Global Markets

Equities rebounded on Friday after Thursday’s losses and turned the week into a positive one for most of the indexes followed here. In the Asia Pacific region, only the Nikkei (down 0.1 percent) slipped on the week. All European indexes despite the day to day volatility managed to gain on the week. In North America, the S%P/TSX Composite (down 0.9 percent) and the Bolsa (down 1.2 percent) were unable to recoup all of the week’s prior losses. Gains ranged from 0.2 percent (All Ordinaries and Dow) to 3.9 percent (FTSE MIB).

The reasons for Friday’s rebound were the better than anticipated U.S. employment report and second thoughts about ECB President Mario Draghi’s comments at his post meeting press conference Thursday.

Central Banks — words, words, words

Words but no action was the theme of the central bank week. Investors were bound to be disappointed given their overblown expectations for new stimulus from the Federal Reserve and the European Central Bank. While neither bank acted, they did demonstrate that they are on high alert about the global economy. Now expectations for new stimulus have shifted to ‘they will act soon.’ However, both face headwinds and neither has a handbook to follow.

For the Fed, the timing could not be much worse with a national election three months away. Democrats are urging him to act — and quickly. Republicans are doing the opposite. If Mr. Bernanke moves at the Fed's September 12 and 13 FOMC as many investors expect, he will be accused by Republicans of trying to help President Barack Obama's re-election. But the FOMC has an advantage over the ECB: the economy it oversees is growing not contracting.

Much of the euro area is in recession or headed towards one. But to print money to finance government budget deficits is an economic taboo, because doing so risks fueling fiscal profligacy and inflation. The ECB's charter forbids it and Germany's Bundesbank strongly opposes any move in that direction. Mr. Draghi's challenge is to preserve the euro without crossing this line.

European Central Bank

Having cut official interest rates to new record lows in July, it really should be no surprise that the ECB made no further changes to its benchmark interest rates. The key refinance rate remains at 0.75 percent with the deposit and marginal lending facility rates at zero percent and 1.25 percent respectively. However, if financial markets were not anticipating any move on conventional monetary policy, they were certainly geared up for some significant new unconventional measures. In particular, there had been considerable speculation that the Securities Markets Program (SMP) might be restarted.

As it is, Draghi only lived up to the least aggressive of expectations, simply signaling that the Bank may undertake fresh unconventional measures in the future, including bond purchases through the SMP. It will — over coming weeks — develop modalities aimed specifically at repairing the monetary policy transmission mechanism. Draghi also again tried to put the onus on EMU governments to pursue their fiscal consolidation plans and enact structural reforms. The economic picture was seen as little different from last time with the main risks stemming from weaker than expected economic growth.

Bank of England

There were no surprises from the Bank of England’s monetary policy committee. In addition to leaving bank rate at 0.5 percent where it has been since March 2009, the asset purchase program target remained at the £375 billion to which it was raised in July. In July, the BoE indicated that the current program of asset purchases would take four months to complete, implying that the MPC's November deliberations would be the most likely time for any new shift in policy. That said, the Bank reserves the right to change tack at any time so financial markets cannot take for granted a steady monetary stance at either the September or October meetings.

To this end, the BoE's new Inflation Report, released next week, will almost assuredly show weaker revised growth and lower inflation projections and many see yet more quantitative easing as just a matter of time.

FOMC

The FOMC left its policy interest rate range unchanged from zero to 0.25 percent where it has been since December 2008. The FOMC continued its policy guidance saying that it expected interest rates to remain exceptionally low through 2014 while Operation Twist will continue through the end of this year.

The Fed acknowledged that the economy is not doing great but it didn't use any language suggesting that the economy is dramatically weakening. Rather the Fed said that "Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated." It noted that inflation is easing but there was no mention of worries that would suggest future policy action. However, in reference to Europe and even Asia the FOMC noted that the strains in global financial markets continue to pose significant downside risks to the economic outlook. The vote was 11 to 1 with Richmond Fed President Jeffrey Lacker dissenting — he preferred to leave out the time period reference for guidance.

Reserve Bank of India

The Reserve Bank of India left its key lending rate unchanged at 8.0 percent and sharpened its tone on inflation, dousing hopes that it would soon ease monetary policy to counter a sharp slowdown in economic growth. It also kept the reverse repurchase rate, or its borrowing rate, at 7.0 percent and the marginal standing facility rate at 9.0 percent.

