Initial jobless applications in the U.S. rose slightly last week, a gain that was in line with expectations and, overall, a still-positive indicator of a weak U.S. recovery. But mixed signals in housing and a drop in a key factory activity gauge for mid-Atlantic region suggested an economy treading water. "For the Fed, the issue was whether the economy was sliding toward the abyss, and it doesn't seem to be, but it's certainly not improving," observed Pierre Ellis, an economist at Decision Economics in New York. 

FDI in China slows as outbound investment surges

Foreign direct investment in China was down 8.7% in July from a year before, and U.S. investment in the first seven months was down 3.6%, the Ministry of Commerce reported. The ministry said investment may continue to decline somewhat in the near term but is likely to be replaced eventually by higher-quality inflows. Separately, the ministry reported that China's outbound direct investment surged by more than half in the first seven months of 2012. 

EU's struggles hurt China's exports, but stable growth is still expected

China's exports to the recession-racked European Union are down 3.6% through the first seven months of the year, the Ministry of Finance reported. "Unpromising exports to the EU has been expected, yet escalating while worsening euro debt crisis, as well as a sharp drop in import demand from European countries, has gone beyond many experts' forecasts," a ministry spokesman said. Meanwhile, global accounting firm KPMG predicted stable growth for the Chinese economy in the second half of this year. 

Merkel sides with ECB on conditions for aid to struggling euro countries

Germany is "in line" with the European Central Bank's demands for measures to reduce borrowing costs in indebted countries, Chancellor Angela Merkel said. It was Merkel's first comment on the crisis in a month and pitched Germany back into the debate over defending the euro as pressure mounted for easier terms and a sharing of debt. 

U.K. economists who backed fiscal restraint now call for stimulus

U.K. economists who had endorsed Chancellor of the Exchequer George Osborne's fiscal stringency ahead of the country's last election have backed off and are now urging fiscal stimulus. Only one of the original 20 economists calls for staying the course. 

U.K. retail sales post July increase

Retail sales in the U.K. defied forecasts of a slight decline and rose 0.3% in July. In addition, new factory and construction numbers now suggest that gross domestic product may have declined less than the 0.7% reported for the second quarter.

Market Activities

INTERNATIONAL MARKETS OVERVIEW

Mixed to favorable economic data in Europe and the U.S. lifted shares Thursday on both sides of the Atlantic. In New York, the S&P 500 was up 0.71% to close at 1415.51, and the Stoxx Europe 600 Index climbed 0.3% to 271.22. Here is a continuously updated list of global stock indexes. 

Japanese shares make strong gains; other Asia markets end mixed

Asian stock markets were mixed Thursday, with Japan the outstanding gainer due to export hopes as the U.S. dollar rose against the yen. The Nikkei ended the day with a 1.9% advance, closing at 9092.76, while Australia's S&P/ASX 200 rose 1.1% to 4330.20. The Hang Seng was off 0.45%, closing at 19962.95, and the Kospi was basically unchanged at 1957.91, up 0.1%. 

Economic Trends & Outlook

Japan expects to end long run of deflation

Japan's long bout of deflation, stretching over 16 years, will come to end in the next fiscal year, the Cabinet Office is reportedly preparing to forecast. Among the upbeat trends contributing to the swing to inflation are an improving job market, higher consumer spending and rebuilding after 2011's tsunami and nuclear disaster. 

India's central bank may consider rate action

Even though inflation remains above the Indian central bank's target range of 5% to 6%, the bank now says it is preparing to assess whether a downward trend will persist and make a decision about rates on that basis. A bank review of monetary policy is scheduled for Sept. 17. Pressure has been growing for bank stimulus as industrial growth weakens.

Worries grow even as South Korea jobless rates falls

Self-employment and the service sector are credited with an unexpected easing of South Korea's unemployment rate to 3.1% in July. Even so, "Europe's fiscal crisis is taking a toll on company hiring. The quality of the job market is deteriorating with more people taking nonsalaried work," said Sun Yoo, an economist at Woori Investment & Securities. In a bid to boost lagging exports, the government introduced several measures Thursday to help exporters secure funding. 

Bank of Japan government holdings top those in circulation

Because of a special asset purchase program, holdings of Japanese government bonds by the Bank of Japan now exceed banknotes in circulation in the country for the first time. The bank's normal policy is to keep its government bond holdings at or less than the balance in circulation as a sign it won't indefinitely support government shortfalls. But the special program was instituted to address prolonged deflation. 

Singapore retail sales decline in June

Singapore's retail sales were down 0.9% in June, pulled lower by slow vehicle sales and a number of other consumer sectors. However, continued softness could help moderate price increases, analysts said. "If retail sales remain soft in [the second half], this could constrain retailers' pricing power, compelling them to absorb higher costs in their margins, providing some modest relief for core inflation," said Citi analyst Kit Wei Zheng. 

Taiwan is seen in danger of recession

Taiwan's economy is in danger of slipping into recession if the world economy worsens and electronics exports don't pick up, Moody's forecasts. Separately, the Council for Economic Planning and Development said the outlook for the global economy in the current quarter declined after two quarters of increases. 

Capital Markets & Financial Products

China offers 14th issue of T-bonds this year

China's Ministry of Finance has begun offering 30.06 billion yuan in five-year book-entry treasury bonds with an annual interest rate of 2.95%. The bonds, the 14th issue this year, will become tradable Aug. 22. 

Iran says it may close key South Korean accounts

Iran is demanding higher deposit rates at two South Korean banks where it has currency-based transaction settlement accounts estimated at $4.4 billion and is threatening to close the accounts, sources said. Such a move could affect as many as 2,700 Korean exporters.

Islets dispute may impinge on Japan-South Korean currency-swap deal

A dispute over islets between Japan and South Korea has led Japan to hint that a currency-swap deal between the two nations may be in jeopardy. Japan's chief Cabinet secretary, Fujimura Osamu, said many options are open to Tokyo and did not rule out withdrawal.

India regulator moves to build country's base of retail investors

In a move to bolster India's capital markets, the Securities and Exchange Board of India moved to broaden openings for retail investors in initial public offerings and mutual funds and extend the reach of mutual funds to smaller localities. The board also opened the door to electronic IPOs.

Industry & Regulatory Update

Standard Chartered switched tune quickly to seek settlement

Standard Chartered's initial denials and sharp defiance of New York regulators over charges of illegal dealings with Iran quickly switched to an outreach for settlement as the bank's shares took a hit. StanChart is now said to be pursuing a package deal with other U.S. regulators to finally set the matter aside.