US economy slows as Europe faces recession

Last week's economic data for developed countries were mixed.

In the United States, economic growth slowed to a 2.2 percent annualised rate in the first quarter from 3.0 percent in the previous quarter. The deceleration in growth was mainly due to a deceleration in inventory investment and a downturn in non-residential fixed investment.

Encouragingly, though, two components that usually drive the US economy showed acceleration in the first quarter.

Consumer spending grew at a 2.9 percent rate in the first quarter. This was up from 2.1 percent in the previous quarter.

Also accelerating in the first quarter was residential investment, which grew at a 19.1 percent rate compared to 11.6 percent in the previous quarter. The first quarter marked the fourth consecutive quarter of growth in residential investment.

Other reports on the US housing sector last week were also encouraging. New home sales came in at a higher-than-expected 328,000 annual rate in March while sales for February were revised up to 353,000, the highest in two years. Pending home sales rose 4.1 percent in March to hit a 23-month high.

A source of concern though for the US economy last week was a report on durable goods orders, which showed a sharp 4.2 percent fall in March. The decline was driven by a 12.5 percent plunge in transportation equipment orders.

If the data on the US economy look mixed, there was even less cause for cheer among the economic reports for Europe.

A report last week showed that the British economy contracted 0.2 percent in the first quarter. With the economy having contracted 0.3 percent in the previous quarter, it is now technically in recession.

The eurozone economy may find itself in the same boat. The European Commission's economic sentiment indicator for the region, which had stabilised somewhat in the first quarter after having fallen dramatically in the second half of last year, resumed its slide in April, falling to 92.8 from 94.5 in March.

Purchasing managers' data for the euro area painted a similar picture. Markit's composite index for the region fell further below the neutral 50 mark in April to a five-month low of 47.4 from 49.1 in March, according to a flash estimate. The manufacturing purchasing managers index fell to 46.0 in April from 47.7 in March while the services PMI fell to 47.9 from 49.2.

In contrast, data last week showed that the Japanese economy appears to have maintained growth recently. Household spending rose 3.4 percent in March from a year ago, accelerating from 2.3 percent growth in February. Industrial production rebounded 1.0 percent in March after having fallen 1.6 percent in February.

Worryingly, however, a survey showed that while production was forecast to rise another 1.0 percent in April, it was expected to fall 4.1 percent in May. Also pointing to a possible slowdown was a report on Friday that showed that Japan's manufacturing purchasing managers index fell to 50.7 in April from 51.1 in March.

So while last week's reports showed that the European economy faces a possible recession, they also showed that the skies are not completely clear for the US and Japanese economies as well.

BoJ announces additional monetary stimulus, US economy slows

The Bank of Japan announced further monetary easing measures on Friday. It said that it would increase its asset purchase programme by 5 trillion yen to about 70 trillion yen even as it kept its key interest rate unchanged at between zero and 0.1 per cent.

The additional monetary stimulus came despite some positive Japanese economic reports released on Friday. Japan's unemployment rate was unchanged at 4.5 per cent in March while household spending rose an inflation-adjusted 3.4 per cent from a year earlier. Core consumer prices rose 0.2 per cent in March over the previous year, registering growth for the second consecutive month.

Growth in Japan could weaken though. Another report on Friday showed that industrial production rose 1.0 percent in March and is forecast to rise another 1.0 percent in April but fall 4.1 percent in May. Indeed, Japan's manufacturing PMI fell to 50.7 in April from 51.1 in March.

In the US, growth has already weakened. US GDP grew at a 2.2 percent annualised rate in the first quarter after having grown at a 3.0 percent rate in the previous quarter. Growth was pulled down by slower business spending and reduced government spending but these were partly offset by a 2.9 percent increase in consumer spending.

An increase in the Thomson Reuters/University of Michigan’s index of consumer sentiment to 76.4 in April from 76.2 last month suggests that consumer spending will continue to prop up the US economy at the beginning of the second quarter.

Eurozone confidence falls, Spain's rating cut

Economic reports on Thursday were mostly negative.

In the euro area, the European Commission's economic sentiment indicator fell to 92.8 in April from 94.5 in March while Standard & Poor's cut Spain's sovereign credit rating to BBB+ from A.

