Global Markets

Equities ended the week on a positive note, reinforced by the better than expected U.S. employment report. Traders appear to have banished August pessimism and now, with the new month, have found their optimism once again. All indexes followed here were up for the day on Friday and for the week as well.

In a week paced with major economic news, investors were highly selective in deciding which reports would drive market sentiment. Better than expected growth in Australia and Switzerland added to optimism. Purchasing managers’ surveys in China and the U.S. were better than expected and U.S. consumer confidence picked up. Data in Europe softened but still indicated growth. Investors preferred to focus on the positive.

On the week, index gains ranged from 0.5 percent for the Topix to 4.9 percent for the PSEi. Other indexes with increases over 4 percent included the CAC, up 4.7 percent and the FTSE, up 4.4 percent.

Global Stock Market Recap

Europe and the UK

European stocks rallied last week after three consecutive weeks in the red. The DAX was up 3.1 percent and regained its positive foothold for the year. The CAC soared 4.7 percent but remains 6.7 percent below its end of year level. The FTSE jumped to its highest level since the first week of May. The index was up 4.4 percent for the week and is 0.3 percent above its year end level. On Friday, the three indexes gained on better than expected economic data. But increases from the U.S. employment report were dampened by a U.S. ISM non-manufacturing reading.

Traders also digested a slew of non-manufacturing PMI reports Friday. Italy, France and the eurozone all posted better than expected results while growth in the UK, Spain and Germany decelerated and were below economists’ forecasts. Merger and acquisition stirrings also added to gains.

European Central Bank

As universally expected, the European Central Bank 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, 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.

Monetary officials have said repeatedly in recent months that interest rates remain appropriate and that they do not see inflationary risks. At his post meeting press conference, ECB President Jean Claude Trichet extended emergency lending measures for banks into 2011 thanks to anticipated slowdown in growth in both the U.S. and the eurozone. The ECB will keep offering banks unlimited one-week and one-month loans until at least January 18, 2011. The ECB will also offer banks three-month loans in October, November and December at interest rates linked to the ECB’s average benchmark rate over the maturity of the loan. The ECB raised its 2010 economic growth forecast to about 1.6 percent from 1 percent previously. It lifted the 2011 projection to 1.4 percent from about 1.2 percent.

Riksbank

The Swedish central bank, the Riksbank raised interest rates and delivered an upbeat assessment of the country’s economy. The Riksbank increased its policy interest rate by 25 basis points to 0.75 percent, saying that rates needed to rise gradually towards ‘more normal levels’. It added that the economy was expected to show strong growth, with inflationary pressures increasing. The Bank downplayed the risks to the Swedish economy posed by fears over the slowdown in the U.S. and the eurozone along the increased risk aversion in financial markets. The Bank last raised rates in July. Since then, Swedish second quarter growth beat expectations, while consumer confidence jumped to a 10-year high.

Asia Pacific

All Asia Pacific indexes followed here were up last week after getting off to a shaky start. Most, after sinking Tuesday rebounded for the rest of the week, despite the usual caution prior to the U.S. employment report Friday morning. Last week’s rally began in Asia and flowed to Europe and the U.S. Despite Thursday’s caution, equities still gained. Economic data for the most part were better than analysts expected. Investors were relieved when China’s purchasing managers index returned to a more vigorous pace of growth after weakening in the previous two months (but still growing) while in Australia manufacturing continued to grow albeit at a slower pace. And Australia’s second quarter GDP grew at a faster pace than analysts anticipated.

The Nikkei, which dropped 3.6 percent on Tuesday, managed to rally to end the week positively with a gain of 1.4 percent. The index rebounded Wednesday when the yen showed signs of stabilizing during the trading session.

