Monday, October 25, 2004
Bank of Canada increases rate again
The Bank of Canada increased its key interest rate by 25 basis points for the second time in two months and said more must be done to slow an economy that is producing so much it threatens to bring about higher inflation. The central bank raised the target rate for overnight loans between commercial banks to 2.5 percent, or 75 basis points higher than the equivalent U.S. federal funds rate. In its statement the Bank said, "Further reduction of monetary stimulus will be required over time to keep inflation on target." Further, it said the pace of rate increases will be influenced by how close the economy is to full output and inflation gains. Canada's economy is close to full capacity now and the core inflation rate would accelerate to 2 percent - the median in its one to three percent target range - by the end 2005. It expects higher oil prices to lift overall consumer prices well above core inflation in the first half of 2005.
In its Monetary Policy Report released on Thursday, the Bank of Canada estimated the economy would expand about 2.9 percent in the next two years, or the fastest pace it can without sparking higher inflation. The second quarter's 4.3 percent growth rate was the fastest pace in two years and the second strongest in the Group of Seven industrialized nations after the U.S. at 4.5 percent. Bank Governor David Dodge said as long as the expansion doesn't start using up too much spare production capacity, policy makers should have "a fair bit of latitude" in deciding when to raise rates. Dodge said he would consider rate increases for the next two years with the objective of raising borrowing costs as the pace of economic growth threatens to spur inflation too quickly.
The central bank trimmed its growth forecast for 2005 from 3.5 percent after the economy expanded faster than it anticipated so far this year. Dodge said the Canadian dollar's 21 percent gain in 2003 against the U.S. currency will begin to hamper exports, and oil prices that are now touching $55.00 a barrel will retard growth. The Canadian dollar traded at a 12 year high during the week. The currency has gained 4.6 percent against the dollar so far in 2004.
The surge in energy prices will reduce global economic growth and demand for Canadian exports, increase production costs for companies and leave consumers with less money to spend. While the (Canadian) dollar's gain will hurt exports, it also will help restrain price advances by making imported goods cheaper for consumers.
Canada is the most export-reliant nation among the Group of Seven industrialized nations. Commodities comprise about a third of its exports, which accounted for about 40 percent of gross domestic product last year. The Bank of Canada's Commodity Price Index, which tracks the prices of 23 Canadian commodities sold in world markets, is at the highest on record.
Global Markets
Equity markets were jittery as crude prices remained around $55 per barrel. And as the number of earnings reports increased, there were bound to be surprises on both the up and down sides. Investors were depressed by the ongoing and burgeoning scandal involving the world's largest insurers. It all began when a suit was filled by New York Attorney General Eliot Spitzer against Marsh & McLennan Cos alleging the world's largest insurance broker took industry payoffs. Business was channeled to insurance companies that paid the biggest commissions to Marsh, rather than to insurers willing to provide the lowest quotes. But after declining all week, profit taking took over on Friday and insurance stocks rebounded. The fallout dented the indexes followed here - five were higher and eight were lower on the week.
Global Stock Market Recap
Europe and Britain
For a brief moment about two weeks ago, the FTSE soared past the 4700 level. Now it is fighting to stay above 4600. The FTSE was hit hard by the insurance stock scandal as well as concerns over profits. Banks were hit hard - first by signs of a slowing British housing market and then by a surprise increase in September retail sales that sparked talk the Bank of England could be forced to raise interest rates higher than expected to curtail consumer spending. On Friday, weak GDP data erased into earlier gains and forced the index lower on the week (see indicator scoreboard below for details). But without a recovery in mining shares, it would have been worse. Mining shares dropped sharply early in the week on worries about slowing Chinese demand for metals.
On the week, the CAC and DAX managed to climb slightly higher despite volatile trading, largely attributable to insurance industry woes and fluctuating crude oil prices. And on Friday, European insurance stocks regained their equilibrium after being pummeled in the aftermath of New York Attorney General Elliot Spitzer's bid-rigging accusations. Some players believe share prices are relatively inexpensive relative to the group's profit outlook.
Asia/Pacific
It wasn't a good week for Asian/Pacific stocks - all indexes followed here were down with the exception of the Singapore Straits Times. While stocks were up on Friday, thanks to exporters to China such as BHP Billiton and JFE Holdings Inc., China's government estimated that GDP growth cooled to 9.1 percent in the third quarter after jumping 9.6 percent in the second (year over year). China imposed lending curbs in April to cool an investment boom that has caused power shortages, clogged transport networks and fueled inflation. Consumer prices rose 5.2 percent in September from a year earlier, after climbing 5.3 percent in each of the previous two months, according to government figures.