However, the RBI lowered banks' statutory liquidity requirement to 23 percent from 24 percent, effective August 11^th. That reduces the portion of deposits banks need to invest in liquid instruments, mainly government bonds, and frees up more funds for banks to lend. Separately, the RBI rolled back a May rule requiring exporters to convert half of their foreign currency holdings into Indian rupees.

The RBI gave a dismal outlook on domestic growth and inflation, citing a weak monsoon that threatens to drive up food prices and a continued slowdown in industrial activity. In its rate decision, the RBI said its primary focus remains controlling inflation to safeguard India's medium term growth. Cutting rates at this stage would "only aggravate inflationary impulses without stimulating growth," the bank said. The RBI slashed its domestic growth forecast for the current fiscal year to 6.5 percent from 7.3 percent and raised its March-end headline inflation forecast to 7.0 percent from 6.5 percent.

Purchasing managers’ surveys make for gloomy reading

With the exception of India and the U.S., most of the world is in a slump according to the slew of Markit manufacturing purchasing managers surveys released mid-week. Although the indexes in the U.S. and India continued to show growth — that is, the index level was above the breakeven point of 50 — both eased from their June levels. The rest as illustrated in the graph contracted at varying rates.

In China and in the U.S., there are competing surveys that give a slightly different picture. In China, manufacturing activity dropped to 50.1 from 50.2 in June according to state affiliated China Federation of Logistics and Purchasing. The Markit HSBC reading was 49.3, up from June's reading of 48.2. The data showed that manufacturing sector operating conditions deteriorated at a slower pace, as factory production increased for the first time in five months and new business decreased at a weaker pace.

In the U.S., the manufacturing PMI according to Markit eased to 51.4 from 52.5 in June — still growing but at a slower pace. However according to the ISM measure, manufacturing activity contracted for a second month albeit at a marginally slower pace. The index edged up to a reading of 49.8 from 49.7 the month before.

Elsewhere, the UK manufacturing sector contracted at its fastest rate for more than three years, while in the Eurozone, factory output contracted at its fastest pace in three years. The PMI for the Eurozone sank to 44 from 45.1 in June. Germany posted one of the lowest scores.

Global Stock Market Recap

Europe and the UK

Despite Thursday’s plunge across European markets, equities climbed on Friday to their highest level in four months. The gain was led by bank stocks which got a delayed lift from the European Central Bank's pledge to tackle the region's debt crisis in what should give breathing space to troubled economies. Rhetoric kept equities buoyant early in the week as investors speculated that the ECB and Fed would introduce new stimulus.

A stronger than expected U.S. employment report on Friday lifted sentiment as investors shed risk averse positions. Just the day before, equities dropped after ECB President Mario Draghi initially disappointed some investors by not announcing any immediate actions to help lower the borrowing costs of Spain and Italy. However, on Friday traders reflected that Draghi's comments meant that the ECB was ready, perhaps sooner than later, to take unconventional measures.

For the week, the FTSE and CAC gained 2.9 percent while the DAX was 2.6 percent above a week ago and the SMI advanced 1.6 percent. The four indexes were also up for the month of July.

Asia Pacific

Most equities here — the Nikkei being the exception — advanced last week despite disappointment with both the Federal Reserve and ECB’s failure to deliver new stimulus measures to help fix Europe's debt crisis. In July, the indexes were mixed

Data during the week focused mostly on the manufacturing and services purchasing managers surveys. The data here continued to show contraction in manufacturing and tepid growth in services. As usual the two Chinese PMI measures diverged. For example, the Markit HSBC survey showed that China's services sector expanded in July at a healthy pace, recovering from June's 10-month low. The China HSBC services purchasing managers index (PMI) rose to 53.1 in July from 52.3 in June. However, in contrast, the latest survey by the China Federation of Logistics and Purchasing showed easing growth in July as the inflow of new orders weakened. The seasonally adjusted purchasing managers' index for the services sector fell to 55.6 in July from 56.7 in the previous month.

Currencies

The euro gyrated against the U.S. dollar during the week but surged Friday after the July U.S. unemployment rate edged up a notch to 8.3 percent, even though more jobs than expected were added. Also playing a role in the dollar’s decline was a reinterpretation of ECB Draghi’s post meeting comments on Thursday. Investors became less risk averse and the left safe havens of the U.S. dollar and Japanese yen.  

