Stocks fall as Nikkei plunges 7 percent

The big market news on Thursday was the plunge in Japanese stocks. The Nikkei 225 dived 7.3 percent, the most since the aftermath of the March 2011 earthquake and tsunami.

Other Asian markets fell as well, with the Hang Seng in particular falling 2.5 percent.

European stocks were also hit hard, the STOXX Europe 600 losing 2.1 percent on Thursday.

However, the selling pressure on Thursday dissipated during the US trading session. The S&P 500 fell just 0.3 percent after having fallen as much as 1.2 percent earlier in the day.

The fall in Japanese stocks was mostly attributed to rising government bond yields. The Bank of Japan responded by announcing on Thursday that it was injecting 2 trillion yen into the financial system to stem volatility.

Not helping markets was a weak manufacturing report from China on Thursday. HSBC's preliminary manufacturing PMI for China fell to 49.6 in May from 50.4 in April, putting it back into contraction territory.

Europe's economy also showed further contraction on Thursday, although there were signs of improvement. Markit's flash composite index based on purchasing managers surveys rose to 47.7 in May from 46.9 in April. The manufacturing index rose to 47.8 from 46.7 while the services index rose to 47.5 from 47.0.

In another sign of improvement in the eurozone economy, the European Commission reported on Thursday that its consumer confidence index for the region rose to -21.9 in May from -22.3 in April.

Elsewhere in Europe, the UK confirmed that it grew 0.3 percent in the first quarter. However, growth was mostly due to a rise in inventories, raising doubts about its sustainability.

At least US growth looks likely to have been sustained, based on data on Thursday. Initial claims for state unemployment benefits fell 23,000 to 340,000 last week. New single-family home sales rose 2.3 percent in April. Markit's preliminary manufacturing PMI for May continued to show expansion despite falling to 51.9 from 52.1 in April.

Bernanke wary of premature tightening, stocks fall anyway

Federal Reserve Chairman Ben Bernanke gave no clear indication of when tightening of monetary policy is likely to begin in his testimony to the US Congress on Wednesday. From Reuters:

The Federal Reserve's monetary stimulus is helping the economy recover but the central bank needs to see further signs of traction before taking its foot off the gas pedal, Fed Chairman Ben Bernanke said on Wednesday...

"If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases," he said...

"A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further," Bernanke said.

The lack of assurance of continued monetary easing, however, was enough to send US stocks down on Wednesday. The S&P 500 fell 0.8 percent, pulling back from the record high the previous day.

Ten-year Treasury yields rose 11 basis points to 2.04 percent, topping 2 percent for the first time since March, and the US dollar rose 0.5 percent to near its strongest level since 2010.

A sustained recovery in the housing market will probably increase the probability of tightening. The National Association of Realtors reported on Wednesday that existing home sales rose 0.6 percent in April to an annual rate of 4.97 million units, the highest since November 2009. The inventory of homes on the market rose 11.9 percent but remains at just 5.2 months' worth of sales.

Elsewhere, there were mixed economic data from the UK on Wednesday. Retail sales fell 1.3 percent in April but factory orders improved in May, with the Confederation of British Industry's total order book balance improving to -20 this month from -25 in April.

Japan's trade deficit rises, BoJ holds off further easing

Japan's trade deficit worsened in April. A report on Wednesday showed that the trade deficit rose 69.7 percent from a year ago to 879.9 billion yen.

While exports rose 3.8 percent in April from a year ago, imports jumped 9.4 percent, partly as a result of a weaker yen.

The yen has been weakening ever since the Japanese government and the Bank of Japan made it clear that they will be trying to stimulate the economy.

However, the BoJ announced no new easing measure after its monetary policy meeting on Wednesday.

Meanwhile, the Bank of England could yet provide further monetary stimulus after a report on Tuesday showed that inflation fell in the UK in April. Inflation eased to 2.4 percent last month from 2.8 percent in March, with almost half of that drop coming from weaker petrol and diesel costs.

Also on Tuesday, the Federal Reserve provided no indication that it is about to wind down its own monetary stimulus. St Louis Fed President James Bullard told reporters after delivering a lecture in Frankfurt that he “can't envision a good case to be made for tapering unless the inflation situation turns around”. New York Fed President William Dudley told the Japan Society in New York on Tuesday that he could not be sure whether policymakers would next reduce or increase the amount of purchases due to the “uncertain” economic outlook.

The absence of any explicit talk of a withdrawal of monetary stimulus helped push the S&P 500 to another all-time high on Tuesday.

Global economic recovery below par

While the global economy has been improving, Dwaine Van Vuuren at RecessionAlert notes that growth has been slower than normal coming out of recession. This is a concern because, according to him, “below par recoveries remain below par recoveries”.

Indeed, Monday brought some signs of slowing in the US economy. The Chicago Federal Reserve reported that its national activity index fell to -0.53 in April from -0.23 in March.

However, the index's three-month moving average edged up to -0.04 in April from -0.05 in March. According to the Chicago Fed, this suggests that growth was near its historical trend.

Earlier on Monday, the Japanese government did upgrade its assessment of the economy, saying that it is “picking up slowly”. However, business investment remains weak.

Over the weekend in China, the government reported that home prices rose in April in 67 of 70 major cities it monitors. This was down from 68 in March.

Calculations by Reuters showed that home prices rose 4.9 percent in April from a year ago, the fastest pace since April 2011. However, on a monthly basis, prices rose 1.0 percent, down from 1.2 percent in March.

Economies and markets have improved, thanks to central banks

Growth in the major developed economies accelerated in the first quarter of 2013. With stock markets around the world also rallying strongly recently, it looks like the aggressive monetary policies of major central banks have been successful.

Among the major developed economies, the United States, Japan and the United Kingdom reported growth in the first quarter. The euro area was the laggard, contracting in the first quarter for the sixth consecutive quarter.

Nevertheless, all the major developed economies saw better economic growth in the first quarter than in the previous quarter.

Growth rates in advanced economies
	Percentage change in real GDP
	2012			2013
	Q2	Q3	Q4	Q1
United States	0.3	0.8	0.1	0.6
Euro area	-0.2	-0.1	-0.6	-0.2
Japan	-0.2	-0.9	0.3	0.9
United Kingdom	-0.4	0.9	-0.3	0.3

Surveys of purchasing managers in April indicated that global growth may have slowed at the beginning of the second quarter (see “Stock markets maintain rally even as global growth slows”).

Nevertheless, investors appear sanguine, with stock markets continuing to rally last week. The Standard & Poor’s 500 Index rose 2.1 percent last week to close at yet another record high of 1,667.47. The STOXX Europe 600 Index rose 1.2 percent last week to 308.72, its fourth consecutive weekly gain. The Nikkei 225 stock average jumped 3.6 percent to close at 15,138.12.

If stock markets lead the economy, as most economists think, then the outlook for the major developed economies is good.

The economic performance of the major developed economies as well as the apparent confidence of investors provides some vindication of the aggressive monetary stimulus, including quantitative easing, implemented by the central banks of the US, euro area, Japan and the UK over the past few years.

Indeed, last week, the International Monetary Fund released a paper that looked at the effects of the unconventional monetary policies in the US, euro area, Japan and the UK. While the paper noted that there is considerable uncertainty about the size of the impact of these policies, it nevertheless concluded that they helped to “avoid acute risks” to financial markets, “significantly reduced long-term yields” and “significantly improved macroeconomic conditions”, with both GDP growth and inflation reacting “positively and substantially” to bond purchases.

However, the paper also said that there are some “key issues that central banks engaged in unconventional measures need to consider”.

One issue is that the measures will face diminishing effectiveness.

Another is the possibility of greater risk taking by financial institutions as a result of accommodative monetary policies and the expectation of central bank intervention, which could undermine financial stability.

