RBA sits tight
The RBA left its policy rate unchanged after adding 25 basis points in November. Third quarter GDP disappointed but employment did not, increasing much more than expected. The rate, at 6.25 percent, is at a six-year high. The Bank has elevated interest rates three times this year to stem inflation, which has breached its target band of 2 percent to 3 percent for the past two quarters. Third quarter consumer prices were up 3.9 percent on the year. The bank's moves have stalled a housing recovery and dampened household borrowing. This in turn might cool the 15-year expansion. The Reserve Bank does not issue an explanatory statement when it leaves the rate unchanged. The Reserve Bank expects core inflation, which removes volatile and short-term price fluctuations, to be about 3 percent in 2007, according to its quarterly monetary-policy statement. The jobless rate was 4.6 percent in November for the second month and the lowest since August 1976. Growth in wages, a source of inflation, slowed to 3.8 percent in the third quarter. The RBA which meets monthly will be on vacation in January - the height of the Southern Hemisphere's summer.

Bank of Canada waits
The Bank of Canada left its policy interest rate at 4.25 percent for the fourth time. The Bank had already increased rates three times during 2006, with the last increase taking place in May. In its statement the Bank suggested that no change was necessary because the risks to the economy remain balanced. Like Australia, Canada is growing at its slowest pace in three years on weaker U.S. demand, a currency trading near a 28-year high, and the impact of previous rate increases. Bank of Canada Governor David Dodge and his committee increased rates to temper an economy he says will work beyond full capacity until mid-2007. He said last month that the current slowdown would be mild and short-lived. But inflation hasn't been even though the economy is slowing, and the November jobless rate of 6.3 percent is close to a 30-year low of 6.1 percent set in May and June. Consumer prices excluding eight volatile prices and indirect tax changes rose 2.3 percent on the year and at the fastest pace since May 2003. Prices and output are rising fastest in the western province of Alberta, where companies may invest C$125 billion by 2015 to boost oil development in tar sands which are believed to hold the largest reserves outside the Middle East.

Bank of England maintains 5 percent rate for now
The Bank of England kept its benchmark interest rate unchanged at a five-year high today after increasing borrowing costs twice in the previous four months. The Monetary Policy Committee and Governor Mervyn King left the repurchase rate at 5 percent. The MPC does not issue a statement when policy is unchanged, but analysts think that current risks are more weighted towards another increase rather than a cut. Rising house prices are bolstering consumer spending and helping services expand, fueling the fastest annual pace of economic growth in two years. But an influx of migrants has swelled the workforce to a record, tempering concern about inflationary wage increases. Two MPC members dissented when the committee voted to increase rates in November - Deputy Governor Rachel Lomax and David Blanchflower. The consumer price index remains above the Bank's inflation target of 2 percent. But with the pound sterling at a 14-year high against the dollar, imported inflationary pressures seem to be under control. However, the higher currency is also hurting exporters by making British goods more expensive to buyers overseas. The Bank of England will release minutes of this meeting on December 20th. It was noted that the MPC, since gaining independence in 1997, has never changed interest rates in December. It also tends to change rates in the same month that their quarterly Inflation Report is issued - the next release is slated for February 2007.

ECB continues to increase rates
As expected, the European Central Bank increased its key interest rate to 3.5 percent. According to ECB President Jean-Claude Trichet, the increase reflected the "upside risks to price stability." This was the sixth increase in rates during 2006. Even though the harmonized index of consumer prices has slipped to 1.8 percent and under the ECB's inflation ceiling of 2 percent, Trichet warned of inflation dangers ahead. At the press conference that follows the Governing Council's policy meeting, reporters and analysts alike sifted the language used by Trichet for a signal to the ECB's medium term thinking for any changes in terminology. Over the past year, the central bank has developed a system of signaling future rate increases. For example, two or three months ahead of a change, it would typically pledge to "monitor closely" or "monitor very closely" inflation developments. Trichet changed his verbiage to "strong vigilance" in the month preceding an increase. But financial markets expect that the pace at which the ECB is increasing interest rates will slowdown next year - and some think the ECB might even pause. At his press conference he said the Bank does not pre-commit to interest rate changes.

The EMU so far has been able to cope with higher interest rates, a stronger euro and cooling growth in the U.S. The greatest concern for inflationary pressures comes from wage increase demands. For example, German steelworkers in September won the biggest pay increase in more than a decade, and officials at IG Metall, the country's largest union, said it will seek "significantly" higher wages in 2007.

Markets last week
All equity indexes followed here were up last week with the exception of the Kospi. As the year draws to a close, only one index remains in the red - Topix, which is down 2 percent since its 2005 close. But the Kospi is only up 0.8 percent while the Nikkei has edged up a mere 1.9 percent. The Bolsa is up 44.7 percent while the Hang Seng and STI are up 26 percent and 22.1 percent respectively.

Global Stock Market Recap

Europe and the UK
The FTSE, CAC and DAX righted themselves this week and ended on the positive side. The FTSE and DAX regained all of the previous week's losses and then some while the CAC managed to gain only what it lost. After trading tremulously around Friday's U.S. employment situation report, attention turned to possible mergers in the banking sector that helped offset the drag from weakness in the mining sector. A higher headline employment number than consensus expectations also helped to put a positive spin on trading. On Wednesday, stocks on the FTSE were muted in response to Chancellor of the Exchequer's Pre-Budget Report where he announced new taxes.

