Global Markets

While an upbeat piece of economic news hasn’t necessarily sent markets into a tail spin as they did a few weeks ago, investors still are casting a wary eye towards the Federal Reserve each time a favorable bit of news is released. This does not only apply to U.S. markets — but to markets globally as well. Earnings season has produced a mixed bag of news so far. Stocks that missed estimates were sold off while those who surpassed expectations rallied.

In economic news, it was a relatively quiet week. The most notable releases were the July flash PMI indexes for the Eurozone, France, Germany, China and the United States. Europe and the U.S. showed signs of improvement while China slumped. In the UK, provisional second quarter gross domestic product showed that the economy grew for the third consecutive quarter. And in Japan, the June core consumer price index (excluding only fresh food) was up 0.4 percent on the year. This was interpreted as a sign that Abenomics is beginning to take hold.

Global Stock Market Recap

Europe and the UK

The CAC was the best performer last week, rising three of five days and gaining 1.1 percent on the week. However, the other major indexes including the FTSE, DAX and SMI retreated for four of five days losing 1.1 percent, 1.0 percent and 1.7 percent respectively. Although the earnings picture improved Friday, investors were reluctant to take positions ahead of the FOMC announcement at mid-week and the July U.S. employment report on Friday.

Eurozone (EZ) officials have approved the transfer of €4 billion of funding to Greece and EZ governments are expected to approve disbursement by Monday. The funds are split between the temporary bailout fund (EFSF) and the income generated from national central banks' holdings of Greek government bonds.

Markit reported its flash purchasing managers’ manufacturing indexes last week. The good news was that the Eurozone economy appears to have begun the third quarter on a rather stronger note than generally expected. However, the bad news was a continued deterioration in China’s manufacturing sector. For all of the Eurozone, the manufacturing flash PMI edged over the 50 breakeven point to a reading of 50.1. Germany also improved to a reading of 50.3 indicating growth. However, France continues to lag — although still contracting at 49.8, it is shrinking at a slower rate.

Unlike the flash reports for China and the U.S., readings for services and a composite index are also included in the flash release. Thus, the flash composite output estimate weighed in at 50.4, up 1.7 points from its final June reading and on the right side of the 50 growth threshold for the first time since January 2012. Both the flash manufacturing and service sector PMIs advanced. Regionally, there remains a significant divergence between the two core countries with the German composite output index at 52.8, still above its French counterpart. However, the latter hit a 17-month peak and is now within shouting distance of the key 50 mark.

China and the U.S. appear to be going in opposite directions — at least in manufacturing. While China’s flash manufacturing PMI crumbled to a reading of 47.7 from June’s final of 48.2 to indicate a faster pace of deterioration, the U.S. counterpart climbed to a plus 50 reading of 53.2 from the previous month’s final of 51.9 to indicate a faster pace of growth.

Asia Pacific

Equities were mixed last week. Investors continued to have concerns over China's economy given the sagging flash manufacturing PMI reading for July. There were reports the Chinese government has ordered more than 1,400 companies in 19 industries to shut down outdated production capacities until the end of September as part of efforts to shift toward slower, more sustainable economic growth. Separately, People's Bank of China Governor Zhou Xiaochuan wrote in an article published on the website of the official People's Daily newspaper that the nation will maintain its prudent monetary policy to create more financing channels for small businesses. The Shanghai Composite was up 0.9 percent on the week while the Hang Seng gained 2.8 percent.

In the good news/bad news category, the Nikkei plummeted 3.0 percent on Friday and dropped 3.2 percent for the week, weighed down by a stronger yen and lackluster earnings reports. The yen increased in value Friday after the June consumer price index report showed that inflation as measured by the core rate excluding only fresh food increased for the first time in 14 months and by the largest amount in nearly five years. Inevitably, when the yen rises in value against its major counterparts, exporters sell off. Earlier in the week, investors cheered the outcome of Sunday’s upper house election in which Prime Minister Shinzo Abe’s party won in an expected landslide.

RBNZ

As expected, the Reserve Bank of New Zealand left its overnight cash rate at 2.5 percent where it has been since March 2011. The RBNZ expects it to remain at 2.5 percent for the rest of the year. The strong New Zealand dollar is helping hold down prices for internationally traded goods with the CPI rising a benign 0.2 percent in the June quarter. Annual inflation was up 0.7 percent, the lowest in nearly 14 years and below the RBNZ’s inflation target range of 1 percent to 3 percent.

