Monday, April 11, 2005
A plethora of central bank meetings
RBA surprises - leaves rate at 5.5 percent
The Reserve Bank of Australia surprised virtually everyone and left its policy interest rate unchanged at 5.5 percent. The Bank increased rates by 25 basis points at its March meeting. Australia's dollar fell to near an eight-month low while bonds gained. The RBA has been under pressure to keep borrowing costs unchanged because of slowing economic growth - fourth-quarter growth was only 0.1 percent on the quarter, the slowest in four years. Consumer confidence sank after the RBA's last increase in March. The Bank does not issue a statement when it leaves interest rates unchanged. Despite the slow growth, there are pressures on the RBA to tighten policy again. Unemployment is at its lowest in nearly three decades and consumer demand continues to be strong - and both factors can lead to inflationary pressures. Although the Australian Bureau of Statistics issues their CPI and PPI on a quarterly basis, a recent private survey showed that consumer price inflation is rising. The RBA has an inflation target of two to three percent.
Bank of Japan maintains the status quo
Bank of Japan Governor Toshihiko Fukui said mechanisms for a recovery are well in place despite a decline in business confidence. His remarks were made at a news conference at the conclusion of the Bank of Japan's two-day monetary policy meeting. Eight of nine members of the Monetary Policy Board voted to keep interest rates at zero and maintain the pace at which the bank pumps money into the economy. The vote was the first in more than a year that wasn't unanimous, causing the yen to rise from near a five-month low on speculation the bank might start to consider a shift in policy. The BoJ kept the amount of reserves available to lenders at between �30 trillion ($276 billion) and �35 trillion. Fukui once again repeated a vow to keep to the Bank's zero-interest-rate policy (ZIRP) until core consumer prices stop falling at least for a few months and policy makers are sure they won't resume declining. Cooling global demand for consumer electronics is crimping manufacturing growth in Japan. Industrial production fell and exports grew at the slowest pace in more than a year in February.
Bank of England treads lightly in pre-election meeting
The Bank of England left its benchmark interest rate at 4.75 percent for an eighth month. The decision is the last before national elections scheduled for May 5th. Consumer spending, which accounts for two-thirds of the economy, has slowed, and February industrial production dropped. Manufacturing narrowly avoided recession at the end of 2004 and has failed to grow in 2005. The pound sterling declined against the dollar after the decision. Prime Minister Tony Blair is counting on 30 uninterrupted quarters of economic growth to help him win a third term in office. The economy has expanded at a faster pace than the European Monetary Union in every quarter since the start of 2001 and is forecast to do so again in 2005. While analysts expect the Bank to increase rates again, they think it will wait until consumer spending rebounds. The Bank of England postponed its May rate announcement, originally scheduled for May 5th, after Blair called a general election for that day. The next rate decision will now come on May 9th. Chancellor of the Exchequer Gordon Brown gave the bank independence when he and Blair came to power in 1997.
ECB stays the course
The European Central Bank once again kept its key interest rate at 2 percent where it has been since June 2003. At his press conference which followed the Governing Council meeting, ECB President Jean Claude Trichet said there isn't any evidence as yet that growth is picking up. He said the central bank didn't discuss a rate increase. A slew of indicators - from business confidence to purchasing plans to industrial production - have suggested that growth remains shaky at best. Last month, the central bank played down weak growth figures for 2005 on the grounds they reflected a downturn in late 2004. This month, however, further signs of deteriorating manufacturing activity and weak consumer demand made any pretense of a strengthening recovery impossible to maintain. Trichet also cautioned that the recent run-up in oil prices was changing the ECB's perspective on the outlook for growth and inflation.
The European Commission cut its 2005 growth forecast to 1.6 percent as $50-plus oil saps consumer spending and increases company costs. The EMU economy looks to lag the U.S. for the 13th year in 14. EU cut its forecast following a string of weak data. The Commission pointed to the need for more progress on structural reforms, continued wage moderation and a further widening of profit margins as key factors underpinning its forecast. They added that a further surge in oil prices or the euro would do further damage to growth. But the Commission also predicted a slight improvement in public finances (assuming no changes in fiscal policies).
Global Markets
Retreating oil prices paved the way for gains in global equity markets last week. Only the Mexican Bolsa was down on the week as internal political factors roiled the market. The Toronto S&P/TSX composite also slipped on the week. After hitting a peak, crude prices declined, easing investor fears that higher costs would cut into profits and consumers would cut spending. The yen continued to sink and the euro did likewise - that is until Friday, when the euro staged a rebound.
Global Stock Market Recap
European and British stocks
Stocks were up this week primarily because crude prices receded from their highs. However, gains were muted by declines among energy producers such as BP, which were hurt by the oil dip. The CAC and DAX were up on the week. The FTSE ended the week on a positive note for the first time since the week ending March 4th.
