The Real Economy: Output, GDP, and Inflation

The pace of job cuts in the U.S. slowed down in May, while consumers remained cautious as spending declined. Job cuts in May were at 345 thousand jobs, down from 504 thousand in April. May's number was nearly half of the monthly average of the prior six months and affirmed that recession has begun to fade. Nonetheless, the jobless rate rose to 9.4 percent, the highest rate since 1983 and up from 8.9 percent in April. Initial jobless claims fell by 4,000 to 621,000 in the week ending May 30, signaling the most severe phase of job losses may be over.  The manufacturing sector showed improvement in May, as the Institute of Supply Management’s Purchasing Managers’ Index rose to 42.8 from 40.1 in April.  Factory orders rose by 0.7 percent (m/m) in April, after declining by 1.9 percent in March. Consumer spending declined by 0.1 percent (m/m), after falling by 0.3 percent in the previous month. The decline in spending reflects tight credit conditions as well as job insecurity.

The Eurozone unemployment rate leaped to 9.2 percent in April from 8.9 percent in March.  This places the rate at the highest level in almost 10 years. Consumer inflation eased back to 0 percent in April from 0.6 percent in the previous month, as weaker demand forced retailers to cut prices.  Producer inflation fell to -4.6 percent in the same period. For the first time in seven months, retail sales increased by 0.2 percent (m/m) in April, as compared with the 0.1 percent decline in the previous month. 

In the UK, improvements in the manufacturing and housing sectors were additional signs that the worst of the recession is over. The pace of contraction in the manufacturing sector continued to slow, as the Purchasing Managers’ Index rose to 45.4 from 43.1 in the previous month.  Home values rose 2.6 percent from the previous month to an average of 158,565 pounds ($260,000), showing the highest increase since 2002. Inflationary pressures continued to ease last month, as output prices fell by 0.3 percent (y/y) in May, compared with the 1.3 percent increase in April.

In China, the Purchasing Managers' Index stood at 53.1 percent in May. It was down 0.4 percent from April, but it was the third consecutive month the index was above 50 percent since July 2008.

Australia showed a surprising positive growth rate of 0.4 percent (q/q) in the first quarter, avoiding two quarters of contraction.


Economic Policy

The better run of optimistic economic data lately kept most major central banks’ interest rates on hold last week.  In addition, none of the major central banks announced further unconventional policy steps this week.

The European Central Bank (ECB) kept interest rates unchanged at 1 percent as it waits to see the impact of measures taken to combat the recession. The ECB is also unlikely to expand its asset-purchase program in the short term.  The scheme intends to purchase €60 ($84) billion worth of covered bonds, which are issued by banks and backed by mortgages or public-sector loans.  The Bank of England also kept interest rates unchanged at 0.5 percent last week and remained committed to continuing with its £125 ($200) billion asset-purchase program.  The Reserve Bank of Australia (RBA) held its benchmark interest rate at 3.0 percent.
Russia cut interest rates for the third time in six weeks to 11.5 percent and lowered the repurchase rate to 10.5 percent as inflationary expectations eased.  Iceland’s central bank lowered the benchmark interest rate by a percentage point.  Policy makers also lowered the repurchase rate to 12 percent from 13 percent.

Financial Market

Global equity markets rose to their highest level this year, as U.S. employment data sparked hopes that the U.S. recession may be coming to an end.  In the U.S, the Dow, the NASDAQ and the S&P 500 rose by 2.9 percent, 5.2 percent and 2.3 percent respectively for the week.  In Europe, the UK FTSE 100, the German DAX and the French CAC were up by 0.5 percent, 2.8 percent and 2.3 percent, respectively.  In Japan, the Nikkei 225 rose by 2.6 percent. The MSCI Emerging Markets Index added 1.8 percent for the week.

The dollar advanced the most against the yen in more than three months and rose versus the euro as economic data showed evidence the U.S. recession is easing. The dollar advanced 1.3 percent this week to $1.40 per Euro, from $1.42. The dollar also rose 3.3 percent to 98.7 Yen per dollar from 95.3 Yen per dollar.

In the credit market, treasury yields jumped higher after the U.S. unemployment data report showed job cuts slowing.  The higher Treasury yields had a further negative impact on mortgage rates, with the 30-year fixed rate increasing by 19 basis points to 5.46 percent on the week and the 15-year fixed rate increasing by 15 basis points to 5.02 percent. Yield on U.S. 10-year bonds spiked to 3.86 percent, up from 3.47 percent a week before. U.K. 10-year bond yields rose to 3.92 percent from 3.76 percent the week before.