The first meetings for 2006 of the European Central Bank and the Bank of England posed no surprises. Both left their key interest rates unchanged, at 2.25 percent and 4.5 percent respectively. Analysts do expect the ECB to increase rates perhaps in March, while the Bank of England is probably on hold until a better feeling of the economy's direction can be ascertained. The Reserve Bank of Australia usually meets at this time of month - but they were on summer break. It is summer time in the southern hemisphere!
ECB on hold for now
At his monthly press conference, ECB President Jean Claude Trichet was less hawkish than expected and avoided December's key word "vigilant" when referring to prices. He had signaled the ECB's heightened inflationary concerns with the 'v' word after the Bank increased their key rate by 25 basis points. Instead he said that the governing council saw the risks of faster inflation and slowing economic growth. In short, the council wants to see more evidence that the economy is strengthening before moving. There have been signs of improving growth. For example, Germany's ZEW investor confidence index for January soared to the highest in two years, manufacturers added workers last month for the first time since 2002 and consumer confidence climbed to a five-year high. But at the same time, the ECB said last month it expects inflation to breach its 2 percent ceiling for a seventh year in 2006. Highlighting the fragility of the region's economy, Germany's statistics office said on Thursday that the economy may have stagnated in the fourth quarter.
Bank of England waits for a more robust consumer
The Bank of England's Monetary Policy Committee decided to leave their key interest rate at 4.5 percent for the fifth month as consumer spending showed signs of picking up while inflation slowed. The Bank is awaiting stronger consumer spending, exports and business investment. The economy grew at the slowest pace in 13 years in 2005. Some retailers reported increased sales over Christmas and the British Retail Consortium said December sales were the strongest in 19 months. Along with the retail sector there are stronger signs from the housing market and services remain robust. Retail sales account for 40 percent of consumer spending, which in turn, accounts for about 66 percent of the economy. Services, which make up almost 75 percent of the economy, have underpinned 53 straight quarters of growth.
Investors fret
After an exuberant start to the year, equity investors paused for breath as they digested some unsettling earnings news. Worries about Iran's nuclear ambitions and continued uncertainty about global interest rates contributed to investor uncertainty. Crude oil prices crept up and have remained over the $60 mark since December 30, 2005 on Middle East uncertainties. Crude futures on Nymex briefly spiked above $65 a barrel on Friday - a three-month high - before retreating ahead of the U.S. holiday weekend. And gold hit a fresh 25-year high above $550 an ounce on Friday as investment funds continued to buy the precious metal.
On the week, six of the 13 indexes followed here lost ground.
Global Stock Market Recap
Europe and the UK
After a rousing start to the New Year, investors turned more equivocal as concerns emerged about the strength of the rally and worries about profits contributed to profit taking. European stock markets were lower on Tuesday as investors took profits following the recent strong run, but mergers and acquisitions activity kept buying interest alive. Stocks were higher on Wednesday and Thursday as the corporate news flow increased, with a number of companies reporting quarterly sales while oil major BP announced output data. The company said it would take a hit of more than $400 million in the fourth quarter from lost production in the wake of Hurricane Katrina.
Other corporate news in Europe deflated investors. For example, France Telecom caused a major corporate stir after issuing a second sales warning in three months. Other telecoms were down on lowered recommendations from analysts. On Friday, European stocks had their biggest drop in a month on concern profit growth would be too small to justify higher stock prices. Allianz AG, Europe's largest insurer, and Siemens AG, Germany's biggest engineering company, paced declines after analysts cut recommendations on the shares amid expectations stock prices already reflect earnings prospects.
According to the German Federal Statistics Office, economic growth ground to a halt unexpectedly at the end of last year. Although no data are available yet, GDP is expected to be unchanged in the fourth quarter from the third. The statistics office said that growth last year had been based largely on exports, with domestic demand remaining weak. And broad and self-supporting growth is still not here. The comments surprised analysts, who had expected growth to continue and have become increasingly upbeat about the outlook in 2006. For 2005 as a whole, the statistics office said the economy had grown by 1.1 percent - the same growth rate as in the previous year.
Asia/Pacific
The Nikkei completed its fourth straight weekly advance despite Tuesday's plunge in the holiday shortened trading week. Optimism over additional capital spending from companies such as Sharp Corp. and Matsushita Electric Industrial Co. outweighed a weaker-than-expected machinery orders report. The Topix was down for the first week in four. Automakers such as Honda Motor Co. were the biggest drag after crude oil prices rose to a three-month high and the dollar weakened against the yen in New York. Investors worried that higher crude prices will in turn increase fuel costs (they already have in my part of the world!) and dent domestic spending in the U.S. Tuesday's drop in Japan was caused by investors selling domestically focused stocks particularly aggressively. The Nikkei's slide reflected investor nervousness about share price valuations after the benchmark average reached five-year closing highs last week.
Currencies
While traders are intent on interest rate spreads, merchandise trade deficits still matter. That was apparent as various currencies reacted to the merchandise trade data for the U.S., Canada and the UK. (See indicator scoreboard below.) But when the week ended, both the yen and euro had barely moved while the pound sterling was stronger. That currency gained on signs of improved economic growth that more than offset dreadful trade data. The Canadian dollar also got a boost as prospects grow for an interest rate increase at the January 24th Bank of Canada meeting.
