Global Markets
The Federal Reserve's 25 basis point increase to 3.5 percent for the Fed Funds rate barely caused a ripple in financial markets Tuesday. Rather oil prices had more of an impact - stocks for the most part went down when crude went up, but they also went up when investors salivated over higher earnings prospects for energy companies. World equity markets had a mostly positive week as increasingly bullish investor sentiment buoyed stock prices. With the Federal Reserve's interest rate increase out of the way, many equity markets in Europe and Asia touched multi-year highs while Wall Street posted further gains. The rally appeared to be supported by recent strong earnings and economic reports and partly by relief that the Fed did not signal faster increases in interest rates. But crude prices over $65 and then $66 a barrel gave investors a reason to pause, and U.S. and European stocks faltered at week's end. On the week, the STI in Singapore lost ground as did the U.S. Nasdaq.

Global Stock Market Recap

Europe and Britain
Equity markets hit fresh highs this week in spite of rampant oil prices and expectations that U.S. interest rates will keep climbing. European stocks paused Thursday and again on Friday as $66 crude prices dented investor optimism. The FTSE was weighed down by a British Airways strike that halted traffic out of Heathrow Airport.

The eagerly awaited Bank of England quarter Inflation Report was issued Wednesday. The report was deemed more hawkish than expected by bank watchers. They decided that the Bank was unlikely to embrace further interest rate cuts in the near future. As a result, sterling climbed to a five-week high against the dollar after the Bank said it was much more likely to hit its inflation target if interest rates remained stable at currently 4.5 percent than if they fell to around 4 percent next year as markets had assumed. The Bank cut interest rates for the first time in two years on August 4th, reducing its repo rate from 4.75 percent to 4.5 percent in response to the sharp economic slowdown led by sluggish consumer spending earlier this year.

Based on current market expectations for interest rates, GDP growth would climb up to an annual rate of above 2 percent by the end of 2005 before rising more vigorously further ahead. Consumer price inflation, the Bank's target measure, was likely to go up in the near term due to the effect of higher oil prices before falling back somewhat below the 2 percent target.

Asia/Pacific
Japanese stocks climbed to a four year high bolstered by optimism that economic growth and corporate earnings will be able to weather a possible change in government after Prime Minister Junichiro Koizumi called an early election. The election was called after the upper house of Parliament rejected Koizumi's proposal to end government control of Japan Post, the world's largest savings bank with ¥350 trillion ($3.1 trillion) in assets. The proposed sale was the centerpiece of his plan to overhaul the economy and the political bureaucracy. Investors decided that the election would probably have little economic impact because it is coming at a time of expansion. The insurance and other financial stocks surged as they benefited from positive economic data. Equity turnover reached its highest daily total since November 1989.

Other Asian equity markets also rallied as buyers continued to take heart from strong corporate earnings and economic data. But Singapore bucked the firmer trend, dropping to a three-week low on concerns about share sales by a state investment agency.

Bank of Japan - no policy change
The Bank of Japan Monetary Policy Board met last week, and as expected kept interest rates at almost zero and the target for reserves it makes available to lenders at between ¥30 trillion ($268 billion) and ¥35 trillion. The vote was 7 to 2 to keep policy unchanged. The central bank adopted its so-called "quantitative easing" policy of infusing cash into the economy and holding interest rates at almost zero in March 2001. BoJ Governor Toshihiko Fukui has vowed to maintain the policy until consumer prices stop falling and board members are certain they won't resume their slide. Core prices, which exclude fresh food, have risen in just one month since April 1998.

Japanese banks have recently been having less need for excess cash due to increased stability in the financial system, making it harder for the BoJ to maintain the current liquidity target. The BoJ has allowed for temporary falls in liquidity below the target range several times since May, and has maintained that such drops are in line with the accompanying policy statement.

Currencies
The yen was up last week as equities climbed to new multi-year highs. The yen was also helped by positive economic news and signs that Junichiro Koizumi may be returned as prime minister after the September 11th snap election. Opinion polls released on Wednesday showed an increase in Koizumi's approval rating, while a majority of respondents said they supported Koizumi's plans to privatize the postal service, the issue that brought his government down.

The dollar lost ground last week against most major currencies including the yen, euro, pound sterling and the Canadian dollar. But it wasn't the Fed's fault. The dollar was virtually unmoved by the Federal Reserve's interest rate decision and its accompanying statement that reiterated a number of its key phrases. Analysts thought that the interest rate spread between U.S. and other major interest rates had been overstated in the U.S. dollar's value.

Sterling was buoyed by an unexpectedly hawkish Bank of England quarterly inflation report, which suggested that their August rate cut may not be the start of a trend. The Bank said inflation would rise above its 2 percent target in 2007 if it was to cut interest rates again, but would be around the target level if rates were now left on hold.

