Global Markets

Anticipation ruled global markets last week as investors counted the minutes to Friday morning’s speech by Federal Reserve Chairman Ben Bernanke. Equities were mixed at week’s end and trading volumes were extremely thin as investors preferred to sit in the sun during the last week of summer.

Pinning hopes on further stimulus from central bankers had been a dominant theme throughout August which proved to be a month of two halves. In the first two weeks of August, most of the major indexes climbed, as European Central Bank President Mario Draghi's pledge in late July to save the euro boosted sentiment. But over the past two weeks, markets have edged back partly because of a lack of catalysts along with low participation during the summer holiday season.

Mr Bernanke’s speech came just two weeks before the September 12^th and 13^th Federal Open Market Committee, a meeting that will decide whether an expansion of the Fed’s stimulus is needed to spur growth. In his speech, Chairman Bernanke reviewed and defined the Fed’s policy moves and said — as he has said before — that the Bank will act "if" the economy needs it. He said he was open to using more quantitative easing if needed, but did not pre-commit to taking action. He further called stagnation in the U.S. labor market a "grave concern" and said the economy was "far from satisfactory." Should the Fed choose not to add stimulus in September, the next likely time it could be considered would be in December. The October meeting will be held just two weeks prior to the U.S. presidential elections and the Fed would not want to act so close to an election.

Most equity indexes followed here were down last week with losses ranging from 0.1 percent (Nasdaq) to 2.5 percent (Nikkei). The DAX was unchanged. Gains ranged from 1.0 percent (PSEi) to 1.5 percent (IBEX). The disparities between indexes were much larger for the month of August. The Bolsa lost 3.2 percent and the Shanghai Composite was down 2.7 percent on the month. The IBEX scored the largest advance — it rebounded 10.1 percent after sinking 5.1 percent in July.

Global Stock Market Recap

Europe and the UK

Indexes here were mostly lower last week in thin trading but for the most part, were able to be positive for the month of August. On Friday, European indexes were positive but the FTSE slipped just prior to the close. On the week, the FTSE, CAC and SMI were down 2.3 percent, 0.6 percent and 1.4 percent respectively. The DAX was unchanged. In August, the FTSE was up 1.4 percent, the CAC gained 3.7 percent and the DAX advanced 2.9 percent while the SMI was 0.2 percent lower. Equities here initially pared their gains after Mr Bernanke’s speech, but still managed to retain a good portion of them. Many investors had expected Bernanke to announce a third round of quantitative easing and were disappointed that he only expressed a readiness to act if needed.

Economic data from the Eurozone were unsettling. Eurozone unemployment rose to a record high and inflation accelerated more than expected, suggesting that household spending will remain muted going forward and weigh further on economic activity. The seasonally adjusted jobless rate remained unchanged at a record 11.3 percent in July. Flash estimate of the harmonized index of consumer prices showed that inflation accelerated more than expected in August to 2.6 percent from 2.4 percent in July. German retail sales unexpectedly dropped for the first time in three months in July amid a continued increase in unemployment, raising concerns that consumer spending may fail to contribute to growth amid the sovereign debt crisis and the threat of a possible recession in the currency bloc.

ECB President Mario Draghi said Wednesday in an article for German weekly Die Zeit that although the Bank would continue to act within its mandate, sometimes fulfilling that mandate requires "exceptional measures." His comments added weight to expectations that the ECB will announce sovereign bond purchases at its meeting on September 6^th. Mr. Draghi reignited hopes that the Bank will act to stabilize the borrowing costs of fiscally frail Eurozone economies. "It should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools," Mr. Draghi said, heightening expectations of action from the ECB. Mr Draghi canceled his trip to the Jackson Hole symposium, reducing speculation that ECB policy makers will unveil new measures prior to their Thursday meeting. Draghi announced on August 2^nd that the central bank may resume bond purchases if distressed governments ask for aid from the region’s bailout funds.

Asia Pacific

Investors here ended the week and month on a down note as they prepared themselves for Mr Bernanke's speech. Markets closed for the week prior to the speech. Investors were hopeful that it would offer some hints to future Fed policy. With recent economic data sending mixed signals, many expected the Fed to refrain from doing anything additional to support the economic recovery. Investors here were also bracing themselves for the European Central Bank’s policy meeting on September 6^th and the FOMC the following week for clues about actions the central banks may take to bolster growth amid Europe's unresolved debt crisis. Despite a weakening in the markets half way through August, most indexes were able to post gains on the month.

