Global Markets

Weaker than expected U.S. economic data trumped positive earnings news to raise questions about the sustainability of U.S. — and global growth. Stocks crumbled and the dollar sank. Investors virtually ignored other events that would have normally sent markets higher. And many occurred around 4:00 PM ET when U.S. markets were closed for the day Thursday. The financial reform bill was finally passed ending a long period of uncertainty, Goldman Sachs resolved its case with the SEC and BP finally was able to shut off the volcano of crude spewing from its well in the Gulf of Mexico. Earnings both helped and hurt equities — Intel gave a tremendous boost while Google, GE along with Citibank and BofA disappointed.

And worries that a cooling Chinese economy might exacerbate slowing activity in the U.S. and beyond restrained traders too. On Thursday, China said that growth had slowed from 11.9 percent in the first quarter to 10.3 percent in the second as credit restrictions and the removal of fiscal stimuli took their toll. But investors worry that with China and other Asian countries the main drivers of the global expansion, even a small slowdown in the pace of activity could prove problematic for the weaker developed nations. Growth concerns were thrown into even sharper focus after cautious comments from Federal Reserve and the generally weak macroeconomic data last week.

The June minutes of the FOMC revealed that Fed members saw growing risks to the economic recovery and had lowered their inflation outlook. The Fed’s growth estimate for this year has been lowered to 3.5 percent from 3.7 percent. And the FOMC also appears to be considering contingencies in the event that the economy takes a significant turn for the worse, although nothing is imminent.

Global Stock Market Recap

Europe and the UK

Friday’s slide turned what had been a positive week to a negative one for the DAX and CAC, while the FTSE barely managed to stay positive. Stocks swooned after the earnings reports of BofA, Citibank, GE and Google left investors uninspired. The downdraft from banks was offset in part by BP after they finally were able to stop the massive oil spill in the Gulf of Mexico. This was a positive for the FTSE.

U.S. consumer sentiment plunged to its lowest level in almost a year ending the data week on a decidedly negative note. Tepid economic data rekindled worries about the health of the global economy and the U.S. in particular. Both the New York and Philadelphia Fed activity indexes were down more than expected and national industrial production was weak as well, saved from decline by utility output. Major economic data from the UK were positive overall — inflation eased while unemployment continued to decline.

Moody’s downgraded Portugal by two notches on Tuesday, citing the country’s deteriorating public finances. It cut the country’s long-term credit rating to A1 from Aa2 on concerns over its debt to gross domestic product and debt to revenue ratios, which have risen rapidly over the past two years. The move follows similar downgrades of sovereign debt ratings in Greece and Spain recently amid concern over the ability of these countries to control soaring budget deficits. Under pressure from international financial markets, Portugal has introduced a series of increasingly harsh austerity measures to bring its public finances under control after the country’s budget deficit soared from 2.6 percent of gross domestic product in 2008 to a record 9.6 percent last year.

Finally — on Friday (July 23), the results of the stress test results for 91 European banks will be announced. Hopes are that they will put the region back on the path of financial stability. A similar approach is believed by many to have contributed to the normalization of financial markets in the U.S.. The interbank market in Europe is clogged as a result of uncertainties regarding the direct and indirect exposure of banks to the sovereign debt crisis. Many market participants have retreated to the sidelines as they wait for better information on the outlook for banks’ balance sheets.

Asia/Pacific

Equities in this region were mixed last week with stocks in Japan, Hong Kong and Shanghai losing ground. Most of the gains occurred on Wednesday in response to better than expected earnings from Intel. However, for the rest of the week, equities languished on weaker than anticipated U.S. economic data and a downward revision to the Federal Reserve’s economic forecast. At the same time, the Fed suggested that additional measures might be needed to combat the weakening economy. (It should be noted that the Bank of Japan raised its growth forecast.) Japan’s indexes were down in part because of the heavy defeat suffered by Japan’s ruling Democratic Party in upper house elections which appear to have put fiscal reforms on the back burner.

However, it wasn’t only weaker U.S. data that addled investors. China released its second quarter GDP data — growth there slowed to 10.3 percent on the year from 11.9 in the previous quarter. June industrial production eased to 13.7 percent from 16.5 percent on the year. It was apparent that the Chinese government’s efforts to curtail growth by ordering banks to increase their reserves to limit lending and numerous other measures to slowdown runaway expansion are yielding results. But investors worried that too great a slowdown could harm growth elsewhere. In contrast, second quarter GDP in Singapore grew by 19.3 percent on the year, partly because manufacturing expanded by 45.5 percent on an annual basis.

