Global Markets

Most equity indexes advanced last week despite dour economic news from the U.S. and Europe. In Europe, preliminary first quarter gross domestic product data showed the Eurozone mired in recession. At the same time, Japan rebounded after an upwardly revised gain in the fourth quarter of 2012, indicating that Abenomics appears to have begun to rejuvenate the economy.

The Eurozone economy contracted again in the first quarter. Eurostat said it is the first time the Eurozone has contracted for six consecutive quarters since the creation of the single currency in 1999. This latest dismal record came after unemployment hit 12.1 percent, its highest level. With Germany in the grip of pre-election politicking, no big European policy moves are likely until after that country’s elections in September. While Germany was able to barely sidestep a recession in the first quarter, France slid into one while the recessions in Italy and Spain remained entrenched.

The Eurozone data is likely to add to pressure on the European Central Bank to take further action after cutting interest rates this month to a record low of 0.5 percent in a largely symbolic move. The ECB also revised down its economic forecasts predicting a recovery later in the year. The data will also fuel the debate on whether front loaded austerity has held back a recovery. The officials perhaps most able to propose action — European Union finance ministers — just spent two days in Brussels arguing over tax havens and debating a banking union, which is aimed at avoiding future disasters, not reviving growth. The gloom in the Eurozone was offset by a sunnier forecast for the UK, where Bank of England Governor Mervyn King said recovery is in sight.

Global Stock Market Recap

Europe and the UK

Equities were up for a fourth consecutive week after massive central bank easing globally encouraged investors to move into risk assets instead of lower yielding and traditionally safer government bonds. Anemic growth data from the Eurozone earlier in the week sent markets higher. Traders increased hopes for more stimulus measures from the European Central Bank. Such market behavior highlighted that investors currently are focusing more on large liquidity injections from central banks, rather than underlying growth problems. The FTSE was up 1.5 percent, the CAC gained 1.2 percent, the DAX advanced 1.4 percent and the SMI was 1.3 percent higher.

On Wednesday, the International Monetary Fund approved a three year loan worth €1 billion to Cyprus as part of the €10 billion international bailout package aimed at stabilizing the country's ailing banking sector. While applauding Cyprus' efforts to address the crisis, IMF Managing Director Christine Lagarde said that the country faces significant challenges, including restoring credibility in the banking sector and reducing fiscal deficits and debt to sustainable levels.

The Bank of England, in its quarterly Inflation Report, lifted its economic growth estimate and forecast that inflation will return to its 2.0 percent target earlier than projected earlier. The BoE forecast economic growth to accelerate to 0.5 percent in the second quarter from 0.3 percent in first quarter of 2013. However, the recovery is likely to remain weak by historical standards. This is the last quarterly report from Governor Mervyn King — he retires at the end of the next month.

Asia Pacific

Equities ended mostly higher for the week despite concerns about the state of the U.S. economy and uncertainty over the prospects of the Fed winding down its bond buying program. Earlier in the week, Chinese data for industrial production and retail sales were mixed and put pressure on stocks. The data underscored the fragility of the country’s recovery. However, expectations of central bank largesse kept investors in a positive mood. On the week, the Nikkei jumped 3.6 percent, the Kospi gained 2.2 percent and the Shanghai Composite was 1.6 percent higher. However, the All Ordinaries, Hang Seng and KLCI declined 0.6 percent, 1.0 percent and 0.2 percent respectively.

Since Shinzo Abe was elected prime minister, the Nikkei has shot up in value. And in the four and a half months in 2013, the index already is 45.6 percent higher than at the end of 2012. The graph however, puts this heady gain in a long term perspective. The index now stands at 15,138.12 — its highest level since December 28, 2007. Expectations for the Japanese government's economic policies, dubbed Abenomics, have made investors optimistic about Japan’s recovery from debilitating deflation. The Bank of Japan’s massive quantitative easing program announced at its April 4^th meeting have reassured markets that the bank is serious about fighting deflation.

The Sensex extended its gains to the fifth straight week as overseas investors remained bullish on India on the back of slowing inflation and expectations of more monetary easing measures by the Reserve Bank of India. The Sensex was up 1.0 percent on the week led mainly by gains in financial stocks. It is now at its highest level in nearly three years. Data earlier this week showed wholesale inflation slowed to below 5 percent in April. This led to a rally in equities as investors expect a slowing in inflation will give the RBI room to cut interest rates further to boost India's economy. The bank has already reduced rates two times (January and April) this year to 7.5 percent.

