Global Markets

Although markets seem to be more immune to the ups — and this week, mostly downs — in the Greek debt negotiations, markets were mixed at week's end. They sagged late in the week on news that the International Monetary Fund left the negotiations. Investors, as the week ended, were steadily focused on the upcoming FOMC meeting on June 16 and 17. Two central banks met and both lowered their key interest rates.

A bailout deal for Greece appeared to slip further out of reach Thursday after the International Monetary Fund withdrew its negotiators from discussions with Greece in Brussels. A document that European Commission President Jean-Claude Juncker submitted to Greece in recent days appears to have led to the talks' breaking point. One top Greek official said that the document was full of "maximalist IMF proposals" that they could not agree to. When it became clear to IMF officials that Greece was adopting this stance, they decided to return to Washington.

The IMF has publicly blamed Greece for its decision to walk away, but senior officials at the Fund said that they were just as frustrated with Europe's refusal to consider a write-down of Greek debt. IMF executives are now privately saying that Greece's problems cannot be solved with pension and labor reforms alone. Rather, Europe must offer significant debt relief. Though both sides seem to have hardened their positions, a former economist at the fund who specializes in Europe, said the IMF's withdrawal shouldn't be seen as the end of discussions. He recalled many occasions when he was called home at a sensitive time in debt talks, only to resume discussions and even get a deal done.

Two central banks met and both lowered their key interest rates by 25 basis points. However, the situations that resulted in the policy changes were quite different.

Bank of Korea

The Bank of Korea slashed its benchmark interest rate to a record low as the economy continues to slow. Policymakers fear the spread of the Middle East respiratory syndrome (MERS) has added a sense of immediacy to the policy action. The BoK cut rates by 25 basis points for a fourth time since August, this time to 1.50 percent. Expectations among analysts were mixed.

Weaker exports are the major downside risk to the Korean economy. In addition, the expected impact from the MERS outbreak will reduce 2015 GDP growth if the number of visitors falls by as much as it did in 2003 during the outbreak of Severe Acute Respiratory Syndrome (SARS).

Reserve Bank of New Zealand

The Reserve Bank of New Zealand surprised analysts and lowered its overnight cash rate by 25 basis points to 3.25 percent Thursday. The RBNZ most recently increased the OCR in July 2014 to 3.5 percent. Analysts were divided on whether the Bank would act at this meeting due to concerns over the hot Auckland housing market. However, Governor Graeme Wheeler said that the cut was not expected to affect housing there.

Like the Reserve Bank of Australia, the RBNZ maintains that its currency, the New Zealand dollar, is overvalued and further declines would be justified. It noted that further cuts in the OCR would be data dependent. However, the governor said he was 'happy' to see the New Zealand dollar fall and would like to see it decline further. And fall it did after the Bank's statement.

First quarter consumer prices were only 0.1 percent higher on the year compared with the Bank's inflation target range of 1 percent to 3 percent. Inflation has been low due to falling import prices and the strong growth in the economy's supply potential. Wage inflation and inflation expectations have been subdued. A decline in international dairy prices that is starting to hurt farm cash flows was a consideration. The New Zealand economy which grew 3.7 percent on the year in the fourth quarter has been supported by low interest rates, high net migration and construction activity and the decline in fuel prices. However, the decline in export commodity prices that began in mid-2014 is proving to have a more pronounced impact on the economy.

Global Stock Market Recap

Europe and the UK

Friday's equity market declines turned what had been gains for the week into losses. Investors were reacting to the International Monetary Fund (IMF) delegates' departure Thursday from Brussels after talks with Greece failed to reach a consensus. Worries over a possible Greek default and the possibility of a "Grexit" weighed on investor sentiment at the end of the trading week. The FTSE was down 0.9 percent, the CAC declined 0.4 percent and the SMI retreated 0.9 percent. The DAX was virtually unchanged (down 0.66 point). According to the IMF, there were major differences between Greece and the negotiators from the European Union, European Central Bank and the IMF. Greece has bundled the four payments due to the IMF into a single payment. Accordingly, it has to repay €1.6 billion this month. Analysts and investors opine that the twists and turns of the Greek saga are likely to drive markets until Athens can reach a deal with its creditors to unlock fresh funding. They noted that the IMF put a clear dent in what is the now false optimism that appeared to be building in the previous few days.

