Global Markets

There is no doubt that there were two market events of the week — the Dow leaping above the 13,000 level after surpassing 12,000 only six months ago and Friday’s U.S. GDP release.

The Dow

Despite the Dow’s brisk growth, it is far from the best performer internationally. The graph below illustrates the gains of key indexes between October 19, 2006 when the Dow climbed above 12,000 and April 25^th when the Dow crossed 13,000. The best performer is the DAX which has benefited from recovering German growth. The Australian All Ordinaries continues to benefit from Asian demand especially from China, which has pushed up stock prices of major commodity producers such as BHP Billiton Ltd. and Rio Tinto Group.

U.S. GDP

Friday was dominated by the weak U.S. first quarter gross domestic product report. GDP was up an annualized rate of 1.3 percent (that translates to 0.3 percent on the quarter and 2.1 percent on the year). The U.S. dollar immediately sank to a new all time low against the euro and European stock markets, already down dropped further. Several indexes that had been higher for the week, ended lower as a result. Analysts fretted over the no win situation of a pick up in inflation combined with lower growth — a combination often described as stagflation. But the housing slump is the main risk to the economy and it showed no signs of abating in the first quarter. Residential investment fell 17 percent after sinking 20 percent in the fourth quarter of 2006 and 19 percent in the third. Corporate spending was also subdued. On the positive side, consumer spending remained very strong, with real personal consumption rising at an annualized rate of 3.8 percent.

Global Stock Market Recap

Europe and the UK

European and British equities sank on Friday for a variety of reasons. Merger and acquisition news that buoyed stocks earlier in the week turned negative on messy counter-biding for the Dutch bank, ABN Amro. And this combined with weaker than anticipated U.S. GDP numbers pushed stocks lower. But it was not only stocks that reacted to the U.S. data. The dollar, which had been toying with its all time low against the euro, in fact sank to a new low. Friday’s losses negated positive gains earlier in the week. European stocks initially reacted to the GDP data and the ensuing U.S. stock retreat, but U.S. stocks recovered while across the pond they did not. Exporters’ stocks were hit by the slowdown along with the soaring euro. The higher value of the euro makes eurozone products more expensive in the U.S. and hurts repatriated profits.

Earlier in the week, profits boosted the indexes as did positive German confidence readings. The clouds on the horizon were worries about the real estate sector in Spain and the financial stability of a major real estate company there. These concerns were compounded by weak U.S. housing and consumer confidence data. On the week, the FTSE and CAC were down while the DAX continued its upward climb. With one more trading day remaining in April, all three indexes are up on the month.

Asia/Pacific

Reactions to the weak U.S. GDP numbers will have to wait until Monday. All Asian markets were closed prior to the data release. But no doubt the positive end to the North American trading day will steady Asian markets then. (Japanese markets will be closed on Monday for the beginning of Golden Week holidays.) But stocks were already down in Asia on Friday after robust gains Thursday, thanks to good earnings. The mediocre group of indicators from Japan didn’t help either equities or the yen. Consumer prices were down as were consumer spending and industrial production. The weakening yen gave a boost to exporters including auto manufacturers. But banks were hit hard as the Bank of Japan’s decision to keep interest rates unchanged deprived them of the opportunity for wider spreads. The All Ordinaries was hit on the last day of the week by metal price declines for copper and gold. With copper as the most important metal for resource companies, stock prices often fluctuate with its price. Only the Kospi and STI managed to end the week on the positive side. The Nikkei was up while the Topix was down in the month of April. With one more trading day remaining, the Kospi is down while the remaining three — Hang Seng, All Ordinaries and STI — are up on the month.

Bank of Japan cuts its inflation forecast

As expected, the Bank of Japan kept its policy interest rate at 0.5 percent, the lowest of all Group of Seven countries. It also cut its inflation forecast to close to zero saying prices will take another year to accelerate. The new forecast estimates that core consumer prices will increase by 0.1 percent in the year ending March 2008 (the end of Japan’s fiscal year) followed by 0.5 percent for the following year. The Bank also forecast that the economy would expand 2.1 percent for the fiscal year that just ended and the next year as well.