The euro erased its weekly loss after Eurozone retail sales unexpectedly increased 0.1 percent in June rather than edging 0.3 percent lower as expected. On Thursday, the euro slid as stocks and commodities fell after ECB President Mario Draghi failed to reassure investors that policy makers were ready to take immediate steps to curb the region’s debt crisis. ECB officials are working on a plan to buy bonds and details will be released in coming weeks, Draghi told his post meeting press conference.

The yen was down against all of its 16 most traded counterparts. The Japanese currency weakened against the dollar for the first week since June 22^nd. A growing number of corporate executives in Japan are becoming worried that the rise of the yen against the euro could end up becoming a bigger concern than the yen-dollar exchange rate. The euro's protracted slide against the yen is weighing heavily on shares of firms that generate a significant amount of revenue from European markets. Last week, the yen briefly fell below ¥95 against the euro. This drove up selling pressure among investors who were concerned about the impact of the yen's strength on export oriented Japanese stocks. Yen/dollar volatility theoretically has a bigger influence on shares of Japanese exporters. This is largely because most transactions involving Japanese firms are conducted in dollars.

Selected currencies — weekly results

Indicator scoreboard

EMU

July flash harmonized consumer price index was up 2.4 percent on the year, unchanged from June. Final figures including the key core rates will be released on August 16. Regionally among the larger states, inflation was unchanged in Germany at 2.0 percent but up a tick at 3.7 percent in Italy, its highest rate since March. However, it was in Spain where prices were up especially sharply, jumping 0.4 percentage points to 2.2 percent due to the introduction of a new payments system for medicines.

June joblessness was up a further 123,000 to a record 17.801 million. The increase, which followed a steeper revised 95,000 advance in May, left the jobless rate unchanged at May's higher amended 11.2 percent. The overall figures would have looked a good deal worse but for the resilience of the German labour market where the unemployment rate ticked lower again to 5.4 percent. Elsewhere, the rate crept up 0.1 percentage points to 10.1 percent in France and was 0.2 percentage points higher to 10.8 percent in Italy. Spain followed a 0.3 percentage point gain last time with a smaller 0.1 percentage point rise to 24.8 percent.

July economic sentiment reading was 87.9, its weakest reading since September 2009. The index has now posted declines in each of the last four months as part of a near 20-point slump from its February 2011 peak. Morale was softer across the board in terms of the major sectors with industry (down 2.2 points to minus 15.0), consumers (down 1.7 points to minus 21.5) and services (down 1.1 points to minus 8.5). Confidence in retail slipped 0.6 points to minus 15 and in construction 0.3 points to minus 28.4. Of particular concern, the core member states suffered more than most with Germany down 3.7 points and France off 2.3 points. Among the other larger economies, Spain slipped a further 1.4 points but Italy surprised with a modest 1.3 point gain.

June producer prices declined 0.5 percent and were up 1.8 percent above their year ago level. This compares with an unrevised 2.3 percent rate last time and constitutes the slowest 12-month pace since March 2010. Overall prices were again depressed by weakness in the energy sector where charges declined a further 1.8 percent on the month but were up 4.8 percent from a year ago. However, even excluding this category, the PPI would have fallen 0.1 percent from mid-quarter and risen just 0.9 percent from June 2011, so the underlying picture continues to soften too. Elsewhere prices were benign with both consumer nondurables and capitals goods registering a minimal 0.1 percent monthly gain, durable consumer goods flat and intermediates down a sizeable 0.3 percent.

June retail sales expanded a better than expected 0.1 percent on the month. The advance followed an upwardly revised 0.8 percent increase in May. Annual sales were down 1.2 percent after declining 1.7 percent the month before. For the second quarter, sales dropped 0.7 percent after increasing 0.2 percent in the first. Food, drink & tobacco sales were 0.4 percent higher while non-food sales excluding motor fuel dropped 0.7 percent after increasing 1.4 percent in May. Regionally retail demand was lower on the month in most EMU members. In Germany, sales declined for the third consecutive month (down 0.1 percent). Sales in France were up 0.7 percent while in Spain, they slipped 0.1 percent. Elsewhere, sales in Belgium were up 0.5 percent after four months of decline. Luxembourg managed an increase of 1.5 percent while in Finland sales slumped 0.9 percent.