In the UK, retail sales dipped in April as consumer confidence stayed weak. The British Bankers' Association reported that home loans in March had fallen to the lowest in 10 months.

In the US, pending home sales rose 4.1 percent in March but the Chicago Fed National Activity Index fell to –0.29 in March from +0.07 in February. Among April data, the Kansas City Fed manufacturing survey's composite index fell to 3 this month from 9 in March while initial jobless claims fell to 388,000 in the week ended 21 April, 1,000 fewer than in the previous week, which had been the highest since the first week of January.

Investors were unperturbed by the weak data though. The S&P 500 rose 0.7 percent on Thursday while the STOXX Europe 600 rose 0.1 percent.

UK in recession, US durable goods orders plunge, stocks jump

Wednesday's major economic data were negative.

The UK economy has fallen into recession. The economy shrank 0.2 percent in the first quarter after having contracted 0.3 percent in the previous quarter.

In the US, durable goods orders plunged 4.2 percent in March, the largest decline since January 2009, dragged down by a 12.5 percent plunge in transportation equipment orders.

The Federal Reserve left monetary policy unchanged after its latest policy meeting on Wednesday, with Chairman Ben Bernanke saying that US monetary policy was “more or less in the right place”.

Despite the lack of positives, markets rose anyway on Wednesday. The S&P 500 rose 1.4 percent while the NASDAQ 100 jumped 2.7 percent. The STOXX Europe 600 gained 1.0 percent. Oil rose 0.6 percent.

Markets rise as US new home sales show recovery

Markets recovered somewhat on Tuesday from the previous day's falls, with the S&P 500 rising 0.4 percent and the STOXX Europe 600 gaining 1.0 percent.

Better-than-expected housing data from the US on Tuesday helped markets. New home sales came in at a 328,000 annual rate in March, higher than the median estimate of 319,000 from a Bloomberg survey. This rate was down from an upwardly revised rate of 353,000 in February, which had been the highest in two years.

Another report on Tuesday showed that the S&P/Case-Shiller 20-city index of home prices in the US fell 3.5 percent in February, the smallest 12-month drop since February 2011.

However, consumer confidence weakened slightly in April with the Conference Board's consumer confidence index falling to 69.2 from 69.5 in March.

Nevertheless, Calculated Risk says that the new home sales report provides “further confirmation that the recovery for the housing industry has started” and that the “debate is now about the strength of the recovery, not whether there is a recovery”.

However, Robert Shiller told Reuters on Tuesday that the housing market is likely to remain weak. “I worry that we might not see a really major turnaround in our lifetimes,” Shiller said.

Europe drags markets down

Markets fell on Monday after political developments over the weekend threatened to exacerbate Europe's debt problems. Bloomberg reports:

Stocks plunged worldwide and the euro weakened as Europe’s backlash against budget cuts gained momentum, while commodities retreated as manufacturing shrank.

The Standard & Poor’s 500 Index fell 0.8 percent at 4 p.m. New York time, trimming its drop from 1.4 percent. The Stoxx Europe 600 Index sank 2.3 percent to a three-month low as gauges for eight nations, including Sweden, Germany, France and the Netherlands decreased 2.5 percent or more. The euro lost 0.5 percent versus the dollar and 1 percent against the yen. The cost of insuring against a European sovereign default climbed to the highest level in four weeks. The S&P GSCI Index of 24 raw materials slumped 0.3 percent. Treasuries rose a fourth day.

The difficulty in cutting budget deficits comes even as the debt of eurozone governments rose to 87.2 percent of gross domestic product in 2011, the highest since the euro was introduced in 1999, from 85.3 percent the previous year.

Weak economic data from the euro area on Monday also hurt market sentiment. Markit's composite index for the euro area fell to a five-month low of 47.4 in April from 49.1 in March, according to a flash estimate. The manufacturing PMI fell to 46.0 in April from 47.7 in March while the services PMI fell to 47.9 from 49.2.

In other economic reports among the major eurozone economies worst hit by the debt crisis, Spain's economy has been estimated by its central bank to have contracted 0.4 percent in the first quarter while Italy's consumer confidence index plunged to 89.0 in April, the lowest since the series began in 1996, from 96.3 in March. Also, Insee's index of French business confidence fell to 95 in April from 98 in March.

