Four major central banks met last week. The Bank of England and the Reserve Bank of Australia kept monetary policy unchanged, leaving their key interest rates at 4.5 percent and 5.5 percent respectively. The Bank of Canada increased its policy rate by 25 basis points to 3.75 percent while the Bank of Japan indicated they would be changing policy soon. But for investors, the main focus for the week was - would the BoJ finally change its ultra-easy money policy after five long years of zero interest rates and flooding the market with money.
Bank of Canada increases rates again
The Bank of Canada increased interest rates on Tuesday for the fifth straight time by 25 basis points to 3.75 percent, the highest level since September 2001. This narrowed the gap between U.S. and Canadian interest rates to 75 basis points for now. In the announcement, the Bank changed its language and said that another increase was less certain. The Canadian dollar sank on the news.
The Bank indicated that some modest increases may be required to keep aggregate supply and demand in balance and inflation on target, a contrast to the statement on January 24th when the Bank said modest rate increases would be required. The Bank has an inflation target range of one to three percent. Governor David Dodge has indicated in recent speeches that inflationary pressures could build given that companies are working at full capacity. The Canadian dollar declined after reaching a 14-year high of 88.49 U.S. cents on March 2nd that capped a 29 percent increase over the past three years. The prospect of fewer rate increases makes buying Canadian-dollar assets that earn interest less attractive to some investors.
Reserve Bank of Australia policy unchanged
As expected, the Reserve Bank of Australia left interest rates unchanged for a 12th month after consumer spending slowed and home-building approvals fell to a five-year low. RBA Governor Ian Macfarlane and his board kept the overnight cash rate target at 5.5 percent. The bank last increased interest rates in March 2005. In a recent speech, Governor Macfarlane said rates were more likely to increase than fall, though he did not plan a move anytime soon. The Reserve Bank of Australia does not comment when rates are unchanged. The RBA has an inflation target range between two to three percent. Fourth quarter consumer price index was up 2.75 percent when compared with the previous year.
Bank of England holds the course
The Bank of England Monetary Policy Committee left its main interest rate unchanged at 4.5 percent for the seventh month in a row. The chances of another cut in interest rates may have receded after some fairly optimistic economic reports. For example, the PMI survey showed that the service sector expanded at its fastest pace in two years in February. In addition, evidence has mounted that the housing market is recovering with prices firming and mortgage approvals robust. Analysts did not expect a policy change because, they reason, the MPC prefers to take action in the month it releases one of its quarterly inflation reports. The next report is in May.
Bank of Japan plans to change policy - soon
The Bank of Japan announced that it would be ending its ultra-easy monetary policy in the future, but for now, interest rates remain at near zero and the BoJ will continue to provide ¥35 billion of quantitative easing. This is vastly above the ¥6 billion believed necessary to keep short term interest rates at zero. The decision, which came a month sooner than most analysts expected, had been widely discussed and was discounted in the market because investors feared that the BoJ might say that interest rates would move up from zero in the near future. With that worry dismissed, the Tokyo stock market managed a 2.6 percent gain. With a rate increase not imminent, the BoJ will be careful about removing excess liquidity, a process that will take at least three months and will not start in earnest until April. Rates may also remain at zero even after current account deposits have fallen to the required level.
Equally important, the bank has not accompanied the ending of quantitative easing with a decisive move towards inflation targeting that several government leaders had been urging. Instead, they have merely given an indication that the Bank is looking at a range of zero to two percent. The Bank of Japan clearly exercised its independence in this decision. Already, the announcement has been criticized by Heizo Takenaka, Koizumi's interior minister and former economy minister. He said the bank's intention of making policy based on the "understanding" that price stability lay between 0 percent and 2 percent did not meet its "obligation for accountability". And Junichiro Koizumi, prime minister, warned the bank earlier in the week about the dangers of an early move, but on Thursday said he "respected the bank's decision."
Stocks were volatile as investors were fixated by potential changes in interest rate policies. Asian/Pacific indexes followed here were split on the week with three up and three down. Both the Topix and Kospi are down on their end of 2005 levels. The London FTSE and its European counterparts, the DAX and CAC, were up on the week and in 2006. In North America, only the Dow was up on the week. The Bolsa, S&P/TSX Composite and Nasdaq lost ground. All four are up so far in 2006.
Global Stock Market Recap
Europe and the UK
The FTSE began the week by setting a five-year high and climbing over the 5,900 level. However, that didn't last for long. It was all downhill on Tuesday and Wednesday. On Wednesday the index was hit with ex-dividend trading which tends to lower the index - it was estimated that it took 20 points off the index along with the quarterly reshuffle of the index's company components. But shares rallied on Thursday's central bank news and on Friday's U.S. employment report. The FTSE regained the heady heights over 5900 to end the week.
Trading was volatile on the CAC and DAX as well. After climbing on Monday, European equity markets sank on Tuesday and Wednesday with banks and oil stocks lower, overshadowing some strong earnings results. Stocks were down to a more than three-week low on concern rising interest rates worldwide might dent economic and profit growth. Mining shares have been vulnerable to drops in commodity prices for metals such as copper and gold as well as crude oil. Both indexes were up on the week.
Asia/Pacific
Japanese stocks, after some mid-week uncertainty, soared after the Bank of Japan declared that deflation was a thing of the past. But while stocks celebrated, the yen did not. As a result, exporters' shares were up on expectations that a stronger dollar would inflate the value of overseas sales. Stocks of Honda and Samsung benefited. The Nikkei was up 2.9 percent on the week - its biggest gain since the week ending January 27th. Bank of Japan Governor Toshihiko Fukui said domestic interest rates would be held near zero for the time being and the bank would probably continue to keep borrowing costs near zero should inflationary pressure be low. Investors were thus reassured zero interest rates would continue and, given Japan's strengthening economic growth, companies would stand to profit.
