Markets jump on Europe debt deal

Markets surged on Friday after news of a breakthrough on Europe's sovereign debt crisis. Bloomberg reports the market action:

Global stocks and the euro surged the most this year, oil had its biggest gain since 2009 and Spanish bonds rallied after European leaders reached an agreement that eased concern banks will fail.

The MSCI All-Country World Index climbed 3 percent, the most since November (MXWD), while the Standard & Poor’s 500 Index advanced 2.5 percent to cap its best June since 1999. The euro appreciated 1.7 percent against the dollar and rallied as much as 2 percent, the most since Oct. 27. Spain’s two-year yield plunged more than a full percentage point. The S&P GSCI gauge of 24 commodities rose 5.6 percent, its biggest gain since April 2009, as oil surged 9.4 percent to $84.96 a barrel.

Reuters reports some details of the agreement.

Under pressure to prevent a catastrophic breakup of their single currency, euro zone leaders agreed on Friday to let their rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states.

They also pledged to create a single banking supervisor for euro zone banks based around the European Central Bank in a landmark first step towards a European banking union that could help shore up struggling member Spain...

In a key concession by EU paymaster Germany, the leaders agreed to waive the ESM's preferred creditor status on lending for Spanish banks, removing a key deterrent to investors buying Spanish government bonds, who feared having to take the first losses in any debt restructuring.

Economic reports on Friday were mixed.

German retail sales fell 0.3 percent in May but French consumer spending rose 0.4 percent.

In Japan, the Markit/JMMA manufacturing PMI fell to 49.9 in June from 50.7 in May. May data released on Friday showed that industrial production fell 3.1 percent while consumer prices excluding fresh food fell 0.1 percent May from a year ago.

However, the unemployment rate also fell to 4.4 percent in May from 4.6 percent in April while housing spending rose 4.0 percent in May from a year ago, improving from the 2.6 percent increase in April.

In the US, consumer spending stalled in May but personal income rose 0.2 percent. The Thomson Reuters/University of Michigan consumer sentiment index fell to 73.2 in June from 79.3 in May but the Institute for Supply Management-Chicago's business activity barometer increased to 52.9 from 52.7 in May.

Eurozone economic sentiment deteriorates as leaders debate debt crisis

Confidence in the euro area fell again in June. The economic sentiment indicator fell to 89.9, the lowest since October 2009, from 90.5 in May.

Germany is now also feeling the weakness in the rest of the eurozone economy. Unemployment there increased by 7,000 in June.

Even as the eurozone economy continues to deteriorate, its leaders continue to argue over the best means to overcome its debt crisis. From Reuters:

Italy and Spain, battling searing market pressure in the euro zone's widening debt crisis, held up agreement on measures to promote growth at a European Union summit on Thursday to demand urgent action to bring down their borrowing costs.

Italian Prime Minister Mario Monti and his Spanish counterpart, Mariano Rajoy, refused to sign off on a 120 billion euro ($149 billion) growth package until EU paymaster Germany approved short-term measures to ease their cost of credit, officials said.

Hours later than planned, European Council President Herman Van Rompuy came out to announce a deal in principle on measures to stimulate infrastructure investment and give more capital to the EU's soft-lending arm, the European Investment Bank.

Meanwhile, the UK economy has also been struggling. First quarter contraction was confirmed at 0.3 percent on Thursday but the contraction in the fourth quarter of 2011 has been revised to 0.4 percent from 0.3 percent.

Another GDP report on Thursday showed that US first quarter annualised economic growth was confirmed at 1.9 percent. The report also showed that corporate profits fell 0.3 percent in the first quarter, the first decrease since the fourth quarter of 2008.

US durable goods orders rise but Europe at risk of disorderly develeraging

Economic data on Wednesday were mostly positive.

In the US, durable goods orders rose 1.1 percent in May. A measure of business investment, orders for non-defense capital goods excluding aircraft, rose 1.6 percent.

And in an indication that the housing market recovery remains intact, the National Association of Realtors reported on Wednesday that pending home sales rebounded 5.9 percent in May after having fallen 5.5 percent in April.

UK housing data on Wednesday disappointed though, with mortgage approvals falling to their lowest level in over a year in May. However, UK retail sales did well in June, with the Confederation of British Industry's distributive trades survey sales balance jumping to +42 in June, its highest since December 2010 from +21 in May.

