Equities were volatile last week as investors tried to cope with the vast quantity of new economic data that rained down on them. Adding to the cacophony were analyst conjectures on policy changes that might occur when central banks meet over the next week. The European Central Bank began the March central bank proceedings by delivering on its widely heralded 25-basis-point increase. The ECB rate is now 2.5 percent. Eight indexes followed here were down while five were up on the week.
Global Stock Market Recap
Europe and the UK
The CAC and DAX were big losers as lower oil and metal prices dragged down companies such as BP Plc and BHP Billiton in the early part of last week. And the prospect of more interest rate increases on the horizon depressed investors at week's end. The FTSE, despite its volatility, barely missed breaking even (it was down only 1.8 points.) It was a no-win situation when U.S. data releases were analyzed by overseas investors. The declines were in reaction to a report that showed consumer confidence sliding to a three-month low in Europe's largest export market. On the other hand stocks also declined when preliminary GDP data showed that U.S. economic growth was higher than previously reported. That led to renewed worries about inflation as investors fretted about the prospect of higher interest rates. European shares dropped and the euro rose after ECB President Jean Claude Trichet followed up the expected interest rate increase with a strong hint of more to come. The FTSE bucked a bearish European trend Friday, helped by possible merger news - Vodafone confirmed the potential sale of its troubled Japanese operations to Softbank.
As widely advertised, the ECB increases interest rates
The European Central Bank increased its key interest rate for the second time in three months to restrain inflation as economic growth accelerates. They increased rates by 25 basis points to 2.5 percent in a move that was well telegraphed in advance and should have been no surprise to investors. The meeting was held via a telephone conference call. At his post-meeting press conference, ECB President Jean Claude Trichet said that the bank is ready to increase rates again if needed as the export-led expansion feeds through to the domestic economy, giving companies greater leeway to raise prices. Confidence among European executives and consumers is at its the highest in five years. Trichet repeated earlier comments that the Governing Council did not decide on a series of monthly increases a la the Fed - but at the same time were ready to do whatever was necessary and appropriate to ensure price stability. The ECB revised its inflation forecasts upward to show prices increasing this year and in 2006 at annual rates above the 2 percent inflation ceiling.
The economic growth outlook has improved in the past month. Both the manufacturing and service PMIs were up more than expected and sentiment surveys have also improved. Recent retail sales data as well as orders for plant and machinery offer hard evidence that the German economy is improving.
In the past month, Trichet and several other ECB Council members have expressed concern about so-called second-round effects, as higher oil prices escalate demands for higher wages, creating an inflationary spiral. For example, IG Metall, the German engineering and metalworkers' union that traditionally sets the benchmark for other industries, has demanded a 5 percent pay increase, more than twice the inflation rate.
Asia/Pacific
Asian/Pacific stocks were mostly down on the week. Only the STI and all ordinaries managed to perform positively. Japanese stocks were the big losers along with those in South Korea. Japanese stocks dropped after the CPI report raised speculation that the Bank of Japan was getting closer to lifting borrowing costs. Banks and property stocks declined on concern that an increase in borrowing costs would curb demand for loans and reduce corporate profits. And exporters such as Toyota dropped after crude oil prices rose for a third day and retailers in the U.S. reported disappointing sales. For the week, the Nikkei declined 2.7 percent and the Topix lost 2.1 percent.
Real estate stocks reacted badly because the high inflation figures bolstered the case for the Bank of Japan to end quantitative monetary easing. This will be a necessary first step before increasing interest rates above zero, though many analysts think the BoJ may wait a year or more after ending quantitative easing before raising rates. Real estate, a sector with high debts, is seen as adversely sensitive to interest rate increases. Retailing also declined despite the view of some analysts that the sector will gain from higher spending as interest rates rise. This is because Japanese households are net savers and higher interest rates will boost their income.
The Bank of Japan meets on March 8th and 9th at which time they are expected to discuss the timing of an exit from quantitative easing along with a new price stability definition. Many analysts anticipate that the BoJ will wait until April when it holds two meetings. Some business leaders would prefer that the Bank wait until April and after the end of the fiscal year on March 31st.
Currencies
Both the yen and euro gained and lost on interest rate prospects. The euro benefited from the ECB's 25-basis-point increase to 2.5 percent with the promise of more increases on the not too distant horizon. The yen fluctuated on rhetoric, ending the week only slightly higher. The yen climbed when the CPI registered a year-on-year increase of 0.5 percent. Traders interpreted this to mean that the Bank of Japan is free to start cutting back on quantitative easing in the near future and open the door to potential interest rate increases later in the year. But the currency reversed direction Friday morning when senior politicians moved to dampen expectations that a spike in Japanese inflation would lead to a prompt normalization of monetary policy. Sadakazu Tanigaki, the finance minister, said "deflation hasn't ended yet" - a sentiment echoed by Prime Minister Junichiro Koizumi who told reporters that deflation is still not beaten. The Bank of Japan is expected to signal the end of its five-year-old policy of quantitative easing in March or April.
