Global Markets

Most indexes were down last week as worries concerning the European sovereign debt situation and specifically escalating woes in Spain and to some extent Italy, sent investors fleeing to safe havens. The impact of the crisis has begun to emerge as countries from India and China to those in Europe and North America begin to record slower growth — and some slide into recession. Only one index followed here — the KLCI — managed to record a gain for the month of May. Losses ranged from 13.1 percent for the IBEX to 1.0 percent for the Shanghai Composite.

If you are looking for proof that the global economy is slowing down, one merely needs to check on the manufacturing PMIs that were released Friday. All of the indexes tracked here were lower on the month with the exception of Japan which was unchanged. And although India and the U.S. posted readings comfortably above the 50 breakeven point between growth and contraction, both were weaker in May.

In the Eurozone, the manufacturing PMI slipped to a reading of 45.1 from 45.9 the month before and suggests that the region’s goods producing sector was again suffering — not only was the headline index worryingly far beneath the key 50 growth threshold, but it was also at its lowest level in some 35 months. Particularly worrying is the apparent on-going deterioration in the France and Germany which, if accurate, suggests that economic stabilization in the region as a whole is well wide of the mark. For the core economies, the German index dropped a further point to a 35-month low of 45.2 while the French index performed even worse, shedding more than 2 points to just 44.7. Italy managed a small increase but at only 44.7, remained far enough below 50 to make no difference and Spain was weaker still, down another 1.5 points to 42.0, a 36-month low and now even beneath Greece (43.1).

In the UK, the PMI declined much more sharply than expected, losing some 4.3 points from a slightly softer revised April reading to 45.9, its lowest level since May 2009. The first contraction in production in six months reflected both a weaker global economy and a subdued domestic market. Job losses were reported for the first time in five months while inflationary pressures eased with increases in both input costs and factory gate prices slowing over the month. A reading for the U.S., as posted for the first time by Markit Economis, was 54.0, 2 points under April’s reading of 56.0.

Global Stock Market Recap

Europe and the UK

What a difference a week makes! Last week, all the major indexes advanced with the exception of Spain. This week they all crumbled with declines ranging from 1.5 percent (SMI) to 7.3 percent (IBEX). Elsewhere, the FTSE lost 1.7 percent, the CAC dropped 3.2 percent and the DAX slid 4.6 percent. The indexes were dragged down by weak global economic data as investors fled to safe havens — U.S. and German bonds.

Signs that the Eurozone economy is weakening further have added to investor angst that the region will struggle to escape its debt crisis intact. European data were particularly troubling. The data showed that it will make it more difficult to rectify the debt situation if the economies are contracting. Equity results for the month of May were abysmal — losses ranged from 4.0 percent (SMI) to 11.9 percent and 13.1 percent for the MIB and IBEX respectively. The FTSE dropped 7.5 percent, the CAC slid 6.1 percent and the DAX sank 7.3 percent.

The damage to the real economy caused by the region's financial and political crises continues to escalate and spread across the region. A further decline in the manufacturing PMIs and a climb in the number of jobless people to a fresh record since the series began in 1995 of 11 percent suggest that the region's economy will continue to flounder in the second quarter as its debt crisis deepens. The bad news — especially when combined with disappointing U.S. and Chinese data — sent equities and the euro tumbling. While the euro appeared to be recovering somewhat, stocks did not.

On Thursday, European Central Bank President Mario Draghi said that the ECB cannot fix the turmoil in the currency bloc and urged Eurozone leaders to come up with a 'vision' for years ahead. Speaking as the Chairman of the European Systemic Risk Board, Draghi called for centralization of financial sector regulations. Draghi also hinted that he supports the direct injection of capital into banks by the permanent rescue fund.

In his sharpest criticism yet of Eurozone leaders' handling of the crisis, Draghi urged them to spell out detailed plans for the euro and fiscal cooperation, something he believes will require governments to surrender some of their sovereignty to succeed. "How is the euro going to look like a certain number of years from now' What is the union vision that you have a certain number of years from now' The sooner this is specified, the better it is," Draghi said.

Asia Pacific

Gains on Monday and Tuesday were offset in most cases by daily losses for the remaining part of the week. Weekly results therefore, were mixed with six indexes rising on the week and six declining. Gains ranged from 0.6 percent (Taiex) to 2.6 percent (PSEi). Losses ranged from a decline of 0.8 percent for the Hang Seng to 2.6 percent for the Jakarta Composite. For the month of May, all indexes with the exception of the KLCI declined. May losses ranged from the Hang Seng’s 11.7 percent slide and the Nikkei’s 10.3 percent swoon to the Shanghai Composites 1.0 percent decline.

