Global Markets

Equities were mixed last week. With little new economic information globally, investors focused intently on the data that were available and especially the flash purchasing managers' indexes. Minutes of recent monetary policy meetings of the Reserve Bank of Australia, Bank of England and the Federal Reserve also were intently parsed. Both the FOMC and BoE held discussions regarding how to reduce quantitative easing and begin to increase interest rates while the RBA reiterated its intention to keep policy unchanged. And the Bank of Japan announced its policy decision as investors looked for its take on the economic impact of the higher sales tax.

Flash estimates mixed

Eurozone May overall private business activity grew at just under its fastest pace this year according to the latest flash PMI estimates. Composite readings which include both services and manufacturing are only available for the Eurozone, France and Germany. Here, an improved services sector offset a slight pullback in manufacturing with France dismally contracting in both.

The composite PMI for the currency bloc, seen as a good indicator of growth, edged down to 53.9 from a near three year high of 54.0 in April. According to compiler Markit, the index points to second quarter economic growth of 0.5 percent, which would be the strongest in three years. But the data also reveal the biggest split between the Eurozone's two largest economies since February. France contracted while Germany bounded ahead, although led by services rather than manufacturing.

China's flash manufacturing PMI climbed to a reading of 49.7 in May from April's 48.1 — its highest since December. Sub-indexes measuring output as well as domestic and foreign demand all recovered sharply from April. But factory jobs were shed for the 13^th month and the overall index was still pointing to contraction. In Japan, manufacturing contracted slightly in May but at a slower pace than in April, suggesting some recovery from the impact the April 1 sales tax increase. The flash manufacturing PMI reading was 49.9 in May, up from April's 49.4.

Global Stock Market Recap

Europe and the UK

Equity indexes advanced last week with the exception of the FTSE despite cautious trading in the week before European Union parliamentary elections Sunday. The FTSE was down four of five days and incurred a weekly loss of 0.6 percent. The DAX added 1.4 percent while the CAC and SMI were up 0.8 percent and 0.2 percent respectively.

Appetite for European shares was sapped during the week by uncertainty over the outcome of EU parliamentary elections, in which strong performances by Eurosceptic parties could undermine governments' efforts to move towards greater integration. However, in the UK markets, the impact was exacerbated given the traditional risk off into a long weekend to celebrate Memorial Day along with the U.S.

Sovereign ratings of Spain and Greece were upgraded by major rating agencies as remedial measures taken by both nations over the last few years start to support economic recovery and revamp fiscal positions.

The Bank of England published minutes of the monetary policy committee's latest meeting held earlier in May. As expected, the vote was unanimous to maintain both the Bank Rate at 0.5 percent and the asset purchase ceiling at Stg375 billion. However, the minutes made clear a widening split over the case for an early increase in rates with a number of members seeing spare capacity above the Bank's current 1.0 percent to 1.5 percent estimate and others on the MPC believing that the output gap is a lot smaller. With the official line on interest rate increases being that they should be only gentle when the tightening cycle begins, some members argued that this favors starting the process sooner rather than later, not least as such an approach might otherwise accommodate a build-up of financial imbalances.

Elsewhere the minutes noted increasing concerns about the housing market. However, for now the BoE's Financial Policy Committee (FPC) is tasked with tackling the growing signs of a house price bubble with monetary policy seen as a last resort. Still, with housing developments a key determinant of UK consumer spending it could yet be that overheating here provides an important trigger for the first increase in official interest rates as and when it is finally delivered.

Asia Pacific

Equities were mixed with the major indexes gaining while those in emerging Asia mostly retreated. Stocks were buoyed by improving U.S. and Chinese manufacturing data that suggest the global economy is recovering. However, lingering concerns over the political crisis in Ukraine and a military coup in Thailand weighed on risk taking. The Nikkei ended the week at a three week high thanks to a weaker yen. The index added 2.6 percent on the week.

The Shanghai Composite advanced 0.4 percent on the week led by property developers amid reports the government will ease curbs on home purchases to support growth. The Hang Seng was up 1.1 percent.

