Monday, March 8, 2004
Last Week's Highlights
Over-exuberant forecasts lead to disappointment yet again
Sooner or later the forecasts could be right and job growth in the U.S. will resume - except that didn't happen in February. Service employment gains were offset by losses in the goods producing sector, leaving the net change at a gain of 21,000 - the number of jobs created by government. Needless to say, the currency markets reacted negatively and the dollar sank against the euro, Canadian dollar, and the pound sterling, giving back most of the week's gains. The dollar had risen ahead of the report in anticipation of a large employment increase.
Central Banks do the expected
Of the four central banks that met last week, only the Bank of Canada changed its policy making interest rate. As expected, the Bank reduced its key interest rate for the fourth time since July, cutting it by 25 basis points to 2.25 percent to encourage domestic spending as a higher Canadian dollar is hampering exports. This narrows the spread with the 1 percent U.S. fed funds rate to 1.25 percent. The Bank said additional monetary stimulus is needed to support aggregate demand and to return inflation to its 2 percent target by the end of 2005. Its current core CPI is 1.2 percent when compared with last year - considerably below target.
The Bank is looking to stimulate domestic consumer and business spending, which must fill a void left by a three-year export slump. Consumers need help to keep buying after powering economic growth for three years with record home and automobile purchases. The Canadian dollar fell to $0.7469 after the announcement. Because the move was so widely expected, the Canadian dollar had already declined before the announcement.
The Reserve Bank of Australia chose to leave its policy rate at 5.25 percent, surprising some analysts. There was speculation that the RBA would increase rates for the third time in five months given Australia's recovery from last year's drought and the ever strengthening Australian dollar, which is reducing import price pressures. Analysts also expect the Bank to increase rates again in a month or two.
As expected, the Bank of England's Monetary Policy Committee left its key interest rate unchanged at 4 percent. The MPC increased rates by 25 basis points at both its November 6, 2003 and February 5, 2004 meetings. As usual, the Bank gave no explanation for its actions. Rather, Bank of England watchers will have to wait until the minutes of the meeting are released on March 17.
Also as expected, the European Central Bank Governing Council left its key interest rate at 2 percent. In doing so, they ignored cries of pain from elected officials over the euro's strength, especially in France and Germany. Growth in both France and Germany managed to creep upward in the fourth quarter, but worries abound about the recovery's viability, especially in light of the euro's strength. The ECB has an inflation ceiling of 2 percent. February flash harmonized index of consumer prices, its inflation gauge, registered a below target reading of 1.6 percent, giving the Bank room to lower rates. The ECB is covetous of its independence, and this isn't the first time that they have not acceded to political pressure. The lack of any policy change also was factored into foreign exchange markets so there was little reaction to the announcements by the Reserve Bank of Australia, Bank of England or European Central Bank.
Global Stock Markets
Only the high-flying Hang Seng, which had been the star performer of the indexes followed here, lost ground last week. But overall, equities treaded water albeit at high levels while awaiting central bank developments and, of course, the week's climax - the U.S. employment report on Friday. Investors initially responded to the disappointing employment data by selling stocks before they factored into the equation the likelihood that interest rates will remain low, which helped equities to pick up by day's end.
Global Stock Market Recap
Europe and Britain
European stocks retreated Friday after the disappointing U.S. employment report. Companies dependent on export sales declined, including Royal Philips Electronics NV and Volkswagen AG. European companies rely on U.S. sales for about 20 percent of corporate revenues. The indexes had risen on optimism that U.S. growth would boost exports and lift company profits in Europe. The dollar tumbled against the euro after the report as the possibility of a Federal Reserve interest rate increase later this year diminished. A weaker dollar erodes the value of European companies' sales in the U.S. However, despite the disappointing data and the non-action by the ECB, the FTSE, CAC and DAX were up on the week.
Asia/Pacific
Investors were in bed before the U.S. payroll data were released and it was probably just as well. But they will have the weekend to ponder their reactions on Monday after sizing up the oscillations in both European and American markets. Japanese stocks climbed to a 21 month high as further weakening of the yen drew investors toward exporters' stocks. Needless to say, exporters' stocks led the way higher as a recent weakening of the yen has raised their competitiveness and profitability overseas, just in time for the end of the Japanese fiscal year on March 31st.
