Global Markets

Most equity indexes were higher last week, offsetting the previous week’s losses — and despite disappointments from central banks. Even though the Federal Reserve did not meet, investors hoped in vain for a signal from Ben Bernanke in his Congressional testimony that the Fed would be adding new stimulus when it next meets on June 19^th and 20^th. He disappointed markets by signaling that further action from the Fed is by no means certain unless the Eurozone crisis worsens.

Four major central banks were scheduled to announce policy decisions — but the People’s Bank of China surprised with an announcement of its own. Bank actions and inactions are summarized below.

Reserve Bank of Australia

The Reserve Bank of Australia lowered its key interest rate for a second consecutive month, by another 25 basis points after reducing it by 50 basis points in May. The key rate now stands at 3.5 percent. The potency of any RBA cut is likely to be diluted though — the country's commercial banks have in the past declined to pass on official rate reductions in full to their customers. As signs of deteriorating global growth increase, the RBA’s cut is seen as a preemptive move to buttress its economy and spark domestic activity.

Economists said the RBA is well placed to meet any coming storm in the world economy. Australia did not fall into recession during the 2008 financial crisis but now is being buffeted by the European crisis along with slowing growth in its major export markets — especially China. Recent economic data released prior to the meeting have disappointed. However, in data released later in the week, first quarter GDP expanded 1.3 percent — more than double expectations while employment gains swamped forecasts as well. Contrary to expectations of no employment growth during the month, employment jumped by 38,900 jobs — all full time.

Bank of Canada

As expected, the Bank of Canada kept its key monetary policy interest rate at 1.0 percent, 25 basis points above the 0.75 percent deposit rate and 25 basis points below the 1.25 percent bank rate. In explanation, the BoC highlighted the deterioration in the global economy, particularly in Europe since its last meeting but still indicated that a monetary tightening may become appropriate at some point. Indeed, with stronger than expected employment reports in both March and April (though not in the post meeting May report), core inflation just above the 2 percent the mid-point of the Bank’s inflation target range of 2 percent to 3 percent and spare capacity limited, the BoC would no doubt have been a good deal more hawkish but for the worrisome overseas picture.

European Central Bank

As expected, the European Central Bank kept interest rates unchanged and did not offer any radical plans to boost Eurozone growth. The ECB left its key refi interest rate at 1.0 percent and rates on the deposit and marginal lending facilities were also left on hold at 0.25 percent and 1.75 percent respectively. By keeping policy unchanged, the ECB is putting the onus on European governments to get their acts together and come up with a grand plan to address the sovereign debt crisis.

The ECB cut its interest rates to a record low in May 2009 and has since injected more than €1 trillion of three year loans into the banking system and bought €212 billion of government bonds. Now the ECB is reluctant to do more heavy lifting as member states procrastinate over the reforms it deems necessary to put the monetary union on a sustainable footing. ECB President Mario Draghi questioned the effectiveness of cutting rates further and flooding financial market with even more liquidity.

At his post meeting press conference Draghi offered little in the way of hope to those looking for any additional monetary accommodation in the near term. While acknowledging that downside risks to the real economy have increased, he signaled no significant changes to the ECB staff's growth forecasts for either this year or next. Draghi said the ECB stands “ready to act” should the debt crisis damp the Eurozone economy further. He also acknowledged that “a few” Governing Council members pushed for a rate reduction at its policy meeting.

Bank of England

The Bank of England kept its key bank rate at 0.5 percent and its asset purchase program at Stg325 billion at the conclusion of its June monetary policy committee meeting. However, the decision was almost certainly a very close call and surprised many analysts who had anticipated fresh monetary stimulus. Expectations for what would be the first cut in official interest rates since March 2009 and/or another increase in quantitative easing have grown steadily in recent weeks and many now see the Bank being forced to act over the next couple of months. The next Inflation Report will be published in August and should the Bank not move in July, the August meeting will attract considerable speculation. No details of the decision were announced. Rather, analysts will have to await the release of the minutes on June 20^th.

The decision signals that inflation worries are still paramount even as the UK struggles with government budget cuts, high unemployment and threats from Europe’s turmoil. While consumer price gains have eased to 3.0 percent in April from 3.5 percent in March, this is still above the BoE’s 2.0 percent inflation target. Britain’s economy contracted 0.3 percent for a second consecutive quarter in the first quarter.