Indicator scoreboard
EMU - M3 money supply for the three months to January was up 7.5 percent when compared with the same three months a year ago. January private loans soared by 9.7 percent when compared with last year.
January harmonized index of consumer prices was down 0.4 percent but up 2.4 percent when compared with last year. The index remains above the ECB's inflation ceiling of 2 percent. Core HICP, which excludes food and energy, dropped 0.9 percent but was up 1.3 percent on the year. The base year for the index has been moved to 2005 from 1996 with this release. February flash harmonized index of consumer prices was up 2.3 percent when compared with February of last year. As with all flash estimates, no detail was available at release time. The HICP has been at or above the ECB inflation ceiling of 2 percent for 13 months.
February economic sentiment climbed to 102.7 from 101.8 in January. Industrial sentiment improved to minus 2 from minus 4 in the preceding month while services sentiment improved to plus 14 from plus 15 in January. Consumer sentiment also improved to minus 10 from minus 11. Retail sentiment improved to minus 5 from minus 6 while construction sentiment ebbed down to minus 5 from minus 4.
January seasonally adjusted unemployment rate remained at 8.3 percent for the second month. German unemployment dropped from 9.5 percent to 9.1 percent. This differs significantly from the national unemployment rate of 11.3 percent due to differing methodology in calculating the data.
February manufacturing purchasing managers' index climbed to 54.5 from 53.5 in January. The index was up for Germany, France, Italy and Spain. A reading over the 50 breakeven point signals expansion. German manufacturing has picked up significantly with both new orders and output increasing to 58.5 from 57.6 and 59.2 from 58.6 respectively.
February services purchasing managers' index climbed to 58.2 from 57 in January, the highest since September 2000. The index readings for all the major economies were higher with the exception of Germany. PMI levels above 55 have usually been accompanied by rising EMU interest rates. The eurozone composite for manufacturing and services hit a 65-month high of 57.7 in February after 56.6 in January.
Fourth quarter gross domestic product was up 0.3 percent and 1.7 percent when compared with the same quarter a year ago. On an annualized basis GDP was up 1 percent. Private consumption was down 0.2 percent on the quarter, reversing most of the third quarter's 0.3 percent gain. Gross fixed capital formation was up 0.8 percent after climbing a brisk 1.1 percent in the third quarter. Exports were up only 0.5 percent on the quarter after jumping 3.4 percent in the previous quarter.
January industrial producer price index soared 1.2 percent and 5.3 percent when compared with a year ago. Energy prices jumped 4.1 percent and 19.9 percent on the year. Excluding energy and construction, the PPI was up 0.4 percent and 1.6 percent on the year.
Germany - February unemployment was down 5,000. It declined 10,000 in the west but was up 5,000 in the east. The unemployment rates were unchanged from January - 11.3 percent in all of Germany and 9.6 percent in the west and 18 percent in the east.
January seasonally adjusted total retail sales were up 1.3 percent and 0.4 percent when compared with last year. Excluding autos and gasoline sales, seasonally and workday adjusted retail sales soared 2.7 percent and were up 1.7 percent on the year. Food sales were up 0.3 percent while nonfood sales were up 2.7 percent on the year.
France - January producer price index jumped 0.8 percent and was up 3.7 percent when compared with last year. The PPI excluding food and energy was up 0.6 percent and 1.4 percent on the year. Energy prices jumped 2.2 percent after declining 0.4 percent in the previous month. Food and agriculture prices were flat on the month and 1.4 percent higher on the year.
January seasonally adjusted unemployment rate edged up to 9.6 percent from 9.5 percent in December. The number of unemployed was up 28,000 while the number of registered jobseekers was up 16,300. Unemployment is defined according to the International Labour Organisation definition which excludes jobseekers that did any work during the month.
Italy - January producer price index jumped by 1.1 percent and was up 4.7 percent when compared with last year. The monthly increase was the steepest since May 1995. Energy prices were up 3.8 percent and 22.1 percent on the year. Excluding energy, the PPI was up 0.5 percent and 1 percent on the year.
Asia
Japan - January seasonally adjusted industrial production was up 0.3 percent and 1.9 percent when compared with the same month a year ago. Production hasn't increased for six straight months since a year of gains ending in March 1997, when growth in exports fueled a recovery from recession.
January retail sales sank 17.1 percent and were down 0.2 percent when compared with last year. Sales at large retailers were down 2.5 percent on the year. Total commercial sales - a combination of total retail and wholesale sales - were up 5.4 percent on the year thanks to a jump in wholesales sales of 7.3 percent.
January unemployment rate edged up to 4.5 percent from 4.4 percent in December. The number of unemployed declined 1.4 percent when compared with January a year ago. The labor participation rate was 59.6, unchanged from the previous year. Employment was up by 80,000 or 0.1 percent on the year. However those who are no longer in the labor force increased by 90,000 or 0.2 percent on the year.
