Global Markets

In a week that was light on economic data, investors focused attention on the Federal Reserve and Ben Bernanke and the outlook for continuing Fed stimulus. At the same time, investors in Asia especially fretted over the apparent slowing of growth in China and the reluctance of officials there to inject stimulus into the economy.

Chairman Bernanke reassured markets on Wednesday that the Fed was in absolutely no rush to tighten policy. Some market players thought the Chairman was taking a more dovish tone than in his June 19^th press conference. At that time, he said the Fed’s latest thinking was that tapering of asset purchases may begin later this year. While the message was unchanged, it appears as though Bernanke was simply more successful in conveying it this week. Following on the heels of numerous Fed officials trying to push back on perceptions of Fed hawkishness since the press conference, it looks as though the markets are finally getting the message. The timing and speed of tapering is data dependent. Furthermore, tapering is not tightening nor would it signal that actual rate hikes are imminent.

Once again a major international organization — this time the International Monetary Fund — cut back on its global growth estimates for this year and next. The IMF trimmed its global growth forecast for the fifth time since April 2012 due to a slowdown in emerging economies and the continuing woes in recession struck Europe. After initially projecting the global economy would expand by as much as 4.1 percent, the IMF now says that global growth will be 3.1 percent this year, unchanged from 2012 and less than the 3.3 percent forecast just in April. The forecast for global growth next year is 3.8 percent, down from 4.0 percent in the IMF’s April projections.

The IMF reduced its 2013 projection for the U.S. to 1.7 percent growth from 1.9 percent just three months ago, while next year’s outlook was trimmed to 2.7 percent from 3.0 percent initially reported in April. At the same time, the IMF now projects China’s growth to be 7.8 percent in 2013, down from the 8.0 percent April projection. The Eurozone is expected to contract 0.6 percent as the economies of France, Italy and Spain continue in recession. The IMF projected a 0.3 percent decline for the Eurozone in April.

However, it raised its forecast for Japan. It now expects Japan's economy to grow 2.0 percent this year on the back of its monetary stimulus, which has boosted confidence and private demand. It previously predicted Japan would grow 1.6 percent this year. The IMF also increased its projection for growth in Britain to 0.9 percent this year from its previous prediction of 0.7 percent.

Global Stock Market Recap

Europe and the UK

Most equities advanced on the week — investors were encouraged by Federal Reserve Chairman Ben Bernanke’s statements made by late Wednesday. However, the political situation in Portugal remains a concern after the country's President rejected an agreement between the ruling coalition and the opposition party on Thursday and called for early elections. Concerns over China’s weakening economy also served to limit the upside. On the week, the DAX soared 5.2 percent after sinking 1.9 percent the week before. The FTSE and CAC were up 2.7 percent and the SMI gained 2.6 percent. The three indexes have gained for three consecutive weeks.

Standard & Poor lowered Italy's sovereign rating by one notch to BBB from BBB+, citing weak economic prospects. S&P also put a negative outlook on the country's long term rating. Stocks there slid 0.7 percent on the week. And on Friday, Fitch stripped France of its AAA credit rating, warning that slower growth is hobbling the country's attempts to cut its debt. The rating was cut to AA+ and the outlook on the country's debt was put at stable. The downgrade caps a two week period in which political turmoil in Portugal and renewed protests in Greece have refocused investors' attention on the challenges facing the Eurozone economy.

Eurozone finance ministers approved payment of €3 billion to Greece in two tranches, but on strict conditions to restructure the economy. The first tranche of €2.5 billion will be paid this month and the remaining €0.5 billion in October. Athens has to fulfill its agreed commitments in July itself. Eurozone finance ministers said significant further work is needed over the next weeks to fully implement all prior actions required for the next disbursement. Reforms are needed on public administration and tax revenue collection. Greece’s unemployment rate (seasonally adjusted) edged up to a record high of 26.9 percent in April. The unemployment rate 15 to 24-year olds (not seasonally adjusted) for was 57.5 percent in April, up from 51.5 percent a year earlier.

