Global Markets

The news from Ukraine dented weekly gains in Europe and the U.S. but did not erase them. Geopolitical concerns receded but returned in full force Friday afternoon in Europe. All equity indexes followed here were up on the week. On the week, gains ranged from a high of 3.6 percent (Nikkei) to 0.6 percent (CAC).

President Petro Poroshenko's office confirmed that Ukraine attacked and partly destroyed a Russian armored convoy that had entered Ukrainian territory Thursday night. European foreign ministers attending an emergency meeting in Brussels on Friday expressed concern that a humanitarian convoy waiting at the frontier with eastern Ukraine had only been a diversion while Russian armored vehicles crossed the border elsewhere.

First estimates of second quarter gross domestic product were released for Japan and the Eurozone. The UK posted its second estimate. And the best news came from the UK where GDP was up 0.8 percent on the quarter and 3.2 percent from the same quarter a year ago. The worst news was from Japan where GDP plunged 1.7 percent on the quarter (6.8 percent at an annualized rate) and was unchanged from a year ago. In the Eurozone, GDP was unchanged on the quarter and up 0.7 percent on the year while Germany contracted 0.2 percent and was up 1.3 percent on the year. France continued to stagnate and was unchanged on the quarter and edged up 0.1 percent from a year ago. In comparison, U.S. GDP was up 1.0 percent (4.0 percent on an annualized basis) and 2.4 percent on the year. Canada will not release second quarter GDP until August 29^th.

Global Stock Market Recap

Europe and the UK

Despite a plethora of 'bad' news, equities here advanced on the week. The FTSE added 1.9 percent, the CAC was up 0.6 percent, the DAX gained 0.9 percent and the SMI was 1.1 percent higher. The 'bad' news was both geopolitical and economic. At week's end, the situation in Ukraine flared again and sent European indexes down. While the FTSE retreated from the highs of the day, it managed to hold onto a 0.1 percent gain. The CAC, DAX and SMI swooned 0.7 percent, 1.4 percent and 0.8 percent respectively.

First the good news — the UK economy grew by 3.2 percent in the second quarter compared with the same period last year, slightly higher than the original 3.1 percent estimate. However, because of a major revision to its data next month, none of the usual expenditure data (such as consumer spending, investment etc) were available. German economic data disappointed — the country's second quarter flash estimate of GDP revealed that it had contracted 0.2 percent on the quarter. The country joined Italy in posting a second quarter contraction. This came hard on the heels of the ZEW survey for August that showed a drop in both current conditions (44.3 down from 61.8) and expectations (8.6 down from 27.1). Most of the blame for the poor readings was placed on the situation in Ukraine and the subsequent sanctions placed on Russia which impact Germany particularly hard. On Thursday, traders had welcomed conciliatory comments from Russian President Vladimir Putin, but tensions between Ukraine and Russia remained high, keeping investors cautious about near term prospects.

Germany was not the only Eurozone member to post disappointing numbers. Both the Eurozone as a whole and France said that growth was unchanged on the quarter. However, according to analysts, there is a perception that the low growth environment might push the European Central Bank into some form of further action. With investors believing that some stimulus is on the way, European equity markets have a positive bias. However, it should be noted that Spain grew at its best pace in seven years, Portugal expanded at its second fastest rate in four years and Greece grew for the second consecutive quarter (quickest pace in over four years).

Bank of England Quarterly Inflation Report

According to the BoE's August Quarterly Inflation Report, the inflation outlook was little changed. However, the spare capacity estimate was lowered to 1 percent of GDP from a mid-point of 1.25 percent in the May QIR. The Bank also cut its unemployment forecast sharply but signaled that wage growth has become its key indicator for determining when interest rates are likely to rise. While the forecast for wage growth this year was cut sharply, the monetary policy committee reiterated that interest rate increases will be gradual. The BoE lowered its wage estimate for 2014 from 2.5 percent to just 1.25 percent. It also reduced its estimate for 2015. Unemployment is expected to continue to decline rapidly. The Bank indicated that wage developments would be key to the exact timing of a rate move.

