The Week in Review for the week ending July 6, 2012
Last week, the European Central Bank and the People’s Bank of China cut interest rates amid widespread weakening global economic data. China’s central bank also joined the Bank of England in injecting more money into their respective economies. Markets initially responded favorably to the renewed central bank action, but then retreated because of ongoing concern over the global economic slowdown.
Friday morning’s tepid US jobs report, indicating no change to the official 8.2% unemployment rate, and only 80,000 more jobs in June, set markets back further.
Bond yields climbed back up in Spain and Italy on renewed worries about economic weakness.
The price of oil rose as tensions with Iran resumed and US oil inventories decreased.
Amid this environment the DJIA was down -0.8%, the S&P 500 was down -0.6%, the Russell 2000 was up 1.1%, the Global Dow ex-U.S. was down -0.1% and crude oil fell -0.6%.
The European Central Bank cut the eurozone’s key lending rate and deposit rate to record lows of 0.75% and zero, respectively. The People’s Bank of China cut its one-year yuan lending rate by 0.31 percentage point and its one-year deposit rate by 0.25 percentage point while injecting 143 billion yuan ($22.5 billion) into the market. China’s central bank pumped 125 billion yuan into its economy the week before and lowered interest rates less than a month ago.
The Bank of England pledged to pump another £50 billion ($78 billion) into the UK’s struggling economy as well.
Eurozone economic indicators continued to slide. The 17-country area reached a new record-high unemployment rate of 11.1% in June, with Spain faring the worst at 24.6%. The region’s purchasing managers’ index (PMI) for manufacturing and services rose slightly, to 46.4 from 46.0 in May. Germany, the eurozone’s largest and healthiest economy, saw its composite PMI fall to 48.1 from 49.3, squeezed by the drop in demand among neighboring countries for its exports. Economists expect the eurozone’s second-quarter gross domestic product to fall.
US employers continued to add jobs in June, but at too slow a rate to lower the nation’s 8.2% unemployment rate. The addition of 80,000 jobs, reported by the US Department of Labor, comes after a revised increase of 77,000 jobs in May, indicating an economy that is treading water after making gains last winter. The second quarter was the worst for US job growth since the third quarter of 2010, with a monthly gain of just 75,000 jobs. Hopes had been raised somewhat by Automatic Data Processing’s monthly report that US private sector employment had risen by 176,000 jobs in June. Initial jobless claims dropped by 14,000 to 374,000 for the week ended June 30, while the four-week average fell 1,500 to 385,700.
US manufacturing activity fell sharply in June, as the Institute for Supply Management’s index dipped to 49.7 from 53.5 in May. This was the first time in three years that the gauge fell below 50.0, indicating contraction.
US retailers reported slowing sales growth in June as sales at 18 retailers tracked by Thomson Reuters increased by 2.5% at stores open at least a year, well below the 7.7% increase in June 2011.
Auto sales remained strong, however, with most major automakers reporting double-digit growth in June from a year earlier.
China’s manufacturing activity in June grew at its slowest pace since November. The official Manufacturing Purchasing Managers Index slipped to a barely expanding level of 50.2 in June from 50.4 in May, according to data from China’s National Bureau of Statistics. According to the HSBC China Manufacturing PMI, activity contracted slightly.
South Korea’s and Taiwan’s manufacturing activity contracted in June after several consecutive months of expansion. However, manufacturing accelerated in India and Indonesia.
Japan reported improved consumer sentiment in the second quarter and robust auto sales in June, two upbeat signs for the world’s third-largest economy, which has stagnated for years. The Bank of Japan’s consumer sentiment index reached its highest level in five years for the quarter. Auto sales rose 41% in June from a year earlier and 55% for the first half year, as consumers took advantage of a time-limited incentive program.
Three senior executives from Barclays, including its chairman, chief executive officer, and chief operating officer, all resigned over a scandal involving efforts to manipulate the London interbank offered rate (LIBOR). Barclays also has agreed to pay $453 million to settle the case with British financial authorities. There are indications that the interest rate rigging, which affected hundreds of trillions of dollars of derivatives and consumer and business loans, went far beyond Barclays. Investigations by British and American regulators are continuing and more than a dozen large banks could be implicated along with the UK’s financial regulator, the Financial Services Authority.
Volkswagen has agreed to buy the remaining 50.1% of the Porsche sports car business that it does not own, completing a complex three-year takeover. Volkswagen will pay Porsche Automobil Holding €4.46 billion plus one ordinary share in Volkswagen stock to complete the deal.
Netflix customers streamed more than one-billion hours of video in June, its CEO Reed Hastings boasted. That level of viewership would make Netflix the most-watched US TV channel, according to an industry analyst. Shares of the company’s stock have risen rapidly recently, although they remain far below their peak of $300 last summer.