In the euro area, Italy's confidence index for the manufacturing sector improved to 88.9 in June from 86.6 in May while German inflation eased to 1.7 in June from 1.9 percent in May.

However, the eurozone's debt crisis continues to simmer, with German Chancellor Angela Merkel again showing little enthusiasm for the quick-fix solutions being proposed by other countries.

Indeed, Zero Hedge quotes Ray Dalio of Bridgewater as saying that the “German-French alliance is breaking down in favor of contributor (higher rated credit) countries aligning against recipient (lower rated credit) countries” and under such circumstances, “there are good reasons to doubt that European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way, without a Plan B in place”.

Merkel says no to shared liability as Italian retail sales fall

One avenue for solving the European debt crisis appears to have closed after German Chancellor Angela Merkel reportedly told members of her government coalition that Europe would not share total debt liability “as long as I live”.

This could be bad news for troubled Italy, already reeling from an economic contraction that saw retail sales fall 1.6 percent in April, according to a report on Tuesday.

Other reports on Tuesday, though, showed that the consumer spending picture looked better elsewhere in Europe. Insee's French consumer confidence index was unchanged at 90 in June while GfK's German consumer confidence index will rise to 5.8 in July from 5.7 in June.

However, in the US, the Conference Board's consumer confidence index fell to 62.0 in June from 64.4 in May, the fourth consecutive decline.

On a more positive note, home prices in the US rose 0.7 percent in April, matching the prior month’s gain, based on the S&P/Case-Shiller home price index.

US new home sales jump but growth slows, Europe sees more bailouts and rating cuts

New home sales in the US jumped 7.6 percent in May to the highest rate since April 2010, providing yet more evidence that the housing market is recovering.

However, US economic growth may be faltering anyway. The Chicago Fed National Activity Index fell to -0.45 in May from 0.08 in April. The three-month moving average fell to -0.34 from -0.13, suggesting, according to the Chicago Fed, that national economic growth was below its historical trend.

In Europe, Spain formally requested a bailout for its banks on Monday. That did not stop Moody's from downgrading 28 Spanish banks that same day.

Monday also saw Cyprus become the fifth eurozone country to request a bailout. Its sovereign credit rating was also cut to BB+, a non-investment grade, by Fitch on Monday.

Risks building up with increasing monetary stimulus

Investors are counting on central banks to provide more monetary stimulus to keep markets afloat. However, despite an extension of Operation Twist last week, another round of quantitative easing from the Federal Reserve may not come soon.

Bloomberg reported the view of St Louis Fed Bank President James Bullard on this matter on Friday:

Federal Reserve Bank of St. Louis President James Bullard said today a possible third round of quantitative easing would face a “pretty high hurdle.”

“We can do that and I think it would be effective,” Bullard said in a television interview on Bloomberg Surveillance with Tom Keene. “But we’d be taking a lot more risk on our balance sheet. We’d be going further into uncharted territory.”

The European Central Bank has also been unwilling to do much more to help ease the region's debt crisis, preferring to put the onus on political leaders to solve the crisis.

Such views seem consistent with that of the Bank for International Settlements, based on the latter's latest annual report published on Sunday. Excerpts from Chapter I of the report:

Over the past year, central banks in the advanced economies have continued or even expanded their purchases of government bonds and their support of liquidity in the banking system...

The extraordinary persistence of loose monetary policy is largely the result of insufficient action by governments in addressing structural problems...

With nominal interest rates staying as low as they can go and central bank balance sheets continuing to expand, risks are surely building up. To a large extent they are the risks of unintended consequences, and they must be anticipated and managed. These consequences could include the wasteful support of effectively insolvent borrowers and banks – a phenomenon that haunted Japan in the 1990s – and artificially inflated asset prices that generate risks to financial stability down the road. One message of the crisis was that central banks could do much to avert a collapse. An even more important lesson is that underlying structural problems must be corrected during the recovery or we risk creating conditions that will lead rapidly to the next crisis.

In addition, central banks face the risk that, once the time comes to tighten monetary policy, the sheer size and scale of their unconventional measures will prevent a timely exit from monetary stimulus, thereby jeopardising price stability. The result would be a decisive loss of central bank credibility and possibly even independence.

Having said that, last week's economic data mostly showed that the global economy is still weakening. Flash purchasing managers' indices in the United States, China and the euro area all showed either slower growth or contraction in June.

Therefore, more doses of monetary stimulus in the near future by central banks certainly cannot be ruled out.

