Although comfort and ease was spreading throughout the markets for quite some time, it seems like the beginning of the third quarter is not that bright for the global economy, as pessimism dominates the hearts of investors in the markets. A sign of an easing global recession earlier was evident, as different sectors started to expand where many believed that the second half of the year may witness the beginning of the recovery…
However here we go once again, with data being released that is simply adding confusion to markets, starting off with confidence in the Euro Zone that has picked up as the outlook seems to be more optimistic, yet was soon to be crushed by the unemployment rates, that have inched higher in both Germany and Euro Zone to reach record highs. On the other hand, from the UK; the final growth reading for the first quarter indicated that the contraction was much more than expected!
The week was full of employment data from across the globe yet the main focus was on the US Job's report that indicated more jobs were shed than forecasted, during June, resulting in the unemployment rate to incline higher. Both public and private sectors continue to be battered by the global recession with no signs of easing in the labor sector, so far that can comfort us and help us say that this may be the beginning of the end for the recession.
The jobless rate in Japan had also risen to hit a five year high, during the month of May.
Markets were already pessimistic ahead of the Jobs report, after confidence in the world's largest economy plunged more than expected to ignite fears. But as the week came to an end, it was more than obvious that we were back to status quo, to end all the mixed signals and send markets to jitters. As a result, less risky assets were now the catch, as investor's risk appetite pretty much disappeared.
Well dear reader, this was a quick recap for the markets throughout the past week, just follow along for further details from the world's greatest economies…
Japan and Asia
This week witnessed a lot of fundamentals from the Asian region, which is showing recovering economies. Despite of that, recovery was seen in the industrial sectors, we may still have concerns about the truth of demand and the continuous drop in Asian exports, which is the main pillar for economic growth in the Asian region, besides deflation risks that appear to be threatening the Asian economies, and pressuring Central Banks.
Starting with Japan; declaring a rebounding industrial production in May, as it inclined by 5.9%, which is the same prior monthly reading, yet industrial output was still declining on a yearly basis, as the reading came in at -29.5%. Replenishing inventories was the main reason for improvement seen in the Japanese industrial sector, as production lines started working again, they are supporting the manufacturing sector.
The Bank of Japan released the Tankan survey, which measures confidence in the business sectors, where reading came in at -48 in the second quarter, which was better than the prior reading of -58. The optimistic reading came to ease pressures on the industrial sector, as plants and companies are supposed to be increasing productivity.
Nevertheless, fears spread in the markets, as concerns about a temporary recovery were raised and it was expected that the output will deteriorate again after some time; especially, since exports are still falling. Consumer spending in Japan is still pressured by the high unemployment rate, as the retail trade reading came in at 0.0% in May.
Unemployment in Japan reached a five year high at 5.2%, due to weak exports that caused losses for a number of companies making them fire more workers in order to reduce operation costs. Regarding the housing sector, housing started declining in May by -30.8%, while construction orders fell -41.9%. This came as a result of weak demand for houses, making the economy lose one of its main pillars for growth.
On the other hand, the industrial sector in China rebounded during June, as the PMI manufacturing index increased to 53.2; noteworthy, the reading above 50 indicates a growing sector. The cheerful reading came after world demand stabilized alongside the Chinese stimulus plan of 4 trillion Yuan, which was approved in November 2008, focused on the infrastructure to support the interior front.
Moving to Australia, exports continued to slump after energy and primary goods prices declined, resulting in the reduction of exports earnings. Exports in May recorded A$ 20.392 billion from a prior A$ 21.504 billion, this lead to a widening deficit in the current account in May to reach A$ 556 million, from a prior A$ 282 million.
As for inflation rates in Thailand, it declined by 4.0% in June on the yearly level, due to low crude oil prices, which is responsible for the largest portion of imports in Thailand; in addition to the weak domestic demand, which is pressuring inflation further to the downside. This resulted in increasing deflation risks after the Central Bank of Thailand kept the interest rates steady at 1.25%, after a series of interest rate cuts.