Asia/Pacific equities revive
Asian/Pacific stocks followed here were up last week, thanks to receding oil prices that eased worries that energy costs would slow global economic growth and push up inflation. Companies that rely on overseas sales such as Japan's Nissan Motor and South Korea's Samsung Electronics were higher. The Nikkei was up for the first week in four, helped by a greater-than-expected increase in February machinery orders.
Dollar continues its climb
The U.S. dollar continued to strengthen last week against both the euro and yen. Continued and possibly bigger interest rate increases in the U.S. (because of Fed inflationary concerns) could lead to an even wider rate gap between both Europe and Japan, making investment in the U.S. more attractive. Higher interest rates are generally currency supportive. The Bank of Japan and the ECB left their interest rates at near zero and 2 percent respectively. The current Fed Funds rate is 2.75 percent. The dollar is up about 5.6 percent against the yen and 5.8 percent against the euro in 2005. However, in Friday trading, the dollar reversed direction against the euro, as traders sold the dollar after it failed to reach a key technical level On the week, the dollar was up against the yen and slightly lower against the euro.
While the recent trend has been attributed to U.S. dollar strength, domestic factors are also at play. Japan's economic recovery remains fragile, while meager bond yields are encouraging Japanese institutions to invest even more funds overseas. As a result, the yen has broken step with other Asian currencies, most of which appreciated on a trade-weighted basis this year.
Indicator scoreboard
EMU - March services PMI index was unchanged from February at 53.0. The index was up in Germany and Italy and down for France and Spain. For the EMU as a whole, input prices and new orders were down. A reading above 50 indicates that activity is expanding.
February industrial producer price index was up 0.4 percent and 4.2 percent when compared with last year thanks to pressures from higher energy prices. Energy prices were up 1 percent after jumping 1.7 percent in the previous month. Excluding energy, the PPI was up 0.3 percent and up 2.8 percent on the year. In addition to energy prices were up for intermediate goods, capital goods, durable and nondurable consumer goods.
February real workday and seasonally adjusted retail sales were up 0.3 percent and 1 percent when compared with last year. Food, drink & tobacco sales were up 1 percent but non-food sales dropped 0.5 percent. The boost in retail sales stemmed from increased sales in both Spain and France.
Germany - February real seasonally adjusted manufacturing orders sank 2.6 percent but were up 1.3 percent when compared with last year. Domestic orders were down 2.8 percent on the month while foreign orders fell 2.3 percent. Producer goods orders were down 3.9 percent while capital goods orders declined 1.9 percent.
February seasonally adjusted industrial production excluding construction sank 1.4 percent but was up 2.8 percent when compared with last year. Manufacturing output was down 2 percent after jumping by 3.6 percent in January. Within manufacturing, all sectors were down with the exception of consumer nondurables.
Britain - March Halifax house price index was up 0.5 percent after declining 0.5 percent in the previous month. Prices were up 9.7 percent when compared with last year.
February industrial output dropped 0.4 percent and was down 0.1 percent when compared with last year. Manufacturing output was down 0.5 percent but 0.9 higher than last year. Output declined in 9 of 13 major sectors. Most of the decline was in chemical & man-made fibers and the pulp, paper, printing & publishing sectors.
Asia
Australia - February retail sales were up 0.6 percent and 2.1 percent when compared with last year. Food sales were up 1.6 percent while clothing sales were up 0.8 percent.
February merchandise trade deficit narrowed to A$2.18 billion ($1.6 billion) from a revised A$2.27 billion in January. Exports were up 1.1 percent. Rural goods exports surged 7 percent while services were up 2 percent. Non-rural goods declined 1 percent. Imports were up 0.4 percent. Imports of consumer goods were down 2 percent while capital goods imports jumped 6 percent.
March employment was up 57,800 jobs while the unemployment rate remained at 5.1 percent. March's employment gain was the largest in six months. Australia has added 290,500 jobs since the beginning of September, the largest increase in employment in a seven-month period since the statistics bureau began monthly records in 1978. Full time jobs were up by 5,400 while part time employment soared by 52,300. The participation rate fell to 64.5 percent.
Americas
Canada - March employment was up by 4,400 jobs while the unemployment rate edged down to 6.9 percent from 7 percent in February. The decline was due to a drop in the participation rate to 67.3 percent from 67.4 percent in the prior month. Full time employment was down by 29,500 but part time employment was up by 33,900.
Bottom line
The Bank of Canada announces its policy decision on Tuesday. Analysts expect the Bank's interest rate will remain unchanged at 2.5 percent due to a weak employment report combined with anemic growth data. The strong Canadian dollar has cut into exports as well. The Bank of Canada has left rates on hold since October, while the U.S. Federal Reserve has lifted borrowing costs seven times since June 2004 to 2.75 percent.
Looking Ahead: April 11 through April 15, 2005
Lower oil begets higher equities