Global Markets

All equity indexes followed here were up last week despite a dearth of new economic data especially from the United States. Investors were propelled by optimism about the outlook for the global banking sector as they awaited details of stress tests on eurozone lenders and what is expected to be positive earnings news. Most news circled around a plethora of central bank meetings in Asia and Europe. Economic news for the most part was upbeat. The International Monetary Fund increased its forecasts for overall world economic growth. The organization expects the global economy to expand by 4.6 percent, faster than the 4.2 percent growth projected in April. If achieved, this would represent the fastest rate of global growth since 2007. Growth in 2011 is seen at 4.3 percent, which is unchanged from the previous estimate.

After sinking the previous week on double-dip recession fears, investor sentiment turned around, in part sparked by an upbeat earnings outlook from State Street Bank. This one report seemed to convince many traders that the looming U.S. second quarter earnings season would be better than expected. Globally, banks were given a boost from hopes that European stress tests will remove a big cloud of uncertainty stifling the financial sector.

The latest evidence contributing to the growth debate appears mixed. In Australia, employment increased more than forecast while Japanese machinery orders in May dropped by much more than expected. And German industrial output for May was stronger than consensus.

On the week, gains ranged from 1.3 percent (KLCi) to 6.2 percent (CAC).

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC rebounded after sinking the previous two weeks. The three indexes were up 6.1 percent, 4.0 percent and 6.2 percent respectively. The three indexes were up four consecutive days. The catalysts for the increases were positive economic data, no surprises from either the ECB or Bank of England, and encouraging growth forecasts from the IMF. But some members of the ECB governing council feel the IMF is too pessimistic about Europe as are other outside observers.

The week was dominated by discussions of European banking sector stress tests and the publication of the results on July 23^rd. The Committee of European Banking Supervisors, conducting the stress tests, said 91 banks across Europe are taking part, including many regional banks which are seen as the weakest.

ECB President Jean Claude Trichet expressed cautious optimism Thursday that Europe’s sovereign debt crisis is easing and that the eurozone economy is growing faster than expected. Mr. Trichet stressed that the ECB was not changing its official growth forecasts. However, he said that the second quarter is likely to be much better than the first. Mr. Trichet also noted the ECB has been able in recent weeks to reduce the size of its new purchases of government bonds, which the bank began in May when debt markets threatened to seize up.

ECB

As universally expected, the European Central Bank left its key interest rate at 1 percent where it has been since May 2009. In more normal times, the refi — or minimum bid — rate would be the lowest rate at which banks could seek ECB financing in competitive bidding at the ECB's main weekly refinancing operations. For now and until further notice (until October at least), it is the rate at which those refinancing agreements are fixed for all bidders. 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.

The ECB has an inflation target of 2 percent — but unlike the UK, inflation has been comfortably below that level. June flash harmonized index of consumer prices was up 1.4 percent after increasing 1.6 percent in May. Economic data continue to be mixed and many analysts think that the recovery is in doubt as the member states move towards fiscal austerity in order to reduce ballooning deficits. Unemployment remains high and growth anemic — EMU GDP inched up just 0.2 percent in the first quarter while the May unemployment rate was 10 percent.

At his press conference, ECB President Jean Claude Trichet said Europe’s economy is stronger than some investors think and signaled the bank doesn’t intend to do more to fight the sovereign debt crisis for now. Trichet said that there is a tendency from the outside to be excessively pessimistic about Europe. Trichet’s optimism about the economy contrasts with the view of the IMF, which cut its forecast for eurozone growth next year to 1.3 percent from 1.5 percent. The economy will expand 1 percent this year, it said.

Bank of England

As expected, the Bank of England's monetary policy committee left its key interest rate at 0.5 percent where it has been since March 2009. It also maintained the size of its bond holdings bought to aid the recovery at £200 billion. Inflation has been running considerably higher than the Bank's 2 percent target. The Bank’s inflation measure is up 3.4 percent — in sharp contrast to the EMU where inflation is 1.4 percent and the U.S. where it is currently 2 percent.