July final services PMI was up 0.3 points from the flash reading to 47.9. The index was up 0.8 percent from the June outcome but still indicative of a sixth consecutive contraction in services at the beginning of the third quarter. New business declined at the sharpest pace in three years, as companies faced ongoing business and consumer uncertainty. Employment also declined. The outlook for service sector activity dropped to its lowest since March 2009, with companies expecting no growth of business activity over the coming year. The mood about the year ahead grew gloomier in all of the four largest euro nations, with Italy and Spain seeing particularly sharp drops in confidence. In contrast, business optimism in Ireland improved slightly. Average input price inflation ticked slightly higher in July, after easing in each of the prior three months. The composite output index that provides a proxy for real GDP was little changed at 46.7 from 46.6 in June. The index signaled a contraction in output for the tenth time in the past 11 months.

Germany

June retail sales were 0.1 percent lower, their third successive drop and their fifth decline since the start of the year. Base effects were nonetheless very positive and boosted unadjusted annual growth from minus 1.1 percent in May to 2.9 percent, its strongest increase since March. The very limited breakdown of the headline data showed non-food volumes up 3.8 percent on the year and food, drink & tobacco sales 1.9 percent higher.

July unemployment rate held steady at 6.8 percent but the jobless total still advanced a further 7,000 to match the increase seen in June. The number out of work now stands at 2.888 million. The lagging ILO data revealed a 24,000 monthly increase in employment in June following gains of 36,000 and 34,000 in April and May respectively. Second quarter jobs growth of 94,000 was down from 147,000 over the first three months of the year and 149,000 in the same quarter of 2011. Vacancies declined 7,000 in July or 2,000 more than their revised drop last time.

France

June household spending on manufactured goods was up 0.5 percent on the month after a slightly firmer revised 1.5 percent increase in May. Purchases were 0.3 percent higher on the year. Sales were boosted by a strong performance by household goods which posted a 1.3 percent advance over May together with a much smaller 0.2 percent increase in the other goods category. However, gains here were partially offset by declines in autos (0.2 percent) and textiles (1.7 percent). Total spending on goods edged up 0.1 percent on the month to leave second quarter purchases 0.2 percent below their first quarter level when they were unchanged from the previous period. Within this, quarterly consumption of manufactured goods was down a disappointing 0.5 percent while energy was up 2.7 percent.

June producer prices dropped 0.9 percent on the month to reduce annual PPI growth from a marginally softer revised 2.1 percent in May to 1.3 percent, the slowest rate since February 2010. The third consecutive monthly drop in prices was mainly a reflection of a 7.7 percent plunge in the cost of coke & petroleum products together with a 0.6 percent slide in the other manufactured products category, mainly chemicals (2.8 percent). Elsewhere transport materials slipped 0.1 percent from May while food & drink was 0.3 percent higher. Overall manufactured products were down 1.1 percent on the month and 0.9 percent higher on the year.

Italy

June producer prices were down 0.1 percent on the month reducing annual PPI growth to 2.2 percent following a marginally firmer revised May outturn. Energy costs dropped 0.7 percent from mid-quarter but outside of a relatively strong 0.3 percent advance in nondurable consumer goods, most categories were reasonably subdued. Consumer goods prices were up 0.2 percent as were capital goods while intermediates were off 0.2 percent.

Asia/Pacific

Japan

June industrial production slipped 0.1 percent. On the year, production dropped 0.8 percent. Transport equipment (down 4.3 percent) led the declines, followed by electrical machinery (down 3.6 percent) and iron & steel (down 3.3 percent). Commodities that mainly contributed to the decrease were large passenger cars (down 6.9 percent) along with semiconductor products machinery and chassis & body parts. METI downgraded its view of the economy to flat. Its forecast for July shows a rebound in production of 4.5 percent but it also forecasts August to be down 0.6 percent.

June unemployment rate edged 0.1 percent lower to 4.3 percent. Analysts expected it to remain at 4.4 percent. The number of unemployed totaled 2.88 million and was down 260,000 from the previous year. On the year, employment recorded its seventh drop in a row. Employment was down 60,000 to 63.04 million after sinking by 300,000 in May. The participation rate slipped 0.1 percent to 59.4 percent. However, the employment rate edged up 0.1 percent to 56.8 percent. Separate data showed the country's job availability improving with the ratio of employment offers to seekers rising to 0.82 in June from 0.81 in May. The latest figure means 82 positions were available for every 100 job seekers.

