Global Markets

Mixed economic data put a damper on equities last week but not enough to wipe out all of Monday’s gains. On Monday, investors reconciled their concerns about slowing Chinese growth with the possibility that further tightening measures would not be needed as the economy stabilizes. And the continuing flow of better than anticipated earnings boosted morale as well and offset a sometimes disappointing spate of economic data. Despite European and North American losses on employment-report Friday, all indexes followed here were up with the exception of the Jakarta Composite (down 0.3 percent) and the KLCI which was virtually unchanged.

The Reserve Bank of Australia, Bank of England and European Central Bank maintained the status quo — all kept monetary policy unchanged. The BoE’s monetary policy committee made no change to the quantitative easing program and ECB President Jean Claude Trichet did not change his outlook citing recent strengthening in European economic data.

Global Stock Market Recap

Europe and the UK

Despite Friday’s losses tied to the employment report, the FTSE, CAC and DAX were up last week thanks for the most part to Monday’s exuberant increases. But traders turned cautious — as again worries about world growth surfaced. On the week, the FTSE, CAC and DAX were up 1.4 percent, 2.0 percent and 1.8 percent respectively.

Stocks that helped push the benchmark European index to a three-month high on Monday failed to maintain their momentum on Tuesday as markets across the region edged lower as investors got a little nervous and decided to take profits near to the recent range highs. Although earnings continued to come in on the positive side, economic data continued to disappoint.

Monday’s gains fed off of Asia’s earlier increases plus better than expected earnings reports from HSBC and BNP Paribas. Resource companies such as BHP Billiton and Linde AG advanced on profit reports as well. Also boosting equities were economic data in the U.S. (ISM manufacturing and construction) and Europe (PMI reports) that exceeded expectations. The Asian news revolved around China. Analysts there decided that the authorities in China would not take further measures to slow the economy now that it shows signs of stabilizing.

German data presented a good news/bad news picture. Factory orders jumped by 3.2 percent in June but at the same time, industrial output surprised with a decline of 0.6 percent. And on Thursday, no one was surprised that both the Bank of England and the European Central Bank left their key interest rates unchanged.

Bank of England

As expected the Bank of England monetary policy committee voted to keep its monetary policy unchanged, keeping its interest rate at 0.5 percent. It also maintained the size of its bond holdings bought to aid the recovery at £200 billion. As is usual when the MPC leaves policy unchanged, it did not release a statement.

On August 11, the Bank will release its quarterly inflation report and forecasts which will spell out the detail behind the MPC's thinking. It's expected the Bank will be forced to revise its optimistic growth projections lower but will raise its forecast for inflation in 2011 to reflect the coming increase in the value added tax (VAT) to 20 percent in January. Investors do not expect interest rates to rise until the second quarter of next year, although former senior Bank employees suggest the MPC will seek to raise rates closer to normal levels quite quickly once they are sure the recovery will endure.

European Central Bank

As universally expected, the European Central Bank's governing council left its key refinancing rate at 1.0 percent where it has been since May 7, 2009. Usually 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. But 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 (the ceiling) at 1.75 percent.

Eurozone inflation has picked up recently but at 1.7 percent in July was within the ECB’s target of an annual rate below but close to 2 percent. With the economic recovery remaining weak, inflationary pressures in the pipeline appear firmly under control, and financial markets have not priced in an interest rate increase until well into 2011. Extended periods of unchanged interest rates have become part of the ECB’s tradition since it was formed 12 years ago. The main policy rate was left unchanged at 2 percent for more than two years prior to December 2005, when the ECB last started a policy tightening cycle.

Asia/Pacific

Most equity indexes followed here were up last week — only the Jakarta Composite edged down 0.3 percent and the KLCI was virtually unchanged. The last day of trading for the week was mixed as investors exercised caution as they awaited the U.S. employment report which would be released after markets closed here. Indeed, trading was mostly mixed during the week as traders sought clues on global growth.

Japanese stocks were up for the third consecutive week thanks mainly to earnings reports and forecasts that exceeded analysts’ estimates. Lower vacancy rates boosted real estate developers as a private report showed Tokyo’s office vacancies fell in July for the first time in two and a half years. However, so far in 2010, the Nikkei is down 8.6 percent and the Topix is down 5.1 percent as Europe’s debt crisis and China’s steps to cool its property market dented confidence in a global economic recovery.

The Ministry of Finance reported that Japanese residents sold a net ¥20.4 billion in foreign stocks in the week ended July 31. The statement also noted that Japanese investors purchased a net ¥1.27 trillion in foreign bonds and notes. Foreign investors bought a net ¥144.1 billion in Japan stocks and purchased a net ¥287.4 billion in Japanese bonds and notes.

