European economic confidence rises, US consumer confidence falls

There was good news for Europe on Tuesday.

The report from the European Commission showed that its economic sentiment indicator for the euro area rose to 92.5 in July, the highest reading in 15 months, from 91.3 in June, providing another indication that the region's recession may be coming to an end.

Elsewhere in Europe, GfK's UK consumer confidence index rose to -16 in July, the highest reading since April 2010, from -21 in June.

However, in the US, the Conference Board's consumer confidence index fell to 80.3 in July from 82.1 in June.

Another report on Tuesday showed that the US housing market is maintaining momentum though. The S&P/Case-Shiller index of home prices in 20 cities rose 12.2 percent in May from a year earlier, the biggest 12-month gain since March 2006.

Earlier on Tuesday, data from Japan raised doubts about its recovery. Japanese industrial production fell 3.3 percent in June while household spending fell 0.4 percent in June from a year earlier.

More encouragingly, however, another report showed that Japan's unemployment rate fell to 3.9 percent in June, the lowest in more than four years, from 4.1 percent in May.

Mixed data from UK and US

Economic data on Monday were mixed.

In the UK, the Confederation of British Industry distributive trades survey's sales balance rose to 17 in July from 1 in June.

Data from the Bank of England showed that lending to small and medium-sized firms grew at its fastest pace on record in June. However, overall lending to non-financial businesses shrank by a net 1.3 billion pounds.

Consumer credit rose by a net 489 million pounds in June, the smallest rise since January.

Mortgage approvals fell to 57,667 from 58,071 in May.

In the US pending home sales fell 0.4 percent in June. May sales, though, had been the highest since December 2006.

Chinese industrial profits growth moderates as economy faces risk of sharp slowdown

A report over the weekend showed that Chinese industrial companies’ profits increased 6.3 percent in June from a year earlier. This was well below the 15.5 percent increase in May and added to signs that China's economic growth is slowing.

Bloomberg has a story today looking at the likelihood and implications of a China slowdown to markets.

A copper price collapse of more than 60 percent, zinc cut by up to a half and oil down to $70 a barrel. That’s the fate facing world commodity markets should China’s growth dip to 3 percent in the next three years -- a scenario economists at Barclays Plc (BARC) are now examining.

They’re not the only ones building models based on a steep decline in growth in the world’s second-biggest economy. Nomura Holdings Inc. (8604) estimates a one-in-three chance of a sharp drop by the end of 2014, and Societe Generale SA sees a “non-negligible risk” of less than 6 percent growth this year and an outside chance of 3 percent average expansion for this half and next.

Indeed, Zero Hedge says that there may be “storm ahead” for China.

Demographics, capital accumulation and productivity are the three most important drivers of potential growth, and these three factors are intertwined to a certain extent. China has already entered its first stage of demographic challenge, with its GDP growth slowing on the back of all three contributors of growth...

[G]oing into 2016-20 the second stage of demographic challenge will kick in as we begin to see a decline in China’s working age population resulting in a rise in the age dependency ratio.

Japanese consumer prices rise but stocks fall; markets at risk from Fed exit

A report on Friday showed that Japan's consumer prices excluding fresh food rose 0.4 percent in June, the first increase in 14 months.

Japanese stocks, however, fell on Friday. The Nikkei 225 slid 3.0 percent to a near three-week low as the yen rose.

Stocks elsewhere mostly shrugged off the losses in Japan though. The STOXX Europe 600 fell 0.2 percent while the S&P 500 rose 0.1 percent.

Helping to boost US stocks on Friday was a report showing that the Thomson Reuters/University of Michigan consumer sentiment index rose to 85.1 in July, the highest level in six years, from 84.1 in June.

However, the International Monetary Fund warned in a report on Friday that the Federal Reserve’s exit from its asset purchase programme could trigger “excessive” interest-rate volatility. This in turn could have “adverse global implications”.

The IMF left its US growth forecast for this year unchanged at 1.7 percent.

UK economy accelerates in second quarter

Global economic data on Thursday were quite positive.