European stocks fall with German business confidence

European stocks fell on Friday. The STOXX Europe 600 Index fell 0.7 percent to close at 246.58.

Economic news out of Europe on Friday had been negative. Ifo's German business climate index fell to 105.3 in June, the lowest reading since March 2010, from 106.9 in May. Italy's consumer confidence index fell to 85.3 in June, the lowest since the data series began in 1996, from 86.5 in May.

Despite signs of a weakening economy, German Chancellor Angela Merkel continues to show reluctance to a quick bailout of the eurozone's indebted economies. From Bloomberg:

There was little sign at the four-way press conference that Merkel backed a more flexible use of the existing bailout mechanism. Asked why she opposed the euro bailout fund directly recapitalizing Spanish banks, the German leader repeated that “liabilities and controls go together.”

Merkel said she can’t support German taxpayer money being channeled directly to a Spanish bank “because I have no powers” of oversight. “I’m the German chancellor; I can tell my banks that. You would have a huge problem here,” she said.

However, pressure from financial markets eased anyway on Friday as Spanish yields fell again. Spanish 10-year yields dropped 23 basis points to 6.38 percent.

Global economy slows in June

Markets tumbled on Thursday amid reports showing that the global economy growth slowed in June.

HSBC's China manufacturing PMI fell to 48.1 in June from 48.4 in May, according to preliminary data.

Flash eurozone data from Markit also showed a decline in the manufacturing PMI, which fell to 44.8 in June from 45.1 in May. However, the services index edged up to 46.8 in June from 46.7 in May and helped the composite output index stay unchanged at 46.0 in June.

Markit's flash US manufacturing PMI fell to 52.9 in June from 54.0 in May.

On a more positive note, the Conference Board's leading index for the US economy rose 0.3 percent in May.

Still, Moody's downgrade of some of the world's biggest banks ensured that the day ended on a negative note.

Fed extends Twist

Bloomberg reports the outcome of the latest Federal Open Market Committee meeting:

The Federal Reserve will expand its Operation Twist program to extend the maturities of assets on its balance sheet and said it stands ready to take further action to put unemployed Americans back to work.

The central bank will prolong the program through the end of the year, selling $267 billion of shorter-term securities and buying the same amount of longer-term debt in a bid to reduce borrowing costs and spur the economy.

The decision came after the Fed lowered its growth forecast for 2012 to 1.9 percent to 2.4 percent, down from its April forecast of 2.4 percent to 2.9 percent. The unemployment rate is now forecast to end the year at 8 percent to 8.2 percent, up from 7.8 percent to 8 percent in April.

The Fed left open the possibility of providing more monetary stimulus later.

“If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” Fed Chairman Ben S. Bernanke said at a news conference in Washington following a two-day meeting of the Federal Open Market Committee. “Additional asset purchases would be among the things that we would certainly consider.”

The Bank of England may also be close to another round of monetary stimulus after the minutes from the last policy meeting showed that officials were split 5-4 on such a move, with Governor Mervyn King in favour, and a report on Wednesday showed that claims for jobless benefit in the UK rose by 8,100 in May.

Minutes of the Bank of Japan's policy meeting in May also indicated some degree of readiness for more action among officials, although Japan's trade data for May suggested that the economy is still growing, with exports up 10.0 percent from a year earlier and imports up 9.3 percent.

Markets bounce after sharp fall in investor confidence

ZEW's gauge of investor confidence in Germany and the euro area fell sharply in June but investors seem to have put their pessimism behind them. European stocks gained for a third day on Tuesday while Spanish notes rose after a successful government debt sale.

Among economic reports on Tuesday, total US housing starts fell 4.8 percent in May but starts on single-family homes rose 3.2 percent. Also building permits rose 7.9 percent to the highest level since September 2008.

In the UK, a fall in the inflation rate to 2.8 percent in May from 3.0 percent in April increased the chance of more stimulus from the Bank of England.

Spain's 10-year yield hits record high

The market rally following the Greek election result was kept in check on Monday by worries over Spain. Bloomberg reports:

Oil and the euro fell while Spain’s 10-year yield rose to a record as an increase in bad Spanish loans fueled concern the debt crisis is deepening, overshadowing wins by pro-bailout parties in Greece. Most U.S. stocks rose.

