Global Markets

In many ways, last week was a typical August week as investor fled to their vacation retreats until September. One sign is low trading volume which makes for choppy, volatile trading as those remaining investors react to new economic data as they relentlessly pursue of signs of economic growth. Equity indexes in Asia — except the Shanghai Composite — were up last week, but those in Europe, the UK and North America were not. North American and European stocks lost their foothold for a positive week on Friday when U.S. economic data disappointed and consumer prices in Europe were down more than anticipated bringing deflation fears to the fore once again.

While new data in Asia were sparse with the exception of China, ample U.S. data including the FOMC announcement garnered investor attention. And in Europe and the UK, new data captured investor attention. In the UK, unemployment continued to rise. And in Europe, Germany and France, growth defied the consensus outlooks for further GDP declines in the second quarter and instead grew. At the same time, consumer prices continued to tumble.

The Norges Bank kept its key interest rate at 1.25 percent but said that it would be ready to increase rates soon given the relative health of its economy. It was joined by the Reserve Bank of Australia’s governor who said that the Bank was ready to increase interest rates to a more normal level.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were dragged down last week in large part due to Friday’s declines which were precipitated by sinking U.S. stocks and disappointing U.S. economic data. The three indexes were down three of five days. While surprisingly positive French and German GDP data propped up the markets on Thursday and into Friday prior to U.S. data, they were not sufficient to counter declining consumer sentiment in the U.S. This underlined the weak retail sales report earlier in the week. And deflationary worries resurfaced in the U.S. and Europe. The CPI was flat in the U.S. and down in the EMU. Stocks declined earlier in the week as investors went into vigil mode as they awaited the FOMC statement on Wednesday afternoon.

On Thursday, European markets were up after a report showed that the eurozone economy contracted slightly in the second quarter — a mere decline of 0.1 percent on the quarter — even as Germany and France emerged out of recession, giving positive signals of an early recovery in the EMU. However, the data were mixed with many member states still in decline including Spain, which contracted by 1 percent in the second quarter. Markets were also boosted by the FOMC announcement which said that the U.S. economy showed signs of leveling off.

Bank of England Inflation Report

In its quarterly Inflation Report, the Bank of England delivered a more robust forecast for the British economy while warning that the recovery was likely to be “slow and protracted”. The report underlined that interest rates would stay low for a longer period than expected by the market and that its £175 billion program of cash injections into the economy was unlikely to be unwound any time soon. After the monetary policy committee surprised markets with the new cash infusion at its August 6^th meeting, a more downbeat outlook had been expected. But analysts said that the Bank had revised up its growth predictions for the first time since May 2007 in the inflation report, albeit after the recession had been deeper than expected this year.

The Bank’s revised forecast is for the economy to contract by about 4.4 percent this year, rather than the 3.9 percent predicted in May. The economy has contracted sharply in the first two quarters. But its projection for the year 2010 was raised from growth of 1.1 percent in May to about 1.8 percent. BoE governor Mervyn King said that it was likely that “output stabilized in the middle of this year and growth is more likely than not to resume over the next few quarters.” The Bank, as it seeks to raise capital levels, believes that the credit shortage for individuals and companies poses a big risk to recovery, but that the process of balance sheet restructuring has barely begun.

Asia/Pacific

All Asian/Pacific equity indexes followed here with the exception of the Shanghai Composite were up on the week thanks to increasing optimism about the global recovery and satisfactory earnings. In Japan, the Nikkei ended the week at a 10-month high, however elsewhere on Friday, gains were limited by pre-weekend profit taking. Earlier in the week, investors rejoiced that the Federal Reserve said that the U.S. economy is leveling out. Banks, exporters and resource stocks advanced on increasing optimism about recovery later in the year.

In Australia, Reserve Bank of Australia governor Glenn Stevens said that it would be appropriate for the Bank to start adjusting interest rates back towards normal levels provided the situation warrants no more exceptional monetary stimulus. The Governor, in his half-yearly testimony before the House of Representatives standing committee, said that the “timing and pace of those adjustments, if and when they come, will be a matter of careful consideration, taking into account all the relevant factors, including what might be happening with market interest rates.”

The Shanghai Composite was down 6.6 percent last week as the index continues to tumble from its recent high on August 4^th. At that point, the index was up 90.7 percent for the year. It ended this week up 67.3 percent. Investors have grown nervous recently that the Chinese authorities will move to curb the liquidity that has largely driven the stock market’s stellar performance.

