Global Markets

Last week investors waited for Fed Chair Janet Yellen's Jackson Hole speech on Friday. This week investors waited for the August U.S. employment report — a most important element in the Federal Reserve's data dependent decision process — again on Friday. The report was weaker than expected — but not that weak. However, equity markets in Europe and the U.S. rallied, betting that the report would remove the possibility of a fed funds increase from the September calendar.

Last Friday (August 26), Fed Chair Janet Yellen said that the Fed remains on course to raise its fed funds interest rate in the coming months. She noted that continued solid labor market performance along with the outlook for economic activity and inflation have strengthened the case for a fed funds increase. Needless to say, interest in this Friday's (September 2) employment report was even more elevated than usual (if that's possible).

Most analysts assumed that August's report would not be a repeat of July's employment gain which was revised to 275,000 from 255,000. However, the 151,000 increase was below expectations. The report sent equities in Europe and the U.S. higher while the U.S. currency dropped and then rallied to end higher on the day. Friday's gains sent both U.S. and European stocks higher for the week. For market players the lower than anticipated employment increase means that the Fed is likely to defer increasing rates until later in the year.

Global Stock Market Recap

Europe and the UK

On Friday, stocks rallied after a weaker than anticipated U.S. employment report dampened expectations of a Fed interest rate increase later this month. Friday's rally turned what was a negative week through Thursday into a positive one. The FTSE gained 0.8 percent, the CAC was up 2.3 percent, the DAX added 0.9 percent and the SMI was 1.5 percent higher. For August, only the OMX Stockholm 30 (up 2.3 percent) and SMI (up 0.9 percent) advanced. The FTSE was down 0.8 percent and the DAX lost 2.5 percent. The CAC was virtually unchanged.

A knee jerk reaction to Brexit'

The big news of the week was the rebound in several UK economic indicators from their initial drops in the immediate aftermath of the Brexit vote. The good news came from the August manufacturing PMI where the index rebounded to a reading of 53.3 after sinking to 48.3 in the immediate aftermath of the Brexit vote. Similarly, the construction PMI jumped from July's 45.9 to 49.2 in August. While still contracting, it was a good improvement. House prices continued to advance and the GfK consumer confidence improved in August. It is interesting to note that only the FTSE — up 10.4 percent — is positive for 2016. The remaining equity indexes are all down so far in 2016.

The Eurozone's (EMU) August manufacturing PMI inched down to 51.7 — a three month low — from 52.0 in July. The rise in manufacturing production was the smallest since May and new orders posted their least marked increase in one-and-a-half years as demand growth cooled in both the domestic and overseas markets. Job creation also eased to its weakest mark since March. Input costs were up for a second month running but the rate of cost inflation was still only marginal. More significantly, factory gate prices were down for a 12th straight month underlining the deflationary pressures that continue to plague the sector. The best performing country was Germany (53.6) ahead of Spain (51.0) while Italy (49.8 and a 20-month low) and France (48.3) were in negative growth territory.

Asia Pacific

Most equity indexes were down on the week in light August trading. Only the Nikkei (up 3.5 percent), the Hang Seng (up 1.6 percent) and the Sensex (2.7 percent) gained on the week. The Kospi was virtually unchanged. The Shanghai Composite slipped 0.1 percent while the All Ordinaries were 2.4 percent lower. The picture for the month of August was different. Most indexes advanced with only the All Ordinaries, STI and PSEi declining on the month. Equities fluctuated in a narrow range as investors avoided taking risk before Friday's U.S. employment report and its potential impact on Federal Reserve policy.

Most economic news centered on Japan where the usual deluge of data at the end of month was parsed carefully regarding future Bank of Japan policy. The data were perceived as good news — both retail sales and household spending in July were less negative. And they were better than consensus forecasts as well. And so was the final August manufacturing PMI — improved but still showing contraction. The decline was the fifth consecutive drop for both retail sales and household spending. The manufacturing PMI has been in contraction for six months in part due to weak exports. Weak exports have been attributed to faltering global demand but also to the rising value of the yen which makes Japanese goods more expensive overseas.

Data from China improved marginally. The official CFLP August manufacturing PMI improved from minimal contraction to minimal expansion (49.9 to 50.4). Investors were cheered by the news interpreting it as at least a steadying of the economy. However, the August Caixin manufacturing PMI reading deteriorated. According to this PMI, manufacturing stagnated, declining from 50.6 in July to 50 in August. In both cases, declining export orders played a role in depressing demand.

