Global Markets

Equities were mixed as investors vacillated between being risk takers and being more risk averse. Earnings and economic data played their part in influencing sentiment. Most economic data indicated a softer growth pattern. Investors were updated about how monetary policy is evolving in Australia, UK and the U.S. as the Reserve Bank of Australia, Bank of England and the Federal Reserve released minutes of their most recent policy meetings.

The Reserve Bank of Australia released the minutes of its May 3 meeting. At that time the RBA left its key interest rate at 4.75 percent where it has been since November 2010. The monetary policy board stated their reasons for a mildly restrictive policy. They said that tighter conditions were because of the increase in the Australian dollar. At some point, the RBA said, interest rates would have to be increased. In the meantime, the Bank will continue to assess evolving growth and inflation outlook. The RBA's inflation target range is from 2 percent to 3 percent. First quarter inflation was 3.3 percent on the year.

Members noted that incoming data show significant effect from earlier floods and Cyclone Yasi. The inflation rate had been boosted by a large increase in fruit and vegetable prices, and it was quite likely that GDP would be shown as having contracted in the March quarter because of the disruption to production in the mining sector. As discussed at the previous meeting, members remained of the view that it was appropriate to look through the temporary effects on inflation and growth and to set policy based on the medium-term outlook.

The Bank of England continued its longstanding split over monetary policy. Once again, Andrew Sentance (50 basis points), Spencer Dale and Martin Weale (both 25 basis points) called for an increase in the bank rate while Adam Posen remained the lone dissenter in favor of increasing the QE target by Stg50 billion to Stg250 billion. However, the majority of members (six) continued to ensure an unchanged policy stance for yet another month. The bank rate remained at 0.5 percent while it kept its QE target at Stg200 billion However, the risk of a near-term tightening probably increased somewhat as both Dale and Weale seemed more convinced about the need to lift rates in May compared to April. The upward revision to the CPI projection contained in the Bank's new Inflation Report is an important factor here. Economic data continue to be very mixed and any decision to tighten monetary policy is likely to be taken cautiously.

The minutes of the FOMC's April 26^th and 27^th meeting revealed that it discussed how it might exit its easy monetary policy. Discussion of exit strategy shows how debate on the Federal Open Market Committee has turned towards tightening of monetary policy rather than further easing. But the FOMC noted the discussion did not mean that the move toward such normalization was imminent. In the discussion, nearly all FOMC members said that the first step towards exit would be stopping the reinvestment of early repayments from the Fed's portfolio of mortgage backed securities. A majority of FOMC participants said they would prefer to start sales of mortgage-backed securities after increasing the Fed's target for short-term interest rates. They argued that if the Fed raises interest rates first, it would have the power to cut them again if the economy weakened, rather than being trapped by the lower limit of zero.

On the week, most indexes followed here declined.

Global Stock Market Recap

Europe and the UK

European equities were down last week after Fitch cut Greece's credit rating to B+, four levels below investment grade saying the country could face a further reduction in its creditworthiness. The agency said that the voluntary restructuring of the country's debt being studied by European Union policy makers counts as a default. Banks, especially those exposed to Greek debt, pulled the DAX and CAC lower. The lowering of Greece's credit rating was compounded after the Bundesbank said in its monthly bulletin that the country will probably lose some growth momentum in the coming months after an "explosive" start to the year. The CAC was down 0.7 percent for the week while the DAX tumbled 1.8 percent. In the UK, although most stocks were down Friday, the index still managed to hold onto a gain of 0.4 percent on the week.

Equities fluctuated between positive and negative during the week as plans for another Greek rescue package remained unresolved. European finance ministers met Monday and Tuesday amid concerns that Greece's debt crisis may worsen. Athens continued to haggle with other European nations and the International Monetary Fund about appropriate levels of fiscal austerity. The arrest over weekend of IMF Managing Director Dominique Strauss-Kahn on sex crime charges complicated the meeting. However, European Central Bank officials ruled out a Greek debt restructuring, clashing with political leaders over a solution to the sovereign financial crisis. Finance ministers earlier in the week floated the idea of extending Greece's debt repayment schedule as it struggles to meet the terms of its €110 billion bailout.

Asia Pacific

Equities were mostly down last week as investors reacted in turn to earnings, the European debt situation and economic data. Asian stock markets retreated as concerns related to a restructuring of Greek debt and fears about slowing global growth weighed on sentiment. Three of 13 indexes (All Ordinaries, STI and Jakarta Composite) followed here were up on the week while one was virtually unchanged (KLCI). Losses ranged from a high of 1.8 percent (Taiex) to 0.2 percent (PSEi).

