Monday, October 10, 2005
Global Markets
Investors had little time to contemplate the many new multi-year highs European and Asian equity indexes scored last week before stocks changed direction and headed downward. Contributing to the downward pressures were hawkish comments implying higher interest rates from Federal Reserve and European Central Bank officials. Investors remain concerned over the short-term negative impact of Hurricanes Katrina and Rita on U.S. growth. And looming is third-quarter earnings season - this also provides an excuse for profit-taking with declines in one market quickly feeding through to other regions globally.
Worries about the U.S. employment report had investors fidgety as well. But the report turned out to be better than expected with most of the hurricanes' hit occurring in the hospitality sector including restaurants and casinos as well as retailing. Manufacturing employment declines were exacerbated by a strike at Boeing, which has now ended. The dollar gained on the news and equities in Europe initially turned positive, but then continued their declines. On the week, all indexes tracked here were down, with the exception of the STI. It was unchanged on the week.
Global Stock Market Recap
Europe and Britain
Equities were down last week as investors worried about a potential global economic slowdown. Although the oil sector led the way, the declines were broad-based, with only a handful of stocks making it into positive territory. On Thursday, markets were unaffected by the widely expected Bank of England and the European Central Bank decisions to leave interest rates unchanged at 4.5 percent and 2 percent respectively. Rather it was a combination of profits warnings combined with weak U.S. economic data that raised fresh fears of the curse of stagflation, adding to hawkish noises about inflation and higher interest rates from several Fed officials. Heavyweight oil stocks, which have provided the bulk of the FTSE's gains since early May, suffered as BP's warning on production targets continued to damage sentiment. The sector lost nearly a third of the gains accrued since early May in just three days.
The Bank of England left its key interest rate unchanged at 4.5 percent for a second month as economic growth continues to slow and oil prices push inflation to it highest in at least eight years. This is limiting the Bank's scope to reduce borrowing costs to stimulate the economy. The Bank lowered its interest rate by 25 basis points in August for the first time in two years as consumer spending growth slowed and house price advances eased. Consumer prices climbed 2.4 percent in August, which is above the Bank's 2 percent inflation target. In the second quarter, the economy grew at the slowest annual pace in 12 years as oil prices above $60 a barrel and a stagnating housing market sapped consumers' willingness to increase spending. Manufacturing continues to struggle to recover from a recession in the first half as factories' margins are squeezed by rising energy costs and sputtering demand in the euro region, the UK's biggest export market. UK interest rates remain the highest in the Group of Seven industrialized nations after five increases in the 10 months through August 2004.
The European Central Bank Governing Council, meeting in Athens, maintained its 2 percent interest rate for the 28th month. The bank's challenge is to shore up economic growth after a second-quarter slowdown while making sure the surge in oil prices doesn't feed into wage demands and push up inflation. Signs the expansion is accelerating may give the bank room to raise rates next year. Rising energy costs pushed euro-region inflation to 2.5 percent in September, the fastest pace in more than a year. Inflation has held at or above the ECB's 2 percent ceiling for eight months.
Asia/Pacific
It was all down hill for Asian/Pacific equities last week. Only the STI managed to inch upward. Exporters such as Nissan Motor Co. and Samsung Electronics Co. were hit hard after Richard Fisher, president of the Dallas Federal Reserve Bank said inflation is moving closer to the "upper end of the Fed's tolerance zone," suggesting that interest rate increases would continue unabated. Higher U.S. borrowing costs could dent demand for goods and services sold by Asian companies. Australia's all ordinaries dropped for four days in a row. BHP Billiton Ltd. dropped as copper prices declined from a record, threatening to crimp earnings. The index was down 4.2 percent on the week, its biggest drop since September 2001.
As expected, the Reserve Bank of Australia kept its key interest rate unchanged at 5.5 percent. The RBA last increased interest rates by 25 basis points in March. Consumer confidence is at a two year low thanks to record gasoline prices while both manufacturing and exports declined. Governor Ian Macfarlane had indicated in an August speech that borrowing costs were unlikely to move in the near term. The International Monetary Fund in its latest forecast cut its growth forecast for Australia's economy. The IMF said that the economy would probably expand 2.2 percent in 2005, its slowest pace since 1992. Their April estimate had been 2.6 percent. Growth is expected to accelerate to 3.2 percent in 2006. The RBA doesn't release a statement when rates are kept unchanged. The Bank will release its quarterly statement on the economy next month.
Currencies
The dollar dropped against most major currencies as market players worried about the viability of U.S. economic growth - and especially after the 'soft' services purchasing managers' survey. The euro rallied strongly against the dollar after ECB president Jean Claude Trichet, warned that inflation was of growing concern, prompting speculation that interest rates might increase. This would help narrow the spread between U.S. and EMU interest rates. At his press conference, Mr Trichet said "strong vigilance with regard to upside risks to price stability is warranted". At the same time, he said that EMU growth outlook remained subject to downward risks because of soaring oil prices, concerns about global imbalances and weak consumer confidence. The euro's advance also was buoyed by optimism that German Chancellor Gerhard Schroeder and Christian Democrat Angela Merkel were moving toward forming a coalition to govern Germany. Earlier in the week, the euro had dipped to its lowest level since July.