One MPC member, Andrew Sentence, has urged that interest rates should be increased from the current record low. But he has been concerned for some time now. He noted that the spare capacity in the economy had failed to influence recent price movements. Heightened concern about inflation comes at a time when global markets appear unnerved by the possibility of a 'double-dip' recession — or at least renewed signs of weakness — and tighter monetary policy could be seen as damaging.

Thursday’s interest rate decision is the first since Chancellor of the Exchequer George Osborne announced an emergency budget on June 22^nd to tackle the record budget deficit. The spending cut program will cut £85 billion from expenditures — equivalent to 5.7 percent of gross domestic product — according to Institute for Fiscal Studies estimates. The new IMF forecasts see the UK economy expanding 1.2 percent this year and 2.1 percent in 2011. That compares with an April projection for growth of 1.3 percent and 2.5 percent.

Asia/Pacific

Asian/Pacific equities were up on the week after sinking the week before. Gains ranged from 4.3 percent and 4.1 percent for the Taiex and Nikkei respectively to a 1.3 percent increase for the KLCi. Even the Shanghai Composite, which has been the worst performer this year, was up 3.7 percent — however it is still down 24.6 percent for the year. Stocks here were lifted by gains in the U.S. and Europe. And on Friday, stocks were boosted by the unexpected interest rate increase by the Bank of Korea.

Economic data during the week were mixed. In Japan, the leading economic index dropped 0.6 percent after declining by 0.1 percent in May. The report noted that six of 10 index components showed marginal strength while four components showed weakness. However, in Australia, employment soared much more than expected. Asian investors latched onto the positive news that U.S. jobless claims declined for one week while some retailers reported sales gains. Investors now opined that the global economic recovery is merely moving to a lower and sustainable gear. And optimism about earnings season lifted market sentiment as well.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its key interest rate at 4.5 percent for a second month. Since October 2009, the RBA has increased rates six times from a record low rate of 3 percent. The rate increases have begun to bite into the interest rate sensitive areas such as retail sales and the property market. In its statement the Bank acknowledged that China’s growth is moderating to more sustainable levels while in Europe, the outlook is uncertain.

The Bank has returned interest rates to average levels for the country. It was one of the few economies that managed to avoid the global recession. It is expected that the RBA will decide whether to resume rate increases after the release of second quarter inflation data on July 28. The Bank said that the CPI could rise above 3 percent near term. First quarter CPI was up 2.9 percent when compared with the previous year and the most since late 2008. The Bank’s inflation target range is between 2 percent and 3 percent. The RBA has paused to assess the impact on the domestic economy of slowing Chinese growth and the sovereign debt issues in Europe.

Rising investment by mining companies is fueling an employment surge that has pushed Australia’s jobless rate to almost half the level of the U.S. and Europe. The rebound in employment also threatens to stoke wages, increasing pressure on inflation that the central bank aims to keep between 2 percent and 3 percent on average.

Bank Indonesia

Unlike many of its regional counterparts, Bank Indonesia kept its policy interest rate unchanged at 6.5 percent for an 11^th month. The measure is at the lowest level since its introduction in July 2005. Indonesia has kept rates steady despite rate increases in Taiwan, Australia, India and Malaysia. The Bank said today it expects inflationary pressures to build in coming months while economic growth could reach the upper end of its estimated 5.5 percent to 6 percent range this year. The current high rate of inflation is due to volatile food prices and is expected to decline. Bank Indonesia has an inflation target of 5 percent plus or minus 1 percent for 2010 and 2011.

Bank of Korea

South Korea is the latest Asian country to start raising rates. Following calls from the IMF, the Bank of Korea has increased the base rate for the first time since late 2008. The 25 basis point increase leaves the rate at 2.25 percent. An expected increase in inflation was the main reason behind the move, even though current inflation is below the 3 percent target.

In its statement, the Bank observed that the domestic economy has continued to grow. The export sector is strong while domestic demand is steadily increasing. Led by the private sector, the labor market is on an improving trend. Despite renewed turmoil in global financial markets and overseas risk factors, the Bank said domestic economic activity will continue on an upward track. It said inflationary pressures are expected to build continuously due to the increase in demand-pull pressures. On Tuesday, the International Monetary Fund upped its 2010 growth outlook for South Korea to 5.75 percent from 4.5 percent.

