US stocks rise, European and Japanese data show weakness

It looks like I may have been wrong when I wrote that the recent stock market rally has lost momentum. From Bloomberg:

U.S. stocks rallied, led by the biggest gain in energy shares in six years, after oil jumped by more than $4 a barrel and a private report showed an unexpected increase in jobs.

All 39 energy producers in the Standard & Poor's 500 Index advanced as crude climbed on a decline in gasoline inventories. Wal-Mart Stores Inc. and Walt Disney Co. gained after ADP Employer Services said payrolls grew by 9,000 in July. Bank of America Corp. and Wachovia Corp. led financial shares higher after the Federal Reserve extended an emergency lending program and the Securities and Exchange Commission prolonged a ban on a type of short sale.

The S&P 500 added 21.06 points, or 1.7 percent, to 1,284.26, capping its biggest two-day rally since April. The Dow Jones Industrial Average jumped 186.13, or 1.6 percent, to 11,583.69. The Nasdaq Composite Index increased 10.1 to 2,329.72. Almost two stocks rose for each that dropped on the New York Stock Exchange.

The US dollar is also trading near a one-month high versus the euro and the yen, helped yesterday by some weak economic data coming out from Europe and Japan.

From Bloomberg yesterday:

Europeans' confidence in the outlook for the economy dropped the most since the Sept. 11 terrorist attacks as soaring energy costs and the euro's advance against the dollar rattled consumers and executives.

An index measuring sentiment in the euro area fell 5.3 points to 89.5 this month, the European Commission in Brussels said today. That is more than economists had forecast and the biggest slide since a 6.3-point drop in October 2001, the month after the attacks in the U.S.

This comes as the GfK NOP index of consumer confidence in the UK fell five points to -39 in July, the lowest since the survey began in 1974.

In Japan, industrial production reportedly fell 2 percent in June but the Nomura/JMMA Japan Purchasing Managers Index recovered to 47.0 in July from 46.5 in June.

US stock market rebounds

The US stock market yesterday more than erased the previous day's losses. Bloomberg reports:

U.S. stocks rallied, erasing yesterday's tumble, sparked by the biggest advance in U.S. Steel Corp. in seven years and falling oil prices...

The Standard & Poor's 500 Index added 28.83, or 2.3 percent, to 1,263.2, rebounding from a 1.9 percent slump yesterday. The Dow Jones Industrial Average gained 266.48, or 2.4 percent, to 11,397.56 after a 2.1 percent tumble yesterday. The Nasdaq Composite Index increased 55.4 to 2,319.62. More than four stocks rose for each that fell on the New York Stock Exchange...

Benchmark indexes extended gains after consumer confidence recovered in July from a 16-year low, sending the Conference Board's index to a higher-than-forecast reading of 51.9...

Crude for September delivery slid $2.54, or 2 percent, to $122.19 today in New York...

Stocks gained even after a private report said home prices in 20 U.S. metropolitan areas fell at a faster pace in May, indicating the three-year housing slump hasn't stabilized. The S&P/Case-Shiller home-price index dropped 15.8 percent from a year earlier, the biggest decline since records began in 2001, after decreasing 15.2 percent in April. The gauge has fallen every month since January 2007.

Meanwhile, the global economic environment remains highly uncertain. Economic data from Japan earlier yesterday showed its unemployment rate hitting a two-year high in June and household spending continuing to fall. AFP/CNA reports:

The jobless rate hit 4.1 per cent in June, the highest since September 2006, the Ministry of Internal Affairs and Communications reported. Markets had expected the jobless rate to remain unchanged at 4.0 per cent...

Meanwhile, household spending slipped 1.8 per cent in June from a year earlier, falling for a fourth straight month, the government reported. Household income dropped 2.1 per cent on average.

And some central banks are still raising interest rates. Again from AFP/CNA:

India's central bank on Tuesday raised its key short-term lending rate by half-a-percentage point in an aggressive bid to tame inflation riding at a 13-year high, pushing shares down sharply...

The repo rate was hiked by 50 basis points to 9 percent, while the cash reserve ratio – the sum banks must keep on deposit – was increased by a quarter point to 9 percent.

Another stock market tumble, another big writedown

The recent rebound in the US stock market has lost its momentum after another big drop yesterday. Bloomberg reports:

U.S. stocks fell and the Dow Jones Industrial Average lost more than 200 points for the second time in three days after the International Monetary Fund said there is no end in sight to the housing slump.

