Economic data negative but Spanish yields fall amid speculation of more central bank actions

Economic data on Monday were negative.

In the euro area, the European Commission's economic sentiment indicator fell to 87.9 in July, the lowest since September 2009, from 89.9 in June.

The pain is already being felt in Spain, where the economy shrank 0.4 percent in the second quarter after contracting 0.3 percent in the first three months of the year.

In the UK, mortgage approvals fell to 44,192 in June, the lowest reading since December 2010, from 50,544 in May, net mortgage lending contracted by 355 million pounds, also the sharpest drop since December 2010, and the Confederation of British Industry's distributive trades survey's sales balance fell to +11 in July from +42 in June.

In the US, the Dallas Fed's manufacturing production index fell to 12.0 in July from 15.5 in June while the general business activity index plummeted to -13.2 from 5.8.

There was a more hopeful development in financial markets on Monday, however, as Spain's 10-year yield fell 13 basis points to 6.61 percent.

And after comments by President Mario Draghi last week, the European Central Bank may be thinking of action to push it down further. From Paul Carrel and Paul Taylor at Reuters:

The European Central Bank is thinking the unthinkable to save the euro, including resuming its controversial bond-buying program and possibly even pursuing quantitative easing - in effect printing money.

In the US, there is speculation that the Fed may cut the interest rate on excess reserves. .

Japanese industrial production falls third consecutive month in June

The Japanese economy is likely to have slowed significantly in the second quarter.

A report from Japan's Ministry of Economy, Trade and Industry today showed that industrial production fell 0.1 percent in June. This was the third consecutive monthly decline in industrial production. Output had fallen by 3.4 percent in May and 0.2 percent in April.

Output in the second quarter as a whole was 2.2 percent lower than in the first quarter, which is likely to have made a significant dent in overall economic growth.

The third quarter appears to have started better. A survey of manufacturers released with the production data showed that output was seen rebounding by 4.5 percent in July.

However, the survey also showed that output was expected to fall again by 0.6 percent in August.

US economy slows, stocks surge

As widely expected, the US economy slowed in the second quarter to grow at a 1.5 percent annual rate, down from 2.0 percent in the first quarter. Consumer spending rose at a 1.5 percent rate, down from a 2.4 percent rate in the prior quarter.

Consumer spending is likely to stay weak at the start of the third quarter. The Thomson Reuters/University of Michigan final index of sentiment declined to 72.3 in July from 73.2 in June. The preliminary reading for July was 72.0.

Despite the weaker US economic data, markets were up on Friday. The S&P 500 rose 1.9 percent, completing the biggest two-day gain since December.

Investors are clearly factoring in the possibility of central bank action to stimulate the economy.

That seems likely in Japan where a report on Friday showed that core consumer prices fell 0.2 percent in June from a year earlier, worse than the 0.1 percent decline in May.

However, German inflation held steady in July at 2.0 percent against expectations for a decline to 1.9 percent.

ECB to do whatever it takes to save euro

Investors are waiting for the Federal Reserve to implement QE3 to help boost markets but in the meantime, a few words from European Central Bank President Mario Draghi will do.

Bloomberg reports Draghi's comments on Thursday:

“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.”

Apparently, it was enough for investors. Markets jumped on Thursday, the S&P 500 rising 1.7 percent and the STOXX Europe 600 surging 2.5 percent. Spain’s 10-year bond yield fell 45 basis points to 6.93 percent.

Economic data on Thursday were mixed.

In Europe, GfK sees German consumer confidence rising to a five-month high in August but Italian retail sales had fallen 0.2 percent in May.

In the US, durable goods orders rose 1.6 percent in June. However, excluding transportation, orders fell 1.1 percent. Orders for non-defense capital goods excluding aircraft fell 1.4 percent, the third decrease in the past four months.

Among other US data, initial claims for jobless benefits fell 35,000 in the week ended 21 July but the Bloomberg Consumer Comfort Index also fell to minus 38.5 in the week ended July 22 from minus 37.9 in the previous period and pending home sales fell 1.4 percent in June.

