Stocks fall on weaker China growth and plunge in US consumer confidence

Markets tumbled on Tuesday as concerns spread to the Chinese and US economies. From Bloomberg:

Stocks sank from Shanghai to New York, with the MSCI World Index losing the most in 14 months, and two-year Treasury yields slid to a record low on concern over weakening growth in China and a slump in U.S. consumer confidence. The euro fell to an eight-year low versus the yen.

The MSCI World Index of 24 developed nations lost 3.2 percent, its biggest retreat since April 2009, as of 4 p.m. in New York. The Standard & Poor’s 500 Index slid 3.1 percent to 1,041.24, its lowest close since October, as 499 of its stocks declined. The Shanghai Composite Index tumbled 4.3 percent. The benchmark 2012 Treasury note yield slid as low as 0.5857 percent and the 10-year yield sank below 3 percent for the first time in 14 months. Oil and copper slumped at least 3 percent...

The tumble in global stocks began after the Conference Board said its leading economic index for China rose 0.3 percent in April, less than the 1.7 percent reported June 15. Losses accelerated after the same research group’s gauge of U.S. consumer confidence slumped to 52.9 in June, below all 71 projections in a Bloomberg News survey of economists. The S&P 500 has tumbled 11 percent since the end of March, headed for its first quarterly loss in a year.

Meanwhile, Europe also continues to be a source of stress for markets.

Today’s data damaged investor confidence amid concern a Labor Department report July 2 will show the U.S. lost jobs for the first time this year, while European bank balance sheets come under heightened scrutiny as a lending facility from the region’s central bank expires.

The rate banks say they charge each other for three-month loans in euros rose to 0.688 percent in London, the highest in eight months, as institutions hoarded cash before the 12-month European Central Bank lending facility expires later this week.

Japanese economic data on Tuesday added to the pessimism. From AFP/CNA:

The unemployment rate edged higher in May to 5.2 percent, rising by 0.1 percentage points from the previous month, government data showed Tuesday...

Average household consumption also fell unexpectedly in May by 0.7 percent on-year, the government said, defying expectations of a 0.5 percent rise as weak domestic demand continues to burden the Japanese economy...

Factory output was down 0.1 percent on month in May, the first drop in three months following a 1.3 percent gain in April.

Further evidence of slower economic growth in Japan came today with the Nomura/JMMA Japan manufacturing PMI falling to 53.9 in June from 54.7 the previous month.

Europe, though, provided better economic data on Tuesday. From Bloomberg:

European confidence in the economic outlook unexpectedly improved in June after reviving global growth and a drop in the euro bolstered the region’s recovery.

An index of executive and consumer sentiment in the 16 euro nations rose to 98.7 from 98.4 in May, the European Commission in Brussels said today. Economists had projected a drop to 98.1, according to the median of 25 estimates in a Bloomberg News survey. The commission’s index is based on a survey of 130,000 managers and 40,000 consumers conducted in the first two weeks of the month.

US spending and income up in May

The US economic recovery appeared to have remained intact in May, based on Monday's data. From Reuters:

U.S. consumer spending rose moderately in May, even as savings touched the highest level in eight months, indicating a tepid economic recovery was still intact...

Spending increased 0.2 percent after going flat in April, the Commerce Department said. That was a touch above market expectations for 0.1 percent. Adjusted for inflation, spending was up 0.3 percent...

Last month, an increase in jobs and longer working hours helped lift incomes. Incomes rose 0.4 percent after gaining 0.5 percent in April, the Commerce Department said.

Adjusted for inflation and taxes, incomes climbed 0.5 percent following a 0.6 percent increase the prior month...

The report on spending showed inflation pressures remain muted. The personal consumption expenditures price index was flat for a second month in a row, while the core price index, which excludes food and energy costs, rose 0.2 percent...

Separately, a measure of national economic activity slipped last month, but remained above levels historically linked to a mature economic recovery following a recession.

The Chicago Federal Reserve Bank said its national activity index fell to 0.21 from 0.25 in April. The three-month moving average indicated limited inflationary pressure over the coming year, the Chicago Fed said.

Still, noting the decline in the growth rate of the ECRI Weekly Leading Index to -6.9 percent recently, John Hussman says that "the US economy appears headed into a second leg of an unusually challenging downturn".

Meanwhile, in the euro area, the ECB reported that loans to the private sector rose 0.2 percent in May from a year earlier after increasing 0.1 percent in April but M3 money supply declined 0.2 percent. Markets, though, remain focused on the sovereign debt issue. From Bloomberg on Monday:

German bunds rose, sending the yield to the lowest in more than two weeks, as investors demanded higher yields to hold all but the safest European government securities amid concern the region’s debt crisis may deepen.

Italian, Spanish and Greek bonds fell after European auctions for a total of 10.7 billion euros ($13 billion) of debt drew weaker demand. The difference in yield between German 10- and 2-year bonds was at the lowest level since December as a report today showed annual inflation in Europe’s largest economy slowed...

US Treasuries were up too, pushing the 10-year yield down to 3.02 percent.

US housing recovery falters

The past fortnight's economic reports have cast renewed doubts about the recovery of the housing sector in the United States.

Last Tuesday, the National Association of Realtors reported that sales of existing US homes unexpectedly fell in May despite a government tax credit to encourage home purchase, decreasing by 2.2 percent to a 5.66 million annual rate.

The number of existing homes on the market fell 3.4 percent to 3.89 million. However, at the current sales pace, this still represented 8.3 months of sales.

On Wednesday, the Commerce Department reported that sales of new homes fell a record 32.7 percent in May to an annual rate of 300,000 units, the lowest level since the series started in 1963, as the expiration of the tax credit made its first impact on this indicator.

The number of new homes for sale dipped to 213,000 units, the lowest since November 1970, but the drop in sales means that this represented 8.5 months of sales, the highest in nearly a year.

The previous week, the Commerce Department had reported that housing starts fell 10 percent in May, the biggest decline since March 2009. The drop in the supply of homes on the market in May was a good sign for housing construction in the long term. However, the home inventory remains at a relatively high level when compared to sales, so it may be difficult for housing starts to regain much momentum in the near future.

The weak housing sector could weigh on an economy that turned out to be weaker than previously expected in the first quarter.

Last Friday, the Commerce Department reported that real gross domestic product growth in the first quarter grew at an annualised rate of 2.7 percent, less than its previous estimate of 3.0 percent. Consumer spending turned out to be weaker than previously estimated, growing at a 3 percent rate rather than the 3.5 percent rate reported earlier.

Of course, it was housing that pulled the rest of the economy into recession in 2007 and although the overall economy has made a partial but substantial recovery, housing itself has lagged far behind despite the efforts to prop it up.

For example, when you compare the trend for housing starts and new home sales with industrial production, it is obvious that the first two have failed to keep pace with the recovery in the latter. Industrial production is clearly in recovery and although the industrial production index is still some way below its peak in 2007, it is also clearly off its trough in 2009, something that cannot be said for housing.