The Standard & Poor's 500 Index retreated 23.39 points, or 1.9 percent, to 1,234.37, its lowest level since reaching an almost three-year low on July 15. The Dow lost 239.61, or 2.1 percent, to 11,131.08. The Nasdaq Composite Index slipped 46.31, or 2 percent, to 2,264.22. Four stocks fell for each that rose on the New York Stock Exchange.

Investor sentiment is clearly fragile, and Merrill Lynch's announcement of further writedowns yesterday shows why. From Bloomberg:

Merrill Lynch & Co. took steps to shore up its endangered credit rating by selling $8.5 billion of stock and liquidating $30.6 billion of money-losing assets at a fifth of their original value.

Temasek Holdings, the Singaporean government investment fund that bought shares in Merrill last December to become the firm's biggest investor, will buy $3.4 billion of stock in the new offering, New York-based Merrill said today in a statement. Merrill will book a $2.5 billion expense related to the transaction as well as $5.7 billion of additional writedowns on collateralized debt obligations and associated hedges.

Global economies slowing but US looking better

Inflation accelerated in Japan in June, the core rate, which excludes volatile fresh seafood, fruit and vegetable prices, hitting 1.9 percent from 1.5 percent in May.

But global inflation concerns may yet be overtaken by global slowdown concerns.

Elsewhere in Asia, South Korea reported that its economic growth slowed to an annual rate of 4.8 per cent in the second quarter from 5.8 per cent in the first.

In the euro zone, growth in money supply may already have peaked. From Bloomberg:

European money-supply growth slowed more than economists forecast in June, reducing pressure on the European Central Bank to raise interest rates.

M3 money supply, which the ECB uses as a gauge of future inflation, rose 9.5 percent from a year earlier after increasing 10 percent in May, the Frankfurt-based bank said today. That's the weakest since November 2006. Economists expected M3 growth to slow to 10.3 percent, the median of 33 forecasts in a Bloomberg News survey shows.

Meanwhile, the UK economy is visibly slowing. Bloomberg reports:

The U.K. economy expanded 0.2 percent in the second quarter, matching the slowest pace since 2001, as shrinking manufacturing and construction and the banking slump brought Britain closer to a recession.

Gross domestic product grew 1.6 percent from a year earlier, the least since 2005, the Office for National Statistics said in London today. The quarterly and annual growth figures both matched the median forecast of economists in a Bloomberg News survey.

In contrast, US economic data on Friday looked relatively positive. Again from Bloomberg:

Bookings for goods made to last several years gained 0.8 percent and posted the first consecutive monthly rise since July 2007, the Commerce Department said today in Washington. New homes sold at an annualized pace of 530,000, exceeding the median forecast of 503,000 in a Bloomberg News survey...

The Reuters/University of Michigan final index of consumer sentiment increased to 61.2 in July from 56.4 in June. The measure averaged 85.6 in 2007 and is up from a preliminary reading of 56.6 in early July.

Global economic growth slowing

The tightening trend in global monetary policy may finally be at an end. From Bloomberg yesterday:

New Zealand's central bank cut its benchmark interest rate by a quarter point to 8 percent, the first reduction in five years, saying slowing economic growth will curb inflation.

Yesterday's economic reports show that global economic growth is slowing fast.

Bloomberg reports that Japanese exports fell in June.

Exports decreased 1.7 percent in June from a year earlier...

Imports climbed 16.2 percent to a record because of the surging oil costs...

Meanwhile, confidence in Europe is faltering.

The Ifo institute's German business confidence index dropped 3.7 points from a month earlier to 97.5 in July...

Confidence among Italian executives fell to the lowest since 2001 in July; French business sentiment was the weakest since May 2005; Spanish unemployment in the second quarter rose to the highest rate in 3 1/2 years; and Belgian business confidence this month dropped to the lowest since April...

Beyond the euro area, U.K. retail sales fell 3.9 percent in June after rising 3.6 percent in May, which was the biggest increase since the data series began more than two decades ago...

Measures of new business in Europe's manufacturing and services industry fell in July, a survey by Markit Economics showed today, while manufacturers' costs rose at the fastest pace in almost four years.

And the US economy shows few signs of recovering.

Sales of previously owned U.S. homes fell in June to the lowest level in a decade as tumbling real- estate prices and consumer confidence signaled no end in sight to a housing recession now in its third year.