Equities declined on the news from Europe and specifically Spain this time. This was compounded by weaker than expected economic data globally. In this region, China’s declining PMIs — both the ‘official’ CFLP and the HSBC/Markit — showed that growth in manufacturing was contracting at a more rapid pace than anticipated. In Japan, industrial production in April, while showing a modest gain, was still weaker than expected as the buying crunch continues to shrink exports and in turn, production. In Japan, the stronger yen is negatively affecting exporters as well.

The official China purchasing managers index fell to 50.4, down from 53.3 in April and lower than a forecast 51.5, pointing to a slowdown in activity. HSBC's competing measure came out at 48.4 in May, a contraction for the seventh straight month, from 49.3 in April. A score below fifty suggests decreasing activity. In every month of 2012 so far, the two different PMIs have been on different sides of the 50 mark that separates growth from contraction. Hopes for a Chinese stimulus package, which was partly responsible for the rally in Asian stocks at the beginning of the week, were moderated by a Xinhua News Agency analysis saying the government would not launch anything on the scale of what it rolled out to fight the 2008 global financial crisis.

India’s economic growth weakened to a nine-year low in the first quarter, hurt by an investment slowdown that has undermined the rupee and jeopardized Prime Minister Manmohan Singh’s development agenda. Gross domestic product was up 5.3 percent in the three months ended March from a year earlier, compared with 6.1 percent in the previous quarter. Singh faces a struggle to bolster expansion as Europe’s debt crisis dims the global outlook while elevated inflation and a record trade deficit limit room for interest rate cuts to boost spending at home.

Currencies

Worries about the situation in Europe sent the euro below the $1.24 level during the week as investors fled to the safe harbors of the U.S. dollar and the Japanese yen. However, the euro rebounded Friday amid speculation that it declined too quickly and Spanish bond yields eased for a second day. The U.S. employment data proved to be positive for the euro, which had earlier sold off as figures showed the Eurozone was still grappling with record levels of unemployment.

The yen advanced on the week against most of its major counterparts as investors fled to the currency as a safe haven. It climbed Friday after the below expected increase in U.S. employment. Japan’s currency climbed to its strongest in almost four months against the dollar as the premium between the yield on 10-year Treasury notes and that of similar-maturity Japanese debt fell to the lowest level on record. Trading in the Japanese yen was particularly volatile on Friday, with traders and analysts on intervention watch amid expectations the Bank of Japan may intervene in the markets to weaken the currency — Japanese policy makers are not pleased with the continuing strength of the yen.

The dollar sold off against other major currencies as well on the poor employment report. It increased expectations of further monetary easing by the Federal Reserve. US non-farm payrolls data showed that just 69,000 jobs were created in May, much less than the 150,000 expected, and extending the recent trend of weaker employment statistics.

Selected currencies — weekly results

Indicator scoreboard

EMU

April M3 money supply was up 2.5 percent on the year. The three month moving average preferred by the ECB was unchanged at a sluggish 2.7 percent. The headline data would have been weaker still but for continued strength in lending to general government which, at a 7.7 percent 12-month rate, was up another 0.2 percentage points from its start of quarter rate. By contrast, lending to the private sector was up just 0.3 percent on the year after a 0.6 percent gain last time and within this loans to households slowed from 0.6 percent to 0.5 percent and for house purchase to 1.0 percent from 1.1 percent. Borrowing by non-financial corporations edged up 0.2 percentage points to a 0.5 percent annual rate while lending to non-monetary financial intermediaries (excluding insurance corporations and pension funds) dropped from 2.3 percent to minus 1.5 percent.

May economic sentiment slid to a reading of 90.6 from 92.9 in April and its weakest level since October 2009. Among the components morale fell 2.3 points to minus 11.3 in industry, 2.5 points to minus 4.9 in services and a hefty 7 points to minus 18.1 in retail. Confidence in construction also declined, down 2.6 points to minus 30.1 and leaving just the consumer sector to post a modest 0.6 point gain to minus 19.3. All these measures are well below their historical norms. Sentiment dropped in all of the four larger EMU states led by Italy (down 4.3 points). France was down 1.5 points, Germany 1.4 points and Spain 1.0 point. Once again only Germany was above its long-run average. Among the other more financially troubled members, morale in Greece posted a 1.3 point drop and Portugal a 1.5 point decline. There was also bad news out of Cyprus where confidence lost another 1.5 points to 74.7, unwinding most of April's bounce and leaving the index just 0.6 points above March's all-time low.

