Global Markets

Equities were mostly lower last week as investors waited in vain for clues to new stimulus from the Federal Reserve. Stocks declined when no roadmap was unveiled. Anxiety built during the week as the markets awaited a slew of Chinese data that were scheduled for release. Equities in the Asia Pacific region were mostly lower for the week while those in Europe and the UK were mixed. U.S. indexes were mixed — the S&P was up, the Nasdaq lower and the Dow virtually unchanged.

Global growth worries trumped most other news during a week that offered little new economic data with the exception of the flow from China. Investors were concerned about the impact of the Eurozone debt crisis on earnings as the season began.

The June FOMC meeting which also included a press conference from Fed Chairman Ben Bernanke left little to the imagination of Fed watchers. But hope springs eternal and investors parsed the minutes for new information. Fed officials were split on whether, how and when to act. That suggests that a third round of quantitative easing is still some way off. Given a recent run of disappointing U.S. economic data, expectations had been building that there would be talks of a bond buying stimulus program.

Now that the much awaited Chinese data have been released and have relieved investors’ worries for now, focus from what the Fed might do has shifted to what the People’s Bank of China might do to encourage growth after lowering policy interest rates in June and July. While the 7.6 percent annual increase in growth confirms that China is growing at its slowest pace in three years, but at the same time it increases hopes for more stimulus. China's easing CPI and PPI give room for an interest rate reduction and that is more important for equity markets going forward.

To illustrate that central banks still have the power to surprise/shock watchers, the Bank of Korea lowered its key interest rate Thursday — the move was totally unanticipated by the markets. Markets in Asia declined on the news.

Global Stock Market Recap

Europe and the UK

Shares rallied Friday, enough for the FTSE, CAC and DAX to reverse losses incurred earlier in the week. The indexes were up 0.1 percent, 0.4 percent and 2.3 percent respectively. The SMI was virtually unchanged on the week. However, the Italian MIB and Spanish IBEX could not totally erase their losses and were down 0.1 percent and 1.1 percent respectively. Equities rallied after growth concerns were eased by China's second quarter GDP result that met expectations of a 7.6 percent increase when compared with the prior year. Mining and energy stocks rallied on the news. The markets were largely able to shrug off a downgrade of Italy's credit rating by Moody's.

Along with Europe’s continuing sovereign debt troubles, investors here kept a wary eye on the latest slew of Chinese economic data and the minutes of the last FOMC meeting. Investors were disappointed when the FOMC minutes indicated that the Fed would not launch another round of quantitative easing soon. Even a bounce in Eurozone industrial production for May failed to improve the mood as analysts continue to think there will be a contraction in the region's economy in the second quarter. A surprise interest rate cut from the Bank of Korea also heightened growth concerns.

The risks surrounding the economic outlook for the euro area continue to be on the downside according to the European Central Bank’s monthly bulletin. Downside risks relate to a renewed increase in the tensions in several euro area financial markets and their potential spillover to the euro area real economy. Another risk is an increase in energy prices over the medium term. The amount of overnight cash deposits of financial institutions at the European Central Bank more than halved after the bank cut the overnight deposit rates to zero on July 5^th.

Asia Pacific

Most equities in this region were down on the week as Friday’s rallies after the release of China’s much anticipated economic data were in line with analysts’ expectations. However, the daily increases were not enough to offset losses incurred earlier in the week. Losses ranged from 3.6 percent (Hang Seng and Taiex) to 0.9 percent (Jakarta Composite). The KLCI and SET were up 0.9 percent while the STI was 0.6 percent higher.

Aside from concerns about the ongoing European debt situation and slowing growth, traders were very nervous about the week’s data from China — especially after the People’s Bank of China cut its key interest rates just prior to the data’s release. Friday’s release showed that second quarter growth met expectations of 7.6 percent on the year — a three year low. It was the sixth consecutive quarter of declining growth. Separate reports showed slowing retail sales and industrial production growth. Industrial production slipped to 9.5 percent from 9.6 percent in May, while retail sales were up 13.7 percent in June, down from 13.8 percent in May. The growth figures were the finale to a week of poor Chinese economic data as lower inflation was taken as a sign that the economy was slowing and weak import growth as a signal that domestic demand is weakening.

