Monday, March 1, 2004
Last Week's Highlights
The volume of the rhetoric has been intensifying over the past week as the next ECB policy meeting approaches. Government officials from France and Germany are weighing in - urging the ECB to lower interest rates now that inflation is at last showing signs of abating. There are other plus factors for a rate reduction as well - money supply growth is slowing and the euro is climbing. German Chancellor Gerhard Schroeder and French Prime Minister Jean-Pierre Raffarin both called for an interest rate reduction to support the nascent European economic recovery. Chancellor Schroeder personally took his plea for a stronger dollar to U.S. President Bush at his summit meeting last Friday. The euro dropped after the official statements.
But an ECB official repeated the bank's mantra once again - that monetary policy is appropriate and the eurozone's growth prospects are improving despite the strength of the euro. He also said that the U.S. and Asian recoveries were helping to boost EMU growth. The ECB is very defensive about any attempt by government officials to influence its decision-making process. The pressure on the politically independent central bank is a first test for ECB President Jean Claude Trichet. In the past, the ECB has responded to political pressure by delaying interest rate cuts.
The yen, however, strengthened against the dollar after Japanese industrial production jumped more than expected and consumer spending was up. One of the main drivers of yen strength over the past year has been strong nonresident demand for Japanese equities. Overseas investors have been net buyers of Japanese stocks for 40 of the past 45 weeks. However, he yen's strengthening could be limited by expectations of continued Bank of Japan intervention to protect the export-led recovery. February yen sales were about half January's level, which was a record �7.15 trillion.
Global Stock Markets
Global equity markets followed here had a wobbly week, with six indexes closing on the negative side and seven on the positive. All but two indexes - the DAX and Nasdaq - were higher in February. All 13 indexes are above their year-end 2003 close with the Bolsa and Hang Seng leading the gains. Overseas investors continued to follow U.S. economic data intently as they squared positions for the month's end and the onslaught of central bank meetings this week.
Global Stock Market Recap
Europe and Britain
British and European indexes followed here sank on the week after investors became cautious following a few disappointing earnings reports. The indexes also continue to be influenced by the direction of U.S. stock indexes. European exporters were up, buoyed by currency moves as the dollar's rally continued, leaving the euro near recent lows. This was particularly helpful to auto stocks, for example, as optimism about corporate profits from the U.S. is important to the bottom line.
Although the FTSE, DAX and CAC ended the week lower, the three are above their end of year levels. Only the DAX declined during February, giving back about 40 percent of January's gains. The FTSE on the other hand made up more than its January monthly loss and is above its 2003 year end level.
Asia/Pacific
Stocks were down at the beginning of the week but regained their footing after the dollar rallied against the yen with the Bank of Japan underlining the yen's decline. But shares were higher as exporters rallied following the yen's continued weakness. And on Friday, after the release of several positive economic indicators, the Nikkei and Topix continued to climb. With one month to go until the end of the fiscal year, equities will be dominated by moves to maximize year end gains.
The Hang Seng continues to outperform other Asia/Pacific stocks followed here. With the Hong Kong dollar pegged with the U.S. dollar, fluctuations in the currency markets have left Hong Kong relatively unaffected. The Kospi has also performed well in the first two months of the year.
Indicator scoreboard
EMU - December industrial orders jumped 5.7 percent and soared 13.3 percent when compared with last year. Transportation equipment orders were up 16.9 percent on the month while electrical and optical products were up 4.7 percent. However, textile products, metal products and machinery and equipment were down.
January M3 money supply was up 0.3 percent and 6.4 percent when compared with last year. For the three months ending in January, M3 was up 7 percent when compared with the same three months a year ago. The three month moving average is the ECB's favored measure of money supply growth. Although the rate of growth is slowing, M3 growth still remains considerably above the ECB's reference rate of 4.5 percent.
