The Week in Review: Asian Stocks Excel as Europe, U.S. Show Weakness

Asian stocks post one of their best weeks in months on strong earnings and bets that Central Banks, particularly in China, will loosen monetary policies. On Friday, the Shanghai Shenzen CSI 300 Index added over 1% in trading near closing as the Hang Seng posted gains of 0.6%. The Nikkei was flat on mixed trading, although up for the week.

Asian stocks post one of their best weeks in months on strong earnings and bets that Central Banks, particularly in China, will loosen monetary policies. On Friday, the Shanghai Shenzen CSI 300 Index added over 1% in trading near closing as the Hang Seng posted gains of 0.6%. The Nikkei was flat on mixed trading, although up for the week.

While earnings posted throughout the region were strong, most of the gains were driven by hints that the Chinese Central Bank will loosen lending policies. The gains also come shortly after Japan posted a 6.8% contraction of GDP in the second quarter, the worst report since 2011. Chinese credit growth and production also missed estimates in the week.

European Struggles in EU Core

Both France and Germany reported disappointing economic growth, with France’s GDP stagnant in the second quarter and the Germans reporting a surprising contraction of their export-focused economy. Analysts have associated the disappointing data with the Ukraine crisis, but some have also pointed out that demand in the European Union, where mass unemployment and the threat of deflation, have kept the economies moribund since 2009.

Germany reported its GDP fell by 0.2% in the second quarter, shortly after the ECB President Mario Draghi publicly said the eurozone economy is threatened by rising tensions in Ukraine. However, Germany’s exports are not solely Russia driven, driving the Center for Economics and Business Research, among others, to suggest that the economic struggles in the periphery of the European Union are gravitating toward its core.

U.S. Credit, Sales Fall

Mortgage activity and retail sales were both weak in the United States, with the Commerce Department reporting only a 0.1% increase in retail sales in July. Meanwhile, the Labor Department reported that wages had fallen by 0.2% in the year ending June 2014, indicating that U.S. consumers are increasingly tapped out and unable to spend. The only exception to the weak data was car sales, which rose 6% in July on a year-over-year basis.

Mortgages were also falling in demand, according to a report by the Mortgage Bankers Association, who said applications fell 4% from the previous week. The decline is attributed mostly to falling refinancing activity, which is down 75% from the high levels seen in May 2013 when rates slowly began to rise. Home purchases are also down 1%, according to the MBA’s seasonally adjusted Purchase Application Index. On an unadjusted basis, the index fell 10% from the prior year.

With limited aggregate demand in the U.S. economy, some analysts fear that stagnant prices or deflation might occur. On Friday morning, data from the Bureau of Labor Statistics suggested this was not yet a reality. The BLS’s Producer Price Index (PPI) rose 0.1% in July, as analysts had expected. Food rose 0.4% as energy fell 0.6% on greater oil and natural gas production domestically and abroad.

Analysts are eagerly looking at coming manufacturing surveys that will indicate how much employment and business activity are growing. Early Friday morning, the New York Federal Reserve released the Empire State Manufacturing Survey, which fell far short of expectations. The survey index fell to 14.7 points, below consensus expectations of 20. The employee headcount index fell three points to 13.6. Other regional Federal Reserves will be releasing their survey reports in the coming weeks.