Monday, July 12, 2004
Last Week's Highlights
Both the Reserve Bank of Australia and the Bank of England left their key interest rates unchanged at 5.25 percent and 4.5 percent, respectively. After two rate increases at the end of 2003, the Reserve Bank has left rates unchanged for seven months given a slow housing market and a dip in inflation to a four-year low. Nevertheless, signs the economy is rebounding have spurred speculation that rates will rise early next year. When rates are kept unchanged, the Bank doesn't release a statement explaining its decision. But the Bank will release its quarterly monetary policy statement on August 9th. The Australian dollar has gained almost 5 percent over the past two weeks on expectations for higher rates. Retail sales are up and exports jumped to a 16-month high. Consumer and business credit had its biggest annual increase in 14 years. Analysts say a rate increase is unlikely before an election that Prime Minister John Howard has said he will call in the second half of this year.
Following back-to-back increases in May and June, the Bank of England left its interest rate at 4.5 percent amid signs that four increases since November are beginning to cool consumer borrowing and the housing market. The Bank will be publishing its new quarterly forecast in mid-August and most expect they will wait until then before making another interest rate move. The Bank of England was the first of the world's major central banks to raise interest rates. The current 4.5 percent rate is considered mildly stimulative and the long term neutral rate is thought to be between 5 and 5.5 percent. Futures markets also suggest interest rates will rise.
Global Markets
Now that the second quarter has ended, investors are naturally shifting their focus toward earnings. Investor expectations were dashed early on by a couple of disappointments while some analysts hedged their bets and backed down from early rosy scenarios. Most indexes followed here were down on the week. Of the 13 indexes tracked here only the Australian All Ordinaries and Singapore Straits Times were up on the week.
But equity markets have been drifting lower over the last few weeks. The picture has been clouded by some weaker-than-expected economic data and a few disappointments in the corporate sector. And oil has moved back over $40 a barrel. This seems to have inspired some safe-haven buying, and government bond yields have dropped while gold has edged back over $400. This could be the normal summer lull, with investors unwilling to take risky positions especially ahead of their vacations. With heightened security and talk of possible terrorist attacks ahead of U.S. political conventions and the Olympic Games, it is easy to rationalize that equity markets will continue to drift until the fall when interest-rate policies and political uncertainty should become clearer.
Global Stock Market Recap
Europe and Britain
European and British stocks drifted lower last week after failing to find any really good news to stimulate buying. The FTSE declined for seven straight days until Thursday when the Bank of England announced that interest rates would be kept on hold. Earnings concerns are fueling pessimism among investors after results from Internet portal Yahoo and corporate software firm Siebel Systems proved soft. But other sectors, including utilities and drug makers, are typically more immune to cyclical swings.
Asia/Pacific
Stocks here got off to a dismal start last week as exporter shares were hit hard by the soft U.S. employment report of the prior week. Semiconductor shares such as Tokyo Electron also were down after some analysts said they thought that Intel Corp may miss its own revenue forecasts. In Japan there were other worries as well.
Japanese stocks fell on concern Prime Minister Junichiro Koizumi may lose support in upper house elections on July 11, disrupting his efforts to spur economic growth. Banks led declines. According to polls by the nation's four largest newspapers, Japan's ruling Liberal Democratic Party may lose seats in the upper house election because of voter anger over plans to make people pay more for state pensions. But on Friday, Japanese stocks broke their losing streak and rose, led by lenders after UFJ Holdings said it may accelerate the sale of its trust bank to Sumitomo Trust & Banking.
Analysts say that after six months of turbulence sparked by renewed outbreaks of bird flu and concerns over China's economy, Asian equity markets are likely to be subdued in the second half of this year as international investors remain reluctant to return to the region despite strong fundamentals in some of the region's markets. Uncertainty over the pace of the Fed's tightening cycle and worries that China's economy might suffer a hard landing are damping investors' enthusiasm for Asian stocks. Asian equities have traditionally been vulnerable to the global economic outlook due to the region's dependence on exports and its vulnerability to spikes in oil prices.
Currencies
The dollar dropped to a four-month low against the euro in the week. The primary cause for the drop appeared to be the recent spate of weaker-than-expected U.S. economic data. The data count against the dollar in two ways. First, they diminish the appeal of dollar-denominated assets for those who had been attracted by the country's rapid economic growth. Secondly, they lessen the need for the Federal Reserve to increase interest rates rapidly, reducing the appeal of the currency for those seeking higher yields. The dollar has lost ground pretty much across the board, with the yen, sterling, Swiss franc and the Canadian and Australian dollars all making progress.
