Global Markets

June was saved by last week’s rally which put several indexes into positive territory for the month. Earlier declines were put at the feet of the Greek debt crisis. Now the rally was put there also as the Greek parliament passed two harsh austerity bills on Wednesday and Thursday. The bills are a precondition to opening the way for the EU and IMF to release a €12 billion loan installment which Athens urgently needs to stave off default.

All equity indexes followed here were up last week, ending the quarter and month in grand style. Weekly gains ranged from 1.0 percent to 6.1 percent. Though many of the indexes followed here did decline in June, the DAX along with those in Japan managed to record positive gains. A look at the first and second quarters shows the All Ordinaries, Topix and Bolsa down in both while the KLSE Composite, FTSE, DAX and Dow were up in both.

The Greek parliament acted despite demonstrations. Thursday's vote on detailed measures to implement €28 billion in spending cuts, tax increases and privatizations passed without any of the street demonstrations which marred Wednesday's vote on an initial austerity bill. The Eurozone finance ministers are now likely to approve payment of the latest loan installment over the weekend. The IMF, part of the so-called "troika" of international lenders along with the EU and European Central Bank, is expected to approve payment on July 5^th.

The Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank today announced an extension of existing temporary U.S. dollar liquidity swap arrangements through August 1, 2012. The Bank of Japan will consider the extension at its next monetary policy meeting. The swap arrangements, established in May 2010, had been authorized through August 1, 2011. The Bank of Japan will consider a swap line extension at its next meeting on July 11^th and 12^th.

Global Stock Market Recap — Weekly

Global Stock Market Recap — 2011 Quarterly Results

Europe and the UK

Equities recorded robust gains last week as Greece managed to avoid default. The advances helped reduce the monthly declines in June for the FTSE and CAC. Thanks to last week’s positive performance, the DAX scored a gain for the month. On the week, the indexes were up 5.1 percent, 5.9 percent and 4.2 percent respectively. In June, the FTSE was down 0.7 percent while the CAC slid 0.6 percent — however, the DAX was up 1.1 percent. Both the FTSE and DAX were up for the second consecutive quarter, rising 0.6 percent and 4.8 percent respectively while the CAC edged down 0.2 percent. Banks led European shares higher as encouraging U.S. manufacturing data and relief over Greece helped cap off a strong week.

Stocks were buoyed by the resolution of the Greek debt crisis, at least for now. In return for harsh austerity measures, Greece may receive as much as €85 billion in new financing, including a contribution from private investors in a second bailout aimed at preventing the country from a default. Over the weekend, EU finance chiefs will hold a conference call to free up a €12 billion tranche from last year’s €110 billion bailout.

Meanwhile, European Central Bank President Jean-Claude Trichet continued to profess strong vigilance on inflation, strongly hinting that the ECB will increase interest rates when it meets on Thursday. The June flash inflation reading was steady at 2.7 percent but above the ECB's 2 percent target level.

Asia Pacific

Asia Pacific equities were up on the week after concerns over Greece's debt problems eased after the country’s austerity program was agreed to by parliament. On the week, gains ranged from 2.9 percent for the Sensex to 0.5 percent for the Shanghai Composite. However, the picture was decidedly mixed for the month of June with six indexes declining and seven advancing. Losses ranged from 5.4 percent (Hang Seng) to 1.2 percent (STI). Gains ranged from 1.1 percent (PSEi) to 0.7 percent (Shanghai Composite).

Two key economic indicators were released last week that were watched very closely by the region and elsewhere as well. In Japan, the quarterly Tankan showed that business sentiment among large manufacturers dropped more than expected in the wake of the March 11^th earthquake and tsunami. Sentiment among large Japanese manufacturers has turned sharply negative since the March earthquake, tsunami and resulting nuclear crisis, but companies do expect conditions to improve over the next three months. The closely watched quarterly survey underscores the impact of the disaster on business and current worries about electricity supplies.

In China, the purchasing managers’ survey also attracted attention especially in countries such as Australia that rely on exports. Manufacturing production fell to an 11 month low of 50.1 — barely above the break even level of 50 —as total new order growth continues to moderate.

Currencies

The dollar was down against most of its major counterparts last week with the exception of the yen and Swiss franc. The euro recorded its first weekly gain in several weeks against the dollar after Greek Prime Minister George Papandreou won approval for an austerity plan needed to keep aid flowing. At the same time, German banks agreed to roll over Greek bond holdings maturing through 2014. The euro also was supported by the belief that the European Central Bank will tighten monetary policy on July 7^th. ECB President Jean-Claude Trichet used the code words ‘strong vigilance’ that usually means that that the ECB will increase rates. The ECB raised its key rate in April for the first time in almost three years by 25 basis points to 1.25 percent.

