Global Markets

Equities were volatile last week — Asia Pacific stocks declined while those in Europe, the seat of much of the week’s uncertainty, advanced. And in the U.S., they were mixed. Losses ranged from 3.2 percent (Hang Seng) to 0.1 percent (SET). The Bolsa edged up 0.2 percent while the Dow was up 0.4 percent.  The KLCI and CAC advanced 0.5 percent and the DAX gained 1.3 percent on the week.

At week’s end, Chancellor Angela Merkel retreated from German demands that bondholders be forced to shoulder a ‘substantial’ share of a Greek rescue, saying she would work with the European Central Bank to avoid disrupting markets. Market sentiment improved after Germany and France had put aside their differences. The countries were pressing for a quick solution to the crisis improved. The debt crisis has rocked the currency area since late 2009.

The euro, equities and Greek bonds rallied as Merkel and French President Nicolas Sarkozy signaled a reconciliation that calls for investors to help rescue Greece amid warnings from the ECB and France that a compulsory move risked triggering the eurozone’s first sovereign default. Attention now shifts to Athens, where Prime Minister George Papandreou overhauled his cabinet to try and secure passage of austerity measures needed for a bailout. European finance ministers next meet on Greece in Luxembourg on June 19^th and 20^th, followed by a Brussels summit of European Union leaders on June 23^rd and 24^th.

Global Stock Market Recap

Europe and the UK

Equities rebounded Friday as the Greek situation inched toward a settlement after weeks of haggling. Investors were cheered by the news that Germany and France have adopted a common position on a bailout for Greece after German Chancellor Angela Merkel conceded that participation by private lenders, including the region's wobbly banks, should be voluntary. Merkel retreated from demands that bondholders shoulder a ‘substantial’ part of the cost of a Greek rescue. Now analysts expect a massive rescue package to be agreed upon in the next week or two, if Greece remains committed to austerity measures.

During the week, stocks oscillated as Greece teetered on the verge of default due to domestic pressures and discord among participants in a potential bailout. Markets have been jittery about a rescue for Greece with Germany insisting that the private sector bear some of the burden of a bailout. Meanwhile, anger in Greece over the harsh terms of aid sparked violent protests in Athens. Greece was practically shut down on Wednesday by a 24-hour general strike to protest new austerity measures. Meanwhile, eurozone officials remained deeply divided over how to tackle the country's debt. While the DAX and CAC broke a six week losing streak, the FTSE extended its decline to a fourth week. The DAX and CAC were up 1.3 percent and 0.5 percent respectively. The FTSE sagged 0.9 percent.

Swiss National Bank

As widely expected, the Swiss National Bank decided to leave its target corridor for three month Libor at zero to 0.75 percent in its second quarter Monetary Policy Assessment (MPA). The SNB also indicated that it would continue to aim to keep money rates around the 0.25 percent mark.

The steady stance reflects a new official inflation forecast that shows annual CPI somewhat above its March projection but slightly below that in 2012. The firmer revised 2011 forecast (average 0.9 percent) is due to higher energy prices than assumed last time while the shallower profile next year (1.0 percent) is attributable to the effects of the strong local currency and a more cautious view of the global economy. By the end of 2013, inflation is shown accelerating quite quickly to exceed its 2 percent target. As such, the longer term prognosis still points to monetary tightening in the future. While maintaining its domestic 2 percent growth forecast for this year, the SNB emphasized downside risks, in particular pointing to the debt problems in the euro periphery and the impact of persistent Swiss franc strength upon Swiss industry.  

Asia Pacific

Concerns that Greece may default on its sovereign debt, disappointing economic data and moves to tighten credit by the People’s Bank of China and the Reserve Bank of India conspired to send equities lower last week. All indexes followed here with the exception of the KLCI declined on the week. Losses ranged from 3.2 percent (Hang Seng) to 0.1 percent (SET). The STI, Shanghai Composite, Sensex and Taiex sustained losses over 2 percent.

The Shanghai Composite headed lower on tightening liquidity and worries about a possible interest rate increase by the People’s Bank of China over the weekend which dampened sentiment after the Bank increased reserve requirements earlier in the week. The Hang Seng index lost 3.2percent sending the index to its fifth straight weekly drop as growing bearishness on Chinese equities coupled with concerns about eurozone debt spooked investors.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. It left its ¥10 trillion asset buying program unchanged. At the same time it introduced a loan program worth ¥500 billion. The new loan program will be offered at a 0.1 percent interest rate and is for two years with one two-year rollover allowed. The new loan limit for each bank is ¥50 billion. In its statement the BoJ upgraded its economic assessment from May and said that the economy is showing signs of picking up. It noted that both household and business sentiment is showing signs of improvement.

