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Global Markets Weekly - 6 July 2009

• Equity markets dipped a little further last week, amid weaker US consumer confidence...
  Last week, equity markets gave back a bit more of their 37% rally from March's lows. Global equities slipped by around 2% in response to weaker-than-expected US consumer confidence and labour market data and are now 5% off their recent high. The Conference Board’s measure of US consumer confidence slipped back in June, reversing nearly a fifth of its rise from February’s all-time low. Both the expectations component, which is sensitive to petrol prices, and the current situation index declined. Consumer expectations are now consistent with flat real consumption growth.
• ...and disappointingly weak data from the labour market.
  The decline in the current situation component of consumer confidence suggests that the US labour market, though probably past the worse, remains troubled. That was confirmed by June’s fall in payrolls of 467,000, which was much worse than the consensus expectation of 365,000. New jobless claims are slowing, but hiring is very weak. Consequently, hourly earnings growth – already down from a high of 4.3% this cycle to 2.7% – is set to remain under downward pressure and may well eventually go negative.
• In the eurozone, too, unemployment rose, while inflation turned negative for the first time ever.
  The eurozone labour market also continues to loosen, with unemployment rising to 9.5% in May, up from a cycle low of 7.2% last summer. Eurozone CPI fell to -0.1% in June, its first ever negative reading. With commodity prices rising, this is expected to be the trough in the headline inflation rate for this cycle, but continued weak demand growth should deliver further falls in core inflation, which currently stands at 1.5%. The European Central Bank kept rates on hold, saying that inflation expectations remain firmly anchored. However, inflation swaps show that ten-year inflation expectations are slowly rising.
• Despite general commodity weakness, industrial metals rose, thanks to Asian growth...
  Commodities also gave up some of their recent gains, falling 3%, led by energy and agriculture. Despite the disappointing economic news from the US, industrial metals prices rose slightly. This seems odd but is consistent with the performance of emerging equity markets, which were flat last week, partly because of the performance of Asian markets. Domestic Chinese equities rose 6%, bucking the global consolidation and continuing their rally from the low point reached last November.
• ...as China's reflationary measures are boosting the entire region.
  The Chinese market is being propelled higher by aggressive fiscal stimulus and governmental measures to stimulate lending. In addition, the Chinese purchasing managers’ survey rebounded further last week and was above the 50 boom-bust level for the second month running. The US, UK and European purchasing managers’ surveys also rose but haven’t yet moved above 50. Chinese reflationary policies are helping the whole of Asia to recover. Last week, Japanese industrial production, which collapsed by 37% in the 12 months to February, rose for the third month running. It is now up 14% from its nadir.
• Weaker data drove down short bond yields, but longer rates barely moved.
  Yields on shorter-dated bonds fell in response to the weaker economic news. Bond markets, which had briefly moved in early June to price in a high probability of a US rate rise by the end of the year, continued to push back the date of the first rise further into next year. They also revised down the level of rates at the end of 2010. Four weeks ago, the market had been expecting rates to reach 2.2% by the end of next year, but that has now fallen to 1.6%. Despite the fall in short rates, the ten-year bond yield hardly budged last week, suggesting that longer-term US growth and inflation expectations remain broadly unchanged.

Indices, Interest rates and Inflation

 

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