Global Markets

All equity indexes followed here advanced with one day remaining in the trading week (U.S. markets are closed Friday). Gains ranged from a high of 2.9 percent (Sensex) to a low of 0.1 percent (STI) as favorable economic data lifted investor morale. All the indexes covered here with the exception of the All Ordinaries and FTSE MIB advanced on the quarter. Of note are improved PMIs for manufacturing in China, India, the U.S. and the UK. The June U.S. employment report added an appropriate coda to the week's slew of economic data. Nonfarm employment increased at a greater than expected 288,000 — analysts expected an increase of 211,000. Both the Reserve Bank of Australia and the European Central Bank left their respective monetary policy unchanged.

Manufacturing PMIs in June

Eurozone June manufacturing PMI slipped to 51.8 from May's final of 52.2. The data signaled that production expanded at its slowest pace since September 2013, in large part reflecting a smaller increase in new orders (weakest since October 2013). Employment was up for a sixth consecutive month but its growth was only marginal and masked declines in a number of member states. Input costs were up modestly for the first time in five months and, more significantly, factory gate prices increased for a second month in a row. Regionally, all the reporting countries except France (48.2 and a 6-month low) and Greece (49.4 and a 7-month low) recorded national PMIs above the 50 breakeven mark between growth and contraction. This group was led by Ireland (55.3) ahead of Spain (54.6 and an 84-month high) and Italy (52.6). Growth in the German PMI (52.0) disappointingly slowed to an 8-month low.

Investors took heart when both measures of Mainland China's manufacturing PMI improved in June. China's 'official' manufacturing CFLP PMI edged up to 51.0 from 50.8 in May and the highest since December 2013. All subcategories improved including production and new orders. New export orders climbed above the 50 breakeven point but imports continued to contract albeit at a slower pace. Employment continued to contract. The HSBC/Markit manufacturing PMI climbed to 50.7 from 49.4 in May. Output increased for the first time since January.

Elsewhere globally, Japan's manufacturing PMI indicated growth for the first time since March with a reading of 51.5, up from 49.9 in May. Both output and new orders increased for the first time in three months. While purchasing activity increased, payroll numbers grew at a slower pace. The US Markit manufacturing PMI climbed to 57.3 from 56.4 in May. And in the UK, the PMI was 57.5, up from 57 in May.

Global Stock Market Recap

Selected Global Stock Market Indexes — 2014 Quarterly Results

Europe and the UK

Equities advanced, boosted in part by better than anticipated economic data from the U.S., UK and China. Morale was reinforced Thursday after European Central Bank President Mario Draghi reassured investors that interest rates will remain low. The better than expected U.S. employment report also lifted spirits. The FTSE was up 1.6 percent, the CAC gained 1.2 percent, the DAX advanced 2.2 percent and the SMI added 1.5 percent.

European Central Bank

No change was made to monetary policy after the Governing Council lowered its key interest rates in June. It announced additional details to facilitate its new TLTRO (targeted longer-term refinancing operations). The benchmark refinance rate stayed at its record low of 0.15 percent and the deposit and marginal lending facility rates were held at minus 0.1 percent and 0.4 percent respectively.

ECB President Mario Draghi's post meeting press conference contained little of note in terms of how the ECB sees the recovery evolving and, as widely expected, simply reiterated June's line on forward guidance. However, Mr Draghi did announce that beginning in January 2015, the Governing Council will meet every six weeks rather than each month as it has done since its inception. Reserve maintenance periods will be adjusted accordingly. The move reflects concerns that monthly gatherings can encourage unwarranted speculation about possible changes in monetary policy to the detriment of financial market stability. The longer gap will also allow the ECB to take on board additional economic data when updating its own medium term scenario.

Mr Draghi also announced that the ECB would begin to publish accounts of its meetings — a big step towards more transparency. The Banks of England and Japan along with the Federal Reserve and the Reserve Bank of Australia already publish minutes of their policy making sessions.