People’s Bank of China

The reserve requirement ratio was once again increased by the People’s Bank of China. The PBoC said it will raise banks' reserve requirement ratio by 50 basis points to 21.5 percent. It was the Bank’s sixth such increase this year as Beijing continues its tightening efforts despite signs that activity is slowing. The increase, which takes effect June 20, comes as the government moves to address inflation concerns by locking up liquidity in the banking system. The increase was announced shortly after the release of May consumer price data that showed inflation jumping by 5.5 percent from a year earlier — up from April's 5.3 percent reading and well above the official target of around 4 percent. The PBoC increased the reserve requirement ratio six times in 2010 and has increased its benchmark lending and deposit rates four times since October. The previous reserve ratio increase took effect on May 18^th and the last interest rate hike took effect April 6^th.

Reserve Bank of India

The Reserve Bank of India once again decided to lift its key policy repo interest rate this time by 25 basis points to 7.5 percent to combat rising inflation. The reverse repo, the rate at which the central bank borrows from banks, was lifted to 6.5 percent from 6.25 percent. The RBI lifted interest rates by 50 basis points just last month. The latest policy action is expected to contain inflation and anchor inflationary expectations by reining in demand side pressures. Domestic inflation remains high and well above the comfort zone. It soared to 9.06 percent in May, the highest among major emerging market economies.

Currencies

The euro’s volatile fluctuations have been in response to the drama being played out as eurozone finance ministers and heads of state continued to argue about a second bailout for Greece. At week’s end, the euro gained after German Chancellor Angela Merkel agreed to compromise and work with the European Central Bank on a debt plan for Greece. The euro strengthened against a majority of its 16 most traded peers after Merkel retreated from German demands that bondholders be forced to shoulder a ‘substantial’ share of a Greek rescue, easing concern the region’s sovereign debt problems will worsen.

The pound sterling weakened against most of its peers as stocks declined on the week amid concern that the pace of Britain’s economic growth is slowing. Bank of England Governor Mervyn King said officials should continue to hold interest rates at a record low because weak growth in wages and money signal that the current bout of above target inflation will prove temporary. U.K. consumer prices held 4.7 percent — the fastest pace since October 2008 last month.

Selected currencies — weekly results

Indicator scoreboard

EMU

April industrial production was up 0.2 percent and was up 5.2 percent on the year. The modest April advance was largely attributable to a 1.3 percent monthly rise in durable consumer goods. Nondurables were steady at their March level but there were small increases in both capital goods (0.5 percent) and intermediates (0.1 percent). Energy production dropped a sizeable 3 percent on the month due to unusually warm weather. Across the region performances varied widely but outside of Italy (1.0 percent), the four larger member states all posted monthly contractions. There were also fresh declines in Greece (3.5 percent) and Portugal (3.6 percent) but Ireland saw a welcome gain (1.3 percent) and both Malta (2.2 percent) and Slovakia (1.6 percent) fared well.

May harmonized index of consumer prices was unchanged on the month and up 2.7 percent on the year. Excluding food, drink, tobacco & petroleum, the index was up 1.5 percent on the year. Both the HICP excluding unprocessed food and petroleum and excluding seasonal food and petroleum decelerated 0.1 percent to 1.7 percent. Regionally overall annual inflation rates declined in almost half of the 17 member states, notably in Germany (2.4 percent from 2.7 percent). However, Cyprus (4.1 percent from 3.5 percent) saw a sharp jump and among the larger economies, Italy (3.0 percent from 2.9 percent) also registered a slight uptick. Top of the pile again was Estonia (5.5 percent) while Ireland (1.2 percent) remained both well at the bottom and the only participant with a sub-2 percent rate.

United Kingdom

May consumer price index was up 0.2 percent and 4.5 percent on the year. The relatively subdued monthly increase largely reflected a 1.3 percent jump in food prices and a 0.7 percent bounce in drink & tobacco costs that was, to a significant extent, offset by a 0.8 percent drop in transport charges. The decline in transport charges confirms April's Easter-related temporary boost — air fares in May were off more than 11 percent on the month. Most other major categories saw quite mild monthly changes in prices although there were above average gains in communications (0.9 percent) and restaurants & hotels (0.5 percent) and declines in both recreation & culture (0.1 percent) and housing, utilities & fuels (0.1 percent). Core CPI was unchanged from April and was up 3.3 percent from a year ago.

May claimant count unemployment jumped by 19,600 but the rate remained unchanged at 4.6 percent. The increase was the largest since July 2009 and followed a significantly larger revised 16,900 increase in April. Some changes to the way in which unemployment benefit claims are measured probably explains some of the gain. By marked contrast, the ILO unemployment measure showed the jobless total shrinking by 88,000 over the three months to April, the steepest decline since April 2000. The unemployment rate on this definition was 7.7 percent. Headline April average earnings growth weighed in at an unexpectedly soft 1.8 percent, down from 2.4 percent last time, while the regular component eased to 2.0 percent from 2.1 percent.