The RBNZ said the pace of future interest rate increases will depend on the booming housing market’s impact on prices. The New Zealand dollar climbed after the statement as traders increased bets Governor Graeme Wheeler will raise the official cash rate as early as January. The RBNZ has left the cash rate unchanged to allow the economy to recover from earthquakes and to revive confidence after Europe’s sovereign debt crisis curbed global demand. Exporters have also been buffeted by near zero interest rates in the U.S. and Europe, which has helped boost the New Zealand dollar.

The RBNZ forecast annual inflation accelerating to 1.5 percent by mid-2014 and 2.1 percent a year later. It projected annual economic growth will accelerate to 3.6 percent in the second half of 2014, from a 2.4 percent pace in the first quarter this year. “Growth in the New Zealand economy is picking up and although uneven is becoming more widespread across sectors,” Wheeler said. “Consumption is increasing and reconstruction in Canterbury will be reinforced by a broader national recovery in construction activity, particularly in Auckland. This will support aggregate activity and eventually help to ease the housing shortage.” New earthquakes in the Wellington area took place this week, causing structural damage to buildings.

Currencies

The U.S. dollar was down against all of its major counterparts including the euro, yen, pound, Swiss franc and the commodity currencies — the Canadian and Australian dollars. The dollar declined after a report that said the Federal Reserve will underline its intention to keep interest rates low for a long time at its upcoming midweek meeting. The report said that the Fed may debate tweaking its forward guidance message to hammer home its message that it will not be raising rates any time soon. With the Fed, European Central Bank and Bank of England meeting, investors were likely to remain cautious.

The yen climbed against all except one of its 16 most-traded counterparts as demand for refuge increased amid ebbing risk appetite and investors cut back on wagers that the currency will weaken against the dollar. The yen vaulted higher at the end of the week after the June core consumer price index increased 0.4 percent from a year ago. Japanese stocks continue to have a tight correlation with the yen. The currency has dropped against the dollar as Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda have pushed to stem deflation and spur growth.

Selected currencies — weekly results

Indicator scoreboard

EMU

June broad money supply M3 unexpectedly slowed last month with annual growth slipping from an unrevised 2.9 percent in May to just 2.3 percent, its weakest pace since January 2012. As a result, the ECB’s preferred 3-month moving average measure eased to 2.8 percent. Lending to the non-bank private sector was again very soft, declining 1.6 percent on the year after a 1.1 percent drop in mid-quarter. Borrowing by households was only flat after a 0.2 percent annual increase last time. Within this, loans for house purchase were off 0.2 percentage points at 0.8 percent. At the same time, lending to non-financial corporations was down 3.2 percent on the year while borrowing by non-monetary financial intermediaries (excluding insurance companies and pension funds) slumped from 0.3 percent to minus 3.2 percent. Moreover, the deceleration in M3 was mirrored in the narrower M1 aggregate which posted an annual increase of 7.5 percent, some 0.9 percentage points short of its May pace.

Germany

Ifo survey suggests that July was a moderately good month for economic activity. At 106.2 the overall business sentiment index was up 0.3 points from its June level and at its highest level since March. The minor improvement reflected stronger current conditions. The sub-index here gained 0.7 points to 110.1 although essentially this just reversed June's decline. Expectations edged a tick weaker to 102.4. Morale among most of the major sectors was similarly little changed from June although retail saw a welcome bounce to its highest reading since July last year.

United Kingdom

Second quarter provisional gross domestic product was up 0.6 percent on the quarter and was up 1.4 percent on the year for its best performance since the first quarter of 2011. First quarter growth was unrevised at 0.3 percent both on the quarter and year. As usual with the preliminary report, there are no details of the GDP expenditure components. However, from the output side both the goods producing and service sectors made positive contributions to quarterly growth. The former posted a 0.6 percent gain within which manufacturing rose 0.4 percent, mining & quarrying 1.5 percent and water supply 2.8 percent. By contrast, electricity, gas and steam dropped 1.4 percent. A 0.6 percent quarterly advance in services was mainly due to a 1.5 percent jump in distribution, hotels & catering which alone boosted growth by 0.2 percentage points but transport, storage & communication (0.6 percent) and business services & finance (0.5 percent) also made solid headway. Government grew just 0.1 percent. Elsewhere, construction expanded a quarterly 0.9 percent and agriculture was up 1.1 percent.

