Global Markets

There were numerous events that global investors were focused on during the week — the looming OPEC meeting scheduled for Thursday, the European Central Bank meeting (also Thursday) and the U.S. employment report on Friday. There was also a deluge of new economic data globally, but these three events stand out from the pack. The employment report sent shock waves through the markets, sending equities in Europe and the U.S. lower and the U.S. dollar tumbling against its major counterparts. Since the Federal Reserve is data dependent, each new piece of economic data has needed to answer the question "what will the Fed do'" May's employment report is answered with a resounding 'postpone!'  

May employment increased by only 38,000, the lowest monthly gain since 2010. This is in contrast with expectations for an increase of about 158,000. Some weakness had been expected because of the Verizon strike which subtracted about 35,000 workers in the Northeast. What hurt even more, were the sizeable downward revisions to both March and April totaling 59,000. The report said the unemployment rate declined to 4.7 percent in May from 5.0 percent in April although the decrease came as people left the labor force. The participation rate slipped to 62.6 percent.

OPEC met Thursday in Vienna and left its levels of oil production unchanged, citing the recent increase in prices and signs that the global petroleum glut may be easing. The oil industry, with its history of booms and busts, has been in its deepest downturn since the 1990s.

Global Stock Market Recap

Europe and the UK

Equities here dropped on the week. The losses increased Friday after the U.S. employment report negatively shocked investors. The FTSE was down 1.0 percent after three weeks of gains. The CAC lost 2.1 percent and was also down for the first week since May 6. The SMI retreated 1.7 percent after three weeks of positive results. The DAX however, has been alternating weeks — climbing one week and declining the next. Last week, the DAX lost 1.8 percent. The disappointing U.S. jobs report triggered a surge in the value of the euro against the U.S. currency. This in turn had a negative impact on European exporters at the end of the trading week.

Composite PMIs

The Eurozone's composite PMI for May was 53.1 and just a tick above its final reading in April. For services, the details were mixed. Growth of incoming new orders dropped to a 16-month low and business confidence declined to its lowest level since last November. However, employment was up for the 19th successive month and the increase was both the strongest in three months and widespread across the region. Input cost inflation accelerated to a nearly three-and-a-half year high, largely reflecting more expensive commodities and increases in transportation and energy bills but also some increase in wages.

Regionally in terms of composite output indexes, the best performer was Ireland (59.1) ahead of Spain (54.8) and Germany (54.5). Among the other larger member states, France (50.9 and a 6-month high) moved above Italy (50.8 and a 17-month low). Elsewhere, activity rates were generally quite lacklustre.

European Central Bank

The European Central Bank left its key interest rates unchanged at the levels introduced in March. The benchmark refi rate stays at zero percent, above the minus 0.40 percent deposit rate and below the 0.25 percent marginal lending rate.

Growth accelerated in the first quarter by 0.5 percent on the quarter from a 0.3 percent quarterly rate at the end of 2015. This eases pressure for additional easing which had waned somewhat anyway. Nonetheless, inflation in May (minus 0.1 percent) was on the wrong side of zero for the second consecutive time and the underlying rate (0.8 percent) remains locked within the 0.8 to 1.0 percent range since April last year. In his post announcement press conference, ECB President Mario Draghi was at pains to emphasize the need to avoid any second round effects from what has become a dangerously long period of weak prices. The ECB still sees the balance of risks being on the downside but not quite as strongly as previously. In other words, policy still has a lot of work to do.

However, a key part of March's easing package will only begin implementation this month; specifically, corporate bond buying (CSPP) on June 8 and the second of the targeted longer-term repo operations (the so-called TLTRO-II) on June 22. In addition to the limited supply of new data, this makes jumping to any early conclusions about the success or otherwise of the measures already announced all the more inappropriate.

Updated staff economic forecasts show minimal change from March. GDP growth is estimated at 1.6 percent this year and 1.7 percent in both 2017 and 2018 while inflation is projected at 0.2 percent, 1.3 percent and 1.7 percent for the same respective periods.