This was the dollar's fourth straight weekly decline against the euro as analysts scaled back estimates for U.S. economic growth and for the pace of interest rate increases by the Federal Reserve. Terrorist warnings in the United States ahead of the November U.S. presidential election didn't help either. Recent weaker-than-expected data suggest a moderation in the growth rate, which in turn would lead to a less aggressive Fed. The smaller-than-expected jobs increase combined with the downward revision in first quarter growth are given as evidence. The worries about slower growth were compounded by a number of U.S. sales warnings and earnings disappointments.
The yen traded last week primarily on opinion poll results predicting the outcome of Sunday's upper house of parliament election. Currencies always suffer from political instability and in this case, stability means having Koizumi and the ruling party in place. Pressure eased on Japanese financial markets ahead of this weekend's upper house elections as the possibility of a disastrous loss by Koizumi's ruling party had already been factored in. A disappointing election result is the main risk for the yen, but the market appears to be looking beyond this to the likelihood that even without Koizumi, the slow but steady pace of reform would not change materially.
Indicator scoreboard
EMU - June services PMI eased to 55.3 from 55.8 in May. The indexes for Germany and France were down but Italy's index was up on the month. The new orders index was up but so too were input prices. Any reading above 50 denotes expansion. NTC Research compiles both the manufacturing and services PMIs. The combined industry and services index dropped to 55.6 from 56 in May.
May real workday and seasonally adjusted retail sales sank 1.3 percent and were down 0.7 percent when compared with last year. May's decline was the third in the last four months as consumer spending continues to be weak in the EMU. Sales of both food and non-food items were down on the month.
Germany - June seasonally adjusted unemployment was down by 1,000 for all of Germany. Unemployment dropped by 6,000 in the west but was up 5,000 in the east. The decline was due to government policies and not to a stronger economy. The unemployment rate remained at 10.5 percent. The unemployment rate remained at 8.4 percent in the west but inched up to 18.5 percent in the east. April seasonally adjusted employment sank by 28,000 jobs.
May manufacturing orders jumped 1.6 percent and 11.3 percent when compared with last year. A 4.1 percent rise in foreign orders more than offset a 0.6 percent decline in domestic orders. The increase was due to an above average volume of bulk orders. Capital goods orders were up 2.5 percent, again with a jump of 6.4 percent in foreign orders more than offsetting a 2.1 percent drop in domestic orders.
May seasonally adjusted industrial production was up 1.1 percent and 4.2 percent when compared with last year. Manufacturing production was up 1.2 percent. Energy and consumer goods output was up but construction output was down.
May seasonally adjusted merchandise trade surplus was �15.3 billion, up from �14.5 billion in April. Exports were up 3.9 percent while imports were up 3.4 percent.
Britain - May industrial production was up 0.5 percent and 1.2 percent when compared with last year. Manufacturing output was up 0.5 percent and 2.0 percent on the year. Output for transport equipment, basic metals and electrical and optical equipment were strong. However, output dropped for paper, printing and publishing, chemicals and man-made fibers.
May merchandise trade deficit was �4.621 billion, up from �4.595 billion in April. Exports were down 0.7 percent while imports were up 0.5 percent. Goods exports were up 1 percent while imports were up 0.9 percent.
Asia
Australia - June employment dropped by 3,800 jobs after declining 43,000 in May. The unemployment rate was 5.6 percent, up from 5.5 percent in May. The job loss was confined to part-time employment which was down by 43,100. However, full-time employment rebounded, up 39,300 jobs after dropping 44,600 in May. A total of 9.65 million people are employed in Australia.
Americas
Canada - June employment added 24,700 jobs, all of them full time. However, the unemployment rate inched up to 7.3 percent from 7.2 percent in the prior month due to an increase in those looking for work. Manufacturing employment edged down, however employment rose in wholesale and retail sales, construction and information, culture and recreation.
Bottom line
The Bank of Japan meets at the beginning of this week with its announcement due on Tuesday. No change in policy is anticipated. Board members remain under pressure to provide any kind of hint about the outlook for monetary policy amid growing expectations that the end of deflation is drawing closer. However, the monthly economic report will contain an interim outlook assessment that should attract attention. In January, the report concluded that economic developments remained within the BoJ's forecast range. This time, however, that kind of statement cannot be made so casually because the data have continued to surprise on the high side since the most recent outlook report in April.
On Monday, investors will focus on Sunday's election outcome in Japan where early returns indicate only a small setback for Prime Minister Koizumi's ruling Liberal Democratic Party. The LDP won at least 49 seats compared with 50 seats for the opposition Democratic Party, with two seats undecided at this writing. Koizumi set a goal for the LDP to secure 51 seats in Sunday's election.
Looking Ahead: July 12 through July 16, 2004
Concerns shift from interest rates