Japanese industrial production increases, Indian economic growth accelerates

It looks like Japan's economy started the second quarter positively. From Bloomberg:

Japan’s industrial production increased less than economists forecast in April, the latest sign that the economic recovery may be losing momentum.

Factory output rose 1.3 percent from March, when it gained 1.2 percent, the Trade Ministry said in Tokyo today. The median estimate of 26 economists surveyed by Bloomberg News was for a 2.5 percent increase.

Manufacturers plan to increase production at a slower pace in May and June, today’s report showed, indicating they anticipate demand to cool...

A separate report showed housing starts rose 0.6 percent in April from a year earlier, the first gain in 17 months.

A survey of purchasing managers in Japan showed that they remained positive in May. The Nomura/JMMA Manufacturing PMI reached 54.7 in May, up from a revised figure of 53.8 in April.

Elsewhere in Asia, India's economic growth accelerated in the first three months of this year. Bloomberg reports:

India’s economic growth accelerated, adding pressure on the central bank to raise interest rates even as Europe’s sovereign-debt crunch threatens the global recovery.

Gross domestic product rose 8.6 percent in the three months ended March 31 from a year earlier after a revised 6.5 percent gain in the previous quarter, the statistics office said in a statement in New Delhi today. That matched the median estimate in a Bloomberg News survey of 22 economists.

Fitch cuts Spain's credit rating, sending markets lower

Another credit rating downgrade sent markets back down on Friday. Reuters reports:

Fitch cut Spain's credit rating by one notch on Friday, sending markets lower and capping a horrible week for a government struggling to convince investors it can solve its economic woes and avoid a Greek-style debt crisis.

Fitch Ratings linked the downgrade to AA+ from AAA to the record levels of household and corporate debt in Spain, as well as mounting public debt, which it said would act as a drag on economic growth.

World equities slid and the euro fell below $1.23 after the downgrade, which stoked fears that Spain, the euro zone's fourth largest economy, could suffer a crisis similar to the one which forced Greece to agree a 110 billion euro rescue with the EU and IMF earlier this month.

Economic data from the US on Friday pointed to continued, albeit modest, improvements in the economy. Bloomberg reports:

Consumer spending paused in April after growing in the first quarter at the fastest pace in three years as Americans used gains in wages to rebuild savings.

Purchases were little changed last month after climbing 0.6 percent in March, indicating an early Easter holiday may have pushed demand into the prior month at the expense of April, according to figures from the Commerce Department today in Washington...

Incomes rose 0.4 percent in April for a second month, matching the survey median. Wages and salaries rose 0.4 percent last month after climbing 0.3 percent in March...

Consumer sentiment improved in May, a report from Thomson Reuters/University of Michigan showed. The group’s confidence index rose to 73.6 from 72.2 in April...

The Institute for Supply Management-Chicago Inc. said today its business barometer fell to 59.7 this month from 63.8 in April, which was the highest level in five years. Figures greater than 50 signal expansion.

Stocks surge, Japanese consumer prices fall

Stocks rebounded strongly on Thursday. From Reuters:

The euro staged a broad rally and U.S. stocks jumped about 3 percent on Thursday, after China said Europe remains a key investment market for its foreign-exchange reserves.

The People's Bank of China said a Financial Times report that Beijing was concerned about its euro-zone bond holdings due to the European debt crisis was groundless...

At the close of trade, the Dow Jones industrial average gained 284.54 points, or 2.85 percent, to 10,258.99. The Standard & Poor's 500 Index rose 35.11 points, or 3.29 percent, to 1,103.06. The Nasdaq Composite Index climbed 81.80 points, or 3.73 percent, at 2,277.68...

The pan-European FTSEurofirst 300 index closed up 2.9 percent at 1,000.46 points. The index remains down around 10 percent from a mid-April peak on worries about Europe's debt crisis. MSCI's all-country world stock index also rose 2.9 percent.

The euro gained 1.67 percent at $1.237 while the dollar fell against a basket of major trading-partner currencies, with the U.S. dollar index falling 1.05 percent at 86.208.

In pushing stocks up, investors shrugged off a downward revision to US first quarter growth. From Bloomberg:

The U.S. economy grew in the first quarter at a slower pace than previously calculated, reflecting smaller gains in consumer and business spending and highlighting the risks to the recovery posed by the European debt crisis.

The 3 percent increase at an annual rate in gross domestic product was less than the median forecast of economists surveyed by Bloomberg News and compares with an advance estimate of 3.2 percent issued last month, figures from the Commerce Department showed today in Washington. Corporate profits grew and incomes were revised down...

More Americans than forecast filed applications for unemployment benefits last week, indicating firings persist even as the economy rebounds, figures from the Labor Department also showed today. Jobless claims fell by 14,000 to 460,000 in the week ended May 22. Economists forecast claims would drop to 455,000, according to the median estimate in a Bloomberg survey.

Recent Japanese economic data have also been mixed.

On Thursday, AFP/CNA reported that Japan's trade surplus had jumped in April.

Japan's trade surplus soared in April, data showed Thursday, as exports led by the auto sector continued to drive a tentative recovery in the world's second largest economy...

Exports surged 40.4 per cent from a year ago to 5.89 trillion yen, marking the fifth straight month of growth and meeting analysts' expectations.

Today's reports, however, show that deflation remains a threat to Japan's recovery. From Bloomberg:

Japan’s unemployment rate unexpectedly increased in April and the decline in consumer prices deepened, signaling that domestic demand is restraining the nation’s recovery from its deepest postwar recession.

The jobless rate rose to 5.1 percent from 5 percent, the statistics bureau said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for no change. Prices excluding fresh food slid 1.5 percent from a year earlier after dropping 1.2 percent in March...

Household spending dropped 0.7 percent in April from a year earlier, the bureau said. The median estimate of economists surveyed was for a 2.5 percent increase. Retail sales rose 4.9 percent from a year earlier, led by gas stations and auto showrooms.

OECD raises global growth forecast

Reuters reports that the OECD has raised it global growth forecast.

The global economy is recovering faster than expected from recession with Asia leading the way, but it is at risk from huge debts in developed countries and possible overheating in countries such as China, the OECD said on Wednesday.

In a twice-yearly report, the Paris-based Organization for Economic Co-operation and Development raised its forecast for global growth to 4.6 percent in 2010 and 4.5 percent in 2011. Last November it predicted growth of 3.4 percent this year and 3.7 percent in 2011, after a 0.9 percent contraction in 2009.

Meanwhile, economic reports from the US continue to be positive. From Bloomberg on Wednesday:

Purchases of new homes jumped in April to a two-year high and orders for durable goods climbed the most in three months, signaling the U.S. economy strengthened before the crisis of confidence in the European Union.

New-home sales increased 15 percent to an annual pace of 504,000 last month, the highest level since May 2008, while bookings for goods meant to last at least three years rose 2.9 percent, the Commerce Department said today in Washington.

However, markets remain focused on developments surrounding eurozone sovereign debt. Reuters reports:

U.S. stocks and the euro ended lower on Wednesday, with the Dow closing below 10,000 for the first time since early February, after a report said China was reviewing its euro-zone debt holdings -- feeding investors' concerns that the European debt crisis could reverse the global economic recovery.

Gold prices rose about 1 percent, building its best three-day gain since January as dealers hedged against Europe's sovereign debt problems and took advantage of the desire for asset protection.