Elsewhere in the world, purchasing managers' data from China on Monday were a little more encouraging. A flash estimate of HSBC's China manufacturing PMI rose to 49.1 in April from 48.3 in March.

Japan provided some positive data on Monday. Its leading index rose for a second consecutive month to 96.3 percent in February from 94.6 in January but the February reading was revised down from a preliminary reading of 96.6. The coincident index, though, was revised up from a preliminary February reading of 93.7 to 95.0 and now show a rise from 94.1 in January.

Elections in France, Netherlands to follow

Europe's sovereign debt problems eased a little last week, allowing markets to rise.

Political developments will determine the course of the debt crisis, although the news over the weekend on this aspect only added more uncertainties.

In France, incumbent Nicolas Sarkozy has not done well in the presidential elections. Reuters reports:

Far-right voters may decide who becomes France's next president after anti-immigration crusader Marine Le Pen's record first-round score jolted the race between Socialist frontrunner Francois Hollande and incumbent Nicolas Sarkozy.

The centre-left Hollande narrowly beat the conservative Sarkozy in Sunday's 10-candidate first round by 28.6 percent to 27.1 percent, the Interior Ministry said with 99 percent of votes counted, but Le Pen stole the show by surging to 18.0 percent, the biggest result for a far-right candidate...

If Hollande wins, joining a small minority of left-wing governments in Europe, he has promised to renegotiate a European budget discipline treaty signed by Sarkozy. That could presage tension with German Chancellor Angela Merkel, who made the pact a condition for further assistance to troubled euro zone states.

Meanwhile, another core eurozone member, the Netherlands, is facing the prospects of elections after the government failed to agree on budget cuts. Reuters reports:

Prime Minister Mark Rutte, whose centre-right coalition has been in power since October 2010, said on Saturday that crucial talks on budget cuts had collapsed after his ally Geert Wilders refused to do a deal, and that new elections were inevitable.

IMF raises funds, German business confidence and UK retail sales improve

The IMF has managed to boost its lending power. Bloomberg reports:

Governments committed more than $430 billion in fresh money to the International Monetary Fund to help it protect the world economy against deepening debt turmoil in Europe.

The near-doubling of the fund’s firepower was announced after Group of 20 finance ministers and central bankers met today in Washington. While the U.K. and Saudi Arabia were among those making specific pledges, Brazil said emerging markets would condition their help on being handed more power at the IMF.

In the meantime, economic data on Friday suggest that some of Europe's bigger economies are not doing too badly.

The Ifo institute’s business climate index for Germany rose for the sixth month in a row to a nine-month high of 109.9 in April from 109.8 in March.

In the UK, retail sales rose 1.8 in March, the fastest pace in more than a year, rebounding from a 0.8 percent fall in February.

Markets fall as economic data disappoint

The Spanish and French governments both successfully sold bonds on Thursday.

However, that did not stop European stocks and bonds from falling. The STOXX Europe 600 Index fell 0.5 percent, with Spain’s IBEX 35 Index tumbling 2.4 percent to extend a three-year low.

Not helping markets was an unexpected decline in the eurozone consumer confidence index to minus 19.8 in April from minus 19.1 in March.

US stocks also fell on Thursday. The S&P 500 Index declined 0.6 percent.

Disappointing US economic data undoubtedly soured market sentiment. Initial jobless claims fell by 2,000 to 386,000 in the week ended 14 April from 388,000 the prior period but was much higher than the consensus forecast of 370,000. Existing home sales fell 2.6 percent in March. The Federal Reserve Bank of Philadelphia’s general economic index decreased to 8.5, the lowest level since January, from 12.5 in March.

It was not all negative for the US economy though. The Conference Board's index of leading indicators rose 0.3 percent in March.

Another encouraging report on Thursday came from Japan. Exports there rose 5.9 percent in March, the fastest pace in a year. Imports also rose sharply by 10.5 percent, leaving Japan with a trade deficit of 82.6 billion yen for March.

China home prices fall, UK unemployment declines

China's property market continued to cool in March, with 37 out of 70 major cities tracked by the government recording falls in home prices from a year ago. This compares with 27 cities recording price falls in February.

A calculation by Reuters shows that new home prices fell by an average of 0.7 percent in March from a year ago, the first decline in two years, and by 0.3 percent from the previous month.

