Greece votes for austerity, economy slows in Europe, recovers in Japan

Reuters reports the latest development in Greece:

Greece approved the first of two austerity measures on Wednesday despite worsening street violence, in a vote vital to winning fresh international aid so it can pay its debts on time and stave off bankruptcy.

Lawmakers voted by a clear margin for the five-year framework of $28 billion in spending cuts, tax rises and state asset sales, handing a 155-138 vote victory to Prime Minister George Papandreou.

"We must avoid the country's collapse at all costs. Now is not the time to step back," the Socialist premier told lawmakers just before the vote.

The solid margin suggested the government should be able to push through a second package of laws on Thursday, implementing the specific budget measures and asset sales. This would clear the last obstacle to release of 12 billion euros ($17.3 billion) of emergency loans from the International Monetary Fund and European Union, which are essential to meet debt payments by mid-July.

The Greek vote was good news for Europe. Not so good was the latest reading on eurozone economic sentiment. From Bloomberg:

European confidence in the economic outlook dropped to the lowest in eight months in June as policy makers struggled to craft a second bailout package for Greece.

An index of executive and consumer sentiment in the 17- nation euro region fell to 105.1 from 105.5 in May, the European Commission in Brussels said today. That’s the lowest since October. Economists had forecast a decline to 105, the median of 27 estimates in a Bloomberg survey showed.

Also, French economic growth for the first quarter has been revised down. Bloomberg reports:

France’s economy, the 17-member euro region’s second largest after Germany, expanded less than previously estimated in the first quarter as rising energy prices squeezed household spending.

Gross domestic product rose 0.9 percent from the fourth quarter instead of a previously estimated 1 percent, Paris-based Insee said today in an e-mailed statement. That’s the fastest pace since the second quarter of 2006. In the year, the economy grew 2.2 percent.

Meanwhile, the UK economy is looking weak in the second quarter. Reuters reports:

Economic recovery looks set to remain sluggish during the current quarter, after official data showed the biggest slump in services output for more than a year in April as well as weak bank lending in May...

Services output contracted by 1.2 percent in April after a 0.8 percent increase in March, driven by a sharp fall in wholesale activity, the Office for National Statistics said on Wednesday. The fall was the biggest since January 2010, when heavy snow caused disruption...

Separate data from the Bank of England showed mortgage approvals ticked up only slightly to 45,940 in May, falling short of analysts' forecast of 46,100.

Consumer credit was up only 173 million pounds, with credit card borrowing rising by just 34 million pounds, the smallest amount since April 2010...

At the same time, however, the Citi/YouGov survey showed Britons' near term inflation expectations jumped in June to 3.9 percent, the highest in over 2-1/2 years. Long-term views hit the highest level since the survey's launch in late 2005.

And UK consumers have become more pessimistic. Bloomberg reports:

U.K. consumer sentiment fell more than economists forecast in June, erasing part of the boost brought from public holidays as Britons lost confidence in the economy, a report by GfK NOP Ltd. showed.

An index of sentiment slipped 4 points to minus 25 from May, when it increased 10 points, the London-based research group said in an e-mailed report today. All five measures of the index declined, with confidence in the economic outlook for the next year dropping 3 points to minus 18.

However, outside Europe, the economic reports on Wednesday were somewhat more positive.

In the US, pending home sales jumped in May. Bloomberg reports:

The number of contracts to buy previously owned U.S. homes rose almost three times as much as forecast as falling prices made properties more affordable.

The surprising 8.2 percent increase in the index of pending home resales from April followed a revised 11 percent drop the prior month, the National Association of Realtors said today in Washington. Economists forecast a 3 percent gain, according to the median estimate in a Bloomberg News survey.

There was also a sharp rise in Japanese industrial production in May. AFP/CNA reports:

Japan's industrial production jumped 5.7 per cent in May from the previous month, reflecting a steady recovery in earthquake-hit supply chains following the March 11 quake and tsunami.

The level beat the market expectation for a 5.5-per cent increase and followed a revised 1.6-per cent monthly rise in April.

The Japanese recovery remains tenuous though. From Reuters:

Japanese manufacturing activity slowed slightly in June as new business orders stagnated, but output grew by the most in four months as companies brought forward production to avoid possible power shortages during the summer, a survey showed on Thursday.

The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 50.7 in June from 51.3 in May. The index remained above the 50 threshold that separates contraction from expansion for a second straight month.

Stocks rise despite Greek protests and weak economic data

Greeks clashed with their government on Tuesday over the austerity plan. Investors were unfazed though. From Bloomberg:

Stocks gained, erasing the MSCI All- Country World Index’s 2011 loss, while the euro rose and Treasuries tumbled amid speculation Europe will take action to prevent a Greek default. Commodities surged the most this month.

The MSCI equity gauge added 1.1 percent to 333.09 at 4 p.m. in New York, and the Standard & Poor’s 500 Index rallied 1.3 percent. Yields on 10-year Treasuries rose above 3 percent for the first time in almost a week after a government auction. The euro strengthened 0.6 percent to $1.4367. The S&P GSCI Index of 24 commodities surged 2.2 percent as crude oil futures jumped the most in almost six weeks.

Investors also looked past weak US economic reports on Tuesday.

Stocks in the U.S. rose today even after data showed home prices fell by the most in 17 months and confidence among American consumers unexpectedly fell to a seven-month low. The S&P/Case-Shiller index of property values in 20 cities fell 4 percent from April 2010, the biggest drop since November 2009. The Conference Board’s consumer confidence index decreased to 58.5 from a revised 61.7 reading in May that was higher than previously estimated.

France proposes solution to Greek debt problem

France has come up with a plan to solve the Greek debt crisis. Reuters reports:

France offered a radical solution Monday for banks to roll over some Greek debt for 30 years as the Greek government fought for political support of its five-year austerity plan to avert bankruptcy.

With depositors fleeing Greek banks in growing numbers and financial markets watching anxiously, President Nicolas Sarkozy told a news conference in Paris that French banks had reached a draft agreement with the authorities on a voluntary rollover of maturing bonds.

"We concluded that by stretching out the loans over 30 years, putting (interest rates) at the level of European loans, plus a premium indexed to future Greek growth, that would be a system that each country could find attractive," he said.

The plan was put to a meeting of international bankers and European Union officials with the International Institute of Finance (IIF) in Rome Monday but no decision was taken, an Italian Treasury official said.

However, it is not just Greece that has debt problems. AFP/CNA reports that China is also facing trouble from local government debt.

Chinese local governments held US$1.65 trillion in debt at the end of 2010, the state auditor said Monday, warning there was a risk some could default amid fears that bad loans will harm the economy.

Excessive borrowing by authorities to fund infrastructure and other projects has sparked concerns among China's leadership about the risks the loans pose to the financial stability of the world's second largest economy.

By the end of last year, local governments had taken 10.7 trillion yuan (US$1.65 trillion) in debts, the National Audit Office (NAO) said in a statement, or about 27 percent of China's 2010 GDP of 39.8 trillion yuan.

