Monday, January 17, 2005
Bank of England and ECB - no policy change for now
Both the Bank of England and the European Central Bank left their key interest rates unchanged on Thursday. The Bank of England's interest rate currently stands at 4.75 percent while the ECB's remains at 2 percent.
Bank of England
Primary targets of the Bank of England's higher interest rate policy have been the high flying housing market along with strong consumer spending. Housing activity has slowed sharply now and price increases have decelerated with higher rates. And according to the British Retail Consortium (BRC), retailers "endured" their worst December in more than a decade. But in their November inflation report, the Bank of England concluded that the link between house prices and consumer spending has weakened in recent years. Unemployment remains low and average earnings continue to climb, bolstering consumers. Meanwhile, government spending and private sector investment continue to grow. As a result, analysts are not anticipating any change in interest rate policy for several months.
Industrial surveys such as the PMI have been relatively strong suggesting the economy is reenergizing after the temporary slowdown in the third quarter. Inflationary pressures stem from a slight pick up in prices, rising wage settlements and a modest fall in sterling over the month. But they have been tempered by the continued slowdown in housing and continued poor official figures from the manufacturing sector.
British interest rates are the highest in the Group of Seven industrialized nations after a five-year housing boom and more than a decade of economic expansion. They in turn prompted concern about inflation even though the rate of inflation is significantly below the Bank's 2 percent target. Since the start of the year, data have suggested that consumption growth may be faltering as the residential property market cools. The Monetary Policy Committee does not explain its reasons for interest rate decisions immediately and Bank watchers have to wait for two weeks for the meeting's minutes. But it is likely that the Committee concluded that not enough had changed since its meeting in December to justify a move.
European Central Bank
The European Central Bank kept its interest rate at 2 percent and signaled that it now sees the euro's considerable strength against the dollar as a more imminent threat to Europe's sluggish economy than inflation. The move was widely expected with weak economic growth and the strength of the euro likely to deter the ECB from raising rates any time soon.
At his post-meeting press conference, ECB President Jean Claude Trichet surprised financial markets by taking a softer tone on inflation prospects, which he said would probably fall below the key 2 percent policy threshold later in 2005. When oil was trading at record highs late last year, the bank - with a mandate to maintain price stability - had been hawkish about the possibility of rate increases to counter inflationary pressures. But on Thursday, Trichet said those dangers had receded along with the oil price.
While U.S. officials probably would like to see new ECB rate cuts to stimulate European demand and European appetite for U.S. exports, the ECB is still concerned that leaving rates at record lows could stoke long-term inflation and add to potential housing price bubbles that are looming in countries like Spain, Greece and possibly France.
Late last year, Trichet warned that foreign exchange movements had been both "brutal" and "unwelcome." He is acutely aware that a surprise rate increase could push the euro higher still against the dollar. Tighter monetary policy would also risk exacerbating the global imbalances that have pushed the U.S. dollar to multi-year lows. Commenting on the U.S. imbalances earlier in the week, Trichet said: "Every part of the world has homework to do."
Global Markets
Equities limped into - and out of - the second week of 2005 trading. Stocks worldwide were mixed for many of the same reasons that have affected trading for some time now. Crude prices were up and seemed to fluctuate on weather forecasts and whether the temperature will go up or down in the U.S. Northeast (it is plummeting as I write). The dollar went down when the trade gap widened to a new record but recovered on other stronger-than-expected economic data. And as the heaviest part of the earning season approaches, investors are displaying their usual queasiness. Of the thirteen indexes followed here, eight were down while five were up.
Global Stock Market Recap
Europe and Britain
After losing ground for three days, the FTSE, DAX and CAC rebounded on Thursday and Friday. But it was too late to counter the earlier losses and all three were down on the week. In Europe, stocks fluctuated with the value of the euro, with exporters shares rising when the euro fell and declining when the euro rose. And of course earnings results affected the direction of the indexes. For example, technology companies reflected U.S. trading, where Intel reported strong results in contrast to rival Advanced Micro Devices. Stocks finished the week on a positive note as raw material companies were up amid optimism that commodity prices would add to last year's gains. Oil company shares were buoyed by the thoughts of higher prices boosting profits as the weather returns to more seasonable temperatures in the U.S. Northeast.