Bank Negara Malaysia

Unlike its peers (other than Australia), the Malaysian central bank increased its key policy rate for the third time this year by 25 basis points to 2.75 percent as the domestic economy is expected to remain strong while inflation levels for the rest of this year are expected to be moderate. The bank expects the domestic economy to remain strong due to continued improvements in private consumption and investment as well as public investment spending. However, the bank feels that external developments, in particular the recent fiscal crisis in Europe, may moderate the pace of growth. First quarter gross domestic product was up 10.1 percent on the year. Exports increased 21.9 percent on the year in May, driven by strong demand for the country's electronic goods.

Currencies

The yen was down while the euro continued to rebound against the U.S. dollar from its lows of just three weeks ago. The yen, which has been a safe haven along with the U.S. dollar and the Swiss franc during recent periods of risk aversity, has edged downward much to the delight of the country’s exporters. Investors put aside their risk concerns last week and allowed the euro along with the commodity currencies of the Canadian and Australian dollars  to rise against the dollar.

The Swiss franc’s safe haven status is expected to increase the Swiss National Bank’s international influence. Since the onset of the credit crunch in 2007, the currency has been in demand while the euro dropped to lifetime lows against the franc. Last year, exchange rate strength prompted the SNB to begin unilaterally intervening in the currency markets for the first time since the early 1990s. As a result, the SNB’s foreign exchange reserves have ballooned. Since March 2009 they have soared by US$176 billion to US$219 billion. Including SNB gold and International Monetary Fund assets, official reserves total US$262 billion. The Swiss economy has recovered faster than the eurozone and its prospects are among the brightest in Europe. As a result, the SNB is likely to pursue a tighter path for interest rates and monetary policy over the next few years.

China has dramatically expanded its investing in Japanese government bonds this year, buying a net ¥541 billion yen of mostly short-term JGBs in the first four months alone. The increase coincides with Europe's fiscal crisis and suggests that the Chinese government may be putting more of its burgeoning foreign exchange reserves into JGBs. China had previously shown little interest in Japanese government debt. Chinese sold a net ¥80 billion of Japanese securities last year. But since the start of this year their buying has picked up. Of the ¥541 billion, ¥517.7 billion consisted of debt maturing in less than a year and ¥23.4 billion of medium to long-term securities.

Selected currencies — weekly results

Indicator scoreboard

EMU

May retail sales edged up 0.2 percent and were up 0.3 percent on the year. Excluding auto fuel, food purchases inched up 0.2 percent on the month while non-food sales climbed a slightly more robust 0.4 percent. Regionally retail sales were supported by monthly increases in France (0.2 percent), Germany (0.4 percent) and Spain (0.3 percent). Rather stronger gains were recorded in Belgium (1.1 percent) and Slovakia (0.5 percent), however there were sizeable declines in Austria (0.6 percent), Portugal (0.8 percent) and Malta (3.8 percent).

First quarter final gross domestic product was up an unrevised 0.2 percent and 0.6 percent on the year. Among the main expenditure components, household spending was down an unrevised 0.1 percent on the quarter and the decline in fixed investment was steepened marginally to 1.2 percent. Government spending was also trimmed back, now up only 0.2 percent on the fourth quarter versus the 0.6 percent increase reported earlier. Growth in both exports (2.1 percent) and imports (3.8 percent) were adjusted a little weaker but net exports still subtracted 0.5 percentage points from the bottom line. Probably the most significant news is a larger revised contribution from business inventories which are now seen adding a full 1 percentage point to the quarterly gain in real GDP, up from 0.8 percentage points in the previous estimate.

