Globally, central banks tag inflation

Global markets fell off last week as weaker US jobs reports coupled with an increase in wages, flustered investors. US unemployment held even at 4.6 percent but the base economic data showing rising wages and weaker jobs supported investors concerns that the world’s leading economy is slowing and suffering from inflationary issues.

Light sweet crude also set a new all time high record last week, just above US $75 before pulling back US $1.19 by week end to close nearer US $74. Light sweet crude fell further Monday as OPEC discussions added more calming talk to the energy markets.

Although last week was definitely a down week, the global equity markets all showed strength on Monday as the financial markets head into earnings season. Even in New York, despite an office building collapse in midtown, traders were optimistic and showed a strong appetite as Alcoa gets ready to release its earnings and start of the three-week long high interest news periods for the financial world. Current estimates have the second quarter earnings in the US averaging 12 percent growth year over year. In Europe, the FTSE recovered late on Monday to move back into the green and get in line with other euro indexes which all showed positive movement for the early week trading. The European central bank held its key overnight rate this past week but did issue comments that it will act aggressively against inflation, following on the lead from the United States Federal Reserve and other central banks. From a financial management position, the world’s leading central banks are definitely united in their comments and intentions to control inflation. Let us hope they do not crush economic growth in the process.

In major news for the week and as we are writing this week’s article from Paris, we feel it important to recognise la finale du Coup de Monde, and congratulate Italy in its hard fought victory over France.

JAPAN

Japan is setting to move away from its zero interest rate policy, cautious of the deflationary pressures present in its economy. But government officials are putting pressure on the central bank to stick to its zero-interest-rate policy to spur economic growth until economic expansion becomes sustainable and deflation is beaten.

Economic data shows that core consumer prices rose for the seventh straight month in May with an increase of 0.6 percent year over year, according to the Japanese Statistics Bureau. Although inflation is the major concern in the European and North American economies it is good news that inflation figures are starting to appear in Japan. After basically struggling in a stagnant growth cycle for some 15 years, Japan needs to get the economy jump started into an economic growth cycle. The rise in consumer prices was also significant because the prices rose at the fastest pace in eight years in Japan. The economic data may be signalling that deflation in the economy is almost beaten and supporting the Bank of Japan’ case for raising interest rates. However, Finance Minister Sadakazu Tanigaki said there is still deflation in the economy, even though the statistics show that deflation is in fact easing.

In other economic news from Japan, industrial production fell by 1 percent in May (after reaching a record in April), as car manufacturers reduced inventories because of weaker domestic demand, according to the Ministry of Economy, Trade and Industry. Meanwhile, the statistics bureau reported a 4 percent drop in the unemployment rate in May, the lowest since April 1998. Retail sales rose by 0.1 percent in May from a year ago, according to the Ministry of Economy, Trade and Industry. Higher petrol prices and sales of electronics, including flat-screen televisions and DVD recorders for the World Cup, were responsible for the unexpected rise in retail sales.

LOOKING AHEAD

We continue to watch inflationary pressures such as those which slowed the US jobs and of course increasing commodity prices. Although we do see a steady rise in product and services as wage increases and the recent jump in feed stock pricing works through the system, we do not believe there will be more dramatic price increase in base commodity pricing. Economic growth can and is likely to continue well within the “goldilocks” zone and we continue to believe that the central banks of the worlds leading nations will ensure that inflation is held well in check. Our stronger fear remains that the over reaction of the central banks may well slow economic growth too much leading to stagnation.