Markets volatile, eurozone industrial orders and US consumer confidence rise

Markets started badly on Tuesday but steadied by the end of the day. Reuters reports:

U.S. stocks and the euro pared deep losses to end mostly flat on Tuesday as investors had second thoughts that a festering euro zone banking crisis will spread worldwide and strangle a reviving economy.

A late-day rally pulled the benchmark S&P 500 into positive territory minutes before the closing bell and wiped out most of the session's losses for the Dow, which closed above the key barrier of 10,000.

U.S. Treasuries gave up most of their gains as equities rebounded from a broad sell-off and the euro staged a rebound from multi-year lows. Earlier, major stock indexes from Asia to Europe closed sharply lower and Wall Street fell more than 3 percent...

The euro was down 0.02 percent at $1.2348, recovering from losses of more than 1 percent.

Earlier, North Korea had been added to the list of market worries. From Bloomberg:

South Korea’s won fell the most in more than a year and the nation’s stocks slumped following a report by a defector group that North Korean leader Kim Jong Il ordered the military to prepare for conflict.

The currency plunged to a 10-month low after Kim told armed forces to get ready for “combat” in a message broadcast on May 20, the Seoul-based North Korea Intellectuals Solidarity group reported on its website. The order came after the South accused his regime of sinking of one of its warships, killing 46. The currency pared losses on speculation authorities intervened as the finance ministry said it was watching the market.

However, economic reports released on Tuesday were relatively positive.

The troubled euro zone actually saw industrial orders rise at the fastest pace in 10 years in March, according to Reuters.

The European Union's statistics office, Eurostat, said industrial new orders in the 16 countries using the euro jumped 5.2 percent month-on-month in the euro zone for a 19.8 percent year-on-year rise.

The monthly rise is the highest since June 2007 and the annual increase is the strongest in a decade.

Meanwhile, UK first quarter GDP growth has been revised up, according to another Reuters reports.

Britain's economy grew slightly faster than initially estimated in the first three months of this year after a rebound in manufacturing and business services, but economists expect headwinds to come.

The Office for National Statistics said the economy grew by 0.3 percent in the first quarter, up from an initial estimate of 0.2 percent.

And while markets have been nervous of late, US consumer confidence actually improved in May. Bloomberg reports:

Consumers gained more confidence in May than projected as a recovering U.S. economy raised expectations hiring will pick up in coming months.

The Conference Board’s confidence index rose to 63.3, exceeding all estimates of economists surveyed by Bloomberg News and the highest level in two years, according to a report from the New York-based private research group...

The S&P/Case-Shiller home-price index covering 20 cities increased 2.3 percent from March 2009, the group said today in New York. The median forecast of economists surveyed projected a 2.5 percent advance.

Euro falls after Spanish bank takeover

The euro started the week by resuming its decline. Reuters reports:

The euro fell against the dollar on Monday, stung by a new round of worries that the euro zone's debt crisis could spread after Spain's central bank took over a small savings bank.

The Bank of Spain on Saturday said it had taken over savings bank CajaSur following the failure of its planned merger with another regional lender. The news caused the euro to retreat from last week's gains.

Although CajaSur is relatively small, analysts said the bailout highlighted weakness in the European banking sector and fueled worries that other savings banks could require money at a time when Spain is trying to slash government spending and repair public finances.

In the US, stocks mostly gave up their gains on Friday despite a better-than-expected rise in existing home sales in April. From Bloomberg:

A larger-than-projected increase in April sales of previously owned homes was accompanied by an even bigger jump in inventories, raising the risk U.S. property values will backslide.

Purchases climbed 7.6 percent to a 5.77 million annual rate as buyers rushed to qualify for an expiring government tax credit, the National Association of Realtors said today in Washington. The number of homes on the market surged by the most in a decade, while median prices showed the biggest gain in four years...

Stocks dropped on concern Europe’s debt crisis has further to run. The Standard & Poor’s 500 Index fell 1.3 percent to close at 1,073.65. Treasury securities rose, sending the yield on the benchmark 10-year note down to 3.21 percent from 3.24 percent late on May 21...

Not another Great Depression bear market

Despite the recent turmoil in markets around the world, stocks in the United States have generally gotten through the recent recession relatively well, having recovered substantially from the lows of 2009.

The recovery in US and global stock markets, however, looked in danger last week as stocks around the world fell amid persistent concern over European sovereign debt. The Standard & Poor’s 500 Index fell 4.2 percent to close the week at 1,087.69. The Dow Jones Industrial Average lost 4.0 percent to close the week at 10,193.39. The STOXX Europe 600 Index fell 4.6 percent to 237.11 last week, the lowest level in more than six months.

Most stock markets around the world are now showing losses for the year. The US stock market has proven to be no exception. The S&P 500 is down 2.5 percent since the beginning of the year while the Dow is down 2.3 percent.

The US stock market is clearly in the midst of a correction. Since the top in April, the S&P 500 is down 10.6 percent while the Dow is down 9.0 percent. Both indices hit their lows for the week on Thursday, at the close of which the S&P 500 was down 12.0 percent from its April peak while the Dow was down 10.1 percent.

Some analysts go further and think that the weakness in the past few weeks marks the start of a bear market. Others are calling it the resumption of the secular bear market that started in 2007. It is obviously too soon to say for sure though.

Despite the recent market nervousness, one possibly positive thing we can say is that, in the wake of the financial crisis that followed the bursting of the housing bubble, the US stock market has not followed the path that it took during the bear market starting in 1929 that was followed by the Great Depression. Back then, apart from one strong rally early in the cycle, the stock market was mostly in a pronounced downtrend for almost three years.

In contrast, in the bear market that started in October 2007, the stock market made a bottom in March 2009 and then rebounded strongly for over a year before its recent peak. Even after the recent decline, the Dow is 55.7 percent above its March 2009 bottom.

The stock market's positive deviation from the path taken during the Great Depression bear market shows that the deflationary pressure from the financial crisis has been successfully resisted for the time being, no doubt thanks to more forceful action by fiscal and monetary policy-makers this time around.

This could in turn mean there is a chance that we are back to the typical post-Second World War cycle with multi-year cyclical bull markets the norm.

If true, this also means that the correction thus far will be limited and will not turn into a full-fledged bear market.

Markets recover

After sliding for most of the week, markets reversed direction on Friday. Bloomberg reports:

U.S. stocks jumped, halting a weeklong global slide, while the euro rose for a third day and Treasuries erased an early gain on speculation the rout in risky assets overshot the potential damage from Europe’s debt crisis.

The Standard & Poor’s 500 Index climbed 1.5 percent to 1,087.69 at 4 p.m. in New York, erasing a morning drop of 1.5 percent that dragged the gauge below its weakest level during the May 6 crash. Brazil’s Bovespa index surged 3.6 percent, while copper jumped the most since February on signs of stronger demand in China. Currencies of commodity producing nations rallied versus the dollar. The 30-year Treasury yield rose one basis point to 4.1 percent after earlier dropping to 3.98 percent, its lowest level of the year.

Economic reports on Friday were mixed.

Reuters reports that the BoJ has raised its outlook for the Japanese economy.

The Bank of Japan raised its outlook for the economy by a notch on Friday and announced a loan scheme targeting growth industries, but also warned that Europe's debt debacle posed a risk to the global economy.

The central bank said the world's second-largest economy was "starting to recover moderately" -- striking a slightly more optimistic tone than in previous statements...