There were few economic indicators released in Europe during the week, but the positive data originated mostly in Germany and the UK. Other economic data that swayed markets originated in China — the data were tepid at best. However, in the U.S., data were virtually all positive.

During the week, German bonds tumbled, pushing 10-year yields above 1 percent for the first time since September before easing back slightly. It was the latest landmark in a sharp selloff in Eurozone bonds that began in mid-April and has found renewed momentum over the past week. Investors say there is no clear catalyst for the move, but many feel yields are still too low given a recent improvement in the Eurozone economy and have been reducing their holdings. At the same time, large swings in the market have been scaring off some potential buyers. European Central Bank President Mario Draghi fanned those fears last week, saying bond markets should be prepared for more volatility.

Asia Pacific

Equities were mixed on the week with Chinese and Hong Kong shares continuing their positive momentum. Investors hope that Beijing would step up stimulus measures to arrest the downward pressure on economic growth stemming from deflationary pressures. With the IMF pulling out of debt talks with Greece and the dollar firming up against its rivals on expectations of an earlier than expected interest rate increase by the Federal Reserve, investors shied away from taking fresh positions ahead of the June 16 and 17 FOMC meeting.

Despite the gains Friday, a selloff in U.S. Treasuries and European bonds, as well as worries about the U.S. Federal Reserve raising interest rates later this year left several markets in Asia with deep losses for the week. Analysts say emerging market equity fund managers are also increasingly feeling the pain of plummeting currencies in the region, which have cut into investors' returns on stocks and bonds. Investors pulled out $8.3 billion from emerging market stocks and bonds in Asia in the week ending June 10, according to the latest data from ANZ Bank.

For the week, China's Shanghai Composite was up 2.9 percent to its highest level since January 2008 as traders bet that further measures to stimulate the economy will be introduced. The Hang Seng however, only inched up 0.1 percent. The Nikkei soared 1.7 percent on Thursday, the biggest percentage gain in four months but still retreated 0.3 percent on the week. Investors ignored positive core machine orders data that unexpectedly jumped a monthly 3.8 percent in a sign that companies are increasing capital expenditures. Analysts had predicted a decline. The Kospi drifted down 0.8 percent thanks to foreign fund selling amid nagging worries of a Greek exit from the Eurozone and uncertainty over the timing of a Fed interest rate increase.

The Sensex ended a volatile week down 1.3 percent. The index jumped 1.4 percent Wednesday only to be followed on Thursday with a 1.7 percent drop. On Friday, after markets closed, the May CPI was up 5.01 percent after increasing 4.87 percent from a year ago in April. April industrial production surprised on the upside, increasing 4.1 percent on the year — expectations were for only a 1.6 percent increase. Indian markets rallied on Wednesday as MSCI's decision not to include Chinese listed shares in one of its key benchmark indexes eased worries over short term capital flight. MSCI is a key benchmark that is used by global fund managers to invest, and domestic investors were worried that had MSCI chosen to bring yuan-denominated stocks into its global emerging markets benchmark, it would likely have hurt emerging markets including India in terms of index weight and capital flows.

MSCI says no to China

MSCI's decision to defer adding China's mainland listed shares to one of its global benchmark indexes disappointed many policy makers. But the delay could help prod Beijing to further open up its markets. Some officials at China's top securities regulator had expected the New York based index provider to include so called A-shares — those denominated in yuan and listed either in Shanghai or Shenzhen — in its Emerging Market Index following rounds of meetings with representatives from the company.

Measures to open China's markets to the outside world have accelerated during the past year. Chinese stock markets had been restricted to most overseas investors until the start of a new trading link connecting Shanghai's market with Hong Kong, which opened the domestic market to all foreign investors in November. The smaller Shenzhen exchange is not included in the link, but is expected to join by the end of this year. The program complemented an existing system of quotas for fund managers with express approval from Beijing, but still restricts the maximum amount of investment that can flow into China every day.

