Monday, August 16, 2004
Bank of Japan and Fed do the expected
As expected the Bank of Japan's monetary policy board unanimously voted on Tuesday to hold monetary policy steady, judging its ultra-easy policy is still appropriate despite Japan's continued economic recovery. The Bank kept its target for liquidity, which is measured by commercial banks' account balances at the BoJ, in the �30 to �35 trillion range. They also left unchanged the BoJ's monthly purchases of government bonds at �1.2 trillion. The Bank vows to keep its quantitative easing policy in place until year over year changes in the core consumer price index stabilize above zero. June's core CPI remained at minus 0.1 percent for the second month.
The Federal Reserve - also as expected - increased the Fed funds rate by 25 basis points to 1.5 percent. In many respects it was an anti-climax for the investors which had pretty well already priced the increase into the market prior to the official announcement. The graph below shows the various Bank rates for the major central banks.
Crude oil concerns
Rising crude oil prices continue to be the focus of investors. Worries (not necessarily in order of importance) are a possible halt to Iraqi exports because of their vulnerability to sabotage, troubles in Russia as the Yukos saga unwinds, ongoing civil unrest in Nigeria, strike threats in Venezuela surrounding its national election on August 15th, worries about Saudi Arabia's true excess capacity, and weather disruptions in the Gulf of Mexico.
The threat to Iraqi exports comes amid renewed fears that Russia's largest oil producer might be forced to stop production as the government steps up efforts to collect billions of dollars in back taxes from Yukos. The company was dealt another setback Monday when government bailiffs froze the assets of its main production unit and a Moscow court upheld the government's seizure of another key unit.
Whether the political turmoil will subside after the Venezuelan election Sunday will be watched carefully. President Hugo Chavez gained support in opinion polls just prior to Sunday's recall vote. Some analysts think he will survive the referendum as he did a military coup in 2002 and an oil strike last year. A victory for Chavez would boost confidence in Venezuela, the world's fifth-largest supplier of oil and a member of OPEC, because Chavez has shown a commitment to paying interest on the nation's $22 billion foreign debt.
Global Markets
As the ides of August set in, vacations swim to the surface and take precedence over more mundane issues. But this year there are many distractions, including those ever-rising oil prices and generally negative sentiment. Stocks got clobbered last week as oil continued to surge to new highs despite the fact that OPEC is producing at the highest level in 25 years. On the week, only the Kospi posted a healthy gain while the Dow was barely up. The number of indexes followed here that are above their 2003 levels continues to shrink. Now only the All Ordinaries, Nikkei, Topix, Strait Times and Bolsa are in positive territory.
Global Stock Market Recap
Europe and Britain
European and British stocks continued to decline. The FTSE has traded throughout the year within a relatively narrow range. At its peak on April 27th it was 2.2 percent above year-end levels. It reached its lowest point less than a month ago - on July 26th - when it was down 4.2 percent. On the other hand, the CAC and DAX have had greater swings during the year. The DAX reached its peak back on January 23rd, up by 4.7 percent. It reached its nadir on August 13th, down 8 percent on the year. The CAC has been more stabile than the DAX. It peaked on April 23rd, up 7.1 percent, and hit its low only last Friday, down 2 percent on the year.
Last week, European stocks were down led by technology companies, cars and chemicals as oil futures reached a record in New York. Companies dependent on oil, whether in manufacturing like chemicals or in their final products like cars, were pummeled. Investors are expecting that higher oil prices are bound to slow economic growth. On the other hand, energy stocks are the second-best performing industry group since June. The London equity market dropped despite signs the housing boom is cooling and hints from the Bank of England that interest rates are near their peak.
Asia/Pacific
Tokyo stocks sank Friday after disappointing gross domestic product data kindled concerns over the economic recovery's strength. GDP grew only 0.4 percent in the second quarter - much lower than consensus estimates of 1 percent. The result indicated a drastic slowdown in the country's upturn which has been regarded as the best since the bubble burst in 1990. (See indicator scoreboard below). The cause, a lack of corporate spending growth, conflicts with separate data that have suggested business investment kept growing in the quarter. Japanese data have been known to be substantially revised.
