Global Markets

While equities continued to climb, investors acknowledged their concerns about Greece, when the Federal Reserve would finally increase its fed funds rate and about Chinese and U.S. growth. Most equity indexes were up on the week despite mixed data especially in the Eurozone.

What the flash PMIs are telling us

A first look at May economic conditions in the form of the flash purchasing managers' index was released. And the results were mixed for manufacturing. While the Eurozone, France, China and Japan's readings improved, those for the U.S. and Germany slipped.

A composite flash PMI is released only for the Eurozone, Germany and France. Readings here gave a slightly different picture. For the Eurozone, the composite reading was 53.4, down a sharp 0.5 points from its final April reading and, while still comfortably on the right side of 50, at its lowest level in three months. The headline damage was caused by services where the flash PMI dropped nearly a point to a 4-month trough of 53.3. Manufacturing activity (52.3 after 52.0) actually accelerated modestly.

Developments in France and Germany were disappointing again. Although the French composite output index edged slightly higher to 51.0, its German counterpart shed more than a point to a 5-month low of 52.8. Consequently, it was the rest of region that did much to support the overall Eurozone economic recovery and the non-core group of countries looks on course for its best quarterly performance since 2007.

Outside of Europe, flash estimates are released only for manufacturing. The U.S. manufacturing PMI reading slipped to 53.8 from 54.1 in April. Slowing growth in new orders, including weakness in export orders tied directly to strength in the dollar, held down the May index. Another area of weakness remains the energy sector where business spending is down. The flash PMIs for China and Japan improved — but China's reading still indicated contraction in manufacturing for a third consecutive month (and fifth in six months) while in Japan, the reading indicated growth after contraction in April.

Global Stock Market Recap

Europe and the UK

Greece continues to addle financial markets in Europe and last week was no exception. At the conclusion of talks in Riga, Latvia Thursday, German Chancellor Angela Merkel said much more work needs to be done to provide bailout funds for Greece. On Friday, investors were also cautious ahead of a speech from Federal Reserve Chair Janet Yellen after markets here were closed for the week. Despite the Greek concerns, the FTSE was up 1.0 percent, the CAC gained 3.0 percent, the DAX added 3.2 percent and the SMI increased 2.7 percent on the week.

European Central Bank President Mario Draghi reiterated on Friday that euro area economic conditions have improved, indicating a cyclical recovery, and urged the region's governments to make progress on structural reform that is essential to sustain the momentum. "The economic outlook for the euro area is brighter today than it has been for seven long years. Monetary policy is working its way through the economy," Draghi said in a speech at an ECB central banking conference in Sintra, Portugal. "Growth is picking up. And inflation expectations have recovered from their trough. This is by no means the end of our challenges, and a cyclical recovery alone does not solve all of Europe's problems."

Earlier in the week, a rally was sparked by comments from Benoît Cœuré who said the ECB would moderately frontload its purchase activity in May and June. Cœuré, a member of the Executive Board of the ECB, said at a conference on Monday, "...we are also aware of seasonal patterns in fixed-income market activity with the traditional holiday period from mid-July to August characterized by notably lower market liquidity. The Eurosystem is taking this into account in the implementation of its expanded asset purchase programme by moderately frontloading its purchase activity in May and June, which will allow us to maintain our monthly average of €60 billion, while having to buy less in the holiday period."

The International Monetary Fund praised Italy's recent reform efforts and increased its growth projections for the country "emerging slowly from a painful recession," but called for "comprehensive policy actions to advance structural reforms." The fund now expects the country's gross domestic product to increase by 0.7 percent this year and 1.2 percent in 2016, up from 0.5 percent and 1.1 percent respectively. Italy's economy grew by 0.3 percent in the first three months of the year, marking the country's best quarterly performance in four years and a departure from almost three years of stagnation and recession.

Asia Pacific

Most equity indexes advanced last week with Mainland China and Japan setting the pace. The Shanghai Composite was up four of five days, gaining 3.1 percent on Tuesday and 2.8 percent Friday. The index climbed to a fresh seven year high and a weekly advance of 8.1 percent. The rapid gains extend an explosive yearlong rally as Beijing steps up monetary easing and money floods in from overseas thanks to a new trading link with Hong Kong.