Currencies

The U.S. dollar advanced against all of its major counterparts last week. The currency slipped on Thursday thanks to weak economic reports, but resumed its climb the next day. The yen continued its decline Friday as it plumbed lows not seen since October 2008. The dollar was up primarily because market participants expect the Federal Reserve to cut back on its quantitative easing as early as this summer. San Francisco Fed President John Williams said he is open to trimming the central bank's bond buying program in coming months if the economy continues to improve. Other Fed presidents have offered similar views recently including Philadelphia Fed’s Charles Plosser and Kansas City’s Esther George.

Selected currencies — weekly results

Indicator scoreboard

EMU

March industrial production was up 1.0 percent on the month but was 1.7 percent weaker on the year. The monthly improvement was led by the energy sector where output, boosted by the cold snap, climbed 3.8 percent on the month. Capital goods (1.2 percent) and durable consumer goods (1.9 percent) gained. Only non-durables (down 0.7 percent) disappointed although intermediates (down 0.1 percent) also struggled. Regionally it was a good period for Germany and Spain where production expanded a monthly 1.7 percent and 2.1 percent respectively. There was similarly good news from Finland (3.8 percent), Greece (1.4 percent), the Netherlands (4.5 percent) and Portugal (5.3 percent). However, France (down 0.9 percent) and Italy (down 0.8 percent) suffered reversals and Slovenia, currently in the spotlight as another potential bailout candidate, saw its output drop 2.9 percent.

First quarter provisional gross domestic product contracted a quarterly 0.2 percent. The decline followed an unrevised 0.6 percent drop in real GDP in the fourth quarter and left total output for the region 2.0 percent below its year ago level. In line with normal practice, Eurostat provided no details of the key GDP expenditure components in its flash estimate but the monthly data suggest that final domestic demand was again a drag. Among the larger economies Germany managed a disappointingly small 0.1 percent quarterly advance and there were fresh declines in France (0.2 percent), Italy (0.5 percent) and Spain (0.5 percent). Neither the Italian nor Spanish economy has seen any growth since the second quarter of 2011. Elsewhere performances were poor with quarterly expansion among those members supplying the data restricted to just Belgium (0.1 percent) and Slovakia (0.3 percent). There will be little surprise that Cyprus (down 1.3 percent) was at the bottom of the growth table and there was renewed weakness too in the Netherlands (down 0.1 percent), Portugal (down 0.3 percent) and Finland (down 0.1 percent). Estonia's good run also came to an abrupt halt (down 1.0 percent) while Austrian activity was unchanged from the fourth quarter.

April final harmonized index of consumer prices confirmed the sharp slide shown in the flash estimate. On the month, the HICP slipped 0.1 percent and was up 1.2 percent on the year for a 0.5 percent decline from March. This is the lowest year-on-year rate since February 2010. The decline in headline inflation was mirrored in all three core measures suggesting that underlying trends have weakened too. Excluding food, drink, tobacco & energy, prices were up 1.0 percent on the year after a 1.5 percent gain last time while without just unprocessed food & energy, the increase slowed to 1.1 percent from 1.6 percent. Omitting only seasonal food & energy, the annual inflation rate was down from 1.7 percent to 1.2 percent. Regionally, 12-month inflation rates dropped in all member states and declined further into negative territory in Greece (minus 0.6 percent) which remained firmly at the foot of the Eurozone ladder. Estonia (3.4 percent) continued to occupy the top wrung ahead of the Netherlands (2.8 percent) and Finland (2.4 percent).

March seasonally adjusted merchandise trade surplus widened out to €18.7 billion, a new record high. The February surplus was also revised a little larger at €12.7 billion while in unadjusted terms the black ink stood at €22.9 billion, up from €10.1 billion in mid-quarter. Within the seasonally adjusted data, exports jumped 2.8 percent on the month to a new peak of €161.9 billion but imports, down 1.0 percent, fell for the fourth time in five months to their weakest level since June 2011. Compared with March 2012 exports were unchanged but imports were 10.0 percent lower. As always the overall surplus was dominated by Germany (€14.4 billion), but black ink was also recorded in France (€2.3 billion) and Italy (€2.1 billion). However, Spain remained in the red, recording a €-1.5 billion deficit.

Germany

First quarter gross domestic product edged up 0.1 percent from the fourth quarter when it declined a steeper revised 0.7 percent. On a workday adjusted basis, real GDP was down 0.2 percent from a year ago after having increased 0.3 percent in the previous period. This was the first time that annual growth has been negative since the fourth quarter of 2009. As usual with the flash estimate, the Federal Statistics Office provided few details. However, it did indicate that what growth there is could be attributed to household spending while gross fixed capital formation contracted again and net exports were essentially flat.