China unveils some things about its currency basket - but still leaves analysts in the dark
After three weeks of a managed float, the Peoples Bank of China took another step and unveiled the currency basket components that the renminbi (yuan) now follows. The basket contains a rather eclectic group of currencies including the Thai baht and Russian rouble - but the weightings were not revealed. The basket includes the U.S. dollar, euro, Japanese yen and Korean won. The currencies of Singapore, Britain, Malaysia, Russia, Australia, Canada and Thailand are also considered in setting the yuan's foreign-exchange rate according to PBOC's governor Zhou Xiaochuan. Zhou made no mention of either the Hong Kong dollar or Taiwan dollar, currencies of two of China's important trading partners.

A comment on crude oil prices
As you can see in the graph below, each easing of oil prices has been followed by a higher high. And each drop in prices has come to a halt at a higher level than the previous easing.

While high energy prices have helped to fight deflation in Japan, elsewhere oil's rally has been less welcome as stocks withered on the continual stream of new record highs. Last week's concerns were numerous including a potential terrorist attacks on Saudi Arabian supplies, numerous refinery fires in the U.S., non-Opec production shortfalls and the Iranian refusal to halt its program of uranium conversion.

Indicator scoreboard
EMU - Second quarter flash gross domestic product edged up 0.3 percent and was 1.2 percent above the same quarter a year ago. For Germany flash GDP was unchanged on the quarter and up 0.6 percent on the year. Italy emerged from recession as its preliminary GDP was up 0.7 percent and 0.1 percent on the year. French flash GDP was up 0.1 percent on the quarter (no year over year comparison was available) while Spanish GDP was up 0.9 percent and 3.4 percent on the year. As with all first releases of GDP, there are no data for GDP components.

Germany - June seasonally adjusted merchandise trade surplus climbed to €14.8 billion from €12.1 billion in May. Exports were down 0.4 percent after increasing by 3.6 percent in May while imports declined 5.5 percent after increasing 5.6 percent in May.

France - June seasonally adjusted industrial output was up 0.3 percent but was down 0.4 percent when compared with last year. Manufacturing output was also up 0.3 percent and down 0.4 percent on the year. Output was up for autos, capital goods and semi-finished goods.

Italy - June seasonally and workday adjusted industrial production dropped 0.7 percent and was down 3 percent when compared with last year. Consumer goods output was down 1.5 percent while investment goods dropped 0.9 percent and intermediate goods sank 1.7 percent. In the products group basis, means of transport, energy, gas & water and furniture were up on the month while paper & publishing, machines & mechanical equipment and mineral extraction were down.

Britain - July producer output prices were up 0.7 percent and 3 percent when compared with last year. Petroleum product prices were up 2.9 percent and 14.8 percent on the year. Other manufactured products were up 1.3 percent, thanks to the 1.3 percent jump in secondary raw material prices stemming from the cost of scrap steel. Core output prices which exclude food, petroleum, beverages and tobacco were up 0.4 percent and 2.2 percent on the year. Producer input prices were up 1.8 percent and 13.5 percent on the year. Crude oil prices jumped 9 percent and soared 57.2 percent on the year.

June global merchandise trade deficit narrowed to Stg4.277 billion from May's deficit of Stg4.981 billion. National Statistics said that new estimates of trade fraud had a distortionary impact on this June's data. They also warned that the estimates of trade fraud were provisional and subject to revision during 2005. The non-EU deficit narrowed while the gap with the EU widened in June. Including the service sector, the trade gap narrowed to Stg2.48 billion from Stg3.491 billion in May.

Asia
Japan - July corporate goods price index was up 0.6 percent and 1.5 percent when compared with last year. The index, which measures prices for energy and raw materials paid by companies, was up for the 17th month.

Second quarter gross domestic product was up 0.3 percent and 1.6 percent when compared with last year. On an annualized basis it was up 1.1 percent. Consumer spending was up 0.7 percent while capital spending jumped 2.2 percent on the quarter. The gains helped overcome a 1.3 percent decline in government spending on roads, bridges and other public works. The GDP deflator, a broad measure of prices, sank 0.8 percent from a year earlier.

Australia - July employment was up by 12,700 jobs while the unemployment rate remained at 5 percent - a 29 year low. Full-time jobs were down by 14,500 while part-time employment gained 27,200 jobs. The labor force participation rate was unchanged at 64.7 percent in July.

Americas
Canada - June merchandise trade surplus expanded to C$4.9 billion from C$4.3 billion in May. Exports jumped by 1.8 percent while imports climbed a modest 0.2 percent. Canada's surplus with the U.S. was C$7.9 billion, slightly below May's surplus of C$7.9 billion. Exports to the U.S. were down 0.3 percent while imports from the U.S. were up 0.2 percent. Exports to the European Union soared by 10.4 percent and by 9.8 percent to Japan. Energy and other raw material exports contributed to the increases.

Bottom line
The next two weeks are very quiet with little new economic news as Europe and Asia slumber through mid-August. However, important UK data will be available next week including employment, unemployment and the CPI while both the ZEW and Ifo surveys in Germany will be available the following week. All will be quiet on the central bank front and traders (i.e. those not on vacation) will be left to their own devices of what to do next.

International Perspective will join those on vacation next week. IP will be available next on August 29th.

Looking Ahead: August 15 through August 19, 2005

Looking Ahead: August 22 through August 26, 2005