Bank of Japan

As expected, the Bank of Japan’s monetary policy board left its key interest rate range at zero to 0.1 percent. It also held off on a further increase in its asset buying program. The Bank has not expanded its asset buying program since its meeting on April 27^th. The program includes purchases of corporate debt and exchange traded funds in addition to government bonds, and is intended to lower longer term interest rates to spur business investment.

The BoJ set the 1.0 percent inflation target and eased policy in February. It followed up with additional stimulus in April to show its determination to re-inflate an economy out of deflation. It has left policy unchanged since then and appears reluctant to boost its asset buying and lending program too hastily. The BoJ upwardly revised its assessments of all nine regional economies in the country compared with three months earlier last week. It was the first such move in nearly three years.

The BoJ, however, did amend some parts of its asset purchasing program in an apparent effort to enhance its easing effects within the existing framework. To prevent bidding shortfalls when conducting the program, the BoJ reduced the provision of fixed rate funding through market operations by ¥5 trillion while raising the amount earmarked for treasury bill purchases by ¥5 trillion instead.

BoJ Governor Masaaki Shirakawa said at his post meeting press conference that the Bank is not thinking of following the European Central Bank in lowering the interest rate on excess reserves held at the BoJ. "Cutting the rate to zero could lower market functioning significantly and could hurt the sense of security among financial firms about fundraising in the market," Mr. Shirakawa said. Mr. Shirakawa added that the BoJ's policymaking is not "automatically linked" to the policies of other global central banks.

Bank of Korea

The Bank of Korea unexpectedly cut its benchmark interest rate by 25 basis points to 3.0 percent on Thursday. South Korea’s central bank surprised economists by cutting the base interest rate for the first time since February 2009, in response to global monetary easing and deteriorating growth prospects at home and internationally. The BoK moved to support the economy amid growing external uncertainty stemming from Europe's sovereign debt crisis.

The rate cut was the first since a 50 basis point cut in February 2009. Earlier this month, the government cut its 2012 forecast for exports, which account for about half of the country's economic growth, to a gain of 3.5 percent compared with a projection in January of 6.7 percent. In 2011, Korea's exports grew 19 percent. Analysts say there is not much room for the BoK to pursue further monetary easing this year beyond the latest cut given elevated inflation expectations.

Currencies

The U.S. currency was mixed against its major counterparts last week. The U.S. dollar was up against the euro and Swiss franc, down against the Canadian dollar and yen and unchanged against its Australian counterpart. The euro, after sinking to a more than two year low, advanced Friday amid speculation that global central banks will take more action to sustain faltering economic growth. One reason for Friday’s euro rebound was a successful Italian auction that came on the heels of a sharp downgrade from Moody’s. There also was a sense of relief that China’s growth data was not as bad as some feared.

Moody's downgraded Italy's credit rating by two notches, citing contagion risk from Greece and Spain, higher funding costs and a deteriorating economic outlook. Italy's government bond rating was cut to Baa2 from A3. The agency maintained the 'negative' outlook on the rating, citing substantial risks to implementing the planned fiscal reforms. However, Italy saw its three year borrowing costs decline at a debt auction on Friday, just hours after the downgrade. Falling yields at the auction indicate that investors shrugged off Moody's warning and retained the optimism derived from the latest EU summit and Spain's efforts to meet its deficit goals.

The pound advanced to the strongest level since November 2008 against the euro as investors bet an attempt to ease UK credit conditions will help spur Britain’s economy. The Bank of England released details today of a new lending program, which it said may boost credit to companies and households by at least £80 billion. The pound rose to the strongest since November 2008 against the euro as concern that legislation needed for Europe’s permanent bailout fund will be delayed boosted demand for the relative safety of the U.K. currency.

