Monday, November 17, 2003
Last Week's Highlights
Flash GDP reports for Germany, France, Italy and the EMU were released last week. The good news is all were showing some growth on a quarterly basis. France and Germany were still down when compared with the previous year. But the numbers weren't good enough to get investors excited. So far, the U.S., Britain and Japan are the three countries that are showing robust growth.
EMU GDP growth was the fastest in five quarters as a global recovery boosted exports in spite of the appreciating euro. GDP, after shrinking in the second quarter, was up 0.4 percent on the quarter and 0.3 percent on the year. Exports, making up a fifth of the region's GDP, have benefited from faster growth in the U.S. and Japan, which grew 1.7 percent and 0.6 percent respectively in the third quarter.
But Europe's recovery continues to lag. The U.S., which buys about a fifth of Europe's exports, posted its fastest quarterly growth in almost two decades, while Japan's economy expanded for a seventh straight quarter, the longest period of growth since 1997. The pace of expansion in Europe is being held back by high unemployment, a deterrent to consumer spending. The euro region's jobless rate has stayed at 8.8 percent for seven months - the highest level in 3½ years.
Given the comparatively slow European recovery, investors think the ECB might postpone increasing interest rates until the second quarter of next year at the earliest. Interest rates are low enough to boost growth, and the region should experience a "gradual economic recovery," according to the ECB's monthly report for November. The ECB lowered its benchmark rate to 2 percent in June, the lowest in any euro country for more than half a century.
Japan's much-battered economy has grown for the seventh quarter in a row thanks to continued demand for Japanese goods in China and the U.S., both major buyers of Japanese goods. Exports contributed a third of the growth, and economists expect the trend to continue for the next few months at least. Domestic demand was less impressive, but business investment - which recent surveys have indicated is picking up - was doing better, with spending on electronics, communications and automobiles showing healthy gains. The growth news failed to produce much of a market reaction, with the Nikkei 225 falling in Friday's trading. The pickup in Japan still leaves the country reliant on faster growing foreign countries.
Equity markets waffled throughout last week, with only the Bolsa, FTSE, DAX and Kospi able to finish the week on a positive note. Investors worried about the sustainability of U.S. growth, which continues to underpin economic recovery elsewhere. The dollar sank as geopolitical worries rattled traders, as did a larger-than-expected U.S. merchandise trade deficit. Overseas traders continue to take the U.S. twin deficits more seriously than those in the U.S.
Global Stock Market Indexes
Recap of global markets
Europe and Britain
Good spirits returned to European investors as one by one, countries unveiled their third-quarter GDP flash estimates. The countries that had declined in the second quarter reversed themselves and grew again in the third. On the week, the FTSE and DAX managed to recover their losses of earlier in the week, while the CAC barely declined.
Asia
Japanese stocks dropped after the ruling coalition kept its parliamentary majority but lost seats in the November 16th general election, leaving Prime Minister Junichiro Koizumi with what some investors see as a weakened mandate. And the Nikkei and Topix failed to rally at week's end when the Cabinet Office reported that third-quarter GDP grew for the seventh quarter in a row. Japanese stocks fell, with the Nikkei closing at a three month low. Exporters such as Sony Corp. and NEC Corp. dropped after a Wal-Mart earnings forecast raised concern that consumer spending may slow in the U.S. Exporters also declined as the yen gained against the dollar. For the week, the Nikkei dropped 4.4 percent, while the Topix slid 3.7 percent. Both suffered their first weekly decline since October 24th.
Elsewhere the Kospi managed to defy the negative pull of other indexes and continue its aggressive climb upward. Other indexes retreated on the week after hauling in large gains in the previous weeks. The all ordinaries index continues to pull back, pressured by the Reserve Bank of Australia's interest rate increase earlier this month and by the continued appreciation of the Australian dollar that has investors worried about its impact on exporters when they repatriate profits.
