Early in the week investors were captivated by Alan Greenspan's last meeting as chairman of the Federal Reserve. The FOMC increased the fed funds rate by the expected 25 basis points to 4.5 percent and on the next day, Ben Bernanke became the new Fed chief. (The ceremonial swearing is Monday.) Analysts were even more intent than usual in parsing the post-meeting statement and its possible carry-over impact to Bernanke's first meeting in March. But U.S. economic data such as Friday's factory orders and employment releases not to mention the various price indexes will always play an important role in the FOMC's decision making. The European Central Bank met on Thursday and as expected, left its key interest rate at 2.25 percent but hinted broadly that an increase of 25 basis points was on tap for its March meeting.
Global markets were mixed last week. Of the 13 followed here, eight indexes lost ground last week. The Kospi dropped below its end of 2004 close.
Global Stock Market Recap
Europe and the UK
After a week of up-and-down trading, only the DAX managed to hold on to a minor gain on the week. The CAC and FTSE were down, but by less than 0.5 percent. There was plenty of economic data and earning news to occupy investors. The net result from some of the economic news is that certain aspects of the EMU pickup in activity remain fragile and vulnerable. While manufacturing improved in Germany, it weakened elsewhere. And employment was down as well. Germany seems to be benefiting more than other countries such as France from the weaker euro and stronger global economy. Profits, especially those from the major oil companies, also garnered attention. For example, worries about future reserves of Shell Oil preyed on the FTSE.
ECB holds its fire for February
As widely anticipated, European Central Bank maintained its key interest rate at 2.25 percent for a second month. The bank increased interest rates at its December meeting by 25 basis points. Most analysts expect the ECB governing council to increase rates at their March meeting. At his press conference after Thursday's meeting, ECB President Jean Claude Trichet indicated that the market, which was pricing in two rate increases this year, had "pretty well captured" the ECB's message. However, Trichet offered no guidance about whether further increases in borrowing costs would follow later this year. The ECB, with an inflation target ceiling of under 2 percent, has seen its price measure - the harmonized index of consumer prices - consistently register readings above that mark. Friday's flash reading for January was 2.4 percent on the year. However the bank risks the political wrath of many of the EMU's finance ministers if it pushes rates up too far, too fast. Thierry Breton, the French finance minister, is one of many who have called on the ECB not to raise rates amid worries that tighter policy could derail Europe's fragile recovery.
Despite the conflicting cross-country data, there have been positive signs in the many sentiment indexes that are available each month. For example, the German Ifo business sentiment survey is at its highest level since May 2000. Business confidence in France, Italy and Belgium is running at levels above those seen at the time of December's rate hike, and the European Commission's economic sentiment index for January was at its strongest level since June 2001.
Asia/Pacific
It was a mixed week for Asian/Pacific stocks. Markets in Hong Kong and Singapore were closed on Monday and Tuesday, while South Korea was closed only on Monday. The decline in Hong Kong stock prices accelerated as the week came to an end. The Hong Kong dollar is pegged to the U.S. dollar and an interest rate hike here is automatically transported to Hong Kong. In Australia, profit taking put a dent into the all ordinaries after the index soared to a new high thanks to resource companies' stocks and banks. Japanese equity indexes were up on the week as they benefited from rebounds in both export and domestic stocks. Investors rewarded equities after strong economic data were reported earlier in the week - the unemployment rate was down and industrial production up. Export stocks such as Sony and Honda were helped by a weakening yen against both the U.S. dollar and euro.
Currencies
The U.S. dollar continued to gain against both the yen and euro. The positive performance has been boosted by the expectation that U.S. interest rates will continue to increase while rate increases in Japan await a final victory over deflation. And in the EMU, the ECB has indicated that, although it plans to increase rates, it would not be doing so at the pace of FOMC. The graph below shows the spread between U.S., German and Japanese interest rates for three-month bills and two-, five- and 10-year bonds.