France

First quarter gross domestic product was down 0.2 percent on the quarter and contracted 0.4 percent from a year ago. Weakness was broad based across most of the major GDP expenditure components among which a 0.9 percent quarterly decline in gross fixed capital formation stood out. Residential investment (down 1.3 percent) was especially soft but businesses (down 0.8 percent) fared little better. Consumer spending remained very sluggish, down 0.1 percent from the fourth quarter when it was only unchanged. General government consumption (0.3 percent) at least provided a small boost but domestic final sales slipped 0.1 percent. Inventory accumulation added just 0.1 percentage points to the bottom line. Foreign trade was disappointing as exports compounded a 0.7 percent quarterly decline at the end of 2012 with a 0.5 percent drop this time. With imports edging 0.1 percent firmer, net exports, the mainstay of the French economy in 2012, subtracted 0.2 percentage points from growth and so offset the lift provided in the fourth quarter.

Italy

First quarter provisional gross domestic product declined 0.5 percent — a record seventh consecutive quarterly contraction. On the year, workday adjusted total output was 2.3 percent below its year ago level. The limited details provided in the flash estimate indicated fresh declines in both the goods producing and service sectors only partially offset by an expansion in agriculture.

March seasonally adjusted merchandise trade surplus was €2.4 billion, up €0.4 billion from a significantly larger revised excess in February. The modest improvement at quarter-end reflected a 1.2 percent monthly increase in exports that easily more than offset a 0.2 percent gain in imports. However, neither came close to reversing their respective declines in February and the annual decline in exports steepened from 2.8 percent to 6.0 percent and in imports from 9.7 percent to 10.6 percent.

United Kingdom

April claimant count joblessness fell 7,300 after a steeper revised 9,900 decline in March. The drop was the fifth in a row and, on this measure, implies a cumulative drop in unemployment of more than 47,000 since November 2012. Over this period, the smallest decline was 5,300 (February) and the largest 13,900 (December). The lack of any real volatility here is consistent with a steady, if likely minimal, rate of economic growth. The unemployment rate was 4.5 percent, down from 4.6 percent last time and the first decline since December. The ILO data painted a similar picture with the jobless rate on this definition also dipping a tick over the three months to March to 7.8 percent. However, despite the apparent modest improvement in jobs, wages remain very weak. With the single month annual rate slumping to minus 0.7 percent in March, headline (first quarter) average earnings growth was just 0.4 percent, the weakest performance since the first quarter of 2001. Even without bonus payments, the rate was only 0.8 percent, the smallest increase on record.

Asia/Pacific

Japan

April corporate goods price index was up 0.3 percent from March and unchanged from a year ago. Among the sub-categories, information & communication prices dropped 6.2 percent from a year ago. Also recording significant declines were pulp, paper & related products (down 2.9 percent), iron & steel (down 5.0 percent), transportation equipment and electrical machinery & equipment (both down 1.5 percent) and business oriented machinery (down 1.6 percent). Prices for lumber & wood products were up 6.0 percent after increasing 2.5 percent last time. Chemicals & related products were 1.7 percent higher after rising 1.0 percent in March.

March tertiary index dropped a greater than expected 1.3 percent and was unchanged when compared with a year ago. Analysts expected a monthly drop of 0.7 percent. Among the industries that declined were information & communications (down 8.3 percent), wholesale & retail trade (down 0.7 percent), electricity, gas, heat supply & water (down 3.9 percent), living related & personal services & amusement services (down 1.5 percent), finance & insurance (down 0.2 percent) and learning support (down 1.5 percent). Among of the industries that increased in March were scientific research, professional & technical services (5.5 percent), transport & postal activities (1.4 percent), medical, health care & welfare (0.9 percent), real estate &goods rental & leasing (1.1 percent), accommodations, eating & drinking services (0.6 percent) and compound services (5.9 percent).

First quarter gross domestic product was up a greater than expected 0.9 percent – expectations were for a 0.7 percent increase. On an annualized basis, GDP expanded 3.5 percent. Analysts expected an increase of 2.8 percent. It was the second consecutive quarterly increase in growth after two quarters of contraction. The quarterly gain was primarily thanks to strong personal consumption which was up 0.9 percent for an annualized rate of 3.7 percent. Personal consumption which accounts for 60 percent of GDP contributed 0.6 percentage points to growth. However, CAPEX (private non-residential investment) declined a quarterly 0.7 percent and subtracted 0.1 percentage point from growth. Private residential investment was up 1.9 percent, contributing 0.1 percent to growth. Exports of goods and services were up 3.8 percent on the quarter while imports increased 1.0 percent. Net exports contributed 0.4 percentage points to growth.

