Monday, March 7, 2005
Monetary policy scorecard - 1 bank ups rates, 2 hold
Three central banks announced the results of their monetary policy meetings last week - the Bank of Canada, Reserve Bank of Australia and the European Central Bank.
Bank of Canada
The Bank of Canada maintained the status quo and kept its benchmark lending rate at 2.5 percent. Their goal is to bolster domestic spending to counter the strong Canadian dollar, which is biting into exports and therefore, economic growth. In their post-meeting statement, the Bank suggested they still plan to raise interest rates at some point. The Bank expects GDP to be up less than 3 percent for a third year - growing 2.8 percent in 2005. The Bank said (in its January 25th rate decision) that the Canadian economy may operate below its full capacity this year because of the stronger currency.
Bank of Canada Governor David Dodge said recently that he would temper future rate increases. The Bank's key interest rate rose 25 basis points at each of the September and October meetings. Dodge has said that rates are low and must go up to control inflation as the economy expands. As in the U.S., consumer spending and housing have been strong components of growth. Mortgage rates are near 50-year lows and the share of the working-age population with a job has been at or near a record high for a year.
The Canadian dollar has traded mostly above $0.80 against the U.S. dollar since October after the Bank's second increase in rates. It reached a 12-year high of $0.8532 on November 26th. Canada depends on exports for about 40 percent of its economy - the biggest share in the Group of Seven nations - and the strong currency has crimped exporters' sales and profits. Canada's economy grew at a 1.7 percent annual pace in the fourth quarter, the slowest in more than a year as exports fell and imports rose.
The Bank of Canada marks its 70th anniversary this month. Governor Graham Towers opened its doors March 11, 1935, as the Great Depression convinced the federal government a central bank was needed in addition to private lenders to regulate credit and help grow the economy.
Reserve Bank of Australia
The Reserve Bank of Australia increased its key interest rate by 25 basis points to 5.5 percent. This was their first interest rate change since their November 2003 meeting when they also raised the rate by 25 basis points. The rate action took place on the heels of a very weak fourth-quarter gross domestic product report that showed growth had slowed to a mere 0.1 percent - its weakest pace in four years as home building declined and consumer spending slowed. RBA Governor Ian Macfarlane said the rate target was raised to reduce the risk of an unacceptable rise in inflation. Labor supply is tight and the economy has been operating with bottlenecks in the transport and mining industries which are holding back the nation's exports. The Bank thinks inflation, due to rising wages and increased commodity prices fueled by Chinese demand, may accelerate to 3 percent by 2006, the top of the central bank's target range. Growth weakened in the fourth quarter as home building declined 3.5 percent and consumer spending growth slowed to 0.4 percent from 1.2 percent in the third quarter. Companies cut inventories, subtracting 0.5 percentage points from growth. Net exports, which measure exports minus imports, subtracted 0.6 percentage points from growth.
European Central Bank
As expected, the European Central Bank Governing Council left its key interest rate unchanged. The interest rate has been 2 percent since June 2003. Both money supply growth and inflation continue to be above the Bank's 4.5 percent and 2 percent targets. The ECB lowered its growth forecast for the EMU this week reflecting the stagnant growth of the 12 country union. The EMU continues to trail other developed economies as oil prices curbed already anemic economic growth and rising unemployment tempers consumer spending. Although the euro's rise against the dollar has eased since the first of the year, its higher value has crimped growth for export dependent economies. Unemployment in Germany rose to the highest since World War II in February and companies have indicated that there are more job cuts ahead.
As he does every month, ECB President Jean Claude Trichet held a press conference to explain the Governing Council's decision. He said he expects the inflation rate to fluctuate around its 2 percent inflation ceiling in coming months and that he sees no significant evidence of underlying domestic inflationary pressures. The ECB trimmed its inflation forecast for this year to 1.9 percent from 2 percent. But escalating oil costs pose one of the biggest risks to both the inflation and growth estimates because they threaten to boost inflation while crimping growth, Trichet said. Growth in the euro region, held back by rising unemployment, is forecast to trail that of the U.S. once again. Growth varies widely across the EMU with Germany and Italy, which account for about half the euro region, contracting in the fourth quarter. In contrast, in France and Spain growth gathered pace and house prices jumped. But in Germany unemployment soared to a postwar high of 4.88 million in February. In France the jobless rate rose to a five-year high of 10 percent in January.
Global Markets
Investors traded stocks nervously as they watched crude prices climb steadily during the week thanks to continued colder than normal temperatures in Europe and the U.S. With exception of Asia/Pacific markets, which are closed before the U.S. employment report is released on Friday morning, stocks were up Friday on positive data. The dollar was not as lucky - traders were apparently irrationally exuberant in their forecasts of employment gains and were disappointed by the result. While employment was higher than the consensus, it was offset by downward revisions to the previous month's gain. The unemployment rate bounced up to 5.4 percent from 5.2 percent in January as well.