The reading of the CPI index in South Korea inclined by 2.0% in June, less than the prior incline of 2.7%, while the monthly reading showed a decline by -0.1% from a previous 0.0%, and expectations referred to 0.1%.
The lower yearly CPI reading came after consumer spending weakened; affected by the worst financial crisis since the Great Depression, besides decreasing primary goods and energy prices, that led to lower inflation rates. On the other hand, the Korean stimulus plan is working on supporting consumer spending and the infrastructure of the economy, as it tries to boost demand levels, since increasing demand will help inflation reach the comfort zone for the Korean Central Bank.
With the end of the first week of the second quarter, equities printed a downbeat picture where Japanese stocks declined 0.61% on Friday by 60.08 points to end at 9816.07 down 0.6% this week, whereas the broader Topix index retreated 0.4% to 920.62 points to end the week losing 0.7%.
As for stocks in Hong Kong they inclined 0.14% on Friday to end the day at 18203.40 points after companies said they would issue new stocks; yet the index still ended the week lower by 2.1%.
The Euro Zone
The European economy is showing more signs of the contraction’s pace narrowing down. Another week of optimism, where we witness the European economy rebounding from the depression, and showing more improvement in the economy; unfortunately, it still signals to another contraction in the European public sectors, where it predicts another quarterly year deep in recession, for the European economy. There is no denying that the contraction we are currently witnessing within the European economy, throughout the first quarter of this year, is severe and the second quarter is going to be even worse; this might be a sign that the bottom of the economic depression is to be achieved in the first quarter of the beginning of this year.
The contraction of retails sales which was weaker than last June’s, appears on the retail sales sector’s purchasing consecutives’ chart, published by Bloomberg. Despite of retail sale’s contraction’s weakening in Germany; the overall European economy witnessed an improvement in this sector, coming inline with the decline in the negative pace; according to Consumer Trust charts which had inclined towards -25 from -28, level.
Trust increased in the industrial and services sectors, on the hopes that the European economy will improve, for real this time, throughout the second half of this year. The basis of the problem currently, is the increasing unemployment rates to 9.5%, by the decrease in inflation rates to -0.1%, for the first time in the European economy’s history; while, prices plummeted throughout the whole year, which appears on the end of the year inflation charts, ending 30 – June – 2009; according to European Commission.
However, inflation rates decline, which forces the European central bank to remain with the current extremely low interest rates, to support the economy despite of the narrowing of the contraction pace, since it is still knee deep in the worst economic depression since WWII within the worst credit crisis since 70 years.
The European industrial sales commission indicator; showed a value of 42.6, better than previously expected for the month of June, where retail sales’ inclined in Germany to 0.4% in the month of May. This indicates a strong decline in the economic recession but at the same time, the European economy remains afloat from this economic recession, in hopes for a safety-line from the European central bank, in hopes of intervening and creating governmental incentives; without them, the economy would plummet once more, like what had happened with other economies that had been backed up by their central bank’s, and governmental incentives.
The continuous weaknesses within the European economy as a whole, was proven. Where, the European central bank needs to continue supporting the economy. According to the retail sales’ charts the data showed another contraction by the end of May, adding to the European economic pressures. Also, retail sales contracted throughout the month of May by about 0.4%, to erase the previous growth in the month of April where even at minimal it had risen by 0.1%.
The European central bank had made its point of view clear, to which it would support the economy indefinitely. Whereas, it had decided to keep the revised interest rate at its current historical lowest level of 1.00%; in the time where it wants to start buying religious supply’s this Monday, on 6, July 2009. The religious supplies being bought are backed by the euro, where maturity is set from three to ten years; the purchasing processes are going to be spread throughout European groups. The central European banks within each country are going to buy a part of these supplies, where the central European bank’s role would be, being able to purchase only 8% from these supplies, whereas the other 92% is going to be dispersed to its representative branches in each country’s central bank throughout the 16 economies.