"The ability of some areas and industries to repay debt is weak and potentially risky," the NAO said.

While the US government also has a growing debt problem, it is the US consumer that showed signs of reining in spending on Monday. From Bloomberg:

Consumer spending unexpectedly stagnated in May as employment prospects dimmed and rising inflation caused Americans to cut back.

Purchases were little changed, the weakest outcome since June 2010, after a revised 0.3 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed today in Washington...

Today’s report also showed that spending adjusted for inflation figures, which are used to calculate gross domestic product, dropped 0.1 percent for a second month. It was the first back-to-back decline in two years.

US Treasury yields in a downtrend

US Treasuries rose last week, pushing yields down as sovereign debt concerns in Europe and a slowing economy drove investors away from riskier assets.

The two-year Treasury note gained for an 11th straight week last week, pushing its yield down to a low of 0.32 percent according to Bloomberg, the lowest level since hitting a record low of 0.3118 percent on 4 November.

The 10-year note also gained last week, pushing its yield down to a low of 2.85 percent, the lowest level since 1 December.

Prices of US Treasuries rose amid concern that European leaders would fail to extend loans to Greece.

Some of the concern on the Greek front, though, was alleviated last week as the government won a confidence vote in Parliament and European leaders endorsed its austerity plan.

However, the threat of default and contagion in Europe was kept at the forefront of investors' minds by an announcement by Moody’s Investors Service last week that it may downgrade the ratings of 13 Italian banks that it deemed vulnerable to a cut in the government’s credit rating.

Also helping to boost Treasury prices last week were further signs that the US and other major economies are slowing.

Sales of new and existing homes in the US both fell in May by 2.1 and 3.8 percent respectively. The Chicago Fed National Activity Index increased to -0.37 in May from -0.56 in April but the three-month moving average fell to -0.19 from -0.15.

In the euro area, a flash estimate of purchasing managers indices from Markit Economics also showed slowing growth. The composite index fell to 53.6 in June from 55.8 in May, with the manufacturing index falling to 52.0 from 54.6 and the services index falling to 54.2 from 56.0.

Even China does not appear to be escaping the slowdown. A flash estimate showed that its manufacturing PMI fell from 51.6 in May to 50.1 in June, indicating hardly any growth.

Another factor in the direction of Treasury prices last week was the Federal Reserve's monetary policy meeting. Here, the impact was mixed.

Fed Chairman Ben Bernanke essentially ruled out another round of quantitative easing. He said at the press conference after the meeting that today, unlike last year when he introduced the securities purchase programme that is now widely called QE2, deflation is no longer a risk. As for the economic slowdown, he said that the economy is expected to pick up pace once some of the temporary factors like high gasoline prices and the effects of the Japanese earthquake dissipate.

However, the Fed also made no suggestion that it was about to remove policy accommodation. In fact, in its statement following the monetary policy meeting, the Fed again mentioned that the federal funds rate are likely to stay exceptionally low for "an extended period" and that it "will maintain its existing policy of reinvesting principal payments from its securities holdings".

With Fed monetary policy set to remain accommodative, Treasury yields are likely to stay low for quite a while longer.

US durable goods orders rise, first quarter GDP growth revised up

Friday provided some positive data for a change.

Reuters reports the latest US durable goods orders and revised first quarter GDP numbers:

New orders for U.S. manufactured goods and a gauge of business spending plans rose in May, easing fears of a sharp slowdown in factory activity.

Durable goods orders increased 1.9 percent after dropping 2.7 percent in April, the Commerce Department said on Friday, with a proxy of business spending also rebounding strongly...

The economy grew at an annual rate of 1.9 percent in the first quarter, the department said in another report, up from a previously estimated 1.8 percent. That marks a sharp slowdown from the 3.1 percent rate in the fourth quarter.

There was also good news from Germany. Bloomberg reports:

German business confidence unexpectedly improved in June, suggesting Europe’s largest economy is weathering the region’s worsening sovereign debt crisis and slowing global growth.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 114.5 from 114.2 in May. Economists forecast a drop to 113.4, the median of 39 estimates in a Bloomberg News survey showed. The index remains close to a record high of 115.4 posted in February.

Oil prices tumble on IEA move amid slowing economy

Oil prices plunged on Thursday. Reuters reports:

Oil tumbled 6 percent on Thursday to a four-month low after the world's top consumers released emergency oil reserves for the third time ever, a surprise intervention to aid the struggling global economy.

The International Energy Agency announced it would inject 60 million barrels of government-held stocks in the global market, immediately increasing world supply by some 2.5 percent for the next month and sending prices spiraling, with U.S. crude prices erasing all of the year's gains.

The fall in oil prices should help boost a global economy that showed further signs of weakness on Thursday.

In China, manufacturing barely grew in June, according to a Bloomberg report.

China’s manufacturing may expand at the slowest pace in 11 months in June, as output growth stalls and export orders drop, a preliminary purchasing managers’ index showed.

The 50.1 level reported by HSBC Holdings Plc. and Markit Economics today compares with a final reading of 51.6 in May. A number above 50 indicates expansion.

The eurozone economy also showed a significant slowdown in June. From Bloomberg:

European services and manufacturing growth slowed more than economists forecast in June, adding to signs that the economy is losing some momentum.

A composite index based on a survey of euro-area purchasing managers in both industries fell to 53.6 from 55.8 in May, London-based Markit Economics said today. Economists had forecast a drop to 55.2, the median of 16 estimates in a Bloomberg survey showed. A reading above 50 indicates growth. Output growth weakened to the slowest in almost two years...

The euro-area services indicator fell to 54.2 this month from 56 in May, Markit said in the initial estimate. That’s the weakest in six months. The manufacturing gauge decreased to 52 from 54.6 in the previous month, the lowest in 18 months.

In the UK, retail sales turned sharply down in June. Reuters reports:

Retail sales showed their weakest performance for a year this month, and stores' outlook for the coming months is little better, a survey by the CBI employers' organisation showed on Wednesday.

The CBI distributive trades survey's June sales balance fell to a 12-month low of -2, well below both May's reading of +18 and economists' forecasts for a fall to +10.

The US provided no exception to the pattern seen in the rest of the world. From Reuters:

The number of Americans filing new claims for unemployment benefits rose last week, suggesting little improvement in the labor market this month after hiring stumbled badly in May.

Initial claims for state unemployment benefits climbed by 9,000 to 429,000, the Labor Department said on Thursday. Economists had expected claims to come in at 415,000...

A separate report on Thursday highlighted one of the economy's weakest spots: housing. The Commerce Department said new single-family home sales fell 2.1 percent to an annual rate of 319,000 units in May. A report on Tuesday had shown sales of previously owned homes, a larger segment of the market, fell 3.8 percent to a six-month low...

Separately, the Chicago Federal Reserve's national activity index stayed in negative territory for a second straight month in May, indicating the economy continues to grow below trend.