People’s Bank of China

The People's Bank of China cut both its lending and deposit rates by 25 basis points to 6.31 percent and 3.25 percent respectively. These are the first rate cuts since the depths of the 2008 financial crisis. The consensus view had been that the PBoC would not cut interest rates in 2012 and instead cut banks’ required reserve ratio (RRR) to boost credit creation and deliver money supply growth in line with the 14 percent official target. The PBoC has cut RRR for the country's biggest banks by 150 basis points from a record high of 21.5 percent in three moves since November 2011 after tightening the RRR requirements during the previous two years as they tried to cool inflation and growth.

The PBoC said it was giving banks the freedom from June 8^th to set deposit rates as high as 110 percent of the benchmark rate and offer rates on new loans for as little as 80 percent of official policy rates, an additional 10 percentage points from the current 90 percent limit. Commercial banks until now have been barred from charging rates on deposits higher than the benchmark set by the central bank. With a deluge of data due over the weekend that includes all of the country's key barometers of investment and industrial activity, the move raised concerns that the PBoC is pre-empting grim news.

Global Stock Market Recap

Europe and the UK

After sinking last week, equities managed to rebound despite continuing downward pressures from Spain and the impending Greek elections. Investors were disappointed that the ECB did not act and that Federal Reserve Chairman Ben Bernanke, in testimony before the Joint Economic Committee of Congress, did not say what they were hoping to hear — namely that the Fed is planning to go ahead with a third round of quantitative easing.

The FTSE recorded two of three positive trading sessions in its holiday shortened week and was up 3.3 percent despite some disappointment Thursday that the Bank of England left its policy unchanged for another month. However, this was offset by the People’s Bank of China’s surprise interest rate cut. Elsewhere, the CAC, DAX and SMI advanced 3.4 percent, 1.3 percent and 1.6 percent respectively.

Fitch Ratings cut its rating on Spain's government debt by three notches to 'BBB' on Thursday and signaled it could lower it further by putting the country on negative outlook. The new rating is Spain's lowest among the three main ratings agencies. Fitch said that Spain is especially vulnerable to a worsening of the Eurozone crisis due to a high level of net foreign indebtedness.

Economic data released during the week mostly are worrisome. Especially disappointing are the drops in both manufacturing orders and industrial production in Germany. In addition, activity in the German construction sector as measured by the PMI for the construction sector slid to 44.7 in May from 49.8 in April. The mood did not improve with Friday’s merchandise trade report. German exports declined faster than expected in April as the deepening Eurozone crisis negatively affects demand from European countries. Signaling weakening domestic consumption, imports plunged at the fastest pace in two years.

Asia Pacific

The week ended as it began with equities declining. Hopes of fresh stimulus buoyed investors midweek, but ended in disappointment on Friday when none was forthcoming. The People’s Bank of China’s interest rate cut on Thursday set off alarm bells about the weekend’s release of the country’s major economic indicators. The results for the week were mixed with five of 12 indexes followed here gaining on the week. The Sensex jumped 4.7 percent while other increases were more subdued. The Shanghai Composite dropped 3.9 percent. Losses elsewhere ranged from 0.1 percent (All Ordinaries) to 1.5 percent (Taiex).

Economic data proved better than anticipated from Australia with a healthy increase in first quarter GDP and May employment. But the better than anticipated economic data were swamped as concerns over China's slowing growth and Germany's resistance to the introduction of eurobonds sparked risk aversion. Japan’s first quarter GDP data were revised upward to a gain of 1.2 percent on the quarter thanks in large part to a significant revision to non-residential capital spending. CAPEX declined a 2.1 percent on the quarter, substantially revised from a 3.9 percent plunge in the first estimate.

Currencies

The U.S. dollar was down against all of its major counterparts with the exception of the yen last week. Investors moved from the dollar as they became less risk averse. The euro was captive last week of events in Spain as it struggled to help its banks. The currency has fluctuated in line with moves to stem the contagion from the sovereign debt crisis. For example, the euro advanced Thursday after German Chancellor Angela Merkel said the nation is ready to back euro area financial instruments.