Selected currencies — weekly results

Indicator scoreboard

EMU

May industrial production was up 0.6 percent on the month but failed to reverse a steeper revised 1.1 percent drop in April. On the year, output contracted 2.8 percent. The first monthly increase in output since February would have been more impressive but for another wild swing in the energy sector, this time registering a 2.3 percent drop after 5.3 percent surge in April. The best performing sub-sector was the 1.7 percent increase in nondurable consumer goods following an equivalent decline last time. There were gains in durable consumer goods (0.5 percent), capital goods (0.9 percent) and intermediates (0.3 percent). Regionally it was the usual mixed bag but a 1.5 percent monthly increase in German output was vital to the headline advance. Italy (0.8 percent) and Spain (0.9 percent) both registered rebounds but France (down 2.1 percent) more than reversed its April increase. Portugal (4.1 percent) also saw a solid increase but only after an even steeper drop in April (6.5 percent), and production there was still down 6.7 percent on the year for the worst performance of any reporting member state.

Germany

May seasonally adjusted trade surplus was €15.0 billion, down slightly from a marginally larger revised €16.2 billion excess in April but still the second largest since December 2009. The unadjusted surplus was €15.3 billion, up from €14.5 billion at the start of the quarter. The narrowing in the seasonally adjusted surplus masked strong growth on both sides of the balance sheet which saw both exports and imports more than reverse their previous month's decline. Exports were up 3.9 percent from April when they were down 1.7 percent while imports jumped 6.3 percent after a 4.9 percent contraction. Both exports and imports have risen in four of the last five months. However, annual export growth now stands at just 0.5 percent with sales to the other EMU states down 2.3 percent. Total imports dropped 0.2 percent from May 2011.

France

May total industrial production dropped 1.9 percent on the month after a slightly shallower revised 1.4 percent increase in April. On the year, output was down 3.5 percent. May was again distorted by the energy sector which this time saw a 7.3 percent monthly slump, although even this reversed less than half of the 16.8 percent surge posted at the start of the quarter. More significantly, manufacturing output was down 1.0 percent, compounding April's sharper revised 0.9 percent slide. Outside of construction (0.4 percent), May registered monthly declines across the board in terms of the major sub-sectors. Output of electronics & machines was down 1.7 percent, transport equipment slid 1.2 percent and food & agriculture was 0.6 percent lower. At the same time, refining was off 4.3 percent and the other manufactured goods area down 1.0 percent.

Italy

May industrial output was up 0.8 percent but still 6.9 percent lower than a year ago. The monthly increase reversed less than half of April's revised 2.0 percent decline. In line with recent months, the May data were again strongly influenced by the energy sector where activity was up 1.7 percent. Elsewhere performances were much less impressive with capital goods and intermediates both gaining a sluggish 0.3 percent and consumer goods declining 0.6 percent.

United Kingdom

May industrial production was up 1.0 percent but was 1.6 percent weaker on the year. Manufacturing output was up 1.1 percent but was down 1.7 percent from a year ago. However, the buoyancy of the headline data masked an extra working day as the May Bank Holiday was shifted into June to accompany the Jubilee celebrations. Indeed, June in turn lost two working days and will be significantly negatively distorted as a result. Manufacturing was boosted on the month by especially strong gains in food and textiles (both 2.2 percent). By contrast, pharmaceuticals (down 3.9 percent) were particularly weak. The energy sector output expanded 0.9 percent.

May global goods trade deficit was Stg8.4 billion and followed a slightly narrower revised stg9.7 billion shortfall in April. The mid-quarter improvement was led by a 7.8 percent monthly rebound in exports that comfortably more than offset a 1.5 percent gain in imports. The underlying deficit (Stg7.1 billion after Stg7.9 billion) reflected a similar picture with exports up 6.1 percent from April and imports 1.2 percent firmer. The deficit with the EU was essentially unchanged at Stg4.5 billion leaving the reduction in the overall red ink attributable to a Stg1.3 billion narrowing in the shortfall with the rest of the world. However, in line with the industrial production figures released alongside this report, May's external trade figures could well have been distorted by the addition of an extra working day. The ONS indicated that any such impact is not quantifiable but it still makes interpreting underlying short-term trends even harder than usual.