As widely expected, the central bank kept the benchmark rate on hold at 0.1 percent and outlined its plan to offer loans at that rate to banks that will fund projects in sectors with growth potential.

However, eurozone growth may be slowing. From Bloomberg:

Growth in Europe’s services and manufacturingindustries slowed more than economists forecast in May, suggesting the euro-region economy may struggle to gather strength as a fiscal crisis hurts confidence.

A composite index based on a survey of euro-area purchasing managers in both industries fell to 56.2 from 57.3 in April, London-based Markit Economics said in an initial estimate today. Economists forecast a drop to 57.2, the median of 15 estimates in a Bloomberg survey showed. A reading above 50 indicates expansion...

A gauge of euro-area manufacturing declined to 55.9 from 57.6 in the previous month, Markit said in today’s report. That’s the first decline since February 2009. An index of services, which account for about 60 percent of the region’s gross domestic product, rose to 56 in May from 55.6...

In Germany, Europe’s largest economy, the Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, fell to 101.5 this month from 101.6 in April. Economists had forecast an increase to 101.9, the median of 37 forecasts in a Bloomberg survey showed.

A Reuters report says that economic growth is also likely to slow in the US.

A measure of future U.S. economic growth fell to a 35-week low in the latest week, indicating a slowing of the recovery, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slumped to 127.3 for the week ended May 14 from 132.0 the previous week.

Asia booms, markets plunge

Asia is booming. Bloomberg reports:

Asia’s growth is accelerating as companies ship more cars, computers and commodities overseas, highlighting the role of exports in the region’s recovery and the risk of a slowdown should Europe’s debt crisis worsen.

Trade accounted for more than half the 4.9 percent annualized growth in Japan’s gross domestic product in the first quarter. Taiwan’s economy grew 13.3 percent from a year earlier, the fastest in three decades, and Singapore expanded at a 38.6 percent annualized rate, reports showed yesterday.

But the boom may not last much longer if Europe's troubles continue.

... The recovery may slow as Europe’s debt woes hurt consumer and business confidence in advanced economies, and a weaker euro makes Asian goods more expensive.

And Thursday's data show that the economic recovery in the US may already be losing momentum. Again from Bloomberg:

The index of U.S. leading economic indicators unexpectedly declined in April, a sign the economic expansion may cool in the second half of the year.

The 0.1 percent decrease in the New York-based Conference Board’s measure of the outlook for three to six months marked the first drop in a year and followed a revised 1.3 percent gain in March. Other reports showed more Americans filed for jobless benefits and manufacturing in the Philadelphia region expanded.

But meanwhile, the decline in stocks appears to be gaining momentum. From Bloomberg on Thursday:

A weeklong rout in stocks deepened, with U.S. benchmark indexes losing the most in more than a year, as reports cast doubts about the strength of the economic recovery and European leaders struggled to contain the region’s debt crisis. Commodities plunged and Treasuries soared.

The Standard & Poor’s 500 Index plunged 3.9 percent to 1,071.59 at 4 p.m. in New York, its biggest drop since April 2009. The Stoxx Europe 600 Index lost 2.2 percent and the S&P GSCI Index of commodities tumbled to the lowest since October. The losses accelerated even as the euro rallied as much as 1.5 percent to $1.2598 after earlier flirting with a four-year low. Ten-year Treasury yields sank to the lowest level of the year, down 15 basis points at 3.22 percent. The yen rallied against all 16 major counterparts.

Eurozone construction output rises, Fed raises US growth forecast

Wednesday brought some positive news on the eurozone economy. From Bloomberg:

European construction output increased the most in 14 years in March led by a rebound in Germany, the region’s largest economy.

Construction in the 16-nation euro region rose 7.6 percent from February, when it fell a revised 7.2 percent, the European Union’s statistics office in Luxembourg said today. That’s the biggest gain since March 1996 and the first increase in a year. From a year earlier, output declined 5.2 percent after dropping 14.8 percent in February.

In the US, the Fed has become more confident on the growth outlook. Bloomberg reports:

Federal Reserve officials raised their U.S. growth estimates for 2010 and lowered forecasts for unemployment and inflation, according to minutes of the Federal Open Market Committee meeting on April 27-28.

U.S. central bankers said the economy will expand in a range of 3.2 percent to 3.7 percent this year, leaving their 2011 forecast unchanged at 3.4 percent to 4.5 percent, according to quarterly forecasts released today with the FOMC minutes. In January, central bankers forecast 2010 growth of 2.8 percent to 3.5 percent, according to the central tendency estimates...

Fed officials’ central tendency forecast for the average unemployment rate in the final three months fell to 9.1 percent to 9.5 percent versus 9.5 percent to 9.7 percent in January. Their estimate for 2011 unemployment was in a range of 8.1 percent to 8.5 percent versus 8.2 percent to 8.5 percent in January.

Even as the growth forecast is revised upward, the inflation forecast has been revised downward.

Fed forecasters lowered their outlook for inflation. The personal consumption expenditures price index minus food and energy will rise 0.9 percent to 1.2 percent this year, down from January’s estimates of 1.1 percent to 1.7 percent.

Estimates for 2011 core inflation were also lowered to 1 percent to 1.5 percent versus the January forecast of 1 percent to 1.9 percent.

Indeed, there has been no sign of inflation in the US recently. From Bloomberg:

The cost of living in the U.S. unexpectedly dropped in April for the first time in more than a year, reinforcing forecasts that the Federal Reserve will keep interest rates near zero for much of 2010.

The 0.1 percent fall in the consumer price index was the first decrease since March 2009, figures from the Labor Department showed today in Washington. Excluding food and fuel, the so-called core rate was unchanged, capping the smallest 12- month gain in four decades.

But housing remains a concern for the US economy.

The share of mortgages in foreclosure climbed to a record 4.63 percent in the first quarter, the Mortgage Bankers Association said in a report today. The combined share of foreclosures and delinquencies was 14 percent, or about one in every seven U.S. mortgages, as job losses caused homebuyers to fall behind on monthly payments.

That just added to the list of worries for markets. Bloomberg reports the market action on Wednesday:

Stocks and commodities slid after Germany banned some bearish bets against government bonds and banks. The euro rose from a four-year low on speculation European leaders will take steps to support the currency.

The MSCI World Index slumped 1.4 percent at the 4 p.m. close in New York for a fifth-straight drop, the longest streak since January. The Standard & Poor’s 500 Index fell 0.5 percent, erasing its gain for the year, and the S&P GSCI Index of 24 commodities tumbled 1 percent to its lowest levels since February. The euro rallied 1.6 percent to $1.2393 and gold retreated below $1,200 an ounce. Ten-year Treasury yields erased losses, rising 2 basis points to 3.36 percent.

Germany’s ban of naked short-sales fueled speculation investors will lose options to hedge against losses on risky assets and added to concerns over tighter financial regulations as the U.S. Senate moved closer to voting on a reform bill. U.S. stocks also slid on a Mortgage Bankers Association report that a record share of home loans were in foreclosure, overshadowing minutes from the latest Federal Reserve policy meeting showing policy makers are in no rush to sell mortgage securities.

US housing starts jump, European inflation accelerates

Bloomberg reports that US home building is recovering.

Work began on more U.S. houses in April than at any time in over a year and wholesale prices unexpectedly decreased, showing the economy is strengthening without stoking inflation.

