Global Markets

Investors focused on economic data last week and what they saw was disappointing. In focus mid-week were the many purchasing managers’ surveys of manufacturing. Virtually all were down in May indicating that manufacturing growth was slowing everywhere from China to Germany to the U.S. (See first graph in Indicator Scoreboard below.) The week culminated in a dismal U.S. employment report that posted a higher unemployment rate and a much lower than expected jobs increase. Equities dropped and so did the U.S. dollar.

The situation in Greece also is high on the investor watch list as the negotiations with the European Union, International Monetary Fund and the European Central Bank continue. Equities and the euro rose and fell as the week — and negotiations — progressed. After a month long review of Greece's implementation of a €110 billion bailout plan agreed to last year, inspectors for the international lenders said that Greece had made considerable progress though fiscal and structural reforms had to be stepped up.

International lenders said they expect to provide Greece with a next slice of aid in July to avert a looming default after they conduct further talks on a tougher economic program for Athens. The chairman of eurozone finance ministers said that he expected European partners to agree to extra financial assistance for Greece but under strict conditions. A joint statement by the EU, ECB and IMF said Athens is committed to an ambitious, medium term plan and would establish an independent agency to manage privatizations.

Many investors are skeptical that some form of restructuring can be avoided in the intermediate term. Indeed, Moody’s Investors Service downgraded Greece’s local and foreign currency bond ratings to Caa1 from B1 mid-week and assigned a negative outlook to the ratings.

Bank of Canada

On Tuesday, the Bank of Canada left its policy interest rate at 1.0 percent where it has been since September 2010. The deposit rate remains at 0.75 percent and the bank rate at 1.25 percent. The lack of surprise in the decision in part reflected the relative softness of a number of key domestic indicators during February and March which served to undermine earlier more aggressive expectations for policy. However, slower growth in the U.S. was also a key factor as is the continued uncertainty over the European sovereign debt situation, the Japanese earthquake and political unrest in the Middle East. The persistent strength of the local currency, while not quite as marked as it has been, also continues to limit the scope for raising rates.

Global Stock Market Recap

Europe and the UK

The DAX and CAC declined for a fifth straight week, the longest losing streak since July 2008. Investors here worried that the U.S. recovery may falter given the latest string of disappointing employment and manufacturing data. Equities in the UK and Europe tumbled four of five days last week. Concerns about U.S. growth were exacerbated by the continuing Greek sovereign debt crisis. The spate of manufacturing purchasing managers’ surveys released during the week showed that growth slowed globally. Signs later in the week that Greece may be getting nearer to a rescue that would allow it to meet its financial obligations through 2013 failed to lift sentiment.

While much of the economic news in this region disappointed, encouraging news on the German labor market cheered investors. The number of unemployed in Germany slipped under three million for the first time in seven months. On the week, the FTSE was down 1.4 percent, the CAC slid 1.5 percent and the DAX ended the week 0.8 percent lower.

Asia Pacific

Equities were mixed last week as investors assessed the damage from the continuing Greek financial crisis and slower growth in the manufacturing sector. Data from Japan and Australia continued to show the impact of the natural disasters that struck their countries. In Japan it was the March 11^th earthquake and tsunami while in Australia it was the floods and typhoons that inundated its Queensland territory in late December 2010 and into January 2011.

In Japan, equities were weighed down by heightened concerns about the global economic outlook and lingering political uncertainty after Prime Minister Naoto Kan survived a no-confidence vote on Thursday. Sentiment remained weak as the rejection of the no-confidence motion against Kan's Cabinet meant that pressure on him would increase in parliament from opposition party lawmakers and rebels within his own Democratic Party of Japan. On the week, the Nikkei slipped 0.3 percent.

The Shanghai Composite managed to be up 0.7 percent thanks to bargain hunting following recent sharp losses. However, investors remain wary as uncertainty lingers over monetary policy. Some analysts think it's possible that a policy tightening move by the People's Bank of China will occur over the three day weekend — the PBoC has chosen holidays for policy changes in recent months.

The Australian market lost ground once again and posted its fifth weekly loss in six weeks. The All Ordinaries dropped 2.0 percent on the week. The economy suffered its steepest contraction in 20 years in the March quarter of 2011 as Queensland floods adversely affected coal mining and exports.

Bank of Thailand

The Bank of Thailand increased its policy interest rate for the fourth time this year as it tries to quell accelerating inflation. The Bank voted unanimously to boost the one-day bond repurchase rate by 25 basis points to 3 percent. It had previously increased of the same amount each in January, March and April. The BoT said it would continue to increase interest rates at a “gradual pace” and that core inflation may exceed its 3 percent inflation ceiling in the second half of 2011 as the economy weathers disruption from Japan’s earthquake. Thailand’s consumer prices climbed 4.19 percent in May from a year earlier — the fastest pace since September 2008. Core inflation, which excludes fresh food and fuel prices, accelerated to 2.48 percent. The Bank uses core inflation to guide monetary policy. First quarter gross domestic product climbed 2 on the quarter — the fastest pace in a year.