Also, capital flows to other countries could increase and create the potential for future abrupt reversals.

Finally, eventual exit from exceptionally easy monetary conditions may prove “challenging”.

With their much-larger balance sheets now filled with assets with longer-dated maturities, central banks could face significant losses on their assets when the time comes for them to tighten monetary policies. This would in turn impact fiscal balances through reduced profit transfers to government.

Also, as central banks have little experience in tightening under such monetary conditions, there is a risk of interest rate volatility and overshooting during the tightening process.

However, for now, most of the advanced economies and stock markets appear to be enjoying the fruits of central banks' bold monetary policies.

Stocks at record high in US, highest since 2008 in Japan

After a one-day pause, the US stock market resumed its advance on Friday. The S&P 500 rose 1.0 percent to a new record high even as the US dollar rose 0.8 percent to its highest level since July 2010.

Positive economic data on Friday helped boost markets.

US consumer sentiment improved in May. The preliminary Thomson Reuters/University of Michigan index of consumer sentiment increased to 83.7 this month, the highest since July 2007, from 76.4 in April.

The outlook for the US economy also appears positive. The Conference Board's index of US leading indicators rose 0.6 percent in April after falling 0.2 percent in March.

Earlier in the day, Japanese stocks also resumed their advance, with the Topix gaining 0.6 percent to close at its highest level since August 2008.

Again, positive news out of Japan on Friday probably helped.

Japanese core machinery orders surged 14.2 percent in March. This still left core orders for the January-March quarter unchanged from the previous quarter though and manufacturers surveyed by the government expect core orders to fall 1.5 percent in the April-June quarter.

The Japanese government is clearly keen to ensure more sustained growth. In a speech to business executives and academics on Friday, Prime Minister Shinzo Abe announced that it aims to boost domestic private investment over the next three years and triple infrastructure exports and double farm, fisheries and marine exports to 1 trillion yen by 2020.

Fed officials considering end of asset purchases as US economy shows signs of slowing

US stocks fell on Thursday. The S&P 500 fell 0.5 percent after four consecutive days of gains that saw the index reach new all-time highs.

The yield on ten-year Treasuries fell six basis points to 1.88 percent. Oil rose 0.9 percent but gold fell 0.7 percent.

Investors sold stocks on Thursday after several Federal Reserve officials recently voiced concerns over the Fed's asset purchases and raised the possibility of an end to these purchases. From Bloomberg:

Dallas Fed President Richard Fisher said today buying mortgage bonds risks disrupting the market, while Philadelphia Fed President Charles Plosser said, “it’s not good for the bank to be holding lots of mortgage paper.” Jeffrey Lacker of Richmond said to reporters yesterday the Fed should “get out of the credit allocation business.”

“It’s clear that the labor market has improved since September” when the Fed began its third round of asset purchases, [San Francisco Fed President John Williams] said today in the text of a speech in Portland, Oregon. “We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer” and end the program late this year.

Weak US economic data on Thursday also did not help markets.

Housing starts plunged 16.5 percent in April. The report was softened though by a 14.3 percent rise in building permits.

Adding to signs of slowing growth in the US economy, other reports on Thursday showed that initial claims for state unemployment benefits jumped by 32,000 last week to 360,000, the biggest increase since November, and the Federal Reserve Bank of Philadelphia’s general economic index fell to -5.2 from 1.3 the prior month.

Inflation is also fading, with consumer prices falling in April for the second consecutive month. The consumer price index fell 0.4 percent last month, the biggest decrease since December 2008, after falling 0.2 percent in March.

Euro area remains in recession, Japanese recovery accelerates

Economic data on Wednesday were mostly negative.

The eurozone economy contracted 0.2 percent in the first quarter. This followed a 0.6 percent contraction in the previous quarter and was its sixth quarter of contraction.

The German economy managed to expand 0.1 percent in the first quarter but the French economy contracted 0.2 percent and the Italian economy shrank 0.5 percent.

The weak eurozone economy may be a drag on the US economy. A report on Wednesday showed that US industrial production fell 0.5 percent in April, reversing the 0.3 percent increase in March.

Further indication of weakness in US manufacturing on Wednesday came from the Federal Reserve Bank of New York, whose index of conditions for manufacturers in the region fell to -1.4 in May from 3.1 in April.

In another indication of possible weakness for the economy, another report on Wednesday showed that producer prices in the US fell 0.7 percent in April, the biggest decrease since February 2010.

At least the US housing market remains in recovery. A report on Wednesday showed that the National Association of Home Builders/Wells Fargo housing market index rose to 44 in May from 41 in April.

The weak economic data did not stop the S&P 500 from making another record high on Wednesday, although Japan's Nikkei 225 stole some of the thunder in financial markets by rising 2.3 percent to close above 15,000 for the first time since 2007.

The strong performance of Japanese stocks recently seem to have been justified by a report on Thursday showing that the economy grew 0.9 percent in the first quarter, the fastest pace in a year.

Private consumption grew 0.9 percent. Net exports contributed 0.4 percentage point to growth after having subtracted from growth in the previous three quarters.

However, capital spending fell 0.7 percent, its fifth consecutive quarterly decline.

S&P 500 hits another record high

The S&P 500 made another record high on Tuesday in a somewhat more decisive manner than on Monday. The S&P 500 rose 1.0 percent to 1650.34, its eighth record in nine days.

In Europe, improved market conditions has allowed European governments to go back to markets to raise funds. Spain sold one-year bills on Tuesday at a yield below 1 percent for the first time since April 2010. The Netherlands sold five-year notes at a record-low yield of 0.611 percent on Tuesday.

Better economic data from the euro area on Tuesday helped. The ZEW index of German investor confidence edged up to 36.4 in May from 36.3 in April. Industrial production in the 17-nation euro region rose 1 percent in March from February.

US stock market ekes out record as retail sales rise, China's economy grows with shadow banking

The US stock market made a new record high on Monday, but barely. The S&P 500 rose 0.07 point to 1,633.77 but about seven stocks declined for every five that advanced.

While investors curbed their buying on Monday, consumers resumed spending in April. US retail sales rose 0.1 percent last month after having fallen 0.5 percent in March.

The extent of the improvement in retail sales was masked by lower gasoline prices. Excluding gasoline sales, retail sales rose 0.7 percent in April.

Earlier on Monday, data from China also showed improvement in the economy.

Industrial output in China rose 9.3 percent in April, accelerating from an increase of 8.9 percent in March.

Fixed-asset investment rose 20.6 percent in the first four months of the year, slightly down from 20.9 percent in the first three months.

Retail sales rose 12.8 per cent year-on-year in April, up from a 12.6 percent increase in March.

Real estate investment rose 21.1 percent in the first four months of 2013 from a year earlier, accelerating from an increase of 20.2 in the first quarter. Revenues from property sales in the first four months eased slightly to 59.8 percent though after having surged 61.3 percent in the first three months.

Helping to boost property and other investment in China has been a rise in shadow banking activities. According to Moody's, China's shadow banking activities have risen 67 percent since the end of 2010, reaching an estimated total of 29 trillion yuan at the end of last year, equivalent to 55 percent of China's GDP.

Stock markets maintain rally even as global growth slows

Stock markets around the world continued to rally last week despite signs that global economic growth may be slowing.

Stocks in the United States rose for a third consecutive week last week. The Standard and Poor's 500 Index climbed 1.2 percent to close at 1,633.70, a record high.

European stocks also rose for a third consecutive week last week. The STOXX Europe 600 Index climbed 1.3 percent to 304.99, its highest level since June 2008.

Japan was the outperformer among developed stock markets last week. The Nikkei 225 rose 6.7 percent, its biggest weekly gain since December 2009, to close the week at 14,607.54, its highest level since January 2008.