No hint of QE3 from Bernanke

Reuters reports the outcome of the latest Federal Reserve monetary policy meeting:

The Federal Reserve on Wednesday cut its forecasts for U.S. economic growth, but offered no hint of further monetary support, saying the recovery should gradually pick up heading into 2012.

Fed Chairman Ben Bernanke said factors weighing on the economy, such as high commodity prices, should be fleeting but warned some of the weakness could linger...

The Fed confirmed it was ending its $600 billion bond-buying program at the end of June and reiterated it will continue to reinvest principal payments from its holdings...

While Bernanke did not rule anything out, he made clear the Fed does not feel the economy is in as dire a condition as it was last fall when it launched its latest bond-buying plan.

Among US economic data released on Wednesday, commercial real estate prices continued to decline in April. Again from Bloomberg:

U.S. commercial property prices fell in April as sales of distressed assets made up a large share of transactions, according to Moody’s Investors Service.

The Moody’s/REAL Commercial Property Price Index dropped 3.7 percent from March and 13 percent from a year earlier. It’s now 49 percent below the peak of October 2007 and at its lowest point in data going back to December 2000, the company said in a report today.

However, home prices showed a surprise rebound in April, according to a Bloomberg report.

U.S. home prices fell 5.7 percent in April from a year earlier, signaling the housing market is struggling to recover as foreclosures weigh down values.

The decline was led by an 11 percent drop in the region that includes Nevada and Arizona, the Federal Housing Finance Agency said today in a report from Washington. The second- largest slump was 8.6 percent in the area that includes Florida...

Prices rose 0.8 percent from March, the FHFA said. Economists had projected a 0.3 percent decline from the previous month, according to the average of 18 estimates in a Bloomberg survey...

Also showing a rebound in April was eurozone industrial orders. Bloomberg reports:

European industrial orders rose in April, as increasing demand in Germany helped counter a slump in France and Italy, suggesting the euro region’s economic expansion maintained some momentum into the second quarter.

Orders in the euro area advanced 0.7 percent from March, when they fell 1.5 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a gain of 1 percent, the median of 18 estimates in a Bloomberg News survey showed. Orders jumped 8.6 percent from a year earlier.

Greek government wins confidence vote

Bloomberg reports the latest news from Greece:

Greek Prime Minister George Papandreou won a vote of confidence, bolstering his new government’s chances of pushing through austerity measures to secure further international financial aid for the country.

A total of 155 lawmakers supported the motion in the 300- seat parliament in Athens early this morning, with 143 voting against, the speaker, Filippos Petsalnikos, said in remarks carried live on state-run Vouli TV. Papandreou reshuffled his Cabinet and sought the approval of the chamber after fending off a revolt within his Pasok party last week. That came after opposition parties rejected his call for a national unity government.

Investors had apparently positioned themselves for the result earlier on Tuesday. From Bloomberg:

U.S. stocks extended their rally for a fourth day, European shares rebounded from a three-month low and the euro gained as Greece prepared for a confidence vote that may determine its financial future. Oil pared early gains and Treasuries fell, while the dollar slumped.

The Standard & Poor’s 500 Index added 1.3 percent, its biggest gain since April 20, to 1,295.52 at 4 p.m. in New York. The Stoxx Europe 600 Index climbed 1.4 percent, also its best advance since April 20. The euro strengthened 0.7 percent to $1.4403. Costs to protect European sovereign debt slid as Greek and Spanish bonds rose. Energy dragged on the S&P GSCI Index, which erased most of an early advance. Ten-year U.S. Treasury yields increased two basis points to 2.98 percent.

US stocks rose despite another poor report on the housing sector. From Bloomberg:

Sales of existing U.S. homes decreased in May to the lowest level in six months, a sign that the housing market is lagging other parts of the economy.

Purchases of existing homes fell 3.8 percent to a 4.81 million annual pace last month, in line with the 4.8 million median estimate in a Bloomberg News survey of economists, data from the National Association of Realtors showed today in Washington. Preliminary figures showing a jump in contract signings suggest May will prove to be the weakest sales month of the year, according to the group’s chief economist.

Japan posts trade deficit as leading index falls

There was disappointing news on the Japanese economy on Monday.

Japan reported weaker-than-expected exports in May. Bloomberg reports:

Japan’s exports fell more than economists estimated in May, adding to signs the world’s third- largest economy may struggle to recover from the March 11 earthquake and tsunami.

Exports decreased 10.3 percent from a year earlier after April’s revised 12.4 percent drop, the Finance Ministry said today. The median estimate of 25 economists surveyed by Bloomberg News was for an 8.4 percent decline. The nation posted a trade deficit of 853.7 billion yen ($10.7 billion), the second biggest since comparable data were made available in 1979...

Overseas shipments rose a seasonally adjusted 2.5 percent in May from April, the first advance in three months, today’s report showed...

An increase in energy prices pushed up import bills. Crude oil prices have gained about 20 percent in the past year and Japan gets virtually all of its oil from abroad. Imports rose 12.3 percent in May from a year earlier, today’s report showed.

Meanwhile, composite indices for April have been revised down, reports Nikkei:

The composite index of coincident economic indicators has been revised downward to a 0.2-point rise on the month to 103.6 in April (2005=100), the Cabinet Office said Monday.

The preliminary reading, released on June 7, stood at 103.8, up 0.3 points from March.

The index of leading indicators, a barometer of economic conditions several months down the road, slid 3.4 points to 96.2.

Europe delays aid to Greece

European leaders engage in a bit of brinkmanship over Greece's debt problem. From Reuters today:

Euro zone finance ministers postponed a final decision on extending a further 12 billion euros ($17 billion) in emergency loans to Greece, saying Athens would first have to introduce harsh austerity measures.

The ministers said in a statement that they expected to pay the money by mid-July. Greece has said it needs the loans by then to avoid defaulting on its debt.

But keeping up the pressure on Athens, the ministers insisted that disbursement would depend on the Greek parliament first passing laws on fiscal reforms and selling off state assets.

Greek concerns ease, US leading index rises

Concerns over Greek sovereign debt eased slightly on Friday. Reuters reports:

Greece's embattled prime minister sacrificed his finance minister on Friday to force through an unpopular austerity plan and avert bankruptcy, while EU powers Germany and France promised to go on funding Athens.

After a week of political turmoil and violent protests in Athens, Prime Minister George Papandreou put his main socialist rival into the finance ministry in a bid to unite his fractious party behind spending cuts, tax rises and privatizations crucial to securing further IMF/EU assistance.

In Berlin, the leaders of Germany and France, long at odds over how to involve private holders of Greek bonds in a new rescue package for Athens, said they agreed on a mild solution favored by Paris and the European Central Bank.

But European leaders cannot afford to be complacent as Friday also brought a reminder that the threat of contagion remains.

