Monday, June 13, 2005
Global markets tread water
The world's exporters breathed a collective sigh of relief Thursday morning when Federal Reserve Chairman Alan Greenspan said that the Fed was not concerned about a serious slowdown in U.S. growth - despite some ups and downs thanks to oil prices - and would continue to increase interest rates at a moderate pace. In short, there was nothing new in his comments to the Joint Economic Committee of the U.S. Congress to unsettle markets. While equities in Asia and Europe benefited from the upbeat view on Friday, U.S. markets continued to languish. On the week, 12 of 13 indexes followed here were up. Only the Nasdaq was down.
Global Stock Market Recap
Europe and Britain
Equities were lifted on Friday thanks to Alan Greenspan's sanguine view of the U.S. economy - it is growing steadily with few inflation worries - to end the week on a positive note. The CAC and DAX closed at three-year highs after increased earnings guidance from Intel lifted sentiment. Oil stocks also made gains ahead of next week's meeting of the Organization of the Petroleum Exporting Countries as oil prices climbed on commodities markets. The FTSE 100 managed to climb above the critical 5000 level again and stay there as the week ended. This was despite pressures on the index caused by upcoming quarterly changes in the index's component companies.
Much to no one's surprise, the Bank of England Monetary Policy Committee kept its key interest rate unchanged at 4.75 percent for the 10th month as consumer spending cooled down and the housing market stagnated. The MPC had increased rates five times between November 2003 and August 2004. U.K. lending rates are the highest among the Group of Seven nations, which also includes France, Germany, Italy, Japan, Canada and the U.S. With retail sales faltering and property prices leveling off after a decade-long boom, investors have abandoned expectations for higher rates and are now betting the bank's next move will be down. With manufacturing a basket case, signs of a slowdown in service output (which accounts for almost three-quarters of the economy), are adding to concerns about the economic outlook. But despite the slowdown, the outlook remains brighter than in Europe's other large economies. The Bank pared its forecast for growth in 2005 to 2.6 percent from 2.7 percent last month, but that is still almost twice the rate the European Central Bank expects for the EMU. No doubt bank watchers will be even more vigilant in dissecting the minutes when they become available on June 22nd as they seek to sniff out the Bank's next move.
Asia/Pacific
All six Asian/Pacific indexes followed here were up on the week. Shares regained ground after dropping on Thursday when investors were worried that Fed Chairman Alan Greenspan's Joint Economic Committee testimony later that day might suggest that higher U.S. interest rates would be in the offing. Higher rates would curtail consumer spending and therefore be a negative for exporters. But equities were propelled higher Friday after Greenspan eased doubts - at least for the time being - about the strength of the U.S. economy. He also reassured the Committee that inflation was contained and interest rate increases could continue at a measured pace. Exporters like Honda benefited in Friday trading. Analysts said afterward that with the U.S. economy growing and inflation in check, the Fed won't have to keep on raising rates indefinitely, which would be a plus for stocks.
There was no drama in the Reserve Bank of Australia's announcement last Wednesday. The RBA left its policy rate at 5.5 percent as expected. Recent data have indicated that manufacturing is slumping along with retail sales as past interest rate increases begin to take effect. In addition, the country is experiencing a major drought in over half of its farmlands which is cutting rural production and is adding to the economy's woes. Consumers have become more sensitive to interest rate changes thanks to growing household debt. The Bank does not explain its decisions when there is no change in policy. Reserve Bank Governor Ian McFarlane is expected to give an update on the Bank's thinking in a speech scheduled for June 14th.
Currencies
After trading in a narrow range most of the week, the dollar gained against the euro and yen after the U.S. trade deficit in April was less than expected and the March shortfall was revised lower. The smaller-than-expected deficit brought relief to dollar bulls. The dollar has lost ground against other major currencies over the past 3 years in part because concerns about the ballooning merchandise trade deficit. (The other main contributor to investor angst was the fiscal deficit.) As a result, both the euro and yen were down against the dollar for the week. Against the euro, the dollar has also become more attractive because of the increasing spread between interest rates. The current Fed policy rate is 3 percent and is expected to continue to climb while the ECB rate remains stuck at 2 percent. The Bank of Japan has kept borrowing costs near zero. Downward pressure on the euro also comes from a long string of miserable data from Germany, Italy and France amongst others.
Indicator scoreboard
Germany - April real seasonally adjusted manufacturing orders sank 2.9 percent and were 0.7 percent below the level of a year ago. The monthly drop more than offset March's 2.1 percent increase. Domestic orders were down 0.6 percent and foreign orders plummeted 5.2 percent. Domestic capital goods orders were down 0.5 percent but foreign capital goods order plunged 7.8 percent. Domestic consumer goods orders were up 0.2 percent while foreign orders jumped by 2.2 percent.
April real seasonally adjusted industrial production excluding construction (the figure preferred by Eurostat) was up 0.2 percent and 2.4 percent when compared with last year. Including construction industrial production was up 1.1 percent and 1.8 percent on the year. Construction jumped 18.6 percent after sinking 12.4 percent in March. Manufacturing output was up 0.6 percent.