Even though the Nikkei lost 2.5 percent last week to hit a three week low as weak economic data at home and elsewhere in Asia intensified concerns the global economy is weakening, the index was up 1.7 percent in August. Signs of deteriorating business performances for Chinese firms as well as downbeat eurozone business and consumer confidence data also elevated worries that weak global demand could hurt the country's export dependent economy.

The government lowered its economic assessment of the economy for the first time in 10 months as the global slowdown and an intensification of the euro area debt crisis have dampened the country's exports and industrial production. The latter was illustrated with the release of July industrial production on Friday — it surprisingly dropped 1.2 percent on the month. According to the Cabinet Office, "The Japanese economy is on the way to recovery at a moderate pace partly due to reconstruction demand, while some weak movements are seen recently." The assessment was more downbeat compared to the government's view published in July.

The Shanghai Composite index slid 2.3 percent on the week as caution set in ahead of key PMI data for August due over the weekend. The index dropped 2.7 percent during the month. The Hang Seng lost 2.0 percent on the week and dropped 1.6 percent in August. The Kospi was down 0.8 percent for the week but managed to gain 1.2 percent for the month. In Australia, the All Ordinaries slid 0.9 percent on the week but was up 1.2 percent in August.

Currencies

The U.S. dollar declined against all of its major counterparts with the exception of the Australian dollar last week. The currency weakened after Fed Chairman Ben Bernanke said that joblessness was a “grave concern” and that “nontraditional policies” shouldn’t be ruled out if economic conditions warrant. The dollar also declined as reports showed business activity in the U.S. expanded more slowly in August and demand for U.S. capital goods (excluding aircraft) slipped in July. Analysts opined that because Bernanke said quantitative easing worked in the past and helps the economy, this probably suggests he is leaning towards more easing. It was noted that he had not slammed the door on more stimulus. Many policy makers at the Federal Open Market Committee’s July 31^st and August 1^st meeting said additional stimulus probably will be needed soon unless the economy showed a “substantial and sustainable strengthening,”

Selected currencies — weekly results

Indicator scoreboard

EMU

July M3 money supply growth increased 3.8 percent on the year, 0.6 percentage points faster than in June. The pick-up boosted the ECB's preferred 3-month moving average growth measure to 3.4 percent from 3.0 percent last time. Private sector lending was up 0.1 percent, an improvement from the 0.2 percent drop at the end of the second quarter. Borrowing by households was unchanged at a 0.3 percent annual rate as was lending for house purchase (0.8 percent). Loans to non-financial corporations fell less sharply (0.4 percent after 0.6 percent) but the main reason for the headline improvement was a bounce in loans to non-monetary financial institutions (ex-insurance companies and pension funds) which saw growth increase from 0.2 percent to 1.8 percent. Overall credit extended to general government was 9.8 percent above its year ago level, matching June’s increase.

August economic sentiment slid to a three year low of 86.1, down from July’s 87.9 and nearly 14 points short of its long run average. The latest deterioration reflected broad based declines. While industry morale slipped 0.3 points to minus 15.3, consumer confidence was off a sizeable 3.1 points to minus 24.6. Sentiment in retail dropped 2.3 points to minus 17.3 and was 4.6 points weaker in construction at minus 33.1. Services saw a 2.3 point decline to minus 10.8. Regionally, among the larger member states only France (up 0.4 points) made any headway. Elsewhere, Germany was down 1 point, Italy 2.4 points and Spain a worryingly sharp 4.9 points. Among the smaller countries, there was some cautiously better news with Greece gaining almost a point and Portugal up nearly 3 points.

August provisional harmonized index of consumer prices was up 2.6 percent on the year and the fastest pace since April. Details of the key core rates will be released on September 14 and seem likely to paint a broadly stable underlying picture with most of the headline damage in August probably caused by the latest spike in energy costs. Nationally, the annual rate was up 0.3 percentage points to 2.2 percent in Germany but edged 0.1 percentage points lower to 3.5 percent in Italy. However, in Spain inflation jumped 0.5 percentage points to 2.7 percent and with the prospect of a 3 percentage point increase in VAT in September, could well accelerate further next month.

July jobless total was up 88,000 to leave the unemployment rate steady at June's upwardly revised record high of 11.3 percent. The number of people out of work now stands at 18.002 million. The July increase in joblessness compares favorably with the 219,000 jump seen as recently as March. German unemployment as measured by Eurostat was unchanged at 5.5 percent for the fourth month in a row. Elsewhere, the unemployment rate was up 0.1 percentage points at 10.3 percent in France and rose another 0.2 percentage points to 25.1 percent in Spain, still easily at highest in the region. The Italian rate was unchanged at 10.7 percent.

