What a difference a week makes
By Ann-Marie Meulendyke, Guest Economist, Econoday
Friday, June 15, 2007
Global Markets
After some sharp declines early in the week, many stock markets made strong recoveries beginning around midweek. The upward adjustment to U.S. interest rates persisted into the early part of the week, but then paused. People continue to see future central bank tightening as the most likely scenario in Europe, Australia, and Japan with expectations for the latter fed by an upward revision to Japanese first quarter growth. In addition, talk of a Federal Reserve rate increase at some point later this year gained steam after stronger than expected U.S. retail sales were reported on Wednesday. By midweek, prospects of healthier economic data began to be seen as positive for stocks.
Global Stock Market Recap
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level |
Week |
Percent Change |
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Index |
15-Jun |
8-Jun |
Dec 29 2006 |
change |
Week |
Year |
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Asia |
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Australia |
All Ordinaries |
6317.10 |
6258.40 |
5644.30 |
58.70 |
0.94% |
10.88% |
Japan |
Nikkei 225 |
17971.49 |
17779.09 |
17225.83 |
192.40 |
1.08% |
3.21% |
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Topix |
1772.94 |
1756.16 |
1681.07 |
16.78 |
0.96% |
4.47% |
Hong Kong |
Hang Seng |
21017.05 |
20509.15 |
19964.72 |
507.90 |
2.48% |
2.73% |
S. Korea |
Kospi |
1772.26 |
1727.28 |
1434.46 |
44.98 |
2.60% |
20.41% |
Singapore |
STI |
3581.16 |
3491.59 |
2985.83 |
89.57 |
2.57% |
16.94% |
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Europe |
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Britain |
FTSE 100 |
6732.40 |
6505.10 |
6308.00 |
227.30 |
3.49% |
3.12% |
France |
CAC |
6105.28 |
5883.29 |
5541.76 |
221.99 |
3.77% |
6.16% |
Germany |
XETRA DAX |
8030.64 |
7590.50 |
6596.92 |
440.14 |
5.80% |
15.06% |
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North America |
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United States |
Dow |
13639.48 |
13424.39 |
12463.15 |
215.09 |
1.60% |
7.71% |
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NASDAQ |
2626.71 |
2573.54 |
2415.29 |
53.17 |
2.07% |
6.55% |
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S&P 500 |
1532.91 |
1507.67 |
1418.30 |
25.24 |
1.67% |
6.30% |
Canada |
S&P/TSX Composite |
14137.41 |
13798.50 |
12908.39 |
338.91 |
2.46% |
6.90% |
Mexico |
Bolsa |
32128.97 |
31466.60 |
26448.32 |
662.37 |
2.10% |
18.97% |
Europe and the UK
The FTSE, CAC and DAX recovered their sharp declines from the first week of June, with strong upward movements early and late in the week. People continue to expect further rate increases by the European Central Bank and Bank of England, increases that would be in the context of economic expansion, which is a factor that can be beneficial for equities. In France, President Sarkozy’s party and its allies appear to have garnered strong support in the first round of parliamentary elections held June 10. But many candidates failed to win sufficient votes to avoid a second round of voting, which is to be held June 17.
Switzerland – Central bank takes tightening step
The Swiss National Bank raised the band for three-month Swiss franc Libor to 2-3 percent. The move increased the middle of the new range to 2.5 percent from 2.25 percent. The bank indicated that further increases in the interest rate are likely in the months ahead "should economic momentum remain unchanged or should movements in the Swiss franc result in a further relaxation in monetary conditions."
Asia/Pacific
Stock market indexes here recovered from weakness in early June with most more than offsetting the previous week’s declines. They remained volatile during the week.
Bond yields continued to be a focus, but market participants gradually adopted the view that an adjustment had been overdue and that markets were adapting.
Japan
The Bank of Japan announced Friday that it was leaving its monetary policy unchanged, a move that was in line with expectations. The central bank left the overnight call-rate target at 0.50 percent. The decision by its nine board members was unanimous. The Bank also left its monthly purchases of government bonds unchanged at 1.2 trillion yen ($9.76 billion).
The Bank of Japan last raised its key overnight rate in February from 0.25 percent, a move that ended five years of zero rates. Many analysts are predicting another a rate increase in late summer.
China
China’s huge trade surpluses attracted political challenges from both the U.S. and the European Union. A group of U.S. senators said they will reintroduce legislation that would pressure China to allow its currency to appreciate. The bill would send exchange rate disputes to the World Trade Organization by treating them as unfair export subsidies. In negotiations with the EU, Chinese officials, trying to achieve better trade arrangements, argued that the final processing of goods, which are otherwise manufactured elsewhere, is inflating their country's surpluses.