Stocks in Japan tumbled once again last week as utilities declined on uncertainty over the future of the power sector. There are continued concerns over the size of Tokyo Electric Power's compensation to those affected by radiation leaks from its disaster hit Fukushima Daiichi nuclear power plant and over the loans owed by the utility to banks. Uncertainty over ancillary issues ranging from a possible breakup of energy companies to problems in containing the nuclear crisis also served to keep investors on edge. Japan's economy contracted much more than expected in the first quarter. This was the country's second consecutive quarter of decline, putting it technically in a recession. The Nikkei was 0.4 percent lower on the week.

The decline in commodity prices weighed on many of the region's resource stocks and in turn the equity indexes. And uncertainty over China's economic outlook and further restrictive monetary policy measures proved to be an overhang depressing markets.

Bank of Japan

As expected, the Bank of Japan left its monetary policy unchanged and kept its key short term interest rate range from zero to 0.1 percent. The monetary policy board noted that the economy is under strong downward pressure and the uncertainty about the earthquake and tsunami are high. The MPB signaled that the news of a much larger than expected contraction in the first quarter did not change its view that growth will resume late this year. The BoJ already has doubled its asset purchase fund to ¥10 trillion and introduced the emergency ¥1 trillion yen loan program for financial institutions operating in the areas devastated by the natural disaster. First quarter GDP dropped 0.9 percent or an annualized rate of 3.7 percent.

Currencies

The U.S. dollar continued to swoon last week. It was down against most of its major counterparts (euro, Swiss franc, pound sterling and Australian dollar). It managed to gain against the Canadian dollar and yen. The euro gained on the week even though it lost ground against the dollar on Friday after a member of the governing council for the European Central Bank said the Bank may not be able to accept Greek sovereign debt as collateral if the bond maturities are extended. The euro was also negatively impacted Friday after the Bundesbank said Germany's economy is losing momentum, damping speculation the ECB would increase its interest rate for a second time. The Swiss franc touched the strongest level this year against the euro as investors sought safety.

Bundesbank President Jens Weidmann said it would be ‘impossible' for the ECB to take extended maturity Greek bonds in its refinancing operations. The remarks added to signs of a division between monetary officials and politicians. Earlier last week, European political leaders floated the idea of extending Greece's debt repayment schedule as it struggles to meet the terms of last year's €110 billion bailout package.

Selected currencies - weekly results

Indicator scoreboard

EMU

April harmonized index of consumer prices was up 0.6 percent on the month and 2.8 percent on the year. Excluding food, drink, tobacco & petroleum, the 12-month HICP rate jumped 0.3 percentage points to 1.6 percent, its fastest pace since April 2009. The core excluding just unprocessed foods and energy jumped 0.3 percentage points to 1.8 percent. Regionally, annual HICP rates moved higher in the majority of member states, although there were declines in Belgium, Greece, Malta, Slovenia and Finland. Among the big four, inflation rose in Germany (2.7 percent), Italy (2.9 percent) and Spain (3.5 percent) and held steady in France (2.2 percent).

March seasonally adjusted merchandise trade balance recorded a deficit of €0.9 billion from a smaller revised €2.1 billion in February. The unadjusted balance was in surplus (€2.8 billion) for the first time since October last year and was €1 billion larger than in the same month of 2010. The modest improvement in the seasonally adjusted figures reflected a 1.1 percent monthly increase in nominal exports that more than offset a 0.3 percent gain in imports. On the year, unadjusted exports were up 16.0 percent while imports grew a slightly stronger 17.0 percent. As always, without Germany's sizeable surplus (€8.7 billion) the bottom line would look a good deal worse and further deficits in France (€0.3 billion), Italy (€2.9 billion) and Spain (€3.2 billion) will hardly impress.

Germany

May ZEW survey current conditions measure posted a 4.4 point gain to a reading of 91.5. However, expectations slid further, down 4.5 points to 3.1. The decline in the latter was attributed to analysts becoming increasingly cautious about prospects for the Chinese economy and a slightly more reserved stance on the United States. ZEW also highlighted downside risks stemming from the unresolved financial crisis in the Eurozone and still substantial global imbalances.

