Global Markets

Equities were mixed for the week and month as investors increasingly focused on the rancorous debt ceiling debate in Washington as a deadline of August 2^nd rapidly approaches. Adding downward pressure were continuing rating actions — Greece’s rating, already in junk territory, was lowered yet again by another two notches to CC with a warning that it may still default on its debt. The ratings for Cyprus were also cut while Spain was put on review. The onslaught of earnings reports proved to be mixed globally with disappointing results in Germany and the U.S. However, these reports were overshadowed by the Washington impasse.

Economic data were mixed and did not boost morale. The favorable data there was had to overcome many obstacles in order to be seen given the debt crises in Europe and the U.S. The week ended with a distinctly downbeat report on U.S. GDP. The consumer, which accounts for about 70 percent of U.S. spending growth, was virtually non-existent in the second quarter. And there was a lot of history to relearn in this report. The annual three year revisions were also released which showed that first quarter growth was only at an anemic 0.4 percent annualized rate, revised down from the previous estimate of 1.9 percent. The data also showed that the recession was deeper than originally thought.

While equities were volatile, the uncertainty surrounding the U.S. and eurozone debt situations played out in the currency markets where both the yen and Swiss franc soared. The dollar fell to a record low against the Swiss franc and approached a postwar low against the yen.

Global Stock Market Recap

Europe and the UK

Strong retail sales in Germany and France Friday were overwhelmed by the U.S. debt ceiling impasse and the credit downgrades of Greece and Cyprus. Moody's placed Spain's AA2 rating on review for possible downgrade, citing the increased vulnerability of the government's finances to market stress and greater risk to bondholders due to the precedent set by eurozone action to support Greece. Moody’s said that Greece's second bailout package has "signaled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits."

Equities were down for the week and month. The FTSE was down 2.0 percent on the week and 2.2 percent in July. The DAX lost 2.3 percent on the week and 2.9 percent for the month while the CAC plunged 4.4 percent and 7.8 percent. Companies that reported earnings less than expected were punished by investors. Banks were particularly vulnerable to rating agencies’ pronouncements.

Although European stocks pared heavy recent losses they ended a dismal week with another daily loss, as investors expressed anxiety that a U.S. debt impasse will spark another global meltdown. The major averages came off their early lows in the final hour of trading amid unconfirmed reports that progress was made toward raising the U.S. debt ceiling. Traders are concerned that U.S. lawmakers would set up a double-dip recession by failing to reach a compromise on the nation’s debt ceiling.

Asia Pacific

Equities were mostly down for the week and July. Continuing concerns that Europe's debt crisis could spread to Spain and Italy along with the ongoing U.S. debt crisis curbed investor appetite for riskier assets. In Japan, exporters were buffeted by the rising value of the yen to near record levels against the U.S. dollar. The Nikkei was down 3.0 percent on the week but managed to edge up 0.2 percent in July. The monthly spate of economic data was mixed — industrial production increased less than expected but core consumer prices were up for the third consecutive month on the year.

Elsewhere, the All Ordinaries dropped 3.7 percent on the week and 3.4 percent in July. In China, the Shanghai Composite dropped 2.5 percent and 2.2 percent. However the Hang Seng was unchanged on the week and inched up 0.2 percent in July. Chinese railway related companies sank after a fatal high speed train accident at the beginning of the week. India’s Sensex dropped 2.8 percent and 3.4 percent after the Reserve Bank of India shocked traders and raised its key interest rate by 50 basis points to 8.0 percent.

Reserve Bank of India

The Reserve Bank of India lifted its key rates for the 11th time since March 2010. The Bank lifted rates by 50 basis points rather than the expected 25 basis point increase. The repo, the rate at which the RBI lends, is now 8.0 percent while the reverse repo, the rate at which the central bank borrows from banks, was adjusted to 7.00 percent from 6.50 percent. The Bank feels that high inflation continues to warrant anti-inflationary stance. The latest decision is expected to reinforce the cumulative impact of past actions on demand. It will also retain the credibility of the commitment of monetary policy to control inflation, thereby maintaining medium-term inflation expectations according to the Bank.

