Global Markets

Equities were down for the week despite Friday’s positive finish in Europe, Canada and the United States. Investors were reinvigorated by U.S. employment data which were higher than anticipated. Commodities for the most part, however, continued to decline. The precipitous drop in prices was attributed in part to the five reserve requirement increases for silver that served as a catalyst over the last two weeks to deflate the bubble there. Fear of higher requirements carried over to other commodities that have been heavily bid up. All equity indexes with the exception of those in Japan were down on the week.

Oil futures ended below $100 a barrel on Thursday and Friday for the first time since March amid a broad commodity selloff. Investors were worried about falling U.S. demand amid gas prices of $4-a-gallon. Silver futures slid after exchange operator CME Group once again raised the costs for investors to trade the metal. Silver's dramatic plunge from record highs has set the tempo in other commodity markets that had neared price milestones of their own, as weak economic data helped spread fears that consumers and businesses will struggle with rising costs for basic goods. After driving commodity prices higher for much of 2011 amid worries about supply shortages, investors now fear that high prices will lower consumption.

According to JPMorgan Chase, about one-third of the 31 central banks they track have raised rates since the start of April and more than half have done so this year. And it's not because of higher policy rates as the Federal Reserve last week retained its pledge to keep rates “exceptionally low” for an “extended period” to aid the economy. The Bank of England may be on a similar path and the ECB has put off its rate increase. Monetary policy elsewhere is becoming tighter. Central banks in the Philippines and Malaysia raised interest rates, and India this week increased its borrowing costs for the ninth time since March 2010. Rates in China are expected to rise further after the PboC said that taming inflation is its top priority.

Global Stock Market Recap

Europe and the UK

Stocks reversed direction Friday after the U.S. payroll numbers beat market estimates. But the advances were too little and too late to offset losses incurred earlier in the week. The FTSE dropped 1.5 percent, the CAC declined 1.2 percent while the DAX slid a modest 0.3 percent. Earlier in the week, equities slumped on weak earnings and declining commodities prices. Economic data did not enthuse either. Growth eased in both manufacturing and services in Europe and the UK while in Germany, manufacturing orders plunged 4 percent in March. U.S. weekly jobless claims unexpectedly jumped primarily on poor seasonal adjustments but still applied additional downward pressure. As was widely expected, the European Central Bank and the Bank of England both kept their key invest rates unchanged on Thursday. Other factors weighed on the stock averages. Commodity prices declined and disappointing earnings dragged down investor sentiment.

Bank of England

As widely anticipated, the Bank of England Monetary Policy Committee left its key interest rate at 0.5 percent where it has been since March 2009. It also left its asset purchase program at £200 billion. Recent economic data have vindicated the wait and see approach despite inflation that is double the Bank's inflation target of 2 percent. The BoE made their decision using new forecasts, which will be published with its quarterly Inflation Report on May 11^th.

Growth in both manufacturing and services eased in April while first quarter GDP data showed that the economy was treading water. Minutes of this meeting will be released on May 18^th. The report on April’s meeting showed Andrew Sentance, whose term finishes at the end of May, maintained a call to raise the key rate 50 basis points to 1 percent, while Martin Weale and Chief Economist Spencer Dale wanted a 25 basis point increase. The majority, including Chairman King, voted for no change.

European Central Bank

As expected, the European Central Bank's Governing Council left its key interest rate unchanged at 1.25 percent. The ECB raised its interest rate at its April meeting by 25 basis points. The ECB also left both its deposit rate and marginal rates at 0.5 percent and 2.0 percent respectively. Today's meeting was held in Helsinki, Finland.

As usual, traders paid close attention to ECB President Jean Claude Trichet’s remarks at his post meeting press conference. The focus was on whether the ECB would signal via its code words ‘strong vigilance’ that an interest rate increase would occur at the June meeting. He avoided that phrase both in his introductory statement and in his answers to subsequent questions. Mr Trichet warned of continuing upward pressures on inflation. He also repeated his opposition to any restructuring of sovereign debt in the eurozone and welcomed the three-year, €78 billion aid package for Portugal.

The euro plunged on Trichet's remarks. Policy makers may want more time to assess the economic health of the eurozone before adding to April’s monetary tightening which was the first in almost three years. While inflation accelerated to 2.8 percent in April and economic growth has gained momentum, higher borrowing costs may exacerbate a debt crisis that has already forced Greece, Ireland and Portugal to ask for external help.