India’s second quarter gross domestic product soared at a brisk 8.8 percent rate on the year — its fastest pace since early 2008. The report highlighted the economy’s strength despite the impact of high inflation on consumer spending. Growth was driven by robust manufacturing and services growth and a pick-up in farm production. The performance no doubt will encourage the Reserve Bank of India to continue with its aggressive monetary tightening to control inflation. The government is forecasting that the economy will expand 8.5 percent during this year, after growing 7.4 percent last year despite a severe drought that hit farm production and contributed to sky-rocketing food prices. However, farm output is expected to be substantially stronger thanks to bountiful monsoon rains which are crucial for agriculture. The RBI, which has already raised interest rates three times so far this year, is due to meet again on September 16^th. The current policy rate is 5.75 percent.

Markets reacted with indifference to the Bank of Japan's eagerly awaited measures to rein in the soaring yen. The rise in the yen has hit Japanese exporters especially hard. The Bank of Japan announced Monday after an extraordinary meeting that it would expand the volume of money available to banks under a special fixed rate to ¥30 trillion up from ¥20 trillion. It also introduced a six-month loan facility on top of a three-month program already in place. BoJ also indicated that it had downgraded its assessment of the economy, citing volatile foreign exchange markets and uncertainty over the economic health of major trading partners like the United States.

Meanwhile, Prime Minister Kan outlined a stimulus package of ¥900 billion aimed at beating deflation, protecting jobs and bolstering domestic investment and consumer spending. Because the amount had already been incorporated into the government’s 2010 budget as emergency funds, economists did not expect much of an impact.

Currencies

The euro, yen and Swiss franc along with the commodity currencies of Canada and Australia were up against the U.S. dollar last week as risk aversity faded and investors plunged back into equities. Of the major currencies only the pound sterling lost ground.

The yen has risen sharply in recent weeks, thanks in large part to the fact that investors are unwinding so-called carry trades — borrowing in low-interest yen and buying higher-yielding assets overseas — and seeking safe haven assets such as Japanese government bonds. The currency’s ascent is a major headache for export-dependent companies like Canon, Toyota and Sony, as it makes their products more expensive, and less competitive, for shoppers in the United States and Europe.

The Swiss franc neared parity with the dollar for the first time in nine months and set a record high against the euro after second-quarter growth figures were stronger than expected. The currency has benefited from safe haven demand during the recent rise in risk aversion. Gains accelerated after the Swiss National Bank stopped intervening to stem the currency’s rise in June, saying that deflationary risks in the Swiss economy had all but disappeared. Analysts said the growth figures — the economy grew at 0.9 percent in the second quarter — heightened expectations that the SNB would exit from its ultra-loose monetary policy sooner than the Federal Reserve, European Central Bank and Bank of England.

The Australian dollar surged higher on Wednesday as forecast-beating growth data dented market expectations that the Reserve Bank of Australia would cut interest rates to stimulate the economy. Figures showed the Australian economy grew at its fastest pace in three years in the second quarter as trade with its Asian neighbors boomed and consumer spending jumped. The Aussie dollar was further boosted by a survey revealing stronger-than-expected Chinese manufacturing activity, lifting risk appetite and alleviating fears over a potential economic slowdown in Asia.

Selected currencies — weekly results

Indicator scoreboard

EMU

August economic sentiment was up 0.7 points to 101.8. The advance in overall sentiment reflected mainly a 3 point gain in consumer morale to minus 11. This was accompanied by a smaller 1 point increase in service sector confidence to 7. However, sentiment was unchanged in industry, retail and construction at minus 4, minus 4 and minus 29 respectively. Among the larger EMU states, Germany led the way with a 1.1 point increase to 111.2. France was up a modest 0.4 points at 100.1 and is still short of the recent 102.7 high seen in April, while Spain improved 0.9 points to 89.6. By contrast morale in Italy dropped 0.9 points to 98.0 to wipe out half of the advance registered in July. Elsewhere sentiment in Greece gained 1.6 points but at just 67.9, remains worryingly low.

