Without wishing to turn this blog into one long economic report, it is worth noting the markets reaction to Thursday’s reports from around the globe. Japan’s Q1 GDP came in up 1.5% against estimates of up 1%, annualised plus 5.9% against an estimate of up 4.2%, consumption and capital investment driving growth. The Japanese yen rallied and the Nikkei fell 1%, one assumes speculators felt this data will reduce the possibility of further stimulus measures in the near term from the Bank of Japan.
In Europe it was a different picture, growth was reported as slowing in the first 3 months of the year, led by Greece. The eurozone bloc saw economic growth of just 0.2%, below expectations of 0.4%. France, Netherlands, Portugal and Italy all contributed to the weak report. Once again Germany was the best performer posting a 0.8% growth in the first quarter. Eurozone inflation continues to show no signs of picking up, April’s month on month rise came in at 0.2%, leaving the final core inflation rate at 0.7% year-on-year. One has to wonder if the ECB in June will be forced to do more that just cut rates to address the economic picture in the eurozone effectively.
10-year bond yields for Spain, Italy and Greece all rose sharply. The negative reaction in the bond market may be a sign bond investors are concerned that the ECB has left it late to react to the economic picture in Europe. Something more substantial than negative interest rates may be needed to stimulate the eurozone economy. Political concerns ahead of next week’s European elections may also have contributed to the weakness in the peripheral bond market.
Finally, the data from the US overall came in mixed, inflation remains subdued, while employment numbers continue to improve. Industrial production fell at its fastest rate in more than 18 months in April. Equities were also rocked by Wal-Mart’s earnings report, considered a window on the health of the consumer, missing analyst’s projections. US treasuries continued the rally, at one stage during the day the US 10-year maturity yield fell below 250bp.
Equities reacted negatively overall to today’s economic reports, whether this was a little profit taking after the rise, or a greater concern that economic growth is perhaps not as robust as investors were beginning to believe. Central banks continue to stress that interest rates are not rising in the near future; suggesting they feel economic growth is not yet strong enough to support rates rising. One-day rates will normalise; having a real risk-free-rate to value other assets against once again will be a good thing.