Monday, February 9, 2004
LAST WEEK'S HIGHLIGHTS
DIVERGENT VIEWS
If anyone thought that central bank policy decisions are influenced by other central banks, that idea was quickly dispelled last week. While the Reserve Bank of Australia, the European Central Bank and the Bank of Japan preferred to keep policy unchanged, the Bank of England raised interest rates while the Swedish Riksbank lowered theirs.
The Reserve Bank of Australia held their key interest rates at 5.25 percent after raising borrowing costs in November and December 2003. The rising Australian dollar has cut export profits for beef, coal and metal, and earlier rate increases have slowed the red hot housing market. Since December's rate increase, exports have dropped to a five-month low, the annual inflation rate is at its lowest in four years and building approvals are declining. That has allowed bank governor Ian Macfarlane to keep rates unchanged even as retail spending and business investment fuel growth. The central bank doesn't release a statement explaining its decision when rates are unchanged. The bank will provide its latest view on the economy when it publishes its quarterly statement on monetary policy on Monday, February 9th.
The Bank of Japan's Policy Board left monetary policy unchanged following a two-day meeting. The BOJ said the decision, which was widely expected by financial markets, was by a unanimous decision. The Bank said it would keep the target on current account deposits at �30 to �35 trillion, adding it would continue to provide ample liquidity beyond that target to ensure market stability. In addition, the BOJ said it would start accepting inflation indexed JGBs (Japanese government bonds) as eligible collateral to facilitate the Bank's money market operations.
The European Central Bank kept its key interest rate at 2 percent. ECB president Jean Claude Trichet made clear at his press conference following Thursday's Governing Council meeting that bank policy remains in neutral for the time being, but he also left room to maneuver if the euro were to spike or economic growth disappoint. If the euro exchange rate remains near current levels and the eurozone recovery gains pace as anticipated, the ECB is likely to leave rates unchanged for some time.
The Bank of England's Monetary Policy Committee, however, raised its policy making interest rate by 25 basis points to 4.0 percent as had been widely expected. The Bank of England referred to above-trend output growth, strong consumer spending and firm house prices in its statement accompanying the decision.
Sweden's Riksbank ended the week with a 25 basis point cut to 2.5 percent, a post-WWII low. The bank's statement was neutral, leaving watchers to debate whether it was in fact leaving the door open for yet more rate cuts.
The Group of Seven finance ministers and central bank leaders held their much anticipated meeting in Boca Raton Florida over the weekend. Their communiqu� wasn't materially different than in September with the exception of a slightly more pointed call for exchange rate flexibility that would aid the needed adjustments in the international financial system. The finance ministers also said they want to avoid "excess volatility". G-7 will be discussed in further detail in this week's Short Take.
GLOBAL STOCK MARKETS
Equities were mixed last week as earnings both satisfied and dissatisfied investor expectations. The U.S. employment report, as it usually does, also impacted investors' decisions. U.S. investors decided that the employment report reflected a steady improvement in the economy and posed no risk of an imminent Fed rate increase. European equities followed the U.S. and rose on Friday as well. The foreign exchange markets were not that sanguine about the lower-than-expected employment increase and the dollar sank on the news
GLOBAL STOCK MARKET RECAP
EUROPE AND BRITAIN
The London FTSE climbed above the 4,400 level to end the week in the black, influenced by Wall Street's positive spin on the U.S. employment situation report that fell short of market forecasts. The FTSE remained positive despite the expected Bank of England 25 basis point interest rate increase on Thursday. The European stock markets walked a narrow line in the days preceding the G-7 finance ministers' weekend meeting and Friday's U.S. employment report. However, on the week, both the CAC and DAX sagged.
ASIA/PACIFIC
Of the six indexes followed here, only Japanese stocks were down on the week. Further strengthening of the yen and nerves about a foreign exchange policy shift by the G-7 sent Tokyo stocks to their lowest level since Christmas. The Nikkei 225 and Topix sank for the second week as export-oriented stocks were hit by an increase in the yen against the dollar and worries that the G-7 might issue oblique criticism of Japanese currency intervention, which would send the yen even higher.
Japanese capital flows in the week ending January 30th showed that foreign investors continued to be heavy net buyers of Japanese stocks according to the Ministry of Finance. Foreign investors also continued as strong net buyers of Japanese bonds. Japanese investors were again small net sellers of foreign stocks, but continued as net buyers of foreign bonds. The data suggested net yen inflows of �25.2 billion in the period.
CURRENCIES
Analysts' big expectations for U.S. employment were once again dashed, and the euro soared on the less-than-forecast growth. But the dollar was under pressure earlier in the week on a combination of position-shifting ahead of G-7, the discovery of the poison ricin in U.S. Senate mail and concerns about the U.S. budget deficit. Analysts said the ricin discovery caused some jitters over the dollar as terrorism fears resurfaced. The Swiss franc, the most traditional of safe havens, had a correspondingly good day.
The dollar declined to a two-week low against the euro in New York trading as the smaller-than-forecast 112,000 job increase last month suggested that U.S. interest rates won't rise as soon as some investors had thought. Slow growth in the labor market may keep the Federal Reserve from raising its target lending rate from a four-decade low of 1 percent. The Fed funds rate is below all other major central bank rates with the exception of the Bank of Japan, giving investors less incentive to hold dollar-denominated debt. The dollar posted an 11th decline in 13 weeks versus the euro and a sixth decline in seven against the yen.