Both the Nikkei and the Topix suffered a second week of decline, losing 1.2 percent and 1.3 percent respectively. Concerns that demand from China may slow have sent shares of raw material companies lower. The Topix Maritime Transport Index and the Iron & Steel Index each slumped 3.1 percent last week. Surging demand from China, which consumes almost a third of the world's steel, helped Japanese steelmakers win price increases from customers. Japan's top three steelmakers all forecast higher earnings. Japan's top three shipping companies also forecast record earnings, getting a boost from rising trade with China that has led to higher freight rates and helped to offset higher fuel costs. However, the top three insurers said they may miss profit targets due to a record number of typhoons that sent damage claims four times higher than expected.
Currencies
The dollar touched an eight month low against the euro as a batch of recent economic statistics depressed the currency. The blows began last week. The first knockdown punch was the record August merchandise trade deficit ($54 billion). It was followed by a sharp drop in the University of Michigan consumer sentiment survey, a weak manufacturing survey from the New York Fed and a monthly drop in industrial production. The bad news was reinforced on Monday by capital flow data showing that overseas investors sharply reduced their demand for Treasury bonds, and were net sellers of U.S. equities in August. The dollar dropped out of the tight trading range of $1.18 to $1.25 against the euro that had prevailed since March. The dollar slumped to similar lows against a broad group of currencies and registered an eight month low in trade weighted terms. Although the dollar's decline was precipitated by soft economic data, soon the market began to worry about the repercussions of oil prices staying higher for longer than expected. High oil prices would reduce worldwide growth - but with some studies suggesting that the eurozone is actually more vulnerable to this threat than the U.S.
There are two possible explanations for recent movements. The first could be yield support. The dollar is taking comfort from any indications that U.S. interest rates will rise and is depressed by any suggestion of a pause in monetary tightening. But interest rate differentials between the eurozone and the U.S. are very small and are not sufficient to entice a speculator facing substantial exchange rate risk. The second explanation is that the dollar is boosted by signs of strong economic growth which make owning U.S. assets more attractive. But this approach contains a paradox. If the U.S. grows faster than other developed economies, then the current account deficit will deteriorate still further. And the U.S.'s current account deficit is seen as the factor that could eventually cause the dollar to collapse.
A neck-and-neck U.S. presidential race, exacerbated by concerns that the losing side will launch a potentially drawn-out legal challenge, induced further jitters.
The yen also was higher last week but eased on Friday when Finance Minister Sadakazu Tanigaki suggested Japan is ready to sell the currency after it climbed to its strongest level since June 25. Japan sold yen with abandon in the months leading up to their fiscal year end on March 31st but hasn't sold its currency since. Japan sold a record �32.9 trillion in the last fiscal year when the yen rose 13 percent against the dollar. A higher value of the yen puts their export driven expansion at risk by raising prices exporters must charge while at the same time reducing repatriated earnings.
Indicator scoreboard
EMU - September harmonized index of consumer prices was up 0.2 percent and 2.1 percent when compared with last year. Excluding food and energy, the HICP was up 0.2 percent and 2.1 percent on the year. The HICP excluding energy, food, alcohol & tobacco was up 0.3 percent and 1.9 percent on the year. Although energy prices edged down 0.1 percent, they are 6.4 percent above September 2003. Finland, Netherlands, Belgium, Austria and Germany managed to have price increases below the 2 percent ECB inflation ceiling.
August seasonally adjusted industrial output was down 0.6 percent but up 1.5 percent when compared with August 2003. The July and August data were adversely affected by summer school holidays in some countries, especially Germany. Consumer durable goods output sank 2.6 percent while capital goods and energy goods were down 0.3 percent and 0.2 percent.
August seasonally adjusted merchandise trade surplus was �2.9 billion, down from July's surplus of �5.5 billion. The surplus was the lowest since July 2001. Exports were up 0.5 percent while imports jumped 3.4 percent.
August seasonally adjusted industrial orders dropped 0.6 percent but were up 10.6 percent when compared with last year. The data were adversely affected by the summer school and holiday schedule in Germany. Orders for textiles & textile products, machinery & equipment and transport equipment were down on the month. But orders increased for chemical & chemical products, basic metals & fabricated metal products and electronics & electronic equipment.
