Week in Review ended June 10, 2011: Stocks fall as investors question strength of economic recovery

Global economic news

U.S. trade deficit narrows; China's surplus less than expectedThe U.S. trade deficit unexpectedly narrowed amid record exports and a plunge in auto and oil imports. The gap shrank 6.7% to $43.7 billion, the lowest since December. Purchases of goods from Japan dropped by a record $3 billion in the aftermath of the earthquake and tsunami. Stocks rallied after the news, on hopes that trade would help boost economic growth. Meanwhile, China reported a less-than-expected $13.1 billion trade surplus in May as surging imports signaled that the nation's demand may support global growth while adding pressure for higher interest rates.

ECB signals rate increase; BOE keeps rates on holdThe European Central Bank signaled it is likely to raise interest rates in July. ECB President Jean-Claude Trichet said "strong vigilance" is needed to contain inflation. The bank raised rates in April for the first time in nearly three years and was the fifth major central bank in the developed world to begin raising rates from the lowest levels of the financial crisis. The Bank of England meanwhile kept its main rate at 0.5% for the twenty-seventh month in a row. Eurozone inflation was running at 2.7% in May, well above the ECB's target of just under 2%.

Bank of Korea raises rates; Indonesia rates unchangedThe Bank of Korea raised interest rates for a third time this year to rein in inflation, which has exceeded its target range, and to curb record household debt. The bank increased the benchmark seven-day repurchase rate to 3.25% from 3%. Korea's rate increase followed one by Thailand on June 1, as job growth and costlier energy caused consumer price gains to exceed the Bank of Korea's 4% ceiling. That was Thailand's fourth rate increase this year. Also this week, the Bank of Indonesia left its reference rate at 6.75%, as a strengthening currency helped contain inflation.

ECB opposes Greek bailoutThe European Central Bank this week maintained its resistance to participating in a bailout of Greece. The Greek budget shortfall may amount to $130 billion through 2014. Governments have been trying to come up with a new aid package by a European summit on June 23 to June 24. The International Monetary Fund has threatened to withhold its share of Greece's bailout until governments that guarantee the financing needs for the next 12 months are covered. The IMF was due to turn over €3.3 billion this month.

Japan's GDP contracts 3.5%Japan's economy contracted 3.5% in the three months ended March 31, less than the 3.7% contraction reported last month. The better-than-expected number is seen as a sign that the economic slump caused by the earthquake was not as deep as expected. An upward revision in inventories helped limit the depth of the downturn. Producer prices in the country rose for an eighth month in May, in line with the rise in energy and raw material costs. Prices companies pay for energy and unfinished goods rose 2.2% from a year earlier. On a more upbeat note, an index of the current business conditions, released by Japan's Cabinet Office, rose to 36 in May from 28.3 in April. However, readings under 50 indicate more pessimism than optimism.

Eurozone economy grows 0.8%The eurozone economy grew 0.8% in the first quarter, up from 0.3% in the previous three months, according to the European Union's statistics office Eurostat. In year-on-year terms, GDP growth was 2.5%, up from 1.9% in the last three months of 2010. Investment, as well as household and government consumption, drove growth in the first quarter. On the flip side, European industrial orders declined more than expected in March, led by a drop in demand for durable consumer goods. Orders fell 1.8% from February. The drop suggests that the eurozone recovery may struggle to gather strength after having expanded at a solid pace in the first quarter.

U.S. jobless claims riseInitial jobless claims unexpectedly increased last week, rising 1,000 to 427,000 in the week ended June 4. The numbers indicate that the labor market is still struggling.

Global corporate news

Toyota forecasts 31% profit drop

Toyota Motor forecast a 31% drop in annual profit after Japan's earthquake disrupted production and sales while the yen strengthened. The company said net income may fall to ¥280 billion in the 12 months ending March 31, 2012, from the¥408 billion that was expected by analysts.

J. Crew posts Q1 lossJ. Crew posted a loss for its fiscal first quarter because of costs related to its March buyout — the company was taken private in early March in a $3 billion acquisition by a group of investors. In addition, the apparel retailer's bottom line was hurt by markdowns and promotions.

The week ahead

• On Tuesday, June 14, the U.S. Department of Commerce releases retail sales for May and business inventories for April. The U.S. Department of Labor reports its Producer Price Index.
• Also on Tuesday, the Bank of Japan completes its two-day policy meeting.
• On Wednesday, June 15, the Labor Department releases its Consumer Price Index for May and the U.S. Federal Reserve Board releases its reports on industrial production.
• On Thursday, the Labor Department releases weekly jobless claims, and the Commerce Department reports data on housing starts for May.
• On Friday, the Thomson Reuters/University of Michigan index of consumer sentiment is released.

Stay focused and diversified
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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News;Financial Times; Forbes.com; CNNMoney.com; msnbc.com.