Global Markets

Global equities were volatile with large swings in both intraday and on a daily basis with swings over 4 percent in either direction. Fear alternated with denial. The week began on a distinctly down note after S&P’s announcement after all markets were closed for the week that it was downgrading U.S. debt to AA+ from AAA. Investors were unsure what this would mean to them and fled to safe havens including U.S. Treasuries, the Swiss franc and Japanese yen. Gold soared over $1,800 but dropped after the CME imposed higher margin requirements. Anxiety over the U.S. economy and Europe’s debt woes were an undercurrent to trading for the week. Some of the growth worries about the U.S. were alleviated Thursday when weekly jobless claims fell below the 400,000 threshold along with Friday’s favorable retail sales report. However, weak data in Europe underscored the fragility of the economy there. Despite gains on Thursday and Friday, most equity indexes followed here declined. The exceptions were the All Ordinaries (up 1.6 percent), FTSE (up 1.4 percent), SMI (up 1.6 percent), OMX (up 1.0 percent) and the S&P/TSX Composite (up 3.1).

FOMC meeting

The Federal Reserve left its policy interest rate range at zero to 0.25 percent as expected. However, the FOMC took an unprecedented step and explicitly stated that the duration of the exceptionally low target rate would be at least until mid-2013 to promote the ongoing economic recovery. The FOMC currently anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate. The Committee also said that it will maintain its existing policy of reinvesting principal payments from its securities holdings and would regularly review the size and composition of its securities holdings. It is prepared to adjust those holdings as appropriate. The timing insertion was not unanimous. Voting against the action were regional Fed bank presidents Richard W. Fisher (Dallas), Narayana Kocherlakota (Minneapolis) and Charles I. Plosser (Philadelphia) who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Fed downgraded its view of the economy noting that "economic growth so far this year has been considerably slower than the Committee had expected" which is even less positive than the prior statement's "the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected." Despite improvement in the latest employment report, the Fed still characterizes the labor market as worse than information available at the June FOMC. The Fed sees consumer spending as less robust and now attributes temporary factors slowing growth as only partially explaining the deceleration. The transitory factors were given greater weight in the prior statement.

Global Stock Market Recap

Europe and the UK

Equities gyrated from positive to negative and then back again last week. When the dust settled, the FTSE was up for the first week since July 22^nd while the CAC and DAX dropped for a third week. The FTSE and CAC were up three of five days while the DAX was up two. On Friday, equities were up after France, Spain, Italy and Belgium imposed short selling bans to stabilize markets. Worries about sovereign debt even in light of weekend Group of Seven, EU and ECB statements did not soften Monday’s declines after S&P’s late Friday night announcement. On the week, the FTSE was up 1.4 percent while the CAC and DAX dropped 2.0 percent and 3.8 percent respectively.

The week got off to a bad start — stock markets tumbled Monday as the downgrade of the U.S. credit rating further sapped confidence in the global economy, and as investors were underwhelmed by the European Central Bank's move to buy Italian and Spanish bonds. The ECB stepped in buy Italian and Spanish debt in order to drive down borrowing costs. Still, markets are deeply concerned about the outlook on debt and the prospects for economic growth among numerous euro zone members. Rumors swirled that exposure to its neighbors' debt may eventually cost Germany and France their coveted AAA ratings. And with the U.S. economy slowing to a crawl, talk of another global recession spooked investors everywhere. But equities ended the week on a positive note despite weak economic data. Eurozone industrial production dropped while French second quarter growth stalled and was unchanged from the first quarter.

France, Spain, Italy and Belgium imposed bans on naked short selling Friday after Société Générale dropped to its lowest price since March 2009 on August 10^th amid false rumors about its solvency. National regulators imposed the bans “to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field,” the European Securities and Markets Authority, which coordinates the work of national regulators in the 27-nation European Union, said in Thursday’s statement. That move came on the back of a rebound in global financial stocks as worries over French banks eventually receded — partly on hopes the previous selling was overdone and based on unfounded rumors of sovereign debt exposure difficulties — and partly as short sellers anticipated the authorities move to briefly ban the practice.