February flash harmonized index of consumer prices was up 1.6 percent when compared with last year. In January, the HICP was down 0.2 percent on the month and up 1.9 percent on the year. No details are available for flash estimates, however in January prices were down for clothing and vacations, offsetting jumps in health care, food, alcohol and tobacco prices. January core HICP, which excludes energy, food, alcohol and tobacco prices, was up 1.7 percent on the year. The preferred ECB measure, which excludes energy and unprocessed foods, was up 1.9 percent on the year. The ECB ceiling for inflation is 2 percent.
EU - February economic sentiment index remained at 96 - the same as in January. Improved consumer confidence, which inched up to minus 14 from minus 15, offset declines in construction and retail sectors. Industry confidence remained unchanged at minus 6. Economic sentiment was up in the Netherlands, Finland, Luxembourg, Germany and Spain. Sentiment in Ireland, France and Italy declined. Services sector sentiment, which is not included in the overall economic sentiment index, improved to plus 11 from plus 10 in January.
Germany - February Ifo Institute business sentiment index declined to 96.4 from 97.5 in January. This was the first monthly decline in the index since April 2003. Sentiment fell more in west Germany than in the east. Expectations were down to 100.4 from 102.9 in January. The strong euro hurt export expectations even though they remained positive. Current conditions inched up to 92.6 from 92.5 in January.
France - January seasonally and calendar adjusted consumer spending on manufactured goods jumped 2 percent and was up 2 percent when compared with January of last year. Clothing and household durables rebounded after plummeting in the prior two months. Sales of other manufactured goods also rebounded. However, auto sales sank after a robust sales month in December.
January unemployment rate slipped to 9.6 percent from 9.7 percent in the previous month. The number of unemployed was down 23,000. Tougher terms for jobless benefits went into effect in January and may have discouraged some of the unemployed from registering. Unemployment is measured according to the International Labour Organization definition which excludes those who did any work during the month.
January producer price index was up 0.3 percent and 0.2 percent when compared with last year. Core PPI, which excludes food and energy, was up 0.2 percent and 0.1 percent on the year. Energy prices were up 1 percent while food and agriculture prices increased by 0.3 percent.
Italy - December retail sales were up 0.4 percent and 1.8 percent when compared with last year. The increase on the year was due almost entirely to food sales.
January producer price index was up 0.2 percent and 0.3 percent when compared with last year. Excluding energy, the PPI was up 0.2 percent and 0.9 percent on the year. Capital goods prices were up 0.3 percent and 1 percent on the year while consumer prices were unchanged on the month but up 1.1 percent on the year.
Britain - Fourth quarter gross domestic product was up 0.9 percent and 2.8 percent when compared with the fourth quarter of 2002. Household expenditures were up 1.1 percent and 3.2 percent on the year. Government expenditures were up 1.9 percent and 3.4 percent on the year. Gross fixed capital formation was up 1.6 percent and 2.9 percent on the year. Total exports were up 1.8 percent and 3.2 percent on the year.
February Nationwide house price index jumped 3.1 percent and was up 17.1 percent when compared with February 2003. This was the fastest rate of growth since April 2002. The average property price was Stg138,730.
Asia
Japan - January seasonally adjusted merchandise trade surplus was �1,098.6 billion ($10.13 billion), down from �1,122.1 billion in December. Exports were up 0.9 percent while imports were up 1.8 percent. Highlighting Japan's growing reliance on China and other Asian nations as a market for Japanese goods, exports to Asia increased by 20.8 percent while imports from the region were up 4.3 percent. The trade surplus with the U.S. was up by 3.9 percent. Exports were down by 5.4 percent, but imports declined even more and were down 13.1 percent. The EU surplus expanded by 25.1 percent on an 11.2 percent jump in exports and a 6.6 percent increase in imports.
January seasonally adjusted spending by wage earners jumped by 4.2 percent and 3.4 percent when compared with the same month a year ago. Wage earner spending is an important gauge of personal consumption, which accounts for roughly 55 percent of gross domestic product. The seasonally adjusted propensity for wage earners to consume, a ratio that measures the amount of disposable income that went to household spending, rose 3.8 percent on the year in January after falling 3.2 percent in December.