Asia Pacific

Most equity indexes advanced last week — the exceptions were the Nikkei (down 1.1 percent) and the All Ordinaries (down 1.4 percent). The Shanghai Composite surged 4.2 percent — its best since March — while the Hang Seng added 1.8 percent.

Investors shrugged off OPEC's lack of a decision to cut output and looked ahead to the release of the U.S. jobs report that could provide more clues on the timing of U.S. rate increases. Markets here were closed for the week when the report was released. Investors appeared to be adjusting to an expected Federal Reserve interest rate increase. Needless to say, investors here will react on Monday, not only to the report itself but to the reactions in Europe and the United States. Analysts have discarded the possibility of a rate increase in June.

The reason offered for the jump in the Shanghai Composite which posted its best weekly gain since March centered on hopes for inclusion of A-shares into the world's biggest indexes. This helped investors shrug off disappointing manufacturing and services data. Investors are increasingly expecting that MSCI, a global index provider, will soon add mainland traded A-shares to its Emerging Markets Index. Traders are anticipating that MSCI's inclusion of A-shares into the index will channel billions in passive asset management money into China, lifting share prices.

Sales tax increase postponed again

Japan's Prime Minister Shinzo Abe announced Wednesday a two-and-a-half-year delay in his long planned consumption tax increase from April 2017 until October 2019. Abe said a tax increase at this point would "create a risk of the country falling back into deflation." He also said that another tax increase (this one from 8 percent to 10 percent) would put domestic demand at risk. This is the second time Abe has put off raising Japan's consumption tax. Originally scheduled for last October, the increase was pushed back in November 2014 by 18 months to April 2017. Abe made that decision after gross domestic product shrank for two straight quarters. At the time Abe stressed there would "not be another delay," saying his policies in the meantime would strengthen the economy enough to withstand another increase. Since then, he has repeatedly said that only an economic shock of the magnitude of the Lehman Brothers collapse in 2008 or a major earthquake would prompt another postponement.

Nearly four years after its inception, Abe's program is stumbling, with the economy barely growing and with prices falling back into negative territory. The impact of the April earthquake on Japan's southern island of Kyushu has deepened concern about the outlook as well. Consumer spending, which accounts for 60 percent of gross domestic product, has been weak since the consumption tax was raised in April 2014 from 5 to 8 percent.

Currencies

The disappointing U.S. jobs report triggered a weakening in the U.S. dollar Friday after employment increased much less than anticipated. The U.S. currency tumbled against all of its major counterparts including the yen, euro, Swiss franc and the Canadian and Australian dollars. However, it advanced against the pound sterling. For the British, their currency is at the mercy of the seemingly continuous polls concerning the "Brexit" vote to be held on June 23. The pound drops when it appears as though the UK will leave the European Union and rises when the outlook is reversed.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

May flash harmonized index of consumer prices was minus 0.1 percent from a year ago after sliding 0.2 percent in April. Both core readings similarly showed a 0.1 percentage point rise to 0.8 percent. Following the Easter distortions of the previous two months, this put underlying inflation back at its level in February. Services edged up to 1.0 percent while non-energy industrial goods were flat at 0.5 percent, their third consecutive month at this mark. Energy (minus 8.1 percent after minus 8.7 percent) equaled its strongest reading since January but food, alcohol & tobacco was again steady at 0.8 percent.

France

First quarter gross domestic product was up 0.6 percent on the quarter following an upwardly adjusted 0.4 percent rise in the previous period. GDP was up 1.4 percent from the same quarter a year ago. Household consumption (1.0 percent) continued to dominate the quarterly advance but there was also a 1.6 percent bounce in gross fixed capital formation. Within the latter, business investment was up 2.4 percent while housing was up a modest 0.3 percent. With public sector consumption up 0.9 percent, final domestic demand added a full 1 percent to the quarterly change in real GDP. However, a slowing in stock building subtracted 0.2 percentage points from headline growth as did net foreign trade where a disappointing flat performance by exports contrasted with a 0.6 percent increase in imports.

