Growing too fast'
By Anne D. Picker, Chief Economist, Econoday
Friday, April 20, 2007
Global Markets
For equities the first and last days of the week were the best. Global markets wobbled on Thursday after figures showed China's economy went into overdrive in the first quarter heightening the prospect of further rate rises and monetary tightening. Confounding analysts who had expected the economy to slow slightly, the National Bureau of Statistics said that gross domestic product increased 11.1 percent in the first quarter compared with 10.4 percent in the fourth quarter of 2006. China has grown by more than 10 percent for the past four years.
Inflation was higher, reaching 3.3 percent in March, a level outside the People’s Bank of China’s comfort zone of below 3 percent. But concern was muted — core inflation was low because most of the CPI increase was from rising food prices. China's stock market dropped nearly 5 percent before the release of the GDP figures — NBS waited until the markets were closed before they released the data. The market decline was attributed to concern about measures to rein in growth that might result from the data. The drop saw other markets in the region falter. But there was no repeat of the global rout that followed the 9 percent slide for the Shanghai composite index on February 27. On the week, only the STI lost ground. The Dow set an all time high.
Global Stock Market Recap
|
|
2006 |
2007 |
% Change |
|
Index |
December 29 |
April 13 |
April 20 |
Week |
Year |
Asia |
|
|
|
|
|
|
Australia |
All Ordinaries |
5644.3 |
6123.8 |
6187.2 |
1.0% |
9.6% |
Japan |
Nikkei 225 |
17225.8 |
17364.0 |
17452.6 |
0.5% |
1.3% |
|
Topix |
1681.1 |
1705.5 |
1710.1 |
0.3% |
1.7% |
Hong Kong |
Hang Seng |
19964.7 |
20341.0 |
20566.6 |
1.1% |
3.0% |
S. Korea |
Kospi |
1434.5 |
1520.8 |
1533.1 |
0.8% |
6.9% |
Singapore |
STI |
2985.8 |
3373.6 |
3360.7 |
-0.4% |
12.6% |
|
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
UK |
FTSE 100 |
6220.8 |
6462.4 |
6486.8 |
0.4% |
2.8% |
France |
CAC |
5541.8 |
5789.3 |
5938.9 |
2.6% |
7.2% |
Germany |
XETRA DAX |
6596.9 |
7212.1 |
7342.5 |
1.8% |
11.3% |
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
United States |
Dow |
12463.2 |
12612.13 |
12962.0 |
2.8% |
4.0% |
|
NASDAQ |
2415.3 |
2491.94 |
2526.4 |
1.4% |
4.6% |
|
S&P 500 |
1418.3 |
1452.85 |
1484.4 |
2.2% |
4.7% |
Canada |
S&P/TSX Comp. |
12908.4 |
13578.62 |
13664.7 |
0.6% |
5.9% |
Mexico |
Bolsa |
26448.3 |
29762.22 |
29832.5 |
0.2% |
12.8% |
Europe and the UK
Stocks began and ended the week on high notes but faltered mid-week on higher-than-expected inflation data and publication of Bank of England minutes of its last meeting which all but guarantee an interest rate increase at their May meeting. On Friday, stocks were already up thanks to earnings and mergers but received an additional boost when the Dow rocketed up over 100 points on its opening. The effect was to lift European stocks even more. The DAX ended the week higher than Monday’s close which was a six year high. All stocks benefited by Friday’s merger news in banks and pharmaceuticals.
Bank of England sends a letter to the Chancellor
On Tuesday, Bank of England Governor Mervyn King sent a letter of explanation to the Chancellor of the Exchequer Gordon Brown, explaining why consumer price inflation was more than one percent above the Bank’s 2 percent target. In the letter, the governor said the Bank “remains determined” to contain inflation after the rate reached 3.1 percent in March. The surge marked the first time since the Bank took control over interest rates in 1997 that policy makers missed the 2 percent inflation target by more than a percentage point.
King wrote that the rate “should fall back within a matter of months” as increases in utility bills drop out of the annual comparison. Inflation in the first quarter was 2.9 percent, in line with the central bank's February forecasts. The pound surged above $2 for the first time since September 1992 and interest-rate futures priced in the risk of at least two more 25 basis point increases this year.