Currencies
The dollar suffered its biggest weekly loss in four months against the euro after Europe's economy returned to growth and Federal Reserve officials signaled that policy makers have room to keep interest rates at current levels in coming months. Even positive economic data failed to rally the dollar from its slump as investors continued to exude negativity on all things dollar (U.S.).
After the Bank of England and the Reserve Bank of Australia raised interest rates during the first week of November to 3.75 percent and 5 percent, respectively, the U.S. dollar declined 0.7 percent against the pound and lost 1.6 percent against Australia's currency. Gold rose, approaching its highest level in more than seven years, chiefly because of the falling dollar.
The U.S. trade deficit widened for the first time since March suggesting more dollars must be sold to pay for rising imports. The report played up market concerns about the international deficit and how it would be funded. Despite good economic data, the U.S. dollar is being shunned because of dovish Fed talk and geopolitical tensions.
International ownership of U.S. debt is increasing as governments such as Japan sell their currencies and buy the dollar. Foreign central bank holdings of Treasury and agency securities in accounts at the Federal Reserve have risen to $1 trillion.
Indicator scoreboard
EMU - Third quarter seasonally adjusted flash gross domestic product was up 0.4 percent and 0.3 percent when compared with last year. As with most flash estimates, no breakdown of GDP's components was available. To calculate its GDP flash estimate, Eurostat used GDP figures from Germany, Italy, France and the Netherlands, together with indicators normally used in compiling national accounts such as industrial production and retail sales for Spain. The five countries account for 79 percent of the euro economy.
Germany - November ZEW economic expectation index jumped to 67.2 from 60.3 in the previous month. This was the index's 10th increase in the past 11 months. Expectations were up but current conditions index inched down. Continued uncertainty over unemployment as well as government tax and social reforms weighed on analysts' view of the current economic situation. The ZEW surveyed 308 German financial experts from October 27th to November 10th for their opinions on current economic conditions and the economic outlook.
September seasonally adjusted merchandise trade surplus jumped to €14.7 billion from €12.2 billion in August. Exports were up 5.3 percent and up 2.6 percent on the year. Imports were up 1.2 percent on the month but down 2.6 percent on the year.
October wholesale prices inched up 0.1 percent and climbed 0.8 percent when compared with last year. Seasonal food prices sank 3.3 percent while energy prices were up 0.8 percent. Excluding oil products, wholesale prices were unchanged on the month and up 1.2 percent on the year.
Third quarter real seasonally adjusted flash gross domestic product was up 0.2 percent when compared with the second quarter. Flash GDP declined by 0.2 percent when compared with the same quarter a year ago. The third quarter increase was the first since the third quarter of 2002. The flash release does not provide data for GDP components, but the Statistics Office said that net exports made a strong contribution to the turnaround.
France - September seasonally adjusted industrial output was up 0.4 percent but sank 1.8 percent when compared with last year. Manufacturing output climbed 0.9 percent but dropped 2.1 percent on the year. Semi-finished goods jumped 2.3 percent but consumer goods declined by 1.6 percent.
Third quarter flash gross domestic product was up 0.35 percent when compared with the previous quarter. However, the flash estimate was down 0.2 percent on the year. This was the first time that France has issued a flash estimate of GDP. No details were available.
September seasonally adjusted merchandise trade surplus widened to €922 million. Exports were up 2.9 percent, led by rebounding semi-finished goods and ships and planes. However, semi-finished and capital goods exports remained weak. Imports increased by 2.1 percent mainly due to higher Airbus component imports from Germany.
Italy - September seasonally and workday adjusted industrial production dropped 0.7 percent and was down 1.7 percent when compared with last year. Consumer, investment, intermediate and energy goods all sank.
Third quarter preliminary real, seasonally and work-day adjusted gross domestic product was up 0.5 percent and 0.5 percent when compared with last year. ISTAT provided no data for GDP components saying only that industry and services were up while agriculture contracted.