Meanwhile, in the UK, the unemployment rate fell to 8.3 percent in the three months to February from a 16-year high of 8.4 percent in the three months to January.

Monetary stimulus to reflate the UK economy further could be limited by concerns about inflation though. Minutes of the Bank of England's April meeting released on Wednesday show that the central bank is now concerned that inflation is likely to be higher than forecast.

Markets jump on Spanish debt sale despite mixed economic data

Markets had a good day on Tuesday after Spain sold more debt than targeted. The Standard & Poor’s 500 Index rose 1.6 percent while the STOXX Europe 600 Index rose 2.0 percent.

However, although the IMF raised its global growth forecast to 3.5 percent this year from 3.3 percent, economic data on Tuesday were mostly not very positive.

In Japan, the consumer confidence index rose to 40.3 in March, the highest since February 2011, from 39.9 in the previous month. However, industrial production fell 1.6 percent in February, more than the initially-estimated 1.2 percent.

In the US, industrial production for March was also disappointing, staying unchanged as manufacturing output fell 0.2 percent. Another negative came from housing, where starts on new homes fell 5.8 percent in March. However, building permits did jump by 4.5 percent.

Meanwhile, inflation in Europe has come in higher than expected. In the euro area, inflation held at 2.7 percent for a fourth month in March, higher than the initial estimate of 2.6 percent. In the UK, inflation rose to 3.5 percent in March from 3.4 percent in February.

The persistence of inflation around the world led the Bank of Canada to say that higher interest rates “may become appropriate” even as it left its benchmark rate at 1.0 percent on Tuesday.

Inflation concerns, though, did not stop the Reserve Bank of India from cutting its benchmark repo rate by 50 basis points to 8.0 percent on Tuesday.

US retail sales rise

Consumer spending helped to keep the US economy growing in March. The Commerce Department reporting on Monday that retail sales rose 0.8 percent last month following a 1.0 percent increase in February. Retail sales excluding autos also increased 0.8 percent.

However, other data released on Monday were not as strong.

The Federal Reserve Bank of New York’s general economic index fell sharply to 6.6 this month from 20.2 in March.

The National Association of Home Builders/Wells Fargo home market index fell to 25 this month from 28 in March.

China slows, markets slump

China has reported that its economy grew 8.1 percent in the first quarter from the previous year, slower than the 8.9 percent increase in the previous quarter and, indeed, the slowest growth rate in nearly three years.

The US economy may also lose some momentum after the Thomson Reuters/University of Michigan’s preliminary index of consumer sentiment fell to 75.7 in April from 76.2 in March. The weaker consumer sentiment came despite the 12-month inflation rate falling to 2.7 percent in March, the lowest in a year.

The prospect of weaker economic growth in the two most important global growth engines, as well as continuing concerns over Spain, appear to have spooked investors on Friday. From Bloomberg.

Stocks fell, giving U.S. equities the longest slump since November and driving Spanish shares to the lowest level since 2009, after China posted slower-than-forecast economic growth and American consumer confidence weakened. Commodities slid and Treasuries rose.

The Standard & Poor’s 500 Index lost 1.3 percent to 1,370.26 at 4 p.m. New York time, declining a second straight week. The Stoxx Europe 600 Index fell 1.5 percent, completing a four-week slump, as Spain’s IBEX 35 sank 3.6 percent to a three- year low. The cost of insuring against a Spanish default rose to a record. The S&P GSCI Index of 24 raw materials slid 0.7 percent as copper fell 2.5 percent. Yields on 10-year Treasuries decreased six basis points to 1.99 percent.

Mixed global economic data, Fed and BoJ ready to act

There were some positive economic data on Thursday.

In China, bank lending in local currency jumped to 1.01 trillion yuan in March, the most since January 2011, from 710.7 billion yuan in February.

The euro area also had positive data for a change. Industrial production rose 0.5 percent in February.

However, US economic data on Thursday were not as positive as in recent months.

Initial claims for unemployment benefits increased by 13,000 last week to 380,000. The latter figure is the highest since 28 January.

Another report showed that the trade deficit shrank in February as imports fell 2.7 percent. A fall in oil imports contributed to the smaller trade gap, but so did a fall in imports from China, which may have been the result of the Chinese Lunar New Year.