In a sign of continued concern over Europe's debt problems, Moody's Investors Service said on Friday it may cut Italy's sovereign credit rating from AA2, citing challenges ahead for economic growth due to structural weaknesses and a likely rise in interest rates.

Meanwhile, Reuters reports mixed economic data for the US on Friday:

U.S. consumer sentiment declined more than expected in June, the Thomson Reuters/University of Michigan survey showed, as consumers remained pessimistic about stagnant incomes and job prospects...

The preliminary reading showed the index at 71.8, down from 74.3 the month before. It was below the median forecast of 74.0 among economists polled by Reuters...

A separate report showed a gauge of future economic activity rose more than expected in May, but high gasoline prices and a weak housing market will see growth remaining moderate.

The independent Conference Board said on Friday its Leading Economic Index increased 0.8 percent to a record high of 114.7 after a revised 0.4 percent fall in April. Economists had expected a rise of 0.2 percent...

On Friday, the IMF forecast that U.S. gross domestic product would grow a tepid 2.5 percent this year and 2.7 percent in 2012. In its forecast just two months ago, it had expected 2.8 percent growth in 2011, rising to 2.9 percent in 2012.

India raises interest rates

India raised interest rates on Thursday. Channel NewsAsia reports:

The Reserve Bank of India has raised its lending rate by 25 basis points to 7.5 per cent. The borrowing rate was also raised by 25 basis points to 6.5 per cent. However, the cash reserve ratio - amount of funds that banks have to keep with RBI - was left unchanged at six per cent.

The central bank governor said the domestic growth outlook remains unchanged and that inflation is way above the RBI's comfort zone.

Greece, though, remained the focus of investors' concern in Europe. From Bloomberg:

European stocks fell to a three- month low as Greek Prime Minister George Papandreou said he will reshuffle his cabinet and seek a confidence vote...

The benchmark Stoxx Europe 600 Index fell 0.5 percent to 266.73 at the 4:30 p.m. close in London, its lowest level since March, as all but three industry groups slid. The gauge has lost 8.4 percent since this year’s high on Feb. 17 as a slowdown in U.S. job creation suggested the economic recovery is faltering and speculation grew that Greece will default on its debt.

US stocks, though, managed to end in positive territory despite mixed economic data. From Bloomberg:

Manufacturing in the Philadelphia region unexpectedly contracted in June and Americans’ views on the economy’s outlook soured, signaling an erosion of confidence in the expansion.

The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 7.7, the lowest since July 2009, from 3.9 the prior month. Readings less than zero signal contraction. The Bloomberg gauge of economic expectations slumped to minus 31 this month, the weakest since March 2009, from minus 16...

Stocks rebounded, a day after the Standard & Poor’s 500 Index dropped to a three-month low, as better-than-estimated housing starts and jobless claims reports tempered concern about Europe’s debt crisis. The S&P 500 rose 0.2 percent to 1,267.64 at the 4 p.m. close in New York...

First-time filings for unemployment benefits declined by 16,000 last week to 414,000, Labor Department figures showed today. Economists surveyed by Bloomberg News projected 420,000 claims, according to the median forecast.

Construction began on 560,000 houses at an annual pace, up 3.5 percent from the prior month and exceeding the 545,000 median forecast of economists, Commerce Department figures showed.

Markets turn nervous on Greece

Reuters reports the market reaction to the latest developments on Greece's debt problem.

World stocks and the euro slumped on Wednesday as upheaval in highly indebted Greece and indecision among Europe's leaders about helping the nation fed fears the euro zone member is edging closer to default.

The euro tumbled 2 percent against the dollar and government debt of the United States and Germany rallied on a safety bid after euro zone finance ministers failed to agree on how to involve private investors in a second financial rescue for Greece.

Senior EU officials said a deal was now unlikely to be reached at a summit next week and was likely to be delayed until mid-July...

The dollar's strengthening against the euro helped propel a more than 4 percent slide in the price of U.S. crude oil, hurt also by further signs of economic weakness...

The MSCI world stock index sagged 1.9 percent a day after posting its biggest single-day percentage rise in two weeks due to less-grim economic data from China and the United States.

European industrial production data had been positive on Wednesday. From Bloomberg:

European industrial production unexpectedly rose in April, led by increased output of durable consumer goods such as home appliances and furniture.

Production in the 17-nation euro area advanced 0.2 percent from March, when it held steady, the European Union’s statistics office in Luxembourg said today. Economists had forecast a drop of 0.2 percent, the median of 36 estimates in a Bloomberg News survey showed. Production increased 5.2 percent from a year earlier after rising 5.8 percent in March.

Industrial production also rose in the US in May, but so did inflation. Bloomberg reports:

The cost of living in the U.S. rose more than forecast in May as prices for everything from autos to hotel rooms climbed, signaling raw-material expenses are filtering through the economy.

The consumer-price index increased 0.2 percent last month and was up 3.6 percent from May 2010, the biggest year-over-year advance since October 2008, according to figures from the Labor Department today in Washington...

Prices excluding food and fuel climbed 0.3 percent in May, the biggest one-month gain since July 2008...

Output at factories, mines and utilities rose 0.1 percent in June after no change the prior month, figures from the Federal Reserve showed. Factory production climbed 0.4 percent, led by the biggest gain in business equipment output in four months...

The Federal Reserve Bank of New York’s general economic index dropped to minus 7.8, the lowest level since November, from 11.9 in May. Readings greater than zero signal expansion in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

Also today, the National Association of Home Builders/Wells Fargo sentiment index fell to 13 in June, a nine-month low, from 16 the prior month. The drop indicates housing will remain a weak spot in the economy.

BoJ expands lending programme, PBC raises reserve requirement

The Bank of Japan announced another measure to support the economy on Tuesday. AFP/CNA reports:

The Bank of Japan on Tuesday said it would expand a programme of lending to companies in growth areas with a new US$6 billion credit line to support the post-quake economy.

The BoJ's policy panel voted unanimously after a two-day meeting to keep its key rate unchanged between zero and 0.1 percent, and expand last June's 3 trillion yen (US$37.4 billion) lending facility to encourage banks to channel funds into sectors such as renewable energy and medicine.

The central bank will offer a new credit line of up to 500 billion yen under a new facility designed to make it easier for smaller firms to access cash from banks without using traditional real estate collateral.

There was some more bad news in Japan on Tuesday.

Sentiment among large Japanese companies tumbled to its lowest in two years during April-June, a government survey showed Tuesday, after the impact of the March 11 disasters.

The index measuring the mood among big companies stood at minus 22.0 in the second quarter compared with minus 1.1 in the previous three months, a joint survey by the Finance Ministry and the Cabinet Office showed.

But the BoJ does not seem overly concerned.

The central bank also slightly upgraded its assessment of the economy, which "continues to face downward pressure, mainly on the production side due to the effects of the earthquake disaster but is showing some signs of picking up".

The BoJ said the Japanese economy was likely to return to "a moderate recovery path" in the second half of the year.

