Global Markets

Financial markets got what they mostly expected from the European Central Bank — a negative interest rate (NIRP or negative interest rate policy). It differs from ZIRP or zero interest rate policy such as practiced in Japan. And the ECB added other measures as well to fight deflation and weak economic growth — except for a quantitative easing program such as those in the U.S. and UK. The financial markets also got an employment report from the U.S. that was pretty much as expected with gains matching expectations and minor revisions to the prior two months' reports.

On the week, equities were mixed in the Asia Pacific region and in Europe but advanced in the U.S. with the Dow and S&P reaching closing highs. Gains on the week ranged from 4.9 percent (Sensex) to 0.1 percent (STI). Losses ranged from 0.8 percent (OMX Stockholm) to 0.2 percent (SMI).

European Central Bank

The European Central Bank launched a raft of measures Thursday to fight low inflation and boost the Eurozone economy. It cut rates, imposed negative interest rates on its overnight depositors and offered banks new long term funds. The ECB cut all its main interest rates to record lows in a drive to fight off the risk of Japan-like deflation and bring down the euro's exchange rate. For the first time, it will charge banks 0.10 percent for parking funds at the ECB overnight. However, it stopped short of large scale asset purchases (quantitative easing) for now — but ECB President Mario Draghi said more action would come if necessary.

The ECB finally caved in to increasing evidence of mounting deflation risks by cutting its benchmark refinance rate by 10 basis points to a new record low of just 0.15 percent. The deposit rate, already at zero, was also shaved 10 basis points to minus 0.1 percent and sits in negative territory for the first time while the rate on the marginal lending facility was lowered by a larger 35 basis points to 0.40 percent.

The reduction in the refi rate was on the smaller side of market expectations. However, the narrowing in the interest rate corridor, courtesy of the disproportionately large cut in the marginal lending rate, should be seen as a clear message that the ECB is still leaning in the direction of additional monetary accommodation. Forward guidance was amended to indicate that key interest rates will be kept at current levels for an extended period, without holding out the promise of further reductions.

Following the unexpectedly sharp drop in May Eurozone flash HICP inflation (to just 0.5 percent) and confirmation of very sluggish first quarter private sector demand, the decision to ease was probably a relatively simple one (and apparently unanimous). Certainly financial markets would have been very disappointed had the ECB chosen not to act and the Bank's own credibility would have suffered a serious blow.

Meantime, those hoping for additional non-standard monetary measures were not forgotten as the rate cuts came as part of a broad based package. Hence a series of targeted LTROs (long term refinance operations) worth up to €400 billion will be introduced aimed specifically at boosting private sector lending. Moreover, current preparatory work related to the introduction of asset backed securities purchases will be accelerated and the sterilization of purchases of sovereign bonds under the Securities Markets Programme (SMP) will be suspended. This alone should inject an extra €175 billion of liquidity into the financial markets although it should not be seen as full blown QE which may well disappoint some. Lastly the ECB signaled that it would extend the current arrangements for full allotment fixed rate lending by more than a year to at least December 2016.

Bank of England

There were no surprises from the Bank of England's monetary policy committee at its June meeting. The MPC left both the Bank Rate at 0.5 percent and its asset purchase program ceiling at £375 billion, consistent with the current forward guidance structure.

Since the last discussions, real economy news has been generally robust and headline and core inflation have accelerated. However, underlying average earnings surprisingly slowed in April, housing market data have been mixed rather than uniformly strong, non-mortgage lending is still soft and the effective exchange rate has been broadly stable. Housing remains the main area of concern with earlier hints of some cooling brought into question following signs of renewed strength in the price data such as the Halifax house price index where the three month moving average was up 8.7 percent when compared with the same months a year ago.

The Bank's May forecasts showed that gradual interest rate increases starting in about a year's time would be consistent with its 2 percent inflation target. Assessing whether the Bank will wait that long is complicated by a reshuffle on the MPC. June's meeting was the first for Andy Haldane, formerly the Bank's expert on banking sector risks and now its new chief economist. U.S. academic Kristin Forbes and Nemat Shafik, a top International Monetary Fund official, are due to join the MPC in July and August respectively, potentially reducing the chance of a big push by its members to raise interest rates sooner.

Bank of Canada

As widely expected the Bank of Canada left key rates on hold. The benchmark overnight rate stays at 1.0 percent while the deposit rate remains at 0.75 percent and the Bank Rate at 1.25 percent. The BoC also opted to retain a neutral bias with language identical to the outcome of the mid-April announcement.