Global stocks have risen amid a backdrop of weakening economic growth.

A report from Markit Economics last week based on purchasing managers surveys around the world showed that the JPMorgan global all-industry output index fell to 51.9 in April from 53.0 in March.

JPMorgan Global All-Industry Indices
	March	April
Output	53.0	51.9
New orders	52.2	51.7
Input prices	54.5	52.1
Employment	51.4	50.4

David Hensley, director of Global Economics Coordination at JPMorgan, noted that the latest purchasing managers surveys showed that global economic output rose at its “slowest pace in six months” in April.

However, investors are apparently betting on more monetary stimulus from central banks to continue boosting markets, and the latter largely delivered.

The Reserve Bank of Australia and Bank of Korea both cut interest rates last week. The RBA cut its benchmark rate by 25 basis points to 2.75 percent while the BOK cut its rate by 25 basis points to 2.5 percent.

However, the Bank of England, which already has a near-zero benchmark rate of 0.5 percent and a policy of bond-buying, left monetary policy unchanged at its monetary policy meeting last week.

Stocks hit all-time high in US, 5½-year high in Japan

US stocks ended the week at a new all-time high. The S&P 500 rose 0.43 percent on Friday to close at 1,633.70. It was up 1.2 percent for the week, its third consecutive weekly gain, and is up 14.6 percent so far this year.

Japanese stocks performed even better on Friday as the yen weakened past 100 per dollar. The Nikkei 225 rose 2.9 percent to a 5½-year high of 14,607.54. The Nikkei was up 6.7 percent for the week, the biggest weekly gain since December 2009.

Economic data from Japan on Friday were mixed. The Cabinet Office's economy watchers survey showed that the service sector current conditions index fell to 56.5 in April from 57.3 in March. However, the future conditions index rose to 57.8 from 57.5.

Also, Japanese bank loans rose 1.7 percent in April from a year earlier, better than the 1.5 percent increase in March.

However, in China, new bank loans fell to 792.9 billion yuan in April from 1.06 trillion yuan in March.

Elsewhere in Asia, India reported on Friday that its industrial output rose 2.5 percent in March from a year ago, accelerating from the 0.5 percent increase in February.

In Europe, Italy's one-year borrowing costs fell to a record low of 0.703 percent as it sold a total of 10 billion euros of bills on Friday.

Meanwhile, economic data out of Germany on Friday were also positive. Exports rose 0.5 percent in March while imports rose 0.8 percent. The trade surplus narrowed slightly to 17.6 billion euros from 17.7 billion in February.

In the UK, the goods trade deficit shrank to 9.056 billion pounds in March from 9.165 billion pounds in February as exports jumped 5.0 percent but construction output fell 2.4 percent in the first quarter to the lowest level since the last quarter of 1994.

South Korea cuts rates, UK monetary policy unchanged

The global central bank easing trend continued on Thursday with the Bank of Korea cutting its benchmark interest rate by 25 basis points to 2.5 percent.

However, the Bank of England left its benchmark interest rate unchanged at 0.5 percent and announced no additional bond purchases after its monetary policy meeting on Thursday.

The need for further monetary stimulus by the BoE may have receded a little after a report on Thursday showed that UK industrial production rose 0.7 percent in March following a 0.9 percent increase in February.

The probability of additional monetary stimulus has also decreased in China after inflation there accelerated to 2.4 percent in April from 2.1 percent in March.

There were also positive signs for the Japanese economy on Thursday. The Cabinet Office's index of coincident economic indicators rose 0.8 point in March according to a preliminary report, suggesting that the economy is maintaining its recovery. However, the index of leading economic indicators fell 0.1 point.

In the US, a report on Thursday showed that initial claims for state unemployment benefits fell by 4,000 last week to 323,000, the lowest level since January 2008. The four-week moving average fell by 6,250 to 336,750, the lowest level since November 2007, just before the last recession.

Not all the data from the US on Thursday were positive. Another report showed that wholesale inventories rose 0.4 percent in March. While an increase in inventories is often a sign that economic growth has picked up, this report also showed that sales by wholesalers fell 1.6 percent in March, the biggest decline in four years.

In market action, US stocks finally ended their five-day record-breaking run on Thursday. The S&P 500 fell 0.4 percent after having set consecutive record highs on the five previous trading sessions.

China's trade jumps, German industrial production rises

There were some positive economic data out of China and Germany on Wednesday.

In China, the trade balance swung back into surplus in April after exports rose 14.7 percent from a year ago. Imports increased 16.8 percent from the previous year.

However, the trade data may have been too good to be true. From AFP/CNA:

"We believe the strong trade growth is not indicative of a growth recovery," said Zhang Zhiwei, a Hong Kong-based economist with Nomura International, said in a research note.

Importers and exporters may have overstated their business to seek to evade Chinese government controls on capital movements and channel funds into the country, he said...

Royal Bank of Scotland economist Louis Kuijs estimated China's exports rose only 5.7 per cent year-on-year in April after adjusting for discrepancies between data from China and figures from the importing markets.

Elsewhere, Germany reported on Wednesday that industrial production rose 1.2 percent in March. This followed a 0.6 percent increase in February.

US stocks hit new records, Japanese stocks at five-year high

US stock indices rose to new record highs on Tuesday, with the Dow Jones Industrial Average closing above 15,000 for the first time ever after rising 0.6 percent to 15,056.20. The S&P 500 rose 0.5 percent to close at 1,625.96.

In Japan, investors came back from a holiday to push the Nikkei 225 up 3.6 percent on Tuesday to 14,180.24, its highest close since June 2008.

Markets got a lift early in the day after the Reserve Bank of Australia cut its benchmark interest rate by 25 basis points to a record low of 2.75 percent, continuing the worldwide trend towards easier monetary policy.

Easier monetary policy has lifted not just stock prices but house prices as well. US home prices rose 1.9 percent in March, a report from CoreLogic showed on Tuesday. Prices rose 10.5 percent from a year ago, the biggest year-over-year increase in seven years.

Easier monetary conditions have also reduced Europe's sovereign debt concerns. A sale of 10-year Portuguese government bonds on Tuesday attracted demand for more than three times the amount targeted for sale.

However, Europe's economy has shown few signs of a recovery, with Tuesday's data coming out mixed. While German factory orders jumped 2.2 percent in March, the same amount of increase as in February, French industrial orders fell 0.9 percent in March, reversing a 0.8 percent increase in February.

Eurozone economic data show contraction, China services slow

Weak economic data continued to come out of the euro area on Monday.

Markit's services PMI for the euro area rose to 47.0 in April from 46.4 in March, helping to pull the composite index up to 46.9 from 46.5. That still left the composite index below 50, indicating contraction, for the 15th consecutive month.

Another report on Monday showed that retail sales in the euro area fell 0.1 percent in March after having fallen 0.2 percent in February.

With the eurozone economy still looking weak, European Central Bank President Mario Draghi reiterated his readiness to cut interest rates again on Monday, helping to push the euro down against the US dollar.

Meanwhile, China's economy has not been spared the global economic weakness. A report on Monday showed that the HSBC services PMI for China fell to 51.1 in April, the lowest since August 2011, from 54.3 in March.

However, things are looking up again in the US, with the positive Friday employment report being followed on Monday by a report from the Federal Reserve showing that banks eased lending standards to businesses over the last three months.

S&P 500 hits record as investors ride central bank wave

The United States stock market hit a record high last week despite mixed reports on the economy.

The Standard & Poor’s 500 Index rose 2.0 percent to 1,614.42 last week, its highest level on record. Stocks rose 2.0 percent over the last two trading days of the week alone, with a strong employment report on Friday cementing the gains.