January household spending headed by a wage earner sank 4.7 percent when compared with last year. Household spending accounts for about 60 percent of GDP. Expenditures were up for housing and fuel, light & water charges. However all other categories including food, clothing, and medical care were down on the year.
February Tokyo consumer price index was down 0.2 percent and up 0.1 percent when compared with last year. Tokyo core CPI which excludes fresh food only was unchanged on the month and up 0.2 percent on the year. January nationwide CPI was up 0.1 percent and 0.5 percent on the year. Core CPI excluding fresh food only was down 0.4 percent and up 0.5 percent on the year. The new core measure which excludes both food and energy was up 0.3 percent on the month and 0.1 percent on the year.
Australia - Fourth quarter gross domestic product was up 0.5 percent and 2.7 percent when compared with the same quarter a year ago. Residential construction was down 2.7 percent after growing 0.8 percent in the third quarter. However, investment was up 4.6 percent while consumer spending was up 0.7 percent. The chain price index was up 5.1 percent in the fourth quarter from a year earlier.
January retail sales were up 0.8 percent and 4.4 percent when compared with last year. Clothing and soft goods sales were up 2.7 percent while department store sales were up 2 percent. Other retailing was up 1.7 percent, hospitality services were up 1.2 percent and food sales were up 0.8 percent. Offsetting some of the gain was household goods sales which were down 1.2 percent.
January seasonally adjusted merchandise trade deficit soared to A$2,690 million, an increase of A$1,544 million on the revised December deficit in December. Exports plummeted by 7 percent. Non-rural and other goods sank 11 percent while rural goods were up 2 percent. Imports were up 2.3 percent. Intermediate and other goods were up 4 percent, capital goods were up 5 percent but consumption goods dropped 1 percent. Tropical cyclones Clare and Daryl are blamed for the sharp export decline. They forced the shutdown of an estimated 200,000 barrels of oil production and two iron ore export ports on Australia's northwestern coast.
Americas
Canada - Fourth quarter gross domestic product was up 0.6 percent and 2.9 percent when compared with the same quarter a year ago. On an annualized basis, GDP was up 2.5 percent. Residential construction slowed to a pace of 1.4 percent from a high of 6.7 percent in the second quarter. Inventories dropped by C$2.5 billion, putting a damper on growth. Consumer spending, which accounts for almost 60 percent of the economy, was up 2.9 percent at an annual rate led by a sharp increase in semi-durable goods. Business fixed investment, which includes spending on commercial construction as well as equipment and software, soared at an 8.6 percent annual rate in the fourth quarter, above the 6.9 percent average rate for all of 2005.
January industrial product price index was up 0.5 percent and 2.2 percent when compared with last year. Higher prices for petroleum products, primary metal and lumber products, were the major contributors to this monthly increase. On the month, petroleum and coal products prices increased 2.9 percent. If petroleum and coal product prices had been excluded, the IPPI would have increased 0.3 percent. Primary metal products were up 3.0 percent as prices for aluminum, nickel, zinc and gold products increased due to lower inventories and continuing strong demand. Lumber and other wood products increased 1.6 percent. Higher prices were observed for softwood lumber and particleboard as demand and construction activity increased due to milder weather. Petroleum and coal products prices were up 26.4 percent on the year. It they had been excluded, the IPPI would have been up 0.2 percent on the year.
January raw materials price index was up 0.5 and 17.8 percent when compared with last year. The major contributors to this increase were mineral fuels, non-ferrous metals and vegetable products. Mineral fuels were up 7.7 percent while crude oil increased 6.5 percent on the month. Prices for non-ferrous metals rose 6.4 percent, as prices increased for zinc concentrates, lead concentrates, gold and radio-active concentrates. Vegetable products increased 2.8 percent. On the year, mineral fuels were up 28.2 percent while crude oil prices rose 27.5 percent. If mineral fuels had been excluded, the RMPI would have increased 7.8 percent.
In January, the value of the Canadian dollar against the US dollar was up 0.3 percent. As a result, if the effect of exchange had been excluded, the total IPPI would have risen 0.6 percent instead of increasing of 0.5 percent. On the year, the value of the Canadian dollar rose 5.9 percent against its U.S. counterpart. If the impact of the exchange rate had been excluded, producer prices would have risen 3.8 percent on the year rather than increasing 2.2 percent.
Bottom line
Investors suffering from data exhaustion following the full schedule of releases will have to deal this week with central-bank-decision overload. The Banks of Canada, Japan and England along with the Reserve Bank of Australia will all be making policy pronouncements. The Bank of Canada is expected to increase rates by 25 basis points to 3.75 percent. Both the Reserve Bank of Australia and the Bank of England on the other hand are expected to maintain the status quo of 5.5 percent and 4.5 percent respectively. Given the increasing volume of chatter, the Bank of Japan is expected to make a policy change soon, but if I were a betting person, I would have to say that they will wait until the new fiscal year in April before considering any move.
Indicators abound