The RBI which is headed by Governor Duvvuri Subbarao raised its inflation outlook for the fiscal year ending March 2012 to 7.0 percent from 6.0 percent. Inflation based on the wholesale price index accelerated to 9.44 percent in June from 9.06 percent in May. These numbers are likely to be upwardly revised. The central bank maintained its baseline projection of real GDP growth for 2011-12 at around 8 percent. Though there are signs of a moderation in growth in some interest-rate sensitive sectors, there is no evidence of a sharp or broad-based slowdown yet, the bank said.

Reserve Bank of New Zealand

The Reserve Bank of New Zealand left its key policy interest rate at 2.5 percent. It was lowered to that level in March in the immediate aftermath of the second earthquake to hit Christchurch on February 22^nd. At that time, the rate was cut 50 basis points from 3.0 percent. The Bank has an inflation target range of 1 percent to 3 percent. In the June quarter, the consumer price index jumped a greater than expected 1.0 percent on the quarter and 5.3 percent on the year. Economic data have been stronger than expected. First quarter GDP was up 0.8 percent on the quarter. And a monthly business survey showed that sentiment has jumped over the past two months. In his statement, the RBNZ governor noted that the country’s strong currency is acting as a drag on growth and could postpone the need for an increase in interest rates.

Currencies

The Swiss franc and yen soared against all their major counterparts including the U.S. dollar and euro last week. Worries that the ongoing sovereign debt problem in Europe will spread to countries such as Spain and Italy sent investors to the safe havens of Switzerland and Japan. Once again, the ratings services were active — Moody’s said it may cut Spain’s rating after lowering Greece yet again. The situation in the U.S. as lawmakers continued to struggle to resolve the budget deadlock spurred refuge demand. The U.S. dollar fell to a record low against the Swiss franc and approached a postwar low against the yen. Weak second quarter growth in the U.S. added downward pressure.

The euro fell against the yen as Spain’s Aa2 ratings were placed on review for possible downgrade by Moody’s. The country’s Prime-1 short-term ratings are unaffected by the action. Prime Minister Jose Luis Rodriguez Zapatero said that elections will be held November 20 instead of March to “project political and economic certainty.” The ruling Socialist Party has been losing support after embarking on austerity measures.

Asian currencies completed a second weekly gain, led by the Philippine peso and India’s rupee, on speculation the region’s growth outlook and rising interest rates will attract foreign funds.

Selected currencies — weekly results

Indicator scoreboard

EMU

June M3 money supply posted a sluggish 2.1 percent increase on the year, down from a slightly firmer revised 2.5 percent annual rate in May. As a result, the three-month moving average which is closely monitored by the ECB held steady at a relatively lackluster and softer than expected 2.2 percent pace. Lending to the private sector was up 2.5 percent from a year ago, a 0.2 percentage point deceleration from last time. Loans to households rose 3.2 percent after a 3.4 percent gain in May. Borrowing for house purchase eased to a 4.3 percent 12-month rate. Loans to non-financial corporations picked up from a very sluggish 0.9 percent pace in May to 1.4 percent but lending to non-monetary institutions (excluding insurance corporations and pension funds) dropped to a 3.4 percent annual rate, less than half of the 7.3 percent pace registered in mid-quarter.

July economic sentiment declined to 103.2 from 105.1 in June. All sectors of the economy were more cautious about economic developments. Confidence slipped 2.4 points to 1.1 in industry, 0.9 points to minus 3.5 in retail, 2.2 points to 7.9 in services and 1.0 points to minus 24.5 in construction. Household morale was also lower, down 1.5 points at minus 11.2. Regionally, most member states posted a decline in sentiment. Among the four largest economies, the most severe setback was in Italy (4.5 points) followed by Spain (2.7 points). France (down 0.5 points) and Germany (down 1.8 points) held up rather better.

July flash estimate of harmonized index of consumer prices was up 2.5 percent on the year, down 0.2 percentage points from its June rate and 0.3 percentage points below the recent 2.8 percent peak seen in April. The deceleration was all the more surprising in the wake of a 0.2 percentage point jump in Germany (to 2.6 percent) but looks to have been largely a function of a hefty 0.9 percentage point drop in the Italian rate (to 2.1 percent). Spanish HICP inflation was provisionally steady at 3.0 percent.

