Global Markets

Markets were choppy last week due to a combination of mixed economic data, the perilous situation in Greece and wavering growth in China. Mixed messages on the state of Greece's negotiations with its international creditors rattled market players this week. There appears to be no serious signs of improvement or an imminent deal, and that is what is really making investors cautious. Most indexes followed here ended in the red for the week but mixed for the month of May.

A slew of both new and revised first quarter growth data was released globally. First quarter growth has proven to be lackluster globally with many economies suffering contraction while others saw only tepid growth. As expected, the second estimate of U.S. gross domestic product indicated that the economic contracted 0.2 percent (not annualized) in the first quarter of this year thanks in large part to dreadful weather, the West Coast shipping strike and a questionable seasonal adjustment program. In the UK, growth remained a tepid 0.3 percent for the second estimate, disappointing investors who thought there was an upward revision coming. Switzerland and Canada released their first estimates and both contracted in the first quarter, by 0.2 percent and 0.1 percent on the quarter respectively. In the Eurozone, Italy is growing at last while Greece slid back into recession with two consecutive negative quarters.

Bank of Canada

As universally expected, the Bank of Canada (BoC) left its key interest rates unchanged, keeping the overnight rate target at 0.75 percent, the deposit rate at 0.50 percent and the Bank Rate at 1.00 percent. The BoC had surprised with a 25 basis point rate cut at its January 21 meeting. The cut at that time was to mitigate the negative effects on the Canadian economy from plunging global oil prices. Over the following three meetings, the BoC kept its policy unchanged. The latest policy statement indicates that there is no material change in the outlook or risks as presented in the April Monetary Policy Report.

Global Stock Market Recap

Europe and the UK

All the equity indexes tumbled on the week, weighed down by the situation in Greece. Once again, the week was dominated by the back and forth between Greece and its creditors, with no clear progress or end in sight. The FTSE declined 0.7 percent, the SMI retreated 1.2 percent and the CAC and DAX dropped 2.6 percent and 3.4 percent respectively. For the month of May, the FTSE edged up 0.3 percent and the SMI added 1.8 percent. The CAC and DAX declined 0.8 percent and 0.4 percent respectively on the month.

Continued concerns over the situation in Greece weighed on investor sentiment. While Greek officials have expressed optimism about reaching an agreement with the country's international creditors, European officials have been far more pessimistic. Greece's creditors have reportedly demanded that the country make hard commitments and overhaul its finances in order to seal an agreement by June 5, when the next payment to the IMF becomes due. IMF Managing Director Christine Lagarde told a German newspaper it is "very unlikely" a comprehensive solution will be reached in the coming days. Lagarde also acknowledged that a Greek exit from the Eurozone is a "possibility" but said it would "probably not be an end to the euro."

The Greece economy fell back into recession in the first quarter as the lingering political crisis dampened its fragile recovery. Gross domestic product fell a seasonally and calendar adjusted 0.2 percent from the fourth quarter when it dropped 0.4 percent. It was the second consecutive quarter of economic contraction, which implies a technical recession.

Earlier in the week, sentiment was negatively affected by political uncertainty in Spain, where Prime Minister Mariano Rajoy's Popular Party suffered its worst result in 20 years in a municipal election, as the voters punished his government for four years of austerity and a raft of corruption scandals before a general election due in November.

Asia Pacific

Most equity indexes here were down on the week and month in choppy trading. The moves by the Shanghai Composite — especially on Thursday and Friday — were extremely volatile. The Nikkei however, now has increased for 11 consecutive trading days and continues to set fresh 15 year closing highs. It is also the index's longest winning streak since February 1988.

The Nikkei was up 1.5 percent on the week and 5.3 percent on the month thanks to a renewed decline in the yen that is underpinning sentiment. Japan releases many of its important economic indicators during the last week of the month and May was no exception. In short, the reports were mixed for April. The jobless rate dropped to an 18-year low of 3.3 percent, housing starts increased for the second straight month and industrial output rose 1.0 percent on the month, marking the first increase in output in three months. However household spending declined for the 13th straight month from a year ago and core consumer inflation was muted at 0.3 percent.

The Japanese data underscore why many analysts think the Bank of Japan's economic outlook is too rosy. The bank's latest view is that Japan's economy "has continued to recover moderately" and it should soon grow above potential and generate some much wanted inflation. But the data tell a different story — consumers are reluctant to spend. Without spending, there's no virtuous cycle for inflation to latch onto. The latest figures on prices bear this out. The saving grace could be a tight labor market. The jobless rate is now the lowest since 1997. Strong job-to-applicant ratios suggest further improvement this year.

Chinese stocks swung widely in volatile trade Friday, especially after the previous session's sharp sell-off. The Shanghai Composite briefly slid more than 4 percent before turning higher and then once again slipping into negative territory to end 0.2 percent lower. The index plunged 6.5 percent Thursday as worries about a liquidity squeeze and stake sales of two state owned banks by a Chinese sovereign-wealth fund rattled investors. This was the index's worst decline since January 19 when the index dropped 7.7 percent. The Shanghai Composite briefly fell into correction territory earlier Friday — off more than 10 percent from its recent high at Wednesday's close — before paring losses.

