The Real Economy: Output, GDP, and Inflation
Economic indicators continue to move in a mostly positive direction, as this week saw the emergence of a handful of signs suggesting that the pace of decline in global economic activity is slowing.

The U.S. has had particular reason to be optimistic over the past week. Weekly first-time claims for unemployment insurance declined by 34, 000 in late April, marking the second consecutive weekly drop (though the jobless rate rose to 8.9 percent). Non-farm payrolls fell by a less than expected $539 thousand in last month. Other bright spots include the 3.2 percent increase in pending home sales by 3.2 percent in March (m/m) and rise in the Institute of Supply Management’s purchasing mangers index (PMI) to 40.1 in April, from 36.3 in March.  The Institute’s new orders index rose to 47.2 from 41.2 in the previous month, the highest level since August.  The non-manufacturing index improved from 40.8 in March to 43.7 in April.

Signs of stabilization in the euro area have arisen with some regularity. The euro zone services PMI was revised up to 43.8, higher than 40.9 in March, in a return to pre-September 2008 levels. German factory orders increased unexpectedly in March by 3.3 percent. Industrial production in Germany also held steady in the same month following a sharp slide over the previous six months. Producer prices in Euro Zone fell by a record 3.1 percent in March (y/y), the largest drop in 22 years. In the UK, the services PMI rose to 48.7 from 45.5, an 8-month high.

In Asia, Taiwan’s exports fell at a slower pace in April as Chinese demand for electronic products provided some relief for the economy. Overseas shipments slid 34.3 percent from a year earlier, following a 35.7 percent drop in March.

Among emerging markets, Brazil’s industrial output rose 0.7 percent (m/m) in March, marking a third successive month of increase. Russia’s consumer price inflation eased to 13.2 percent in April from 14 percent in March (y/y).

Economic Policy
The much-anticipated results of the U.S. government's stress tests suggested that 10 of the 19 largest banks would require fresh capital totaling $74.6 billion to withstand credit losses in a pessimistic scenario. Regulators used an “adverse scenario” of a 3.3 percent decline in GDP in 2009, and an average unemployment rate of 8.9 percent this year, and 10.3 percent in 2010. Financial markets were buoyed by the results which were less negative than feared.

The European Central Bank (ECB) lowered its refinance rate by a quarter-point to 1 percent, while Czech Republic, Iceland, Norway and Romania also cut their rates last week. The ECB cut the main refinance rate by 25bps to 1 percent, and left the deposit rate on hold at 0.25 percent. The Czech central bank cut the benchmark interest rate to a record low of 1.5 percent from 1.75 percent. Romania’s central bank slashed its key interest rate by 50 basis points to 9.5 percent. The decision came days after the International Monetary Fund finalized its $17.32 billion standby loan to Romania. Elsewhere, the Norwegian central bank cut interest rates by half a point to 1.5 percent, while the Icelandic central bank has slashed its benchmark interest rate by 2.5 points to 13 percent. The Bank of England left interest rates on hold at 0.5 percent, but expanded its money-printing program to as much as 125 billion pounds ($188 billion) to counter the threat of deflation.

Financial Markets
Global equity markets ended the week higher, helped by better-than-expected U.S. employment data and stress test results.

In the U.S., the Dow Jones, the NASDAQ and the S&P500 rose by 4.4 percent, 1.2 percent and 5.9 percent, respectively.  The UK FTSE-100 climbed above 4,500, stretching the rally to 28 percent since March and 5.2 percent for the week. The German DAX ended the week 3 percent higher.  In Japan, the Nikkei 225 closed up 5.1 percent. With the exception of the Dow Jones and the UK FTSE 100, most major global stock markets have now moved into positive territory for the year to date.

The MSCI World and Emerging Markets Indices surged by 6.4 percent and 9.4 percent on the week, respectively. However, these indices are still down by 43.3 percent and 45.8 percent since the October 2007 market highs.

On the credit market, the TED spread (the three-month dollar LIBOR less three-month Treasury Bills) narrowed by 10 basis points during the past week. The spread has eased to an 11-month low of 0.76 percent. The three-month London Interbank Offered Rate (LIBOR) dropped below 1 percent for the first time last week. The previous record low was 1 percent, reached in June 2003.

Medium and long-dated bond yields rose in the US, Japan and UK. US 10yr treasury yields rose to 3.29 percent from 3.18 percent a week ago. UK and Japan 10yr treasury yields ended the week 5.1 percent and 4.3 percent higher, respectively.

The euro strengthened against its major counterparts after the ECB cut its benchmark interest rate to 1 percent. The dollar ended the week lower against its major counterparts. The US dollar closed the week at $1.36, $1.52 and ¥98.3 against the euro, the British pound and the yen respectively from $1.33, $1.49 and ¥99.1.