BoJ expands lending programme, PBC raises reserve requirement

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

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

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

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

There was some more bad news in Japan on Tuesday.

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

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

But the BoJ does not seem overly concerned.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Steve Keen on rising debt trend and its end

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

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

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

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

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

Markets fall, South Korea raises rates

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But inflation in the UK may finally be moderating.

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

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

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

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

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

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

ECB signals rate hike, euro falls

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Japan confirms first quarter GDP contraction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

European retail sales and German factory orders rise in April

Economic reports from Europe on Tuesday were quite positive.

Eurostat reports that retail sales were up in April.

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

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

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

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

Japan's coincident index up in April

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

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

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

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

With economy weakening, is QE3 coming?

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

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

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

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

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

US employment growth slows, global output index rises

The economic reports on Friday were mixed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

US data weak, Europe to rescue Greece

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

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

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

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

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

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

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

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

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

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

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

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

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

Thailand raises rates, US stocks fall, global manufacturing slows

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

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

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

US stocks fell sharply. From MarketWatch:

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

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

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

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

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

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

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

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

Indeed, Treasury yields fell, as did oil prices.

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

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

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

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

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

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

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

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

US economy weaker, eurozone inflation lower

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

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

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

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

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

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

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

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

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

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

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

Japanese economy beginning to recover

Japan's economy may have started to recover in April after a sharp contraction in March. From Reuters:

Japan's industrial output edged up in April after a record fall in March and companies expect bigger gains in the next two months, adding to evidence that a recovery from the March 11 earthquake and tsunami is under way.

Output rose 1.0 percent last month, below analysts' median 2.8 percent forecast, but manufacturers sharply increased their forecast for May, predicting output would rise 8.0 percent compared with the previous 2.7 percent forecast, data from the Ministry of Economy, Trade and Industry showed on Tuesday.

Companies expect the recovery to continue in June with production seen rising 7.7 percent, in a sign they are making headway in restoring supply chains and bringing back production lines idled by the disaster and power blackouts...

Underscoring lingering weakness in consumption, household spending fell 3.0 percent in April from a year earlier, after a record 8.5 percent annual drop seen the previous month and against a median forecast for a 2.9 percent annual decline, government data showed.

The jobless rate inched up to 4.7 percent from 4.6 percent seen in March, as expected, while the availability of jobs fell to 0.61 from 0.63 in March, below 0.62 expected by economists, meaning that there were more than three jobs available for every five job seekers.

In another indication that Japanese industry is recovering, Reuters also reports a rise in the manufacturing PMI in May.

Japanese manufacturing activity rebounded from a two-year low in May and expanded for the first time in three months as firms restored supply chains disrupted by the March 11 earthquake and tsunami, a survey showed on Tuesday.

The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 51.3 in May from 45.7 in April, which was the lowest since April 2009.

Eurozone economy shows signs of slowing

After accelerating in the first quarter, the economy in the euro area may have slowed in the second quarter.

In the first quarter of 2011, the eurozone economy grew by 0.8 percent, accelerating from an increase of 0.3 percent in the fourth quarter of last year.

Surveys of businesses and consumers conducted by the European Commission indicate that the economy has slowed since then. The findings of the latest survey were released on Friday and it showed that that the Economic Sentiment Indicator fell to 105.5 in May from 106.1 in April.

The ESI has fallen 2.5 points since it peaked at 108.0 in February. This is the largest three-month fall in the indicator since March 2009 when the economy was still in recession.

For the individual sectors, the indicator for industry fell to 3.9 in May from 5.6 in April, services fell to 9.2 from 10.4, retail trade fell to -2.5 from -1.8 and construction fell to -24.6 from -24.3. Only the consumer sector improved with its indicator rising to -9.8 from -11.6.

Among the major euro area economies, the ESI for Germany slipped by 0.1 but fell by 1.9 for France and 2.7 for Italy.

Another indication of a slowing eurozone economy had come at the beginning of last week. Markit Economics had reported on Monday that its flash eurozone composite output index had fallen to a seven-month low of 55.4 in May from 57.8 in April. The flash manufacturing PMI fell to a seven-month low of 54.8 in May from 58.0 in April while the services index fell to a five-month low of 55.4 from 56.7.

The fall in the composite index in May was the biggest since November 2008 when the economy was deep in recession.

US and eurozone economies show signs of weakening

US economic data on Friday were weak.

MarketWatch reports that pending home sales fell in April.

The National Association of Realtors' pending home sales index fell 11.6% to a reading of 81.9 in April, from a downwardly revised 92.6 in March. (March’s index initially was reported to be 94.1.)

MarketWatch also reports that consumer spending lost momentum in April.

Consumer spending rose by the smallest amount in three months during April, government data showed Friday, in a further sign of erosion in spending momentum due to higher prices at the gas pump.

Consumers’ spending rose 0.4% last month, the Commerce Department estimated.

Meanwhile, personal incomes rose 0.4% in April. Income has risen for seven straight months...

Adjusted after-tax incomes were flat in April for the second straight month, and spending increased 0.1% for the second straight month.

Adjusted for inflation, spending on durable goods and non-durable goods was flat in April. Spending on services rose 0.1%...

Consumer prices rose 0.3% in April, as measured by the personal consumption expenditure price index. Prices were 2.2% higher compared with a year ago, up from 1.8% in March...

Core consumer prices, which exclude volatile food and energy prices, rose 0.2% in April and are up 1.0% in the past year. This is up from a record-low 0.7% in December but still well within the Fed’s comfort zone.

