Europe and the UK
European stocks ended the week at a three-month high after U.S. employment report soothed fears that the Federal Reserve would resume increasing interest rates when it met on September 20th. And French drug maker Sanofi-Aventis' stock benefited from a favorable ruling in the Plavix patent case.

The ECB is very vigilant
The European Central Bank left its policy interest rate at 3 percent on Thursday, but at his post-meeting press conference, Bank President Jean Claude Trichet made it very clear that a rate increase could happen at the October 5th meeting. He said economic growth and inflation would exceed previous forecasts. He said that "strong vigilance remains of the essence so as to ensure that upside risks to price stability are contained." He also said that ECB rates are still low and the Bank expects inflation to stay elevated. Analysts consider the words "strong vigilance" code words indicating a rate increase at the next rate-setting meeting. Analysts pointed out that Trichet used the same language to lay groundwork for the ECB's four rate increases since December. The Bank has been trying to rein in consumer prices amid faster economic growth and near-record oil prices. In the second quarter, the EMU, at 0.9 percent, grew faster than both the U.S., 0.7 percent, and Japan, 0.2 percent, when compared with the previous quarter.

The ECB staff raised its projections for growth and inflation. The Bank said the economy will expand about 2.5 percent in 2006 and 2.1 percent in 2007. In its June forecast, the ECB predicted growth of 2.1 percent this year and 1.8 percent in 2007. The staff expects consumer prices to increase by about 2.4 percent in both 2006 and 2007. These too are above its previous forecasts of 2.3 percent and 2.2 percent. The ECB aims to keep inflation below 2 percent, something it has failed to do for a full year since 1999.

Asia/Pacific
Asian/Pacific stocks were up last week, thanks to better-than-expected earnings for technology stocks. But Japanese stocks faltered on Friday after fears of softening domestic demand surfaced after a disappointing auto sales report. Companies like Toyota were down. But on the week, Japanese stocks benefited from the weaker yen, which helps repatriated profits while lowering the prices of the country's exports. And in South Korea, Samsung Electronics, the country's largest exporter and Hynix Semiconductor, Asia's second-largest maker of computer memory chips, gained after the country's exports showed a year-on-year increase of 18.7 percent.

Japanese bond yields
Japanese government bond yields have sagged markedly in recent after some bond analysts decided that weak inflation data negated the possibility of another interest rate increase in 2006. But others, including Bank of Japan watchers, think that traders over-reacted to the lower-than-expected consumer price index numbers. Bond prices have risen sharply since the release on August 25th, pushing yields on the 10-year benchmark from above 1.8 percent to 1.665 percent yesterday, near a five-and-a-half month low. The 10-year yield was not far from the 1.61 percent rate of March 9th when the BoJ abandoned its six-year quantitative easing policy. Since then, liquidity levels have been normalized and in July the BoJ increased its interest rate to 0.25 percent after declaring that deflation was dead.

But many are questioning the consumer price index. The series was rebased to 2005 from 2000 and components were restructured and re-weighted. For example, obsolete items such as sewing machines were removed from the index while flat screen TVs were added for the first time. But the central bank has said that it will focus on a forward-looking policy that takes into account a broad set of data. In other words, it will not be tied to one backward-looking number, namely the CPI. They will also look at data such as capital investment, inventory accumulation and asset prices. The bank has made it clear it reserves the right to act against the danger of future inflation even if this is not reflected in current data.

Currencies
The yen was also down after last week's weak CPI data. The yen reached all time lows against the euro on expectations the Bank of Japan would become more cautious about increasing interest rates while the ECB would continue to increase those for the eurozone. The yen was down against other major currencies as well. There were also rumors that investors were renewing their interest in carry trades, whereby money is borrowed cheaply from one source (Japan) and placed where it can earn more interest (Europe).

Both the euro and yen were up slightly against the U.S. dollar last week, but traded within a relatively narrow band. The dollar was up initially after a relatively bland U.S. employment situation report that was pretty much as expected by the markets. This was followed by a report that showed contracts to buy existing homes sank the most in five years. The currency lost ground against both the euro and yen amid growing speculation the Federal Reserve will hold interest rates at their current level.

Indicator scoreboard
EMU - July M3 money supply was up 7.8 percent on the year. For the three months ending in July, M3 was up by 8.3 percent when compared with the same three months a year ago. The European Central Bank targets M3 money supply growth at 4.5 percent for the three month moving average. Although M3 growth eased in July, its growth still far exceeds the Bank's target.

August flash harmonized index of consumer prices was up 2.3 percent when compared with last year and less than July's increase of 2.4 percent on the year. The HICP has been at or above the ECB's 2 percent ceiling since January 2005. As with all flash releases, no detail was available.