In the UK, the economy appears to have gained momentum. GDP grew 0.6 percent in the second quarter after having risen 0.3 percent in the first quarter.

Elsewhere in Europe, there was also good news from Germany. The Ifo institute’s business climate index rose to 106.2 in July from 105.9 in June.

And in the US, durable goods orders rose 4.2 percent in June. Orders for non-defence capital goods excluding aircraft rose 0.7 percent.

Manufacturing shrinks in China but euro area and US report stronger economic data

China's manufacturing sector contracted in July, an HSBC survey showed on Wednesday. Its preliminary reading of the manufacturing PMI for China fell to 47.7 this month, an 11-month low, from 48.2 in June.

In contrast, the eurozone manufacturing sector returned to expansion in July, according to a Markit report on Wednesday. Its preliminary reading of the eurozone manufacturing PMI rose to 50.1 this month from 48.8 in June.

The eurozone services PMI rose to 49.6 in July from 48.3 in June, helping to push the composite index up to 50.4, an 18-month high.

Markit's preliminary US manufacturing PMI also rose in July to 53.2 from 51.9 in June.

In more good news for the US economy, new home sales rose 8.3 percent in June to the highest pace since May 2008.

Japan's economy picking up but trade stays in deficit

The Japanese government has upgraded its assessment of the Japanese economy.

The Cabinet Office's July report on the economy on Tuesday said: “The economy is picking up steadily and shows some movements on the way to recovery.”

However, while a report on Wednesday indeed showed that Japan's exports rose 7.4 percent in June, its fourth consecutive increase, imports rose 11.8 percent, pushing the trade balance into a 180.8 billion yen deficit.

The June deficit extended the country's string of monthly deficits to the longest since a 14-month run that ended in August 1980.

US existing home sales fall

US economic data on Monday were mixed.

Existing home sales fell 1.2 percent in June. With the inventory of unsold homes rising 1.9 percent, the months' supply rose to 5.2.

Nevertheless, the median price for a previously-owned home jumped 13.5 percent from a year ago to $214,200, the highest since June 2008.

The US economy as a whole may have improved. The Chicago Fed National Activity Index rose to -0.13 in June from -0.29 in May. The three-month average rose to -0.26 from -0.37, suggesting that growth remained below historical trend.

Slower foreign buying contributed to rise in Treasury yields

US Treasury yields have risen over the past few months and foreign investors appear to have contributed to the trend. From Bloomberg:

Foreign investors, the bulwark of the U.S. government bond market as it more than doubled in size during the financial crisis, are adding Treasuries at the slowest pace since 2006 amid the worst rout in four years.

Holdings by non-U.S. investors rose 1.9 percent through May, down from 5.2 percent a year ago data last week show, as foreigners owned less than 50 percent of Treasuries outstanding for the first time since March 2012. Overseas central banks cut the amount of bonds held for them by the Federal Reserve during the second quarter. The Bloomberg U.S. Treasury Bond Index fell 2.4 percent, the most since 2009, after Chairman Ben S. Bernanke said he might slow asset purchases as the economy improves...

Central bank sales probably were “far more significant in June,” and helped push two-year note yields to as high as 0.43 percent in June 25 from as low as 0.19 percent in May, Sebastien Galy, a senior foreign-exchange strategist in New York at Societe Generale SA, France’s largest bank, said in a telephone interview on July 16.

The 10-year Treasury yield hit 2.75 percent on 8 July, the highest since August 2011.

Since then, however, Treasuries have recovered some of their losses. The 10-year yield fell 10 basis points last week, touching a low of 2.46 percent on 17 July after Federal Reserve Chairman Ben Bernanke told Congress that the Fed will not slow its bond purchases if the economy does not perform as well as it expects.

US leading index flat, UK retail sales and Chinese home prices rise

US economic data on Thursday were mixed.

The Conference Board's index of US leading indicators was unchanged in June after having risen 0.2 percent in May.

However, the number of claims for unemployment insurance fell by 24,000 to 334,000 last week, the fewest since early May.

Also, the Federal Reserve Bank of Philadelphia’s general economic index increased to 19.8, the highest level since March 2011, from 12.5 the prior month.