Indeed, the economy has already shown signs of recovery from the earthquake disruptions. Reuters reports:

Japan's industrial output rose 1.6 percent in April, revised data showed on Tuesday, suggesting that factory activity is picking up after the previous month's record fall due to a massive earthquake and tsunami that struck on March 11.

In contrast to Japan, China's policy-makers must be wishing its economy has slowed more. From AFP/CNA:

China said on Tuesday that its politically sensitive inflation rate hit its highest level in nearly three years in May, prompting Beijing to order banks to increase the amount of money they keep in reserve.

China has been battling to contain inflation, which jumped to 5.5 percent year-on-year in May -- far above the official annual target of 4.0 percent -- as food prices soared on power shortages and crippling droughts in some areas.

It was the highest rate since July 2008, when the index rose 6.3 percent...

The People's Bank of China said after the data release that it would increase the reserve requirement ratio by 50 basis points, effectively limiting the amount of money banks can lend, in the latest move to tame consumer costs...

Output from the country's thousands of workshops and factories rose 13.3 percent from a year earlier in May, slightly slower than the 13.4 percent in April amid electricity shortages and a government clampdown on bank lending.

Fixed-asset investment for the January-May period rose 25.8 percent on year, up from 25.4 percent in the first four months of the year.

Retail sales rose 16.9 percent year-on-year in May.

India is also experiencing high inflation, report AFP/CNA:

India's annual inflation accelerated above market forecasts to 9.06 percent in May, official data showed on Tuesday, increasing pressure on the central bank to raise interest rates further.

The rise in the wholesale price index -- the government's preferred measure of the cost of living -- was lower in April at a provisional 8.66 percent, the ministry of commerce said.

But the UK's trend of higher-than-expected inflation appears to have come to an end. Reuters reports:

Inflation in Britain held at a 2-1/2 year high in May as food prices rose, squeezing Britons' finances and leaving rate-setters stuck firmly with the dilemma of how to tackle soaring prices while the economy is weak.

The Office for National Statistics said consumer prices rose 0.2 percent last month keeping the annual inflation rate at 4.5 percent, as expected. Rising food prices offset a drop in travel costs, as airfares dropped after the Easter holiday.

High inflation did not stop UK consumer sentiment from improving in May though. From Reuters:

Consumer confidence enjoyed one of its biggest jumps on record last month, a survey showed on Wednesday, providing a glimmer of hope that the recovery may get back on track.

Nationwide Building Society said its consumer confidence index rose to 55 in May from an upwardly revised 44 in April, moving further away from the all-time low of 40 hit in February.

The 11 point rise mirrors a similar jump in GfK NOP's May confidence survey, and suggests unusually warm weather and a succession of bank holidays boosted consumer morale.

Inflation has also not held back US consumer spending much. From Bloomberg:

Sales at U.S. retailers fell less than projected in May, showing consumers were weathering elevated gasoline costs.

The 0.2 percent decrease reported by the Commerce Department in Washington today compared with the median forecast for a 0.5 percent drop in a Bloomberg News survey of economists. Excluding the biggest slide in auto sales in more than a year, purchases climbed 0.3 percent. Another report showed wholesale costs rose last month...

The increase in wholesale costs last month was led by higher prices for fuel and plastic products, according to the Labor Department. The 0.2 percent increase in the producer-price index followed a 0.8 percent advance in April...

Another report today showed that business inventories rose in April as sales cooled. The 0.8 percent advance in stockpiles followed a 1.3 percent increase in the prior month and compared with a 0.9 percent rise that was the median forecast of economists surveyed by Bloomberg News, Commerce Department figures showed today in Washington.

Chinese loans and Japanese machinery orders fall, Greek credit rating cut

The week's economic reports started on a negative note.

China reported a fall in new loans for May. From AFP/CNA:

New loans issued by Chinese banks fell sharply in May from the previous month, the central bank said Monday, in a sign Beijing's efforts to stem a flood of credit in the economy are bearing fruit.

The country's banks handed out 551.6 billion yuan (US$85.14 billion) in loans in May compared with 739.6 billion yuan in April -- and 100.5 billion yuan less than a year earlier, the People's Bank of China said in a statement...

The broadest measure of money washing around the economy, M2, rose 15.1 per cent at the end of May compared with 15.3 per cent at the end of April, the central bank said, in another sign of slowing credit.

Data from Japan was also negative. Again from AFP/CNA:

Japan's core private-sector machinery orders, a leading indicator of corporate capital spending, posted a surprise decline of 3.3 per cent in April, government data showed on Monday.

The negative core data, which exclude volatile demand from power companies and for ships, followed a revised 1.0 per cent gain in March and missed forecasts for a 1.2 per cent increase, according to a Dow Jones Newswires poll.

And Greece's credit rating has been downgraded again. Bloomberg reports:

Greece was branded with the world’s lowest credit rating by Standard & Poor’s, which said the nation is “increasingly likely” to face a debt restructuring and the first sovereign default in the euro area’s history.

The move to CCC from B reflects “our view that there is a significantly higher likelihood of one or more defaults,” S&P said in a statement yesterday. “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.”

Steve Keen on rising debt trend and its end

Steve Keen says that the bull market of the past few decades had been the result of a secular trend of rising debt.

[T]he rate of change of asset prices is related to the acceleration of debt. It’s not the only factor obviously—change in incomes is also a factor, and as Schumpeter argued, there will be a link between accelerating debt and rising income if that debt is used to finance entrepreneurial activity. Our great misfortune is that accelerating debt hasn’t been primarily used for that purpose, but has instead financed asset price bubbles.

However, Keen says that the trend of rising debt has reached an end.

In a well-functioning economy, periods of acceleration of debt would be followed by periods of deceleration, so that the ratio of debt to GDP cycled but did not rise over time. In a Ponzi economy, the acceleration of debt remains positive most of the time, leading not merely to cycles in the debt to GDP ratio, but a secular trend towards rising debt. When that trend exhausts itself, a Depression ensues—which is where we are now. Deleveraging replaces rising debt, the debt to GDP ratio falls, and debt starts to reduce aggregate demand rather than increase it as happens during a boom.

Some of the equations that were omitted in the post (at the time of writing) can be found in the PDF version of the article.

Markets fall, South Korea raises rates

Markets ended the week on a negative note on Friday. Reuters reports:

Major stock markets fell for a fifth week in six on Friday on growing worries about the global economy, while U.S. crude oil prices sank more than $2 on Saudi Arabia's offer of more oil to Asian refiners.

The euro declined the most against the dollar in a month as concern over Greece's debt crisis returned to center stage and investors scaled back expectations on the pace of future interest-rate hikes in the euro zone.

World stocks as measured by the MSCI world equity index lost 1.5 percent on the day, posting their fifth down week in six. The index has lost 7 percent over the past six weeks, erasing almost all of its gains so far this year.

In Asia, market sentiment was not helped by another round of monetary tightening by South Korea. AFP/CNA reports:

South Korea's central bank Friday raised the key interest rate by 25 basis points to 3.25 per cent as authorities vowed to step up their battle against inflation.