Housing starts rose to a 672,000 annual rate last month, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level since October 2008, according to Commerce Department figures today in Washington. Another report showed producer prices dropped 0.1 percent, the second decrease in the past three months.

Or maybe not.

Building permits, which are considered a leading indicator for homebuilding, fell 12 percent to a 606,000 annual rate last month, the report showed. Applications for both single-family and multifamily projects decreased.

The fall in producer prices does suggest subdued inflation pressures in the US. Tuesday's data do not suggest the same benign inflation picture in Europe though. Again from Bloomberg:

European inflation accelerated to a 16-month high and exports jumped the most in more than a year as the economy gathered strength.

Consumer prices in the economy of the 16 nations using the euro rose 1.5 percent in April from a year earlier, compared with a 1.4 percent gain in March, the European Union statistics office in Luxembourg said today. Exports from the euro area rose a seasonally adjusted 7.5 percent in March from February, the biggest increase since January 2008...

Inflation was in line with an initial estimate published on April 30 and the fastest pace since December 2008. Energy prices rose 9.1 percent in April from a year earlier, the statistics office said. In the month, overall consumer prices increased 0.5 percent.

The trade surplus narrowed to 600 million euros ($745 million) in March from 3.4 billion euros the previous month. Imports rose 10.3 percent to 124.2 billion euros.

And in the UK, Reuters reports that inflation has jumped to a 17-month high.

British consumer price inflation unexpectedly jumped to a 17-month high in April, driven by big rises in tax on alcohol and tobacco as well as higher prices for women's clothing and food, data showed on Tuesday...

Annual consumer price inflation rose to 3.7 percent last month, up from 3.4 percent in March, while the longer-running retail price inflation series hit its highest level in more than 18 years, the Office for National Statistics said...

On the month, consumer prices rose by 0.6 percent.

One country that isn't facing inflation pressure is Japan, but deflation there has not been too much of a hindrance to overall economic growth. From Bloomberg on Tuesday:

Japan’s consumer sentiment rose to the highest level since October 2007 as the benefits of an export-fueled recovery continued to spread to households.

The confidence index climbed to 42 last month from 40.9 in March, the Cabinet Office said today in Tokyo. A number below 50 means pessimists outnumber optimists...

A separate report today showed that tertiary demand slid 3 percent in March as companies pared spending on technology and communication services.

Chinese stocks plunge, economic growth may have peaked

While US and European stock markets finished the first trading day of the week on a relatively flat note, the Chinese stock market plunged again on Monday. From AFP/CNA:

Chinese shares hit their lowest level in more than a year Monday, tumbling 5.07 percent as world markets fell and domestic concerns over property market tightening measures grew, dealers said.

The Shanghai Composite Index, which covers both A and B shares, was down 136.70 points at 2,559.93 on turnover of 88.2 billion yuan (12.9 billion US dollars).

The index hit its lowest closing level since May 4, 2009, when the market sank to 2,559.91...

Premier Wen Jiabao said over the weekend that the government would contain excessive increases in property prices in some cities and curb growth of industries that are over capacity, the official Xinhua News Agency reported.

State media also reported on Monday that China's National Development and Reform Commission was drafting more stringent rules for the property market.

Even as the government contemplates more curbs on the property market, Chinese economic growth may already have peaked. From Bloomberg:

China’s growth may have peaked as developers accelerated construction work ahead of government measures to cool the property market, according to research organization The Conference Board.

A leading economic indicator rose 1.1 percent to 144.5 in March, after a 0.4 percent gain in February, the New York-based organization said today in an e-mailed statement, releasing the measure for the first time...

... Adams said it followed six months of smaller increases and “this one month is not enough to call a new trend from.” He commented in a conference call. China’s growth remains “strong” according to Adams.

Economic reports elsewhere on Monday were relatively positive though.

Reuters reports that US data for May continue to point to growth.

The New York Federal Reserve said its gauge of manufacturing in New York state showed the pace of growth slowed in May, though the jobs index component rose to its highest level in about six years...

The New York Fed's "Empire State" general business conditions index fell to 19.11 in May from 31.86 in April. Economists polled by Reuters had expected a May figure of 30.00. Readings of more than zero show growth. The index has now shown growth for 10 straight months...

U.S. home-builder sentiment rose in May to the highest level in more than 2-1/2 years, boosted by a homebuyer tax credit and a strengthening economy, the National Association of Home Builders said on Monday.

The NAHB/Wells Fargo Housing Market index increased three points to 22, the highest since August 2007, the group said in a statement. It was the second straight month of gains in the index. Overall sentiment, however, remained negative, with a reading below 50 indicating more builders view sales conditions as poor than good.

For Japan, Bloomberg reports that machinery orders rose in March.

Japanese machinery orders advanced for the first time in three months and producer prices fell the least in more than a year, reflecting a sustained recovery in an economy struggling to end deflation.

Orders, an indicator of business investment in three to six months, climbed 5.4 percent in March from February, the Cabinet Office said today in Tokyo. The costs that companies pay for energy and unfinished goods fell 0.2 percent in April from a year earlier, the Bank of Japan said.

Markets still nervous despite European financial package

Markets steadied a bit last week after the European Union came out with a huge financial package to help indebted European governments raise money.

Stock markets mostly gained last week. The Standard & Poor’s 500 Index rose 2.2 percent to 1,135.68. The STOXX 600 Index rose 4.8 percent to 248.46.

Stock market gains in Asia were more muted. The MSCI Asia Pacific Index rose just 1.3 percent to 120.00.

Markets had surged last Monday after the announcement by the EU of the financial stabilisation package. The package included 440 billion euros in guarantees from eurozone countries plus 60 billion euros in a European stabilisation fund that could be disbursed to help eurozone countries if needed. In addition, the IMF would contribute up to 250 billion euros, bringing the total sum involved to 750 billion euros.

Declines on Friday pared the stock market gains for the week after Deutsche Bank chief executive officer Josef Ackermann said Greece may not be able to repay its debt in full and former Federal Reserve chairman Paul Volcker said he was concerned the euro area may break up. The declines show that investors remain nervous about prospects for resolving the debt crisis.

Indeed, commodities ended the week on a negative note. A sell-down on Friday brought the Reuters/Jefferies CRB Index down 1.1 percent for the week to a three-month low of 258.55.

The euro also fell over the week. It fell 3.1 percent against the US dollar to $1.2358 and 2.1 percent against the Japanese currency to 114.38 yen.

At least the economic data in Europe last week were positive. The EU and the euro area both grew 0.2 percent in the first quarter of 2010, a slight improvement over the 0.1 percent and 0.0 percent growth registered for the fourth quarter of 2009.

Unfortunately, the eurozone country with the most serious debt problem, Greece, contracted 0.8 percent in the first quarter. With fiscal tightening expected over the next few years, things are likely to get much worse for the Greek economy before they get better.

On a more positive note, Spain, another economy facing debt concerns, reported 0.1 percent growth in the first quarter, ending almost two years of recession.

Indeed, according to a report from the Organisation for Economic Co-operation and Development, the economic outlook for the euro area and the developed world in general remains positive. The OECD composite leading indicator for member countries as a whole increased by 0.6 in March. The leading indicator for the United States and Japan increased by 0.8 and 0.9 respectively while the euro area leading indicator increased by 0.5.

