Monday, September 13, 2004
One out of four moves
Analysts were kept busy last week reading between the lines of four central bank statements. In the end, only the Bank of Canada had changed policy.
Reserve Bank of Australia on hold
The first to announce its decision was the Reserve Bank of Australia. The RBA kept its benchmark interest rate unchanged at 5.25 percent for a ninth month. But analysts expect rates to climb once the country's national election is over - scheduled for October 9th. Consumer confidence is growing and home lending increasing. The RBA increased rates in both November and December 2003.
Prime Minister John Howard called the election about 10 days ago. Howard is seeking a fourth term and is campaigning on national security and his economic record, which includes low interest rates (the 5.25 percent is relatively low for Australia). The economy expanded 4.1 percent in the second quarter from a year earlier, the fastest pace in two years.
When it leaves rates unchanged, the RBA doesn't release a statement explaining its decision. Howard is seeking a fourth term and is campaigning on national security and his economic record, which includes low interest rates. In its quarterly monetary policy statement published in July, the Bank said it would be "surprising" if interest rates didn't rise "at some stage in the current expansion" given a likely acceleration in inflation during 2005. But with inflation under control, the central bank was able to keep rates unchanged for now. Consumer prices, the key gauge of inflation, were up 2.5 percent in the second quarter from a year earlier and were within the RBA's inflation target range of between 2 percent and 3 percent.
Bank of Canada increases rates
As expected, the Bank of Canada increased its key overnight interest rate by 25 basis points to 2.25 percent. The rate had been 2 percent since April 13, 2004. Before this meeting the Bank had cut interest rates six times since April last year, each time by 25 basis points. The economy is growing faster and more sharply than most analysts and the Bank had expected. The Bank has projected the output gap will be closed by mid-2005. Inflationary pressures are rising as perhaps are inflationary expectations, based on surveys and financial market prices. Second quarter GDP grew at a 4.3 percent annualized pace - fastest in the Group of Seven industrialized nations. Already analysts are expecting similar interest rate moves in both October and December. The Bank has an inflation target range of 1 to 3 percent but focuses on the 2 percent midpoint. The Bank of Canada's preferred measure of inflation - core inflation which excludes eight volatile items - was 1.9 percent in July when compared with last year. The overall consumer price index was up 2.3 percent.
Bank of England leaves things unchanged - for now
As expected, the Bank of England left its key interest rate at 4.75 percent. There is mounting evidence that the long expected cooling of the housing market is finally underway. House prices have doubled since 1999, underpinning a boom in consumer spending that helped Britain post its longest period of growth in at least 200 years and led households to take on a record �1 trillion ($1.79 trillion) of debt. Easing house prices combined with recent soft industrial production and retail sales data have confirmed that rates are at or very near their peak.
The central bank has increased rates five times since November 2003 to crimp consumer spending and slow a real estate boom that has doubled the price of an average home in the past five years. With inflation well below the Bank's 2 percent target, it has the luxury of pausing to assess reactions by consumers. The British public is unusually sensitive to interest rate policy. The bank signaled last month that borrowing costs may be nearing a peak when it released its quarterly inflation and economic growth forecasts, which projected a slowdown in the economy next year. The benchmark rate compares with the Fed's 1.5 percent and the European Central Bank's 2 percent. As usual, the Bank gave no explanation for its actions. Bank of England watchers will have to wait two weeks until the meeting's minutes are released on September 22nd.
Bank of Japan continues anti-deflationary policy
The Bank of Japan's Monetary Policy Board left policy unchanged for an 11th consecutive time as widely expected by financial markets. The BoJ said it would keep its target on current account deposits at �30 to �35 trillion and added that it would continue to provide ample liquidity beyond that target to ensure market stability. The Bank has vowed to maintain its policy of quantitative easing until changes in the core consumer price index (year over year) stabilize above zero. The Bank made no mention of any additional liquidity measures it might take before the end of the first half of the fiscal year on September 30th when demand for funds often rises. The lack of action indicates the BoJ expects there is more than enough liquidity already washing through the financial system.