Bank of England Inflation Report

In its Inflation Report, the Bank of England said that inflation may reach 5 percent this year before easing through 2013. It sees inflation at about 1.8 percent in the second quarter of 2013, based on a chart of quarterly average projections. Gross domestic product growth is seen at about an annual 2.7 percent. Risks to growth are skewed slightly to the downside according to the report reflecting the possibility that the slowing in global growth could prove more persistent.

The BoE kept its key interest rate at a record low of 0.5 percent choosing to support the economic recovery rather than curb inflation. The economy barely grew in the second quarter and manufacturing output dropped in June. The Bank said that the greatest risk stems from the eurozone debt crisis citing trade, banks’ indirect exposure to sovereign debt and a potential impact on confidence and wholesale funding markets.

Asia Pacific

Equities in this region were not spared the day to day gyrations experienced in Europe and North America — and for much of the same reasons. The S&P downgrade of U.S. debt on Friday (August 5^th) gave investors the weekend to react to that along with the frantic meetings in Europe to calm the eurozone sovereign debt crisis. The indexes continued to plunge, picking up from where they left off the previous week. However, stocks in Australia rebounded at week’s end and provided the only positive to the week’s trading. All other indexes were down once again on the week. The All Ordinaries were able to recover losses from earlier in the week and were up 1.6 percent on the week, making only a small dent in the previous week’s 7.4 percent swoon.

The Nikkei dropped 3.6 percent after dropping 5.4 percent the previous week. Shares were dragged down as renewed concerns about recent market turmoil and the impact on forthcoming corporate earnings took a toll on bellwether stocks. The relatively high value of the yen against both the U.S. dollar and euro along with the uncertainty about overseas markets have dampened the outlook for exporters and that translated to declines of that group of stocks.

On Friday, the Japanese government revised down its real gross domestic product forecast for fiscal 2011 to 0.5 percent from its January estimate of 1.5 percent due to the effects of the March 11 earthquake disaster on both businesses and consumers. But the government expects the economy to grow at a faster pace of 2.7 percent to 2.9 percent in the next fiscal year because broken supply chains for cars and electronics are being restored quickly and consumer sentiment is recovering. These forecasts are largely in line with the Bank of Japan monetary policy board’s latest median growth forecast for 0.4 percent in fiscal 2011 and 2.9 percent in fiscal 2012.

Currencies

The dollar advanced against all of its major counterparts — except the yen despite the efforts of the Bank of Japan and Ministry of Finance to lower the currency’s value. The Bank of Japan has already intervened on behalf of the MoF unlike the coordinated intervention that took place after the March 11^th disaster. On Thursday, Bank of Japan spooked traders into hammering the currency by checking their rates. Several traders said that the Bank contacted them to check their levels for the currency — a move that often signals an imminent intervention. But the central bank didn't sell yen itself, several dealers said.

The BoJ last intervened to try to calm markets last week, buying $52 billion in an effort to push the yen down, citing "one-sided" moves that were pushing the currency away from fundamental drivers. It worked, but only briefly, with the yen quickly rebounding. Export-denting yen strength has clouded the outlook as the country recovers.

Adding to the pressure is the fact that the Swiss National Bank announced a series of fresh measures Wednesday to counter Swiss franc strength, effectively channeling extra safe haven flows into the yen. Rampant speculation that Switzerland would resort to dramatic measures to weaken its currency sent the franc plunging nearly 6 percent against the euro and dollar, which momentarily overwhelmed lingering concerns about the global economy and Europe's debt crisis.

The Swiss National Bank has reacted with increasing dismay as the franc rocketed to new record highs against every major currency. In recent interviews, senior SNB policy makers have floated a range of ideas to manage the franc's strength including boosting liquidity and creating negative interest rates that would effectively charge investors for holding the currency. But the franc's losses accelerated as traders speculated that Switzerland could take the most unlikely and drastic move of all — pegging its currency to the euro. Until now, such a policy move was considered unlikely. However, the franc's steep slide Thursday was a reflection of the SNB's mounting anxiousness over its currency's unprecedented surge.