Germany

July labour markets tightened with the number of people out of work falling 11,000 to 2.957 million. The latest decline followed a slightly steeper revised 10,000 drop in June but left the jobless rate steady at 7.0 percent. The July unemployment figures were consistent with June payroll data released earlier which showed a second consecutive 36,000 rise in headcount.

June retail sales surged 6.3 percent following a smaller revised 2.5 percent decline in May. The snapback left unadjusted volumes 1.0 percent lower on the year but, more significantly, 2.5 percent higher on a workday adjusted basis. The limited breakdown of the headline figures shows sales of food, drink & tobacco down an unadjusted 0.1 percent on the year and non-food demand 1.7 percent lower. Within the latter, purchases of clothing & footwear (down 4.1 percent) and furniture & other household goods (down 3.4 percent) were especially poor.

France

June consumption of manufactured goods was up 1.1 percent on the month in June following a smaller revised 1.2 percent decline in May. Purchases were 2.2 percent higher on the year. The recovery was led by a 2.3 percent rebound on the month in purchases of durables within which autos rose 2.2 percent and household goods were up 3.8 percent. Textiles jumped 4.3 percent after a 3.5 percent drop in May. The other products category saw sales advance 0.7 percent although this failed to reverse a 1.2 percent drop in the previous month. Total consumer spending rose 1.2 percent from May and was 1.8 percent firmer on the year.

United Kingdom

Second quarter gross domestic product was up 0.2 percent on the quarter and 0.7 percent when compared with the same quarter a year ago. ONS pointed to a number of special factors (royal wedding, Japanese tsunami, record temperatures) that combined it estimates to have reduced total output by about 0.5 percentage points during the quarter (services 0.4 percent, goods 0.1 percent). If accurate, these one-off effects imply an underlying quarterly expansion rate of a much more respectable 0.7 percent. In terms of output, what growth there was reflected a 0.5 percent quarterly increase in services, within which transport, storage & communication was up 1.1 percent, business services & finance 0.5 percent and distribution, hotels & catering 0.3 percent. However, total industrial production dropped 1.4 percent as a 0.3 percent decline in manufacturing output was compounded by hefty declines in the more erratic sub-sectors (mining & quarrying 6.6 percent, utilities 3.2 percent). Construction registered a 0.5 percent gain but agriculture was off 1.3 percent.

Asia/Pacific

Japan

June retail sales surprised and were up 1.1 percent on the year. This was the first increase since February, prior to the March 11 disaster. Sales were down 1.3 percent in May. Within sub-categories, sales were mixed. Machinery & equipment jumped 15.2 percent while fabrics, apparel & accessories were up 4.1 percent. Food & beverage was up 3.2 percent and fuel was up 2.1 percent. Partially offsetting these increases, motor vehicles sank 15.2 percent while general merchandise slid 1.3 percent.

June consumer price index was down 0.1 percent on the month and up 0.2 percent on the year. Core CPI which excludes only fresh food was down 0.2 percent and up 0.4 percent on the year. Excluding both food and energy, the CPI was down 0.1 percent and up 0.1 percent on the year. Goods prices were unchanged on the month and up 0.3 percent on the year while services were down 0.1 percent and up 0.2 percent. Energy prices were up 5.2 percent on the year after rising 5.7 percent in May. Food prices were down 1.0 percent while furniture & household utensils dropped 3.2 percent on the year. Miscellaneous prices jumped 6.6 percent. Transportation & communication prices advanced 1.1 percent on the year.

June unemployment rate edged up to 4.6 percent from 4.5 percent in May. The number of unemployed persons was 2.93 million, a decline of 360,000 from the previous year. Job losses were led by the accommodations, eating & drinking services, information & communications as well as the agriculture & forestry sectors. The number of employed persons was 60.02 million, up 30,000 from a year ago. The results continue to exclude the three prefectures struck by the Great East Japan Earthquake. Job creation continued to be led by medical, health care and welfare as well as construction.

June expenditures by two or more person households dropped 4.2 percent on the year after declining 1.9 percent in May. Spending continues to struggle in the aftermath of the March earthquake. Housing plunged 10.7 percent on the year while expenditures on transportation & communication sank 11.4 percent. Fuel, light & water charges slipped 5.3 percent. However, spending on furniture & household utensils were up 9.1 percent.