Household spending weakened in June and increased by 1.6 percent on the year after jumping 4.0 percent in May. This was the fifth consecutive increase but considerably below analysts’ estimates of a 2.6 percent increase. Spending on housing was up 15.5 percent on the year while transportation & communication was 19.9 percent higher. However, clothing & footwear declined 1.4 percent and fuel, light & power was 2.6 percent lower. Elsewhere, food spending edged up just 0.3 percent as did spending on furniture & household utensils. Medical care was up 1.6 percent and culture & recreation was 1.8 percent higher.

Australia

June retail sales were up 1.0 percent after increasing by 0.8 percent in May. Sales were up 5.4 percent when compared with the same month a year ago. Most industries contributed to the increase. Food retailing (0.9 percent) and department stores (3.4 percent) were the main drivers of growth. Sales also were up for other retailing (1.4 percent), cafes, restaurants & takeaway food services (1.0 percent) and clothing, footwear & personal accessories (1.8 percent). The only industry to decline was household goods retailing (down 0.2 percent). Sales were up in all states. In volume terms, sales were up 1.4 percent in the June quarter 2012, seasonally adjusted, following an increase of 1.4 percent in the March quarter 2012.

June seasonally adjusted goods and services balance was a surplus of A$9 million after a revised deficit of A$313 million. Exports declined 0.4 percent. Non-rural goods declined 3 percent while non-monetary gold was up 17 percent. Rural goods were up 6 percent. Services were A$9 million higher on the month. Imports were down 1.6 percent. Intermediate and other merchandise goods declined 6 percent while consumption goods slid 2 percent. Capital goods were 6 percent higher and non-monetary gold was up 4 percent. Services slid 2 percent.

Americas

Canada

May monthly gross domestic product edged up 0.1 percent and was 2.4 percent higher than a year ago. What monthly growth there was in May was attributable to services as the factory sector registered no change in output. Within the latter, manufacturing output declined 0.5 percent following no increase in April and construction was off 0.2 percent. However, weakness here was offset by gains in mining & oil & gas extraction (0.6 percent), utilities (0.1 percent) and agriculture & fishing (0.1 percent). The service sector found support from a 0.7 percent monthly increase in retail trade and a 0.6 percent gain in accommodation & food together with smaller advances in a number of other areas. The only declines of note were in transportation & warehousing (0.5 percent) and arts, entertainment & recreation (1.7 percent).

June industrial product prices were down 0.3 percent on the month and were just 0.4 percent higher on the year. At the same time, the raw material price index dropped a further 4.0 percent, leaving the RMPI down 11.7 percent from June 2011. The monthly decline in the IPPI was essentially due to a 5.0 percent drop in petroleum & coal product costs. Excluding this category the headline index would have risen 0.5 percent on the month and 1.0 percent on the year. Elsewhere prices were typically up when compared with their respective May levels. The only gains of note were in motor vehicles & equipment (1.0 percent), meat, fish & dairy products (1.0 percent) and lumber (0.9 percent). The other major positive impact came from the falling exchange rate without which the IPPI would have declined a sharper 0.8 percent on the month. The drop in the RMPI was dominated once again by weaker mineral fuel costs, this time down 9.4 percent from May and without which the headline index would have increased by 0.7 percent on the month and fallen 4.1 percent on the year. Non-ferrous metals (down 1.2 percent) were also soft on the month but there were sizeable gains in both animals & animal products (3.1 percent) and wood (3.0 percent).

Bottom line

Investors focused on the outcomes of central bank meetings last week. The outcomes, which produced no policy changes from the Federal Reserve, Bank of England, European Central Bank and the Reserve Bank of India disappointed many bank watchers and traders. Economic data were mixed.

The Reserve Bank of Australia and Bank of Japan announce policy decisions at the beginning of the week. The Bank of England’s quarterly Inflation Report comes mid-week. China releases its monthly slew of data. Data releases elsewhere likely will not garner the attention of the Chinese data.

Looking Ahead: August 6 through August 10, 2012

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