Meanwhile, inflation pressures remained moderate in March as producer prices were unchanged, although prices excluding food and energy rose 0.3 percent.

Sluggish growth and moderate inflation means that the Federal Reserve may still provide additional monetary stimulus. From Reuters:

U.S. Federal Reserve officials, out on a speaking spree on Thursday, suggested the economy would have to deteriorate for the central bank to consider additional monetary stimulus.

Policymakers did hint at the possibility of further action. Fed Board Governor Sarah Raskin said the U.S. central bank stands ready to do all it can to support the economic rebound, while William Dudley, president of the New York Fed, emphasized the recovery's fragility...

Late Wednesday the Fed's influential vice chair, Janet Yellen, said the central bank's policy of near-zero interest rates is appropriate given high unemployment and the headwinds facing the economy. She added the central bank has a variety of options were it to engage in further asset purchases, and that the Fed remains “quite willing” to take whatever actions are necessary to achieve its mandate.

Not every Fed official has been as dovish though.

... Philadelphia Fed President Charles Plosser on Thursday said the central bank should move away from the approach of suggesting a specific calendar date for the start of rate hikes...

“Maximum employment is largely determined by factors that are beyond the control of monetary policy,” he said.

That seems to be a view shared by PIMCO's Mohamed El-Erian. In a speech at the Federal Reserve Bank of St Louis on Thursday, he said that “central banks can no longer – indeed, should no longer – carry the bulk of the policy burden”. He said that not only is the effectiveness of central banks' actions declining, there is also a “growing risk of collateral damage and unintended circumstances”.

Such views are not likely to deter central banks from further monetary stimulus though, at least not in Japan. Despite a slight improvement in the Japanese government's assessment of the economy, Bank of Japan Governor Masaaki Shirakawa reportedly pledged on Thursday to “pursue powerful easing” to help overcome deflation.

Markets regain ground, Japanese machinery orders jump, US economy continues expansion

Markets recovered somewhat on Wednesday from the previous day's falls, with the STOXX Europe 600 rising 0.7 percent. The euro rose and yields on Spanish and Italian 10-year debt fell as an ECB policymaker raised the possibility of more bond-buying by the central bank and Italy successfully sold 11 billion euros of Treasury bill, albeit at higher yields than last month.

Still, the weak state of Europe's indebted economies may restrain further recovery in investor confidence. For example, Spain reported on Wednesday that industrial output fell 5.1 percent year-on-year in February.

There were positive economic reports elsewhere on Wednesday though.

In Japan, core machinery orders jumped 4.8 percent in February.

In the US, the Federal Reserve's Beige Book reported that the economy continued to expand at a modest to moderate pace from mid-February through late March. However, higher gasoline prices may weigh on the economy.

Indeed, another report on Wednesday showed that US import prices jumped 1.3 percent in March, the biggest increase since April last year. Imported petroleum prices increased 4.3 percent, also the biggest increase since April 2011.

Stocks plunge in Europe as Spanish and Italian yields surge

Markets fell sharply on Tuesday as Europe's sovereign debt problems returned to the centre of attention. Bloomberg reports:

The S&P 500 fell for a fifth day, losing 1.7 percent to close at 1,358.59 at 4 p.m. in New York, and the Dow Jones Industrial Average lost 213.66 points. The Stoxx Europe 600 Index decreased 2.5 percent as national benchmark indexes tumbled 5 percent in Italy and about 3 percent in Spain and France. Ten-year U.S. Treasury yields slid below 2 percent, while Spanish yields approached 6 percent for the first time this year and Italian yields surged 23 basis points. The yen rose versus all 16 peers and the dollar climbed against 13. Copper led commodities lower and oil sank to an eight-week low.

Spanish bonds tumbled as Economy Minister Luis de Guindos declined to rule out a rescue for the nation as 10 billion euros ($13 billion) of additional budget cuts failed to alleviate investor concerns...

Weakening investor sentiment in the euro area had already been reflected in the Sentix index, which fell to minus 14.7 in April from minus 8.2 in March.

Economic data on Tuesday were mixed.

