Global Markets

Four central banks met last week and all four left their monetary policies unchanged. And yet the economic conditions in each of their countries are diverging from one another. The U.S. is probably the best performing economy of the four. The Eurozone remains in recession although there are some signs of life, while in the UK the economy seems to be growing — second quarter GDP was up 0.6 percent on the quarter. However, India is suffering from a basket of woes, including a tumbling rupee.

Federal Reserve

The FOMC left its federal funds interest rate range at zero to 0.25 percent. The Committee also decided to continue purchasing additional agency mortgage backed securities at a pace of $40 billion per month and longer term Treasury securities at a pace of $45 billion per month. The FOMC made very few changes to its policy statement, but the changes that were made tilted toward the dovish side. Compared to June, the economy now appears to be expanding at a “modest,” rather than a “moderate” pace.

According to analysts there was a chance that the FOMC would use its policy statement to confirm its apparent intention to reduce the pace of asset purchases later this year, but it did not do so. This probably means that the FOMC is still unsure about the timing for pulling back on its bond purchases. Economic data have been mixed, with job growth holding steady at just under 200,000 per month, while GDP growth is proving to be quite weak.

Bank of England

The Bank of England monetary policy committee left its policy Bank Rate at 0.5 percent and its quantitative easing ceiling unchanged at Stg375 billion. The decision was a foregone conclusion in the wake of a raft of generally positive economic news. Growth is accelerating and inflation, while still well above target, is performing much as officially expected. While the BoE took the unusual step of issuing a statement explaining its July decision, it did not do so in August.

The Quarterly Inflation report which is due August 7^th is the next major policy focal point for financial markets. In particular there is significant speculation that the monetary authority will detail plans to adopt some form of forward guidance. From his time at the Bank of Canada, BoE governor Mark Carney is known to be a supporter of such a policy regime.

The bank also made no announcement about an expected shift in strategy to help Britain's economic recovery, under which it could start providing guidance on how long interest rates are likely to stay at their record low. Finance minister George Osborne asked Carney and the rest of the BoE's monetary policy committee to report to him on Wednesday — at the same time as the bank's quarterly Inflation Report is issued — on the merits of bringing forward guidance to Britain. Carney, at a news conference also scheduled for Wednesday, will make his first public comments on Britain's economy since taking charge of the BoE.

European Central Bank

The ECB lived up to market expectations by leaving key policy rates on hold. The refi rate remains at 0.5 percent and the deposit and marginal lending facility rates stay at 0.0 percent and 1.0 percent respectively.

At his press conference, Draghi offered forward guidance saying that the ECB expects to keep interest rates at low levels for an extended period of time, assuming inflation expectations remain anchored. The ECB reacted last month to market turmoil sparked by the Fed's exit plan by breaking with precedent and offering forward guidance on rates. "The Governing Council confirms that it expects the key ECB rates to remain at present or lower levels for an extended period of time," he said, affirming last month's first stab at giving forward guidance on rates. It was unanimously supported by the 23-strong council, he said.

Regarding the publication of minutes and evaluation of the ECB’s communications, he noted that unlike the FOMC or the BoE monetary policy committee or Japan’s monetary policy board, the ECB governing council is made up of member central bank governors who are there on a personal capacity. They are independent of their respective countries’ policies and as such would not be able to speak as freely were they to be identified. This is absolutely key as no central banker would want to waver from defending national interests if the minutes of his words and actions were to be revealed back home. Talks will be held in the fall.

Reserve Bank of India

The RBI elected to leave its key repo rate unchanged at 7.25 percent. The reverse repo and the marginal facility rates, which together determine the official interest rate corridor, were similarly held steady at 6.25 percent and 10.25 percent respectively.

In a recent move to address the current weakness in the rupee, the RBI also chose to tighten liquidity via a number of measures, including increasing the Marginal Standing Facility (MSF) rate by 200 basis points, bringing it to 10.25 percent. The RBI clearly felt it had to show a stronger intent to put a floor under the rupee, due to the potential inflationary implications of a softer currency and the related negative short term effects on the trade position.

This might be the last Monetary Policy Statement for Reserve Bank Governor Duvvuri Subbarao. Subbarao was first appointed governor of the RBI in September 2008 for a three year term which was extended for another two years and is ending on September 4.

PMI update for July

Manufacturing PMIs in Europe are beginning to show nascent signs of growth. While not all are above the 50 breakeven point between growth and contraction, the readings have improved since June. However, the PMIs in China, Japan and Australia did not.