Asia Pacific

All indexes covered here advanced through Thursday, July 3 even though investors remained cautious ahead of both the European Central Bank policy announcement and the U.S. employment report which were released after markets here closed for the day. The Sensex outperformed with a gain of 2.9 percent while the Nikkei was up 1.7 percent and the Hang Seng, 1.3 percent. The All Ordinaries rallied on gains in metal prices and a decline in the Australian dollar after a speech by Reserve Bank of Australia's Governor Glenn Stevens.

The Sensex continues to rally. It advanced 13.4 percent in the second quarter and the most since the three months through September 2009. International investors bought Indian stocks on expectations the new government under Prime Minister Narendra Modi will curb Asia's fastest consumer inflation and boost an economy growing at near the slowest pace in a decade. The government will present its federal budget on July 10.

The Hang Seng surged to close at its highest level this year on Wednesday, bolstered by a rally in U.S. equities and upbeat signs on China's economy. The market was helped by positive manufacturing data from China released Tuesday — a holiday in Hong Kong — that suggested the mainland economy had reached a trough after a recent downturn. The numbers helped support the Hong Kong market when it reopened on Wednesday. There was also some relief in the city after a pro-democracy rally — the biggest demonstration in at least a decade — passed peacefully on Tuesday.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia left its cash interest rate at 2.5 percent where it has been since August 2013. The RBA's statement for the meeting was almost identical to the one after the June meeting. At its June meeting, the RBA said that "the current accommodative stance of policy was likely to be appropriate for some time yet." However, there has been a shift in tone in recent months with more pointed comments on the Australian dollar. The Board reiterated that monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with its (2 percent to 3 percent) inflation target. They said that the most prudent course is likely to be a period of stability in interest rates.

Regarding the Australian dollar, the Board noted that the currency remains high by historical standards and is offering less assistance than it might in achieving balanced growth in the economy especially given the declines in key commodity prices. The RBA has flagged government spending cuts and a drop in resource investment as constraints on growth. The Australian dollar has gained more than 7 percent since the RBA moved to a neutral bias in February this year.

The Australian dollar dropped below 94 US cents following comments by Reserve Bank of Australia Governor Glenn Stevens on the currency and on house prices Thursday. In an Australasian Meeting of the International Econometric Society in Hobart, the RBA governor warned investors against believing that house prices will always increase. Stevens also said that low interest rates had their intended impact on the economy and that the exchange rate remains high by historical standards. He said that investors are underestimating the likelihood of a significant decline in the Australian dollar at some point. This was after it rallied to a near eight month high earlier in the week. The Governor, after a respite, is once again back to talking down the currency — a method preferred to the alternative of lowering interest rates below their record low of 2.5 percent.

Currencies

The U.S. dollar rallied Thursday to end the week higher against the yen, euro, Swiss franc and the Australian dollar. However, the currency was down against the Canadian dollar and pound sterling.

Australia's dollar rose to its highest since November 2013 when the Reserve Bank of Australia kept interest rates at a record low of 2.5 percent. The Aussie reversed earlier declines after the Reserve Bank of Australia reiterated it expects to hold borrowing costs steady for some time. However, the currency reversed direction after RBA Governor Glenn Stevens said the currency was overvalued and remains high by historical standards.

The Aussie's rise in recent months has been driven in large part by escalating demand for the country's bonds, which investors often view as a safe haven during uncertain times for the global economy. There has been growing concern recently over weak economic conditions in both Europe and the U.S., and Australian government bond yields are currently more attractive than those in Europe, Japan or the U.S. Offshore investors have to convert their currencies into Aussie dollars before buying the nation's bonds.

The Aussie rose above parity for the first time since becoming a floating currency in late 2010. It stayed there for much of the next two years, before falling below again in May 2013 as the Federal Reserve began preparing global markets for the unwinding of its economic stimulus. The Aussie has not risen to or above parity since.