The rally had taken a brief pause in recent weeks on worries it had gone too far and too fast, but the bulls have recently returned, buoyed by a new wave of government funded infrastructure projects. They include a number of railway and subway projects announced Tuesday worth $72.6 billion and aimed at getting the sluggish economy to speed up. Another driver has been a relaxation of rules by Beijing that makes it easier for local governments to raise money, a move that could provide the economy with a short-term lift but marks a reversal on efforts to tackle a mountain of debt. It should be noted that the rally has not spread to Hong Kong which was up just 0.6 percent for the week. Much of the attention in the city has been on a clutch of shares that have taken big tumbles after a rapid rise earlier in the year. Investors took weak Chinese data in stride as signs of continued weakness in the economy only served to boost expectations of more stimulus.

The Nikkei was up 2.7 percent on the week, renewing a 15-year high. The Bank of Japan said the country's economy is improving moderately, with its monetary policy board voting 8 to 1 to leave its policy framework unchanged, keeping the bank's annual asset purchases at ¥80 trillion. The BoJ last expanded its easing measures in October 2014. The better than expected first quarter GDP numbers made additional easing from the BoJ unnecessary. Analysts noted that buying by the Bank of Japan, the GPIF (Government Pension Investment Fund), smaller pension funds as well as Japan Post (ahead of its IPO later this year) is keeping the market well supported, with or without added yen weakness.

Whether it was the GDP number, a weaker yen or just an urge to push the market higher, Japanese shares have closed at their highest point this year and a fresh 15-year high. The benchmark Nikkei rose 0.9 percent to 20,196.6, which is the highest closing level since April 14, 2000. The index traded as high as 20,278.9. The Nikkei previously managed to trade and close above 20,000 points for the first time in 15 years on April 22 of this year, when data showed the nation posted its first trade surplus in 36 months in March.

The Japanese economy grew 0.6 percent in the first three months of the year or at an annualized pace of 2.4 percent. Those headline numbers were ahead of economists' expectations, but the detail shows that much of the growth was due to a huge build-up of inventories. Take that out, and the economy is still weak.

Elsewhere, Australian equities tumbled on lower iron ore prices and continued signs of weak Chinese growth. The All Ordinaries lost 1.1 percent on the week. The Reserve Bank of Australia published minutes from its monetary policy meeting held earlier this month. At that time, the RBA lowered its key interest rate by 25 basis points to 2.0 percent. The Board saw the case for a rate cut but debated its timing — that is whether it would occur in May or later. Waiting would give the Board additional information from the budget. But they decided that the rate cut was consistent with the revised RBA staff forecasts. Regarding the Australian dollar, they noted that a further fall in the value of the currency seemed likely and necessary. Currency developments were a likely input for business investment decisions. The Board also discussed the potential risks of imbalances for low interest rates. The Sensex added 2.3 percent in part on India's Meteorological Department's (IMD) prediction of a timely start to the monsoon which has bolstered hopes for a rate cut when the RBI meets to review its policy on June 2.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. It said it would continue to buy JGBs at an annual pace of ¥80 trillion. The vote to maintain its policy was 8 to 1. Takahide Kiuchi voted against the decision once again, arguing that a pace of purchases of ¥45 trillion was appropriate. In its statement, the monetary policy board (MPB) said that the economy has continued to recover moderately and was likely to continue doing so. The MPB said that the core CPI was likely to continue to be about zero for now. It noted that private consumption has been resilient and exports were picking up. However, the BoJ sees risks to its outlook stemming from European growth and prices.

At his post meeting press conference, Bank of Japan Governor Haruhiko Kuroda hit a more upbeat note about the nation's economy Friday, saying the Bank has effectively raised its view of the economy, while rejecting a view that more additional easing is necessary to achieve 2 percent inflation. Kuroda said that the change made in the wording of the bank's latest economic assessment amounted to a "half- or one-step forward." Kuroda's remarks dispelled confusion caused by the statement that said the economy "continues to recover." The wording was so similar to the previous month's wording that the economy "continues its recovery trend" that observers had trouble deciding whether it was an upgrade or a slight tweak with no significant meaning.

Kuroda was upbeat over his interpretation of Japan's first quarter gross domestic product data released earlier in the week. GDP grew an annualized pace of 2.4 percent, largely on a big buildup in inventories — a factor that some economists warned can be a precursor of declines in manufacturing activity going ahead. But Kuroda called the increase evidence of strength in the economy, not something "unintended," playing down worries that it was a sign of weak demand causing unsold items to pile up.

Currencies

The U.S. dollar rallied last week, gaining against all of its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. The dollar was on track at this writing for its best week against the euro in over 4 ½ years. There was little reaction to Fed Chair Janet Yellen's speech on the economy in the early afternoon (US EDT) Friday, just an hour before the bond markets closed for the Memorial Day weekend, Chair Yellen stated that the FOMC "must take policy in a forward-looking manner" or "risk overheating the economy."