The OECD's overall composite leading indicator rose to 100.5 in February from 100.3 in January, with Japan and the US driving the improvement. The CLI for the euro area was flat in February, which is still an improvement over the negative trend in previous months.

Outside the OECD area, China also saw a rise in its CLI.

However, an unexpected return to a trade surplus for China left analysts with doubts over the strength of its economy. Imports rose 5.3 percent from a year ago in March, well below the 39.6 percent increase in February. Exports rose 8.9 percent, also below an 18.4 percent increase in February.

BoJ leaves monetary policy unchanged

The Bank of Japan left monetary policy unchanged today.

Economic data from Japan on Monday had not suggested that more monetary stimulus is needed.

Japan's current account moved back into surplus in February. It recorded a surplus of 1.18 trillion yen compared to the 437.3 billion yen deficit in January.

The Economy Watchers Survey's current conditions index jumped to 51.8 in March, the highest reading since July 2011, from 45.9 in February. The future conditions index fell to 49.7 in March from 50.1 in February.

Meanwhile, though, neighbouring China could be slow to ease monetary policy after a report on Monday showed that its inflation rate rose to 3.6 percent in March from 3.2 percent in February.

Global economy slows in March

The global economic picture has dimmed a little after recent data indicate that the United States economy may be losing momentum even as China's growth slows and the eurozone economy continues to languish.

In the US, the employment report last Friday was a big disappointment, with non-farm payrolls increasing by just 120,000 in March, well below the median projection of 205,000 in a Bloomberg survey and even below the lowest estimate. The March increase was also the smallest since October. The unemployment rate fell to 8.2 percent from 8.3 percent in February mainly due to people leaving the labour force.

The findings of the US purchasing managers surveys released last week had painted a mixed picture for March. The Institute for Supply Management's manufacturing PMI rose to 53.4 in March from 52.4 in February but the non-manufacturing index fell to 56.0 from 57.3.

China's economy had already been showing some uncharacteristic weakness in recent months and that trend may have continued in March as surveys of purchasing managers in the manufacturing sector provided contrasting results. The China Federation of Logistics and Purchasing's manufacturing PMI rose to 53.1 in March from 51.0 in February but HSBC's manufacturing PMI fell to 48.3 from 49.6. Furthermore, a decline in HSBC's services business activity index to 53.3 in March from 53.9 in February contributed to a fall in the composite output index to 49.9 last month from 51.8.

Meanwhile, the eurozone economy continues to be the laggard among major developed economies. Markit's composite output index for the region declined for the second consecutive month in March as it fell to 49.1 from 49.3 in February. The composite index was weighed down by the manufacturing index, which fell to 47.7 in March from 49.0 in February, more than offsetting a rise in the services index to 49.2 from 48.8.

The purchasing managers surveys corroborate the European Commission's business and consumer surveys a week earlier, which had also indicated weakness in the eurozone economy. The EC's economic sentiment indicator fell to 94.4 in March from 94.5 in February.

In contrast, recent economic reports from Japan have been positive. Markit's composite output index rose to 53.2 in March, a record high for the series, from 51.2 in February. The improvement was driven by an increase in Markit's services business activity index to 53.7 in March, the highest reading on record, from 51.2 in February. The Markit/JMMA manufacturing PMI rose to 51.1 from 50.5.

Other economic data from Japan last week were also positive. The index of coincident economic indicators rose to 93.7 in February from 92.7 in January while the index of leading economic indicators jumped to 96.6 from 94.5.

US employment disappoints, Japanese leading index rises

The US March employment report turned out to be a big disappointment. Non-farm payrolls increased just 120,000, less than the most pessimistic estimate in a Bloomberg survey.

The unemployment rate did fall to 8.2 percent. However, it was mainly due to people leaving the labour force.

The average work week for all workers decreased to 34.5 hours from 34.6 and temporary help fell by 7,500.

While US economic data disappointed, Japanese data on Friday were positive. The leading index jumped to 96.6 in February from 94.5 in January. The coincident index rose to 93.7 from 92.7.

BoE monetary policy unchanged as UK economy ekes out growth

The Bank of England maintained its monetary policy course on Thursday, keeping the total of its asset purchases at 325 billion pounds and holding interest rates at 0.5 percent.

An estimate by the National Institute of Economic Research on Thursday showed that the UK economy grew just 0.1 percent in the first quarter.