Thailand's SET lost only 0.6 percent for the week after the military seized power in a coup. Thai stocks were resilient during the week's turmoil, which included a declaration of martial law Tuesday. The coup marked a further level of dysfunction in one of Southeast Asia's biggest economies, rattling investors. Thailand's stock market has shown resilience despite more than six months of street protests, a failed election and a court's removal of the prime minister this month. The SET remains one of Asia's best performers so far this year — up 7.6 percent.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. Financial asset purchases remained unchanged, with the goal of increasing the monetary base at an annual pace of about ¥60 to ¥70 trillion yen. It maintained its inflation target at 2 percent but sees a shortfall. It projects the consumer price index to be about 1.25 percent for some time. The BoJ has made no adjustments to the size or scale of its massive asset purchase program it introduced in April 2013.

At his press conference, BoJ Governor Haruhiko Kuroda continued to sound confident regarding the economy's progress which means hoped for action from the Bank is unlikely. According to the Governor, Japan is shrugging off the effects of its first consumption tax increase in 17 years. He also maintained a pledge to keep easing until the 2 percent inflation target is hit. The increase in tax, from 5 percent to 8 percent, caused spending on big-ticket items such as cars and condominiums to drop sharply in the weeks after April 1 when it took effect.

Currencies

The U.S. dollar was up against all of its major counterparts with the exception of the British pound sterling. Against sterling, the dollar was virtually unchanged. Positive economic data at week's end helped push the dollar upward. The euro fell to a three month low against the U.S. dollar after a wobble in German business confidence added to expectations the European Central Bank will cut interest rates next month. The possible move by the ECB has been underscored by the clear signals sent by President Mario Draghi and other members of the Governing Council in recent weeks that a rate cut plus a few unconventional measures are on the cards for the June meeting. Key in the week's decline was the weakening of the German Ifo survey in May that suggests the German recovery may be slowing. Investors were also reluctant to take on too much risk ahead of European election results and a presidential election in Ukraine this weekend. Both British and U.S. markets will be closed on Monday, which will dry up market liquidity.

The Australian dollar continued to retreat after defying gravity for most of the year. A combination of global and domestic factors has brought the Aussie under intense pressure, driving it down 1.4 percent — the biggest weekly decline in four months. That has analysts and traders speaking more pessimistically about the currency than they have in a long time. On the international front, increasingly gloomy Chinese economic data — Australia's biggest trading partner — helped send iron ore this week to a 20 month low, below US$100. Prices for the steelmaking commodity — which represents some 20 percent of Australia's exports — are little more than half the 2011 peak, creating a major headwind for the economy.

Domestic pressure has come from the conservative government's first budget. Unveiled earlier this month, it aims to reduce a long running deficit by raising taxes and making sweeping cuts to welfare spending. The impact was almost instantaneous. Consumer confidence plunged, falling in May to its lowest in nearly three years. A few years ago, the story was the Aussie's meteoric rise. After the financial crisis, Australia's strong trade links with industrializing China helped the country avoid the global recession and at one point the currency breached parity with the U.S. dollar. It peaked beyond US$1.10, and has remained strong even as the nation's economy slows with the downturn in mining investment, which has triggered mass job losses over the past couple of years.

Selected currencies — weekly results

Indicator scoreboard

Germany

First quarter gross domestic product expanded at an unrevised 0.8 percent quarterly rate. Annual workday adjusted growth remained at 2.3 percent and the unadjusted yearly increase in total output at 2.5 percent. Strength was broad based among the key elements of private sector demand. Following a 0.3 percent quarterly decline in the fourth quarter of 2013, household consumption was up 0.7 percent while within a 7.4 percent bounce in gross capital investment, equipment spending was up 3.3 percent and construction 3.6 percent. With government expenditure 0.4 percent higher, domestic demand grew 1.9 percent which, even after allowing for a sizeable 0.7 percentage point contribution from business inventories, constitutes a more than solid recovery after a disappointing 0.3 percent contraction last time. Overall GDP growth was held in check by a sharp reversal in net foreign trade. Here a 0.2 percent increase in exports was easily more than offset by a 2.2 percent jump in imports to subtract 0.9 percentage points from the quarterly change in total output.

