Global Markets

The feel good trading that took place as the week began faded as the week progressed and geopolitical issues once again came to the fore in Iraq and continued simmering in Ukraine. Crude oil prices jumped and had a negative impact on European markets. The World Bank's downward revision for global growth also punctured optimism.

The reasons for optimism at the beginning of the week stemmed from a positive U.S. employment report on Friday (June 6) followed by improved May export data from China over the weekend. Earlier, the European Central Bank finally acted to stimulate Eurozone growth and avoid deflation by cutting its policy interest rate to 0.25 percent and introducing negative interest rates on its overnight depositors.

Investors were concerned that the World Bank cut its global growth forecast. The cuts were spurred by weaker outlooks for the U.S., Russia and China. At the same time, they called on emerging markets to strengthen their economies before the Federal Reserve raises interest rates. The World Bank predicted the global economy will expand 2.8 percent this year, down from its January projection of 3.2 percent. The U.S. forecast was reduced to 2.1 percent from 2.8 percent while outlooks for Brazil, Russia, India and China were also lowered. The setbacks may be temporary however — the 2015 estimate for world economic growth was unchanged at 3.4 percent.

In the report, the World Bank warned emerging markets that the next bout of financial unrest may catch them off guard, recommending smaller budget deficits, higher interest rates and measures to boost productivity. Over the past year, emerging market assets have recovered from two sell off periods, including one after the Fed first indicated in May 2013 plans to trim U.S. monetary stimulus. That recovery, according to the Bank, is giving countries a respite to strengthen their economies before the inevitable increase in borrowing costs that will follow the Fed's interest rate increase.

The bank cut its 2014 forecast for Russia's growth to 0.5 percent from a January prediction of 2.2 percent. It sees Ukraine contracting 5 percent. The Bank maintained its forecast this year for the Eurozone at 1.1 percent. The forecast for Japan was trimmed to 1.3 percent from 1.4 percent.

Global Stock Market Recap

Europe and the UK

Equities retreated last week after energy prices jumped on the sectarian violence in Iraq. Talk of an interest rate increase from Bank of England Governor Mark Carney weighed heavily on the FTSE and airlines were under heavy pressure because of rising oil prices. On the week, the FTSE was down 1.2 percent, the CAC declined 0.8 percent, the DAX lost 0.7 percent and the SMI slipped 0.1 percent. Although equities hit six year highs earlier in the week propelled by the European Central Bank's actions, they drifted lower on global economic concerns after the World Bank cut its growth forecasts and on geopolitical tensions.

It was a light week for new economic data in the region. The highlights were from the UK where both industrial output and manufacturing output were up 0.4 percent in April. They gained 3.0 percent and 4.4 percent respectively from the same month a year earlier. And both measures of unemployment declined further. The May claimant unemployment rate edged down to 3.2 percent. The last time it was that low was in October 2008. The ILO unemployment rate, which is a three month moving average and lags the claimant rate, was 6.6 percent for the three month through April. The last time it was that low was in December 2008.

On Thursday night (June 12) in his Mansion House speech in the City of London, Bank of England Governor Mark Carney said that British interest rates could rise sooner than financial markets expect, in a surprisingly stark warning that monetary policy may start to tighten within months. Mr Carney's comments on the possible timing of an interest rate increase were striking. Most analysts had not expected rates to increase until the second quarter of next year. Mr Carney said Britain's economy still had scope to grow without pushing up inflation, but that there was little sign yet of a slowdown in the pace of expansion that the BoE had penciled in for the second half of the year.

Governor Carney said that more important than the timing of a first rate rise was that future increases be "gradual and limited" in part due to high household indebtedness and a drag on growth from a stronger currency. He also said that the timing of a rate increase would depend on incoming data, and that the BoE had no fixed plan on when to raise rates.

Asia Pacific

Equities were mixed last week. Stocks began the week on a positive note after Japan's first quarter growth was unexpectedly revised upward thanks to a large revision in capital spending. Also boosting investor morale were better than expected May export data from China. The week ended with equities paring early losses as energy stocks advanced and investors found comfort in Chinese industrial output and retail sales data that were pretty much as anticipated. This was offset in part by the growing turmoil in Iraq that sent energy prices upward. On the week, the Nikkei edged up 0.1 percent, the Hang Seng advanced 1.6 percent and the Shanghai Composite was up 2.0 percent. However, the All Ordinaries lost 1.1 percent and the Sensex retreated 0.7 percent.

