Monday, January 5, 2004
Overseas equities continued their winning ways as 2003 wound down. The first trading session of 2004 unfolded despite heightened terrorist alerts, and while equities escaped relatively unscathed, the dollar was relentlessly pushed to lower levels against virtually all the major world currencies including the euro, pound sterling, Swiss franc and the Canadian and Australian dollars. The yen was bolstered only by continued covert intervention from the Bank of Japan, which is eager to protect the nation's export-fueled return to growth.
The sinking dollar
The dollar had its biggest weekly drop in five against both the euro and yen on speculation U.S. officials would allow the dollar to continue to weaken as a means of keeping the economy growing. The dollar fell for an eighth consecutive week as some traders bet that faster growth won't persuade the Federal Reserve to raise interest rates soon. Comparatively low interest rates make U.S. assets less appealing to foreign investors. In Europe, the dollar's weakness against the euro has stirred fears that a tentative export-led recovery, coming after a long period of stagnation, could unravel.
The yen also strengthened as the Japanese economy continued to grow and stock prices soared after reaching their nadir in April. Against the dollar, the yen climbed about 10.6 percent in 2003. The dollar declined less against the yen than the euro as the Bank of Japan, at the behest of the Finance Ministry, spent an estimated record of more than �21 trillion ($200 billion) to stem the currency's appreciation. Overseas investors have been net buyers of Japanese shares for all but four of the past 36 weeks, pushing the Nikkei higher for the first year in four. The yen's appreciation risks eroding demand for Japanese exports, which have been the foundation of the economy's growth. Exports and capital spending accounted for all of last quarter's 0.3 percent growth.
The Canadian dollar wrapped up its biggest year against the U.S. dollar in more than five decades, as international investors flocked to Canadian debt securities for their higher yields. The Canadian dollar surged 21 percent, the most since 1951 when the Bank of Canada began keeping track of foreign exchange data. It has gained on speculation the U.S. Federal Reserve won't raise its benchmark interest rate, preserving the rate advantage of Canadian debt investments. The central bank's target interest rate is 175 basis points higher than the Fed's rate of 1 percent. The currency's value increased despite slower Canadian economic growth, which has lagged the U.S. In the third quarter, U.S. gross domestic surged at an annualized 8.2 percent rate, the most in 20 years. Canada's GDP grew a meager 1.1 percent.
The pound sterling has climbed to its highest level against the dollar in five years. The dollar's weakness reflects worries over the U.S. ability to finance its merchandise trade deficit, which is currently equivalent to about 5 percent of GDP. But the stronger British currency could spell trouble for companies such as Pearson (owner of the FT) who depend on U.S. markets for a high proportion of their sales. The dollar's slide against sterling began in earnest two months ago when investors took the view that the U.S. government had relaxed its traditional strong dollar policy in an effort to stimulate exports. The decline has accelerated since then amid evidence that foreign investors may be losing their appetite for U.S. financial assets, making it more difficult for the U.S. to finance its trade deficit with the rest of the world.
Global Stock Markets
All indexes followed here were up on the week in thin trading as many traders and investors stayed away to enjoy the holidays. The picture for 2003 was good as all indexes produced healthy gains. Wednesday's Short Take will offer an in-depth review of the year in the stock market.
Global Stock Market Recap
Europe and Britain
Indexes in London and Europe were boosted by strong manufacturing data in the U.S. and Europe. The FTSE 100 ended the two-week holiday trading period at its highest close since June 2002. And the seven-day winning streak, despite low volumes, represented the index's best performance since May 1997. Similarly, the CAC and DAX also posted gains during the two-week holiday period. Stocks in the region snapped a three-year bear market last year as economic growth in the U.S., Europe's biggest export market, helped revive earnings.
Asia
Asian stocks continued to climb as economic reports underpinned sentiment that the U.S. and other global economies are truly in recovery. All indexes covered here were up last week. Asian economies depend on exports for growth stimulus - and have actively sought to stem the U.S. dollar's fall in order to protect their markets. The theme that has been driving markets in the last few months has been rising profits. Trading for the New Year will begin on Monday, as vacationing investors and traders focus on earnings and growth prospects in 2004.
Indicator scoreboard
EMU - November seasonally adjusted M3 money supply increased by 7.4 percent when compared with November of last year. For the three months through November, M3 was up 7.7 percent when compared with the same three months in 2002. The three-month average is the ECB's measure of money supply growth, which has been expanding far more rapidly than the bank's 4.5 percent reference rate.
December Reuters manufacturing purchasing managers' index climbed to 52.4 from 52.2 in November. The index was boosted by a jump in the index for Germany to 53.0 from 51.1 in the prior month. The indexes for Italy and France were down to 51.9 from 52.3 and 51.9 from 52.7, respectively. In Britain and the U.S., manufacturing growth accelerated to readings of 56 and 66.2, respectively. An index level of over 50 signals expansion while a reading under 50, contraction.