Bank of England minutes
Members of the Monetary Policy Committee voted 7 to 2 to keep interest rates unchanged at their last meeting two weeks ago. Two members voted to increase rates to 5.5 percent from the current 5.25 percent. Some members predicted inflation would slow in the next few months but others were concerned that inflation risks were high enough to warrant an increase. The MPC did not have the current inflation data at that meeting. The pound rallied above $2.01 — the highest level since 1981, after the release of the minutes, as investors raised bets the bank will lift borrowing costs.
Asia/Pacific
Equities in this region were volatile during the week but two events dominated. The first was the rapid growth in China and the attendant fears of higher interest rates as a result and the second was the record setting performance of the Dow, which hit new highs. The Dow’s rise appeared to allay concerns that a drop in China’s stocks would precipitate a global sell-off. In Japan, the weakening yen helped exporters stocks which seem to fluctuate on the currency’s value. Also impacting exporters’ stocks is investors’ sentiments on world economic growth. On the week, only the STI lost ground while the others followed here — the Nikkei, Topix, All Ordinaries, Kospi and Hang Seng — were up.
China's gross domestic product rose 11.1 percent from a year earlier in the first quarter, exceeding the 10.4 percent consensus forecast and inflation accelerated to 3.3 percent, the fastest pace in more than two years, and breached the central bank's 3 percent target. China’s stocks fell as a result and investors elsewhere sold fearing a repetition of the February Shanghai stock plunge. However, in this case, history did not repeat itself. China’s markets have recovered totally from that sell off. China's CSI 300 Index rebounded 4.4 percent after sliding 4.7 percent on Thursday on speculation rapid growth would prompt the government to raise borrowing costs. When the index slumped 9.2 percent on February 27 it helped precipitate a plunge in global stock markets.
Currencies
Currency market’s attention shifted to the pound sterling last week. It has been on a steady rise but finally vaulted over the $2 to the pound mark on April 17 for the first time in about 15 years after the consumer price index unexpectedly soared 3.1 percent on the year. The currency continued to climb to $2.0133 the next day putting it at the highest level against the U.S. dollar since June 1981. Analysts are anticipating that the Bank of England will increase interest rates twice more this year with May’s prospective increase a sure thing. This would give the UK the highest interest rates in the Group of Seven countries (U.S., Canada, Italy, France, Germany, Japan and the UK). While the pound’s increasing value against the U.S. dollar has made the U.S. the place to go for vacations and of course shopping, the currency's appreciation hurts the manufacturing sector because it makes exports costlier abroad. Higher rates on sterling-denominated assets prompted central banks to increase the amount of the U.K. currency in their reserves last year. The pound surpassed the yen as the world's third most-popular reserve currency, behind only the dollar and the euro.
The euro continues to rise in value against the U.S. dollar as it climbed above $1.36 per euro. This is within the 1 cent of a record high for the euro last seen in December 2004. The rationale rests with economic growth — the U.S. economy will grow at a slower pace than Europe and that makes U.S. financial assets look less appealing. Expectations are that interest rates within the EMU will continue to rise while many analysts bet that U.S. rates will be lower as the year progresses.
The yen dropped Monday against the U.S. dollar and to a record low against the euro after the Group of Seven industrial nations post meeting statement omitted a specific reference to the yen. But the yen stabilized and increased in value against the U.S. dollar but declined against the euro during the week.
Indicator scoreboard
EMU — March harmonized index of consumer prices was up 0.7 percent and 1.9 percent when compared with the same month a year ago. This was the seventh month that the HICP has been under the ECB’s 2 percent inflation ceiling. Energy prices were up 1.5 percent and 1.8 percent on the year. Clothing & shoe prices shot up 7.2 percent while motor fuels were up 3.3 percent on the month. Prices were down for recreation & culture, health costs, communications and vegetables. Excluding only energy, the HICP was up 2 percent on the year. However, excluding energy, food, alcohol and tobacco, the HICP was up 1.9 percent as was the ECB’s favored measure which excludes energy and unprocessed foods.