In China, July industrial output climbed 10.8 percent on the year and a tad faster than the 10.7 percent growth in June, but lower than economists' expectations for an 11.7 percent increase. Most economic indicators suggest a continuing strong recovery, largely as a result of government investment and state-directed lending that saw new loans nearly triple in the first seven months from the same period last year. However, state controlled banks heeded instructions to rein in excessive lending, with the volume of new lending dropping 77 percent from a month earlier. Chinese leaders have repeatedly emphasized their commitment in recent weeks to a “moderately loose” monetary policy, but fears of bubbles forming in the property and stock markets prompted the central bank and banking regulators to order banks to slow lending last month.

In other data, the consumer price index fell 1.8 percent while the producer price index was down 8.2 percent from a year earlier. July exports and imports declined from a year earlier for the ninth consecutive month, underscoring the need for the government to maintain its domestic investment led stimulus. Exports were down 23 percent from a year earlier, while imports fell 14.9 percent. However, exports were up a seasonally adjusted 5.2 percent on the month while imports increased by 3.5 percent.

Bank of Japan maintains policy

As expected, the Bank of Japan kept its key interest rate at 0.1 percent where it has been since December 2008. The Bank did not reveal any new policy measures — at the July meeting the BoJ extended its credit easing programs by three months to December 31^st. Since then, the BoJ has begun purchasing corporate debt and providing unlimited loans backed by collateral to lenders. The economy has been improving after plunging into an abyss last fall and into the first quarter of 2009. GDP is expected to increase on the quarter on August 17^th when second quarter data will be released after contracting for four consecutive quarters. Exports, which plummeted when world trade froze, have shown signs of stabilization and industrial production has increased since March. And machine orders, so important for capital spending, increased in May and June. But the revival here has not yet spurred business investment and consumption which account for about two-thirds of the economy. And sinking prices threaten to mire Japan in deflation once again.

In its statement, the Bank said that economic conditions have stopped worsening. And the monetary policy board maintained a cautiously optimistic view going forward. They repeated that "there are prospects for Japan's economy to return to a sustainable growth path with price stability in the longer run." But they warned of significant uncertainty mainly stemming from overseas economic and financial markets. It noted that financial conditions remain generally tight but continue to show signs of improvement.

In his post-meeting press conference, governor Masaaki Shirakawa expressed concern over a quickening consumer price decline, but said Japan's economy was not in danger of entering a deflationary spiral. Considering how sharp Japan's economic downturn has been it may take time for the declines in prices to end.

Releasing its Monthly report on Recent Economic and Financial Developments, the Bank of Japan maintained its economic assessment for the country, after having upgraded the assessment in the past three months. Reaffirming its July statement that “economic conditions have stopped worsening", the Bank said that "economic conditions are likely to turn upward over time.”

Currencies

The dollar zigzagged during the week as new economic data weighed on the currency. But at week’s end, the yen and euro were up while the pound sterling was down. The two commodity currencies — the Canadian and Australian dollars — were both down on the week as views on the global recovery changed with each new data release. On Friday for example, the U.S. currency was up — not because the data instilled confidence in the U.S. economy, but because equities swooned on the disappointing news.

The euro reached its high point on Thursday after France and Germany surprised and reported growth in the second quarter. Both Germany and France recorded growth of 0.3 percent outstripping forecasts of continued declines. At the same time, the U.S. dollar came under broad pressure as risk appetite improved following Wednesday’s FOMC statement. Although confidence was dented by a surprise decline in U.S. retail sales, equities still rose and improved market sentiment weighed on the dollar, stemming haven demand. The Fed reassured the market that U.S. interest rates would be kept at low levels for an extended period of time and sounded a slightly more upbeat tone on the economy.

Analysts anticipate that the Reserve Bank of Australia and the Reserve Bank of New Zealand were likely to be the first of the big central banks to raise interest rates, prompting the Australian and New Zealand dollars to outperform. But after the Norges Bank’s hawkish statement on Wednesday, Norwegian krone should also be added to that list.

Selected currencies — weekly results

Indicator scoreboard

EMU

June industrial production dropped 0.6 percent and was down 17 percent when compared with last year. All the main sectors declined. Semi-finished goods output was down 0.5 percent while capital goods dropped 0.2 percent. Consumer durables production fell 4.2 percent, bringing the annual decline to 24.9 percent. Energy output was down 1.1 percent, bringing the year-over-year decline to 9.0 percent. However, nondurable consumer goods production edged up 0.2 percent. By member state, the Netherlands output jumped 2.1 percent while France was up 0.5 percent and Spain edged up 0.2 percent. Germany was flat on the month while Italy declined 1.2 percent.

