Monday, June 14, 2004
Bank of Canada stays on hold...
The Bank of Canada joined the Australian Reserve Bank and the European Central Bank and left its key interest rate unchanged last week. The rate is currently at a four decade low of 2.0 percent after the Bank lowered it by 25 basis points on April 13th. Although prices are rising, inflation is not yet a problem in Canada. After a lackluster first quarter (despite strong exports), the economy has perked up. For example, so far in the second quarter, more than 105,000 jobs have been created, manufacturing employment is improving, and exports and domestic demand are higher. This is bound to lead to solid second quarter GDP growth. Most analysts expect interest rates to climb later in the year. The Bank has cut rates five times in the past year as inflation has remained shy of the central bank's 2 percent target. However, the consumer price index advanced 1.6 percent in April when compared with last year - the fastest pace in four months fueled by rising prices for gasoline, electricity and cigarettes.
But the Bank of England does not
The Bank of England raised its primary policy making interest rate by 25 basis points for the second month in a row. This was the fourth increase since July 2003 and the third since November. Their rate is now 4.5 percent. It is the Bank's latest attempt to rein in consumer spending and cool down the housing market. Both so far have been resistant to the rate increases. In addition to rampant house prices, data show that retail sales are growing vigorously and the manufacturing sector is recovering. The rate increase came despite the fact that inflation remains below the Bank's 2 percent target. The pound sterling fell initially because many analysts thought the bank should have increased rates by 50 basis points. Analysts say that in addition to soaring housing prices, a pressing concern is the high level of consumer debt. Some analysts think that shock treatment is needed because the increases since November have had little impact on house prices and spending.
Global Markets
With U.S. stock and bond markets closed on Friday, trading was light elsewhere. In Britain, equities had little reaction to the Bank of England's rate increase on Thursday. Both European indexes and the FTSE were up on the week as were the Asian/Pacific indexes with the lone exception of the Kospi. Remarks by St. Louis Fed President William Poole reverberated through the markets on Friday. He suggested that the Fed might raise its key interest rate faster than some investors expect.
Global Stock Market Recap
Europe and Britain
The FTSE, DAX and CAC were up for the second week. The volatility that was apparent earlier in the month seems to have subsided since oil prices have eased and most central bank interest rate issues have been resolved at least until next month. While many investors are waiting for the Fed, they have reconciled themselves to the inevitability of a rate increase. Some fret that economic growth will slow, especially after Federal Reserve officials warned that the central bank is prepared to raise interest rates more rapidly than investors expect. The U.S. is Europe's largest trading partner. Most of the anemic growth that has occurred on the continent has been stimulated by exports to the U.S.
Asia/Pacific
All Asian/Pacific indexes followed here were up on the week with the exception of the South Korean Kospi. Declining manufacturer and consumer confidence depressed investors who were in need of a positive boost. Both Japanese indexes along with the Hong Kong Hang Seng were up over 3 percent after dropping in the prior week. Japanese investors were joyous over the upward revision in GDP data. In the first quarter, the economy recorded the highest growth rate of the G7 industrial countries, 6.1 percent at an annualized rate. (See indicator scoreboard below.)
But on Friday, the Nikkei and Topix declined after robust Chinese economic data bred concerns that China, Japan's number two export customer after the United States, could move more rapidly to slow its booming economy. China's May inflation rate and retail sales jumped, prompting worries that authorities may raise interest rates to curb inflation. Beijing has said repeatedly that it intends to rein in its economy to avoid overproduction and supply gluts. Higher interest rates would make loans more expensive and could discourage people from spending.
Currencies
After sliding earlier in the week, the dollar gradually recovered, gaining at an accelerated pace against most major currencies. It headed for the biggest weekly advance against the euro in five months. William Poole was the catalyst for the latest move, saying the central bank may raise its key interest rate faster than some expect. Poole, who is a voting member of the FOMC, said the Fed was prepared to lift rates further and faster than what the financial markets anticipate should inflation accelerate. Poole's statements were backed up by Atlanta Fed President Jack Guynn, who said that Fed policy makers can abandon their pledge to raise interest rates at a "measured" pace if inflation accelerates. Although U.S. stock and bond markets were closed Friday for President Ronald Reagan's funeral in Washington, the foreign exchange markets were open.
The yen was higher against the dollar for its third weekly gain in four based on investor expectations that Japan's economic recovery is accelerating and becoming more entrenched. These expectations were backed up by positive economic data. For example, both industrial production and GDP estimates were revised up during the week.
Indicator scoreboard
Germany - May seasonally adjusted unemployment was up 9,000 with all of the increase in west Germany. The unemployment rate remained at 10.5 percent for the second month. Unemployment rate inched up to 8.5 percent in the west and to 18.4 percent in the east. March employment sank by 33,000 jobs.
April seasonally adjusted industrial output jumped by 2.2 percent and 3 percent when compared with last year. The increase was due to a stronger manufacturing sector, which increased 2.5 percent. Construction output was up 1.7 percent. Consumer durable goods output soared by 5.5 percent while non-durables climbed by 2.7 percent. Output in the capital goods sector increased 2.5 percent.
