Global Markets

Global equity indexes were mixed in volatile trading last week. Investors parsed economic data that both disappointed and pleased. High on the list were the slew of first quarter growth data. Japan's were mostly discounted given the rush by businesses to purchase prior to the increase in the sales tax on April first that skewed results higher. Europe's data, however, disappointed. U.S. data were mixed as well. The continuing flow of earnings data also affected investor sentiment.

Focus on poor growth in first quarter

Expectations to the contrary, growth in Europe remains fragile. By many accounts, the Eurozone has been rebounding from a double-dip recession that began in 2008 after the fall of Lehman Brothers. Financial markets have been celebrating and in the process have driven down borrowing costs for even the most troubled economies in recent months, while politicians have declared the worst of the crisis is over. But the uneven nature of the recovery — between a group of strong countries in the north and a larger swath of weak nations in the south — has made it difficult for the overall economy to gain momentum.

First quarter Eurozone flash gross domestic product edged up only 0.2 percent on the quarter for its fourth consecutive quarter of growth — however, it was half what analysts expected. The differences at the country level are stark. For example, while Germany's economy expanded by 0.8 percent in the first quarter and Spain doubled its growth from the previous quarter, France in contrast slipped back into stagnation again. And Italy, Portugal, Greece, the Netherlands, Finland and Estonia contracted yet again.

There are reasons to be optimistic about Eurozone growth going forward. Investment and industrial activity have been rebounding since last autumn and consumer confidence has picked up. Spain has gone from a painful recession to three straight quarters of growth. But there are dark clouds on the horizon. The fallout from the crisis in Ukraine, for example, threatens to spill over into the broader European economy. The growth potential of many European economies has also been stifled by the effects of austerity measures imposed in response to high government debt. In many cases, countries that pledged major policy overhauls for labor markets, spending and taxes during the crisis that were meant to stoke recoveries have yet to see those initiatives bear fruit. The worry now is the likelihood that governments will not press ahead with reforms, which could further impede the rebound.

The dynamics are putting increased pressure on the European Central Bank to follow through on a pledge to stimulate the economy at its June 5^th meeting.

Global Stock Market Recap

Europe and the UK

Equities were mixed last week on concerns about Eurozone growth, earnings and global demand for industrial goods. A surprise drop in U.S. industrial production also weighed on investors. On the week, the FTSE was up 0.6 percent, the DAX was 0.5 percent higher and the SMI gained 2.0 percent. The CAC however declined 0.5 percent while the MIB and IBEX lost 3.5 percent and 0.1 percent respectively.

The main catalyst for the declines was the disappointing growth data for the Eurozone that dashed hopes that the region's economy accelerated in the first quarter of 2014. The GDP numbers followed comments from ECB Vice President Vitor Constancio that the Bank is ready to take action if warranted, adding to the persistent drumbeat of dovish commentary from the ECB. Many analysts now expect the ECB to cut interest rates at its June meeting, while some are calling for more radical action — including a program of asset purchases to stimulate the economy and drive up anemic rates of inflation. Eurostat confirmed Thursday that annual consumer price growth as measured by the harmonized index of consumer prices was just 0.7 percent in April and well below the ECB's inflation target of slightly under 2 percent.

The Bank of England's Quarterly Inflation Report contained few surprises. The policy guidance and general economic outlook remained basically unchanged from February. The new inflation forecasts are not significantly different from those presented in February and remain soft enough to justify the Bank's contention that there will be no early increase in the Bank Rate. However, the Bank has made fundamental changes to its view of productivity and unemployment. Based on a slower projected increase in productivity, the (ILO) jobless rate is now seen falling to 6.1 percent by the second quarter of next year before flattening out over the longer term at 5.9 percent.

Asia Pacific

Most equity indexes were positive last week with the notable exception of the Nikkei which retreated for a second week once again pressured by yen gains and poor corporate earnings. However, the indexes were mixed on Friday thanks to declines in the U.S. on Thursday. Ukraine concerns continued to keep investors cautious. Indian shares rallied, extending their recent sharp gains, after election results indicated business friendly Narendra Modi and his party were heading for a comfortable victory in the recently concluded Lok Sabha or lower house of parliament polls.