Of the Asia/Pacific indexes followed here, four of six remain positive in 2004. The Hong Kong Hang Seng is not one of them, peaking on February 18th, up 10.8 percent, and sinking to its low on May 17th, down 12.8 percent. The index has recovered since then and is down only 1.7 percent in 2004.
The Kospi also is not one of them - rather it is the worst performer here. After reaching its high on April 23rd - when it was up 15.5 percent for the year - the index sank to 11.2 percent below year-end levels on August 2nd. South Korea has had its share of political uncertainty including impeachment proceedings against their president. However, the country is vulnerable to energy prices since it imports the bulk of its oil. There are also fears its exports will decline should growth slow elsewhere.
In a surprising move, the Bank of Korea reduced its key interest rate target by 25 basis points to 3.5 percent in an effort to help lower debt servicing costs. The easing move also could help the real estate market and moderate concerns over a hard landing of prices after the government earlier this year instituted heavy regulation of real estate transactions - which caused home purchases to plunge and put pressure on house prices. But analysts doubt that this week's rate cut action will be much help to the economy. Debt repayment pressures are concentrated among low-income consumers whose debt servicing burden looks unlikely to improve much unless financial institutions become less cautious in dealing with debtors in this category. The downside of the rate reduction is that it could accelerate capital flows out of South Korea to more favorable interest paying countries.
Currencies
The dollar took it on the chin Friday when the U.S. merchandise deficit soared to $55.8 billion. This heightened foreign exchange market fears of the U.S. twin deficits - fiscal and trade. Both have long been factors to investors here, pushing down the value of the dollar since its peak 2� years ago against the euro. The decline has been more pronounced against the euro than the yen because of Bank of Japan intervention to depress the yen's value in order to boost exports and growth.
Indicator scoreboard
EMU - Second quarter seasonally adjusted flash gross domestic product was up 0.5 percent and 2.0 percent when compared with last year. As with all flash estimates, no details were available. The flash estimate is based on early GDP estimates from Germany, France and Italy plus related indicators.
Germany - Second quarter seasonally and calendar adjusted flash gross domestic product was up 0.5 percent and 1.5 percent when compared with the same quarter a year ago. The increase was due mainly to net exports while domestic demand was nearly stagnate. The flash estimate does not contain sectoral detail, which will be available on August 24th.
June seasonally adjusted merchandise trade surplus dropped to �13.8 billion from �15.2 billion in May. Exports were down 5.8 percent while imports sank by 4.7 percent.
France - Second quarter flash gross domestic product was estimated to have increased between 0.8 and 0.9 percent on the quarter. Details on components will be released with the preliminary GDP estimate scheduled for August 20th.
June seasonally adjusted industrial output was up 0.2 percent and 2.3 percent when compared with June of last year. Manufacturing output climbed by 0.4 percent and 3.3 percent on the year. Auto output jumped 2.1 percent and 8 percent on the year. Consumer goods output rebounded in June, climbing 1.2 percent while semi-finished and capital goods both were down 0.2 percent. Excluding construction, output inched up 0.2 percent. Eurostat uses output excluding construction when calculating EMU output.
Italy - Second quarter preliminary real, seasonally and workday adjusted gross domestic product was up 0.3 percent and 1.1 percent when compared with the same quarter a year ago. ISTAT, the Italian statistical agency, provided no data on the components.
June seasonally and workday adjusted industrial production sank 0.7 percent and was down 0.1 percent when compared with last year. All major categories were down with the exception of intermediate goods, which were flat on the month. Consumer goods output plummeted 3.5 percent while investment goods output was down 0.8 percent. Fifteen product categories were down on the month.
Britain - July producer output prices inched up 0.1 percent and were up 2.5 percent when compared with last year. Core seasonally adjusted output prices were up 0.3 percent and 1.6 percent on the year. Input prices were up 0.6 percent and 3.2 percent on the year. Scrap metal prices contributed to the increases in both indexes.