Crude oil prices continued to climb last week as colder than normal weather in the U.S. Northeast and in Europe increased supply worries. Some analysts are now seeing prices heading closer to the $60 level as growth continues to pressure supplies, which have been cut by the turmoil in Russia over their largest crude producer, Yukos.
Global Stock Market Recap
Europe and Britain
Despite qualms about energy prices European and British stocks were up on the week. They were bolstered on Friday by the U.S. employment report which often has more impact on market direction than their own domestic indicators. European stocks rose amid optimism that job growth in the U.S. would support economic expansion without causing the pace of interest rate increases to accelerate. Energy company stocks were favored by investors - higher oil prices mean large cash flows for those companies. A positive start to trading in the U.S. provided a boost for the equities markets on Friday, accelerating an already positive tone thanks to positive earnings reports.
Asia/Pacific
With the exception of Hong Kong, Asian/Pacific indexes monitored here were up last week. The Nikkei extended its run of positive sessions to seven on Friday - their best in more than four years. The high price of crude boosted energy stocks, while growing optimism over the prospects for the domestic economy and that of its biggest export market, the U.S., were improving. Australia all ordinaries once again hit a record high despite an interest rate increase by the Reserve Bank of Australia and an anemic fourth-quarter GDP report. Oil stocks were winners as doubts about ever-rising crude prices did not dent optimism for energy company profits.
Currencies
The dollar declined on Friday after staying in a relatively narrow trading range all week. Traders' fantasies of stratospheric employment growth were punctured by only a better than expected gain in February and a jump in the unemployment rate to 5.4 percent from 5.2 percent. The dollar is up about 2.5 percent against the euro so far this year in part on expectations growth in the U.S. economy will outpace Europe for a fourth year. However, the yen has lost about 2 percent against the dollar as growth there has disappointed investors. The European Central Bank cut its growth forecasts in the week, and Japan's economy shrank for a third straight quarter in 2004.
Indicator scoreboard
EMU - January harmonized index of consumer prices dropped 0.6 percent and was up 1.9 percent when compared with last year. Monthly declines were in garment prices, which sank 7.7 percent, and package holidays which plummeted 13.7 percent. Tobacco prices soared 12.2 percent while transport fuels jumped 6.2 percent and heating oil, 19.5 percent. Core HICP, which excludes energy, food, alcohol and tobacco, was down 1 percent and up 1.6 percent on the year. The core excluding only energy and unprocessed food - the preferred ECB inflation measure - was down 0.8 percent but up 1.8 percent on the year. The flash harmonized index of consumer prices for February was also released last week. It was up 2 percent when compared with last year. The flash estimate does not contain any detailed information and is based on just a few country results. The full report will be available mid-March.
February seasonally adjusted manufacturing purchasing managers survey was unchanged at 51.9. An index level above 50 signals expansion while a reading below, contraction. Faster growth in France and Italy offset slower growth in Germany and Spain. According to NTC, the research firm that compiles the indexes, the strength of the euro is creating problems and hitting export performance.
February seasonally adjusted services purchasing managers survey reading was down to 53 from January's 53.4 reading. With the index remaining above the 50.0 no-change level, an expansion of activity was signaled for the twentieth successive month. Performance varied markedly by country. Growth accelerated in France and Spain, reaching eight and four-month highs respectively, with France seeing by far the strongest expansion of all countries. But growth slowed in Germany, dropping to near-stagnation and the slowest since the current upturn began in August 2003 and weakened to a twenty-month low in Italy.
January producer price index was up 0.6 percent and 3.9 percent when compared with last year. Energy prices rebounded 1.6 percent after dropping by that amount in December. Excluding energy, the PPI was up 0.3 percent and 2.9 percent on the year.
Fourth quarter gross domestic product was up 0.2 percent and 1.6 percent when compared with the same quarter a year ago. Growth was tempered by net exports and inventories. However, private consumption growth improved from 0.1 percent in the third quarter to 0.5 percent in the fourth. However, domestic demand weakened, increasing by only 0.3 percent in the fourth quarter, down from an increase of 0.9 percent in the third. But this deceleration was largely due to lower inventories that masked strong improvements in private consumption and capital investment.
January seasonally adjusted unemployment rate was unchanged at 8.8 percent. Of the nine countries reporting January data, unemployment rate was higher in one, was down in one and unchanged in the rest. Spain continued to show the highest rate at 10.3 percent while Ireland showed the lowest at 4.3 percent. Eurostat estimated that 12.7 million men and women were unemployed in the eurozone.
January real workday and seasonally adjusted retail sales were up 0.3 percent but down 0.6 percent when compared with last year. Food, drink and tobacco retail sales were up 0.1 percent while non-food sales were up 0.6 percent. Much of the increase was due to a jump in German retail sales.
EU - February economic sentiment dropped to 98.8 from 100.2 in January. Industrial sentiment sank to minus 7 from January's minus 5 while consumer sentiment remained at the minus 13 level. Industrial, services, retail trade and construction were down.