China has been trying to curb inflation, which has recently accelerated sharply, reaching a 3.4 percent annual rate in May. It has attempted to tighten credit through a number of techniques, but it has found it difficult to counter the inflationary effects of capital inflow arising from its trade surplus.
Currencies
The U.S. dollar again rose relative to several major currencies as it benefited from increases in U.S. interest rates that have outstripped increases in other countries. Recent signs of a pickup in U.S. economic activity, along with some statements by Federal Reserve officials, have increased the perception that the Federal Reserve’s next policy move is more likely to be a tightening than an easing.
The dollar reached its highest level against the yen since December 2002 amid ongoing capital outflows from Japan and widening interest rate spreads favoring the dollar.
Indicator scoreboard
EMU —HICP inflation was a widely expected 1.9 percent in May. Inflation has remained at 1.9 percent for the last three months, just under the top of the ECB’s desired inflation band. The ECB, which had tightened at the early June meeting, is expected to make more upward rate adjustments this summer. Most of the broader inflation categories showed very little change in their respective 12-month rates, including the core (ex-food, drink and tobacco) which also held at 1.9 percent. Geographically, the only significant move in the headline inflation figure was in Belgium where prices decelerated to 1.3 percent year-on-year from 1.8 percent year-on-year. Elsewhere, small falls in Ireland, Luxembourg and Finland were essentially offset by similarly limited increases in Italy, Austria and Slovenia.
Industrial output dropped in April after two months of gains. The last year has been marked by generally modest expansion on average, but with month-to-month volatility.
Merchandise trade continued to show a surplus for April, but trade was close to balanced.
Germany — Consumer prices were un-revised in the final May data to leave headline inflation at the previously reported 1.9 percent, the same rate as posted in both March and April. Consumer and business confidence continued to advance in May, adding to signs that labor market gains are supporting consumers’ outlook. In addition, merchandise trade in April continued to show a similar surplus as in the previous month.
France — The new government will have its plate full as it seeks to deal with both structural and current economic issues. Industrial production figures fell 0.8 percent in April after a rise of 0.2 percent in March, disappointing market expectations and continuing a long-evident soft pattern. Particular weakness was observed in consumer goods production, capital goods, and energy output, with the last partly an offset to a jump in the previous month.
United Kingdom — Economy continues to expand
Producer prices were well behaved in April but that did little to ease inflationary worries stemming from expressed Bank of England concerns about prospective wage increases and household inflation. Further policy tightening is still anticipated down the road.
The volume of retail sales rose by 0.4 percent between April and May, reflecting gains in most sectors, particularly household goods. In the three months to May, sales were up 1.1 percent compared with the previous 3 months.
Asia/Pacific
Japan
A range of indicators point to an ongoing expansion of the Japanese economy. GDP for the first quarter of 2007 was revised up more than expected, to a 3.3 percent annual rate compared with an initial estimate of 2.4 percent. Corporate goods showed their third consecutive monthly increase.
Domestic corporate goods prices rose for the third straight month.
Japan's tertiary index rebounded to a monthly 1.7 percent in April following a revised 1.9 percent drop the month before. April's figure was well above the consensus forecast and March was revised up from a previous estimate of a 2.2 percent drop. Industries that contributed to the increase were information & communications, wholesale & retail trade, services, real estate, eating & drinking places, accommodations, transport, and electricity, gas, and heat supply & water. Industries that partially offset with decreases were learning support, finance & insurance, medical, health care & welfare, and compound services.
Bottom line
A much more optimistic tone pervaded major stock markets this past week as interest rates stabilized around midweek after the sharp run-up during the previous week. Economic data generally point to sustained expansion which leaves in place concerns that inflation may push up against comfort levels. At some point in coming months, further policy rate increases are considered likely by most European central banks and the Bank of Japan. Strength in U.S. retail sales encouraged more talk of a possible Fed tightening, although reasonably tame core inflation measures left such a move an open question. In this past week, the Bank of Japan left it’s policy unchanged while the Swiss National Bank raised its target range 25 basis points.
Looking Ahead: June 18 through June 22, 2007
Central Bank activities |
June 21,22 |
EU |
Summit of EU Heads of State |
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The following indicators will be released this week... |
Europe |
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Jun 19 |
Germany |
ZEW Business Survey (June) |
Jun 20 |
Germany |
Producer Price Index (May) |
Jun 22 |
Germany |
Ifo Business Survey (June) |
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France |
Consumption of Manufactured Products (May) |
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Asia/Pacific |
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Jun 21 |
Japan |
Merchandise Trade (May) |
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Americas |
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Jun 19 |
Canada |
Consumer Price Index (May) |
Jun 21 |
Canada |
Retail Sales (April) |
Ann-Marie Meulendyke is the author of U.S.Monetary Policy and Financial Markets
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