Germany - September producer price index was up 0.2 percent and 2.3 percent when compared with last year. Total energy prices were up 0.2 percent and 3.4 percent on the year. Excluding energy products, PPI was also up 0.2 percent and 1.9 percent on the year.
August manufacturing orders were revised to a decline of 1.7 percent from the originally reported drop of 1.5 percent. Foreign orders were revised to a drop of 2.4 percent from the original 2.1 percent decline while domestic orders dropped 1.2 percent rather than 1 percent.
France - September seasonally adjusted consumer spending on manufactured goods sank 0.6 percent but was up 1.8 percent when compared with last year. Spending in all sectors dropped with the exception of autos, where it rose 3 percent. Clothing and textiles purchases dropped 2.7 percent while household durables were down 1.7 percent.
Italy - August industrial orders were flat but were up 9.7 percent when compared with last year. Foreign and domestic orders were up 10.8 percent and 8.9 percent respectively. Domestic orders account for around 70 percent of the overall index with foreign orders accounting for the rest.
August retail sales were down 0.1 percent and dropped 0.3 percent on the year. The data were down primarily because of sinking food category sales which account for about 40 percent of retail sales. ISTAT's retail sales data are not watched closely because they show little or no correlation with consumer spending data as published in quarterly GDP statistics.
Britain - September retail sales volumes jumped 1 percent and were up 6.9 percent when compared with last year. Food store sales were up 0.6 percent and 4.3 percent on the year. Textile, clothing and footwear items were up 0.4 percent on the month and 7.6 percent on the year. However, non-specialized store sales such as department stores dropped 1.0 percent on the month but were up 4.3 percent on the year.
Third quarter gross domestic product was up 0.4 percent and 3 percent when compared with the same quarter in 2003. This is significantly below the 0.9 percent and 3.6 percent year-on-year growth of the second quarter. National Statistics said industrial production was mainly responsible for the slowdown but services growth remained robust. Little detail is available with this first release.
Asia
Japan - September seasonally adjusted merchandise trade surplus eased to �816 billion from �1.043 billion in August. Exports were down 2.3 percent while imports climbed 2.5 percent. The nonseasonally adjusted data show a different picture when compared with the previous year. The unadjusted trade balance increased to �1.2 trillion ($11.4 billion) from �1.1 trillion in September 2003. On the year, exports soared by 12.5 percent while imports were up 12.4 percent.
August tertiary index was up 0.4 percent and 2.1 percent when compared with last year. The tertiary index reflects activity in 11 industries, including utilities, real estate, transport, telecommunications, wholesale and retail, and finance and insurance. The all industry index was up 0.2 percent and 3.2 percent on the year. The all industry index combines the tertiary index reading with activity in the construction, agricultural and fisheries industries, the public sector and industrial output. The index is considered a close approximation of gross domestic product growth, as measured by industrial and service-sector output.
Americas
Canada - August retail sales jumped 0.8 percent and were up 3.4 percent when compared with last year. Retail sales in constant Canadian dollars were up 1.1 percent after increasing by 0.4 percent in July. Excluding new car dealers, used and recreational motor vehicle and parts dealers' sales were up 0.9 percent and 4.8 percent on the year. Sales were up in all sectors with the exception of clothing and miscellaneous, which include office supplies, sporting goods, hobby, music and book stores.
Bottom line
The pace of international data releases picks up this week, especially in Japan. The Bank of Japan will hold a monetary policy meeting on Thursday and no change of policy is anticipated. The Bank has said it would not change its zero interest rate policy until deflation was thoroughly flushed from the economy. In the eurozone, both money supply and the flash harmonized index of consumer prices will be released as a prelude to the European Central Bank meeting scheduled for November 4th. The indicators are the ECB's two pillars of monetary policy and provide the basis for decision-making.
Equity and currency markets remain skittish. That is not expected to change in the last full week prior to the U.S. presidential election which is too close to call. Echoes of 2000's long drawn-out legal battle to determine the winner hang over the markets. But that is not the only uncertainty. Climbing crude and heating oil prices and their impact on economic growth is widely discussed. Consumer spending could not only be negatively affected, but profits also - especially if competition keeps companies from passing costs onto consumers.
Looking Ahead: October 25 through October 29, 2004
Fall rattle