Global Markets

Relative calm in equities markets was turned on its head Friday by several disconcerting news items. Investors already had trepidations going into Friday about world growth and the impact from Europe’s sovereign debt crisis on financial markets. Even though the purchasing managers’ surveys were at relatively high levels, most edged down in May. China’s PMI declined and in the process escalated worries about a slowdown in Chinese growth. In mid-week, the change in leadership in Japan for the fifth time in four years unsettled markets as investors fretted about how it would affect economic policy there as the country continues to fight deflation. And of course, the continuing North/South Korean tensions left investors jittery.

Two new issues unfolded on Friday before the U.S. employment data were released. Unsubstantiated rumors were flying that a French bank was facing a large derivatives loss, talk that upset already edgy European investors. And when Hungary (an EU member but not an EMU member) said its economy is in a very grave situation, it reignited concerns that the region’s debt crisis is spreading. And then of course, the U.S. employment report disappointed. Investors ran for the hills and sold equities — and the euro — as the flight to safety sent the euro plummeting below the $1.20 level for the first time since March 2006. Some traders now refer to the dollar as the un-euro.

Group of 20 meets

The group of 20 finance ministers and central bankers are currently meeting in Busan, South Korea as a prelude to the summit from June 25^th to June 27^th in Muskoka, Canada. How to reduce budget deficits and how quickly to do so is bound to cause tensions among the group’s members. And the plunge in the euro and in global stock markets, which were triggered by fears that Greece's debt woes could spread to other eurozone countries, has added urgency to the meetings. So far, the group has discussed the timing of unwinding the loose monetary and fiscal policies launched to cushion the crisis.

The G20 brings the world's systemically important economies together with emerging markets. Together they account for 85 percent of global output. Anxious to soothe global markets, the group is expected to back the eurozone's deficit cutting strategy even though China and Brazil fret that the bloc has not acted more decisively.

Global Stock Market Recap

Europe and the UK

The week’s gains rapidly became the week’s losses Friday. The day began on a tranquil note as investors awaited the U.S. employment report. But that all changed on a rumor that a French bank was facing a large derivatives loss. Further negative sentiment hit the markets following comments from an Hungarian official that the nation’s economy is in a ‘very grave situation.’ The official also said that default talk is ‘not an exaggeration’ and that Hungary will not implement austerity measures. And then the U.S. employment report disappointed and sent stocks plummeting. On the week, the FTSE lost 1.2 percent, the DAX edged down 0.1 percent while the CAC dropped 1.7 percent.

The EMU let loose with its plethora of economic releases last week and the result was — mixed. GDP data confirmed that the eurozone barely grew in the first quarter while unemployment remained high. But the purchasing managers’ surveys showed strength, even though they eased from the month before. As would be expected given the tumult of the last month, economic sentiment edged lower. Consumer spending which is a vulnerable spot, continued to decline in April as retail sales continued their slump.

According to reports, eurozone banks are parking record sums at the European Central Bank overnight. Use of the Bank’s deposit facility climbed to €316.4 billion on Tuesday, exceeding levels seen after the collapse of Lehman Brothers in September 2008, according to the ECB. The ECB data underscores the difficult financial market conditions the ECB faces as it debates when and how to resume an exit strategy designed to dismantle emergency measures in place since the end of 2008. Demand for liquidity in recent ECB open market operations has also crept higher recently. This suggests banks are building up liquidity on a precautionary basis.

Asia/Pacific

Most indexes followed in this region recorded weekly gains — the exceptions were the All Ordinaries which slipped 0.1 percent while the Shanghai Composite continued its slide with a more substantial 3.8 percent decline. For the most part stocks were mixed on Friday as traders preferred to take profits and await the outcome of the U.S. employment report which was released after markets here had closed for the week. Traders were hoping that the data would show that the U.S. economy would not be hurt by the European crisis.

However, other issues were on the table as well as investors continued to fret over slowing Chinese growth along with the European sovereign debt situation. And in Japan, there had been uncertainty earlier in the week which had been provoked by the resignation of Yukio Hatoyama as prime minister. And on Friday, Naoto Kan was voted as his replacement for Japan’s fifth prime minister in just four years. He is expected to name his cabinet on Tuesday.