August manufacturing PMI edged down to 55.1 from 56.7 in July and a six-month low. The apparent slowdown in economic activity in the region as a whole reflected a moderation in the growth of both output and new orders although both continued to expand for the 13th month in a row. Exports also strengthened again but their rate of growth dipped for the fifth consecutive month. Employment was up for the fourth month running but net new job creation remains only slow. Meantime both input and output price inflation eased somewhat. With the exception of France, all the larger states saw activity rates decelerate from the start of the quarter. In particular, Germany shed 3 points at 58.2 and Italy was down 1.6 points at 52.8. Spain only dropped a relatively small 0.4 points but at just 51.2, is now perilously close to the 50 growth threshold. One of the main issues to emerge from today's figures is the growing gap between the strongest performers, Germany, France and Austria, and most of the other EMU members, notably Italy, Spain, the Netherlands and Greece, which remains mired in recession.

August flash harmonized index of consumer prices eased from 1.7 percent in July to 1.6 percent on the year. The decline was led by Germany where the 12-month inflation rate fell fully 0.3 percentage points to 0.9 percent. Among the other larger EMU states, prices also slowed in Spain but held steady in Italy. National data from these countries suggest that core inflation in the region also remained very tame.

July unemployment rate remained at 10.0 percent for the second month. The number of unemployed however declined by 8,000. This followed increases of 53,000 and 3,000 in May and June respectively. Total joblessness now stands at 15.833 million, a rise of 668,000 from the same month in 2009. The headline figures would look worse but for the ongoing strength of the German labor market which continues to comfortably outperform many of its EMU neighbors. Over the year there have also been significant declines in jobless rates in Austria (3.8 percent from 5.1 percent) and Malta (6.5 percent from 7.3 percent) as well. At the other end of the scale the worst performing member is still Spain where the rate edged up yet another notch to some 20.3 percent.

Second quarter gross domestic product was up an unrevised 1.0 percent although amendments to the earlier data (first quarter now stands at 0.3 percent on the quarter, 0.8 percent on the year) saw annual growth adjusted upward to 1.9 percent from 1.7 percent. The first look at the expenditure components confirmed the anticipated modest improvement in the household sector with consumer spending expanding 0.5 percent on the quarter after a meager 0.2 percent advance last time. Government spending performed in identical fashion while gross fixed capital formation rebounded by 1.8 percent from the first quarter's 0.4 percent decline. Inventories, which added 0.8 percentage points to quarterly growth at the start of the year, provided an additional 0.2 percentage points this time. The foreign trade sector had little impact on the bottom line with both export and import volumes rising 4.4 percent.

July producer prices excluding construction were up 0.2 percent and 4.0 percent on the year. The monthly increase was dominated by the energy sector where prices rose a sharp 0.6 percent on the month. Excluding this category the headline index would have risen just 0.1 percent from June and stands 2.0 percent on the year, the same pace as at the end of last quarter. Underlying pipeline pressures thus remain well contained. Among the other major sub-sectors, prices were steady on the month for both the capital goods and durable consumer goods. Nondurables and intermediates saw a minimal 0.1 percent gain.

July retail sales crept 0.1 percent higher and were up 1.1 percent up on the year, adjusted for differences in working days. Volumes were supported by a 0.3 percent monthly increase in sales of food, drink & tobacco. Non-food demand fell 0.1 percent. Regionally, as is often the case with these volatile data, there were wide variations in performance. While sales were up an impressive 2.2 percent on the month in France, they were down 0.3 percent in Germany and slumped 3 percent in Spain where VAT was hiked 2 percentage points at the start of the month.

Germany

August joblessness declined by 17,000 and broadly in line with those seen in both June (22,000) and July (21,000) and suggests that the labor market is recovering well. The jobless rate held steady at 7.6 percent for the third month while vacancies rose another 4,000. Total unemployment now stands at 3.193 million.