Spanish yields fall amid negative global economic data

Spanish bonds yields finally retreated from recent record highs on Wednesday. The two-year yield fell 47 basis points to 6.42 percent while the 10-year yield declined 25 basis points to 7.38 percent.

Germany’s 10-year yield climbed two basis points to 1.26 percent even though the Ifo institute reported that its business climate index fell to 103.3 in July from 105.2 in June.

In the UK, the economy shrank by a hefty 0.7 percent in the second quarter. However, on a more positive note, the Confederation of British Industry survey's total order book balance rose to -6 in July from -11 in June.

Meanwhile, Japan posted an unexpected trade surplus in June as lower oil prices contributed to a 2.2 percent fall in imports from a year earlier. Exports fell 2.3 percent.

And in a break from recent trend, US housing data came out negative on Wednesday. New home sales fell 8.4 percent to a 350,000 annual rate in June.

However, the May reading was revised up to a 382,000 pace, the highest since April 2010. And Bill McBride thinks that based on the recent trend, June sales will probably be revised up too.

Spanish and Italian yields rise, eurozone and US manufacturing weaken

Spanish and Italian government bonds remained under pressure on Tuesday. Spain’s 10-year yield rose 12 basis points to 7.62 percent and Italy's 10-year yield rose 26 basis points to 6.60 percent.

The rise in yields comes as data for the euro area on Tuesday showed that the region's economy remains in contraction. Markit's flash estimate of the eurozone composite index was unchanged at 46.4 in July, an increase in the services index to 47.6 from 47.1 offsetting a decline in the manufacturing PMI to 44.1 from 45.1.

China's manufacturing sector, though, showed signs of stabilization on Tuesday. HSBC reported that a flash estimate showed that its manufacturing PMI for China rose to 49.5 in July, a five-month high, from 48.2 in June.

Unfortunately, Tuesday's data showed that US manufacturing is moving in the opposite direction. According to Markit's flash estimate, the US manufacturing PMI fell to 51.8 in July, the worst reading since December 2010, from 52.5 in June. Another report on Tuesday showed that the Richmond Federal Reserve's manufacturing index tumbled to -17 in July from -1 in June.

However, while US manufacturing may be turning down, US housing appears to be turning up. On Tuesday, the Federal Housing Finance Agency reported that home prices rose 0.8 percent in May while the real-estate website Zillow said home prices rose 0.2 percent in the second quarter from a year ago, the first year-over-year increase since 2007.

Stocks fall, Spanish yields surge

Markets had a rocky start to the week. Stocks fell amid continuing concern over Europe's debt crisis, the S&P 500 falling 0.9 percent and the STOXX Europe 600 plunging 2.5 percent.

In response, Spain and Italy moved to ban short-selling of stocks.

But bond markets were also showing investor unease as Spain’s 10-year yield surged 23 basis points to 7.50 percent after a report that six Spanish regions may ask for aid from the central government. Yields in safe havens moved in the opposite direction, with the US 10-year yield touching an all-time low of 1.40 percent and the two-year German yield hitting minus 0.08 percent.

However, Germany may be losing its appeal as a safe haven. After the market closed, Moody’s said it had lowered the outlooks for the Aaa credit ratings of Germany, the Netherlands and Luxembourg to negative, citing “rising uncertainty” about Europe’s debt crisis.

Even as investors showed increased concern over the euro area, a report out on Monday showed that consumer confidence in the region has also deteriorated. The European Commission reported that its consumer confidence index for the euro area declined to minus 21.6 in July from minus 19.8 in June.

Another economic report on Monday showed why Spain is the focus of concern at the moment. The Bank of Spain reported that the Spanish recession deepened in the second quarter, with the economy shrinking 0.4 percent after having contracted 0.3 percent in the first.

In contrast, the US economy has managed to sustain growth, albeit at a lower-than-usual rate. The Chicago Federal Reserve reported on Monday that its national activity index increased to minus 0.15 in June from minus 0.48 in May. The three-month average rose to minus 0.20 from minus 0.38, indicating, according to the Chicago Fed, that growth was below its historical trend.

US economy shows signs of slowing despite housing recovery

The data on the United States economy last week mostly provided further evidence of a slowing economy even as the housing sector continues its recovery.