PMI reading in China is complicated with two indexes to choose from — the ‘official’ and the Markit/HSBC. While the official PMI edged up 0.2 points to 50.5, the HSBC slumped to a reading of 47.7. The methodology of the official index was revised this year and many analysts question its accuracy. In India, the seasonally adjusted manufacturing PMI slipped to 50.1 in July from 50.3 the month before, indicating some stagnation in conditions. Output was down for the third consecutive month and order flows weakened, while inventory accumulation and employment growth slowed. Australia’s PMI plunged 7.6 points to 42.0 in July 2013. The drop more than unwound the promising improvement in June and brought it in line with the average level seen over the past year.

The manufacturing PMI in the Eurozone climbed to a two year high of 50.3. The move above the neutral line into expansionary territory was aided by the first growth in new order volumes for more than two years and output growth in Germany, Italy, Netherlands and Ireland. A major problem is the lackluster labor market. Among Eurozone members, Germany’s PMI hit an 18 month high of 50.7 after a reading of 48.6 the month before. Despite subdued export sales to China and the euro area, new orders expanded robustly. In France, the PMI signaled only a marginal deterioration with a reading of 49.7, helped by a return to growth in production and a slower decline in new orders. Italy’s manufacturing sector expanded for the first time in two years, edged up to 50.4 from 49.1 the month before.

The UK manufacturing PMI reached 54.6 in July, its highest point since February. Improved demand both domestically and abroad helped push the new orders subcomponent up to 58.2 from 55.4 the month before. The consumer goods industry is leading the recovery. However, it is perhaps even more encouraging to see increasing output and orders in both the intermediate and investment goods industries as well.

In the U.S., both the Markit PMI and the ISM index confirmed strength in the manufacturing sector. The former recorded a reading of 53.7 (up from June’s 51.9) and the latter, a reading of 55.4 (up from June’s 50.9). New orders were a strong component for both indexes.

Global Stock Market Recap

Europe and the UK

Equities advanced on the week and in July. Economic data including the manufacturing PMIs mostly improved during the week. However, unemployment remains at 12.1 percent with little sign of improvement while retail sales continue to slump in Germany and France. Investors were relieved that the ECB kept its policy interest rate unchanged and will keep liquidity abundant. The Bank of England maintained its current policy and offered no forward guidance — but that may be coming on August 7^th when the quarterly Inflation Report is released. The FTSE was up 1.4 percent on the week while the CAC gained 1.9 percent, the DAX advanced 2.0 percent and the SMI was 2.1 percent higher. For July, the indexes added 6.5 percent, 6.8 percent, 4.0 percent and 1.8 percent respectively.

In the UK, both the manufacturing and construction PMIs for July scored healthy gains — the manufacturing PMI climbed to 54.6 from 52.5 and the construction PMI jumped to 57.0 from 51.0 bolstering the idea that the British economy is coming out of its long slumber. The further the readings are above the breakeven 50 level, the faster the growth.

Asia Pacific

Equities were mixed last week. What stands out is the disparity of performance between the major indexes and developing Asia. While the former were positive for the week, the latter were negative. Change varied from the Nikkei’s 2.4 percent gain to the 3.4 percent loss for the PSEi and the even bigger 3.8 percent drop for the SET.

While last week’s results presented a wide variety of outcomes, the monthly results present a mixed picture. Among the major indexes, only the Nikkei did not record a gain. Rather the index slipped 0.1 percent on the month in volatile trading. Elsewhere, both the All Ordinaries and Hang Seng jumped over 5 percent on the month. Declines were led by the Jakarta Composite — it lost 4.3 percent on the month.

Along with the many central bank announcements to occupy their attention, investors also monitored a slew of mixed earnings reports and economic data. Investors cheered signs of improvement in the global economy. They were heartened after the European Central Bank and the Bank of England both maintained their monetary policy outlook as they followed the path taken by the U.S. Federal Reserve the day before.

Investors were presented with conflicting sets of data on the health of manufacturing in China during July. According to a joint survey conducted by China Federation of Logistics and Purchasing (CFLP) and the National Bureau of Statistics (NBS), the ‘official’ purchasing managers' index rose to 50.3 in July from 50.1 in June, beating expectations for a decline to 49.8. In contrast, detailed results of a survey by Markit Economics and HSBC indicated the steepest contraction in factory activity in 11 months in July. The corresponding PMI reading dropped to 47.7 in July from 48.2 in June. It should be noted that the samples differ and methodology of the ‘official’ index was revised this year and many analysts question its accuracy.