The yen dropped to a seven-week low against the dollar and euro as traders guessed that the interest rate gap with the U.S. and Europe will widen. The Japanese currency also fell against 12 other major currencies after Bank of Japan Deputy Governor Toshiro Muto said that it was too soon to judge whether conditions are in place for ending the bank's zero interest rate policy (ZIRP). Muto also indicated that the BoJ would probably keep its near zero rate even after it cuts its reserve target for the amount of money it pumps into the banking system which is currently between ¥30 trillion to ¥35 trillion. The yen tumbled on his comments.
Analysts said that yen weakness could also have some relationship to rising inflation expectations. With inflation starting to turn positive, real interest rates probably will be negative for some time after the removal of quantitative easing. This is considered yen negative.
Indicator scoreboard
EMU - January manufacturing PMI edged downward to 53.5 from 53.6 in December. Although all countries reported a pickup in production, the differential between the fastest and slowest growing big four countries widened. Growth of new orders slipped but still remained strong. Input prices were up at the fastest rate since last February. At the same time, output prices were up for the sixth month in a row. At a level above the 50.0 no-change mark, the PMI signaled an improvement in the business situation for the seventh consecutive month.
January service sector business activity index edged up to a two-year high of 57.0 from 56.8 in December. Business activity has now risen for 31 straight months, with the rate of increase improving continually over the past five months. Input cost inflation slowed from December's 14-month high even though firms continued to report high energy prices. The RBS/NTC eurozone composite output index, which measures the output of the combined manufacturing and service sectors, edged up to 56.6 from 56.4 in December.
December unemployment rate edged upward to 8.4 percent from 8.3 percent in November. This compares with a 4.4 percent December unemployment rate in Japan and 4.9 percent in the U.S. Of the 12 EMU members, the unemployment rate in Germany was the only one to increase while the rates in France, Spain and Greece declined.
December producer price index was up 0.2 percent and 4.6 percent when compared with December of 2004. Excluding energy the index was up a benign 0.1 percent and 1.4 percent on the year. Energy prices were up 0.4 percent and 16.9 percent on the year.
January flash harmonized index of consumer prices was up 2.4 percent when compared with a year ago. The increase is above the ECB's inflation ceiling of 2 percent for the 12th month in a row. As is customary, no details are available in the flash reports.
December retail sales inched up 0.1 percent and were up 0.8 percent when compared with last year. Declines in German and Spanish sales were barely offset by gains elsewhere. Food sales were down 0.3 percent while non-food sales were up 0.4 percent.
EU - January economic sentiment index climbed to 101.8 from 100.6 in December. Industrial sentiment edged up to minus 4 from minus 5 while consumer sentiment was unchanged at minus 11. Retail sentiment was unchanged while the services sentiment reading climbed to plus 15 from plus 13 in the previous month.
Germany - January seasonally adjusted unemployment was up by 69,000. Unemployment was up 34,000 in the west and 35,000 in the east. The January unemployment rate for all of Germany edged upward to 11.3 percent from the previous month. East German unemployment rate jumped to 18 percent from 17.6 percent in the previous month while in the west, the rate inched up to 9.6 percent from 9.5 percent. December seasonally adjusted payroll jobs dropped by 10,000.
December seasonally adjusted retail sales dropped 2.5 percent and were down 1.5 percent when compared with a year ago. Retail sales excluding autos and gasoline stations were down 1.4 percent.
France - December producer price index edged down by 0.1 percent but was up 3.1 percent when compared with last year. Excluding food and energy, the PPI was also down 0.1 percent but up a much milder 1.3 percent on the year. Energy prices were down 0.4 percent while food and agriculture prices were up by the same amount.
December seasonally adjusted unemployment rate inched down to 9.5 percent from 9.6 percent in the preceding month. The number of jobless declined by 23,000.
Italy - December producer price index was up 0.3 percent and 4.1percent when compared with December of 2004. Most of the increase can be attributed to higher energy prices which were up 15.5 percent on the year. Excluding energy the PPI was up 0.1 percent and 0.8 percent on the year.
Asia
Japan - December industrial production was up 1.4 percent and 3.8 percent when compared with the same month a year ago. Production was up for electronic parts & devices, general machinery and transport equipment.