Asia Pacific

Equities were down for the week with the exception of those in Japan, where the market was closed for three days for the Golden Week holidays. Losses ranged from 3.9 percent (SET) and 3.2 percent (Sensex) to 0.3 percent (Taiex). The Nikkei edged up 0.1 percent while the Topix gained 0.6 percent. The massive drop in commodity prices on Thursday and worries about the U.S. economy pulled the regional indexes lower. Most had already been lower on the week as investors became risk averse on global growth concerns. These concerns were amplified by interest rate increases by the Reserve Bank of India and Bank Negara Malaysia and expectations that the People’s Bank of China will follow soon. And in Australia, the Reserve Bank of Australia said in its quarterly financial statement that a "further tightening of monetary policy will likely be required at some point" to keep inflation in check.

People’s Bank of China

In its first quarter monetary policy report, the People's Bank of China said that there is no limit to how far it can increase reserve requirements. It also promised to increase interest rates further to manage inflation expectations as it warned of rising global price pressures. The report said that economic growth and the domestic labor market were in good shape, but repeated the government's warnings on surging price pressures. The PBoC said that tackling inflation remains "the top priority." The Bank would continue to use interest rates and other price tools to adjust demand for funds while at the same time adjust investment and savings behavior to manage inflation expectations. The PBoC has increased interest rates four times and reserve requirements seven times since last October in response to rising prices.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its key interest rate at 4.75 percent where it has been since November 2010. The RBA has an inflation target range of 2 percent to 3 percent. Data last week showed consumer prices were up 1.6 percent in the first quarter and 3.3 percent on the year. And bank loans to households and businesses grew the most in two years.

Governor Glenn Stevens, the only developed nation central banker whose economy avoided recession as credit markets froze in 2008, had indicated that the RBA would “look through” inflation after floods devastated Queensland state, and leave the overnight cash rate target at 4.75 percent for a fifth straight meeting. Australia’s policy rate contrasts with near zero levels in Japan and the U.S. which has helped drive the Australian dollar to a record high. The soaring exchange rate has helped so far to contain inflation.

In its quarterly review the RBA said higher interest rates will likely be needed “at some point” to contain inflation that is predicted to accelerate this year faster than previously forecast. While the Australian dollar’s 21 percent gain in the past year and higher household savings will “offset some of the inflationary pressures associated with the resources boom, underlying inflation is expected to be in the top part of the target band over much of the next couple of years,” according to the Bank. The Australian dollar rose the most in two weeks as traders bet that the RBA will lift rates as soon as June. Surging shipments of iron ore and coal to China and India are driving growth and increasing demand for workers in an economy already close to capacity.

The RBA forecast growth in the year through to the final quarter of 2011 at 4.25 percent, unchanged from its February estimate. Consumer prices will rise 3.25 percent over the period, up from a previous prediction of 3 percent, and core inflation will quicken to 3 percent from 2.75 percent.

Reserve Bank of India

The Reserve Bank of India increased interest rates by a bigger than expected 50 basis points to 7.25 percent and said it would battle stubbornly high inflation even at the cost of some economic slowdown, casting doubt over the government's ambitious growth targets. The rate increase was the RBI’s ninth since March 2010. The case for stronger action had been building since data showed March inflation reached nearly 9 percent. The Reserve Bank of India has been among the most aggressive central banks anywhere over the past year but its gradual policy tightening has failed to cool inflation that was initially driven by high food and fuel prices, and more recently by demand pressures.

The RBI’s decisive action and tough language restores some of the inflation fighting credibility it had lost while consistently underplaying inflation risks and sticking with a "calibrated" approach to tightening in the face of the government's pro-growth bias. Central banks in other developing markets have also been raising rates as their economies emerged from the global financial crisis much faster than industrialized countries. Much of India's stubbornly high inflation is blamed on supply bottlenecks, including in food output, which are beyond the scope of monetary policy. However price pressures have become more widespread prompting the central bank to take more decisive action.

In addition to the Reserve Bank of India, Bank Negara Malaysia raised the Overnight Policy Rate (OPR) to 3.00 percent from 2.75 percent. The floor and ceiling rates of the corridor for the key rate were correspondingly revised up to 2.75 percent and 3.25 percent respectively. The Philippine central bank — Bangko Sentral ng Pilipinas — also increased its key policy interest rate by 25 basis points to 4.5 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.5 percent for the overnight lending or repurchase (RP) facility.