Oil lost 0.9 percent to pace a retreat in commodities. Natural gas rallied on speculation hotter weather will boost demand at power plants. The euro weakened 0.5 percent to $1.2572 at 4 p.m. New York time after strengthening for four straight days. The 10-year Spanish yield jumped as much as 41 basis points to 7.29 percent and ended at 7.16 percent. The Standard & Poor’s 500 Index added 0.1 percent as 11 stocks gained for every 10 that fell on U.S. exchanges. Treasury 10-year yields were little changed at 1.58 percent.

The yield on Germany’s 10-year bund fell three basis points to 1.41 percent but Bill Gross thinks that Germany is also at risk. From Bloomberg:

Bill Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co., said Germany is in a bond market bubble as the country is saddled with rising liabilities from Europe’s debt crisis.

“I would be leery of German bunds simply because there are only a few scenarios in which they can do well,” Gross said today in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “Germany for me is a credit risk. It’s not an attractive market.”

While Europe remains the main threat for the global economy, China also is a risk as its housing market continues to cool. 43 out of 70 cities tracked by the government registered month-on-month falls in home prices in May, the same number as in April. Reuters estimates that home prices fell 0.1 percent in May, the eighth straight decline.

Recent housing data from the UK and US have been better though.

Rightmove reported that asking prices for homes in England and Wales rose 1.0 percent to a record high in June.

In the US, the NAHB/Wells Fargo Housing Market index rose to 29 in June, its highest level in five years, from 28 in May.

Greece pulls back from the brink again

Markets can breathe a little easier after the results of the Greek elections. Reuters reports:

Parties supporting a bailout saving Greece from bankruptcy won a slim parliamentary majority on Sunday, beating radical leftists who rejected austerity and bringing relief to the euro zone which was braced for fresh financial turmoil.

The election result looked likely to yield a coalition government led by conservative New Democracy but leaves an emboldened SYRIZA bloc to rally angry opposition in the streets to the punishing terms of the bailout.

Official results released by the interior ministry, with 97 percent of ballots counted, showed New Democracy taking 29.7 percent of the vote, with SYRIZA on 26.9. The PASOK Socialists were set to take 12.3 percent of the vote.

The election result buys time for Greece and Europe as a whole although the WSJ's MarketBeat says that markets are likely to remain volatile as nothing has fundamentally changed, nothing has been resolved, Greece will still eventually default, and the pain in Spain remains.

US industrial production and consumer confidence fall, stocks rise

There were more signs on Friday that the US economy is slowing.

Industrial production fell 0.1 percent in May. The Federal Reserve Bank of New York’s general economic activity index dropped to 2.3 in June from 17.1 in May. The Thomson Reuters/University of Michigan index of consumer sentiment fell to 74.1 in June, the lowest level this year, from 79.3 last month.

Stocks rose anyway on Friday with both the S&P 500 and the STOXX Europe 600 rising 1.0 percent amid speculation of more central bank easing.

There was no fresh easing from the Bank of Japan though after its latest monetary policy meeting on Friday.

Spanish yields rise again, UK announces move to boost credit

Spain remained a focus of market attention on Thursday. Its 10-year yield rose to a euro-era record of 6.998 percent before retreating to 6.92 percent, still leaving it up 16 basis points for the day.

However, US stocks shrugged off the worries over Europe on Thursday. The S&P 500 rose 1.1 percent on hopes for central bank action.

Thursday's US economic data did boost the case for further easing by the Federal Reserve. Initial claims for jobless benefits rose by 6,000 last week, the fifth increase in six weeks, and consumer prices fell 0.3 percent in May, the sharpest drop since December 2008.

In the euro area, consumer prices fell 0.1 percent in May, bringing the 12-month inflation rate down to 2.4 percent from 2.6 percent in April.

In deflation-prone Japan, Thursday brought the disappointing news that industrial production for April has been revised to show a 0.2 percent decline from the initially-reported 0.2 percent increase.

It was the UK, however, that announced action to improve financial conditions on Thursday. Reuters reports:

Britain's government and the Bank of England will flood its banking system with cash in a coordinated move to get credit flowing through its recession-hit economy, as the euro zone crisis casts a "black cloud" over the world economy.

The country will launch a scheme to provide cheap long-term funding to banks to encourage them to lend to businesses and consumers, and the central bank will activate an emergency liquidity tool, BoE governor Mervyn King said in his annual Mansion House policy speech to London financiers.

However, in India, efforts to boost economic growth are being made more challenging by the fact that inflation remains elevated. The inflation rate rose to 7.55 percent in May from 7.23 percent in April.