The main economic news emanated from Australia. The Reserve Bank of Australia kept its key interest rate at 4.5 percent as it evaluated the impact of its previous rate increases. New economic data showed that retail sales continue to weaken, perhaps showing the impact of higher interest rates. And national job vacancies declined in May as employers worried about the European sovereign debt crisis, the volatility on the local stock markets and the steady rise in interest rates. But the merchandise trade data were distinctly bullish as exports jumped 11 percent while imports edged up 0.1 percent and the balance shifted from deficit in March to a surplus in April. And in the rear view mirror, first quarter GDP growth eased to 0.5 percent from 1.1 percent in the previous quarter.

Reserve Bank of Australia pauses

As expected, the Reserve Bank of Australia left its key interest rate at 4.5 percent after sending rates higher in six of seven previous meetings. The Bank said that the monetary policy setting is appropriate for the near term. The RBA began increasing rates in October 2009 from a 50 year low of 3 percent — the first of the major industrialized countries to do so. In the process, the increases have restrained retail sales and slashed mortgage lending. April bank lending gained at the weakest pace in five months while house price growth slowed to a 16-month low. April building approvals plunged by 14.8 percent after soaring 16.8 percent in March. Australia’s manufacturing sector also showed an easing of growth. The index fell 3.5 points in May to a reading of 56.3. And retail sales were up less than expected.

The interest rate increases helped send the Australian currency soaring. However, about half the gains have disappeared in the wake of the Greek debt crisis which increased uncertainty regarding the global market outlook. Australia managed to avoid last year’s recession and grew 0.9 percent in the last quarter of 2009. First quarter GDP growth – to be released tomorrow -- is anticipated to slow to 0.6 percent on the quarter as businesses show a reluctance to spend. And consumer confidence has deteriorated and retail spending remains subdued.

Canada

As expected, the Bank of Canada lifted its key interest rate by 25 basis points to 0.5 percent. This was its first rate change since setting the lowest possible rate in April 2009. It is the first rate increase among the Group of Seven countries. First quarter growth expanded at an annualized rate of 6.1 percent and the fastest pace in 10 years thanks to consumer spending and manufacturing. The Bank of Canada has an inflation target range of 1 percent to 3 percent focusing on the midpoint. Inflation accelerated to 1.8 percent on the year in April from 1.4 percent in March.

In its statement, the BoC said that it is reestablishing the normal functioning of the overnight market. It said that while the Canadian economy is strong, the world recovery is becoming increasingly uneven. It pointed to Europe in particular for renewed weakness.

Canada has benefited from rising demand for copper, gold, wheat and oil from emerging economies such as India and China. The country is the world's second-biggest exporter of natural gas, and sits on the largest pool of oil reserves outside the Middle East. Private companies led a 108,700 gain in jobs last month, the largest in records dating from 1976, and the unemployment rate fell to 8.1 percent from 8.2 percent. Job growth is supporting retail sales, which set a record high in March according to Statistics Canada.

Currencies

The euro dropped to a new four year low of under $1.20 in intraday trading on Friday after a disappointing U.S. jobs report exacerbated investor fears that the eurozone sovereign debt crisis was spreading across the region. The euro was already being hammered on worries Hungary would be the next fiscally stressed European Union member to struggle with sovereign debt. The worse than expected U.S. employment data added to worries about the pace of the global economic recovery. Investors fled to the dollar, yen and Swiss franc. The euro also touched a record low against the Swiss franc, triggering some investors to keep an eye out for a possible fresh round of Swiss National Bank intervention to temper franc strength. The commodity currencies — the Australian and Canadian dollars — were harder hit than the euro because of their greater sensitivity to growth expectations.

Also putting heavy pressure on the euro was Hungary's new government, which failed to calm financial markets that were roiled by a senior official's warning that the country faces a Greece-style fiscal meltdown. And French Prime Minister Francois Fillon might have given the euro a green light to fall further with comments that the euro's weakening was good news and that he wasn't worried about the current exchange rate. The common currency has weakened more than 16 percent against the dollar in 2010 as a sovereign debt crisis spread to the eurozone periphery and has triggered fears it will infect the region's financial system and worse.