July consumer price index was down 0.3 percent but climbed 1.4 percent when compared with last year. Unusually large furniture discounts in summer sales pushed the index down. Goods and food prices were down in contrast to those for the service sector which were up. The retail price index excluding mortgage interest payments was down 0.2 percent and up 2.2 percent on the year.
June global merchandise trade deficit climbed to Stg4.97 billion from Stg4.82 billion in May. The surplus from erratic items fell. The oil surplus shrank to Stg22 million from Stg206 million in May - the lowest since August 1991. The deficit in erratic items (ships, aircraft and precious stones) widened to Stg90 million from Stg14 million. Excluding oil and erratics, the trade deficit narrowed to Stg4.905 billion from Stg5.017 billion the previous month. Goods exports were up 1 percent but imports climbed by 1.5 percent.
July claimant count unemployment was down by 13,700, leaving the unemployment rate at 2.7 percent. The rate is the lowest since July 1975. The International Labour Organization unemployment count for the three months to June was up by 27,000, but the ILO unemployment rate remained at 4.8 percent. Employment was down by 53,000 when compared with the previous three months.
Average earnings for the three months to June were up 4.4 percent when compared with the same month a year ago. For the month of June, average earnings were up 4.3 percent. Excluding bonuses, average earnings inched up to 4.2 percent from 4.1 percent in the previous month. Manufacturing earnings were up 4.4 percent, private sector earnings were up 4.3 percent and services climbed by 4.1 percent.
Asia
Japan - Second quarter gross domestic product was up 0.4 percent and 4.4 percent when compared with the same quarter a year ago. On an annualized basis, GDP was up 1.7 percent. Consumer spending flagged and companies curbed investment. Business spending was unchanged from the first quarter while consumer spending rose 0.6 percent, nearly half of the revised 1.1 percent gain in the first quarter. The slowdown in business investment stemmed largely from reduced spending by construction companies. The GDP deflator, a measure of price changes used to calculate the difference between nominal and real gross domestic product, fell 2.6 percent from a year earlier - the 25th straight drop.
June revised industrial production dropped 1.2 percent but was up 7.4 percent when compared with last year. The June number was unchanged from the preliminary number of two weeks ago. However, the forecast for industrial production, which is also contained in this report, is more upbeat. Companies told the Ministry of Economy, Trade and Industry (METI) they plan to increase output an average 1.6 percent on the month in July and 1.0 percent in August.
Australia - July employment increased by 21,600 but the unemployment rate inched up to 5.7 percent from 5.6 percent in June as more people looked for work. All the new jobs were part time. The participation rate was 63.6 percent.
Americas
Canada - June merchandise trade surplus soared to C$8.626 billion from C$5.8 billion in May. Exports jumped 4.4 percent but imports dropped 3.7 percent. Canada's surplus with the United States rose to C$10.74 billion from C$9.04 billion in May. Exports to the U.S. were up 2.9 percent while imports from the U.S. sank 3.6 percent. Excluding the U.S., there was a deficit of C$2.1 billion. There was a surplus, however, with Japan of C$126 million.
June manufacturing shipments jumped 1.5 percent and were up 12 percent on the year. Fifteen of 21 industries, accounting for 82 percent of shipments, were up. June marked the seventh consecutive advance in shipments. Both new orders and unfilled orders also showed strength in June. New orders were up 1.7 percent and 12.9 percent on the year while unfilled orders were up 0.3 percent but were still down on the year by 0.4 percent.
Bottom line
In the coming week investors will be getting little new economic information or company earnings, putting crude price machinations into even brighter focus. The next couple of weeks are high vacation season so volumes will be thin, adding to potential volatility in the markets. Markets don't like uncertainty and there are many issues that will probably keep investors at bay. Continued uncertainty among oil producers and climbing oil prices won't go away soon. And concerns about terrorism continue to plague investors, especially in the run up to the U.S. presidential election in November.
Looking Ahead: August 16 through August 20, 2004
Crude depresses