A big disappointment among last week's reports was the unexpected decline in retail sales in June. Retail sales fell 0.5 percent, the third consecutive monthly decline.

Another ominous sign was the fall in the Conference Board's leading economic index. It fell 0.3 percent in June following a 0.4 percent rise in May and a 0.1 percent decline in April.

Ataman Ozyildirim, economist at The Conference Board, noted: “The US LEI declined in two of the last six months, and its six-month growth rate has eased in the last three months.”

Also declining in June were existing home sales, which fell 5.4 percent.

However, there were also positive US economic data last week.

Industrial production rebounded 0.4 percent in June after having fallen 0.2 percent in May.

And notwithstanding the fall in existing home sales, the recovery in home building appears to be intact.

The National Association of Home Builders/Wells Fargo housing market index rose 6 points to 35 in July, its highest level in five years.

Housing starts rose 6.9 percent in June to a seasonally adjusted annual rate of 760,000 units, the highest since October 2008.

Building permits did fall 3.7 percent last month but the May rate had been the highest since September 2008.

At least Federal Reserve Chairman Ben Bernanke appears relatively sanguine about the economy. In his testimony to the Congress last week, Bernanke acknowledged that the economy decelerated in the first half of the year. However, he also said that some of the headwinds the economy is facing, such as tight borrowing conditions, should fade over time and allow the economy to grow more rapidly.

However, Bernanke also said that one risk to this outlook is the euro-area fiscal and banking crisis. Here, the situation appears not to have improved much, if at all, last week.

Spain's five- and 30-year yields hit euro-era records last week while the 10-year yield rose back above 7 percent, rising 61 basis points to close at 7.27 percent on Friday, just short of the euro-era record of 7.285 percent.

Spain bailout approved, yields hit record highs

Spain's bailout was formally approved by eurozone finance ministers on Friday.

However, Spain's 10-year yield rose again on Friday to 7.27 percent as the region of Valencia announced that it was preparing to seek a rescue and the Spanish government abandoned its forecast for a return to growth next year. Spain's five- and 30-year yields touched euro-era record highs.

Stocks finally succumbed to selling on Friday. The S&P 500 fell 1.0 percent while the STOXX Europe 600 fell 1.4 percent.

Stocks rise, Spain's 10-year yield back above 7 percent

Stocks were up on Thursday. The S&P 500 rose 0.3 percent to a two-month high while the STOXX Europe 600 rose 1.1 percent to the highest level since April.

In pushing up stocks, equity investors shrugged off negative developments in European bond markets. Spain's 10-year yield climbed back above 7 percent on Thursday. In contrast, German two-year yields were below zero for a tenth day and the French five-year yield hit a record low of 0.728 percent.

Stock markets also shrugged off weak economic data on Thursday.

In the US, existing home sales fell 5.4 percent in June. The Federal Reserve Bank of Philadelphia’s general economic index was minus 12.9 in July after minus 16.6 the month before. The Conference Board's leading economic index fell 0.3 percent in June. Initial claims for jobless benefits increased by 34,000 to 386,000 last week.

In the UK, retail sales rose just 0.1 percent in June.

And in Japan, the all industry activity index fell 0.3 percent in May while the leading index fell to 95.2 in May from 95.6 in April.

Chinese and US housing markets show improvement

China's housing market showed signs of improvement in June, according to a report on Wednesday. New home prices in 25 out of the 70 Chinese cities tracked by the government increased in June from the previous month, the National Bureau of Statistics reported, up from just six in May. Home prices fell in 21 cities in June, down from 43 in May.

Wednesday also brought more signs of continued recovery in the US housing market. Housing starts rose 6.9 percent in June to a seasonally adjusted annual rate of 760,000 units, the highest since October 2008. However, building permits fell 3.7 percent.

Meanwhile, the broader US economy is continuing to grow, according to the Federal Reserve's Beige Book. "Reports from most of the twelve Federal Reserve districts indicated that overall economic activity continued to expand at a modest to moderate pace in June and early July," the report said.

US industrial production and housing sentiment improve

There was good news for the US economy on Tuesday.

