Monday, December 8, 2003
Last Week's Highlights
Dollar's decline focus of financial markets
The euro entered new trading territory last week as the dollar sank to its sixth successive new low against the euro. But the euro's rise since February 2002 should not be taken as a great vote of confidence in the eurozone economies; rather, it is the dollar's fall from grace. Foreign demand for U.S. output lags far behind U.S. demand for foreign output, leaving the United States with a huge current account deficit. And current account deficit concerns have been compounded by the ever-exploding fiscal deficit, not to mention continued terrorism threats. Analysts now fret that increased U.S. growth will up demand for imports even more - and that will make the trade deficit even larger. The dollar began its most recent slide two months ago when investors decided 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 are 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. The U.S. depends on equity and government bond sales to foreign investors in order to pay for imported goods whose value far outstrips export earnings. But sales of assets to these investors have fallen sharply in recent weeks.
The dollar fell to multi-year lows against the pound sterling (cable), the Canadian and Australian dollars and the Swiss franc. Yields are much higher in Canada, Britain and especially Australia, making investments in these countries enticing to investors seeking higher yields. That doesn't hold true for the Swiss. The Swiss National Bank rate is still lower than the U.S.'s 1-percent Fed funds rate. For monetary policy purposes, the SNB's current interest rate range is zero to 0.75 percent, tending towards 0.25 percent. The Swiss, trying to stimulate growth, are keeping interest rates low in part to keep down the value of the franc. The Swiss currency has at times lately replaced the U.S. dollar as a safe-haven refuge.
One of four central banks raises interest rates
The Reserve Bank of Australia, as expected, increased its key interest rate by 25 basis points for a second consecutive month to 5.25 percent as the RBA attempts to rein in consumer borrowing and spending. Unemployment is currently at a 14-year low, fueling retail sales which had their largest gain in 11 months during October. Lending to home buyers is rising at the fastest rate in 23 years, fueling home prices and adding to household debt. Bonds fell and the Australian dollar rose to a six-year high against the dollar after the decision was announced. Reserve Bank of Australia Governor Ian Macfarlane said that an increase "was warranted in order to reduce the degree of stimulus to the economy." Low rates have done the job of spurring economic growth, and the bank may now be concerned that consumer prices are about to rise.
The European Central Bank kept its key interest rate at 2 percent where it has been for the past six months. At the same time, the Bank of England left its interest rates unchanged at 3.75 percent, following its two-day monthly monetary policy committee meeting. The moves were widely expected.
ECB President Jean Claude Trichet, at the customary press conference following monetary policy meetings, declined to comment on the euro's escalating value but said that currency controls weren't in line with ECB policy. He also said that the EMU economy would see a gradual recovery in the coming quarters, characterized by an improvement in domestic demand and an easing of inflation. But for now, the inflation rate hasn't fallen as sharply or as quickly as the ECB had expected. Interest rates are the Bank's chief tool in fighting inflation, which is its main job.
In November the Bank of England raised its key interest rate by 25 basis points to 3.75 percent to head off inflation as the economy showed signs of strengthening. That was the first rate increase since February 2000 when the Bank's rate was 6.0 percent. Rates eventually dipped to 3.5 percent, the lowest in 48 years.
The Bank of Canada maintained its interest rate target at 2.75 percent. But the central bank signaled it was unsure if existing monetary stimulus is enough to boost business investment and household spending. It was also unsure if the strength of the Canadian dollar will offset effects of stronger global demand for Canadian good and services. In its statement explaining its decision, the Bank of Canada said that "recent economic developments bearing on the prospects for economic activity reflect a number of cross-currents." It noted that core and total inflation had fallen below the 2 percent target and "are poised to move lower in the short run." The Bank said third quarter economic growth was below expectations, due mainly to a sharp inventory correction.
Stock prices peter out as week ends
While equity markets began December with a bounce on Monday, they quickly settled into a torpor despite the continual stream of better-than-expected European and U.S. economic data. Investors once again took profits and fretted about economic growth. An important point to remember is that it is December, and investors will be settling accounts in the next few weeks as the year-end approaches. On the week, three of the indexes tracked here - Kospi, NASDAQ and Bolsa - were down. The Hang Seng was virtually unchanged.
Global Stock Market Indexes
Recap of global markets
Europe and Britain
The FTSE, DAX and CAC were higher on the week in spite of almost daily record highs for the euro against the dollar. The week began enthusiastically enough with investors snapping up equities after the long U.S. Thanksgiving weekend. However, the week ended on a disappointing U.S. employment report. The rise in overall employment was well below analysts' enthusiastic forecasts. (The details of the report, however, showed that employment is beginning to revive, albeit slower than analysts wished.) U.S. investors were disappointed as well and those in Europe and Britain followed the leader - down. Investors and industrial leaders in Europe, unlike government officials so far, have voiced concerns about the rising euro's impact on exporters' sales and profits. Investors worry about the euro's increasing value on Europe's nascent recovery, which thus far has been export-driven.