Germany - February seasonally adjusted unemployment jumped by 161,000. Unemployment was up by 152,000 in the west and 9,000 in the east. This was a new post-war record largely on the continued impact of Hartz IV labor market reforms. The unemployment rates were up as well - to 11.7 percent for all of Germany from January's 11.4 percent; to 9.7 percent in the west from 9.3 percent; and 19.3 percent from 19.2 percent in the east. Under the Hartz IV labor reform law which took effect January 1, 2005, recipients of social welfare who are capable of working receive unemployment aid instead of welfare and thus appear in official labor market statistics.
January seasonally adjusted total retail sales were up 2.8 percent and 1 percent when compared with last year. Excluding autos and gasoline, sales were up 2.1 percent but down 0.4 percent on the year.
January real and seasonally adjusted manufacturing orders sank 3.4 percent but were up 4.7 percent when compared with last year. Domestic orders plummeted 7.1 percent while foreign orders were up 0.8 percent. Capital goods orders were down 7.8 percent after jumping 15.1 percent in the prior month. Domestic capital goods orders sank 7.3 percent, retracing nearly all of December's 8.4 percent increase. Foreign capital goods orders were up 0.3 percent after soaring 12.4 percent in December.
Italy - January producer price index jumped by 0.6 percent and was up 4.5 percent when compared with last year. The monthly increase stemmed from a 1.9 percent jump in energy prices. Excluding energy, the PPI was up 0.3 percent and 3.5 percent on the year. By product category, mineral prices jumped 1.8 percent while and wood prices climbed by 1.1 percent. Declines for leather goods, food, beverages & tobacco slightly offset the increases.
Britain - February Nationwide house price index was up 0.5 percent and 10.2 percent when compared with last year. This was the lowest level of growth since June 2001. The average selling price of a house was Stg152,879 up from Stg151,757 in January.
February Halifax house price index dropped 0.5 percent but was up 9.7 percent when compared with last year. On a three-month moving average basis, prices were up 12.1 percent when compared with the same three months a year ago.
Asia
Japan - January seasonally adjusted industrial production jumped 2.1 percent and was up 1.1 percent when compared with last year. Industries that contributed to the increase are chemicals (excl. drugs), transport equipment and information & communication electronics equipment. Products that contributed to the increase were large passenger cars, metal oxide semiconductor IC and drive, transmission & control parts.
January spending by households headed by wage earners soared 8.2 percent and 2.6 percent when compared with last year. Wage-earner household spending is an important gauge of personal consumption, which accounts for roughly 55 percent of Japan's gross domestic product. The propensity for wage earner households to consume, a ratio that measures the amount of disposable income that went to household spending, fell to 74.8 percent from an upwardly revised 77.4 percent in December.
January unemployment rate remained at 4.5 percent for the second month. The number of unemployed persons was 2.96 million, a decrease of 270,000 from the previous year. Employment was up by 470,000 jobs, the most since 1992. The number of employed persons was 62.61 million, an increase of 400,000 from the previous year. The participation rate was unchanged at 59.5 percent.
Australia - January merchandise trade deficit widened to A$2.72 billion ($2.1 billion) from a revised A$2.41 billion in December. Imports were up 1.7 percent and 13.8 percent on the year while exports slipped 0.4 percent and were up 8.4 percent on the year. Exports of rural goods, such as meat, wheat and wool, dropped 5 percent. Imports of consumer goods rose 10 percent. Imports of capital goods dropped 4 percent.
Fourth-quarter gross domestic product was up 0.1 percent and 1.5 percent when compared with the same quarter a year ago. Non-farm GDP grew by 0.2 percent on the quarter. The increase in GDP was driven by total private business investment and total final consumption expenditures. Offsetting these increases were net exports, inventories and private gross fixed capital formation on dwellings. The economy has contracted for just two quarters in the past 13� years.
Americas
Canada - Fourth quarter gross domestic product was up 0.4 percent and 3 percent when compared with the same quarter a year ago. Consumer spending was up 1 percent and 3.9 percent on the year. Fixed investment was up 2 percent and 6.7 percent on the year. Exports were down 0.9 percent but were up 3.6 percent on the year. Exports of machinery & equipment along with agricultural & fish exports were down on the quarter. However, service exports were up 0.8 percent. Corporate profits were up 1.5 percent for the second quarter in a row.
Bottom line
Last week was highlighted by the many central bank decisions and of course, the U.S. employment report. It was a heavy week in data internationally as well, with mixed results at best. Germany once again disappointed as unemployment continued to soar while manufacturing orders dropped. And the ECB revised its economic growth estimate lower. Australia barely grew but for very different reasons than those in Europe. In Australia, capacity constraints are negatively affecting growth.
Onward to the new week, which will give investors more time to digest last week's data, given the relatively light schedule listed below. Only the Bank of England meets. It is expected to keep their current 4.75 percent interest rate - at least for March.
Looking Ahead: March 7 through March 11, 2005
Stocks navigate oil slick