Monday, December 15, 2003
Last Week's Highlights
Britain's switch to HICP inflation target confirmed
Britain's Chancellor of the Exchequer Gordon Brown announced in his annual pre-budget report the immediate switch to a new inflation target based on the European harmonized measure. He said the new target for the harmonized index of consumer prices (HICP) would be 2 percent, compared with the previous 2.5 percent target for the retail price index excluding mortgage interest payments (RPIX). As with the old measure there will be symmetrical one percent fluctuation bands around the target. The new measure goes into effect immediately and has been expected for some time. The graph below illustrates the gap between the two inflation measures.
One of the key differences between HICP and RPIX is that the former does not include a housing depreciation component - the amount homeowners need to spend to maintain their properties - or Council Tax payments. The long-term differential between the RPIX and HICP is estimated to be between 0.7 and 0.8 percentage points. Some monetary policy watchers are assuming that policy in the short-term will be looser because of the lower 2 percent target. But monetary policy committee members have played down the impact of the shift on monetary policy because they believe the gap between the two measures is temporary.
Changing of the guard
Canada's new Prime Minister, Paul Martin, was sworn in on Friday replacing Jean Chrétien. Ralph Goodale replaces John Manley as finance minister. The new administration is making budget balancing a priority even though it means painful cuts in government spending. Spending sky rocketed during the year while revenues remained flat. Disasters like SARS, mad cow disease, plus August's power outage cut growth and slashed the surplus to a wafer-thin margin.
Dollar's value continues to erode
It doesn't take much these days for the dollar to hit a new low against the euro. On Friday, the dollar fell to $1.23 per euro for the first time after U.S. consumer confidence unexpectedly declined, a sign U.S. economic growth may slow, which in turn would hurt dollar-denominated investment performance. And Treasury Secretary John Snow didn't help when he said in an interview that the dollar's decline "has been orderly," validating the view that the U.S. welcomes a weaker dollar as a means of boosting growth through exports. The euro was helped by more favorable French data that showed the economy beginning to recover.
The dollar sank to ¥106.75 on Tuesday, the lowest level in more than three years and triggering massive intervention by the Bank of Japan. Although the change on the week was small, the dollar has fallen 10 percent against the yen this year. Expectations are that U.S. interest rates will remain low, making U.S. assets less attractive. The yen's advance this year makes products made by companies from Toyota to Sony more expensive to U.S. consumers. Exports and capital spending accounted for all of the Japanese economy's third quarter growth.
Equities waver on year-end settling
Equities were mixed last week as investors looked to lock in profits as year-end approaches. Japanese indexes dropped as the yen strengthened and investors worried about the currency's value on exporters' sales and profit margins. The indexes in Europe were somewhat more upbeat as a string of favorable economic indicators bolstered morale. On the week, seven indexes were down and the remaining six finished in positive territory.
Global Stock Market Indexes
Recap of global markets
Europe and Britain
The FTSE 100 was down on the week, but the CAC and DAX managed to finish on the plus side as the indexes gyrated from positive to negative day by day. The indexes' movements continue to be influenced by U.S. economic indicators and U.S. market performance. U.S. consumer sentiment is definitely an international market mover these days, mainly because so much depends on the American consumer's penchant to spend. And with the year-end near at hand, investors are trying to lock in profits now and will be reluctant to take risks that could spoil the year's gains.
Asia
Japanese stocks advanced after traders dealing with the Bank of Japan said the bank sold yen for three days last week to protect the export-led economic recovery. Both Finance Minister Sadakazu Tanigaki and Bank of Japan Governor Toshihiko Fukui are concerned that a swift rise in the yen, which would make exports more expensive, would hurt the economy's attempt to recover from a 12-year slump.
Japanese capital flows in the week ending December 5th showed foreign investors were net buyers of Japanese stocks for the 33rd time in the last 35 weeks. However, foreign investors were heavy net sellers of Japanese bonds. Japanese investors were modest net sellers of foreign stocks and but net buyers of foreign bonds. The data released suggested net outflows of ¥242.4 billion in the period.
Hong Kong stocks continue to rebound, sending the Hang Seng to a 29-month high. The Hang Seng has rallied 35 percent this year as increased tourism and trade from China help the city's economy recover from a record contraction in the second quarter. And although the Singapore Straits edged down slightly last week, it has gained almost 29 percent so far this year.
Indicator scoreboard
Germany - October seasonally adjusted merchandise trade surplus was €9.83 billion, down from the €14.40 billion surplus in September. Exports were down 6.6 percent and down 1.2 percent when compared with last year. Imports were up 1.6 percent and up 0.1 percent on the year.