Reassuring words about Eurozone stimulus came from European Central Bank Governing Council member and Bundesbank president Jens Weidmann. He said Thursday that the central bank's forward guidance on low interest rates will not deter it from increasing interest rates, if inflationary pressures emerge. The ECB's introduction of the forward guidance at its July meeting was justified by the current inflation outlook, Weidmann said in a speech in Munich.

Asia Pacific

Concerns about China’s growth tempered equities in this region even though they managed to increase on the week. Both the Australian All Ordinaries and Taiwan Taiex were 2.7 percent higher when the week ended while the Nikkei was up 1.4 percent. Australian markets rallied on Fed Chairman Ben Bernanke’s comments on Wednesday.

China’s growth prospects came to the fore Friday when China's Finance Minister Lou Jiwei cautioned the economy will likely grow at a slower pace than the government's official growth target for the year. An annual 6.5 percent or 7.0 percent economic growth rate would not be a ‘big problem’ as the country increases its focus on reforms and economic transformation. With second quarter GDP data due on Monday, his comments reinforced China's increased tolerance towards slower growth and reflect the determination of authorities to pursue more economic reforms that may benefit in the longer run.

Bank of Japan

As expected, the Bank of Japan monetary policy board (MPB) left its key interest rate range at zero to 0.1 percent. It also left its bond buying program unchanged so that the monetary base will increase at an annual pace of about ¥60 trillion to ¥70 trillion. It was the first time since January 2011 — before Japan’s natural and nuclear disasters in March that year — that the BoJ had ventured to use the word ‘recover.’

The BoJ said that the economy is expected to recover moderately on the back of resilience in domestic demand and the pick-up in overseas economies. However, the MPB noted that there remains a high degree of uncertainty concerning Japan’s economy including prospects for the European debt situation, developments in the emerging and commodity exporting economies and the pace of the U.S. recovery. Japan’s economy expanded at an annualized rate of 4.1 percent in first quarter. The International Monetary Fund raised its outlook for Japanese growth for 2013 to 2.0 percent, putting it well ahead of its G-7 peers.

The Japanese government plans to adopt a different measure of inflation than the BoJ’s. While the BoJ targets a 2.0 percent increase from a year ago in the core consumer price index — a measure that excludes volatile prices of fresh food only — the government plans to use ‘core-core’ CPI, which also excludes energy costs. The change will effectively raise the bar for Prime Minister Shinzo Abe's inflation goal. It means that higher energy prices will be taken out of the equation. The official, who was involved in the decision to switch to core-core said the change was meant to help ensure that Japan truly breaks the grip of deflation.

Currencies

The U.S. dollar retreated against its major counterparts last week after Fed Chairman Ben Bernanke said the U.S. economy still requires monetary stimulus to bolster growth and lower unemployment. The currency declined after minutes of the Fed’s June FOMC meeting showed several committee members wanted more signs of labor market improvement before slowing bond purchases.

The U.S. dollar pared a weekly loss against the euro as Philadelphia Fed President Charles Plosser said the Fed should start slowing monthly asset purchases in September. The currency had declined for the past two days after Bernanke signaled the bond buying will not be curtailed soon. The euro weakened as Fitch Ratings downgraded France and Portugal struggled with political turmoil.

The yen strengthened after the Bank of Japan boosted its view of the economy and refrained from adding stimulus. The yen gained against the U.S. dollar after the Bank of Japan increased its assessment of the economy by referring to a recovery for the first time since before an earthquake and tsunami in March 2011.

Selected currencies — weekly results

Indicator scoreboard

Germany

May seasonally adjusted merchandise trade surplus narrowed to €14.1 billion — down more than €3 billion from a slightly smaller revised €17.5 billion April surplus and at its lowest level in more than a year. The unadjusted surplus weighed in at €13.1 billion after €18.0 billion last time. The deterioration in the adjusted figures reflected a 2.4 percent monthly drop in exports compounded by a 1.7 percent increase in imports. This was the first decline for exports since February and the third consecutive increase for imports. Compared with May 2012, the former showed a 4.8 percent decline, within which sales to other EMU countries were off a disproportionately steep 9.6 percent, while the latter posted a smaller 2.6 percent decline.

