Global Markets

Investors spent a good deal of the past week looking forward to the busy first week of June and especially the results of the European Central Bank meeting on June 5. Investors want to know what the ECB will do to counteract disinflationary pressures. Ever since ECB President Mario Draghi said during last month's press conference that officials would be "comfortable" easing policy, investors have been trying to figure out what the ECB might do. Possibilities range from a cut in the main benchmark interest rate or refinancing rate to more exotic policies including a full-blown program of asset purchases.

Most indexes followed here were up in May. The gains ranged from 8.0 percent (Sensex) 4.3 percent (Hang Seng) to 0.1 percent (KLCI). The S&P/TSX Composite lost 0.3 percent, the MIB slid 0.7 percent and the PSEi was 0.9 percent lower.

India's GDP

Gross domestic product for the three months ending March 31 grew 4.6 percent when compared with the same quarter a year ago. For the full fiscal year ending in March, the economy expanded 4.7 percent, the second straight year that growth was under 5 percent. The slow expansion shows a significant decline from the 8.4 percent growth in the 2010-11 fiscal year. The data add pressure on newly elected Prime Minister Narendra Modi to spur investment after winning the strongest electoral mandate in 30 years.

Reviving growth is the new government's immediate challenge while the Reserve Bank of India works to lower inflation, according to Reserve Bank of India Governor Raghuram Rajan. The first single party parliamentary majority in India since 1984 puts Mr Modi in a position to take politically sensitive decisions such as cutting subsidies and hastening project approvals. Mr Modi, who took office as Prime Minister on May 26, is faced with an economy riddled with stubborn inflation, weak domestic demand, a considerable fiscal deficit, elevated borrowing rates and depleted industrial output. Adding to the worries about rising prices is a possible agricultural crisis in the form of a weak monsoon, if India's meteorological department's forecast bears out. The sweeping victory of the B.J.P. in the parliamentary elections has led the Indian stock markets to rally to record highs and the Indian rupee to hit an 11-month high against the dollar.

Global Stock Market Recap

Europe and the UK

Equities mostly advanced on the week and month even though they ended the week on a mixed note thanks to an unexpected drop in German retail sales. The MIB jumped 4.3 percent on the week but was unable to offset earlier losses and was down 0.7 percent in May. The SMI lost 0.3 percent on the week but added 2.3 percent on the month. The FTSE posted modest gains both on the week and month. The index was up 0.4 percent on the week and 1.0 percent in May. The CAC was up 0.6 percent and 0.7 percent while the DAX rallied 1.8 percent and 3.5 percent.

There were worrisome data from Germany during the week. Aside from the 0.9 percent monthly decline in April retail sales, German May unemployment increased 24,000 — the steepest since December 2008 and followed an unrevised 25,000 drop in April. However, investors were encouraged by European parliamentary election victories for governing parties in Germany and Italy. The broadly bright start of the week suggested that investors were not concerned by the strong electoral performance by Eurosceptic parties, particularly in France and the UK. Analysts said that the financial markets were prepared for these results and a strong showing for Matteo Renzi's Democratic Party in Italy as well as Angela Merkel's CDU helped spur a rally in equity markets. Renzi's Democratic Party, or PD, won 41 percent of the vote in Italy, nearly double the 21 percent registered by Beppe Grillo's Eurosceptic Five Star Movement. The PD's 41 percent was the highest for a single party since the now-defunct Christian Democrats took a point more in the 1958 parliamentary election.

Asia Pacific

Despite ending the trading month on a sour note, all indexes followed here with the exception of the PSEi advanced in May. The Sensex bounced 8.0 percent while the Hang Seng added 4.3 percent. For the week however, it was a mixed picture with four of 12 indexes including the Sensex, Kospi, Jakarta Composite and the PSEi lower. The end of month swoon was in large part due to an unexpectedly large downward revision to first quarter U.S. growth. Investors were looking ahead to Chinese official PMI data to be released over the weekend and the June 5 policy meeting of the European Central Bank.

On April 1, the long anticipated increase in Japan's consumption tax finally went into effect. April economic data released during the week offer an early assessment of how the Japanese economy is absorbing the tax increase. Retail sales jumped 7.2 percent on the year in March as demand was brought forward as consumers rushed to get in purchases ahead of the tax increase. However, April retail sales cratered, falling 4.6 percent on the year.

The impact on CPI inflation was no less dramatic. Over the past year, BoJ policymakers have been buying government bonds at a pace intended to double the monetary base in two years with a stated goal of targeting 2.0 percent inflation. In March, CPI inflation was 1.6 percent on the year. The tax increase helped lift the inflation rate to 3.4 percent in April — the fastest annual rate of CPI inflation since the early 1990s. However, adjusted for the tax increase, inflation was estimated to be about 1.7 percent.

Second quarter GDP is expected to contract, mainly because of the hit to consumer spending. However, consumer spending is expected to rebound in ensuing quarters. Similarly, the price disruptions from the consumption tax increase are expected to fade over time.