The good news is that consumer sentiment improved in May. Again from MarketWatch:

A gauge of consumer sentiment rose in May as expectations improved, according to the Thomson Reuters/University of Michigan survey data released Friday.

The overall sentiment gauge increased to 74.3 in May from 69.8 in April. However, the gauge remains below a reading of 77.5 in February before prices for gasoline spiked.

Eurozone economic data on Friday were also weak. Bloomberg reports:

European confidence in the economic outlook weakened for a third straight month in May as the region’s worsening debt crisis and surging commodity costs clouded growth prospects.

An index of executive and consumer sentiment in the 17- member euro region slipped to 105.5 from 106.1 in April, the European Commission in Brussels said today. Economists had forecast a drop to 105.7, the median of 27 estimates in a Bloomberg survey showed.

There was some consolation in the euro area in the form of a drop in German inflation in May. From Bloomberg:

Inflation in Germany, Europe’s largest economy, unexpectedly eased in May after oil prices dropped from a 2 1/2-year high.

The harmonized inflation rate fell to 2.4 percent from 2.7 percent in April, the Federal Statistics Office in Wiesbaden said today. Economists had expected inflation to hold at the highest level since September 2008, the median of 17 forecasts in a Bloomberg News survey showed. On the month, consumer prices declined 0.2 percent.

A fall in inflation would probably not have been welcomed in Japan. Thankfully, there was none, at least in April. From AFP/CNA:

Japan's core consumer prices rose for the first time in more than two years, mainly as a result of an increase in fuel prices, government data showed Friday.

The core consumer price index, which excludes volatile food prices, rose 0.6 percent in April from a year earlier, the first increase since December 2008.

And there were other encouraging signs on Friday for the Japanese economy. Reuters reports some stabilisation in retail sales in April.

Japanese retail sales fell 4.8 percent in April from a year earlier, but the pace of decline slowed from the previous month, government data showed on Friday, as worries about the impact from the March earthquake and tsunami started to ease.

US first quarter growth unchanged, stocks rise

US first quarter GDP growth was unchanged from the advance estimate. Bloomberg reports the latest numbers as well as other US economic data:

Consumer spending cooled in the first quarter more than previously estimated as the jump in food and fuel costs held back the biggest part of the U.S. economy.

Household purchases rose at a 2.2 percent annual pace from January through March, less than the 2.7 percent calculated last month and short of the 2.8 percent median forecast of economists surveyed by Bloomberg News, according to Commerce Department figures issued today in Washington. The economy grew at a 1.8 percent pace last quarter, the same as previously calculated...

The number of workers filing applications for unemployment insurance benefits increased by 10,000 to 424,000 in the week ended May 21, according to data from the Labor Department. The median forecast of economists surveyed by Bloomberg projected claims would decrease to 404,000...

A monthlong slide in consumer confidence ended last week as gasoline prices retreated, another report showed. The Bloomberg Consumer Comfort Index rose to minus 48.4 in the period to May 22 from a nine-month low of minus 49.4 the prior week. Readings of minus 40 or less are generally associated with recessions and their aftermaths, the report said...

Today’s report also offered a first look at profits. Earnings before taxes were up 1.3 percent from the prior quarter, the smallest gain in more than two years, after rising 2.3 percent in the prior period. They climbed 8.5 percent from the same time last year.

The smaller increase in corporate profits did not stop investors from pushing up stocks on Thursday. Again from Bloomberg:

U.S. stocks gained a second day as higher-than-estimated corporate profits at companies including Tiffany & Co. (TIF) overshadowed data showing the economy grew at a slower rate than forecast and jobless claims unexpectedly rose...

The Standard & Poor’s 500 Index advanced 0.4 percent to 1,325.69 at 4 p.m. in New York. The Dow Jones Industrial Average increased 8.10 points, or 0.1 percent, to 12,402.76. Both benchmark gauges yesterday snapped a three-day decline.

Stock gains came despite more worries over eurozone sovereign debt.

Earlier today, stocks extended declines after Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the International Monetary Fund may not release its portion of a 12 billion-euro ($17 billion) aid payment to Greece next month.

Japanese exports and US durable goods orders fall

Japan's trade balance fell into deficit in April. AFP/CNA reports:

Japan fell into a trade deficit in April as exports tumbled at the fastest pace in 18 months on supply chain disruptions after the March 11 earthquake and tsunami, official data showed Wednesday.

It was the first time in 31 years that Japan suffered a trade deficit for the month of April, according to the finance ministry...

Exports fell 12.5 per cent, the fastest pace of decline since October 2009, with shipments of automobiles diving 67.0 per cent and electronics parts such as microchips dropping 19.0 per cent...

Overall imports in April rose 8.9 per cent to post growth for the 16th consecutive month as purchases of petroleum products shot up 62.2 per cent on higher prices and demand.

The reports from the US on Wednesday were also negative. Bloomberg reports:

Orders for U.S. durable goods dropped more than forecast in April, reflecting a slump in aircraft demand and disruptions in supplies of auto parts stemming from the earthquake in Japan.

The 3.6 percent decrease in bookings for goods meant to last at least three years was the biggest since October and followed a 4.4 percent surge in March that was larger than previously estimated, a Commerce Department report showed today in Washington. Economists projected a 2.5 percent April decline, according to the median forecast in a Bloomberg News survey...