The unchanged policy stance follows last week's news that surprisingly slow first quarter economic growth was attributable to the first contraction in final domestic demand since the 2009 recession. March GDP expanded a minimal 0.1 percent on the month and a weaker than officially anticipated global economy is seen as making for some additional downside risks. However, both headline and core inflation accelerated in April, partly due to earlier losses in the Canadian dollar and also an unexpectedly strong bounce in the housing market in the month.

Reserve Bank of Australia

As widely expected, the Reserve Bank of Australia left its policy cash rate on hold at 2.5 percent where it has been since August 2013. In previous announcements and recent speeches, RBA governor Glenn Stevens has made it clear that policy would remain unchanged. The Board continues to deem that the most prudent course is a period of stable interest rates. Inflation was seen as consistent with the RBA's inflation target range of 2 percent to 3 percent. The continued easy monetary policy should help growth strengthen. Mr Stevens noted "signs of improvement in investment intentions" in non-resources industries and dropped a reference to weakness in the labor market from the post-meeting statement.

The exchange rate remains high by historical standards especially given the decline in commodity prices. The earlier decline in the currency helped establish more balanced growth. However, given its recent climb, the help will be less than before. The RBA noted that public spending is scheduled to be subdued going forward. Fiscal consolidation adds to a mining investment slowdown as a brake on growth.

Reserve Bank of India

There were no real surprises from the Reserve Bank of India in its latest policy statement. The key repo rate was held at the 8.0 percent level to which it was raised back in January while the reverse repo rate stays at 7.0 percent and the marginal standing facility rate (MSF) and Bank Rate both remain pegged at 9.0 percent. The RBI also indicated no move on the 4.0 percent reserve ratio (CRR).

However, as part of the RBI's efforts to shift away from sector specific refinancing, the RBI announced a reduction in export credit finance while compensating fully with a commensurate expansion of the market's access to liquidity via a special term repo facility. This new measure aims to improve liquidity access from the RBI for the system as a whole while at the same time improving the transmission mechanism of monetary policy. The RBI said further policy tightening will not be warranted if consumer price inflation stays on course to hit 8 percent in January 2015 and 6 percent a year later.

Global Stock Market Recap

Europe and the UK

Most equities advanced on the week after the European Central Bank announced its monetary policy easing measures Thursday. Investors in Italy, Spain and France were especially upbeat while those in Switzerland and Sweden were not. The SMI and OMX Stockholm retreated 0.2 percent and 0.8 percent respectively. However, The MIB added 3.1 percent, the IBEX increased 2.5 percent and the CAC was 1.4 percent higher. The FTSE and DAX were up a more muted 0.2 percent and 0.4 percent respectively. The DAX briefly rallied over the 10,000 mark Thursday as investors seemed to hang onto comments from ECB President Mario Draghi. He said the bank is not over with its battle against sticky low inflation and stands ready to take non-standard measures including asset purchases. On Friday, the indexes were boosted by the U.S. employment situation report that showed the economy created more jobs in May than forecast.

Asia Pacific

Equities were mixed last week as investors here first waited for and then reacted to the European Central Bank's monetary policy easing moves. Asian stock markets showed little reaction to the European Central Bank's move to introduce negative deposit rates. Rather, they were still waiting for the U.S. employment report that would be released after markets here closed for the week, along with May Chinese merchandise trade data over the weekend. Analysts noted that the ECB's move did not take anyone by surprise. However, there was some measure of optimism from ECB President Mario Draghi who signaled that more action would come if necessary, which likely means more quantitative easing.

On the week, the Nikkei gained for a third consecutive week, this time by 3.0 percent. The weekly gain was boosted by Monday's reaction to an improvement in the Chinese manufacturing PMI. The All Ordinaries was down for the first week since May 2^nd, losing 0.5 percent. The Shanghai composite declined 0.5 percent while the Hang Seng retreated 0.6 percent in a holiday shortened week. The Sensex, which has been rallying on optimism for India's new government, added 4.9 percent after retreating the previous week on profit taking. The index is up 20 percent so far in 2014.  

Currencies

The euro, which had gyrated after the ECB's announcement of a series of measures designed to combat deflation, ended the week higher. Many thought the currency would weaken given the decline in interest rates. Earlier in the week, economic data also weighed on the currency. But on Thursday, after the ECB announcement and post meeting press conference where the details of the policy changes were spelled out in detail, the euro initially dropped to its low for the day of $1.3503 from above $1.36 before rebounding and ending the day at $1.3657. Initial market reaction was sharp. To many investors, the ECB's package exceeded expectations — though it fell short of asset purchases of the sort done by Bank of England and the Federal Reserve. But the financial market moves later faded as some investors booked profits after recent steep declines in the euro and gains for equity markets.