The June rate rise, the third this year, came despite data suggesting the economic recovery is slowing at home and abroad.

Meanwhile, data from China on Friday gave mixed signals about the direction of its economy. Again from AFP/CNA:

China's politically sensitive trade surplus expanded to US$13.05 billion in May from the previous month as the value of exports hit a new record high, government data showed Friday...

Exports growth slowed last month, rising 19.4 per cent year-on-year to US$157.16 billion -- but still a record high for a single month based on previous data -- customs authorities said in a statement.

Imports gathered pace, soaring 28.4 per cent from a year earlier to US$144.11 billion.

Industrial production data from Europe have been giving a clearer indication though, with Bloomberg reporting on Friday that French industrial production fell in April.

French industrial output dropped for a second month in April as a cooling global expansion slowed demand at home and abroad.

Output from factories, mines and utilities fell 0.3 percent from March, when it declined a revised 1.1 percent, statistics office Insee said today. Economists forecast a 0.4 percent gain, according to the median of 12 estimates in a Bloomberg survey.

UK industrial production fell even more in April. From Reuters:

Factory output fell at its sharpest monthly pace in around two years in April, hit by an extra holiday for the Royal Wedding and supply chain disruption from Japan's earthquake, and suggesting the economy made a lacklustre start to the second quarter...

The Office for National Statistics said industrial output fell 1.7 percent in April, confounding the median forecast for a rise of 0.1 percent, and the biggest fall since August 2009.

The narrower measure of manufacturing output -- which does not include utilities or oil and gas extraction -- dropped 1.5 percent in April, the steepest fall since January 2009.

But inflation in the UK may finally be moderating.

The [Bank of England's] May inflation attitudes survey showed that average public inflation expectations for the next 12 months fell for the first time since February 2009, dropping to 3.9 percent from 4.0 percent in the February 2011 survey...

Separate data from the ONS showed factory gate inflation eased in May, as manufacturers' input costs fell at their fastest monthly pace in two years.

Producer output price inflation eased to 5.3 percent in May from an upwardly revised 5.5 percent in April.

However, in the US, inflation may prove more persistent than expected as import prices continued to rise in May. From Bloomberg:

Prices of goods imported into the U.S. unexpectedly rose in May as increasing costs for consumer goods like autos and clothing overshadowed the first drop in fuel expenses in eight months.

The 0.2 percent increase in the import-price index, its eighth consecutive gain, followed a revised 2.1 percent climb in April, Labor Department figures showed today in Washington. Economists projected a 0.7 percent decrease for last month, according to the median estimate in a Bloomberg News survey. Costs advanced 12.5 percent from May 2010, the biggest 12-month increase since September 2008.

ECB signals rate hike, euro falls

It looks like the ECB will be raising rates again soon, although the impending move didn't help the euro on Thursday. Bloomberg reports:

The European Central Bank signaled a July rate increase while damping investor expectations for further moves by reiterating a forecast that inflation will fall below its 2 percent limit next year.

The euro dropped more than a cent and German government bonds fell after ECB President Jean-Claude Trichet said the central bank hadn’t raised next year’s inflation forecast from 1.7 percent, fueling speculation it won’t increase rates as quickly as previously expected. At the same time, Trichet signaled the bank intends to lift its benchmark in July after keeping it at 1.25 percent today.

Latest data confirm “continued upward pressure on inflation” and “strong vigilance is warranted,” Trichet said. “It means that we are in a mode where there might be in the next meeting an increase of rates, but we are never pre- committed. We are not signaling any particular pace for the next decisions on our interest rates.”

The central bank increased its 2011 inflation forecast to 2.6 percent from the 2.3 percent, and left the forecast for next year at 1.7 percent. The 17-nation euro-area economy will grow 1.9 percent in 2011, up from the previous 1.7 percent projection. Growth will slow to 1.7 percent in 2012, the ECB said, reducing its forecast from 1.8 percent.

The Bank of England left interest rates unchanged after its monetary policy meeting on Thursday. Consumer demand in the UK has been weak recently, contributing to a narrower trade deficit in April, reports Reuters:

Britain's goods trade deficit with the rest of the world narrowed more than expected in April, although the improvement was driven by a sharp fall in demand for consumer goods, rather than any big improvement in exports.

The Office for National Statistics said that Britain's goods trade gap narrowed to 7.389 billion pounds in April from 7.708 billion in March, lower than analysts' forecasts for a deficit of 7.55 billion pounds...

The ONS said exports rose by 0.1 percent on the month, while imports fell 0.9 percent.

Bloomberg reports that the US trade deficit also narrowed in April.

Record exports and lower oil purchases unexpectedly helped narrow the U.S. trade deficit, easing concern that the world’s largest economy is faltering.

The gap shrank 6.7 percent to $43.7 billion in April, the lowest since December, Commerce Department figures showed today in Washington...

Exports increased 1.3 percent to $175.6 billion, boosted by sales of fuel oil, petroleum products and computers.

Imports dropped 0.4 percent to $219.2 billion from $220.2 billion in March. Demand for foreign-made automobiles and parts dropped by $2.82 billion to $19.1 billion.

Japan confirms first quarter GDP contraction

Japan's first quarter GDP was only revised slightly. Reuters reports:

Japan's gross domestic product (GDP) shrank 0.9 percent in January-March from the previous quarter, revised Cabinet Office data showed on Thursday, unchanged from the preliminary figure despite a bigger drop in corporate capital spending than initially estimated in the wake of the March earthquake...

It translated into an annualised contraction of 3.5 percent in real, price-adjusted terms, against an initial reading of 3.7 percent of contraction and economists' forecast of a 3.0 percent decline.

Data on Wednesday had indicated that the second quarter is looking somewhat better for the Japanese economy. Reuters reports:

Japan's current account surplus fell less than expected in April from a year earlier, fuelling further hopes for an early economic recovery as manufacturers restore lost production and mend supply chains after the March disaster...

Japan's current account surplus fell 69.5 percent in April from a year earlier, Ministry of Finance data showed, less than the median forecast for an 84.3 percent annual decline, although exceeding the 34.3 percent annual drop in March.

The surplus stood at 405.6 billion yen ($5 billion), nearly double the median forecast of 210 billion yen, as big gains in dividend income from abroad more than offset deficits in trade of goods and services.

Outstanding loans held by Japanese banks inched down 0.7 percent in May from a year earlier, central bank data showed. Lending fell for an 18th straight month, but the decline slowed, suggesting the March earthquake and tsunami supported corporate demand for funding.

And Japan's service sector sentiment improved again in May. Again from Reuters:

Japan's service sector sentiment index rose to 36.0 in May, a Cabinet Office survey showed on Wednesday, continuing its gradual recovery from a record fall posted in March, helped by efforts to mend damage caused by an earthquake, tsunami and subsequent nuclear crisis.