Currencies

The U.S. dollar was up against the euro, yen and Swiss franc for the week. It declined against the pound sterling and Australian dollar. It was virtually unchanged against the Canadian dollar. The U.S. currency gyrated Friday in the wake of the employment report release. Initially the currency dropped especially against the yen and euro. But then the U.S. dollar rebounded and recovered its daily losses.

The pound sterling climbed above $1.33 earlier in the week in intraday trading for the first time in four weeks after data showed one of the sharpest monthly rebounds on record for British manufacturing. The PMI recovered from a three year low and jumped to a 10-month high of 53.3 in August. It recovered from the three year low it hit in July after Britain's June 23 vote to leave the European Union. Sterling climbed to a one-month high Friday after the construction PMI raised expectations that the economy is holding up so far after the Brexit vote in June. The pound extended its gains after the U.S. employment report failed to meet expectations, reducing chances that the Federal Reserve will increase rates later this month. Sterling has performed reasonably well in the past few weeks, holding above a 30-year low of $1.2798 struck on July 8. The currency has been helped by better than expected economic data that has taken the edge off concerns that there would be a sharp decline in economic activity following Brexit.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

August flash harmonized index of consumer prices was up 0.2 percent from a year ago for a second month but equaling its highest mark since January. Core HICP excluding energy, food, alcohol & tobacco was up 0.8 percent on the year, equaling a 3-month low. Without just energy & unprocessed food, the rate was also 0.8 percent, in line with the outcome every month since May. Among the main subsectors, non-energy industrial goods inflation slipped 0.1 percentage point to 0.3 percent while services followed suit with a tick lower to 1.1 percent. Energy (minus 5.7 percent after minus 6.7 percent) made a positive contribution but food, alcohol & tobacco (1.3 percent after 1.4 percent) went the other way.

Asia/Pacific

Japan

July household spending declined a less than anticipated 0.5 percent on the year – forecasts were for a 0.9 percent drop. This was the fifth consecutive decline. Spending dropped 2.3 percent on the year in June. Seven of nine subsectors were down on the year. Among them were fuel, light & water charges (down 2.1 percent), transportation & communication (down 8.5 percent), education (down 1.4 percent) and culture & recreation (down 3.3 percent). Food spending was up 0.9 percent, housing was 8.2 percent higher, furniture added 9.1 percent and medical care was 2.0 percent higher from a year ago. The consumer is an important mainstay in the Japanese economy, however the lackluster performance has been a drag on growth. Indeed, according to the preliminary estimate, consumption added only 0.1 percent annualized to second quarter growth.

July retail sales retreated for the sixth month in seven by 0.2 percent. In June, sales dropped 1.3 percent. Among the subcategories, auto sales were down 0.2 percent after slipping 0.1 percent in June. Fuel sales dropped 11.9 percent after sinking 11.6 percent the month before. The sales decline for general merchandise moderated to 0.7 percent after sinking 3.3 percent in June. However, food & beverage sales were up 2.0 percent after increasing 0.7 percent and fabrics, apparel & accessories gained 1.3 percent and just 0.1 percent in June. Machinery & equipment advanced 0.8 percent after increasing 0.2 percent. The moderation in the decline in retail sales followed a similar pattern in the household spending report.

July industrial production was unchanged in July and down 0.5 percent from the same month a year ago. Expectations were for a monthly increase of 0.8 percent. This could add pressure on the Bank of Japan to take action and ease monetary policy further. Chemicals excluding drugs reversed direction and declined 1.4 percent after increasing 3.8 percent in June. Fabricated metals dropped 3.0 percent after jumping 5.7 percent in June. General-purpose, production & business oriented machinery declined 0.7 percent after increasing 0.4 percent in June. Transport equipment was up 1.2 percent after adding 1.8 percent in June. Electronic parts & devices were up for a second month, this time by 1.5 percent after increasing 1.6 percent in June. Electrical machinery was 1.6 percent higher on the month after increasing 1.1 percent the month before. The government is forecasting August output to jump a monthly 4.1 percent but for September, output is expected to decline 0.7 percent.