Meanwhile, a report on Thursday showed that the UK economy is maintaining momentum.

Retail sales rose 0.2 percent in June. For the second quarter as a whole, retail sales contributed 0.1 percentage points of growth to gross domestic product after rising 0.9 percent from the first quarter.

Also maintaining momentum in June was China's home prices. Reuters reports that new home prices in 70 major Chinese cities rose 0.8 percent in June, slowing just slightly from May's increase of 0.9 percent.

The Chinese government had reported on Thursday that home prices had risen in June in 63 of 70 cities it monitors.

Compared with a year ago, new home prices in China rose 6.8 percent in June, the fastest pace since Reuters began calculating the data in January 2011.

Fed tapering to depend on data, BoE votes against more bond-buying

Federal Reserve Chairman Ben Bernanke reminded everyone on Wednesday that the Fed is by “no means on a preset course” as far as tapering of asset purchases is concerned. From Bloomberg:

“We’re going to be responding to the data,” Bernanke said today to the House Financial Services Committee. “If the data are stronger than we expect, we’ll move more quickly” to reduce purchases. If data “don’t meet the kinds of expectations we have about where the economy’s going, then we would delay that process or potentially increase purchases for a time.”

Indeed, US economic data on Wednesday suggest that tapering in the near future is by no means assured.

Housing starts fell 9.9 percent in June, driven by a 26.2 percent plunge in multi-family homes. Building permits fell 7.5 percent.

However, some economists attributed the decline in housing starts last month to the weather. “It looks like it's weather-related,” said Sam Bullard, a senior economist at Wells Fargo Securities. “On the surface it doesn't look good, but we are confident that starts activity is still going to climb higher in the months to come.”

Also, the Fed's Beige Book published on Wednesday indicated that the economy continued to grow at a modest to moderate pace in June and early July, with residential real estate and construction activity increasing at a moderate to strong pace in all districts.

Meanwhile, expectations for additional monetary stimulus from the Bank of England receded after minutes of the central bank's meeting earlier this month showed on Wednesday that all policy makers voted against more bond-buying.

In addition, a report on Wednesday showed that the number of Britons claiming jobless benefit fell by 21,200 in June, the eighth consecutive decrease and the fastest rate of decline in three years.

Markets fall amid positive US economic data

Markets fell on Tuesday. The S&P 500 fell 0.4 percent, its first decline in nine days. The STOXX Europe 600 fell 0.7 percent.

The fall in stocks came despite positive US economic data on Tuesday.

Industrial production rose 0.3 percent in June, the biggest increase since February.

The National Association of Home Builders/Wells Fargo housing market index rose to 57 in July, the highest level since January 2006, from 51 in June.

Consumer prices jumped 0.5 percent in June, the most in four months, driven by gasoline. The 12-month inflation rate rose to 1.8 percent last month, up from 1.4 percent in the prior month.

The annual inflation rate in the UK also rose in June to 2.9 percent from 2.7 percent in May. However, from the previous month, consumer prices fell 0.2 percent.

US retail sales rise, European bailout fund downgraded

US economic data on Monday were mixed.

Retail sales rose 0.4 percent in June, driven by a 1.8 percent gain at automobile and parts dealers. However, excluding autos and gasoline, retail sales fell 0.1 percent, the first decline in a year.

The Federal Reserve Bank of New York’s general economic index rose to 9.5 in July, the highest since February, from 7.8 in June.

Another report on Monday showed that business inventories rose 0.1 percent in May.

Following the economic reports on Monday, economists now see the US economy growing at 1.1 percent in the second quarter, down from a previous forecast of 1.4 percent.

Despite the mixed economic data, US stocks rose on Monday. The S&P 500 gained 0.1 percent, its eighth consecutive increase, making the current run the longest winning streak since January.

European stocks also gained on Monday, the STOXX Europe 600 rising 0.4 percent.

However, following its downgrade of France's credit rating at the end of last week, Fitch Ratings downgraded the European Financial Stability Facility's credit rating to AA+ from AAA on Monday.