Industrial production rebounded 0.4 percent in June after having fallen 0.2 percent in May. Manufacturing production rose 0.7 percent in June, reversing the 0.7 percent fall in May.

Housing continued its recovery in July with the National Association of Home Builders/Wells Fargo housing market index rising 6 points to 35, its highest level in five years.

Meanwhile, inflation has remained moderate. The consumer price index was unchanged in June after having fallen 0.3 percent in May.

Inflation has also moderated in the UK, falling to 2.4 percent in June from 2.8 percent in May.

Growth forecasts lowered as US retail sales fall

The International Monetary Fund has updated its World Economic Outlook and is now forecasting the world economy to grow 3.5 percent in 2012 and 3.9 percent in 2013.

The latest growth forecast for 2013 is 0.2 percentage point lower than the forecast in April. The forecast for 2012 was little changed, with the IMF noting that first quarter growth had been better than expected but the second quarter is looking worse.

Indeed, a Commerce Department report on Monday showed that US retail sales fell 0.5 percent in June. It was the third consecutive monthly decline.

Real Time Economics reports that following the retail sales report, economists have revised estimates of US second quarter growth down to near stall speed.

More signs of global economy slowing

Economic data last week provided more indications that the global economy is slowing.

Last week, the Organisation for Economic Co-operation and Development reported that its composite leading indicator for members as a whole fell to 100.3 in May from 100.4 in April. While the CLI for the euro area continued its declining trend, May also saw the CLIs for the United States and Japan fall for the second consecutive month.

OECD composite leading indicators
	Ratio to trend, amplitude adjusted					Change from previous month
	2012					2012
	Jan	Feb	Mar	Apr	May	Jan	Feb	Mar	Apr	May
OECD area	100.3	100.4	100.4	100.4	100.3	0.10	0.08	0.03	-0.03	-0.08
United States	101.0	101.1	101.2	101.1	100.9	0.25	0.17	0.05	-0.06	-0.17
Euro area	99.7	99.7	99.6	99.6	99.6	-0.04	-0.02	-0.02	-0.04	-0.06
Japan	100.8	100.8	100.9	100.8	100.7	0.12	0.08	0.02	-0.05	-0.10

Reports from the US last week were consistent with a slowing economy. The trade deficit fell by 3.8 percent in May as exports rose 0.2 percent while imports fell 0.7 percent. The Thomson Reuters/University of Michigan index of consumer sentiment fell to 72, the lowest level this year, from 73.2 in June.

In Japan, the Cabinet Office's economy watchers survey showed last week that sentiment in the service sector has deteriorated. The diffusion index for current conditions fell to 43.8 in June from 47.2 in May and the diffusion index for future conditions fell to 45.7 from 48.1.

The outlook for Japan's manufacturing sector may also be weakening. Another report last week showed that machinery orders excluding volatile orders fell by a sharp 14.8 percent in May.

Beyond the OECD area, China's economy has also slowed. It reported on Friday that its economy grew 7.6 percent in the second quarter from a year earlier. This was down from 8.1 percent in the previous quarter and the slowest rate in three years.

Consumer sentiment down, investor sentiment up

US consumer sentiment deteriorated in July with the Thomson Reuters/University of Michigan index of consumer sentiment falling to 72, the lowest level this year, from 73.2 in June.

Investor sentiment, however, improved on Friday. Stocks rose, with the S&P 500 jumping 1.7 percent and the STOXX Europe 600 rising 1.3 percent.

And despite the credit rating downgrade earlier in the day, Italy managed to sell 3.5 billion euros of three-year bonds at 4.65 percent, down from 5.3 percent at the sale last month.

Italy's rating cut, China's growth slows

There have been mixed news on Europe.

A report on Thursday showed that eurozone industrial production unexpectedly rebounded by 0.6 percent in May after having fallen 1.1 percent in April.

Also on Thursday, the Italian government sold 361-day Treasury bills at 2.697 percent, down from 3.972 percent at the previous sale.

However, on Friday, Moody’s Investors Service lowered Italy’s government bond rating by two notches to Baa2 from A3 and warned that it could be downgraded further.

Europe's problems may be compounded by slowing economic growth in the rest of the world.

