Global Markets

Investors are parsing data releases as they try to guess, and maybe even second guess, just what the Federal Reserve is planning to do. The result has been volatility as each data release raises the question — will they or won’t they change policy. The volatility has been exacerbated by August’s thin markets. Inflation and employment are getting the most attention because the Fed has set policy thresholds for the data. But in the process, investors appear to be ignoring other important data. For example, on Thursday, the markets reacted to the positive jobless claims and CPI data and appeared to ignore (at their peril) weak manufacturing data reported by two highly regarded regional surveys along with weak industrial production data.

Global Stock Market Recap

Europe and the UK

Investors here continue to look across the pond as they await the Fed’s policy decision. Thursday’s U.S. data for jobless claims and consumer prices renewed investor fears that the Federal Reserve could begin tapering its stimulus measures as early as its FOMC meeting in mid-September. Little attention was paid to weaker than expected manufacturing data in the July industrial production report and the regional Empire State and Philadelphia Fed surveys. Those fears eased a bit late Friday, after a weaker than expected U.S. consumer sentiment report. The FTSE was down 1.3 percent while the SMI lost 0.2 percent on the week. The DAX and CAC were up 0.6 percent and 1.2 percent respectively.

The economic picture brightened somewhat after the Eurozone and member states Germany and France reported that growth had turned positive in the second quarter according to flash estimates of GDP. Italy and Spain improved as well — and though both are still in recession, their declines lessened considerably. However, most continue to be below last year’s levels.

In the UK, data continue to indicate that the economy is expanding — July retail sales growth accelerated more than expected as the heat wave boosted food store sales. Total retail sales volume advanced 1.1 percent from the prior month for the third consecutive monthly increase. Claimant count unemployment declined a greater than anticipated 29,200 indicating that employment growth is picking up. The data precipitated a drop in the FTSE as the data reignited the chance of an earlier than expected interest rate increase by the Bank of England.

Bank of England governor Mark Carney has said rates will not increase before unemployment drops to 7 percent. However, the strong retail sales showed unemployment could fall to that level earlier than forecast, which in turn could lead to a quicker rise in interest rates. Analysts said that the better the economic news, the more likely it is that interest rates will rise earlier than forecast.

Bank of England policymakers approved forward guidance in a split vote earlier this month as Martin Weale called for tougher stance on above 2 percent inflation according to the meeting’s minutes. The monetary policy committee linked the future path of bank rate and asset purchases to the unemployment threshold earlier this month. Eight members voted in favor of future guidance, while Weale dissented on the rate pledge.

Asia Pacific

Equities for the most part gained on the week despite sagging Thursday and Friday. With little new data outside of Japan, focus was on the plethora of new U.S. economic data — especially on price and employment data. Trading continues to be dominated by expectations that the Federal Reserve will cut back on its bond purchases at its September 17^th and 18^th meeting.

Despite wide swings during the week, the Nikkei was up 0.3 percent. New economic events disappointed — second quarter gross domestic product was weaker than anticipated, climbing only 0.6 percent on the quarter while expectations were for a 1.0 percent increase. Volatile machine orders dropped 2.5 percent in June, less than the anticipated 7.5 percent drop. The Nikkei average dropped 2.1 percent Thursday, pulling back from a one week high reached the previous day. Japanese ministers' comments about a potential corporate tax cut soured the mood. During the trading session Thursday, Japanese government spokesman Yoshihide Suga and Finance Minister Taro Aso both downplayed this week's report in the Nikkei business daily that the government is considering a corporate tax cut.

China’s Shanghai Composite was up 0.8 percent for the week after surging as much as 5.6 percent in intraday trading Friday due to a trading glitch. Some questioned if it was a fat finger error at a Chinese brokerage that caused a mysterious spike in Shanghai’s stock market. The Hang Seng was the best performing index gaining 3.3 percent on the week.

The Sensex crumbled at week’s end, losing 4.0 percent Friday and ended a holiday shortened week down 1.0 percent. Indian stocks had their worst session in nearly two years on concerns that the Reserve Bank of India is losing credibility. Stocks dropped a day after the Reserve Bank of India imposed new restrictions on capital outflows, curbing investment by Indian companies. The move was the latest in a long series of regulations aimed at propping up the rupee from record lows. The measures have failed — the rupee has shed 0.6 percent Friday to a fresh all-time intraday low of 62.03. Investor sentiment took a beating after the RBI on Wednesday announced additional measures aimed at moderating capital outflows.

Currencies

The U.S. dollar was up against most of its major counterparts including the euro, yen, Swiss franc and the Canadian and Australian dollars last week. However it was lower against the pound sterling. Like equities, the dollar fluctuated on investor sentiment about the next move by the Federal Reserve. But there were other factors affecting currencies. For example, the pound sterling continued to rise against its counterparts after the release of the quarterly Inflation report on August 7^th and the Bank of England minutes on Wednesday. The currency improved with a string of better than anticipated economic data including the labour market report and retail sales.

