Global Markets

Equities were mixed with Asian indexes faring better than those in Europe and North America. Earnings continued to be a key driver although worries about slackening global growth and Europe’s ongoing sovereign debt problem — especially for Greece — sent many investors to the sidelines. Extremely volatile commodity prices linked directly to stocks. When commodity prices for oil, for example, declined so did stocks related to them. Crude prices were affected by a rise in U.S. inventories as well as a lowered demand forecast from the International Energy Agency. The IEA cut its forecast for crude oil demand next year as a result of the recent surge in petroleum prices and weakening growth prospects for industrialized countries.

In the aftermath of its April inflation data, China’s People’s Bank of China increased banks' reserve requirements for the fifth time this year and the eighth since October, as it ramped up its efforts to slow inflation amid signs of slowing growth. The reserve ratio was increased by 50 basis points to 21 percent effective on May 18^th. April consumer inflation eased slightly to an annual gain of 5.3 percent from 5.4 percent the month before for the second month exceeding 5 percent. The increase was higher than expected and above the government's target of 4 percent. The PBoC last increased reserve requirements less than a month ago on April 17^th. The Bank also raised interest rates in April by 25 basis points for the second time this year to 6.31 percent. Crude futures continued their recent slide, falling below $100 a barrel after the PBoC announcement.

Recent economic data have signaled slowing activity in the Chinese economy which grew 9.7 percent on the year in the first quarter. Industrial output growth slowed to 13.4 percent in April from 14.8 percent in the previous month. Retail sales grew 17.1 percent, slower than March's 17.4 percent gain. New loans issued in local currency in China rose to CNY739.6 billion in April, above expectations.

Global Stock Market Recap

Europe and the UK

Equities dropped last week as commodities continued their volatility for a second week. Earnings reports continued to be mixed although for the most part, they have provided a counterweight to the sovereign debt issues surrounding Greece and worries about inflation in China. On the week, the FTSE was down 0.9 percent, the CAC was off 1.0 percent and the DAX ended 1.2 percent lower.

Inflationary pressures in Europe, the UK and China raised expectations that central bankers would respond by tightening monetary policy soon. This dampened investor risk appetite. Greece's sovereign debt crisis resurfaced and continued to addle markets as they awaited further word on another aid package that would help avert restructuring or default. The European Union agreed in an unannounced meeting on May 6^th to ease the terms of the €110 billion lifeline Greece received last year. The gathering followed a report in Der Spiegel magazine that Greece may withdraw from the euro. EU officials denied the report and said Greece will need more aid after investors drove yields on its two year notes to more than 25 percent. S&P lowered Greece’s sovereign credit rating by two levels to B and said further reductions are possible.

Germany moved Wednesday to reassure financial markets by supporting Bank of Italy governor Mario Draghi as the next president of the European Central Bank. He would succeed Jean Claude Trichet when his eight year term expires in October. German chancellor Angela Merkel told the weekly newspaper Die Zeit that Mr. Draghi embodied German ideas about economic stability and that the government could support his candidacy to succeed Trichet of France. Euro area finance ministers tentatively plan to make the ECB nomination when they meet in Brussels on May 16^th. Germany has previously signaled that European leaders will make a decision on an ECB candidate at a June summit.

BoE inflation report

In its quarterly Inflation Report, the Bank of England warned that inflation in Britain could hit 5 percent this year before falling back in 2012 and 2013, raising the likelihood that the Bank would lift its interest rate from the record low of 0.5 percent. The bank also said the British economy was not growing as fast as it had expected, as “the continuing squeeze on households’ real incomes is likely to weigh on demand, especially over the next year or so.”

BoE governor Mervyn King said that inflation was being driven primarily by higher prices for commodities and imports, as well as an increase in Britain’s value added tax (VAT). Considering the sensitivity of inflation to such factors and recent volatility in commodity prices, he said that there is a great deal of uncertainty in the outlook for inflation. The Bank said that while risks to growth are “skewed to the downside,” surveys and growth in employment in recent months “suggest that underlying activity may have been stronger than indicated by official output data.” Temporary factors, such as the additional bank holiday for the royal wedding last month and the impact from the Japanese earthquake and tsunami are likely to add volatility.”

Asia Pacific

Equities here fared somewhat better than their European and North American counterparts and were mostly positive on the week despite volatility. Shares declined in Australia, Japan and South Korea for the week. However, the Shanghai Composite (up 0.2 percent) and Hang Seng (up 0.5 percent) advanced overcoming declines incurred after the People's Bank of China increased banks' reserve requirements.

The Nikkei dropped 2.1 percent while the Topix was 1.9 percent lower for the week. Banks were pressured by speculation about a loan waiver for Tepco after Chief Cabinet Secretary Yukio Edano said unless banks waive debt dating from before the March 11^th earthquake, the public will never accept using tax money to help the utility pay compensation for damage stemming from its nuclear plant crisis.

