By Anne D. Picker, Chief Economist, Econoday
Friday, April 6, 2007

Global Markets

Equities were up in the holiday shortened week. Australian stocks were boosted Wednesday when the Reserve Bank of Australia did not increase their policy interest rate from 6.25 percent as many had feared. And similarly, stocks in London rose after the Bank of England kept its key rate at 5.25 percent on Thursday. Many indexes have fully recovered, and then some, after the three weeks of sharp losses that started on February 27. In Asia, the All Ordinaries, Kospi and STI are above their highs this year as is the German DAX. In North America, the Canadian S&P/TSX Composite and the Mexican Bolsa have also regained their March losses but U.S. indexes have not.

As equities have recovered from the late February downdraft, investors once again became willing to take on some risk. This in turn encouraged carry trades in which low yielding currencies such as the yen and Swiss franc are sold to finance purchases of higher yielding assets such as those in New Zealand and Australia where interest rates are high in comparison. Against the U.S. dollar, the euro, pound sterling and the Canadian and Australian dollars were higher on the week. The yen was lower. 

Global Stock Market Recap

Europe and the UK

Equities in the UK, France and Germany were up in this holiday shortened week. The DAX, CAC and FTSE are once again approaching their six-year highs, a climb that had been interrupted by the February/March decline. The DAX has recovered all of its losses and is now above its February 26 peak which was just the day before the market turbulence that began on February 27. Both the FTSE and CAC are just below their highs for the year. The FTSE benefited from the Bank of England’s decision not to increase interest rates this month. But merger activity kept investor interest during the week. High on the interest list was Daimler’s possible divestiture of its U.S. subsidiary, Chrysler.

Bank of England decides to wait

The Bank of England left its key interest rate at 5.25 percent on Thursday. Analysts had been split as to whether the Bank would increase rates this month or wait until May when the quarterly Inflation Report will be released. The Bank’s monetary policy committee surprised the markets when it unexpectedly increased rates in November 2006 and again in January 2007. However, in data released this week, manufacturing output declined for the second month in a row and industrial production was also below analysts’ forecasts. However, both the manufacturing and services purchasing managers surveys were upbeat. And retail sales rebounded in February after a decidedly downbeat January report. But inflation remains above the Bank’s 2 percent target at 2.8 percent and has been hovering almost 1 percentage point higher than target for four months. The Bank’s forecasts have suggested that another increase would be necessary to tamp inflation back down to its 2 percent target. The Bank followed its normal practice of making no statement accompanying the decision to leave rates unchanged. Bank of England watchers will have to wait until the minutes of the meeting are released on April 18.

Asia/Pacific

Indexes were up on the week as trading tapered off prior to the long holiday weekend. On Friday, only the Japanese and South Korean markets, of those followed here, were open for business. Needless to say, volume was light. Although stocks in Japan were down on Monday and marginally down on Thursday and Friday, the Nikkei ended the week gaining 1.1 percent while the Topix was virtually unchanged on the week. The U.S. economy is Japan’s largest export market and many investors were reluctant to trade just prior to the U.S. employment situation report on Friday.

Singapore's Straits Times Index (STI) continues to shine as it set an all time high last week. The index has out-performed all other indexes followed here — it is up 12.1 percent on the year. Australia’s All Ordinaries benefited from the RBA’s decision to leave interest rates unchanged. The index is up 7.4 percent so far this year, boosted by strong demand for its minerals by China. It too is at an all time high.

Reserve Bank of Australia refrains

The Reserve Bank of Australia once again left its key interest rate at 6.25 percent, a six-year high. Analysts were split as to whether the RBA would increase rates. Inflation as measured by the quarterly consumer price index has been above the Bank’s 2 percent to 3 percent target range for the last three quarters. Most analysts think it was merely a one month reprieve and interest rates will be increased again in May especially since the last increase had little impact on wage increases and consumer spending. Despite high interest rates, household spending and borrowing continue to grow apace and labor shortages have pushed up wages. The Reserve Bank does not release an explanatory statement when policy is not changed. The RBA increased rates in May, August and November of 2006.

Australia's dollar initially plunged after the Bank’s announcement but then rebounded as traders opined that prospects for another rate increase are high and this was merely a postponement of the inevitable. Traders bet that the spread between Australia’s interest rate and rates elsewhere would continue to widen. But stocks rose in celebration that interest rates did not go up.

North America

Equities in Canada, U.S. and Mexico were up in last week’s holiday shortened trading week. Canadian stocks benefited from takeovers and higher metals and energy prices. The S&P/TSX Composite set a new all time record, beating its previous all-time high that occurred on February 26.

U.S. stocks posted their best start to a second quarter since 2004 thanks to merger activity and upgraded technology companies profit estimates. However, the gains were not enough to put the Dow, Nasdaq or the S&P 500 over their February 26 levels. Each has a way to go to recoup early March losses.

Currencies

The yen declined last week after equities gained on renewed investor interest in riskier assets. Improved equities performance has in turn revived interest in carry trades. The yen has dropped to multi-week lows as equities have risen. The graph below shows clearly how the yen increased in value as stocks sank and then reversed itself as the stock recovery took hold.

The euro climbed to a two-year high against the dollar and approached an all-time record versus the yen as signs of faster growth in Europe increased speculation that the European Central Bank will increase interest rates again. Gains in the euro accelerated after it rose above $1.34, triggering orders to buy, traders said. ECB officials said that higher borrowing costs are needed to contain inflation as reports showed strength in manufacturing.