India increased efforts to stem the rupee’s plunge and stop capital outflows that are pushing the economy toward its biggest crisis in more than two decades. The rupee’s plunge has accelerated since May as foreign investors pulled money from Indian bonds and stocks on concern the U.S. will pare stimulus. The Reserve Bank of India cut the amount local companies can invest overseas without seeking approval to 100 percent of their net worth from 400 percent. Residents can remit $75,000 a year compared with the previous $200,000 limit.

Recent moves since last month to tighten cash supply, restrict currency derivatives and curb gold imports have failed to arrest the rupee’s decline to record lows as India struggles to attract capital to fund a record current account deficit. The rupee has weakened 28 percent in the past two years, the biggest tumble since the government pledged gold reserves in exchange for loans from the International Monetary Fund in 1991. To contain the currency decline, the RBI raised two interest rates July 15^th and restricted banks’ access to cash through its daily repurchase auctions. India also boosted import duties on gold and silver on August 13^th and banned the import of gold in the form of coins and medallions to reduce the trade deficit.

Selected currencies — weekly results

Indicator scoreboard

EMU

Second quarter flash gross domestic product was up 0.3 percent but down 0.7 percent from a year ago. For the first quarter, GDP contracted an unrevised 0.3 percent. Headline data continue to mask large divisions between the performances of member states. On the bright side, real GDP in both France (0.5 percent) and Germany (0.7 percent) posted solid quarterly gains and there was good news too out of Finland (0.7 percent) and in particular, Portugal (1.1 percent) where the economy finally pulled out of recession. However, Spanish output contracted a further 0.1 percent and the decline in Italian GDP was extended by another 0.2 percent. Cyprus (down 1.4 percent) predictably endured another horrid period and the recession in the Dutch economy steepened by 0.2 percent. As usual Eurostat provided no details of the GDP expenditure components in its provisional release.

June industrial production was up 0.7 percent and was up 0.3 percent from a year ago. Capital goods posted a 2.5 percent monthly gain and consumer durables surged 4.9 percent. Intermediates (0.5 percent) also made fresh headway but energy dropped 1.6 percent and non-durables were off 0.6 percent.

Germany

ZEW survey shows analysts with a rather more optimistic assessment of Germany's economic developments this month. August's current conditions index climbed nearly 8 points to 18.3 and expectations were up almost 6 points at 42.0. The improvement in current conditions was the largest since March and left the measure at its highest level since July 2012. Expectations saw their strongest gain since February and recorded their best reading since March.

Flash second quarter gross domestic product was up 0.7 percent and was up 0.5 percent from a year ago. This was its strongest quarterly rise since the first quarter of 2011. The increase followed a marginally weaker revised flat performance in the previous period. The unadjusted data showed an annual increase of 0.9 percent following a 1.6 percent contraction at the start of the year. The FSO indicated that the solid second quarter performance was primarily due to strengthening domestic demand with gains in both household spending and government current expenditure compounded by a (probably weather related) rebound in fixed capital formation. There was also a small positive contribution from net foreign trade as export growth outstripped that of imports.

France

Flash second quarter gross domestic product expanded 0.5 percent on the quarter. The advance, which followed an unrevised 0.2 percent contraction at the start of the year, returned annual growth to positive territory at 0.3 percent and means that France is no longer in technical recession. Final domestic demand was up a quarterly 0.3 percent and easily more than reversed the first quarter's 0.1 percent decline. Within this household consumption grew an unexpectedly respectable 0.4 percent after a fall of the same magnitude last time while public sector spending gained 0.5 percent. However, gross fixed capital formation again disappointed — it slid 0.5 but that was only half that posted at the start of the year. Investment by businesses slipped just 0.1 percent but households saw a 1.7 percent drop. Stock building added 0.2 percentage points to the quarterly increase in total output having contributed 0.1 percentage points last time. Net exports had a neutral impact as a 2.0 percent quarterly increase in exports was offset by a 1.9 percent rise in imports.

United Kingdom

July producer output prices were up 0.2 percent and 2.1 percent on the year. Input prices were up 1.1 percent on the month and 5.0 percent from a year ago. Input costs were driven up by a 6.8 percent monthly jump in the price of crude oil and a 2.1 percent increase in fuel. Together these categories added nearly 2 percentage points to the monthly change in the overall index. By comparison most others sectors were relatively stable. The monthly advance in output prices was largely dependent on a 1.6 percent bounce in petroleum products. Elsewhere within the basket the steepest gain was only 0.3 percent (food and paper products). Tobacco & alcohol and clothing both saw 0.1 percent declines. The core output prices were up 0.1 percent from June and were 2.1 percent higher than in July 2012.

July consumer price index was unchanged on the month and up 2.8 percent from July 2012. The main downward effect on the 12-month increase came from the recreation & culture sector where prices fell 0.4 percent from June compared with a 0.2 percent increase in the same period in 2012. Additionally, clothing & footwear charges declined 3.6 percent on the month, a significantly steeper decline than the 2.6 percent drop registered last year. Combined, these sectors subtracted nearly 0.2 percentage points from the overall annual rate. Elsewhere most sectors had little impact although within the transport category this masked sharply divergent developments in air fares (down) and energy (up). The core CPI was down 0.2 percent on the month to reduce its annual rate by 0.3 percentage points to 2.0 percent.