The employment report from the Labor Department showed that nonfarm payroll employment rose by 165,000 in April. This was higher than the 140,000 estimated by economists surveyed by Bloomberg. In addition, revisions added a total of 114,000 jobs for February and March. The unemployment rate fell to 7.5 percent, the lowest in four years.

However, another report on Friday on factory orders provided a negative signal on the economy. The Commerce Department reported that new orders for manufactured goods fell 4.0 percent in March. While a plunge in volatile civilian aircraft orders contributed to the fall, even excluding transportation equipment, orders fell 2.0 percent.

Reports from purchasing managers surveys earlier in the week had also indicated slowing manufacturing activity. The Institute for Supply Management's manufacturing PMI fell to 50.7 in April from 51.3 in March and Markit's manufacturing PMI fell to 52.1 from 54.6.

Activity in the services sector may also be slowing. Another report on Friday from the Institute for Supply Management showed that its non-manufacturing index fell to 53.1 in April from 54.4 in March.

US economic growth may also be adversely affected by the continuing weakness in Europe. Data last week showed that the European Commission's economic sentiment indicator for the euro area fell to 88.6 in April from 90.1 in March and Markit's eurozone manufacturing PMI fell to 46.7 in April from 46.8 in March.

The European Central Bank did cut its main policy interest rate by 25 basis points to a record low of 0.50 percent after its monetary policy meeting on Thursday though whereas the Federal Reserve announced no new policy measures after its meeting on Wednesday.

In a presentation at the 10th annual Strategic Investment Conference last week, PIMCO Chief Executive Officer Mohamed El-Erian noted “an enormous contrast between the markets and the real economy”. He said that while markets are rallying, developed economies are seeing lower growth due to ongoing deleveraging.

He said that markets are rallying despite weak economic growth because central banks are providing monetary support. And because the weak economic growth is likely to persist, central banks “have little choice other than to continue on their current trajectory”.

Therefore, El-Erian recommended: “Ride the central bank wave.”

However, he also warned that “all waves eventually break”. When the disconnect between economic fundamentals and the markets revert, it is likely to prove “painful for unhedged investors”.

US stocks rise to another record as employment improves, India cuts interest rates

The S&P 500 rose to another record on Friday, climbing 1.1 percent to close at 1,614.22.

Stocks gained despite mixed economic data on Friday.

US nonfarm payrolls increased by 165,000 in April, better than the 138,000 increase in March. The unemployment rate fell to 7.5 percent, the lowest in four years.

However, US factory orders fell 4.0 percent in March while the Institute for Supply Management's services index fell to 53.1 in April from 54.4 in March.

Elsewhere, a report on Friday showed that China's services sector slowed in April. The non-manufacturing PMI from the National Bureau of Statistics and China Federation of Logistics and Purchasing fell to 54.5 from 55.6 in March.

However, the UK services sector accelerated in April. The services index from Markit Economics and the Chartered Institute of Purchasing and Supply rose to 52.9, the highest in eight months, from 52.4 in March.

Still, the economic weakness in Europe will remain a concern for policy makers, especially after the European Commission lowered its forecast for the eurozone economy on Friday. The Commission now sees the eurozone economy contracting by 0.4 percent this year, worse than its February forecast of 0.3 percent contraction.

Indeed, growth concerns pushed India's central bank to reduce its benchmark repo rate by 25 basis points to 7.25 percent on Friday, its third cut this year.

The ever-expanding monetary stimulus coming from central banks around the world has raised its own concerns though. The Asia Development Bank's managing director Rajat Nag warned on Friday that while quantitative easing out of Japan and other economies will help them grow, “we have to be wary of building asset bubbles”.

ECB cuts rates, S&P 500 rises to record high

As expected, the European Central Bank cut its main interest rate by 25 basis points to a record low of 0.50 percent at its monetary policy meeting on Thursday.

The ECB decision came amid further signs on Thursday of continuing economic deterioration in the eurozone economy. Markit's eurozone manufacturing PMI fell to 46.7 in April from 46.8 in March.

In the US, the trade deficit narrowed in March. Imports decreased 2.8 percent, the most since February 2009, but exports also fell by 0.9 percent.

Investors mostly shrugged off the weak data, with the S&P 500 Index in particular rising 0.9 percent on Thursday to a record high. European stocks also rose on Thursday, the Stoxx Europe 600 Index adding 0.3 percent.

However, the euro fell for the first time in five days against the US dollar after ECB President Mario Draghi said after its monetary policy meeting that it may take the unprecedented step of charging banks to hold excess reserves.

Fed on hold even as economy shows signs of weakening

The Federal Reserve did not increase monetary stimulus at its policy meeting on Wednesday.

Relatively weak economic US data released that day suggest that it may yet do so later.

A report from ADP on Wednesday showed that US private sector employment rose by 119,000 in April, fewer than the 131,000 increase in March.

Another report in the US showed that construction spending fell 1.7 percent in March following the biggest slump in government projects in 11 years.

Other reports showed that US manufacturing slowed in April. Markit's manufacturing PMI fell to 52.1 from 54.6 in March while the Institute for Supply Management's manufacturing PMI fell to 50.7 from 51.3.

Meanwhile, manufacturing also slowed in China in April.

A report from the National Bureau of Statistics and the China Federation of Logistics and Purchasing on Wednesday showed that their manufacturing PMI fell to 50.6 in April from 50.9 in March. A report from HSBC and Markit on Thursday showed that their manufacturing PMI fell to 50.4 in April from 51.6 in March.

There were some signs of recovery in the UK on Wednesday though. The Markit/CIPS manufacturing PMI rose to 49.8 in April from 48.6 in March and house prices rose 0.9 percent in April from a year ago according to Nationwide.

Unemployment falls in Japan, hits record high in euro area

Tuesday's economic reports were mixed.

Japan reported that household spending jumped 5.2 percent in March from a year earlier, the biggest increase since February 2004. The unemployment rate fell to 4.1 percent in March, the lowest since November 2008.

Japanese industrial production rose 0.2 percent in March. Manufacturers surveyed by the government expect output to rise 0.8 percent in April but fall 0.3 percent in May.

The improvement in Japanese manufacturing is also reflected in the latest purchasing managers survey. The Markit/JMMA manufacturing PMI rose to 51.1 in April from 50.4 in March.

Data from Europe were less positive.

The unemployment rate in the euro area rose to a record high of 12.1 percent in March from 12.0 percent in the previous two months.

Meanwhile, inflation in euro area fell to 1.2 percent in April from 1.7 percent in March.

Spain's economy contracted 0.5 percent in the first quarter, the seventh consecutive quarterly contraction.

Even Germany has not avoided economic weakness as retail sales fell 0.3 percent in March. Encouragingly, though, the GfK consumer confidence index for May rose to 6.2, the highest in more than 5½ years, from 6.0 in April.

In contrast, GfK's consumer confidence index for the UK fell to -27 in April from -26 in March. On a more positive note, UK mortgage approvals rose to 53,504 in March from 51,947 in February.

In the US, both consumer confidence and housing provided positive data on Tuesday. The Conference Board's consumer confidence index jumped to 68.1 in April from 61.9 in March while the S&P/Case Shiller index of home prices in 20 cities rose 9.3 percent in February from a year earlier, the biggest increase in almost seven years.

However, the Institute for Supply Management-Chicago business barometer fell below the 50 mark to 49.0 in April from 52.4 in March.

Eurozone confidence falls, US consumer spending rises

Economic data on Monday were mixed.

In the euro area, the economic sentiment indicator fell to 88.6 in April from 90.1 in March.

In Germany, prices fell 0.5 percent in April, pulling the inflation rate down to 1.1 percent, the lowest since August 2010, from 1.8 percent in March.

However, in the US, consumer spending grew 0.2 percent in March, as did personal income, while pending home sales jumped 1.5 percent last month after having fallen 1.0 in February.

