Monday, June 7, 2004
OPEC raises quotas for now
OPEC agreed to increase oil output quotas by 2 million barrels per day in June in an effort to quell soaring crude oil prices. The quotas are scheduled to be raised by another 0.5 million barrels per day in August. In July, the organization will meet again to review the situation. OPEC accounts for about 39 percent of world oil production. Since June last year, oil prices have jumped about 30 percent as global demand, especially from China and the United States has soared at its fastest pace in 16 years. Geopolitical concerns, bottlenecks at domestic refineries, and speculative investment activity in crude futures markets have also contributed to higher prices. Concerns that Middle East oil fields are vulnerable to terrorist attacks have also hurt. Because OPEC members are already pumping above their proscribed levels, an OPEC increase in quotas may add only 800,000 to 1 million barrels of crude to the 80 million barrel-a-day world market according to Kuwait's minister. It is the largest production quota increase since November 1997 when the group added supplies as Asian economies slid into recession and weakened demand, sending prices down to $10 a barrel a year later.
According to analysts, the increase in quotas would leave most members except Saudi Arabia producing at their limits. For two decades OPEC has allocated production quotas to its members to limit output and regulate the market, decisions the group has no formal mechanism to enforce. Before then, the group, founded in 1960 in Baghdad, simply set prices. Although quotas represent an artificial number and rarely reflect true OPEC output, they offer a guideline for the organization to match supply to seasonal fluctuations in global oil demand. With most OPEC countries already producing at maximum capacity, only Saudi Arabia, Kuwait and the United Arab Emirates have the ability to boost production. These three countries say they could pump together another 2 million barrels per day if stretched to capacity. Oil industry sources say that OPEC has also discussed redistributing production quotas to align them more closely with actual production. Algeria, Libya and Nigeria have consistently produced well above their respective ceilings, while Indonesia and Venezuela have struggled to meet their targets.
RBA and ECB keep the status quo
Two central banks met and left their policy interest rates unchanged. The Reserve Bank of Australia left their key interest rate at 5.25 percent for the sixth straight month as last year's increases have slowed consumer spending and cooled the housing market. The bank last raised rates by 25 basis points in December to a three-year high following a similar increase in November. According to analysts, the slowdown in property lending that the RBA wanted is occurring as a result of these increases. The central bank doesn't release a statement when rates are left unchanged. The Australian dollar was little changed after the decision. The central bank is charged with keeping annual inflation between 2 and 3 percent. The annual inflation rate fell to a four-year low 2 percent in the first quarter.
The European Central Bank left its key interest rate at 2 percent to support an economic recovery in the EMU. This was despite the latest inflation reading, which soared above the bank's 2 percent limit to 2.5 percent thanks primarily to oil prices. Faster economic growth in the first quarter and accelerating expansion in manufacturing and services as noted by the PMI index readings for May have underpinned the ECB's forecast for a gradual recovery (see indicator scoreboard below.) Rising oil prices pose a risk to that outlook. By boosting inflation above 2 percent they could threaten to sap any revival in consumer spending. The ECB, after lowering rates seven times in two years, has kept borrowing costs at their lowest level since 1946.
ECB President Jean-Claude Trichet said at a press conference following the meeting that the economic recovery has strengthened and inflationary pressures have increased. According to the Bank's new forecasts, growth will range between 1.4 and 2 percent with inflation between 1.9 and 2.3 percent.
Global Markets
Surging oil prices combined with continued terrorism again suppressed investors' bullish tendencies last week. As a result, the week produced a decidedly mixed bag of results, with 5 of the 13 indexes followed here lower on the week. Four of the five decliners were in Asia while the fifth was Nasdaq. Investors continue to worry about energy, inflation and terrorism. Despite OPEC's decision to increase production quotas, investors are only too aware that Middle East production facilities, especially those in Saudi Arabia, have been increasingly targeted by terrorists. Oil prices seem to be the main driver of stock prices, at least in the short term. Higher energy prices mean that companies and consumers must spend more on heating and fuel, reducing cash available for goods such as computers and cars. Sales at phone and health care companies, so-called defensive stocks, may hold up as demand for their products isn't as closely tied to disposable income.