China released its slew of economic indicators during the week. Inflation remained stubbornly high and well above the government’s 4 percent target while retail sales and industrial production eased when compared with the previous year. In response, the PBoC lifted reserve requirements yet again.

In South Korea, the Bank of Korea surprised and left its key interest rate at 3 percent — analysts had expected a 25 basis point increase. The decision was not unanimous according to governor Kim Choong Soo. The Bank also held off on any action at the previous meeting in April after raising rates by 25 basis points from 2.75 percent in March.

Currencies

The dollar was up against all of its major counterparts last week in a volatile week of trading. Shifting sentiment toward risk assets kept the markets churning. The euro was particularly volatile as the ongoing Greek sovereign debt crisis pressured the euro and offset the mostly better than expected first quarter growth readings. Commodity prices dropped as the dollar rose.

The pound sterling weakened after data showed economic growth in Germany and France exceeded estimates and a report said UK living standards will fall. Sterling depreciated against the majority of its 16 most traded peers. It dropped against the euro on the assumption that interest rates in the eurozone will outpace those in the UK.

The Federal Reserve bought $1 billion of the U.S. currency on March 18^th when Group of Seven nations intervened in the currency market to halt the surge in the yen after Japan was struck a devastating earthquake and tsunami. The purchases were the first since 2000 when global monetary officials tried to support the euro. The Group of Seven central banks and monetary authorities intervened in a coordinated effort after the yen surged to a record ¥76.25 per dollar. Concerns were that the strengthening yen would hamper recovery efforts. The New York Fed, acts on the behalf of the U.S. Treasury in the foreign exchange market.

In commodity trading, the CME Group halted trading in crude oil, heating oil and gasoline futures for the first time in more than two years after prices for gasoline dropped to a trading limit. The disruption spooked investors, who recalled the previous week’s sudden plunge in silver futures, and sent other commodity prices lower as well on Wednesday. Reformulated gasoline blend stock futures tumbled to the 25 cent limit on the New York Mercantile Exchange after Department of Energy data suggested U.S. fuel usage is falling. When gasoline hit the limit at 12:06 p.m. EDT Wednesday, circuit breakers on CME's electronic Globex trading platform were triggered. The price move resulted in a five minute delay in trading for all three energy futures contracts. Trading resumed on both the floor and electronically at 12:11 p.m. EDT. CME Group's actions come amid wild swings across commodities markets in recent weeks. In the previous week, silver, oil and other raw materials saw rapid price declines due to fears about how the high costs of food and energy are affecting the global economy.

Selected currencies — weekly results

Indicator scoreboard

EMU

March industrial production declined 0.2 percent and was up 5.3 percent on the year. Capital goods output dropped 0.9 percent, energy and consumer nondurables both declined 0.7 percent. Intermediates were unchanged from February while consumer durables edged up just 0.1 percent. Regionally, industrial production was up 0.4 percent in both Germany and Italy but dropped in France (0.9 percent) and Spain (1.0 percent). While annual output growth in Germany stands at a heady 10.9 percent and a rather less lofty 3.3 percent in France and 3.1 percent in Italy, in Greece production was 7.5 percent weaker on the year and in Spain, 0.9 percent lower.

First quarter flash gross domestic product was up 0.8 percent and was 2.5 percent higher on the year. Eurostat did not offer any details of the expenditure components of real GDP. However, it would appear from some of the national statistics that domestic demand probably accelerated thanks to a pick-up in capital investment and a slightly stronger performance by household spending. Stock building may also have had a positive impact. Among the big four states, quarterly growth quickened in all except Italy which seriously underperformed with a second successive rise of just 0.1 percent. However, once again there was a sharp divergence between the two largest members and Spain as growth in France and Germany rose to 1.0 percent and 1.5 percent respectively while the Spanish expansion rate edged just a tick higher to a still sluggish 0.3 percent. Elsewhere, the ailing Greek economy finally emerged from recession with real GDP rising 0.8 percent on the quarter (but still 4.8 percent down on the year). There were similarly solid quarterly performances also by Belgium (1.0 percent), Estonia (2.1 percent), the Netherlands (0.9 percent), Austria (1.0 percent) and Slovakia (1.0 percent). On the downside, Portuguese output slumped 0.7 percent which, following a 0.6 percent decline in the fourth quarter of last year, puts the national economy back in recession.

Germany

March seasonally adjusted merchandise trade surplus widened to €15.3 billion from the revised €11.2 billion in February. The jump in the surplus reflected healthy expansion rates in both sides of the balance sheet with nominal exports rising 7.3 percent on the month and imports up 3.1 percent. Within annual export growth of 15.8 percent, sales to the rest of the eurozone increased 14.2 percent and to non-EU nations, 15.4 percent. The comparable figures for imports were 16.9 percent, 20.8 percent and 9.9 percent respectively.

