In its semi-annual outlook, the International Monetary Fund was upbeat on the world's economy. Although the U.S. remains the main engine of growth, most emerging countries including China, India and Russia, are showing buoyant activity. The spring World Economic Outlook compared the world's two most important laggards, Japan and the EMU. While the Japanese expansion was now well established, domestic demand growth in the eurozone remained subdued. The IMF raised its forecast for Japanese growth. However, it downgraded its forecast for the eurozone primarily because of its more pessimistic view of growth in Germany, France and Italy. Although the IMF believed that the expansion in the EMU had some traction, it said consumption was still weak leaving the area vulnerable to shocks.
Equity markets celebrated after the minutes of the Federal Reserve Open Market Committee said that the steady stream of interest rate increases could be ending soon. The equity markets reacted with joy as investors took the view that the Fed would halt its tightening cycle after one more increase in May. Tuesday's rally on Wall Street was followed in both Asia and Europe on Wednesday. Equity markets also managed to shrug off the surge in commodity prices thanks to encouraging earnings reports in the U.S. and Europe.
The Fed's comments helped drive the dollar to a seven-month low against the euro. A subsequent recovery for the currency proved short lived after the Swedish Riksbank said it had increased the amount of euros in its reserves to the detriment of the dollar, prompting concerns that other central banks might follow suit. The interest rate spread between the U.S. and Japan and Europe has been an important prop for the dollar over the past two years. Now it seems the European Central Bank and the Bank of Japan will narrow the gap with the U.S. as they increase their interest rates.
On the week, all indexes followed here were up with the Bolsa leading the pack with an increase of 4.4 percent on the week. The Banco de Mexico unexpectedly cut its interest rate to a 20-month low.
Global Stock Market Recap
Europe and the UK
A shortened trading week didn't stop investors from pushing the CAC and DAX higher thanks to investor reaction to the latest FOMC minutes. The FTSE hit a five year high, climbing over the 6100 level for the first time since January 2001. The FTSE benefited from soaring metals prices that made mining companies attractive to investors. And with crude prices over $70 a barrel, oil companies were buying targets as well. This offset the normally negative forces that typically impact stock prices when crude prices climb. On the week the DAX, CAC and FTSE were up 3 percent, 2.9 percent and 1.7 percent respectively.
Bank of England minutes
Minutes of the Bank of England April 6th meeting showed that monetary policy board members continue to harbor concerns about the effects of high energy prices and the public's inflation expectations. For the fifth consecutive month the lone dissenter was Stephen Nickell who continued his quest for a rate cut on the grounds that energy prices were not pushing up the CPI and there was excess capacity in the economy. However, the majority disagreed with his conclusion on the amount of spare capacity. Spare capacity is critical because it gives an indication of how much industry can expand before it begins to contribute inflationary pressures. On Tuesday the Bank released its quarterly survey of public inflation expectations, which showed people think prices are increasing at an annual rate of 2.8 percent. The last reading of the consumer price index showed inflation at 1.8 percent. The public's inflationary expectations are important because it could determine wage demands and lead to worries about high inflation becoming a self-fulfilling prophecy.
Asia/Pacific
A number of Asia-Pacific markets recorded all-time highs last week week, including South Korea, Australia, Singapore and India, while Hong Kong touched a 5�-year peak. Japanese stocks were comparatively subdued, although the Nikkei 225 Average still managed to climb 1 percent over the week.
Japanese investors are buying record amounts of foreign securities, including ultra-safe U.S. treasuries as well as riskier assets in booming emerging markets such as India and China. Investments in foreign securities through investment trusts are growing steadily as investors are looking for better returns while taking higher risks than investing in domestic savings vehicles. Trust funds, also known as mutual funds in other markets, have proven a popular vehicle for Japanese investors wanting to diversify their holdings while offsetting the increased risk of buying single foreign stocks or bonds.
The latest Ministry of Finance data show that Japanese stock brokers bought a net ¥8.6 trillion of foreign securities in the 15 months to end-March while investment trust firms purchased a net ¥6.1 trillion.
Canada
Canadian stocks continued their climb for the third week, led by raw material companies such as Barrick Gold Corp. as gold prices rebounded and copper reached a record. The S&P/TSX rebounded on Friday after experiencing its biggest decline in two months on Thursday. The reason for both the decline and in its reversal lay in metal and oil commodity prices. For example, a gauge of raw materials stocks had the biggest gain among the 10 industry groups in the S&P/TSX, climbing 1.8 percent after having dropped 3.5 percent Thursday as gold and silver prices tumbled.
Currencies
The U.S. dollar took a beating last week for a variety of reasons. Soaring energy prices took their toll but the downward pressures increased when the FOMC minutes appeared to indicate that the Fed's interest rate cycle could be ending. The market reacted by pricing in a greater probability that the FOMC will end its tightening after one more 25 basis point increase at their May meeting and decreasing the dollar's potential yield support. On Friday, Sweden's central bank, the Riksbank said it had slashed its dollar holdings almost in half. The bank revealed that it had cut the proportion of dollars in its reserves from 37 to 20 percent, as well as selling off all its holdings of yen, which previously amounted to 8 percent of its reserves. These sales were balanced by increased holdings of euros, up from 37 to 50 percent, as well as building a new Norwegian krone position of 10 percent. Although Sweden's reserves are small, at around $21 billion, the news thrust the ongoing issue of potential central bank diversification out of the dollar back into the limelight. However currency moves were kept in check by a degree of uncertainty ahead of this weekend's meeting of Group of Seven finance ministers, where the issues of global imbalances and Chinese currency policy will be on the agenda.