"Following the downgrade of France's IDR (issuer default rating), the EFSF's long-term debt issues are not fully covered by 'AAA' guarantees and over-guarantees and, for debt issued before October 2011, by the cash reserve," Fitch said in a statement.

China's economy slows again

China's economy grew by 7.5 percent in the second quarter, data from the National Bureau of Statistics showed on Monday.

The second quarter growth was slower than the 7.7 percent growth in the first quarter, which was itself a decrease from the 7.9 percent growth in the last quarter of 2012.

However, the second quarter growth figure was in line with estimates from economists.

China's slowing growth trend was reflected in its industrial production for June, which rose 8.9 percent from the previous year compared with 9.3 percent for the first six months of 2013.

However, retail sales rose 13.3 percent year-on-year in June compared with 12.7 percent for the first half as a whole.

Stocks rose in Asia on Monday, with the Shanghai Composite in particular gaining 1.0 percent.

Economic data negative, France downgraded

Economic data on Friday were mostly negative.

In the US, consumer confidence cooled in July. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 83.9 from 84.1 in June.

Another report on Friday showed that US producer prices rose 0.8 percent in June, the biggest increase since September, after having risen 0.5 percent in May.

In China, data from the People's Bank of China on Friday showed that M2 money supply rose 14.0 percent in June from the previous year, down from 15.8 percent the previous month. New local-currency bank loans rose to 860.5 billion yuan last month though from 667.4 billion yuan in May, so non-traditional sources of finance took the brunt of the credit slowdown.

Slowing credit growth could hurt China's economic growth. Economists surveyed by Bloomberg estimated that China's economy grew 7.5 percent in the second quarter from a year ago, down from 7.7 percent growth in the first quarter.

And Finance Minister Lou Jiwei reportedly said in Washington on Thursday that the “expected GDP growth rate this year is seven percent”.

Meanwhile, Asia's other large emerging economy may be hurting even more. A report on Friday showed that India's industrial output shrank by 1.6 percent in May from a year ago. It had grown 1.8 percent in April.

Industrial production also shrank in the euro area in May, falling by 0.3 percent. It had risen by 0.5 percent in April.

Meanwhile, Europe's sovereign debt remains a lingering concern in financial markets. Portuguese 10-year yields rose 61 basis points to 7.51 percent on Friday amid concern a political dispute will result in new elections and endanger the nation’s financial-aid programme.

And the concern continues to spread to the core eurozone countries. Fitch Ratings downgraded France's credit rating to AA+ from AAA on Friday, citing its lack of growth and the build-up of debt.

Markets rise as BoJ leaves monetary policy unchanged

Global stock markets rose on Thursday, buoyed by Federal Reserve Chairman Ben Bernanke's statement on Wednesday that it would keep monetary policy accommodative “for the foreseeable future”.

In the US, the S&P 500 rose 1.4 percent to a new closing high of 1675.02. The 10-year Treasury yield fell 5.5 basis points to 2.57 percent

Elsewhere, the STOXX Europe 600 rose 0.6 percent while in Asia, the Nikkei 225 rose 0.4 percent and the Shanghai Composite jumped 3.2 percent.

Markets, however, received no additional boost from the Bank of Japan, which left monetary policy unchanged following its policy meeting on Thursday.

Elsewhere in Asia, though, monetary conditions appear to have tightened.

China's seven-day repurchase rate jumped 23 basis points on Thursday to 3.83 percent.

Bank Indonesia raised its key interest rate by 50 basis points to 6.50 percent on Thursday, its second consecutive rate hike.

China and Japan report weak data, Fed to maintain stimulus but Brazil tightens policy

A report on Wednesday showing China's trade data for June renewed concerns of an economic slowdown. China's exports fell 3.1 percent in June from the previous year while imports fell 0.7 percent.

Japan also released negative data on Wednesday. Its consumer confidence index fell 1.4 points to 44.3 in June.

Stock markets were mixed on Wednesday.

In Asia, the Nikkei 225 fell 0.4 percent but the Shanghai Composite jumped 2.2 percent.

Western stock markets were little changed on Wednesday. The STOXX Europe 600 rose 0.1 percent while the S&P 500 was flat.

