Monday, May 10, 2004
Central Banks do as expected
There were no surprises last week from the central banks. The Bank of England increased its key rate by 25 basis points to 4.25 percent while the Federal Reserve, Reserve Bank of Australia and European Central Bank kept their rates unchanged at 1 percent, 5.25 percent and 2 percent, respectively.
The Reserve Bank of Australia kept its benchmark interest rate unchanged for a fifth month amid signs the housing market is slowing and after the annual inflation rate declined to a four-year low. RBA increased interest rates by 25 basis points in November and again in December. The Bank increased rates to slow demand for housing, where home prices have risen more than 18 percent in each of the past two years. Building approvals for homes, apartments and renovations have declined for four of the five months to February. Inflation remains at the low end of the Bank's inflation target band of between 2 and 3 percent, undermining the rationale for raising rates.
The Bank of England raised its benchmark lending rate for the third time in seven months by 25 basis points to 4.25 percent, the highest in 2� years, to mute inflation as economic growth picks up. This widens the interest rate gap between the U.S. and Britain to 3.25 percent and to 2.25 percent between the EMU and Britain. The Bank of England started increasing rates in November of 2003 and subsequently followed with another 25 basis point increase in February. It was the first of the world's top four central banks to do so since recessions in the U.S., Germany and Japan in 2001 and 2002. Unlike those countries, Britain managed to avoid recession. Britain's economy is growing at more than four times the pace of the euro region while the unemployment rate has remained at 4.8 percent. In a statement following the decision, the bank said the economy has a "small and diminishing margin of spare capacity," suggesting "inflationary pressures are likely to build.'"
In Helsinki, Finland, the European Central Bank once again left their key interest rate at 2 percent. ECB President Jean Claude Trichet said he's seen "positive signals" suggesting the EMU economy may be "strengthening." The comments all but wiped out speculation about a rate reduction from the ECB, which has kept rates unchanged since June 2003. In short, the ECB has not changed its expectation of a continuation of the gradual pick-up and sees no need to change interest rates any time soon. At his post meeting press conference, Trichet varied his comments very little from those after April's meeting. Trichet also repeated that ECB policy has "absolutely no bias" at the moment, that risks to price stability are still balanced and that interest rates are "in line with" the favorable outlook for eurozone price stability in the medium term. While Trichet made clear that the ECB currently sees no need to change interest rates, he was also very careful not to rule out another cut and cited various risks and uncertainties.
Global Markets
Global markets remained on edge for the same reasons that have kept them there for some time now - the escalation of Iraqi violence and U.S. interest rates concerns. On Tuesday, the Federal Reserve changed its post-meeting statement, eliminating the word "patience" and saying it could likely raise rates at a "measured" pace. And concerning inflation, it took a fully symmetrical position, saying that "the risks to the goal of price stability have moved into balance." This sent equity investors running for the hills. On the week, all indexes followed here were down with the exception of the FTSE, Singapore Straits Times and Toronto S&P/TSX composite.
Global Stock Market Recap
Europe and Britain
The CAC and DAX declined on the week, paced by banks amid concern that rising interest rates will slow economic and corporate profit growth. Companies in industries sensitive to borrowing-cost changes, such as automobiles and construction, slid as the Bank of England lifted its key rate for the third time since November and the U.S. employment report added to speculation the Federal Reserve may start raising rates possibly at their June meeting. Despite the Bank of England rate increase, equities there managed to climb in a shortened trading week.
A 12-month rally by European stocks stalled in March amid concern spending by businesses and consumers would slow in the aftermath of the Madrid terrorist attacks. Rising interest rates in Britain and possible higher borrowing costs in the U.S., Europe's biggest export market, may further discourage demand and that will have a direct impact on European equity markets.
Asia/Pacific
Japanese stocks fell for five consecutive sessions on worries of a Federal Reserve interest rate increase. Although Friday's U.S. employment situation report was published long after Asian/Pacific markets were closed for the week, anticipation of a strong report convinced investors that the Fed would be more likely to raise interest rates to steady economic growth. And that could hit Japan's economy by damping the export demand that has been driving the country's recovery. The Nikkei has lost 6 percent in the last five trading days and is suffering its longest losing streak since the five days ended April 14, 2003.
Currencies
The dollar rebounded strongly against the euro and yen after the U.S. employment report was stronger than expected. Earlier in the week, the dollar had fallen against both currencies after the Federal Reserve left its key interest rate at 1 percent and signaled it will take a "measured" pace in raising borrowing costs. One of the things that had been supporting the dollar has been expectations of an imminent increase in rates. Higher rates increase the yield advantage offered by U.S. debt compared with that in Europe, boosting demand for the dollar. Without an imminent rate increase, traders said they needed more economic evidence to confirm that growth is gaining steam. They got their evidence in Friday's employment report.