Manufacturing in particular looks likely to continue to recover based on last week's Commerce Department report on durable goods orders. Although total durable goods orders fell 1.1 percent in May, excluding the volatile transportation component, durable goods orders were up 0.9 percent, indicating that the underlying trend probably remains positive.

In contrast, the past fortnight's reports show that the battered and bruised housing sector is still struggling to get off the floor.

US economy to slow despite higher consumer confidence

US first quarter GDP growth has been revised down. Reuters reports:

Gross domestic product expanded at a 2.7 percent annual rate instead of the 3 percent pace reported last month, the Commerce Department said in its final estimate on Friday...

The new softer reading for the January-March period reflected a downward revision to growth in consumer spending, which the department said rose at a 3 percent clip, not the 3.5 percent it had thought a month ago.

On a more positive note, consumer confidence improved in June.

Despite the tepid recovery, consumers are gradually feeling more confident in the economy. The Thomson Reuters/University of Michigan's consumer sentiment index rose to 76 in June, its highest since January 2008, from 73.6 last month. Economists had expected a reading of 75.5.

Notwithstanding the improved consumer confidence, slower growth is looking increasingly likely for the US economy after the ECRI Weekly Leading Index's annualized growth rate fell to minus 6.9 percent in the week ended 18 June from minus 5.8 percent the week before despite the index itself rising to 122.9 from 122.4. From Reuters:

"After falling for six weeks, the uptick in the level of the Weekly Leading Index suggests some tentative stabilization, but the continuing decline in its growth rate to a 56-week low underscores the inevitability of the slowdown," said Lakshman Achuthan, managing director of ECRI.

Japanese deflation eases

Deflation is easing in Japan, according to a Bloomberg report today.

Japan’s consumer prices fell at a slower pace in May, supporting the central bank’s view that a pickup in domestic demand is beginning to ease deflation.

Prices excluding fresh food slid 1.2 percent from a year earlier, moderating from a 1.5 percent decline in April, the statistics bureau said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg was for a 1.3 percent drop...

Corporate service prices, which the central bank says correlate closest with changes in the output gap, slid 0.8 percent in May from a year earlier, the smallest decline in 19 months, the BOJ said yesterday.

However, another Bloomberg report yesterday showed that growth in Japanese exports is also slowing.

Japan’s export growth slowed for a third month in May, signaling the pace of the economic recovery is likely to cool.

Shipments abroad advanced 32.1 percent from a year earlier, less than April’s 40.4 percent, the Finance Ministry said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for 36.5 percent. From the previous month, exports fell a seasonally adjusted 1.2 percent...

Imports climbed 33.4 percent in May from a year earlier, leaving a trade surplus of 324.2 billion yen ($3.6 billion), the ministry said. The median estimate of economists was for a 480 billion yen excess.

Meanwhile, in the euro area, industrial orders continued to grow in April.

European industrial orders increased for a third month in April, led by demand for intermediate goods such as car engines.

Orders in the 16-nation euro area rose 0.9 percent from March, when they jumped 5.1 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast orders to increase 1.6 percent, the median of 18 estimates in a Bloomberg News survey showed. In the year, April industrial orders rose 22.1 percent after increasing 20.3 percent in March.

In the US, durable goods orders fell in May but the overall picture from Thursday's US economic data were not unduly negative.

Orders for computers and machinery climbed in May, showing gains in global business investment and demand that will give the U.S. economy a lift.

Bookings for goods meant to last at least three years, excluding autos and aircraft, increased 0.9 percent, the third gain in the past four months, according to figures from the Commerce Department issued today in Washington. A report from the Labor Department showed the number of claims for jobless benefits last week hovered near this year’s average...

Total orders for durable goods dropped 1.1 percent in May, the first decrease in six months, as demand for commercial aircraft retreated, the Commerce Department figures showed.

Fed to remain on hold as US new home sales plunge

The Fed has again said it intends to keep interest rates low. From Bloomberg on Wednesday:

Federal Reserve officials retained a pledge to keep the benchmark interest rate at a record low for an “extended period” and signaled that Europe’s debt crisis may harm American growth.

“Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad,” the Fed’s Open Market Committee said in a statement today in Washington. Central bankers cited slowing inflation and said the recovery is “proceeding,” altering April language that the economy has “continued to strengthen,” while reaffirming they foresee a “moderate” pace of growth.

Economic data on Wednesday would have given Fed officials reason to be cautious about the recovery.

Reuters reports that US new home sales plunged in May.

Sales of new homes dropped a record 32.7 percent in May to the lowest level in at least four decades as the boost from a popular tax credit faded, adding to worries over a slowing economic recovery.

Single-family home sales tumbled to a 300,000 unit annual rate, the lowest level since the series started in 1963, the Commerce Department said on Wednesday.

Paul Kasriel remains hopeful for the housing market though.

Is there any reason to believe that after a couple of months, home sales will pick up again? Yes. Why? Because with mortgage rates at rock-bottom levels and with house prices very low in relation to household incomes, housing is about as an attractive a purchase as it has been in the past 40 years...

The absolute number of new housing units for sale stood at 213 thousand in May... the lowest inventory of new homes since November 1970... This should spur a modest increase in housing starts in the months ahead.

Meanwhile, Bloomberg reports that eurozone manufacturing and services expansion slowed in June.

Growth in Europe’s services and manufacturing industries slowed in June, adding to signs the region’s recovery is cooling as the sovereign debt crisis clouds the growth outlook.

A composite index based on a survey of euro-area purchasing managers in both industries fell to 56 from 56.4 in May, London- based Markit Economics said today. Economists had projected a drop to 55.8, the median of 13 estimates in a Bloomberg survey showed. A reading above 50 indicates expansion...

An index of services, which account for about 60 percent of the euro region’s gross domestic product, fell to 55.4 in June from 56.2 in the prior month, Markit said. A gauge of euro-area manufacturing declined to 55.6 from 55.8 in May.

Confidence improves in Europe, existing home sales decline in US

Bloomberg reports that consumer confidence in the euro area improved in June.

European consumer confidence remained near the lowest in nine months in June as rising unemployment and a fiscal crisis clouded the growth outlook.

An index of consumer sentiment in the 16-nation euro region rose to minus 17.3 from minus 17.8 in May, the Brussels-based European Commission said today in an initial estimate. The May reading was the lowest since September 2009. The commission is scheduled to publish its monthly report on economic confidence, which includes the consumer-confidence gauge, on June 29.

Also improving in June was German business confidence. Again from Bloomberg:

German business confidence unexpectedly rose to a two-year high in June as the euro’s depreciation and a global economic recovery brightened the outlook for exports.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 101.8 from 101.5 in May. That’s the highest since May 2008. Economists expected a decline to 101.2, according to the median of 38 forecasts in a Bloomberg News survey.

Across the Atlantic, the news was significantly more downbeat. From Bloomberg:

Sales of U.S. previously owned homes unexpectedly fell in May as demand began to slip even before a government tax credit expires.

Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.