The assessment comes amid heightened expectation of an interest rate increase, with some predicting a move as soon as this year. However while the BoE acknowledged the sharp improvement in the jobs market, it laid special emphasis on the weakness of wages as an indicator of slack. In light of the heightened uncertainty about the current degree of slack, the committee noted the importance of monitoring the expected path of costs, particularly wages, in assessing inflationary pressures. The Inflation Report stressed there was a range of views among MPC members on the amount of spare capacity and the equilibrium jobless rate. The detail on the dissenting views will be learned next week when the minutes of the August MPC meeting are published Wednesday.

Asia Pacific

Equities in this region were up on the week with Japan performing the best in the region and Hong Kong trading near a six year high. The Nikkei gained 3.7 percent for the week, its sharpest weekly increase since mid-April. The index was buoyed by easing geopolitical risks in Ukraine, Iraq and Gaza as well as expectations of a continued low interest rate environment in the U.S.

The Hang Seng was up 2.6 percent. On Friday, the index topped 25,000 during the trading day but failed to close above that level. The index last traded above 25,000 more than six years ago in May 2008. The Shanghai Composite was up 1.5 percent on the week. The index rallied Friday, gaining 0.9 percent after the nation's State Council said it would lower borrowing costs for small companies, which have traditionally found it difficult to get funding from the country's big banks. Chinese equities climbed after data showed inflation was subdued in July while weaker than estimated credit growth and industrial production boosted speculation the government will ease monetary policy.

Japan's gross domestic product contracted at an annualized rate of 6.8 percent in the second quarter of 2014 — the worst decline since the earthquake and tsunami in 2011, due in large part to a sharp decline in consumer spending following the implementation of a consumption tax increase from 5 percent to 8 percent in April.

Bank of Korea

The Bank of Korea cut its key interest rate by 25 basis points to 2.25 percent for the first time in 15 months, joining the government's efforts to boost anemic economic growth at the risk of exacerbating the nation's heavy household debt burden. The BoK's rate cut follows the government's announcement last month of a $40 billion economic stimulus package that includes looser mortgage rules which are intended to kick start the stalled housing market. BoK Governor Lee Ju-yeol said the Bank chose to act "pre-emptively" to support the economy. South Korea's economy grew 0.6 percent in the second quarter — the slowest expansion since the first quarter of last year. The sinking of the Sewol ferry in April dampened consumer spending while a slowdown in China and an uneven recovery in Europe have weighed on exports. The Kospi was up 1.6 percent on the week but was little changed on Thursday after the Bank of Korea's announcement.

Currencies

The U.S. dollar was mixed last week. It advanced against the euro, pound sterling and yen but declined against the Swiss franc and the Canadian and Australian dollars. At week's end, both the Swiss franc and yen were in demand as investors sought safe havens in light of the news from Ukraine. The Canadian dollar was bolstered by the revised July employment report that increased the number of employed up to 40,700 rather than the initially announced paltry 200.

The pound sterling dropped after the Bank of England's Quarterly Inflation Report indicated that the BoE would not be increasing interest rates as soon as the markets anticipated. BoE governor Mark Carney had earlier this summer pushed the pound to a six-year high by fanning speculation that the Bank could raise rates before the end of the year, but Wednesday's Inflation Report slashed the Bank's wage growth forecasts — which has become a crucial factor in the decision on when to increase. Adding to the pressure on the pound, data out just before the QIR was published, indicated that average earnings actually fell for the first time since 2009 in June. Sterling dropped against all of its 16 major counterparts Wednesday as BoE Governor Mark Carney also reiterated his assertion that rates will only rise gradually and to a limited extent.

Selected currencies — weekly results

Indicator scoreboard

EMU

June Eurozone industrial production fell by a more than expected 0.3 percent from the unrevised decline of 1.1 percent in May. Output was unchanged from a year ago. The monthly decline was led by a drop of 1.9 percent in nondurable consumer goods and a decline of 0.7 percent in energy production. Capital goods remained stable on the month while intermediate good and durable consumer goods were up 0.4 percent and 2.3 percent respectively. The biggest declines among member states were recorded in Ireland (down 16.5 percent), the Netherlands (down 3 percent) and Lithuania (down 2.7 percent). Malta output was up 5.2 percent.