Thursday's drop cast doubt on the sustainability of the more than twofold increase in Chinese markets over the past year. It has also given ammunition to naysayers who for months have pointed to a widening gap between stock prices and economic reality. The volatility across China highlights the challenges Beijing faces in trying to manage China's financial markets. Stimulus measures and the expectation of further measures have stoked the run up in stocks, but China's leaders are trying to coax more of a gradual rise as more foreign money enters its markets.

China's stock market has surged over 140 percent over the past 12 months despite a flagging economy, as retail investors, including university students, barbers and janitors pile into the market. However, economists have warned that, based on economic fundamentals, the rally is unjustified. Official data show the surge has been accelerated by cheap credit, with the outstanding value of margin finance hitting a record 2 trillion yuan on Tuesday.

A trio of factors combined to send investors racing for the exits: China's sovereign-wealth fund said earlier this week it had sold stakes in two state owned banks; brokerages were tightening restrictions on giving out credit to individual stock investors; and the central bank soaked up cash from commercial banks, a sign that the government is trying to contain excess liquidity in the financial market. Some observers said the drop wasn't entirely surprising. Skeptics have warned for months that the market is a bubble and increasingly disconnected from the reality of a worsening economy and growing pile of debt. Beijing has time and again tried to coax gradual gains through editorials in state media, to sustain long term gains in a historically volatile market.

Currencies

The U.S. dollar advanced against all of its major counterparts with the exception of the Swiss franc last week. The dollar gained against the Australian and Canadian dollars, the euro, pound sterling and the yen. The dollar pushed to a 12-year high against the yen Thursday, buoyed by investors betting that the U.S. has emerged from its economic slowdown and is moving toward higher interest rates.

Many money managers have wagered that the Federal Reserve would raise interest rates as the U.S. economy strengthened before rival central banks would. Higher U.S. borrowing costs would make the dollar more attractive to investors searching for yield. Recent data showing a stronger U.S. economy has persuaded investors that the Federal Reserve could raise rates long before other major central banks, pushing up the dollar. But the trade turned sour from March through May as U.S. economic data softened and the Fed signaled it could delay raising interest rates. Last week, the data improved and the dollar showed signs of resurgence. On Thursday, a strong reading for pending home sales in April and weekly U.S. jobless claims consistent with a growing economy added to the string of better numbers.

However, Friday's GDP data indicating that U.S. growth actually contracted over the first quarter, rather than expanded, combined with an unexpected drop in the Chicago PMI and weakening in consumer sentiment to dampen the dollar rally. But most analysts have discounted the negative first quarter as a blip.

Commodities continue to be affected by the dollar's rise. The value of the dollar exerts influence over commodities because they are denominated in the currency, making them more expensive for foreign buyers when the U.S. currency increases in value. And it has in May. It has been helped by indications from Federal Reserve Chair Janet Yellen that she expects to be able to raise interest rates later this year even after a disappointing first quarter for the U.S. economy.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

May economic sentiment reading was 103.8, matching the marginally upwardly revised April print. Among the major categories, confidence in industry was up a couple of ticks at minus 3.0 but 0.9 points weaker at minus 5.5 in the consumer sector. Services were 0.8 points better off at 7.8, retail 2.2 points higher at 1.4 and construction 0.5 points firmer at minus 25.0. Regionally among the larger member states, France and Germany improved in economic sentiment while Spain was unchanged and Italy posted a small decline. Inflation developments were generally positive. Manufacturers' expected selling prices rose for a fourth consecutive month and their service sector equivalent recorded their highest reading so far this year. There was also a solid rise in consumer inflation expectations which saw their strongest mark since last November.

France

April household spending on manufactured goods was up 0.3 percent on the month following a marginally steeper revised 0.3 percent decline in March. Compared with a year ago, purchases were up 2.0 percent after a 1.6 percent increase last time. April's monthly advance was dominated by textiles where sales climbed 1.3 percent although this only partially offset a 5.1 percent slump in March. Elsewhere, autos edged up 0.1 percent but household goods declined 0.2 percent as did the other products category.

Italy

First quarter gross domestic product was up 0.3 percent on the quarter and up 0.1 percent when compared with the same quarter a year ago. The 0.1 percent annual growth was its first positive reading since the third quarter of 2011. The major components of domestic demand painted a mixed picture. Private consumption contracted 0.1 percent on the quarter but fixed investment jumped 1.5 percent as a 28.7 percent surge in transportation equipment and a 0.5 percent gain in construction more than offset a 0.9 percent drop in equipment and other products. Government spending edged 0.1 percent higher. Net exports had a negative impact as export volumes were only flat while imports rose 1.4 percent.

United Kingdom

First quarter gross domestic product expanded an unrevised 0.3 percent on the quarter. This was the slowest quarterly growth rate since October to December 2012. The annual rate of expansion was 2.4 percent, also matching its provisional estimate and 0.6 percentage points short of its fourth quarter growth. The first look at the full national accounts confirmed a smaller contribution from household spending but only marginally as consumption was up 0.5 percent on the quarter after a 0.6 percent gain last time. More promisingly, gross fixed capital formation rebounded 1.5 percent after a 0.6 percent drop last time within which business investment was up 1.7 percent. Government expenditure was 0.6 percent stronger following a 0.2 percent dip. Having boosted growth by almost a full percentage point in October to December quarter, net exports subtracted 0.9 percentage points last quarter, the largest negative impact since the third quarter of 2013.