Leading indicators reported by Japan last week also pointed to a continuation of its economic recovery. Its composite index of leading indicators jumped 4.4 points in March to 102.8, its biggest gain on record. The diffusion index for current conditions from the economy watchers survey rose to 49.8 in April, its highest in three years, from 47.4 in March, while the index for future conditions rose to 49.9 in April from 47.0 in March.

In the US, economic reports last week were also positive. The reports showed that retail sales increased 0.4 percent in April while industrial production rose 0.8 percent.

Ironically, problems for global growth could come from an unexpected source: emerging economies. The OECD report last week said that its composite leading indicators for Brazil and China decreased by 0.3 in March, indicating "a potential halt in expansion".

Last week's reports from China provided few hints of such a halt though. Industrial output rose 17.8 percent year-on-year in April while retail sales were up 18.5 percent.

However, inflation appears to be accelerating in China and this could provoke further monetary tightening. The rate of consumer price inflation accelerated from 2.4 percent in March to 2.8 percent in April, the highest in 18 months. Property prices jumped 12.8 percent in April, the biggest since records began in 2005.

Already, the Chinese stock market is signalling nervousness about the outlook for the economy and monetary policy. Although the Shanghai Composite Index rose 0.3 percent last week to 2,696.63, it is down 17.7 percent for the year and is 22.3 percent below its highest level in 2009.

That is not a good sign from an economy that is supposed to be one of the key drivers of growth for the rest of the world.

So while investors are mostly focused on Europe at the moment, it is certainly not the only source of risk for global markets.

Markets fall despite positive US data

US economic data on Friday were quite positive. Bloomberg reports:

Retail sales and industrial production in the U.S. climbed more than forecast in April, indicating the economic recovery gained momentum at the start of the second quarter.

Sales increased 0.4 percent last month after a 2.1 percent gain in March that was larger than previously estimated, Commerce Department figures showed today in Washington. Production rose 0.8 percent, the most in three months, the Federal Reserve said...

Americans were less pessimistic about the labor market, helping lift consumer sentiment in early May, according to a Thomson Reuters/University of Michigan report. The index of confidence rose to 73.3 from an April reading of 72.2.

Markets, however, shifted their focus back on European debt concerns. Again from Bloomberg:

The euro slid to the lowest since the aftermath of Lehman Brothers Holdings Inc.’s collapse and stocks tumbled, paring a weekly rally, on concern the sovereign debt crisis will trigger a breakup of the European currency. Oil fell to a three-month low, while U.S. and German bonds rallied.

The Standard & Poor’s 500 Index lost 1.9 percent at 4 p.m. in New York, paring its weekly advance to 2.2 percent. The Stoxx Europe 600 Index slumped 3.4 percent and climbed 4.8 percent for the week. Crude oil retreated 3.8 percent and copper dropped the most in a week as the euro sank below $1.24 to levels not seen since October 2008. The yield on the 10-year German bund decreased 8 basis points, while the 10-year Treasury yield fell by the same amount to 3.46 percent. The cost of insuring against corporate defaults rose. Gold declined from a record.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said Greece may not be able to repay its debt in full, and former Federal Reserve Chairman Paul Volcker said he’s concerned the euro area may break up. Sony Corp., the world’s second- largest maker of consumer electronics, said it may suffer a “significant impact” if Europe’s deficit spreads, while Chinese Premier Wen Jiabao said the foundations for a worldwide recovery aren’t “solid” as the sovereign-debt crisis deepens...

The two-year German note yield declined 5 basis points to 0.56 percent as investors flocked to the debt of Europe’s largest economy as a safe haven. Greek 10-year bonds dropped, with the yield climbing 36 basis points to 7.71 percent.

But investors would do well to also keep an eye on tightening conditions in China.

China failed to draw enough bids at a treasury bill sale for a second time in a month on speculation banks are seeking higher returns in longer-maturity debt. The finance ministry sold 17.4 billion yuan ($2.5 billion) of the 20 billion yuan of 273-day securities on offer at an average yield of 1.72 percent, compared with 1.54 percent at the last sale, according to data compiled by Bloomberg. China didn’t complete sales of 273-day and 91-day debt on April 9.

Japan shows further signs of recovery, US initial jobless claims fall

Japanese economic reports on Thursday were mixed.

Reuters reports a fall in bank lending in April.

Japanese bank lending fell in April from a year earlier, matching the biggest decline in four years and showing that companies' funding needs remain weak despite an economic recovery and recent easing steps by the central bank...

Outstanding loans held by Japanese banks fell 1.8 percent in the year to April, matching the annual decline in March, which was the biggest fall in four years.

Other data, however, were not bad.

Underscoring the nascent economic recovery and the lack of corporate need for loans was a 13.2 percent decline in Japanese corporate bankruptcies for April from a year earlier to 1,154 cases.

Total debt involved plunged 48 percent to 270 billion yen ($2.9 billion), the lowest since August 1975...

Other data showed Japan's current account surplus rose 65 percent in March from a year earlier to its biggest amount in two years, as exports steadily pick up thanks to brisk demand, particularly from Asia.

And confidence is returning to the economy.

Japan's service sector sentiment index, seen as a good leading indicator on the economy, also rose to a three-year high.

Details from another Reuters report showed that the service sector sentiment index rose to 49.8 in April, its highest in three years, from 47.4 in March, while the outlook index rose to 49.9 in April from 47.0 in March.

US reports on Thursday were also relatively positive. Reuters reports:

The number of U.S. workers filing for jobless benefits fell only slightly last week, suggesting the unemployment rate will remain elevated even as recovery in the labor market becomes entrenched.

Initial claims for state unemployment aid slipped 4,000 to 444,000 in the week to May 8, the Labor Department said on Thursday, maintaining this year's very modest downward trend even as other job market indicators show major improvement.

The deflation threat appears to be fast receding.

In a second report, the department said import prices increased 0.9 percent last month on higher petroleum costs after rising 0.5 percent in March. However, excluding the volatile petroleum category, prices were up only 0.3 percent, suggesting little inflationary pressure.

And the housing market provided further hope for stabilisation and recovery.

Separately, in another positive sign for the economy, lenders initiated far fewer new actions against struggling U.S. homeowners last month, RealtyTrac said on Thursday.

April foreclosure filings fell 9 percent from March and 2 percent from a year ago, the first year-over-year drop since RealtyTrac started tracking annual foreclosure rates in January 2006.

However, banks took control of a record 92,432 properties in April, up 1 percent from a month earlier and 45 percent from a year ago.

Eurozone economy grows in first quarter, Japanese leading index jumps

Eurozone GDP managed a small expansion in the first quarter. Reuters reports:

The euro zone economy made a weak start to 2010 as paltry growth in powerhouses Germany and France weighed, while debt reduction efforts in the region's weaker states look set to puncture hopes of faster expansion in coming quarters...

Quarterly growth for the euro zone overall was 0.2 percent in the January-March period after a flat final quarter of 2009.

Still, global economic recovery is proving quite robust, with even the deflation-prone Japanese economy looking set to continue expanding. Again from Reuters:

Japan's index of leading indicators jumped 4.4 points in March from February, its biggest gain on record, government data showed on Wednesday, as the world's No.2 economy steadily recovers on the back of brisk exports to Asia.

It was the 13th consecutive month of increases in the index, which is compiled using data such as the number of job offers and consumer sentiment and is a barometer of the economy a few months ahead.