Resales dropped 2.6 percent to a lower-than-forecast 4.86 million annual rate from a 4.99 million pace the prior month, the National Association of Realtors said today in Washington. The median home price dropped 6.1 percent from June 2007...

The Labor Department earlier today reported that first-time claims for unemployment benefits rose last week to the highest in almost four months, a sign the slowing economy is weakening the labor market. Applications increased by 34,000 to 406,000 in the week ended July 19.

Oil prices fall, stocks and US dollar gain

Crude oil pulled further away from its peak yesterday. MarketWatch reports:

Crude-oil futures slumped almost $4 Wednesday, retreating for a second day as data showed U.S. inventories fell less than expected and as concerns faded that Hurricane Dolly would pose much of a threat to energy infrastructure in the Gulf of Mexico.

Also helping crude's drop, the dollar gained ground after the U.S. Federal Reserve released its Beige Book. The latest economic report showed slowing growth, adding downward pressure on dollar-denominated commodities prices. Read Economic Report.

US stocks benefited from the fall in oil price. MarketWatch reports:

U.S. stocks on Wednesday ended modestly higher for a second consecutive day of gains as crude deepened its decline and as lawmakers drew closer to approving a plan to help troubled mortgage companies Fannie Mae and Freddie Mac...

The Dow Jones Industrial Average gained 29.88 points, or 0.3%, to settle at 11,632.38, with 21 of its 30 components trading higher...

The S&P 500 climbed 5.18 points, or 0.4%, to 1,282.18, with consumer discretionary fronting sector gains, up 2.8%, followed by financials, which advanced 2.4%...

The technology-laden Nasdaq Composite rose 21.92 points, or nearly 1%, to 2,325.88, gaining the most out of the three main stock indices.

The stock market rally was global.

In overseas trade, Asian markets rallied, with financials and transportation stocks paving the way higher. See Asia Markets.

In Europe, stocks also posted gains. Read Europe Markets.

The US dollar also rose yesterday, partly from lower oil prices and higher stocks but also from signs of weakening economies elsewhere. Again from MarketWatch:

The dollar index...was at 72.790, up from 72.486 in late North American trading Tuesday...

The yen was pressured by news that Japan's Cabinet Office lowered its economic growth forecast for the current fiscal year to 1.3% from a previous estimate of 2.0%, citing the effects of rising crude oil and other commodity prices, a stronger currency and lower U.S. demand for Japanese exports. See full story.

Europe's single currency was under similar pressure, after a larger-than-expected slip in industrial orders underlined economic worries.

Industrial orders across the 15-nation euro zone fell more than expected in May, posting a 3.5% monthly drop and a 4.4% annual decline, Eurostat reported, underlining worries about the single-currency area's economic prospects.

US inflation not moderating yet

Last week's report on the consumer price index for the United States shows that inflation is not abating. In fact, it appears to be accelerating.

The Labor Department reported on 16 July that the overall CPI rose 1.1 percent in June, accelerating from 0.6 percent in May. The CPI excluding food and energy rose 0.3 percent in June, accelerating from 0.2 percent in May.

The overall CPI in June was 5.0 percent higher than the level 12 months ago, the biggest increase since 1991. The CPI excluding food and energy rose 2.4 percent in June from 12 months ago, a more subdued rate of increase.

However, it is now quite apparent that the CPI excluding food and energy has been a poor measure of core or underlying inflation in the US over the past few years (see "Elevated US headline inflation proves persistent" for a fuller discussion) so its subdued level is of little comfort.

Other measures of core inflation appear less benign. The Federal Reserve Bank of Cleveland monitors two such measures: the median CPI and the 16% trimmed-mean CPI. These alternative measures of core inflation also accelerated in June, both increasing by 0.4 percent compared to 0.2 percent and 0.3 percent respectively in May. Compared to the levels 12 months ago, the median CPI was higher by 3.1 percent in June while the 16% trimmed-mean CPI was higher by 3.2 percent.

Most economists expect a slower economy to eventually pull inflation down. So why is inflation still accelerating?

The simple reason is that it is still too early.

On the same that the Labor Department reported the CPI, the Federal Reserve released information on industrial production and capacity utilisation. The former was up 0.5 percent in June, turning around from a 0.2-percent fall in May, although the longer-term trend is still down. Capacity utilisation also rose to 79.9 percent from 79.6 percent. The former remains close to the cycle peak of 81.4 hit in July last year.

In other words, slack in industrial capacity has not increased much from the cycle peak despite the economic slowdown. Historically, a peak in inflation is usually seen only after a considerable period of sustained decline in capacity utilisation.