Underlying weakness in the UK economy had been suggested by an earlier economic report. Industrial production rose 0.4 percent in February, thanks to cold weather that helped to boost both oil and gas production and electricity generation. However, manufacturing output fell 1.0 percent.

Cold weather did not help German industrial production however. A report on Thursday showed that industrial production there fell 1.3 percent in February as construction output shrank 17.1 percent.

Amid the weak economic data coming out of Europe, the US economy continues to outperform. A report on Thursday showed that initial claims for unemployment benefits fell 6,000 to 357,000 in the week ended 31 March, the fewest since April 2008.

ECB keeps rates unchanged as demand for Spanish bonds falls short

The ECB left interest rates unchanged on Wednesday. Bloomberg reports:

European Central Bank President Mario Draghi quashed talk of an early exit from emergency stimulus measures as Spain struggled to borrow in financial markets, a reminder of the risk that the region’s debt crisis could flare again.

Speaking just hours after Spanish Prime Minister Mariano Rajoy warned his country faces “extreme difficulty,” Draghi said yesterday that talk of the ECB starting to withdraw its support for euro-area banks is “premature.” At the same time, in a nod to growing inflation concerns in Germany, he said the ECB won’t hesitate to counter price risks if needed. Policy makers left their benchmark rate at a record low of 1 percent.

Market action on Wednesday suggested that investors remain concerned about Europe's debt problems. Stocks fell, with the STOXX Europe 600 Index in particular falling 2.1 percent. Spain's 10-year yield rose 24 basis points to 5.69 percent after the government managed to sell just 2.59 billion euros of bonds due between January 2015 and October 2020 out of a planned maximum of 3.5 billion euros.

Economic data from the euro area on Wednesday had been mixed. Retail sales fell 0.1 percent in February but Markit's services PMI for the region rose to 49.2 in March from 48.8 in February, helping to cushion the fall in the composite index to 49.1 in March from 49.3 in February, compared to a preliminary estimate of a fall to 48.7.

Also on Wednesday, Germany reported that factory orders rose 0.3 percent in February, rebounding only slightly after a 1.8 percent fall in January and still 6.1 percent lower than a year ago.

Data elsewhere on Wednesday were somewhat more positive.

In the US, a report from the Institute for Supply Management showed that the services sector continued to grow in March as its non-manufacturing index came in at 56.0, down from a one-year high of 57.3 in February. Meanwhile, ADP reported that US private employment rose by 209,000 in March.

The services sector also grew in the UK in March. The Markit/CIPS services PMI rose to 55.3 from 53.8 in February.

Markets fall even as US economy may be entering sweet spot

Markets fell on Tuesday, with the Standard & Poor’s 500 Index losing 0.4 percent while gold, silver and oil all lost more than 1 percent.

The sell-off was attributed to reduced expectations for further monetary stimulus from the Federal Reserve after the release of the minutes from the last FOMC meeting, which showed members expressing decreased urgency for such stimulus.

US economic data on Tuesday added to signs that the economy is in little need of further stimulus. Factory orders rebounded 1.3 percent in February, reversing January's 1.1 percent fall, while auto sales rose 13 percent in March, completing the best quarterly sales rate since 2008.

Indeed, in view of the recent relatively strong US data, a Bloomberg report suggests that the US economy may be entering a sweet spot.

The U.S. once again may be emerging as a main engine for global growth -- and at an opportune time, as Europe slides into recession and China’s economy decelerates...

“We’re entering a sweet spot for the economy,” said Allen Sinai, president of Decision Economics Inc. in New York. “We’re in a self-reinforcing cycle,” where faster employment growth leads to higher household income and increased consumer spending.

US manufacturing accelerates, eurozone manufacturing deteriorates

Global manufacturing PMI data for March were mixed.

The US was an outperformer, with the Institute for Supply Management’s manufacturing PMI rising to 53.4 in March from 52.4 in February.

UK manufacturing also did well, with the Markit/CIPS manufacturing PMI rising to 52.1 in March from 51.5 in February.

However, manufacturing in the euro area contracted in March. Markit's eurozone manufacturing PMI dropped to 47.7 last month from 49.0 in February, in line with a preliminary reading.