The index of coincident economic indicators rose a preliminary 1.1 points, climbing for a full year as the economy's recovery continues.

US trade data for March also suggest that the global economic recovery remains on track. From Bloomberg:

The trade deficit in the U.S. widened in March to the highest level in more than a year as imports climbed faster than exports, adding to evidence of the global recovery from the worst recession in the post-World War II era...

Imports climbed 3.1 percent in March to $188.3 billion, led by a $2.76 billion surge in crude oil purchases and increasing demand for foreign-made automobiles...

Surging growth in emerging Asian and Latin American countries is propelling demand for U.S. goods. Exports increased 3.2 percent to $147.9 billion, reflecting sales of generators, semiconductors and industrial supplies such as petroleum products.

Markets slip, Chinese inflation accelerates

Markets remained shaky on Tuesday despite the EU rescue plan. From Bloomberg:

Stocks fell, led by commodity producers and banks, and oil and copper slid on skepticism an almost $1 trillion European loan package will halt the region’s debt crisis. The pound gained as Conservative leader David Cameron was appointed prime minister. Gold rose to a record.

The Standard & Poor’s 500 Index lost 0.3 percent at 4 p.m. in New York following a 4.4 percent jump yesterday after the European plan was announced. The MSCI World Index dropped 0.7 percent. Oil fell on a stronger dollar, while copper slid on concern growth will slow in Europe and China. The pound rose 0.8 percent to near $1.50 and added 1.5 percent versus the euro on speculation Cameron will form a coalition with Liberal Democrats and take aggressive steps to cut the deficit. Ten-year gilt yields fell 4 basis points to 3.9 percent.

Renewed fears of another Chinese tightening didn't help. From AFP/CNA:

China said Tuesday that consumer prices and bank lending accelerated in April, fuelling fears the economy may overheat and building pressure on Beijing to hike interest rates and let its currency rise.

Property prices also had the biggest year-on-year jump in nearly five years in April, signalling measures introduced by the government in recent weeks to curb inflation and rein in soaring prices were having little effect...

The consumer price index, the main gauge of inflation, rose a higher-than-expected 2.8 percent compared with April last year, the NBS reported.

The increase outpaced the 2.4 percent jump in March but was still below the government's own inflation target of three percent for the year...

New loans issued by Chinese banks hit 774 billion yuan (113.4 billion dollars) in April after falling to 510.7 billion yuan in March while property prices rose 12.8 percent year-on-year in April, official data showed...

Urban fixed asset investment, a measure of government spending on infrastructure and a key driver of China's economy, rose 26.1 percent in the January-April period to 4.67 trillion yuan, the NBS said Tuesday.

Industrial output from the country's millions of factories and workshops rose 17.8 percent year-on-year in April, while retail sales were up 18.5 percent for the month to 1.15 trillion yuan.

On Monday, China had reported that its trade balance returned to surplus in April as exports rose 30.5 percent from a year earlier.

Markets rally on EU rescue plan

Markets were all about the European financial rescue plan on Monday. From Reuters:

A $1 trillion emergency package to stabilize the euro zone unleashed a spectacular rally in world stocks on Monday but the euro wiped out initial gains as worries about the region's debt problems persisted.

The rescue plan -- the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 -- triggered the biggest one-day rise in European shares in 17 months after panic selling last week.

Wall Street also surged as confidence returned, at least temporarily. The Dow Jones Industrial average jumped 3.9 percent and the narrower Standard & Poor's financial share index was up 5.6 percent amid relief among banks.

Yields paid on Greece's 2-year notes plunged to 8.7 percent from Friday's close of 22.4 percent as the plan reassured investors about the country's ability to service debt in the short term...

The euro rose as much as 3 percent after weeks of draining confidence but erased nearly all of its gains later to trade at $1.278 per U.S. dollar, reflecting concerns about Europe's long-term debt problems...

The $1 trillion package consists of 440 billion euros in guarantees from euro area states, plus 60 billion euros in a European stabilization fund that could be disbursed to help euro zone states if needed on strict austerity conditions.

EU finance ministers said the IMF would contribute up to 250 billion euros for a total of 750 billion, about $1 trillion.

An important part of the rescue plan came in the form of the ECB buying government bonds, an act not without controversy. From Bloomberg:

The central bank envisioned by the euro’s founding fathers is being eclipsed as the sovereign debt crisis forces it to help clean up the fiscal mess of governments...

The euro’s political leadership agreed to rescue countries that failed to control their deficits and a divided ECB backstopped it by purchasing government bonds after the Greek fiscal crisis sparked a selloff in Spanish and Portuguese debt...

[ECB President Jean-Claude Trichet’s] decision to sign up to a euro-region bailout mechanism may see him start his final year in office fighting suspicions that the German model of the independent central bank no longer applies. Just hours after the program was announced, Bundesbank President Axel Weber said buying bonds has “significant risks.”

US recovery gets needed boost from employment

While gross domestic product in the United States has been expanding since the middle of 2009, helped by strong growth in consumer spending, Friday's non-farm payroll employment report is probably the most unambiguous indication yet that the economy has moved out of recession.

On 7 May, the Department of Labor reported that non-farm payroll employment rose by 290,000 in April. This was the biggest increase in employment in four years. It was also the fourth consecutive monthly increase and the fifth month of increase in the past six months.

While hiring for the 2010 census boosted the increase in non-farm payrolls, the bulk of the increase came from the private sector, where employment increased 231,000.

The report noted that since December, non-farm payroll employment has expanded by 573,000, with 483,000 jobs added in the private sector.

Some indicators in the report that often lead total employment show that the increase in employment is likely to continue in coming months. The average work week for employees on private non-farm payrolls increased by 0.1 hour to 34.1 hours in April, the highest in more than a year. Temporary help services added 26,000 jobs in April, and employment in this industry has increased by 330,000 since September 2009.

However, although the latest employment reports indicate that non-farm payroll employment has begun to recover, at 130 million in April, it remains far below the previous peak of 138 million seen at the end of 2007.

The continuation of the recovery in employment is important for the sustainability of the US economic recovery as a whole. Earlier reports from the Department of Commerce had shown that while consumer spending had fully recovered from the recession in the first quarter of the year, personal income has been seriously lagging.

On 30 April, the report on gross domestic product by the Department of Commerce showed that the US economy grew at an annual rate of 3.2 percent in the first quarter of 2010. Personal consumption expenditures grew 3.6 percent.

Even after adjusting for inflation, the level of personal consumption expenditures in the first quarter was higher than the peak in the previous expansion cycle in the fourth quarter of 2007.

Disposal personal income has also stayed resilient, the first quarter's level of real disposal personal income being the same as that at the previous cycle peak in the second quarter of 2008.

However, the underlying trend in income has been much weaker. Real personal income excluding current transfers in the first quarter remained near the recession low and was 6.5 percent lower than the previous peak in the second half of 2007.

The weakness of personal income is hardly surprising in view of the weak recovery in employment thus far.

Clearly, the recovery in consumer spending so far owes much to fiscal and monetary stimuli. Real personal income excluding transfers was 4 percent less than real personal consumption expenditures in March. This is clearly an unsustainable situation. If the underlying trend in personal income stays weak, the recovery would be left vulnerable to an end to macroeconomic stimulus.

Fortunately, the latest employment report indicates that the recovery in employment is gaining momentum.

If sustained, growth in employment should lead to growth in personal income in coming months, which should in turn underpin further growth in consumer spending and the economy as a whole.