July claimant count joblessness dropped a hefty 29,200 and that after a steeper revised 29,400 decline in June, its largest decline since March 2010. As a result, the unemployment rate edged down to 4.3 percent from 4.4 percent — its lowest reading since February 2009. The ILO unemployment count for the three months to June was down 4,000. The ILO unemployment rate remained at 7.8 percent however. Elsewhere the news on wages was soft with headline average earnings up just 2.1 percent on the year after a marginally stronger revised 1.8 percent rise last time.

July retail sales volumes were up 1.1 percent on the month. The third monthly increase in a row followed an unrevised 0.2 percent advance in June and boosted the annual growth rate of purchases from 1.9 percent to 3.0 percent, its best performance since January 2011. Excluding auto fuel the picture was much the same with sales also gaining a solid 1.1 percent from the previous period and rising a marginally firmer 3.1 percent on the year. However, the headline data are quite misleading with the entire monthly increase in overall sales accounted for by a 2.5 percent surge in food demand. Excluding fuel, non-food volumes actually were down 0.3 percent on the back of a sizeable decline in household goods (1.3 percent) and a marked drop in spending at non-specialized stores (1.6 percent). In addition, clothing & footwear posted a more modest 0.2 percent contraction. However, there was positive news from both the other stores and non-store retailing sectors where sales increased a monthly 1.0 percent and 1.7 percent respectively. Fuel also saw a 1.0 percent jump.

Asia/Pacific

Japan

Second quarter gross domestic product was up a less than forecast 0.6 percent from the first quarter or an annualized rate of 2.6 percent. Analysts expected GDP to increase 0.9 percent on the quarter and at an annualized pace of 3.6 percent. This was the third consecutive quarterly advance. First quarter GDP was revised down to a gain of 0.9 percent from 1.0 percent from the fourth quarter while the annualized pace was revised down to 3.8 percent from 4.1 percent. The deflator was down 0.3 percent from a year ago – the smallest decline since it was unchanged in the third quarter of 2009. Domestic demand contributed 0.5 percentage points. Consumption was up 0.8 percent and made a 0.5 percent contribution to growth. Exports also contributed to growth, adding 0.4 percentage points. However, CAPEX slumped 0.1 percent in the second quarter after slipping 0.2 percent in the first quarter.

July corporate good price index was up by a more than expected 0.5 percent from the previous month and up 2.2 percent from a year ago. Analysts expected a more muted increase of 0.2 percent and 1.9 percent on the year. It was the fourth consecutive increase when compared with the previous year. The index excluding extra charges for summer electricity was up 0.3 percent on the month but was still up 2.2 percent on the year. Most components were up from a month ago. On the year, lumber & wood products jumped 12.2 percent after rising 9.4 percent in June while petroleum & coal products jumped 16.8 percent after 8.5 percent the previous month. The latter probably reflects the decline in the value of the yen. 

June private sector machine orders excluding volatile orders for ships and those from electric power companies declined a seasonally adjusted 2.7 percent and were up 7.7 percent from a year ago. In the April to June quarter, orders were up 6.8 percent when compared with the previous quarter. In June, manufacturing orders were up 2.4 percent while non-manufacturing orders excluding volatile ones plunged 17.5 percent. The total value of machinery orders received by 280 manufacturers operating in Japan decreased 14.3 percent on the month. In the April to June period it was up 3.3 percent compared with the previous quarter.

Americas

Canada

June manufacturing sales dropped 0.5 percent on the month, wiping out expectations for the first back-to-back increase since November/December 2011. The fourth drop in the last six months followed a slightly smaller revised 0.6 percent increase in May and steepened the annual decline in shipments to 3.7 percent. Volumes were even weaker, sliding a sizeable 1.3 percent from mid-quarter and now show a 4.8 percent drop from a year ago. Sales were down on the month in sixteen of the twenty-one reporting industries with particularly marked reversals being registered in miscellaneous manufacturing (20.2 percent), wood (7.7 percent), fabricated metals (6.5 percent) and leather and allied products (15.7 percent). The main offset was provided by a 7.4 percent jump in petroleum & coal following earlier cutbacks associated with maintenance work. The rest of the survey was somewhat more promising with new orders 2.5 percent higher on the month and backlogs 2.7 percent better off. Inventories also slipped 0.2 percent although this was insufficient to reduce the inventory/sales ratio from May's relatively high 1.42 months.

Bottom line

Investors continue to be obsessed with the Federal Reserve’s next move and in the process could be ignoring mitigating information that could delay any cut back in stimulus. Most equity indexes advanced on the week except those in the U.S.

The last two weeks of August are typically slow with light trading. Data releases in Europe are typically deferred during this time as well. Investors will wait for September before making any dramatic moves, ceteris paribus.

Looking Ahead: August 19 through August 23, 2013

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