The euro was buoyed by favorable economic data including better-than-expected French manufacturing data and a higher-than-expected reading for German investor confidence. The positive data plus the view that the ECB is poised to follow-up December's 25 basis point rate hike added to the euro's strength. But the currency was down Thursday, after ECB President Jean Claude Trichet said there are risks to economic growth in Europe. His comments disappointed traders who expected him to be more hawkish in his comments.
The Japanese yen hit a three-month high against the dollar during the week, but there was no sign that authorities were concerned about the currency's rise. Finance Minister Sadakazu Tanigaki said on Sunday that the currency market's recent volatility largely reflected fundamentals. The yield spread between Japan and the U.S. is also swinging in the yen's direction, due to a possible rise in Japanese interest rates later this year.
Indicator scoreboard
EMU - Third quarter gross domestic product was unrevised at an increase of 0.6 percent and 1.6 percent when compared with the same quarter a year ago. This was an improvement over the second quarter which was up 0.4 percent and 1.2 percent on the year. Growth within EMU members was disparate. Private consumption was up 0.3 percent and 1.5 percent on the year while gross fixed capital formation was up 1.3 percent and 2.9 percent on the year.
Germany - November merchandise trade surplus climbed to €14 billion from €12.7 billion in October. Exports were down 1.4 percent while imports plummeted 4 percent. Exports to non-EU countries were up 12.6 percent while imports while imports were up 9.7 percent on the year.
January ZEW economic expectations index climbed to 71 - its highest in two years - from 61.6 in December. Current conditions improved to minus 31.6 from 44.4 in the previous month thanks to improving industrial production. The ZEW indicator, which tends to be volatile, shows the difference between the positive and negative forecasts for economic development during the next six months in Germany. It is based on the views of 303 analysts and institutional investors.
France - November industrial production was up 3.1 percent and 1.3 percent when compared with last year. Manufacturing output was up 2.6 percent and 1.5 percent on the year. All sectors were up on the month. Auto output soared 7.1 percent after sinking 9 percent in October. Capital goods output was up 2.9 percent after dropping 3.8 percent in October.
November merchandise trade deficit widened to €3.1 billion from €2.4 billion in October. Imports jumped 4.5 percent after dropping 1.7 percent in October. Energy imports were the main contributor to the widening deficit but capital goods imports were up also. Exports were up 2.5 percent after sinking by 4 percent in October. Semi-finished and consumer goods exports were up as were capital goods.
Britain - November merchandise trade deficit burgeoned to £6 billion from £5 billion in the preceding month. Imports were up 3.2 percent but exports dropped 0.9 percent. The non-EU trade deficit soared to £3 billion from £2.3 billion in October. Exports to countries outside the EU sank 3.6 percent, partly due to lower oil sales, while imports were up 4.2 percent. Trade in oil showed a deficit for a fifth consecutive month, the longest stretch since records began in 1980. Exports to the EU, which accounts for 60 percent of U.K. trade, were up 1.3 percent while imports were up 2.4 percent.
November industrial production was up 0.7 percent but down 2.4 percent when compared with last year. Manufacturing output which excludes mining and quarrying was up 0.4 percent but down 1.8 percent on the year. Ten of 13 sectors within manufacturing increased output in November.
Asia
Australia - November retail sales edged down by 0.1 percent but were up 2.9 percent when compared with November 2004. Clothing sales dropped 1.5 percent while supermarket sales declined by 0.7 percent. However, department store sales were up 0.3 percent.
November merchandise trade deficit soared to A$2.5 billion from A$1.4 billion in October. Exports were up 0.6 percent while imports vaulted by 7.2 percent. Capital goods imports, which include business machinery and vehicles, climbed 10 percent and consumer goods imports jumped 11 percent. Intermediate goods imports which include fuel were up 6 percent. Farm goods exports, such as meat, sugar, wheat, and wool, dropped 3 percent. Shipments of non-rural goods, which include metals and minerals, were up 2 percent. Exports of services, which include tourist spending in Australia, dropped 1 percent.
December employment was up by 2,100 jobs while the unemployment rate remained at 5.1 percent for the second month. Full-time employment was down by 4,800 while part-time positions increased 6,900. The participation rate was unchanged at 64.4 percent.
Americas
Canada - November merchandise trade surplus narrowed to C$6.9 billion ($6 billion) during the month from C$7.6 billion in October. The drop in the surplus was entirely due to weaker export prices, not volumes. Imports were little changed, dropping 0.1 percent while exports were down 2 percent. Energy exports fell 11 percent. The price of natural gas declined 9.5 percent as U.S. demand eased because of mild temperatures. Oil prices fell 8 percent in the month. Canada's trade surplus with the U.S. narrowed to C$11 billion from a record C$11.5 billion in October. Canada is the second-largest source of oil imports for the U.S.
Bottom line
A steady diet of data will whet investors' appetites in the UK where major labor market and price data along with retail sales will be carefully watched. And in Japan, the Bank of Japan's monetary policy meeting will be followed by Governor Toshihiko Fukui's speech to branch managers Friday. With the BoJ signaling its intent to alter its monetary policy just as soon as deflation ends, bank watchers and analysts will be hanging on every word looking for a clue as to when this might happen.
ECB, BoE - not this month
