Monday, February 2, 2004
Last Week's Highlights
The Fed hasn't lost its clout with worldwide financial markets. It dropped four little words from its post-meeting statement and sent stock, bond and currency markets aflutter. In what had been an already choppy trading week, the removal of the phrase "for a considerable period" sent investors to the barricades and they dumped bonds, stocks and virtually all foreign currencies. The dollar jumped against the euro, yen, pound sterling and Swiss franc as analysts - who were caught off guard by the change in wording - scrambled to guess when the Fed would begin to raise up interest rates, election year or not, from the bargain basement floor.
Of key interest to investors are interest rate differentials between countries. And now that the four little words have been removed, investors expect the Fed to eventually increase U.S. interest rates. This would make investments in non-U.S. countries less attractive and perhaps weaken U.S. demand for their exports. Already the impact of this thinking has sent some currencies down from long-term highs against the dollar. For example, the Australian dollar had its biggest weekly loss in almost six months on concern the yield advantage Australia holds over the U.S. may shrink. The Reserve Bank of Australia's policy interest rate is currently 5.25 percent - 4.25 percent higher than the Fed's rate.
Global Markets
All 13 equity indexes followed here were down last week after rather impressive gains earlier in January. Only the all ordinaries and the FTSE were down on the month, with new year exuberance offset by end of month questions. The week was volatile as the Fed, breaking a rather humdrum run of so-what-else-is-new post-meeting statements, proved it can still move markets. And with most of the world still relying on U.S. growth to revive their moribund economies via export purchases, a perfectly sustainable annualized GDP growth rate of 4 percent panicked investors into selling equities and the dollar. Investors should remember that the advance release is based on thin data and is apt to be revised considerably next month.
Foreign exchange markets were volatile as investors tried to adjust to the new Fed position, such as it is. Fed policy makers have kept their Fed funds target at a 45-year low since June. The dollar rose as some traders bet that G-7 finance ministers would make comments at their weekend meeting to slow the dollar's decline. The market is now mainly focusing on the G-7 meeting and whether it will change the outlook for the dollar.
Global Stock Market Recap
Europe and Britain
European stocks staged a brief recovery on Friday with a triumphant Paris market debut by Illiad, the internet group, and an expected intensification of the takeover battle for control of Aventis, the French drugs group. But the FTSE, CAC and DAX ended the week on a negative note after U.S. markets failed to lead higher. European investors continue to trade on U.S. news despite some favorable economic news from Germany in the Ifo sentiment report. (See indicator scoreboard below.)
In London, equity markets finished a soft trading week at their lowest levels since mid-December after disappointing U.S. economic data cast a shadow over the day's trading. The FTSE lost 1.6 percent on the week. Gains crumbled away as investors focused on "weak" GDP data from the United States - GDP grew at an annualized 4 percent rate in the fourth quarter and below consensus estimates that centered at about 4.8 percent (The range of forecasts had been unusually wide, however.).
Asia/Pacific
Asian equity markets and bonds were lower in part on the Fed's change of statement. The change surprised analysts who had become used to hearing that the Fed would remain accommodative "for a considerable time". But Asian markets already had been falling as investors fretted about the impact of bird flu virus and potential delays to the economic recovery that could result.
Japanese capital flows in the week ending January 23rd showed foreign investors were again heavy net buyers of Japanese stocks according to data released by 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 returned as net buyers of foreign bonds.
Currencies
Uncertainties dog foreign exchange markets
Trading was choppy on foreign exchange markets as they focused on interest rate prospects and what the Group of Seven might say at the conclusion of their meeting on Saturday. Traders are looking to G-7 for direction. While there wasn't too much change on a weekly basis, intraday trading especially for the euro was like bungee jumping at times, especially after the conclusion of the Fed meeting on Wednesday. The Fed's change in statement blind-sided traders. The U.S. dollar gained on the Fed's statement but fell on the GDP number, while the euro gained on ECB verbal intervention. The ECB's 2 percent interest rate is double the Federal Reserve's comparable rate, enhancing the euro's appeal in short-term debt securities.
Demand for the yen was spurred by Japanese Finance Minister Sadakazu Tanigaki, who suggested that Japan may allow its currency to gain before the Group of Seven finance ministers meeting in Florida. Selling yen is intended to avert speculative market moves and excessive moves of foreign exchange rates. The Bank of Japan, at the behest of the Ministry of Finance, sold a record �20.1 trillion last year to protect the nation's export-led recovery, limiting the dollar's decline to 9.7 percent against the yen. The yen gained after the Ministry of Finance said foreign investors were net buyers of Japanese stocks for a fifth week and a 36th week out of the last 41. The Bank of Japan continues to intervene covertly at the request of the Ministry of Finance.