While manufacturing has spearheaded the economic recovery, housing has struggled. Home prices dropped 2.5 percent in the first quarter from the prior three months, the Washington-based Federal Housing Finance Agency said today.

The OECD, though, has raised its forecast for economic growth in the US as well as the euro area. From Reuters:

Global economic recovery is on track, helped by a stronger United States, but threats ranging from high oil prices to European sovereign debt crises could yet combine to create a bout of stagflation, the OECD said on Wednesday...

In its twice-yearly Economic Outlook, the OECD forecast world growth would ease to 4.2 percent this year from 4.9 percent in 2010 before accelerating to 4.6 percent in 2012...

The OECD raised its outlook for the United States from its last report in November, forecasting growth this year of 2.6 percent, compared with an estimate of 2.2 percent in November.

It was also slightly more optimistic about the outlook for growth in the euro zone, forecasting the bloc's economy would expand 2.0 percent in 2011, up from 1.7 percent in November.

But it slashed Japan's forecasts after the country's triple disaster in March. It estimated the country's economy would contract 0.9 percent this year, having forecast growth of 1.7 percent in November.

US new home sales rise, eurozone industrial orders fall

Economic reports on Tuesday were mixed.

Bloomberg reports the US data:

Purchases of new houses rose in April for a second month as the market struggled to recover from a record low.

Sales climbed 7.3 percent to a 323,000 annual pace last month, figures from the Commerce Department showed today in Washington. The median estimate in a Bloomberg News survey of economists called for sales at a 300,000 annual rate...

Another report today showed manufacturing, which led the economy out of the recession, may be cooling. The Federal Reserve Bank of Richmond’s factory index dropped to minus 6 this month, the lowest reading since April 2009. Negative numbers indicate manufacturing was shrinking.

In the euro area, Bloomberg reports that industrial orders fell in March.

European industrial orders declined more than economists forecast in March, led by a drop in demand for durable consumer goods, such as appliances and furniture.

Orders in the euro area slipped 1.8 percent from February, when they increased 0.5 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a drop of 1.1 percent, the median of 17 estimates in a Bloomberg News survey showed. Orders jumped 14.1 percent from a year earlier.

But the euro area's largest economy had relatively positive data to report. From Bloomberg:

German business confidence remained unexpectedly unchanged in May as booming exports and rising company spending boosted economic growth.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, held at 114.2 from April. Economists forecast a decline to 113.7, the median of 24 forecasts in a Bloomberg News survey showed...

German gross domestic product rose 1.5 percent in the first quarter from the previous three months, the Federal Statistics Office said today. That’s the fastest growth since the second quarter of 2010. Exports advanced 2.3 percent and construction spending jumped 6.2 percent.

In the UK, retail sales slowed in May but were better than expected. Reuters reports:

Retail sales grew more slowly in May, although they beat expectations, and firms are cautious about the outlook for growth next month, a survey by the Confederation of British Industry showed on Tuesday...

The CBI Distributive Trades survey's reported sales balance fell to +18 in May from +21 in April. That was above analysts' expectations for a reading of +10, but below its long-run average.

Markets hit as debt concerns worsen

Investors were unquestionably nervous on Monday. Bloomberg reports:

Global stocks sank the most in two months, while the euro touched an all-time low versus the Swiss franc and commodities plunged, amid signs Europe’s government- debt crisis is worsening and the economic recovery is slowing. Costs to protect Greek debt from default surged to a record.

The MSCI All-Country World Index sank 1.8 percent at 4:30 p.m. in New York. The Standard & Poor’s 500 Index retreated 1.2 percent and Italy’s FTSE MIB Index slid 3.3 percent. Ten-year bond yields reached euro-era records in Greece and Ireland and climbed in Portugal, Spain and Italy. The euro fell below $1.40 for the first time since March as the dollar strengthened versus all 16 major peers. Oil and copper lost at least 2.4 percent.

U.S. equities followed European shares lower after Italy’s credit-rating outlook was cut by S&P on May 20 and Spanish Prime Minister Jose Luis Rodriguez Zapatero’s Socialist party suffered losses in local elections amid a backlash over austerity measures...

The Chicago Fed national index, which draws on 85 economic indicators, was minus 0.45 in April versus 0.32 in March. A reading of less than zero indicates below-trend growth in the national economy and a sign of easing inflation pressures.

Flash eurozone and China PMIs fall in May

The eurozone economy accelerated in the first quarter but PMI data released today suggest that it may not escape a slowdown in the second quarter. The Wall Street Journal reports:

Growth in the euro zone's private sector eased more than expected to its weakest pace in seven months in May, led by a sharp slowdown in manufacturing, the preliminary results of a survey by financial-information firm Markit showed Monday.

The flash reading of the euro zone's composite-output index, a gauge of activity based on partial results of a survey of manufacturing and services firms, dropped to 55.4 in May from 57.8 in April. A reading above the 50 level indicates an expansion in activity...

The manufacturing-purchasing-managers' index dropped much more than expected to 54.8 in May, from 58.0 the previous month, while the euro-zone services-business-activity index fell to a five-month low of 55.4, from 56.7 in April.

Earlier, China had also reported a slight fall in its manufacturing PMI. Bloomberg reports:

A Chinese manufacturing index fell to its lowest level in 10 months, adding to signs that economic growth is cooling after the government raised interest rates and curbed lending to rein in inflation.

The preliminary purchasing managers’ index compiled by HSBC Holdings Plc and Markit Economics dropped to 51.1 in May from a final reading of 51.8 in April. A number above 50 indicates expansion.