In addition, the European central bank suggested a 60 billion euro plan for this operation; pumping the financial markets with liquidity, while continuing to give loans to the banking sector whilst it matures in 12 months. The European central bank sees an obvious improvement within the economy but had not really seen a real improvement, before the second half of year 2010. Until then, the interest rate is expected to remain extremely low, but in fact it can be decreased, where the European central bank didn’t give the signal that these interest rates are the lowest but it sees that this rate fits the current economical situation perfectly, where the severity of the contraction pace seems to be decreasing.
The economy is still witnessing a contraction but it seems like satisfaction is appearing to be evident on the overall bank’s performance, in comparison with the depth of the contraction since the first quarter of this year, and the fourth quarter from last year but at the same time; we find the European economy is still in need of support, this is what we have witnessed throughout this week, from the European central bank.
As for the extremely low inflation rates, the European central bank finds it low but also sees that these low rates are temporary, as the bank expressed its worries through Trichet, by expressing worries about the price per oil barrel and supplies around the world, but currently it seems like the inflation is fitting the current times, because the European bank continues its economic support policy.
At the end of the week, European stocks closed mixed where the French CAC 40 gained 3.10 points or 0.10% to close at 3119.51 levels, while the German DAX Index declined 10.28 points or 0.22% to close at 4708.21 levels.
United Kingdom
The week had ended, and downturns in Europe’s leading second largest economy, continue to darken our outlook, even after the Bank of England had used all available tools just to salvage their economy from the worst recession since World War II.
Quantitative easing methods were approved recently by the Monetary Policy Committee and the Treasury departments, a total of 125 billion pounds are about to be injected into the markets and till now the bank only used 96 billion pounds to purchase bonds. Those interventions followed the sequence of rate reduction, taking them down to 0.50%; the lowest since the banks establishment.
What really darkened this week’s outlook was the slight improvement to the mortgage approvals, reaching 43.4 thousand levels from the previous 43.2 thousand, coming worse than market’s expectations. Pressures are still apparent on the housing sector that banks remain hesitant, preventing them from lending out money to borrowers, unless they are given to highly credited citizens across the nation.
However, those levels are not satisfying the Bank of England, which is why they declared this week the levels of loans would improve in the upcoming three months, because the pace of contraction in the Kingdom eased, which was obvious in the manufacturing and services reading along with restoring confidence.
In the first three months of the year, the services and Manufacturing sectors were harshly destructed from the prolonged weakened demand in the nation, as banks in Britain were prevented from giving out money to business’, in order to revive the economy. When no money is available with Britons, they can’t spend any more, the crippled confidence made them anchor the levels of spending.
Therefore, we’ve also seen this week the final revision to the first quarter GDP reading, where the first quarter had recorded the deepest contraction since 1958 revised to -2.4%, also the yearly contracted 4.9% revised from the previous -4.1%. The revisions came worse than market anticipated, as citizens in the royal kingdom did not think that their growth levels would contract by that much.
This week also revealed the PMI manufacturing and services readings, the manufacturing sector contraction narrowed down in June to 47.0 levels from the previous 45.4, as the output surged to 52.1 into an expansion from the previous 48.1.
The Kingdom was the only economy between rivals to witness an expansion in its services sector, as currently the manufacturing sector is following its footsteps in order to bolster the economy and boost it out of a prolonged contraction seen since the beginning of the Credit Crisis. In addition, the services sector held on the expansion seen in the May, where according to the released data; June PMI services expanded to 51.6 levels, now we need to another confirmation in July so we can say that the chances of an expansion in the GDP reading would take place in the first half of the upcoming year.
Nevertheless, dear reader our attention will remain heading towards the Bank of England’s rate decision next week, where expectations clear up that rates will stay at 0.50%.
At the end of the week, the British FTSE 100 inclined 2.01 points or 0.05% to close at 4236.28 levels.
The United States
The last week of the second quarter has finally ended, taking with it some pessimistic news as some investors hope, and a fresh start for the world’s largest economy; the United States, a lot of data has surfaced throughout this week despite the fact that the American Nation celebrates its glorious Independence Day, this weekend.