Most investors were focused on the minutes of the Federal Reserve's monetary policy meeting last month as well as Chairman Ben Bernanke's appearance in Cambridge, Massachusetts on Wednesday. “Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” Bernanke reportedly said in response to a question after a speech.

While the Fed looks set to keep rates low for some time to come, Brazil's central bank raised its benchmark Selic rate by 50 basis points to 8.50 percent on Wednesday. It was the second consecutive policy meeting in which rates have been raised.

IMF lowers global growth forecast, S&P cuts Italy's credit rating

The International Monetary Fund has lowered its global growth forecast for 2013. In its latest World Economic Outlook, it says that global growth will be 3.1 percent this year, less than its forecast in April.

It notes that while old risks to global growth prospects remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies.

Indeed, a report in China on Tuesday showed that consumer price inflation accelerated to 2.7 percent in June from 2.1 percent in May. However, producer prices fell 2.7 percent in June from a year ago, its 16th consecutive month of year-on-year decline.

And in a reminder that old risks indeed remain, Standard & Poor's cut Italy's sovereign credit rating on Tuesday to BBB from BBB-plus and left its outlook on negative.

Meanwhile, there were mixed economic reports from the UK on Tuesday.

The National Institute of Economic and Social Research reported that it estimates that the UK economy grew 0.6 percent in the second quarter, double the growth rate in the first quarter.

The report came just after the Office for National Statistics reported that UK manufacturing output shrank 0.8 percent in May. A 4.9 percent jump in oil and gas output, however, left overall industrial production unchanged from the previous month.

Another report on Tuesday showed that the UK goods trade deficit grew to 8.491 billion pounds in May from 8.430 billion pounds in April. Over the three months to May, total exports were up 1.9 percent while imports were up 2.3 percent.

OECD sees better growth in developed economies but slower growth in emerging economies

The OECD reported on Monday that its latest composite leading indicators point to diverging growth patterns in major economies.

The CLI for the OECD area as a whole rose to 100.6 in May from 100.5 in April, with individual country CLIs indicating improvements in growth in most major OECD economies.

However, the OECD said that the CLIs for large emerging economies point to stabilising or slowing momentum.

Meanwhile, there were mixed economic data from Japan on Monday.

Japanese bank lending rose 1.9 percent in June, its biggest annual increase since July 2009. Its current account surplus rose 58.1 percent in May from a year earlier.

However, the Cabinet Office's economy watchers survey showed that the current conditions index fell to 53.0 in June from 55.7 in May. The future conditions index fell to 53.6 from 56.2.

Economic data from Germany on Monday were negative.

German exports fell 2.4 percent in May. With imports rising 1.7 percent, the trade surplus narrowed to 13.1 billion euros from 18.0 billion euros in April.

German industrial production fell 1.0 percent in May. It was the first decline since January and followed a 2.0 percent rise in April.

US Treasury yields rising as Fed tapering expected

The better-than-expected United States employment report for June sent Treasury prices down again last week.

Nonfarm payrolls increased by 195,000 in June, the Labor Department reported on Friday. This was better than the 165,000 increase estimated by economists surveyed by Bloomberg. Revisions added 70,000 jobs to the previous estimates for April and May.

The unemployment rate in June was unchanged from the previous month at 7.6 percent.

The news sent US Treasuries down. The yield on the US 10-year Treasury note rose to 2.74 percent last week, up 25 basis points from the previous week and hitting the highest level since August 2011.

The rising trend in Treasury yields in recent weeks has been driven by expectations of a reduction in debt purchases by the Federal Reserve. Fed Chairman Ben Bernanke had announced last month at a press conference after its monetary policy meeting that if incoming data are “broadly consistent” with its economic forecast, it would moderate the pace of debt purchases later this year.

A poll by Reuters on Friday showed that of 17 dealers who answered a question on the expected timing of the reduction in Fed purchases, 11 called for September, three said October, two said December and one said the first quarter of 2014.

According to Reuters, economists at Goldman Sachs and JP Morgan specifically cited the June employment report as a factor in bringing forward their expected timing of the slowing of Fed purchases.