Japan spent a record �7,155 billion on currency intervention in January in an effort to stem the yen's rise against the dollar according to the finance ministry. That unprecedented intervention, which compared with a previous monthly record of �4,458 billion last September, underlines the extent to which Tokyo is prepared to fling money at stemming the yen's appreciation. Japan's two-year economic rebound has been largely export led, and government officials are nervous that a sharp rise in the currency could cut short the recovery before it spreads to the domestic sector. The official reason for intervention is to smooth out abrupt moves and to ward off speculators, not to buck market fundamentals. In spite of Tokyo's efforts, the yen rose to a three-year high against the dollar this week. Though Japanese industry is more and more demanding a halt in the yen's appreciation, exports do not seem to be suffering. In December, the trade surplus rose 41 percent even though the yen was 13 percent stronger against the dollar than it had been the year before.
Indicator scoreboard
EMU - December M3 money supply growth was up by 0.2 percent and 7.1 percent when compared with last year. The three month moving average ending in December was up by 7.6 percent when compared with the same three months in 2002. The ECB uses the moving average as its measure of money supply growth. The ECB's reference value for M3 money supply growth is 4.5 percent.
EU - January economic sentiment index rose to 95.8 from 95.6 in the previous month. Improved confidence in industrial and retail sectors helped boost the index. Industrial sentiment inched up to minus 7 from minus 8 in December while the retail sector improved to minus 11 from minus 13. Consumer sentiment was unchanged at minus 16. Sentiment in the services sector, which is not included in the overall economic sentiment index, fell to plus 10 from plus 11 in December.
Germany - January Ifo Institute west German business sentiment index rose to 97.4 from 96.9 in December. This was the index's ninth consecutive increase. The increase was due solely to a rise in current conditions which jumped to the highest level since July 2001 while expectations remained stable. Sentiment was up in the manufacturing and construction sectors and down in the retail and wholesale sectors. East German overall sentiment rose to 105.4 from 104.7 in December. Expectations increased, offsetting a drop in current conditions.
December retail sales including autos and gasoline stations dropped 1.8 percent and sank 3.7 percent when compared to last year. Excluding autos and gasoline stations, retail sales were down 3.3 percent and 3.8 percent on the year. Excluding only autos, sales shrank by 2.3 percent and 5.5 percent on the year.
France - December seasonally adjusted International Labour Organization unemployment was up by 11,000, pushing the unemployment rate to 9.7 percent from 9.6 percent in the preceding month. The ILO definition of unemployment excludes jobseekers who did any work during the month. New restrictions on unemployment benefits will eliminate nearly 200,000 jobless from the rolls in January and half a million or more over the next two years. In addition, last year's pension reform will allow thousands of long-time workers to retire early this year. If all their posts were filled by the unemployed, the jobless rate could decline by nearly a full percentage point, according to one estimate.
December producer price index edged down 0.1 percent but was up 0.4 percent when compared with December of last year. Excluding food and energy, the monthly change was also down 0.1 percent but the increase when compared with last year was 0.1 percent. Energy prices were down 0.5 percent and 1.0 percent on the year. Factory prices for semi-finished, capital goods and consumer goods prices were down on the month.
Italy - December producer price index slipped 0.1 percent and was up 0.8 percent when compared with last year. Excluding energy, the PPI was unchanged but was up 1.0 percent on the year. Energy prices were down 0.8 percent and dropped 1.4 percent on the year.
Britain - January Nationwide house price index was up 0.7 percent and 14.3 percent when compared with last year. Prices cooled from December's respective increases of 1.5 percent and 15.6 percent.
Asia
Japan - December seasonally adjusted merchandise trade surplus jumped to �1.12 trillion ($10.5 billion) from �1.02 trillion in November. Exports were up 1.6 percent while imports were down 0.6 percent. Exports measured by volume rose 12.6 percent in December, the sixth straight increase, and imports by volume rose 9.2 percent, the fourth increase. In 2003, the trade surplus rose 3.6 percent to �10.24 trillion. Imports rose 5 percent led by oil and related products.
December spending by wage earners sank 3.2 percent but was up 1.1 percent from a year earlier. Wage earner spending is an important gauge of personal consumption, which accounts for roughly 55 percent of gross domestic product.