Global markets return from summer vacation
The financial markets returned from their summer break but did so rather tentatively. Investors idled, waiting to hear Fed Chairman Alan Greenspan's Budget Committee testimony on Wednesday. The tentativeness turned to lethargy and indecisiveness after they absorbed what Greenspan said. In a speech billed as the week's major economic event, the testimony did not provide fresh clues on the state of the U.S. economy. Greenspan said evidence indicated the economy had climbed out of its recent soft patch and was picking up steam. In currency markets, the dollar slipped against the euro after Greenspan underscored the prospects for low inflation. Some took the comment as a hint the Fed might not raise interest rates as steadily as expected. Little seemed to enthuse investors during the rest of the week, with equities trading in relatively narrow ranges. And now the season for company confession prior to the close of the third quarter will give investors something else to worry about. On the week, all of the indexes followed here except the FTSE were up despite investor hesitation.
Global Stock Market Recap
Europe and Britain
Waiting for Alan Greenspan's testimony on Wednesday provided the perfect excuse for British and European investors to sit on their hands early in the week. Corporate earnings from a wide range of sectors provided the impetus for much of the action that did take place. But it wasn't just Wednesday. The FTSE, DAX and CAC traded in very narrow ranges all week, with little to stir them. Some analysts say the outlook for stocks isn't very buoyant against the prospect of declining profit growth in coming quarters. In addition, terrorism, record oil prices, higher interest rates and a possible slowdown in the U.S. economy appear to be curbing demand.
The European Central Bank said "strong vigilance" is needed to ensure that inflation slows below 2 percent next year as an economic recovery strengthens and oil prices surge. Prices of interest rate futures are anticipating the central bank to raise borrowing costs as early as the end of the year.
Asia/Pacific
The Nikkei and Topix started the week on an upbeat note with the Nikkei having its biggest advance since June after a government report showed electronics manufacturers increased investment to meet rising global demand for their products. Companies boosted equipment and machinery spending by 11 percent in the second quarter according to a Ministry of Finance report. These data are incorporated in the GDP data and led in turn to the assumption that the revised second quarter GDP data expected on Friday would be revised upward. In fact, the data were revised downward, leading to declines in equities and the yen. Other disappointing data during the week also dampened investor enthusiasm. Machine orders dropped 11.3 percent in July - the biggest drop in three years. These domestic disappointments combined with Greenspan's comments that failed to boost confidence in the U.S. economy added to the downward pressure. Despite the host of negatives all six indexes followed here were up on the week.
Foreign investors were net buyers of Japanese stocks for the sixth straight week in the week ended September 3rd on the Tokyo, Osaka and Nagoya exchanges. Foreigners bought a net �178.92 billion in the week, marking the biggest volume of net buying since the week ended June 25th. Foreign investors purchased a net �168.88 billion in the previous week. Foreigners accounted for �1.740 trillion of purchases against �1.562 trillion of sales last week. Among local investors, individuals sold a net �82.85 billion while investment trusts bought a net �22.15 billion.
Currencies
The dollar treaded water early in the week as traders awaited Fed Chairman Alan Greenspan's comments on economic conditions. Then the dollar fell as traders viewed his remarks as unexpectedly pessimistic. Greenspan's text dwelled on both the dangers of high budget deficits and of the uncertainties stemming from higher energy prices and the effects on the economy. Regarding oil, Greenspan said the "outlook for oil prices remains uncertain" and "future balances between supply and demand (for oil) will remain precarious."
The dollar fell against the euro for a fifth day on Friday after an unexpected drop in producer prices fueled speculation the Federal Reserve would slow the pace of interest rate increases. Friday's declines left the dollar headed for its biggest weekly loss against the euro in more than a month. The U.S. currency rose in July on expectations higher interest rates would lure international investors to U.S. financial assets. The yen dropped after the downward revision of Japanese GDP stoked concern that the economic recovery could be faltering. But it reversed direction after the U.S. PPI was released. For the week, the dollar was down against both the yen and euro.
Indicator scoreboard
EMU - Second quarter gross domestic product was up 0.5 percent and 1.9 percent when compared with the same quarter last year. Domestic demand continued to be weak, barely edging up 0.1 percent on the quarter. Gross fixed capital investment also edged up 0.1 percent after declining 0.2 percent in the first quarter. The EMU continues to rely on exports for growth. Exports jumped 3.7 percent while imports increased 2.9 percent.