So when will inflation actually decline? The minutes of the Federal Open Market Committee meeting in June released on 16 July show that members think this will happen in 2009. Inflation was expected to remain elevated in 2008 but "a projected leveling-out of energy prices and the anticipated slack in resource utilization" was expected to allow headline inflation to "decline considerably in 2009 from its pace in the second half of 2008".

Therefore, expect to see continued elevated inflation readings in the coming months.

Chinese economy cools

There are signs that the Chinese economy is cooling. AFP/CNA reports:

China's economy expanded by 10.4 per cent in the first half and 10.1 per cent in the second quarter, the National Bureau of Statistics said, down from growth of 11.9 per cent recorded for all of 2007...

China's consumer price index - the main gauge of inflation - rose 7.9 per cent in the first half of 2008, with food prices soaring 20.4 per cent, according to the bureau...

For June alone, inflation was 7.1 per cent, the bureau said.

While the CPI looks encouraging, Michael Pettis says that the acceleration in PPI inflation tells a different story. He thinks that the debate about whether or not to tighten monetary conditions further will "rage on".

But Morgan Stanley thinks that the latest data at least paves the way for a policy shift towards preventing economic slowdown.

US stocks and housing starts jump

US stocks gained for a second day yesterday. Bloomberg reports:

U.S. stocks rallied, sending the Dow Jones Industrial Average to its best two-day gain in almost six years, after JPMorgan Chase & Co.'s profit topped estimates and falling oil prices sparked an advance in consumer shares...

The S&P 500 jumped 14.96 points, or 1.2 percent, to 1,260.32. The Dow added 207.38, or 1.9 percent, to 11,446.66, bringing its two-day rally to 4.4 percent. The Nasdaq Composite Index rose 27.45, or 1.2 percent, to 2,312.3. More than two stocks climbed for each that fell on the New York Stock Exchange.

It has been a nice bounce, but in terms of points, the 484-point gain in the Dow over the past two days is less than the 546-point gain seen over 27-28 November last year, which then represented a 4.3 percent rise.

In the real economy, housing looks likely to remain a drag despite yesterday's headline number on housing starts. Bloomberg reports:

Builders started work in June on the fewest single-family U.S. homes since 1991...

Construction starts fell to an annual pace of 647,000, the Commerce Department said today in Washington. A change in New York City building codes spurred total starts, which include condominiums and apartment buildings, to a four-month high...

Total housing starts rose 9.1 percent to a 1.066 million pace from a revised 977,000 rate in May. Economists forecast a 960,000 reading in June, from a previously reported 975,000 for May, according to the median on 76 projections in a Bloomberg News survey...

Building permits rose 11.6 percent to a 1.091 million rate in June. Excluding multifamily applications in the Northeast, permits would have risen 0.7 percent.

Other reports gave mixed signals.

The Philadelphia Fed's general economic index was minus 16.3 in July, lower than forecast, compared with minus 17.1 in June. Negative readings signal a decline, and the measure averaged 5.1 last year. The index of prices paid climbed to 75.6, the highest level since 1980, from 69.3...

A separate government report showed initial claims for unemployment benefits rose less than forecast last week. Claims increased to 366,000 from 348,000 the prior week, the Labor Department said.

Inflation: 4 in Europe, 5 in the US

Global inflation shows few signs of abating.

It's not abating in Europe. From Eurostat:

Euro area annual inflation was 4.0% in June 2008, up from 3.7% in May. A year earlier the rate was 1.9%. Monthly inflation was 0.4% in June 2008.

EU annual inflation was 4.3% in June 2008, up from 4.0% in May. A year earlier the rate was 2.1%. Monthly inflation was 0.4% in June 2008.

And it's not abating in the US. From Bloomberg:

U.S. consumer prices surged 5 percent in the past year, the biggest jump since 1991, just as households struggled with falling home values and the credit crunch.

Spiraling expenses for food and fuel spurred the increase in June, the Labor Department said today in Washington. The cost of living rose 1.1 percent from May, more than forecast and the second-largest rise since 1982...

Excluding food and energy, so-called core costs climbed 0.3 percent in June from the previous month and 2.4 percent from a year before.

Other data on the US economy yesterday were mixed.

A separate report today said confidence among U.S. homebuilders dropped to 16 this month, a record low. Readings for current sales, expected sales and buyer traffic in the National Association of Homebuilders/Wells Fargo sentiment index also were at all-time lows...