The new week and month began on a positive note on speculation that the Chinese authorities will not tighten policy further given that the economy shows definite signs of cooling. Optimism about earnings also lifted market sentiment even as disturbing economic conditions in the U.S. continue to be a cause of concern.

People’s Bank of China

The People’s Bank of China published its second quarter monetary policy report on Thursday. The Bank said inflation risks persist as growth stabilizes in China. The global economy is expected to maintain the recovery’s momentum, despite the European sovereign debt crisis. But the report also sounded a note of caution, noting that 'the atmosphere for the domestic and the international economy is uncertain and grave, with an increasing number of unstable and unknown factors.' China’s inflation accelerated to 3.3 percent in July, the fastest pace in 21 months, according to economists’ median estimate before an announcement due August 11. Rising labor and resource costs and “relatively loose” global monetary conditions may add to price pressures, the central bank said.

“In the next phase, China’s economy is expected to gradually stabilize and grow in a more sustainable manner after a rapid rebound,” the central bank said. “Despite uncertainties such as the sovereign-debt crisis in some Europe economies, the world economy in general will continue to recover,” the bank said. China’s growth will be aided by policies this year to develop western regions, accelerate public home construction and promote emerging strategic industries, the report said.

At the same time as it highlighted price increases, the central bank said that slowing money and credit growth, stabilizing commodity prices and “abundant” domestic manufacturing capacity could help to limit the inflation threat. China severed the yuan’s effective peg to the dollar on June 19. The currency’s limited gains since the policy shift reflect supply and demand and there’s no basis for large fluctuations, the central bank said.

Reports say China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices having fallen as much as 60 percent in the hardest hit markets. Banks were instructed to include worst-case scenarios of prices dropping another 50 percent to 60 percent. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its key interest rate at 4.5 percent for a third month. Since October 2009, the RBA has increased rates six times from a record low rate of 3 percent. The RBA said that inflation is close to target and that growth close to trend. However, it said, the outlook is uncertain. The rate increases have begun to bite into interest rate sensitive areas such as retail sales and the property market. In data released earlier, retail sales inched up 0.2 percent for the second month while building approvals dropped 3.3 percent after sinking 6.4 percent in May. The RBA has paused to assess the impact on the domestic economy of slowing Chinese growth and the sovereign debt issues in Europe.

The Bank has returned interest rates to average levels for the country. It is one of the few economies that managed to avoid the global recession. The Bank's inflation target range is between two percent and three percent. In the second quarter, consumer prices were up 0.6 percent on the quarter and 3.1 percent on the year. However, the Bank's preferred core inflation measure — the trimmed mean — was up 2.7 percent on the year. And rising investment by mining companies is fueling an employment surge that has pushed the jobless rate to almost half the level of the U.S. and Europe. But the rebound in employment also threatens to increase inflationary pressures.

In its quarterly Monetary Policy Statement, the RBA said that its current interest rate structure is appropriate and it left its forecasts for GDP and inflation largely unchanged. The RBA forecast GDP growth for the full 2010 year to be around 3.25 percent, strengthening to 3.75 percent over 2011 and 4.00 percent over 2012. The bank said growth in the mining sector is expected to be stronger than in other sectors.

Currencies

The U.S. dollar was down against its major counterparts as well as the major commodity currencies. The euro has been climbing rather steadily since the conclusion of the bank stress tests last month. With all of Europe's major banks passing and the bond market snapping up sovereign debt in Greece and Spain, the dollar has given back a huge portion of its spring rally against the euro. The ECB joined the International Monetary Fund in reporting that Greece has made ‘impressive progress’ in implementing austerity measures and is well-positioned to secure additional loans. The U.S. dollar hit its lowest point of the year against the yen, but could not break through to trade below ¥85. The dollar also fell to a four-month low against the euro.

Japan’s Finance Minister Yoshihiko Noda stepped up his rhetoric on the yen’s rapid appreciation saying that the currency’s moves are a little ‘one-sided’. He declined to say if he would direct any specific actions — that is intervention— but his words did little to weaken the currency. Any government intervention to weaken the yen would involve fighting very large forces — a broadly weak dollar, a lack of international coordination and China's growing role in the yen market.

