Monday, April 12, 2004
Central banks bide their time
Both the Reserve Bank of Australia and the Bank of England left interest rate policy unchanged last week. The RBA made their decision largely because the housing market has slowed in response to November and December increases in borrowing costs. Bank governor Ian Macfarlane and his eight board members left the overnight cash rate target at 5.25 percent. Home lending has dropped to an 11-month low and consumer spending has finally slowed. The rate increases had been aimed at cooling the torrid lending pace, which was increasing at its fastest rate in 15 years. House prices have soared more than 18 percent per year over the past two years. The Australian dollar's 27 percent gain against the U.S. dollar in the past year has crimped export earnings. Exports, which make up one-fifth of the economy, fell 4 percent in February. But analyst expectations for further rate increases revived after the release of the labor force report on Thursday, which showed that February employment swelled by 66,900 jobs and unemployment dropped to 5.6 percent. The Reserve Bank of Australia doesn't release a statement when it keeps rates unchanged.
The Bank of England also left interest rates unchanged at 4 percent for the second month. The Bank had increased rates by 25 basis points both in November and February. Although the Bank did not release any statement after their meeting, Bank governor Mervyn King has said that they intend to increase rates gradually as they struggle to balance the pressures of rocketing household debt against a faltering recovery in manufacturing, which is being hampered by a stronger pound sterling. Britain has the highest interest rates and the lowest unemployment in the Group of Seven. The interest rate gap has already contributed to a strengthening in the pound sterling which is hurting exporters. The manufacturing recovery is staggering with output unexpectedly dropping in February. Yet some analysts think that an increase in the interest rate is in store for May. The two previous rate increases occurred in the same month (November and February) as the Bank's Inflation Report was issued - the next report is due in May.
Global Stock Markets
World stock markets continued to feed off positive U.S. economic data on one hand and fend off escalating violence in Iraq on the other. The onset of the earnings season isn't helping investors' psyches either as they squared positions before the long weekend. Only markets in Japan and South Korea were open on Friday. The remaining markets were closed for Good Friday. Despite investor worries, all indexes followed here with the exception of the Dow and Nasdaq were up on the week.
Global Stock Market Recap
Europe and Britain
British and European stocks managed to hold their own last week as tensions heightened over the deteriorating situation in Iraq. But positive earnings reports and U.S. stock performance influenced results here. Stocks were up Thursday in Britain after the Bank of England left its key interest rate unchanged at 4 percent.
In Europe, optimistic forecasts by technology firms Yahoo and Dell along with an unexpectedly large drop in weekly U.S. jobless claims buoyed European indexes, helping them to overcome earlier losses in the week.
Asia/Pacific
All Asian/Pacific markets followed here were up last week, despite investors' concerns about the increasing violence in Iraq. Japanese stocks soared over the 12,000 mark for the first time since August 2001. With domestic consumption picking up, retailers' stocks are attracting investors thanks to better sales, continued cost cutting, and forecasts of higher profits. Continued good economic news from Japan, including a positive Tankan survey of business sentiment, has cheered domestic and foreign investors alike. The recovery continues to be export led. Domestic consumption remains weak but is showing some life. Earnings for the last fiscal year are expected to show robust growth, helped by cost cutting and healthy exports.
Currencies
The dollar was up against the yen and the euro thanks in part to a decline in U.S. jobless claims - which fell to the lowest level in more than three years. This added evidence to signs of a labor market rebound that, in turn, may lead to higher interest rates. This upbeat news was in contrast to new data from Germany that showed industrial production unexpectedly declining and exports dropping. With growth flagging in the EMU, investors are not finding the euro as attractive when compared to other currencies. Exporters are not sorry to see the euro decline. The high value of the euro has hurt exports and decimated profits as companies try to maintain market share. The higher value of a currency makes exports less attractive in the importing country because they cost more. Profits suffer when they are repatriated, hurting exporters' margins. Interest spreads still favor the euro with the European Central Bank's key interest rate at 2 percent and the Fed funds rate at 1 percent. Should the ECB finally capitulate and cut rates, a narrower gap would diminish the euro.
The yen weakened during the week without any help from the Bank of Japan and despite the Nikkei's vault over the 12,000 mark. The yen weakened Thursday after there were explosions near Japanese forces in Iraq, which according to Prime Minister Junichiro Koizumi were aimed at driving Japan's troops from the country.
