Monday, June 21, 2004
Bank of Japan confirms economy is improving
After leaving its ultra-loose monetary policy unchanged at its meeting last week, the Bank of Japan gave its rosiest picture of the economy in a very long time, saying that increasing corporate profits were fueling jobs growth and domestic consumption. The BoJ's assessment came on the heels of recent economic reports that confirmed the economy is continuing to gain strength. The Bank's report is closely examined by BoJ watchers who are looking for any subtle changes in wording that might offer hints to possible interest rate policy adjustments.
Even though the Bank was more upbeat, Governor Toshihiko Fukui tried to dampen speculation that any tightening might be near. He said the bank would maintain its current monetary policy until there were signs that Japan's long battle with deflation was over. His comments helped stem a three-week rise in long-term interest rates. Traders and investors had been betting that stronger economic growth could lead the central bank to change its ultra-easy money policy. The Bank of Japan's key interest rate has been near zero for 2� years.
Global Markets
Equity traders are finding it difficult to assess the impact on their holdings of those looming Federal Reserve interest rate increases - or, for that matter, the size of the increases. They were somewhat mollified by Fed Chairman Alan Greenspan's confirmation hearing testimony when he sounded more dovish than some other FOMC members have sounded recently. However, the dollar, which had been rising on an anticipated jump in the Fed funds rate, retreated after the testimony and the record merchandise trade and current account deficit reports.
Global Stock Market Recap
Europe and Britain
All three indexes followed here had a poor start to the week on Monday. Despite investor concerns about the direction and the amount of the Fed's interest rate increase at month's end, stocks were up on the week in Britain and in France. However, the DAX could not recoup those losses. European stocks were up led by companies that depend on economic expansion for sales growth after Greenspan said inflation is "not likely to be a serious concern." The indexes tracked advances in Asia on optimism that the Fed might boost rates at a "measured" pace to stem inflation, rather than raising them as fast or as much as some investors feared.
Asia/Pacific
All Asian/Pacific indexes were down on the week with the exception of the Australian all ordinaries. Asian investors continue to worry about what the People's Bank of China might do on interest rates. Many - convinced that the PBC will raise rates as soon as July - sold stocks. Most Asian indexes, after reaching their peaks in early April, have fallen after the Chinese government clamped down on lending to industries, including real estate, steel and cement, to cool growth. Asian equity investors are hanging on every word from anyone associated with the PBC. For example, stocks rose when someone tied to the Bank said that China's efforts to slow growth were having some effect. Investors have also been focused on the Fed and the inevitability of higher rates in the United States. China and the U.S. are Asia's most important export customers, and slower growth in either will impact Asian economies.
Currencies
The dollar was ever sensitive to allusions to interest rate changes as well as to a record quarterly U.S. current account deficit. Currency traders have been worrying about the U.S. twin deficits for some time now, and Friday's deficit did nothing to ease their worries. A decline in net income flows and increased unilateral transfers abroad, neither of which appear in the monthly merchandise trade data, caught traders off guard. The record $144.9 billion first-quarter account deficit pushed the dollar down against the euro. An ever increasing gap between imports and exports adds to concern that more dollars will have to be converted to other currencies in coming months as the economy accelerates. Based on the quarterly figure, the U.S. must attract $1.6 billion a day from international investors to maintain the value of the dollar.
The yen was up for a second week against the dollar and the euro on speculation Japan's economic rebound will attract investors to assets denominated in the Japanese currency. Demand for the yen increased after Bank of Japan officials raised their growth assessment and Prime Minister Junichiro Koizumi said a recovery in consumer spending is beginning to bolster the economy. The yen was up on the week despite a decline in stocks. The yen also gained after China's central bank said the economy is slowing, suggesting interest rates might not have to go up.
Indicator scoreboard
EMU - May harmonized index of consumer prices was up 0.3 percent and 2.5 percent when compared with last year. Core HICP excluding energy, alcohol and tobacco was up 0.1 percent and 1.8 percent on the year. HICP excluding energy and unprocessed food - the preferred ECB core measure - was up 0.1 percent and 2.1 percent on the year. Only two states, Finland and the Netherlands, were below the target inflation rate of 2 percent.
April seasonally adjusted industrial output was up 0.2 percent and 1.6 percent when compared with last year. Increases in intermediate goods, capital goods and consumer durables were mostly offset by lower output of consumer nondurables and energy goods. Output in Germany and Italy was up but production in France, Spain and the Netherlands was down.