Second quarter flash estimate of gross domestic product was weaker than expected. GDP was unchanged on the quarter and up 0.7 percent from the same quarter a year ago. In the first quarter, GDP was up 0.2 percent and 0.9 percent on the year. As usual with Eurostat, no detail was provided in the flash estimate. These will not be available until September 3. At national levels, growth among the larger member states was mixed. Germany's second quarter GDP contracted 0.2 percent after growing 0.8 percent in the first quarter. On the year, Germany was up 1.3 percent when compared with a year ago. Italy recorded its second consecutive decline, this time by 0.3 percent on the quarter and 0.2 percent from a year ago after slipping 0.1 percent on the quarter and 0.4 percent in the first quarter. Growth in France was unchanged for a second quarter and was up 0.1 percent from a year ago. The pace of growth in Spain is impressive, increasing this time by 0.6 percent on the quarter and 1.2 percent on the year. Among the smaller countries, the strongest increase was posted by Latvia (1.0 percent) ahead of Slovakia (0.6 percent) while at the other end of the spectrum, Cyprus, which is still mired deep in recession, contracted a further 0.3 percent. However, the Portuguese economy rebounded, growing 0.6 percent after shrinking 0.6 percent in the first quarter.

Eurozone inflation resumed its downward trend this month. Final HICP confirmed the flash estimate of just 0.4 percent annual increase and just a tick short of its final June mark and the weakest since October 2009. This compares with July 2013 when the rate was 1.6 percent. On the month, inflation dropped 0.7 percent from June. Moreover, the underlying picture was only marginally firmer. Hence, the core rate as measured by the HICP excluding food, alcohol, tobacco and energy held steady at an annual rate of 0.8 percent while, without only energy prices, the HICP was up 0.5 percent. Regardless of how the data are parsed, consumer prices remain sluggish. In services, easily the most robust part of the economy, inflation was unchanged at 1.3 percent and in non-energy, industrial goods edged down to a decline of 0.1 percent. Among the more volatile components, energy charges were 1.0 percent lower on the year (compared with a gain of 0.1 percent in June). Food, alcohol and tobacco prices were 0.3 percent weaker (down 0.2 percent in June).

Germany

ZEW's August survey found analysts cutting their assessment of German economic conditions much more than expected. The expectations measure sank to 8.6 from July's 27.1, while current conditions plunged to 44.3 from 61.8 in July. The median forecast for the former was 17 and the latter, 55. The expectations reading was the lowest since December 2012. According to ZEW, the decline in economic sentiment was likely connected to the ongoing geopolitical tensions that have affected the German economy. In particular, current figures on industrial production and incoming orders suggest markedly reduced investment activities on the part of German firms against the backdrop of uncertain sales prospects. Since the economy in the Eurozone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected.

Second quarter flash gross domestic product was down 0.2 percent but was up 1.2 percent from the same quarter a year ago. This was the first quarterly contraction since the third quarter of 2012. As usual with flash releases, little detail was available. The decline was attributed to foreign trade, where exports rose less than imports on a quarterly basis, and also to investment. Full GDP details for the second quarter will be published on September 1.

France

Second quarter gross domestic product was unchanged on the quarter and up 0.3 percent from the same quarter a year ago. Household consumption expenditures were up 0.5 percent after sinking 0.5 percent in the first quarter. However, gross fixed capital formation dropped 1.1 percent after sliding 1.0 percent in the previous quarter. The trade balance subtracted 0.1 points from GDP.

United Kingdom

July claimant count unemployment declined 33,600 after dropping 39,500 in June. This was the 21^st consecutive drop in the number of claimants to the lowest number since September 2008. The claimant count unemployment rate was 3.0 percent, down from 3.1 percent in June and also the lowest since September 2008. For the April to June period, unemployment declined 132,000 sending the unemployment rate on this basis down to 6.4 percent from 6.8 percent for the prior three month period. The level of employment rose by 0.9 percent to a record 4.590 million. Significantly, only 23 percent resulted from self-employment, down from 31 percent of new jobs in the March to May period. Wages remain under pressure, with salaries failing to keep up with inflation, which was 1.9 percent in June. Total weekly earnings fell by an annual rate of 0.2 percent in the three months to June after a 0.4 percent increase in the previous period. Excluding bonuses, regular earnings rose by a record low 0.6 percent between April and June, down from 0.7 percent previously. 