The Hang Seng Index dropped 2.3 percent and had its worst week in more than four months. Hong Kong property company Henderson Land Development was down on concern the U.S. employment report would give the Fed more reasons to increase interest rates. Higher interest rates have dented property sales because of increasing financing costs. The Hong Kong dollar is pegged to the U.S. dollar and interest rates changes are passed along each time the Fed makes a move. The Hang Seng dropped 2.3 percent last week, the most since the week ended October 14th.
Currencies
The yen was up immediately after the Bank of Japan announced the end of its ultra-loose monetary policy on Thursday, but its gains faded as the day advanced. The yen extended its slide on Friday as the U.S. dollar gained strength after a positive employment report. The euro lost ground as well. Traders said the strength of the report means the Fed will probably increase interest rates three more times to 5.25 percent. This would widen the spread substantially between the Fed and other central bank rates. The Fed has lifted its key rate 14 straight times since June 2004 to combat inflation. And last week, European Central Bank increased its benchmark by 25 basis points for the second time in three months to 2.5 percent. The Bank of Japan pushed interest rates to zero percent in March 2001 and they have remained there since.
Indicator scoreboard
EMU - January real seasonally adjusted retail sales were up 0.8 percent and 0.8 percent when compared with January 2005. Retail sales recovered in both Germany and France. Food, drinks and tobacco sales were up 1 percent and non-food sales were up 0.5 percent.
Germany - January real seasonally adjusted manufacturing orders were up 1.4 percent and soared 10.6 when compared with last year. Domestic orders were down 0.6 percent but up 5.3 percent on the year while foreign orders jumped 3.3 percent and 15.9 percent on the year. The increase reflects the strength of the overseas market for capital goods which were up 7.3 percent and 21.6 percent on the year.
January seasonally adjusted industrial production was down 0.1 percent and up 3.2 percent when compared with January 2005. The economics ministry said the data were distorted by harsh winter weather that resulted in a drop of construction activity. Industrial production excluding construction was up 0.4 percent and 4 percent on the year. Manufacturing output was up 1.3 percent and 4.8 percent on the year. Consumer goods output was up 1.3 percent and 2.4 percent on the year while capital goods were up 2.2 percent and 6.5 percent on the year.
January seasonally adjusted merchandise trade surplus edged up to €12 billion from €11.4 billion in December. Exports were up 3.3 percent while imports gained 3 percent.
France - January merchandise trade deficit narrowed to €2.4 billion from €2.6 billion in the previous month. Imports were up 1.4 percent mainly because of energy. Consumer and capital goods imports were down. Exports were up 2.2 percent.
January seasonally adjusted industrial output excluding construction was up 0.3 percent while manufacturing output was up 0.7 percent. The increases stemmed from production increases for automobiles and capital goods. However consumer goods slipped slightly as did energy and agriculture.
Britain - January global merchandise trade deficit eased to £5.727 billion from December's deficit of £6.103 billion. Including services, the total trade deficit was virtually unchanged at £3.776 billion while the services surplus declined to £1.951 billion from £2.267 billion previously. Excluding oil and erratic items, the volume of exports fell by 0.5 percent between December and January and the volume of imports fell by 4.5 percent.
January industrial output was up 0.4 percent but was down 1.3 percent when compared with last year. This was the third consecutive month that output increased. Manufacturing output was up 0.2 percent but was down on the year by 1.4 percent. Output was up in 5 of the 13 manufacturing sub-sectors. Transport equipment and paper, printing & publishing were up 2 percent and 1.1 percent respectively.
Asia
Japan - February corporate goods price index was up 0.4 percent and 2.9 percent when compared with last year. Prices for nonferrous metals and petroleum & coal products were up while prices for electrical machinery & equipment were down.
Australia - February employment was up by 25,900 jobs while the unemployment rate edged down to 5.2 percent from 5.3 percent in the previous month. Full-time employment rose by 6,200 and part-time jobs jumped 19,700. The participation rate, which measures the labor force as a percentage of the population aged over 15, was unchanged at 64.4 percent.
Americas
Canada - January merchandise trade surplus declined to C$6.35 billion in January from C$7.7 billion in December. The drop was due primarily to lower prices for energy exports. Exports were down 3.3 percent while imports were virtually unchanged on the month. Canada's surplus with the U.S. eased to C$10.7 billion from the previous month's record surplus of C$11.6 billion. Exports to the U.S. dropped 3.6 percent while imports from the U.S. were down 1.3 percent. Excluding the United States the trade deficit was a record C$4.4 billion. Exports were down 1.9 percent while imports were up slightly.
February employment was up by 24,700 jobs and the unemployment rate declined to 6.4 percent from 6.6 percent in January. The unemployment rate matched a 30-year low set in November 2005. The job gains were all part-time. Employers added 56,300 part-time jobs while shedding 31,600 full-time workers. The drop in the jobless rate stemmed in part because 18,000 workers left the labor force. Average hourly wages were up 3.3 percent from a year earlier.
Bottom line
Investors will finally have time this week to catch their collective breath after the deluge of indicators and central bank meetings of the past two weeks. Of interest will be the continuing political fallout from the Bank of Japan's announced intentions to end its accommodative policy. This is of course all relative. Zero interest rates will remain for some time to come but excess liquidity will be gradually drained from the system.
Busy week for central bankers