Spain moves closer to junk

Spain's credit rating was cut on Wednesday, this time by Moody's. The latter announced that Spain's rating has been cut from A3 to Baa3, just one level above junk, and is on review for further downgrade.

Spain will not go down without a fight though. From Bloomberg on Wednesday:

Spanish Prime Minister Mariano Rajoy said today he’ll “battle” central bankers refusing to buy debt from peripheral nations. Rajoy published a letter to European Union leaders calling for the European Central Bank to buy debt from the countries struggling to shore up their finances.

“That is the battle we have to wage in Europe,” Rajoy told the Spanish parliament in Madrid today. “I am waging it.”

Tim Duy, who expects further easing by the Federal Reserve, also supports Rajoy's battle with the ECB.

Honestly, I find it incomprehensible to believe that the ECB will not soon come to the aid of Spain and Italy with additional bond purchases. Only the most irresponsible policy body would take such a risk...

No wonder Mike Dolan of Reuters sees “many more years of money printing” from the world's big four central banks.

Meanwhile, negative economic data further soured the mood on Wednesday.

Euro-area industrial production fell 0.8 percent in April, its second consecutive decline.

US retail sales fell 0.2 percent in May, also a second consecutive decline.

However, Japan had good news to report. Core machinery orders there rose 5.7 percent in April, much better than expected.

Stocks rebound but Spanish yields remain elevated

Stocks rebounded on Tuesday with the S&P 500 rising 1.2 percent and the STOXX Europe 600 rising 0.6 percent.

However, government bond yields in the euro area continued to rise. Spain's 10-year yield rose another 20 basis points to 6.71 percent while Italy's 10-year yield rose 14 basis points to 6.17 percent.

Economic data on Tuesday were mixed.

In the UK, industrial production was unchanged in April but manufacturing output fell 0.7 percent.

In India, industrial production barely returned to growth in April, rising 0.1 percent from a year earlier after having fallen 3.5 percent in March.

Markets show doubts over Spanish bailout

It seems that investors were unimpressed with the Spanish bailout.

European stocks finished flat on Monday, erasing early gains in the final hour of trading. US stocks closed lower with the S&P 500 falling 1.3 percent.

The euro weakened 0.3 percent against the US dollar. The Spanish 10-year yield rose 29 basis points to 6.51 percent and the Italian 10-year yield rose 26 basis points to 6.03 percent.

Reuters notes how weak the market reaction to the Spanish bailout has been when compared to previous bailouts.

Greece's first bailout in 2010 sparked a healthy 1.3 percent rally in the benchmark Standard & Poor's 500 stock index on the following day, but subsequent rescues fostered more muted responses.

The reaction after Spain's bank bailout has been the most downbeat of the lot, particularly given the size of the package and the speed with which gains were wiped out. U.S. stocks fell into negative territory within an hour of Monday's opening bell and then continued dropping.

"Even the most inconsolable and bearish analysts were taken aback at how decisively markets rejected this bailout," said Richard Franulovich, currency strategist at Westpac Securities.

Asian stock markets closed before the negative sentiment prevailed, however, and the MSCI Asia Pacific Index managed to climb 1.9 percent.

Positive economic data also helped boost Asian markets.

On Sunday, China reported a jump in trade figures for May. Exports rose 15.3 percent in May from a year earlier while imports rose 12.7 percent.

On Monday, China reported that new local-currency loans rose to 793.2 billion yuan in May from 681.8 billion yuan in April.

In Japan, a report on Monday showed that the business survey index of sentiment at large manufacturers improved to -5.7 in the April-June quarter from -7.3 in the previous quarter.

Japanese consumer confidence also improved in May. The Cabinet Office's household consumer confidence index rose to 40.7 from 40.1 in April.

Japanese economy slows after strong first quarter growth

Japan's economy made a strong start to 2012 but that strength appears to have dissipated in recent months.

Last week's updated reading on the economy in the first three months of the year showed that the Japanese economy grew 1.2 percent in that quarter. On an annualised basis, the economy grew 4.7 percent.

The strong growth owed much to government spending, which increased 1.3 percent from the previous quarter as a result of reconstruction activity following last year's earthquake and tsunami. However, consumer spending was also strong, growing by 1.2 percent. Net exports, a major growth driver in the past but an inconsistent performer in recent years, also contributed 0.1 percentage point to growth.