Asia/Pacific
All Asia/Pacific indexes followed here were up on the week with the exception of the South Korean Kospi. The Kospi declined for the first week since October 13th. The decline was attributed to the strength of their currency, the won, which is at its strongest in more than nine years. The strong currency, it is feared, will hurt exporters' overseas sales. Samsung Electronics (South Korea's largest exporter) along with Hyundai Motors were particularly hurt. Adding to investor gloom, the Bank of Korea had increased its reserve requirement ratio for foreign currency deposits to 7 percent from 5 percent. Domestic reserve requirements had been increased in November.

Japanese stocks ended the week on a sour note after revised gross domestic product data showed that the economy grew only 0.2 percent on the quarter rather than the originally estimated 0.5 percent. The decline in consumer spending, which accounts for more than half of the economy, was also worse than the initial estimate. It sank 0.9 percent instead of 0.7 percent. The negative was underlined by machinery orders which were up only 2.8 percent in October after sinking 7.4 percent in the previous month. This was far below expectations. The biggest banks were down after the Bank of Japan said its lending dropped last month. Despite the poor data, both the Topix and Nikkei were up on the week.

Currencies
The dollar gained the most in two months against the yen. In an interview on CNBC Friday morning, Treasury Secretary Henry Paulson revived the Robert Rubin mantra and said a strong dollar is in the U.S. interest. The yen's decline was also helped by a report in Jiji Press, a Japanese newswire that said there was a greater chance the Bank of Japan will opt not to lift rates at its meeting in two weeks. The government also lowered its estimate of economic growth today after the weaker-than-expected GDP revisions.

The euro was little changed on Thursday after the European Central Bank increased interest rates. The change had already been priced into the markets. After remaining above the $1.33 to the euro level for most of the week, the dollar jumped to below $1.32 after Paulson's comments. The dollar initially lost ground on Friday even though the employment report showed that more jobs were created than expected. But, the dollar edged down against the euro as an initial rally just after the release of the report ran out of steam. Traders said the dollar had not rallied as much against the euro as would have normally been expected after such robust figures because overall sentiment remained bearish.

Indicator scoreboard
EMU - October producer price index was unchanged on the month and up 4 percent when compared with the same month a year ago. Energy prices were the main reason for easing in October. Energy prices were down 0.5 percent on the month but were up 5.3 percent on the year. Excluding energy, the PPI was up 0.3 percent and 3.6 percent on the year.

October retail sales were up 0.3 percent and 1.1 percent when compared with last year. October's increase was due to increased non-food sales which were up 0.4 percent. Sales for food, drinks and tobacco were flat.

Germany - October manufacturing orders dropped 1.1 percent and were up 6.2 percent when compared with last year. Domestic orders sank 2.6 percent while foreign orders managed an increase of 0.6 percent. The domestic orders decline was totally attributable to capital goods orders which plummeted 6.5 percent. Basic goods orders edged up 0.1 percent while consumer goods were up 1.5 percent. The three major categories were up for foreign orders. Basic goods were up 0.7 percent while capital goods edged up 0.2 percent and consumer goods were up a healthy 2.5 percent.

October unadjusted merchandise trade surplus was €17.2 billion compared with €15.1 billion in September. Exports were up 2.6 percent while imports edged down by 0.2 percent.

October industrial production excluding construction dropped 1.3 percent but was up 3.1 percent when compared with the same month a year ago. All major sectors declined for the second month with the exception of capital goods. Capital goods output was down 1.8 percent while consumer goods output dropped 1.6 percent. Overall manufacturing excluding energy but including non-energy related mining was down 1.2 percent after declining 0.4 percent in September.

Britain - October industrial output sank 0.8 percent was up 0.6 percent when compared with last year. Manufacturing output also slumped. It was down 0.5 percent but was up 2.4 percent on the year. The manufacturing decline was attributed to declining output for chemicals and man-made fibers as well as machinery and equipment. Electricity and gas along with mining and quarrying also were down.

Asia
Japan - Third quarter gross domestic product was revised down to an increase of 0.2 percent and 1.6 percent when compared with the same quarter a year ago from an increase of 0.5 percent and 2.7 percent on the year. It was the seventh straight quarter of expansion. The GDP deflator, which measures changes of prices of all items produced in Japan, fell 0.7 percent from a year earlier.

Australia - Third quarter gross domestic product was up 0.3 percent and 2.2 percent when compared with the same quarter a year ago. Consumption was up 0.8 percent and 3.4 percent on the year while gross fixed capital formation sank 1.8 percent but managed to climb 3.1 percent on the year. The GDP chain price index was up 0.8 percent and 4.5 percent on the year. Curbing growth has been the worst drought in a century.

November employment was up by 36,200 while the unemployment rate remained at 4.6 percent, a 30-year low. The jump in employment worsened a worker shortage that threatens to drive up wages and inflation. The tight labour market has forced companies to use incentives such as bonuses and accelerated promotions to attract and retain workers. The number of full-time jobs rose 57,400 while part-time employment dropped 21,200. About 10.3 million of Australia's 20.7 million people have a job. The participation rate, which measures the labor force as a percentage of the population aged over 15, climbed to 64.8 percent from 64.6 percent in the previous month.

Bottom line
Last week saw four central banks meet but only the ECB increase interest rates. At the press conference following the meeting, try as they may, the press could not get ECB President Trichet to commit to a date for the next rate increase. Given some analyst optimism that the Bank of Japan would increase its key interest rate again, the revised GDP data washed away that optimism. On-quarter growth was revised downward from a tepid 0.5 percent third quarter increase to a pallid 0.2 percent.

Next week it's the Federal Reserve's turn to hold a policy meeting. Virtually no one anticipates a change to the policy interest rate of 5.25 percent. Now that Japan's GDP has been revised downward, analysts look to the Tankan to be released on Friday for a roadmap to the economy's performance.

Looking Ahead: December 11 through December 15, 2006