The pound advanced to its highest level in more than five years against the dollar after June UK manufacturing growth as measured by the purchasing managers' index unexpectedly accelerated to the fastest pace in seven months. Analysts said that the report added to signs a strengthening economy may prompt the Bank of England to consider raising borrowing costs sooner than anticipated. With unemployment at a five year low, with house prices soaring and with the economy headed for the strongest growth of any Group of Seven nation this year, investors are betting the BoE will raise the benchmark interest rate in early 2015 from the record low set in March 2009. The pound has continued to gain despite recent attempts by the BoE to temper expectations of an imminent tightening in monetary policy.

Selected currencies — weekly results

Indicator scoreboard

EMU

June flash estimate harmonized index of consumer prices was up 0.5 percent from a year ago, unchanged from the final May estimate and equaling the recent low posted in March. However, the underlying annual inflation rate, as measured by the HICP less food, alcohol, tobacco & energy, accelerated a tick to 0.8 percent although even this was still 0.2 percentage points short of the 1.0 percent high for the year recorded in both February and April. The main downward pressure came from food, alcohol & tobacco where prices were 0.2 percent beneath their year ago level compared with a 0.1 percent increase in May. Elsewhere services sector inflation gained a couple of ticks to 1.3 percent and energy inflation was up 0.1 percentage points at 0.1 percent. Non-energy industrial goods prices were flat on the year, in line with their mid-quarter result.

Germany

May retail sales retreated 0.6 percent after dropping a significantly steeper revised 1.5 percent in April — the first back to back drop since September and October last year. Unadjusted annual growth was 1.9 percent, down from a slightly smaller amended 3.2 percent at the start of the quarter. On a seasonally and workday adjusted basis, retail sales were down 0.8 percent on the year.

Asia/Pacific

Japan

May seasonally adjusted industrial production was up a less than expected 0.5 percent and was up an unadjusted 0.8 percent on the year. Analysts expected a monthly increase of 0.9 percent and an unadjusted 1.4 percent gain on the year. On a seasonally adjusted basis, output was up 2.1 percent from a year ago. May's output figure was an improvement on April, however, when output declined by 2.8 percent. Among the industries that contributed to the increase were transport equipment (up 1.9 percent after dropping 2.6 percent in April), textiles (up 1.9 percent after sliding 2.1 percent), and electronic parts & devices (up 0.4 percent after sinking 5.3 percent). Commodities that increased included reaction vessels, machining centers and large passenger cars. According to the survey of production forecasts, production is expected to decrease 0.7 percent in June and increase 1.5 percent in July.

The Bank of Japan's Tankan survey indicated that sentiment among major manufacturers worsened for the first time in six quarters as they were hit by the increase in the sales tax on April 1. Second quarter large manufacturers diffusion index declined more than expected to plus 12 from plus 17 in March. Analysts expected large manufacturers diffusion index would decline to plus 16. The sentiment index for major nonmanufacturers slid to a reading of plus 19, down from plus 24 in the previous quarter. Small manufacturers' index, which is more indicative of domestic demand, declined to a reading of plus 1 from plus 4 while the reading for medium sized manufacturers was plus 8, down from plus 12. Small nonmanufacturers reading declined to plus 2 from plus 8 while medium nonmanufacturers declined to plus 10 from plus 17. Large companies raised their combined investment plans for the continuing financial year ending March to a 7.4 percent increase from a previous 0.1 percent rise forecast in the previous survey. The new figure was the highest since the 2007 June survey.