Currencies

The dollar was down against all of its major counterparts with the exception of the pound sterling last week as U.S. weak economic data pushed a normalization of interest rates further into the future. Similarly, the pound dropped against the dollar and euro after a disappointing decline in the UK services industries index, adding to pressure on the Bank of England to keep interest rates on hold. The U.S. dollar dropped to a record low against the Swiss franc as investors sought haven assets after the jobless rate unexpectedly rose to 9.1 percent.

The euro was volatile during the week with its fortunes tied primarily to expectations that a package for Greece would be put together. The euro soared to a four week high against the dollar after Greece was approved for more assistance to address its debt crisis the poor U.S. employment report. The euro extended its gains after Luxembourg’s Jean-Claude Juncker, who leads the group of eurozone finance ministers (Ecofin), said they agreed to pay the next installment to Greece under last year’s €110 billion bailout.

Selected currencies — weekly results

Indicator scoreboard

EMU

May purchasing managers’ index for manufacturing reading was 54.6, 3.4 points below its April level of 58.0. Growth in eurozone business activity hit a 7-month low last month and reflected slower growth in output, orders, employment and inventory accumulation. Output grew at its slowest rate in seven months while both orders and backlogs hit an 8-month low. At the same time, new export orders rose at their weakest pace since September. Inflation signals also showed some moderation with input costs at their slowest rate in six months and factory gate price inflation, down in all member states, easing to its lowest level since January. Regionally PMIs fell across the board and there were especially worrying declines in both Italy (2.7 points to 52.8) and Spain (2.4 points to 48.2), the latter now moving back into recession territory. Greece (44.5) also signaled a steeper rate of contraction.

April unemployment rate was 9.9 percent for the second month. The outcome masked an 115,000 drop to 15.529 million in the number of people out of work. Compared with a year ago, joblessness fell 457,000. As usual there were sharp variations in unemployment rates across the region but while joblessness again declined in Germany (6.1 percent after 6.2 percent) using Eurostat measures, rates at least held steady in Ireland (14.7 percent), Portugal (12.6 percent) and Spain (20.7 percent).

May flash harmonized index of consumer prices estimate edged lower to 2.7 percent from 2.8 percent in April — its first decline since August last year. As usual no details were provided by Eurostat but from some of the national data it would seem that underlying inflation was also well behaved in the month. The key core figures will be released on June 16.

Germany

April retail sales rebounded by 0.6 percent after sinking a hefty 2.7 percent slump at the end of the first quarter and left volumes at their second weakest level since April 2010. Annual growth jumped to 3.6 percent from minus 3.6 percent in March, in large part due to the timing of Easter. Non-food sales were 3.7 percent higher on the year while food was up 4.3 percent.

May employment added a seasonally adjusted net new 8,000 jobs this month to nudge the unemployment rate lower to 7.0 percent from 7.1 percent in April. Joblessness now stands at 2.974 million. The slight decline in May unemployment followed a marginally smaller revised 33,000 drop in April and was accompanied by a 2,000 increase in vacancies, well down from the 13,000 advance registered last time. The lagging ILO data showed a 28,000 rise in employment, also short of the 38,000 gain posted in March.

France

April consumption of manufactured goods plunged 1.6 percent after a larger revised 1.1 percent decline in March. The April drop left sales 1.2 percent higher on the year following a 1.6 percent annual rise last time. Total consumer spending was 1.8 percent weaker on the month and 0.1 percent lower on the year. Much of the damage was caused by a 6.3 percent monthly drop in durables, itself reflecting a 10.2 percent plunge in autos as the previous positive effects of the scrappage incentives unwind. Textiles & leather saw a 0.5 percent fall in volumes and energy was off 3.2 percent on surprisingly mild weather. Expenditures on food were up 0.8 percent from March and the other engineered goods sub-sector registered a 0.2 percent gain.

April producer prices were up 0.8 percent on the month and 6.4 percent on the year. Higher gas prices saw utility charges climb 2.1 percent from March and, together with a 2.4 percent surge in coking and refining product prices were largely accountable for the sizeable increase in the headline index. Overall manufactured products saw prices 0.5 percent higher on the month within which food & drink costs rose 0.8 percent as meat prices jumped 2.8 percent while transport materials were up 0.4 percent. By contrast, the other industrial products category posted just a 0.2 percent gain.

First quarter mainland unemployment rate edged down to 9.2 percent from 9.3 percent in the fourth quarter of 2010. Total unemployment including overseas territories held steady at 9.7 percent. The number of people out of work in metropolitan France declined 7,000 to 2.618 million having dropped 22,000 in the fourth quarter. Joblessness is now at its lowest level since the third quarter of 2009.

Asia/Pacific

Japan

April unemployment rate edged up to 4.7 percent from 4.6 percent in March. The data exclude the three earthquake hit prefectures. Seasonally adjusted employment was down 140,000 in April after sinking 460,000 in March. The number of seasonally adjusted unemployed was up by 20,000 on the month after increasing by 10,000 in March. On the year, the number of employed persons increased by 70,000 while the number of unemployed declined by 300,000.