Asia/Pacific

Japan

A strong rise in exports helped Japan register a smaller than expected merchandise trade deficit during April. The trade deficit was Y53.4 billion from a downwardly revised Y227.4.3 billion surplus in March that was the nation's first trade surplus since June 2012. It is evident that the weaker yen played a role. The yen's help was most obvious in exports, which were up 8.0 percent on the year, down slightly from 8.5 percent in March. Imports, though, were down 4.2 percent on the year after sinking 14.5 percent in March. Import growth has been negative in the first four months of this year. On a seasonally adjusted basis, the merchandise trade deficit was Y208.7 billion after a surplus of Y5.0 billion. Exports were down 1.5 percent on the month while imports were up 1.8 percent.

April retail sales jumped 5.0 percent from a year ago. It was the first increase in sales since December 2014. The gain was flattered by a low figure one year ago as consumers retrenched as the tax increase was implemented. Sluggish wage growth, falling oil prices and higher taxes have kept retail spending subdued. Earlier in the week the minutes from Bank of Japan's April 30 meeting showed most members see the effects of the tax increase dissipating, though "some members" said the improvement in private consumption "had somewhat lacked momentum."

April consumer price index was up 0.4 percent on the month and up 0.6 percent from a year ago. The key CPI excluding fresh food was up 0.3 percent both on the month and year. The core also excluding energy was up 0.3 percent and 0.4 percent. Among the components, electronics goods, TVS and energy were down from a year ago. The CPI excluding fresh food for the Ku-area of Tokyo, which acts as a leading indicator because it is for May, rose 0.2 percent, down from 0.4 percent a month earlier. The Bank of Japan had been hoping its unprecedented monetary stimulus program would ensure 2 percent inflation by now, but the wild swings in commodity prices coupled with a recession last year after the increase in the sales tax in April 2014, forced it to shift its inflation timeline just last month.

April household spending was down 1.3 percent from a year ago. This was the thirteenth consecutive month of decline. The retreat in spending began when the sales tax was increased from 5 percent to 8 percent in April 2014. Consumers went on a spending frenzy prior to the enactment of the increase and shut off the spending spigot when it was introduced. The weak consumption figures could threaten to keep inflation subdued in the months ahead, though recent commentary from the BoJ suggests the bank is optimistic about the economy's resilience.

Unemployment in April slipped to 3.3 percent from 3.4 percent in March. The number of unemployed declined 200,000 from a year ago. At the same time, employment increased 40,000 from a year ago to 63.42 million. A tighter labour market should help workers demand higher wages and create a virtuous circle for inflation to rise. That is what the BoJ hopes for.

April industrial production was up 1.0 percent on the month. It was the first increase since January 2015. On the year, however, output was down 0.1 percent. Among the industries that increased were electronic parts and devices, electrical machinery and fabricated metals. According to the Survey of Production Forecast in Manufacturing, production is expected to increase 0.5 percent in May and decrease 0.5 percent in June. Industries that are expected to contribute to the May increase are general-purpose, production and business oriented machinery, electrical machinery and information and communication electronics equipment. Industries that mainly contributed to the decrease in June include General purpose, production and business oriented machinery, .electronic parts and devices and electrical machinery.

Americas

Canada

First quarter gross domestic product contracted 0.1 percent on the quarter after expanding 0.6 percent in the fourth quarter of 2014. This was its worst performance since the second quarter of 2009. Annual growth slid from 2.5 percent to 2.4 percent. The deceleration reflected a 0.4 percent quarterly decline in final domestic demand that effectively wiped out the previous period's advance. This was largely attributable to a 1.8 slump in gross fixed capital formation which alone subtracted more than 0.4 percentage points from the change in total output. In particular, expenditure on non-residential structures, machinery and equipment was down 4.1 percent. Household spending edged up 0.1 percent while government consumption declined 0.2 percent. Inventory accumulation added 0.2 percentage points. Net exports had a small positive impact as a 0.3 percent dip in export volumes was just offset by a 0.4 percent drop in real imports.

Bottom line

The slew of first quarter data released last week indicated that global growth indeed slowed in the first quarter and not just in the U.S.  Greece continues to be the topic for discussion in the global markets. Equities were mostly down for the week and mixed in May, with many giving back gains from earlier in the month during this past week.

The Reserve Bank of Australia, European Central Bank and the Bank of England hold monetary policy meetings this week. No policy changes are expected. However, an interest rate reduction is expected from the Reserve Bank of India. The U.S. Federal Reserve publishes its Beige Book in preparation for its FOMC meeting on June 16 and 17. The manufacturing and composite PMIs should give a good indication of how growth is faring mid-second quarter. Canada posts its April labour force survey and the U.S. reports its employment situation.

Looking Ahead: June 1 through June 5, 2015

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