The Sensex was down for the week thanks to a selloff on Friday. Oil and gas stocks retreated sharply as Brent crude futures surged. Indian stocks had been climbing almost daily to fresh record highs. However, some international investors are turning nervous saying specific policy measures are needed from the weeks old new government to spur further gains. But since the landslide victory on May 19, the pro-business Prime Minister Narendra Modi has not announced any specific policy measures to achieve those goals. Investors say specifics could help determine which way Indian stocks are headed. However, the prognosis of a weak monsoon did lead to some caution by investors.

Earlier in the week, the People's Bank of China chose to do targeted reserve requirement ratio (RRR) cuts instead of a general cut for all commercial banks. Data for May released during the week indicated that the Chinese economy appears to be stabilizing.

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's balance sheet has expanded to 52 percent of gross domestic product since Governor Haruhiko Kuroda unleashed record easing in April 2013, compared with 25 percent for the Fed and 24 percent for the Bank of England. The BoJ held ¥165 trillion of long-term Japanese government bonds as of May 31.

Data reflecting the increase in the sales tax from 5 percent to 8 percent on April 1 were pretty much as expected. Businesses and consumers bought in the first quarter to avoid paying the increased tax. However, the limited data for May also reflect an easing of the declines.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand increased its overnight cash rate by 25 basis points to 3.25 percent. This was the third time this year that the OCR has been increased. The Bank does not believe the exchange rate for the New Zealand dollar is sustainable at current levels. The Bank noted that the exchange rate had not yet adjusted to weakening commodity prices, but is expected to do so. Regarding future OCR increases, the RBNZ said that the "speed and extent to which the OCR will need to rise will depend on future economic and financial data, and its implications for inflationary pressures." It should be noted that the RBNZ is removing monetary stimulus at the same time as the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan pledge to hold interest rates at record lows to spur lending and stimulate growth in their own economies.

According to the RBNZ, the current economic expansion has considerable momentum and GDP is estimated to have grown by about 4 percent in the year to June. It noted that global financial conditions remain accommodative with low long term interest rates and narrow risk spreads.

Currencies

The pound sterling reached the strongest level in 19 months against the euro after Bank of England Governor Mark Carney said the BoE may raise its key interest rate from a record low earlier than investors expected. Sterling gained against all but one of its 31 major peers even as Carney said higher borrowing costs might stretch homeowners burdened with debt and derail the recovery. Forward contracts based on the sterling overnight interbank average (Sonia) show investors now are betting the benchmark rate will increase 25 basis points by January compared with May before Carney's speech. Carney's comments set him at odds with the European Central Bank, which cut interest rates and announced additional stimulus measures last week. The BoE's key interest rate has been at 0.5 percent since March 2009. As recently as last month, Carney signaled that officials were prepared to wait until next year to raise interest rates as the recovery could keep strengthening without fueling inflation.

The U.S. dollar was up against the euro and Swiss franc. However, it declined against the pound, yen and the Canadian and Australian dollars. The yen weakened from a four month high against the euro but declined against the U.S. dollar when the Bank of Japan maintained its monetary policy even though Bank of Japan Governor Haruhiko Kuroda said the economy was recovering moderately.

Selected currencies — weekly results

Indicator scoreboard

EMU

April industrial production rebounded with a surprisingly strong 0.8 percent monthly increase after sliding a slightly steeper revised 0.4 percent in March. The April increase put workday adjusted annual growth at 1.4 percent, up from 0.2 percent last time but still its second weakest reading so far this year. The relative buoyancy of output reflected mainly a 2.5 percent increase in energy and a 2.1 percent spurt in nondurable consumer goods. However, intermediates (0.6 percent) also held up well and consumer durables (0.1 percent) edged up slightly. Nonetheless, capital goods posted a 0.1 percent monthly decline, compounding a 0.6 percent contraction in March. Regionally the majority of member states saw output expand on the month. Among the larger economies, France recorded a minimal 0.1 percent advance but Germany was up 0.4 percent, Italy 0.7 percent and Spain a hefty 1.7 percent, albeit after a 0.5 percent drop in March. Elsewhere Estonia (2.2 percent after 2.1 percent) looks to be recovering well following a 1.2 percent fall in real GDP in the first quarter and Greece (0.9 percent) achieved its first increase in four months. The sharpest increase was in Portugal (6.7 percent after dropping 4.1 percent) while the steepest contraction was in Malta (6.0 percent).

France

April industrial production was up 0.3 percent but output was down 2.0 percent from the same month a year ago. The headline increase reflected a monthly 0.8 percent gain in energy and extracted goods, a 0.7 percent advance in other manufacturing goods and a 0.2 percent increase in construction. However, there were declines in food & agriculture (0.7 percent), transport & equipment (0.5 percent), electronics & machinery (0.4 percent) and refining (0.2 percent). Overall manufacturing output was up 0.3 percent from March.