Markets jump on renminbi announcement

Trading started brightly on Monday after the weekend move by China on the renminbi, with stocks rising across Asia. AFP/CNA reports:

China's announcement at the weekend that it would make its currency more flexible sent Asian stocks soaring on Monday, with the yuan hitting a five-year high against the dollar.

Shanghai stocks jumped 2.90 percent and Hong Kong surged 3.08 percent. Tokyo's Nikkei rose 2.43 percent, Sydney added 1.33 percent and Seoul gained 1.62 percent.

The move also sent the gold price soaring to a record high in Hong Kong as the weaker dollar made the precious metal more attractive...

The Chinese currency surged to 6.7974, its highest level since a revaluation by Beijing in July 2005 but still within the 6.7934 to 6.8616 trading range.

However, by the end of the day, some of the exuberance had vanished. Bloomberg reports:

U.S. stocks fell, slowing a global rally, as the Standard & Poor’s 500 Index failed to remain above levels watched by traders and optimism about China’s plan to relax the yuan’s fixed rate to the dollar faded in the last hour. Commodities pared gains and Treasuries trimmed losses.

The S&P 500 slipped 0.4 percent to 1,113.2 at 4 p.m. in New York after jumping as much as 1.2 percent in the first hour. The Reuters/Jefferies Index of commodities trimmed a 1.6 percent rally to less than 0.3 percent. Ten-year Treasury yields rose 3 basis points to 3.25 percent after surging 8 basis points. The losses in U.S. stocks weren’t enough to erase gains in the MSCI World Index, with the developed-markets gauge rising 0.5 percent for a 10th straight advance, the longest streak in 11 months.

Bloomberg also reports that the boost to Chinese stocks came from the notion that interest rate increases are now less likely.

China’s stocks rallied the most in almost a month, led by banks, airlines and property companies, on the prospect that a stronger yuan will tame inflation and reduce the need for interest-rate increases.

Still, a stronger currency could dent economic growth. Barry Eichengreen and Andrew Rose report that historically, countries tend to see slower growth in the years following removal of a currency peg.

The average annual rate of GDP growth slows by 1 percentage point between the five years preceding the exit and the five years following. But there is no growth collapse. Exiting up does not doom the economy to a Japanese-style lost decade.

Renminbi flexibility to be enhanced

The People's Bank of China announced on Saturday that it was making the renminbi more flexible.

In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

There were no details about how much the renminbi will be allowed to moved. A Bloomberg report today suggests that even by the end of the year, it is likely to be limited.

The yuan’s appreciation may be limited to 1.9 percent against the dollar this year as the euro’s slump hurts exporters, a survey of economists showed after China signaled an end to a two-year peg.

The currency will climb to 6.7 per dollar by Dec. 31, according to the median estimate of 14 analysts interviewed after the People’s Bank of China said on June 19 it will allow greater “flexibility.” The central bank yesterday ruled out “large changes” in the exchange rate and said it will prevent “excessive” moves.

And while most analysts assume that the renminbi will appreciate, some are not so sure.

“We can’t exclude the possibility of yuan depreciation,” said Shen Jianguang, Mizuho Securities Asia Ltd.’s chief economist for Greater China, who said a 2.5 percent drop is possible this year if the dollar-euro rate is unchanged. Even so, he added, China needs to show flexibility in its currency before the Group of 20 summit in Toronto on June 26-27.

Reuters also cites Nouriel Roubini and Li Daokui as saying that the renminbi could depreciate.

If the euro were to continue to depreciate, "the renminbi would have to be allowed to depreciate relative to the dollar, a paradoxical outcome," Roubini said...

Li Daokui, an academic adviser to the monetary policy committee of the People's Bank of China, told Reuters in Beijing that the yuan could depreciate against the dollar if the euro falls sharply against the U.S. currency.

As Robert Wenzel points out, the move could also have an impact on China's demand for US Treasuries, although I think the impact would depend mainly on how much the renminbi is allowed to appreciate.

ECRI leading index falls, markets rise

It is looking ever more likely that the US economy will slow. The ECRI's Weekly Leading Index fell to a 45-week low of 122.5 for the week ended 11 June from 123.0 in the prior week while the annualised growth rate declined to -5.7 percent from -3.7 percent a week earlier.

However, markets have stabilised recently, with the stock market going through its longest rally in 11 months, according to Bloomberg on Friday.

The MSCI World Index of stocks rose for the ninth day, the longest rally in 11 months, and Spanish bonds jumped on speculation efforts to contain Europe’s debt crisis will succeed. Treasuries fell, while gold climbed to a record. Oil reversed losses to rebound above $77 a barrel.

The global index increased 0.2 percent and extended its rally since June 7 to 7.1 percent. The Standard & Poor’s 500 Index rose 0.1 percent to 1,117.51, capping its biggest back-to- back weekly gain since November. The Stoxx Europe 600 Index climbed to a five-week high, while the euro traded near $1.24 after its biggest weekly gain since May 2009. Gold for August delivery rose 0.8 percent to $1,258.30 an ounce. Spain’s 10-year bond yield lost 18 basis points.

Mixed data from US and UK, Europe to publish bank stress tests

The US economic recovery looks intact for now as Bloomberg reports that the index of leading indicators rose in May.

The world’s largest economy will keep expanding in the second half of the year without stoking inflation or generating many jobs, reinforcing the Federal Reserve’s low-interest-rate policy, reports today showed.

The index of leading indicators, a gauge of the outlook for growth over the next three to six months, climbed 0.4 percent in May, according to data from the New York-based Conference Board...

However, other data released on Thursday indicate growth may be weakening.

Initial jobless claims increased by 12,000 to 472,000 in the week ended June 12, Labor Department figures showed...

Manufacturing in the region covered by the Philadelphia Fed expanded in June at the slowest pace since August as a measure of factory employment contracted for the first time in seven months, the branch of the central bank reported today...

Other data from the Labor Department showed consumer prices dropped 0.2 percent in May, a second consecutive decrease and the biggest since December 2008. Excluding food and fuel, the so-called core rate increased 0.1 percent...

There were mixed data from the UK on Thursday. Bloomberg reports that retail sales were up in May.

U.K. retail sales increased more than economists forecast in May as shoppers bought electrical goods such as wide-screen televisions to watch the World Cup soccer tournament.

Sales climbed 0.6 percent on the month, the Office for National Statistics said today in London. Economists predicted a 0.1 percent gain, according to the median of 21 forecasts in a Bloomberg News survey. Sales were unchanged in April, revised down from a 0.3 percent increase.

However, UK manufacturing weakened in June, according to another Bloomberg report.

A U.K. index of factory orders dropped in June for the first time in three months as export sales weakened, the Confederation of British Industry said.

The gauge slipped to minus 23 from minus 18 in May, the nation’s biggest business lobby said in London today. A measure of export orders declined five points to minus 2, showing the first negative balance since December. The CBI surveyed 498 companies from May 25 to June 9.

However, after the recent widening of European bond spreads, markets will be particularly interested in the latest developments in the euro area. From Reuters:

European leaders agreed on Thursday to publish details of "stress tests" showing the financial health of individual banks next month and to toughen budget rules to restore confidence in their currency union.