The Fed said today that production at factories, mines and utilities increased 0.5 percent last month after dropping 0.2 percent in May. Capacity utilization, which measures the proportion of plants in use, rose to 79.9 percent from 79.6 percent...

Today's figures also showed wages decreased 0.9 percent in June after adjusting for inflation, the biggest drop since September 2005, and were down 2.4 percent over the last 12 months. The decline in buying power is one reason economists forecast consumer spending will slow.

BoJ, BoC leave rates unchanged

The Bank of Japan left interest rates unchanged yesterday. From AFP/CNA:

Japan's central bank on Tuesday left its super-low interest rates unchanged as it cut its growth forecasts for Asia's largest economy for the second time in less than three months.

The policy board decided unanimously to leave interest rates at 0.5 per cent, where they have been since February last year, the Bank of Japan said in a statement at the end of a two-day meeting.

The central bank trimmed its forecast for economic growth in the current fiscal year to March to 1.2 per cent from 1.5 per cent previously.

It also lowered its forecast for gross domestic product (GDP) growth in the next fiscal year to 1.5 per cent from 1.7 per cent.

The Bank of Canada also left interest rates unchanged yesterday.

The economic data reported yesterday were mostly weak.

In Germany, the ZEW index of investor confidence fell to minus 63.9, the lowest since it was first compiled in December 1991, from minus 52.4 in June, while in France, confidence among manufacturers fell to the lowest in five years in June.

Meanwhile, inflation continues to roar ahead, jumping in the UK to 3.8 percent in June from 3.3 percent in May.

And the US faces both slowing economy and high inflation. Bloomberg reports:

Retail sales rose 0.1 percent from the previous month, the Commerce Department said today in Washington. That was less than economists forecast. At the same time, the Labor Department reported that producer prices jumped 1.8 percent, the most since November. From a year ago, prices climbed 9.2 percent, a surge unseen since 1981.

US stocks fall despite Treasury rescue plan

Yesterday's market action shows how difficult it is going to be to rebuild confidence in financial markets. From Bloomberg:

U.S. stocks fell, sending financial shares to their biggest drop in eight years, on heightened concern that bank failures will spread.

Washington Mutual Inc. posted the steepest retreat ever and National City Corp. tumbled to a 24-year low after last week's collapse of IndyMac Bancorp Inc. spurred speculation that regional banks are short of capital. The companies said they've seen no unusual depositor activity. Fannie Mae and Freddie Mac erased an earlier rally fueled by Treasury Secretary Henry Paulson's plan to help rescue the largest U.S. mortgage lenders.

The declines pushed the Standard & Poor's 500 Financials Index of 89 companies down 6.1 percent, its steepest plunge since April 2000. The S&P 500 slid 11.19 points, or 0.9 percent, to 1,228.3. The Dow Jones Industrial Average lost 45.35, or 0.4 percent, to 11,055.19. The Nasdaq Composite Index slipped 26.21, or 1.2 percent, to 2,212.87. More than two stocks dropped for each that rose on the New York Stock Exchange.

European stocks managed to post gains for the day. Bloomberg reports:

European stocks rose after takeovers increased and a six-week decline in the Dow Jones Stoxx 600 Index left shares at their cheapest relative to earnings in at least six years...

The Stoxx 600 advanced 0.8 percent to 272.47. Stocks rebounded after last week's drop capped the longest losing streak since January as concern deepened record oil prices will hurt automakers and airlines, while speculation grew that Fannie Mae and Freddie Mac of the U.S. were short of capital.

The gains were made despite more evidence yesterday that the economy is turning down. Again from Bloomberg:

European industrial production fell the most in almost 16 years in May, as the euro's gain against the dollar, soaring energy costs and cooling global growth weighed on the region's largest economies.

Output in the 15 nations that share the currency dropped 1.9 percent from the previous month, the biggest decline since December 1992, the European Union's statistics office in Luxembourg said today. From a year earlier, production decreased 0.6 percent, the first annual drop in three years.

US stocks slump despite better-than-expected economic data

US stocks fell again yesterday. Bloomberg reports:

U.S. stocks fell, extending the longest stretch of weekly losses for the Standard & Poor's 500 Index since 2004, as growing concern about the health of Fannie Mae and Freddie Mac sent bank shares to an 11-year low...