On Wednesday, the SNB stepped up its fight to counter what it called a “massive overvaluation” of the currency by boosting liquidity. The SNB said it will “significantly increase” the supply of liquidity to the money market and expand banks’ sight deposits to 120 billion francs from 80 billion francs. It will also conduct foreign exchange swap transactions to create liquidity, a measure last used in 2008.

Selected currencies — weekly results

Indicator scoreboard

EMU

June industrial production dropped 0.7 percent and was up 2.9 percent on the year. All categories were down. Capital goods swooned 1.5 percent while intermediate goods dropped 0.6 percent. Consumer durables declined 2.5 percent and nondurables were off 0.5 percent. Energy output slid 0.4 percent. On the year, capital goods were up 7.0 percent while intermediate goods were up 3.3 percent. In the four larger member states, June output was down 0.8 percent in Germany, dropped 1.7 percent in France and 0.6 percent in Italy. Output in Spain was 0.8 percent lower. Most of the small states also reported monthly declines.

Germany

June seasonally adjusted trade balance narrowed to €11.5 billion from a slightly revised €12.9 billion in May. This was the lowest surplus since February. Exports slid 1.2 percent in June after increasing 4.4 percent in May. However, imports managed to edge up 0.3 percent following a 3.8 percent bounce the month before. On the year, exports were up 3.1 percent. Exports to other eurozone members were up 4.7 percent and increased 1.3 percent to non-EU nations. Imports were up 6.0 percent on the year with an 11.4 percent increase to other eurozone members and a drop of 3.1 percent to non-EU members. The unadjusted trade surplus was €12.7 billion, with the decline in exports almost doubling that of imports.

France

June industrial production dropped 1.6 percent after increasing a revised 1.9 percent the month before. On the year output was up 2.1 percent. Manufacturing dropped 1.9 percent after May's 1.4 percent boost. Leading the decline were electrical and electronic equipment & machine equipment (down 3.8 percent), transport equipment (down 2.8 percent) and other manufacturing (down 1.9 percent). On the positive side, gains were seen in coke & refined petroleum products (up 2.2 percent) and in food products & beverages (up 0.3 percent). Mining was up 0.9 percent in the latest month while construction slipped 0.1 percent.

Second quarter flash gross domestic product was unchanged on the quarter after increasing 0.9 percent in the first quarter. On the year, GDP was up 1.6 percent. The second quarter slowdown was due to domestic demand which was flat after jumping 1.8 percent in the first quarter. Household consumption expenditure dropped 0.7 percent after increasing 0.4 percent while gross fixed capital formation was up 0.9 percent increasing 1.2 percent. Imports were down 0.9 percent after jumping 3.1 percent in the first quarter. Exports were unchanged after increasing 1.8 percent in the previous quarter. Inventories were neutral on GDP growth, after contributing for 0.8 point in the first quarter.

Italy

June seasonally adjusted merchandise trade deficit narrowed to E1.94 billion from E3.11 billion in May. Exports dropped 0.8 percent while imports slid 4.1 percent. Exports to the EU dropped 1.4 percent while imports sank 5.7 percent. The unadjusted deficit was E1.8 billion. When compared with the previous year, exports were up 8.1 percent with those to non-EU countries up 7.8 percent and to the EU rising 8.3 percent. Imports were up 3.2 percent on the year. Imports from non-EU countries were up 8.1 percent while and from the EU countries, 0.6 percent.

United Kingdom

June industrial production was unchanged on the month and dropped 0.3 percent on the year. Manufacturing output slumped 0.4 percent but managed to increase 2.1 percent on the year after a 1.8 percent increase on the month and 2.8 percent gain on the year in May. Output was down sharply for the second quarter, although according to the Office of National Statistics, the data will have limited impact on growth for the quarter. Oil and gas output which plunged 6.5 percent on the month in May due to maintenance work only was up 0.2 percent in June. National Statistics said there was some anecdotal evidence of some ongoing unscheduled maintenance in June. Electricity, water & gas industries output was up 2 percent on the month.