The euro rose to a three-week high against the dollar and concerns about Spain's financial health eased somewhat after Madrid's successful sale of 3.5 billion euros in 10- and 30-year bonds.

The successful sale of Spanish bonds helped stem the rise in bond spreads. Bloomberg reports:

German government bonds narrowed their yield difference with Spanish debt after investors snapped up the Mediterranean country’s securities at an auction, assuaging concern the nation will struggle to meet redemptions.

Spanish bonds rose, pushing the yield on the 10-year security down from the highest since July 2008. Spain sold 3.5 billion euros ($4.3 billion) of bonds, the maximum amount, at yields below the prevailing market rates, and attracted bids worth as much as 2.45 times the securities on offer.

Japan shows moderate recovery, US economic data mixed

The Bank of Japan maintained its assessment of moderate recovery for the Japanese economy in its monthly report released on Wednesday. The view was supported by a rebound in the tertiary index in April reported by Bloomberg.

Japan’s demand for services rose for the first time in three months, a sign the economic recovery is spreading to households.

The tertiary index, which captures 63 percent of the economy, advanced 2.1 percent from March, the Trade Ministry said today in Tokyo. The median forecast of 21 economists surveyed by Bloomberg News was for a 2.5 percent increase.

US economic data on Wednesday were mixed. Bloomberg reports:

Production in the U.S. rose by the most since August and builders broke ground on fewer homes than projected, showing manufacturing is sustaining the recovery as the housing market retreats following the expiration of a government tax credit.

Output at factories, mines and utilities increased 1.2 percent last month after a 0.7 percent gain in April, a Federal Reserve report in Washington showed today. Housing starts fell 10 percent, the biggest decline since March 2009, according to figures from the Commerce Department.

However, the housing market collapse in the US is old news. The new news could be a collapse in Asian property markets. Again from Bloomberg:

From Shanghai to Singapore, policy makers are struggling in their efforts to curb property bubbles that threaten to derail the world’s fastest growing region.

In China, home prices are surging at a record pace even after authorities set price ceilings, demanded higher deposits, and limited second-home purchases. In Hong Kong, where the government has pledged to release more land to cool prices, a site auctioned on June 8 fetched the most since the market peak of 1997. It’s a similar story in Singapore and Taiwan as prices defy cooling measures.

There are tentative signs that markets may be cooling.

While prices have yet to drop, sales volumes have. Property sales in Beijing, Shanghai and Shenzhen fell as much as 70 percent in May. China Vanke Co., the nation’s biggest publicly traded property developer, said its sales fell 20 percent in May from a year earlier. Guangzhou R&F Properties Co.’s contracted sales last month shrank 48 percent...

Private residential sales in Singapore rose to a nine-month high of 2,208 in April, the Urban Redevelopment Authority said, the highest since July 2009, showing the “resilience” of demand for new homes even after the government curbs, Li Hiaw Ho, executive director of CB Richard Ellis Research, said then. Sales dropped to 1,078 units in May.

BoJ rolls out loan scheme, UK inflation recedes, US stocks jump

The Bank of Japan stepped up its deflation fight on Tuesday while leaving interest rates unchanged. AFP/CNA reports:

Japan's central bank unveiled a 33-billion-US-dollar loan scheme Tuesday to boost growth and battle deflation, as it faces mounting pressure from a new government focused on economic restoration.

The Bank of Japan (BoJ) will make low-interest funds available to private banks to lend to companies, a move it hopes will in turn encourage firms to make longer-term business investments in a bid strengthen the economy...

The central bank on Tuesday kept its key lending rate unchanged at 0.10 percent, as widely expected and said "Japan's economy shows further signs of moderate recovery" aided by exports to fast-growing emerging economies.

In contrast to Japan, there is no sign of deflation whatsoever in the UK, although inflation did recede in May. From Reuters:

Lower food costs helped British inflation fall slightly faster than expected in May, boosting hopes price growth has peaked and backing the central bank's view that it will fall back to target within a year.

The Office for National Statistics said the annual rate of CPI inflation fell to 3.4 percent in May from April's 17-month high of 3.7 percent. Economists had forecast a fall to 3.5 percent.

UK house price inflation may be accelerating though, with the government saying that prices in April were 10.1 percent higher than a year ago, the highest rate of increase since October 2007, and the Royal Institution of Chartered Surveyors saying that its house price balance rose to +22 in May from +19 in April.

UK consumer confidence, however, plunged to an 11-month low in May, according to a Reuters report.

Consumer confidence fell to its lowest level in almost a year last month as the election and the prospect of an emergency budget darkened households' outlook, a survey by the Nationwide Building Society showed on Wednesday.

Nationwide's consumer confidence index fell to 65 in May, the lowest reading since June last year, from an upwardly revised reading of 75 in April.

Also falling is US homebuilders' confidence, although manufacturing continues to help keep the US economic recovery alive. Reuters reports:

Manufacturing in New York state grew in June even as hiring slowed, supporting views the factory sector is recovering...

The Empire State general business conditions index edged up to 19.57 in June from 19.11 in May, the report from the New York Federal Reserve said on Tuesday. The June reading was slightly below what economists polled by Reuters had forecast...

A separate report released on Tuesday showed U.S. import prices declined in May as petroleum costs plummeted, bolstering projections of tame inflation and low interest rates.

Import prices fell 0.6 percent, the biggest decline since July, after rising by a revised 1.1 percent in April, the Labor Department said...

Another economic report issued on Tuesday showed U.S. homebuilder sentiment fell in June by the sharpest amount since the height of the financial crisis as the homebuyer tax credit expired.

The National Association of Home Builders said the NAHB/Wells Fargo Housing Market index dropped 5 points to 17, the sharpest point decline since November 2008.

Despite the mixed US economic data, US stocks rose strongly on Tuesday. MarketWatch reports:

U.S. stocks rallied to end sharply higher on Tuesday, with equities gaining momentum as the S&P 500 Index broke through its 200-day moving average and the euro held above $1.23, signaling growing confidence with Europe's ability to deal with its debt crisis.

The Dow Jones Industrial Average (DJIA 10,405, +213.88, +2.10%) gained 213.88 points, or 2.1%, to end at 10,404.77, with all 30 of its components tallying gains, led by Boeing (BA 67.30, -0.18, -0.27%), up 4.1% and Caterpillar Inc. (CAT 63.76, +0.30, +0.47% , up 4%.

The S&P 500 (SPX 1,115, +25.60, +2.35%) rose 25.60 points, or 2.4%, to end at 1,115.23.

Moody's cuts Greece rating, global economic growth to continue

Moody's finally acknowledges what the market already knows. From Bloomberg:

Greece’s credit rating was cut to non-investment grade, or junk, by Moody’s Investors Service, threatening to further undermine demand for the debt-strapped nation’s assets as it struggles to rein in its budget deficit.

