Monday, January 19, 2004
Last Week's Highlights
Dollar benefits from moral suasion
European officials are speaking out with increasing intensity about the euro's relentless climb against the dollar. The first was ECB president Jean Claude Trichet who spoke at last week's G-10 meeting in Basel, Switzerland (not to be confused with the G-7 finance meeting next month in Boca Raton, Florida). He signaled his disquiet at the euro's increasingly rapid rise against the dollar, saying it had been "brutal" and a sign of "excessive volatility". He was joined by other European community notables - French finance minister Francis Mer, Bank of France governor Christian Noyer, Bundesbank president Ernst Welteke, ECB chief economist Otmar Issing - all stating that the rapid rise of the euro against the dollar is hurting exporters and could damage the EMU's fragile recovery.
In the run-up to the finance ministers meeting next month, France is coordinating efforts with Germany to convince the G-7 to speak out against currency instability. But both countries are facing an uphill task in persuading the United States of the need to stop the dollar's steep decline against the euro. European governments and central bankers are increasingly concerned about the problem, while U.S. officials insist there isn't any problem at all. The growing divergence in views was highlighted last Tuesday when Fed chairman Alan Greenspan played down the dollar's weakness and repeated that the funding of the nation's deficits will be no problem, a view not held for the most part outside the U.S. Most analysts believe the Bush administration favors a weaker dollar to help exporters and narrow the ballooning trade deficit. The administration would be loath to see the dollar rise just ahead of the presidential election.
For now, the ECB appears to be following a carefully calibrated strategy, gradually ratcheting up its verbal intervention until the markets get the message. Thus, after Trichet's lukewarm reaction last week to the euro's rise was brushed off, the ECB chief issued a warning shot across the market's bow that was more clearly heard and led to a dollar rally. The ECB's increasingly forceful language has fueled speculation it may be on the verge of outright market intervention or an interest rate cut to take the wind out of the euro's sales. But the rhetoric isn't yet strong enough to point to an immediate move.
The dollar's rise was aided on Friday by U.S. Treasury data that showed a major pickup in foreign investment in the U.S. during November. Traders drove the dollar to its biggest one-day advance since August. The data showed foreigners poured a net $87.6 billion into U.S. financial assets, the most since June. International investors have been increasingly worried that the U.S. would be unable to attract sufficient foreign investment to fund its twin deficits - fiscal and current account. November's net foreign inflow into U.S. securities was 20 times higher than in September, when the purchases dwindled to $4.3 billion and sparked concern that low U.S. interest rates were deterring international investors.
Not all U.S. businesses are benefiting from the sinking dollar - those that rely on importing to survive are finding it difficult to keep prices competitive especially those that import from Europe. In contrast to exporters who benefit from more competitive pricing overseas, importers (except those who deal with countries like China that peg their currencies to the dollar) continue to absorb or pass on the pain of increased costs.
Global Stock Markets
Equities were down in Asia/Pacific (with the exception of the South Korean Kospi) but were up in Europe and the Americas. Investors hung on every earnings report, selling aggressively when they didn't like what they heard and buying when they did.
Global Stock Market Recap
Europe and Britain
After touching 16-month highs the FTSE, CAC and DAX retreated after data showed fewer jobs were created in the United States than had been forecast. Those companies that rely on U.S. business were immediately hit as worries about the U.S. recovery (which never seem to be too far below the surface) once again became a source of concern. The resurfacing of corporate governance issues also knocked the market off balance. Adecco, the Swiss employment agency, said it found material weaknesses in its U.S. internal controls. But as earnings reports showed strength, the indexes began to climb again. And as the euro weakened after an onslaught of warnings by key officials, companies that are dependent on U.S. sales paced stock market gains. Companies such as DaimlerChrysler AG, Royal Philips Electronics NV and Alcatel SA benefited. The dollar's strength helps carmakers and all exporters. A rising dollar boosts the value of sales that European companies derive from the exports to the U.S.