But foreign investors bought more Japanese stocks than they sold for the first time in three weeks. Foreigners were net buyers by ¥172.5 billion in the July 5^th through July 9^th period. The amount is the largest since the second week of April.

Bank of Japan

As expected, the Bank of Japan kept its key interest rate at 0.1 percent where it has been since December 2008. Also as expected, the Bank of Japan upgraded its economic growth projections for its April fiscal year from 1.8 percent to around 2.6 percent on expectations that strong exports will continue to benefit the overall economy. However it edged down its FY 2011 forecast to 1.9 percent from 2.0 percent in April. The core CPI forecast was revised upward to minus 0.4 percent on the year from minus 0.5 percent. The BoJ said that the economy continues to show signs of moderate recovery and financial market conditions continue to improve. The monetary policy board said that they must watch global market moves and their subsequent impact on the Japanese economy — but they added that the economy was likely to remain on a recovery trend.

Recent government data show that Japanese exports rose for the sixth straight month in May, up 32.1 percent from a year earlier. However, eurozone sovereign debt worries could further push up the yen as investors look to pick up safe haven assets and a rise in the yen could weigh on exports. The BoJ's June Tankan survey, released earlier this month, showed that Japan's big manufacturers now plan to boost capital spending by 4.4 percent this fiscal year.

Currencies

The dollar sank against both the euro and yen thanks to weak economic data that showed the economy losing momentum and to lower FOMC growth forecasts that indicated it will be quite some time before the Fed increases interest rates. On Friday, the euro touched $1.30 very briefly for the first time since May before falling back on declining equities. The yen rallied against all of its major counterparts as the U.S. stock market decline spurred demand for a refuge before the weekend. The dollar lost about 2.2 percent against the euro in the week in its biggest drop since May 2009 and fell 2.4 percent against the yen.

Demand for the yen has been driven by deteriorating U.S. economic data, including a slump in regional manufacturing, retail sales, employment and trade figures that have raised concerns over the U.S. economic recovery in recent weeks.

The Fed revised down its growth and inflation forecasts, saying it would have to consider further monetary easing measures if the economic outlook were to worsen ‘appreciably’. The declining outlook for the U.S. economy contrasted with projections from the Bank of Japan, which raised its growth forecasts after its policy meeting on Thursday. The result was that the yen’s haven status from the nervousness on global asset markets was enhanced at the expense of the dollar.

Selected currencies — weekly results

Indicator scoreboard

EMU

June harmonized index of consumer prices was unchanged on the month and up 1.4 percent on the year. Excluding food, drink, tobacco and petrol the index was up 0.1 percent and 0.9 percent on the year. Omitting just unprocessed foods and petrol, the rate was also only up 0.9 percent, unchanged from its May pace. Without seasonal food and petrol the index was also up 0.9 percent. Among the major expenditure groups, annual inflation fell most significantly in transport (3.9 percent from 5.5 percent) thanks to a sharp drop in energy charges (6.2 percent from 9.2 percent). However, there was also a sharp deceleration in alcohol & tobacco (3.7 percent from 4.4 percent) and a much less marked slowdown in housing (1.8 percent from 2.0 percent). The only pick-up in prices of note was in clothing where prices rose just 0.6 percent on the year versus 0.4 percent last time.

May industrial production excluding construction was up 0.9 percent on the month and 9.4 percent on the year. Durable consumer goods saw a hefty 2.4 percent bounce on the month while capital goods posted a solid 1.0 percent advance. Intermediates expanded 0.8 percent and nondurable consumer goods output rose 0.6 percent. Energy production also climbed 0.6 percent. Regionally most reporting states recorded monthly increases in industrial output although Spain (minus 0.3 percent), Malta (minus 0.6 percent) and Portugal (minus 0.7 percent) disappointed. Overall Eurozone output found particular support from Germany (2.9 percent) and France (1.9 percent) but Italy (1.0 percent) also fared well.

May seasonally adjusted merchandise trade deficit was €3.0 billion after recording a significantly smaller revised €0.1 billion surplus in April. The deterioration in the balance masked an expansion in both sides of the balance sheet as cash exports rose 1.6 percent on the month while imports jumped 4.2 percent. The unadjusted data revealed a €3.4 billion shortfall, a sharply weaker performance than the €2.2B of black ink posted in the year ago period. Annual exports were up 23.0 percent on the year but were eclipsed by a 30.0 percent surge in imports. As usual, the overall trade gap in May would have looked a lot worse but for another healthy contribution from Germany (€5.8 billion). France (€1.2 billion) also managed a small surplus but both Italy and Spain again subtracted from the bottom line.