The Sensex advanced four of five days last week, closing at a record high on Friday as the anticipation over the next government propelled the index higher. On Friday, the Sensex jumped as much as 6.2 percent, hitting a record level of 25375.63. However, it gave up most of those gains to end at 24121.74, up 0.9 percent, as investors booked profits at the end of a strong week that has boosted the index by 4.9 percent. The Sensex pushed higher as vote tallying Friday showed that India's opposition Bharatiya Janata Party, which is perceived to be pro-business, was headed for a major victory in national elections. The voting took place over five weeks and in nine phases. The Election Commission tallied over 550 million votes in the massive Indian parliamentary elections that will usher in a new government.

Japan's gross domestic product expanded at an annualized pace of 5.9 percent in the first quarter of 2014 as a result of dramatically higher consumer spending ahead of the April 1 sales tax increase. That was well above forecasts for an increase of 4.7 percent following the downwardly revised 0.3 percent gain in the previous three months. Analysts expect GDP to contract in the second quarter.

China's April data for both industrial output and retail sales disappointed. Industrial output was up 8.7 percent from the year before, slightly low than the 8.8 percent increase in March and expectations for an 8.9 percent increase. April retail sales eased to an increase of 11.9 percent on the year from 12.2 percent in March and a forecast for a 12.1 percent increase.

Currencies

The U.S. dollar advanced against the euro, pound and Swiss franc but retreated against the yen and the commodity currencies — the Canadian and Australian dollars. The euro retreated Thursday after flash first quarter GDP data indicated that growth was weaker than expected in the Eurozone — with the exception of Germany. The pound sterling weakened after the Bank of England's latest Quarterly Inflation Report indicated that the Bank was in no hurry to increase interest rates.

The rupee surged more than 2 percent this week — its biggest rally since September — on optimism Indian election results Friday will show a clear winner capable of reviving the economy. Subsequently after markets closed in India, the opposition Bharatiya Janata Party and its allies led in the worlds biggest ever vote. There are 543 parliamentary seats up for election, with 272 needed for a majority. The currency gained 2.1 percent this week according to prices from local banks compiled by Bloomberg. The Reserve Bank of India intervened in the foreign exchange market Friday to curb currency volatility, limiting gains in the rupee.

At the time of writing, India's general election appeared to have produced a stunning victory for Narendra Modi, with his Bharatiya Janata Party (BJP) seemingly on course to gain the 272-plus seats required for a parliamentary majority. Voters put their faith in his promises of an economic revival and left the Congress party nursing its worst defeat since independence more than 60 years ago. Mr Modi would be the first Indian prime minister born after independence in 1947 and the first from a humble background.

Selected currencies — weekly results

Indicator scoreboard

EMU

March industrial production (excluding construction) was down 0.3 percent on the month following an unrevised 0.2 percent increase in February. On the year, output was up 0.5 percent. Weakness was broad based. There were monthly declines in intermediates (0.8 percent), capital goods (0.3 percent) and consumer nondurables (0.5 percent) as well as in energy (0.4 percent). The only sector not registering a decline was durable consumer goods but production here was only flat at its February level. Regionally the worst performers were Portugal and Greece where output dropped 4.8 percent and 1.9 percent on the month respectively. Ireland posted the strongest gain (5.6 percent) ahead of Slovenia (2.0 percent) and Estonia, Luxembourg and Malta (all 1.1 percent). Among the larger member states it was all bad news with France down 0.7 percent, Germany off 0.2 percent, Italy retreating 0.5 percent and Spain 0.6 percent lower.

April harmonized index of consumer prices was up 0.2 percent on the month and 0.7 percent on the year. The core HICP which excludes energy, food, alcohol & tobacco was similarly unrevised at an increase of 1.0 percent on the year. The other underlying measures painted a similar picture with annual rates for both the ex-unprocessed food and energy index and the HICP without just seasonal food and energy climbing 0.2 percentage points to 1.1 percent to reverse in full their March declines. The final HICP data mean that national yearly inflation rates in April were negative in seven of the 18 member states. Moreover, of the remainder, only five had rates above the 1.0 percent mark and all were well short of the near-2 percent medium-term target.