Asia/Pacific
Japanese stocks waffled as investors were unable to find buying incentives and fretted about the continued strength of the yen against the dollar. Both the Nikkei and Topix were down in the holiday-shortened week. The relative calm in the currency markets, where the dollar had settled in a narrow trading range around Y106.4, did nothing to assuage concern that a strong yen is undermining exporter profitability. Fresh trade data showed another sharp jump in Japan's current account surplus but failed to lift the market.
Japanese capital flows in the week ending January 9th showed that foreign investors were again heavy net buyers of Japanese stocks, according to the Ministry of Finance. Foreign investors were also net buyers of Japanese bonds. Japanese investors were modest net sellers of foreign stocks, but they opened the new calendar year as heavy net buyers of foreign bonds.
Commodities
An oil squeeze'
The International Energy Agency in Paris upwardly revised its estimates for growth in world oil demand this year. The source of the increased demand is expected to be non-OECD countries, especially China. The IEA is the energy security watchdog of the OECD. November demand from China, the latest available data, was up 10 percent on the year mainly due to record power consumption. In 2003, China overtook Japan to become the world's second-largest consumer of oil behind the U.S.
Crude oil prices rose as plunging temperatures in the Northeast increased fuel demand, risking a further reduction in inventories that are already at a 28-year low. Temperature records were set in just about every city in New England, and some of these records were 100 years old. The Northeast is responsible for 75 percent of the nation's heating oil consumption. While temperatures are supposed to moderate, they are also expected to remain below normal for some time. Supplies of crude oil fell 1.9 percent to 264 million barrels last week, the lowest since September 1975, according to the U.S. Energy Department.
The Organization of Petroleum Exporting Countries, which supplies about a third of the world's oil, will meet in Algiers on February 10th and at that time will decide whether to maintain or cut production quotas, according to the group's president, Purnomo Yusgiantoro. OPEC officially seeks to keep its benchmark price between $22 and $28 a barrel. The OPEC price, based on a basket of seven crude-oil grades, has been above their price range for 30 straight days. The group has an informal agreement to weigh a production increase when prices are above the range for 20 days in a row.
The improving global economy combined with a weaker dollar provides a positive backdrop to the outlook for oil demand next year. The usual round of year-end projections from analysts has seen forecasts for economic growth revised upwards, while predictions for the U.S. dollar moved downwards. The dollar's weakness has cushioned the negative impact of high crude prices on growth for non-dollar denominated oil consumers. Brent crude denominated in euros, for example, is little changed from the levels seen at the start of 2002.
Gold's close dollar link
Gold's recent price climb has awakened the gold bugs. Gold broke the $400 mark for the first time in three years in November 2003 and has remained there since December 1, 2003. A falling dollar and trade disputes were the causes of this latest rally. But gold is up about 55 percent from its low three years ago. Whether it approaches $850, its 1980 peak, depends on whether the recent rise reflects temporary factors or deep concerns about the world economy. For centuries gold was used as currency, and it still holds an appeal for those who yearn for the days when big currencies were backed by gold.
But gold slumped 3 percent, or about $13, on Friday as the dollar strengthened against other currencies following encouraging U.S. economic data. Strong U.S. data may be prompting some investors to reduce their exposure to gold. Bullion has traditionally been regarded as a hedge against a declining U.S. dollar and the ultimate flight to safety. Last year saw a lot of hot money flow into gold, mainly as speculators saw some good opportunities with a war in Iraq and a declining dollar. As long as alternative investments remain in vogue, gold could benefit from these portfolio moves.
Indicator scoreboard
EMU - Third quarter gross domestic product was up 0.4 percent and inched up 0.3 percent when compared with the same quarter a year ago. A surge in net exports more than offset a decline in domestic demand. Private consumption edged up 0.1 percent while investment dropped 0.3 percent.
