Monday, April 26, 2004
Key positions filled
At the IMF
The International Monetary Fund is expected to formalize the appointment of Rodrigo Rato, a former finance minister in Spain, as its new managing director. Rato would replace Horst K�hler, who resigned last month when he accepted a nomination to become Germany's president. The IMF met over the weekend for its annual spring conference with its sister organization, the World Bank. Although the appointment is formally made by the IMF's executive board, the post is traditionally a European choice while the World Bank position is a U.S. appointment. The executive board will meet to discuss the procedure for the appointment on Tuesday. A formal decision on the matter is expected soon after.
... and at Bundesbank
On Tuesday, the German government chose Axel Weber, a professor of international economics, as the president of the Bundesbank, one of Europe's most prominent economic roles. The appointment follows the resignation of Ernst Welteke in a scandal over corporate hospitality. Weber is a member of the panel of "wise men" who advise the government on economic policy and is a specialist in monetary policy and international finance. The appointment of an external candidate to the presidency of the central bank is highly unusual, running against the tradition that presidents are drawn from members of the executive board or from leaders of the bank's regional branches. Prime Minister Gerhard Schr�der is believed to have insisted that the new president should not come from within the Bundesbank. Officials said the government was annoyed by the scandal over Welteke and believed the bank needed an injection of new blood.
Meanwhile as May 1st looms
None of the 10 new European Union members will meet the deadline for translating the EU's 85,000-page rulebook into their national languages by the time they join. The embarrassing revelation means that some European laws will be unenforceable in national courts, because citizens could claim they did not understand them. The European Commission admitted the task of translating the vast tome of rules and regulations had proven too much for the new member states. European law, which accounts for over half of national legislation, covers a wide range of areas, including employment law, environmental legislation and regulations to ensure the free flow of goods in the single market. Previously it was thought that Malta, which has a dearth of qualified Maltese translators, was having the greatest problem, but the Commission says that even big countries such as Poland will not meet the deadline.
From May 1st all citizens from the new member states will enjoy full rights afforded by EU membership, but they could escape prosecution if a law had not been translated into their native tongue. The Commission says priority was given to translating the most important laws first, which plays down the risk of national courts throwing out cases because they could not understand the law.
G-7 foreign ministers meet in Washington
Investors were too busy monitoring earnings and economic data while also listening to numerous speakers saying essentially the same thing - U.S. interest rates would go up sometime sooner than later - to pay much attention to the buildup prior to the G-7 and IMF/World Bank meetings in Washington over the weekend. Foreign exchange market players were not looking for a defining statement from G-7 as they had in December when the dollar seemed to be sinking at a rapid pace. Now the dollar seems to have stabilized against both the euro and yen at more tolerable levels.
In their statement, the finance ministers said that the prospects for world economic growth have improved and economies were growing despite worries about rising oil prices and violence in the Middle East. The G-7 nations pledged to help rebuild Iraq, Afghanistan and the Palestinian areas and urged others to join in. But they warned that energy prices could affect growth.
Global Markets
Investors were inundated by Fed speak last week as Alan Greenspan testified twice before committees in Congress and a plethora of Fed board members and presidents recited a similar mantra - namely that interest rates are about to rise, although no one committed to a time table. But a string of good earnings reports and better-than-expected U.S. durable goods orders offset investor trepidations of the looming Fed interest rate increase. Although initially U.S. investors responded negatively to some of Alan Greenspan's congressional testimony particularly on Tuesday, the indexes for the most part rebounded and ended the week about even or higher. The exceptions were the Hang Seng and the Toronto S&P/TSX composite.
Global Stock Market Recap
Europe and Britain
The FTSE, DAX and CAC were up on the week despite what is being labeled "the Alan Greenspan effect" that sent stocks down on Wednesday, paralleling declines in New York. The Fed chairman signaled that the central bank may start increasing U.S. interest rates.