Different sectors in the economy reported better than expected results; whereas, the news that dominated this week’s agenda was from the housing, manufacturing and labor sectors, where each has its own story to tell. Whereas, the start of this week came with NO fundamentals released from the U.S as it would be the last day, but investors dealt with lack of news in a pessimistic ways, sending indices down but managed to gain, as we walked further through this economic week.
We’ll start by the housing sector which have seen brighter days, but seemingly stabilizing and rebounding from the drop it witnessed over the past months, the S&P/CaseShiller home price index was released; showing an incline in house prices in April by -18.12% from the previous -18.70, while the S&P/CS Composite – 20 declined to 139.18% from the previous reported estimate of 139.99%.
Meanwhile, Pending Home sales inclined in the month of May by 0.1% from the previous incline of 6.7%, while on the yearly scale the index rose by 4.6% from the previous reported estimate of 3.3 percent. This validates that the housing sector has finally reached the balance point and now, as we move ahead with this year, the sector should gradually improve, while falling house prices will rise; as bargain seekers mount the market, looking for cheap houses to purchase.
Therefore, economical activity in the sector has been improving, giving a slight indication that the housing sector actually is following the manufacturing sector into recovery, talking about the manufacturing sector, which continues to race faster than other sectors to recover, had its fair share of released fundamentals throughout this week.
The manufacturing sector released the Chicago PMI for the month of June, which rose above expectations to settle on 39.9 from the previous 34.9 reported estimate, in addition the ISM manufacturing index inclined from the previous 42.8 to reach 44.8; in the month of June and the ISM Prices Paid inclined to 50.0 from the previous 43.5.
Also factory orders for the month of May were released, factory orders rose by 1.2% following the prior revised rise of 0.5%, and above markets’ expectations of 0.9%.
The manufacturing sector is clearly on the right track to recover faster than any other sector, where it previously presented pessimistic data about the performance of the sector; clearly manufacturers are waiting for the third and fourth quarter to come, in order to witness a clear recovery in overall economical activities, therefore escalating their inventories as they await consumer spending to pick up once again.
But that might be hard to look for, as the U.S released the Consumer Confidence report for the month of June, which shockingly came opposite of what was expected; as it dropped to 49.3 from the previous reported figure of 54.9.
As for the U.S. labor market, conditions are still very challenging, as the unemployment rate rose in June to 9.5% from the prior estimate of 9.4%, though below markets expectations of 9.6% but still unemployment continue to rise amid the ongoing recession, as companies continue to layoff more employees to face the recession.
The long awaited jobs report also showed that non-farm payrolls declined in June by 467,000, following the prior revised drop of 322,000 jobs lost back in May and worse than median estimates of 365,000 lost jobs.
Also average hourly earnings were flat in June after rising by a revised 0.2%, while compared with a year earlier average hourly earning’s rose by 2.7%, down from the prior revised rise of 3.0% and below expectations, and average weekly hours dropped in June to 33.0 from the prior and expected estimate of 33.1.
Meanwhile, General Motors filed for bankruptcy under Chapter 11 to Judge Robert Gerber, as GM reached a deal with the U.S. government which will see the U.S. government owning a 60% stake in the new company, which will be formed from the sale of the old company’s assets.
Under the same deal, the Canadian government will receive a 12.5% stake, while the United Auto Workers will own a 17.5% stake, meanwhile the remaining 10% are expected to go to owners of unsecured debt; accordingly, current shareholders won’t get any stake in the new company.
The auto industry is still under huge pressures; both GM and Chrysler were forced to go bankrupt, amid the worst conditions for the auto industry since early 1980s; however, restructuring plans are expected to take both auto giants on the right track, back to a healthy and prosperous future.
With the trading week cut short for the Independence Day celebrations, trading halted for U.S markets on Thursday following the abysmal labor report which pressured indices to end in red for the third consecutive week, the longest stretch of losses since March. This week the S&P 500 slipped 2.5% to 896.42 while the DJIA also fell 1.9% to 8,280.74.