The Real Economy: Output, GDP, and Inflation

Leading economic indicators continued to improve in major economies, while global inflationary pressures remained tame. However, contraction in industrial output persisted.

The economic data from the U.S. was mixed last week. U.S. housing starts soared 17 percent in May to an annual rate of 532,000, helped by lower prices and tax incentives. Gains in stock prices, consumer confidence, and building permits pushed the Conference Board’s leading economic indicators index up 1.2 percent in May. The rise in the index for the second straight month reinforced signs that the worst of the recession might be over.

Inflationary pressure eased as consumer prices rose by 0.1 percent in May (m/m), less than the forecasted 0.3 percent. In another positive development, the number of first time unemployment benefits claims plunged by 148,000 in the week ending June 6, the biggest weekly drop since 2001. However, initial jobless claims rose by 3,000 to 608,000 as layoffs mounted in the auto industries. Futher, output has continued contracting, as industrial production fell 1.1 percent in May, with a 7.9 percent plunge in motor vehicle and parts output accounting for the bulk of the drop.  

European investors continued to show increased optimism about an economic recovery. The ZEW Expectation of Economic Growth Index rose to 42.7 in May from 28.5 in April, reflecting the overall improved macroeconomic optimism. Consumer prices remained at the same level in May compared to a year ago and increased by 0.1 percent from April. The rise in trade surplus in April offered further encouraging news, as exports showed some signs of stabilizing on a monthly basis.  The euro-zone surplus rose to $3.8 billion, up from $2.5 billion in March. Industrial production declined by 1.9 percent in April, the first in three months.

In Asia, the World Bank revised upwards its forecast for China's 2009 GDP growth to 7.2 percent, up from the 6.5 percent forecasted in March. According to the Bank, massive policy stimulus will enable China to keep growing at a respectable rate this year and next, but a robust recovery is unlikely given the weak global environment.

Economic Policy

The Obama administration announced a plan aimed at broadly reforming the financial sector in the United States, thought to be the biggest such regulatory overhaul since the 1930s. The package includes  increased banking sector oversight to control systemic risk, higher capital-reserve requirements for banks, more transparency for securitized debt and over-the-counter derivatives as well as the creation of a new and independent consumer-protection agency that would oversee consumer financial products.

The Swiss National Bank left its benchmark interest rate unchanged at 0.25 percent. In Mexico, the central bank cut the overnight rate from 5.25 percent to 4.75 percent. The central bank of Turkey also cut interest rates by 50 bps to 8.75 percent.

Financial Markets

Global equity markets fell last week on falling commodity prices and lowered bank ratings, reversing some of the gains from the previous weeks. In the U.S., the Dow Jones, the S&P500 and the NASDAQ fell by 2.9 percent, 2.9 percent and 2.6 percent, respectively. The UK FTSE 100 and the German DAX fell by 2.2 percent and 4.5 percent, respectively.  In Japan, the Nikkei 225 was down by 3.4 percent. 

After a four-week winning streak, the MSCI World Index and the MSCI Emerging Markets Index closed the week lower by 3 percent and 5 percent, respectively.

Along with the equity market, major government bond markets took a breather last week. The U.S. 10-year bond closed the week down 0.6 percent.  The yields on Japan and UK 10-year bonds fell by larger margins of 4.6 percent and 4.1 percent, respectively.

In currency markets, the U.S. dollar saw little change against the euro and pound. The dollar lost some ground against the British pound, declining to $1.65 from $1.64. Against the euro, it improved slightly to $1.39 from $1.40 a week before. The dollar weakened against the yen, falling to ¥96.23 from ¥98.3.