China reported on Friday that its economy grew 7.6 percent in the second quarter from a year earlier, a three-year low and down from 8.1 percent in the previous quarter.

Elsewhere in Asia on Friday, Singapore reported that its economy shrank at an annualised rate of 1.1 percent in the second quarter after having grown at a 9.4 percent rate in the first quarter.

Some central banks are already adjusting monetary policies in anticipation of weaker economic growth.

The Bank of Korea cut its benchmark interest rate by 25 basis points to 3.00 per cent on Thursday, its first reduction in three years, while Brazil cut its benchmark interest rate by half a percentage point to 8.0 percent on Wednesday, the lowest on record.

However, the Bank of Japan held off on further policy easing, leaving its policy rate unchanged at a range of zero to 0.1 percent.

Spain's announces new plan to cut budget deficit, US trade deficit falls

The Spanish government announced fresh austerity measures on Wednesday. Bloomberg reports:

[Spanish Prime Minister Mariano] Rajoy announced cuts in unemployment benefits and public wages, signaled reductions in pensions and raised sales taxes as part of a 65 billion-euro ($80 billion) package of deficit cuts, risking a deeper recession. As striking miners clamored for aid to keep their industry alive in a march along Madrid’s main boulevard, Rajoy trimmed union funding by 20 percent.

The measures may risk a deeper recession but markets reacted favourably on Wednesday.

Spain’s benchmark Ibex stock index rose 1.1 percent and the risk premium on 10-year government debt compared to the German benchmark slid 17 basis points to 531 points at 5 p.m. Madrid time.

In any case, slower growth in other economies did not stop US exports from rising in May. The trade deficit shrank 3.8 percent in May as exports rose 0.2 percent to the second highest on record while imports fell 0.7 percent.

Amid mixed global economic data, US may already be in recession

Economic data on Tuesday were mixed.

Worries of a slowdown in China were maintained after its latest trade numbers. The trade surplus expanded 42.9 percent year-on-year in June after exports rose 11.3 percent but imports grew just 6.3 percent.

In Japan, the household consumer confidence index fell to 40.4 in June from 40.7 in May.

In Europe, French industrial production fell 1.9 percent in May but Italian industrial production rose 0.8 percent while UK industrial production rose 1.0 percent.

Meanwhile, Lakshman Achuthan of Economic Cycle Research Institute is sticking to his recession call for the US. In fact, he told Bloomberg on Tuesday that the US economy may already be in recession.

Stocks fall as Spain's 10-year yield exceeds 7% and Asia reports weak economic data

Markets started the week on a negative note. Stocks fell on Monday, the S&P 500 falling 0.2 percent and the STOXX Europe 600 falling 0.4 percent. Continuing concerns over Europe's debt crisis pushed Spain's 10-year yield to 7.06 percent even as Germany and France sold six-month bills at negative yields.

Earlier in the day, Asian stocks had suffered steep falls, the Shanghai Composite Index in particular falling 2.37 percent. The falls were partly a delayed reaction to the US jobs data on Friday but also due to weak data out of Asia on Monday.

China reported on Monday that its inflation rate fell to 2.2 percent in June from 3.0 percent in May, leading to fears of deflation. Producer prices fell 2.1 percent in June from a year ago.

Reports from Japan on Monday were also negative. Its current account surplus plunged 62.6 percent in May from a year earlier while core machinery orders fell 14.8 percent in May from the previous month.

In addition, Japan's service sector sentiment deteriorated for the third straight month in June. The economy watchers survey's diffusion index for current conditions fell to 43.8 in June from 47.2 in May and the future conditions index fell to 45.7 from 48.1.

Global economy near stagnation in June

Economic reports last week showed that the global economy continued to lose momentum at the end of the second quarter.

Surveys of purchasing managers around the world showed that the global economy was close to stagnation in June. The JPMorgan global all-industry output index fell to 50.3 in June from 52.1 in April.