Australia

May merchandise trade deficit was A$1.911 billion after a revised deficit of A$780 million. Exports dropped 4.6 percent on the month but were up 0.6 percent from a year ago. Imports slipped 0.6 percent on the month and were up 4.4 percent on the year. Non-rural goods exports were down 6 percent while rural goods declined 2 percent and non-monetary gold slid 6 percent. The main component contributing to the fall in seasonally adjusted rural goods estimates was cereal grains and cereal preparations, down 8 percent. The main components contributing to the decline in seasonally adjusted estimates for non-rural goods were metal ores and minerals, down 9 percent, and other mineral fuels down 13 percent. In seasonally adjusted terms, capital goods imports declined 4 percent while consumption goods fell A$34 million. Non-monetary gold was up 12 percent while intermediate and other merchandise goods were up A$17 million.

May seasonally adjusted retail sales were down 0.5 percent after slipping a revised 0.1 percent in April. On the year, retail sales were up 4.6 percent. Among the sales categories that declined in May were clothing, footwear and personal accessory retailing (down 2.3 percent), department stores (down 2.6 percent), household goods retailing (down 0.9 percent) and other retailing (down 0.4 percent). The declines were partially offset by increases in food retailing (0.1 percent) and cafes, restaurants & takeaway food services (0.1 percent). By state, sales in Victoria (down 1.1 percent) lost the most followed by New South Wales (down 0.5 percent), Western Australia (down 0.3 percent), Queensland (down 0.1 percent), the Australian Capital Territory (down 0.3 percent) and Tasmania (down 0.2 percent). Partially offsetting the declines were increased sales in South Australia (0.2 percent) and the Northern Territory (0.4 percent).

Americas

Canada

April monthly gross domestic product edged up 0.1 percent for a second month. It was the fourth consecutive month that real GDP has increased since its weather induced contraction at the end of 2013, but still not enough to boost the annual growth rate which held steady at 2.1 percent. April's advance was wholly attributable to services where output was up 0.3 percent on the month. Within this there were gains by wholesale trade (1.3 percent), accommodation & food (also 1.3 percent) and retail trade (0.8 percent) as well as contributions from transportation & warehousing (0.5 percent) and real estate & rental & leasing (0.4 percent). The only setback of any note was in arts, entertainment & recreation (down 0.6 percent). By contrast the goods producing sector declined 0.3 percent and that despite a 0.2 percent increase in manufacturing output. Utilities (down 1.0 percent), mining, quarrying & oil & gas extraction (down 0.6 percent) as well as agriculture, forestry, fishing & hunting and construction (both also down 0.6 percent) all had a poor period.

May merchandise trade deficit was C$0.15 billion following a larger revised C$0.96 billion deficit in April. The headline improvement reflected a 3.5 percent monthly increase in exports that more than offset a 1.6 percent increase in imports. Sales to the key U.S. market were 2.1 percent higher than in April which with imports from the country dipping 0.2 percent saw the bilateral trade surplus widen out from C$4.0 billion to C$4.8 billion. The news on volumes was also positive with total real exports were 4.2 percent stronger on the month, almost double the 2.4 percent increase in imports. The overall monthly increase in nominal exports was built upon the auto sector, where vehicles & parts climbed 9.8 percent and a 3.4 percent advance in energy products. Consumer goods were up 4.4 percent to a record C$4.8 billion and there was a particularly robust showing by pharmaceutical & medicinal products which surged more than 41 percent following a near-26 percent drop in April. Imports were boosted by a 6.7 percent monthly increase in motor vehicles & parts, their fourth consecutive increase, as well as solid gains in metal ores & non-metallic minerals (44.5 percent), aircraft & other transportation equipment & parts (12.7 percent) and industrial machinery, equipment & parts (2.5 percent). Energy imports were down 3.6 percent.

Bottom line

Equities advanced thanks to better than anticipated economic data that outweighed geopolitical concerns. Positive data from China, Japan and the U.S. especially relieved investors' worries about growth going forward.

Next week is quieter. Industrial output and merchandise trade data for May will dominate the releases in Europe. The Bank of England will hold its monetary policy meeting. Investors will be looking for clues to future interest rate policy. China posts its June inflation data while Australia's June labour force data will be intently studied.

Looking Ahead: July 7 through July 11, 2014

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