April household spending dropped 3.0 percent after sinking 6.5 percent in March when compared with a year ago. Spending was down on the year in all major categories with the exception of clothing & footwear (up 5.0 percent), medical care (up 3.7 percent) and furniture & household utensils (up 0.7 percent). Household spending was tightly reined in by consumers out of respect for those directly affected by the earthquake.

April industrial production was up 1.0 percent after plunging 15.5 percent in the immediate aftermath of the earthquake and tsunami in March. On the year, output was down 12.8 percent. Output remains low as businesses struggle to regain production. While the disaster did not hit a major industrial area, it did wipe out a number of niche industries over a wide area. At the same time the tsunami crippled several plants which supply power to the eastern seaboard. This affected production at factories far from the devastation area. However, Japanese manufacturers have worked together to try to repair supply chains and have made progress despite power shortages which thus far have been less disruptive than originally expected. According to METI, output remains low but gradual recovery is seen. June output according to the METI forecast index is projected to be up 8.0 percent in May and up 7.7 percent in June.

Australia

Gross domestic product in the March quarter dropped 1.2 percent, the largest quarterly decline since the March quarter 1991. On the year, GDP was up 1.0 percent. Flooding which began in late December 2010 combined with cyclones in both Queensland and Western Australian to have a significant impact economic activity. Despite the decline in GDP volumes there was an increase of 0.3 percent in real gross national income driven by a 5.8 percent increase in the terms of trade on the back of stronger commodity prices. Final consumption expenditures were up 0.8 percent and 3.7 percent on the year. Gross fixed capital formation was up 2.4 percent both on the quarter and on the year. On the expenditure side, the decline (in seasonally adjusted volume terms) was driven by net exports (down 2.4 percentage points) and changes in inventories (down 0.5 percentage points). Partially offsetting these declines were private gross fixed capital formation (plus 0.7 percentage points), household final consumption expenditure (plus 0.3 percentage points) and government final consumption expenditure (plus 0.2 percentage points). From an industry perspective the main negative was mining (down 6.1 percent), manufacturing (down 2.4 percent) and agriculture (down 8.9 percent).

April retail turnover was up a better than expected 1.1 percent after declining 0.3 percent the previous month. On the year, turnover was up 3.3 percent. Among sectors, food was up 0.9 percent, other retailing was up 2.0 percent and department stores were up 3.6 percent. Household goods climbed 0.7 percent while clothing, footwear & personal accessory retailing gained 1.2 percent. However, sales in cafes, restaurants & takeaway food services were down 0.3 percent.

April goods and services trade balance was A$1,597 million, down from April’s surplus of A$1,692 million. Exports were up 0.6 percent while imports gained 1.0 percent. On the year, they were up 8.5 percent and 7.2 percent respectively. Non-rural goods were up 1.0 percent while rural goods jumped 6.0 percent. Non-monetary gold was down 20 percent. On the import side, capital goods were up 12 percent. However consumption goods were down 3.0 percent while intermediate and other merchandise goods slipped 1.0 percent and non-monetary gold declined 8.0 percent.

Americas

Canada

First quarter gross domestic product expanded 1.0 percent on the quarter or at an annualized rate of 3.9 percent. On the year, GDP was up 2.9 percent. Among the key GDP expenditure components, private consumption stalled although this did follow a sharp 1.1 percent rise in the fourth quarter. Partly as a result, the savings rate jumped a full 1 percentage point to 6.6 percent. However, business investment compensated with a healthy 3.2 percent gain, reflecting solid growth in both non-residential structures (3.2 percent) and machinery & equipment (3.7 percent). With government spending also flat on the quarter, final domestic demand expanded 0.6 percent or just half the rate achieved in the previous period. Stock building also made a major contribution to the bottom line. The real trade balance deteriorated as export volumes grew 1.6 percent from the fourth quarter while imports were up a more rapid 2.2 percent. In terms of output, goods producing activity was up a quarterly 1.8 percent (manufacturing 2.0 percent) while services were up 0.7 percent. Construction registered a 1.7 percent gain.

March monthly gross domestic product was up 0.3 percent and 2.8 percent when compared with March a year ago. Overall goods producing industries output was up 0.9 percent on the month. Manufacturing was up 1.8 percent while construction was up 0.7 percent and utilities gained 0.8 percent). Other gains were only minimal but no sub-sectors saw output contract. Activity in services was markedly less robust with output only unchanged on the month. Essentially a 1.0 percent decline in retail trade mitigated a 0.7 percent increase in transportation & warehousing and a 0.4 percent increase in wholesale trade. Other sub-sectors saw little change in output.

Bottom line

Equities slumped on weaker than anticipated economic data globally and the indecision surrounding the Greek bailout. The Bank of Canada left its key interest rate at 1 percent while the Bank of Thailand increased its rate to 3.0 percent.

Central banks are on the calendar this week. Four Asia Pacific banks including the Reserve Bank of Australia, Reserve Bank of New Zealand, Bank of Korea and Bank Negara Malaysia are on the calendar along with the Bank of England and European Central Bank.

Looking Ahead: June 6 through June 10, 2011

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