First quarter flash gross domestic product jumped 1.5 percent and 5.0 percent on the year. As usual the Federal Statistics Office provided no details to explain the headline advance. However, the FSO did indicate that growth was led by domestic demand. Capital investment seems to have rebounded from its fourth quarter contraction and importantly, household consumption apparently expanded strongly. Exports should also have made another important contribution. Significantly, the level of real GDP is now above where it stood before the financial crisis.

France

March industrial production (excluding construction) declined 0.9 percent on the month following a slightly stronger revised 0.5 percent increase the month before. On the year, output was up 3.3 percent, the slowest pace since August last year. Manufacturing output dropped 1.0 percent on the month reflecting broad-based declines among the main categories. Transport equipment was down 4.2 percent, electronics & machines declined 1.0 percent and food & agriculture slid 0.4 percent. Refining posted a 1.7 percent contraction and the other manufacturing goods sector was off 0.2 percent. Energy output dipped 0.7 percent and construction 0.3 percent.

First quarter flash gross domestic product was up 1.0 percent and 2.2 percent on the year. The first quarter improvement followed slightly weaker revised 0.3 percent quarterly and 1.4 percent annual rates at the end of last year. The most significant contribution to the pick-up in quarterly growth was inventory accumulation which added 0.7 percentage points to the bottom line. Domestic demand, excluding stock building, contributed 0.6 percentage points. Among the major expenditure components household consumption was up 0.6 percent on the quarter and gross fixed capital formation climbed 1.1 percent. Within the latter, business investment grew 1.9 percent and the public sector expanded 1.0 percent but households posted a 0.3 percent contraction. The foreign trade sector disappointed as a 1.4 percent gain in exports was more than offset by 2.7 percent spurt in imports. As a result, net exports subtracted 0.4 percentage points. In terms of output, the acceleration in headline growth was in no small way due to 3.7 percent leap in the manufacturing sector, the strongest increase for at least thirty years. Services expanded 1.1 percent.

Italy

March industrial production was up 0.4 percent and 3.1 percent on the year. The March gain was led by the energy sector where production grew 1.5 percent but capital goods were not far behind (1.2 percent). Intermediates (0.5 percent) also managed a respectable advance but output of consumer goods disappointingly declined 0.6 percent due to a 3.4 percent slump in durables.

First quarter flash gross domestic product edged up 0.1 percent and was up 1.0 percent on the year. In keeping with normal practice no expenditure components were released but Istat did indicate that what growth there was reflected a pick-up in activity in agriculture. Ominously, both the goods producing and service sectors stagnated.

United Kingdom

March shortfall on global trade in goods widened out from a slightly larger revised Stg6.99 billion in February to Stg7.66 billion in March. The underlying deficit (excluding oil and erratics) followed suit, increasing from Stg6.57 billion to Stg7.32 billion. The deterioration reflected a 0.5 percent monthly decline in nominal exports together with a 1.7 percent rise in imports. The fall in exports was concentrated in non-EU markets where sales slumped 10.5 percent on the back of hefty declines in both intermediates and capital goods. By contrast, EU purchases jumped 9.7 percent with both oil and chemicals hitting record levels. As a result, while the bilateral shortfall with non-EU countries expanded Stg1.7 billion to Stg4.5 billion, the deficit with the EU narrowed by Stg1.0 billion to Stg3.2 billion.

March industrial production was up 0.3 percent and 0.7 percent on the year. Manufacturing posted an even smaller 0.2 percent gain from its February level to stand 2.7 percent higher on the year. Output was up on the month in seven of the 13 sub-sectors and fell in six. The largest contributions to the overall gain came from paper, printing & publishing where production climbed 1.4 percent and food, drink & tobacco (up 1.0 percent). The steepest decline was recorded in the electrical & optical category (down 1.4 percent). Among the more erratic sectors, utilities output advanced 1.0 percent on the month while mining & quarrying expanded 0.4 percent and oil & gas extraction, 0.6 percent.

Australia

March balance on goods and services was A$1,740 million after sinking A$88 million in February. Exports were up 9.2 percent and 20.6 percent on the year while imports were up 1.2 percent and 5.2 percent on the year. Exports of non-rural goods jumped 11 percent while non-monetary gold soared 59 percent. Rural goods however slipped 2 percent. Services edged up 1.0 percent. On the import side, intermediate & other merchandise goods imports were up 8.0 percent and non-monetary gold climbed 25 percent. But capital goods imports sank 8.0 percent and consumption goods were down 1.0 percent.