April producer prices jumped 1.0 percent and were up 6.4 percent on the year. Energy charges were up a further 2.6 percent from their March level and once again were responsible for much of the headline gain. Excluding this sector, prices were up 0.4 percent on the month and 4.2 percent on the year. Among the other major sectors, basics saw a 0.6 percent monthly increase and consumer goods were up 0.5 percent but the price of capital goods edged just 0.2 percent firmer.

Italy

March seasonally adjusted merchandise trade deficit widened out to €4.2 billion from a larger revised €3.4 billion shortfall in February. The latest deterioration was due to a 3.9 percent monthly increase in nominal imports which easily overwhelmed an otherwise respectable 1.7 percent increase in exports. On the year, imports were up 20.4 percent compared with annual export growth of 14.1 percent. The expansion in the deficit continues to be dominated by higher fuel prices. Hence, in the unadjusted data, a shortfall on energy of €5.4 billion more than accounted for the entire monthly deficit (€3.9 billion).

United Kingdom

April consumer prices jumped 1.0 percent and 4.5 percent on the year. However, as with some of the real economy data there looks to have been some significant distortions caused by the early Easter in which case at least a partial unwinding of the April spike is possible in May. In particular, airfares jumped 29 percent from March and sea fares were up more than 22 percent. Combined, these categories added a little more than 0.3 percentage points to the monthly change in the headline CPI. The overall transport sector, which again was hit by another sizeable jump in energy costs, added almost 0.5 percentage points to the total monthly increase. At the same time, alcohol & tobacco budget duties also were up more this year than in 2010 and so provided a further one-off boost to prices in this sector. However, the CPIY, which excludes changes in indirect taxes, posted a 3.0 percent annual rate, also up 0.5 percentage points from last time. Core CPI was up 0.9 percent and lifted its annual rate to 3.7 percent, up 0.5 percentage points from March and the highest rate since the series was first compiled in 1997.

April claimant count unemployment jumped 12,400, its largest increase since January 2010 and that after a larger revised 6,400 gain in March. As a result, the jobless rate edged up to 4.6 percent from 4.5 percent. Changes to the benefit treatment of single parents may have had some effect on the data. By contrast however, the ILO measure of unemployment revealed a surprisingly sharp 36,000 decline over the three months to March, the largest decline since the second quarter of 2010. The drop was enough to reduce its definition of the jobless rate to a lower than expected 7.7 percent. At the same time, employment posted a solid 118,000 advance, an increase dominated by full-time positions. Annual headline average earnings growth weighed in at a higher than anticipated 2.3 percent, up from a slightly firmer revised 2.1 percent last time. However this remains historically very soft and no obvious threat to inflation. In fact, excluding bonuses, wages decelerated to just a 2.1 percent annual rate.

April retail sales volumes were up 1.1 percent on the month and 2.8 percent on the year. Excluding fuel, purchases rose a slightly stronger 1.2 percent from March and were 2.7 percent higher on the year. However, the report needs to be treated carefully as a number of caveats apply. In line with the April CPI data, this year's retail sales were impacted by the inclusion of the main Easter trading period. This was not the case in 2010, when, in addition, uncertainty ahead of the General Election may have undermined consumer confidence. Moreover, the warmest April on record combined with the Royal Wedding bank holiday likely provided a further significant boost this year. Among the major categories, solid monthly rises were recorded in food (2.2 percent), clothing & footwear (3.2 percent), household goods (1.5 percent) and non-store retailing (2.0 percent). Overall non-food sales advanced 0.4 percent, reflecting declines at non-specialized stores (0.3 percent) and in the other stores sub-sector (2.6 percent). Fuel purchases were also off 0.2 percent.

Asia/Pacific

Japan

April corporate goods price index was up 0.9 percent and 2.5 percent when compared with last year. Both were up for the seventh consecutive month. Not surprisingly, petroleum & coal products were the biggest contributors to the monthly increase. They were up a monthly 6.2 percent and 18.7 percent on the year. Chemicals & related products were up 1.5 percent and 2.6 percent on the year. Other sectors that minimally contributed to the monthly increase were nonferrous metals, electric power, gas & water, metal products, iron & steel, agriculture, forestry & fishery products and lumber & wood products.

March private sector machinery orders, excluding volatile ones for ships and those from electric power companies, increased a seasonally adjusted 2.9 percent and were up 6.3 percent on the year. For the January to March period, orders were up 3.5 percent. In the April to June period private sector orders, excluding volatile ones, are forecast to increase by 10.0 percent from the previous quarter. This forecast was basically made by summing up the figures from 280 machinery manufacturers. In 2010 fiscal year ending March 31, private sector orders, excluding volatile ones, rose by 7.0 percent.