The one-year rally by European indexes was interrupted in March amid concern that spending and corporate profit growth might slow in the aftermath of terrorist attacks in Spain. But equities have resumed climbing and results from companies such as Microsoft have reinforced the upward trajectory. But on Friday, the indexes pared some gains after U.S. durable goods orders rose almost five times as fast as expected in March, fueling concerns that the Federal Reserve may raise interest rates and slow global profit growth.
Asia/Pacific
The Hang Seng Index fell for seven consecutive days - its longest losing stretch in a year - on concern that interest rates in China and the U.S. may increase sooner than anticipated. Hong Kong's borrowing costs, because of the currency peg, track those of the United States. However, the Hang Seng rebounded Friday on positive economic data. China's stock indexes fell to 12-week lows, led by travel and tourism-related companies after the health ministry reported a new suspected SARS case in Beijing.
The Nikkei and Topix recovered their positive footing and climbed despite disappointing economic data. (See indicator scoreboard below.) A positive for the equity markets was the growing strength of the U.S. dollar against the yen. Exporters, the mainstays of current economic growth, benefit in two ways from the weaker yen - more favorable prices for their exports to the U.S. and higher repatriated earnings from the U.S.
Currencies
The dollar benefited the most from Alan Greenspan's testimony and was up against virtually all major currencies. Strong data plus the inevitability of higher interest rates were pluses here but negatives in other markets.
The yen and the euro were not the only currencies that were down against the dollar. The Swiss franc and British pound sterling also weakened.
Both the Canadian and Australian dollars, after soaring against the U.S. dollar, have retreated from their February peaks. The Canadian dollar has weakened in part due to faltering growth tied in part to slowing exports and a narrowing interest rate premium after the Bank of Canada lowered rates for a fifth time earlier this month. The interest rate spread is now only 1 percent. The Australian dollar has weakened since rate increases by the Reserve Bank of Australia seem to be putting a crimp in the economy. The current RBA rate is 5.25 percent.
Indicator scoreboard
EMU - February industrial output was up 0.1 percent and 0.6 percent when compared with February of last year. All sectors were up on the month with the exception of capital and durable consumer goods. Output in Greece, Spain, Portugal, France and the Netherlands was up while it was down in Ireland, Germany and Belgium output. Italy was flat on the month.
February merchandise trade surplus was �5.4 billion, up from January's surplus of �1.8 billion. Exports were up 5.4 percent while imports were up only 1.4 percent on the month. When compared with last year, exports were up 1.6 percent while imports were up 1.3 percent.
February seasonally adjusted industrial orders were up 0.5 percent and 2.8 percent when compared with last year. Orders for textile products and transport equipment dropped but were offset by increased orders for electrical and optical products, chemicals, machinery and equipment and metal products.
Germany - March producer price index jumped 0.6 percent and was up 0.3 percent when compared with last year. Energy prices were up 0.4 percent but sank 1.1 percent on the year. Excluding energy, the PPI was up 0.6 percent and up 0.7 percent on the year.
April ZEW sentiment on the German economic outlook among financial experts sank to a reading of 49.7 from 57.6 in the previous month. The survey, conducted monthly by the Center for European Economic Research (ZEW) in Mannheim, surveyed 306 German financial experts between March 29th and April 19th. The report indicates that a growing number of experts expect a worsening of the German economy and that there are mounting concerns about the recovery's sustainability. Among the reasons for the deterioration in expectations are disappointing German data, including worse-than-expected numbers for industrial production and manufacturing orders, as well as the weakness of the domestic labor market and the sharp rise in the price of oil.
France - March consumer spending on manufactured goods dropped 1.4 percent but was up 1.8 percent when compared with last year. The decline was due to clothing sales that plummeted 10.1 percent. However, auto sales and household durable spending were up. Manufactured goods sales account for about 25 percent of total spending.