Investors appear to be comfortable with the data. Stocks rose on Monday, with the S&P 500 climbing 0.7 percent to a record high and the STOXX Europe 600 gaining 0.5 percent. The euro strengthened 0.5 percent against the dollar.

In Italy, yields on 10-year bonds fell 15 basis points to 3.91 percent as the government sold 6 billion euros of five- and 10-year bonds at the lowest yield since 2010. This came after Italy's new prime minister Enrico Letta formed a new government over the weekend, ending a two-month political stalemate.

First quarter sees rebound in economic growth

Last week's economic data showed rebounds in growth for the United States and the United Kingdom in the first quarter.

In the UK, real gross domestic product grew 0.3 percent in the first quarter, reversing the 0.3 percent decline in the previous quarter.

In the US, the economy grew at an annualised rate of 2.5 percent in the first quarter, rebounding after growth had slowed to a 0.4 percent rate in the final quarter of last year.

Other reports from the US last week indicated that growth has probably weakened since the first quarter though.

Durable goods orders fell 5.7 percent in March, more than reversing the 4.3 percent increase in February.

Further indication of weaker growth in US manufacturing came from Markit's purchasing managers survey. The flash reading of the manufacturing index for April came in at 52.0, down from 54.6 in March.

US consumer spending may also weaken. While the GDP report showed a rebound in consumer spending growth to 3.2 percent in the first quarter from 1.8 percent in the previous quarter, the Thomson Reuters/University of Michigan index of consumer sentiment declined to 76.4 in April from 78.6 in March.

US housing data last week were mixed. Existing home sales fell 0.6 percent but new home sales, a leading indicator of the economy, rose 1.5 percent in March.

Elsewhere in the world, economic data from the euro area last week mostly indicated weakness.

Markit's flash composite index for the euro area based on purchasing managers surveys came in at 46.5 in April, unchanged from March. The services index rose to 46.6 in April from 46.4 in March but the manufacturing index fell to 46.5 from 46.8.

In Germany, the euro area's biggest economy, the Ifo business climate index fell to 104.4 in April from 106.7 in March.

Consumer confidence in the euro area did improve to -22.3 in April from -23.5 in March though.

Meanwhile, China's economy may also be slowing.

Data over the weekend showed that profits from industrial companies in China grew 5.3 percent in March from a year earlier, down from 17.2 percent growth in the first two months.

Earlier last week, a flash reading of HSBC's manufacturing index for China came in at 50.5 in April, down from 51.6 in March.

BoJ sees end to Japan's deflation, US growth rebounds less than expected

Japan reported on Friday that its consumer prices excluding fresh food fell 0.5 percent in March from the previous year, signalling continued deflation.

There was no immediate reaction from the Bank of Japan. Its latest monetary policy meeting ended on Friday without new policy action.

Instead, the BoJ raised its forecasts for growth and inflation. The economy is now expected to grow 2.9 percent for the fiscal year to March, up from an earlier 2.3 percent projection in January. Inflation is expected to hit 0.7 percent, up from an earlier 0.4 percent projection.

In the US, a report on Friday showed that the economy rebounded in the first quarter to grow at a 2.5 percent annualised rate after having grown at a 0.4 percent rate in the previous quarter. However, the first quarter growth was less than the 3 percent growth estimated by economists surveyed by Bloomberg.

Another report from the US on Friday showed that the Thomson Reuters/University of Michigan final index of consumer sentiment declined to 76.4 in April from 78.6 a month earlier. The preliminary April reading had been 72.3.

The weaker-than-expected growth in the US economy helped push the US dollar down 1.2 percent against the yen on Friday. The yen also rose 1.1 percent versus the euro.

Central banks buy gold and equities, UK economy rebounds

It looks like central banks were among the losers from the recent fall in gold prices. From Bloomberg:

Central banks bought the most gold since 1964 last year just before the collapse in prices into a bear market underscored investors’ weakening faith in the world’s traditional store of value...

Central banks are the biggest losers, with about $560 billion of value erased since gold reached a record $1,921.15 an ounce in September 2011...

Some people think central banks are not very good at timing markets.

“They sell at the wrong time and buy at the wrong time,” said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “They aren’t traders. They are looking at it as a long-term holding, as an ultimate reserve currency. With the benefit of hindsight, they tend to get it wrong more often than not.”

That may not be good news for stocks as central banks have apparently also been buying or are planning to buy equities. Again from Bloomberg:

Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.

In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves.

Still, both gold and stocks rose on Thursday, with the STOXX Europe 600 in particular rising 0.8 percent for its fifth consecutive day of gains.

Positive economic reports from Europe helped buoy investor sentiment.

In the UK, the economy grew 0.3 percent in the first quarter, reversing the 0.3 percent decline in the previous quarter and thus avoiding a recession.

In Germany, the government raised its forecast for growth in 2013 to 0.5 percent from 0.4 percent.

US durable goods orders and Ifo index fall

Economic data on Wednesday were weak.

In the US, durable goods orders fell 5.7 percent in March after having risen 4.3 percent in February. Excluding transportation equipment, orders fell 1.4 percent in March after falling 1.7 percent the prior month.

Somewhat more encouragingly, orders for non-defense capital goods excluding aircraft rose 0.2 percent.

In Germany, Ifo's business climate index fell to 104.4 in April from 106.7 in March, its second consecutive decline.

In the UK, mortgage approvals were 1.2 percent lower in March compared to a year ago as net mortgage lending shrank by 328 million pounds last month and retail sales fell in April.

Despite the weak economic data, markets were mostly steady on Wednesday. Copper rebounded 2 percent, its first gain in four days after falling into a bear market on April 19. Gold rose 1 percent and European stocks rallied for a fourth day.

Markets rise as manufacturing slows

Markets ended positively on Tuesday, especially in Europe, where the STOXX Europe 600 Index jumped 2.4 percent, the biggest rise since 3 August. In the US, the S&P 500 rose 1.0 percent.

European government bonds also rose on Tuesday. The yield on Italy's 10-year government bonds in particular fell as much as 17 basis points to 3.89 percent, the lowest since 27 October 2010, while the two-year yield touched 1.125 percent, the lowest since Bloomberg began compiling the data in 1993.

Raised expectations for a rate cut from the European Central Bank may have helped boost markets after Markit's composite index for the euro area remained in contraction territory in April, staying unchanged from March at 46.5 based on a flash reading released on Tuesday. The services index rose to 46.6 in April from 46.4 in March while the manufacturing index fell to 46.5 from 46.8.

Meanwhile, manufacturing activity in China slowed in April. HSBC's flash manufacturing PMI came in at 50.5, down from 51.6 in March.

US manufacturing activity also slowed in April. Markit's flash US manufacturing PMI fell to 52.0 from 54.6 in March.

Another report from the US on Tuesday showed that new home sales increased 1.5 percent in March.

European bonds rise with consumer confidence, US growth slows

Europe's financial and economic problems showed further signs of easing on Monday.

Italy’s government bonds rose, pushing the two-year yield down 10 basis points to a record low of 1.24 percent, after Giorgio Napolitano was re-elected as president over the weekend.

Spanish bonds also rose on Monday, the 10-year yield falling 12 basis points to 4.50 percent, the lowest since November 2010, even as a report from Eurostat showed that the country's budget deficit widened to 10.6 percent of gross domestic product last year.

Another report on Monday showed that consumer confidence in the euro area rose to -22.3 in April from -23.5 in March.

In the US, though, the Chicago Fed's National Activity Index fell to -0.23 in March from +0.76 in February. The three-month average fell to -0.01 from +0.12.

According to the Chicago Fed, the three-month average showed that economic growth “was very near its historical trend” and that inflationary pressure is “subdued”.