US employment sees biggest jump in four years

Bloomberg reports the April US employment numbers.

Payrolls in the U.S. surged by the most in four years in April, led by gains in private employment that indicate the economy is weaning itself from government support.

The 290,000 increase in employment exceeded the median estimate of economists surveyed by Bloomberg News and followed a 230,000 gain in March that was larger than initially estimated. The jobless rate rose to 9.9 percent from 9.7 percent as thousands of jobseekers entered the workforce, a Labor Department report in Washington showed today...

The April gain included 66,000 temporary workers hired by the government to help conduct the 2010 census and a 231,000 rise in private payrolls...

While the economy added jobs, incomes were little changed. Average hourly earnings rose to $22.47 in April from $22.46 in March, today’s report showed.

The average work week for all workers rose to 34.1 hours in April, the highest since January 2009, from 34 hours the prior month.

However, the US employment report doesn't have the market's undivided attention these days. From Bloomberg:

Stocks slid for a fourth day, erasing 2010 gains for U.S. benchmark gauges, and the bonds of debt- laden nations tumbled after Europe’s debt crisis spurred an equity rout yesterday that undermined confidence in trading systems. Oil sank, capping the biggest weekly drop since 2008.

The Standard & Poor’s 500 Index fell as much as 3 percent before paring losses to 1.5 percent at the 4 p.m. New York close, leaving it down 0.4 percent in 2010. The MSCI World Index sank 2.3 percent. The Stoxx Europe 600 Index fell 3.9 percent to the lowest level since November. Greece led a drop in deficit- stricken European nations’ bonds, with the yield premium demanded to own the 10-year securities instead of benchmark German bunds rising to a record 9.65 percentage points.

US and Chinese stocks plunge

US stocks plunged on Thursday. Bloomberg reports:

U.S. stocks tumbled the most in a year on concern Europe’s debt crisis will halt the global recovery. The selloff briefly erased more than $1 trillion in market value as the Dow Jones Industrial Average fell almost 1,000 points, a 9.2 percent plunge that was its biggest intraday percentage loss since 1987, before paring the drop.

The Dow average ended down 347.8 points, or 3.2 percent, at 10,520.32. The Standard & Poor’s 500 Index fell as much as 8.6 percent, its biggest intraday plunge since December 2008, before closing down 3.2 percent at 1,128.15. It was the biggest percentage drop on a closing basis since April 20, 2009, for both measures. The Nasdaq OMX Group Inc. said it will cancel trades of stocks that moved more than 60 percent during the plunge. Futures on the Dow and S&P 500 expiring next month lost more than 0.5 percent at 6:52 p.m. in New York...

New York Stock Exchange spokesman Rich Adamonis said “there were a number of erroneous trades” during the tumble. The NYSE told CNBC that there were no system errors as speculation of bad trades swirled through the market.

Erroneous trades aside, the trigger was obviously the continuing European debt crisis.

The euro tumbled the most since the collapse of credit markets in 2008, dropping 1.5 percent to $1.2620 at 5:10 p.m. in New York and touching a 14-month low of $1.2529, even as Greece’s parliament approved austerity measures demanded by the European Union and International Monetary Fund as a condition of its 110 billion euro ($139 billion) bailout...

Bonds of debt-laden European nations tumbled. The yield on Spain’s 10-year note surged 24 basis points, or 0.24 percentage point, to 4.42 percent, the highest since June. Italy’s 10-year yield jumped 22 basis points to 4.27 percent.

The 10-year Greek bond yield surged 1.14 percentage points to 11.31 percent, the highest in Bloomberg data going back to 1998. The nation’s two-year debt surged 1.46 percentage points to 16.36 percent, also a record in Bloomberg data.

German bunds gained, sending the yield premium investors demand to own Greek and Spanish 10-year debt instead of Europe’s benchmark bond to records.

The ECB left interest rates unchanged on Thursday but investors were apparently looking for something more.

European Central Bank President Jean-Claude Trichet held interest rates at a record low of 1 percent today and said the bank didn’t discuss whether to purchase government bonds to stem the region’s debt crisis, defying market speculation that he would take such measures.

Almost forgotten amid the US stock market tumble was that the Chinese stock market saw an even bigger sustained drop earlier on Thursday. Again from Bloomberg:

China’s stocks plunged, driving the benchmark index to an eight-month low, on concern government measures to curb property speculation and cool inflation will hurt economic growth...

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 117.45, or 4.1 percent, to 2,739.70, its lowest close since Sept. 2. The CSI 300 Index retreated 4.6 percent to 2,896.86. Futures on the CSI 300 expiring on May 21, or the most active contract, lost 3.4 percent to 2,972.6.

The Shanghai gauge has slumped 16 percent in 2010, Asia’s worst performer, as the government unwound monetary stimulus and stepped up measures to prevent a housing bubble inflated by record lending last year. The index surged 80 percent in 2009.

The property boom at the centre of government and market concerns, though, may already be starting to unwind.

The nation’s home prices may drop 30 percent, according to brokerages including China Jianyin Investment Securities Co. Home sales plunged nearly 40 percent by both units and floor space in 15 major cities last week, extending a streak of declines since mid-April, according to Zheshang Securities Co...

An index tracking 34 property stocks on the Shanghai Composite tumbled 5.2 percent, the lowest close since March 2009. The gauge is the worst performer among the five industry groups this year, declining 27 percent.

EC upgrades eurozone growth as Greeks riot

The Greek debt crisis has taken a deadly turn. From Reuters:

European leaders warned on Wednesday that the euro zone debt crisis could spread like a bushfire beyond Greece, and investors sold stocks and the euro as Greek anti-austerity unrest claimed its first lives...

Three people, including a pregnant woman, choked to death when rioters set an Athens bank ablaze during a protest against wage and pension cuts that were the price of the 110 billion euro ($146.5 billion) EU/IMF bailout agreed on Sunday.

A general strike shut down Greek airports, tourist sites and public services and about 50,000 demonstrators marched against the planned public spending cuts and tax rises, demanding that tax cheats and corrupt politicians be put on trial...

Anxiety that the crisis may spread sent stocks tumbling worldwide...

The euro hit a 14-month low of $1.2801 and the cost of insuring Spanish and Portuguese debt against default spiked to euro lifetime highs.

Moody's Investors Service put its credit rating for Portugal on a three-month review, and an analyst at the agency said that a downgrade was now likely.

Economic reports on the euro area on Wednesday were mixed. Markit's composite index for services and manufacturing industries rose to 57.3 in April from 55.9 in March. However, retail sales were flat in March.

Nevertheless, the European Commission remains confident about economic recovery and has even upgraded its growth forecasts for the euro area. From Reuters:

Euro zone economic growth should be stronger this year than previously thought and the budget gap lower, the European Commission said, but it warned of risks to recovery from financial market tensions sparked by Greece.

In its twice-yearly economic forecasts for countries of the 27-nation European Union, the bloc's executive said economic growth in the 16 countries using the euro would be 0.9 percent this year, rather than the 0.7 percent it projected in February.

Norway's central bank also appears confident enough about economic recovery to resume monetary tightening. From Bloomberg:

Norges Bank raised its benchmark interest rate a quarter point, resuming a tightening cycle policy makers shelved last quarter as they seek to balance the krone’s appreciation against rebounding household demand.