July unemployment rate remained at 7.8 percent for the second month. This compares with an unemployment rate in the U.S. of 4.8 percent and in Japan, 4.1 percent. Within the EMU, the unemployment rate for Germany edged upward while France's edged downward. Spanish unemployment dropped to 7.6 percent from 8.2 percent in the preceding month.

Second quarter gross domestic product growth improved and was up 0.9 percent and 2.4 percent when compared with the same quarter a year ago. In the first quarter, GDP was up 0.8 percent and 2.1 percent on the year. The main contributor to growth was domestic demand. Gross fixed capital formation was up 2.1 percent and 4.6 percent on the year while private consumption was up 0.3 percent and 1.7 percent on the year.

EU - August business and consumer sentiment declined to a reading of 106.7 from 107.8 in July. Business sentiment edged down to 2 from 4 in the previous month while consumer sentiment remained unchanged at minus 8. Manufacturing sentiment was down due to falling production expectations. Consumers were a little less pessimistic about the general economic outlook as unemployment concerns receded. Service sector sentiment was unchanged but construction sentiment declined. August French sentiment was not available because of vacation season.

Germany - July retail sales dropped 1.2 percent and were up 0.3 percent when compared with last year. Excluding autos and gasoline stations sales were down 1.5 percent on the month and were unchanged on the year.

August unemployment rate was 10.6 percent, the same as in July as the number of unemployed was up by 10,000. Unemployment rate in the East jumped to 17.2 percent from 16.9 percent in July while the unemployment rate in the West remained at 9 percent. July seasonally adjusted employment was up for the sixth month, gaining 31,000 jobs while unemployment was down by 10,000 according to ILO criteria. The ILO unemployment is defined as those persons without work who are actively looking for a job and could start work immediately.

France - July unemployment rate edged down to 8.9 percent from 9 percent in the previous month. The unemployment rate is at its lowest in almost 4½ years. The number of unemployment dropped by 29,000.

Asia
Japan - July unemployment rate edged down to 4.1 percent while the jobs-to-applicants ratio, which shows how many positions are available to a job seeker, was at its highest level in 14 years.

July seasonally adjusted retail sales were up 5.3 percent but down 0.2 percent when compared with last year. An extended rainy season dampened sales. The rainy season stretched 10 days longer than the historical average in areas where about 60 percent of the population lives, according to the Japan Meteorological Agency. The data exclude Internet shopping and spending on services including travel and entertainment.

July industrial production dropped 0.9 percent but was up 5.1 percent when compared with last year. Production is starting to moderate as rising oil prices and higher borrowing costs in Japan's overseas markets curb spending.

Australia - July retail sales were up 0.6 percent and 6.2 percent when compared with last year. A recent tax cut combined with growing employment combined to boost sales. Sales at department stores jumped by 7 percent while spending on household goods climbed 1.2 percent and clothing sales gained 0.6 percent.

Americas
Canada - July industrial product price index (IPPI) was up 1.7 percent after dropping by 0.4 percent in June. The IPPI was up 4.3 percent when compared with last year, almost double June's increase of 2.2 percent on the year. The upward pressure for both the monthly and yearly increases came mainly from higher prices for primary metal products and petroleum products. Primary metal product prices were up 7.2 percent after sinking 5.2 percent in June. Prices for nickel, copper, refined zinc products and refined gold products soared as well. Petroleum and coal products prices increased by 5.2 percent. If petroleum and coal product prices had been excluded, the IPPI would have increased 1.2 percent on the month.

July raw materials price index (RMPI) soared 5.2 percent after declining 2.3 percent in the previous month. The jump was due primarily to higher prices for crude oil and non-ferrous metals. On the year, the RMPI soared 19 percent after climbing 14.8 percent in June. Mineral fuels were up 6 percent on the month while crude oil prices jumped by 7.5 percent, mainly due to concerns about supply disruptions. If mineral fuels had been excluded, the RMPI would have increased 4.5 percent instead of 5.2 percent.

The value of the Canadian dollar against the U.S. dollar was down 1.4 percent in July. As a result, the total IPPI excluding the effect of the exchange would have risen 1.3 percent instead of 1.7 percent. The Canadian dollar was 8.3 percent higher against the U.S. dollar on the year. If the impact of the exchange rate had been excluded, producer prices would have risen 6.5 percent on the year rather than their actual increase of 4.3 percent.

Second quarter gross domestic product was up 0.5 percent and 2.9 percent when compared with the same quarter a year ago. In the first quarter, GDP was up 0.9 percent and 3.2 percent on the year. GDP was up 2 percent on an annualized basis. The easing in second quarter GDP was due to slower but sustained growth in consumer spending and business investment in plant and equipment, as well as a cooling in the housing market.

Bottom line
August ended on an upbeat note for equity investors (with the exception of the FTSE, which was down on the month). And optimism continued into the first day of September. There was an abundance of economic data last week, but few surprises. It was a short work week in the UK while in the U.S. it was the last chance to grab a summer week off before Labor Day (September 4).