The risks of a slowing global economy and potential deflation remain at the centre of traders' attention, as government bond yields see fresh lows. The selling began when Japan said gross domestic product grew at an annualised rate of just 0.4 per cent in the second quarter, much less than the 2.3 per cent growth forecast by economists. The rising yen was also said to be a concern for future Japanese growth, according to economists. Japanese 10-year bonds fell to their lowest yield since 2003. In Europe, figures in the eurozone showed that energy and commodities were propping up inflation. Overall prices rose 1.7 per cent since last July, but core consumer prices fell 0.5 per cent in the past month - suggesting still-sluggish activity in many sectors - while the rising headline may push the European Central Bank to tighten policy, threatening the recovery. The US Empire State manufacturing survey index, an early-warning indicator that takes the pulse of New York region activity for August, was below forecast. The National Association of Homebuilders also showed that August confidence in the industry had fallen to its lowest since early 2009. All of which has only furthered markets' perception of the risk of deflation due to slowing growth. Government bond yields are extending their declines since the US Federal Reserve said it would continue its quantitative easing' programme of buying bonds. "Prices data has indicated the inflation picture is quite tame. And the disappointing NAHB and Empire survey suggest economic momentum is contining to slow. That's only added to the fundamental reason to own Treasuries," said Jessica Hoversen, research analyst at MF Global. US 10-year bonds are at their lowest yield since March 2009, with the yield falling 8 basis points to 2.59 per cent. European benchmark German Bunds are down 5 basis points to yield 2.33 per cent, a fresh all-time low. The dollar is falling against the yen and euro. The FTSE All-World stock index is up 0.2 per cent, however, after the S&P 500 index erased its losses as materials and technology companies rallied from lows. European shares have also pared losses. Though the US consumer prices index showed a similar month-to-month uptick - the first in four months - in a report on Friday, UK price rises are expected to slow. US producer prices are forecast by economists to have expanded at a faster rate, but US manufacturing and industrial economic data have consistently disappointed of late. Anxiety about the US economy has been expressed in the dollar market, as well as in bonds. Short positions on the greenback reached a 2010 high last week. *Factors to watch The return of earnings? Big retailers Walmart and Home Depot, and PC-makers Dell and Hewlett-Packard, report this week. Earnings had helped give a floor to shares in July, when global stocks rose to three-month highs. However, at this point, with the growth story so much in focus, earnings may just not matter much unless they are blockbuster-good. The first of the bunch to report, home repair retailer Lowe's, missed its own revenue projection and lowered its third-quarter earnings forecast. ? *Europe Shares were down, but did not have a strong direction. The UK's FTSE 100 index has finally turned round after leading shares in European markets to slight gains despite a broader pull-back in risk last week. It is down 0.5 per cent. BP is the biggest drag on the index, while large miners and retailers offered some support. The broader Eurofirst 300 was dragged down by oil and gas and the utilities sector, while retailers outperformed following Hennes & Mauritz strong earnings. Bank of Ireland and Allied Irish Banks are two of the top 10 decliners across Europe as they fight the perception that troubled loans may sink them. Ireland's Iseq index is down 0.6 per cent and has now fallen 6 per cent since last week. *Asia The Nikkei 225 average was down 0.6 per cent after the Japanese GDP figures. Australian shares followed suit, falling 0.5 per cent on the S&P/ASX 200 index. Chinese shares rose 2.1 per cent in Shanghai and 0.5 per cent in Hong Kong. China's GDP officially surpassed Japan's to make it the world's second-largest economy, at $1,380bn. Goldman Sachs strategists earlier today recommended staying long Chinese shares, on the theory that they would outperform relative to developed markets given China's more effective monetary policy tools. *Currencies The dollar extended its losses following the Treasury's global capital flows data for June, which showed that China was again a net seller of Treasury bonds, leading to a net outflow of capital from the US. The greenback is lower against the yen by 1 per cent, at Y85.36. The yen has traded in a range of around Y85-Y86 since the Fed's decision to continue its monetary stimulus programme, rather than beginning to wind it down as previously anticipated. The dollar turned lower against commodity currencies following the Treasuy's report. The Australian dollars is up 0.5 per cent against its US namesake. The euro extended its gains to 0.8 per cent to $1.2856, and the pound reverse a slight dip to rise 0.8 per cent agains the dollar, to $1.5689. The euro however is down 0.3 per cent on the Swiss franc, extended its losses. Germany's strong GDP growth on Fridy was not enough to erase worries about slowing Greek, Spanish and even French growth. *Debt US 30-year bond yields are down 11 basis points to 3.76 per cent, their lowest since April 2009, while US 2-year bonds are little changed. The flatter curve suggests investors are now expecting a more prolonged recession that will keep rates lower for longer. Ten-year German Bund yields are down 5 basis points as European shares lose steam, at a record low yield of 2.34 per cent. Japanese 10-year bond yields are down 5 basis points to 0.94 per cent, a fresh seven-year low. Ireland, in the spotlight since Bank of Ireland and Allied Irish Banks said that their bad loan portfolios were still under strain, has seen its credit-default swap prices and bond yields rise. The CDS market is pricing it as the second highest default risk of the so-called "peripheral! eurozone nations, behind Greece. Ireland's 10-year bonds are now yielding 302 basis points more than German 10-years, just short of the 305-point peak in May. An auction of 4- and 10-year bonds on Tuesday will be closely watched. *Commodities US benchmark crude oil has given up gains, and is now down 0.1 per cent at $75.27 a barrel, adding to one-month lows reached during Friday's session. Gold is up 0.7 per cent to $1,223 an ounce, as bullion traders react to Japan's GDP figures and price in slower growth in the US, much of Europe and China. The precious metal has risen to two-month highs in the past week of trading. The Market Eye It can be frustrating when markets react to backwards-looking economic data. GDP growth is a perfect example; and that's even before considering how frequently such measures are revised. So that's forward-looking or contemporaneous data, even if it's as imprecise as consumer confidence, can have a big impact. Today, enter the US's closely watched Empire State manufacturing outlook for August. As third quarter data comes in, wrote Jonathan Golub, US equity strategist at UBS, in a note today, markets will be closely watching to see whether economists' growth projections slip from 3 per cent, where they were two months ago, nearer to 2.5 per cent. UBS's own chief economist has already lowered his projection to 1.5 per cent. Mr Golub says that historically, 2.5 per cent is "the cusp between positive and negative earnings growth" year-over-year. "This should leave investors intently focused on every piece of incremental economic data, perpetuating the market's macro focus until a more definitive trend - either upward or downward - emerges," says Mr Golub.

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