April merchandise trade surplus was �6 billion, down from a surplus of �10.8 billion in March. Exports sank 6.1 percent while imports were down 2.8 percent.
Germany - May producer price index was up 0.5 percent and 1.6 percent when compared with last year. Energy prices, which jumped 2 percent and 3.9 percent on the year, were responsible for most of the index's increase. Excluding energy, the PPI inched up 0.1 percent and 1 percent on the year. Basic and semi-finished goods prices were up 0.4 percent for the smallest gain since January. Consumer goods producer prices were down 0.2 percent but up 0.9 percent on the year.
Italy - April seasonally and workday adjusted industrial production was up 0.5 percent and 0.2 percent when compared with last year. Both consumer and investment goods were up 1.5 percent and 0.4 percent respectively. Intermediate and energy goods were also up on the month. Mineral extraction output soared 22.4 percent while food, drinks and tobacco as well as rubber and plastic products showed healthy increases. However gasoline refinery, leather & footwear and electricity, gas and water output were down.
Britain - May consumer price index jumped 0.4 percent and 1.5 percent when compared with last year. Both air fares and fuel prices were up. Food prices were down. The Bank of England's former inflation indicator - the retail price index less mortgage interest payments - was also up 0.4 percent on the month but soared 2.3 percent on the year.
May producer output prices were up 0.3 percent and 2.4 percent when compared with last year. Core output prices edged up 0.1 percent and 1.4 percent on the year. Input prices soared 1.6 percent and 5.3 percent on the year. A surge in petroleum product prices was the culprit. They were up 2.9 percent and 6.9 percent on the year. Crude oil prices soared 13.6 percent and 31.9 percent on the year. However, the jump was partially offset by declining prices of recovered secondary raw materials such as steel scrap.
May claimant count unemployment dropped by 12,000 and the claimant unemployment rate remained at 2.8 percent. The unemployment rate of 2.8 percent is the lowest since 1975, when the economy was rebounding from the 1973 oil shock. International Labour Organization unemployment for the three-month period of February through April was down by 9,000 from the previous three months. The ILO unemployment rate was 4.8 percent. For the three month period of February through April, employment gained 30,000 jobs from the previous three months.
Average earnings for the three months through April were up 4.3 percent when compared with the same three months a year ago. Excluding bonuses, average earnings were up 4.1 percent. For April, average earnings including bonuses were up 4.7 percent when compared with April of last year. Earnings growth is led by services companies, which showed an increase in average earnings including bonuses of 4.3 percent in the three months through April. Private-sector services pay growth was 4.4 percent. That compares with wage growth of 3.8 percent in manufacturing.
May retail sales volumes jumped 0.8 percent and were up 7.4 percent when compared with last year. Sales were boosted by warm weather clothing and outdoor activity goods. Non-food store sales were up 0.6 percent and 9.2 percent on the year while food stores sales were up a healthy 0.6 percent and 4.1 percent on the year.
Americas
Canada - April manufacturing shipments were up 0.5 percent and 7.0 percent when compared with last year. This was the fifth month in a row that shipments climbed. Durable goods shipments were up 1.1 percent thanks to gains in aerospace and computer manufacturing, coupled with strong demand and soaring prices for wood products and primary metals. Nondurable shipments slipped 0.2 percent. Fourteen of the 21 manufacturing industries, representing 82 percent of total shipments, posted increases. New orders jumped 2.4 percent and 11.6 percent on the year. Unfilled orders were up 2.6 percent but are still down 4 percent when compared with last year.
Bottom line
Amid squabbling, the 25 European Union members finally agreed on a new constitution, but failed to find a new head of the European Commission as Romano Prodi's five-year term draws to a close on November 1st. European Union leaders finally overcame differences about the balance of power and budget rules among other things. There will now be an EU president and foreign minister and they also agreed to strengthen the European Parliament. With economic growth lagging the U.S. for the 11th year in 12, unemployment at 9.1 percent, and the attacks in Madrid highlighting the threat of terrorism in Europe, the leaders were under pressure to try to restore confidence in the expanding union.
There will be little new economic news over the next few days, although things do pick up at week's end in Japan with release of new price data and in Germany with the Ifo survey. Investors will look at this week as the calm (though nervous) before the storm - the FOMC meeting is the following week as is an ECB meeting.
Looking Ahead: June 21 through June 25, 2004
Worrying about interest rates (cont'd)