However, after the first quarter, the Japanese economy may have lost momentum.

Data last week showed that the preliminary reading of the composite index of coincident economic indicators fell to 96.5 in April from 96.7 in March. The index of leading economic indicators also fell to 95.1 from 96.4.

The findings from the Cabinet Office's economy watchers survey released last week also indicated that the economy weakened in the second quarter. The diffusion index for current conditions fell to 47.2 in May from 50.9 in April and 51.8 in March. The May reading for the future conditions index was 48.1, down from 50.9 in April and 49.7 in March.

Purchasing managers surveys in Japan painted the same picture. Markit's composite output index for Japan hit a record 53.2 in March but fell to 51.3 in April and 50.1 in May. The manufacturing PMI was unchanged at 50.7 in May after having fallen in April from 51.1 in March. However, the services business activity index fell to 49.8 in May from 51.0 in April and 53.7 in March.

Spain's bailout confirmed, China still shows signs of slowing

Reuters reports that a bailout for Spain has been agreed upon.

Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week.

After a 2 1/2-hour conference call of the 17 finance ministers, which several sources described as heated, the Eurogroup and Madrid said the amount of the bailout would be sufficiently large to banish any doubts.

But doubts there still are, according to the Guardian's Heather Stewart.

Though €100bn – the figure cited by European ministers, if not by Spain itself – was a far larger figure than initial reports suggested, many analysts believe that, with capital flooding out of Spain, it will still not be enough to prevent a full-blooded bailout of the government at a later date. Fixing the banks will help the vital task of preventing the entire European financial system from freezing up; but it will do little for the Spanish economy, which is on its knees.

When financial markets reopen on Monday morning, traders will have to decide whether they are reassured that eurozone leaders have opted to act; or whether to start worrying about which country will be next. Italy, widely seen as the next domino to fall, could come under concerted attack.

While a crisis in Spain's banking system has been averted for the time being, the concern over a slowdown in China was not allayed after economic data released on Saturday.

Industrial output in China rose 9.6 percent year-on-year in May, more than the 9.3 percent rise in April, but urban fixed asset investments rose 20.1 percent in the first five months of 2012 on-year, weakening from 20.2 percent in the first four months, while retail sales rose 13.8 percent in May from a year earlier, down from the 14.1 percent increase in April.

Inflation also slowed to 3.0 percent in May, the lowest since June 2010. However, falling inflation does give policy makers the option of easing monetary policy to stimulate growth.

Spain to seek bailout

It looks like Spain is about to ask for a bailout. From Reuters:

Spain is expected to ask the euro zone for help with recapitalizing its banks this weekend, sources in Brussels and Berlin said on Friday, becoming the fourth country to seek assistance since Europe's debt crisis began.

Five senior EU and German officials said deputy finance ministers from the single currency area would hold a conference call on Saturday morning to discuss a Spanish request for aid, although no figure for the assistance has yet been fixed.

Later the Eurogroup, which consists of the euro zone's 17 finance ministers, will hold a separate call to discuss approving the request, the sources said.

Economic data in the euro area on Friday had been negative.

In Germany, exports fell 1.7 percent in April. Imports tumbled 4.8 percent, the biggest drop in two years.

The French economy is set to contract 0.1 percent in the second quarter, the Bank of France forecast on Friday. It also reported that its business sentiment indicator for the industrial sector fell to 93 in May from 94 in April.

In Italy, industrial production fell 1.9 percent in April.

It was not just eurozone data that were negative on Friday.

In the US, the trade deficit narrowed in April as exports fell 0.8 percent and imports fell 1.7 percent.

Japan saw an upward revision of first quarter economic growth to 1.2 percent from the preliminary figure of 1.0 percent.

However, the Cabinet Office's service sector sentiment index fell to 47.2 in May from 50.9 in April. The future conditions index also fell to 48.1 from 50.9.

China cuts interest rates, Fitch cuts Spain's credit rating

China announced interest rate cuts for the first time since 2008 on Thursday. The one-year lending rate was reduced by a quarter percentage point to 6.31 percent.

The Bank of England, though, left monetary policy unchanged on Thursday after the services PMI came in unchanged at 53.3 in May and the British Retail Consortium reported a stronger-than-expected 3.4 percent annual rise in the value of retail sales.

In the US, Federal Reserve Chairman Ben Bernanke told Congress on Thursday that the central bank is ready to take action to stimulate the economy but gave no indication such action was imminent.