Japan's stocks rose, with the Nikkei and Topix having their biggest weekly advances this year. Exporters such as Honda Motor Co. led gains after the yen fell against the dollar to its lowest level since November 2003, spurring optimism the value of their overseas sales may increase. The Nikkei 225 Stock Average climbed to 11,537.29, the highest since June 6, 2002. The Topix index climbed to 1,131.01, with automakers and computer-related shares accounting for about half of its advance. For the week, both the Nikkei and the Topix gained 4.5 percent. The Nikkei had the best week since the five days ended August 15th while for the Topix it was the biggest weekly advance since October 3rd. Overseas investors were net buyers of Japanese equities for a 10th week in 11 in the five days ended February 27th, according to the most recent figures from the Tokyo Stock Exchange.
Currencies
Once again it was a turbulent week in the currency markets. The dollar rallied against the euro and sterling on Tuesday after ISM and Challenger survey data hinted that the U.S. recovery was finally going to increase hiring. Attempts by German and French politicians to persuade (unsuccessfully) the ECB to weaken the euro by cutting interest rates also contributed to the dollar's rally against the euro. The ECB treasures its independence and has previously not acceded to political pressure. But on Friday, the dollar gave back its gains after the employment report disappointed. Traders had been betting that the Fed would increase interest rates as soon as employment began to grow. Higher interest rates would make U.S. investments more appealing to investors overseas.
And even though the dollar gained against the yen, it was a monetary assault by the Japanese that pushed the yen down. The Bank of Japan, acting at the behest of the Ministry of Finance, continues with its program of covert intervention. A decision by the Japanese parliament to release a further $359 billion to fund intervention in the market played its part, as did speculation that the BoJ had once again lowered its threshold for intervention and was selling yen at the �110.50 mark. Analysts think that authorities want the dollar back to the �115 level, where it was trading prior to the Dubai Group of Seven meeting in September 2003. Japan sold �10.5 trillion yen ($95.3 billion) in the two months ended February 26th to protect exporters, more than half the record amount spent last year.
The British pound had its biggest gain in six weeks against the dollar after the employment report lessened the chance the Federal Reserve will raise interest rates soon. The dollar had been gaining since last month partly on optimism U.S. employment growth is picking up, bringing closer the day the Fed raises its federal funds rate. A Fed rate hike would cut the premium British interest rates have over those in the U.S. and boost the allure of dollar deposits. The U.S. official overnight rate is 1 percent compared with 4 percent in Britain.
Indicator scoreboard
EMU - January seasonally adjusted unemployment rate remained at 8.8 percent. Of the nine EMU countries reporting January data, unemployment was unchanged in eight but was up in Belgium. Spain continued to have the highest unemployment rate while Luxembourg had the lowest. It's estimated that 12.3 million men and women were unemployed in the eurozone.
February Reuters seasonally adjusted manufacturing purchasing managers index remained at the same level as in January - 52.5. Output and new orders eased and layoffs picked up. Any level above 50 signals expansion, but below 50, signals contraction. The index improved in Germany, Spain and the Netherlands but eased in Italy, France, Britain and the EMU as well as in the United States.
February seasonally adjusted services purchasing managers index slipped to 56.2 from 57.3 in the previous month. Activity was down in Italy, Germany, France, Britain and the United States. News orders slowed and job losses accelerated. The EMU composite index for industry and services inched downward to 55.4 from 56.2 in January because of lagging new orders and bigger job losses.
January producer prices were up 0.2 percent and 0.3 percent when compared with last year. Energy prices were up 0.2 percent. Excluding energy the PPI was also up 0.2 percent.
Fourth quarter gross domestic product was up 0.3 percent and 0.6 percent when compared with the same quarter a year ago. Domestic demand more than offset a decline in exports. Consumption inched up 0.1 percent while gross fixed capital formation was up 0.6 percent. Government spending was up 0.6 percent.