In making the four-step downgrade to Ba1 from A3, Moody’s cited “substantial” risks to economic growth from the austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the European Union and the International Monetary Fund. The lower rating “incorporates a greater, albeit, low risk of default,” Moody’s said in a statement yesterday in London. The outlook is stable, it said.

Europe did provide some positive economic news on Monday. Again from Bloomberg:

European industrial production increased more than economists forecast in April, led by demand for intermediate goods such as steel and car engines.

Output in the economy of the 16 nations using the euro rose 0.8 percent from March, the European Union’s statistics office in Luxembourg said today. Economists had projected a gain of 0.5 percent, the median of 33 estimates in a Bloomberg survey showed. From a year earlier, April production jumped 9.5 percent, the biggest gain since the data started in 1991.

Meanwhile, Morgan Stanley economists think that the European sovereign debt crisis is unlikely to lead to a double-dip recession for the global economy.

Notwithstanding the sovereign debt crisis that is rattling Europe and unnerving global financial markets, global economic growth has continued to surprise on the upside over the past few months... As a consequence, our forecast for full-year 2010 global GDP growth has moved up from 4.4% last quarter to 4.8% now, and we wouldn't be surprised if it turned out to be 5% or higher eventually...

There are plenty of things to worry about: a sovereign crisis that in our view will eat its way through the European periphery into the core and eventually move across the Atlantic; lower potential growth due to tougher regulation, higher taxes and weak banking systems; and potential global inflation surprises in EM countries due to excessively loose global monetary policies. However, the double-dip recession and the resulting deflationary pressures that many worry about right now are merely tail risks, in our view.

Indeed, last week, the OECD had reported that its composite leading indicators for April point to continuing albeit slowing expansion in most OECD countries.

Slower growth might not be a bad thing though for countries facing high inflation. India's inflation rate hit 10 percent in May and another rate hike from the Reserve Bank of India now looks likely soon.

Japanese economy shows growth, US economy risks double-dip

Today's data indicate that the Japanese economy probably continued to grow in the second quarter.

Bloomberg reports that Japan's large manufacturers have become more optimistic.

Japan’s large manufacturers said business conditions improved from three months ago, signaling the nation’s export-led recovery is gaining traction even as Europe’s debt woes roil global financial markets.

Sentiment was 10 points compared with 4.3 points last quarter, the government said in a report in Tokyo today. Companies said they plan to increase spending on plant and equipment by 9.7 percent this fiscal year, compared with the 5.5 percent cutbacks projected three months ago...

Service companies turned optimistic for the first time in 11 quarters. The index for large non-manufacturers was plus 0.9 points, compared with minus 6.3 points the previous three months. Those findings add to evidence that some parts of the domestic economy have been improving after wages rose for a second month in April.

Another report from Japan showed that industrial production rose 1.3 percent in April, revised up from 1.2 percent previously reported.

It is quite possible that the Japanese economy could slow soon, though. Last week, the government had reported that the composite index of leading indicators fell to 101.7 in April from 101.9 in March. Furthermore, according to the Economy Watchers Survey, the diffusion index for current conditions fell to 47.7 in May from 49.8 in April while the diffusion index for future conditions fell to 48.7 from 49.9.

Slower growth ahead is also looking likely for the US economy after the ECRI reported on Friday that its Weekly Leading Index fell to a 44-week low of 123.2 for the week ended 4 June. The index's annualised growth rate fell to -3.5 percent.

In fact, John Hussman thinks that based on his criteria for identifying oncoming recessions, conditions are getting close to pointing to a double-dip recession for the US economy.

For all intents and purposes, unless the credit spreads, the S&P 500, or the yield curve reverse, a further decline in the Purchasing Managers Index to 54 or below would be sufficient to confirm a "double-dip recession." Note that by itself, such a level might not be particularly troublesome. But in concert with the other evidence we observe, it would be sufficient to complete the syndrome of risk factors.

Chinese inflation accelerates, US retail sales fall

Friday's data on China's economy show few signs of cooling. From Bloomberg:

China’s gains in retail sales, consumer prices and industrial production countered the government’s assessment that the recovery isn’t “solid,” and put more pressure on policy makers to let the yuan rise.

Inflation accelerated to an annual 3.1 percent pace in May, surpassing officials’ target for the full year, retail sales gains quickened to 18.7 percent and industrial production jumped 16.5 percent, government reports showed yesterday in Beijing...

Industrial production growth eased from a 17.8 percent year-on-year rate in April. Urban fixed-asset investment rose 25.9 percent on that basis in the first five months of the year, compared with 26.1 percent in January-April.

A report from AFP/CNA shows that the Indian economy has also been growing rapidly.

India's industrial output grew by 17.6 percent in April from a year earlier, beating market forecasts, official data showed Friday, in the eighth straight month of double-digit expansion.

It is a different story though in the UK, as Bloomberg reports:

U.K. manufacturing unexpectedly weakened in April for the first time in three months as car production dropped, a sign the economic recovery may be struggling to keep momentum.

Factory output fell 0.4 percent from March, the Office for National Statistics said today in London. Economists predicted a 0.5 percent increase, according to the median of 25 forecasts in a Bloomberg News survey. A separate report showed producer prices rose 0.3 percent in May, less than the median forecast for an 0.5 percent increase.

Friday also saw a weak report on US retail sales. Again from Bloomberg:

Sales at U.S. retailers unexpectedly dropped in May for the first time in eight months, indicating the rebound in consumer spending is cooling as Americans boost savings.

Purchases fell 1.2 percent, led by a record plunge in demand at building-material stores that may reflect the end of a government rebate on sales of energy-saving appliances, according to figures from the Commerce Department issued today in Washington...

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment increased to 75.5, the highest since January 2008, from 73.6 in May. The gauge was projected to rise to 74.5, according to the median forecast in a survey of 65 economists.

New Zealand and Brazil raise rates, Chinese exports jump

The European Central Bank made no significant change to monetary policy on Thursday. Bloomberg reports:

Jean-Claude Trichet said the European Central Bank will extend its offerings of unlimited cash and keep buying government bonds as it tries to ease tensions in money markets and fight the European debt crisis.

“It’s appropriate to continue to do what we’ve decided” on purchases of sovereign and corporate bonds, Trichet, who heads the ECB, said at a press conference in Frankfurt today. Earlier, the central bank kept its benchmark interest rate at 1 percent. “We have a money market which is not functioning perfectly.”

There was also no move from the Bank of England. Reuters reports:

The Bank of England made no change to interest rates or its bond purchase programme on Thursday, as it waits for Britain's new government to reveal the extent of its fiscal austerity measures in a June 22 budget.

The Monetary Policy Committee's decision to leave rates at a record low 0.5 percent and hold its asset purchase total at 200 billion pounds ($291.3 billion) was expected by all 61 economists in a Reuters poll, and elicited no market reaction.

It was left to smaller central banks to maintain the global monetary tightening trend.

Bloomberg reports a rate hike from New Zealand.

New Zealand’s central bank raised its benchmark interest rate for the first time in three years, signaling that faster inflation is a bigger threat to growth than further gains in the nation’s currency.