February seasonally adjusted merchandise trade balance deteriorated to a €0.2 billion deficit from a surplus of €1.8 billion in the previous month. Exports were up 0.6 percent but imports jumped 2.3 percent thanks to higher crude oil prices. On an unadjusted basis, the February deficit was €1.7 billion.
Germany — April ZEW expectations index jumped to a reading of 16.5 from 5.8 in the preceding month. The index remains below its long term average of 33.1. Current conditions were up to 76.9 from 69.2. According to ZEW, the results suggest that the German economy is expected to grow faster in the next six months thanks in main part to the surprisingly strong improvement of the labor market which bolsters consumer demand. Domestic investment demand is increasing as well. ZEW surveyed 320 analysts and institutional investors between March 26 and April 16 about their medium term expectations concerning economic activity and the capital markets. The index shows the balance between positive and negative expectations regarding future economic activity in Germany within a timeframe of six months.
March producer price index was up 0.3 percent and 2.5 percent when compared with last year. Energy prices were up 0.4 percent and 1.1 percent on the year. Petroleum product prices were up 3.1 percent. Excluding energy, the PPI was up 0.2 percent and 3 percent on the year.
France — March consumer spending on manufactured goods was up 0.7 percent and 6.3 percent when compared with last year after dropping 0.5 percent on the month in February. Excluding autos, auto parts and drugs, spending was up 1 percent and 8.7 percent on the year. Despite a decline in auto spending, durable goods spending was up 1.5 percent and 12 percent on the year thanks to strong household goods spending. Textile spending sank 2.3 percent but remained up 3.2 percent on the year.
United Kingdom — March producer output prices were up 0.6 percent and 2.7 percent when compared with last year. Core output prices which exclude food, alcohol, tobacco and energy were up 0.4 percent and 2.9 percent on the year. The increase was mainly due to climbing prices for scrap metal and higher petroleum prices. Producer input prices were up 1.2 percent and 0.7 percent on the year. Input prices reflect an 8.2 percent increase in crude oil prices.
March consumer price index was up 0.5 percent and 3.1 percent when compared with last year. Bank of England Governor Mervyn King will need to write an open letter to the Chancellor of the Exchequer to explain why consumer price inflation was more than 1 percentage point over the 2 percent inflation target. Food and non-alcoholic beverage prices pushed the index upward on the year. Prices for furniture & furnishings as well as gasoline were up as well. The retail price index excluding mortgage interest payments was up 0.6 percent and 3.9 percent on the year.
Average earnings including bonuses for the three months ending in February was up 4.6 percent when compared with the same three months a year earlier. Average earnings had increased by 4.2 percent in the previous three months. Average earnings excluding bonuses were up 3.6 percent, unchanged from January. Pay growth (including bonuses) in the private sector was 4.9 percent, compared with 3.2 percent for the public sector. Excluding bonus payments, private sector growth stood at 3.7 percent compared with 3.1 percent for the public sector.
March claimant count unemployment was 910,800, down 9,200 on the previous month and down 28,000 on the year. However the claimant count unemployment rate remained at 2.9 percent for the third consecutive month. Employment for the three months ending in February was down 47,000. The unemployment rate for the same three months remained at 5.5 percent. The number of unemployed people was up by 21,000 over the quarter and by 120,000 over the year. The employment rate for people of working age was 74.3 percent for the three months ending in February 2007.
March retail sales were up 0.3 percent and 4.8 percent when compared with the same month a year ago. February sales were revised to a robust gain of 1.6 percent on the month. Clothing, toys and mobile phones spurred gains. Sales on the month were led by a 0.9 percent gain in the textiles, clothing & footwear category, and a 1 percent increase in the other stores group of retailers. All components of the index rose apart from non-store retailing and repair, which includes mail-order sales.
Asia
Japan — February tertiary activity index was up 1 percent and 2.3 percent when compared with last year. Wholesale trade in machinery and equipment, finance and insurance, health care, road & rail transport and utilities increased on the month while automobile maintenance services, sales agents of condominiums and eating & drinking places softened. Tertiary industries account for about 60 percent of the entire economic output and include the following industries — utilities, transport, telecommunications, wholesale & retail, finance & insurance, real estate, restaurants & hotels, as well as medical, health care & welfare.
