By Anne D. Picker, International Economist,Econoday
Monday, July 23, 2001

Markets took it on the chin last week as earnings reports cascaded in. As if investors did not have enough to deal with given the string of disappointing earnings, they also had to factor in Alan Greenspan's semi-annual testimony before Congress and the usual rumors circulating around the Group of Seven (or eight) summit meeting, this one set in Genoa, Italy. The markets were jittery and volatile. The dollar fell after President Bush sounded soft on dollar policy and Greenspan pointed to economic weakness. Only the Dow barely managed to rise on the week; all other indexes followed here declined.

The Bank of Japan downgraded its overall assessment of the economy for the second month. The more pessimistic view comes amid growing signs that the economy, mired in deflation, has tipped into recession. Despite the downgraded report card, the Bank's policy board voted unanimously last week to leave its monetary policy unchanged. The central bank downgraded its view of private consumption, which makes up almost 60 percent of total economic activity. The report showed that the central bank continues to pin its hopes for an economic revival on stimulus from U.S. exports later this year. At the same time, the report noted that the risk of a prolonged deceleration in global growth might block Japan's path to recovery in the near future.

The Bank of Canada lowered its policymaking interest rate 25 basis points to 4.25 percent - the fifth reduction this year - to bolster consumer spending and counteract weaker U.S. demand for exports. Canadian interest rates are now 50 basis points above comparable U.S. rates. The Bank of Canada restated its view that economic growth will pick up over the second half of the year and in 2002.

The European Central Bank left its policymaking interest rate unchanged at 4.5 percent. Central bank officials have indicated they are more concerned about price growth than the weakening economy. Inflation in the EMU has exceeded the central bank's 2 percent ceiling for 13 months. Growth in Germany, Europe's biggest economy, petered out in the second quarter, and unemployment is rising both in Germany and France. Confidence among both executives and consumers is waning across the continent. June consumer prices rose at a 3 percent pace in June - one percentage point above the ECB's inflation stability ceiling. (See indicator scoreboard below.)

In contrast to the ECB's approach, Greenspan, in his House Financial Services Committee testimony, said that if the U.S. economy shows continued signs of weakness the Federal Reserve is prepared to lower interest rates again. But additional rate reductions probably would be limited because the central bank has already cut the Fed funds rate to 3.75 percent, the lowest in seven years. The Fed forecast that the economy would expand as much as 2 percent in 2001 and more than 3 percent in 2002, as a rebound starts to take effect late this year.

Introduction   •   Global Stock Market Indexes   •   Recap of Global Markets   •   Currencies   •  Indicator Scoreboard

The Bottom Line   •   Looking Ahead