The G-7 meeting dominated market thinking. While European officials have been voluble about the dangers of a strong euro and pledged to maintain a united front at the meeting, Japanese officials have signaled their intent to continue intervening to weaken the yen. Moreover, market participants have interpreted a lack of comment by the U.S. as an indication of official tolerance for a weaker currency.
Indicator scoreboard
EMU - November real seasonally and workday adjusted retail sales plummeted 1.9 percent and were down 1.6 percent when compared with last year. All major sectors were down with the exception of pharmaceutical and medical goods.
January seasonally adjusted manufacturing PMI inched up to 52.5 from 52.4 in the previous month. An index reading over 50 signals manufacturing growth. German expansion stabilized while France picked up speed. Italy continues to grow even though its index reading declined on the month.
January seasonally adjusted services PMI increased to 57.3 from 56.6 in December. The major impetus stemmed from improved expectations and new business in most of the economies except Italy. The composite index for industry and services output rose to 56.2 from 55.8 in December.
December seasonally adjusted unemployment rate remained at 8.8 percent. Of the nine countries reporting December data, unemployment was unchanged in seven and declined in Ireland but increased in Austria. Spain continued to show the highest unemployment rate and Luxembourg the lowest. Eurostat estimated that in December 2003, 12.3 million people were unemployed in the eurozone.
December industrial producer prices slipped by 0.1 percent but were up 1.0 percent when compared with last year. Energy and non-durable consumer goods prices were down and the remaining categories remained flat on the month. Excluding energy, the PPI was unchanged on the month and increased 0.6 percent on the year.
January flash estimate of the harmonized index of consumer prices was up 2 percent when compared with last year. In order to compute the flash estimate, Eurostat uses early price information provided by Germany, Italy and - if available - by other member states, as well as information about energy prices.
Germany - December seasonally adjusted manufacturing orders jumped 1.2 percent and 6.5 percent when compared with last year. Foreign orders were up 3.3 percent while domestic orders were down 0.6 percent. A larger-than- usual number of big orders helped boost the December numbers. Consumer and investment goods orders were up but basic and semi-finished goods were down. West German manufacturing orders increased by 1.1 percent while east German climbed by 2.6 percent.
December seasonally adjusted industrial production was up 0.6 percent thanks to improved construction and manufacturing sector output. The December data use a new 2000 base year. East and west Germany regional data will no longer be published. Investment goods and energy output dropped. Industrial production excluding construction - the figure used by Eurostat in calculating eurozone industrial production - was up 0.6 percent and 3.5 percent when compared with last year.
January seasonally adjusted unemployment was down by 81,000 with respective declines of 46,000 and 35,000 in the west and east. The declines were due to new EU harmonized calculations that counted fewer Germans without a job. Using the old methodology, unemployment would have risen by 28,000. However, since the start of this year those enrolled in retraining programs are no longer officially counted as being unemployed. The unemployment rate for all of Germany slipped to 10.2 percent from 10.4 percent in December. The unemployment rate in the west slipped to 8.2 percent from 8.4 percent in the prior month while in the east, the rate was down to 17.8 percent from 18.2 percent in December.
Britain - January Halifax house price index was up 2.3 percent and 18.4 percent when compared with last year. For the three months to January, prices were up 16 percent when compared with the same three months a year ago. The Halifax said the low level of housing stock on the market had contributed to the strong upward pressure on house prices.
Asia
Australia - December seasonally adjusted merchandise trade deficit widened to the highest level in eight months - A$2.55 billion ($1.95 billion) from A$1.72 billion in November. Imports of consumer goods increased while rural exports declined. The rising dollar has cut into exporters' profits. Imports rose 5 percent while exports declined 2 percent.
December retail sales dropped 0.6 percent after climbing 1.1 percent in November. This was the first decline in a year, perhaps indicating that the Reserve Bank of Australia's interest rate increases are beginning to have an impact on consumer borrowing and spending. Spending at department stores fell 2.1 percent while sales of household goods dropped 1.7 percent. December sales were also impacted by mild weather, which dented sales of air conditioners. Retail sales may also have been weak in December after the rugby World Cup enhanced sales in November.
Americas
Canada - January employment was up by 14,900 and the unemployment rate remained unchanged at 7.4 percent. An increase of 47,000 full-time jobs was offset by a decline in part-time work by 32,000 jobs. The labor force participation rate slipped to 67.6 percent from its record of 67.7 percent in December. Employment increased by 19,000 in professional, scientific and technical services, and by 11,000 in information, culture and recreation. Manufacturing employment inched up by 4,800 jobs. Employment was down in accommodation & food services and construction, with both sectors likely to have been affected by bitterly cold weather in January.
BOTTOM LINE
After last week's plethora of central bank meetings and the buildup to the G-7 communiqu� on the weekend, this coming week will seem slow. Market players will be looking for guidance from the G-7 statement and find little new information despite its conciliatory nature. But it could, based on the call for less volatility, offer the dollar some respite from the relentless downward pressure. Japan and other Asian countries have no intention of curtailing their intervention, while Europe will continue to bear the brunt of the dollar's decline - but perhaps at a more manageable speed.
This week will also provide the first glimpse at fourth quarter GDP for Germany, France, Italy and the EMU as a whole. Expectations are that the data will confirm signs that these economies have begun their rebound back to positive growth.
Looking Ahead: February 9 through February 13, 2004
Central Banks go in all directions