The strong yen could challenge the country’s economic recovery because the high value of the yen makes the country's exports — a key driver of its growth — more expensive in its key markets. The dollar is now close to the key threshold of 85 yen, a point below which some analysts and some government officials believe the government will be forced to act to weakening the yen. But Japan has supported the U.S. efforts to get China to liberalize its currency policy. Turning around and intervening in markets to weaken the yen would go against the argument that markets should be allowed to set currency levels.

Selected currencies — weekly results

Indicator scoreboard

EMU

July manufacturing PMI was 56.7, up from June’s reading of 55.6. The improvement was largely due to Germany where a nearly three point advance to 61.2 pointed to a particularly good period for manufacturing. By contrast, the Italian and Spanish indexes were little changed and significantly lower than Germany's at 54.4 and 51.6 respectively while the French index lost 0.5 points at 53.9.

June producer price index excluding construction was up 0.3 percent and 3 percent on the year. Prices were supported once again by rising energy costs which were up 0.6 percent on the month. Excluding this category the PPI would have edged up just 0.1 percent from May to stand 1.9 percent higher on the year. The other main sectors saw prices remaining relatively subdued. While intermediates, nondurable and durable consumer goods prices all were up just 0.2 percent on the month, capital goods were flat. Regionally national PPIs grew on the month in all member states with the exception of Ireland, Malta and Portugal. The steepest increase was in Greece followed by the Netherlands and Slovakia.

June retail sales were unchanged on the month and up just 0.4 percent weekday adjusted on the year. Non-food sales excluding automotive fuel managed a modest 0.3 percent rise from their May level with demand here almost certainly enhanced by temporary spending linked to the World Cup. Food, drink & tobacco purchases were down 0.7 percent on the month. Regionally, performances were very mixed. On the positive side there were sizeable monthly gains in Belgium (1.6 percent), Spain (1.1 percent), Austria (0.9 percent) and Slovakia (2.6 percent). However, advances here were largely offset by hefty declines in both Germany (0.9 percent) and France (1.3 percent).

Germany

June manufacturers’ orders jumped 3.2 percent following a revised 0.1 percent decline in May. On the year workday adjusted orders were up 24.6 percent. Foreign demand was up 5.7 percent. Within this, orders from the rest of the eurozone increased by 11.3 percent, well ahead of a relatively modest 1.8 percent advance in the non-EMU bloc. The rise in overall foreign orders was dominated by capital goods which were up 10.3 percent on the month. Consumer and durable orders were up 2.2 percent but basics fell 1.8 percent. Domestic orders by contrast edged up just 0.3 percent on the month with basics 0.2 percent higher; capital goods were 0.6 percent firmer but consumer and durables were down 0.6 percent. Even so, on the year the domestic side was still up 20.2 percent.

June industrial production dropped 0.6 percent on the month but was up a workday adjusted 10.9 percent on the year. Excluding construction output eased 0.5 lower percent on the month and was up 11.4 percent on the year. Second quarter output was up a very impressive 5.4 percent on the previous period when it expanded only 1.7 percent. Capital goods (up 4.1 percent in May) contracted 1.1 percent on the month and intermediates (up 3.1 percent) declined 1.0 percent. Elsewhere consumer goods (1.6 percent) edged up a further 0.2 percent and energy climbed 3.6 percent for the second month in a row. Construction was down 0.9 percent after a 1.9 percent drop in May.

France

June merchandise trade deficit narrowed from a slightly smaller revised E5.2 billion in May to E3.8 billion. The June deficit was the smallest shortfall since February but, in the wake of the hefty deficit recorded in May, still left the quarterly deficit at E13.2 billion, the largest since the third quarter of 2008. Worryingly, since hitting a trough of E7.4 billion in the third quarter of last year, the red ink has been on a clearly rising trend. June itself reflected a recovery in nominal exports which were up 10.2 percent on the month. The surge was largely due to the highly volatile transportation sector. Imports were up a more modest 4.8 percent on the month.

Italy

June industrial production was up 0.6 percent after gaining 1 percent in May. As a result workday adjusted annual growth accelerated to 8.2 percent. The advance was led by the capital goods area where output climbed 2.3 percent on the month. Intermediates were up 0.9 percent and energy rose 0.8 percent. However, with durables down 3.1 percent and nondurables off 0.8 percent, output of consumer goods dropped a sizeable 1.1 percent.

Second quarter gross domestic product provisionally expanded 0.4 percent on the quarter. The annual gain in total output was 1.1 percent, up 0.6 percentage points from last time and the fastest pace since the third quarter of 2007. ISTAT provides few details in the flash GDP estimate but they did indicate that the bottom line was supported by increased output in industry and services while agriculture had a negative effect. More complete data are scheduled for September 10.

