Monday, May 9, 2005
RBA, ECB on hold but not the Fed
Reserve Bank of Australia
The Reserve Bank of Australia kept its policy interest rate at 5.5 percent for the second month. The RBA does not issue a statement when it leaves interest rates unchanged. But in its quarterly statement on monetary policy released on Friday, the RBA said inflationary pressures had receded and March's interest rate increase had dampened consumer demand. This raised expectations that the Bank won't increase interest rates again this year. The RBA eased indications that another increase in rates was in the offing by saying that there is a case for borrowing costs to be kept unchanged for now. When the RBA increased rates in March, it cited inflation risks from high wage demands in a tight labor market and from capacity constraints after 14 years of continuous economic expansion. The narrowing interest rate differential with the U.S., which increased its policy rate to 3 percent on Tuesday, could dim the appeal of Australian assets and dampen demand for the Australian dollar. The RBA's inflation target range is 2 to 3 percent. The CPI was up 2.4 percent in the first quarter when compared with last year.
European Central Bank
For the ECB, the day and location of their meeting were the only things that changed. The European Central Bank, meeting on Wednesday instead of Thursday and in Berlin instead of Frankfurt, kept its policy interest rate at 2 percent for the 24th month as the economic outlook for the EMU deteriorates. No one was surprised. Business confidence was at a 19-month low in April as the cost of oil held above $50 a barrel, job concerns kept a lid on household spending and global growth slowed. By contrast, the U.S. Federal Reserve yesterday raised its main rate to 3 percent and signaled more increases. ECB President Jean Claude Trichet, at his press conference after the meeting, repeated his comments from the past two meetings - the bank sees "no significant evidence of underlying inflation pressure building up" and recent economic data have been "on balance on the downside." Trichet also reiterated his comment that lowering interest rates to stimulate growth was not an option. This was in response to critical remarks last week made by Italian Prime Minister Silvio Berlusconi and German Economy & Labor Minister Wolfgang Clement.
Global Markets
In the usual course of events, the first week of the month builds to a crescendo on Friday with the release of the U.S. employment situation report. But last week, investors also had to deal with an FOMC meeting and a meeting of the ECB - and the British general election as well. Once the FOMC meeting was over and its statement dissected by analysts, the next big event was the employment report. And investors adopted a cautious stance ahead of the release. Their patience was rewarded as employment jumped 274,000 instead of the mere 166,000 forecast by analysts. The dollar jumped against most major currencies while stocks in Europe climbed. Government bond prices fell and yields climbed higher after the report was interpreted to mean that the soft patch for the U.S. economy might be over.
The markets had been unresponsive by and large during the run up to the British election simply because the result was a forgone conclusion - Tony Blair and the Labour Party would win a third term. But when his margin of victory was less than expected, the pound sterling weakened.
Adding to this mix were holidays in Asia, including Japan where markets were closed for three days. On the week, 12 of the 13 indexes followed here were up. This was a welcome change from the previous week when 12 of the 13 indexes were down.
Global Stock Market Recap
Europe and Britain
Markets were calm prior to Thursday's British general election. Investors were widely expecting the Labour Party to win an unprecedented third straight term, which they did. Some analysts said that this will probably be the last piece of good news for the government for a considerable period of time as the rapidly cooling housing market depresses consumer demand and weaker global activity causes manufacturing activity to contract. Aside from victory, the election results didn't offer much good news to the Labour Party, which saw its margin in the House of Commons diminish significantly to about 63 seats at this writing from 167 seats in 2001. Despite this, the FTSE was up during the holiday shortened trading week.
In Europe, investors were more focused on the release of the April U.S. payrolls data than either the no-change ECB verdict on Wednesday or the British elections on Thursday. And the report surprised - pleasantly - as it showed a much larger-than-expected increase in the number of employees U.S. companies added during April. Analysts said the data took on greater importance given unclear signals from the Federal Reserve on Tuesday on the pace and extent of future interest rate hikes. The CAC and DAX were up on the week, with five positive trading days.
Asia/Pacific
Trading was fragmented during last week due to the many holidays in Asia. That wasn't the problem in Australia, however, where stocks have been declining. The index hit its high for the year on March 21st at which time it was 5 percent above year end. Since then, the index has dropped 7.4 percent and is now under water by 2.8 percent. Another drought plus the bite of high interest rates have cut consumer enthusiasm and purchases. Recently dropping commodity prices also have made a dent in growth.
Japanese traders enjoyed the Golden Week holidays (markets there have been closed four of the last six trading days), and trading was subdued in the rest of Asia. The Nikkei was up 1.7 percent on Friday to a three-week high as the market played catch-up with gains elsewhere. The Japanese market was last open on Monday, but had traded nervously ahead of the FOMC meeting the next day. The Fed announced a slight increase in U.S. interest rates and said future increases would also be moderate. This pronouncement alleviated concerns that rising U.S. interest rates would have a negative impact on Japanese exporters, who have been fuelling Japan's recovery. Shares of exporters - including auto manufacturers- were up as a result.
Currencies
The currency markets had a volatile week as the dollar fell against both the euro and the yen in the wake of the Fed's comments, but later rallied following the jobs data. But the yen continued to find support from intensifying speculation that China is about to bow to external pressure and revalue its currency (the renminbi or yuan).
Currency trading continued to be dominated by opinion on whether the Chinese government would revalue its currency. For obvious political reasons the government needs to suggest that it is planning some sort of reform rather than responding to the cacophony of international demands that it unpeg its currency from the U.S. dollar. That in turn is escalating speculation to dizzying heights. But the Chinese probably do not want to give in to foreign pressure. A renminbi revaluation seems most likely to come when markets, currently in limbo on the issue, are least expecting it. A small revaluation would probably make little difference to the U.S. trade deficit and it would also make little difference to the build up of Asian foreign exchange reserves.