The U.S. currency turned higher Friday, rebounding from early losses thanks to the April consumer price index report that indicated underlying price pressures are building. This would bolster the case for the U.S. Federal Reserve to raise interest rates later this year. The core CPI which excludes food and energy costs increased 0.3 percent, the largest increase since January 2013 and was 1.8 percent higher on the year and near the Federal Reserve's 2 percent target.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

April final harmonized index of consumer prices edged up 0.2 percent on the month but was unchanged from a year ago and its highest mark since November 2014. On the year, the core HICP excluding food, alcohol, tobacco & energy was up 0.6 percent although the HICP omitting just unprocessed food & energy was up 0.7 percent. Without just seasonal food & energy, the rate was 0.6 percent. Regionally most countries recorded little monthly change in their annual inflation rates although Cyprus (down 1.7 percent after down 1.4 percent) registered a relatively sharp decline and now stands just a tick above Greece. At the same time, Malta posted a disproportionately large 0.9 percentage point jump to 1.4 percent and now occupies the top rung of the Eurozone inflation ladder.

Germany

May ZEW survey suggests that analysts have become a little more cautious about the German economy since last month. In falling 4.5 points to 65.7, the current conditions index retraced only a fraction of April's 15.1 point bounce and still shows its second highest level since June 2014. This was the first decline since last October. However, expectations also were trimmed, the sub-index here losing a sizeable 11.4 points following a 1.5 point decline in April. Now at 41.9, its new level was the weakest so far this year.

First quarter gross domestic product was up 0.3 percent on the quarter and annual workday adjusted growth of 1.0 percent, down from 1.4 percent at the end of 2014. The quarterly expansion was led by private consumption which followed a gain of 0.7 percent in the fourth quarter with a 0.6 percent increase this time. Investment spending on equipment was up 1.5 percent after a 0.4 percent advance in October to December and construction investment was up 1.7 percent following a 1.3 percent gain. With government expenditure 0.7 percent firmer, final domestic demand added 0.8 percentage points to the quarterly change in GDP. Overall economic growth would have been stronger but for a 0.3 percentage point hit from inventory accumulation and a second successive negative contribution from net exports. Exports rose a respectable enough 0.8 percent on the quarter but with imports climbing 1.5 percent, net foreign trade subtracted 0.2 percentage points having already reduced growth by 0.3 percentage points in the fourth quarter.

May Ifo business climate survey sentiment index was 108.5 down slightly from its April mark. It was its first decline in seven months. The lack of volatility in the composite measure reflected a modest 0.3 point rise in current conditions to 114.3, its third straight gain and its highest reading since June last year, and a 0.4 point decline in expectations to 103.0. The dip expectations followed a 0.5 point slide in April and left the component at a 3-month low. Among the major sectors morale weakened in manufacturing (13.6 from 14.1) and wholesale (9.8 from 12.7) but rose in construction (minus 4.9 from minus 5.2) and retail (6.9 from 2.6). The unadjusted service sector index was nearly 3 points higher at 25.8.

United Kingdom

April consumer price index was up 0.4 percent on the month but slipped 0.1 percent when compared with a year ago. This was the first reading in negative territory on record. The main downward impact on the yearly rate came from transport where charges increased 2.4 percent on the month compared with a 7.9 percent jump over the same period in 2014. Higher air and sea fares were largely responsible. A number of others sectors, including housing & household services, clothing & footwear and household equipment & routine maintenance also made small negative contributions. The most prominent positive impact came from motor fuels which saw a 1.6 percent monthly increase compared with a 0.1 percent drop a year ago. Both petrol and diesel provided headline inflation with a modest boost. Recreation & culture alongside miscellaneous goods & services and food & non-alcoholic drinks had minor positive effects. As a result, the core CPI advanced 0.3 percent from March which was small enough to shave 0.2 percentage points off the annual underlying rate which now stands at 0.8 percent.

April input costs were up 0.4 percent on the month to reduce their annual deflation rate from 12.8 percent in March to 11.7 percent while factory gate prices edged just 0.1 percent firmer to leave yearly output price inflation steady at minus 1.7 percent. Within the minimal monthly increase in factory gate prices, the only gains of note were in the paper & printing and petroleum product categories (both 0.4 percent). Other increases were 0.2 percent or less and there were 0.1 percent declines in clothing, textile & leather as well as in chemicals & pharmaceuticals. Core prices were flat on the month and 0.1 percent higher on the year, matching March's results. The monthly increase in input costs was dominated by a 2.9 percent jump in crude oil and was further supported by a 0.9 percent gain in imported parts and chemicals and a 0.6 percent advance in home food materials. Imported food materials (down 2.7 percent) was by far the weakest subsector.