May Ifo survey reading was 110.4 and was just 0.8 points short of its April reading. The minor decline this month reflected a 0.5 point drop in current condition to 114.8 and, more significantly, a larger 1.1 point decline in expectations to 106.2. The former now stands at its lowest level since February while the latter saw its weakest reading since October 2013. At a sector level, morale softened in all areas although outside of wholesale (off 3 points at 11.4) and retail (down 2.8 points at 4.9) the deterioration was relatively mild.

United Kingdom

April consumer price index was up 0.4 percent on the month to lift the annual inflation rate by 0.2 percentage points to 1.8 percent, its highest since the start of the year and its first increase since June 2013. The core index was up a still sharper 0.5 percent from March to boost its yearly pace by 0.4 percentage points to 2.0 percent, its highest level since September of last year. The strongest contribution to the acceleration in the headline rate came from the transport sector where air fares surged a monthly 18 percent and sea fares 22 percent compared with a monthly decline of 6 percent and a rise of 3 percent respectively in April 2013. The other main positive impact came from clothing & footwear where charges climbed 1.0 percent on the month following essentially no change in the year ago period. The main downward contribution was supplied by food & non-alcoholic beverages where costs were off a monthly 0.5 percent and alcohol & tobacco where a 0.9 percent increase from the end of the quarter was well short of the increase posted last year.

April producer output prices were unchanged on the month and 0.6 percent higher on the year while input costs dropped 1.1 percent from quarter end for a decline of 5.5 percent on the year. Within the output price basket, most sub-sectors saw little monthly change. The only increases of any significance were in tobacco & alcohol and clothing, textiles & leather (both categories 0.3 percent). Other gains were minimal. The sole decline was in transportation equipment (0.1 percent). Excluding food, drink, tobacco & petrol, prices were also steady at their March level and were up 1.0 percent on the year. Meantime, a fourth consecutive monthly drop in input costs mainly reflected a 3.2 percent decline in fuel together with a 2.3 percent crop in imported food materials and a 1.6 percent reversal in crude oil. In fact, all sub-sectors except home food materials (0.2 percent) and other home-produced materials (unchanged) posted monthly declines.

April retail sales jumped 1.3 percent after increasing an upwardly revised 0.5 percent in March. On the year, sales were up 6.9 percent — the fastest pace in nearly a decade. Consumer demand in April was almost certainly boosted by the combination of warm weather and the Easter holiday. Excluding auto fuel, sales were even more robust with a 1.8 percent advance from March that put yearly growth at 7.7 percent. Most categories made fresh progress last month. In particular, non-store tailing recorded a 5.9 percent monthly increase after a 1.7 percent drop last time. Specialized stores were up 0.3 percent along with household goods while textiles, clothing & footwear were up 0.2 percent. The only reversal within the ex-auto non-food sector was in the other stores category although this was a substantial 2.0 percent (albeit after a string of sizeable gains previously) and saw the sector as a whole dip 0.4 percent after a 1.8 percent bounce in March. Food purchases were 3.6 percent higher on the month while auto fuel dropped 3.7 percent.

First quarter gross domestic product was up 0.8 percent on the quarter and up 3.1 percent from the same quarter a year ago. Household spending matched the headline 0.8 percent quarterly expansion rate and alone boosted total output by 0.5 percentage points. Gross capital formation jumped 2.2 percent within which business investment was up 2.7 percent. General government final consumption expanded just 0.1 percent while business inventories added 0.2 percentage points to quarterly growth. Net foreign trade had a neutral impact as a 1.0 percent quarterly drop in exports was essentially mitigated by a 1.1 percent slide in imports.