Asia/Pacific

Japan

April retail sales were down a less than expected 0.8 percent after sliding 1.0 percent in March when compared with a year ago. Analysts expected sales to retreat 1.2 percent. Retail sales have now declined three of the four months so far this year. Fuel sales continued to decline, this time by 14.0 percent after sinking 14.7 percent in March. Machinery & equipment sales declined for a third month this time by 2.3 percent and general merchandise also was down 2.3 percent. On the positive side, auto sales were up 0.7 percent following two negative months. Food & beverage added 2.4 percent and textiles, apparel & accessories, 2.0 percent.

April household spending was down a less than expected 0.4 percent from a year ago. The decline followed a drop of 5.3 percent on the year in March. Like previously released retail sales data, spending has now declined three of the four months in 2016. Six of nine major categories declined on the year. Fuel, light & water charges were down 2.0 percent while clothing & footwear dropped 10.4 percent and furniture & household utensils slid 5.7 percent. Housing sank 11.5 percent. Transportation & communication (down 3.4 percent) and culture & recreation (down 0.6 percent) also declined. Food and medical expenditures were up 1.6 percent and 2.3 percent respectively. Education jumped 22.4 percent.

April industrial production increased 0.3 percent on the month. On the year, output was down 1.9 percent. Among the industries that increased in April were chemicals excluding drugs (3.5 percent), electrical machinery (3.9 percent) and general purpose, production & business oriented machinery (1.3 percent). The government forecasts that output will be up 2.2 percent in May and 0.3 percent in June. Among the industries that are expected to contributed to the gains in May are general-purpose, production & business oriented machinery, information & communication electronics equipment and electrical machinery. Transport equipment and fabricated metals are expected to contribute to the increase in June.

Australia

First quarter gross domestic product increased a greater than expected 1.1 percent on the quarter and was up 3.1 percent when compared with the same quarter a year ago. Final consumption was up a quarterly 0.7 percent and 3.2 percent from a year ago. However, gross fixed capital formation dropped 1.7 percent and was down 5.7 percent on the year. The economy is showing a transition from mining based investment to production as new engineering construction fell for the 10th consecutive quarter (down 6.4 percent) while mining production grew (6.2 percent). Mining related products significantly contributed to the 4.4 percent growth in exports. Service based industries were the other contributor to growth with finance, retail trade, accommodation & food services and arts & recreation all increasing. This is consistent with the steady growth in service to households.

Americas

Canada

First quarter gross domestic product was up 0.6 percent on the quarter or at a seasonally adjusted annualized pace of 2.4 percent. On the year, GDP was up 1.1 percent. Real final domestic demand expanded a sluggish quarterly 0.3 percent but more than reversed the fourth quarter's 0.1 percent contraction. Within this, household consumption rose 0.6 percent essentially matching its rate of the previous three quarters but gross fixed capital formation continued to decline. A 0.4 percent drop was the fifth consecutive, albeit the smallest, and reflected a 2.5 percent decrease in non-residential structures, machinery & equipment. By contrast, the housing market stayed strong and residential structures increased a solid 2.7 percent. General government consumption advanced 0.4 percent while public investment declined a further 0.6 percent. Inventories subtracted just 0.1 percentage point. The largest positive contribution to growth came from exports for which a 1.7 percent quarterly gain boosted total output by 0.5 percentage points. With imports expanding only 0.3 percent, net foreign trade contributed 0.4 percentage points.

Bottom line

Equities were mostly lower on the week. Shares in Europe and the U.S. tumbled after the much weaker than expected U.S. employment report sent investors to safe havens, Analysts reassessed their outlook for Fed interest rate increases now that June appears to be eliminated from consideration. The European Central Bank left its policies unchanged. Economic data were mixed globally.

Next week promises to be quieter than the one just past. Down under, both the Reserve Bank of Australia and the Reserve Bank of New Zealand will announce their respective monetary policy decisions. In Europe, merchandise trade and industrial production data dominate. China releases May data for merchandise trade and consumer and producer prices. In Japan, revised GDP data and machine orders will be released.

Looking Ahead: June 6 through June 10, 2016

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