The Canadian dollar was higher as traders bought the currency on speculation that the Bank of Canada will continue to increase interest rates to control inflation. Traders expect the bank will increase rates at least twice more this year after the CPI was higher than expected. The CPI was up 2.2 percent on the year. The bank has an inflation target range of one to three percent that focuses on the 2 percent mid-point. The bank has increased interest rates five straight times since September to 3.75 percent.
Indicator scoreboard
EMU - March harmonized index of consumer prices was up 0.6 percent and 2.2 percent when compared with last year. Energy prices were up 0.5 percent and 10.5 percent on the year. Core HICP which excludes energy and unprocessed food was up 0.6 percent and 1.4 percent on the year. The monthly increase was due to the 0.6 percent increase in clothing and footwear prices.
Germany - March producer price index was up 0.5 percent and 5.9 percent when compared with last year. Excluding energy the PPI was up 0.2 percent and 1.2 percent on the year. Prices were up in all major sectors.
France - March consumption of manufactured goods dropped 0.6 percent but was up 3.5 percent when compared with last year. Clothing spending plummeted 8 percent while household equipment expenditures were up 3.8 percent. Auto sales were down 0.5 percent.
Italy - February retail sales edged up 0.1 percent and were up 1.5 percent when compared with last year. Non-food spending was unchanged while food spending was up 0.2 percent. When compared with last year, food spending was up 2.6 percent while non-food spending increased by 0.9 percent.
Britain - March consumer price index was up a benign 0.2 percent and 1.8 percent when compared with last year. Prices were down for milk, vegetables, airfares, gasoline, recreation and culture. Core CPI which excludes energy, food, alcoholic beverages and tobacco was up 1.3 percent on the year. The retail price index excluding mortgage interest payments was up 0.4 percent and 2.1 percent on the year.
Asia
Japan - March unadjusted merchandise trade surplus was ¥978.1 billion, down from ¥1.1 trillion a year earlier. On a seasonally adjusted basis, the surplus was ¥698.1 billion, slightly higher than February's surplus of ¥686.5 billion. Imports were down 0.7 percent while exports were down by 0.4 percent on the month.
February tertiary index dropped 1.5 percent but was up 1.9 percent when compared with last year. The tertiary index reflects activity in 11 service industries, among which are utilities; transport; telecommunications; wholesale and retail; finance and insurance; real estate; restaurants and hotels; medical, health care and welfare.
The all industry index was down 0.9 percent but up 2 percent on the year. The all industries index takes a reading of activity in the eleven industries that comprise the tertiary index combined with activity in the construction, agricultural and fisheries industries, the public sector and industrial output. The index is considered a close approximation for gross domestic product growth as measured by industrial and service sector output.
Americas
Canada - March unadjusted consumer price index was up 0.5 percent and 2.3 percent when compared with last year. Core CPI which excludes food and energy was up 0.4 percent and 1.5 percent on the year. The Bank of Canada core CPI which excludes eight volatile components was up 0.4 percent and 1.7 percent on the year. On a seasonally adjusted basis, the CPI was up 0.2 percent and 2.3 percent on the year while the core CPI was up 0.2 percent and 1.5 percent on the year.
February retail sales were down 0.4 percent but up 4.6 percent when compared with last year. The automotive sector was responsible for the bulk of the setback, with sales falling 2.5 percent after four straight months of increases. Excluding sales by dealers of new, used and recreational vehicles and auto parts, which account for almost 25 percent of the retail industry, retail sales edged up 0.3 percent. Retailers that experienced strong January sales (likely due to the redemption of gift cards and the increased observance of cultural and ethnic holidays in January) saw slight declines in February. On the other hand, the building and outdoor home supplies stores sector maintained its strength, increasing its sales by 1.0 percent after increasing by a substantial 3.2 percent in January.
Bottom line
The pace picks up this week, with a plethora of new economic data including the UK's first estimate of GDP growth in the first quarter. Investors will also be absorbing an increasing torrent of earnings reports. The Banks of Japan and Canada both have meetings scheduled this week. Analysts think the Bank of Canada will continue to increase their interest rate that currently stands at 3.75 percent. A 25 basis point increase is expected.
The Bank of Japan will meet on April 28th. Ahead of the meeting, Finance Minister Sadakazu Tanigaki urged policy makers to cool expectations of interest rate increases after the government's borrowing costs increased to the highest level since 1999. Ten-year bond yields climbed to 2 percent on speculation the Bank of Japan might increase its interest rate held close to zero since 2000 more than once. The government could be trying to avoid an increase in its debt servicing costs, estimated to account for 25 percent of this fiscal year's budget spending. Central bank Governor Toshihiko Fukui said that the jump in yields wasn't out of line with those in the U.S. and Europe and blamed stronger global growth. The BoJ will release its semi-annual report on Friday. The report will describe the bank's policy outlook for the first time since it ended its five-year-old policy of flooding the economy with cash on March 9th.
A good week for stocks