Currencies

The U.S. dollar was down against several of its major counterparts including the yen and the Canadian and Australian dollars. The dollar was virtually unchanged against the euro and Swiss franc. It advanced against the pound sterling. The dollar slumped after revised first quarter GDP slid a more than expected 1.0 percent and April consumer spending was down 0.1 percent.

Earlier in the week, European Central Bank President Mario Draghi put a lid on the euro by signalling the Bank is ready to inject fresh stimulus into the Eurozone economy at its June meeting. The single currency has declined steadily against the dollar since May 8, when Draghi said the ECB's governing council would be comfortable to act at its June 5 meeting.

Selected currencies — weekly results

Indicator scoreboard

EMU

April M3 money supply increased just 0.8 percent, down from a lower revised 1.0 percent rate in March. Annual growth fell to its slowest pace since September 2010 and reduced the ECB's preferred 3-month moving average measure by a tick to 1.0 percent. The key private sector bank lending counterpart was actually a little stronger than last time, contracting 1.8 percent on the year after a 2.2 percent drop at quarter-end. Within this, loans to households were flat after declining 0.1 percent in March and borrowing for home purchases was 0.1 percentage points firmer at 0.7 percent. Lending to non-financial companies was slightly less negative at minus 2.8 percent and to non-monetary financial intermediaries (excluding insurance companies and pension funds) significantly so at minus 7.4 percent after minus 10.6 percent last time.

May EC economic sentiment (ESI) added 0.7 points to a reading of 102.7, its 12th increase in the last 13 months and its highest reading since July 2011. May's advance reflected broad-based, if relatively minor, improvements in morale, notably in the consumer sector where a 1.5 point increase to minus 7.1 reported in the flash release was confirmed. Industrial confidence improved 0.5 points to minus 3.0 and there was a 0.4 point rise in construction to minus 30.0. With services seeing a 0.3 point gain to 3.8, retail (flat at minus 2.5) was the only category not to make headway. Nationally, most ESI's displayed little volatility. Among the larger four economies, Germany advanced 0.7 points to 107.8, Italy rose 0.5 points to 101.3 and Spain was up 0.4 points at 101.9. However, the French ESI dipped 0.4 points to 96.7 and so remained the only member of this group to fall short of the common 100 long-run average.

Germany

May joblessness increased 24,000, ending a 5-month run of consecutive declines. The increase was the steepest since December 2008 and followed an unrevised 25,000 drop in April. However, May's reversal was not sharp enough to raise the unemployment rate from the 6.7 percent level posted in both March and April. However, there was also disappointing news on vacancies which declined 3,000 after a 2,000 increase last time.

France

April consumer spending on manufactured goods was flat after a stronger revised 0.7 percent monthly increase in March. Annual spending growth accelerated from 0.7 percent at quarter-end to 1.2 percent, its best performance since December. Purchases were once again restrained by weakness in textiles which declined 1.5 percent following drops of 2.6 percent and 1.7 percent in February and March respectively. The other products category (down 0.4 percent) also suffered. However, household goods edged up 0.2 percent and autos continued to advance with a 0.5 percent gain. Total goods spending declined 0.3 percent from March — its third decline in the last four months. On the year, total spending was down 0.5 percent.

Asia/Pacific

Japan

April retail sales sank a greater than expected 4.4 percent from a year ago. It was the fastest decline since July 2012. Retail sales had soared 11.0 percent in the month prior to the introduction of the sales tax increase from 5 percent to 8 percent. All sub-categories dropped in April. General merchandise sales dropped 8.9 percent after vaulting 19.6 percent in March. Motor vehicle sales plummeted 10.2 percent after increasing 9.2 percent. Machinery & equipment slid 12.3 percent after soaring 37.3 percent the month before. Fuel declined 4.8 percent after increasing 5.3 percent in March. Apparel sales were down 2.0 percent after adding 7.2 percent. Food and beverages were down 1.9 percent after gaining 5.4 percent.

April consumer price index was up 2.1 percent on the month and 3.4 percent on the year. This was the first month's data that reflect the sales tax increase to 8 percent from 5 percent. Excluding fresh food, the CPI was up 2.1 percent on the month and 3.2 percent from a year ago. Excluding both food and energy, the CPI was up 2.0 percent and 2.2 percent on the year. Excluding the sales tax, the level of inflation was estimated to be 1.5 percent. The Bank of Japan estimated that the sales tax increase would add 1.7 percentage points to Japan's core CPI in April after retailers passed on the cost of the extra tax to their customers. Among the increases in prices, electronics were up 3.2 percent on the year compared with only a 0.1 percent rise in March. Television prices dropped 1.4 percent compared with the 4.6 percent drop in March. Energy costs jumped 7.9 percent after climbing 6.1 percent the month before. Overall goods prices were up 5.2 percent while services prices were up only 1.8 percent.

April household spending dropped 4.6 percent from a year ago after soaring 7.2 percent in March. Spending was pushed forward prior to the introduction of the sales tax increase. Most spending categories declined. Food spending dropped 6.9 percent on the year while furniture & household utensils sank 18.7 percent. Clothing & footwear dropped 6.0 percent and medical care was down 4.5 percent. Transportation & communication slid 3.6 percent.

