Monday, July 26, 2004
And now the Bank of Canada
On Tuesday, the Bank of Canada left its policy making interest rate at 2 percent, saying that increasing oil prices hadn't driven up its preferred measure of inflation fast enough to warrant an increase in borrowing costs - yet. The Bank's target rate remains at a 43-year low and 75 basis points higher than the equivalent U.S. Fed funds rate of 1.25 percent. The Canadian dollar fell on the news. At the same time, the Bank said it expects the economy to reach full capacity - the point at which the pace of expansion sparks inflation - sooner than expected and forecast a return to capacity by mid-2005. The central bank sets interest rates with the aim of keeping core inflation at about 2 percent and within a range of 1 to 3 percent.
On Thursday, the Bank of Canada's Monetary Policy Report left no doubt that it planned to increase interest rates. The Bank signaled that it's ready to raise interest rates as the quickening pace of economic growth, a rebound in exports, and higher oil prices set the stage for faster inflation. By cutting costs and boosting productivity, exporters have weathered the Canadian dollar's 21 percent gain since last year better than the central bank expected. With the likelihood international demand will fuel exports and domestic spending will remain strong, the economy is expected to expand at a 3.5 percent pace through mid-2005.
Global Markets
With few indicators on the schedule, Federal Reserve Chairman Alan Greenspan's semi-annual congressional testimony was the market moving event of the week. European and Asian/Pacific markets were closed and investors there had to wait until the next day to voice their approval, which they did on Wednesday. But then they had second thoughts as earnings reports continued to roll in and disappoint. In his remarks Greenspan posited a picture that was almost Panglossian - that it was (almost) the best of all possible worlds. Greenspan told Congress the expansion in the U.S. economy appeared to be "self-sustainable". He minimized the importance of recent weak consumer spending figures saying that the FOMC would be able to raise interest rates at a "measured" pace. And inflationary pressures, brought about by the surge in energy prices, would be short lived.
The constant drumbeat of news concerning terrorism - which has been an undercurrent to trading - continued to weigh down investors. The independent committee's report on the 9/11 World Trade Center attack was released in the week, while security concerns continued to increase surrounding the summer's two U.S. political conventions and subsequent November election.
The best performer of the week was the U.S. dollar. Currency traders rubbed their hands with glee as they anticipated higher interest rates here. On the week, all equity indexes followed here except the Hong Kong Hang Seng and the Toronto S&P/TSX Composite sank. Profit reports and concerns for growth in the second half of the year added to investor discontent.
Global Stock Market Recap
Europe and Britain
The DAX, CAC and FTSE continued to lose ground in July. For the FTSE, it was its fifth straight weekly loss - the longest run of declines in more than two years. The index was up on Friday though, thanks to a preliminary second quarter gross domestic product report that showed the British economy growing at a rapid pace (see indicator scoreboard below). In Europe, the DAX and CAC were weighed down by earnings concerns and energy prices that remain over the $40 mark. In part the concerns over energy supplies stem from the ongoing travails of Russia's largest oil producer, Yukos, which could reduce crude output from the country.
Asia/Pacific
Asian stock markets put in mixed performances on Friday as investors awaited a batch of corporate earnings reports due this week. Tokyo fell to a seven week closing low amid renewed weakness in the technology sector. Sony, NTT DoCoMo and Sharp are among the major companies due to publish their quarterly earnings figures next week. Investors seem to dismiss an upward appraisal of growth earlier in the week by the Cabinet Office.
Currencies
Fallout from Alan Greenspan's testimony reverberated in the currency markets. The U.S. dollar was up against all the major currencies including the euro and pound sterling as well as the Canadian and Australian dollars. The Australian dollar fell the most in seven weeks on expectations the nation's interest rate advantage over the United States will narrow more quickly than some expected. The Reserve Bank of Australia's key interest rate currently is 5.25 percent. Comments by Greenspan fueled speculation that the Fed will increase rates at each of its four remaining meetings this year bringing the U.S. rate to 2.25 percent. Fed interest rate increases make Australian assets less appealing to investors who fund purchases by borrowing cheaply here.
The yen was frail last week despite the growth upgrade from the Cabinet Office. Concerns about stubborn oil prices, which refuse to fall below $40 per barrel, are worrying Japanese investors. The declining Nikkei and Topix also contributed to the decline. When foreign investors shun Japanese stocks, the yen falls because of the lack of demand. With earnings season getting underway in Japan in earnest next week, disappointments elsewhere weighed on investors.