The S&P 500 lost 13.9, or 1.1 percent, to 1,239.49, its lowest level in two years. The Dow Jones Industrial Average fell 128.48, or 1.1 percent, to 11,100.54 after earlier tumbling as much as 251 points. The Nasdaq Composite Index slipped 18.77, or 0.8 percent, to 2,239.08. About five stocks dropped for every three that rose on the New York Stock Exchange.

Inflation fears moved to the background, although they remained evident in the data reported yesterday.

Prices of goods imported into the U.S. rose more than forecast in June as record energy costs and a decline in the dollar made purchases of foreign products more expensive. The 2.6 percent increase in the import price index last month matched the gain in May, the Labor Department said today. The index jumped 20.5 percent from a year ago, the biggest year- over-year increase on record.

And from Bloomberg's report on the Reuters/University of Michigan consumer sentiment survey:

The survey also showed consumers expect the inflation rate over the next five years to be 3.4 percent, the same as they expected in June and to rise to 5.3 percent over the next 12 months, compared with a 5.1 percent forecast in the June survey.

But the economic data were generally better than expected.

The Reuters/University of Michigan preliminary index of consumer sentiment registered 56.6, higher than forecast and little changed from a June reading of 56.4 that was the lowest since May 1980...

The trade report from the Commerce Department showed the gap between imports and exports shrank 1.2 percent to $59.8 billion...

And the ECRI's weekly leading index rose to 132.5 in the week to 4 July from 131.2 in the previous period.

Across the Pacific, though, consumer sentiment continued to decline. Bloomberg reports:

Japanese consumers became the most pessimistic they've been in at least 26 years as higher gasoline prices and food costs eroded their spending power.

The sentiment index dropped to 32.6 last month from 33.9 in May, the Cabinet Office said today in Tokyo, the lowest since the government began compiling the figures in 1982.

And Japanese industrial production in May has been revised down to a 2.8-percent increase from a 2.9-percent preliminary reading.

BoE holds rates amid signs of slowing global economy

The Bank of England left interest rates unchanged yesterday. Reuters reports:

The Bank of England left interest rates on hold despite spiralling inflation as slowing Chinese exports growth and faltering European industry provided further evidence on Thursday that global growth is teetering...

Despite inflation overshooting the UK's two percent target by a distance, its central bank kept official rates at 5.0 percent, suggesting it expects economic doldrums to rein in prices sooner or later...

British house prices fell at their sharpest annual pace in at least two decades in June, a survey showed on Thursday, a downturn that threatens to plunge the economy into recession.

The Bank of Korea was unmoved for the 11th month running at its policy review on Thursday, hoping intervention to prop up its currency will contain price pressures running at their highest in almost 10 years.

The latest economic data provide justification for concerns about a slowing global economy.

French industrial production fell 2.6 percent on a monthly basis in May, the national statistics office said on Thursday, much more than forecasts for a 0.5 percent drop.

Similarly, Italian industrial output was much weaker than expected in May, posting the largest monthly drop since September last year, down 1.4 percent on the month...

The trade surplus in China, the world's fourth-largest economy which has grown at a heady pace, hit $21.35 billion in June, up from $20.21 billion, but the annual pace of exports was slower than expected at 17.6 percent.

Japanese economic data mixed

Japan's economy has so far held up but the outlook remains weak.

Today, Bloomberg reports that Japan's current account surplus shrank in May.

Japan's current-account surplus narrowed for a third month in May as record oil prices pushed up the import bill and export growth slowed.

The surplus shrank 5.9 percent to 2 trillion yen ($18.7 billion) from a year earlier, the Ministry of Finance said in Tokyo today. The median estimate of 30 economists surveyed by Bloomberg News was for the gap to decrease to 1.92 trillion yen...

Imports climbed 4 percent to 5.98 trillion yen in May, compared with 13.4 percent in April, today's report showed. Japan imports virtually all of its oil. Crude oil surged to a record $145.85 a barrel on July 3...

Exports rose 4.2 percent in May from a year earlier, compared with 4.9 percent in April, today's report showed. Shipments to the U.S., Japan's largest export market, fell for a ninth month in May, a separate ministry report showed last month. Today's trade figures don't include regional breakdowns.

The rise in the prices of imported commodities helped push Japan's wholesale inflation rate to a 27-year high of 5.6 percent in June.

Economic reports earlier in the week had given mixed signals.

Machinery orders rose faster than expected in May.