However, Bill McBride pointed out in a post last week that all of the data released since the Fed's announcement in June of a possible slowing of debt purchases has been worse than its forecasts. He thinks that the economy will have to pick up pace before it can be said to be broadly consistent with those projections and allow the Fed to start to taper its debt purchases.

US employment increases by 195,000 in June

US employment growth maintained its momentum in June. Nonfarm payrolls increased by 195,000 last month, better than the 165,000 projected by economists.

Revisions added 70,000 jobs to the employment figures for April and May. The unemployment rate in June was unchanged from the previous month at 7.6 percent.

Predictably, US Treasuries fell on the news. The 10-year yield rose 22 basis points to 2.72 percent at 4 PM in New York, the highest since August 2011.

Stocks, however, shrugged off the rise in interest rates. The S&P 500 rose 1.0 percent.

Also reporting good news on Friday was Japan. Its index of coincident economic indicators rose 0.8 point in May. And in a sign that growth is likely to be maintained, the index of leading economic indicators jumped 2.8 points.

However, Germany had negative data to report on Friday. Factory orders there fell 1.3 percent in May, its second consecutive decline.

ECB expects rates to stay low for extended period

As expected, the European Central Bank left interest rates unchanged at its monetary policy meeting on Thursday.

Unexpectedly, however, ECB President Mario Draghi told a press conference after the meeting that the central bank “expects the key ECB interest rates to remain at present or lower levels for an extended period of time”.

Markets predictably jumped in reaction to the announcement. The STOXX Europe 600 rose 2.3 percent and the euro declined 0.7 percent against the US dollar.

New Bank of England governor Mark Carney did not go quite as far as his ECB counterpart. After its meeting on Thursday which left monetary policy unchanged, the BoE said in its statement: “The implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.”

Perhaps the BoE's reticence in comparison with the ECB is because recent developments in the UK economy have actually been quite positive.

Following the robust data earlier this week, a report from mortgage lender Halifax on Thursday showed that British house prices rose 0.6 percent in June. Prices were 3.7 percent higher in the April-June period than a year ago, the sharpest annual increase in nearly three years.

US report positive employment data, other data mixed

Economic data on Wednesday were mixed.

In the US, employment data were positive. ADP reported that private sector employment increased by 188,000 in June, up from the 134,000 gain in May while the Labor Department reported that initial claims for state unemployment benefits fell 5,000 to 343,000 last week.

However, other reports on Wednesday showed possible signs of weakness in the US economy. A report from the Commerce Department showed that exports fell 0.3 percent in May, resulting in a wider trade deficit. The Institute for Supply Management's services index fell to 52.2 in June, the lowest level since February 2010, from 53.7 in May.

In China, data showed that services sector activity expanded in June but failed to allay concerns of a slowing economy. The services PMI published by the National Bureau of Statistics fell to a 9-month low of 53.9 in June from 54.3 in May. The Markit/HSBC services PMI edged up to 51.3 in June from 51.2 in May but the new orders index fell to 50.5 in June, the lowest since November 2008.

In the euro area, services sector activity contracted again in June but at a slower rate. Markit's services PMI rose to 48.3 last month from 47.2 in May. That helped push the composite index up to 48.7 from 47.7.

Also encouragingly, retail sales in the euro zone rose 1.0 percent in May, its first increase in four months.

Meanwhile, the UK continued to report robust economic data on Wednesday. The services PMI jumped to 56.9 in June from 54.9 in May. Other data on Wednesday showed that lenders see a further significant rise in mortgage demand in the next three months while a British Retail Consortium survey suggested a major easing in price pressures.

US auto sales, house prices and factory orders rise

US economic data on Tuesday were quite positive. Reuters reports:

Overall auto industry sales in June are on track to increase about 10 percent, and according to GM, will hit their strongest annual sales pace since November 2007...

A report by data analysis firm CoreLogic showed house prices rose 2.6 percent in May from April and were up 12.2 percent compared to May last year, the biggest year-over-year increase since February 2006...