September world merchandise trade balance fell to a deficit of €364 million after running up a surplus of €1.4 billion in August and a surplus of €483 million a year earlier. Imports from the rest of the world were up 5.4 percent while exports were up 1.4 percent.
Britain - October seasonally adjusted producer input prices soared 1.6 percent and were up 1.8 percent when compared with last year. Crude oil prices were up 8.4 percent but only 1.8 percent on the year. Imported food material prices and chemical prices were up on the month. Producer output prices inched up 0.1 percent and were up 1.4 percent on the year. Core output prices, which exclude food, beverages, tobacco and petroleum, slipped 0.1 percent on the month but rose 1.3 percent on the year.
September merchandise trade deficit was Stg3.854 billion up from Stg2.619 billion in August, due in large part to deterioration in the oil trade position. This was the highest deficit since records began in 1697. National Statistics said that Stg0.5 billion was due to the deterioration in the oil balance, Stg0.3 billion to erratic items and some Stg0.3 billion to cars. Extended maintenance work in the North Sea led to the oil balance showing a deficit of Stg63 million compared with a surplus of Stg437 million in August. The value of global goods exports fell 2.7 percent on the month, while imports rose 5.2 percent. Export volumes fell 2.5 percent while import volumes rose 5.8 percent.
September average earnings were up 3.6 percent on the year, slightly more than in the previous month. Private sector earnings including bonuses rose 3.1 percent, while manufacturing earnings rose to 3.3 percent. Services average earnings rose to 3.8 percent.
September claimant unemployment fell by 3,300 but the claimant unemployment rate remained at 3 percent. The ILO unemployment rate for the three months to September remained at 5 percent even though the number of unemployed rose by 12, 000.
Asia
Japan - Third quarter gross domestic product increased 0.6 percent and was up 2.4 percent when compared with last year. This was the seventh straight quarter of expansion and the longest since 1997. Corporate capital investment and exports continued to provide support. Exports are compensating for a consumer spending slump, which makes up more than half the economy. Consumer spending was flat and government investment declined. Business investment was up 2.8 percent, less than the 4.7 percent jump posted in the previous period. Exports grew 2.8 percent while imports were up 1.7 percent. But in a sign that deflation continues to plague the economy, the GDP deflator - a measure of the impact of price changes on real economic growth - deteriorated to minus 2.7 percent.
Americas
Canada - September merchandise trade surplus rebounded to C$5.6 billion. The surplus recovered most of the August declines, which were caused by the power blackout in Ontario and the northeastern United States. Exports were up a healthy 4.7 percent while imports jumped 4.5 percent. The trade surplus with the United States climbed from C$7.7 billion to just over C$8.1 billion, thanks to strong movements in the automotive and forestry sectors. Exports to the U.S. accounted for 82 percent of total exports while imports from the U.S. accounted for 70 percent of total imports. The total non-US trade deficit widened in spite of increased exports to every major region except the European Union.
September shipments soared 5.2 percent as manufacturers made up lost ground from the adverse impact of the electrical blackout of August 14th. Seventeen of 21 manufacturing industries representing 84 percent of total shipments reported higher production. Motor vehicles, chemical products, computer and electronic products and automotive parts manufacturing were among the majority of industries reporting significant gains. Manufacturers posted their first increase in unfilled orders in over a year. New orders soared 8 percent, the third increase in the last four months. Widespread increases were reported, including motor vehicles, computers and aerospace manufacturing.
Bottom line
The pressure on the U.S. dollar is expected to continue. Aside from the soaring twin deficits and geopolitical concerns, the widening interest rate spreads between the U.S. and other countries are worrying investors. Investments in other countries, especially those with higher rates, are bound to attract investors who are looking to enhance returns as well as those with an appetite for risk. With growth picking up around the globe, the U.S. is no longer the only game in town.
Looking Ahead: November 17 through November 21, 2003
Everyone is growing!