Australia

July retail sales were unchanged on the month after inching up 0.1 percent the month before. Expectations were for an increase of 0.3 percent. On the year, retail turnover was up 2.7 percent, unchanged from June. Among the subcategories, food retailing increased 0.7 percent, cafes, restaurants & takeaway food services gained 1.2 percent, other retailing edged up 0.2 percent and clothing, footwear & personal accessory retailing was 0.3 percent higher. However, turnover declined in department stores (down 6.2 percent) and household goods retailing (down 0.7 percent). Turnover was up in Queensland, South Australia, Western Australia, the Australian Capital Territory, Tasmania and the Northern Territory. However turnover declined in Victoria and New South Wales.

India

Second quarter gross domestic product slowed to 7.1 percent on the year from 7.9 percent at the start of the year. Growth was led by public administration, defense & other services (12.3 percent), finance, real estate & professional services (9.4 percent) and utilities (also 9.4 percent). Manufacturing (9.1 percent) also had a good quarter as did trade, hotel, transport, communications & broadcasting services (8.1 percent). However, mining & quarrying (down 0.4 percent) performed weakly and neither construction (1.5 percent) nor agriculture, forestry & fishing were robust. Doubts about the accuracy of the data (a new methodology was introduced last year) continue to plague the national accounts and the near-term outlook is further clouded by uncertainty surrounding the impending introduction of a new Goods and Services Tax (GST), which was officially approved earlier this month.

Americas

Canada

Second quarter gross domestic product declined 0.4 percent on the quarter for the worst performance since the second quarter of 2009, in the midst of the Great Recession. Annual growth was up 0.9 percent when compared with the same quarter a year ago. On an annualized basis, GDP retreated 1.6 percent. Exports, which accounted for most of the quarterly rise in output in January to March, dropped 4.5 percent and, combined with a 0.3 percent increase in imports, saw the real external balance subtract 1.5 percentage points from growth. However, even without this hit the picture was still soft as final domestic demand rose just 0.5 percent for a second successive quarter. Indeed, but for a 0.5 percentage point contribution from inventory accumulation, the fall in GDP would have been even more marked. Within domestic demand, household consumption was up 0.5 percent while gross fixed capital formation was flat, breaking a longstanding run of quarterly decreases. Residential investment edged up 0.3 percent but machinery & equipment was down 0.5 percent. General government investment increased 0.7 percent and consumption 0.7 percent. The second quarter data were significantly impacted by the Alberta fires. The quarter ended on a respectably positive note with monthly GDP climbing 0.6 percent.

The July merchandise trade deficit narrowed to C$2.49 billion from a larger revised C$3.97 billion in June. The improvement in the headline reflected a 3.4 percent monthly rise in exports, helped to a limited extent by a 0.1 percent dip in imports. The bilateral surplus with the U.S. widened from C$1.43 billion to C$2.62 billion as sales across the border climbed 3.3 percent and purchases retreated 0.5 percent. The monthly increase in nominal exports was led by motor vehicle & parts (6.2 percent) and metal & non-metallic mineral products (9.7 percent). Aircraft & other transportation equipment & parts (9.6 percent), metal ores & non-metallic minerals (4.1 percent) and industrial machinery, equipment & parts (6.0 percent) also performed well. However, energy was down 0.8 percent. Imports were depressed by electronic & electrical equipment & parts (down 2.6 percent), consumer goods (down 2.0 percent) and industrial machinery, equipment & parts (down 1.4 percent).

Bottom line

Investors had plenty of economic data this past week to help them read the tea leaves going forward. One of the more vexing forecasting issues is when will the Federal Reserve finally act. The Fed is data dependent so Friday's employment report got particularly close scrutiny but certainly did not resolve the issue. Data from the UK belied so far the economic disaster that was predicted after the country voted to leave the European Union.

The Reserve Bank of Australia announces its policy decision on Tuesday and is followed by the Bank of Canada on Wednesday and the European Central Bank Thursday. No new policy initiatives are anticipated. The RBA has already cut interest rates twice this year. The BoC also will leave its policy rate unchanged despite a contraction in the second quarter mainly because wild fires took a heavy toll on oil activity. For the ECB, despite continuing inflation woes, action seems unlikely. On Friday, China begins its monthly data releases with the August merchandise trade and consumer and producer price indexes.

Looking Ahead: September 5 through September 9, 2016

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