Europe's debt crisis remains a concern for most central bankers. Thursday brought more bad news on that front as Fitch cut Spain's credit rating by three notches to BBB.

Ironically, the Fitch cut came on a day that Spanish bonds surged. Spain’s 10-year yield fell 19 basis points to 6.09 percent on Thursday after the government exceeded its maximum target at a debt sale.

Meanwhile, data on Thursday indicated that Japan's economy may be losing momentum. Its index of coincident economic indicators fell 0.2 point in April, the first drop in three months. The index of leading economic indicators saw an even bigger fall of 1.3 points.

Markets surge as ECB does nothing

The European Central Bank left interest rates at 1.0 percent on Wednesday. President Mario Draghi said the bank was not open to trading with governments on the policy response to the crisis, putting the onus firmly on euro zone governments to solve the debt crisis.

Markets jumped anyway. Stocks rallied over 2 percent for their biggest gains this year while German bund and US Treasury yields rose.

Economic data on Wednesday were mixed.

Eurozone GDP was confirmed to be unchanged in the first quarter. However, German industrial output fell 2.2 percent in April from the previous month while Spanish industrial output plunged 8.3 percent in April from a year earlier.

In contrast, the US economy expanded at a moderate pace from early April to late May, according to the Federal Reserve's Beige Book.

Spain sounds alarm, RBA cuts interest rates

Spain has sent another distress signal, with Treasury Minister Cristobal Montoro saying on radio on Tuesday that Spain has lost access to credit markets.

Markets ignored the signal, though, as Spanish bonds rose for a fourth day and its 10-year yield dropped 11 basis points to 6.3 percent.

Markets also shrugged off negative data out of the euro area on Tuesday. German factory orders fell 1.9 percent in April after having jumped 3.2 percent in March. Eurozone retail sales fell 1.0 percent in April after having risen 0.3 percent in March. Markit's composite index of manufacturing and services dropped to 46.0 in May from 46.7 in April after the services index fell to 46.7 from 46.9.

Other reports on Tuesday, though, indicate that services performed better in the US and China. In the US, the Institute for Supply Management’s index of non-manufacturing rose to 53.7 in May from 53.5 in April. In China, the HSBC/Markit services PMI rose to a 19-month high of 54.7 in May from 54.1 in April.

Still, concern over the economic outlook led the Reserve Bank of Australia to cut its official cash rate by 25 basis points to 3.50 percent on Tuesday.

Japan enters bear market, US factory orders fall

Following the weak economic data and sharp falls seen in US and European markets last Friday, Asian markets started this week on a weak note, the MSCI Asia-Pacific Index falling 2.1 percent on Monday.

Japan’s Topix in particular fell 1.9 percent to its lowest close since December 1983. It is now in bear market territory having fallen more than 20 percent from its high in March.

However, Western markets were relatively steady on Monday. The STOXX Europe 600 fell 0.5 percent while the S&P 500 reversed losses earlier in the day to finish flat.

US stocks managed to avoid losses despite an unexpectedly weak report on factory orders on Monday. US factory orders fell 0.6 percent in April after having fallen 2.1 percent in March. Excluding transportation equipment, factory orders fell 1.1 percent in April. Durable goods orders were unchanged in April but orders for non-defense capital goods excluding aircraft decreased 2.1 percent.

There was also another sign of slower growth in China on Monday. The National Bureau of Statistics and China Federation of Logistics and Purchasing reported that the PMI for the non-manufacturing sector fell to 55.2 in May from 56.1 in April.

May data show slower US economic growth

Data at the end of last week did not bode well for the United States economy's role as an engine of global economic growth.

Based on its survey of purchasing managers, the Institute for Supply Management's PMI for US manufacturing fell to 53.5 in May after having hit a one-year high of 54.8 in April.

The resilient US manufacturing sector had been instrumental in offsetting the slowdown elsewhere in the world over the past few months.

The drop in the ISM PMI last month, however, together with weaker PMI readings elsewhere, helped pull the JPMorgan global manufacturing PMI down to 50.6 in May, the lowest reading in five months, from 51.4 in April.

JPMorgan Global Manufacturing PMI
	April	May
Global PMI	51.4	50.6
Output	53.1	51.0
New orders	51.8	51.4
Input prices	56.2	50.0
Employment	51.2	51.6

The slowdown in the US manufacturing sector may be part of a broader deceleration in the economy.