First quarter flash estimate of GDP was up 0.2 percent, matching the fourth quarter 2013 gain. Annual workday adjusted growth rose from 0.5 percent to 0.9 percent, its best performance since the third quarter of 2011. The economy has now been expanding for four consecutive quarters. As usual with the flash estimate, Eurostat provided no details of the GDP expenditure components. These will not be available until June 4. At a national level, growth among the larger member states was mixed. A 0.8 percent quarterly increase in German total output impressed and a 0.4 percent gain in Spain was double the fourth quarter pace, but the French economy only stagnated while Italy recorded a disappointing 0.1 percent contraction. Among the smaller countries the strongest increase was posted by Latvia (0.7 percent) ahead of Slovakia (0.6 percent) while at the other end of the spectrum, Estonia declined 1.2 percent and Cyprus, which is still mired deep in recession, down a further 0.7 percent. The Portuguese economy also shrank 0.7 percent.

Germany

May ZEW survey results were mixed with a modest but still stronger than anticipated improvement in analysts' assessment of current economic conditions contrasting with a surprisingly sharp deterioration in expectations. The current conditions measure was up 2.6 points to 62.1, its sixth consecutive monthly advance and its highest level since July 2011. However, expectations fell a hefty 10.1 points, their fifth straight decline since December and the sharpest during the period. May's forward looking gauge was the weakest since January 2013.

First quarter GDP was up 0.8 percent on the quarter following an unrevised 0.4 percent gain in the previous period. It was the best performance since the first quarter of 2011 and lifted annual workday adjusted growth by nearly a full percentage point to 2.3 percent. The unadjusted yearly increase in real GDP was 2.5 percent, up from 1.3 percent in the fourth quarter of 2013. As usual with the flash report, the FSO provided no details of the GDP expenditure components. However, it did point to an increase in household spending and a particularly marked increase in fixed capital formation in construction and machinery. Inventory accumulation also looks to have boosted growth but net trade, which had a major positive impact last time, turned negative as exports fell and imports rose.

France

First quarter gross domestic product was unchanged from the previous period. Fourth quarter GDP was revised down a tick to 0.2 percent. On the year, GDP was up 0.8 percent. Weakness in the first quarter was driven by a 0.5 percent quarterly contraction in household consumption which easily more than fully reversed the fourth quarter's 0.2 percent gain. Gross fixed capital formation was down 0.9 percent, its third consecutive decline as a 2.6 percent slump in investment by households was compounded by a 0.5 percent drop in spending by non-financial corporations. Government consumption was up 0.4 percent but final domestic demand contracted a disappointingly sharp 0.4 percent. The headline data would have looked a good deal poorer but for a hefty 0.6 percentage point boost to quarterly growth from inventory accumulation. Net foreign trade, having added 0.3 percentage points to the quarterly change in real GDP at the end of 2013, subtracted 0.2 percentage points this time as a modest 0.3 percent rise in exports was comfortably outpaced by a 1.0 percent increase in imports.

Italy

First quarter gross domestic product slipped 0.1 percent on the quarter after edging up 0.1 percent in the previous quarter. The yearly decline in total output actually eased from 0.9 percent to 0.5 percent but this simply reflected a steeper decline in the year ago quarter. Annual growth has not been in positive territory since the third quarter of 2011. The only other information provided by Istat indicated a quarterly increase in agricultural output but stagnation in services and a decline in industrial production.

United Kingdom

April claimant count unemployment declined 25,100 following a marginally steeper revised 30,600 decline in March. Over the first four months of the year, joblessness on this measure has already declined 126,600 and the latest drop was enough to see the jobless rate slip another tick to just 3.3 percent, its 11th consecutive decline and its lowest reading since November 2008. The first quarter ILO data were just as robust, revealing a 133,000 decline in the number of people out of work (the largest since September to November 2013) and a record 283,000 surge in employment. The unemployment rate on this definition was 6.8 percent, also 0.1 percentage point below last time. An expected, there was no acceleration in March headline average earnings growth with the rate holding steady at an annual 1.7 percent. Excluding bonuses, pay was up only 1.3 percent on the year, down from 1.4 percent last time.

Asia/Pacific

Japan

The April corporate goods price index for the first time reflects the increase in the sales tax from 5 percent to 8 percent that took effect on April 1. The CGPI jumped 2.8 percent on the month and 4.1 percent on the year. Excluding the tax increase, the CGPI would have increased 0.1 percent on the month and 1.4 percent from the same month a year ago and down from March's 1.7 percent. Contributing to the monthly increase were food, beverages, tobacco & feedstuffs, transportation equipment, petroleum & coal products, electric power, gas & water, iron & steel and other manufacturing industry products. All commodity subindexes were up. Among the highest price increases (above 3 percent on the month) were for iron & steel, general purpose machinery, electrical machinery & equipment, information & communications equipment, metal products and lumber & wood products. All other subindexes were up 2 percent or more with the exception of chemicals & related products.

