So it seemed that everyone thought the market was simply correcting the wave of optimism seen by the end of last week after the release of the NFP reading and results of the U.S Stress Tests, yet what shocked markets was that this correction, ended in a rather quite a pessimistic sentiment.
Investors failed to hold onto what they once thought concerning the global credit crisis and that the worst has finally passed us. Stock markets were fluctuating and boards continued to flash the color red as many had become more cautious than before. But what is the current situation in the world? Data released continues to provide us with contradicting results. Jobless claims in the US showed that the labor market remained week as many filed for first time aid yet the NFP was much better than expected...what is that about?
Well dear reader, governments and policy makers are waiting to see the effects of the rate cuts and stimulus packages and it's hard to currently correctly assess the situation. Reports from central banks were released this week starting off with the BoE releasing their quarterly inflation report showing that inflation will continue to undershoot the target and that growth will recover during 2010.
On the other hand, from the Euro Zone, the ECB released their monthly report showing nothing different than the previous report, though they confirmed the low levels of inflation as they will stabilize over the medium term. But that wasn't the major market mover, as growth data came flooding in from the zone starting off with Spain showing the deepest contraction in 40 years, followed by Germany which contracted 3.8 percent and the Euro Zone which shrank more than expected with 2.5 percent.
As the zone remains in trouble, the IMF also suggested conducting stress tests to European banks similar to those seen in the US after the German Cabinet passed a new plan to help banks dump toxic assets and convert them with government bonds, to help provide liquidity in the area.
Moving on to the US and away from the economy, the automobile sector remains in distress as GM may fail to meet the deadline on June 1 and be forced to go officially bankrupt; whereas Chrysler, which had filed for bankruptcy earlier this month, said it is attempting to obtain approval of closing 789 dealership agreements after failing to reduce debt and become profitable. On the other hand, Ford motors said that it may become profitable by 2011 as they continue to cut back on expenses and reduce company debt.
And the tour begins...
Japan and Asia
This week ended without any major fundamentals in the Asian economy as only the interest rate decision from the South Korean central bank was released besides a number of economic reports from different Asian countries which reflects a continuous drop in growth rates in the region waiting for recovery that is still expected to be seen by the beginning of next year.
Starting our tour from South Korea, the central bank decided to hold interest rates steady at 2.0% for the third consecutive month to follow the same decision made by the Australian central bank which maintained its interest rates at its lowest level since 49 years at 3.0% during this week.
The policy that was followed by the South Korean central bank aims at waiting for what would the current improvements in the market result in, especially after the stimulus plans that were created by the South Korean government, with the last estimated to total 17.2 Trillion Korean won; in addition to the Series of interest rate cuts by 3.25% since last October in order to support the economic growth and motivate the interior front hoping to end the negative effect on the economy which has resulted from the massive exports contraction.
The improvements in the Chinese economy besides the economic reports released from the American economy, which is the largest market for Asian products, emphasized that the worst stage of the financial Crisis has passed and recovery will be realized by the beginning of next year as expectations for many countries in the world refer to that. In role, that forces central banks in the Asian region to wait till Asian economies accommodate themselves with the new situations in markets.
This week, the Chinese economy released reports concerning exports of April which continued decreasing showing a reading of -22.6% to reach $91.94 billion after the previous 17.1% contraction during March. Also the Chinese trade balance surplus narrowed to reach 13.14 billion dollar after it reached 18.56 billion dollar during the previous month.
Reports for April came to emphasize that the world demand didn't increase and that the recovery in the Chinese economy resulted from the nation within. The governmental stimulus plan that was afforded by the Chinese government during last November worth 4 trillion yuan, showed great support to the Chinese economy and it was able to increase the internal demand to offset the obvious contraction in the amount of exports which the economy mainly relies on in the growing process. The incentive plan was directed to support infrastructure projects which is considered the best way to create more job opportunities that leads to social stability in the world's largest populated country.