Second quarter flash gross domestic product declined 0.1 percent and was down 4.7 percent when compared with the same quarter a year ago. Although as usual, Eurostat did not release any details, unexpected growth in both France and Germany and in particular from their exports and consumption likely supported output while declining inventories were likely a drag on regional growth. In addition to Germany and France, GDP was up in Portugal, Greece and Slovakia while growth continued to drop in the Netherlands.

July harmonized index of consumer prices was down 0.7 percent both on the month and on the year. Food prices dropped 0.6 percent and were down 1 percent on the year while energy prices declined 1.8 percent and 14.4 percent. Core HICP excluding food, energy, alcohol and tobacco was down 0.6 percent but up 1.2 percent on the year. Excluding just energy, the HICP was down 0.5 percent and was up 1 percent on the year. Clothing prices dropped 9.8 percent while housing was down 0.5 percent. Other declines included household equipment (down 0.4 percent), transportation (down 0.1 percent), communications (down 0.2 percent) and miscellaneous items (down 0.1 percent). Recreation and culture registered the highest gains on the month (up 1.3 percent), followed by restaurants & hotels (up 1.0 percent), alcohol & tobacco (up 0.5 percent) and health care (up 0.2 percent).

Germany

Second quarter seasonally adjusted flash gross domestic product was up 0.3 percent but was down 5.9 percent on the year. The quarterly gain was the first since the first quarter of 2008. As usual, no detail was available but the Federal Statistics Office estimated that higher exports, private and government consumption and construction offset the drag from inventories during the quarter.

France

June industrial output excluding construction was up 0.3 percent but was down 12.8 percent when compared with last year. Manufacturing production was up 0.4 percent thanks to gains in transportation goods (up 3.6 percent), automobiles (up 5.3 percent), "other" transportation goods (up 2.0 percent) and chemicals (up 1.6 percent). On the downside, refining output fell 0.4 percent after a 10.1 percent rise in May. By category of usage, investment goods output was up 1.3 percent following a 2.7 percent rise in May. However, intermediate goods fell 0.3 percent after jumping by 3.7 percent in May, and consumer durables dropped 2.7 percent after a 0.9 percent increase in May. Consumer nondurables were flat.

Second quarter gross domestic product was up 0.3 percent but dropped 2.6 percent when compared with the previous year. This was the first increase since the first quarter of 2008. Private consumption increased by 0.3 percent helped by tax breaks and public incentives for new car purchases. Exports rebounded, growing 1.0 percent on the quarter after a 7.1 percent decline in the first quarter. However, gross fixed capital formation continued to decline, dropping 1 percent on lower business and household investment (down 1.9 and 0.9 percent, respectively).

United Kingdom

June merchandise trade deficit edged up to Stg6.4 billion from Stg6.2 billion in May. Exports were up 1.4 percent while imports were up 2.2 percent. The main reason for the wider deficit was the erosion in the oil balance, to a deficit of Stg315 million from a surplus of Stg100 million, attributed to summer oil-field maintenance work. Imports of oil jumped by 23.6 percent while oil exports were up 1.7 percent. The non-EU country deficit widened slightly to Stg3.65 billion from Stg3.22 billion, driven by a 2.6 percent decline in exports and a 1.9 percent increase in imports. However, the deficit with EU countries narrowed slightly to Stg2.80 billion from Stg2.96 billion on a 4.8 percent increase in exports compared with a 2.4 percent climb in imports.

July claimant count unemployment was up by 24,900 on the month and up 709,000 on the year. The claimant count unemployment rate edged up to 4.9 percent from 4.8 percent in the previous month. For the three months ending in June, the unemployment rate as measured by the International Labour Organisation method climbed from 7.6 percent to 7.8 percent — the highest since the three months ending in December 1996 — from 7.6 percent. The number of jobless was up by 220,000 from the previous three months. Employment fell by 271,000 is the steepest decline since 1971, the inception of the measure.

Average earnings for the three months ending in July were up 2.5 percent and up from 2.3 percent in the three months ending in June. Private sector earnings rose 2.1 percent, while public sector earnings were up 3.7 percent. Excluding bonuses, average earnings were also up 2.5 percent, down from 2.6 percent in May.