April seasonally adjusted merchandise trade surplus was €12.6 billion, down from €14.7 billion in March. Exports were down 0.4 percent while imports were up 3.8 percent. Unadjusted trade surplus also was €12.6 billion. Exports were up 4.9 percent while imports jumped 10 percent on the year.
France - April seasonally adjusted merchandise trade deficit swelled to €3.2 billion from €2.3 billion in March. Imports jumped 3.9 percent while exports climbed 1.2 percent. Imports were up for pharmaceuticals, autos, semi-finished and capital goods.
April industrial production was down 0.3 percent and was unchanged when compared with last year. Energy production sank by 4.8 percent while agriculture and food output fell 0.1 percent. However, auto output was up 0.7 percent after dropping significantly for two consecutive months. Construction increased 1.6 percent after weak results in the previous months. Basic manufacturing - industrial production excluding energy and farming - was up 0.5 percent.
Italy - First quarter gross domestic product dropped 0.5 percent and was down 0.2 percent when compared with the first quarter a year ago. Investment was down 0.6 percent and declined 2.6 percent on the year. Private consumption was up 0.2 percent and 0.7 percent on the year, but government consumption was down 0.5 percent and 0.2 percent on the year.
Britain - May Halifax house price index was down 0.6 percent and up 3.2 percent when compared with last year. Halifax said that the underlying trend was one of flat house prices.
April industrial output was up 0.8 percent but down 1.9 percent when compared with last year. Manufacturing output was up 0.9 percent but down 1.4 percent on the year. Output was up in 10 out of 13 manufacturing sectors.
April global merchandise trade deficit was Stg4.838 billion, slightly larger than March's Stg4.638 billion. Exports were up 1.9 percent while imports were up 2.4 percent. Exports of crude oil, chemicals and cars were higher. Car and oil imports were higher, but these increases were partially offset by a drop for capital goods. Excluding oil and erratic items, the volume of exports of goods was up 4 percent between March and April. The volume of imported goods, excluding oil and erratic items, was up 2.5 percent.
Asia
Japan - May corporate goods price index was down 0.1 percent and up 1.8 percent when compared with last year. Prices of petroleum and coal products were up 1.6 percent while chemical and related prices were down. Nonferrous metal prices were also down on the month.
Australia - May employment was up by 14,000 jobs. Full-time employment declined 600 in May while part-time positions rose 14,600. Employment has increased 321,000 since the beginning of September. The unemployment rate remained at 5.1 percent for the second month. The labor force participation rate rose to 64.6 percent in May from 64.5 percent the previous month.
Americas
Canada - May employment was up by 35,400 jobs while the unemployment rate remained at 6.8 percent for the second month. Full time employment was up 23,300 while part time was up by 12,000 jobs. All the employment gains were in the services sector which was up by 45,800 jobs - but manufacturing employment continued to shrink and was down by 10,400 jobs. Educational services and construction also lost jobs and were down 18,000 and 15,000 respectively.
April merchandise trade surplus was C$5.1 billion, up from last month's surplus of C$ 4.8 billion. Exports were up 0.3 percent while imports declined 0.5 percent. Exports were up on record high levels of meat and meat preparations, as well as solid gains in aircraft and telecommunications equipment. The import decline was led by metals and metal ores and energy products, as well as by lower imports of consumer products. These declines were partially offset by rising imports of motor vehicle parts and aircraft, engines and parts. The trade surplus with the U.S. was C$8.2 billion with exports down by 0.4 percent and imports up by 0.2 percent. Exports to the rest of the world were up 3.2 percent while imports declined 1.9 percent. The deficit with countries other than the U.S. narrowed from C$3.5 billion to C$3.1 billion.
Bottom line
No change in policy is expected when the Bank of Japan meets this week. They probably will decide to keep their policy interest rate near zero and continue to pump cash into economy to overcome more than seven years of deflation. It is expected that Governor Toshihiko Fukui and other members of the monetary policy board will maintain the bank's target for reserves made available to lenders at between ¥30 trillion ($280 billion) and ¥35 trillion at a two-day meeting ending June 15th. At their last meeting on May 20th, the board decided to allow reserves to temporarily fall below ¥30 trillion in response to weakening cash demand from lenders. Fukui said the step doesn't mean a policy shift. He reiterated a pledge to keep flooding the economy with cash until consumer prices show stable gains. Any BoJ decision will be announced early afternoon on June 15th in Tokyo. The Bank of Japan is due to release its monthly economic report at 3 p.m. and Fukui is scheduled to speak at a 3:30 p.m. press conference on the same day.
Meanwhile, in Europe they continue to assess the fallout from the 'No' votes in France and the Netherlands and what the impact on the EU and the EMU will be. The meeting of EU heads of state will attract heightened attention particularly since it is the first opportunity for all the leaders to discuss the situation and perhaps decide what steps they are going to take going forward. The UK has already shelved a possibility of a referendum - the British were widely expected to vote no anyhow. And they are not the only ones who might vote no.
Looking Ahead: June 13 through June 17, 2005
EU vote post mortem plus Greenspan