Germany

July ZEW current conditions improved sharply while expectations deteriorated. The current conditions index finally returned to positive territory for the first time since July 2008 with a surprisingly steep 22.5 point jump to 14.6. However, expectations lost another 7.5 points to 21.2, the lowest reading since April 2009. ZEW pointed to worries about sovereign debt issues and budgetary consolidation as reason for the weakness in expectations and warned of a waning potential for further economic gains.

Italy

May seasonally adjusted merchandise trade deficit was €2.7 billion, an increase in the red ink of €0.7 billion on an already larger revised April €1.7 billion shortfall. The May outcome was the worst in more than two years. The deterioration in the headline reflected a 1.1 percent monthly increase in nominal exports that was more than offset by a 4.4 percent rise in imports. The unadjusted balance was in deficit by €2.0 billion, up from a €1.1 billion shortfall in the year ago period. Annual growth in exports was a solid enough 17.0 percent but imports expanded at almost twice the pace, up 31.1 percent on a year ago. Within the former, energy sales surged nearly 50 percent on the back of higher oil prices and were well ahead of the next best performers, intermediates (23.6 percent) and consumer goods (19.4 percent). Capital goods were the most disappointing, rising just 6.2 percent from May 2009. Imports were also boosted by energy (37.1 percent), but intermediates fared rather better (52.5 percent). However, both imports of consumer goods (15.9 percent) and capital goods (10.9 percent) were sluggish by comparison.

United Kingdom

The delayed final estimate of first quarter gross domestic product showed the real economy expanding an unrevised 0.3 percent and an unchanged 0.2 percent contraction on the year. However, revisions to earlier periods saw 2008 growth of 0.5 percent replaced by a decline of 0.1 percent. Among the main expenditure components, household spending was nudged a tick weaker to show a quarterly decline of 0.1 percent but fixed capital investment was adjusted significantly stronger, up an extra 3 percentage points to a 4.5 percent rate. Government spending was adjusted up to a 1.5 percent quarterly pace from the previously reported 0.5 percent but export growth is now put at minus 1.7 percent from 0.0 percent. With imports revised up 0.2 percentage points to 1.6 percent, net exports now subtracted 0.9 percentage points from the bottom line compared with the 0.4 percentage points shown in the earlier estimate. In terms of output, services expanded 0.3 percent at the start of the year but was easily eclipsed by a 1.0 percent gain in industrial production, within which manufacturing grew 1.4 percent.

June consumer price index edged up 0.2 percent and was up 3.2 percent on the year. Core CPI advanced 0.2 percent and 3.1 percent on the year. The headline rate would have been significantly higher but for an easing in price pressures in the manufacturing sector. Annual inflation in the goods producing area dropped 0.6 percentage points to 2.8 percent. However, prices in the more important service sector picked up from a 3.4 percent annual rate in May to 3.9 percent last month, its fastest rate since February 2009. Matters are complicated by the budget and the headline CPI excluding indirect taxes which was running at an annual rate of just 1.6 percent in June, down from an already low 1.7 percent in May. The main upward pressure to the overall 12-month rate came from communication (6.4 percent from 5.3 percent) and miscellaneous goods and services (3.0 percent from 2.4 percent). There were also much smaller advances in both health and restaurants & hotels. Alcohol & tobacco picked up (5.5 percent from 5.1 percent) However, the acceleration here was almost offset by slower 12-month rates in clothing & footwear (minus 1.4 percent from minus 0.7 percent), furniture & household equipment (2.4 percent from 2.7 percent) and recreation & culture (1.8 percent from 2.0 percent).

June claimant count unemployment dropped 20,800, reducing the jobless rate to 4.5 percent from 4.6 percent and the lowest since March 2009. This was the fifth consecutive monthly drop and coincided with a 10,000 increase in vacancies on the quarter. The ILO unemployment rate painted a similar picture with joblessness declining 34,000 in the three months to May to yield an unemployment rate down 0.1 percentage points on the quarter to 7.8 percent. Indeed, March-May employment on this measure jumped 160,000, its largest gain since August 2006. However the headline average earnings decelerated surprisingly sharply to 2.7 percent from a slightly lower revised 4.1 percent in April. Additionally the ex-bonus rate slipped 0.1 percent to just a 1.8 percent rate. Headline annual average earnings growth in manufacturing dropped from 5.6 percent to 4.9 percent and in services declined from 4.4 percent to 2.8 percent. Note that the National Statistics Office announced that measurement changes to next month's data will reduce the employment rate by 1.8 percentage points on average.