December ZEW economic outlook survey climbed to 73.4 from 67.2 in November. The survey, which is conducted by the Center for European Economic Research (ZEW), asked 316 German financial experts their opinions on current economic conditions and the economic outlook for major industrial economies.
France - October seasonally adjusted merchandise trade surplus narrowed to €329 million from €711 million in the previous month. Imports jumped 2.4 percent on purchases of Airbus components from Germany. Exports were up 0.9 percent on autos and drugs.
October seasonally adjusted industrial output jumped 1.3 percent and was up 0.5 percent when compared with last year. Manufacturing output was up 1.0 percent and 0.2 percent on the year. All sectors increased with the exception of autos.
Italy - Third quarter gross domestic product was up 0.5 percent and up 0.5 percent as well when compared with the same quarter a year ago. Growth was buoyed by positive net exports, while inventories were a major drag. Private consumption was up 0.7 percent and 2.5 percent on the year while capital investment sank 0.4 percent and 4.1 percent on the year. Exports jumped 5.7 percent on the quarter but were still down 2.5 percent on the year. Imports were up 1.5 percent and 0.9 percent on the year.
October seasonally and workday adjusted industrial production was flat but up 0.4 percent when compared with last year. Both consumer, energy and investment goods output were up on the month. Minerals extraction and leather & shoes output were down on the month.
Britain - October global merchandise trade deficit narrowed to Stg4.449 billion compared with Stg4.673 billion in September, thanks to a turnaround in the erratics balance, which had a surplus of Stg50 million compared with a deficit of Stg258 million in September. (National Statistics said this reflected drops in imports of aircraft and precious stones and increases in exports of aircraft and silver.) The oil surplus was small because of oil refinery production problems. Goods exports were up 3.2 percent while imports were up 1.3 percent.
November producer output price index inched up 0.1 percent and climbed 1.7 percent when compared with last year. Core producer prices, which exclude food, beverages, tobacco and petroleum products, were up 0.2 percent and 1.3 percent on the year. Input prices were flat on the month but up 3.8 percent on the year. Increases in fuel and home produced food prices were partially offset by a fall in crude oil.
October industrial production increased 1 percent and was up 0.9 percent when compared with last year. Manufacturing production was also up 1 percent but jumped 2.4 percent on the year. Output rose in 11 out of 13 manufacturing sectors.
Asia
Australia - November employment was up by 20,700 jobs for a fourth monthly increase. Total employment has increased 185,200 since July. Full time employment rose by 27,900 last month and part time jobs declined by 7,200. The unemployment rate remained at a 14-year low of 5.6 percent. The participation rate, a measure of those with jobs or seeking work, fell to 63.7 percent in November from 63.8 percent in October.
Japan - Third quarter gross domestic product estimate was revised downward to an increase of 0.3 percent from the originally reported 0.6 percent gain. This was the seventh straight quarter of growth fueled by overseas demand for mobile phones, digital cameras, cars and other electronic goods. Business spending was revised to a gain of 0.5 percent, from its initial 2.8 percent increase, the biggest contribution to the revision. On the year, GDP was revised to a gain of 1.8 percent from the originally reported increase of 2.5 percent.
Fourth quarter Bank of Japan Tankan survey showed confidence among large manufacturers at its highest since June 1997. The index of confidence among companies with at least 1,000 employees rose to 11 from 1 last quarter and minus 5 six months ago. A positive number means the majority of manufacturers are optimistic. The closely watched Tankan - which means short-term outlook - surveyed 8,204 companies from November 10th to December 11th on their view of the economy, sales, profits, spending, employment and other business plans. Among small manufacturers, sentiment improved to minus 13 from minus 23.
Americas
Canada - October merchandise trade surplus plummeted to C$5.1 billion from C$6 billion in the prior month. Exports sank 4.2 percent while imports dropped 1.7 percent. Trade with the United States caused most of the movement because of its high trade concentration with Canada. Exports to the U.S. dropped 3.8 percent, partly as a result of the continued appreciation of the Canadian dollar against the U.S. dollar. Imports from the United States fell 1.6 percent. Exports to non-U.S. destinations declined 6.0 percent while imports from other countries fell 1.9 percent. Exports to Japan plummeted 12.9 percent. However exports to the European Union were up 4.2 percent. On a sectoral basis, exports fell for machinery and equipment, automotive products and energy products.
Bottom line
At this writing, Saddam Hussein has just been captured by U.S. forces. The possible easing of political tensions will no doubt dominate investor attention as more information unfolds through the week. This is also the last full trading week of 2003. Investors will be wrapping up for the year. The indexes followed here look to end the first year in four on the plus side after recovering from their nadirs in March and April.
Looking Ahead: December 15 through December 19, 2003
Dollar continues its slide