Germany

May manufacturing orders dropped 0.5 percent after soaring an upwardly revised 3.2 percent in April. On the year, orders were up 24.8 percent. The monthly headline decline was wholly attributable to a 2.3 percent slump in orders for basics. However, this followed a 4.3 percent surge in April and both capital goods (0.4 percent) along with consumer & durable goods (3.6 percent) posted fresh advances. Orders dropped in both the domestic and overseas sectors. Domestic orders slid 0.6 percent and reflected a 0.5 percent drop in basics compounded by a 0.6 percent decline in capital goods. By contrast, consumer & durables were up 3.1 percent. Foreign orders declined 0.3 percent and were solely due to a 3.3 percent nosedive in eurozone demand, notably for capital goods which were off 6.5 percent. Non-eurozone orders were up 1.8 percent after a 6.0 percent increase in April. Basics were down 1.5 percent on the month but were more than offset by a 2.7 percent gain in the capital goods area and a particularly sharp 7.1 percent bounce in consumer & durables, albeit after a 4.6 percent drop last time.

May total industrial production jumped by 2.6 percent after a larger revised 1.2 percent advance in April. Workday adjusted annual growth however slowed from 13.9 percent in April to 12.4 percent but this simply reflects an exceptionally hefty monthly increase in the year ago period. Excluding construction, output was up 2.8 percent and 12.8 percent on the year. Outside of energy which declined by 3.2 percent and construction which dropped 2.3 percent all of the main sub-sectors saw healthy monthly output gains. Capital goods were up 4.6 percent and within a 1.7 percent rise in consumer goods, durables jumped 5.4 percent. With intermediates expanding 3.2 percent, total manufacturing output was up 3.4 percent on the month after a 1.0 percent increase last time.

May merchandise trade surplus contracted to €10.5 billion from €12.8 billion in April. However, the slide in the surplus masked significant growth on both sides of the balance sheet. Nominal exports were up 9.2 percent on the month after a 6.3 percent drop in April while imports gained an even stronger 14.8 percent following a 7.2 percent slump at the start of the quarter. Annual export growth jumped to nearly 29 percent in May, largely thanks to a 39.5 percent surge in non-EU demand. Purchases by other EMU countries were up 21.4 percent on the year. Meanwhile total imports were 34.3 percent higher than a year ago within which inflows from the rest of the eurozone rose 32.8 percent from May 2009 while those from outside were up 38.2 percent.

France

May seasonally adjusted merchandise trade gap widened out to €5.5 billion from €4.3 billion in April. The latest deficit saw the cumulative red ink over the first five months of the year expand to €21.2 billion, up from E19.0 billion during the same period in 2009. The largest monthly shortfall since October 2008 reflected a sharp 5.2 percent decline in exports that was only partially offset by a relatively mild 1.1 percent drop in imports. Most of the damage was caused by the transportation sector which saw exports slump in excess of 20 percent on the month.

May industrial output excluding construction was up 1.7 percent and 8.2 percent on the year. Energy & extracted goods surged 9.8 percent while manufacturing output gained 0.5 percent on the month. This followed a 0.3 percent gain in April. Within manufacturing, production of transport goods rose 1.1 percent on the month as autos jumped 4.7 percent, thereby partially reversing a 7.2 percent slump in April. Food & agriculture was up 0.7 percent and the other manufactured category advanced 1.0 percent. However, there was a hefty fall in output in refining (8.0 percent) and a smaller decline in electronics & machinery (0.2 percent). Activity in construction was unchanged.

Italy

May industrial output was up 1.0 percent after increasing by 0.9 percent in April. On the year, output was up by 7.3 percent. The May bounce reflected a 1.9 percent monthly gain in consumer goods and a 1.5 percent increase in capital goods. Intermediates expanded a relatively modest 0.3 percent while the energy sector contracted 0.2 percent.

United Kingdom

May industrial output was up 0.7 percent after a revised decline of 0.7 percent in April. On the year, output was up 2.6 percent. Manufacturing output was up 0.3 percent after sinking a revised 0.8 percent in April. On the year, manufacturing output was up 4.3 percent. Within manufacturing, eight sub-sectors saw gains while four posted losses. Total industrial production was supported by a 2.5 percent jump in both mining & quarrying and oil & gas extraction together with a 1.3 percent advance in utilities output. This release incorporates new seasonal adjustment factors as well as a rebasing of the headline series.