Japan faces recession, China worries about bubbles, Europe concerned over sovereign debt

Despite the Japanese economy shrinking in the first quarter, the Bank of Japan did not add to monetary stimulus on Friday. AFP/CNA reports:

The Bank of Japan on Friday left its key rate unchanged at between zero and 0.1 per cent as it continues to assess measures to soothe an economy pushed into recession by the March 11 earthquake and tsunami.

"Japan's economy faces strong downward pressure, mainly on the production side, due to the effects of the earthquake disaster," the central bank said in a statement...

In its assessment Friday, the BoJ said the economy "is expected to return to a moderate recovery path from the second half of fiscal 2011 as supply-side constraints ease and production regains traction."

The BoJ's counterpart in China was also in the news on Friday. Again from AFP/CNA:

The head of China's central bank said Friday too many people were saving too much money, which could lead to asset bubbles, adding Beijing had to find a way to promote growth and curb inflation...

"China is an economy with a high savings rate, which may lead to high investments and may cause overheating and overcapacity in some sectors and fuel bubbles," Zhou Xiaochuan, governor of the People's Bank of China, said...

Zhou said the outlook for the global economic recovery was clearer now than last year but many uncertainties remained.

He added that China needed to take "counter-cycle" policies as its economic cycle was different from that of developed nations...

Zhou also reiterated China would take a "gradual" approach to making the yuan fully convertible, as Beijing continues to promote the international status of the currency.

While China worries about excessive savings, Europe has debt problems that threatened to get worse on Friday. From Bloomberg:

Greek bonds led declines among peripheral euro-area nations, sending 10-year yields to a record, on concern a restructuring of its debt would reignite Europe’s sovereign-debt crisis.

The spread, or yield difference, between benchmark Greek debt and German bunds widened to the most on record. Fitch Ratings said it downgraded Greece’s credit ratings by three levels to B+ from BB+, four notches below investment grade. German bonds rallied as European Central Bank Council member Jens Weidmann said the bank may no longer be able to accept Greek bonds as collateral if maturities are extended, stoking demand for the relative safety of Europe’s benchmark debt...

Yields on 10-year Greek debt surged 59 basis points to a record 16.59 percent, and was at 16.57 percent as of 4:45 p.m. in London. The 6.25 percent security due in June 2020 dropped 1.705, or 17.05 euros per 1,000-euro face amount, to 53.17. Two- year note yields jumped 36 basis points to 25.22 percent.

Data show struggling US economy

US data on Thursday looked weak. Bloomberg reports:

Sales of existing U.S. homes unexpectedly declined, manufacturing in the Philadelphia region slowed and consumer confidence dropped, pointing to an economy that is struggling to regain momentum following the surge in energy costs.

Purchases of existing homes decreased 0.8 percent to a 5.05 million annual pace in April, the National Association of Realtors said today in Washington...

Manufacturers, facing a less pressing need to rebuild inventories and supply disruptions following the earthquake and tsunami in Japan, may also be slowing down. The Federal Reserve Bank of Philadelphia’s general economic index fell to 3.9, the weakest reading since October, from 18.5 a month earlier...

The Bloomberg Consumer Comfort Index declined to minus 49.4 in the period to May 15, the worst reading since August, from the prior week’s minus 46.9. A gauge of personal finances plunged to the weakest level since October 2009, and a monthly measure of economic expectations held at a seven-month low...

The Conference Board’s index of leading indicators, a gauge of the outlook for the next three to six months, fell 0.3 percent in April, the first drop in 10 months, the New York- based group said. The measure was depressed by a pickup in jobless claims that reflected temporary setbacks including auto- plant shutdowns caused by the disaster in Japan.

On a more positive note, the unemployment picture brightened a little.

Another report today showed fewer Americans than forecast filed first-time claims for unemployment benefits last week. Applications declined by 29,000 to 409,000, according to figures from the Labor Department. Economists projected 420,000, according to the median forecast in a Bloomberg survey.

UK data on Thursday were positive. From Reuters:

The Royal wedding holiday and record warm weather encouraged shoppers to splash out in April, giving hard hit retailers a one-off boost but doing little to change the picture of a fragile economic recovery...

The Office for National Statistics said sales volumes including automotive fuel rose 1.1 percent last month, well above analysts' forecasts for an increase of 0.8 percent, and the biggest rise for a month of April since 2002...

There was some good news from a CBI survey that showed an improvement in factory orders in May. But firms expected output growth to weaken in the coming months, and separate data showed car output fell more than 12 percent last month.

Japanese economy contracts in first quarter

Japan's economy shrank more than expected in the first quarter. Reuters reports:

Japan's economy shrank in the first quarter at nearly double the pace expected, effectively slipping into recession as the devastating earthquake in March hit business spending and private consumption.

Gross domestic product fell 0.9 percent in the first quarter, much more than a median market forecast for a 0.5 percent contraction.

For the third consecutive quarter, net exports contributed negatively to growth.

Net exports shaved 0.2 percentage point off GDP, against the median estimate that it would trim 0.1 point off growth.

Private consumption, which accounts for about 60 percent of the economy, was down 0.6 percent against the median forecast of a 0.5 percent decline, marking the second straight quarter of decrease.

Corporate capital spending fell 0.9 percent against the market forecast of a 1.2 percent decline.