Germany - November seasonally adjusted industrial output jumped 1.3 percent and was up 1.1 percent when compared with last year. Most of the increase was concentrated in investment goods and construction. Manufacturing output soared 1.7 percent. Industrial production excluding construction - the figure used by Eurostat in calculating eurozone industrial production data - also was up 1.3 percent. Both east and west German industrial output was up 1.3 percent.
France - November seasonally adjusted industrial output sank 0.4 percent but remains 1.2 percent above a year ago. Manufacturing output was down 0.2 percent but up 0.9 percent on the year. Consumer goods, semi-finished goods, energy and autos all registered output declines, but both capital goods and food industry output were up on the month.
November seasonally adjusted merchandise trade surplus widened to �411 million. Exports were down 2 percent thanks to the ongoing weakness in capital goods and semi-finished goods while food and consumer goods contributed to the downward pressure. Imports dropped 2.4 percent. Autos, plane, ship and semi-finished goods contributed to the decline.
Italy - November seasonally and workday adjusted industrial production was up 0.3 percent both on the month and on the year. Output for consumer and investment goods was up while energy goods were down.
Britain - November industrial output sank 1 percent and was down 0.4 percent when compared with November last year. Manufacturing output also dropped by 0.7 percent but was 0.7 percent higher than last year. This was a setback for the recovery in manufacturing that had been evident recently. There were significant drops in output from the electrical and optical equipment industries, paper, printing and publishing industries, and in the food, drink and tobacco industries. Mild weather contributed to declines in electricity, water and gas as well as in mining and quarrying.
December producer output prices edged up 0.2 percent and were up 1.8 percent when compared with last year. Input prices were down 0.2 percent but managed to climb 1.8 percent on the year. Both scrap metal prices and furniture prices jumped on the month.
December claimant count unemployment was down by 8,000 but the claimant unemployment rate remained at 3 percent for the third month. The International Labour Organization unemployment rate for the three months through November edged down to 4.9 percent from 5 percent for the three months through October. This is the lowest reading since the data series began in 1984.
September through November three-month average earnings dipped to 3.5 percent from 3.6 percent in the previous month when compared with the same three months in 2002. The decline was due in part to the timing of a local government pay settlement that was made in November of 2002. Private sector services average earnings growth slipped to 3.1 percent from 3.2 percent for the three months to November.
Asia
Japan - November seasonally adjusted industrial output was up a revised 0.8 percent. The revision was due to rising output in the chemicals, industrial machinery, electronic parts, transportation machinery, pulp, and high-technology machinery industries. When compared with last year, output was up 4.7 percent.
Americas
Canada - November merchandise trade surplus declined to C$4.3 billion. Exports dropped 1.1 percent while imports were up 1.7 percent. This is the second month that the surplus has declined. The drop in exports that predominated during 2003 was because of unsettled United States demand along with the rising value of the Canadian dollar, especially against the U.S. dollar. Exports to the U.S. inched down 0.1 percent while imports from the U.S. jumped by 1.6 percent. Canada's surplus with the U.S. declined to C$334 million while the balances with all other countries were deficits.
Bottom line
The Bank of Japan meets on Monday and Tuesday. Analysts do not expect any change in policy. The Bank continues to aggressively - but covertly - intervene in the foreign exchange markets to prop up the value of the yen against the U.S. dollar to protect the export-driven expansion underway in Japan.
On the other hand, the Bank of Canada, which makes its policy decision known on Tuesday, is expected by many to cut their interest rate by 25 basis points to 2.5 percent. The rising value of the Canadian dollar has put a crimp on exports to their largest market - the United States. And although employment growth continues, other indicators such as motor vehicle sales, the shrinking trade surplus and building permits point to slower growth than the 4 percent expected by the Bank of Canada.
The Chinese New Year - Tet - begins this week. Many markets will be closed including those in Hong Kong, China, Singapore, South Korea, Malaysia and Taiwan.
Looking Ahead: January 19 through January 23, 2004
Jawboning down the euro