As the first quarter ground to an end, equity investors fretted over the inevitability of interest rate increases in Europe and Japan, and acknowledged that the Fed just might continue increasing rates more than analysts previously thought. The current Fed funds rate is now 4.75 percent after the 25 basis point increase on Tuesday. The graph below shows the current key interest rates as we head into the first week of April and its many central bank meetings.
With the exception of the Kospi, all equity indexes followed here improved over their end of 2005 levels - and some climbed to new five-year highs. The issues really have not changed for investors. As oil prices climb, investors are caught by their worries about the impact on company profits, the ability of consumers to keep absorbing high fuel costs, and the positive impact they have on energy company profits. Oil prices briefly went over $67 last week and have been reflecting the violence in Iraq, the standoff with Iran on its nuclear program and political unrest in Nigeria. Canadian stocks in particular have been caught in the seesaw prices of not only oil but other commodities such as copper and gold. There also was renewed strength in precious and base metals prices as funds remained active buyers. Gold touched a 25-year peak of $588.75, silver hit $11.91, a level not seen for 22 years, and platinum hit an all-time high of $1,093. Among base metals, copper and zinc also hit all-time highs.
Global Stock Market Recap
Europe and the UK
FTSE, CAC and DAX ended the month and quarter above previous levels. But stocks retreated from the previous week's four-and-a-half-year highs, although continued merger speculation limited the decline. The FTSE and DAX were up 3 percent in March while the CAC gained 4.4 percent. For the quarter the FTSE was up 6.2 percent, the CAC, 10.7 percent and the DAX by 10.4 percent.
On the week, the FTSE and DAX were down while the CAC managed to eke out a gain. Trading was choppy especially in London where questions were raised whether the FTSE had reached its peak in the previous week. The FTSE dropped about 100 points in the first two days of trading, with much of the selling just profit taking. But trading in London, Paris and Frankfurt were pretty much on hold early in the week as investors awaited the Fed's interest rate announcement. In Europe, robust economic data in the form of the Ifo survey surprised analysts. This led to speculation about when the European Central Bank would next increase interest rates. Other strong economic data from the eurozone included improved Italian business confidence, which climbed to the highest level in five years, and an increase in French building permits for the second month in a row.
Asia/Pacific
While the focus has been on Japanese stocks, the all ordinaries followed by the STI outperformed them in the first quarter. The all ordinaries was up 8 percent and the STI followed with a 7.9 percent gain. And although the Hang Seng lost ground in March, it too surpassed Japanese gains and was up 6.2 percent in the quarter. The Nikkei gained 5.9 percent while the Topix was up 4.8 percent. Only the Kospi was down in the first quarter, losing 1.4 percent - but that was after a gain of 54 percent in 2005.
Analysts think that the Japanese stock market finds itself at a difficult stage. The market's inability to move consistently upward in the first quarter can be blamed in part on its spectacular gains last year. In the last six months of 2005 the Nikkei 225 soared by 39 percent - the fastest six-month rise in more than half a century. Last year's jump was driven by foreign institutions. But the sharp increase in valuations has made foreign institutions nervous with investment banks such as Morgan Stanley reducing Japan's weighting by a third within its suggested global equity portfolio. UBS had already cut its Japan weighting in December. Expectations of higher corporate earnings underpin this long-term bullishness. Earnings are set for another increase for the fourth year in 2005-06. Not since the 1970s has corporate Japan enjoyed such an unbroken run.
Some investors are also worried about what will happen to share prices when the Bank of Japan begins to increase interest rates, which could put pressure on corporate profits. Fears about the more highly indebted equity sectors such as real estate are of concern to investors.
Another related fear is that the stock prices of Japanese exporters could be hit by a rise in the yen's value which could be prompted by a large flow of money back home to take advantage of higher interest rates. A higher yen makes it harder for Japanese exporters to compete abroad.
Americas
Canadian stocks have had their ups and downs - and a good part of the movement can be traced to trading volatility in commodities such as good and oil. These stocks ended the quarter on a down note. However, the S&P/TSX composite, which is at an all-time high, was up 3.6 percent on the month and about 7.4 percent on the quarter. This was the best first quarter performance since 2000 and the index has risen in ten of the last 11 quarters. The Bolsa is not far behind the S&P/TSX - this index was up 3 percent in March and 8.3 percent in the first quarter after soaring by 37.8 percent in 2005. While the Dow and Nasdaq improved their performances over last year, they trail Canada and Mexico with the Nasdaq up 6.1 percent and the Dow up 3.7 percent on the quarter. The Dow was up 1.2 percent in March while Nasdaq did better, climbing by 2.6 percent.
Currencies
The currency markets were expecting the Fed's interest rate increase so there was little initial action here after Tuesday's announcement. Since then, traders have been dithering over the number of remaining increases on speculation interest rate increases by the European Central Bank will begin to outpace moves by the Federal Reserve. As a result, the dollar experienced its first quarterly decline in a year against the euro. The dollar has dropped about 2.4 percent in the past three months, after posting the first annual gain against the euro in four years in 2005. In contrast the yen is barely changed in the quarter. Last week's fluctuations were primarily because of last minute adjustments to positions prior to the end of the fiscal year on Friday. The euro was helped by the overall improvement in the region's economy, especially in Germany.