Another report from the US on Monday showed that existing home sales fell 0.6 percent in March. The fall was mostly attributed to a decline in the availability of distressed homes though.

G20 and IMF mindful of QE side effects as Fed expected to persist

The G-20 gave qualified support for quantitative easing policies last week. From Bloomberg:

Group of 20 finance chiefs pledged to stay alert to any fallout from easy monetary policies even as they backed the Bank of Japan’s plan to buy more than 7 trillion yen ($70 billion) a month of bonds.

In a nod to concerns that stimulus in one economy often creates challenges elsewhere and could fuel asset bubbles, the G-20 officials meeting in Washington heightened their commitment to being “mindful of unintended negative side effects stemming from extended periods of monetary easing.”

The IMF has also shown concerns about the unintended consequences of QE.

Although the spotlight fell on currencies, the International Monetary Fund, which held its spring meetings alongside the G-20 gathering, last week said loose monetary policy could inflate credit bubbles, threatening a fresh round of financial crises...

The IMF plans a study on how best to unwind stimulus, said Managing Director Christine Lagarde, who called the current support programs “appropriate.”

Quantitative easing is unlikely to be unwound soon though, at least in the US, according to Wall Street analysts. Again from Bloomberg:

Wall Street’s biggest bond dealers see little chance the Federal Reserve will slow the pace of debt purchases designed to boost economic growth before year-end, even as policy makers face calls to curb the buying.

Of the 21 primary dealers that trade with the central bank, 14 said in a Bloomberg News survey that the Fed won’t start to reduce its $85 billion monthly bond buying until the last three months of 2013. Twelve forecast they will end in mid-2014 or later. Fifteen say it will take until at least June 2015 for policy makers to raise the record low benchmark interest rate target of zero to 0.25 percent. Goldman Sachs Group Inc. chief economist Jan Hatzius sees no increase before January 2016.

Fitch cuts UK credit rating

While the financial crisis in the euro area has abated recently, sovereign debt remains an issue for many developed economies, as Fitch's downgrade of the UK on Friday reminds us. From Reuters:

Britain's credit standing took a further blow on Friday when Fitch Ratings became the second major international agency to strip the country of its top-notch credit rating...

Fitch trimmed the rating to AA-plus from AAA, citing a weaker economic and fiscal outlook. But it returned the outlook to "stable", removing the threat of any further rating action, at least in the near term.

The impact on markets is expected to be minimal.

"The downgrade only tells us what was already known: that fiscal consolidation has ground to a halt and that the growth outlook is poor," said Rob Wood, UK economist at Berenberg Bank.

Moody's had been the first rating agency to downgrade the UK in February.

US leading index falls, China home prices rise

US data on Thursday indicate that the economy may be slowing. The Conference Board's index of US leading indicators fell 0.1 percent in March. The Federal Reserve Bank of Philadelphia’s manufacturing index fell to 1.3 in April from 2.0 in March.

Meanwhile, in the UK, cold weather contributed to a 0.7 percent fall in retail sales in March. That left first quarter retail sales just 0.4 percent higher than the previous quarter.

However, in China, foreign direct investment rose 5.7 percent in March from a year earlier and new home prices rose 1.2 percent in March as 68 of 70 major cities monitored by the government saw price increases, up from 66 in February.

Europe also had good news. Spain’s bonds rose on Thursday, its 10-year yield falling two basis points to 4.66 percent after the government sold 10-year debt at the lowest yield since September.

However, Italy's 10-year yield rose one basis point to 4.26 percent on Thursday as two rounds of voting failed to break a deadlock on the selection of the country's next president.

Japanese consumer confidence and exports rise, US maintains expansion

Japan's economy appears to be improving.

A report on Wednesday showed that the Cabinet Office's consumer confidence index rose to 44.8 in March from 44.2 in February. It was the third consecutive increase.

A report on Thursday showed that Japan's exports rose 1.1 percent in March from a year earlier. Imports rose a larger 5.5 percent though, leaving a trade deficit of 362.4 billion yen, the ninth consecutive monthly trade deficit.

Meanwhile, the US economic expansion remained “moderate”, according to the Federal Reserve's latest Beige Book survey. The Fed report on Wednesday noted increases in manufacturing activity, with particular strength in industries tied to residential construction and automobiles, that offset weakness in defense-related industries in some regions.

However, the UK economy appears to be still struggling. A report on Wednesday showed that its unemployment rate rose to 7.9 percent in the three months ending in February, the highest since the three months to August 2012.

Mixed data, low inflation means no Fed tightening soon

Markets rebounded on Tuesday with the S&P 500 rising 1.4 percent and gold rising 1.9 percent.

However, economic data on Tuesday were mixed.

In the US, a report showed that industrial production rose 0.4 percent in March but manufacturing production fell 0.1 percent.

Another report from the US on Tuesday showed that total housing starts rose 7.0 percent in March. However, starts for single-family houses fell 4.8 percent and building permits fell 3.9 percent.

There has been little inflation in the US though. The consumer price index fell 0.2 percent in March after having jumped 0.7 percent in February.

Low inflation means that the Federal Reserve will be in no hurry to remove monetary stimulus.

Indeed, Rich Bernstein thinks that the Fed will be slow to tighten. It will only tighten “when a strong and broad consensus forms that the economy can withstand a tightening cycle”, which is not the case today.

When it eventually does tighten, it will probably “tighten too much . . . and cause a recession”. However, that eventuality “is probably quite far in the future”.

Meanwhile, elsewhere, inflation held steady in the UK at 2.8 percent in March and slowed in the euro area to 1.7 percent from 1.8 percent in February.

The main concern in Europe, rather, has been weak growth. The ZEW index of investor confidence in Germany fell to 36.3 in April from 48.5 in March, its first decline in five months.

Indeed, the International Monetary Fund has urged European policy makers to stimulate the economy as it cut its latest global growth forecast for this year to 3.3 percent from 3.5 percent in January.

Gold plunges as markets decline following slower growth in China

Markets tumbled again on Monday, with gold in particular plunging 9.3 percent, its biggest fall since 1980.

Stocks were also hit hard. The S&P 500 fell 2.3 percent, its biggest fall since 7 November.

Weak economic data on Monday contributed to the market declines.

In China, economic growth reportedly slowed to 7.7 per cent in the first quarter from 7.9 percent in the previous quarter.

Fixed-asset investment jumped 20.9 percent in the first quarter from the same period last year. However, this was down from a 21.2 percent increase for the first two months.

Industrial production rose 8.9 percent year-on-year in March and 9.5 per cent for the first quarter as a whole. Retail sales were up 12.6 per cent in March and 12.4 per cent in the first quarter.

US data on Monday were also disappointing. The National Association of Home Builders/Wells Fargo index of builder confidence fell to 42, the lowest since October, from 44 in March. The Federal Reserve Bank of New York’s general economic index fell to 3.1 in April from 9.2 in March.

Central bankers see no bubble, Hussman disagrees but sees value in gold shares

Bloomberg reports that central bankers are not seeing a bubble in equities despite the ultra-easy monetary policies that have been implemented around the world.

Policy makers from the Federal Reserve and the Bank of England said they see few signs of equity price bubbles in the U.S. and the U.K., countering criticisms record stimulus is stoking excessive risk-taking.

“I don’t think we’re in that kind of territory that obviously makes these asset prices unsustainable and at a bubble level,” Bank of England policy maker David Miles said today during a panel discussion at the Boston Fed. While “this is something we have to keep monitoring” at the Fed, “I don’t see” these risks now, Minneapolis Fed President Narayana Kocherlakota said to reporters after speaking at the same forum.

Kansas City Fed President Esther George did warn of risks though earlier this month.