January Tokyo consumer price index was down 0.5 percent and 0.5 percent when compared with last year. Tokyo core CPI, which excludes fresh food, was down 0.2 percent and 0.3 percent on the year. The pace of decline in Tokyo-area consumer prices is an early indicator of price trends for the rest of Japan. December nationwide CPI was up 0.1 percent but down 0.4 percent on the year. Nationwide core CPI was up 0.1 percent but unchanged on the year. The BoJ uses nationwide core CPI as its chief price indicator in setting monetary policy. The central bank has repeatedly said recent improvements in the CPI are temporary and it expects deflation to continue through next fiscal year, which starts April 1. Rising medical costs and taxes have slowed the decline in consumer prices since April.
December unemployment rate dropped to 4.9 percent from 5.2 percent in November. This is the first time since June 2001 that the unemployment rate has been below 5 percent.
Americas
Canada - November retail sales were down 0.3 percent but up 1.9 percent when compared with last year. Sales were pulled down by weaker motor vehicle sales. Excluding sales by motor and recreational vehicle dealers, the largest component of the automotive sector, retail sales were up 0.6 percent in November. Auto sector sales were down 1.8 percent while sales for motor and recreational vehicles sank 3.1 percent.
December industrial product price index (IPPI) was up 0.3 percent but down 3.4 percent when compared with December 2002. On a monthly basis, prices for primary metal products were up 2.3 percent, the result of higher prices for nickel, silver and gold. Motor vehicles and other transport equipment increased 0.5 percent, mainly due to exchange rate effects. Prices were higher for petroleum and coal products, electrical and communication products as well as meat, fish and dairy products. However, lumber and other wood product prices were down on the month. Decreasing prices for particleboard and softwood plywood were responsible for this drop.
December raw material price index (RMPI) was up 2.4 percent but plummeted 5.1 percent when compared with last year. Mineral fuels prices were responsible for more than half of the monthly increase. Crude oil prices jumped 4.3 percent on the month as a result of strong demand and low inventories. Higher prices for non-ferrous metals, animals and animal products, vegetable products as well as wood products also contributed to this increase.
In December, the value of the U.S. dollar strengthened against the Canadian dollar, pushing up 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 0.1 percent instead of 0.3 percent. On a 12-month basis, however, the influence of the dollar is much stronger. Consequently, the IPPI excluding the effect of the exchange rate would have increased 1.0 percent rather than declining 3.4 percent on the year.
November monthly gross domestic product was unchanged and up 1.5 when compared with last year. Production in the energy sector jumped 1.8 percent, the strongest rise since February 2001, reflecting higher production and exploration of natural gas. Colder than normal temperatures helped boost the output of electricity generators and natural gas distributors. The transportation sector was up as a result of increased air travel. The housing boom continues, as housing starts for single-family dwellings rose. In addition, higher output was reported by the health, education and government-administration sectors. These gains were offset by a sharp drop in diamond production, which reduced mining sector output. Fewer new motor vehicle sales resulted in lower activity in the retail sector. Wholesalers overall also reported reduced sales. A reduction in the number of long distance calls had a negative impact on telecommunication service providers. The arts and entertainment sector stumbled, reflecting fewer lottery ticket sales and lower attendance at sporting events. Industrial production (mining, utilities and manufacturing) remained unchanged, as higher utilities output was offset by a sharp reduction in the mining sector. The manufacturing sector maintained its production from October in spite of a strengthening Canadian dollar.
Bottom line
For those who parse central bank statements and actions, this week provides a bonanza. The Reserve Bank Australia begins the week with its meeting on Tuesday, but no announcement will be made until Wednesday. The Reserve Bank of New Zealand's surprise rate hike coupled with the Federal Reserve Bank's more upbeat tone this week could allow the RBA to raise its key rate by 25 basis points to 5.5 percent. But opinion is split whether the RBA will increase rates for what would be a third straight meeting - something they have not done previously.
Analysts think the odds are good for a 25 basis point rate increase by the Bank of England on Thursday. Unemployment remains at record lows while growth, even in the much maligned manufacturing sector, has improved. The Bank's current rate stands at 3.5 percent. The increase would be the first since the 0.25 basis point increase in November and would be another attempt by the bank to slow down soaring house prices.
The European Central Bank is expected to leave its policy rate at 2 percent despite cries of anguish from exporters who are reeling under the pressures of the rising euro. But the inflation-targeted ECB is pleased that the rising euro is dampening price increases. It has yet to acknowledge that its value could hurt the nascent recovery, which ironically is stemming from increased exports.
The big event of the week, and the one which has garnered more than the usual attention, is the Group of Seven finance ministers' meeting in Boca Raton, Florida on Friday and Saturday. Foreign exchange market anticipation over the communiqu� has been building for several weeks as the U.S. dollar's decline accelerated.
Looking Ahead: February 2 through February 6, 2004
Four little words