Asia/Pacific

Japan

June merchandise trade deficit was a larger than expected Y180.8 billion. Exports were up 7.4 percent from a year ago, less than the consensus 10.5 percent while imports jumped 11.8 percent. Expectations were for a 14.9 percent increase. Exports were up for the fourth straight month from a year ago while import posted their eighth straight increase. Exports to Asia were up 7.4 percent and to China, 4.8 percent for the fourth and third consecutive increases respectively. Exports to the U.S. jumped 14.6 percent for the sixth increase in a row. After 21 consecutive declines, exports to the EU increased 8.6 percent from a year ago. On a seasonally adjusted basis, the deficit was Y598.7 billion. Imports were down 1.7 percent in June after increasing 4.3 percent the month before. On the year, adjusted imports were up 13.8 percent. Exports edged up 1.1 percent and 11.0 percent from a year ago.

June consumer prices were unchanged on the month and up 0.2 percent from a year ago. The crucial CPI core that excludes only fresh food was also unchanged on the month and was up 0.4 percent from June 2012. This was the first positive CPI reading since April 2012. Excluding food and energy, the CPI was down 0.1 percent from May and down 0.2 percent on the year. While one month does not make a trend, the improved CPI readings will certainly be well received in Japan where the Bank of Japan has vowed to rid the country of deflation and have an inflation rate of 2 percent. Among the major categories, food prices were down 0.9 percent from a year ago, housing dropped 0.5 percent and furniture & household utensils slid 2.4 percent. However, offsetting these declines were an annual jump in fuel, light & water charges of 5.7 percent and increase of 1.8 percent for transportation & communication. Both goods and services prices increased 0.3 percent and 0.1 percent. 

Australia

Second quarter consumer price index was up 0.4 percent on the quarter and for the second consecutive quarter. On the year, the CPI was up 2.4 percent. The most significant price increases in the June quarter were for medical & hospital services (up 3.4 percent), tobacco (up 3.0 percent), new dwelling purchase by owner occupiers (up 0.9 percent), furniture (up 4.8 percent) and rents (up 1.1 percent). The most significant offsetting price declines were for domestic holiday travel & accommodation (down 4.0 percent) and automotive fuel (down 3.1 percent). Two analytical measures used by the Reserve Bank of Australia are the trimmed mean and weighted median. The trimmed mean was up 0.5 percent and 2.2 percent while the weighted median jumped 0.7 percent and 2.6 percent.

Americas

Canada

May retail sales jumped 1.9 percent for their third consecutive increase. On the year, sales were up 3.6 percent. In volume terms, sales were also up 1.9 percent from May, their third consecutive monthly increase. The gain in part reflected a 4.3 percent monthly jump in spending on autos and excluding this sector, sales were up 1.2 percent. There were solid gains in food & drink (1.1 percent), building material & garden equipment & supplies (3.7 percent), furniture & home furnishings (2.1 percent) and in clothing and accessories (1.2 percent). Gasoline stations (1.4 percent) also fared well alongside general merchandise (also 1.4 percent). The only areas of any real weakness were electronics & appliances (down 0.8 percent) and miscellaneous (down 0.5 percent).

Bottom line

Although the economic calendar was light — unlike the upcoming two weeks — the data showed that things were improving somewhat in the Eurozone and the UK but deteriorating in China. The Reserve Bank of New Zealand decided to keep its OCR at 2.5 percent for the rest of the year but would consider raising it later to combat expected inflationary pressures from the rebuilding of Canterbury after its devastating earthquake in March 2011.

The Federal Reserve, Bank of England and the European Central Bank meet this week. And while none are expected to change their current policy interest rates or bond buying schemes, changes in the nuanced wording in their statements will have bank watchers parsing them very carefully. Among the plethora of new economic information, July purchasing managers indexes will indicate the health — or not — of that sector. Japan’s key data are on tap at the beginning of the week while the week climaxes to a close on Friday with the U.S. employment situation report. And there are many key reports in between to keep market players alert.

Looking Ahead: July 29 through August 2, 2013

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