US industrial production and housing starts weak, UK inflation jumps

US economic data on Tuesday were disappointing. Bloomberg reports:

Industrial production in the U.S. unexpectedly stalled in April and housing starts dropped, posing hurdles to a rebound from the first quarter’s economic slowdown.

Output at factories, mines and utilities was unchanged after a 0.7 percent gain in March, figures from the Federal Reserve showed today, led by a drop in auto production after parts supplies were disrupted by the earthquake and tsunami in Japan. Work began on 523,000 houses at an annual pace, down 11 percent, as tornadoes and floods in the South shut down construction sites.

Also disappointing was an unexpected acceleration in UK inflation in April. Reuters reports:

Annual inflation hit a 2-1/2 year high last month and core prices rose at a record pace, but central bank governor Mervyn King warned that reacting too quickly to rising prices could harm the economy.

Consumer prices rose a bigger-than-expected 4.5 percent year-on-year, the fastest pace of increase since October 2008, propelled by soaring travel costs around Easter and higher duty on alcohol and tobacco.

The Bank of England has so far reacted minimally to the high UK inflation figures and is likely to continue to do so.

"The MPC (monetary policy committee) judges that attempting to bring inflation to the target quickly risks generating undesirable volatility in output," King wrote, saying the overshoot was largely due to a rise in VAT sales tax in January and higher energy and import prices.

Japan's machinery orders rise even as consumer confidence plunges

There were some contradictory reports from Japan on Monday.

AFP/CNA reports that Japan's core machinery orders were up in March.

Japan's core machinery orders, a leading indicator of corporate capital spending, posted a surprise rise in March despite the devastating earthquake and tsunami, data showed Monday.

The core private-sector machinery orders grew 2.9 percent from February, beating market expectations of a fall of more than nine percent due to the severity of the March 11 disaster...

Core machinery orders for the three months to March rose 3.5 percent from the previous quarter and are expected to rise a further 10.0 percent in the April-June term, according to the Cabinet Office.

However, consumer confidence plunged in April. Again from AFP/CNA:

Japanese consumer confidence fell at the fastest pace on record in April from the previous month, data showed Monday, after March's earthquake, tsunami and a nuclear crisis cast a shadow on the economy.

The data showed consumer sentiment worsening to a two-year low of 33.1 in April from 38.6 in March, when the index plunged after Japan's biggest recorded earthquake and a tsunami on March 11 that devastated the northeast coast.

In the euro area, April inflation was confirmed at 2.8 percent and Portugal had its bailout approved to help it stave off a sovereign debt crisis.

Meanwhile, the US is also having its own debt problem. From Reuters:

U.S. Treasury investors were calm on Monday as the United States hit its debt limit, with prices rising on faith lawmakers will reach a deal to increase the debt ceiling before a default...

The U.S. Treasury Department said it can stave off default until early August, in part by tapping federal pension funds, as the nation reached its $14.294 trillion debt limit.

Relatively weak US economic data on Monday helped keep bond prices up. From Bloomberg:

The Federal Reserve Bank of New York’s general economic index fell to 11.9 from a one-year high of 21.7 in April, the central bank reported today. Measures of orders and sales fell less than the headline reading, while managers were more upbeat about the future and the group’s hiring index climbed to the second-highest level on record...

The National Association of Home Builders/Wells Fargo sentiment index held at 16 this month, data from the Washington- based group showed. A measure of sales expectations for the next six months fell to an eight-month low.

US inflation is mainly, but no longer just, about energy

Energy prices continued to drive inflation in the United States in April but prices of other items are also accelerating.

On Friday, the Labor Department reported that the consumer price index increased 0.4 percent in April. Compared to a year ago, the consumer price index in April increased 3.2 percent, a rate of increase higher than that in March when it rose 2.7 percent and, indeed, the highest rate since October 2008.

Energy was the main contributor to inflation in April. Energy prices rose 2.2 percent in April from the month before.

Perhaps more significantly, however, there was an acceleration in the rate of inflation in the prices of components that are widely considered as core. Consumer prices excluding food and energy rose 0.2 percent in April, higher than the 0.1 percent increase in March. The rate of increase in consumer prices excluding food and energy in the 12 months to April was 1.3 percent, increasing for the sixth consecutive month.

The Labor Department also reported producer price data last week that also showed signs of accelerating inflation.

Producer prices rose 0.8 percent in April compared with 0.7 percent in March. Producer prices rose 6.8 percent in the 12 months to April, sharply higher than the 5.8 percent increase in the 12 months to March and the highest rate of increase since September 2008.

Energy was again the main contributor to producer price inflation in April, rising by 2.5 percent from March.

Producer prices excluding food and energy rose 0.3 percent in April, the same rate as the month before. The rate of increase in producer prices excluding food and energy in the 12 months to April was 2.1 percent, increasing for the fifth consecutive month.

A third report from the Labor Department last week also showed signs of accelerating inflation.

Its report on import and export prices showed that import prices rose 2.2 percent in April. This followed a rise of 2.6 percent in March and marks the first time import prices have increased by more than two percent in consecutive months since June 2008. The latest increase means that import prices are 11.1 percent higher than one year ago.

Again, energy was the main source of higher prices. Fuel import prices rose 6.7 percent in April, accounting for approximately 80 percent of the overall increase in import prices.

However, nonfuel import prices also showed a substantial rise of 0.6 percent in April. Prices for nonfuel imports recorded a second consecutive 12-month increase of 4.3 percent in April, the largest year-over-year increase since October 2008.