July retail sales were down 0.3 percent for the second month. On the year, sales are up just 0.8 percent. Volumes have now fallen in four of the last five months and underline the still difficult trading conditions faced by retailers. Nonetheless, back-to-back sales declines in June and July would seem to confirm the assumed sizeable World Cup boost to demand in May. Without this the profile over 2010 to date would look decidedly soft. Annual growth figures show non-food sales up a real 1.9 percent led by furniture & household goods (4.3 percent), pharmaceuticals & cosmetics (2.8 percent) and clothing & shoes (1.5 percent). Mail order sales (minus 3.9 percent) remain sharply below their year ago level.

France

Second quarter ILO unemployment dropped 0.2 percentage points to 9.5 percent. This was the second successive quarterly decline and reduced the rate to its lowest level since the second quarter of 2009. The improvement on the mainland was mirrored in the total figure which includes overseas territories. A 0.2 percentage point decline here left a 9.7 percent rate, also the lowest reading since the second quarter of last year. However, note that the ILO data contrast with the monthly figures produced by INSEE. These data showed joblessness steady at a 9.9 percent rate over the first five months of the year before edging up to 10.0 percent in June.

Asia/Pacific

Japan

July industrial production was up 0.3 percent and 16.4 percent on the year. Contributing to the increase were general machinery, chemicals (excl. drugs) and pulp, paper & paper products. Commodities that mainly contributed to the increase are reaction vessels, flat-panel display products machinery and semiconductor products machinery. According to the production survey forecast, output is expected to increase 11.6 percent in August and 0.2 percent in September.

July retail sales were up 3.9 percent when compared with a year ago. It was the seventh consecutive increase in sales. However, large scale store sales continue to decline. They dropped 1.2 percent on the year. Sales were propped up by cooling devices and the like during the summer heat wave and the government rewards for energy efficient appliance purchases. The government incentives are scheduled to conclude at the end of the year. Responding to those concerns, and to help lift production which is flagging due to the appreciation in the currency, the government has decided to extend the current system rewarding purchasers for buying energy efficient appliances and building products.

Australia

July retail sales were up 0.7 percent — slightly greater than expected. On the year, sales were up 4.0 percent. Sales at cafes, restaurants & takeaway food services jumped 5.3 percent followed by other retailing which was up 1.4 percent. Food retailing gained 0.4 percent while clothing, footwear & personal accessory retailing edged up 0.2 percent. Sales in household goods retailing declined 1.7 percent after a strong result in June. Department store sales dropped 0.7 percent.

Second quarter Gross Domestic Product increased 1.2 percent and was up 3.3 percent on the year. On the expenditure side, growth was driven by household final consumption expenditures which were up 1.6 percent on the quarter and 3.2 percent on the year and exports of goods and services which were up 5.6 percent and 4.7 percent on the year. Offsetting the growth was the change in inventories and imports of goods and services. Government final consumption expenditures increased 1.8 percent and 6.3 percent on the year. The main contributors to growth in household final consumption were purchase of vehicles (up 11.2 percent), recreation & culture (up 3.3 percent) and insurance & other financial services (up 2.6 percent). Gross fixed capital formation increased 0.6 percent and was up 5.8 percent on the year. Total private gross fixed capital formation increased 0.8 percent on the quarter and reflects a rise in total dwellings investment of 5.0 percent. Public gross fixed capital formation was flat. Total inventories fell byA$514 million compared with an increase of A$1770 million last quarter. The change in inventories subtracted 0.7 percentage points from GDP growth during the quarter.

July international trade surplus declined to A$1.9 billion from A$3.4 billion in June. Exports of goods and services credits dropped 4.5 percent. Non-rural goods declined 6 percent while non-monetary gold sank 15 percent. Rural goods were up 5 percent. Services credits slid A$15 million. Cereal grains and cereal preparations were up 22 percent while other rural gained 3 percent. Imports edged up 0.2 percent. Consumption goods imports inched down 1 percent while capital goods imports edged up $4 million. Imports of intermediate and other merchandise goods were up 0.9 percent while non-monetary gold sank 44 percent.