May flash harmonized index of consumer prices increased 2.4 percent on the year from 2.6 percent in April and was the lowest since February 2011. Details on the core rates will be released on June 14, but national data from some of the member states suggest that any deceleration here will be less marked as today's headline benefited from weaker energy prices. Regionally headline inflation eased a notch in both Germany (2.1 percent) and Spain (1.9 percent) and dropped 0.2 percentage points in Italy (3.5 percent).

April joblessness was up 110,000, lifting the number of people out of work to 17.4 million but leaving the unemployment rate unchanged at March's upwardly revised 11.0 percent. In March joblessness was up 133,000. As usual the headline data would have looked a good deal worse but for Germany where the unemployment rate edged down a notch to 5.4 percent according to Eurostat calculations. By contrast, France and Italy both saw a 0.1 percentage point increase to 10.2 percent while Spain posted a 0.2 percentage point increase to 24.3 percent and now stands within touching distance of the all-time high seen eight years ago. The Portuguese rate was a tick higher at 15.2 percent but Ireland bucked the trend by registering a 0.2 percentage point drop to 14.2 percent, its fourth consecutive monthly decline.

Germany

May unemployment rate edged down to 6.7 percent from 6.8 percent due to a decline in the labor force. The level of unemployment was virtually unchanged at 2.872 million. However, the originally reported 10,000 increase in the number of people out of work in April was revised up to 18,000, more than offsetting the 13,000 decline recorded in March. The lagging employment figures showed continued sluggish growth in April, a 29,000 increase on the month that is up slightly from March's 27,000 gain but still the second smallest rise since September.

April retail sales were up 0.6 percent and up 1.4 percent on the year (workday adjusted). The April gain left purchases 1.5 percent above their first quarter mean and bodes well for household spending and real GDP growth in the second quarter.

France

April household spending on manufactured goods dropped 1.3 percent and was 1.6 percent lower on the year. Total spending was down 0.6 percent but was up 0.4 percent on the year. The textiles area was hit especially hard with sales down 8.2 percent on the month after declines of 2.2 percent and 0.3 percent in February and March respectively. Autos also struggled, registering a 2.0 percent monthly slide and food purchases were down 0.5 percent while the other manufactured goods category declined 1.0 percent. However, having plunged nearly 12 percent on the month in March, energy consumption rebounded with a 10.2 percent surge last month. In line with much of Europe, the energy sector has been particularly volatile since February due to sharp swings in the weather.

April producer prices were unchanged on the month and 2.7 percent higher on the year. The cost of coke and refined petroleum products dropped 1.4 percent while other manufactured products declined 0.1 percent monthly (textiles down 0.5 percent). Elsewhere, food and drink prices were up 0.3 percent, mining & quarrying & utilities were 0.5 percent higher and electrical equipment was up 0.2 percent. Transport equipment registered no change.

Asia/Pacific

Japan

April unemployment rate edged up to 4.6 percent from 4.5 percent in March. The number of unemployed persons was 3.15 million, a decline of 140,000 from a year ago. April employment dropped 270,000 on the year 62.75 million. This was the fifth consecutive decline in employment.

April household spending was up 2.6 percent when compared with a year ago. Spending was up for all categories with the exception of housing which was down 15.6 percent from a year ago. Medical care spending slid 7.5 percent from a year ago while clothing and footwear edged down 0.7 percent on the year. Spending increased for education (16.7 percent) and transportation & communication (16.1 percent). Food spending was up 2.1 percent while furniture & household utensils saw a 3.0 percent increase. Culture & recreation was 0.6 percent higher on the year.

April retail sales were up 5.8 percent from a year ago. This was the fifth consecutive increase in a row. March retail sales were up an unrevised 10.3 percent. Auto sales continued to jump – they were up 55.6 percent from a year ago after gaining 50.4 percent in March. Fuel sales were up 7.7 percent after increasing 6.1 percent the month before. However, retail machinery sales dropped 18.3 percent after losing 12.2 percent in March.