Asia/Pacific

Japan

May private machinery orders excluding volatile items such as ships and those from electric power companies plunged 14.8 percent after increasing 5.7 percent in April. Analysts expected a drop of 3.3 percent. On the year, core machinery orders slid 7.1 percent. Manufacturing orders declined 6.0 percent while nonmanufacturing orders excluding volatile orders were down 6.4 percent. Orders from overseas slipped 0.3 percent. The total value of machinery orders received by 280 manufacturers operating in Japan declined 14.5 percent after sliding 4.0 percent in April. For the April to June period, the total amount of machinery orders was forecast to decrease by 9.4 percent while private sector orders, excluding volatile items, were expected to be 2.5 percent higher from the previous quarter respectively.

May tertiary index was up 0.7 percent on the month. On the year, the tertiary index was up 2.3 percent. Among the industries that increased in May from the month before were wholesale & retail trade (1.6 percent), medical, health care & welfare (1.1 percent), information & communications (1.1 percent), transport & postal activities (0.9 percent), living-related & personal services & amusement services (1.3 percent), scientific research and professional & technical services (0.4 percent). Miscellaneous services and compound services also advanced. Among the industries that declined during the month were finance & insurance (down 2.0 percent), electricity, gas, heat supply & water (down 2.8 percent), real estate & goods rental & leasing (down 1.0 percent) and accommodations, eating & drinking services (down 1.3 percent).

June corporate goods price index was down 1.3 percent on the year thanks to lower prices for gasoline, chemicals and nonferrous metals. This was the largest annual drop since March 2010 and the third consecutive decline this year on slower global demand under the new 2010 base year. The BoJ released revisions to the past figures of the index, reflecting the change in the base year and the data formula that takes place every five years. The BoJ reported that the year-on-year change in the CGPI was lowered by an average 0.5 percentage points in the wake of the base year change to 2010 from 2005. The index was down 0.6 percent on the month. It was the second month in a row that the index declined, led by gasoline and other refined crude oil products as well as chemical products.

Australia

June seasonally adjusted unemployment rate increased to 5.2 percent from a revised rate of 5.1 percent in May. The number of people unemployed increased by 7,200 people to 631,300. The number of people employed was down by 27,000 to 11,500,500. The loss in employment virtually offset the revised gain of 27,900 in May. The drop was mainly driven by a decline in full time employment which was down 33,500 to 8,065,500. This was partially offset by an increase in part time employment of 6,600 to 3,435,000. The labour force participation rate slipped 0.2 percentage points in June to 65.2 percent.

China

June consumer price index was up a less than expected 2.2 percent when compared with a year ago. The CPI has steadily declined since March when the reading was 3.6 percent. On the month, the CPI was down 0.6 percent. For the first six months of the year, the CPI was up 3.3 percent when compared with the first six months of 2011. The urban CPI eased to an increase of 2.2 percent from a year ago from 3.3 percent in May. The rural CPI increased 2.0 percent after increasing 2.9 percent the month before. Food prices dropped sharply – they were up 3.8 percent after increasing 6.4 percent in May. Clothing prices were up 3.3 percent after 3.1 percent last time. Most other sectors either were unchanged from the month before or eased slightly from May’s increases.

June producer price index was down for the fourth consecutive month. The PPI was down 2.1 percent from a year ago after falling 1.4 percent in May. On the month, the index was down 0.7 percent. For the first six months of the year, the index slipped 0.6 percent when compared with the same months a year ago. Sector prices were down from a year ago with the exception of consumer goods which were up 0.7 percent on the year. Raw materials procurement, fuel and power prices dropped 2.5 percent on the year while ferrous metals, nonferrous metals and raw chemical materials were down 6.7 percent, 7.6 percent and 5.0 percent respectively from a year ago. Fuel and power were unchanged on the month after increasing 1.6 percent in May.