The carry trade — selling dollars to buy the currencies of Norway, Australia, Canada and New Zealand — jumped last week as investor appetite for higher yielding assets increased. In carry trades, investors buy higher-yielding assets with amounts borrowed in nations that have low interest rates. The Federal Reserve’s benchmark interest rate of zero to 0.25 percent makes the dollar popular for funding such transactions.

The Swiss franc weakened against its 16 most-traded peers as investors sought higher yielding currencies on confidence that policy makers and bankers have staved off a Greek default. The currency slid for a fifth day against the euro after data showed that Swiss manufacturing growth slowed. The pound sterling also slumped last week, especially against the euro on signs that the UK recovery is faltering as evidenced by sinking confidence and softening manufacturing growth. There is a reduced chance that the Bank of England will increase interest rates anytime soon. The BoE interest rate is currently 0.5 percent.

Selected currencies — weekly results

Indicator scoreboard

EMU

June economic sentiment on average edged lower to 105.1 from 105.5 in May. The June slippage was attributable to some softening in confidence in industry where the sub-index dropped 0.6 points to 3.2. Morale was essentially unchanged in the consumer sector (minus 9.8) and in retail (minus 2.4) and made limited gains in services (9.9 after 9.3) and in construction (minus 23.6 after minus 24.7). Regionally among the larger states, sentiment declined, albeit by relatively small amounts — in France (0.9 to 106.3) and Germany (0.6 to 114.5) but improved in both Italy (1.8 points to 99.3) and Spain (2.6 points to 95.7). In all of the larger members except Spain confidence remains above its long run average of 100. By contrast, both Greece and Portugal fell further below their long-run means.

June flash harmonized index of consumer prices remained at 2.7 percent when compared with a year ago. Details on the key core rates will not be available until July 14 but there have been some indications from national figures that they might show a slight increase. Among the larger member states, inflation was unchanged in both Germany and Italy at 2.4 percent and 3.0 percent respectively but fell 0.4 percentage points to 3.0 percent in Spain.

May M3 money supply growth was up 2.4 percent on the month. The ECB's preferred 3-month moving average measure edged up to 2.2 percent from 2.1 percent. Lending to the private sector was up 2.7 percent on the year. Within this, borrowing by households was unchanged at a 3.4 percent annual pace and lending to non-financial corporations was similarly static at 0.9 percent. Loans for house purchase were 4.4 percent higher than in May 2010 but borrowing by non-monetary financial intermediaries (ex-insurance corporations and pension funds) jumped from 6.1 percent to 7.3 percent.

June manufacturing PMI declined to a reading of 52.0 from May’s 54.6. Regionally, all of the four larger states witnessed a significant decline in their respective PMIs. At least France (down 2.4 points at 52.5) and Germany (down 3.1 points at 54.6) remained above the key 50 growth threshold but both Italy (down 2.9 points at 49.9) and Spain (down 0.9 points at 47.3) fell worryingly short. Somewhat ironically, the only EMU member to register a gain was Greece, although the rate of economic contraction there (45.5) remains easily the steepest in the bloc. Production rose at its slowest pace since September 2009, with stronger capital goods output more than offset by softer consumer goods and intermediates. This will in part reflect the first (small) decline in new orders since July 2009. Weakening domestic demand was a major feature but exports also increased at their poorest pace since September 2009. Backlogs fell for the first time in twenty months and the rate of inventory depletion was the quickest since March, both developments being attributable to poor sales. However, employment continued to grow at an above average pace despite further declines in Greece, Ireland and Spain and, for the first time since last November, Italy.

May joblessness rose 16,000, the first increase in seven months, to lift the number of people out of work to 15.510 million. The unemployment rate nonetheless held steady for the second consecutive month at 9.9 percent. Among the larger states, labor markets continued to improve in the stronger growing economies with both France and Germany shaving another 0.1 percentage points off their national rates to 9.5 percent and 6.0 percent respectively. However, in Italy the rate edged up a notch to 8.1 percent while in Spain a 0.2 percentage point increase boosted its rate to 20.9 percent, easily still the highest for the entire area.

Germany

May retail sales excluding autos dropped 2.8 percent after April was revised to no change on the month. On the year, seasonally and workday adjusted sales were down 4.5 percent. The latest drop means that average purchases for the first two months of the second quarter were 2.6 percent below their first quarter mean when volumes rose a modest 0.6 percent. The limited data disaggregation available shows sales of food, drink & tobacco up 0.7 percent on the year while non-food purchases were 3.8 percent higher. Within the latter, clothing & shoes were 6.4 percent stronger and mail order 7.0 percent to the good.