The survey of workers such as taxi drivers, hotel workers and restaurant staff -- called "economy watchers" for their proximity to consumer and retail trends -- showed their confidence about current economic conditions climbed from 28.3 in April...

The outlook index, indicating the level of confidence in future conditions, was at 44.9, up from 38.4.

The eurozone's first quarter growth was unchanged at 0.8 percent in the latest estimate released on Wednesday but the second quarter may have started much weaker, at least for its biggest economy. Bloomberg reports that German industrial production fell in April.

German industrial production unexpectedly declined for the first time in four months in April, led by a drop in construction output.

Production fell 0.6 percent from March, when it rose a revised 1.2 percent, the Economy Ministry in Berlin said today. Economists had forecast a gain of 0.2 percent, the median of 36 estimates in a Bloomberg News survey showed. In the year, production rose 9.6 percent when adjusted for working days.

There was also a fall in German exports. The Telegraph reports:

German exports recorded its biggest drop in more than two years in April.

Seasonally adjusted exports fell by 5.5pc from the previous month - the biggest decline since a 6.5pc drop in January 2009 - while imports declined by 2.5pc, the national statistics office said in a statement on Wednesday.

Meanwhile, the Fed's Beige Book suggests that the US economy has also slowed. Reuters reports:

Growth slowed in some U.S. regions during May as costlier food and energy as well as supply disruptions stemming from a major earthquake in Japan in March took a toll, the Federal Reserve said on Wednesday.

"Reports from the 12 Fed districts indicated that economic activity generally continued to expand since the last report, though a few districts indicated some deceleration," the U.S. central bank's periodic "Beige Book" summary said.

European retail sales and German factory orders rise in April

Economic reports from Europe on Tuesday were quite positive.

Eurostat reports that retail sales were up in April.

In April 2011, compared with March 2011, the volume of retail trade rose by 0.9% in the euro area (EA17) and by 1.1% in the EU27. In March retail trade fell by 0.9% and 0.8% respectively.

Also up in April were German factory orders. Bloomberg reports:

Factory orders in Germany, Europe’s largest economy, rebounded in April from a slump in the previous month, led by stronger demand for investment goods.

Orders, adjusted for seasonal swings and inflation, rose 2.8 percent from March, when they plunged a revised 2.7 percent, the Economy Ministry in Berlin said in a statement today. Economists had forecast a gain of 2 percent, according to the median of 37 estimates in a Bloomberg News survey. In the year, orders rose 10.5 percent, when adjusted for work days.

Japan's coincident index up in April

After a large fall in March, Japan's index of coincident economic indicators rose in April. Reuters reports:

Japan's index of coincident economic indicators rose a preliminary 0.3 points in April from March, the Cabinet Office said on Tuesday, rebounding from a record drop the previous month in a sign the impact of the March earthquake and tsunami could be starting to fade.

But the Japanese economy may not be out of the woods.

The index of leading economic indicators, compiled using data such as the number of job offers and consumer sentiment and a gauge of the economy a few months ahead, fell 3.7 points from March.

With economy weakening, is QE3 coming?

Despite the weak economic data in recent weeks, John Hussman is not too pessimistic about the US economy. From his latest commentary:

In recent weeks, and particularly in last week's ISM, employment claims and unemployment reports, we've observed a substantial weakening in measures of economic growth. At present, the evidence of economic deterioration is not severe - as I noted in 2000, 2007 and last summer, recession evidence is best obtained from a syndrome of conditions, including the behavior of the yield curve, credit spreads, stock prices, production, and employment growth. While all of these components have weakened, they have not deteriorated to the extent that has (always) accompanied the onset of recessions.

To a large extent, the current softening of economic conditions is really nothing more than the recrudescence of the deterioration we saw last summer. Basically, we've arrived upon the can that the Fed kicked down the road when it initiated QE2...

Which leads to the question: Will the Fed embark on QE3? Hussman says:

[I]t seems unlikely that we will observe a push toward QE3 unless we observe substantially more economic weakness than we've observed to date. Moreover, much of the strength of the market's response to QE2 appears to have been conditioned by the fact that stocks were down substantially from their prior highs when Bernanke began discussing the policy. The upshot is that we view the likelihood of QE3 as fairly remote, but we can't rule it out. Even so, the prospects of QE3 and further Fed-induced speculation are probably not worth contemplating until we first observe significant economic and market weakness.

US employment growth slows, global output index rises

The economic reports on Friday were mixed.

In the US, Bloomberg reports that payrolls expanded at the slowest pace in eight months.

Payrolls grew at the slowest pace in eight months and the U.S. jobless rate unexpectedly climbed to 9.1 percent in May, reinforcing signs that a slowdown in the world’s largest economy is persisting into the second quarter.

Employers added a less-than-projected 54,000 jobs last month, after a revised 232,000 gain in April that was smaller than initially estimated, Labor Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for payrolls to rise 165,000. The jobless rate climbed to the highest level this year from 9 percent a month earlier.

However, the ISM's non-manufacturing index rose in May.

Another report today showed service industries expanded faster than forecast in May. The Institute for Supply Management said its index of non-manufacturing businesses increased to 54.6 in May from 52.8 a month earlier. The median estimate of 74 economists surveyed by Bloomberg projected the measure would rise to 54. A reading above 50 signals expansion.

In the euro area, Bloomberg reports that growth in services slowed in May but was higher than initially estimated.

European services and manufacturing growth slowed in May to the weakest in five months as economies from Germany to Spain and Italy reported faltering output.

A composite index based on a survey of euro-area purchasing managers in both industries fell to 55.8 from 57.8 in April, London-based Markit Economics said in a statement today. That’s above an initial estimate of 55.4 published on May 23. The index has been above 50, indicating growth, for 22 months...

The euro-area services indicator fell to 56 from 56.7 in April, today’s report showed...

The UK's service sector also slowed in May, according to Reuters:

The service sector grew at its slowest pace for three months in May, as public holidays held back activity, stoking worries that the economy's sluggish start to the year has persisted into the second quarter. The Market/CIPS headline services PMI index eased to 53.8 last month from 54.3 in April, the lowest reading since February and below the 54.1 consensus forecast...

Separate figures on Friday showed the volume of new British construction orders fell by 23 percent on the quarter in the first three months of 2011, the biggest decline since 1987.

Nevertheless, the overall global output index actually rose in May. From Reuters:

The world's private sector economy expanded at a slightly faster pace in May, with companies in emerging powers China, Brazil and Russia leading the way, a business survey showed on Friday.

JPMorgan's Global All-Industry Output Index, which is based on the results of purchasing managers surveys of thousands of companies worldwide, rose to 52.6 in May, up from April's 21-month low of 51.8.

US data weak, Europe to rescue Greece

US economic data on Thursday were again weak. Reuters reports:

The number of Americans signing up for jobless benefits fell only slightly last week, doing little to calm growing fears of a pullback in the economy's recovery.