Currencies

The U.S. dollar was up against all of its major counterparts last week with the exception of the yen. The euro dropped after the ECB left interest rates unchanged and did not hint that rates would increase again in June as market players expected. The decline was underlined on Friday when U.S. employment increased more than anticipated. In U.S. trading in the afternoon, the euro tumbled after the German magazine Der Spiegel reported that Greece may stop using the currency. The European currency reached a two-week low against the dollar after the magazine said Greece is considering reintroducing its own currency and that the European Commission called a meeting to discuss the move. A spokesman for Luxembourg’s Jean-Claude Juncker, who leads euro-region finance ministers, denied the report. Greece also vehemently denied the report.

Australia’s dollar rose the most since September after the Reserve Bank increased inflation forecasts and said higher interest rates may be needed ‘at some point.’ The currency also snapped a six-day decline against the yen on speculation Japanese policy makers will act to weaken their currency after it rose against all its major counterparts this week. The outlook suggests that further tightening is likely to be required at some point for inflation to remain consistent with the RBA’s inflation target range of 2 percent to 3 percent in the medium term.

Selected currencies — weekly results

Indicator scoreboard

EMU

April manufacturing PMI was 58.0, a 0.3 point upward revision to its preliminary estimate and its second best reading since August 2000. Germany, France and the Netherlands once again posted the strongest national results and continued to contrast sharply with Greece, where, despite a 1.4 point gain, the PMI remained solidly below 50 and Spain, where the index (50.6) slipped close to the expansion threshold. Output continued to lead the way among the main components, posting one of the fastest growth rates seen in the last decade. By contrast new orders slipped but remained strong by historical standards. Buoyant export demand outside of Greece was once again a feature and employment also rose further in the faster growing countries. However, job losses were seen in both Greece and Spain and headcount stagnated in Italy. Delivery times lengthened significantly, in part due to the disruptions to supply caused by the earthquake in Japan but also due to strong global demand for inputs. This was reflected in the price measures, both of which remained at elevated levels. Input price inflation actually eased a little but selling prices rose at close to record rates.

March producer prices (excluding construction) were up 0.7 percent and 6.7 percent on the year. Energy once again dominated the headline advance surging another 1.9 percent on the month (13.0 percent on the year). Without this, the PPI would have risen 0.2 percent from mid-quarter and 4.5 percent on the year. Elsewhere prices were relatively becalmed. Even intermediates, where charges have climbed quite sharply of late, registered a reasonably subdued 0.3 percent monthly gain, an increase matched by nondurable consumer goods. Durable consumer goods saw prices just 0.1 percent firmer while capital goods saw no change at all.

March retail sales dropped 1.0 percent and were 1.7 percent lower on the year. Food & drink purchases were off 0.6 percent on the month while non-food sales (excluding auto fuel) sank an even steeper 1.1 percent essentially wiping out the previous two months' advances. Much of the damage was caused by Germany where demand slumped some 2.1 percent on the month although this may well be revised stronger in due course. Certainly national retail sector surveys remain quite upbeat. Elsewhere the overall picture was mixed as usual but there were hefty declines in both France (1.0 percent) and Spain (1.4 percent). The retail sales data are very volatile and initial estimates can be revised by substantial margins. Nonetheless, a 0.1 percent contraction in volumes in the first quarter underlines the ongoing softness of the household sector.

Germany

March manufacturing orders sank 4.0 percent following a smaller revised 1.9 percent gain in February and reduced orders to a level not seen since October 2010. Workday adjusted annual growth shed nearly 10 percentage points to 9.8 percent. The contraction was almost evenly split between the domestic (3.5 percent) and overseas markets (4.3 percent) and was largely due to a slump in the capital goods sector. Within home orders, capital goods nosedived 7.4 percent on the month while consumer & durables dropped a relatively mild 0.7 percent and basics climbed 0.3 percent. Meantime the decline in foreign demand included a 7.2 percent slide in capital goods (3.4 percent eurozone, 9.2 percent non-eurozone). Basic goods orders were up 0.3 percent from February and consumer & durables shrank 0.6 percent.

March industrial production was up 0.7 percent on the month and 11.2 percent on the year. Excluding construction, output was up 0.4 percent and 10.7 percent on the year. March's strength reflected gains in output across the board bar energy, which saw a 1.2 percent monthly contraction. Production in both the capital and consumer goods sectors were up 0.8 percent while intermediates lagged with a 0.3 percent advance. Following a 1.8 percent increase in February, overall manufacturing output expanded a more modest 0.5 percent but construction built upon its 3.4 percent mid-quarter surge with an even more impressive 6.2 percent monthly leap.