“Underlying inflationary pressures are expected to increase,” Reserve Bank Governor Alan Bollard said in a statement released in Wellington today after increasing the official cash rate to 2.75 percent from a record-low 2.5 percent. “Given the current low level of the cash rate, it is therefore appropriate to gradually remove policy stimulus.”

And from Brazil.

Brazil’s central bank raised its benchmark interest rate for a second straight meeting to contain inflation as signs the economy is overheating prevailed over concern the European debt crisis may slow growth.

The bank, in a one-sentence statement accompanying its unanimous decision yesterday, said the second consecutive 0.75 percentage point increase would help “ensure the convergence of inflation to the target trajectory.” Policy makers increased the Selic rate to 10.25 percent from 9.5 percent, matching the forecast of 50 of 52 analysts surveyed by Bloomberg.

Clearly, some economies could do with some cooling -- for example, China's. Bloomberg reports Chinese data on Thursday.

China’s exports jumped the most in six years and property prices rose at a near-record pace, signs that the economy is withstanding the sovereign-debt crisis in Europe and remains at risk of overheating.

Exports gained 48.5 percent in May from a year earlier, the customs bureau said today, more than the 32 percent median estimate in a Bloomberg News survey of 32 economists. None expected such a big gain. Real-estate prices rose 12.4 percent across 70 cities, the statistics bureau said separately.

In sharp contrast to China, the US reported a drop in exports on Thursday. Again from Bloomberg:

The trade deficit in the U.S. widened in April to the highest in more than a year as exports and imports both declined.

The gap grew 0.6 percent to $40.3 billion, the most since December 2008, Commerce Department figures showed today in Washington. A separate report showed more Americans than anticipated filed claims for jobless benefits last week.

Despite the monetary tightening by some central banks and the negative data from the US, markets were optimistic on Thursday. From Bloomberg:

Stocks rallied, sending benchmark indexes to their biggest gains in two weeks, after economic reports from China, Japan and Australia showed accelerating growth. The euro strengthened a third day, gold fell and Treasuries extended losses after a 30-year bond sale.

The Standard & Poor’s 500 Index increased 3 percent to 1,086.84 at 4 p.m. in New York and the MSCI World Index advanced 2.4 percent, the biggest gains since May 27. The euro surged 1.1 percent to $1.2114, while the New Zealand dollar strengthened versus all 16 of its most-traded peers and Australia’s dollar rose against all but the so-called kiwi. Oil climbed to a four- week high. Ten-year Treasury yields jumped 14 basis points to 3.32 percent, the biggest increase since May 27.

Fed says economy improving, Japanese growth revised up

Reuters reports Fed chairman Ben Bernanke's testimony to House of Representatives Budget Committee.

Federal Reserve Chairman Ben Bernanke said on Wednesday the U.S. economic recovery was on a solid footing but cautioned it could be years before the jobs lost during the deep recession of 2008-2009 are restored.

While Bernanke said the economy had made an "important transition" to relying less on government support, his emphasis on the struggles of the U.S. jobs market suggested the central bank was in no rush to raise interest rates...

Bernanke said the economic recovery's reliance on government spending would probably diminish over time, while increasing private demand would take over the job of stimulating growth, as recent data showed.

That view was bolstered by a report from the Fed that said the economy strengthened last month, even as worries about Europe's debt crisis dented confidence.

"Economic activity continued to improve since the last report across all twelve Federal Reserve districts, although many districts described the pace of growth as 'modest'," the Fed said in its Beige Book, an anecdotal report on economic conditions.

Meanwhile, Japan's recovery is looking surprisingly robust. Bloomberg reports today that the government has revised up first quarter growth slightly.

Japan’s economy expanded more than initially estimated in the first quarter as consumer spending and housing investment rose at a faster pace.

Gross domestic product rose at an annual 5 percent rate in the three months ended March 31, quicker than the 4.9 percent reported in preliminary figures last month, the Cabinet Office said today in Tokyo. The median estimate of 18 economists surveyed by Bloomberg News was for 4.2 percent. None of the analysts predicted quicker growth.

On Wednesday, Bloomberg had reported a rise in Japanese machinery orders in April.

Japanese machinery orders rose more than economists estimated, signaling companies are preparing to spend again as the economy recovers and earnings rebound.

Orders, an indicator of business investment in three to six months, climbed 4 percent in April from March, a second straight increase, the Cabinet Office said today in Tokyo. The median forecast of 27 economists surveyed by Bloomberg News was for a 1.7 percent gain.

Japanese and German economic data show slower growth

Japan's economy improved in April but growth may be about to slow. Nikkei reports:

Japan's composite index of coincident economic indicators rose 1.1 points from a month earlier to 101.6 (2005=100) in April, according to preliminary data released Tuesday by the Cabinet Office.

The index of leading indicators, a barometer of economic conditions several months down the road, slipped 0.2 point to 101.7.

Further evidence of slowing growth for Japan came from Reuters:

Japan's service sector sentiment index fell to 47.7 in May, a Cabinet Office survey showed on Tuesday, the first fall in six months... from 49.8 in April...

The outlook index, indicating the level of confidence in future conditions, fell to 48.7 from 49.9 in April.

In Germany, exports fell 5.9 percent in April, but this is after surging 10.8 percent in March.

German industrial production maintained growth in April after also having experienced a surge the previous month. Bloomberg reports:

German industrial production increased more than economists forecast in April as a weaker euro boosted export demand and local companies stepped up spending.

Production rose 0.9 percent from March, when it jumped 4.3 percent, the Economy Ministry in Berlin said today. Economists had forecast a 0.7 percent gain, the median of 35 estimates in a Bloomberg News survey shows. From a year earlier, production increased 13.3 percent when adjusted for the number of work days.

German factory orders rise

As the euro falls towards four-year lows, Germany's powerful export machine looks like a potential beneficiary. From Bloomberg:

German factory orders unexpectedly jumped for a second month in April as the weaker euro boosted export demand and companies increased investment.

Orders, adjusted for seasonal swings and inflation, rose 2.8 percent from March, when they surged 5.1 percent, the Economy Ministry in Berlin said today. Economists had forecast a 0.4 percent drop, according to the median of 34 estimates in a Bloomberg News survey. From a year earlier, orders gained 29.6 percent.

This comes at a time when the other export powerhouse, China, may be losing some of its labour cost advantage. From AFP/CNA:

Taiwanese IT giant Foxconn said Monday it would hike wages at its factories in the south Chinese city of Shenzhen, in a move observers said could trigger industry-wide salary increases.

Foxconn, which assembles products for US-based Apple, will raise the monthly pay for its assembly line workers in Shenzhen by nearly 70 percent to 2,000 yuan (290 dollars) from October 1, a spokeswoman said...

The announcement came after a series of suspected suicides at the firm's Shenzhen plants, which led to reports of long work hours under sweatshop-style conditions, setting off protests in Hong Kong and Taiwan.

Indicators point to slowing global economy

There are signs that global economic growth is slowing.