Asia/Pacific

Japan

June corporate goods price index dropped 0.4 percent – it was the first decline in eight months. On the year, the CGPI was up 0.5 percent for the second month. Manufacturing prices were down 0.3 percent on the month after increasing 0.2 percent the previous month. On the year, manufacturing was up 0.4 percent after gaining 0.5 percent in May. Petroleum prices were down 0.2 percent on the month but up a hefty 22.8 percent on the year. On a yen basis, import prices were down 2.7 percent on the month but up 8.0 percent on the year while export prices were down 1.2 percent from May and dropped 3.6 percent from a year ago.

May tertiary sector activity index dropped 0.9 percent from the upwardly revised gain of 2.4 percent in April. On the year, the index was up 1.1 percent after rising 1.8 percent in April. Wholesale & retail trade declined by 0.9 percent on the month while miscellaneous services (except government services etc.) dropped by 2.1 percent. Electricity, gas, heat supply & water sank 2.2 percent, accommodations, eating & drinking services declined 1.6 percent and real estate & goods rental & leasing was down 0.7 percent. Living-related & personal services & amusement services, medical, health care & welfare and finance and insurance also declined. However, information and communications increased 1.9 percent, transport and postal activities were up 1 percent, scientific research, professional and technical services inched up 0.1 percent and compound services jumped by 2.1 percent.

Americas

Canada

May shortfall on merchandise trade widened out to C$0.5 billion from C$0.3 billion in April. The limited deterioration came despite a sharp 5.2 percent monthly advance in nominal exports as imports rose at a stronger 5.7 percent pace. The real trade position also worsened somewhat as exports volumes rose a respectable 3.9 percent only to see import volumes increase 4.2 percent. The bilateral surplus with the U.S. improved slightly, up just more than C$0.1 billion to C$3.6 billion as cash exports rose 5.5 percent on the month and imports climbed 5.8 percent. However, the shortfall with the EU narrowed by more than C$0.5 billion thanks to a 25 percent surge in exports. This would seem to confirm that the April data were indeed biased by the impact of Iceland's volcanic activity on European airspace that month. Within the overall monthly increase in exports, the best performing sectors were automotive products which soared by 20.8 percent followed by agricultural & fishing products (6.0 percent), forestry (4.9 percent) and machinery & equipment (4.6 percent). Imports of industrial goods & materials (6.8 percent), machinery & equipment (6.6 percent) and autos (4.8 percent) all registered unusually large advances. There was also a particularly sizeable jump in the other consumer goods sector (9.3 percent).

May manufacturing sales were up 0.4 percent and 16.5 percent on the year. Nominal sales have risen for eight months in a row now and the monthly gain in the headline was matched by volumes for which a 0.4 percent advance lifted 12-month growth to 14.6 percent. Higher sales were registered by 9 of the 21 reporting industries but it was the auto sector that made the most significant impact. Within a 3.1 percent monthly increase in overall transportation, motor vehicle sales jumped 4.6 percent and motor vehicle parts were up 2.8 percent. Excluding this sector, sales edged down by 0.1 percent from April although they were still up 11.7 percent on the year. Other areas performing well on the month were clothing (7.2 percent), food (1.5 percent), paper manufacturing (2.0 percent), machinery (1.4 percent) and computer & electronics (1.9 percent). However, there were especially steep declines in chemicals (5.0 percent), petroleum & coal (1.9 percent) and electrical equipment (1.0 percent). New orders jumped 2.5 percent from April and unfilled orders were up 1.3 percent.

Bottom line

Earnings and weak U.S. economic data took front and center last week. The Federal Reserve lowered its growth forecast while at the same time, the Bank of Japan raised its outlook. Earnings were mixed. Chinese data showed that the government’s efforts to rein in growth have had some success.

On Tuesday, the Bank of Canada is expected to increase rates for the second time in as many rate setting meetings by 25 basis points to 0.75 percent. In its summer business outlook survey the Bank signaled a continuing economic recovery, although there were also some signs of incipient slowing. Notably, while firms reported a pickup in sales over the past year, they expect it to slow in the coming year. And on Friday, the well advertised results of the eurozone stress test results will be made public.

Looking Ahead: July 19 through July 23, 2010

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