The yen weakened after China cut its key interest rates for the first time since 2008, dampening the appetite for safe haven assets. Meanwhile, the U.S. dollar pared losses after Fed Chairman Ben Bernanke refrained from signaling additional steps the Fed might take to spur growth during Congressional testimony. The pound rallied after the Bank of England kept stimulus plans on hold.

The euro rallied Friday on speculation that Spain may ask for European aid over the weekend. But on Friday, the Spanish government sought to dampen expectations that it would formally request financial aid to help recapitalize its banking sector as soon as this weekend. However, it acknowledged that it was contemplating the possibility of seeking outside help. The Spanish government is working with the IMF and the evaluators about the figure that would be needed by the financial system to carry out a complete reorganization of the sector according to Spain's Deputy Prime Minister. He said that no decision has been made in any sense and that one has to respect the process and wait for the reports of the IMF and independent auditors.

Selected currencies — weekly results

Indicator scoreboard

EMU

May services PMI was revised up 0.2 points to 46.7 from the earlier flash estimate but still shows business activity contracting and at a slightly faster rate than in April (46.9). New orders declined and outstanding business was pared again while headcount also shrunk. Germany at least held relatively firm (a weaker revised 51.8) but at 45.1 and a seven month low, the French sector underperformed again while Italy (42.8) continued to struggle and Spain (41.8) saw its worst performance since November 2011. Combined with the marginally firmer revised manufacturing PMI results, today's figures make for a composite output index of 46.0, down from 46.7 in April. This was the fourth consecutive reading below the key 50 growth threshold and indicative of what should be the steepest fall in output since June 2009.

First quarter revised gross domestic product confirmed last month's flash estimate that showed the economy stagnating in the first quarter after a 0.3 percent contraction at the end of 2011. Annual growth slipped 0.1 percent after increasing 0.7 percent in Q4. The first look at the GDP expenditure components served to underline the sluggishness of private domestic demand and the reliance upon exports to prevent the economy from sliding back into technical recession. Household consumption was flat on the quarter after a 0.5 percent drop last time while private fixed capital formation followed a 0.4 percent fourth quarter loss with a still steeper 1.4 percent decline. Government consumption was up 0.2 percent after two successive quarterly declines and business inventories subtracted 0.2 percentage points from the bottom line. Net foreign trade provided the only significant positive impetus. With export volumes rebounding 1.0 percent on the quarter (down 0.7 percent in Q4) and imports edging just 0.1 percent firmer (down 1.7 percent), net trade contributed 0.4 percentage points to quarterly growth and without which the economy would have shrunk. Regionally it was the 0.5 percent quarterly gain in Germany that in large part prevented a fall in total Eurozone output. With France flat, Italy down 0.8 percent and Spain off 0.3 percent, the other larger economies all struggled. However, a few of the smaller member states also performed well, notably Finland (0.8 percent) and Slovakia (0.7 percent).

April retail sales volumes excluding autos dropped 1.0 percent on the month to leave the level of purchases 2.5 percent lower on the year. The latest decline followed an unrevised 0.3 percent increase in March. The headline drop would have been worse but for a 0.3 percent monthly gain in food, drink & tobacco purchases (ex-auto fuel) which helped to mask a 1.4 percent slump in non-food demand. The data were helped by a sizeable positive contribution from Germany where a 0.6 percent monthly increase followed a 1.6 percent gain in March. Elsewhere there were hefty declines in France (1.5 percent) and Spain (2.4 percent) as well as in Austria (3.5 percent), Slovenia (2.9 percent), Finland (1.8 percent) and Portugal (2.1 percent). Portuguese volumes were 9.3 percent weaker than in April 2011, the sharpest annual fall of any country providing updated figures.

Germany

April manufacturing orders dropped 1.9 percent after a sharply stronger revised 3.2 percent monthly jump in March. Compared with a year ago, workday adjusted orders were down 3.8 percent, a sharp deterioration from the 0.2 percent annual drop recorded last time. The disappointing April headline was attributable to weakness in capital goods and consumer & durables goods which registered monthly losses of 3.3 percent and 5.0 percent respectively. By contrast, basics were up 0.9 percent on the month but this only partially reversed March's 1.2 percent slide. Domestic orders posted a 0.4 percent monthly increase after a 1.8 percent advance last time. Rather the decline in the headline was due to a 3.6 percent monthly decline in foreign orders within which the Eurozone was down 1.8 percent and non-Eurozone, 4.7 percent.