May industrial production dropped a surprisingly steep 1.0 percent on the month. With April's already strong bounce revised up to an even more robust 2.0 percent, the decline left intact a respectable upward trend. However, annual workday adjusted growth was still down 1.0 percent. May was hit by a 2.3 percent monthly decline in capital goods output and a nearly 5 percent drop in consumer durables. Declines here were easily more than enough to offset a 1.0 percent gain in intermediates and a 0.9 percent increase in consumer nondurables. Elsewhere, construction contracted 2.6 percent from April and energy was off 1.5 percent.

France

May industrial production declined 0.4 percent on the month and was up 0.4 percent on the year which is the first positive reading since November 2011. The monthly drop in manufacturing was steeper although a 1.1 percent decline here followed a sharper 2.6 percent increase at the start of the quarter. Still, weakness was broad based with monthly declines registered in all of the main manufacturing sub-sectors except food & agriculture (0.0 percent). Refining (down 2.5 percent) and electronics & machinery (down 2.0 percent) performed especially poorly but transport equipment (down 0.5 percent) and the other manufactured goods category (down 1.0 percent) also had a poor May. The headline fall was checked by a 2.1 percent increase in energy and extracted goods but construction slipped 0.2 percent.

United Kingdom

May industrial production was unchanged on the month and down 2.3 percent from a year ago. However, the steepening in the annual decline was essentially due to unfavorable base effects caused in part by a shift in last year's May holiday into June. This should be unwound in the next report. Manufacturing dropped 0.8 percent for the second consecutive decline and the worst performance since January. The 12-month rate of decline here accelerated to 2.9 percent but similarly will have been biased lower by holiday effects. The main downward impact on manufacturing output was a 5.9 percent plunge in basic pharmaceutical products & pharmaceutical preparations. This was compounded by a 4.1 percent drop in basic metals & metal products as well as a 3.6 percent slide in computer, electronic & optical products. Partial offsets were provided by a 2.3 percent increase in food, drink & tobacco alongside a 2.4 percent gain in chemicals and a 1.8 percent increase in rubber & plastics. Elsewhere mining & quarrying posted a 3.5 percent monthly increase, water & waste management advanced 2.6 percent but utilities were down 1.7 percent.

May merchandise trade gap was virtually unchanged from April at Stg8.5 billion. Exports were up 1.5 percent on the month while imports climbed 1.3 percent. However, the headline figure was flattened by strong sales of oil and masked a much more significant worsening in the underlying picture. Excluding oil and other erratic items, the deficit was Stg8.1 billion, up Stg0.7 billion from April. Thanks to oil, net trade with the EU improved a little with the bilateral deficit narrowing by Stg0.6 billion to Stg4.4 billion. Consequently, the shortfall with the rest of the world deteriorated sharply, increasing from Stg3.4 billion to Stg4.1 billion.

Asia/Pacific

Japan

June corporate goods price index was up 0.1 percent and 1.2 percent from a year ago. This was the third consecutive increase from a year ago. Gains and declines in prices were mixed among the major categories. On the year, pulp, paper and related products were up 7.5 percent after increasing 9.3 percent the month before but iron & steel slid 4.5 percent after declining 3.5 percent. Prices for business oriented machinery, electronic components & devices, electrical machinery & equipment and information & communications equipment were down from a year ago. Nonferrous metals increased 8.5 percent after gaining 8.3 percent the month before. Food prices were up 0.6 percent and 1.0 percent in May.

May tertiary industry index was up 1.2 percent on the month and 1.6 percent from a year ago. Among the industries that make up this index, the finance & insurance component was up 2.7 percent on the month while scientific research, professional & technical services added 3.6 percent. Wholesale & retail trade gained 0.8 percent and information & communications advanced 2.7 percent. Accommodations, eating & drinking places were 1.5 percent higher.