June unemployment declined by 8,000 to 2.967 million. The June decline matched an unrevised May drop and left the jobless rate steady at 7.0 percent. Recent figures have pointed to some cooling in the demand for labour, although in some cases the slowdown in employment growth can be attributed to a shortage of skilled workers. Vacancies in June crept 2,000 higher for the second month in a row.

France

First quarter real gross domestic product growth was revised down to 0.9 percent from 1.0 in the previous estimate. On the year, GDP was up an unrevised 2.2 percent. The minor modification to the quarterly expansion rate in part reflected a slightly stronger revised 1.2 percent gain in capital investment (was 1.1 percent) that was more than offset by a weaker adjusted 0.4 percent increase in private consumption (0.6 percent). The previously reported 1.0 percent advance in government consumption was also more than halved to just 0.4 percent while upward revisions to both exports (1.8 percent from 1.4 percent) and imports (3.0 percent from 2.7 percent) reduced the negative contribution from the foreign trade balance by 0.3 percentage points to minus 0.1 percent. Stock building added an unrevised 0.7 percentage points to the bottom line.

May consumption of manufactured goods dropped 1.5 percent after sinking a revised 1.2 percent in April. On the year, sales were down 1.0 percent. The May slump reflected broad based reversals. Sales of textiles dropped 4.4 percent on the month while household goods were off 0.4 percent and autos 1.8 percent. Overall durable goods were down 1.6 percent. The other products category saw demand contract 1.3 percent. With energy purchases up 3.4 percent, total consumer goods spending fell a slightly less marked 0.8 percent from April but this still left the two-month average 2.3 percent below its first quarter mean.

May producer prices were down 0.5 percent but were up 6.0 percent on the year. The decline largely reflected a 4.6 percent decline in the cost of energy. Overall manufactured prices fell 0.3 percent with electrical equipment & technology (down 0.1 percent) the only other category to register a decline. Elsewhere, food & drink bills were up 0.4 percent, transport was up 0.1 percent and other industrial products were up 0.4 percent.

Italy

May producer prices were down 0.2 percent but up 4.8 percent on the year. Energy prices dropped 0.9 percent on the month. Consumer durables prices were up 0.3 percent while intermediates were up 0.2 percent. Capital goods edged down 0.2 percent while nondurables were unchanged on the month. Excluding energy, the PPI was steady on the month and 4.2 percent higher than in May 2010.

First quarter jobless rate fell 0.2 percentage points to 8.2 percent. This was the lowest reading since the end of 2009 and reflected solely a 0.4 percentage point decline among female workers to 9.2 percent. The male rate was steady at 7.5 percent for the second quarter in succession.

United Kingdom

The final estimate of first quarter real gross domestic product was up an unrevised 0.5 percent. Historical revisions saw annual growth shaved 0.2 percentage points weaker to 1.6 percent. However, unchanged quarterly growth masked some significant shifts in the composition of demand as well as a smaller revised decline in total domestic demand (minus 0.9 percent from previously minus 1.3 percent). Household spending still shows a 0.6 percent drop from the fourth quarter, its steepest decline since the second quarter of 2009, but the slide in fixed capital formation was more than halved to minus 2.0 percent. However, the improved performance here was in part offset by slower growth in government spending which is now put at 0.5 percent, down from 1.0 percent last time. The main boost to the economy was overseas demand with exports up 2.4 percent and imports down by the same amount. As a result, net exports added 1.4 percentage points to the bottom line. In terms of output, industrial production contracted a slightly smaller 0.1 percent on the quarter within which manufacturing expanded 0.7 percent. Service sector activity was up an unrevised 0.9 percent while construction fell 3.4 percent. The GDP deflator was up 1.2 percent from the fourth quarter and 2.9 percent on the year — but the ONS warned that the 2.5 percentage point increase in VAT in January had a significant impact here.

Asia/Pacific

Japan

May retail sales declined a less than anticipated 1.3 percent when compared with the same month a year ago after sinking 4.8 percent in April. This was the third consecutive decline. Analysts had expected sales to drop 2.2 percent. Auto sales slumped 24.4 percent on the year after plummeting 37.8 percent the month before. Machinery & equipment sales rebounded by 3.8 percent after sliding 9.6 percent in April. Food sales also increased 1.7 percent while fabrics, apparel and accessories were up 3.3 percent. Fuel sales were 1.3 percent higher.