The yen was driven lower this week on speculation Japan’s new prime minister would support a weak currency and actively encourage intervention in the market to stop it appreciating. Naoto Kan, former finance minister, took over as Japan’s prime minister on Friday following the resignation on Wednesday of Yukio Hatoyama. Mr Hatoyama, who had been PM for less than nine months, had been under increasing pressure to stand down following scandals over campaign funding. Mr Kan was expected to join the trend towards fiscal austerity, taking a tough stance on reining in the country’s massive public debt.

Selected currencies — weekly results

Indicator scoreboard

EMU

M3 money supply edged down 0.2 percent on the year for the three months ended in April. For April alone, M3 was down 0.1 percent on the year. Private sector lending inched up 0.1 percent on the year, but was an improvement on the 0.2 percent decline recorded in March. Within this, loans to non-financial corporations dropped 2.6 percent from down 2.4 percent but household borrowing picked up to a 2.5 percent 12-month rate from 2.1 percent last time. Lending for house purchase was up 2.9 percent.

May flash harmonized index of consumer prices was up 1.6 percent on the year. As usual no component details were provided by Eurostat but from national statistics it looks as if the core rates were once again significantly softer than the overall inflation rate. Among the larger EMU states providing data, prices were up 1.2 percent in Germany and 1.8 percent in Spain. In Italy, the HICP was up 1.6 percent.

May economic sentiment dropped to 98.4 from 100.6 in April. The drop in overall economic sentiment was reflected in most sectors. Consumer morale declined 3 points to minus 18, retail was down 4 points to minus 5, services were off 3 points at 3 and construction fell 3 points to minus 28. The only category to post a gain was industrial confidence which edged up 1 point to minus 6. The decline in sentiment this month comes as no real shock in the wake of the ongoing Greek debt crisis and general malaise in European financial markets. Regionally it was surprising to see a 1.1 point increase in sentiment in Germany as France (down 4 points), Italy (down 3.9 points) and Spain (down 3.9 points) all saw sizeable declines. Less surprising was a 7.2 point slump in Greece.

May manufacturing PMI declined to a three month low of 55.8 from April’s 57.6 reading. The decline reflected slower growth of output and new orders although euro weakness helped to support overseas demand. The deceleration in production was especially marked, being the second steepest since the survey began in 1997. While Greece is the only EMU member with manufacturing still in recession, it's in Germany where the slowdown in output and orders is most marked.

April retail sales swooned 1.2 percent — their steepest decline in 18 months and their third contraction so far in 2010. Although the previously reported stable performance in March was revised upward to show a 0.5 percent gain, working day adjusted purchases in April was still a disappointing 1.5 percent lower on the year. The limited breakdown showed a 1.1 percent monthly drop in purchases of food, drink & tobacco as well as a 1.1 percent slide in sales of non-food products, excluding petroleum.

April joblessness increased by 25,000 to 15.86 million. The total was 1.275 million higher than a year ago. The latest increase lifted the unemployment rate to 10.1 percent from 10.0 percent in March. The report would have looked worse but for the surprising strength of the German labor market which recorded a 0.1 percentage point decline in its jobless rate to 7.1 percent. Among the other larger EMU states, the French unemployment rate edged up to 10.1 percent and to 8.8 percent in Italy. However, Spain once again saw the worst performance with a 0.3 percentage point jump to a disturbingly high 19.5 percent.

April producer prices excluding construction increased by 0.9 percent and were up 2.8 percent on the year. Energy prices again dominated the headline increase with a 1.9 percent gain on their March level and a 10.2 percent increase from a year ago. Excluding this sector the PPI advanced 0.5 percent on the month and was up 1.0 percent on the year. Following the pattern of recent months, the only other area to see any significant price increases was intermediates which were up 1.3 percent on the month and 2.7 percent on the year. By contrast, capital goods costs were unchanged and 0.1 percent weaker from a year ago. Both durable and nondurable consumer goods prices edged up just 0.1 percent. All of the larger EMU states saw their respective headline PPIs rise quite sharply in April. The German index was up 0.8 percent, just below a 0.9 percent gain in France while in Spain prices increased 1.0 percent and in Italy, 1.2 percent. No member state registered a monthly decline.