Imports may have been a source of disinflationary pressure in the US for much of the past 20 years or so but that is no longer the case now.

Euro area reports strong growth in first quarter, US reports mixed data

The eurozone economy performed surprisingly well in the first quarter. From Reuters:

Powerful performances by the German and French economies propelled growth in the euro zone well above forecasts in the first quarter while also highlighting the yawning gap between the bloc's strong and weak.

The 17-nation currency area expanded by 0.8 percent in the first three months of the year, data showed on Friday, fueled by startling 1.5 percent GDP growth in Germany, while the French economy grew 1.0 percent, driven in part by consumer demand...

The European Commission forecast quarter-on-quarter growth in the euro zone would slow to 0.3 percent in the second quarter and then stabilize at 0.4 percent for the next two quarters.

The countries with debt concerns showed mixed performances.

Portugal's economy shrank 0.7 percent in the first quarter, sending the economy back into recession. Its government has admitted that, having sought a bailout, its economy will shrink both this year and next. The Commission expects 2.2 percent contraction in 2011 and 1.8 percent in 2012.

Greece actually achieved quarterly growth -- of 0.8 percent -- for the first time since late 2009 but that followed a vicious 2.8 percent contraction in the last quarter of 2010.

The Commission expects Athens to announce new austerity measures this year to meet its bailout targets. It forecast the economy would shrink 3.5 percent this year if policies are unchanged, but expects 1.1 percent growth in 2012.

Spain gained some support for its efforts to persuade markets it can avoid being sucked into the debt crisis -- its economy expanded 0.8 percent on an annualized basis, its strongest rate since the second quarter of 2008. On the quarter, growth was 0.3 percent.

On Thursday, the UK economy had released somewhat-disappointing data. Again from Reuters:

A disappointing performance by industry and a rise in the number of home repossessions dealt a blow to Britain's recovery prospects on Thursday, and doused any hopes for an upgrade to first-quarter growth...

The Office for National Statistics said industrial output rose 0.3 in March after a 1.2 percent fall in February, less than half the gain forecast by economists, partly due to ongoing maintenance work in oil and gas fields...

Figures from the Council of Mortgage Lenders showed the squeeze on incomes is already having an impact on households, with home repossessions between January and March up 15 percent on the quarter. Separate data showed a 3 percent quarterly rise in court orders to repossess homes.

Also on Thursday, Bloomberg had reported mixed data from the US.

Retail sales rose in April at the slowest pace in nine months and consumer sentiment declined last week, highlighting the risks that rising gasoline prices pose for the U.S. economy.

Purchases increased 0.5 percent, the smallest gain since July, after a 0.9 percent March advance that was more than double the previous estimate, Commerce Department figures showed today in Washington. The Bloomberg Consumer Comfort Index dropped to minus 46.9 in the period to May 8, the lowest reading since March...

Applications for jobless benefits decreased 44,000 in the week ended May 7 to 434,000, Labor Department figures showed. Economists forecast 430,000 claims, according to the median estimate in a Bloomberg survey.

The producer-price index rose 0.8 percent, compared with a 0.6 percent median estimate of economists surveyed, other figures from the Labor Department showed. The so-called core measure, which excludes volatile food and energy costs, increased 0.3 percent, more than projected.

Data on Friday confirmed that overall inflation is high in the US and showed that the retail sales number in April really was not particularly impressive. Again from Bloomberg:

The cost of living in the U.S. rose in April, led by increases in food and fuel that are starting to filter through to other goods and services.

The consumer-price index increased 0.4 percent, matching the median forecast of economists surveyed by Bloomberg News and following a 0.5 percent advance in March, figures from the Labor Department showed today in Washington. Excluding food and energy, the so-called core gauge rose 0.2 percent.

Friday's data on consumer sentiment was more positive though.

The Thomson Reuters/University of Michigan preliminary consumer sentiment index rose to 72.4, a three-month high, from a final reading of 69.8 in April, the group reported today. The gauge was projected to rise to 70, according to the median forecast of 62 economists surveyed by Bloomberg.

China raises reserve requirement, Japan's economy shows weakness

Note: This post was supposed to have been put up yesterday but was delayed because of problems with Blogger.

China has tightened monetary policy again. AFP/CNA reports:

China's central bank on Thursday said it would raise the amount of money that lenders must keep in reserve as official concerns persist over inflation and rising housing costs.

The People's Bank of China said it would raise its reserve requirement ratio by 0.50 percentage points, effective May 18 - the fifth such hike this year.

When the new reserve ratio requirement takes effect, China's commercial banks will be required to hold 21 per cent of their deposits in reserve, based on earlier announcements made by the bank.

Japan, in contrast, is far from any monetary policy tightening after data on Thursday showed a sharp plunge in exports in March. AFP/CNA reports:

Japan's current account surplus in March shrank 34.3 per cent from a year earlier, data showed Thursday, underlining the impact of a devastating quake and tsunami on the world's third-largest economy.

The plunge in the surplus followed a 3.0 per cent rise in February...

Thursday's data showed that Japan's trade surplus tumbled by 77.9 per cent to 240.3 billion yen with exports falling 1.4 per cent despite a 16.6 per cent rise in imports.

The finance ministry also said in a separate report Thursday that Japan fell into a trade deficit in the first 20 days of April.

Japan ran a deficit of 786.8 billion yen for the 20 days, reversing a surplus of 154.6 billion yen in the same period last year.