Second quarter gross domestic product expanded an unrevised 0.8 percent on the quarter but revisions to output in the construction and service sectors led to an upgrade of annual growth to 3.2 percent from the originally reported 3.1 percent. This was the fastest pace of annual growth since the fourth quarter of 2007. In light of the upcoming major revisions to GDP, the ONS did not provide estimates of expenditure measures of GDP as is customary when releasing a second reading of quarterly output. Similarly, Fridays release contained no revisions to previous quarterly data. Extensive revisions to GDP calculations are due for release on September 30. The new data will reflect changes in the methodology used to calculate GDP. Changes to earlier data, from 1997 to the end of 2012, are slated for release on September 30 as well. However, the other output components reflected revisions contained in monthly data released in recent weeks. Production was revised down to an increase of 0.3 percent in the second quarter from 0.4 percent. Partially offsetting this downward revision was an upward revision to construction. It was revised to no change from a decline of 0.5 percent in the first estimate.

Asia/Pacific

Japan

July producer prices were up 0.3 percent on the month and 4.3 percent from a year ago. Excluding the sales tax increase, the PPI would have been up 1.5 percent on the year, down from June's 1.7 percent and lower than annual price increases prior to the April 1 beginning of the sales tax increase. Prices increased for all sub-categories with the exception of electronic components & devices. Petroleum & coal products jumped 11.9 percent after increasing a revised 12.3 percent in June. Food prices were up 3.0 percent after a revised 3.1 percent increase last time. Iron & steel prices were up 5.6 percent while nonferrous metals were 6.9 percent higher. Among the other categories, lumber & wood products were up 5.3 percent, plastic products gained 4.5 percent and information & communications equipment prices were 2.1 percent higher.

Second quarter gross domestic product dropped 1.7 percent on the quarter for an annualized rate of 6.8 percent. The result was not quite as bad as analysts expected — namely a 1.8 percent quarterly drop and 7.0 percent annualized decline. The quarterly decline was the first since the fourth quarter of 2013 and the largest since the first quarter of 2011 when the country was shaken by the great earthquake and tsunami. At that time, GDP contracted 1.8 percent on the quarter. Not surprisingly, a sharp drop in consumer demand drove the quarterly loss. Household consumption in the quarter fell by 5.2 percent. This compares with the first quarter when household spending rose 2.1 percent as people rushed to buy things before taxes increased. Business investment fell only 2.5 percent. In the first quarter, business spending rose 7.7 percent.

June private sector machinery orders, excluding volatile ones for ships and those from electric power companies, increased a seasonally adjusted 8.8 percent. Private orders were down 3.0 percent on the year. For the April through June quarter, orders plunged 10.4 percent. Manufacturing orders were up 6.7 percent on the month while nonmanufacturing orders were up 4.0 percent. The total value of machinery orders received by 280 manufacturers operating in Japan increased 17.1 percent in June from the previous month on a seasonally adjusted basis. In the April through June period, the total was up 14.4 percent compared with the previous quarter. In the July to September period, the total amount of machinery orders is forecast to decrease by 15.3 percent and private sector orders excluding volatile ones are expected to rise 2.9 percent from the previous quarter. This forecast was basically made by summing up the figures from the 280 machinery manufacturers.

China

As expected, July consumer price index was up 2.3 percent from a year ago for a second month. On the month, the CPI edged up 0.1 percent. Year to date, the CPI also was up 2.3 percent. Urban CPI was up 2.3 percent on the year while rural prices were up 2.1 percent. Food prices were up 3.6 percent after increasing 3.7 percent in June. Non-food inflation also eased, down 0.1 percent to 1.6 percent from 1.7 percent. Tobacco & alcohol prices dropped 0.6 percent for the fourth consecutive month. Clothing prices were up 2.6 percent for a second month while household facilities prices added 1.1 percent after 1.2 percent the month before. Transportation & communication prices were up 0.7 percent on the year after increasing 0.6 percent the two months before.

Producer prices in July were down 0.9 percent on the year after sliding 1.1 percent in June and 1.4 percent in May. Year to date prices were down 1.6 percent. On the month, prices slipped 0.1 percent. Prices continue to decline for production goods but prices for consumer goods increased for a third month. Raw materials procurement, fuel and power prices were down 1.1 percent after declining 1.5 percent in June. Production materials were down 1.2 percent after dropping 1.5 percent in June. Consumer goods, however, were up 0.3 percent with daily goods rising 0.4 percent, food & related products increasing 0.7 percent and clothing & related products also up 0.7 percent. However, consumer durable goods slid 0.9 percent for a second month. Ferrous metals dropped 4.1 percent while non-ferrous metals slid 1.1 percent.