April industrial production dropped 2.5 percent. The poor results pulled back the annual rate to 4.1 percent for the slowest pace since November. Transport equipment declined 3.5 percent, electronic parts and devices dropped 5.2 percent and chemicals (excluding drugs) were down 3.3 percent. Among the commodities that declined were large passenger cars (down 3.1 percent), solar battery cells (down 33.7 percent) and planography or offset printing (down 9.1 percent). Manufacturers surveyed said they anticipated a 1.7 percent pickup in output in May, an upward revision from a month ago when they expected just a 0.1 percent gain.

April unemployment rate was 3.6 percent for a third month as expected. The unemployment rate has been on a gradual downtrend and remains the lowest since July 2007, when it was also at 3.6 percent as employers became cautious after the April 1 sales tax increase. The increase in employment decelerated to 260,000 on the year after jumping 520,000 in March. It was the 16^th consecutive increase in employment. The labour force participation rate slipped 0.1 percentage point to 59.5 percent while at the same time the employment rate increased 0.2 percentage points to 57.2 percent.

Americas

Canada

March monthly real gross domestic product edged up 0.1 percent after increasing 0.2 percent in February. On the year, monthly GDP was up 2.1 percent after increasing 2.2 percent the month before. Output of goods producing industries was up 0.3 percent mainly as a result of increased mining and oil & gas extraction. Utilities and manufacturing also advanced. These gains were partly offset by declines in construction and the agriculture & forestry sector. The output of service industries edged up 0.1 percent. Increases in the arts & entertainment sector and the finance & insurance sector outweighed declines in retail trade and accommodation & food services. The public sector (education, health and public administration combined) and wholesale trade were unchanged in March. A rebound in hockey put the arts & entertainment sector up 5.6 percent after a 5.1 percent decline in February.

First quarter gross domestic product was up 0.3 percent in the first quarter, following a 0.7 percent increase in the fourth quarter of 2013. This was the smallest increase since the fourth quarter of 2012. GDP was up at an annualized pace of 1.2 percent. On the year, GDP was up 2.2 percent. Final domestic demand was down 0.1 percent in the first quarter, as lower business gross fixed capital formation offset increased household final consumption expenditure. Government final consumption expenditure was 0.1 percent lower. Household final consumption expenditure was up 0.3 percent, the smallest gain in four quarters. Increased spending on nondurable goods (1.0 percent) more than offset decreased spending on durable and semi-durable goods. Outlays on services were up 0.2 percent. Business gross fixed capital formation was down 0.9 percent, the third decrease in five quarters. Business gross fixed capital formation in residential structures declined 1.6 percent, with new home construction (down 1.5 percent) and ownership transfer costs (down 6.4 percent) both down. Business investment outlays on plant and equipment decreased 0.5 percent. Exports dropped 0.6 percent despite a 3.8 percent increase in exports of energy products. Exports of goods were 0.8 percent lower while those of services rose 0.6 percent. Imports of goods and services fell 1.9 percent.

April industrial product price index (IPPI) declined 0.2 percent mainly because of lower prices for primary non-ferrous metal products. The raw materials price index (RMPI) increased 0.1 percent, led by animals and animal products. On the year, the IPPI was up 3.9 percent while the RMPI was up 9.1 percent. The decline in the monthly IPPI was the first since October 2013. Of the 21 major product groups, two were up, 15 were down and four were unchanged. The decrease of the IPPI was mainly attributable to lower prices for primary non-ferrous metal products (down 1.9 percent). The IPPI was moderated by higher prices for meat, fish and dairy products (2.5 percent). Motorized and recreational vehicles (down 0.6 percent) declined for the first time since September 2013, led by lower prices for passenger cars and light trucks, motor vehicle engines and motor vehicle parts as well as aircraft. The decline in motorized and recreational vehicle prices was closely linked to the appreciation of the Canadian dollar relative to the US dollar. Some Canadian producers who export their products report their prices in U.S. dollars. Consequently, the 1.1 percent increase in the value of the Canadian dollar relative to the US dollar may have had the effect of decreasing the IPPI. Without the measurable effect of the exchange rate, the index would have risen 0.1 percent instead of decreasing 0.2 percent.

Bottom line

Economic data from Japan illustrated the impact of the sales tax increase on consumer spending and output. In Europe, most data disappointed with the exception of economic confidence. In Canada, only first quarter GDP data disappointed — but Canada had a difficult winter too.

Next week, focus will be on the many central bank announcements throughout the week. The Reserve Banks of Australia and India and the Banks of England and Canada all have meetings scheduled. However, the European Central Bank meeting will draw the most attention as investors wait to see what action the governing council takes in light of weak inflation. May purchasing managers' indexes for both manufacturing and services will be released along with the U.S. employment situation report on Friday.

Looking Ahead: June 2 through June 6, 2014

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