Continued weakness in consumer prices makes it more difficult for the BoJ to increase its key interest rate — something it is eager to do to prevent excessive business investment. Its low rate has had a negative impact on the yen, which continues to drop in value against most major currencies. While the Bank has declared deflation dead, the government has yet to do so. Deflation has bedeviled the economy since the early 1990s when the asset price bubble burst.

In his press conference, BoJ Governor Fukui said the Bank would keep rates low for some time and had no predetermined schedule for the timing or pace of interest rate increases. The Bank said it would gradually raise rates in accordance with improvements in the economy and prices. Fukui said that “rate adjustments need to be made if the economy's expansionary trend remains intact and price trends in the long term are expected to be firm, even if prices are falling in the short term.” However, today’s weak U.S. growth report will make it hard for the Bank to increase rates.

Canada

The Bank of Canada maintained its 4.25 percent key interest rate in its announcement on April 24. It has been at this level since May 2006. The Bank, which has an inflation target range of 1 percent to 3 percent with a mid-point target of 2 percent, said however that inflation risks are no longer balanced because of rising food and gasoline prices. The Bank increased their inflation forecast for the second half of 2007 to above 2 percent from 1.7 percent in January. The economy has been operating at full capacity thanks to record energy exports and the development of Alberta's tar sands. But at the same time, the energy boom has increased the value of the Canadian dollar and as a result has crippled manufacturing exports from the eastern part of the country.

David Dodge, the Bank’s governor, announced that he will not seek another seven-year term after his current one expires on January 31, 2008. It is not anticipated that he will leave before then. Dodge was the first outsider appointed governor since the Bank of Canada was formed in 1934.

Currencies

Both the U.S. dollar and Japanese yen sank to record lows against the euro on Friday both the victim of weak economic data. In the U.S., GDP data were below expectations while in Japan, consumer price inflation especially disappointed also. During the U.S. Friday afternoon currency trading session, the yen was as low as ¥163.16 to the euro and ¥119.66 to the U.S. dollar.

On Friday also, the Federal Reserve's trade-weighted dollar index fell to the lowest since its inception in 1971 as traders bet that the dollar will continue to decline in value against the euro. The Fed's major index is the weighted average of the U.S. dollar versus the currencies of Australia, Canada, Sweden, Switzerland, Japan, the U.K. and the euro.

At the same time, the dollar dropped to an all-time low of $1.3683 per euro during the New York trading day surpassing its previous low $1.3666 set in December 2004. The dollar dropped as the GDP release fueled fears of slowing U.S. growth coupled with rising prices. Analysts said interest rate expectations had been the main driver of the dollar’s recent weakness. In contrast to other major economies such as the UK, eurozone and Australia to mention a few, where monetary tightening is anticipated, U.S. interest rates are forecast to be reduced.

Indicator scoreboard

Germany — April Ifo business sentiment index reading was 108.6, up from 107.9 in March. Current conditions sub-index climbed to 113.2 from 112.4 while the six month outlook moved up to 104.3 from 103.2. Manufacturing sentiment improved as fears about the appreciating euro diminished. Retail and wholesale sentiment was also higher but construction sentiment was unchanged. Ifo surveys about 7,000 firms in manufacturing, construction, wholesaling and retailing about their current and six month outlook.

France — March unemployment rate edged down to 8.3 percent from 8.4 percent in February. The number of jobless dropped by 34,000 according to the International Labour Organisation definition (excludes any job seeker who did any work during the month). The unemployment rate is at its lowest level in 24 years. The unemployment rate a year ago in March 2006 was 9.4 percent.

March producer price index was up 0.3 percent and 2.1 percent when compared with the same month last year. Core PPI which excludes food and energy was up 0.1 percent and 2.8 percent on the year. Energy prices which account for 17 percent of the PPI were up 1.5 percent.

United Kingdom — First quarter gross domestic product was up an above trend 0.7 percent and 2.7 percent when compared with the same quarter a year ago. The service sector grew 0.8 percent and 3.5 percent on the year while industrial production was flat. Within services, transport was up 1.7 percent and 4 percent on the year while business services output was up 1.1 percent on the quarter and 5.2 percent on the year.