The US employment report on Friday showed that nonfarm payrolls increased just 69,000 in May after having risen by 77,000 in April. These two increases were the smallest in the past twelve months. The unemployment rate edged up to 8.2 percent in May from 8.1 percent in April.

Earlier in the week, revised data had shown that US economic growth slowed to a 1.9 percent annual rate in the first quarter, down from the 2.2 percent initial estimate and from 3.0 percent in the fourth quarter.

The latest economic data would have dented hopes of a rebound in the US economy in the second quarter.

Markets tumble as US employment slows, global manufacturing weakens

Markets were hit on Friday as economic data provided clear signals of a slowing global economy. The S&P 500 plunged 2.5 percent, its biggest drop since November, and the STOXX Europe 600 fell 1.9 percent. The US 10-year Treasury yield fell 10 basis points to 1.46 percent. Oil plunged 3.8 percent to an eight-month low of $83.23 a barrel.

In the US, the employment report on Friday showed that the economy added just 69,000 jobs in May. The unemployment rate rose to 8.2 percent in May from 8.1 percent in April.

Manufacturing in the US also showed signs of slowing. The Institute for Supply Management's manufacturing index fell to 53.5 in May from 54.8 in April. Markit's manufacturing PMI fell to 54.0 in May from 56.0 in April.

Growth in personal income also slowed to 0.2 percent in April from 0.4 percent in March. Encouragingly, however, consumer spending increased 0.3 percent in April, better than the 0.2 percent increase in March.

Construction spending also increased 0.3 percent in April, the same rate as in March.

In any case, the US economy is easily outperforming the eurozone economy, where the unemployment rate was 11.0 percent in April, the same as in March and the highest on record. In addition, Markit's manufacturing PMI for the euro area fell to 45.1 in May from 45.9 in April.

Elsewhere in Europe, there has been a dramatic collapse in manufacturing in the UK. The Markit/CIPS manufacturing PMI plunged to 45.9 in May, the lowest reading since May 2009, from 50.2 in April.

Even China's manufacturing sector is at risk of contraction. HSBC's manufacturing PMI fell to 48.4 in May from 49.3 in April. The China Federation of Logistics and Purchasing's manufacturing PMI fell to 50.4 in May from 53.3 in April.

Rounding off the manufacturing purchasing managers surveys in the major economies, Japan had earlier in the week managed to avoid showing a decline. Nevertheless, the Markit/JMMA Japan manufacturing PMI was barely in expansion in May, coming in at 50.7, unchanged from the previous month.

European economy shows improvement but slowdown spreads elsewhere

Amid continuing concerns over its debt problems, Europe produced better-than-expected economic data on Thursday.

In Germany, the unemployment rate fell to 6.7 percent in May from 6.8 percent in April while retail sales rose 0.6 percent in April.

In France, consumer spending rose 0.6 percent in April.

Meanwhile, inflation has become less of a threat to the eurozone economy. The inflation rate fell to 2.4 percent in May from 2.6 percent in April.

Outside the euro area, Nationwide reported that UK house prices rose 0.3 percent in May.

In Denmark, the Nationalbank lowered its key lending rate to 0.6 percent from 0.7 percent after the economy grew 0.3 percent in the first quarter.

However, while European data were encouraging, data elsewhere on Thursday indicated that the economic slowdown has spread.

Revised US first quarter GDP data showed that the economy has lost momentum. It grew at a 1.9 percent annual rate last quarter, down from the 2.2 percent initial estimate and from 3.0 percent in the fourth quarter.

May data released on Thursday indicated that there has not been much improvement since. An ADP report showed that private employers added just 133,000 jobs in May. Initial claims for state jobless benefits rose 10,000 last week to 383,000, the seventh increase in eight weeks. A report from Challenger, Gray & Christmas showed that the number of planned layoffs at US companies hit an eight-month high in May.

The Institute for Supply Management-Chicago's business barometer fell to 52.7 in May, the lowest since September 2009, from 56.2 in April.

Japan's economy may also have started the second quarter on a weak note. Industrial production rose just 0.2 percent in April. A survey showed that factory managers expected output to fall 3.2 percent in May and then rebound 2.4 percent in June.

Emerging economies have also not escaped the spreading slowdown. India's economy grew 5.3 percent in the first three months of 2012 from a year earlier, sharply down from 9.2 percent growth in the previous quarter.