January nationwide consumer price index slipped 0.2 percent and was down 0.3 percent when compared with last year. The core consumer price index, which excludes fresh food, was down 0.7 percent and dropped 0.1 percent from a year earlier. February Tokyo CPI was unchanged but slipped 0.2 percent on the year. The core CPI was down 0.1 percent and down 0.2 percent on the year.
January unemployment rate edged up to 5.0 percent from 4.9 percent in December. The number of people looking for work rose faster than the number of new jobs. Employment was up by 70,000 jobs and the size of the workforce grew by 110,000.
January seasonally adjusted industrial production jumped 3.4 percent and was up 5 percent when compared with a year earlier. Industrial shipments rose 2.5 percent while inventories declined 1.3 percent.
Americas
Canada - Fourth quarter gross domestic product was up 0.9 percent and 1.6 percent when compared with the same quarter a year ago. Exports provided the main source of strength. Consumer spending and government spending were flat. Manufacturing output was up 2 percent, the first increase in five quarters. This reflected a bounce back from reduced third quarter output as a result of the electricity blackout in Ontario, the reopening of international borders to some Canadian beef products, robust housing construction in both Canada and the United States and higher demand for motor vehicles parts from American motor vehicle assembly plants. Information and communications technologies manufacturers registered a significant 4.4 percent increase in output, only the second gain in the last six quarters.
December monthly gross domestic product in basic prices was up 0.4 percent and 2.1 percent when compared with last year. Higher manufacturing and mining output offset a slight decline in public utilities. The mining sector rose 1.2 percent following two months of decline. Consumer demand weakened with retailing activity down 1.0 percent primarily because of a slump in new car sales.
December retail sales plummeted 1.2 percent but managed to increase 0.6 percent when compared with last year. The decline was due to lower demand for motor vehicles and poor sales in general merchandise and clothing stores. Christmas shopping sank 2.6 percent in general merchandise stores, their largest monthly sales decline since September, 2001. Clothing store sales decreased but furniture sales were up.
Bottom line
There can be no doubt what investors will be focused on this week with four central banks to announce interest rate decisions. The week begins with the Bank of Canada's announcement on Tuesday. Analysts expect the Bank to ease by 25 basis points to 2.25 percent. The Canadian economy was weaker than expected in the fourth quarter. Buoyed for several years by a spendthrift consumer, analysts now suspect that consumer fatigue has set in as evidenced by declining auto sales and poor Christmas retail sales.
The Reserve Bank of Australia is expected to go in the opposite direction and increase their key interest rate by 25 basis points to 5.5 percent on Wednesday. Consumer spending continues to climb despite two previous 25 basis point increases. But evidence is mounting that the rate increases are beginning to take their toll on the soaring housing sector. A problem for the export driven economy is the ever rising Australian dollar, which is discouraging investment by these industries as their products become more expensive in their key U.S. market.
Although the Bank of England is expected to increase rates again, most analysts do not expect that to happen on Thursday. Domestic demand growth in the fourth quarter was the strongest since 1999. Consumer spending is accelerating despite sluggish income gains. However, the climbing value of the pound sterling has helped the Bank defer a further increase for now.
Last - the ECB. The economy continues to give little cause for optimism. However, press reports say that a discussion of a possible interest rate decline is on the Governing Council's agenda Thursday. The debate is bound to be lively, especially now that the HICP is estimated to be significantly below the ECB's 2 percent inflation ceiling at 1.6 percent on the year. Growth in the EMU, estimated to be 0.6 percent in the fourth quarter, is below the major industrial players. The ECB's own growth estimate is expected to be lowered at this meeting. Despite this, most analysts are expecting the usual from the ECB - no change in interest rates. The press conference that follows the meeting should be interesting.
Looking Ahead: March 1 through March 5, 2004
European rhetoric heats up