Monday, June 28, 2004
Global Markets
Last week was relatively quiet when it came to economic indicators. But it was the calm before the storm as investors waited for confirmation from the Fed that they would indeed increase rates by 25 basis points to 1.25 percent. Most indexes followed here were up on the week as investors squared their positions in preparation for end of the quarter and half year on Wednesday. Indexes in Japan, Hong Kong and South Korea far outpaced the others followed here as Asian investors looked forward to higher profits, especially from exporters.
Global Stock Market Recap
Europe and Britain
European and British equities didn't go very far last week. The FTSE was barely down while the CAC and DAX managed to finish a shade on the positive side. The indexes flipped from positive to negative thanks to mixed signals on the strength of global growth. One of the prime negatives was the disappointing Ifo German sentiment report (see indicator scoreboard below). This clouded the outlook surrounding the country's economy. But despite the gloomy report, the DAX was up on Friday for the third day in a row, but only after U.S. consumer confidence increased. The index has been up in the last 5 out of 6 weeks. Europe's indexes continue to focus on the U.S. economy, taking its cues from there.
Asia/Pacific
Inflation - or the lack of it -continued to be the focus of Japanese investors. The latest CPI report again disappointed - the core CPI in Tokyo and nationally showed no signs that deflation is abating. The Bank of Japan has said that it would not change its interest rate policy (and they didn't at Friday's meeting) until there were clear and lasting signs that deflation had ended. Many analysts continue to view Japanese growth as extremely fragile and one that relies on exports as a main engine of growth.
But to many, Japan's economic rebound looks increasingly robust. Positive data extend from exports to the major banks, whose efforts to dispose of bad loans were rewarded with a credit rating upgrade by Standard & Poor's. The main fear now is that Japan's success will prove its undoing. The major risk that is waiting includes concerns over the Bank of Japan's exit strategy from its ultra-easy monetary policy. To date, the BoJ has shied away from any explicit commitments with the exception that they see concrete evidence of steadily positive inflation before even contemplating any tightening.
Currencies
The yen fell against the dollar, pound and euro Friday after Bank of Japan Governor Toshihiko Fukui said that it is too soon to consider increasing interest rates after the CPI continued to decline in May and June. The Bank's Monetary Policy Board decided to keep interest rates at zero, where they have been since March 2001. But despite Friday's decline, the yen was up on the week, thanks to the continuing good economic news. The yen has gained over 6 percent against the dollar since reaching an eight-month low on May 13th. Japan's top foreign exchange officials have said that the government is closely watching the market raising speculation it is prepared to intervene to stem speculative moves. The yen rose against the dollar for a third week on speculation that next week's economic data will reinforce the view that Japan's expansion will continue.
The dollar fell after U.S. durable goods orders unexpectedly declined and terrorism concerns heightened prior to U.S. President G.W. Bush's visit to Ireland and Turkey over the weekend. A downward revision to the first quarter GDP statistics didn't help the dollar either, especially in an environment where people were raising their expectations on the economy.'
Indicator scoreboard
Germany - June ZEW sentiment on the economic outlook among financial experts was 47.4, up from 46.4 in May. According to ZEW, the high oil prices and its anticipated negative effects on future consumer prices as well as expectations of an ECB rate hike dampened the expectations index increase. Sentiment about current economic conditions was also up in June. The ZEW surveyed 310 German financial experts between June 1st and June 21st for their opinions on current economic conditions and the economic outlook for major industrial economies.
June Ifo Institute business sentiment index sank to 94.6 from 96 in May. Both future expectations and current conditions declined, and overall sentiment fell in all four sectors surveyed - manufacturing, construction, wholesale and retail. Expectations fell for the fourth time in the last five months (May was unchanged). Current conditions fell for the second month in a row. The bulk of the deterioration in sentiment occurred in west Germany.
France - May consumer spending on manufactured goods was down 0.2 percent but up 4.8 percent when compared with May of last year. Nearly all categories were down with the exception of autos, which rebounded from their 3.1 percent decline in April to a gain of 4.1 percent in May. Excluding autos and auto parts and drugs, consumer spending was down 0.7 percent but was up 4.6 percent on the year.
Italy - April retail sales were up 0.2 percent and 0.8 percent when compared with last year. ISTAT officials tend to place more emphasis on the year-on-year series. Both food and non-food sales were up on the year. These data are not watched as closely as retail sales in other countries because they have little or no relationship to the consumer spending data in GDP.
Asia
Japan - May seasonally adjusted global merchandise trade surplus widened to �1.28 trillion ($11.74 billion) from a revised �983.7 billion in April. Exports were up 7.3 percent while imports were up 1.5 percent. From a year earlier, the trade surplus rose 36 percent to �934.2 billion yen. Exports jumped 9.8 percent and imports were up 4.9 percent.
April tertiary index jumped 2.2 percent and 3.3 percent when compared with last year. The tertiary index reflects activity in 11 service industries, including utilities, transport, telecommunications, wholesale and retail, finance and insurance, real estate and services. The all industry index was up 2.3 percent and 3.7 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.
June Tokyo consumer price index edged up 0.1 percent but was down 0.1 percent when compared with last year. The core Tokyo CPI was down 0.1 percent on the month and on the year. The May national CPI was up 0.1 percent but was down 0.5 percent on the year. The Core CPI was unchanged on the month but down 0.3 percent on the year.
Americas
Canada - May consumer price index was up 0.9 percent and 2.5 percent when compared with last year. The jump was mainly due to soaring gasoline prices which jumped 13.6 percent and 30.2 percent on the year. Excluding food and energy prices, the CPI was up 0.2 percent and 1.3 percent on the year. The Bank of Canada measure of inflation, which excludes eight of the most volatile items, was up 1.5 percent on the year.
April retail sales dropped 0.8 percent but were up 4.1 percent when compared with last year. Excluding auto sales, retail sales slipped 0.1 percent but still are up 5.6 percent on the year. Sales were down in 5 of 8 categories. In constant dollars, retails sales dropped 0.9 percent on the month. With this release, the sectors are now defined by the North American Industry Classification System which is not comparable to the previously-used Standard Industrial Classification.
Bottom line
The week ahead is a busy one on both the political and economic fronts. Both the Fed and the ECB meet. The Fed is expected to up their Fed Funds rate by 25 basis points to 1.25 percent. The ECB is expected to maintain its 2 percent bank rate, even though inflation in the EMU has jumped to 2.4 percent. The statements of both banks will be studied carefully by bank watchers. The pace of new economic data releases picks up as well especially in Japan with the release of the all important Tankan Survey along with unemployment and worker spending data.
On Monday, there is an election in Canada that is too close to call. Neither the Liberals nor the Conservatives have enough support right now to win the 155 seats needed to control the 308- seat House of Commons. That means a government will be formed by whichever party can pull together a coalition with enough votes to pass bills. The balance of power may rest with the Bloc Quebecois, which advocates the separation of predominantly French-speaking Quebec from Canada. The Bloc only runs candidates in Quebec.
The U.S. military is scheduled to hand over administrative power to an interim Iraqi government on June 30th.
Looking Ahead: June 28 through July 2, 2004
Waiting for the Fed