Currencies

The U.S. dollar was up against most of its major counterparts for the week despite retreating Friday when the employment situation report disappointed investors. The dollar was pressured lower early in the week on expectations that the Federal Reserve would reaffirm its commitment to keeping U.S. interest rates near zero. The currency had declined for three consecutive weeks before rising this week. The currency was up against the yen, pound sterling and the commodity currencies — the Canadian and Australian dollars. It was virtually unchanged against the euro and Swiss franc. The U.S. dollar was front and center given the onslaught of major U.S. economic news such as second quarter gross domestic product and of course the FOMC meeting.

Selected currencies — weekly results

Indicator scoreboard

EMU

July economic sentiment index climbed to a reading of 92.5 from 91.3 in June thanks to improved confidence among consumers and managers in industry, services and retail trade. Only in the construction sector confidence weakened. Economic sentiment improved in four out of the five largest euro area economies. Italy increased by 2.9 to 89.5, Spain by 1.2 to 93.5, France by 1.2 to 89.9 and Germany by 0.7 to 100.5. However, sentiment deteriorated in the Netherlands by 2.0 to 87.5. The slight increase in industry confidence (up 0.6) resulted from improvements in managers' production expectations and their assessment of the current level of overall order books. Consumer confidence improved markedly (up 1.4) for the eighth successive month. This was mainly due to further easing unemployment expectations and better savings expectations over the next 12 months. Consumers' views on the future financial situation of their households and the future general economic situation also brightened somewhat.

July flash harmonized index of consumer prices was up 1.6 percent from a year ago for a second month. Food, alcohol & tobacco were up 3.5 percent after increasing 3.2 percent in June. Energy was up 1.6 percent for a second month while services were 1.4 percent higher also for a second month. Non-energy industrial goods were up 0.4 percent after increasing 0.7 percent in June.

June unemployment rate remained at 12.1 percent for the fourth consecutive month. The number of people out of work in the Eurozone declined 24,000 on the month to 19.266 million. The June jobless total compared with 18.137 million out of work a year ago. Among national unemployment levels, Greece and Spain registered the highest jobless rates, at 26.9 percent and 26.3 percent respectively. The lowest rates were in Austria at 4.6 percent and Germany at 5.4 percent. Among Eurozone members reporting the highest increases in unemployment, the jobless rate in Cyprus rose to 17.3 percent in June from 16.5 percent in May and from 11.7 percent in June a year ago.

Germany

June seasonally adjusted retail sales unexpectedly plunged 1.5 percent after increasing a downwardly revised 0.7 percent in May. Sales were down a seasonally adjusted 0.6 percent on the year. The results suggest that weather may have had a bigger impact on retailers than solid consumer confidence. The decline dropped real sales for the first half of 2013 into negative territory at minus 0.1 percent. Second quarter sales were unchanged on the quarter while the less volatile three month for April through June was down 0.2 percent from March through May. Clothing sales were up 2.8 percent in June but were down 2.6 percent in the first half of the year, as unseasonably cold weather in Germany delayed the start of the spring and summer sales. All other components declined on the year, while only the food category managed to record positive sales over the first six months of the year.

July jobs market improved with the number of people out of work falling 7,000 dropping the total to 2.934 million from a downwardly revised 2.941 million in June. The unemployment rate remained at 6.8 percent for a third month. Despite the first drop in unemployment since February, vacancies declined a further 1,000 smaller than the 4,000 fall posted last time. Payroll jobs, which carry a one-month lag, climbed 10,000 after an upwardly revised 24,000 in May.

France

June household spending on manufactured goods dropped 0.4 percent after increasing a downwardly revised 0.9 percent in May. On the year, manufacturing purchases dropped 0.8 percent. Total spending on goods declined 0.8 percent on the month and was down 0.5 percent on the year. Autos declined 0.1 percent and both household goods and other dropped 0.3 percent. However, textiles bounced 4.6 percent higher while durables gained 0.7 percent. However, on the year, durable goods are 0.5 percent lower and automobiles dropped 3.9 percent.

Asia/Pacific

Japan

June retail sales were up for a second month, this time by 1.6 percent, a shade lower than the expected 1.7 percent gain on the year. Sales were up 0.8 percent in May. Only motor vehicle sales were down among the major categories. Motor vehicle sales declined for a second month. Sales were down 6.3 percent after sliding 6.2 percent the month before. Machinery sales rebounded 2.6 percent after sinking 4.4 percent the month before. Fuel sales were up 5.0 percent after increasing 3.2 percent the month before.

June household spending was down 0.4 percent from a year ago after sinking 1.6 percent in May. Analysts expected spending to increase 1.3 percent. Spending was dragged down by a 16.5 percent drop in housing expenditures and a 9.5 percent slide in transportation & communication as well as a 7.1 percent decline in education. Lower purchases of automobiles and auto insurance led the decline, offsetting the recent recovery in spending on eating out and domestic holiday hours. However, spending increased 3.9 percent for furniture & household utensils and 8.1 percent for clothing & footwear. Spending on culture & recreation was 7.7 percent higher while medical care spending increased 7.8 percent.