May wholesale prices were up 0.5 percent, led by strong gains in metals, tobacco and oil product prices. When compared with last year the WPI jumped 3.6 percent. WPI increases were led by the ore, iron, steel and non-ferrous metal category. Prices for solid fuels and petroleum products rose 5.2 percent.
April seasonally adjusted merchandise trade surplus soared to �15.2 billion from �13.9 billion in March. Exports jumped 5.2 percent while imports were up 4.1 percent. Exports are equivalent to about a third of Germany's gross domestic product and are supporting the meager expansion in the absence of consumer spending.
France - April seasonally adjusted industrial output dropped 0.4 percent but was up 1.1 percent when compared with April of 2003. A 3.9 percent drop in energy production was the main driver of the decline. Manufacturing output was up 0.4 percent and 0.7 percent on the year. A capital goods output increase contributed to the jump in manufacturing output. However, consumer goods output dropped 1.6 percent while auto output declined by 0.5 percent. Industrial output measured without construction, energy and the agri-food business, is deemed by INSEE (the French statistical agency) as the "truest" indicator of manufacturing production.
April seasonally adjusted merchandise trade balance sank to a deficit of �457 million from a surplus of �869 million in March. Imports soared by 5.5 percent while exports edged up 0.5 percent. Contributors to the import jump were aeronautics (Airbus components and Boeing aircraft), machine tools, computer equipment and semi-finished products. Export gains were in semi-finished goods, consumer goods and electronics.
Italy - First quarter gross domestic product was up 0.4 percent and 0.8 percent when compared with the same quarter a year ago. The data were unrevised from the preliminary release. Domestic demand and capital investments expanded while net exports and inventory change declined.
Britain - May seasonally adjusted Halifax house price index was up 2.2 percent and 21.8 percent when compared with last year. Halifax said strong housing demand, together with a shortage of supply, have ensured a high level of house price inflation. The average price of a house rose to Stg157,849.
April industrial production was up 0.7 percent and 0.5 percent when compared with last year. Manufacturing output was up 0.9 percent and 1.0 percent on the year. This was the first increase in manufacturing output in three months and the highest monthly increase since August 2002. Eight of the 13 subsectors were up on the month. Output rose in chemicals and man-made fibers, machine equipment, and electrical and optical equipment.
April global merchandise trade deficit widened to Stg4.66 billion from Stg4.15billion March. The deficit widened mainly because the oil balance fell into deficit. The erratics deficit also widened. Exports were up 1.7 percent but imports jumped by 3.7 percent.
Asia
Japan - First quarter gross domestic product was revised upward to 1.5 percent from the previous estimate of 1.4 percent. The higher growth was due in part to an increase in private inventories. Corporate capital spending was revised down to 1.7 percent growth from a 2.4 percent preliminary rise. The revised GDP increase translates to 6.1 percent growth in annualized terms, up from an initial estimate of 5.6 percent. The GDP deflator, a measure of the impact of price changes on real economic growth, was unchanged at minus 2.6 percent. Consumer spending rose 1.0 percent during the quarter, also unchanged from the preliminary reading. Exports, which have flourished thanks to strong demand from China and other Asian markets, were unchanged from that May figure at 3.9 percent growth. But imports grew 2.8 percent, up from an initial reading of 1.9 percent.
May corporate goods price index - which tracks goods bought by companies and the cost of electricity and other utilities - inched up 0.1 percent and 1.1 percent when compared with last year. This was the third monthly increase in a row. Oil and commodities prices were up, adding to hopes that deflation might be easing.
Australia - May employment declined by 41,100 with full time employment taking the brunt of the drop. Full time employment sank by 42,600 jobs but part time employment was up by 1,500 jobs. The unemployment rate declined to 5.5 percent from 5.6 percent in April despite the job losses because the number of people looking for work declined. The participation rate declined to 63.5 percent.
Americas
Canada - April merchandise trade surplus soared to C$7.6 billion from C$ 6.2 billion in March. Exports were up 4.4 percent while imports increased 0.7 percent. Canada's surplus with the U.S. was up as well, to C$9.2 billion from C$8.4 billion in the previous month. Exports to the U.S. were up 3.3 percent but imports climbed only 0.6 percent. Only Japan of all other trading partners was also in surplus. Export growth was fuelled by strong international demand and high prices for most industrial commodities. Contributing to the export increase were aircraft, industrial machinery, passenger automobiles and petroleum and coal products. Imports declined for both the automotive and agricultural products, which offset increases in most of the other sectors.
Bottom line
The Bank of Japan meets Monday and Tuesday. And while no change is expected in policy as long as deflation continues, talk has shifted to when and how the Bank will engineer a change from easy money supply and its zero interest rate policy to one of some restraint. The Bank has said many times that it would not change policy until deflation no longer exists, but soaring growth at an annualized 6.1 percent rate has raised some concerns that they might wait too long to shift.
Japan has sought to quell concern about rising long term interest rates, hailing a 3� year high in 10-year bond yields as a sign of the recovery's strength. Heizo Takenaka, Japan's economy and financial services minister, said, "Yields can rise when the economy is getting better and they can also rise when the credibility of JGBs (Japanese government bonds) is deteriorating. I do not see the yield rise as negative at all. Rather, I see it as a positive sign."
Looking Ahead: June 14 through June 18, 2004
An upward trend in place for interest rates'