June merchandise trade gap unexpectedly widened out once again to Stg8.873 billion from Stg8.467 billion in May. The increase in the red ink reflected a 2.4 percent monthly decline in nominal imports and an even larger 4.8 percent drop in exports. Excluding oil and erratics, the deficit eased from Stg8.3 billion in May to Stg7.68 billion in June. Exports dropped 1.9 percent while imports dropped a larger 7.0 percent on the month. Regionally the shortfall with the rest of the EU declined Stg3.4 billion to Stg3.2 billion. With non-EU countries the deficit expanded from Stg5.1 billion to 5.7 billion.

Asia/Pacific

Japan

July corporate goods price index was up 0.2 percent on the month and a higher than expected 2.9 percent on the year. Analysts had forecast an annual increase of 2.6 percent. This was the 10th consecutive month that the annual rate increased. Most subcategories recorded gains on the year. Manufactured goods prices were up 2.8 percent. Processed foods were up 3.9 percent while textile products were up 3.7 percent. Lumber & wood products were up 4.0. Petroleum & coal products jumped 18.5 percent while nonferrous metal prices were up 13.1 percent on the year. Scrap & waste prices soared 19.6 percent on the year. Offsetting these increases were a 5.9 percent decline on the year for information & communications equipment, a 2.8 percent drop in electronic components & devices and a 2.5 percent slide for electrical machinery & equipment.

June tertiary industry activity index jumped 1.9 percent on the month and 0.9 percent on the year. Contributing to the increase were wholesale & retail trade (up 2.9 percent), transport & postal activities (up 3.1 percent), living related & personal services & amusement services (up 4.2 percent), information & communications (up 1.7 percent), scientific research, professional & technical services (up 2.7 percent) and finance & insurance (up 1.0 percent). Other sub-categories that were up included medical, health care & welfare, miscellaneous services (except government services etc.), electricity, gas, heat supply & water and accommodations, eating & drinking services. Industries that declined included real estate & goods rental & leasing (down 0.8 percent, learning support (down 1.3 percent) and compound services (down 1.3 percent).

June core private sector machine orders excluding volatile items (orders for ships and from electric power companies) jumped 7.7 percent and were up 17.7 percent on the year. Manufacturing orders were up 9.3 percent while non-manufacturing orders jumped 15.7 percent. Orders from overseas dropped 5.9 percent after sinking 6.6 percent in May. Total machine orders received by 280 manufacturers operating in Japan increased by 5.6 percent in June from the previous month. In the July to September period the total amount of machinery orders was forecast to decrease by a quarterly 0.9 percent with private sector orders, excluding volatile ones, forecast to increase by 0.9 percent.

Australia

July employment edged down by 100. At the same time, the unemployment rate ratcheted up to 5.1 percent from 4.9 percent. The number of people employed was 11,450,500 in July. Full time employment declined by 22,200 jobs. This was offset by an increase in part-time employment of 22,100 people. The number of people unemployed increased by 18,000 people to 611,600 in July. The labour force participation rate was unchanged at 65.6 percent. Monthly aggregate hours worked showed an increase of 3.6 million hours to 1,621.4 million hours.

China

July consumer price index was up 0.5 percent on the month and 6.5 percent on the year. The CPI was up 6.4 percent in June and 5.5 percent in May. The urban CPI was up 6.2 percent while the rural CPI jumped 7.1 percent on the year. Once again, food prices jumped – up 14.8 percent after climbing 14.4 percent in June. Housing prices eased to an increase of 5.9 percent after rising 6.2 percent in June. Health care was up 3.6 percent after increasing 3.4 percent in the prior month. Other increases included non-food (up 2.9 percent), clothing (up 2.2 percent), tobacco & alcohol (up 2.8 percent) and household facilities (up 2.7 percent).

July producer prices were unchanged on the month and up 7.5 percent on the year. Raw materials procurement, fuel & power prices were up 11.0 percent while production materials rose 8.4 percent on the year. Within production materials, mining & exploration soared 18.1 percent while raw materials jumped 12.1 percent on the year. Consumer goods were up 4.8 percent from a year ago. Among consumer goods, daily goods were up 4.5 percent, food & related products jumped 8.6 percent, clothing & related products rose 4.5 percent while durable goods edged down 0.5 percent on the year. Ferrous metals were up 10.2 percent, non-ferrous metals rose 18.9 percent, fuel & power were up 12.6 percent and raw chemical materials gained 13.3 percent – all on the year.