As for the Chinese industrial sector, it is still suffering from a massive contraction in exports yet the yearly industrial production increased in April to reach 7.3%, less than analyst expectations and the 8.3% reading in March. The decline was led by the plunge in Electric alongside the main problem in the Chinese economy, which is slumping exports. In addition, China released the yearly retail sales during April showing an increase to reach 14.8% while the previous reading was 14.7%.
Japan, which is the second largest economy in the world, reported a surplus in the trade balance which amounted to 132.9 billion yen in March compared with surplus of 202.1 billion yen during February, as for the Japanese current account it improved to reach a surplus of 1485.6 billion yen compared with 1116.9 billion yen during March.
The improvement in the current account resulted from the slowdown in the decline in exports which reached to -46.5% compared with the previous -50.4% reading where exports are not expected to recover soon because of the bad effect of the financial crisis which is the worse since the Great Depression and which resulted in decreasing the demand for Asian products in general and Japanese exports too knowing that exports are the main driver to growth.
Also, machine orders during March was released this week which continued falling despite the increase witnessed the previous month as the reading in March decreased to reach -1.3% compared with the revision of the reading in February that was 0.6%, worth mentioning that the reading of this indicator excluded ships building and the utility sector.
Industrial sector mainly depends on growing exports so with the current world demand and the recession that affected exports, we find that the industrial sector stopped growing resulting in a slump in capital spending which dragged machine orders. Japanese factories and companies now depend on their inventory to show no desire to improve its product or spend more in the investment process due to the expected decrease in demand which affects companies' profits negatively. Focusing on inventory, we find that layoffs increased as companies are trying to reduce its production cost to face the pessimistic expectations about profit.
Deeper than expected contraction that was the highlight of this week; all markets across the globe were waiting for this reading especially the Europeans because all other economies across the globe have revealed how deep they contracted in the first quarter. Therefore, it's an unexpected contraction, yet we can't deny the fact that this might be the bottom for all contractions, where a gradual recovery will be seen by the end of the year.
Growth retracted 2.5% on the quarter from the previous 1.6%, followed by the yearly reading heading to -4.6% from the previous -1.5%. Trichet warned on various times that a contraction in the first quarter will be deep but we never thought that it would be that deep which now makes us question the recovery.
Projections and expectations took place but we never thought that it would reach this far, the Credit Crisis resulted in pushing the zone into their first and worst recession since the euro was established. However, the ongoing expectations that GDP will contract 4.9% this year according to the IMF but if wider contraction would take place in the upcoming quarters then the euro area yearly growth will breach -5.0%.
In the first three months of the year, a deep contraction took place after the industrials production plunged in March heavily to -20.2% on the year and -2.0% on the month. The levels of production were curbed badly after domestic and international demand weakened on European goods; economies such as Germany that used to depend on exports got hit badly pushing them to face a wider retraction than the one seen in the overall zone.
The Federal Statistics Office announced today that the German GDP contracted heavily, the quarter on quarter reading fell 3.8% in the first quarter coming worse than the revised previous -2.2%. The yearly working day adjusted reading retracted 6.9% from the revised prior -1.8%, along with the non-seasonally adjusted reaching to -6.7%.
The severe contraction that took place in the first quarter has pushed unemployment rates to elevated levels, where we witnessed rates surging in March to 8.9% unexpectedly, bolstered by the Spanish jobless rates that reached to 17.4% and the German Unemployment rates.
All construction companies in Spain had to stop all their work by letting off all workers, leaving them with no money or income to spend. That's why we saw the levels of Unemployment escalate to the current elevated levels in the first quarter at that time even when the European Commission had approved a fiscal plan that would work to stop jobless rates from heading higher.
Okay we agree on the fact that an improvement will take place but the existing pressures from the elevated jobless rates will continue to curb spending where citizens lack any spare money to spend at those harsh times. The Unemployment plan that Trichet and the European Commission introduced in the prior year must start saving workers so they can ease the prolonged tension on their economy.