Asia
Japanese shares soared on Monday as investors shrugged off news that the government had nationalized Ashikaga, a bankrupt regional bank. The government announced that it was taking over all of Ashikaga's shares, making the bank the second to fall into public hands this year. The decision was long awaited as the first shutdown of a regional bank - a significant part of the banking system hard hit by the difficulties of smaller, local companies throughout the last decade. The decision is being scrutinized for hints of how the authorities will handle the inevitable consolidation of regional banks more broadly. The news calmed uncertainty about the bank, and the Nikkei index leapt 3 percent. Earlier this year, the Ministry of Finance took over failing Resona Bank, which last week turned in trillion-yen losses at a time when many of the nation's banks are finally moving into the black.
Indicator scoreboard
EMU - Third quarter gross domestic product was up 0.4 percent and 0.3 percent when compared with last year. The increase was solely due to an increase in net exports. Domestic demand sank 0.6 percent while investment dropped 0.5 percent on the quarter.
October unemployment rate remained at 8.8 percent. Unemployment was up in four countries while it fell in one and was unchanged in four. Unemployment data were not available for Greece, Italy (which reports the data quarterly) and the Netherlands. Spain continues to have the highest unemployment rate while Luxembourg the lowest.
October industrial producer prices inched up 0.1 percent and were up 0.9 percent when compared with last year. Energy prices increased by 0.2 percent after dropping 0.8 percent in September. Excluding energy, industrial PPI was flat on the month and up 0.6 percent on the year.
November seasonally adjusted Reuters purchasing manufacturers index climbed to 52.2 percent from 51.3 percent in the prior month. Germany, France and Italy all were above the 50 percent breakeven point between growth and decline.
November seasonally adjusted Reuters services activity index jumped to 57.5 from 56 in the previous month. This was the index's highest level in more than three years. The new business index registered a reading of 57.9, up from October's 55.5 percent. Input prices index climbed to 55.5 from the 54.6 level in October while prices charged finally reached the 50 percent breakeven point. The employment index also was above the 50 percent level after declining for 15 months.
Germany - November seasonally adjusted unemployment dropped by 18,000, largely due to the government's efforts to take the long-term unemployed off the jobless roles. Unemployment declined 10,000 in the west and 8,000 in the east. The pan-German unemployment rate remained at 10.5 percent. West German unemployment rate remained at 8.4 percent while the east German rate slipped to 18.4 percent from 18.5 percent in October. September seasonally adjusted employment dropped by 29,000 after declining by 33,000 in August.
October real seasonally adjusted manufacturing orders jumped 2.0 percent and were up 2.2 percent when compared with last year. Domestic orders soared 2.7 percent while foreign orders were up 1.3 percent. Consumer goods orders sky-rocketed 7.5 percent. West German orders were up 2.3 percent while in the east orders dropped by 1.6 percent.
October seasonally adjusted industrial production soared 2.4 percent and was up 0.8 percent when compared with last year. All major production sectors were up with the exception of energy, which sank 5.6 percent. Manufacturing output was up 3.2 percent with investment goods production jumping by 4.8 percent. Consumer goods managed to inch up 0.1 percent. Industrial production excluding construction - the figure used by Eurostat in calculating eurozone industrial production data - was also up 2.4 percent. West German industrial output was up 2.4 percent while in the east, it was up 2.0 percent.
October seasonally adjusted retail sales including autos and gasoline stations were up 0.8 percent but were still down 1.5 percent when compared with last year. Excluding autos and gasoline stations, retail sales were up a more modest 0.2 percent and were down 2 percent on the year.
Britain - November Halifax house price index was up 1.0 percent and up 12.5 percent when compared with last year. For the three months to November, the index was up 14.1 percent when compared with the same three months a year ago.
Asia
Australia - Third quarter gross domestic product jumped 1.2 percent and was up 2.6 percent when compared with last year. Second quarter GDP was revised to a 0.3 percent gain from 0.1 percent originally reported and was up 2.3 percent on the year. The GDP deflator rose 0.7 percent from the previous quarter and rose 2.6 percent from the year earlier quarter. This was the economy's fastest growth in almost two years, fueled by consumer spending on cars and houses and a recovery in tourism after the end of the deadly SARS outbreak in Asia. Household spending increased 1.7 percent while business investment increased 2.1 percent.
Americas
Canada - November employment jumped by 54,100 jobs. Employers have added 166,000 since August. The unemployment rate inched down to 7.5 percent from 7.6 percent in the prior month. Full time jobs were up 36,100 while part time jobs climbed by 18,000. Manufacturing employment was up by 24,000 jobs. November's increase was primarily in the main manufacturing provinces of Ontario and Quebec. Job increases in the service sector were entirely in retail and wholesale trade.
Bottom line
Investors will be scrutinizing the Federal Reserve Open Market Committee's statement at the conclusion of their meeting Tuesday for clues of a change in the Bank's interest rate policy. This will undoubtedly impact the fate of the U.S. dollar. With growth spreading worldwide, investors will look for more favorable yields on their investments than currently offered in the U.S. That will make financing the U.S. twin deficits more difficult as foreign investors become less enamored with returns on U.S. investments.
Looking Ahead: December 8 through December 12, 2003
Deficit worries sink dollar