Asia

Japan — March unadjusted merchandise trade surplus soared to ¥1.633 trillion. Exports were up 10.2 percent when compared with the same month a year earlier while imports were unchanged. March seasonally adjusted trade surplus was ¥1.123 trillion. Exports edged up 0.3 percent while imports dropped 7.9 percent when compared with the previous month. Exports to China and the eurozone have picked up the slack from a slowdown in the U.S.

March unemployment rate remained at 4 percent for the fifth month. The total number of jobless fell for the 16th straight month, decreasing by 80,000 from the same month a year earlier to 2.81 million. Employment was up by 430,000 when compared with March of the previous year. The participation rate was 4.2 percent.

April Tokyo consumer price index was up 0.4 percent and 0.2 percent when compared with the same month a year ago. The core CPI, which excludes just fresh food, was up 0.3 percent and unchanged on the year. Excluding fresh food, alcoholic beverages and energy, the CPI was up 0.4 percent on the month but down 0.2 percent on the year. The Tokyo index is seen as a harbinger of next month’s national readings. March national CPI was up 0.3 percent but down 0.1 percent on the year. The core excluding only fresh food was up 0.2 percent but down 0.3 percent on the year. The new core CPI which excludes fresh food, alcoholic beverages and energy was up 0.3 percent but down 0.4 percent on the year.

March industrial production dropped 0.6 percent but was up 2.8 percent when compared with the same month a year ago. General machinery, electrical machinery and fabricated metals output declined. METI also conducts a planned production survey for the next two months. The survey indicates that April production is expected to increase by 1.5 percent while May production should be up by 1.4 percent.

March expenditures for two or more person households were up 0.1 percent when compared with the previous year. However, worker household expenditures declined 0.3 percent on the year.

March retail sales were down 0.7 percent when compared with last year. The consumer continues to be the Achilles heel of Japanese growth. This was the sixth consecutive month that sales were down. Department store sales, which account for 8 percent of total retail sales, fell 1.5 percent as cold weather cut demand for spring clothes.

Australia — First quarter producer price index was unchanged on the quarter and up 2.8 percent when compared to the same quarter a year ago. Domestic prices were up 0.1 percent and 3.8 percent on the year while import prices sank by 1.1 percent on the quarter and were down 2.8 percent on the year. Domestic prices were up mainly due to price increases in building, construction and other manufacturing which were partially offset by declining prices for agricultural products and auto vehicles and parts. Import prices were down thanks to drops in electronic equipment, industrial machinery, photographic & scientific and tobacco prices.

First quarter consumer price index was up 0.1 percent and 2.4 percent when compared with last year. Food prices sank by 2.3 percent but were up 4.6 percent on the year. Prices were also down for imported furniture and electronics. Fruit prices plunged 34 percent and furniture prices sank 3.3 percent. Pharmaceutical prices however soared by 13 percent, school fees jumped 7.1 percent and home rents climbed 1.4 percent. The Reserve Bank of Australia’s preferred measure of annual underlying inflation, the so-called trimmed mean, was up 2.7 percent in the first quarter. The measure removes the most volatile price movements.

Bottom line

Earnings appeared to take precedence over economic news last week — that is until Friday when weak Japanese data together with weak U.S. data roiled the equity and currency markets. The Dow’s symbolic climb over the 13,000 mark buoyed investor confidence for a couple of days as mediocre economic data seemed to take a back seat to psychological fixation. Friday was different as economic data once again became the prominent influence on investor decision making.

With the beginning of a new month, the new cycle of central bank meetings begins with the Reserve Bank of Australia. The threat of an immediate rate increase from its current 6.25 percent level receded last week after the consumer and producer price indexes increased less than feared. And in Europe, major economic data will be the focus as investors await the ECB and Bank of England meetings in the following week.

Looking Ahead: April 30 through May 4, 2007

Anne D Picker is the author of International Economic Indicators and Central Banks.