On Sunday, China had provided mixed signals on its manufacturing sector. The China Federation of Logistics and Purchasing's manufacturing PMI rose to 53.1 in March from 51.0 in February but HSBC's manufacturing PMI fell to 48.3 from 49.6.

Meanwhile, in Japan, which had reported an improved manufacturing PMI last week, the Bank of Japan's Tankan survey's index of business confidence among large Japanese manufacturers was at minus 4 in March, unchanged from the previous quarter.

Outside of manufacturing, data from the major economies were negative.

In the US, construction spending fell 1.1 percent in February to its lowest level since October.

In the euro area, the unemployment rate rose to 10.8 percent in February, its highest level in almost 15 years, from 10.7 percent in January.

Markets rally strongly in first quarter

Markets mostly completed a highly profitable quarter at the end of last week.

Stocks in the United States rose last week, with the Standard & Poor’s 500 Index rising 0.8 percent to 1,408.47. The index rose 12.0 percent in the first quarter, the biggest first-quarter rally since 1998.

Stocks in Europe fell last week, with the STOXX Europe 600 Index falling 0.9 percent to 263.32. Nevertheless, for the first quarter, the index rose 7.7 percent, the best first quarter gain since 2006.

Asian stocks rose last week, with the MSCI Asia Pacific Index rising 0.2 percent to 126.60. The index rose 11.2 percent in the first quarter, its biggest quarterly gain since September 2010.

Buoyant sentiment was less evident in commodities. The Thomson Reuters-Jefferies CRB Index gained just 1.0 percent in the first quarter after falling 4.3 percent in March.

The performance of the index, though, was mainly dragged down by natural gas, which fell 28.9 percent in the first quarter as a burgeoning US gas inventory pushed prices to 10-year lows.

However, most other commodities saw price increases in the first quarter. US crude oil rose 4.2 percent in the first quarter despite a 3.8 percent decline in March. Gasoline jumped 26.2 percent in the first quarter.

Improved risk appetite over the past three months meant that while stocks and commodities rose, bonds fell. US Treasuries suffered their worst quarter since the last three months of 2010, with the yield on the 10-year note rising 33 basis points to 2.21 percent and the yield on the 30-year bond rising 44 basis points to 3.34 percent.

The rally in markets has been widely attributed to monetary stimulus by central banks around the world, particularly the Federal Reserve and the European Central Bank. The question for investors then is: How long can central banks keep stimulating markets?

Barry Ritholtz at The Big Picture has a post with a chart taken from LPL Financial showing how each of the Fed's monetary stimulus programme over the last few years boosted the stock market. As soon as the stimulus from one programme faded, the Fed introduced another one, thus keeping the market rallying.

So clearly central banks can maintain the stimulus for a considerable period of time.

However, it is unlikely that they can keep this up once overvaluation of markets becomes extreme. Remember that the stock market collapsed in 2001-2002 and 2008 even while the Fed was cutting interest rates.

As John Hussman of Hussman Funds remarks in his latest weekly commentary: “The only real choice policy makers have is how large a bubble they choose to see collapse.”

Having said that, Hussman notes that markets are not as overvalued now as they were at the peaks of 2007, 2000 and 1929. Citing the work of Andrew Smithers, Hussman says that the market is now overvalued by 70 percent. He expects an average annual nominal total return of 4.1 percent over the coming decade.

Hussman also says in his commentary that high profit margins, which some analysts have used to justify the higher stock prices, will not save stock markets. This time citing the work of James Montier at GMO, Hussman says that the increase in corporate profit margins has come at the expense of government and household savings, which have been deteriorating over the same time period.

He says this is unsustainable and that “any deleveraging of presently debt-heavy government and household balance sheets will predictably create a sustained retreat in corporate profit margins”.

Still, you may not want to bet against a continuation of the rally just yet. As Ritholtz pointed out, Fed Chairman Ben Bernanke has shown himself to be willing to provide whatever stimulus markets have demanded. “The traders on the street,” he said colourfully, “know exactly how to throw a hissy fit. They are happy to whack the market 20% to get Ben’s attention, and he seems happy to give them their binky to make them stop crying and go back to their cribs.”

Of course, the real crying may start when the next round of monetary stimulus turns out to be as effective on markets as the ones in 2001-2002 and 2008 were.