There was little new economic data last week, but one release dazzled - the Ifo sentiment survey in Germany. It showed that optimism about the economy both currently and in six months are at their highest levels since October 1991. This is certainly good news for the ailing EMU economy. But it also all but confirmed that the ECB will increase interest rates at their March 2nd meeting. Stocks also reacted to probable interest rate increases in the U.S. after FOMC minutes were released on Tuesday. And on Wednesday, the Bank of England Monetary Policy Committee minutes scotched hopes of an interest rate decline. On the week, despite volatility, all stock indexes followed here were up with the exception of the Dow.
Global Stock Market Recap
Europe and the UK
Like equities in Asia, European and British investors alternated between buying and selling last week. At week's end, U.K. stocks advanced, led by WPP Group Plc and Lloyds TSB Group Plc after the companies reported better-than-expected earnings. Merger news also boosted shares, which were sometimes pulled down because of ex-dividend stock prices. Analysts are upbeat about the FTSE as many companies have been beating expectations. Stocks were up in Paris and Frankfurt, despite some concerns about the prospect of higher interest rates. The DAX was boosted by drug stocks including Schering AG after the company said it boosted sales in Asia. Merger and acquisition activity helped keep stocks at four-and-a-half-year highs even though U.S. stocks struggled to maintain their momentum amid fresh indications that interest rates may go higher. News on Friday of an attack at a huge oil installation in Saudi Arabia prompted a sharp increase in oil and gold prices but had only a limited impact on equities.
Bank of England minutes show no divide
Minutes of the Bank of England's last monetary policy meeting didn't quite live up to the pre-release hype of some analysts who were convinced that the Monetary Policy Committee was likely torn by divergent opinions on whether interest rates should be lowered again. However, the minutes show that for the third month, eight of nine members voted to hold rates at 4.5 percent. Only Stephen Nickell, again, voted for a cut. The changing composition of the MPC probably lowers the chance of future dissent. Nickell retires in May. The first term of Richard Lambert, who voted for a cut in August, also ends then, although he could be reappointed.
The MPC's five to four August decision to over-rule Governor Mervyn King and cut rates was highly unusual. MPC votes are rarely close - of the 31 interest rate changes since the Bank was made independent in 1997, 21 have been unanimous and six were supported by eight of the nine members. As in other central banks, the governor controls the agenda. Four other MPC members are Bank of England employees, who are probably less likely to rebel.
Asia/Pacific
Japanese stocks sank and soared alternately as each day brought a new investor mood. Stocks pivoted amid signs that foreign investors had once again resumed buying. On Monday, the Nikkei sank to a four week low, only to soar 3 percent on Tuesday. But on Wednesday, spirits were down again and so were stocks. But not for long. On Thursday, the Nikkei regained Wednesday's losses and then some. On Friday, investors paused for breath and there was little change in the index. On the week, the bulls managed to win the tug of war and the index gained 2.5 percent. The Topix followed a similar pattern but its gyrations were not quite as large. That index ended the week higher, gaining 2.6 percent. Stocks rallied despite fresh hints from the Bank of Japan that the country's policy of quantitative easing, which floods the banking system with excess liquidity, would soon come to an end, paving the way for eventual interest rate increases. But most analysts don't think this will happen until the new fiscal year begins in April.
The latest official weekly figures from the Ministry of Finance covering the second week of February showed that foreigners were net sellers for the first time since September. Unofficial figures suggest foreigners were likely to have been net sellers last week as well. News that foreigners had returned boosted real estate stocks in particular on Tuesday, though the sector also benefited from reports that office owners in central Tokyo are raising rents.
Currencies
The yen has been garnering a good deal of attention lately as currency traders bet on whether the Bank of Japan will finally end its quantitative easing program and move towards a rationalization of their interest rate policy. The yen rises each time Bank of Japan Governor Toshihiko Fukui reiterates the central bank is nearing the end of its five-year policy. And a Friday newspaper story reported that the BoJ could move as soon as its March 8th and 9th meeting. Analysts doubt this mainly because March is the last month of Japan's fiscal year and the demand for funds is very high. They think that the Bank could move in April. The change to the BoJ's stance is being considered amid signs the country is finally emerging from seven years of deflation. The bank has pledged to keep flooding the banking system with cash until consumer prices excluding fresh food stop falling for at least a few months and policy makers are sure they will decline further.
The dollar was up against the euro last week as market players expect that faster growth combined with increasing interest rates will keep U.S. assets attractive to international investors. Expectations look for a widening interest-rate spread despite the probability of a 25-basis-point increase to 2.5 percent by the European Central Bank on Thursday. But futures show that traders expect the Federal Reserve to increase rates at their meeting at the end of March. On Friday, the euro was down after a report showed Italian business confidence unexpectedly fell for the first month in nine.
Indicator scoreboard
EMU - December unadjusted merchandise trade deficit was €947 million, slightly larger than November's deficit of €904 million. Imports were down 4.5 percent while exports dropped 4.6 percent. On the year, imports jumped by 17.1 percent while exports were up 9.6 percent. On a seasonally adjusted basis, exports were up by 0.5 percent and imports by 3.5 percent on the month. For the year 2005, the trade surplus dropped to €23.4 billion from €71.5 billion for 2004.