Indicator scoreboard

EMU — March purchasing managers index for manufacturing eased to 55.4 from 55.6 in February. The indexes for Germany, Italy and Spain edged downward while the index for France increased slightly. Among the components of the index, EMU output prices were down while input prices increased. New orders and output recorded lower readings in March. A reading of 50 is considered the breakeven point between expansion and contraction — the higher the reading, the more rapid the expansion.

February producer price index was up 0.3 percent and 2.9 percent when compared with last year. After declining in the previous months, energy prices were up 0.4 percent and 1 percent on the year. Core PPI excluding energy was up 0.3 percent and 3.4 percent on the year. On the month, capital goods prices edged up 0.1 percent while nondurable consumer goods were up 0.2 percent and durable consumer goods were up 0.4 percent.

February retail sales were up 0.3 percent and 1.2 percent when compared with the same month a year ago. Non-food product sales were up 0.5 percent while food and drink sales were up 0.3 percent. The data indicate that the repercussion from the increased Value Added Tax in Germany has been less than some anticipated. Retail sales are only a portion of household final consumption and do not always correlate well with this GDP component.

Germany — February manufacturing orders soared by 9.5 percent and were up 3.9 percent when compared with last year. Domestic orders were up 0.9 percent and 8.6 percent on the year. But foreign orders jumped by 6.8 percent and 10.4 percent on the year and continue to be the main impetus for orders growth. Capital goods orders benefited by a strong boost in foreign orders and jumped by 6.9 percent and 11.8 percent on the year. Foreign capital goods orders were up 11 percent on the month and 11.8 percent on the year. Basic goods orders were up 0.7 percent and 7.6 percent on the year. Foreign basic goods orders were up 1 percent while domestic orders were up 0.7 percent on the month.

February industrial production excluding construction was up 0.9 percent and 6.9 percent when compared with the same month a year ago. Manufacturing gained 0.8 percent on the month and 8.2 percent on the year. Energy output was up 2.4 percent but dropped 4.8 percent on the year. Consumer durables output was up 1.4 percent and 7.7 percent on the year while nondurables climbed 0.2 percent and edged down 0.7 percent. Capital goods jumped 1.1 percent and 9.3 percent on the year.

United Kingdom — February industrial production was down 0.2 percent and up 0.3 percent when compared with last year. Mining and quarrying output was up 2.6 percent thanks to an increase in oil and gas production. Manufacturing output sank 0.6 percent and was up 1.2 percent on the year. The was the largest monthly decline since October 2005 thanks to declining aircraft and motor vehicle production. Output was down in 12 out of the 13 sub-sectors with transport equipment dropping 1.3 percent. Auto production was negatively affected by a plant closure.

Asia

Japan — First quarter Tankan survey for large manufacturers reading was 23 — down from 25 in the fourth quarter of 2006. The index for small manufacturers was 8, down from 12 in the previous quarter. The index for large non-manufacturers was unchanged from the previous quarter at 22. Combined capital spending plans by all firms surveyed were forecast to decline by 0.3 percent in the new fiscal year, which ends on March 31, 2008. The Tankan was conducted from February 23 through March 30. The Tankan is a diffusion index with zero as the breakeven point — positive numbers indicate that more companies are positive rather than negative. The survey of 10,958 firms of all sizes provides the most detailed picture of how Japanese industry sees business conditions over the next three to six months.

Australia — February retail sales were up 0.9 percent and 6.8 percent when compared with last year. Clothing and soft goods sales were up 2.4 percent while hospitality & services were up 1.2 percent. Household goods were up 1.1 percent, food up 1 percent, and recreational goods up 0.8 percent.

February merchandise trade deficit was A$876 billion, virtually unchanged from the previous month. Both imports and exports were up 2.1 percent. Non-rural and other goods exports were up 3 percent while rural goods were up 1 percent. Consumption goods imports jumped 5 percent while capital goods imports were up 3 percent. 

Americas

Canada — March employment soared by 54,900 while the unemployment rate was unchanged at 6.1 percent. The service sector gained 66,000 jobs more than offsetting the 11,000 job decline in the goods producing sector. The labor force gained 26,500 workers in March to reach 17.893 million. The participation rate reached 67.7 percent. Full time employment gained 30,500 jobs while part-time employment increased by 24,500.

Bottom line

It was a positive week for equities as merger news combined with political news to boost investor morale. Crude oil prices edged down below the $65 a barrel level for West Texas intermediate after Iran eased tensions by releasing captured British navy and marine personnel. Economic news was light. Both the Reserve Bank of Australia and the Bank of England postponed the inevitable and kept their key interest rates at 6.25 percent and 5.25 percent respectively.

The Bank of Japan and the European Central Bank both meet this week. Neither bank is expected to change their key interest rates which stand at 0.5 percent and 3.75 percent respectively. The Bank of Japan has stated that it increase rates only gradually. The ECB has hinted that more increases are to come. But the ECB usually gives the markets a month’s notice when it intends to increase rates — it uses the key word ‘vigilance’ in its post meeting statement — which it did not do at its February meeting. Both banks have been under political pressures not to increase rates. Japan has an election upcoming in July with many by-elections before that and is not expected to make further changes before then.

ECB policy is a contentious issue in this month’s French presidential election. The Bank has been blamed for everything that ails the French economy. And Business Europe, a business lobby, has warned that if interest rates are increased much further, the exchange rate for the euro could be dangerous for business, assuming that the value of the euro would increase with the interest rate. The ECB has lifted its main interest rates seven times since December 2005 and has hinted strongly of further rises to come. Analysts are betting that the next increase will be at the June meeting.

Looking Ahead: April 9 through April 13, 2007

Anne D Picker is the author of International Economic Indicators and Central Banks.

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