Indicator scoreboard
EMU - M3 money supply for the three months ending in February was up 7.6 percent when compared with the same three months a year ago. February M3 was up 8 percent when compared with February 2005. Loans to the private sector jumped by 10.3 percent on the year after climbing 9.6 percent in January.
EU - March economic confidence and sentiment index improved to 103.5 from 102.7 in the previous month. Industrial confidence improved to minus 1 from minus 2 in February while consumer sentiment edged downward to a reading of minus 11 from minus 10. Services, retail and construction sentiment all improved to plus 15 from plus 14, minus 2 from minus 5 and minus 3 from minus 5 respectively.
Germany - March Ifo business sentiment indicator climbed for the third month to 105.4 from 103.4 in February. Surveyed firms gave more favorable assessments of both their current situation and their business expectations for the coming six months. They were especially satisfied with their present business situation than in February. The current situation reading improved to 105.1 from 101.9 while expectations climbed to 105.7 from 104.9 in February. In manufacturing, the business climate index increased because of clearly improved assessments of the current situation. Construction, retailing and wholesaling readings were also higher.
March seasonally adjusted unemployment was up by 30,000 with 27,000 of the increase in the west and 3,000 in the east. Unemployment rates were up from February - for all of Germany, the rate was 11.4 percent up from 11.3 percent, while in the east it was 18.1 percent, up from 18 percent and in the west, it was 9.7 percent, up from 9.6 percent. Exceptionally cold and snowy weather accentuated the increase.
February retail sales including autos and gasoline stations were down 0.8 percent but up 0.9 percent when compared with last year. Excluding autos, sales were down 0.6 percent but up 1.3 percent on the year. Food, drinks and tobacco sales were down 0.4 percent and down 0.1 percent on the year while clothing, shoes and leather goods sank 3.6 percent on the month but were up 4 percent on the year.
France - February producer price index edged up by 0.1 percent and was up 3.5 percent when compared with February of last year. Excluding food and energy, the PPI was up 0.1 percent and 1.3 percent on the year. Energy prices, which account for about 17 percent of the total index, were flat on the month while food and agriculture prices were up 0.4 percent.
February seasonally adjusted unemployment rate remained at 9.6 percent for the second month. However, the number of jobless was down by 15,000 to 2.613 million while the number of registered jobseekers working less than 78 hours per month dropped by 10,100.
Final fourth quarter gross domestic product was revised upward to 0.4 percent from 0.2 percent on the quarter thanks to a boost in foreign trade and a smaller drag from inventory change. GDP was up 1.5 percent on the year. Private consumption was up 0.6 percent while public consumption registered a 0.3 percent gain. Investments were up 1 percent with business fixed capital up 1.2 percent while household investment was up 0.6 percent.
Italy - Fourth quarter gross domestic product was unchanged on the quarter and up 0.5 percent when compared with the same quarter a year ago. Consumer spending and investment were a major drag on growth, while net exports were weak. Domestic consumption (private plus government) edged down by 0.1 percent but was up 0.5 percent on the year. Capital investment (machinery, transportation and construction) sank 1.7 percent and was down 0.1 percent on the year. With this release, Italy moved from fixed 1995 prices to chained prices with a reference year of 2000. Data have been revised back to 2001 only.
February producer price index was up 0.4 percent and 4.9 percent when compared with last year. Intermediate goods were up 0.8 percent while energy prices were up 0.2 percent and 21 percent on the year. The PPI excluding energy was up 0.5 percent and 1.5 percent on the year.
Britain - Fourth quarter gross domestic product was up 0.6 percent and 1.8 percent when compared with the same quarter a year ago. Household spending was up 0.7 percent and 1.5 percent on the year. Gross fixed capital formation was down 0.5 percent on the quarter while government spending was up 1.2 percent. .
Asia
Japan - February seasonally adjusted retail sales dropped 1.5 percent but were up 1 percent when compared with the previous year. This was the first monthly decline after three months of consecutive increases.
February seasonally adjusted industrial production declined 1.7 percent but was up 3.7 percent when compared with the same month a year ago. This was the first monthly decline in seven months. Chemicals excluding drugs, general machinery and electrical machinery output were down on the month. Also down were semiconductor products machinery, metal oxide semiconductor IC (memory) and boiler parts and accessories. Shipments were down 2.8 percent but inventories were up by 0.3 percent.
February spending by households headed by wage earners was down 0.6 percent when compared with last year. Overall household spending, which includes wage earner spending, was down 1.5 percent on year. The propensity for wage-earner households to consume, a ratio which measures the amount of disposable income that went to household spending, was up 1.3 points in February from the same period a year earlier. Wage earner household spending is an important gauge of personal consumption, which accounts for roughly 55 percent of Japan's gross domestic product.
