By Anne D. Picker, International Economist,Econoday
Monday, May 6, 2002

Investors were roiled by slower than dreamed of U.S. growth and took their disappointment out on both equities and the U.S. dollar. While the United States is showing typical signs of slow growth, Europe and Japan are still struggling to begin growing. Yet concerns over weak U.S. growth prevailed over no-growth elsewhere, and the dollar sank especially against the euro and yen. With Asian and European markets intermittently closed for holidays last week, investors protected themselves in the clinches while trying to enjoy their holidays. Equity ups and downs covered a wide range in the week. The Hong Kong Hang Seng jumped 3.6 percent while the Nasdaq dropped 3.1 percent. The Paris CAC and Frankfurt DAX lost 2.2 and 2.4 percent, respectively.

As expected, the European Central Bank Governing Council left their official interest rate unchanged at 3.25 percent. The ECB last cut rates in November 2001. After declining in the fourth quarter of 2001, the European Monetary Union has begun to show some signs of growth. Yet the recovery remains tenuous at best given the strident nature of German wage negotiations and the uncertainties surrounding the new French government. In the press conference that followed the ECB's meeting, Bank President Wim Duisenberg unexpectedly highlighted the upside risks to price stability. This led analysts to believe that the Bank is preparing everyone for a rate increase soon. With growth so weak, the ECB will have to be careful not to truncate what there is of an economic recovery.

In Germany, the labor negotiations scene continues to heat up. A widespread industrial action, Germany's first since 1995, will push the workers' case for a wage increase. IG Metall, Germany's major industrial union, is beginning one-day work stoppages at major employers in southern Baden-Wuerttemberg state, a heartland of German manufacturing. Chancellor Gerhard Schroeder is pleading for a deal that won't trample the nascent economic recovery. With developments unfolding, the union said it will use a "flexible" strike system in which facilities are struck in rotation to minimize effects on suppliers.

The Swiss National Bank unexpectedly cut its official interest rate target band by 50 basis points Thursday, citing its "continued concern" about the strength of the Swiss franc. The SNB has been fighting a losing battle against the rapid appreciation of the Swiss franc against other major currencies, which is jeopardizing the slowly developing economic recovery. The target range for 3-month Libor interest rates was cut from 0.75-to-1.75 percent from the previous range of 1.25-to-2.25 percent. The SNB also warned that it remained ready to cut rates again, if necessary, to combat Swiss franc strength.

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