May unadjusted core machinery orders excluding volatile orders soared 10.5 percent on the month after sinking 8.8 percent in April. On the year, core orders jumped 16.5 percent. On the month, manufacturing orders were up 3.8 percent but were 6.2 percent lower from a year ago while nonmanufacturing orders soared 25.4 percent and 34.3 percent. Orders from overseas were up 10.3 percent on the month and 17.1 percent on the year. Government orders were 44.8 percent higher on the month and 51.1 percent above a year ago.

Australia

June employment increased 10,300 to 11,668,500. The increase was due to increased part time employment, up 14,800 to 3,524,100. This was offset by a decline in full time employment which was down 4,400 to 8,144,500. June unemployment increased to 5.7 percent. The number of people unemployed increased by 23,700 to 709,300. The seasonally adjusted labour force participation rate edged 0.1 percentage point higher to 65.3 percent. Aggregate hours worked also increased -- up 8.8 million hours to 1,638.6 million hours. The employment to population ratio, which expresses the number of employed persons as a percentage of the civilian population aged 15 years and over, was unchanged at 61.6 percent.

China

June consumer price index was up 2.7 percent from a year ago after climbing 2.1 percent in May. Prices were unchanged on the month in contrast to a decline of 0.6 percent in May. For the first six months of the year, the CPI was up 2.4 percent from a year ago. Food prices soared 4.9 percent on the year after increasing 3.2 percent in May. Non-food prices were up 1.6 percent for the third month. The urban CPI was up 2.6 percent after increasing 2.1 percent the month before. At the same time, rural prices jumped 2.8 percent after 2.2 percent in May. Prices among other groups were little changed. For example, household facilities increased 1.5 percent after 1.6 percent the month before and housing prices were up 3.1 percent after 3.0 percent in May.

June producer price index dropped 2.7 percent from a year ago. The index slid 0.6 percent from May. For the first six months of the year, producer prices were down 2.2 percent. All categories declined except consumer goods, which were unchanged from a year ago. Raw materials procurement, fuel, and power dropped 2.6 percent after losing 3.0 percent in May. Production materials were down 3.5 percent after sliding 3.8 percent in May. Ferrous metals plunged 6.3 percent, non-ferrous metals sank 4.5 percent, fuel & power dropped 4.9 percent and raw chemical materials were down 3.0 percent.

June unadjusted merchandise trade surplus was $27.13 billion, about as expected. However, exports significantly missed the consensus estimate of a gain of 4.0 percent and dropped 3.1 percent from a year ago. Similarly, imports slid 0.7 percent compared with expectations of a 7.6 percent increase. Exports declined to the U.S. (down 5.4 percent), the EU (down 8.3 percent) and Japan (down 5.0 percent). Imports were up from the U.S. (up 14.7 percent) and the EU (0.9 percent) but down from Japan (16.3 percent). On a seasonally adjusted basis, exports were up 2.1 percent after sliding 8.2 percent in May while imports were up 3.2 percent after sinking 8.6 percent the month before. From a year ago, seasonally adjusted exports were down 1.0 percent after increasing 1.2 percent in May while imports were up 3.6 percent after slipping 0.6 percent.

Bottom line

The Bank of Japan left its key monetary policies unchanged and used the word ‘recover’ for the first time since January 2011. Investors focused on the FOMC minutes and Chairman Ben Bernanke’s remarks on Wednesday. They combined to send the U.S. dollar down and equities up.

The Bank of Canada meets for the first time under its new governor, Steven Poloz. Minutes from the Bank of England’s meeting earlier this month also are expected. China releases its June industrial production and retail sales numbers along with the highly anticipated estimate of first quarter growth. Elsewhere, the UK posts producer and consumer price data along with retail sales and its labour market report for June.

Looking Ahead: July 15 through July 19, 2013

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