February all industry index was up 0.9 percent and 2.9 percent when compared with last year after edging downward on the month in January. The all-industries index is considered a close approximation for gross domestic product growth as measured by industrial and service sector output. The index takes a reading of activity in the industries that comprise the tertiary index (see above) combined with activity in the construction, agricultural and fisheries industries, the public sector and industrial output.
China — First quarter gross domestic product accelerated to 11.1 percent when compared with the first quarter a year ago. In addition to GDP, other data released included the March report for the CPI, up 3.3 percent on the year thanks largely to a 6.2 percent jump in food prices. Producer prices were up 2.7 percent on the year. Other major indicators including retail sales, factory output and capital spending accelerated as well.
Americas
Canada — February factory shipments eased down 0.2 percent but were up 4.9 percent when compared with the same month a year ago. Statistics Canada pointed out that shipments showed resilience in the face of a national rail strike and an oil refinery fire which left central Canadian oil refiners scrambling to fill gasoline demand. The volume of shipments was up 0.1 percent. Shipments fell in 14 of 21 manufacturing sectors, representing 56 percent of total output. Durable goods shipments were down 0.5 percent on declines in the wood, machinery, computer and electrical equipment industries. Shipments of nondurable goods were up 0.1 percent thanks to an increase in the petroleum and coal sector. New orders jumped by 1.9 percent and 4.6 percent on the year. Unfilled orders soared 4.9 percent and 10.9 percent on the year.
March consumer price index was up 0.8 percent and 2.3 percent when compared with last year. Gasoline prices which soared by 10 percent are responsible for the increase. Core CPI excluding food and energy was up 0.4 percent and 1.8 percent on the year. The Bank of Canada core CPI which excludes eight of the most volatile components was up 0.3 percent and 2.3 percent on the year. The Bank has an inflation target range of 1 percent to 3 percent and uses its core measure to gauge inflationary trends.
February retail sales edged up 0.1 percent and were up 5.2 percent when compared with the same month a year ago. Excluding autos, retail sales were up 1 percent and 5.2 percent on the year. Five of the eight retail sectors were down on the month. Weak auto sales (including gasoline, new & used cars and recreational vehicles & parts) were offset by strong sales in food & beverage, pharmacies & personal care and general merchandise.
Bottom line
A milestone for equities was set last week as the Dow made its way to a new all time high. Not to be outdone, the equity indexes in Europe hit new six year highs before receding on interest rate fears. In currencies, the euro edged ever nearer to its all time high against the U.S. dollar while the pound sterling vaulted over the $2 mark for the first time in 15 years.
The Bank of England sent its first letter to the Chancellor of the Exchequer to explain why inflation had increased beyond the 1 percent band around their 2 percent inflation target. The letter provoked commentary on its contents and style.
The Bank of Japan meets for a one day meeting and the Bank of Canada makes its interest rate announcement. No policy changes are expected. Although there are few indicators this week, those that are to be released are important. The UK will release its first estimate of first quarter GDP as will the United States. And Japan will release its most important indicators of the month including consumer prices, unemployment, consumer spending and merchandise trade.
Looking Ahead: April 23 through April 27, 2007
Central Bank activities |
April 24 |
Canada |
Bank of Canada Monetary Policy Announcement |
April 27 |
Japan |
Bank of Japan Monetary Policy Board Meeting |
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|
|
The following indicators will be released this week… |
Europe |
|
|
April 23 |
Italy |
Retail Sales (February) |
April 25 |
Germany |
Ifo Business Survey (April) |
|
UK |
Gross Domestic Product (Q1. 2007 preliminary) |
April 27 |
France |
Unemployment (March) |
|
|
Producer Price Index (March) |
|
|
|
Asia |
|
|
April 23 |
Australia |
Producer Price Index (Q1.2007) |
April 24 |
Australia |
Consumer Price Index (Q1.2007) |
April 25 |
Japan |
Merchandise Trade Balance (March) |
April 27 |
Japan |
Consumer Price Index (March, April) |
|
|
Industrial Production (March) |
|
|
Retail Sales (March) |
|
|
Household Spending (April) |
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Employment, Unemployment (March) |
Anne D Picker is the author of International Economic Indicators and Central Banks.
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