United Kingdom

April industrial production increased 0.3 percent on the month and 2.9 percent from a year ago. Manufacturing output was up 0.4 percent and 4.4 percent on the year. Within total manufacturing, the main components contributing to the monthly increase were computer, electronic & optical products (up 2.9 percent), rubber, plastic & other non-metallic mineral (1.8 percent) and transport equipment (1.7 percent). On the downside there were monthly declines in coke & refined petroleum products (4.5 percent), basic pharmaceutical products & pharmaceutical preparations (0.7 percent), textiles, wearing apparel & leather products (0.5 percent), electrical equipment (0.4 percent) and basic metals & metal products (0.3 percent). In addition, food, drink & tobacco and other manufactured machinery & equipment were down 0.2 percent. Elsewhere within total industrial production, electricity, gas & steam output was up 3.7 percent in April but oil & gas extraction declined 2.2 percent, mining & quarrying dropped 1.1 percent and water supply & sewerage decreased 0.7 percent.

May jobless claims declined 27,400 from April which posted a revised drop of 28,400. Claims have now declined every month since October 2012. The unemployment rate was 3.2 percent, down another tick from the start of the quarter and its lowest level since October 2008. The ILO data paint a similar picture with the number of people out of work in the three months to April falling a sizeable 161,000. The jobless rate on this definition was 6.6 percent, its best reading since December 2008 after a 6.8 percent last time. Headline average earnings growth slowed surprisingly sharply to just 0.7 percent in April after a revised 1.9 percent in March. More significantly given the distortions caused by bonus payments, regular pay decelerated to an annual 0.9 percent rate, down 0.4 percentage points from March.

Asia/Pacific

Japan

Revisions show Japan's GDP expanded at a faster than anticipated pace in the first quarter, as business spending surged ahead of the April 1 tax increase. First quarter GDP growth was revised up to 1.6 percent on the quarter from the previous estimate of 1.5 percent. On an annualized basis, GDP was up 6.7 percent (5.9 percent last time). GDP was up 2.8 percent when compared with the same quarter a year ago. Most importantly CAPEX was revised upward to a 7.6 percent quarterly gain from the first estimate of 4.9 percent. CAPEX contributed a revised 1.1 points, up from 0.7 point. Private consumption was up 2.2 percent after the original 2.1 percent.

The April tertiary index plunged a greater than expected 5.4 percent on the month and dropped 2.5 percent from a year ago. Expectations were for a 3.3 percent decline. Most industries declined including wholesale & retail trade, miscellaneous services (except government services etc.), finance & insurance, living-related & personal services & amusement services, information & communications, transport & postal activities, electricity, gas, heat supply & water, real estate & goods rental & leasing, accommodations, eating & drinking services, learning support and compound services. Only scientific research, professional & technical services and medical, health care & welfare managed to increase during the month.

May corporate goods price index was up 0.3 percent on the month after soaring 2.9 percent in April thanks to the implementation of the sales tax increase from 5 percent to 8 percent on April 1. On the year, the CGPI was up 4.4 percent after increasing 4.2 percent last time. It is the fastest annual pace since October 2008. Analysts expected the CGPI to be up 0.1 percent and 4.1 percent on the year. Excluding the sales tax impact, the monthly increase was 0.2 percent in both April and May. On the year, excluding the sales tax impact, the index was up 1.6 percent in May and 1.5 percent the month before. Details of the report indicate the biggest monthly price gains were for utilities (+3.8 percent) and nonferrous metals (+0.8 percent). Electric power, gas & water contributed 0.25 percent to the price increase. However, excluding the tax, the contribution was only 0.14 percent. Contributions of petroleum & coal products and nonferrous metals were the same both including and excluding the tax.

April machine orders excluding volatile items, such as orders of ships and from electrical companies, dropped a less than expected 9.4 percent. Expectations were for a drop of 11.8 percent. On the year, orders were up 15.7 percent. Nonmanufacturing orders excluding volatile items were up 0.9 percent on the month. Private sector orders were down 9.1 percent but excluding volatile orders they lost only 2.1 percent. Overseas orders soared 71.3 percent on the month.

Australia

May employment declined 4,800. The decline in total employment was due to decreased male and female part-time employment and was the first decline after four months of employment gains. Details were less worrisome than the headline, however. All of the losses were for part-time work (down 27,000), while full-time jobs saw a jump of 22,000 — its biggest gain since February. The unemployment rate remained at 5.8 percent for the third month. The number of people unemployed increased by 3,200 to 717,100. The labour force participation rate slipped 0.1 percentage point to 64.6 percent. The seasonally adjusted underemployment rate was 7.6 percent. Combined with the unemployment rate of 5.8 percent, the latest seasonally adjusted estimate of total labour force underutilization was 13.5 percent in May 2014, the same as February 2014.

