Global Markets

Equities rallied last week as mostly favorable U.S. economic data backed up the Federal Reserve's inclination to put a possible fed funds rate increase on the table for June or July. All equity indexes except the Shanghai Composite (down 0.2 percent) advanced on the week. Increases ranged from 0.5 percent (KLCI) to 5.3 percent (Sensex).

The Group of Seven finance and central bankers met in Japan prior to the G-7 summit which just concluded. The meeting of finance ministers and central bankers ended without agreement on a plan to revive global growth. Finance ministers stressed the importance of varying action for each country but the United States treasury secretary, Jacob J. Lew, urged his Japanese counterpart, Taro Aso, to refrain from devaluing the yen to lift the country's exports. At the end of the summit, the G-7 pledged to seek strong global growth, while papering over differences on currencies and stimulus policies and expressing concern over North Korea, Russia and maritime disputes involving China.

In a discussion that delayed traders from their early escapes for the Memorial Day holiday weekend Friday afternoon, Fed Chair Janet Yellen followed the theme of the April FOMC minutes and said that a Fed funds rate increase would be appropriate, data willing, in the next several months. Since the minutes were published, both the June and July meetings are now considered 'live' for a possible rate increase.

Global Stock Market Recap

Europe and the UK

Equities advanced in Europe and the UK last week. The FTSE added 1.9 percent while the CAC, DAX and SMI jumped 3.7 percent each. It was the third straight week that the FTSE, CAC and SMI have increased. With one trading day remaining in May, only the MIB is lower on the month. The FTSE has now increased four of five months this year while the CAC and DAX have been higher in three and the SMI in two. Traders tapered off at the end of the week — they said they were waiting for remarks by Fed chair Janet Yellen scheduled after markets here closed as a reason to stay on the sidelines.

It was a light week for new economic data. On Friday both UK and French consumer confidence strengthened. Earlier in the week, the flash PMIs were released for Germany, France and the Eurozone. For the Eurozone, the composite PMI slipped to 52.9, a 16 month low. The slip in the composite reflected a poor period for manufacturing where the flash PMI surprisingly fell 0.2 points to a 3-month trough of 51.5. Services (53.1) were unchanged from their level at the start of the quarter. The composite output index gained in both France (51.1 and a 7-month high) and Germany (54.7 and a 5-month high).

The UK economy expanded as initially estimated in the first quarter. Gross domestic product was up 0.4 percent from the previous three months, unrevised from the original estimate. On the year, GDP slowed to an increase of 2.0 percent from 2.1 percent in the original estimate.

The Greek government and its creditors seem to have reached a broad agreement that should pave the way for the disbursement of €10.3 billion of funds needed to avoid near-term default. In addition to the new bailout money, there will be phased debt relief in two years' time, a key demand of Athens and a strict condition of continued IMF involvement.

Asia Pacific

All Asian equity indexes advanced last week — with the exception of the Shanghai Composite (down 0.2 percent). Gains ranged from 5.3 percent (Sensex), 4.1 percent (Taiex) and 3.6 percent (Hang Seng) to 0.6 percent (Nikkei) and 0.5 percent (KLCI). With one trading day left in May, the Sensex and All Ordinaries performed the best and the Shanghai Composite performed the worst.

Investor sentiment in the region was buoyed by gains in oil prices, easing Brexit worries and news of an agreement in talks between Eurozone finance ministers and Greece to unlock €10.3 billion in new bailout loans as well as debt relief for Athens as demanded by the IMF.

Economic data were sparse during the week. Japan's May flash manufacturing PMI contracted for a third month. The contraction began prior to mid-April's earthquake in southern Japan. However, the decline in April exports in part reflects the impact of the earthquake given the supply chain disruptions that occurred. And the April consumer price index continued to be bogged down in deflation. A question hovering over the markets here was whether the second sales tax increase from 8 percent to 10 percent scheduled for April 2017 will be postponed in light of the struggling economy and the distortions that were caused by the initial increase in April 2014. Meantime, equities continue to fluctuate with the value of the yen.

The All Ordinaries added 1.0 percent last week and with one day remaining in May, the index was up 3.2 percent. Stabilizing commodity prices have sent mining sector shares higher. Investors ignored disappointing CAPEX data that indicated that Australian business investment fell 5.2 percent in the March quarter. The result was much worse than forecasts for a 3.5 percent decline after a 0.8 percent increase in the previous three months.

Currencies

The U.S. dollar was up against the euro, Swiss franc and Australian dollar last week. However, it retreated against the pound sterling and was virtually unchanged against the yen. At week's end the currency got a boost from the upward revision of first quarter gross domestic product and comments from Fed chair Janet Yellen regarding a possible fed funds increase. During the week, FOMC members both voting and non-voting said that they would be comfortable with an interest rate increase soon.