United Kingdom

June industrial production was down 0.5 percent and up 1.3 percent on the year. Manufacturing however was up 0.3 percent and 4.1 percent on the year. The sector as whole was held back by earlier than usual oil and gas rig maintenance closures which saw output in this area sink 6 percent on the month. The decline here was compounded by a 5.7 percent drop in the equally erratic mining and quarrying sub-sector. Within manufacturing the best performers on the month were chemicals (2.0 percent), metals (2.1 percent) and food (1.6 percent). Advances here were partially offset by declines in engineering (1.3 percent) and textiles (0.8 percent).

July input prices declined 1.0 percent and were up 10.8 percent on the year while output prices edged up 0.1 percent on the month and were 5.0 percent higher on the year. Factory gate prices were supported by a 0.7 percent monthly jump in food costs that alone added 0.1 percentage points to the headline index. Other smaller positive impulses were to be found in textiles & clothing, paper, metals & electrical and optical goods (all up 0.3 percent). The largest negative impact came from petroleum products (down 1.0 percent) which essentially offset the positive effects of higher food costs. Core output prices edged up 0.2 percent on the month and were up 4.7 percent on the year. Input prices, down 1 percent, were dragged lower on the month by sharp declines in home food materials (4.0 percent), crude oil (2.3 percent) and imported parts & equipment (0.5 percent). The only increase in prices of note was in fuel (1.9 percent).

Asia/Pacific

Australia

June seasonally adjusted retail sales edged up 0.2 percent — the same as in May. On the year, sales were up 1.9 percent. In June, household goods retailing, up 1.3 percent, recorded the largest seasonally adjusted increase followed by department stores which were up 0.6 percent. Cafes, restaurants & takeaway food services were up 0.6 percent and other retailing gained 0.3 percent. However, sales in clothing, footwear & other personal accessory retailing dipped 1.2 percent and food retailing edged down 0.3 percent. Retail sales volumes were up 0.8 percent in the June quarter 2010 while prices inched up only 0.1 percent. In volume terms, clothing, footwear & other personal accessory retailing was up 2.8 percent and household goods retailing gained 2.4. Cafes, restaurants & takeaway food climbed 0.8 percent while food retailing increased by 0.1 percent. However, department stores sales dropped by 1.4 percent while other retailing was down 0.6 percent.

June seasonally adjusted balance of trade surplus climbed to A$3.5 billion from a revised A$1.8 billion in May. This is the highest surplus ever recorded. Exports were up 7.1 percent while imports edged up 0.2 percent. Non-rural goods exports soared 13 percent while rural exports were up 6 percent. Non-monetary gold dropped 24 percent. Services credits were up A$16 million. Imports of intermediate and other merchandise goods were up 5 percent while consumption goods edged up 1 percent. Non-monetary gold dropped 28 percent while capital goods were down 3 percent. Services debits were up 1 percent.

Americas

Canada

July employment declined 9,300 after soaring by over 93,000 in June. The unemployment rate edged up to 8.0 percent from 7.9 percent. The modest drop in jobs reflected small declines of 4,600 in the private sector and just 600 in public sector positions. The number of self employed was also off, down 4,200. The overall figures mask a sharp 139,000 drop in full-time jobs, almost offset by a 129,700 surge in part-time employment. Employment was also very mixed across the major sectors with industry adding a very respectable net 42,000 but services shedding 51,300. Within the former, manufacturing jobs increased nearly 29,000, agriculture (5,700) and natural resources (4,100). Construction jobs were up 2,800 and utilities crept 700 higher. Services were dominated by a widespread 65,300 drop in education and, to a lesser extent, by a nearly 30,000 drop in finance, insurance, real estate & leasing. Trade (minus 14,400) also suffered as did business, building & other support services (minus 7,800). However, there was brighter news in transportation & warehousing (up 12,100), public administration (up 18,700) and professional, scientific & technical services (up 4,400).

Bottom line

Most equities were up last week thanks to a mix of positive earnings reports and forecasts and a mixture of both positive and negative economic data. The RBA, Bank of England and ECB left their monetary policies unchanged. The dollar continued to tumble thanks to the country’s fragile economic recovery.

The Bank of Japan and Federal Reserve hold policy meetings this week. While no change is anticipated by the Bank of Japan, the Fed’s post meeting statement will undergo an even more intense parsing then usual. Analysts will be looking to see if the Fed will once again become more accommodative given the tepid — and faltering — U.S. recovery.

Looking Ahead: August 9 through August 13, 2010

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