JPMorgan Global All-Industry Indices
	May	June
Output	52.1	50.3
New orders	52.2	50.5
Input prices	51.6	49.4
Employment	50.7	51.1

In the US, the Institute for Supply Management's manufacturing PMI fell to 49.7 in June from 53.5, dropping below the neutral 50 mark for the first time in almost three years. Services activity also slowed, with the ISM's non-manufacturing index falling to 52.1 in June from 53.7 in May.

In the euro area, Markit's composite output index rose to 46.4 in June from 46.0 in May, staying well below the 50 mark. The eurozone manufacturing PMI was unchanged at 45.1 as the services PMI rose to 47.1 from 46.7.

In China, the manufacturing PMI from the National Bureau of Statistics and China Federation of Logistics and Purchasing fell to 50.2 from 50.4 in May while HSBC's manufacturing PMI fell to 48.2 from 48.4.

China's services sector appears somewhat stronger. The non-manufacturing PMI from the National Bureau of Statistics and China Federation of Logistics and Purchasing rose to 56.7 in June from 55.2 in May but HSBC's services PMI fell to 52.3 last month from 54.7 in May.

In Japan, Markit's composite output index fell below the neutral 50 mark to 49.1 in June from 50.1 in May. The Markit/JMMA manufacturing PMI fell to 49.9 in June from 50.7 in May while the services business activity index fell to 49.3 from 49.8.

Beyond the purchasing managers' surveys, other economic data released last week were mixed.

The US employment report last Friday was disappointing. Non-farm payrolls increased by just 80,000 in June compared to the median projection of 100,000 from a Bloomberg survey. The unemployment rate stayed at 8.2 percent.

US employment has increased by an average of just 75,000 per month in the second quarter, down from an average of 226,000 in the first quarter.

In Japan, the economy also provided another sign of weaker growth last week. The Cabinet Office's coincident index of economic indicators fell to 95.8 in May from 97.0 in April.

However, not all the data on Japan were negative. The leading index of economic indicators rose to 95.9 in May from 95.6 in April. Also, the Bank of Japan's Tankan survey showed that the large manufacturers' sentiment index improved to minus one in the second quarter from minus four in the previous quarter while the index for large non-manufacturing firms rose to eight from five.

US employment disappoints but Japanese leading index and German industrial production rise

Economic data on Friday were mixed.

US employment growth was weak in June. The economy added just 80,000 jobs, fewer than the 100,000 projected by economists. The unemployment rate stayed at 8.2 percent.

Encouragingly, however, average hourly earnings increased to $23.50 from $23.44 in the prior month, the average work week rose six minutes to 34.5 hours and the number of temporary workers increased 25,200 in June following an 18,600 rise in May.

In Japan, the coincident index of economic indicators fell to 95.8 in May from 97.0 in April. However, the leading index rose to 95.9 from 95.6.

In Germany, industrial production rebounded by 1.6 percent in May after having fallen by 2.1 percent in April.

Still, markets were weak on Friday. Stocks and commodities fell, the S&P 500 declining 0.9 percent and oil dropping 3.2 percent. US Treasuries rose, with the 10-year yield falling five basis points to 1.55 percent.

European financial markets continued to show distress on Friday. Spain's 10-year yield closed at 6.95 percent, up 17 basis points, after hitting 7.04 percent earlier in the day. German 10-year yield fell five basis points to 1.33 percent while the two-year yield fell three basis points to minus 0.013 percent.

Central banks ease monetary policies, markets fall anyway

Central banks were out in force on Thursday with more monetary stimulus. Bloomberg reports:

The Bank of England began today’s stimulus push, announcing it would restart buying bonds two months after stopping. Governor Mervyn King and colleagues raised their asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds, meeting the forecast of most economists, in a bid to pull its economy from recession. They said output will likely remain sluggish after contracting in the past two quarters.

Within a minute of that decision, the People’s Bank of China cut its key interest rate for the second time in a month and allowed banks to offer bigger discounts on their own lending costs. The one-year lending rate will fall by 31 basis points to 6 percent and the one-year deposit rate will drop by 25 basis points to 3 percent effective tomorrow. Banks can offer loans of as much as 30 percent less than benchmark rates...

