Last Week's Highlights

Things are looking up
The Bank of Japan is getting more optimistic about the outlook for Japan, acknowledging that the economy is recovering gradually. This was the fourth consecutive month the central bank has delivered a more optimistic evaluation. The Bank pointed to increased exports thanks to rising global demand combined with rising business fixed investment as the catalysts for growth. Private consumption, which had been weakening, has stabilized and is now virtually flat and the decline in household income is coming to a halt. The Bank left interest rates at zero to nurture the longest economic recovery since 1997 and fight the deflation that is continuing to erode company earnings. U.S. and Chinese demand for Japanese cars, flat-panel screens and DVD players might continue to outpace growth in the local market.

The central bank cut rates almost to zero in March 2001 and vowed to keep them there until prices start to rise. The board projected has projected that core consumer prices would fall 0.2 percent in the fiscal year ending March 31, 2004 and 0.3 percent in the next fiscal year. The monetary policy board voted unanimously to keep monthly purchases of government bonds from banks at �1.2 trillion ($11.1 billion) at their two day meeting, which ended on Tuesday.

Currencies

Dollar bashing continues unabated
Once again the dollar dominated market player attention as it slipped to new record lows against the euro and multi-year lows against the pound sterling and Swiss franc. The "commodity currencies" - Australian and Canadian dollars - also got caught in the whiplash. The market tends to become illiquid as it reaches the end of the year so any currency moves can be magnified because of light trading volume.

Foreign central banks have two primary reasons for buying U.S. assets. The banks don't want the value of their prior holdings to be diminished any more than a private investor and they don't want their own currencies to appreciate too much so that it chokes off domestic economic growth. This suggests that low real U.S. interest rates could be an important driving force behind the dollar weakness - and more so than the much touted concerns of the twin deficits (fiscal and current account). Japan and Hong Kong have used the proceeds of currency sales to buy U.S. Treasuries in recent months and in effect have been financing U.S. deficits. The Bank of Japan sold a record �17.8 trillion from January through November 26th to weaken the currency against the dollar. The Hong Kong Monetary Authority has sold HK$14 billion since September 23rd, a record pace.

The dollar sank last week on concerns that foreign investors would move money to assets abroad where returns are higher. The U.S. currency extended its decline after the Treasury Department said international investors bought a net $27.7 billion of U.S. securities in October. This was an improvement from September's increase of $4.19 billion, which was the smallest in five years. Foreign central banks accounted for two-thirds of the October purchases.

Traders have sold dollars since the Federal Reserve said (after its December 9th meeting) that its target interest rate can remain at 1 percent for a considerable period. The European Central Bank's target 2 percent target is twice that of the Fed, a level that Otmar Issing, the ECB's chief economist, called appropriate. The Reserve Bank of Australia increased its rate by 50 basis points in the past two months to 5.25 percent, while the Bank of England raised its target last month to 3.75 percent. With the rest of the world returning to growth, yields in the U.S. just aren't attractive enough yet to really entice a lot of foreign buying.

Global Stock Markets
Stocks were mixed during the week as the Saddam Housein rally failed to develop. Rather investors assessed the news soberly acknowledging the many problems that continue to lie in the path to resolution of the Iraqi situation. It was the last full week of trading before the end of 2003 and many investors were locking in profits for the end of the year. With all markets heading toward a plus side finish for the first time in four years, investors weren't in the mood to take undue risks. December is a month where many institutional investors want to lock in their gains, and with the rally we had this year it's no surprise that there was some selling. On the week, all but two of the indexes followed here were up on the week.

Global Stock Market Recap

Europe and Britain
This week was the final full week of trading and the final phase of trading for 2003 profits. Investors are readying their portfolios for 2004 and buying growth-sensitive stocks because they expect the recovery to continue. With German business confidence climbing to its highest level in almost three years and the U.S., the region's largest trading partner growing without inflation, investors looked to see which stocks would benefit most in the current environment. In the past two weeks, investors bought the year's laggards, such as utilities and energy companies to add companies with steady earnings and cash flows. Now as the year draws to a close, they're switching back to the year's biggest gainers, speculating they will benefit the most from growth in 2004. Oil producers in particular gained as the price of oil stayed near the highest level since March as U.S. oil inventories declined. All three indexes - FTSE 100, CAC and DAX - were up on the week.

Asia/Pacific
Four of six indexes followed here were up on the week. Both the Nikkei and Topix regained about half of their previous week's losses, thanks to positive U.S. economic news and the more upbeat portrait of the Japanese economy from the Bank of Japan. South Korea's Kospi also benefited from investors' upbeat expectations for exporters and was up for the second week. The Hong Kong Hang Seng, however, dropped on the week, giving back virtually all of the previous week's hefty 2.3 percent gain.