July industrial production was up 0.9 percent and 14.0 percent on the year. Analysts expected an annual increase of 14.7 percent and below June’s output of 15.1 percent. Most sub-category output was below the month before. Only textiles and transport equipment increased year-on-year output at a greater rate than in June. Chemicals output eased to 14.9 percent from 15.8 percent on the year while non-metal minerals output was 18.8 percent from 19.8 percent the previous month. Electricity output was up 13.2 percent after jumping 16.2 percent in June. Output for crude oil, pig iron and raw steel were not available.

July retail sales were up 17.2 percent on the year after increasing 17.7 percent in June. Urban sales were up 17.3 percent while rural sales increased 16.4 percent. Sales eased for all sub-categories with the exception of gold, silver & jewelry and oil & oil products which were up 45.0 percent and 40.6 percent on the year respectively.

July merchandise trade surplus was $31.5 billion, up from $22.3 billion in June. On the year, exports were up 20.4 percent after increasing 17.9 percent in June. Imports gained 22.9 percent after climbing 19.3 percent the month before. For January through July 2011, the trade surplus increased $76.2 billion on the year compared with $83.9 billion in 2010. On a seasonally adjusted basis, exports were up 5.4 percent on the month after increasing 4.2 percent in June. Imports increased a much more modest 1.5 percent compared with a decline of 2.6 percent in June. On the year, seasonally adjusted exports were up 23.4 percent while imports grew by 28.2 percent.

Americas

Canada

June merchandise trade deficit widened to C$1.6 billion from a revised C$1.0 billion in May. Exports dropped 1.7 percent while imports edged down 0.2 percent. The decline in exports was largely the result of declines in energy products and automotive products. Volumes, which decreased 2.2 percent, were down in five out of seven sectors. Prices increased 0.5 percent and were up in all sectors except energy products. The merchandise import decline was led by energy products. Overall, prices fell 2.1 percent and volumes increased 1.9 percent. Exports to the United States declined 2.4 percent while imports fell 2.3 percent. Imports from countries other than the United States increased 3.1 percent to a record high of C$15.2 billion. Exports to countries other than the United States edged up 0.3 percent to C$10.0 billion. Canada's trade deficit with countries other than the United States widened from C$4.8 billion in May to a record C$5.2 billion in June. Exports of energy products as a result of lower volumes and prices declined 5.1 percent. Exports of automotive products fell 5.3 percent, largely the result of a 6.8 percent decline in passenger autos and chassis. Exports of agricultural & fishing products declined 2.3 percent. However, industrial goods & materials exports increased 0.9 percent on the strength of metals and alloys, and chemicals, plastics and fertilizers. Imports of energy products declined 11.7 percent. Volumes were down 6.1 percent while prices fell 6.0 percent. Crude petroleum imports fell 22.1 percent largely because of timing of shipment and plant shutdowns for maintenance. Imports of industrial goods & materials declined 0.5 percent while chemicals and plastics fell 2.6 percent.

Bottom line

Equities were very volatile with most indexes followed here lower on the week. U.S. data were mostly positive while in Europe, most were distinctly downbeat. The Federal Reserve, in its post-FOMC policy announcement, said that it would keep low interest rates until mid-2013 and was ready to act should growth falter. Officials in Europe scrambled to contain the spread of sovereign debt woes to larger member states including France.

French Prime Minister and German Chancellor Angela Merkel will meet in Paris to discuss the eurozone debt crisis on Tuesday. In Europe, German and eurozone flash second quarter gross domestic product are on tap, but otherwise it is a light week. In Asia, Japan will release its first estimate of second quarter GDP as well. The U.S. has high profile indicators dealing with housing, production and inflation on tap. But investors will be looking for some stability in trading after this extremely volatile week.

Looking Ahead: August 15 through August 19, 2011

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