May retail sales sank 1.4 percent and edged up 0.2 percent on the year. Excluding auto fuel, sales dropped 1.6 percent from April and were unchanged on a year ago. Headline sales were dragged lower by a 3.7 percent nosedive in food sales. This was not so surprising following the strong holiday-related surge in this sector in April. Non-food demand was down a more modest 0.4 percent on the back of declines in household goods (0.9 percent), clothing & footwear (0.8 percent) and non-specialized goods (0.3 percent). The declines here were only partially offset by increases in non-store retailing (1.8 percent) and the other stores category (0.4 percent). Fuel purchases were up 0.6 percent.

Asia/Pacific

Japan

April private machine orders excluding volatile items (orders for ships and from electric power companies) dropped 3.3 percent after rising 1.0 percent in March. It was the first decline in four months. On the year, orders were down 0.2 percent after rising 8.8 percent in March. Manufacturing orders declined 2.7 percent while nonmanufacturing orders excluding volatile items were up 2.9 percent. Orders from overseas dropped 2.1 percent after plunging 10.8 percent in March.

China

May consumer prices jumped 5.5 percent on the year after increasing 5.3 percent in April. Urban prices were up 5.3 percent while rural prices jumped 6.0 percent. Food prices increased by 11.7 percent while the non-food prices were up 2.9 percent. Consumer goods prices were up 6.2 while services were up a more moderate 3.9 percent. In the first five months, the year-on-year change of consumer prices was up by 5.2 percent. Grouped by commodity categories all prices increased. Prices for food jumped 11.7 percent, tobacco, liquor & articles advanced 2.6 percent and clothing prices were up 1.8 percent on the year. Household facilities, articles & maintenance services gained 2.5 percent and health care & personal articles increased 3.2 percent. Prices also increase for transportation & communication (0.7 percent), recreation, education, culture articles & services (0.6 percent) and housing (6.1 percent). In May, the monthly change of consumer prices was up by 0.1 percent. Prices in cities and rural areas each were up 0.1 percent. The food prices dropped by 0.3 percent while the non-food prices grew by 0.2 percent.

May producer prices for industrial products were up 6.8 percent on the year for the second month. Grouped by commodity categories, the producer prices for means of production were up 7.5 percent of which that for mining & quarrying industry soared 17.1 percent, raw materials industry jumped 9.9 percent and manufacturing industry increased by 5.4 percent. The producer prices for means of livelihood increased by 4.6 percent of which the food prices advanced 8.3 percent, clothing was up 4.4 percent, articles for daily use were up 4.4 percent but durable consumer goods dropped by 0.5 percent. Producer prices for industrial products went up by 0.3 percent on the month. In the first five months of this year, producer prices for industrial products were up by 7.0 percent on the year.

May total retail sales of consumer goods were up 16.9 percent on the year after increasing by 17.1 percent in April. Of this total, the retail sales made by the enterprises (units) above designated size were up by 22.7 percent. In the first five months of this year, the total retail sales of consumer goods were up 16.6 percent when compared with a year ago. On the month, retail sales were up 1.28 percent. Urban area retail sales were up 17.0 percent on the year while sales were up 16.5 percent in rural areas.

May industrial output was up by 13.3 percent on the year after increasing by 13.4 percent in April. In the first five months of this year, it was up by 14.0 percent after climbing 14.2 percent for the four months to April on the year. On the month, output was up 1.03 percent. On the year, state owned and state holding enterprises went up by 8.9 percent, collective enterprises were up 9.5 percent, share holding enterprises were up 15.2 percent and growth for enterprises funded by foreign investors or investors from Hong Kong, Macao and Taiwan province was up 9.5 percent. On the year heavy industries gained 13.5 percent while light industries were up 12.9 percent. All 39 industrial divisions were up on the year.

Americas

Canada

April manufacturing shipments dropped 1.3 percent after sliding 1.9 percent in March. On the year, shipments are up 6.5 percent. Moreover, the drop in nominal sales would have been steeper still but for a pick-up in prices as volumes were 1.8 percent below their March level. Cash shipments were down on the month in 15 of the 21 reporting industries with transport (down 7.8 percent) the worst performing of the major categories. Supply problems linked to the Japanese earthquake were cited as an important factor here. Significant declines were also seen in petroleum & coal products (1.7 percent) as well as in paper manufacturing (2.9 percent) and in non-metallic minerals (2.0 percent). Higher monthly sales were led by food (1.8 percent), machinery (3.2 percent) and chemicals (1.7 percent). New orders slid 10.3 percent on the month while backlogs were up 0.4 percent.

Bottom line

The news last week revolved around the Greek sovereign debt crisis. Equities and currencies were volatile as investors despaired of a resolution. The Bank of Japan and the Swiss National Bank left their monetary policies unchanged while the Reserve Bank of India once again raised its interest rates. The People’s Bank of China chose to increase its reserve requirements in its efforts to contain inflation.

This week, investors will focus on the FOMC announcement and Chairman Ben Bernanke’s press conference on Wednesday. Sentiment will be carefully monitored in Germany with both the ZEW (Tuesday) and Ifo (Friday) surveys. And the drama in Greece will continue.

Looking Ahead: June 20 through June 24, 2011

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