MSCI said these limits were a source of uncertainty for investors who track its indexes, because it is possible for the available quota to run out before the end of the trading day when passive funds, which seek to replicate index performance, do most of their trading. Having enough quotas to buy the stocks needed to accurately track the index was cited as another concern among investors polled by MSCI, as well as uncertainty over laws identifying the ultimate owner of a stock traded across borders.

Currencies

The U.S. dollar declined against all of its major counterparts last week including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars.

On Friday, German Chancellor Angela Merkel warned that an overly strong euro would make reforms harder to implement in Spain and Ireland. The comments briefly caused the currency to drop nearly a full cent against the dollar before it recovered much of its lost ground. The euro's snapback highlights how hard it has been to keep the single currency subdued. And that is despite the uncertainty over Greece's negotiations. One of the euro's biggest problems is the region's — that is Germany's — substantial merchandise trade surplus with the rest of the world. It is hard to maintain downward pressure on a currency when money keeps flowing in because of strong exports.

The yen shot up against the dollar Wednesday, reaching a two week high, after Bank of Japan Governor Haruhiko Kuroda said the real effective exchange rate shows the Japanese currency is "very weak". The dollar fell as low as ¥122.77, its lowest since May 27, and far below its session high of ¥124.63 in early afternoon in Tokyo. Kuroda, addressing a lower house financial affairs committee, declined to comment on whether the yen's current level reflects economic fundamentals. The dollar had jumped to a 13-year peak of ¥125.86 on June 5 after the U.S. May nonfarm payrolls report showed unexpectedly strong job growth and gave investors reason to believe the Federal Reserve remains on track to raise interest rates later this year.

The yen has fallen largely as a side effect of the BoJ's massive quantitative easing aimed at overcoming deflation. Some Japanese policymakers have recently expressed concern about the yen's decline for fear this could raise import prices too quickly or become a source of trade friction.

The New Zealand dollar slid more than 2 percent Thursday to a five year low of NZ$0.7000 after the Reserve Bank of New Zealand cut its key rate 25 basis points to 3.25 percent. The kiwi ended the week even lower and below the NZ$0.7000 level. Most analysts had not expected a cut while market players had said it would be a close call. The kiwi took a further hit as the RBNZ, which had increased interest rates just last year, joined the global rate cutting club and said it would ease again if needed. Over the past two months, the kiwi is down about 8.9 percent, which is a bit tamer than the previous eight week drop the currency endured from August to October, 2000, when it sank 11.5 percent.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

First quarter gross domestic product expanded at an unrevised quarterly rate of 0.4 percent in the January to March period. Annual growth was also unrevised at 1.0 percent. The first look at the key GDP expenditure components makes for moderately optimistic reading. Private consumption was up 0.3 percent on the quarter, a tick faster than last time, while gross fixed capital formation rose 0.2 percent, also 0.1 percentage points above its fourth quarter pace. Government consumption followed zero growth with a 0.1 percent advance and business inventories added 0.1 percentage points to the quarterly change in total output after a zero contribution in October to December. In contrast to the fourth quarter, external trade dampened growth, subtracting 0.2 percentage points from the quarterly rate having added 0.1 percentage points previously. Regionally, among the larger four member states, France grew 0.6 percent, Germany and Italy both 0.3 percent and Spain 0.9 percent. The best performing country was Cyprus (1.6 percent and so now out of recession) while the worst was Lithuania (minus 0.6 percent) ahead of Estonia (minus 0.3 percent). Greece (minus 0.2 percent) fell back into recession to join Finland (minus 0.1 percent).

Germany

April industrial production was up 0.9 percent on the month after a marginally smaller revised 0.4 percent drop in March. The increase was the first in 2015 and boosted annual output growth from zero to 1.4 percent. April's monthly advance was led by capital goods which posted a 1.5 percent gain. Intermediates were up 0.7 percent but consumer goods declined 0.9 percent reversing the previous period's increase. Energy (1.4 percent) also boosted headline growth as did construction (1.3 percent). Manufacturing output rose 0.7 percent following a 0.6 percent decrease last time.