A stronger euro has been the rule — not the exception — after European Central Bank rate decisions this year. The euro's strength in the wake of ECB meetings underlines investors' disappointment that policymakers have not been radical enough in their promises to stimulate the Eurozone economy. And that appears to have continued on Thursday, even though the ECB introduced a laundry list of measures to help the economy.

The U.S. dollar ended the week on a mixed note. It retreated against the euro, pound sterling, Swiss franc and Australian dollar. It advanced against the yen and Canadian dollar.

Selected currencies — weekly results

Indicator scoreboard

EMU

May manufacturing PMI was revised down 0.3 points to 52.2 and down from April's 53.4 for its weakest reading in six months. The slowdown in business activity growth reflected softer rates of expansion in production, new orders and employment. Companies also reported a sharper cut in inventories of purchased goods. The rate of decline in input prices eased during May but this was the fourth straight month in which costs have fallen. However, factory gate prices on average saw their first increase in three months. Regionally, most national PMIs were above the key 50 mark although France, despite an upward revision to its flash estimate, still fell short at 49.6. The strongest performer was the Netherlands (53.6) ahead of Italy (53.2) and Spain (52.9) which posted a 49-month high. Germany (52.3) saw a 7-month low.

April unemployment declined to 11.7 percent from 11.8 percent after a 76,000 decline in the number of people out of work. It was the first fall of any magnitude so far in 2014. The decline means that the jobless rate is 0.3 percentage points below the 12 percent record seen over much of last year. Year-on-year, 487,000 fewer people were out of work compared with April 2013. There was also much needed improvement in youth unemployment which declined from a 23.9 percent rate in March to 23.5 percent. Regionally, national jobless rates were either unchanged or lower in all member states except Finland (8.5 percent after 8.4 percent) where the economy fell back into recession last quarter. The highest rate was still Spain (25.1 percent after 25.2 percent) ahead of Cyprus (16.4 percent after 16.9 percent) and Portugal (14.6 percent after 14.8 percent). The lowest rates were once again in Austria (unchanged at 4.9 percent) and Germany (unchanged at 5.2 percent).

May flash harmonized index of consumer prices decelerated again to just 0.5 percent on the year and equaled the near 5-year low seen in March when the rate was supposedly biased down by Easter effects. Moreover, the decline in overall inflation was more than matched by the core index which excludes energy, food, alcohol & tobacco. The rate here dropped 0.3 percentage points to 0.7 percent and so also fully reversed the bounce seen in April. In fact outside of energy (unchanged after declining 1.2 percent) yearly rates were down across the board. Thus, non-energy industrial goods dipped 0.1 percentage points to zero and services were down a hefty 0.5 percentage points at 1.1 percent. Food, alcohol & tobacco inflation stood at minus 0.1 percent following a 0.7 percent print last time.

First quarter gross domestic product was up an unrevised 0.2 percent and was 0.9 percent higher than a year ago. The GDP expenditure components confirmed the anticipated sluggishness of private sector domestic demand. Thus, household consumption was up a minimal 0.1 percent on the quarter having shown no growth at all in the October to December quarter while gross fixed capital formation advanced 0.3 percent, or only a third of the rate achieved in the fourth quarter of 2013 and its smallest increase since the second quarter of 2013. Government consumption almost reversed the fourth quarter's 0.4 percent drop with an increase of 0.3 percent. The headline data would have looked worse but for a rebound in business inventories which, having subtracted 0.2 percentage points from the quarterly change in total output last time, added 0.2 percentage points at the start of the year. Net foreign trade had a negative impact. With sales overseas up 0.3 percent or less than half the 0.8 percent advance posted by imports, net exports shaved 0.2 percentage points from quarterly growth after adding 0.3 percentage points in the fourth quarter. Regionally, it was once again a disappointingly mixed affair. The solid quarterly gains in real GDP in Germany (0.8 percent), Latvia (0.7 percent) and Slovakia (0.6 percent) contrasted with renewed contractions in the recession states of Cyprus (0.7 percent) and Finland (0.4 percent) as well as fresh declines in Italy (0.1 percent), Estonia (1.2 percent), the Netherlands (1.4 percent), Portugal (0.7 percent) and Slovenia (0.3 percent). Elsewhere, the Spanish economy posted its third successive quarterly advance (0.4 percent) but France stagnated.