France - November seasonally and calendar adjusted consumer spending on manufactured goods sank 2.8 percent but was up 1.4 percent when compared with last year. Clothing sales plummeted 9.2 percent while auto sales dropped 5.7 percent. However, household durable sales, including new digital entertainment equipment, were up 0.7 percent and 10 percent on the year.
November producer price index edged up 0.1 percent and was up 0.7 percent when compared with last year. Excluding food and energy the PPI was up 0.1 percent and 0.2 percent on the year. Climbing farm prices offset cheaper energy.
November seasonally adjusted unemployment rate slipped to 9.6 percent from 9.7 percent in the previous month. However, the number of jobless is up 5.1 percent when compared with last year when measured according to the International Labour Organization definition, which excludes jobseekers who did any work during the month.
Italy - Fourth quarter seasonally adjusted unemployment rate slipped to 8.5 percent from a revised 8.6 percent in the third quarter. This was the lowest unemployment rate since the current series began in October 1992. ISTAT's employment data are published every three months (January, April, July and October). The fall in the rate of unemployment was due entirely to a decline in people looking for work, rather than an increase in employment.
Britain - Final third quarter gross domestic product was revised upward to 0.8 percent from the originally reported 0.7 percent. When compared with the same quarter last year, GDP was up 2.1 percent. Growth was boosted by upward revisions to estimates for health & social work, business activities, insurance services and wholesaling. Manufacturing was up 0.1 percent, and construction up 2.0 percent. Service sector output was up 0.9 percent on the quarter and 2.4 percent on the year. On the expenditure side, household spending rose by 0.9 percent on the quarter and 2.5 percent on the year, with continuing strong growth in recreation & culture and restaurants & hotels. The household savings ratio rose to 5.9 percent from 5.3 percent in the second quarter.
December Nationwide house price index was up 1.5 percent and 15.6 percent when compared with last year. The average house is now worth Stg135,444. Nationwide forecast that house price growth would continue at a slower pace in 2004. There was a drop in first-time buyers entering the market, signally affordability problems and offering a sign that the market is cooling naturally.
Asia
Japan - November unemployment rate remained steady at 5.2 percent. The unemployment rate, which hit a post-World War II high of 5.5 percent earlier in 2003, held steady at 5.1 percent in August and September before edging up to 5.2 percent in October. The total number of jobless fell for a 6th straight month, decreasing by 80,000 from the same month a year earlier to 3.3 million. The data also showed the total number of employed workers falling for a fourth straight month, in part due to the fact that the eligible work force is shrinking as the population ages. The ratio of job offers to job seekers, an indicator of demand for labor, rose to 0.74 in November compared to 0.70 in October. The ratio shows that 74 jobs were being offered for every 100 workers seeking employment.
November nationwide consumer price index dropped 0.5 percent and was down 0.5 percent when compared with last year. Seasonally adjusted CPI was down 0.2 percent and 0.5 percent on the year. The core CPI slipped 0.1 percent on the year. The Bank of Japan uses nationwide core CPI as its chief price indicator in setting monetary policy. But the BoJ has repeated many times that the recent improvement in the CPI is temporary. It expects deflation will continue through next fiscal year, which starts April 1, so there is no need to alter its ultra-easy monetary policy. December seasonally adjusted Tokyo CPI was unchanged but down 0.5 percent on the year. Tokyo core CPI was up 0.1 percent but down 0.1 percent on the year.
November seasonally adjusted industrial production was up 0.8 percent and 2.4 percent when compared with last year. Production growth was driven by a 9.0 percent on-month rise in output of general machinery, such as semiconductor production equipment and boilers. Output of electronic parts and devices rose 1.7 percent. But transportation equipment output fell 0.5 percent partly due to slower auto production.
November spending by households headed by a salaried worker was up 0.2 percent but fell 0.2 percent when compared with last year. This was the fourth drop in five months.
Americas
Canada - October retail sales were up 0.2 percent and were up 2.1 percent when compared with last year. When prices are taken into account, total retail sales advanced 0.6 percent in October after dropping 1.0 percent in September. Lower gasoline prices, down 4.4 percent, depressed overall retail sales growth in October. Consumer spending also was weak in household furniture and appliance stores, general merchandisers, clothing stores and drug stores. Food retailers were the exception, with purchases up by 1.9 percent.
October monthly gross domestic product edged up 0.2 percent and was up 1.8 percent when compared with last year. Activity was up on continuing strong consumer demand and a continuing hot housing market.
Bottom line
With the holidays but a memory, trading volumes should be back to normal this week. It is a busy week, with many key economic indicators to be released. Policymakers for the Bank of England and the European Central Bank will hold meetings as well. The Reserve Bank of Australia, which normally meets during the first week of every month, takes January off - it is the height of summer there. While the ECB is expected to leave policy unchanged, some analysts think that the Bank of England could raise their policy interest rate by 25 basis points. This will be the first meeting for the Bank of England since their inflation target has been set at 2 percent and their inflation measure changed to the CPI, which is calculated in the same way as the harmonized index of consumer prices for the EMU countries.
Looking Ahead: January 5 through January 9, 2004
Out with the old, in with the new