Selected currencies — weekly results

Indicator scoreboard

Germany

Second estimate of first quarter gross domestic product increased 0.7 percent on the quarter and 1.6 percent increase on the year. This release provided a first look at GDP expenditure components. Domestic demand was up 0.8 percent on the quarter after 0.9 percent last time. Household consumption was up 0.4 percent and gross capital investment accelerated by 0.4 percentage points to 1.8 percent. Within this, equipment rose 1.9 percent and construction 2.3 percent following gains of 1.0 percent and 2.0 percent respectively last time. Government expenditures rose 0.5 percent or just more than half their fourth quarter increase while inventory accumulation added only 0.1 percentage point to the quarterly change in GDP. Net foreign trade subtracted from growth for the third successive quarter as exports increased 1.0 percent and imports a sharper 1.4 percent. However, the hit only amounted to 0.1 percentage points off GDP and was well short of the 0.5 percentage points last time.

The May ZEW survey suggests that analysts have become somewhat more upbeat about the economy's current situation while at the same time adopting a more cautious view of the outlook. May current conditions index rose more than 5 points to 53.1, possibly reflecting the upside surprise on first quarter growth. This was its first monthly increase since January and its highest level since the start of the year. However, it was still well short of the 65.7 reading posted a year ago. Meanwhile, expectations deteriorated by 4.8 points to 6.4. This was 35.5 points below its May 2015 mark but at least still above its March print.

May Ifo survey was a little more upbeat than generally anticipated with both the current conditions and expectations components surprising on the upside. At 107.7 the headline business climate index was up a full point from its marginally firmer revised April reading and at its highest level so far this year. Current conditions also gained a point to 114.2, equaling their best reading since August 2015 and more than reversing April's 0.6 point decline. Expectations increased 1.1 points to 101.6, their third successive gain and the second strongest mark so far in 2016. There were widespread improvements in morale on the sector level. Manufacturing rose 1.3 points to 7.8 and retail was up 4.3 points at 11.1. Additionally, confidence advanced 3.1 points to 2.4 in construction and was up 2.4 points at 13.1 in wholesale.

United Kingdom

Second estimate of first quarter gross domestic product was essentially unrevised with a 0.4 percent increase from the previous quarter. However, the yearly rate of expansion was shaded just a tick lower to 2.0 percent. Household consumption was again the driving force, posting a 0.7 percent quarterly gain after a 0.6 percent increase last time. This equaled its strongest rise since the first quarter of 2015. Gross fixed capital formation returned to positive growth. However, a 0.5 percent quarterly increase reversed only about half of the fourth quarter's 1.1 percent drop. Moreover, business investment declined 0.5 percent. With government consumption up 0.4 percent and business inventories little changed, total domestic expenditure advanced 0.7 percent, matching its fourth quarter gain. The headline statistics would have looked rather better but for a hefty 0.4 percent hit from net foreign trade. This reflected a 0.3 percent quarterly decline in exports, their second fall in the last three quarters, and a 0.8 percent increase in imports, their third consecutive increase.

Asia/Pacific

Japan

Japan's unadjusted merchandise trade surplus was Y823.5 billion after March's surplus of Y754.985 billion. Analysts expected the surplus to be Y492.8 billion. Exports tumbled 10.1 percent from a year ago while imports plunged 23.3 percent. While the decline in exports met expectations, imports dropped more than the expected 19.0 percent. While the decline in exports was its seventh straight, it was the 16^th consecutive decline for imports. On the year, exports to Asia (down 11.1 percent), China (down 7.6 percent) and the United States (down 11.8 percent) dropped. However, exports to the EU were up 9.9 percent on the year. On a seasonally adjusted basis, Japan's trade surplus was Y425.6 billion after Y296.3 billion in March. In April, exports were down 1.2 percent while imports were 3.6 percent lower.

April consumer prices were down 0.3 percent from the same month a year ago. Excluding only fresh food the CPI also declined 0.3 percent. However, excluding both fresh food and energy, the index was up 0.7 percent from a year ago. Goods prices were down 1.1 percent on the year while services prices were up 0.8 percent. Energy prices dropped 12.6 percent after sinking 13.3 percent last time. In contrast, TVs were up 13.3 percent after jumping 15.2 percent on the year. Electronics goods prices were 9.2 percent higher. Food excluding perishables was up 1.5 percent after 2.0 percent in March.

Bottom line

This past week can be regarded as the calm before the data storm of the coming week. It was a relatively light week for economic data. Data of note were the flash PMI reports for the Eurozone, France, Germany, Japan and the United States. Surveys from Germany indicated more upbeat attitudes. UK first quarter GDP was unrevised from the first estimate at a quarterly increase of 0.6 percent. In Japan, exports and imports dropped and deflation remains.

Markets in the UK and U.S. will be closed Monday. However, the rest of the week is quite full of major economic reports. Japan will release April data for retail sales, household spending, unemployment and industrial production. Australia and Canada report first quarter growth. The European Central Bank holds a monetary policy meeting. Final May PMIs will be reported for individual countries and globally.

Looking Ahead: May 30 through June 3, 2016

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