April retail sales (excluding autos) followed a smaller revised 0.1 percent increase in March with a stronger than expected 0.4 percent rise in April. Annual volume growth was 2.4 percent, up from 1.0 percent last time. April's advance was the fourth in as many months although only January's 1.0 percent spurt stands out, and that came after a 1.2 percent drop in December. The composition of April's gain was less than impressive. Excluding auto fuel, sales of food, drink & tobacco, the gain did match the 0.4 percent monthly headline increase but non-food demand was down 0.1 percent having just stagnated in March. Regionally, there were solid monthly increases in Latvia (2.5 percent) and Estonia, France and Slovenia (all 1.4 percent) as well as in Ireland and Spain (both 1.1 percent). However, Germany and Portugal both recorded a 0.9 percent reversal and Malta was off 2.6 percent.

Germany

April manufacturing orders rebounded 3.1 percent after dropping an unrevised 2.8 percent in March. It was their sharpest gain since September 2013. This boosted annual growth from 1.4 percent at the end of last quarter to 6.4 percent. April's recovery was broad based but dominated by a 7.1 percent jump in consumer goods. Capital goods were up a solid 4.4 percent and basics a more modest 0.2 percent. However, April's buoyancy was wholly attributable to overseas demand which expanded 5.5 percent on the month. By contrast the domestic market was only unchanged.

April industrial production edged up 0.2 percent on the month following a slightly steeper revised 0.6 percent decline in March. Compared with April 2013, workday adjusted production was up 1.8 percent after a 2.9 percent annual increase last time. Within the overall monthly gain the main area of strength was energy which posted a 2.7 percent increase but consumer goods (1.1 percent) also performed well. However, intermediates edged just 0.1 percent higher and capital goods dropped 0.3 percent having already contracted 0.3 percent in March. Construction fell 1.2 percent, compounding its 2.7 percent slide at the end of the first quarter.

April seasonally adjusted merchandise trade surplus widened to €17.7 billion from a larger revised €14.8 billion in March. Unadjusted the surplus stood at €17.4 billion, down from €18.0 billion in April 2013. April's headline improvement reflected significantly stronger exports which, at €94.3 billion, up 3.0 percent from March, were only just short of the record high seen in January. However, the rebound failed to offset in full a cumulative 3.1 percent decline in February/March and compared with a year ago, exports were still down 0.2 percent. Imports were only 0.1 percent firmer on the month following a 1.0 percent drop last time and now show unadjusted annual growth of only 0.6 percent.

France

First quarter mainland unemployment rate was unchanged at 9.7 percent while including overseas territories, the rate was also steady, at 10.1 percent. The number of people out of work in metropolitan France now stands at 2.779 million within which youth unemployment is 620,000. The youth jobless rate was 22.9 percent, up 0.2 percentage points from the end of last year but 2.0 percentage points below its reading in the first quarter of 2013.

United Kingdom

April merchandise trade global shortfall was Stg8.9 billion from a smaller revised print in March. Note that the April headline incorporates Stg700 million worth of oil exports missed by the ONS but picked up by Her Majesty's Revenue and Customs (HMRC). The ONS figures will be duly amended (along with any other revisions) in next month's release. On the basis of the ONS data, exports fell 4.4 percent on the month (dominated by the missed oil component) while imports were up 0.8 percent. The bilateral deficit with the rest of the EU widened by Stg5.8 billion as exports dropped 4.4 percent and imports advanced 2.5 percent. With the rest of the world the shortfall expanded Stg0.4 billion to Stg3.8 billion as exports fell 4.3 percent and imports declined 1.1 percent. The misreporting makes today's release a bit of a mess and means that the already low level of credibility attached to the trade data has just been downgraded still further. However, the underlying (ex-oil and erratics) export volumes over the last three months were 0.7 percent lower from the previous period while imports measured on the same basis were 1.0 percent weaker.

Asia/Pacific

Australia

April retail sales were up 0.2 percent after edging up 0.1 percent in March. This was the 12th consecutive monthly increase. On the year, sales were up 5.7 percent. Among the larger contributors to the sales increase were department stores (2.9 percent), followed by food retailing (0.2 percent), cafes, restaurants & takeaway food services (0.5 percent) and clothing, footwear & personal accessory retailing (0.2 percent). Partially offsetting these increases were declines in household goods retailing (down 1.0 percent) and other retailing (down 0.2 percent). Among  states, the largest contributor to the increase was Victoria (0.8 percent), followed by New South Wales (0.1 percent), Tasmania (0.4 percent), the Northern Territory (0.5 percent) and South Australia (0.1 percent). The increases were partially offset by declines in Queensland (down 0.3 percent), the Australian Capital Territory (down 0.8 percent) and Western Australia (down 0.1 percent).