At 1:45 p.m. in Frankfurt, the ECB then cut its main rate by 25 basis points to a record low of 0.75 percent and said it will no longer pay anything on overnight deposits as sovereign debt turmoil threatens to drive the 17-nation euro economy into recession. Both actions were anticipated by economists...

Elsewhere, Kenya’s central bank cut its benchmark lending rate for the first time in 18 months and Denmark’s lowered its main borrowing costs to record lows.

Economic data on Thursday were mostly positive.

German factory orders rebounded 0.6 percent in May after having fallen 1.4 percent in April.

In the US , jobs data on Thursday looked encouraging. Private employers added 176,000 new workers to their payrolls in June, according to ADP. The number of planned layoffs fell to 37,551 in June from 61,887 in May, according to Challenger, Gray & Christmas. And initial claims for state unemployment benefits dropped 14,000 to 374,000 last week.

However, the Institute for Supply Management's non-manufacturing index fell to 52.1 in June from 53.7 in May.

Despite the flood of monetary stimulus and benign economic data, markets were unable to sustain gains on Thursday. Stocks ended the day down, the MSCI world equity index dropping 0.6 percent, and the euro hit a one-month low against the US dollar.

Of particular concern, the Spanish 10-year yield rose 37 basis points to 6.78 percent while Italy’s 10-year bond yield increased 21 basis points to 5.98 percent.

Europe's economy remains weak, China looks vulnerable

European economic data on Wednesday were better than expected but still weak.

Markit's Eurozone composite PMI for June was revised up to 46.4 from a preliminary reading of 46.0, which had been the same as May's. The rise in the composite PMI was boosted by a rise in the services PMI to 47.1 in June from 46.7 in May.

Eurozone retail sales also showed a rebound in May, rising 0.6 percent after having fallen 1.4 percent in April.

In the UK, the services PMI fell to 51.3 in June from 53.3 in May.

Wednesday also brought a sign that China's services activity slowed in June. HSBC's services PMI fell to 52.3 last month from 54.7 in May.

In his Absolute Return Letter for July, Niels Jensen notes that the economic outlook is deteriorating, with a European recession “already baked in the cake” and China also looking “particularly vulnerable”.

A cyclical slowdown is not the only challenge the Chinese are facing. The urbanisation of the country is slowing from an estimated 3-4% over the past decade to 1-2% over the next decade. The labour pool is peaking as we speak and demographics will become an increasingly negative factor in the years to come, all of which suggest that annual GDP growth in China is likely to slow to 5% or even less in the not so distant future.

Indeed, Jensen thinks that Asia as a whole is at risk of a negative credit event, with cheap credit leading to a growing misallocation of capital and an increase in non-performing assets. However, with loan-to-deposit ratios still well below the levels in 1997, “such an outcome is probably not months but years away”.

China and US report better data but UK hit by weak economy and Libor scandal

In contrast to Monday, Tuesday's economic data were mostly positive.

In China, the non-manufacturing PMI from the National Bureau of Statistics and China Federation of Logistics and Purchasing rose to 56.7 in June from 55.2 in May.

In the US, factory orders rebounded 0.7 percent in May after having fallen 0.7 percent the previous month. Excluding transportation equipment, factory orders increased 0.4 percent in May after falling 0.9 percent the previous month. Auto sales rose to an annual rate of 14.1 million in June from 13.7 million in May.

Economic data from the UK on Tuesday were not as positive though. While consumer lending picked up in May, mortgage approvals fell and construction activity declined in June, with the Markit/CIPS Construction PMI falling to 48.2, its lowest reading since December 2009, from 54.4 in May.

Further souring the mood in the UK is the ongoing scandal over Libor manipulation, which has now led to the resignation of Barclays' chief executive amid claims of possible complicity by the Bank of England as well as others. Reuters reports:

Bob Diamond squares up to critical British MPs on Wednesday, a day after quitting as Barclays' chief executive over the Libor interest rate scandal, potentially dragging the Bank of England, government and rival banks deeper into the affair.

Diamond's testimony to a parliamentary inquiry could prove politically explosive; on Tuesday, Barclays published a 2008 internal memo from him which fellow managers understood to mean that the Bank and government might approve if they manipulated the Libor rate at the height of the banking crisis.