April industrial production edged up 0.2 percent and was up 13.4 percent on the year. Transport equipment (up 6.5 percent), chemicals excluding drugs (up 4.4 percent) and electrical machinery (up 3.9 percent) were up on the month. Commodities that contributed to the increase included large passenger cars (up 9.8 percent), chassis & body parts (up 13.3 percent) and drive, transmission & control parts (up 5.2 percent). However, information & communications electronics equipment slid 19.5 percent and electronic parts & devices dropped 7.8 percent on the month. The report also showed that companies expect output to fall 3.2 percent in May from the previous month and then rise 2.4 percent in June. METI maintained the tone of its assessment of industrial production, saying it is recovering

Australia

April retail sales dropped 0.2 percent after increasing 1.1 percent in March. On the year, sales were up 2.4 percent. Household goods retailing was down 0.8 percent, other retailing was 0.7 percent lower, department stores slid 1.0 percent and clothing & footwear & personal accessory retailing edged down 0.1 percent. Sales in cafes, restaurants & takeaway food services were up 0.4 percent and food retailing was 0.1 percent higher.

Americas

Canada

April industrial product price index was unchanged on the month and up 0.4 percent on the year. Raw materials costs were much weaker and down 2.0 percent and plunged 13.6 percent compared with a year ago. The IPPI was boosted on the month by gains in chemicals (1.7 percent) and petroleum & coal products (0.4 percent). Elsewhere prices were generally weak, notably primary metals which dropped 2.1 percent. Meat, fish & dairy products (down 0.5 percent) and miscellaneous non-manufactures (down 0.6 percent) also posted significant declines but most other categories saw prices little changed on the month. As usual, the RMPI was dominated by the mineral fuels sector which posted a 2.8 percent monthly decline. Excluding this category the RMPI was down 1.3 percent from March and dropped 5.6 percent on the year. The other main areas of weakness were in non-ferrous metals, where prices were down 3.0 percent on the month, and animal & animal products (down 1.9 percent). On the upside, vegetable products (1.4 percent) and ferrous materials (1.2 percent) both recorded sizeable gains.

First quarter gross domestic product was up 0.5 percent on the quarter and up 1.8 percent on the year. GDP was up at an annualized pace of 1.9 percent. The increase in total output last quarter was led by business investment in plant and equipment which expanded 1.2 percent compared with the previous period and a 2.9 percent bounce in housing investment. Household spending was up a much more modest 0.2 percent and government consumption was down 0.4 percent. Final domestic demand grew just 0.3 percent while non-farm inventories rose quite sharply. Net exports were up just 0.6 percent on the quarter, little more than half the 1.1 percent increase in import volumes. In terms of the major output sectors, the goods producing area saw a 0.3 percent quarterly contraction, masking a 0.5 percent advance in manufacturing and reflecting more a 0.7 percent drop in energy. Construction gained 1.2 percent. Services expanded 0.5 percent, mainly thanks to wholesale trade (2.0 percent) and finance and insurance, real estate & renting (0.7 percent). Retail trade was up a minimal 0.1 percent and information & communication gained 0.4 percent but transportation & warehousing fell 0.2 percent.

March monthly GDP edged up just 0.1 percent after declining 0.2 percent in February. On the year, monthly GDP was up 1.6 percent. The gentle pick-up in total output came about despite a 0.1 percent monthly slide in the goods producing sector. Manufacturing (0.9 percent) enjoyed a good month after back-to-back declines and construction performed well also (0.8 percent). However, gains here were more than offset by a 1.6 percent slump in mining & oil & gas extraction and a 0.9 percent slide in utilities. Services grew 0.2 percent from February with most sub-sectors reporting modest increases. Wholesale trade (0.7 percent) and accommodation & food (0.9 percent) led the way but retail trade (0.6 percent) held up well as did arts, entertainment & recreation (0.6 percent). The only real area of weakness was education (down 0.8 percent).

Bottom line

A deluge of economic data failed to ease global growth concerns. Rather the data intensified fears that the weakening in Europe’s economies is spreading not to just other Eurozone member states but countries around the globe.

Focus this coming week will be on central bank policy decisions. Among the banks scheduled to meet are the Reserve Bank of Australia, Bank of Canada, Bank of England and the European Central Bank. Merchandise trade and industrial output data dominate new data releases. Investors will be monitoring polls as they await the new elections in Greece (June 17) and the parliamentary elections in France (June 10 and June 17).

Looking Ahead: June 4 through June 8, 2012

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