Asia/Pacific
Asian/Pacific stocks had a lackluster week as investors waited for earnings news. On Friday, technology stocks got a boost after Samsung Electronics, the region's biggest electronics maker by market value, reported better-than-expected fourth quarter results. South Korean Kospi closed at its highest since April 27, 2004 on the news. Japanese stocks were helped by economic news - November industrial production was revised upward and machinery orders, jumping by a four-year high of 19.9 percent, suggest more capital spending ahead.
According to the finance ministry, foreign investors bought a record �15,260 billion ($149 billion) in Japanese equities and bonds in 2004. This is the highest level since such statistics began to be compiled in 1981. Contributing to the popularity of Japanese securities among overseas investors was the growing optimism in the Japanese economy, which appears to be on a solid recovery track. Net equity purchases were up 7 percent from the previous year. Net foreign purchases of bonds exceeded sales for the first time in three years. However, securities investment by Japanese investors in overseas markets surpassed foreign investment in Japanese securities by �2,970 billion.
Currencies
The euro had an up-and-down week but with little in the way of dramatic moves that characterized December trading. It was up when the U.S. merchandise trade deficit hit an all-time high and down after ECB President Trichet said inflationary pressures have diminished, reducing expectations for higher interest rates. Europeans, many of whom worked themselves up about the swooning dollar last year, suddenly seem to have mellowed as the dollar has rebounded in 2005. Public and private comments by central bankers and other officials have been noticeably more relaxed even though economists caution that underlying trends have not changed. On Thursday, Trichet reiterated that sharp currency moves were unwelcome and undesirable for growth. But his otherwise relaxed tone suggested that for now, the euro was a manageable problem. The speed of the euro's appreciation has slowed somewhat for now. The recovery of the dollar has also shifted many Europeans' gaze from the United States to Asia. While European leaders were calling on the United States to tackle its trade and budget deficits last month, they are now calling on the Asians to allow their currencies to rise.
There is still plenty of skepticism about the readiness of the United States to confront its deficits or stanch the fall of the dollar, especially since a weak dollar benefits American exporters. But after months of frustration, some here are choosing to look on the bright side. Recently, currency traders seem to have diverted their attention from the trade deficit to other factors such as the U.S.'s superior growth rate and the likelihood of higher U.S. interest rates.
The yen was up on the week as more analysts think that intervention by the Japanese government is less likely. The consensus seems to be that this year - unlike last when intervention prior to the end of the fiscal year on March 31st climbed through the billions - the economy can tolerate a higher yen. But what the new threshold of pain is, there is merely conjecture.
According to EBS, the largest inter-bank trading platform, and the Chicago Mercantile Exchange, foreign exchange trading volumes leapt to record levels in the first week of 2005. Average daily volume for the week on EBS was $162 billion, up 21 percent when compared with the same week last year and considerably higher than the average of about $100 billion. Trading in foreign exchange products over the CME's Globex electronic platform last week was up 182 percent over the same period in 2004, and pit-traded options volumes were up 114 percent compared with last year. About 90 percent of all foreign exchange transactions involve the dollar, and any move there tends to affect the whole market. EBS is the larger of two main platforms where banks deal exclusively with one another, and it is believed by traders to hold the best liquidity in euro-dollar and dollar-yen trading. Those two currency pairs make up about 42 per cent of all activity in the spot market.
Indicator scoreboard
EMU - Third quarter gross domestic product was unrevised at 0.3 percent and 1.8 percent growth on the year. Growth was due entirely to domestic demand and inventory accumulation. Domestic demand was up 1 percent but private consumption was up by only 0.1 percent on the quarter. Gross fixed capital investment was up 0.7 percent while government spending was up 0.5 percent.
Germany - November merchandise trade surplus eased to �11.9 billion from �12.6 billion in October. On a seasonally adjusted basis, the trade surplus was �11.7 billion, down from �12.4 billion in the previous month.