Initial claims for state jobless benefits slipped 6,000 to 422,000, the Labor Department said on Thursday, which was higher than the 415,000 claims expected by economists...

In another troubling sign, a survey of 733 small businesses released on Thursday showed their hiring stalled in May. The National Federation of Independent Business said its survey found that the average number of net new jobs slipped to 0.01 per firm from 0.04 in April...

Productivity grew at a 1.8 percent annual rate in the first quarter, the department said. While that was up from the previously reported 1.6 percent pace, it was well below the 2.9 percent pace set in the fourth quarter...

The economy's slowing pace was underscored by a third government report showing orders received by U.S. factories fell 1.2 percent in April.

But Europe's sovereign debt concerns continued to recede on Thursday. Reuters reports that eurozone officials are ready to rescue Greece again.

Greece is set to impose a deeper bout of austerity on its struggling economy and promise to speed up a privatization drive in return for a new international bailout to avoid a debt default.

Prime Minister George Papandreou Friday will present his side of the deal, a medium-term budget plan, when he meets the chairman of euro zone finance ministers -- the people who must stump up much of the planned new funding along with the IMF.

Senior euro zone officials meeting in Vienna agreed in principle to a new three-year program for Greece to run until mid-2014, a source close to the negotiations said.

And Spain continued to distinguish itself from the worst-hit countries. From Bloomberg:

Spain sold 4 billion euros ($5.8 billion) of bonds, meeting the maximum target the Treasury set for the sale and sending the nation's bonds higher.

The Treasury in Madrid said it sold 2.75 billion euros of three-year bonds at an average yield of 4.037 percent, compared with 3.568 percent the last time the securities were auctioned on April 7 and 4.118 percent on the secondary market before the sale. It also sold 1.2 billion euros of four-year debt at an average yield of 4.23 percent.

Thailand raises rates, US stocks fall, global manufacturing slows

Thailand raised interest rates on Wednesday. AFP/CNA reports:

Thailand raised its key interest rate on Wednesday for the seventh time in under a year to tackle inflation - the latest effort by a fast-growing Asian economy to prevent overheating.

The Bank of Thailand's Monetary Policy Committee voted unanimously to increase the cost of borrowing to 3.0 percent, up from 2.75 percent previously.

US stocks fell sharply. From MarketWatch:

U.S. stocks dropped on Wednesday, with bank issues taking the brunt of the pressure, as Wall Street scaled back its economic growth outlook following another round of dour data...

Tallying its worst single-day point drop since June 2010, the Dow Jones Industrial Average fell 279.65 points, or 2.2%, to 12,290.14...

The Standard & Poor’s 500 Index declined 30.65 points, or 2.3%, to 1,314.55 — its sharpest decline since Aug. 11, 2010.

And no, the falls had nothing to do with Thailand's rate hike.

Stocks fell after the day’s U.S. economic reports added to fears the economic recovery was stalling.

American companies added 38,000 employees to their payrolls in the past month, according to data from ADP Employer Services. Economists had been expecting an increase of 175,000. Read more about ADP payrolls report.

The Institute for Supply Management reported that growth in the U.S. manufacturing sector slowed, with its closely watched gauge dropping to 53.5% in May from 60.4% in April. See details of largest one-month drop since 1984.

Stocks reached their lows of the day after Moody’s Investors Service cut Greece’s credit rating, citing the increased risk “Greece will fail to stabilize its debt position” without restructuring its debt. Read more on Greece.

Indeed, Treasury yields fell, as did oil prices.

Treasury prices rallied, pushing the benchmark 10-year note yield below 3% for the first time since early December, while the dollar softened and oil prices fell. Read more about bonds.

The manufacturing slowdown was not just a US matter. From Bloomberg:

Manufacturing growth from China to the euro region and the U.S. slowed in May, adding to signs that momentum is weakening in a global economy facing headwinds from rising commodity costs and regional shocks...

China’s purchasing managers’ index was at 52, compared with 52.9 in April, the China Federation of Logistics and Purchasing said in an e-mailed statement today. The number was higher than the median forecast of 51.6 in a Bloomberg News survey of 16 economists...

In the 17-nation euro region, a gauge of manufacturing slipped to 54.6 from 58 in April, London-based Markit Economics said today. That’s below an initial estimate of 54.8 released on May 23 with countries from Germany to Spain showing declines...

A U.K. factory gauge based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply declined to 52.1, the lowest since September 2009, from a revised 54.4 in April. Output and new orders fell for the first time since the middle of 2009...

In Russia, the Purchasing Managers’ Index fell to 50.7, from 52.1 in April, HSBC Holdings Plc (HSBA) said in a report today, citing data compiled by Markit. It “signaled a near-stagnation of Russian manufacturing growth in May and a sharp easing in cost inflationary pressure,” HSBC said in the report.

A report from AFP/CNA also showed a slowdown in manufacturing throughout much of the rest of Asia.

US economy weaker, eurozone inflation lower

US data on Tuesday show clearly that the economy has weakened recently. Bloomberg reports:

Consumer sentiment unexpectedly decreased in May to the lowest level in six months as Americans grew concerned over the outlook for jobs and the economy, while a measure of home prices dropped to a nine-year low.

The Conference Board’s confidence index dropped to 60.8 from a revised 66 reading in April, figures from the New York- based private research group showed today. Home prices decreased 5.1 percent in the first quarter from the same time in 2010, according to data from S&P/Case-Shiller...

Home prices were down 4.2 percent from the previous three months, the biggest one-quarter drop since the first three months of 2009, according to the report from S&P/Case-Shiller. At 125.41, the group’s national index was the lowest since the second quarter of 2002...

Also today, the Institute for Supply Management-Chicago Inc. said its business barometer fell to 56.6 this month, the lowest since November 2009, from 67.6 in April. Figures greater than 50 signal expansion. Economists forecast the gauge would fall to 62, according to the median estimate in a Bloomberg News survey.

There was some better news from the euro area in the form of lower inflation. Bloomberg reports:

European inflation unexpectedly slowed in May, giving the European Central Bank room to keep borrowing costs on hold next month.

Inflation in the 17-nation euro region slowed to 2.7 percent from 2.8 percent in April, the European Union’s statistics office in Luxembourg said today in an initial estimate. Economists had forecast no change in the inflation rate, the median of 33 estimates in a Bloomberg News survey showed. Unemployment held at 9.9 percent in April from the previous month, a separate report showed.

There was also some short-term relief in financial markets from the latest news on Greece's sovereign debt problem. From Bloomberg:

European Union leaders will decide on additional aid for Greece by the end of June and have ruled out a “total restructuring” of the nation’s debt, said Jean-Claude Juncker, head of the group of euro-area finance ministers.

Inspectors from the EU, the International Monetary Fund and the European Central Bank are set to wrap up a review of Greece’s progress in meeting the terms of last year’s 110 billion-euro ($158 billion) bailout in the next few days. The EU will then formulate its plan for further aid to Greece, which remains shut out of financial markets a year after the rescue.