First quarter gross domestic product edged up 0.2 percent and was up 0.6 percent when compared with the same quarter a year ago. Household spending declined 0.1 percent on the quarter, an even poorer showing than the meager 0.2 percent advance achieved in the fourth quarter and fixed capital investment dropped 1.1 percent after a 1.3 percent contraction in the previous quarter. Government spending provided some support with a 0.6 percent quarterly increase having registered no change last time. But for a 0.8 percentage point contribution from business inventories quarterly growth would have turned negative again. The only other major plus was exports which grew a healthy 2.5 percent. However, with imports up an even stronger 4.0 percent, the net foreign trade sector subtracted 0.5 percentage points. Regionally most EMU states managed at least a small increase in output last quarter.

Germany

May joblessness dropped by 45,000 reducing the unemployment rate to 7.7 percent from 7.8 percent in April. Unemployment dropped 34,000 in the West and 11,000 in the East. The latest combined decline means that 152,000 have now been shaved off the jobless count over the last three months. The stronger headline data also found support in the vacancies figures which revealed a further 5,000 increase on top of a slightly larger revised 10,000 gain in April.

April seasonally adjusted retail sales volumes were up 1.0 percent but were still 1.1 percent below last year’s level. March sales were down an unrevised 1.6 percent and down 3.1 percent on the year. The volatile monthly profile to retail spending makes identifying any underlying trend especially difficult. The sign on the monthly change has now reversed with each release since October 2009. At best it would seem that retail sales are moving sideways.

France

First quarter mainland unemployment edged up by 4,000 to 2.703 million leaving the jobless rate unchanged at 9.5 percent. The overall unemployment rate including overseas territories was steady at 9.9 percent. Last quarter was the first since the first quarter of 2008 that the jobless total has not increased and reflects the recovery in the real economy that began in the second quarter of 2009. And the unemployment rate among the female workforce actually declined 0.1 percentage point to 9.6 percent.

Asia/Pacific

Japan

April industrial production increased by 1.3 percent and soared by 25.8 percent on the year. General machinery, fabricated metals and other manufacturing contributed to the increase in output. Commodities that contributed included semiconductor products machinery, active matrix lcds (liquid crystal devices) large and middle and small active matrix lcds (liquid crystal devices). METI expects production to increase at a much slower pace in May and June. It expects to see an increase of 0.4 percent and 0.3 percent respectively.

Australia

April retail sales were up slightly less than expected. Seasonally adjusted sales were up 0.6 percent after increasing a revised 0.8 percent in March. On the year, April sales were up 1.8 percent. Sales in household goods were up 2.6 percent, food sales increased by 1.3 percent (and clothing, footwear & other personal accessory retailing edged up 0.3 percent. However retail sales dropped 2.4 percent in department stores while other retailing swooned 0.7 percent as did sales in cafes, restaurants & takeaway food services. Consumer confidence and employment remain strong and should help underpin a broader consumption boom -- but consumers remain cautious.

First quarter seasonally adjusted gross domestic product was up 0.5 percent on the quarter and 2.7 percent when compared with the same quarter a year ago. Fourth quarter GDP was revised upward to a quarterly increase of 1.1 percent from the original estimate of 0.9 percent. Government consumption expenditures increased 0.8 percent while household consumption expenditures were up 0.6 percent on the quarter. The main contributors to growth in household expenditures were insurance & other financial services (up 2.2 percent) and recreation & culture (up 1.6 percent). Gross fixed capital formation increased 0.5 percent. However, total private gross fixed capital formation declined 2.4 percent, reflecting a drop in machinery & equipment investment (down 5.7 percent). Public gross fixed capital formation gained 11.6 percent, driven by general government, state & local investment (up 16.8 percent). Total inventories were up by A$1.203 million and contributed 0.2 percentage points to GDP growth during the quarter. Exports of goods & services declined by 0.5 percent.

April merchandise trade surplus was A$134 million, a vast improvement from March’s revised deficit of A$2.0 billion. Exports soared 10.7 percent while imports edged up 0.1 percent on the month. Exports of non-rural goods were up 18 percent while rural goods dropped 3 percent and nonmonetary gold sank 4 percent. Imports of nonmonetary gold soared 50 percent while consumption goods were up 3 percent and capital goods edged up 1 percent. However, intermediate and other merchandise goods imports dropped 6 percent.