Exports fell 12.7 per cent year-on-year, the sharpest fall since October 1-20 in 2009, while imports rose 14.2 per cent.

Data from Japan on Wednesday had also shown a weak economy in March. From Reuters:

Japan's index of coincident economic indicators fell a preliminary 3.2 points in March from February, the Cabinet Office said on Wednesday, after the March 11 earthquake and tsunami damaged factory output and triggered a nuclear crisis...

The index of leading economic indicators, compiled using data such as the number of job offers and consumer sentiment and a gauge of the economy a few months ahead, fell 4.5 points from February.

But the economy may have stabilised somewhat in April. Again from Reuters:

Japan's service sector sentiment index rose to 28.3 in April, a Cabinet Office survey showed on Thursday, improving from a record fall posted the previous month, helped by efforts to repair supply constraints, prevent power shortages and contain a nuclear crisis caused by the March earthquake and tsunami.

The survey of workers such as taxi drivers, hotel workers and restaurant staff -- called "economy watchers" for their proximity to consumer and retail trends -- showed their confidence about current economic conditions rose from 27.7 in March...

The outlook index, indicating the level of confidence in future conditions, was at 38.4, up from 26.6 in March.

In any case, the Japanese economy is unlikely to get much more help from the Bank of Japan. From Bloomberg:

With his nation’s economy contracting under disaster damage of as much as 25 trillion yen ($310 billion), Bank of Japan Governor Masaaki Shirakawa is signaling that his biggest worry is inflation.

At stake for the student of Milton Friedman is protecting the bank’s independence from financing public spending, as urged by lawmakers after the record March 11 earthquake. Shirakawa, 61, instead oversaw a 40-trillion yen boost in short-term funds, eschewing the scale of longer-dated asset purchases the Federal Reserve mounted after confidence in credit markets collapsed and the U.S. entered its worst recession since the Great Depression.

Apparently, many don't agree with Shirakawa's parsimony.

The governor gets mixed results in a survey of Bloomberg users this month. While 50 percent of respondents said the BOJ’s stance is appropriate, Shirakawa was behind Fed Chairman Ben S. Bernanke, European Central Bank Chairman Jean-Claude Trichet and Bank of England Governor Mervyn King in a ranking of who did the best job managing their region’s crisis. He got 9 percent of votes, versus 42 percent for Bernanke. Shirakawa’s favorability rating rose to 44 percent from 31 percent in October 2009.

He's certainly not getting the same adulation that "maestro" Alan Greenspan received when the latter was Fed chief.

China cools, US trade deficit rises, BoE signals rate hike

There were further signs of cooling in China's economy on Wednesday although the inflation rate eased only slightly in April. From Reuters:

China's industrial output growth eased much more than expected in April to suggest the world's second-biggest economy is cooling, reducing the need for further aggressive monetary policy tightening even as inflation remains stubbornly high.

Consumer inflation eased modestly to 5.3 percent in April from a 32-month high in March of 5.4 percent. The outcome topped expectations but still underlined the view that price pressures are peaking and may start to ease in the second half of 2011.

Industrial output rose 13.4 percent from a year earlier, but that was more than a full percentage point below both expectations and a strong pace in March.

Retail sales growth eased more than expected while annual increases in money supply and outstanding yuan loans hit their lowest pace in 29 months, signs that measures to slow the economy are starting to bite.

In the US though, the trade deficit widened in March. Bloomberg reports:

The U.S. trade deficit widened more than forecast in March as the highest oil prices in more than two years boosted imports, eclipsing record exports.

The trade gap rose 6 percent to $48.2 billion, the biggest since June, from $45.4 billion in February, the Commerce Department reported today in Washington. The median forecast of 72 economists surveyed by Bloomberg News projected it would widen to $47 billion...

Imports climbed 4.9 percent to $220.8 billion, the highest level since August 2008, from $210.4 billion. A jump in fuel prices and increasing demand for autos and computers led the gain.

A barrel of crude oil cost an average $93.76 in March, the most since September 2008, the Commerce Department said. Excluding petroleum, the trade gap shrank to $16.9 billion from $20 billion in February.

Exports increased 4.6 percent, the biggest gain since March 1994, to $172.7 billion. Increasing demand overseas for autos, chemicals and industrial machinery contributed to the advance. The gain also reflected record sales to customers in South and Central America, and the highest purchases from countries in the European Union since June 2008.

The UK also saw a wider trade deficit in March. Reuters reports:

The country's goods trade deficit widened more than expected in March, giving back some of the strong improvement seen in the first two months.

The Office for National Statistics said that the goods trade gap widened to 7.66 billion pounds from 6.99 billion in February, some way above the 7.25 billion pounds economists had expected.

But sterling rallied anyway on Wednesday after the Bank of England released its latest inflation forecasts. Bloomberg reports:

Bank of England Governor Mervyn King said that inflation remains “uncomfortably high,” and officials signaled they may need to raise interest rates later this year even as the economy struggles to build momentum.

“The recent pattern of revisions to the projections over the next year -- downward to growth and upward to inflation -- has continued,” King told reporters in London today. Inflation “remains uncomfortably high and well above the 2 percent target. And there is a good chance that, if utility prices rise further later in the year, inflation will reach 5 percent.”

The pound rose after the release of the bank’s forecasts, which showed that a quarter-point interest-rate increase by the end of the year may be needed to control inflation, which officials see “markedly higher” in the short-term than they did in February. The central bank kept its benchmark rate at a record low of 0.5 percent last week to aid economic growth.