“We should not underestimate the risk of an extended period of zero interest rates and the accompanying incentives that may lead to future financial imbalances,” George said on April 4 in El Reno, Oklahoma. “Such imbalances could unwind in a disruptive manner and cause the labor market recovery to stumble.”

Criticism of central bank policies have been stronger from non-central bankers.

For example, the recent action by the Bank of Japan has triggered the following response reported by Bloomberg:

The Bank of Japan’s “huge bet” by boosting quantitative easing won’t turn the economy around and is instead sending the nation toward default, said Takeshi Fujimaki, former adviser to billionaire investor George Soros...

“By expanding the monetary base to 270 trillion yen, the BOJ is making a huge bet which I think it will ultimately lose,” Fujimaki said in an interview in Tokyo on April 11. “Kuroda’s QE announcement is declaring double suicide with the government. The BOJ will have to share the country’s fate and default together.”

Another critic of quantitative easing has been fund manager John Hussman. In his latest article, he notes an “accelerating eagerness to buy market dips since 2010”.

This tendency reflects a broadening consensus among investors that there is no direction other than up, and that any correction, however small, is a buying opportunity. As investors clamor to buy ever smaller dips at increasing frequency, the slope of the market’s advance becomes diagonal or parabolic. This is one of the warning signs of a bubble...

Undoubtedly, the eagerness of investors to aggressively buy every dip has been driven by the confidence that quantitative easing supports those actions. Still, I doubt that investors have seriously considered the fact that each round of QE has had successively smaller effects...

While Hussman thinks that most assets have become overvalued as a result of quantitative easing, he notes that the recent fall in gold may have made gold shares attractive.

I should note that last week, spot gold fell to 1486, and the Philadelphia gold index (XAU) declined to just 116, down nearly 50% from its 2011 peak. Importantly, this places the ratio of the spot gold price to the XAU at the highest level in history. This fact does not, in and of itself, imply near-term gains in the XAU. However, looking out over horizons of a year or more, an elevated gold/XAU ratio is a strong indicator of subsequent prospective total returns in gold shares.

Gold sinks, US retail sales fall

Markets fell on Friday, with gold in particular falling more than 4 percent to its lowest level since July 2011. Other precious metals and oil also fell, as did stocks. US Treasuries and German bunds rose.

Unexpectedly weak economic data from the US on Friday contributed to the market sell-off.

US retail sales fell 0.4 percent in March, the biggest drop since June. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 72.3 in April from 78.6 in March.

Meanwhile, inflationary pressure remains subdued. Producer prices fell 0.6 percent in March after having risen 0.7 percent in February.

Europe had positive data to report on Friday though. Industrial production in the euro area rose 0.4 percent in February.

Italy sells bonds at lower yields as global economy gains momentum

The news on Thursday was positive.

In Europe, Italy saw yields decline at its latest bond auction on Thursday. It sold a total of 7.17 billion euros of debt, near the 7.5 billion-euro maximum target.

Even as the European financial crisis remains in check, the European Central Bank said in its monthly bulletin for April on Thursday that “signs of renewed growth momentum have begun to emerge in recent months” for the global economy. This is expected to help the euro area grow its exports and “lead to a gradual recovery in the second part of the year”.

Indeed, on Wednesday, the OECD had reported that its composite leading indicators “point to growth picking up in most major economies”, including the euro area.

And in the US, a report on Thursday provided yet another sign that its economy continues to grow. Jobless claims plunged by 42,000 to 346,000 in the week ended 6 April 6 from 388,000 the previous week.

China's trade falls into deficit but new loans jump

China's trade balance fell into deficit in March, according to a report on Wednesday. Imports rose 14.1 percent from the previous year. Exports were also up 10.0 percent.

In a sign that China's economy is likely to continue growing, a report on Thursday showed that new local-currency lending rose to 1.06 trillion yuan in March from 620 billion yuan in February.

Meanwhile, another report on Thursday showed that Japan's economic recovery also looks likely to continue. Core machinery orders rose 7.5 percent in February, the fastest pace since mid-2011. Orders had fallen 13.1 percent in January.

UK economy ekes out growth in first quarter

It looks like Britain will avoid another recession for the time being. The National Institute of Economic and Social Research has estimated that the UK economy grew 0.1 percent in the first quarter.

Other data on the UK economy on Tuesday were mixed though. While industrial production rose 1.0 percent in February, the trade deficit rose to £3.6 billion from £2.5 billion in January as exports to non-EU countries fell by 4.7 percent.

Another report on Tuesday showed that the trade picture for Germany in February was also not good. While the trade surplus increased to 16.8 billion euros from 13.6 billion euros in January, exports fell 1.5 percent as imports fell by a bigger 3.8 percent.

Meanwhile, China reported on Tuesday that inflation slowed to a rate of 2.1 percent in March from 3.2 percent in February.

Japan's current account returns to surplus, German industrial output rises

With the yen weakening recently following moves by the Bank of Japan to stimulate the economy, hopes have risen for a rebound in Japan's trade balance.

However, a report on Monday showed that Japan's current account balance had already moved backed into surplus in February, its first surplus in four months. The surplus of 637.4 billion yen was well down from the year-ago surplus of 1.2 trillion yen but it reversed the 364.8 billion yen deficit in January.

In further good news for Japan on Monday, the Cabinet Office's economy watchers survey showed that the index for current conditions rose to 57.3 in March from 53.2 in February, its fifth consecutive increase. The future conditions index dipped to 57.5 though from 57.7.

In Europe, Germany reported on Monday that its industrial production rose 0.5 percent in February, rebounding from a 0.6 percent fall in January.

However, in a sign that Europe continues to face problems, Fitch warned Portugal on Monday it could downgrade the country's debt rating deeper into junk territory if last week's rejection of austerity measures by its constitutional court disrupts its fiscal repair plans.

Economies face demographic drag

Employment growth around the world has been weak in the current economic cycle. While this is partly due to cyclical factors, an underlying secular trend in demographics has also been a contributing factor.

On Friday, the United States Labor Department reported that employment rose by 88,000 in March. This is weaker than in recent months but employment growth in the recovery from the last recession has been weak anyway, with employment still significantly below the last cycle peak.

One of the reasons for the weak growth in employment has been the lack of demand growth in the world economy as major banks in developed economies tightened lending standards to try to repair balance sheets stretched by excessive lending in the last economic cycle.

However, another, less-mentioned reason for the weak growth in employment is the slower growth in the labour force itself. Indeed, in some countries, the labour force is shrinking.

For example, while US employment rose by just 88,000 in March, the unemployment rate still fell to 7.6 percent from 7.7 percent in February as the labour force contracted by 496,000.

The outright decline in the US labour force in March may have been an aberration. Over the longer term, the US labour force has still been growing.

Still, the trend in the growth rate is clearly down. In the ten years from March 1983 to March 1993, the labour force grew 16.3 percent. In the ten years from March 1993 to March 2003, it grew 13.5 percent.

In the ten years from March 2003 to March 2013, the US labour force grew just 6.2 percent.

The US is not unique in seeing weak growth in its labour force. Indeed, the demographic trend looks even worse in some of the other major economies.

In an article on 27 March, Bloomberg reported that, based on data from the US Census Bureau, China’s pool of 15- to 39-year-olds fell to 525 million last year, down from 557 million five years earlier. As a result of the slowing growth in the labour force, the report, citing consulting company Hackett Group, said that the gap between manufacturing costs in the US and China has almost halved in the past eight years and will fall to 16 percent this year.

Europe has a similar demographic trend. The database from the Census Bureau shows that the number of 15- to 39-year-olds in countries belonging to the European Union fell to 161 million last year from 169 million in 2007.

As far as shrinking labour forces is concerned, though, no country has had it worse than Japan. Data from Japan's Statistics Bureau show that its labour force peaked back in 1997 and has been on a declining trend ever since.