Indicator scoreboard
EMU - October seasonally adjusted industrial output was up 0.6 percent and 0.9 percent when compared with last year. All sectors increased output on the month. Output in Ireland soared 13.6 percent, followed by Germany, up 2.4 percent and the Netherlands, up 1.7 percent. Portugal, Belgium and Finland were down on the month.

November harmonized index of consumer prices (HICP) was up 0.1 percent and 2.2 percent when compared with last year. Excluding energy, food, alcohol and tobacco the HICP was unchanged on the month and up 1.7 percent on the year. The HICP has remained stubbornly at or above the ECB's 2 percent inflation ceiling. Energy prices were down 0.2 percent reflecting a 1.1 percent drop in gas prices. Service prices slipped 0.1 percent due largely to cheaper package holiday prices.

Germany - October seasonally adjusted manufacturing orders were revised to 2.3 percent from the originally reported 2.0 percent increase. When compared with last year, orders increased 2.6 percent. Foreign orders were revised upward to 1.6 percent from the originally reported 1.3 percent while domestic orders were revised to an increase of 3.0 percent from the originally reported 2.7 percent.

December Ifo Institute west German business sentiment index jumped to 96.8 from 95.7 in the previous month for its eighth consecutive increase. Expectations were primarily responsible for the increase and were at their highest level in nine years. However, current conditions barely inched up.

Italy - October world merchandise trade surplus soared to �2.658 billion from �1.522 billion a year earlier. Imports sank 4.3 percent while exports were up 0.3 percent.

October industrial orders slipped 0.2 percent when compared with last year. Domestic orders were up 0.7 percent but foreign orders dropped 2.1 percent. Domestic orders account for about 62 percent of the overall index and foreign orders account for the rest. Seasonally adjusted orders were flat on the month with domestic orders down 0.9 percent and foreign orders up 1.7 percent. ISTAT tends to place more emphasis on the year-on-year numbers than on the seasonally adjusted monthly data.

Britain - November claimant count unemployment dropped by 7,900 after falling by 4,500 in October. The claimant unemployment rate remained unchanged at 3 percent. The rate was last lower in June 1975. Employment jumped 37,000 in the three months to October. The employment level is now at its highest since the current series began in 1984. Unemployment as measured by the International Labour Organization criteria for the three months to October fell 33,000 when compared with the previous three months. The ILO unemployment rate remained at 5 percent.

Average earnings were up 3.6 percent for the three months to October when compared with the same months a year earlier. This is well below the Bank of England's 4.5 percent reference rate. Private sector earnings rose to 3.2 percent from 3.1 percent, while manufacturing earnings were steady at 3.2 percent. Services average earnings rose to 3.8 percent, down from 3.9 percent.

November harmonized index of consumer prices slipped 0.1 percent but was up 1.3 percent when compared with last year. This is well below the Bank of England's new inflation target of 2 percent. The retail price index was up 0.1 percent and 2.5 percent on the year. The former inflation target, the retail price index excluding mortgage interest payments also was up 0.1 percent and 2.5 percent on the year.

November retail sales volumes inched up 0.1 percent and were up 3.7 percent when compared with last year. Food store sales were down 0.3 percent but up 2.3 percent on the year while non-food stores were up 0.1 percent on the month and 5.9 percent on the year.

Americas
Canada - October shipments sank 1.1 percent and were down 3.7 percent when compared with last year. The decline was broadly based, spanning 15 of 21 industries and accounting for 71 percent of total shipments. A number of factors contributed to the pause in shipments. In some industries, October marked the return to more normal shipments levels following quarter-end boosts to production in September and the large bounce back after the Ontario blackout. Lower industrial prices also contributed to declines in some industries. Another key factor impacting export-reliant manufacturers was the appreciating value of the Canadian dollar against the U.S. dollar, which reached a 10-year high in October. Partly offsetting the decline in shipments for October, food manufacturers benefited from the re-opening of the U.S. border to selected exports of Canadian beef products. Unfilled orders fell 2.0 percent to a six-year low. This followed a 0.4 percent rise in September, the only increase in unfilled orders in the preceding 13 months.

November consumer price index was up 0.2 percent and 1.6 percent when compared with last year. Most of the monthly increase stemmed from a 4 percent jump in automotive vehicle prices. Prices of fresh vegetables, beef and national gas prices also contributed to upward price pressure. Offsetting these increases were lower prices for gasoline, traveler accommodations, air transportation, electricity and women's clothing.

Bottom line
Investors should be in a cheery mood as we enter the holiday season and the last two weeks of 2003. For the first time since 1999, all indexes followed here (and many we don't) will be up on the year. And most gains will be in double digits. With the prospect of stronger world growth finally becoming a reality, investors' choices will multiply. This could be bad news for the U.S. dollar as investors find yields more appealing in countries with higher interest rates.

Looking Ahead: December 22 through December 26, 2003

Looking Ahead: December 29, 2003 through January 2, 2004