The central bank increased the overnight deposit rate to 2 percent, it said in a statement on its website today, though policy makers considered making no change. The decision had been expected by nine of sixteen economists surveyed by Bloomberg. Seven predicted no change.

A relatively positive set of economic numbers from the US also added to evidence of continuing recovery for the global economy. From Bloomberg:

Service industries in the U.S. expanded in April at the same pace as the prior month, indicating factories will drive any pickup in the economy.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, held at an almost four-year high of 55.4 for a second month. Readings above 50 signal expansion...

Companies increased payrolls by 32,000 workers last month, the most since January 2008, data from ADP Employer Services showed today...

Job cuts announced by U.S. employers plunged 71 percent in April from a year earlier, figures from Chicago-based Challenger, Gray & Christmas Inc. also showed today. Planned firings dropped to 38,326, the lowest level since July 2006.

RBA raises rates, stocks and commodities fall

The RBA raised interest rates yet again on Tuesday. Bloomberg reports:

The Reserve Bank of Australia signaled a higher bar for interest-rate increases after becoming the world’s first major central bank to withdraw “emergency” stimulus used during the global financial crisis.

Governor Glenn Stevens raised the benchmark rate for a sixth time in seven meetings, to 4.5 percent, and said lending costs are back to “average” for most borrowers. The bank will hold off on a boost next month, according to all 24 economists surveyed by Bloomberg News after yesterday’s decision.

Positive economic reports from the US suggest that monetary tightening now is appropriate. From Bloomberg:

Factory orders unexpectedly rose in March and more Americans signed contracts to buy previously owned homes, indicating the U.S. economy gained speed entering the second quarter.

The 1.3 percent increase in orders placed with manufacturers matched the prior month’s gain, which was more than twice as large as previously estimated, the Commerce Department said today in Washington. Signed home-purchase agreements, or pending sales, rose 5.3 percent in March, according to the National Association of Realtors.

Markets, however, are looking vulnerable after investors turned their attention back to sovereign debt worries on Tuesday. Bloomberg reports:

U.S. equities tumbled the most since February and European stocks erased their 2010 gain, while the euro slid to a one-year low, amid concern a government debt crisis is spreading. Oil, copper and gold sank on a slowdown in Chinese manufacturing. Treasuries rallied.

The Standard & Poor’s 500 Index slid 2.4 percent at 4 p.m. in New York and the Stoxx Europe 600 Index plunged 2.9 percent, leaving it down 0.4 percent this year. The euro weakened below $1.30 for the first time since April 2009. Copper fell to the lowest since February, while oil sank the most in three months as the dollar rose against 14 of 16 major counterparts. The 10- year Treasury yield slid 8 basis points to 3.6 percent...

Yields on Spain’s 10-year debt climbed 8 basis points to 4.11 percent, near the highest since February. Credit-default swaps on Spain rose 50 basis points to 207.8, while Portugal added 71 to 346.6, CMA DataVision data showed...

Greek bonds fell for the first time in four days, with the yield on the government’s 10-year bond rising 90 basis points to 9.4 percent. Investors demanded an extra 645 basis points to hold Greek 10-year bonds instead of benchmark German bunds, up from 544 basis points yesterday. Credit-default swaps on Greece surged 85 basis points to 731, according to CMA DataVision prices, implying an almost 45 percent probability of default over five years.

US manufacturing accelerates

US economic data released on Monday were quite positive. Bloomberg reports:

Manufacturing in the U.S. expanded in April at the fastest pace since June 2004, indicating the world’s largest economy accelerated as it entered the second quarter.

The Institute for Supply Management’s factory index rose to 60.4, exceeding the median forecast in a Bloomberg News survey of economists, from a March reading of 59.6. Americans’ spending increased in March by the most in five months, according to the Commerce Department...

Construction spending unexpectedly increased in March, propelled by gains in state and local government projects, a Commerce Department report showed. The 0.2 percent rise followed a 2.1 percent drop in February.

Manufacturing is also improving in most of the rest of the world.

A manufacturing index based on a survey of euro-area purchasing managers increased to 57.6 from a March reading of 56.6, London-based Markit Economics said. A gauge of factory performance in Australia surged 9.3 points to 59.8 in April, the Australian Industry Group and PricewaterhouseCoopers said.

Over the weekend, China's Federation of Logistics and Purchasing reported that its manufacturing PMI rose to 55.7 in April from 55.1 in March.

Real Time Economics provides a breakdown of world-wide factory activity by country.

Greece gets bailout, China raises reserve requirement

The weekend has proven to be a bit more eventful than usual.

Greece finally gets the bailout it has been waiting for. Reuters reports:

European finance ministers triggered a record 110 billion euro ($147 billion) bailout for debt-stricken Greece on Sunday after Athens committed itself to years of painful austerity.

After weeks of tough talk and procrastination due to fierce public opposition to handouts for the Greeks, German Chancellor Angela Merkel finally threw her full support behind the EU/IMF package, vowing to fight for parliamentary approval by Friday.

Euro zone ministers, meeting in emergency session, approved the three-year package of emergency loans and agreed the first funds would be released in time for Athens to make a big debt repayment to creditors on May 19.

In exchange for by far the largest bailout ever assembled for a country, Prime Minister George Papandreou announced further spending cuts and tax increases totaling 30 billion euros over three years on top of tough measures already taken...

The euro zone loans will carry an interest rate of about 5 percent -- just half the rate demanded by markets last week to buy Greek debt, but nearly 2 percentage points more than the rate on Germany's benchmark bonds.

Even as Europe is loosening its purse strings, China is tightening monetary policy. From AFP/CNA:

China Sunday told banks to increase the amount of money they must keep in reserve as it tries to rein in an explosion of new lending that has stoked fears of inflation and economic overheating.

The People's Bank of China said in a notice on its website that the reserve requirement ratio would be hiked by 50 basis points from May 10 -- the third reported increase since the beginning of the year.

US economy grows 3.2 percent in first quarter

Strong growth in consumer spending helped keep the US economic recovery on track in the first quarter. Bloomberg reports:

American consumers helped propel the U.S. economy at the start of 2010, taking over leadership of a recovery that is starting to generate the jobs needed to ensure it’s sustained.

Gross domestic product grew at a 3.2 percent annual rate in the first quarter as household spending climbed at the fastest pace in three years, figures from the Commerce Department showed today in Washington. Other reports indicated the world’s largest economy accelerated to start the second quarter...

The Institute for Supply Management-Chicago Inc. said its business barometer rose to 63.8 this month, the highest level since April 2005, from 58.8 in March. Figures greater than 50 signal expansion.

The Reuters/University of Michigan final index of consumer sentiment dropped to 72.2, from a reading of 73.6 in March. The gauge was projected to fall to 71 from a month earlier, according to the median forecast in a Bloomberg News survey of 66 economists.

Meanwhile, a weak economic recovery in the eurozone is helping to keep inflation in check but unemployment high. Bloomberg reports:

European inflation accelerated to the fastest pace in more than a year while the region’s unemployment rate remained at an 11-year high.

Consumer prices in the 16-nation euro region rose 1.5 percent in April from a year earlier after a 1.4 percent gain in March, the European Union statistics office in Luxembourg said today in an initial estimate. That’s the fastest inflation since December 2008 and is in line with economists’ estimates in a Bloomberg News survey. Unemployment held at 10 percent in March, the highest since August 1998, a separate report showed.