April seasonally adjusted trade balance was in a larger than expected €22.3 billion surplus following a marginally upwardly revised €19.4 billion excess in March. The unadjusted black ink stood at €22.1 billion, down only slightly from a revised €23.1 billion last time. The improvement in the adjusted headline reflected a 1.9 percent monthly increase in exports to a new record high of €100.4 billion and a 1.3 percent contraction in imports, their first decline since January. Exports have now expanded for three consecutive months. Compared with April 2014 exports were up 7.5 percent, within which sales to other EMU states rose just 3.3 percent and imports 2.8 percent.

United Kingdom

April shortfall on global trade in goods was a much smaller than expected Stg8.56 billion — its lowest since December 2013. However, March's already sizeable deficit was revised significantly larger to Stg10.71 billion. The core shortfall which excludes oil and other erratic items deficit shrank from Stg9.68 billion last time to Stg7.27 billion, also its best performance in more than a year. Total nominal exports were up 2.8 percent on the month (core 3.4 percent) following a 2.1 percent increase at the end of the second quarter but were down 0.8 percent on the year. Regionally, the bulk of the improvement was attributable to trade with non-EU countries where the deficit fell more than Stg1.3 billion to Stg2.1 billion. Net exports to the other EU states were up Stg0.8 billion at Stg-6.5 billion.

April industrial production was up 0.4 percent and 1.2 percent on the year. However, the monthly increase here masked an unexpected 0.4 percent drop in manufacturing output that reduced its yearly advance from 1.2 percent to just 0.2 percent, its worst performance since September 2013. Seven of the 13 subsectors saw monthly decreases in output within which the steepest was posted by basic pharmaceuticals (6.0 percent). This alone subtracted some 0.3 percentage points from the monthly change in overall manufacturing output. The main positive impact was made by chemicals where production rose 1.6 percent. Consequently, the monthly gain in total industrial production came from elsewhere, especially a 5.6 percent spurt in mining & quarrying and a 0.9 percent rise in water supply, sewerage & waste management. Together these easily more than offset a 3.3 percent drop in electricity, gas, steam & air conditioning.

Asia/Pacific

Japan

Japanese growth in the first quarter was revised way beyond forecasts, thanks to a huge change in the estimates for business spending. First quarter gross domestic product was revised upward to 1.0 percent on the quarter from the original estimate of 0.6 percent. Expectations were for an increase of 0.8 percent. GDP was up an annualized pace of 3.9 percent. However, GDP was down a revised 1.0 percent after initially estimated at 1.4 percent. GDP was revised up to 0.9 percent from minus 1.0 percent for the fiscal year 2014. Among the components, CAPEX was revised to 2.7 percent on the quarter from the preliminary 0.4 percent. However, household consumption was unrevised at 0.4 percent. Government consumption was down 1.5 percent and subtracted from growth.

May producer prices were up 0.3 percent on the month but dropped 2.1 percent from a year ago. The PPI also was down 2.1 percent in April. The last time the PPI dropped as much was in July 2012. Adjusted for the sales tax, the PPI was up 0.3 percent on the month and slid 2.0 percent on the year. Still weighing heavily on the annual change was petroleum & coal products – they plunged 21.1 percent. However, many other sub-categories declined as well. They included iron & steel, chemicals & related products and electronic components & devices to mention just a few.

April core machine orders which exclude volatile items surprised and were up a monthly 3.8 percent – expectations were for a drop of 2.6 percent. From a year ago, orders were up 4.4 percent against forecasts of a 2.1 percent decline. Core machine orders are considered a proxy for private capital expenditures. The upward move followed a 2.9 percent gain a month before. The weaker yen is helping to support export competitiveness and manufacturing orders. Nonmanufacturing orders were weak because of weak domestic demand. The April data came a few days after revisions to first quarter GDP showed that the economy grew by an annualized 3.9 percent in the March quarter.

Australia

May unemployment rate surprised and declined to 6.0 percent, down from April's revised rate of 6.1 percent. The seasonally adjusted labour force participation rate was unchanged at 64.7 percent in May 2015 from a revised April estimate. The number of people employed increased by a surprising 42,000 to 11,759,600. Expectations were for an increase of 13,500. The increase in employment was driven by increases in part time employment for females (up 29,800) and full time employment for males (up 15,900). The seasonally adjusted number of people unemployed decreased by 22,000 to 745,200. This was driven by unemployed people who looked for full time work, which decreased by 23,500 to 514,500. The seasonally adjusted underemployment rate was 8.5 percent, unchanged from February 2015. Combined with the unemployment rate of 6.0 percent, the latest seasonally adjusted estimate of total labour force underutilization was 14.5 percent, a decrease of 0.4 percentage points from February 2015.