January ZEW economic expectations index climbed to 26.9 from 14.4 in the previous month. The institute said that a chief reason for improvement in analysts' expectations was likely the greater optimism in the German retail sector following a successful Christmas season. Also contributing were recent developments in the euro's exchange rate and the price of oil, which did not rise further during the survey period. Financial experts were more optimistic about current German economic conditions. The ZEW survey results are based on responses from 305 German financial experts on current economic conditions and the economic outlook for major industrial economies between December 20, 2004 and January 10, 2005.
November industrial production sank 1.7 percent and was down 0.7 percent when compared with last year. All industrial output categories with the exception of nondurable consumer goods sank on the month.
France - November seasonally adjusted industrial output was up 0.1 percent and 2.1 percent when compared with last year. Manufacturing output, however, was down 0.3 percent but up 2.6 percent on the year. Manufacturing output was dragged down by semi-finished and capital goods output, both sinking by 0.8 percent. This outweighed increases in both consumer goods (up 1 percent) and autos (up 0.9 percent).
November seasonally adjusted merchandise trade deficit was �1.080 billion, down from October's �1.841 deficit. Exports were up 1 percent while imports declined by 1.5 percent. Auto exports were robust as were semi-finished goods exports. But capital goods exports were dragged down by a decline in Airbus sales. Consumer goods exports also were down. Oil product imports benefited from the decline in prices and were down 9 percent after soaring by 25 percent in October.
Britain - December producer output prices were down 0.4 percent but up 2.9 percent when compared with last year. The decline was due in part to a drop in scrap steel prices - they tumbled 17.3 percent after soaring as much as 50 percent during 2004. Declining petroleum product prices also contributed to the decline. Seasonally adjusted core output prices were down 0.3 percent but up 2.3 percent on the year. Producer input prices sank 2.3 percent but were up 3.4 percent on the year. Declining crude oil prices also prompted another sharp drop in input prices.
November merchandise trade deficit was Stg4.6 billion down from Stg5.0 billion in October. Exports jumped 4.3 percent while imports were up 1.2 percent. Excluding oil and erratic items, the deficit on goods narrowed to Stg4.858 billion from Stg5.274 billion in October.
November industrial output was up 0.2 percent but declined 0.9 percent when compared with last year. Manufacturing output slipped 0.1 percent and was unchanged on the year. Output declined in five sectors including chemical and man-made fibers. Output increased in eight sectors including transport and equipment industries.
Asia
Australia - November merchandise trade deficit widened to A$2.66 billion ($2 billion) from A$2.37 billion in October. Exports (down 0.4 percent) dropped for the second month in a row to A$12.88 billion. Imports were up 1.6 percent to A$15.54 billion. Imports of consumer goods gained 1 percent. Capital goods, which include business machinery, declined 5 percent. Imports of intermediate goods, which include fuel, rose 5 percent.
December unemployment rate edged down to 5.1 percent from 5.2 percent in November. This is the lowest since November 1976 when it was 4.9 percent. Employment increased by 29,000 jobs. Part-time positions increased 34,800 and full-time jobs were down by 5,800. The economy added 259,800 jobs in 2004, the 12th year of gains. The participation rate, a ratio of people with jobs or who are looking for work, rose to 63.8 percent from 63.7 percent.
Americas
Canada - November merchandise trade surplus jumped to C$7.3 billion. Imports and exports were down 10.2 percent and 2.9 percent, respectively. About one-third of the drop in imports stemmed from the increase in the value of the Canadian dollar. The trade surplus with the U.S. was C$10.3 billion. Exports dropped 2.1 percent while imports plummeted by 12.1 percent. Main contributors to the export drop were declines in automotive, energy and forestry products.
Bottom line
Jittery equities markets graphically illustrate investor nervousness over expected earnings reports. And nail-biting time will continue over the next several as earnings reports unfold in increasing intensity. Last week's central bank meetings did not surprise nor will this week's Bank of Japan meeting. The Bank has reiterated time and again that it has no intention of changing policy until deflation is purged from the economy.
Looking Ahead: January 17 through January 21, 2005
Investors skittish