in sentiment to 79.0 followed by Germany (3.2 points to 80.8). Italy posted a 3.5 point improvement to 83.7 while France edged just 0.3 points higher to 81.2. The smaller countries also all saw morale advance with exception of Greece and Slovenia which witnessed declines.

Germany

July jobless declined 6,000 and left the unemployment rate unchanged at 8.3 percent. Headline joblessness now stands at 3.480 million. The data appear significantly stronger than expected but the Labour Office once again pointed to a downward bias to the data caused by changes to accounting methodology. Excluding this factor, unemployment would have climbed an estimated 33,000.

France

June producer prices were up 0.6 percent but were down 8.7 percent when compared with last year. The surprise increase was attributable a 12.8 percent jump on the month in the cost of coke & refined petroleum products although prices here were still down 46.7 percent on the year. Prices were down 0.2 percent in the extractive industry & utilities and also dipped 0.1 percent in the electrical equipment, information technology and machinery sector. Transport materials' prices were steady on the month while food, drinks & tobacco costs were unchanged. Overall manufactured product prices were up 0.8 percent from May. Export prices edged 0.1 percent higher on the month while import prices spiked 1.2 percent, again thanks to an 11 percent leap in energy charges.

Italy

June producer price index was up 0.5 percent but was still 7.2 percent lower on the year thanks to ongoing negative base effects. Export prices were also up 0.5 percent on the month. The increase in the domestic index was wholly attributable to energy prices which soared 2.6 percent on the month. The only other sector to see a gain was intermediates (0.1 percent). Consumer goods prices dropped 0.2 percent with durables off 0.1 percent and nondurables down 0.3 percent. Capital goods edged 0.1 percent lower.

Asia/Pacific

Japan

June retail sales sank for the tenth consecutive month as a worsening job market continues to force households to cut spending. As expected, sales dropped 3 percent when compared with a year ago and show no sign of improvement. Unadjusted large retailer sales sank 5.1 percent on the year after dropping 4.5 percent in the previous month.

June industrial production was up 2.4 percent – pretty much as expected. However, on the year, output is still down 24.4 percent. The index has increased for four months in a row which is the longest expansion phase since February 2008. However the recovery in manufacturing output follows the steepest decline ever recorded and has not been as robust as hoped. Electronic parts & devices, steel & iron and chemicals (excluding drugs) all contributed to the increase in production. Commodities also were up led by metal oxide semiconductors, large passenger cars and metal oxide semiconductor IC (memory). According to the Survey of Production Forecast in Manufacturing, production is expected to increase 1.6 percent in July and to increase 3.3 percent in August.

June household spending inched up by 0.2 percent when compared with last year. Spending on housing and medical soared by 10 percent and 12 percent respectively. These were offset by a declines in most other categories including education which swooned by 11 percent on the year while culture & recreation sank by 2.4 percent. Spending on furniture & household utensils sank by 2.2 percent.

June unemployment climbed to 5.4 percent from 5.2 percent in May. Analysts say that the unemployment rate would be much higher except that discouraged workers are leaving the labor force. The labor force is now the smallest in over 15 years. The number of employed persons was 63 million, 2.3 percent from the previous year. The number of unemployed persons soared by 31.3 percent or 830,000 from the previous year.

June national consumer price index edged down 0.2 percent and was down 1.8 percent when compared with last year. On the year, all prices except those for education were down. On the month, only prices for transportation & communication managed to rise. Excluding only fresh food, the CPI was down 0.2 percent on the month and 1.7 percent on the year. And excluding both food and energy, the core was down 0.2 percent and 0.7 percent on the year. Goods prices sank 0.5 percent on the month and were down 3.4 percent on the year while prices for services inched down 0.1 percent and 0.2 percent on the year. July Tokyo CPI which is often seen as a precursor for the national index was down 0.4 percent on the month and 1.8 percent on the year. Tokyo core excluding only fresh food was down 0.3 percent and 1.7 percent on the year while excluding food and energy, the index was down 0.3 percent and 1.1 percent on the year.

Americas

Canada

June industrial product price index jumped 0.7 percent but is 5.4 percent below its year ago level. A strong Canadian dollar helped to keep prices in check without which the headline index would have risen a monthly 1.2 percent. June's performance was dominated by a 10.8 percent jump in petroleum & coal product prices. Excluding this sector, the IPPI would have fallen 0.3 percent on the month and would have been unchanged on the year. Other monthly gains were modest with the exception of primary metals which climbed 2.2 percent. Chemicals & chemical products were up 0.4 percent as were fruit & vegetables. Weakness in prices elsewhere was relatively widespread and led by motor vehicles & equipment where charges fell 1.3 percent from May. Other significant declines were posted by pulp & paper (down 1.2 percent), electrical & communications products (down 0.8 percent) and metal fabricated products and rubber, leather & plastics (both down 0.7 percent). Raw material price index soared by 6.2 percent but the RMPI was still 30.7 percent below its year ago level. Price developments last month were largely dictated by a 12.4 percent leap in the cost of mineral fuels. Excluding this area the RMPI would have risen just 0.8 percent on the month and would have fallen 9.3 percent on the year.

May monthly gross domestic product contracted by 0.5 percent and was 3.5 percent weaker on the year. Goods producing industries plummeted 1.6 percent on the month while services were unchanged for the third consecutive month. Goods production was undermined once again by auto plant shutdowns which were instrumental in a 1.6 percent monthly drop in manufacturing output. About half of the fall here was due to a 21 percent slump in motor vehicle production. However, all of the other sectors also posted declines with mining and oil & gas extraction down 2.8 percent, construction and utilities both off 0.7 percent and agriculture, forestry, fishing & hunting 1.1 percent weaker. Within the service sector, output dropped in transportation & warehousing (1.0 percent), administrative & waste management (0.6 percent) and arts, entertainment & recreation (2.9 percent). Accommodation & food also registered a sizeable drop (0.5 percent). Offsetting this weakness were gains retail trade (0.6 percent), finance, insurance & real estate (0.4 percent) and public administration (0.1 percent).

Bottom line

Once again as is typical of this phase of the business cycle, new economic data were mixed. However, most suggested that the bottom has been reached. However, the speed of the recovery is very much an unknown. Analysts will be looking at this week’s purchasing manager reports to find clues to the elusive expansion.

The Bank of England, European Central Bank and the Reserve Bank of Australia meet this week. No change in interest rates is expected. However, the Bank of England has promised to further explain its quantitative easing stance and whether they are planning to expand it. With consumer prices contracting, the ECB should not be concerned with inflation as a constraint on actions. The Reserve Bank of Australia is in an envious position. Its economy is not in recession and with interest rates at 3 percent still has traditional monetary policy tools at its disposal.

Looking Ahead: August 3 through August 7, 2009

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