China

May merchandise trade surplus soared to $59.49 billion from $34.13 billion in April. Imports tumbled the most since February, dropping 17.6 percent from a year ago. This was the seventh straight month of falling imports, suggesting consumption in China continues to wane. Exports, the driver of China's boom, fell 2.5 percent from a year ago, a third straight month of decline. The drop was, however, was smaller than expected and compares with year-on-year declines of 6.4 percent in April and 15 percent in March.

Chinese consumer prices increased at their slowest pace since January 2015 in May, underscoring slack in the economy and waning trends in consumption. China's consumer price index decelerated to a pace of 1.2 percent in May from 1.5 percent in April and below the 1.3 percent pace predicted by forecasters. The reading is well below Beijing's target of "around 3 percent" this year. The CPI was down 0.2 percent on the month and up 1.3 percent for the year to date. Urban prices increased 1.3 percent on the year after increasing 1.6 percent in April, while rural prices were up just 1.0 percent after 1.3 percent. Transportation & communication declined 1.3 percent after retreating 1.6 percent the month before. Food prices were up 1.6 percent after increasing 2.7 percent in April.

Producer prices deflated for a 39th consecutive month in May, dropping 4.6 percent on the year for a third consecutive month. The sustained decline in producer prices reflects the downturn in China's housing market, which had led to excess supply of the materials used in the housing boom. An excess supply of industrial goods such as steel, glass and cement also has exerted downward pressure. On the month, the PPI slipped 0.1 percent. Year to date, the PPI is down 4.6 percent. Raw materials procurement, fuel and power dropped 5.5 percent on the year for a second month. Production materials dropped 5.9 percent for a third month. Consumer goods slipped 0.3 percent after edging down 0.2 percent in April. Fuel & power dropped 10.9 percent after sinking 11.2 percent the month before.

Output has accelerated for a second month suggesting some stabilization. May industrial production was up 6.1 percent on the year after increasing 5.9 percent in April. Expectations were for an increase of 6.0 percent. On the month, output was up 0.52 percent. For the year to date, production was up 6.2 percent. Output improved for textiles, non-metal minerals, general equipment and power & thermal. Motor vehicle output declined for a second month, this time by 1.6 percent after slipping 0.3 percent in April from the year before. Transport equipment grew at a slower pace, increasing 5.1 percent after 9.2 percent in April.

May retail sales were up 10.1 percent on the year, up from 10.0 percent in April. While an improvement, the reading is still well below the 2014 average growth rate of 12 percent. Sales were up 0.81 percent on the month. Year to date sales were 10.4 percent, unchanged from the month before. One reason for low spending is subdued inflation. In April and May, CPI readings were 1.5 percent and 1.2 percent respectively. China's inflation target is 3.0 percent. Urban retail sales edged up to 9.9 percent from 9.8 percent in April while rural sales were up 11.6 percent after 11.4 percent. Auto sales improved to a gain of 2.1 percent after 1.6 percent in April. Oil products sales continued to retreat but at a slower rate – down 5.5 percent after dropping 7.4 percent the month before.

Bottom line

Equities retreated last week thanks to the setback in Greece's negotiations with its creditors. Economic data were mixed globally. Both the Bank of Korea and the Reserve Bank of New Zealand lowered their respective policy rates by 25 basis points. China released its monthly slew of economic data. Most of the data pointed to tepid growth.

Next week will be dominated by the Federal Reserve's FOMC meeting, its updated forecasts and Chair Janet Yellen's press conference mid-week. The Bank of Japan also meets. The UK offers a full plate of data including consumer and producer price indexes, retail sales and its labour market report. The Bank of England also publishes minutes from its most recent monetary policy committee meeting.

Looking Ahead: June 15 through June 19, 2015

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