Equipment orders, which signal capital spending in the next three to six months, rose 10.4 percent from April when they climbed 5.5 percent, the Cabinet Office said today in Tokyo. The median estimate of 36 economists surveyed by Bloomberg News was for a 1.1 percent gain.

But sentiment among Japanese merchants fell to a six-year low in June.

The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, dropped to 29.5 from 32.1 in May, the Cabinet Office said today in Tokyo. An index of conditions in two to three months slid to 32.1, the worst since September 2001, from 35.1.

So Japan's economy could still be headed for a decline.

But if so, it's unlikely to be the only economy in Asia to do so. Singapore may actually be leading the way down after its GDP reportedly shrank an annualized 6.6 percent in the second quarter.

US stocks jump as oil falls

US stocks did well yesterday despite disappointing pending home sales data for May. From Bloomberg:

U.S. stocks rallied the most in a month, led by banks and transportation companies, after JPMorgan Chase & Co.'s chief executive officer said losses in credit markets will ease and oil posted its biggest drop since March...

The Standard & Poor's 500 Index jumped 21.39 points, or 1.7 percent, to 1,273.7. The Dow Jones Industrial Average climbed 152.25, or 1.4 percent, to 11,384.21. The Nasdaq Composite Index added 51.12, or 2.3 percent, to 2,294.44. Almost four stocks gained for each that fell on the New York Stock Exchange...

Crude oil for August delivery fell 3.8 percent to $136.04 a barrel in New York on concern that the global economy may slow further. Oil dropped almost $10 since reaching a record $145.85 a barrel on July 3.

Upside for stocks still looks somewhat limited to me, though. Essentially, the US stock market has merely given up most its gains since the Fed ended its rate-hiking cycle in mid-2006. That Fed pause had been an important trigger for markets to resume their bull runs and ultimately over-extend themselves.

But with most of those pause-induced gains having been given up, and the Fed on yet another pause but on the easing side, it's going to be interesting to see which way the market now turns.

Industrial production falls in Germany and the UK

While the US economy has managed to keep its head above water, Europe's economy appears to be starting to struggle.

Bloomberg reports the latest industrial production figures from Germany.

German industrial production fell the most in more than 9 years in May, further evidence that Europe's largest economy is losing momentum.

Output, adjusted for seasonal swings and inflation, dropped 2.4 percent from April, when it declined 0.2 percent, the Economy Ministry in Berlin said today. That's the most since February 1999. Economists expected a gain of 0.3 percent, according to the median of 42 forecasts in a Bloomberg News survey. In the year, output fell 1.5 percent.

And Reuters reports the industrial production production figures from the UK.

Industrial output fell at its sharpest pace in 2-1/2 years in May, official data showed on Monday, raising fears that economic growth is freezing up...

The Office for National Statistics said industrial production fell 0.8 percent on the month, well beyond analysts' expectations of a 0.1 percent decline. This left output 1.6 percent lower on the year, the biggest drop since December 2005.

ECB rates up, US employment down

As expected, the ECB raised interest rates yesterday. However, it gave no hint of further rate hikes. Bloomberg reports:

European Central Bank President Jean-Claude Trichet played down prospects of further interest-rate increases, saying the quarter-point move today will help bring inflation back below 2 percent.

"Today's decision will contribute to achieving our objective," Trichet said at a press conference in Frankfurt after the ECB raised its benchmark lending rate to 4.25 percent. Trichet said he has "no bias" on further moves.

Trichet is no doubt mindful of the slowing eurozone economy. Although retail sales in the euro area showed an unexpected increase in May, broader indicators show a clear deceleration in the economy. From Reuters:

Spain's private sector plummeted towards recession in June, with Ireland and Britain not too far behind in surveys which show the hottest house-boom economies of Europe are now slowing hard on the heels of the United States...

The PMI index for Spain's services sector hit a record low of 36.7, and its manufacturing sector reading is also below the 50 mark which is the dividing line between growth and contraction...

The index of British activity dropped to 47.1 in June from 49.8 in May, for a second month in contraction territory.

For the euro zone as a whole, the PMI service sector index fell to 49.1 in June from 50.6 in May, dipping into the red for the first time since June 2003.

Slowing economies, though, did not stop Sweden and Denmark from also raising interest rates yesterday. In Asia, Indonesia raised interest rates for the third consecutive month.

The economic data in the US yesterday were also negative. Bloomberg reports:

Payrolls fell by 62,000 after a 62,000 drop in May that was greater than first reported, the Labor Department said today in Washington. The unemployment rate held at 5.5 percent after soaring the most in two decades in May...