April retail sales were up 1.2 percent after declining 0.7 percent in May. Compared with a year ago, sales were up 4.7 percent for a 0.7 percentage point gain from the quarter-end rate. Excluding auto fuel, the April results also show a 1.2 percent increase from March and a 4.7 percent annual rise. April's recovery was wholly attributable to the non-food sector which, excluding auto fuel, recorded a hefty 2.4 percent monthly jump. Within this, warm weather probably contributed towards a 5.2 percent surge in clothing & footwear while the other stores category advanced a solid 2.4 percent. Smaller increases were seen in non-specialized stores (0.3 percent), household goods (0.5 percent) and non-store retailing (0.1 percent). Purchases of auto fuel were up 2.0 percent but food slipped 0.1 percent.

Asia/Pacific

Japan

March private machine orders excluding volatile ones for ships and electric power companies were up 2.9 percent. For the January to March quarter, these orders increased 6.3 percent on the quarter. For the April to June period, private sector orders excluding volatile ones are projected to drop 7.4 percent from the previous quarter. These orders serve as a proxy for capital spending. The total value of machinery orders received by 280 manufacturers increased 1.8 percent in March from the previous month on a seasonally adjusted basis. In January to March period it rose by 12.0 percent compared with the previous quarter. In the 2014 fiscal year the total amount of machinery orders increased by 8.4 percent while private sector orders excluding volatile ones edged up 0.8 percent.

The Japanese economy appears to be recovering with its second consecutive quarter of growth. First quarter gross domestic product was up 0.6 percent on the quarter – consensus was for a 0.4 percent quarterly gain. On an annualized basis, GDP was up 2.4 percent. However, GDP was down 1.4 percent when compared with the same quarter a year ago. Fourth quarter GDP was revised down to a gain of 0.3 percent on the quarter or an annualized pace of 1.1 percent. Among the components, domestic demand contributed 0.8 percentage point while net exports subtracted 0.2 percentage point. CAPEX contributed 0.1 percent while inventories added 0.5 percentage point. Private consumption was up 0.4 percent on the quarter as was CAPEX. Government consumption was up 0.1 percent.

Americas

Canada

April consumer prices edged down 0.1 percent on the month and were up 0.8 percent from a year ago and its slowest pace since October 2013. Core prices excluding food & energy were unchanged from March and were 1.9 percent higher on the year after a 2.0 percent increase last time. The BoC's preferred measure which excludes eight volatile items was up 0.1 percent on the month and 2.3 percent on the year. Seasonal factors are not particularly relevant in April and adjusted for these the CPI also dipped 0.1 percent from March when it was up 0.3 percent. Similarly adjusted the ex-food and energy index advanced 0.1 percent while the BoC gauge was unchanged. Within the adjusted basket the main upward pressure on prices came from alcohol & tobacco products which posted a 0.5 percent increase and household operations, furnishings & equipment (0.4 percent). On the downside, recreation, education & reading fell 0.6 percent, clothing & footwear 0.3 percent and both transportation and shelter 0.2 percent.

March retail sales were up 0.7 percent after increasing 1.5 percent the month before. On the year, sales were up 3.1 percent after 2.4 percent in February. However, the bulk of the increase in nominal demand was attributable to higher prices and volumes edged just 0.1 percent firmer from mid-quarter. The monthly gain in overall nominal sales was led by motor vehicles & parts which climbed 1.5 percent largely on the back of a 1.8 percent spurt in new vehicles. Excluding this sector total sales were up a more modest 0.5 percent. Elsewhere, food & drink advanced 1.3 percent, clothing & accessories 2.4 percent and health & personal care 1.7 percent. Partial offsets came via declines in general merchandise (2.4 percent), gasoline (0.5 percent) and electronics & appliances (0.2 percent).

Bottom line

The Federal Reserve, Bank of England and the Reserve Bank of Australia published minutes from their most recent monetary policy meetings. Only the RBA acted at its meeting and cut its key interest rate by 25 basis points to 2.0 percent. The flash May purchasing managers' indexes painted a mixed picture of growth and contraction.

The Bank of Canada announces its policy decision this coming week. Expectations are that the BoC will leave its policy interest rate at 0.75 percent. The UK, U.S., Spain and Italy report revised gross domestic product data while Canada releases its estimate of first quarter GDP. And Japan posts its end of the month avalanche of economic data.

Looking Ahead: May 25 through May 29, 2015

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