March Tokyo consumer price index was up 0.2 percent and unchanged when compared with last year. Tokyo core CPI, which excludes fresh food, was up 0.4 percent and 0.2 percent on the year. February nationwide CPI was down 0.3 percent and up 0.4 percent on the year. Core CPI was down 0.1 percent on the month and up 0.5 percent on the year. Core CPI which excludes both food and energy was down 0.1 percent and up 0.2 percent on the year.
February unemployment rate dropped to 4.1 percent from 4.5 percent in the previous month. The total number of jobless dropped by 310,000 to 2.77 million people when compared with the same month last year. The number of those with jobs was up for 10th straight month, increasing by 480,000 to 62.72 million people on the year.
Australia - February retail sales were up 0.7 percent and 4.6 percent when compared with last year. All categories of retail sales were up with the exception of recreational goods. Other retail sales were up 1.8 percent while clothing and soft goods were up 1.3 percent. Department store sales were up 0.9 percent and hospitality services climbed 0.7 percent. Food was up 0.6 percent while household goods were up 0.4 percent.
Americas
Canada - February industrial product price index (IPPI) was down 0.4 percent and up 0.6 percent when compared with last year. Lower prices for petroleum, lumber and chemical products were the major contributors to this monthly decrease. Higher prices for petroleum products and chemical products were the major contributors to the annual increase. Prices for petroleum and coal products were up 14.5 percent on the year. If petroleum and coal product prices had been excluded, the IPPI would have decreased 0.7 percent rather than increasing 0.6 percent on the year.
February raw materials price index (RMPI) was down 3.2 percent due to lower prices for mineral fuels and animals and animal products. The RMPI was up 10.6 percent on the year. Mineral fuels were down 6.0 percent on the month while crude oil prices dropped 6.4 percent due to high inventories. On the year, mineral fuels were up 14.6 percent, with crude oil prices rising 12.2 percent. If mineral fuels had been excluded, the RMPI would have increased 6.6 percent instead of rising 10.6 percent on the year.
Between January and February, the value of the Canadian dollar against the U.S. dollar was up 0.7 percent. As a result, the total IPPI excluding the effect of the exchange would have dropped 0.2 percent instead of its actual decrease of 0.4 percent. On a 12-month basis, the value of the Canadian dollar rose 7.9 percent against the U.S. dollar. If the impact of the exchange rate had been excluded, producer prices would have risen 2.7 percent on the year rather than their actual increase of 0.6 percent.
January monthly gross domestic product edged up 0.2 percent and was up 3.3 percent when compared with the same month a year ago. Services were up 0.5 percent which offset a 0.5 percent decline in producing goods. Industrial production sank by 0.9 percent after climbing 0.7 percent in the prior month. Industrial production was pulled down by declines in mining, the oil and gas sector and utilities. Retail was up 0.9 percent and manufacturing output edged up 0.1 percent. Fourteen of 21 major manufacturing groups that account for 49 percent of output were up.
Bottom line
Three central banks will be meeting this week but none are expected to change their policy interest rate at the meetings. First at bat is the Reserve Bank of Australia. The RBA's policy interest rate has been 5.5 percent since March 2005. While continuing to grow, the economy has been noticeably weaker with inflation in the fourth quarter at 3 percent - the top of the RBA's inflation targeting range. Interest rates in Australia are now only 75 basis points above the U.S. Before the Fed began its increase cycle, the spread was as much as 4.25 percent.
The Bank of England meets on Wednesday and Thursday and is expected to keep their key rate at 4.5 percent. Inflation in the UK is running at about the Bank's inflation target of 2 percent. Here too, growth has been weak, with the housing industry and the consumer still trying to cope with higher interest rates. With the Fed's rate increase the spread between the UK and U.S. interest rates is negative - that is rates are now 25 basis points higher in the U.S.
The ECB is considered the best candidate to increase interest rates further after strong economic data last week - but not yet. Analysts are betting that the ECB will increase rates again in May from the present 2.5 percent to 2.75 percent. M3 money supply growth far exceeds the Bank's target of 4.5 percent - the last reading was 7.6 percent. And inflation continues to be above the ECB's target of 2 percent - flash HICP for March was 2.2 percent.
Investors will also have to deal with yet another week of heavy new economic data. Among the plethora of releases, and probably one of the most important, is the quarterly Bank of Japan Tankan survey which will be released Monday morning in Japan which is Sunday night in U.S. The complex survey is expected to offer further confirmation that the Japanese expansion has traction.
Finally, daylight savings time begins in North America on Sunday, April 2nd. Japan does not observe DST while Australia leaves DST as they head into the fall. Therefore, Japanese indicators are available an hour later. For example, the Tankan is scheduled to be released Monday morning at 8:50 AM local time. On the U.S. east coast it translates to Sunday night at 7:50 PM EDT. For Australian releases, there is a two hour swing in the release times for both the RBA announcement and indicators for U.S. watchers. Indicators, which are released 11:30 AM in Canberra, will be available the night before at 9:30 PM EDT while the RBA announcements, which are made at 9:30 AM local time on Wednesdays, will be available at 7:30 PM EDT Tuesday night.
Quarter ends on a mixed note