Indicator scoreboard
EMU - May seasonally adjusted industrial output was up 0.7 percent and 3.9 percent when compared with last year. Only durable consumer goods output was down. Output was up in Finland, Netherlands, Germany, Belgium, Portugal, Spain and France. Capital goods, energy, non-durable consumer goods and basic goods were up while consumer goods were unchanged on the month.
May seasonally adjusted industrial orders were down 0.3 percent but up 6.8 percent when compared with last year. Many categories including electronic & electrical equipment, metals & fabricated metal products, textile & and textile products and machinery & equipment orders were down on the month. Orders for chemicals and transportation equipment were up.
May non-seasonally adjusted merchandise trade surplus was �7.3 billion, up from April's �7 billion surplus. Unadjusted exports and imports jumped 8 percent and 5 percent respectively on the year. Seasonally adjusted May trade surplus was �9.2 billion. Both exports and imports retreated 0.8 percent on the month.
Germany - June producer prices were down 0.1 percent but up 1.5 percent when compared with last year. Energy prices were down 0.8 percent but up 2.9 percent on the year. Excluding energy, the PPI was up 0.1 percent and 1.3 percent on the year. Food producing and processing prices jumped 0.4 percent and 1.6 percent on the year. Capital goods prices were flat.
July ZEW economic expectations index jumped to 48.4 from 47.4 in June. The survey of 288 German financial experts is conducted by the Center for European Economic Research (ZEW) in Mannheim. The improvement in the expectations index was due to strong foreign demand for German products.
France - June consumer spending on manufactured goods soared 4.2 percent and 8.5 percent when compared with last year. All spending categories were up led by a 10 percent gain in household durable spending. Excluding cars, tires, automobile parts and medical products, spending was up 5 percent on the month.
Italy - May seasonally adjusted industrial orders were down 1.2 percent but were up 2.4 percent when compared with last year. Domestic orders were down 1.2 percent while foreign orders were down 1.4 percent. When compared with last year, five of 10 product sectors were up.
May world merchandise trade surplus was �294 million compared with a deficit of �65 million in April. When compared with last year both exports and imports were up, rising 7.9 percent and 5 percent respectively.
May seasonally adjusted retail sales were down 0.7 percent and 1 percent when compared with last year. On an unadjusted basis, sales plummeted 3.2 percent on the year. The decline was the result of dropping food sales and a negative calendar effect (the May 1 labour day holiday was on a Saturday, depriving shops of an important shopping day). ISTAT's retail sales data are not closely watched because they shows little or no correlation with consumer spending data as published in quarterly GDP statistics.
Britain - June retail sales volumes jumped 1.1 percent and 7.2 percent when compared with last year. Retail sales expanded at their fastest rate in six months as the Euro 2004 tournament boosted purchases of household goods sales, with consumers purchasing new TV sets and football-related attire. Retail sales have not declined for 13 successive months, the longest period of growth since records began in 1986. Slightly offsetting these gains was a fall in clothing sales, which was attributed to relatively poor weather in June.
Second quarter gross domestic product was up 0.9 percent and 3.7 percent on the year. Service sector was up 0.9 percent and 4 percent on the year. Manufacturing output increased but no data were available with this preliminary release.
Asia
Japan - June seasonally adjusted merchandise trade surplus dropped to �942.8 billion ($8.58 billion) from �1.28 trillion in May. Imports jumped 6 percent to the highest in at least eight years, and exports slid 1.9 percent. From a year earlier, the trade surplus widened to �1.15 trillion. Exports rose 19.4 percent and imports rose 15.3 percent.
May seasonally adjusted tertiary index dropped 1.0 percent but was up 1.0 percent when compared with last year. The tertiary index is a measure of demand for services and reflects the activity in 11 industries including utilities, real estate, transport, telecommunications, wholesale and retail, and finance and insurance. The all industry index was down 0.7 percent and was up 1.4 percent on the year. The all industry index combines the tertiary index reading with activity in the construction, agricultural and fisheries industries, the public sector and industrial output. The index is considered a close approximation of gross domestic product growth as measured by industrial and service sector output.
Bottom line
Earnings will continue to dominate investor attention in this last week of July. Trailing behind - but not that far - will be the expected onslaught of new U.S. data. With U.S. growth tapering off in June, analysts are eagerly awaiting their first look at July data over the next couple of weeks. Traders will also keep a wary eye on the ongoing dispute between the Russian government and their largest crude oil producer, Yukos. Any disruption of Russian oil deliveries could push crude prices even higher, which in turn could threaten growth.
Looking Ahead: July 26 through July 30, 2004
The summer of our discontent'