The Tempe, Arizona-based ISM said its index of non-manufacturing businesses...decreased to 48.2, the lowest since January, from 51.7 in May...

Another report from the Labor Department today showed initial claims for unemployment benefits rose by 16,000 to 404,000 last week. The four-week average reached the highest level since October 2005, just after Hurricane Katrina.

Markets though were relatively unfazed by the negativity.

Stocks ended the session mixed and Treasuries dropped. The Dow Jones Industrial Average added 0.7 percent to close at 11,288.5, while the Nasdaq Composite Index lost 0.3 percent to 2,245.4. Benchmark 10-year note yields were at 3.98 percent at 3 p.m. New York time, from 3.95 percent late yesterday.

Dow sinks as oil jumps

The respite for US stock investors didn't last very long. Reuters reports the latest stock market performance.

The Dow sank into a bear market on Wednesday after a report showed U.S. private employers cut the most jobs in nearly six years and oil shot to another record, increasing concerns about the health of the economy and corporate profits...

Nervousness abounded a day before the key monthly jobs report after data released on Wednesday showed U.S. private employers slashed 79,000 jobs in June, the biggest monthly private payroll reduction since November 2002. The ADP data raised expectations for an even more disappointing payrolls report...

The Dow Jones industrial average tumbled 166.75 points, or 1.46 percent, to 11,215.51...

The Standard & Poor's 500 Index lost 23.39 points, or 1.82 percent, to close at 1,261.52, while the Nasdaq Composite Index slid 53.51 points, or 2.32 percent, to end at 2,251.46...

The ADP's employment report aside, Wednesday's data brought some brighter news as well, with a boost in demand for aircraft lifting new orders at U.S. factories by an unexpectedly large 0.6 percent in May.

U.S. crude for August delivery jumped to a record $144.32 a barrel.

Hindsight will probably tell us that the US stock market started the second leg of a bear market in May.

Global manufacturing activity shrinks

The global manufacturing PMI fell below 50 last month.

The eurozone PMI fell below 50 for the first time in three years, falling to 49.2 in June from 50.6 in May.

UK manufacturing did worse, its PMI falling to 45.8 in June from a downwardly revised 49.5 in May. This report came as the Nationwide building society reported that UK house prices fell 0.9 percent last month, the eighth straight month of declines.

Even China shows signs of slowing, with the China Federation of Logistics and Purchasing PMI falling to 52.0 in June from 53.3 in May and the CLSA PMI falling to 53.3 from 54.7, a trend supported by data from the National Bureau of Statistics.

Somewhat ironically, it was the US that showed an improvement in its manufacturing PMI, which rose to 50.2 in June from 49.6 in May. This came at a price, though; the prices sub-index rose to 91.5 from 87. And construction spending fell again in May, albeit by a less-than-expected 0.4 percent.

BIS sees deeper and more protracted global downturn than consensus

Yesterday saw the release of the latest annual report for the Bank for International Settlements. The conclusion was not very positive for the global economic outlook. From the abstract:

In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation. The crucial questions at the present juncture have to do with the severity of these individual trends as they now appear and how they might interact. While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect...

A downturn is certainly what the global economy appears to be facing, although it has not generally turned out as bad as some feared.

Bloomberg reports the latest Tankan survey from Japan.

Confidence among Japan's largest manufacturers fell less than economists estimated, signaling that the nation's exporters expect to withstand the U.S. slowdown and rising raw-materials costs.

The Tankan index of manufacturer sentiment slid to 5 points in June from 11 in March, a third quarterly decline, the Bank of Japan said today in Tokyo. The median estimate of 32 economists surveyed by Bloomberg was for a drop to 3 points.

Large companies said they plan to increase capital spending 2.4 percent this fiscal year, after saying they would cut investment three months ago. Exporters are turning to Asia and oil-producing nations amid waning sales in the U.S., the nation's largest market. That demand is easing the impact that record commodities costs have on corporate profits at home.

Other recent data largely corroborate the weak trend in Japan. The Nomura/JMMA Japan Purchasing Managers Index declined to 46.5 in June, a 6-year low, from 47.7 in May. May housing starts fell 6.5 percent from the previous year.

In the US, the Chicago PMI did manage to climb to 49.6 in June from 49.1 in May.

Meanwhile, in the euro area, inflation is still accelerating, rising to 4 percent in June, the highest in more than 16 years, from 3.7 percent in May.