France

March merchandise trade deficit narrowed from a slightly larger revised €6.37 billion in February to €5.75 billion. The improvement reflected a 1.4 percent monthly increase in nominal exports combined with a 0.4 percent decline in imports and constituted the smallest deficit since December last year. The increase in the former was largely due to stronger performances in the industrial and agricultural sectors while the decline in the latter was attributable to a fall in energy demand. The energy deficit shrank by around €0.2 billion.

United Kingdom

April input prices were up 1.3 percent and 12.2 percent on the year. Raw material and fuel costs surged a further 2.6 percent on the month following an upwardly revised 3.8 percent leap in March to lift their annual growth rate to 17.6 percent. Output prices advanced 0.8 percent from March and now stand 3.4 percent higher on the year. Budget effects are estimated to have added 0.3 percentage points to the monthly increase in output prices but even the duty-adjusted index showed annual growth holding steady at an uncomfortably high 5.5 percent. The increase in duties was particularly apparent the alcohol & tobacco sector which contributed 0.26 percentage points to the overall advance. Predictably, the next largest boost came from petroleum products (0.15 percentage points) followed by clothing & textiles (0.14 percentage points). Chemicals & pharmaceuticals (0.11 percentage points) also had a significant impact. Core output prices were up a firm 0.6 percent from March and were 3.4 percent higher on the year. A 7.1 percent increase in crude oil charges was responsible for 2 percentage points of the monthly increase in headline input prices. Other imported materials also saw further sizeable gains with metals up 1.4 percent, chemicals 1.5 percent and parts and equipment 1.0 percent.

Asia/Pacific

Australia

March retail sales dropped 0.5 percent and were up 2.3 percent on the year. Sales were up 0.8 percent in February. Virtually all major categories declined. Department stores were down 3.0 percent, food retailing was down 0.4 percent, household goods retailing declined 0.3 percent while other retailing and cafes, restaurants & takeaway food services edged down 0.1 percent. The only positive was for clothing, footwear & personal accessory retailing – it edged up 0.1 percent.

Americas

Canada

March industrial product prices jumped 0.9 percent on the month and 5.0 percent on the year — its fastest pace since November 2008. An 8.2 percent monthly leap in petroleum & coal product prices essentially accounted for the entire headline advance. Excluding this category the IPPI actually edged 0.1 percent lower. Other, less steep increases were posted by meat, fish & dairy products (1.4 percent), chemicals (0.7 percent) and rubber & leather products (0.6 percent). However, overall prices were to some extent held in check by a 0.8 percent drop in the auto sector, itself largely a function of the Canadian dollar appreciating by more than 1 percent over the period against its U.S. counterpart. There was also a 0.3 percent monthly drop in primary metal product charges. The raw materials price index soared 5.7 percent and was up 16.7 percent on the year. Mineral fuels lay behind an unusually sharp monthly leap. Without the 15.2 percent jump in prices here, the RMPI would have fallen 1.9 percent on the month although annual growth would have largely matched the headline rate (16.9 percent). All the other main categories saw prices decline bar animals & animal products (1.5 percent) and non-metallic minerals (unchanged).

April employment was up by 58,300 jobs. The bounce in jobs was accompanied by a 0.1 percentage point dip in the unemployment rate to 7.6 percent. Full time positions rose a relatively modest 17,200 while part-time jobs gained 41,100. But private sector employment was up a solid 35,600, easily eclipsing a 20,600 increase in public sector posts. The number of self-employed edged just 2,100 higher. Job creation last month was wholly attributable to a 69,600 surge in the service sector, itself largely due to marked rises in finance, insurance, real estate & leasing (18,700) and business building & other support services (17,200). Other less impressive advances were recorded in education (8,400), health care & social assistance (7,700) and information, culture & recreation (7,200). Transport & warehousing added 6,600 but retail saw a hefty 16,500 shakeout. The goods producing sector cut its headcount by 11,300 with job losses posted across the board outside of natural resources (6,600). Manufacturing actually held up quite well (down only 800) but construction (down 5,800) and utilities (down 7,700) both registered significant declines.

Bottom line

Markets were volatile and mostly lower last week. Several central banks met — three emerging market banks increased their interest rates as they fought inflationary pressures. Three industrial country banks left their policy rates unchanged. Economic data were mixed and disappointed as did many earnings reports.

China releases its set of April economic data including prices, trade, retail sales and industrial production. Australia also releases its merchandise trade data as well as its April employment report. In Europe, several countries also will release trade and industrial output data. Flash estimates of first quarter growth are on tap for Friday. Canada and the U.S. also release international trade data.

Looking Ahead: May 9 through May 13, 2011

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