Asia/Pacific

Japan

July corporate goods price index recorded its first monthly gain in 11 months. The CGPI was up 0.4 percent on the month. On the year however, the index plunged a record 8.5 percent for its seventh consecutive drop. Import prices contributed to the monthly increase and were up 1.1 percent on a yen basis. On the month, petroleum & coal products prices jumped 7.5 percent while nonferrous metals were up 1.3 percent. Chemicals & related products were up 0.7 percent while other manufacturing prices were up 0.4 percent. All other categories declined on the month with the biggest drop recorded by iron & steel, down 2.1 percent. On the year, the drag on the CGPI from plummeting energy prices is apparent. Petroleum & coals prices sank 43.1 percent on the year while nonferrous metals dropped 29.6 percent. The only price gains on the year were recorded by transportation equipment, ceramic, stone & clay products, pulp, paper & related products and precision instruments.

June tertiary industry index edged up 0.1 percent but was down 5.8 percent when compared with last year. Five industrial groups were up while seven declined and one was unchanged. Those that increased included scientific research, professional & technical services, finance & insurance, medical, health care & welfare, miscellaneous services (except government services etc) and transport & postal activities. The industries that declined included information & communications, wholesale & retail trade, accommodations, eating & drinking services, electricity, gas, heat supply & water, real estate & goods rental & leasing, learning support and compound services. Living-related & personal services & amusement services was unchanged on the month.

Americas

Canada

June merchandise trade deficit narrowed to C$55 million from a revised C$1.1 billion in May. Exports were up 2.3 percent after dropping for the three previous months while imports were down 1.3 percent. The increase in exports was solely attributable to increased exports of energy products. If they were excluded, total exports would have declined 0.5 percent. Imports, which have been on a downward trend since October 2008, were down for the fourth consecutive month. Declines in three sectors (machinery & equipment, industrial goods & materials and other consumer goods) more than offset increases in the remaining sectors (energy products, agricultural & fishing products, automotive products & forestry products). Energy product exports were up 14 percent thanks to a price increase of 5.1 percent and an 8.4 percent increase in volumes. Crude exports jumped 22.3 percent largely reflecting increased U.S. demand. Exports to the United States were up 5.1 percent, largely the result of higher exports of crude petroleum, while imports from the U.S. dropped 1.8 percent. This widened Canada's trade surplus with the United States to C$3.1 billion from C$1.7 billion in May. Canada's trade deficit with countries other than the U.S. grew to $3.1 billion from $2.8 billion in May, as exports fell 4.5 percent while imports edged down 0.3 percent.

June manufacturing shipments were up 1.9 percent, partially reversing the revised 4.9 percent decline posted in May. Strong sales in the aerospace industry and price increases of petroleum and coal products largely explain the increase. Excluding both industries, manufacturing sales would have decreased 0.5 percent. Constant dollar manufacturing sales were up 1.1 percent. Sales were up in 12 of 21 manufacturing industries in June, representing 68 percent of the total. Production in the volatile aerospace industry increased 61.0 percent after declining 44.5 percent in May. Excluding the aerospace industry, total manufacturing sales increased 0.4 percent. Petroleum & coal products sales were up 6.9 percent reflecting higher prices for petroleum products. Non-metallic mineral products (up 5.6 percent), furniture & related products (up 4.9 percent), wood products (up 3.5 percent) and food (up 1.4 percent) were other industries reporting sales increases. However, motor vehicle manufacturing declined 6.0 percent after sinking 20.8 percent in May. Motor vehicle parts manufacturing edged down 0.1 percent. The unfilled orders were up 2.0 percent partially offsetting the 7.0 percent decline in May. Aerospace products & parts industry reported a 3.0 percent increase. Excluding this industry, unfilled orders increased 0.9 percent. In another sign that things could be improving for this sector, new orders increased 18.4 percent.

Bottom line

Central banks in Norway and Australia both indicated that their next interest rate move would be up as both economies are outperforming most others. And while the Federal Reserve acknowledged that the U.S. economy was leveling, there was no mention of policy change in their statement. In its Inflation Report, the Bank of England acknowledged that things were getting (slightly) better. But negative consumer inflation in Europe and the U.S. has people worried about deflation again.

As is befitting the end of August, next week will be rather quiet with little new economic data. However, on Monday (local time) Japan will release its first estimate of second quarter gross domestic product. Analysts think that the economy grew for the first time since the first quarter of 2008. In Germany, the first of two important confidence indicators will be released — the ZEW while in the UK, retail sales will be dissected to see if the consumer has a pulse.

Looking Ahead: August 17 through August 21, 2009

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