Surveys of purchasing managers around the world showed that industry activity continued to increase in May. However, the rate of increase apparently slowed as some of the indices compiled by JPMorgan and Markit showed declines.

JPMorgan Global All-Industry Output Indices
	April	May
Output	57.7	57.0
New orders	56.9	55.3
Input prices	60.9	59.2
Employment	50.8	51.4

Among the major developed economies, slower growth was most evident in the surveys of purchasing managers from the United States and the euro area.

In the US, the Institute for Supply Management's manufacturing PMI fell to 59.7 in May from 60.4 in April while the new orders index was unchanged at 56.7. The ISM's non-manufacturing index was unchanged at 55.4 in May while the new orders index fell to 57.1 from 58.2 in April.

In the euro area, Markit's composite purchasing managers' index for the manufacturing and services industries fell to 56.4 in May from 57.3 in April. The services index rose to 56.2 in May from 55.6 in April but the manufacturing index fell to 55.8 from 57.6.

There were also other economic reports last week that indicate the likelihood of slower growth ahead.

The US employment report on Friday showed that the underlying health of the job market may be too weak to sustain a strong recovery. While overall employment grew by 431,000 in May, temporary census jobs accounted for 411,000 of the increase. The unemployment rate did show a decrease to 9.7 percent from 9.9 percent in April but only because of a 322,000 reduction in the labour force.

A more worrying report for the US economy on Friday came from the Economic Cycle Research Institute. The ECRI reported that its weekly leading index fell to 124.1 for the week ended 28 May from 125.6 in the prior week. The index's annualised growth rate plunged to 0.4 percent, the lowest rate in 50 weeks, from 5.1 percent the week before.

Meanwhile, in Europe, first quarter growth for the euro area was confirmed at 0.2 percent last week and other economic reports, like the purchasing managers surveys, gave little hope of significant acceleration from there. A report from Eurostat on Thursday showed that retail sales in the region fell 1.2 percent in April. The European Commission reported on Monday that its economic sentiment indicator fell to 98.4 in May from 100.6 in April.

Growth in the euro area has been weak largely because bank lending has been weak. The European Central Bank's report on money supply and lending published on Monday showed that M3 remained 0.1 percent lower in April than the year before while loans to the private sector managed to edge up just 0.1 percent.

The financial situation in Europe could yet worsen as the ongoing debt crisis could further impair European banks' ability to lend. In its Financial Stability Report also published on Monday, the ECB warned that banks may have to write off 195 billion euros of bad loans by 2011. In addition, large near-term funding requirements of governments could crowd out issuance of bonds by banks, raising funding costs and hence further adversely affecting profitability.

Investors clearly remain nervous about Europe's sovereign debt problems. While some of the recent turbulence appeared to be dissipating from markets for much of last week, on Friday, remarks by the Hungarian prime minister's spokesman about a potential debt problem sent stock markets and the euro tumbling again.

The MSCI World Index of stocks in developed markets fell 2.8 percent on Friday and is now down 9.3 percent year-to-date. It is 14.6 percent below its peak in April.

The stock market is supposed to be a leading economic indicator and it, like many of the other indicators released last week, is not giving a very positive signal for the global economy at the moment.

Hungarian deficit and US jobs report rock markets

It is looking very much like contagion as Hungary joins the list of global debt concerns. From Reuters on Friday:

Dire warnings by Hungary's new government have reignited market concern about the fiscal health of countries in eastern Europe, but many analysts believe the region's sound economic fundamentals will prevent a Greek-style debt crisis.

With investor nerves already frayed over the state of public finances in the euro zone, remarks by the Hungarian prime minister's spokesman supporting the view that the country had only a slim chance of avoiding a debt crisis similar to that of Greece triggered a regional sell-off on Friday.

Edward Harrison at Credit Writedowns reports that Hungary has taken over the number ten spot of potential sovereign defaulters.

To add to investor concerns, US non-farm payrolls came in below expectations. From Bloomberg:

American companies hired fewer workers in May than forecast and workers dropped out of the labor force, indicating government support is still needed to spur economic growth.

Private payrolls rose by 41,000, Labor Department figures showed today, trailing the 180,000 gain forecast by economists. Including government workers, employment rose by 431,000, boosted by a jump in hiring of temporary census workers. The jobless rate fell to 9.7 percent from 9.9 percent.

Consequently, markets took big hits on Friday. Bloomberg reports:

Stocks plunged, sending benchmark U.S. indexes to four-month lows, commodities slid and Treasuries rallied as lower-than-forecast American job growth and a widening government debt crisis fueled concern the global economic recovery will slow. Hungary’s currency, equities and bonds plummeted.

The Standard & Poor’s 500 Index tumbled 3.4 percent to 1,064.88 at 4 p.m. in New York, with only three stocks in the gauge rising. The Dow Jones Industrial Average sank below 10,000 and both measures closed at the lowest levels since Feb. 8. Oil fell 4.2 percent to $71.51 a barrel, while tin sank 9.5 percent to lead declines in metals. Ten-year Treasury yields decreased 17 basis points to 3.2 percent. The euro slid below $1.20 for the first time since March 2006 and the yen climbed against all 16 major counterparts. The forint tumbled to an almost 15-month low against the dollar on concern Hungary may default.

Services industries grow in May

The latest US economic indicators continue to point towards growth. Bloomberg reports on Thursday:

Service industries in the U.S. expanded for a fifth month and factory orders rose, pointing to a broadening economic recovery that’s generating more jobs.

The Institute for Supply Management’s index of non- manufacturing businesses, which makes up almost 90 percent of the economy, held at 55.4 for a third month in May. Readings above 50 signal expansion. Bookings at factories rose 1.2 percent in April, a Commerce Department report showed...

The number of Americans filing first-time claims for jobless benefits last week fell to 453,000, a level that signals firings remain elevated even as employment grows, according to figures from the Labor Department today. Data from ADP Employer Services showed companies added 55,000 workers to payrolls in May, the fourth consecutive increase.

Data from the eurozone were mixed though. Bloomberg reports an improvement in services activity.

Growth in Europe’s services and manufacturing industries slowed less than initially estimated in May.

A composite index based on a survey of euro-area purchasing managers in both industries fell to 56.4 from 57.3 in April, London-based Markit Economics said today. That’s above an initial estimate of 56.2 published on May 21...

An index of services, which account for about 60 percent of the euro region’s gross domestic product, rose to 56.2 in May from 55.6, Markit said...

However, Reuters reports that retail sales in the euro area plunged in April.

Euro zone retail sales fell sharply in April, missing expectations for a small monthly rise, data showed on Thursday, as uncertainty over jobs and government spending curbed consumer demand.

The European Union's statistics office said euro zone retail sales, a good indication of households' propensity to spend, fell 1.2 percent month-on-month, the deepest fall since October 2008, for a 1.5 percent year-on-year drop.

Reuters also reports that the UK services PMI edged up in May.

Growth in the services sector held broadly steady in May, a survey showed on Thursday, but worries about an impending public spending squeeze led to a drop in hiring and a sharp slowdown in new business.