Germany - January producer prices were up 1.2 percent and 5.6 percent when compared with last year. Energy prices soared 4.4 percent and 21.4 percent on the year. Excluding energy, the PPI was up a modest 0.2 percent and 1.2 percent on the year. Oil and oil product prices were up 7.4 percent on the month while precious metals soared by 9 percent. Computer accessories prices were down 1.8 percent.
Fourth quarter gross domestic product was unchanged on the quarter and up 1.6 percent when compared with the same quarter a year ago. Declines in both private and government consumption along with net exports offset gains in capital investment.
February Ifo sentiment survey reading was 103.3, up from 102 in January. Both current conditions and the six month outlook were up. February's index was the highest since October 1991.
France - Fourth quarter gross domestic product was up 0.2 percent and 1.2 percent when compared with last year. On an annualized basis, GDP was up 0.9 percent. Weak growth was attributed to an abrupt slowdown in exports. Private consumption was up 0.7 percent on the quarter, but business fixed investment weakened to an increase of 1 percent from 1.4 percent in the previous quarter.
January consumer spending on manufactured goods rebounded and was up 0.9 percent and 2.5 percent when compared with last year. Clothing sales led the rebound and were up 3.4 percent after sinking 4.2 percent in December. Household durable spending was up 1.5 percent but auto sales sank 3.3 percent.
Italy - December seasonally adjusted retail sales were up 0.2 percent and 2.4 percent when compared with last year. Both food and non-food sales were up 0.2 percent. Food accounts for about 40 percent of retail sales. ISTAT's retail sales data are not closely watched because they are often volatile and show little correlation with consumer spending data as published in quarterly GDP statistics.
UK - Fourth quarter gross domestic product was up 0.6 percent and 1.8 percent when compared with the same quarter a year ago. On an annualized basis, GDP was up 2.3 percent. Household spending was up 0.7 percent and 1.7 percent on the year while government spending was up 0.8 percent and 2.8 percent on the year. Investment spending was down 0.8 percent on the quarter but was up 1.6 percent on the year.
Asia
Japan - January unadjusted merchandise trade balance registered the third deficit in 20 years as the Chinese Lunar New Year holiday curbed export growth to Asia and rising demand at home fueled imports. The unadjusted trade deficit was ¥348.9 billion, the first since 2001, compared with a surplus the same month a year earlier. Two days of the Chinese Lunar New Year holiday, which is typically observed in the first week of February, fell in January. The holiday is observed in China, Hong Kong, Taiwan, South Korea, Singapore and Malaysia, which together buy about 60 percent of Japanese goods shipped overseas. However, on a seasonally adjusted basis, the merchandise trade balance recorded a surplus of ¥572.3 billion, down slightly from December's surplus of ¥587.9 billion. Seasonally adjusted exports were down 0.9 percent while imports declined by 0.7 percent on the month.
December tertiary index was up 0.2 percent and 2.7 percent when compared with the same month a year ago. 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.
December all-industry index was up 0.4 percent and 3 percent when compared with last year. The all industry index takes a reading of activity in the industries that comprise the tertiary index combined with activity in the construction, agricultural and fisheries industries, the public sector and industrial output. This index is considered a close approximation for gross domestic product growth as measured by industrial and service sector output.
Americas
Canada - December retail sales were up 0.3 percent and 6.7 percent when compared with last year. Excluding dealers of new, used and recreational vehicles, and auto parts, retail sales were up 0.4 percent and 6.7 percent on the year. Five of eight retail sales sectors were up in December including furniture, home furnishings & electronic stores sector (up 1 percent) and food & beverages stores (up 0.6 percent). Clothing & accessories stores edged downward by 0.2 percent.
January consumer price index was up 0.5 percent and 2.8 percent when compared with last year. The increase was due primarily to higher energy prices. Core CPI which excludes food and energy was down 0.2 percent and was up 1.4 percent on the year. The Bank of Canada core CPI which excludes eight volatile items was unchanged on the month and up 1.7 percent on the year. The Bank of Canada has an inflation target range of from one to three percent. Seasonally adjusted CPI was up 0.5 percent and 1.3 percent on the year.
Bottom line
The Bank of Japan once again signaled that it intends to tighten monetary policy as Japan moves out of deflation and the economy continues its recovery. The yen was up against the dollar and Japanese government bond yields rose. Tighter Japanese monetary policy threatens the carry trade - investors borrow in yen to buy assets with potentially higher returns to take advantage of interest rate spreads. On Thursday, the ECB begins the March round of central bank meetings. They are expected to increase their key interest rate by 25 basis points to 2.5 percent. The following week sees the Banks of England and Canada as well as Japan meet as does the Reserve Bank of Australia - certainly enough action to keep investors very occupied. But this week also sees an outpouring of new economic data that certainly will affect the decisions of all the banks that are meeting, and those that are not.
Interest rates capture investors' attention