In a separate report, the Commerce Department said new orders for manufactured goods increased 2.1 percent after advancing 1.3 percent in April. Factory orders rose in most categories in May.

US economy shows signs of growth amid mixed data elsewhere

Economic data on Monday were mixed.

In the US, manufacturing activity grew in June. The Institute for Supply Management's manufacturing PMI rose to 50.9 from 49.0 in May.

Markit's US manufacturing PMI also indicated growth in June despite falling to 51.9 from 52.3 in May.

Another report from the US showed that construction spending rose 0.5 percent in May to its highest level in nearly four years.

In the euro area, the unemployment rate rose to a record high of 12.1 percent in May from 12.0 percent in April even as inflation accelerated to 1.6 percent in June from 1.4 percent in May.

However, in a sign that the eurozone recession may be near to an end, Markit's manufacturing PMI for the region rose to 48.8 in June from 48.3 in May.

Meanwhile, the UK economy showed further signs of recovery on Monday. The Markit/CIPS manufacturing PMI rose to 52.5 in June from 51.5 in May. Home loans rose to 58,242 in May, the most since 2009, from 54,354 in April.

Japan's economy is also showing positive momentum. The Bank of Japan's Tankan report on Monday showed that its index of sentiment among large manufacturers rose 12 points to four in the three months to June, the first time in nearly two years that it has been positive.

However, China provided further signs of a slowing economy on Monday. The HSBC manufacturing PMI fell to 48.2 in June from 49.2 in May while the official manufacturing PMI fell to 50.1 from 50.8.

Market rally in first half of year ends on volatile note

After a volatile month, global stock markets stabilised last week.

The MSCI All Country World Index rose 1.3 percent last week, partially recovering the previous week's 3.2 percent loss that had been driven by concerns of a tapering of bond purchases by the Federal Reserve.

For the entire month of June, the MSCI All Country World Index was down 3.1 percent. That cut its gain for the first half of the year to 4.7 percent.

Among the major stock markets, Japan's was the only one to have gained in June. It was also the best-performing stock market among major stock markets for the first half of the year.

MSCI index performance
	Local currency (percent)		US dollars (percent)
	June	1H 2013	June	1H 2013
USA	-1.50	12.50	-1.50	12.50
Japan	0.01	32.59	1.66	15.41
UK	-5.58	5.16	-5.54	-1.88
Germany	-4.50	1.85	-4.21	0.42
France	-5.40	2.68	-5.11	1.23
Hong Kong	-5.73	-2.86	-5.65	-2.93

In line with the rebound in stock markets, government bonds also recovered last week. The US 10-Treasury yield fell four basis points to 2.49 percent last week after having risen 40 basis points the previous week.

In his latest investment outlook published last week, William Gross described the recent market volatility as a case of market panic in response to the Federal Reserve's announcement of a likely tapering of its bond purchases. Investors had taken on too much risk and leverage. As they tried to adjust their positions in response to the Fed's announcement, selling begat more selling, hence the sharp fall in bond prices.

However, Gross advised bond investors not to jump ship now. He thinks that continued low economic growth and inflation will probably prevent the Fed from tapering its bond purchases. He also thinks that the 10-year Treasury should be yielding 2.20 percent, somewhat lower than at present.

In contrast to Gross, John Hussman says in his latest market comment today that a reduction in the pace of the Fed’s bond purchases is likely in the next few months. While he also sees little inflation in the near term, he says that inflation risks will become larger in the back half of this decade. He says that the current pace of purchases increases the risk of systemic disruption and financial distortion as well as the difficulty of eventually normalising monetary policy.

Still, Hussman thinks that Treasury bonds remain worthwhile investments. He thinks that weak economic growth and the lack of immediate inflation pressures will likely dissuade the Fed from selling its bond holdings and also keep short-term rates near zero for a very long time. This in turn is expected to support demand for medium and long-term Treasury debt.

However, Hussman is not as optimistic for stocks and corporate bonds. He thinks that the risk premiums for these assets have already become too thin. He says that stock market internals in particular have broken down “decisively” and that “this may be the highest level investors will see on the S&P 500 for quite some time”.