At week's end, the dollar was up for a fifth straight week against the yen, the longest rally since 2001. The dollar was up against 11 major currencies on the week.
Indicator scoreboard
EMU - April manufacturing purchasing managers survey climbed to 54.0 from 53.3 in the previous month. Although orders and output contributed to the improving picture, soaring input prices squeezed profit margins. The survey is conducted by NTC Research and published by Reuters. An index reading above the 50 percent breakeven point signals that manufacturing is growing. Manufacturing grew faster than in March in Germany, France, Italy and Spain.
April services purchasing managers survey edged up to 54.5 from 54.4 in March. Both the new orders and prices charged indexes remained unchanged from March at 53.6 and 48.1, respectively. But the input price index jumped to 55.2 from 54.3 in the prior month. Services growth weakened in France, was virtually unchanged in Germany, but bounced up in Italy.
March industrial producer price index jumped 0.5 percent and was up 0.4 percent when compared with last year. Higher prices for energy and other commodities spurred the increase. Energy prices were up 1.0 percent but were still 2.7 percent below last year's level. Excluding energy, the PPI was up 0.5 percent and 1.1 percent on the year.
March seasonally adjusted unemployment rate remained at 8.8 percent for the 13th month. Of the nine EMU countries reporting, unemployment was unchanged in five, rose in three and fell in one. Unemployment rate for the original EU 15 remained at 8 percent while the rate for the EU 25, incorporating the 10 new members, was 9 percent.
March seasonally adjusted retail sales dropped 0.2 percent but were up 0.9 percent when compared with last year. Sales were up in both the food, drink and tobacco and nonfood products categories. Detailed data were not available.
Germany - April seasonally adjusted unemployment was up by 23,000, with 12,000 of the increase in the west and 11,000 in the east. February employment dropped 20,000. Payroll data lag unemployment data by two months. The unemployment rate inched up to 10.5 percent from 10.4 percent in March. The unemployment rate remained 8.4 percent in the west but increased to 18.3 percent in the east.
March manufacturers orders sank 0.7 percent but were up 5.2 percent when compared with last year. Both domestic and foreign orders were down on the month. Domestic orders dropped 0.5 percent and foreign orders sank 0.9 percent. Orders for consumer and basic goods were down but capital goods orders were up.
March industrial production plummeted 2.3 percent and was down 0.8 percent when compared with last year. Construction was the main culprit, sinking 10.2 percent. Production of semi-finished goods used to make other products dropped 3.3 percent while consumer goods output was down 2 percent. Output of goods such as factory machinery increased 0.2 percent. German industrial production excluding construction - the figure used by Eurostat in calculating eurozone industrial production - was down 1.8 percent on the month. The Economics Ministry said it expected a major upward revision of the March data. It noted that many German firms had not yet reported March production data and in their place, the Federal Statistics Office had substituted these companies' February results. Because February had fewer work days than March, the Economics Ministry expects the data to be adjusted upward when all March production reports have been received by all firms participating in the survey.
Britain - April seasonally adjusted Halifax house price index was up 1.8 percent and 20.5 percent when compared with April 2003. The 3-month annual rate jumped 19.1 percent. The data confirmed ongoing strength in the housing market. Halifax expects house prices to ease gradually in the second half of the year as first-time buyers find it increasingly difficult to raise the money for a mortgage and expected interest rate increases dampen demand.
Asia
Australia - March seasonally adjusted merchandise trade deficit widened to A$1.99 billion from a deficit of A$1.73 billion in February. Exports were up 0.7 percent but down 4.5 percent on the year. Imports soared 2.6 percent but inched down 0.1 percent on the year.
Americas
Canada - April employment jumped by an estimated 49,600, all in full-time jobs. The unemployment rate was down to 7.3 percent from 7.5 percent in the previous month. Full time employment was up by 55,600 jobs and part-time employment down by 6,200 jobs. Employment was up in both goods-producing and services-producing sectors by 22,000 and 27,600 jobs, respectively. Virtually all of the employment gain was added by the private sector and especially among the self employed.
Bottom line
After the weekend to sleep on the U.S. data, investors will have had time to decide whether the impact of a possible measly 25 basis point U.S. interest rate increase will hurt spending and earnings as much as seemed to be implied at week's end. The currency markets have been focused on U.S. interest rates for some time now and have been waiting patiently for rates to finally increase. Support for the euro has been waning thanks to anemic growth, especially in Germany - once the engine of European growth. And given the higher inflation numbers last month, price reports will get a more intensive scrutiny from market watchers, especially in light of rising energy costs and anecdotal evidence of higher prices elsewhere.
Looking Ahead: May 10 through May 14, 2004
No surprises