July industrial production was up 9.0 percent when compared with a year ago after growing 9.2 percent in June. For the seven months of 2014, output was up 8.8 percent for a second month. On the month, output slipped to an increase of 0.68 percent from 0.77 percent in June for the lowest increase since December 2013. Output gains from a year ago were mixed with five sub-categories increasing output from June levels while seven increased less than the month before. Motor vehicle production was up 10.5 percent on the year after increasing 11.2 percent the month before. However, transport equipment output increased to 16.6 percent after 16.1 percent in June. Chemicals output increased 11.5 percent, up from 10.6 percent in June. General equipment output also gained, increasing 11.9 percent after 8.8 percent the month before.

July retail sales were up 12.2 percent from a year ago, down from an increase of 12.4 percent in June and 12.5 percent in May. For the year to date, sales were up 12.1 percent for the third month. Sales eased to a monthly increase of 0.86 percent after increasing 0.95 percent in June and 1.14 percent in May. Urban sales were up 12.1 percent on the year after increasing 12.3 percent in June while rural sales increased 13.2 percent after 13.4 percent. Auto sales were up 8.1 percent from a year ago after increasing 6.9 percent the month before. Oil products were up 11.3 percent after 11.4 percent last time. Furniture sales improved in July to an increase of 16.0 percent after gaining 15.6 percent in June. Household nondurables were up 12.2 percent, slightly less than June's 12.5 percent gain. Home appliances sales improved to an increase of 12.6 percent from 10.7 percent.

Americas

Canada

Isolated human error made for a significant under-estimation of the Canadian labour force in July. Statistics Canada sharply revised last week's initial report, moving employment growth to 41,700 from a mere 200. Jobs declined 9,400 in June. The unemployment rate remained at 7.0 percent. Full-time jobs are now down 18,100 from last week's big drop of 59,700. The gain in jobs was entirely in part-time employment which rose 59,900, little changed from last week's 60,000. Note that the error, which Statistics Canada is confident will not be repeated, affected the count for full-time employment. The participation rate is now at 66.1 percent, unchanged from June but up from 65.9 percent in last week's report. By sector, goods producing jobs declined 26,300 instead of a 34,000 drop in the initial report. Service jobs are now up 68,000, corrected from increase of 34,300.

June manufacturing sales were up 0.6 percent on the month and 6.9 percent year. It was the fifth gain in six months. The gain stemmed from a 3.0 percent increase in nondurable goods sales, led by the chemical, petroleum & coal product as well as the food industries. Excluding the chemical industry, total sales edged down 0.1 percent. Chemical industry sales were up 8.6 percent to C$4.2 billion in June, their highest level since October 2008. Much of the gain reflected higher than usual sales in the pesticide, fertilizer & other agricultural chemical sub-industry. This year, colder and wetter weather in the Western provinces delayed planting, leading to some sales in this sub-industry shifting from May to June contributed to the stronger seasonally adjusted sales for the month. In addition, sales of pharmaceuticals & medicines also rose contributing to the overall gain in the chemical industry. Petroleum & coal product industry sales increased 4.0 percent to C$7.6 billion. Most of the increase stemmed from higher volumes of products sold. Food sales rose 2.2 percent to C$8.0 billion in June, the fourth increase in six months. Part of the gain reflected an increase in the seafood product preparation and packaging sub-industry, following weak sales in May. Lower sales in the motor vehicle industry offset a portion of the gains. Sales in the industry were down 8.6 percent to C$4.5 billion, the first decrease following two months of strong gains. Unfilled orders edged down 0.3 percent, the third decrease in four months. Lower unfilled orders in the aerospace product & parts industry were responsible for the decline. This decrease was mostly offset by higher unfilled orders in the computer & electronic product industry. New orders were up 0.6 percent.

Bottom line

All equity indexes followed here advanced last week despite headwinds from disappointing economic data and geopolitical concerns. Investors think the 'bad' news will bring more stimulus from the European Central Bank and the Bank of Japan, given the dreary readings of second quarter GDP.

This week brings flash PMI estimates for China, Japan, the Eurozone, Germany, France and the U.S. They should give an inkling of how things are going in the third quarter. The Federal Reserve releases minutes from its most recent meeting and Chair Janet Yellen will speak on the labor markets in Jackson Hole, Wyoming.

Looking Ahead: August 18 through August 22, 2014

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