Japan's economy grew more rapidly than expected in the first quarter as businesses especially moved up spending prior to April 1 and the increase in the sales tax from 5 percent to 8 percent. GDP was up 1.5 percent on the quarter or at an annualized rate of 5.9 percent. Analysts expected the quarterly increase to be 1.2 percent or 4.7 percent annualized. On the year, GDP was up 2.7 percent. Business spending accounted for the upside surprise, up 4.9 percent on the quarter. Fourth quarter business spending was also revised up, to 1.4 percent from 0.8 percent. Consumer spending was up 2.1 percent as forecast, up from just 0.4 percent in the last three months of 2013. Private consumption was up 2.1 percent or 8.5 percent annualized. Net exports (exports minus imports) pushed down first quarter GDP by 0.3 percentage point, the third straight quarter of negative contribution. Imports surged ahead of the sales tax increase while exports of cars and other durable goods slowed as manufacturers had to meet strong domestic demand through the end of March.

China

April industrial production eased to an annual increase of 8.7 percent from 8.8 percent in March. This was the slowest monthly increase since April 2009. The year to date increase was also 8.7 percent. On the month, output was up 0.82 percent from 0.8 percent the month before. Among the subcategories, output improved on the year for transport equipment (up 11.6 percent from 6.7 percent), motor vehicles (up 7.9 percent from 7.3 percent), machinery (up 11.2 percent from 10.4 percent), textiles (up 7.4 percent from 6.1 percent) and steel products (up 5.4 percent from 5.0 percent). Among the subcategories, output was weaker on the year for chemicals (up 9.1 percent after 11.5 percent), general equipment (up 8.8 percent after 10.7 percent), communication (up 11.4 percent after 15.3 percent), cement (up 3.9 percent after 5.9 percent) and power & thermal (up 2.5 percent after 4.1 percent).

April retail sales eased to an increase of 11.9 percent on the year from 12.2 percent in March. For the year to date, sales were up 12.0 percent, the same as in March. However, on the month, sales increased 0.83 percent, down from March's gain of 1.24 percent. Urban sales were up 11.7 percent on the year after gaining 12.1 percent the month before. Rural sales however improved to 13.2 percent from 12.9 percent. Home appliance sales were up only 2.9 percent after jumping 13.0 percent the month before. Cosmetics gains eased to 6.6 percent from 9.2 percent and furniture was up 15.5 percent after 18.1 percent. Auto sales were up 12.3 percent after 14.0 percent. Sales improved for household nondurables which were up 10.7 percent after an 8.5 percent gain. Sales also improved for grain & fuel oil, clothing and stationery.

Americas

Canada

March manufacturing sales were up 0.4 percent and were up 3.5 percent from a year ago. Volumes performed a little better, posting a 0.5 percent gain from February although this still only made for a minimal 0.1 percent yearly increase. Within the overall nominal advance, 11 of the 21 reporting subsectors saw monthly increases. Among these, food jumped 2.1 percent, machinery was up 3.3 percent and plastics & rubber products gained 2.7 percent. Partial offsets were provided by paper products (down 3.8 percent) and petroleum & coal (down 0.8 percent), the former hit by industrial action in Vancouver. The rest of the survey was soft. New orders dropped nearly 20 percent from February and backlogs were down 0.8 percent. Inventories were up 0.2 percent, although this was not enough to move the inventory/sales ratio which held steady at 1.41 months, 0.02 months above its year ago level.

Bottom line

Investors monitored the continuing stream of earnings reports and economic data. While most of the U.S. data were positive, investors focused on the downward surprise of April's industrial production data. Elsewhere, first quarter estimates of GDP garnered attention with Europe's data weaker than analysts' expectations. A given in analysts minds is that Japan's first quarter gain will translate into a second quarter decline.

The Bank of Japan meets this coming week. Its policy announcement will be read carefully to see if there are any hints of further easing to ameliorate the impact of April's sales tax increase. May flash PMIs for Japan (for the first time), China, the U.S. and the Eurozone will be studied carefully — investors will be looking for an upward bounce in the readings indicating improved economic conditions in the second quarter.

Looking Ahead: May 19 through May 23, 2014

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