Indicator scoreboard
EMU - September manufacturing PMI improved to 51.7 from 50.4 in the previous month. France, Germany, Italy and Spain all are now above 50 - the breakeven point between growth and decline. While output prices were unchanged, input prices jumped, reflecting increased crude oil prices.
September service sector business activity index climbed to 54.7 from 53.4 in August. Indexes for Germany, Italy and Spain improved while the index for France edged slightly lower. New orders and input prices were up, with the prices charged index rising above the 50 breakeven level.
August real, workday and seasonally adjusted retail sales were up 0.9 percent and 2 percent when compared with the same month a year ago. The increase was powered by a strong rebound in French retail sales while German sales languished for the third month running.
August unemployment rate inched up to 8.6 percent from the revised July reading of 8.5 percent. Unemployment was lower in France and Spain but was higher in Germany. The remaining eight reporting countries were unchanged on the month.
August industrial producer prices were up 0.4 percent and 4 percent when compared with last year. The increase continues to be almost entirely due to higher energy prices. Excluding energy, the PPI was up a tame 0.1 percent and 1.3 percent on the year.
Germany - August seasonally adjusted manufacturing orders dropped 3.7 percent but remained 8.3 percent above the same month a year ago. The monthly drop reverses most of July's 4.1 percent gain. Part of the decline could be due to the inability of seasonal adjustment factors to properly correct for the concentration of German summer holidays in August. The decline occurred despite higher than average bulk orders for items such as aerospace, shipbuilding and rail; and to a lesser extent, heavy machinery, electrical generating equipment and communications technology. Foreign orders were down 6.2 percent after soaring by 8.3 percent in July while domestic orders dropped 1.3 percent after barely inching up 0.1 percent in the previous month. Orders were down in all subcategories.
August seasonally adjusted industrial production dropped 1.6 percent but remained 2.1 percent above the same month a year ago. As with the orders data, the seasonal adjustment factor did not compensate for the concentration of August summer holidays. Industrial production excluding construction - Eurostat's preferred measure - was down 1.8 percent but up 2.4 percent on the year.
Britain - August index of production dropped 0.9 percent and was down 1.9 percent when compared with the same month a year ago. Manufacturing output was down 0.2 percent and down 0.1 percent on the year. Six of thirteen subsectors declined while the remaining seven increased. Those declining were paper, printing & publishing, transport equipment and food, drink & tobacco. The only significant increase in output was in electrical and optical equipment.
Asia
Japan - Third quarter Tankan survey of large manufacturing enterprises edged up to 19 points from 18 in the second quarter. The Tankan, which means short-term economic outlook, surveys more than 10,000 companies and is the most closely watched index of business confidence in Japan. It asks companies about the outlook for business including sales, profits, spending and employment. Large companies are those with 1 billion yen ($8.9 million) or more in capital. Small manufacturing enterprises survey, which includes those usually not involved in international trade, also edged up one point to 3 for the third quarter.
Australia - August merchandise trade deficit widened to A$1.64 billion ($1.2 billion) from a revised A$1.33 billion in July. Exports dropped 3.4 percent while import edged down 1.3 percent. August's deficit extends the run of trade gaps to 43 months, the longest run of deficits since the 56 month run that ended February 1985. Exports of rural goods, such as meat, sugar, wheat, and wool, dropped 3 percent. Exports of non-rural goods, which include metals and minerals, fell 5 percent. Service exports, which include tourism spending, rose 0.4 percent. Imports of capital goods, which include business machinery and transport vehicles, dropped 1 percent and imports of consumer goods increased 1 percent. Imports of intermediate goods, which include fuel, declined 3 percent from July.
Americas
Canada - September employment edged downward by 2,300 jobs as the decline in part time jobs more than offset the gain in full time employment. Jobs in manufacturing were down by 7,900. Employment was up in information, culture & recreation, education and other. However, employment was down in finance, insurance, real estate & leasing as well as in business, building & other support services. The unemployment rate slipped to 6.7 percent from 6.8 percent in August.
Bottom line
When the Bank of Japan meets this week, it will probably continue the string of no policy changes by central banks begun last week. The Monetary Policy Board is expected to maintain the bank's target for reserves it makes available to lenders at between ¥30 trillion ($265 billion) and ¥35 trillion. However, the Bank has started forecasting that the seven years of deflation that has been plaguing the economy might end by the end of this year. This would allow the bank to change its 4 1/2 year policy. Rising prices would allow companies to pass on costs, increase profit margins and encourage corporate and consumer spending.
The Bank of Japan has set three conditions that must be met for a change in monetary policy. They are - core consumer prices stop falling for at least a few months; the Bank is sure they won't resume sliding; and the bank is confident about the overall strength of the economy. The Bank will announce its decisions in the early afternoon of October 12th. It will release a monthly economic assessment report at 3 p.m. on the same day and it will be followed by a Governor Toshihiko Fukui press conference at 3:30 p.m. Minutes of the meeting will be published on November 24th.
Looking Ahead: October 10 through October 14, 2005
Equities sink worldwide