March private sector machinery orders excluding volatile ones for ships and those from electric power companies, increased a seasonally adjusted 14.2 percent. On the year, orders were up 6.1 percent. These data show a vast improvement over February when orders increased 4.2 percent and were down 9.9 percent on the year. The total value of machinery orders received by 280 manufacturers operating in Japan increased 27.8 percent in March from the previous month on a seasonally adjusted basis. Manufacturing orders were up 13.3 percent and nonmanufacturing orders (excluding volatile items) were 14.3 percent higher. Orders from overseas jumped 52.1 percent. In the April to June period the total amount of machinery orders was forecast to decrease by 5.0 percent and private sector orders, excluding volatile ones, were forecast to retreat by 1.5 percent from the previous quarter respectively. In the 2012 Fiscal Year the total amount of machinery orders declined by 6.7 percent. Private sector orders, excluding volatile ones, fell 3.0 percent.

China

April industrial production was up 0.87 percent on the month and 9.3 percent from a year ago. For the year to date, output was up 9.4 percent when compared with the same months a year ago. Motor vehicle production was up 18.3 percent from April 2012 after a 12.4 percent gain last time. Textiles (10.1 percent after 9.5 percent), chemicals (12.3 percent after 11.4 percent) and general equipment (10.5 percent after 7.8 percent) also showed increased output. Power & thermal (5.5 percent after 1.4 percent), electricity (6.2 percent after 2.1 percent) and cement (8.7 percent after 6.9 percent) also advanced. The main areas of relative weakness were non-metal minerals (11.1 percent after 11.8 percent), transport equipment (1.5 percent after 4.8 percent) and steel (8.1 percent after 9.2 percent).

April retail sales edged up to 12.8 percent on the year from 12.6 percent last time. On the month, sales were up 1.23 percent. Sales were up 12.5 percent on the year for the year to date. The improvement in overall annual sales growth was wholly attributable to urban demand which strengthened by 0.4 percentage points to 12.6 percent. By contrast, rural sales eased 1.2 percentage points to a 13.8 percent rate. At a sector level performances were very lopsided with just gold, silver & jewelry (72.2 percent after 26.3 percent) and autos (13.0 percent after 5.5 percent) registering any acceleration. Elsewhere, purchases slowed across the board.

Americas

Canada

March manufacturing sales declined 0.2 percent following a slightly larger revised 2.8 percent increase in February. It was the third decline in the last four months and left sales 1.0 percent beneath their year ago level. However, the monthly drop in shipments was wholly attributable to weaker prices as volumes were up 0.2 percent. The slide in nominal sales was largely driven by petroleum & coal (down 2.6 percent) and chemicals (down 2.0 percent). There was also a nearly 17 percent drop in clothing manufacturing and a 3.3 percent contraction in miscellaneous manufacturing. However, plastic & rubber products advanced 3.7 percent and motor vehicles were up 1.5 percent. New orders slumped 2.2 percent on the month and backlogs were down 1.1 percent. Inventories edged just 0.1 percent lower to leave the inventory/sales ratio steady at 1.39 months.

April consumer prices declined 0.2 percent on the month. As a result, annual inflation dropped 0.6 percentage points to just 0.4 percent, its lowest level since October 2009. Excluding food and energy, core CPI was unchanged from March and soft enough to reduce the 12-month rate on this measure by 0.4 percentage points to 0.5. At the same time, the Bank of Canada index, which excludes eight volatile items, edged 0.1 percent higher on the month while the annual rate declined from 1.4 percent to 1.1 percent. Seasonally adjusted CPI was down an even steeper 0.4 percent from the end of the first quarter. On the same basis, both the excluding food and energy and BoC indexes were flat. Within the adjusted basket the main negative impact came from transportation where sharply lower gasoline charges contributed to the 1.1 percent monthly drop. Elsewhere, health & personal care as well as recreation, education & reading and clothing & footwear all recorded declines of 0.2 percent while food was off 0.4 percent. Only alcohol & tobacco (0.2 percent) and shelter (also 0.2 percent) posted gains.

Bottom line

Economic data mostly disappointed last week — Europe remained in the grips of recession and in the U.S., data were weaker than expected. However, Japan grew more than expected in the first quarter after an upwardly revised fourth quarter. Inflation in Canada, the Eurozone and the U.S. was muted thanks in part to declining gasoline prices.

The Bank of Japan meets this week but no major policy moves are anticipated. Flash PMIs for May are on tap for the U.S., the Eurozone, Germany and France. On Wednesday, the Eurozone will hold a summit — no major initiatives are expected.

Looking Ahead: May 20 through May 24, 2013

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