April employment posted a decline of 22,100. Full time employment declined by 49,100 to 8,056,800 but part time employment increased 26,900 to 3,379,700. The unemployment rate remained at 4.9 percent for the second month. The number of unemployed decreased 9,800 to 583,000. The number of persons looking for full time work was down by 1,700 to 413,000 and the number of persons looking for part time work declined by 8,100 to 170,000. The participation rate was of 65.6 percent, a decrease of 0.2 percentage points from March.

China

April merchandise trade surplus was $11.42 billion after a minimal surplus of just $0.14 billion in March. Exports surged 29.9 percent on the year to a record $144.26 billion. Imports were nearly 22 percent higher at $144.26 billion. Seasonally adjusted exports were up 12.3 percent on the month while imports were up 7.4 percent. Despite the April outcome and largely courtesy of the February deficit, the first four months of 2011 saw a surplus of only $10.28 billion, around 33 percent less than posted during the same period of last year. For April alone, the bilateral surplus with the U.S. stood at $15.09 billion, up 17.2 percent from a year ago thanks to annual export growth of 27.2 percent.

April industrial production was up 0.9 percent on the month and 13.4 percent on the year. This was 1.4 percentage points lower than March’s gain of 14.8 percent. In the first four months of this year, output was up by 14.2 percent on the year, down from 14.4 percent for the first three months of the year. All 39 industrial divisions advanced. The textile industry was up 5.9 percent while raw chemical materials & chemical products advanced 13.9 percent. Non-metallic mineral products were up by 18.1 percent, general machinery jumped 19.9 percent and the manufacture of transport equipment was up 9.7 percent.

April retail sales were up 17.1 percent on the year after increasing 17.4 percent in March. On the month retail sales were up 1.4 percent. In the first four months of the year, total retail sales of consumer goods were up 16.5 percent on the year, Sales were up 16.4 percent in the first three months of this year. Urban sales were up 17.3 percent on the year while sales in rural areas were up 16.3 percent.

April consumer price index was up 0.1 percent on the month and 5.3 percent on the year. The annual rate edged lower from March’s increase of 5.4 percent. The CPI was up 5.2 percent in cities and 5.8 percent in rural areas. Food prices were up 11.5 percent while the non-food prices increased by 2.7 percent. The prices of consumer goods increased 5.9 percent while services were up 3.9 percent. Prices for other items also were up on the year. Tobacco, liquor & articles rose by 2.4 percent, clothing increased 1.4 percent, household facilities, articles & maintenance services were up 2.1 percent and health care & personal articles were up 3.2 percent. Transportation & communication edged up 0.5 percent, recreation, education, culture articles & services increased 0.5 percent while housing was up 6.1 percent.

April producer prices were up 1.0 percent on the month and 6.8 percent when compared with a year ago. On the year, producer prices eased from an annual increase of 7.3 percent. Grouped by commodity categories, the producer prices for means of production went up by 7.5 percent on the year. Mining & quarrying was up 17.4 percent, raw materials were up 9.9 percent and processing industry increased by 5.5 percent on the year. Producer prices for means of livelihood increased by 4.6 percent. Food prices were up 8.4 percent, clothing increased 4.5 percent, articles for daily use were up 4.4 percent but durable consumer goods dropped by 0.6 percent on the year.

Americas

Canada

March merchandise trade surplus increased from C$356 million in February to C$627 million in March. Exports increased 3.5 percent while imports were up 2.8 percent. Export volumes were up 2.5 percent, increasing in all sectors except agricultural and fishing products. At the same time, prices advanced 0.9 percent. Broad based gains in the value of exports were led by energy products and industrial goods and materials. Import volumes rose 3.2 percent while prices decreased 0.4 percent. Imports of automotive products, which largely accounted for the decline in February, were the main contributor to the gain in March. Increases were also recorded in imports of industrial goods and materials as well as machinery and equipment. Imports from the United States rose 3.2 percent, mostly a result of increases in imports of automotive products, while exports grew 1.9 percent, led by higher exports of crude petroleum. Consequently, Canada's trade surplus with the United States narrowed to C$4.8 billion in March from C$5.0 billion in February. Exports to countries other than the United States rose 7.8 percent in March, largely reflecting higher exports to the European Union. During the same period, imports grew 2.1 percent. As a result, Canada's trade deficit with countries other than the United States declined from C$4.7 billion in February to C$4.2 billion in March.

Bottom line

Markets were volatile last week as investors became wary of risk once again. Commodities slid as did equities especially in Europe and North America as mostly favorable earnings failed to offset global growth worries as well as sovereign debt problems that continue to roil the eurozone. The continuing Greek saga sent the euro down against the U.S. currency.

The Bank of Japan meets at week’s end, but before the Bank’s announcement we will learn how the economy fared in the first quarter which was negatively affected by the earthquake and tsunami. It is a relatively light week for new data in Europe, but in the UK, consumer prices, unemployment and retail sales are on the calendar.

Looking Ahead: May 16 through May 20, 2011

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