December unemployment rate declined to 4.4 percent from 4.6 percent in the preceding month. The total number of jobless was down for the first time in two months, decreasing by 50,000 from the same month a year earlier to 2.65 million.
December spending by Japanese households headed by wage earners was up 0.6 percent and 4 percent when compared with last year. Wage-earner household spending is an important gauge of personal consumption, which accounts for roughly 55% of Japan's gross domestic product. The propensity for wage-earner households to consume, a ratio which measures the amount of disposable income that went to household spending, rose to 80.9 percent from 73.8 percent in November on a seasonally adjusted nominal basis.
Australia - December merchandise trade deficit shrank to A$1.2 billion, down from A$2.5 billion in November. Exports soared by 7.1 percent while imports were down 1.3 percent. Non-rural and other goods exports jumped by 10 percent while rural goods were up 5 percent. Capital goods imports were down 4 percent and intermediate and other goods dropped 2 percent. Service imports however were up 2 percent.
December retail sales were up 0.4 percent and 4 percent when compared with last year. Sales were down 0.1 percent in the previous month. Sales were up as stores slashed prices to attract Christmas shoppers and hot weather boosted spending on air conditioners. Household goods were up 1.8 percent and sales at supermarkets were up 0.3 percent. Sales at clothing stores dropped 1.3 percent and sales at department stores fell 0.8 percent.
Americas
Canada - December industrial product price index (IPPI) declined by 0.3 percent but climbed 2.5 percent when compared with December of last year. Lower prices for petroleum products, motor vehicles and chemical products were the major contributors to this monthly decrease. On a month-over-month basis, manufacturers' prices were down 0.3%, mainly due to lower prices for petroleum products, motor vehicles and chemical products. Petroleum and coal products prices decreased 2.1 percent. Excluding these prices the IPPI edged down 0.1 percent. The annual increase was largely due to higher prices for petroleum products as well as chemical products when compared to one year earlier. Petroleum and coal products prices were up 25.1 percent on the year. Excluding these prices, the IPPI was up 0.6 percent on the year.
December raw materials price index (RMPI) was down 1.2 percent but jumped 16.8 percent when compared with last year. There were price declines in mineral fuels as well as ferrous materials. However, when compared with last year, mineral fuel prices (including crude oil) were up 27.2 percent. Excluding mineral fuels, the RMPI was up 7.3 percent on the year.
In December, the value of the Canadian dollar against the U.S. dollar was up 1.7 percent. As a result, the total IPPI excluding the effect of the exchange rate would have risen 0.2 percent instead of its actual decrease of 0.3 percent. On a 12-month basis, the value of the Canadian dollar rose 5.0 percent against the U.S. dollar. If the impact of the exchange rate had been excluded, prices would have risen 3.8 percent on the year rather than their actual increase of 2.5 percent.
November monthly gross domestic product was up 0.2 percent and 3 percent when compared with last year. The strength in the services industries more than offset a decrease in goods production. Growth was concentrated in retail trade, notably from vigorous sales of new motor vehicles, as well as in construction activities and in tourism-related industries. Declines among wholesalers and manufacturers of motor vehicles as well as in forestry and electric generation contributed to offset part of the gains. Industrial production (the output of Canada's factories, mines and utilities) declined 0.2 percent. The strength in the mining, oil and gas sector was more than offset by declines in manufacturing and utilities. Manufacturing output declined 0.3 percent. Production decreased in nine of the 21 major groups, but among them were some of the largest, accounting for 46 percent of this sector's output.
Bottom line
It will be another busy central bank meeting week! The Reserve Bank of Australia meets for the first time in two months on Tuesday and its monetary policy decision will be announced on Wednesday. No policy change is expected given signs of a weaker economy thanks to a weary consumer and slowing in the real estate sector. The Bank of England, which meets Wednesday and Thursday (with its policy announcement Thursday), is also not expected to change rates. The RBA's current key policy rate is 5.5 percent while the Bank of England's is 4.5 percent - the same as the U.S. fed funds rate. And finally the Bank of Japan also will meet Wednesday and Thursday. The BoJ remains under intense political pressure to keep policy unchanged and its interest rate near zero.
Fed, ECB - no surprises