Germany

August Ifo survey paints a downbeat picture of the German economy. At 102.3 the headline sentiment index was down almost a point from a marginally weaker revised 103.2 level in July to register its lowest reading since March 2010. The latest slippage was largely attributable to worsening expectations which shed 1.3 points to 94.2, their fourth decline in a row. Current conditions at 111.2 were down 0.3 points from last time. Confidence among the major sectors was little changed but retail suffered a sharp reversal as the diffusion index more than unwound July's bounce in dropping from a positive 5.1 to minus 4.7. Morale in wholesale was also 6 points lower at minus 2.1 but construction dipped just 0.2 points to minus 6.9 while manufacturing edged up 0.7 points to minus 1.2. Services saw a 3 point drop to 12.7.

August joblessness increased 9,000 for the second consecutive month. However, the increase was too small to have any impact upon the unemployment rate which again held steady at 6.8 percent for a ninth month. The number of people now out of work stands at 2.901 million. The mid-quarter jobless figures follow the release earlier of the ILO data which showed a 23,000 net gain in employment in July — equaling the June gain but comfortably short of the increases seen around the turn of the year. Employment has expanded every month since January 2010.

July retail sales dropped 0.9 percent and were down 1.1 percent on the year. June's previously reported 0.1 percent slip was revised up to show a 0.5 percent gain, but purchases last month were 0.6 percent below their second quarter average. The very limited data breakdown revealed non-food sales 0.2 percent higher on the year.

Italy

Second quarter unemployment rate deteriorated sharply as the jobless rate climbed from a higher revised 10.1 percent at the start of the year to 10.6 percent. The 0.5 percentage point jump was well above the 0.3 percentage point gain seen in the first quarter. Monthly figures for the current quarter suggest that the pace of deterioration has slowed somewhat with the rate in July holding steady at June's 10.7 percent level. Still, business surveys suggest that unemployment will continue to rise over coming months in line with a domestic real economy that remains firmly entrenched in recession.

Asia/Pacific

Japan

July retail sales dropped 0.8 percent from a year ago. This was the first drop in retail sales since November 2011. Auto sales were up a healthy 32.5 percent on the year while drugs and toiletry stores were up 2.7 percent. Fabrics, apparel and accessories inched up 0.1 percent. All other major categories contracted on the year. Machinery and equipment plunged 26.6 percent. This was the 12^th consecutive decline. General merchandise slid 4.8 percent after declining 3.1 percent in June. Fuel was down for a second month as were food and beverage and ‘other.’ The Cabinet Office recently lowered its forecast for the Japanese economy and clearly these data give one indication that the domestic economy is weakening.

July consumer price index was down 0.3 percent on the month and declined 0.4 percent from a year ago. Excluding only fresh food, the CPI was down 0.2 percent and was 0.3 percent lower as expected on the year. Excluding food and energy, the index was down 0.2 percent on the month but dropped 0.6 percent for the third month when compared with the same month a year ago. All subcategories declined from a year ago with the exception of fuel, light & water charges (up 3.0 percent), education (up 0.4 percent) and clothes & footwear (up 0.2 percent). Declines were led by furniture & household utensils (down 3.1 percent), transportation & communication (down 1.2 percent) and culture & recreation (down1.8 percent). Goods prices were down 0.8 percent on the year while services edged down 0.1 percent. Energy costs were up 0.7 percent on the year after jumping 2.0 percent in June. TVs dropped 4.2 percent after sinking 6.1 percent the previous month. Recreational durable goods slid 8.8 percent after June’s 11.1 percent drop.

July household spending was up 1.7 percent from a year ago after increasing 1.6 percent in June. Analysts were looking for an increase of 0.8 percent. Spending was mixed among categories. Housing jumped 10.9 percent while transportation & communications spending was lifted 18.7 percent. Medical care spending was up 6.3 percent from a year ago while education increased 4.8 percent and housing jumped 10.9 percent. Spending declined for food (down 1.8 percent), fuel, light & water charges (down 2.5 percent), furniture & household utensils (down 1.0 percent), clothing & footwear (down 1.5 percent) and culture & recreation (down 10.7 percent).