Asia/Pacific

Japan

March private machine orders excluding volatile items such as orders of ships and from electrical companies soared 19.1 percent on the month and 20.1 percent from a year ago. Both beat analysts' estimates by a significant amount. On a monthly basis, these orders have gyrated between increase and decline on an alternating basis since November 2013. On the quarter orders excluding volatile ones were up 4.2 percent. Private orders were up 17.3 percent. Manufacturing orders jumped 23.7 percent while nonmanufacturing orders (excluding volatile items) were up 8.5 percent on the month. Overseas orders were up 3.2 percent while government orders dropped 18.5 percent. The Cabinet Office forecasts that the total amount of machinery orders for the April through June quarter will increase by 21.3 percent and private sector orders excluding volatile ones are expected to increase only 0.4 percent from the previous quarter respectively. This forecast was basically made by summing up the figures from 280 machinery manufacturers.

April unadjusted merchandise trade deficit was ¥808.9 billion, somewhat larger than analysts were expecting but considerably below March's ¥1.45 trillion short fall. Exports were up 5.1 percent from a year ago while imports were 3.4 percent higher. Both were up more than expected. It was the 22^nd consecutive month that the trade balance has been in deficit underlining how Prime Minister Shinzo Abe's economic growth campaign has, despite the improvement in April, failed to boost the nation's exports. Japan's chronic trade shortfall has been caused by high energy imports prompted by the government's decision to turn off atomic reactors following the March 2011 Fukushima disaster. Exports to Asia were up 3.6 percent on the year while those to China were up 9.8 percent. Exports to the EU were up 12.7 percent and to the US, 1.9 percent. On a seasonally adjusted basis, the trade deficit was ¥844.6 billion. On the month, exports were up 0.6 percent while imports dropped 9.9 percent as spending was curtailed after the sales tax increase went into effect on the first of April.

Americas

Canada

March retail sales edged down 0.1 percent on the month but advanced 3.9 percent when compared with a year ago. Volumes declined 0.2 percent from February and were up 3.5 percent from March 2013. Within total nominal sales there were monthly declines in seven of 11 subsectors. Among these, motor vehicles & parts (0.7 percent) stood out. Excluding this category, purchases were up 0.1 percent on the month and were 3.7 percent stronger on the year. Clothing & accessories (down 1.4 percent) also struggled as did miscellaneous stores (down 2.0 percent), health & personal care (down 0.4 percent) and building material & garden equipment & supplies dealers (also down 0.4 percent). General merchandise was down 0.3 percent and sporting goods, hobby, book & music stores down 0.1 percent. However healthy monthly advances were posted by electronics & appliances (1.7 percent) and furniture & home furnishings (1.2 percent) as well as a smaller increase in food & drink (0.4 percent). Gasoline stations were up 0.8 percent.

April consumer prices were up 0.3 percent and were up 2.0 percent for the first time since April 2012. Consumer prices excluding food and energy were up a monthly 0.2 percent and 1.4 firmer on the year following a 1.2 percent annual increase last time. The BoC's preferred core measure also increased 0.2 percent from March and 1.4 percent on the year. Seasonally adjusted CPI was up 0.2 percent. Both the ex-food and energy and the BoC indices were similarly 0.2 percent higher than in March. Within the adjusted basket the main upward pressure stemmed from clothing & footwear and shelter, both of which posted 0.8 percent monthly gains. The only other increase of note was food (0.4 percent) and there were declines in recreation, education & reading (0.3 percent) and in alcoholic beverages & tobacco products (0.1 percent).

Bottom line

Equities were mostly higher last week. A morale boost from the flash PMIs was offset to a large part by political uncertainties in Thailand and Ukraine. Minutes from the Federal Reserve, Reserve Bank of Australia and the Bank of England indicate that the Banks are content to maintain the status quo for the time being.

On Sunday, May 25, the results of the EU parliamentary elections will be announced. Key economic data concerning consumer spending and the labour force are on the calendar. Japanese April data for industrial production and the consumer price index along with consumer spending will be examined for the impact of the April 1st sales tax increase.

Looking Ahead: May 26 through May 30, 2014

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