March tertiary industry index plunged 6.0 percent on the month and was down 2.9 percent on the year in the wake of the earthquake and tsunami that occurred during the month. All major categories of the index showed the impact of the disasters. Auto sales and electronics were particularly weak. Wholesale and retail trade dropped 8.9 percent while information & communications sank 9.2 percent. Living related & personal services & amusement services plunged 15.8 percent while accommodations, eating & drinking services plummeted 11.0 percent. Other declines were more modest. Finance & insurance was down 2.6 percent, real estate & goods rental & leasing was down 1.6 percent and medical health care & welfare edged down 0.6 percent.

First quarter gross domestic product was down 0.9 percent or at an annualized rate of 3.7 percent following a revised 3.0 percent annualized drop in the previous quarter. The economy shrank after the March 11 earthquake and tsunami disrupted production while consumers cut back spending. On the year, GDP was down 0.7 percent. Private consumption dropped 0.6 percent on the quarter. Corporate capital expenditures were down 0.9 percent on auto supply restrictions. The second straight quarter of contraction puts Japan effectively into recession with analysts projecting the economy to shrink again in the second quarter as supply constraints triggered by the March catastrophe continue to weigh on output and exports. Japan's economy is expected to recover later this year, helped by reconstruction efforts and government spending, though risks remain as electricity shortages in the summer could delay a recovery in factory output.

Americas

Canada

March manufacturing shipments jumped 1.9 percent on the month and 10.4 percent on the year. Volumes matched the nominal gain, also posting a 1.9 percent improvement from their February level and now stand 6.8 percent higher on the year. Higher nominal monthly sales were registered by 15 of the 21 reporting industries and were dominated by a 20.6 percent jump in aerospace products & parts. The auto and machinery industries enjoyed gains of 4.1 percent and 4.2 percent respectively and paper manufacturing was 4.0 percent better off. Other significant increases were seen in furniture and related products (5.7 percent), computers and electronics (3.9 percent) and, to a lesser extent, food (0.8 percent) and petroleum & coal (0.8 percent). There were no monthly declines of note but non-metallic minerals and fabricated metal products both slipped 0.2 percent. New orders surged 11.3 percent from February (excluding autos 12.4 percent) and backlogs rose 9.5 percent. However, with inventories rising 2.1 percent (mainly in petroleum and coal), the inventory/sales ratio held steady at 1.30 months.

April consumer prices were up 0.3 percent and 3.3 percent on the year. Excluding food and energy prices were unchanged and only 1.7 percent higher on the year. Similarly, a modest 0.2 percent monthly advance in the Bank of Canada's preferred index which excludes eight volatile items was up 1.6 percent on the year. Seasonally adjusted CPI also was up 0.3 percent on the month, within which shelter (0.5 percent) and transportation (1.0 percent) were the main drivers. By contrast most other categories were relatively well behaved. Thus, food charges were down 0.2 percent from March and household operations, furnishings & equipment declined 1.7 percent. Health & personal care costs matched the headline increase but recreation, education & reading was only flat and alcohol & tobacco just 0.1 percent firmer.

March retail sales were unchanged on the month and were up 0.9 percent on the year. Higher energy and food prices played an important part in the March data and were the only reason why sales avoided a decline. Volumes dropped a steep 0.8 percent from mid-quarter. Within cash sales, only four sub-sectors achieved monthly advances and gains here were offset by weakness among the other seven categories. Not surprisingly, a strong increase was recorded at gasoline stations (1.4 percent) but there was also a solid jump at electronics & appliance stores (2.1 percent). General merchandise stores (0.8 percent) saw reasonable demand and motor vehicle & parts (0.3 percent) finally managed to boost sales after three successive declines. Purchases fell elsewhere however, with furniture & home furnishings (down 2.2 percent) and miscellaneous (down 3.1 percent) suffering especially badly. Health & personal care (down 1.0 percent), clothing & footwear (down 0.9 percent) and building materials (down 0.8 percent) and sports & hobbies (down 1.9 percent) all declined.

Bottom line

The Reserve Bank of Australia, Bank of England and the Federal Reserve explained their posture towards monetary policy in the week. In Japan, first quarter GDP contracted sending the economy into a technical recession. Energy prices continue to send price indexes higher.

It is a relatively light week for new economic data. The Group of Eight will meet in Deauville France at the week's end.

Looking Ahead: May 23 through May 27, 2011

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