July unemployment rate was 4.3 percent for a second month as job cuts eased and more people entered the labor market looking for work. Employment slid by 30,000 from June to a seasonally adjusted 62.69 million. This contrasts with a jump of 270,000 the month before. The adjusted number of unemployed was 10,000 higher to 2.82 million in July, compared with decline of 80,000 at 2.81 million in June. The unadjusted number of employed people dropped 90,000 from a year ago to 62.27 million in July. The unadjusted number of jobless was down 240,000 to 2.88 million on the year in July, after dropping 260,000 in June.

July industrial production dropped 1.2 percent from a month earlier and was down 2.5 percent from a year ago in a sign that the export dependent economy may be stalling amid a slowdown overseas. Analysts expected a monthly gain of 1.7 percent. METI maintained its assessment that industrial production is in a flat trend, after downgrading its assessment last month for the first time since last September. A survey of manufacturers released with the data showed that companies expect output to edge up 0.1 percent in August from the previous month before decreasing 3.3 percent in September.

Americas

Canada

July industrial product prices and raw material costs moved in opposite directions with the former falling 0.5 percent on the month and the latter advancing 0.9 percent. On the year, the IPPI was up 0.3 percent after increasing 0.4 percent in June while the RMPI is 10.0 percent lower on the year after an 11.8 percent 12-month decline last time. The monthly drop in the IPPI was largely attributable to weakness in chemical products, where prices slumped 2.6 percent, along with motor vehicles, where charges were off 0.9 percent. Petroleum and coal was flat but there were significant monthly declines in primary metals (1.1 percent), miscellaneous non-manufactures (1.1 percent) and pulp and paper (0.6 percent). The only monthly increase of any size was in food (0.8 percent). The RMPI's advance was led by a 1.1 percent monthly increase in mineral fuel costs together with a 5.1 percent spike in vegetable products and a 0.9 percent increase in wood. Partial offsets were provided by ferrous metals (down 1.3 percent) and non-ferrous metals (down 0.5 percent). Others sub-sectors were broadly stable from June.

Second quarter gross domestic product was up 0.5 percent on the quarter pr am annualized rate of 1.8 percent. On the year, GDP was up 2.5 percent. Consumer spending was up just 0.3 percent after an even weaker 0.2 percent in the first quarter. Gross fixed capital formation built on the first quarter's 1.5 percent jump with a solid 1.3 percent advance. However, the government sector continued to contract with current spending slipping a further 0.1 percent on the quarter after a 0.5 percent drop previously. As a result, final domestic demand expanded 0.4 percent or 0.1 percentage points more than at the start of the year. Net foreign trade was a major drag, subtracting about 0.5 percentage points from quarterly growth. A weak energy sector limited exports to a 0.2 percent increase on the quarter while imports climbed 1.6 percent. The weakness of net exports was reflected in a current account deficit that widened out from C$10.2 billion in the first quarter to some C$16.0 billion, the most red ink in almost two years.

June monthly gross domestic product was up 0.2 percent and 2.4 percent on the year. Growth was largely attributable to the goods producing sector which posted a 0.3 percent monthly advance. Within this however, manufacturing dropped 0.2 percent — its second fall in a row. Utilities (0.8 percent), agriculture, forestry & fishing (1.2 percent) and mining & oil & gas extraction (0.8 percent) all saw decent gains while utilities output edged up 0.1 percent. Services sector activity was up just 0.1 percent for the fourth month in a row. A solid increase in arts, entertainment & recreation (1.7 percent) easily reversed the previous month's hefty decline and found support in more modest gains in transportation & warehousing (0.7 percent) and education services (0.4 percent). However, gains here were almost cancelled out by a 0.8 percent monthly drop in wholesale trade together with a 0.6 percent slide in accommodation & foods services as well as a 0.2 percent slip in retail trade.

Bottom line

Investors spent the week waiting for Fed Chairman Ben Bernanke’s speech to the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. Economic data released during the week tended to be ignored with the exception of the dour data from Europe at week’s end.

Four central Banks meet this week beginning with the Reserve Bank of Australia on Tuesday and followed by the Bank of Canada on Wednesday and the Bank of England and the European Central Bank, Thursday. The week is a busy one with both manufacturing and services PMIs dominating the early part of the week and the U.S. employment situation report, the end. The employment report has an even more elevated importance given that the FOMC meets a few days later. Investors continue to focus on central bank stimulus as a way out of the current economic morass.

Looking Ahead: September 3 through September 7, 2012

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