Americas

Canada

First quarter gross domestic product was up 1.5 percent on the quarter and was up 2.2 percent on the year. On an annualized basis, GDP was up 6.1 percent. The first quarter advance was attributable to broad-based gains among key GDP expenditure components. On the quarter, household spending was up 1.1 percent and gross fixed capital formation gained 2.0 percent. Increases here were supported by a 0.5 percent increase in government spending and a near 3 percent jump in exports. The strength of final domestic demand (up 1.1 percent) was in turn reflected in a 3.4 percent bounce in imports. In terms of output, the goods producing area was up 2.7 percent within which manufacturing climbed an impressive 4.2 percent while services expanded by a more modest 1.1 percent. Within the service sector, wholesale was especially strong (3.9 percent) but retail (2.6 percent) also held up well as did transport and warehousing (1.7 percent).

March monthly gross domestic product expanded 0.6 percent and boosted annual growth of real GDP to 3.1 percent. The March advance was led by the goods producing sector where output expanded 1.4 percent on the back of a 1.8 percent increase in manufacturing. Mining & oil & gas extraction surged 2.7 percent while construction was up 0.9 percent and agriculture, forestry & fishing 0.5 percent. By contrast utilities contracted 1.9 percent. Service sector activity grew a more modest 0.3 percent within which wholesale trade (up 2.0 percent) made the standout contribution ahead of retail (up 1.8 percent). Most other areas were broadly stable with the notable exception of arts, entertainment & recreation (down 5.4 percent) where Winter Olympics factors were almost certainly important.

May employment was up 24,700, the fifth consecutive monthly rise. However, this latest advance was still not quite large enough to reduce the jobless rate which held steady at April's 8.1 percent. The composition of the May data shows significant underlying strength. Not only did full time positions (67,300) more than fully account for the overall employment gain, but private sector jobs jumped a sizeable 43,400. With the public sector adding 9,400 positions only self employment saw a decline (28,000). Job creation was dominated by the services sector which added a net 32,400 new positions. The goods producing area posted a 7,700 contraction although within this, manufacturing payrolls expanded a modest 2,700 and agriculture rose nearly 10,000. The bulk of the damage here was done by natural resources (down 10,700). Services employment was underpinned by transport & warehousing (26,100) health care & social assistance (17,800), finance, insurance, real estate & leasing (12,200) and public administration (12,700). There were also smaller increases in trade (5,600), business, building & other outdoor support (8,400) and professional, scientific & technical services (5,800).

April industrial product prices were up 0.3 percent but were 0.4 percent lower on the year. The main upward push on prices came from primary metals (up 3.7 percent), meat, fish & dairy (up 0.8 percent) and lumber & wood products (up 0.7 percent). Price declines were led by motor vehicles (down 1.1 percent) and electrical & communications (down 0.7 percent). Petroleum & coal product prices were up 0.6 percent without which the IPPI would still have gained 0.6 percent on the month but declined a steeper 2.7 percent on the year. Raw materials price index climbed 1.7 percent on the month while annual growth jumped 17.3 percent. A 10.8 percent monthly bounce in the cost of ferrous materials did most of the damage with other sizeable advances restricted to non-ferrous metals (up 3.0 percent), mineral fuels (up 1.4 percent) and animal related products (up 1.0 percent). Excluding mineral fuels, the RMPI would have risen 2.0 percent on the month and 5.1 percent on the year.

Bottom line

Economic data were mixed last week as investor worries about global growth once again escalated. They fled from risky investments and into the safe havens of U.S. Treasuries and German Bunds. They ditched the euro in favor of the U.S. dollar, Japanese yen and Swiss franc. Hungary looks set to join the increasing number of EU members who are suffering from fiscal woes. Geopolitical events also claimed investor attention as the confrontation between North and South Korea continues. And in Japan, the fifth prime minister in four years took office. The Bank of Canada became the first Group of Seven country to lift interest rates while the Reserve Bank of Australia maintained the status quo.

The Bank of England and European Central Bank both meet Thursday. No policy move is anticipated from the BoE. No policy interest rate move is expected from the ECB but as always, investors will parse ECB president’s post-meeting statement and question responses closely.

Looking Ahead: June 7 through June 11, 2010

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