June unemployment rate slid to 3.9 percent from 4.1 percent in May. It is the lowest unemployment rate since October 2008 when the unemployment rate was 3.8 percent. The number of unemployed persons in June was 2.60 million, a decline of 280,000 or 9.7 percent from the previous year. The number of employed persons was 63.33 million, an increase of 290,000 thousand or 0.5 percent from the previous year.

June industrial production plunged 3.3 percent on the month and sank 3.6 percent from a year ago. The declines were greater than analyst expectations of a 1.5 percent decline on the month and a 3.2 percent drop from a year ago. This was the first month since January that output declined. The industries that contributed to the decline were transport equipment, electronic parts & devices and general purpose, production and business oriented machinery. Commodities that mainly contributed to the decline were large passenger cars, drive, transmission & control parts and parts & accessories of steam turbines. Despite the June setback, output was up 1.4 percent in the second quarter for the second consecutive quarterly increase.

Australia

June quarter producer price index was up 0.1 percent and 1.2 percent from a year ago. Analysts expected the quarterly increase to be 0.5 percent. The quarterly increase for final demand products excluding exports was mainly due to increases in the prices received for building construction (up 0.6 percent), road & bridge construction (also up 0.6 percent) and bakery product manufacturing (up 3.6 percent). The increases were partially offset by declines in the prices received for motor vehicle & motor vehicle part manufacturing (down 1.0 percent) and other agriculture (down 4.1 percent). Prices for intermediate demand goods also increased 0.1 percent on the quarter and were up 0.8 percent on the year. Crude prices dropped 0.3 percent on the quarter and were up 0.3 percent when compared with the same quarter a year ago.

Americas

Canada

June industrial product price index (IPPI) was up 0.3 percent on the month and 0.6 percent from a year ago. The monthly increase was the first since February. Of the 21 major commodity groups, 15 were up, 2 were down and 4 were unchanged. The increase was the result of higher prices for motor vehicles & other transportation equipment (up 0.8 percent) as well as petroleum & coal products (up 0.5 percent). The increase here was mostly because of a 1.4 percent increase in gasoline prices which were up for a second consecutive month. The depreciation of the Canadian dollar relative to the U.S. dollar was largely responsible for this advance. The raw materials price index (RMPI) advanced 0.3 percent on the month and 4.0 percent from a year ago, mostly because of higher prices for animals & animal products and crude oil. Of the seven major product groups, three were up, three were down and one was unchanged. Animals & animal products (up 2.5 percent) was the largest contributor to the increase of the RMPI, mainly because of higher prices for slaughter hogs (up 12.3 percent), which posted a third consecutive monthly advance. It was the largest gain since June 2012 for slaughter hogs. Mineral fuels (up 0.4 percent) also exerted upward pressure on the RMPI, as a result of higher prices for crude oil (up 0.5 percent). The RMPI excluding mineral fuels was up 0.2 percent in June. The advance of the RMPI was moderated mainly by vegetable products which were down 1.6 percent.

May monthly gross domestic product was up 0.2 percent for a fifth straight monthly increase. On the year, GDP was up 1.6 percent. The monthly gain was led by services — especially retail and wholesale trade — which rose 0.5 percent on top of April's 0.4 percent increase. The gain here offsets a 1.7 percent drop in oil & gas extraction that pulled total goods production down by 0.3 percent on the month. Manufacturing, which has been up and down this year, was up 0.3 percent with durable goods production increasing 0.3 percent on gains in machinery, furniture and related products and fabricated metals. Manufacturing of primary metals and of computer & electronic products was down. Other details include no change for construction as gains in residential components were offset by declines on the non-residential side. Retail trade was up 1.8 percent for a third straight monthly gain centered in vehicles.

Bottom line

Four central banks met and left their respective monetary policies unchanged. Economic data were mixed. New data from Europe indicated that the economies there are beginning to stabilize. In Japan, the data including industrial output, manufacturing PMI and retail and household spending were negative. In the U.S. results were mixed as well, with the employment report disappointing while indicators of manufacturing activity picked up.

After last week, the coming week almost seems peaceful. The Reserve Bank of Australia meets as does the Bank of Japan. The betting is that the RBA will lower its policy interest rate while the BoJ will sit tight. Also on the calendar are the monthly deluge of July data from China and a slew of service and composite PMIs.

Looking Ahead: August 5 through August 9, 2013

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