China

May unadjusted merchandise trade surplus widened to $35.92 billion from $18.46 billion in April. This was the largest surplus since January 2009. Exports were up 7.0 percent on the year while import surprisingly slipped 1.6 percent. Year to date, the trade surplus was $71.3 billion, down 12.2 percent from the same months a year ago. For the first five months, exports were down 0.4 percent from a year ago while imports were up 0.8 percent. Exports to the U.S. were up 6.3 percent from a year ago while imports edged up 1.1 percent. Exports to the European Union jumped 13.4 percent while imports were up 14.5 percent. Exports to Japan edged up 2.2 percent while imports were down 1.1 percent. On a seasonally adjusted basis, exports were up 5.6 percent on the month after increasing 9.8 percent the month before. Imports, however, dropped 6.5 percent after rising 5.4 percent. On the year, exports were up 11.1 percent and imports added 2.9 percent.

After increasing 1.8 percent on the year in April, the CPI jumped 2.5 percent in May. On the month, the index added 0.1 percent. For the five months in 2014, the CPI was up 2.3 percent compared with the same five months a year ago. The urban CPI was up 2.5 percent after increasing 1.9 percent in April while the rural CPI was up 2.4 percent after 1.6 percent a month earlier. Food prices jumped in May, accounting for the small surprise. Food prices were up 4.1 percent from a year ago after rising just 2.3 percent a month earlier. Non-food prices were up a benign 1.7 percent after 1.6 percent in April. Clothing prices were up 2.5 percent after 2.3 percent. Household facilities and health care were both up 1.2 percent for a third month. Transportation and communication was up 0.6 percent after edging up 0.1 percent. Prices here declined in February and March.

The producer price index remained in deflationary territory for a 27th consecutive month. However, the decline in the PPI was much slower than a month earlier. The PPI declined 1.5 percent in May after dropping 2.0 percent in April. The deflationary picture for producers reflects weak demand and also overcapacity in sectors including steel and cement. On the month, the PPI slipped 0.1 percent after declining 0.2 percent in April. For the year to date, the PPI was down 1.9 percent. Raw materials procurement, fuel and power prices were down 1.8 percent on the year while production prices declined 1.9 percent. Consumer goods edged up 0.2 percent on the year for the first gain since November 2013.

May industrial production was up 8.8 percent on the year as expected after increasing 8.7 percent in April. On the month, output was up 0.71 percent after 0.70 percent the month before. For the five months year to date, output was up 8.7 percent when compared with the same months last year. Output improved in nine of 13 subcategories. Motor vehicle output jumped 12.2 percent after increased 7.9 percent and 7.3 percent in April and March respectively. Transport equipment surged 14.1 percent after 11.6 percent in April. However, output declined to an increase of 8.9 percent from 11.2 percent in April and 10.4 percent in March. Communication added 9.9 percent after 11.4 percent and 15.3 percent in April and March.

May retail sales were up a greater than expected 12.5 percent from a year ago. On the month, sales were up 1.16 percent after increasing 0.82 percent in April. Sales for the five months in 2014 were up 12.1 percent when compared with the same months a year ago. Urban sales improved to an increase of 12.3 percent from 11.7 percent while rural sales were up 13.9 percent after 13.2 percent. Seven of 12 subcategories saw sales improve in May. They included grain & food oil, clothing, household nondurables, home appliances, cosmetics, building & decoration materials and oil & oil products. Auto sales slowed to an increase of 7.6 percent, down from 12.3 percent in April. Communications equipment slowed to an increase of 25.3 percent from 28.8 percent the month before. Gold, silver & jewelry sales slid 12.1 percent after plunging 30.0 percent in April.

Bottom line

The Bank of Japan continued to leave its monetary policy unchanged. However, the Reserve Bank of New Zealand increased its overnight cash rate for a third time. China released its monthly slew of data. It indicated that the economy appears to be stabilizing. BoE Chairman Carney's remarks regarding the timing of a possible interest rate increase sent equities down and the pound sterling higher.

The FOMC this week announces its monetary policy along with its quarterly forecasts. They in turn will be parsed by reporters (and analysts) at Chair Janet Yellen's press conference. The Reserve Bank of Australia and the Banks of Japan and England publish minutes of recent policy meetings. The UK releases May consumer and producer price data and the Eurozone releases final harmonized index of consumer prices for May.

Looking Ahead: June 16 through June 20, 2014

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