Global Stock Market Recap
Europe and Britain
Despite losses Tuesday, the CAC and DAX managed to increase last week on favorable economic news, especially from Germany. European stocks fell Tuesday, led by DaimlerChrysler AG, Royal Philips Electronics NV and British Airways Plc, on concern that record oil prices may stymie economic and profit growth. But overall, investors in Europe seemed to be less rattled than those in Asia while awaiting OPEC's production output decision. Because crude oil is priced in dollars, the exchange rate between the euro and the dollar matters - the stronger the euro against the dollar, the cheaper the price of crude. Based on improving prospects, the ECB lifted its growth forecasts for the second half of this year and in 2005.
Asia/Pacific
Trading was rocky for most Asian indexes followed here as investors waited to hear what OPEC would decide. Asian stocks fell when the week began, led by Cathay Pacific Airways Ltd. and China Airlines Corp., as crude oil futures climbed in Tokyo trading following a third terrorist attack this month against foreign workers in Saudi Arabia. Investors were briefly distracted by better domestic economic data in Japan. Then they reverted to their crude oil price watch.
But these worries were overtaken Friday by the usual anxiety that precedes the monthly U.S. employment situation report. With growth in many Asian economies export dependent, these data are a critical indicator of future domestic growth. Many Asian economies - and Japan especially - rely almost solely on imported crude. Higher prices and tighter supply could hinder the burgeoning economies by slowing growth. Japan is a special case, though, as higher energy prices could help put an end to the pernicious deflation that has lingered for years.
Currencies
The yen was down, but not because of anything that has to do with the United States for once. Rather it declined on worries that the Chinese economy will cool and not grow at its current breakneck pace. The yen fell against the dollar and euro after Japanese stocks declined and a Chinese official urged banks to curb lending to help cool the economy. China, which is Japan's second biggest export market, is trying to slow growth after the economy expanded 9.1 percent in 2003. Concern that the effort will hurt Japanese exports pushed the Nikkei down and dampened demand for the yen.
The dollar was extremely volatile in the wake of a better-than-expected U.S. employment situation report on Friday. Traders were initially gleeful before having second thoughts that pushed the dollar down. Regardless of how good the report was, at least two things continue to worry investors - the huge U.S. trade deficit and whether the Fed has waited too long to increase the Fed Funds rate.
Indicator scoreboard
EMU - First quarter gross domestic product was up 0.6 percent and 1.3 percent when compared with last year. Increased net exports and private household consumption more than offset slower growth in government consumption and anemic growth in gross fixed capital formation. On the quarter, domestic demand managed to climb 0.2 percent, significantly lower than the fourth quarter's 0.7 percent gain. Although private consumption was up, other components such as gross fixed capital investment were down as was government spending.
May seasonally adjusted manufacturing purchasing managers' survey climbed to 54.7 from 54 in the previous month. This was the ninth straight month of expansion. A reading over 50 signifies expansion. The higher the index above 50, the faster the pace of growth. Both new orders (thanks to export orders) and output accelerated their pace of growth. Input prices jumped thanks to oil and non-energy commodity prices. The index is prepared by NTC Research in Britain.
May services purchasing managers survey improved to 55.8 from 54.5 in the previous month. This was the tenth month of expansion in a row. However, rates of increase varied markedly. France recorded a substantial improvement in the rate of growth to show the strongest expansion, followed by Italy. Germany again recorded the weakest rate of expansion, despite recording a marginally stronger monthly increase in activity than in the previous two months. The composite output index, which measures the output of the combined manufacturing and service sectors, rose from 54.9 in April to 56.1 in May. The latest reading signaled an expansion of private sector output in the euro area for the tenth successive month and acceleration in the rate of growth for the second month running. The index is prepared by NTC Research in Britain.
April seasonally adjusted unemployment rate was unchanged from March at 9 percent. The March figure had been revised upward from 8.8 percent. The revisions were part of a normal update. Of the nine EMU states reporting data, unemployment was up in two while it was unchanged in seven. Spain continued to have the highest unemployment rate - 11.2 percent - while Luxembourg continued to have the lowest - 4.2 percent. Data for Greece and the Netherlands were not available. Italy reports unemployment only on a quarterly basis.
April industrial producer price index was up 0.4 percent and 1.4 percent when compared with last year. Energy prices were up 0.7 percent and 1.5 percent on the year. Excluding energy, the PPI was up 0.4 percent and 1.4 percent on the year. Intermediate goods prices, which include metals and other commodities, soared 0.8 percent and 2.2 percent on the year.