Italy - February industrial orders jumped 4.1 percent and 3.5 percent when compared with last year. This was a noticeable improvement over January's drop of 3.7 percent and 6.1 percent on the year. But many analysts are skeptical of the value of Italy's industrial orders data, which tend to be particularly volatile. Domestic orders were up 3.7 percent while foreign orders were up 3.4 percent. Domestic orders account for around 62 percent of the overall index, with foreign orders making up the rest. In presenting the data, ISTAT's own statisticians tend to place more emphasis on the year-on-year numbers.
February merchandise trade deficit with the rest of the world shrank to �788 million from January's �2,334 million deficit. The deficit in February 2003 was �425 million. However, exports were up 1.3 percent on the year while imports jumped 3 percent.
February retail sales were down 0.4 percent but crept up 0.1 percent when compared with last year. Food sales, which account for about 43 percent of total sales, were up but nonfood sales dropped on the year. ISTAT's retail sales data are not watched as closely as in other eurozone countries because they show little or no correlation with consumer spending data as published in quarterly GDP statistics.
Britain - March producer output prices were up 0.4 percent and 1.3 percent when compared with last year. Core output prices edged up 0.2 percent and 1.4 percent on the year. Producer input prices soared 1.9 percent and 0.9 percent on the year. Input prices reflected higher crude oil prices, which were up 12 percent on the month.
First quarter gross domestic product was up 0.6 percent and 3 percent when compared with the same quarter in 2003. Little detail is available with this preliminary estimate. However, services were up 0.8 percent and 2.9 percent on the year. This was offset by declining production output. National Statistics (NS) cautioned that because of the timing of Easter it had received fewer than normal responses, making it more likely that the data will be revised.
March retail sales volumes were up 0.6 percent and 6.4 percent when compared with last year. All major sectors were up including food, textiles, clothing and footwear, household goods.
March consumer price index inched up 0.2 percent and 1.1 percent when compared with March of 2003. This is considerably lower than the Bank of England's 2 percent target rate of inflation. If the BoE misses the inflation target by more than 1 percentage point on either side, monetary policy rules stipulate that the Bank has to write a letter to Chancellor of the Exchequer Gordon Brown. The retail price index excluding mortgage interest payments, the former inflation target measure, was up 0.3 percent and 2.1 percent on the year.
Asia
Japan - March seasonally adjusted merchandise trade surplus narrowed to �1.01 trillion ($9.27 billion) from �1.18 trillion in February as manufacturers imported more machinery in anticipation of rising sales and consumers boosted spending on goods made overseas. Imports rose 6.5 percent on the month while exports rose 1.3 percent.
February seasonally adjusted tertiary index plummeted 3.9 percent but was up 3.3 percent when compared with last year. The tertiary index reflects activity in utilities, transport and telecommunications, wholesale and retail, finance and insurance, real estate and services. The all industry index sank 3.6 percent but was up 3.5 percent on the year. The all industry index is used as a proxy for gross domestic product because it adds industrial production, construction, agriculture and government spending to the tertiary index.
Americas
Canada - March seasonally adjusted consumer price index was up 0.1 percent and 0.7 percent when compared with last year. The CPI excluding food and energy was up 0.2 percent and 1.2 percent on the year. The CPI excluding eight volatile components as defined by the Bank of Canada was up 0.3 percent and 1.3 percent on the year.
Bottom line
Now that Alan Greenspan has made it clear that the Fed is on the path toward higher interest rates, economic indicators will become more important than ever, as will every comment by every Fed official. The Fed chairman is focusing on labor costs, saying they are still falling and helping to keep inflation in check. But others are concerned over the bigger-than-expected jump in the March consumer price index, making it clear that the CPI is the indicator to watch to see if inflation is getting out of control. And many other Fed officials have made it clear they see a rate hike in the future, and the numbers on the economy will dictate when.
The Bank of Japan's policy board will announce forecasts for economic growth and prices in their biannual outlook on Wednesday. In October, the policy board members predicted that the economy would grow 2.5 percent and prices would decline 0.3 percent this fiscal year, which started April first.
Looking Ahead: April 26 through April 30, 2004
An avalanche of rhetoric