June preliminary industrial production was up 3.9 percent after jumping 6.2 percent in May. June’s increase was the third consecutive rise. On the year, output was down 1.7 percent. The industries that mainly contributed to the increase are transport equipment, electronic parts & devices and information & communication electronics equipment. Commodities that mainly contributed to the increase were large passenger cars, active matrix LCDs (Liquid Crystal Devices) and large trucks.

Australia

Second quarter producer prices were up 0.8 percent after jumping an unrevised 1.2 percent in the first quarter. On the year, the PPI was up 3.4 percent after climbing 2.9 percent in the first quarter. The quarterly increase was mainly due to increases in building construction (1.2 percent), petroleum refining (10.3 percent) and other agriculture (7.9 percent). These increases were partially offset by declines in the prices received for industrial machinery and equipment manufacturing (down 2.0 percent). Intermediate prices were up 2.1 percent on the quarter and were up 5.6 percent on the year. The quarterly increase was mainly due to rising prices received for oil & gas extraction (15.0 percent), petroleum refining (6.9 percent) and grain, sheep, beef & dairy cattle farming (4.9 percent). Offsetting these price increases in part were declines in the prices received for basic non-ferrous metal manufacturing (down 2.7 percent). Preliminary stage one commodity prices were up 2.8 percent and 6.8 percent on the year. Once again the main culprits were increases in the prices received for oil & gas extraction (15.0 percent), petroleum refining (6.8 percent) and iron & steel manufacturing (6.1 percent). The increases were partly offset by declines in prices received for basic non-ferrous metal manufacturing (down 2.7 percent).

June quarter consumer price index was up 0.9 percent and 3.6 percent on the year. The CPI was up 1.2 percent and 3.3 percent on the year in the March quarter. The Reserve Bank of Australia’s trimmed mean was up 0.9 percent on the quarter and 2.7 percent on the year. On the quarter, fruit prices jumped 26.9 percent, automotive fuel was up 4.0 percent, hospital & medical services gained 3.4 percent, furniture advanced 6.0 percent and deposit & loan facilities were up 2.1 percent. Offsetting these higher prices were vegetables (down 10.3 percent), audio, visual & computing equipment (down 6.3 percent), electricity (down 1.5 percent), domestic holiday travel & accommodation (down 1.5 percent) and milk (down 4.6 percent). The increase in fruit prices was mainly due to an increase of approximately 138 percent in the price of bananas due to shortages created by Cyclone Yasi. Banana prices increased 470 percent over the six months to the June quarter 2011.

Americas

Canada

May monthly gross domestic product slipped 0.3 percent and was up 2.2 percent on the year. The May headline decline was wholly attributable to a 1.6 percent monthly drop in output in the goods producing sector. Within this, manufacturing activity was down 0.4 percent and construction fell 0.3 percent. However, declines here were compounded by a hefty 5.3 percent slump in mining and oil & gas extraction as maintenance shutdowns and wildfires in Northern Alberta took their toll. The only areas of positive growth were agriculture, forestry & fishing (0.5 percent) and utilities (0.4 percent). By contrast, services saw output expand a modest 0.2 percent on the month, largely thanks to a healthy 1.0 percent advance in wholesale trade. Most other sub-sectors posted gentle gains including retail trade (0.2 percent) and accommodation & food services (0.3 percent). Nonetheless, transportation and warehousing as well as information and cultural industries were flat and there were small declines in administrative & waste management services and arts, entertainment & recreation.

Bottom line

Equities were mostly lower for the week and month as the impasse in Washington grinds down to its final hours with no resolution in sight. And in Europe, sovereign debt issues continue to fester. Economic data were mixed. The big disappointment was U.S. second quarter growth and the downward revisions that preceded it.

Four central banks will meet this week — The Reserve Bank of Australia, Bank of England, European Central Bank and the Bank of Japan. None are anticipated to change policy. The other big event will be the monthly U.S. employment report on Friday. But investors all will be watching the U.S. and its struggle to increase its debt ceiling.

Looking Ahead: August 1 through August 5, 2011

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