The DJ EURO STOXX 50 gained 10.57 points or 0.45% to close at 2364.10 levels, while The French CAC 40 Index gained 12.76 points or 0.40% to close at 3169.05 levels, and The German DAX Index declined 0.97 points or 0.02% to close at 4737.50 levels.
The Euro opened this week's trading against the U.S. dollar at 1.3651 and recorded a high of 1.3718 and a low of 1.3460 to close at 1.3486.
The highlight of this week in the United Kingdom was the quarterly inflation report as it brought nothing but pessimism on Britons as it showed that the nation is dealing with a slow economic recovery alongside deflation risks that have been triggered from crippled demand.
The Bank of England quarterly report said that inflation is estimated to fall to 0.4% during this year while slightly inclining to 1.5% during next year as prices remain pressured from the ongoing global slowdown in spite of the central bank purchasing government bonds to avoid deflation risks.
There are anticipations in the economy that the falling pound is going to help increase prices as a result of imported goods now becoming worth more to Britons which will lead to producers increasing their prices as a way to make up for the gain in import prices.
The inflation report also revealed that the banking system is slightly stabilizing as the quantitative easing is starting to slowly ease the crunch in the financial system which was why Governor of the BoE Wednesday stated that he has solid reasons to expect slower spending while unemployment rates surged to 7.1 percent.
Also this week we saw that unemployment jumped 244,000 to 2.2 million from January till March, which marked the fastest pace since 1996 while claimant count rose 57,100 in April, marking another high since 1997.
The softening labor market curtails consumption further in the nation as consumers are pound less which is why King believes that there will low spending in the economy at a time of instable economic growth; therefore without spending in the nation, there will not be an economic recovery anytime soon.
The central bank already believes that the nation will continue to contract annually for the rest of this year before returning to positive levels during next year while a recovery to start becoming visible by the end of 2010.
King also mentioned that investments are still weak as a result of the credit quake that left businesses and consumers starving for loans while the lending system is rigid which is why the BoE continues to buy gilts so far set with 125 billion pounds as a way to provide liquidity and lower borrowing costs.
When and if banking systems stabilizes, it will help support economic growth therefore ending the ongoing recession in the UK as they contracted by 1.9 percent in the first three months of this year, which marked the worst quarter since 1979!
In conclusion, we see that the ongoing job losses, crisis in financial system, falling home values and other major sectors tumbling are all major reasons that the British economy continues to face misery that it has not faced since World War II.
The British FTSE 100 Index plummeted 14.47 points or 0.33% to close at 4348.11 levels.
The British Pound opened this week's trading against the U.S. dollar at 1.5226 and recorded a high of 1.5351 and a low of 1.5057 to end the week at 1.5158.
Pessimism dominated earlier this week as investors feared that the world's largest economy is still far from recovery especially after the release of a set of data that signaled the economy is still weak, however stocks managed to rebound towards the end of the week, though the outlook remains highly uncertain.
The Federal Reserve Bank Chairman Ben Bernanke signaled this week the outlook is still challenging and accordingly investment and trading banking businesses should remain cautious, while highlighting that the Stress Tests weren't designed to measure operational, liquidity and reputational risks, and Bernanke advised investors not to perceive the Stress Tests to be all what banks might need.
Meanwhile, Bernanke assured investors that the Fed has several measures in order to withdraw liquidity from the financial system, as recently rising concerns about the long-term outlook for inflation started to emerge, as the Fed pledged to purchase $300 billion of long-term Treasuries to help ease conditions in the financial system, in addition to the huge amounts of money committed by the Fed and the Treasury to help unfreeze credit markets.
The U.S .Commerce Department released this week the trade balance for the month of March, the trade deficit widened in March to $27.577 billion from the prior revised deficit of $26.134 billion, as exports dropped by 2.4% while imports dropped by 1.0%.
Also the National Association for Realtors reported that median home prices dropped in the first three months of this year by 14% compared with a year earlier, as home prices dropped in 134 metropolitan cities out of 152; the housing market in the United States continue to drag economic growth amid the worst slump in more than 8 decades.