Germany - April retail sales jumped 2.5 percent but were down 2.2 percent when compared with last year. Retail sales excluding autos and gasoline stations were up 1 percent but dropped 1.6 percent on the year. Retail sales excluding autos only were up 0.6 percent but were down 1.6 percent on the year.
April manufacturing orders soared by 2.5 percent and 7.7 percent when compared with last year. Domestic orders were up 1.2 percent while foreign orders jumped by 3.8 percent. All categories were up on the month. Consumer goods orders were up by 6.8 percent in April, basic and semi-finished goods were up 3.4 percent and capital goods orders were up 0.8 percent.
Italy - April producer price index was up 0.5 percent and 1.7 percent when compared with last year. Intermediate goods, which contain most commodity prices, jumped 1.2 percent and 3.9 percent on the year. Excluding energy prices, the PPI was up 0.5 percent and 1.9 percent on the year.
Asia
Australia - April seasonally adjusted merchandise trade deficit narrowed to A$1.81 billion ($1.29 billion) from A$1.99 billion in March. Imports were up 3.4 percent while exports were up 5.8 percent. Exports of grain, coal and gold were up. Exports make up about 20 percent of the economy. Non-rural goods exports, which include gold, iron ore and fuel, increased 6 percent. Exports of rural goods jumped 13 percent. Imports of capital goods, which include machinery, vehicles and telecommunications equipment, increased 4 percent, while imports of consumer goods jumped 5 percent. April is the 24th straight monthly trade gap, the worst run of deficits since 33 months of shortfalls between December 1997 and August 2000. The trade balance has been in deficit because of drought and reduced demand from Australia's major trading partners in the past two years.
First quarter gross domestic product edged up 0.2 percent and was up 3.2 percent when compared with the first quarter of 2003. On a quarterly basis, this was the slowest rate of growth since the fourth quarter of 2002. Interest rate increases at the end of 2003 have dampened the housing boom that helped the economy expand for the past 13 quarters. The economy has expanded on an annual basis for more than 12 years. The chain price index, a measure of price changes in the economy, rose 1.4 percent in the first quarter. Household spending was up 1.2 percent while dwelling investment sank 1.3 percent. Business investment was down by 1.1 percent. Exports, however, jumped by 2.2 percent.
Americas
Canada - First quarter real gross domestic product was up 0.6 percent and 1.6 percent when compared with the same quarter in 2003. Growth was boosted by a resurgence of consumer spending and continued growth in exports. Renewed consumer spending and a pickup in the growth of business investment pushed domestic demand to 1.2 percent, twice the pace of fourth-quarter 2003. Exports continued to recover as a result of demand for energy products and machinery and equipment while imports were flat. The chain price index for GDP rose 1.2 percent, the fastest rate in four quarters. Excluding energy, the index was up 0.9 percent. Overall, the Canadian economy grew at an annualized 2.4 percent in the first quarter of 2004 compared with an annualized 4.4 percent in the United States.
May unemployment rate edged down to 7.2 percent from 7.3 percent in April, the lowest since July 2001. Employment jumped by 56,100 jobs. Full time employment was up by 37,200 jobs while part time employment climbed by 19,000 jobs. Employment was up by 32,900 jobs in the goods producing sector and up by 23,200 jobs in the services producing sector. Construction jobs jumped by 20,000 jobs.
Bottom line
While many analysts feel that the only direction for British interest rates is up, market players are split on whether the Bank of England's Monetary Policy Committee will act on Thursday. The housing market and consumer demand continues at a blistering pace. And Bank figures showed that mortgage lending soared to a new record in April, taking Britons' overall debt to its highest level yet. Personal debt levels hit �985 billion in May, a total that economists called "alarming". Coupled with anecdotal reports the manufacturing sector is continuing its recovery and the dominant service sector remains robust, Bank watchers said another rate increase is sure to come either next week or next month.
The Bank of Canada announces its rate decision on Tuesday and no change is expected. The Bank lowered its major policy interest rate to 2 percent on April 13th. Friday's strong employment report in Canada bolsters expectations that short term interest rates will rise soon. The employment report along with other recent economic indicators, are sending out upbeat economic signals. Analysts say that while the Bank is in no rush to reverse course, a rate increase by the fall looks increasingly likely.
Finally, the Group of Seven/Eight meets in Sea Island, Georgia for their annual summit. Though it seems that political events will be the focus of the meeting, market watchers will look carefully for any implications that could impact economic policy.
Looking Ahead: June 7 through June 11, 2004
Oil prices dominate market focus