May seasonally adjusted industrial production was up 5.7 percent on the month but declined 7.2 percent on the year. On an unadjusted basis, the annual decline was 5.9 percent. This was the second consecutive monthly increase in production following the devastating March earthquake. In March, output plunged 15.5 percent. The main contributors to the increase in output were transport equipment (up 36.4 percent) and general machinery (up 5.3 percent). Chemicals excluding drugs (up 8.7 percent) also gained on the month. Commodities that were the main contributors were large and small passenger cars and large trucks. According to METI’s Survey of Production Forecast in Manufacturing, production is expected to increase 5.3 percent in June and increase 0.5 percent in July.

May real household expenditures were down 1.9 percent on the year after dropping 3.0 percent in April and plunging 8.5 percent in the immediate aftermath of the March 11 earthquake. Spending on furniture & household utensils jumped 22.5 percent while education increased 13.9 percent. Spending on housing was up 8.2 percent. However, spending on food was down 1.5 percent and fuel, light & water charges were down 5.2 percent.

The May unemployment rate declined to 4.5 percent from 4.7 percent. Seasonally adjusted employment was down 100,000 on the month while the unadjusted employment was up 90,000 on the year. The jobless rates in the earthquake areas of Iwate and Miyagi were 6.5 percent and 7.0 percent respectively. The number of unemployed dropped 90,000 on the month.

May consumer price index was up 0.1 percent and 0.3 percent on the year. The core CPI excluding only fresh food was up 0.1 percent and 0.6 percent on the year. Excluding both food and energy, the core CPI was up 0.1 percent and 0.1 percent. The CPI was pushing up by heating oil, gasoline and tobacco. Energy costs were up 0.5 percent on the month and 5.7 percent on the year after jumping 1.6 percent and 7.3 percent in April.

Second quarter Bank of Japan Tankan showed that business confidence among both large and small manufacturers worsened. Current business sentiment among large manufacturers dropped to minus 9 from plus 6 in the first quarter. The deterioration in sentiment reflected the impact of the March 11 earthquake and tsunami. The March survey was mostly completed by the time the earthquake struck. Despite the drop in June, survey respondents expect the index to rebound to a plus 2 reading in September. Small manufacturers’ sentiment dropped from minus 10 in the first quarter to minus 21 in the second. Firms have been making concerted efforts to restore supply chains that had been disrupted by the disaster. Capital expenditures for all industries were unchanged.

Americas

Canada

May consumer price index jumped 0.7 percent and 3.7 percent on the year and the fastest pace since March 2003. Much of the acceleration was due to energy prices but there were signs of some underlying strength too. Both the Bank of Canada’s preferred core CPI, which excludes eight volatile items and the core excluding food and energy were up a solid 0.5 percent on the month. On the year they were up 1.8 percent and 2.0 percent respectively. Seasonally adjusted CPI was up 0.2 percent on the month. Within this measure, clothing & footwear costs dominated, surging 2.0 percent. Other areas were more subdued although household operations and furnishings (0.6 percent), alcohol & tobacco (0.5 percent) and food (0.5 percent) all saw significant gains.

April monthly gross domestic product was unchanged and up 2.8 percent on the year. Goods producing output was also unchanged from March and would have been significantly weaker but for a 1.0 percent bounce in mining and oil & gas extraction. Manufacturing posted a 0.7 percent contraction. And while utilities and construction both saw output edge up a minimal 0.1 percent, agriculture, forestry & fishing shrank 0.1 percent. Activity in the service sector was also unchanged although this masked a 0.5 percent monthly contraction in wholesale trade and a 0.5 percent rise in retail trade. Otherwise, outside of a 0.3 percent slide in arts, entertainment & recreation, all of the other sub-sectors posted monthly output changes of between minus 0.1 percent and 0.2 percent.

Bottom line

It was all about Greece and the country’s arduous path to obtaining further bailout funds. Weaker global growth played a role as well but had little affect on equities. On Thursday and Friday, investors honed in on the better than anticipated Chicago PMI and ISM manufacturing readings with relief. On Thursday, the Federal Reserve ended its $600 billion Treasury bond buying program, known as QE2.

This week brings three central bank meetings including the Reserve Bank of Australia on Tuesday and the Bank of England and European Central Bank, both on Thursday. Only the ECB is expected to increase its interest rate. Australia releases both its retail sales and unemployment data during the week. In Europe, industrial production and producer prices for most of the major countries are on tap along with German manufacturing orders. In the U.S., markets are closed Monday for the Fourth of July celebration. And Friday is June’s employment situation report.

Looking Ahead: July 4 through July 8, 2011

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