Moreover, the retail sales index for the month of April was released this week, retail sales dropped by 1.2% in April following the prior revised drop of 1.3% and well below median projections for a flat estimate, while retail sales that exclude autos dropped by 0.5% in April following the prior reported drop of 1.2% and also below median estimates for a 0.2% rise.
On the other hand, business inventories for the month of March were released, business inventories dropped by 1.0% following the prior reported drop of 1.4% back in February and slightly better than markets' expectations of a 1.1% drop. Inventories continued to weigh down on economic growth during the first quarter of this year, as companies reduced their inventories to meet the slumping demand.
The producer price index for the month of April indeed eased deflation risks, as PPI rose by 0.3% over the month following the prior reported drop of 1.2% and slightly better than median estimates of 0.2%, as rising food and gasoline prices helped to ease deflationary risks, though downside risks to inflation remain.
PPI dropped by an annualized rate of 3.7% inline with markets' expectations and following the prior reported drop of 3.5%, also core PPI which excludes food and energy prices rose in April by 0.1% inline with median estimates and following the prior revised estimate, while core PPI rose by an annualized 3.4% inline with markets' expectations and down from 3.8% reported previously.
Deflation risks are indeed easing, as the recent rise in energy prices alongside the increased measures from the Fed should be able to eliminate deflation risks, however since economic activity remains very weak, downside risks to inflation should continue to threat the world's largest economy.
The U.S Labor Department released its weekly initial jobless claims showing a rise of 32,000 to 637,000 from the prior revised estimate of 605,000 applications, while continuing claims rose to a record high of 6.560 million from the prior revised estimate of 6.358 million and well above median estimates of 6.40 million.
The U.S. labor markets remain on the receiving end of the ongoing recession, as the unemployment rate rose in April to the highest level since 1983 at 8.9 percent, as companies continued to layoff more employees in a bid to reduce some costs and face the ongoing recession.
The consumer price index for the month of April was flat following the prior drop of 0.1% and inline with expectations, while compared with a year earlier CPI declined by 0.7% following the prior drop of 0.4% and worse than the expected drop of 0.6%.
Core CPI which excludes food and energy prices rose in April by 0.3% following the prior rise of 0.1% and more than the expected rise of 0.2%, while compared with a year earlier core CPI rose by 1.9% more than the expected and previous estimates of 1.8%.
Moreover, net long term TIC flows rose to $55.8 billion from the prior revised estimate of $22.0 billion and above expectations of $35.0 billion, while total net TIC flows rose in March by $23.2 billion from the prior reported revised estimate of -91.1 billion.
Also industrial production for the month of April showed a drop of 0.5% following the prior revised drop of 1.7% and slightly better than median estimates of a 0.6% drop, while capacity utilization dropped in April to 69.1% from the prior revised estimate of 69.4% but better than median estimates of 68.8%.
Finally the University of Michigan released its confidence index for the month of May, confidence rose to 67.9 from the prior estimate of 65.1 and above markets' expectations of 67.0, while one-year inflation expectations index declined to 2.6% from 2.8%, and the five-year expectations were unchanged at 2.8%.
The Dow Jones Industrial Average index dropped 62.68 points or 0.75% to close at 8268.64, The Standard & Poor's 500 Index dropped 10.19 points or 1.14% to close at 882.88, The NASDAQ Composite Index dropped 9.07 points or 0.54% to close at 1680.14.
The U.S dollar opened this week's trading against the Japanese Yen at 98.62 and recorded a high of 98.81 and a low of 94.72 to end the week at 95.06.
Gold prices rose this week, as after opening at $915.50 gold rose to set a high of $933.97 and a low of $908.40 before closing the week at $931.05 an ounce. Oil prices on the other hand declined this week, as after opening at 58.31, oil rose to set a high of 60.03 and a low of 56.04 before closing the week at 56.49.