April industrial production dropped 2.2 percent, unwinding a smaller revised 2.2 percent advance in March. On the year, annual workday adjusted production was down 0.7 percent, down 2.1 percentage points from the March rate. Apart from energy, the headline drop reflected weakness across the board. A 3.7 percent monthly plunge in consumer goods was all but matched by capital goods (down 3.6 percent) while intermediates were off 0.4 percent. Energy output was up 2.4 percent from March but construction maintained its recent highly volatile pattern with a 6.0 percent slump.

April seasonally adjusted merchandise trade surplus expanded from an upwardly revised €14.0 billion in March to a significantly larger than expected €16.1 billion. The unadjusted surplus was €14.4 billion, down from €17.4 billion last time. However, the surprise improvement in the headline print masked a contraction in both sides of the balance sheet. Nominal exports were down 1.7 percent from the end of last quarter, their first monthly decline so far this year, while imports dropped a hefty 4.8 percent to their lowest level since December. Annual export growth at least remained positive (3.4 percent) albeit well short of the rates seen throughout 2011 but imports (down 1.0 percent) registered their first decline since December 2009. Weakness in overseas demand was again concentrated in the other Eurozone members where purchases of German output were down 3.6 percent from April 2011. By contrast, exports to the non-EU bloc were up 10.3 percent.

France

First quarter mainland unemployment rate climbed to 9.6 percent, up from a slightly lower revised fourth quarter reading of 9.3 percent. This was its highest level in more than 12 years and 0.4 percentage points above its level a year ago. Including overseas territories, the rate climbed 0.2 percentage points on the quarter to 10.0 percent. In Metropolitan France the number of people out of work now stands at 2.746 million, up 86,000 from the fourth quarter which saw a more modest 46,000 advance.

April seasonally adjusted merchandise trade deficit was €5.8 billion, little changed from a minimally smaller revised €4.6 billion deficit in March. Exports were up 1.8 percent on the month and would have been stronger still but for sluggishness in the aeronautics area and a fall in refined petroleum sales. Imports were up 2.1 percent from March to stand just 1.1 percent short of the record peak established in February. Energy products and intermediate goods and equipment were the principal driving forces here.

United Kingdom

May producer output prices were down 0.2 percent and were up 2.8 percent on the year. Input prices dropped 2.5 percent on the month and edged up just 0.1 percent above the year ago level. Most of the decline in output prices was due to a hefty 3.0 percent decline in petroleum products and alone subtracted 0.3 percentage points off the overall change. Elsewhere prices were much more stable, ranging between a 0.4 percent increase in food and a 0.1 percent dip in chemicals & pharmaceuticals. Consequently the core output price index was unchanged from its April level, although this still provided for a 0.2 percentage point slide in the annual underlying rate to 2.1 percent. Input costs were similarly dominated by the energy sector, in this case a 7.7 percent monthly decline in the cost of crude oil. This was compounded by a 2.7 percent decline in imported metals and a 1.4 percent drop in fuel. On the upside the steepest rise was recorded by the other home produced materials category (0.9 percent) followed by home food materials (0.8 percent) and imported chemicals (0.6 percent).

Asia/Pacific

Japan

First quarter gross domestic product was revised upward to a gain of 1.2 percent from the initial estimate of 1.0 percent on the quarter. On the year, GDP was up a revised 2.7 percent from 2.6 percent. On an annualized basis, GDP was up 4.7 percent from 4.1 percent. Domestic demand was slightly stronger — up 1.0 percent on the quarter, up from 0.9 percent. Private demand was revised up to 0.9 percent from the original 0.6 percent. Private consumption, which accounts for about 60 percent of GDP, was revised upward to 1.2 percent from the original 1.1 percent. However, private non-residential investment (CAPEX) was down 2.1 percent, not quite as onerous as the original drop of 3.9 percent. Net exports contributed an unrevised 0.1 percent to quarterly growth while domestic demand contributed 1.0 percent. CAPEX subtracted a revised 0.3 percent (0.5 percent last time).