The number of entrants into the labour force looks set to fall further in the coming years. China, Europe, Japan and even the US have fewer people below age 15 than in the 15-29 age group.

Fewer new workers means lower economic growth is likely. Demographics looks set to remain a drag on economic growth for most of the major economies for several more years.

Yen at risk of rout but Japanese stocks rise amid falls elsewhere

The Bank of Japan's latest moves to stimulate the economy are being met with some skepticism. From Bloomberg:

Billionaire investor George Soros and Bill Gross, who runs the world’s biggest bond fund, said the Bank of Japan plan to end deflation risks weakening the yen.

“If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche,” Soros said today in an interview on CNBC...

Kuroda may have difficulty achieving his inflation goal, Gross said. Group of Seven nations may press Japan to control the pace of the yen’s decline to temper gains in their own currencies, he said...

Nevertheless, in early reaction to the BoJ move, Japanese stocks started strongly on Friday, the Nikkei 225 surging more than four per cent in early trade to its highest level since August 2008. However, it ended the day just 1.6 percent higher.

Other Asian markets mostly closed lower, with South Korean stocks losing 1.6 percent amid tension with North Korea and Hong Kong stocks tumbling 2.7 percent after news of deaths from bird flu in China.

The weakness carried over into the European and US sessions. The STOXX Europe 600 fell 1.6 percent, its biggest drop since October. The S&P 500 initially fell 1.3 percent following a weak US jobs report but recovered later to end the day just 0.4 percent lower.

Among economic data on Friday, the US employment report was the highlight of the day. The weak growth of 88,000 payrolls in March initially drove markets down, although the unemployment rate did fall to 7.6 from 7.7 percent in February as the labour force shrank.

Encouragingly for the US economy, another report on Friday showed that the trade deficit narrowed in February as exports rose 0.8 percent while imports were little changed.

There were also positive data from Japan on Friday. A preliminary reading of the index of coincident economic indicators showed a rise of 0.5 point in February. The index of leading economic indicators rose 2.5 points.

Economic data from Europe on Friday were mixed. Retail sales in the euro area fell 0.3 percent in February. This followed a 0.9 percent increase in January. Moving in the opposite direction, German factory orders jumped 2.3 percent in February after having fallen 1.6 percent in January.

ECB leaves monetary policy unchanged as eurozone services sector deteriorates

Following the market-moving measures taken by the Bank of Japan on Thursday, the European Central Bank's monetary policy meeting later that day proved to be a more sedate affair.

The ECB left its main interest rate unchanged at 0.75 percent. At a press conference after the meeting, ECB President Mario Draghi said that “we will monitor very closely all the incoming information on economic and monetary developments, and assess the impact on the outlook for price stability”.

The weak eurozone economy could still push the ECB into further monetary stimulus though. A report on Thursday showed that Markit's index of services activity for the euro area fell to 46.4 in March from 47.9 in February, pushing the composite index down to 46.5 last month from 47.9 in the previous month.

The Bank of England also left monetary policy unchanged after its meeting on Thursday.

While the UK economy has also been struggling, data on Thursday were positive, with the Markit/CIPS services PMI rising to 52.4 in March from 51.8 in February.

New BoJ governor fires opening salvo in war on deflation

Japan's policy makers seem determined to end deflation, with the Bank of Japan today launching a renewed offensive against it. Bloomberg reports:

Bank of Japan Governor Haruhiko Kuroda began his campaign to end 15 years of falling prices by doubling monthly bond purchases in a bid to reach 2 percent inflation in two years.

With Kuroda presiding over his first meeting, the board today temporarily suspended a cap on some bond holdings and dropped a limit on the maturities of debt it buys. The BOJ will purchase 7 trillion yen ($74 billion) of bonds a month along with more risk assets, the central bank said in Tokyo.

Elsewhere, the case for further monetary easing appears mixed based on Wednesday's economic reports.

In the euro area, a report on Wednesday showed that inflation slowed to 1.7 percent in March from 1.8 percent in February.

In the US, the Institute for Supply Management reported on Wednesday that its non-manufacturing index fell to 54.4 in March from a one-year high of 56.0 in February. ADP reported that private employment rose by 158,000 last month, down from a 237,000 gain the prior month and the smallest increase since October.

On a more positive note, China reported on Wednesday that its official non-manufacturing PMI rose to 55.6 in March from 54.5 in February while HSBC reported that its services index for China rose to 54.3 from 52.1.

US factory orders rise but shrinking eurozone manufacturing may get hit further by Cyprus

Economic data on Tuesday were mixed.

In the US, a report showed that factory orders rose 3.0 percent in February, more than reversing a 1.0 percent decline in January and providing an indication that US economic growth is gaining momentum.

In contrast, manufacturing in the euro area worsened in March with Markit's manufacturing PMI falling to 46.8 in March from 47.9 in February. Chris Williamson, chief economist at Markit, warned in his report that there is concern that the “events in Cyprus . . . will have hit demand further in April”.

Another report on Tuesday showed that unemployment in the region stayed at a record high of 12.0 percent in February, unchanged from January.

In the UK, manufacturing also contracted, although the Markit/CIPS manufacturing PMI did rise to 48.3 in March from 47.9 in February. Another report from the UK showed that mortgage approvals fell in February but the value of mortgage lending rose, as did lending to consumers.

Meanwhile, the saga in Cyprus may not be over despite the country receiving a bailout deal. Tuesday saw Finance Minister Michael Sarris resign amid a probe into the country's financial crisis.

And Cumberland Advisors' David Kotok reminds us: “Contagion starts small, and we may now be witnessing one gathering momentum in the Eurozone.”

US and China show signs of continued growth

Reports on Monday showed continued economic growth in the US and China.

The US data were somewhat mixed.

Manufacturing activity cooled in March, according to the Institute for Supply Management. Its manufacturing PMI fell to 51.3 last month from 54.2 in February.

In contrast, Markit's manufacturing PMI for the US rose to 54.6 in March from 54.3 in February.

Another report from the US on Monday showed that construction spending rose 1.2 percent in February after having fallen 2.1 percent in January.

Earlier on Monday, data had shown accelerating activity in China's manufacturing sector.

The manufacturing PMI from the National Bureau of Statistics and the China Federation of Logistics and Purchasing rose to 50.9 in March, the highest since April 2012, from 50.1 in February.

HSBC's manufacturing PMI for China rose to 51.6 in March from 50.4 in February.

Japan's Tankan shows improvement but Asian property may be topping out amid new curbs

Japan's economy moved out of recession in the fourth quarter but the data since then have been mixed (see, for example, Friday's reports).

The latest indication of a recovery came today. The Bank of Japan's Tankan survey showed that the index for large manufacturers rose to minus 8 in March from minus 12 in December. The index for large non-manufacturers improved 2 points to plus 6.

While Japan is trying to revive its economy, many other countries in East Asia are trying to cool their property markets.

Over the weekend, several Chinese cities introduced new curbs on home purchases. Bloomberg reports:

Beijing, the capital, banned single-person households from buying more than one residence while Shanghai prohibited banks from giving credit to third-home buyers, according to the local administration websites. The two cities will also enforce a 20 percent tax on capital gains from property sales...

The city administration of Shanghai, where new home prices in February rose 3.4 percent from a year earlier, also said it will increase down-payment requirements and interest rates for second-home mortgages. Shenzhen, Guangzhou, Chongqing, Tianjin and Jinan have also published details on the housing curbs.

Meanwhile, James Gruber notes that governments in Hong Kong and Singapore have become “more concerned with property price rises and are willing to act to curb them”. He thinks that it is possible that “property in Hong Kong and Singapore may be close to topping out not just for a few years, but for a decade or more”.