Global manufacturing shrinks

Global manufacturing activity contracted in June, according to purchasing managers surveys. A report on Monday showed that the JPMorgan global manufacturing PMI fell to 48.9 in June, its lowest reading since June 2009, from 50.6 in May.

Few economies were able to escape the manufacturing downturn in June.

In the US, a report on Monday from Markit showed that its manufacturing PMI fell to 52.5 in June from 54.0 in May. However, another report from the Institute for Supply Management showed that its manufacturing index fell to 49.7 from 53.5.

A piece of good news for the US on Monday, though, was that construction spending rose 0.9 percent in May, hitting its highest level since December 2009.

There was no such silver lining in the data for the euro area on Monday. Manufacturing in the euro area contracted again in June, with the Markit PMI unchanged from May at 45.1. Meanwhile, the eurozone unemployment rate hit 11.1 percent in May, the highest on record, from 11.0 percent in April.

UK manufacturing also stayed in contraction in June, although the Markit/CIPS manufacturing PMI did rise to 48.6 from a three-year low of 45.9 in May.

Manufacturing activity in China also weakened in June. A report from HSBC on Monday showed that its manufacturing PMI for China fell to 48.2 in June from 48.4 in May. This followed another report on Sunday showing that the manufacturing PMI from the statistics bureau and China Federation of Logistics and Purchasing had fallen to 50.2 in June from 50.4 in May.

However, Japan did provide some positive news on Monday. The Bank of Japan's Tankan survey showed that the large manufacturers' sentiment index improved to minus one in the second quarter from minus four in the previous quarter. The index for large non-manufacturing firms rose to eight from five.

After volatile half year, most markets are back in black

The first half of 2012 saw fluctuating performances in global stock markets. Strong gains in the first quarter were reversed in the second.

However, the final month of the second quarter saw another reversal. Most stock markets managed to rebound in June, allowing them to reach the year's halfway mark in positive territory.

The Morgan Stanley Capital International All-Country World Index closed at 312.11 at the end of June, up 4.74 percent for the month and 4.21 percent for the year.

The following table shows the performances of the major developed stock markets based on their respective MSCI indices.

Stock market performances in 1H 2012 Major developed markets
	Local currency (percent)	US dollars (percent)
USA	8.25	8.25
Japan	5.74	1.97
UK	0.13	1.06
Germany	5.27	2.91
France	2.00	-0.29

However, for most of the European countries that have debt problems, stock markets finished the first half of the year in negative territory.

Stock market performances in 1H 2012 Eurozone markets with debt concerns
	Local currency (percent)	US dollars (percent)
Italy	-4.66	-6.80
Spain	-16.79	-18.65
Greece	-19.67	-21.47
Portugal	-18.27	-20.10
Ireland	5.46	3.10

The performance of markets during the first half of the year was heavily influenced by developments relating to the European sovereign debt crisis. Most recently, the announcement of an agreement by European leaders on Friday to drop the preferred creditor status of the European Stability Mechanism over other bondholders in Spanish banks given government aid and to allow direct bank funding using bailout funds sent markets surging.

The evolution of the debt crisis will no doubt continue to influence markets in the second half of the year. The agreement announced on Friday provides a path for further progress in the resolution of the crisis but whether it actually leads to a lasting solution to the debt crisis remains to be seen. Previous agreements announced by European leaders had not resulted in lasting market rallies.

The latest agreement, for one, requires the establishment of a central banking supervisor before bailout funds can be injected directly into banks. However, there are few details on this, and working them out may take some time.

As Satyajit Das puts it in a commentary today: “Given issues of national control and sovereignty, the risk of delays and failure of agreement are not insignificant.”

Unfortunately, Europe is running out of time because it is running out of money. “There was no commitment of new money of any kind,” he points out. “The ability of the EU to support the peripheral nations on an ongoing basis is questionable.”

The other factor that will drive markets will be global economic growth. Early data for June based on surveys of purchasing managers showed that all the major economies either slowed or are in outright contraction.

The first half of 2012 had been volatile for stock markets. Continuing concerns over Europe's debt crisis and slowing global economic growth mean that the second half could turn out equally so.