May global merchandise trade shortfall widened out to Stg8.1 billion from a marginally larger revised Stg7.4 billion in April. The deterioration reflected a 0.2 percent monthly gain in exports that was easily more than offset by a 2.4 percent rise in imports. In volume terms exports were flat while imports jumped 2.7 percent. Excluding oil and erratics the deficit also widened, by around Stg0.8 billion to Stg7.4 billion. Regionally the damage was caused by net trade with non-EU countries where the bilateral shortfall rose from Stg4.0 billion to stg4.5 billion.

June producer input prices were down 0.2 percent after a smaller revised 0.2 percent decline in May. On the year, input prices were up 10.7 percent. Output prices dropped a slightly steeper 0.3 percent on the month following a weaker adjusted 0.1 percent gain May. They were up 5.1 percent from June 2009. The slide in output prices was the first since November 2008. The core output index matched the headline measure with a 0.3 percent monthly drop but its 12-month rate picked up from 4.4 percent to 4.8 percent.

Asia/Pacific

Australia

May merchandise trade surplus jumped to A$1.6 billion from an upwardly revised surplus of A$1.1 billion in April. Exports jumped a greater than expected 6.0 percent on the month and were 25.0 percent greater than a year ago. Imports also were up more than anticipated. Imports were up 3.9 percent on the month and 13.4 percent on the year. Exports of non-monetary gold rose A$772 million (66 percent), non-rural goods were up A$385 million (2 percent), rural goods gained A$235 million (11 percent) and services increased by A$5 million. Imports of capital goods were up A$408 million (10 percent), consumption goods rose A$214 million (4 percent) and intermediate and other merchandise goods rose A$182 million (2 percent). Non-monetary gold dropped A$36 million (4 percent). Services were up A$108 million (2 percent).

June employment jumped by another 45,900 jobs while the unemployment rate remained at 5.1 percent. The rise in employment was driven in part by an increase in part-time employment by 27,500 people. This was reinforced by an increase in full-time employment which climbed by 18,400 people. This was the 10th consecutive month that the number of people employed full-time increased. The number of people unemployed decreased by 200 people to 598,400. The participation rate increased by 0.1 percent to 65.2 percent. Since September 2009, employment has risen every month with the exception of February (down 12,000) for a total increase of 327,300 new jobs.

Americas

Canada

June employment soared by 92,300 and enough to lower the jobless rate by 0.2 percentage points to 7.9 percent. This was the first dip below the 8 percent mark since January last year. The majority of new positions were added in the private sector where employment jumped nearly 52,000. The public sector payroll expanded 15,700. Full-time jobs increased almost 49,000 while part-time positions were up 44,200. It was the service sector that more than accounted for the increase in overall employment last month as 103,400 was added to the headcount here while the goods producing area contracted by 10,200. Within the former the best performers were trade & business, building & other support services where payrolls expanded by 21,600 and 20,000 respectively. However, there were also significant gains in health care & social assistance (19,700), accommodation & food (11,000) and professional, scientific & technical services (12,800). The only declines were seen in transportation & warehousing (5,100) and education (4,200). Within the goods producing sector, manufacturing employment shrank 14,300 and agriculture was down 5,200. The only rise of note was in construction (11,000).

Bottom line

Investors appeared to enjoy their respite from the data deluge of the previous week and threw aside risk concerns. Data that were available were for the most part favorable. As a result, global recession worries receded. In Asia, a combination of the Reserve Bank of Australia’s post-meeting comments combined with a stronger than expected employment report helped tamp double-dip concerns. And the ongoing bank stress tests in Europe also gave investors a rest from sovereign risk worries. Central banks for the most part did what was expected.

Now that Paul the octopus has enjoyed his moment of fame and the World Cup has ended, investors will turn their attention to second quarter earnings reports that will be released this week in the U.S. On tap, is a monetary policy decision from the Bank of Japan — no change in policy is anticipated.

Looking Ahead: July 12 through July 16, 2010

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