Germany - July seasonally adjusted manufacturing orders jumped 3 percent and soared 7.4 percent when compared with last year. Foreign orders were up 5.2 percent while domestic orders were up only 1 percent. All orders categories were up with investment goods orders jumping 4.5 percent, reversing most of June's 4.8 percent drop. The July gain was due mostly to foreign demand, up 7.6 percent while domestic demand rose 0.9 percent. Foreign demand also dominated the increase in consumer goods orders which were up 3.1 percent after sinking 2.6 percent in the prior month. West German orders were up 3.2 percent while in the east, orders were up only 0.6 percent.
July seasonally adjusted industrial output was up 1.6 percent and 2.2 percent when compared with last year. All production categories were up. Manufacturing output was up 1.8 percent and 3.3 percent on the year. Within manufacturing, durable consumer goods production soared 6.8 percent and 2.6 percent on the year. Excluding construction, industrial output was up 1.7 percent and 3.2 percent on the year.
July seasonally adjusted merchandise trade surplus was �12.8 billion, down from June's surplus of �13.4 billion. Exports were up 3.6 percent while imports jumped 6 percent.
Britain - July industrial production was down 0.3 percent but inched up 0.1 percent when compared with last year. Manufacturing output was down 0.2 percent but up 0.9 percent on the year. Output was lower for both pharmaceuticals, down 8.3 percent, and beer, down 11.1 percent. National Statistics said the slump in beer sales was largely due to the Euro 2004 football tournament. This inflated beer production in June which then fell back sharply in July.
July merchandise trade deficit increased to Stg5.159 billion from Stg5.056 billion in June. National Statistics said the deterioration in the oil balance was almost entirely responsible for the widening of the July goods trade gap. The oil balance sank to a deficit of Stg61 million from a surplus of Stg61 million in June, the largest deficit since January 1991. Goods imports jumped 1.6 percent while exports were up 1.4 percent.
Asia
Australia - August employment declined by 6,600 jobs - the third drop in four months - after gaining 15,200 in July. The unemployment rate was unchanged at 5.7 percent. The employment decline was centered in part time jobs, which declined by 14,800. Full time employment rose 8,100.
Japan - Second quarter gross domestic product was up 0.3 percent and 4.2 percent when compared with the same quarter in 2003. The data were a downward revision from the initial estimates of 0.4 percent and 4.5 percent on the year.
Americas
Canada - August employment was down by 7,000 jobs. Part time jobs sank by 15,400 jobs, more than offsetting the 15,400 gain in full time positions. The unemployment rate stayed steady at its three-year low of 7.2 percent. The public sector lost 21,400 jobs while private sector employment was up 14,100. Jobs were down by 20,700 in the manufacturing sector - offsetting July's gains. Accommodation and food services sector lost 17,300 jobs and educational services lost 28,700 jobs. Sectors that registered significant job gains were finance, insurance, real estate and leasing; and information, culture and recreation; and healthcare and social assistance.
July merchandise trade surplus eased to C$6.2 billion from C$7.5 billion in June. Exports halted a string of five consecutive monthly increases and declined 1.2 percent. Imports jumped 2.8 percent. Exports to the United States fell by 1.2 percent while imports from the U.S. jumped 4.1 percent. This resulted in a C$1.2 billion decline in Canada's trade surplus with the United States to C$8.8 billion. While the United States remains Canada's dominant trading partner, the share of goods destined for the U.S. has declined from a high of 85 percent just two years ago to 81 percent in July. For example, exports to China have expanded by 58 percent in the first seven months of 2004 compared with 2003. This makes China the fourth most common destination for exports after the United States, Japan and the United Kingdom.
Bottom line
The outcome of the Bank of England and Reserve Bank of Australia monetary policy meetings left investors questioning what will be next for monetary policy. Investors in both countries think the banks will resume interest rate increases - but when and by how much has yet to be resolved. The two have the highest rates, 4.75 percent and 5.25 percent, of the central banks covered here. Bank of Canada followers already assume rates will continue to climb at the next couple of meetings. But in Japan, it looks as though the status quo of zero interest rates will continue for the foreseeable future, especially now with the strength and resiliency of growth being called into question.
Looking Ahead: September 13 through September 17, 2004
Busy week for central bank watchers