Americas

Canada

July industrial product price index edged up 0.1 percent and was up 1.0 percent on the year. Few of the major sub-sectors saw large monthly swings in prices. However, a 0.9 percent drop in the petroleum & coal products area subtracted 0.2 percentage points from the bottom line and without this category prices would have risen 0.3 percent from June. The only other decline of note was in lumber & related wood products where prices dropped 0.5 percent. Upside pressure stemmed mainly from primary metal products (1.4 percent) and miscellaneous non-manufactures (1.9 percent) which easily eclipsed gains elsewhere. Raw material and fuel costs jumped a larger than anticipated 1.8 percent from June and were up 6.0 percent on the year. The monthly rise was driven by a 4.1 percent surge in animals & animal products and a 3.6 percent increase in non-ferrous metals. Vegetable product prices were also markedly higher, up 1.8 percent on the month. The only decline in prices was seen in wood (0.1 percent) while non-metallic minerals were just flat.

Second quarter gross domestic product expanded 0.5 percent, somewhat less than the 1.4 percent growth in the first quarter. On the year, GDP was up 3.4 percent. The second quarter deceleration in part reflected some loss of momentum in the household sector where consumption rose 0.7 percent on the quarter, down from 1.0 percent last time. Gross fixed investment also rose at a more modest pace, up 2.0 percent or 0.4 percentage points less than in the first quarter. Government spending maintained the same pace however, registering a second consecutive 0.4 percent quarterly advance. Consequently, final domestic demand grew 0.9 percent on the quarter, its first sub-1 percent pace since the second quarter of 2009 when the economy was still in recession. Inventories rose sharply for the second quarter in succession — but this followed declines in each quarter of 2009. There was a significant negative impact from net trade as export volumes rose just 1.5 percent or less than half the 3.9 percent jump posted by imports. By industry the second quarter advance was led by the goods producing sector which saw output expand 1.9 percent from the first quarter thanks to a 1.6 percent gain in manufacturing and a sizeable 2.4 percent increase in energy. Services managed a minimal 0.1 percent advance, being kept in check by falls in both retail trade (0.4 percent) and wholesale trade (0.2 percent). The best performing sector was transport and warehousing (0.8 percent).

June monthly gross domestic product edged up 0.2 percent and was up 3.9 percent on the year. The goods producing sector was up 0.6 percent for the second month in a row. Within this manufacturing surged 1.3 percent, more than making up for a disappointing flat performance in mid-quarter. There was also a solid 1.8 percent monthly rise in utilities and a 2.2 percent surge in agriculture, forestry & fishing. However, construction struggled again with production rising just 0.1 percent and mining & oil & gas extraction dropped 0.8 percent. The service sector expanded only 0.1 percent despite a 0.7 percent monthly increase in retail trade, a 1.0 percent advance in arts, entertainment & recreation and a 0.8 percent gain in waste administrative management services. Declines were recorded in finance, insurance & real estate (down 0.2 percent), accommodation & food services (down 0.4 percent) and in public administration (down 0.1 percent).

Bottom line

Economic data were mixed last week but were biased to the positive side with many of the key numbers above analysts’ estimates. The Bank of Japan held an extraordinary meeting and announced an increase to its bond buying program while the government offered additional stimulus. Both were decried by market participants as doing little to bring down the value of the yen and stimulate growth in the flailing economy.

Four central banks hold regular policy meetings this week — the Bank of Canada, the Reserve Bank of Australia, and the Banks of Japan and England. Only the Bank of Canada is expected to increase its cash target rate by 25 basis points to 1 percent but some analysts wonder if the marked slowing of growth in the domestic economy and the weakness in the U.S. might not influence the Bank’s decision. Both Canada and Australia will release their labor market reports.

Looking Ahead: September 6 through September 10, 2010

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