The Markit/CIPS services PMI headline activity index nudged up to 55.4 in May after a surprise drop to 55.3 in April when disruption from Iceland's volcanic ash cloud pushed growth to its lowest since January.

Yen falls, US stocks jump

The focus of attention in currency markets shifted to the yen after the dramatic resignation of the Japanese prime minister on Wednesday. Bloomberg reports:

The yen dropped the most versus the dollar in more than three weeks after Prime Minister Yukio Hatoyama resigned, fueling concern Japan’s new leadership will pursue policies that may weaken it.

The Japanese currency fell against most major counterparts on speculation Hatoyama will be succeeded by Finance Minister Naoto Kan, who has called for the Bank of Japan to do more to fight deflation. Higher-yielding currencies including New Zealand’s dollar and Brazil’s real rose. The euro was near a four-year low versus the greenback on concern Europe’s efforts to cut budget deficits will hamper its economic revival...

Japan’s currency depreciated 1.3 percent to 92.13 yen per dollar at 5 p.m. in New York, from 90.94 yesterday. It slid as much as 1.6 percent, the most on an intraday basis since May 10, and touched 92.36, the weakest level since May 18.

Japanese stocks were also down on Wednesday, the Nikkei 225 falling 1.1 percent to 9,603.24.

In contrast, US stocks were buoyant on Wednesday. MarketWatch reports:

U.S. stocks rallied Wednesday to reclaim most of the losses suffered during a two-session retreat, as investors scooped up energy stocks and other battered shares.

"Today's bounce back is helping some of yesterday's biggest losers," said Bruce McCain, chief investment strategist at Key Private Bank.

After losing 234.97 points, or 2.3%, during the past two trading days, the Dow Jones Industrial Average on Wednesday regained nearly all of that territory, rising 225.52 points, or 2.3%, to 10,249.54.

US economic data released on Wednesday were mostly positive. Reuters reports:

Pending home sales hit a six-month high in April, data showed on Wednesday, but falling demand for home loans pointed to ebbing activity in the vital housing market due to the expiration of a popular tax credit for buyers...

The National Association of Realtors' Pending Home Sales Index, based on contracts signed in April, increased 6 percent to 110.9 -- the highest level since October and above expectations of a 5 percent rise. It was the third straight month of gains.

But applications for loans to buy homes dropped last week for the fourth straight week, holding at 13-year lows, the Mortgage Bankers Association said...

Another report showed the number of layoffs announced at U.S. companies almost unchanged in May from April when they touched a four-year low as employers were more upbeat about the economic outlook...

Major automakers recorded double-digit U.S. sales gains in May from depressed year-earlier levels as industry-wide sales ticked up for a seventh consecutive month with a boost from orders by rental agencies, data showed.

Canada raises interest rates, manufacturing slows in US, euro area and China

Canada has joined the rate-hike group. Bloomberg reports:

The Bank of Canada today became the first Group of Seven central bank to raise interest rates since July 2008 and signaled that further increases could be delayed by slower domestic and global growth.

Policy makers led by Governor Mark Carney increased the target rate on overnight loans between commercial banks to 0.5 percent from a record-low 0.25 percent. The last increase for the Group of Seven was by the European Central Bank, and Canada hasn’t raised rates since July 2007.

However, Australia, one of the early movers on rates, left them unchanged on Tuesday. From Bloomberg:

Australia’s central bank left its benchmark interest rate unchanged and signaled it may keep borrowing costs steady in coming months as it assesses the impact of the most aggressive rate increases in the Group of 20.

Governor Glenn Stevens and his policy-setting board kept the overnight cash rate target at 4.5 percent, the Reserve Bank of Australia said in a statement in Sydney today. The decision was predicted by all 22 economists surveyed by Bloomberg News.

Economic reports on Tuesday indicated that the global economy remains on a growth path.

Bloomberg reports another month of expansion for US manufacturing.

U.S. manufacturing grew in May at a faster pace than forecast as factories added workers to meet the greatest export demand in two decades as well as a revival in domestic orders.

The Institute for Supply Management’s gauge fell to 59.7 from 60.4 in April, exceeding the median forecast of economists surveyed by Bloomberg News, which called for a decline to 59. Readings greater than 50 point to expansion...

A report from the Commerce Department showed construction spending rose 2.7 percent in April, the most since August 2000, as demand related to the end of a tax credit spurred builders to break ground on more houses. Economists projected no change for April, according to the median forecast in a Bloomberg survey.

Reuters reports that manufacturing also continued expanding in the euro area, but at a much slower rate.

Manufacturing in the euro zone expanded in May, but at a far slower rate than April's 46-month high as cost pressures and tighter margins drove firms to take their feet off the production accelerator, a survey showed on Tuesday...

The Markit Eurozone Manufacturing Purchasing Managers' Index for May sank to 55.8 from 57.6 in April, nudged down from an earlier flash estimate of 55.9.

The UK's manufacturing PMI managed to hold steady at 58.0 in May, but ominously, Chinese manufacturing activity slowed, according to an AFP/CNA report.

China's manufacturing activity slowed in May, as the effects of government tightening measures to prevent the economy from overheating kicked in, official and independent surveys showed Tuesday.

The HSBC China Manufacturing PMI, or purchasing managers index, fell to 52.7 last month from a revised figure of 55.2 in April, an 11-month low, indicating the recovery of China's manufacturing sector lost some momentum, the bank said...

A separate survey released by a government agency on Tuesday showed manufacturing activity had dropped to 53.9 in May from 55.7 in April.

Real Time Economics has a list of manufacturing PMIs by country.

European confidence falls, Canadian growth accelerates

Europe's debt crisis has affected confidence in the region. Bloomberg reports:

European confidence in the economic outlook unexpectedly worsened in May and inflation accelerated less than economists forecast as the euro region’s debt crisis shook markets.

An index of executive and consumer sentiment in the 16 euro nations fell to 98.4 from 100.6 in April, the European Commission in Brussels said today. Economists had forecast an unchanged reading, based on the median of 25 estimates in a Bloomberg News survey. Consumer-prices rose 1.6 percent in May from a year ago, a separate report showed, below the 1.7 percent rate forecast by economists. Inflation was 1.5 percent in April.

Elsewhere, Canadian economic growth accelerated in the first quarter. Again from Bloomberg:

Canada’s economy expanded at the fastest pace in a decade in the first quarter, led by consumer spending and manufacturing, increasing pressure on the country’s central bank to raise interest rates tomorrow.

Gross domestic product grew 6.1 percent at an annualized pace in the January-March period, Statistics Canada said today in Ottawa. Economists predicted a 5.9 percent expansion, based on 20 predictions gathered by Bloomberg News. The Bank of Canada had projected a 5.8 percent gain...

Statistics Canada changed its estimate of fourth-quarter growth to 4.9 percent from an initially reported 5 percent.

The agency also reported separately today that factory prices increased 0.3 percent in April, while their raw material costs rose 1.7 percent. Economists predicted industrial prices would decline 0.2 percent and material costs would gain 1.4 percent.