January seasonally adjusted retail sales were up 2.4 percent and 0.6 percent when compared with last year. Food, drink and tobacco as well as non-food products were up on the month. January data were only available for four countries: retail sales in Spain, France and Portugal were up while Germany's year-on-year sales declined.
Germany - January retail sales were up 1.5 percent but were still down 1.0 percent when compared with last year. Excluding autos and gasoline stations, retail sales increased by 1.4 percent but declined 1.2 percent on the year.
February seasonally adjusted unemployment rate inched up to 10.3 percent from 10.2 percent in January despite statistical changes and job schemes aimed at reducing the number of unemployed. West German unemployment rate was up to 8.3 percent from 8.2 percent in the prior month while east Germany's rate was up to 18 percent from 17.9 percent in January. The number of unemployed rose by 26,000. Starting in January, around 80,000 participants in training programs were no longer counted as unemployed. The Labor Office has also encouraged unemployed people to set up their own businesses and retire early, thus reducing the number of jobless.
January seasonally adjusted manufacturing orders sank by 2.0 percent but were up 1.6 percent when compared with last year. Foreign orders dropped 2.8 percent and domestic orders were down 1.2 percent. Demand declined in all categories with the exception of domestic demand for basis goods. West German orders were down 2.3 percent while east German orders were up 1.2 percent.
Britain - February Halifax house price index jumped 1.6 percent and 17.9 percent when compared with last year. The two 25-basis-point Bank of England rate increases continue to have a muted impact on housing affordability. Low housing supply has added to the upward pressure on prices.
Asia/Pacific
Australia - January seasonally adjusted merchandise trade balance on trade in goods and services narrowed to a deficit of A$2.0 billion in January from a deficit of A$2.6 billion in December. Exports were up 4.6 percent while imports slipped 0.5 percent.
Fourth quarter gross domestic product was up 1.4 percent and jumped 4 percent when compared with last year. The economy has expanded for 12 straight quarters. Household spending increased 1.6 percent with housing investment gaining 3.3 percent. Business investment increased 3.5 percent and exports rose 3.3 percent.
Americas
Canada - January industrial product price index was up 0.4 percent but sank 3.6 percent when compared with last year. Petroleum and coal products jumped 5.4 percent while primary metal products such as nickel, silver, copper and lead increased by 2.3 percent. Motor vehicles and other transport equipment prices declined mainly as a result of the effect of the exchange rate. Prices were lower for pulp and paper products, meat, fish and dairy products and electrical and communication products.
January raw materials price index soared 2.4 percent but sank 7.4 percent when compared with last year. Higher crude oil prices, up 5.1 percent as a result of low inventories and colder temperatures, continue to push up prices of raw materials. Higher prices for non-ferrous metals, animals & animal products and ferrous materials also contributed to this increase. However, mineral fuel prices were down 11.8 percent on the year, with crude oil prices declining 13.7 percent.
In January, the U.S. dollar continued to weaken against the Canadian dollar, pushing down prices of commodities that are quoted in U.S. dollars, notably motor vehicles, lumber products, and pulp and paper products. As a result, the total IPPI excluding the effect of the exchange rate would have risen 0.8 percent instead of 0.4 percent. However, on the year, the influence of the dollar is much stronger. Consequently, the IPPI excluding the effect of the exchange rate would have increased 0.8 percent rather than declining 3.6 percent.
Bottom line
Now that the "other" central banks have concluded their meetings, investors will already be focusing on the FOMC meeting on March 16th. Analysts are revising their Fed action forecasts since Friday's employment report signaled that the labor market is still faltering. When will the Fed finally begin to raise interest rates' This question is crucial, especially with the presidential election looming in November. The Fed will want a window between whatever - if anything - they do and the election, to avoid looking political.
Analysts will also be paying close attention to the International Energy Agency's monthly report on oil supply, demand and inventories in light of ever-rising prices and OPEC's seeming indecision on its production quota for the second quarter. On Thursday, this week's Short Take will take a look at oil.
Looking Ahead: March 8 through March 12, 2004
U.S. employment travails continue