Australia

First quarter gross domestic product was up a much better than anticipated 1.3 percent from the previous quarter and up 4.3 percent from the same quarter a year ago. Growth in the previous quarter was revised upward to a quarterly increase of 0.6 percent and an annual increase of 2.5 percent. Analysts expected GDP to be up a modest 0.5 percent and 3.3 percent on the year. Quarterly growth was driven by a 1.0 percent contribution from final consumption expenditure and a 0.9 percent contribution from business investment. The increases were partially offset by net exports which subtracted 0.5 percent and dwelling investment which subtracted 0.1 percent. Industries including mining (up 2.3 percent), professional, scientific & technical services (up 2.8 percent) and financial & insurance services (up 1.7 percent) each contributed 0.2 percentage points to growth.

May unemployment rate was 5.1 percent, up from 5.0 percent in April. However, employment increased by 38,900 to 11,537,900. The increase in employment was where you want to see it — it was driven by full time employment, up 46,100 to 8,107,900. It partially was offset by a decline in part time employment, down 7,200 to 3,430,100. At the same time, the number of people unemployed increased by 22,400 people to 622,800 in May. There was also an increase in the labour force participation rate of 0.3 percentage points to 65.5 percent.

April merchandise trade deficit eased to A$203 million from a revised A$1.3 billion the month before. Exports were up 3.3 percent while imports declined 0.9 percent. Exports of non-rural goods were up 4 percent while rural goods were 3 percent higher. Non-monetary gold slipped 2 percent. Imports of intermediate and other merchandise goods declined 5 percent and (non-monetary gold dropped 10 percent. Capital goods were 2 percent higher while consumption goods edged up 1 percent. Services increased 2 percent.

Americas

Canada

May employment growth slowed quite sharply to a 7,700 increase on the month and well short of the unrevised 58,200 increase seen in April. The jobless rate was unchanged at 7.3 percent. Full time jobs expanded just 1,400 while short term positions were up a slightly firmer 6,300. However, growth was concentrated in the public sector, where headcount climbed nearly 7000, and in the self-employed (23,300). By contrast, private jobs were off 22,500. The goods producing sector wholly accounted for the headline gain in employment. Within an 11,100 advance here, manufacturing led the way with a very respectable 36,400 increase and was supported by a 10,700 gain in agriculture. However, the other sub-sectors struggled, notably construction which registered a 27,000 decline. Services shed 3,400 positions. In the main this reflected losses in information, culture & recreation (27,300) and professional, scientific & technical services (12,500) although there were also declines in finance, insurance, real estate & leasing (9,200) as well as business, building & other support services (9,100). Gains of any note were restricted to educational services (25,760), trade (23,600 and other services (6,500).

April seasonally adjusted trade deficit was C$0.37 billion. This compared with a smaller revised C$0.15 billion surplus in March and constituted the first deficit after five successive small monthly surpluses. The deterioration mainly reflected a 1.2 percent monthly drop in exports (U.S. also down 1.2 percent) as imports edged up just 0.1 percent (U.S. up 1.3 percent). The U.S. bilateral surplus narrowed from C$4.5 billion in March to C$3.8 billion. Within the overall monthly decline in sales overseas, industrial goods & materials were down 5.8 percent and machinery & equipment 3.1 percent. The only other decline was in energy (0.8 percent). Other categories all saw decent gains, led by agriculture & fishing (3.8 percent) and autos (2.8 percent). Imports were held in check by a 6.8 percent slump in the energy sector. The only other drops were recorded by agriculture & fishing (1.6 percent) and machinery & equipment (0.6 percent). Amongst the other sub-sectors, forestry (3.2 percent), autos (2.6 percent) and the other consumer goods area (2.6 percent) all managed decent monthly gains.

Bottom line

The week was dominated by central bank activities as investors fretted about slowing economic growth. The festering problems with Spanish banks also put investors on alert. Economic data in Europe disappointed while data from Australia surprised on the positive side.

Tensions will build as investors await the June 17^th Greek election. But they will also be awaiting the results of France’s parliamentary elections scheduled for June 10^th and June 17^th to see if President François Hollande will get a majority. The Bank of Japan meets at the end of the week.

Looking Ahead: June 11 through June 15, 2012

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