China trade surplus and US import prices up in April

China's trade surplus jumped in April. AFP/CNA reports:

China's politically-sensitive trade surplus ballooned to US$11.4 billion in April and exports hit a record monthly high, data showed Tuesday, as Washington pressured Beijing for a stronger currency.

The trade surplus -- a constant thorn in the side of Sino-US relations -- dwarfed the US$139 million surplus posted in March and a Dow Jones forecast for $1 billion in April.

Exports rose 29.9 per cent year-on-year to $155.7 billion -- a record high value for a single month -- while imports increased by 21.8 per cent to US$144.3 billion, customs authorities said in a statement.

However, Chinese imports are no longer able to keep overall US import prices down. From Bloomberg:

Prices of goods imported into the U.S. rose more than forecast in April as a slumping dollar and growing economies overseas pushed up the cost of fuel and food.

The 2.2 percent increase in the import-price index followed a revised 2.6 percent gain in March, according to figures from the Labor Department today in Washington. Other reports showed distributors boosted inventories and small businesses lost confidence.

Commodities rebound, Greek debt downgraded

Commodities managed to rebound on Monday but there was more bad news for Greece. Bloomberg reports:

Commodities rebounded from the biggest weekly slide since 2008 amid optimism about economic growth and speculation recent declines were excessive, helping drive a rally in U.S. stocks. European equities fell and Greek bonds tumbled as Standard & Poor’s cut its rating on the nation.

The S&P GSCI Index of 24 raw materials jumped 3.6 percent, its biggest gain since 2009, at 4 p.m. in New York following last week’s 11 percent slide. Silver futures climbed 5.2 percent and oil rebounded 5.5 percent to above $102 a barrel. The S&P 500 increased 0.5 percent to 1,346.29 as energy and raw-material producers led gains, while the Stoxx Europe 600 Index lost 0.3 percent. Greece’s 10-year note yield rose 21 basis points to 15.71 percent. The euro strengthened 0.4 percent to $1.4367 versus the dollar after gaining as much as 0.9 percent earlier.

Mark Gongloff at WSJ's MarketBeat wonders why markets seemed shocked at the S&P downgrade of Greece.

Financial markets seemed briefly shocked by S&P’s downgrade of Greece this morning, but they shouldn’t have been. The credit-default swap market was warning of just such a downgrade for months...

As far back as January, the CDS market was treating Greece as if it already had the “B” credit rating S&P slapped on it today, according to data provider Markit.

And that still might be too high. Since January, Greece’s implied rating has fallen to CCC, Markit says. Portugal and Ireland are also trading like CCC credits, while Italy is priced like a BBB. The major ratings agencies all have higher ratings on those countries.

Demographics, financial markets and the economy

Wesley Gray at the Empirical Finance Blog brings to our attention a recent paper by Robert Arnott and Denis Chaves entitled "Demographic Changes, Financial Markets, and the Economy".

From the abstract of the paper:

... In our work, we find that a growing roster of young adults (age 15–49) is very good for GDP growth, a growing roster of older workers is a little bad for GDP growth, and a growing roster of young children or senior citizens is very bad for GDP growth.

We find surprisingly powerful results when we apply the same technique for exploring the links between demography and capital markets returns, net of the strong and well-documented effects of valuation and yield levels. Stocks perform best when the roster of people age 35–59 is particularly large, and when the roster of people age 45–64 is fast-growing. Bonds follow a similar pattern, with an age-shift: they’re best when the roster of people age 50–69 is growing quickly...

The authors use their results to make some forecasts for GDP growth and market returns in a number of countries. From the conclusion:

... Our projections are bleak in the case of GDP growth for most of the developed world. The developed countries, and Japan in particular, have alarmingly low birth rates and high number of retirees. But, especially for the younger of the developed economies, the picture is relatively good for bonds and mixed in the case of stocks...

US and Canadian employment rise more than expected

US employment rose much more than expected in April Reuters reports:

U.S. companies created jobs at the fastest pace in five years in April, pointing to underlying strength in the economy even as the jobless rate rose to 9.0 percent.

Private sector hiring, including a big jump at retailers, boosted overall nonfarm payrolls by 244,000, the largest increase in 11 months, the Labor Department said on Friday. Economists had expected a gain of only 186,000.

The private sector created 268,000 jobs, the most since February 2006, while government payrolls shrank.

Canada also added more jobs than expected in April. Bloomberg reports:

Canada added almost three times more jobs than economists forecast in April and the unemployment rate declined, suggesting the central bank will raise interest rates in the next few months.

Employment rose by 58,300 after a March decline of 1,500, Statistics Canada said today in Ottawa. The jobless rate fell to 7.6 percent from 7.7 percent, as the labor force grew by 47,400. Economists forecast no change in unemployment and 20,000 new jobs in Bloomberg News surveys that had 24 and 25 estimates. The largest estimate was for 40,000 new jobs.

There was also good news in Europe with Germany reporting another increase in industrial production in March. Again from Bloomberg:

German industrial production rose for a third month in March as construction surged, adding to signs Europe’s largest economy gathered strength in the first quarter.

Output increased 0.7 percent from February, when it rose 1.7 percent, the Economy Ministry in Berlin said today. Economists had forecast a gain of 0.5 percent, the median of 21 estimates in a Bloomberg News survey showed. In the year, production rose 11.2 percent when adjusted for working days.