Sterling extended its losses on Friday the Labour Party won a third term but with a sharply reduced majority. Although the Labour majority was significantly reduced to about 63 seats from 167 - the result was largely expected and sterling's reaction was considered to be knee jerk. Most strategists remained confident that the pound's drop was temporary.
The dollar edged downward during the week as the market viewed the Fed's statement that accompanied its rate increase as broadly dovish. The dollar initially was up in the immediate aftermath of the FOMC decision but declined after the Fed corrected their announcement. The delayed release of a phrase saying long-term inflation expectations are "well contained" altered the effect of the statement and the dollar came under pressure as a result. However, the employment report changed everything on Friday morning and the dollar soared against the euro as a result, reversing the week's losses and then some.
Indicator scoreboard
EMU - April seasonally adjusted manufacturing purchasing managers index dropped to 49.2 from 50.4 in March. This means that manufacturing is contracting since it is below the 50 break even point. Germany, France, Italy and Spain all had readings below 50. Most components contracted led by orders and employment. The PMI indexes are compiled by NTC Research in Britain.
April seasonally adjusted services purchasing managers survey dropped to 52.8 from 53 in March. A decline in expectations and employment offset an increase in new orders. Performance among members of the EMU continued to diverge. Gains in France and Spain were partially offset by slower growth in Germany and a plunge in Italy. The index is compiled by NTC Research of Britain.
March industrial producer prices increased 0.6 percent and jumped 4.2 percent when compared with last year. Energy prices soared 2.5 percent and 11.5 percent on the year. Excluding energy, industrial PPI was up 0.1 percent and 2.5 percent on the year.
March seasonally adjusted unemployment rate inched up to 8.9 percent from 8.8 percent in February. Of the nine EMU countries reporting March data, unemployment was up in two and down in one. Eurostat estimated that in February 2005, 12.8 million men and women were unemployed in the eurozone.
March real, weekday and seasonally adjusted retail sales were up 0.3 percent and 1.4 percent when compared with March a year ago. Food, drink & tobacco sales were down 0.5 percent while non-food sales managed to edge up 0.1 percent. Sales were up in Germany, France, Luxembourg and Belgium but were down in Spain and Portugal.
Germany - March real seasonally adjusted manufacturing orders jumped 2.2 percent and were up 3.7 percent when compared with last year. Domestic orders were up 2 percent while foreign orders were up 2.4 percent. Overall capital goods orders erased the previous month's decline and jumped 3.1 percent with domestic orders up 3.7 percent and foreign orders up 2.7 percent.
Britain - April CIPS manufacturing purchasing managers index dropped below the 50 break even point to 49.5 from 51.6 in March. This is the first time that the index has contracted since June 2003. New order, export order and employment sub-indexes were below the 50 contraction/expansion point. Output declined but remained positive. CIPS said the decline was mainly due to a drop in new business, which in part reflected the drop in exports.
April CIPS services purchasing managers index edged downward to 56.5 from 57 in March. There was an upturn in employment growth while input price inflation eased to its weakest in a year. However, business expectations were their lowest for two years. The report attributed the decline to some short-term uncertainty during the run-up to Thursday's general election.
April Halifax house price index was unchanged and up 5.9 percent when compared with last year. For the three months ending in April, the index was up 7.8 percent when compared with the same three months a year ago. The standard average house price was Stg 163,615. The data support the Bank of England Monetary Policy Committee's view that recent data suggest that the market is stabilizing.
Pacific
Australia - March retail sales were unchanged and up 1.5 percent when compared with last year. All industries except other retailing and hospitality & services increased. Department stores and clothing & soft good retailing have posted moderate or strong growth for at least three months.
March seasonally adjusted merchandise trade deficit was A$2.7 million, up from February's deficit of A$2.2 million. The drought across half of the country cut exports of wool, wheat and other farm goods, while oil imports increased. Exports were down 0.9 percent with rural goods dropping 8 percent. Imports were up 2 percent while intermediate goods imports (which includes oil and spare parts) increased 9 percent but capital goods dropped 4 percent.
Americas
Canada - April employment jumped by 29,300 after gaining only 4,400 jobs in March. Unemployment rate edged down to 6.8 percent from 6.9 percent in March. Full time employment increased by 49,600 jobs while part time employment dropped by 20,100. Despite the overall gain, manufacturing lost 29,000 jobs while services gained 28,900 jobs. Retail and wholesales trade jobs declined by 20,000. Employment was up in professional, scientific & technical services, educational services, and in public administration.
Bottom line
The Bank of England's monetary policy meeting and announcement were postponed because of the election to Friday, May 6th and Monday, May 9th. Given weaker economic data released last week, analysts anticipate that there will be no change in the current 4.75 percent policy interest rate.
The reaction of stocks, bonds and the pound sterling to the Labour Party's victory in the general election was muted. The U.S. jobs report had a greater market impact on Friday. And even though Labour's majority was lower than expected, the worst outcome for markets - a hung parliament - was avoided. Labour's majority sank to about 63 seats - far below the 167 seat majority which Labour won in 2001. The timing of the transfer of power from Tony Blair to (it is assumed) the current Chancellor of the Exchequer, Gordon Brown, is one uncertainty that investors will focus on.
Looking Ahead: May 9 through May 13, 2005
An event filled week