Indicator scoreboard
EMU - March purchasing managers' index for services was down to the 54.4 level from 56.2 in the previous month. The index was down in Germany, France, Italy and Spain. The mid-month terrorism attacks in Spain contributed to the decline. A reading above the 50 breakeven point indicates that activity is expanding. The slowdown was evident in most components. New and outstanding business categories were down as were business expectations. The composite index for manufacturing and services was 54.5, down from February's reading of 55.4
February real workday and seasonally adjusted retail sales sank 0.8 percent but managed to climb 0.5 percent when compared with last year. Both food and non-food sales were down.
Germany - March seasonally adjusted unemployment was up by 44,000 with 31,000 of the increase in west Germany and 13,000 in east Germany. The seasonally adjusted unemployment rate was 10.4 percent, up from 10.3 percent in the prior month. The unemployment rate was up for both east and west Germany. The Federal Labour Office made clear that the rise in unemployment was due to the continuation of weak economic conditions.
February seasonally adjusted manufacturing orders were up 0.3 percent and were 3.1 percent above last year's level. Domestic orders increased by 1.2 percent while foreign orders declined 0.6 percent. Domestic investment goods orders were up but foreign orders sank. Conversely, domestic consumer goods orders were down while foreign orders were up. West German orders were up 0.6 percent while east German orders sank 2.6 percent.
February seasonally adjusted industrial output was down 0.7 percent but up 1.8 percent when compared with last year. A drop in manufacturing output more than offset a rebound in construction. Manufacturing output was down 1.1 percent with the capital goods sector sinking 1.9 percent. Consumer goods production was also down, declining by 1.7 percent with durables sinking 2.6 percent and nondurables dropping 1.5 percent. Industrial production excluding construction - the figure used by Eurostat in calculating eurozone industrial production data - was down 1.0 percent.
February seasonally adjusted merchandise trade surplus dropped to �11.9 billion from �14.1 billion in January. Exports were down 2.5 percent while imports were up 1.4 percent.
Britain - February industrial production was down 0.6 percent and was 1.2 percent lower than a year ago. Manufacturing output was down 0.6 percent but managed to be 0.2 percent above a year ago. Eight of the 13 industry groups in manufacturing output declined with paper, printing and publishing sliding the most. Electricity, gas and water output rose while mining and quarrying output dropped.
February global merchandise trade deficit was Stg4.249 billion, down from Stg5.452 billion in January. The deficit narrowed because of a rebound in exports to non-EU countries and especially the United States. Total exports were up 2.4 percent while imports dropped by 4.3 percent. Non-EU exports soared by 8.6 percent while imports sank by 8.5 percent.
Asia
Australia - March unemployment rate dropped to a 14-year low of 5.6 percent from 5.9 percent in the previous month. Employment jumped by 66,900 jobs. The unemployment rate was last at 5.6 percent in December 1989. Full time employment was up by 39,200 and part time jobs increased 27,800. The March increase was the largest since January 2003. A total of 9.64 million people are employed.
Americas
Canada - March employment dropped by 13,300, the second consecutive monthly decline while the unemployment rate inched up to 7.5 percent from 7.4 percent in the prior month. Employment was up in the goods producing sector and in utilities. However, this was more than offset by service sector declines. The sharpest declines were in business, building and other support services and in educational services. Full time jobs were up by 2,900 but part time employment dropped by 16,100.
Bottom line
Analysts expect the Bank of Canada, with inflation slipping below the bottom of its target range, to cut interest rates on Tuesday for the fifth time since July to counter a shrinking economy. Expectations for cheaper borrowing costs are rising because the three main measures of the economy's performance - employment, production and inflation - have all pointed to a slowdown. The Bank of Canada sets the rate for overnight loans between commercial banks to keep inflation advancing at about a 2 percent annual pace, in the middle of a target band of 1 percent to 3 percent. Royal Bank of Canada and other lenders use the overnight rate to guide what they charge consumers and businesses for loans, and that in turn influences demand for goods and services. The Canadian dollar has risen 12 percent in the past year and is now about 75 cents to the U.S. dollar. Exports to the U.S. make up a third of Canada's economy.
When investors return from the long weekend, they will be confronted with an increasing deluge of earnings reports to decipher and incorporate into their investment strategies. Investors will continue to be vigilant in their economic news analysis as well.
Looking Ahead: April 12 through April 16, 2004
RBA and Bank of England sit tight