March quarter GDP increased 1.1 percent on the quarter and was up 3.5 percent from a year ago. The quarterly pace is the fastest pace in two years. The increase was driven by net exports (1.4 percentage points), final consumption expenditure (0.3 percentage points) and total private gross fixed capital formation (0.2 percentage points). These increases were partially offset by decreases in changes in inventories (minus 0.6 percentage points) and public gross fixed capital formation (minus 0.2 percentage points). The key supports were a surge in exports and increased consumer spending, thanks to the Reserve Bank of Australia's interest rate cuts in mid-2013. In addition, a strong upswing in housing construction has begun.

April trade balance unexpectedly slumped into deficit of A$122 million from a revised surplus of A$902 million in March. Analysts had forecast a surplus of A$300 million partly because Australian miners have been producing iron ore which has contributed to a supply glut and a sharp decline in the price of the steel making metal. Exports declined 1.5 percent on the month while imports were up 2.2 percent. Exports of rural goods declined by 6 percent, non-monetary gold dropped 11 percent and non-rural goods fell A$96 million. The main component contributing to the decline in seasonally adjusted estimates was coal, coke and briquettes. Partly offsetting the decline was the increase in the metal ores and minerals component. Exports were weighed down by the higher value of the Australian dollar and lower commodity prices. Imports of capital goods were up 8 percent and consumption goods were up 3 percent. However, imports of intermediate and other merchandise goods were down along with non-monetary gold.

Americas

Canada

April seasonally adjusted merchandise trade deficit was C$0.64 billion following a larger revised C$0.77 billion surplus in March. April's deterioration reflected a combination of weaker exports and stronger imports. The former saw a 1.8 percent monthly drop — their first decline since January — while the latter advanced 1.4 percent, their third straight gain. Compared with a year ago, exports were up 7.1 percent and imports, a somewhat smaller 6.6 percent. The news on volumes was little better with real exports sliding 0.8 percent from March and imports increasing a sizeable 1.9 percent. The bilateral black ink with the U.S. shrank from C$4.42 billion in March to C$4.23 billion as exports dipped a monthly 0.2 percent and purchases from overseas edged up 0.3 percent. The monthly decline in nominal exports was led by energy products which dropped 10.7 percent, partly due to a 4.6 percent drop in prices. Elsewhere, metal & non-metallic mineral products were off 6.2 percent and aircraft & other transportation equipment 2.8 percent. The best sector performers were forestry products and building & packaging materials (14.6 percent) and electronic and electrical equipment & parts (8.9 percent) ahead of metal ores and non-metallic minerals (3.0 percent) and motor vehicles and parts (2.4 percent). On the import side, monthly growth was built upon basic & industrial chemical, plastic & rubber products (5.4 percent), electronic and electrical equipment & parts (4.4 percent) and farm, fishing and intermediate food products (2.4 percent). Metal and non-metallic mineral products (3.3 percent) were also strong but metal ores and non-metallic minerals (down 30.9 percent) collapsed.

May employment increased 25,800 after contracting in April. However, with the participation rate holding steady at 66.1 percent, the jobless rate still edged up to 7.0 percent from 6.9 percent the month before. May's increase in jobs was dominated by full time positions which expanded 32,700. Part time headcount was up 15,900. Private sector hiring increased 24,700 while the public sector added 41,500. However, gains here were partially offset by a sizeable 40,400 drop in the number of self-employed. The headline increase in employment was wholly attributable to the services sector where headcount was up 35,100. Within this, there were strong increases in education (21,500), accommodation & food (19,500) and trade (16,500). The main area of weakness was finance, insurance, real estate & leasing (down 21,000) together with other services (down 8,700) and information, culture & recreation (down 7,000). The goods producing payroll declined 9,500 led by a 23,200 contraction in natural resources and a 12,200 reversal in manufacturing. The only significant gain in this sector occurred in agriculture (19,300).

Bottom line

Five central banks met but only the European Central Bank changed its monetary policy. Other than central banks, the week was chuck full of updated economic data including May readings of manufacturing and services PMIs. Australia finally released its first quarter growth data — the data were stronger than anticipated. Unemployment data for the Eurozone, Canada and the U.S. were mixed.

This week will certainly be calmer with the focus on industrial output and merchandise trade data. The Bank of Japan meets and is expected to maintain its current monetary policy. China will release its May data for consumer and producer prices, retail sales, industrial production and its merchandise trade balance.

Looking Ahead: June 9 through June 13, 2014

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