June merchandise trade surplus jumped to $31.73 billion from $18.7 billion in May. The surplus was considerably higher than the $23 billion expected by analysts and was the largest since January 2009. Growth in both exports and imports slowed. Exports rose 11.3 percent from a year earlier, down from May's 15.3 percent pace. Imports increased 6.3 percent from a year earlier, half of May's 12.7 percent. In the six months through June, the trade surplus was $68.92 percent compared with $44.93 billion in 2011. Exports were up 9.2 percent in the first half of the year while imports were up 6.7 percent from a year ago.

Second quarter gross domestic product was up 7.6 percent on the year after growing by 8.1 percent in the first quarter. The gain was the lowest since the beginning of 2009. On the quarter, GDP was up 1.8 percent compared with 1.6 percent in the previous quarter. When compared with the first half of 2011, GDP was up 7.8 percent after growing 9.6 percent in 2011. Growth has slowed, dragged down by a combination of weakening exports to Europe, stagnant real estate investment, and the inability for domestic consumption to take up all of the slack.

June industrial output was up 9.5 percent on the year and up 0.76 percent from May. For the first six months of 2012, output was up 10.5 percent when compared with the same months a year ago. Output was mixed among categories. Motor vehicles were up 13.8 percent from a year ago, down from May’s 16.4 percent annual gain. Electricity was unchanged in June from a year ago after increasing 2.7 percent in May. Power & thermal declined to 1.7 percent gain, down from 4.5 percent in May. Communications slowed to an annual increase of 9.6 percent from 13.3 percent last time. Among the categories that picked up from May include chemicals, up 11.3 percent after increasing 10.2 percent the month before. Non-metal minerals and ferrous metals were up 10.5 percent and 9.5 percent respectively after increasing 9.6 percent and 8.5 percent in May.

June retail sales were up 13.7 percent on the year, slipping slightly from May’s gain of 13.8 percent. On the month, June retail sales were up 1.08 percent. For the first six months of 2012, sales were up 14.4 percent when compared with the same months a year ago. Urban retail sales were up 13.7 percent as they were in May. However, rural retail sales slipped to a 14.0 percent gain from 14.3 percent advance in May. Auto sales were up 6.2 percent after increasing 8.0 percent the month before. Clothing was up 20.2 percent on the year after increasing 19.0 percent in May. Communications equipment sales were 30.4 percent higher after a 26.0 percent advance in May.

Americas

Canada

May international trade deficit was C$0.79 billion, up from a slightly larger revised C$0.62 billion shortfall at the start of the quarter. The deterioration in the headline was essentially attributable to 0.4 percent monthly increase in imports as exports stagnated over the period. Sales to the U.S. crept 0.2 percent higher on the month (3.6 percent on the year) which, with imports 1.8 percent stronger, saw the bilateral surplus narrow from C$3.61 billion to C$3.23 billion. Within the flat performance by overall exports, machinery & equipment posted a solid 8.7 percent monthly advance but, alongside other consumer goods (1.1 percent), was the only category to make headway. Elsewhere there were declines across the board including a particularly sharp drop in energy products (4.3 percent). Forestry products declined 1.8 percent, autos were off 1.6 percent and agriculture & fishing products eased 1.4 percent. Imports benefitted most from a 3.7 percent monthly increase in energy sales, backed up by a 1.5 percent gain in agriculture & fishing. Autos were up 0.8 percent. However, forestry products dropped 3.6 percent, machinery & equipment was down 1.3 percent and the other consumer products area was 1.7 percent lower.

Bottom line

Investors first waited for the minutes of the most recent FOMC meeting to see it they could find clues to future stimulus from the Fed. They also spent time waiting for important economic data from China. Worries about the data escalated after the People’s Bank of China eased interest rates days before the data would be released. This was a second month that the PBoC acted prior to their monthly data deluge.

Only the Bank of Canada is due this week to make a policy announcement. The Federal Reserve however, releases its Beige Book of anecdotal information that is prepared by the 12 District Banks. The calendar is light in Europe while in the UK, important consumer price and labour market data are on tap. It is quiet in the Asia Pacific region.

Looking Ahead: July 16 through July 20, 2012

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