Monday, November 10, 2003
Last Week's Highlights
The Reserve Bank of Australia and the Bank of England increased their key interest rates by 25 basis points to 5 percent and 3.75 percent respectively. Now market analysts are wondering if these increases will be followed by other central banks.
Reserve Bank of Australia
Australia became the first industrialized country to tighten monetary policy this year when it unexpectedly raised its key interest rate by 25 basis points to 5 percent. This was the first interest rate change since June 2002 when the RBA also increased rates by 25 basis points. The increase still leaves policy loose by historic standards. Consumers have taken advantage of interest rates near 30-year lows to borrow and buy houses and cars. Lending to buy homes rose by 22.5 percent in September from a year earlier, according to the RBA. Given the strength of the statement that accompanied the move, analysts now expect another rate increase in the not too distant future. Low rates have fueled borrowing to buy houses and support a surge in retail spending. Third quarter retail spending rose 2.7 percent from the previous three months, the largest increase in 4½ years. House prices rose about 18 percent in the third quarter from a year earlier.
The move, which increased the differential between Australian and U.S. rates to 400 basis points, sent the Australian dollar to a fresh six-year high against the US dollar. Since the beginning of this year the Australian has skyrocketed 26 percent against the U.S. dollar. Exporters have been voicing concern about the impact of the more expensive Australian dollar on trade and on the economy as a whole. But the RBA downplayed the recent appreciation, saying it reflected greater optimism about growth. The Australian economy was "picking up", the bank said, mainly because of strong domestic demand, with both consumption and business investment growing strongly.
Bank of England
The Bank of England followed the Reserve Bank of Australia and raised rates to cool a British housing boom. The Bank increased its benchmark rate by 25 basis points to 3.75 percent. This was the first increase in more than three years and reverses the July precautionary 25 basis point cut. The lowest interest rates in 48 years have fueled consumer borrowing and spending, even though manufacturing has been staggering. Accelerating economic growth in the U.S. and signs of recovery in Germany and Japan has spurred speculation that rates worldwide are headed higher. British banks loaned a record £8.8 billion ($15 billion) in mortgages in September. The increase in rates will raise the cost of the average £80,000 mortgage by £4 a week, according to HBOS, the nation's biggest mortgage lender.
In the statement explaining the MPC's decision, the Bank said that the reasons for raising rates were both global and domestic. It said that the global recovery was gathering momentum, and not only in the United States. It also stated that neither household spending nor the housing market has slowed by as much as the committee expected. Bank of England Governor Mervyn King will explain the decision further on November 12th when he presents the bank's quarterly inflation and growth forecasts. The Bank of England monetary policy committee had lowered the key-lending rate nine times since the beginning of 2001, and kept Britain from following other major economies into recession.
Gross domestic product is expected to grow at least 2 percent this year according to the Treasury. That compares with the European Union's estimate of 0.4 percent growth in the euro region. Britain's economy grew 0.6 percent in both the second and third quarters when compared with the preceding three months. The pace of expansion accelerated from 0.2 percent in the first quarter. Most analysts expect at least one more rate increase by the middle of next year. The Bank of England doesn't face the same concerns as the Fed and the ECB about the labor market. Unemployment by International Labour Organization standards is 5 percent in Britain, near the lowest in a generation. In the U.S., the rate was 6 percent in October, compared with 3.8 percent in April 2000. The EMU's jobless rate is 8.8 percent.
European Central Bank
The European Central Bank left their key interest rate unchanged at 2 percent as expected. ECB President Jean Claude Trichet, at his first press conference since taking over from Wim Duisenberg this month, said interest rates in the euro region were "appropriate" amid signs that recovery of the world economy is clearly making progress. With interest rates not an issue, analysts rated Trichet's performance at his first post-meeting news conference since taking over for Wim Duisenberg on November 1st. They gave him 8 out of 10.
All equity indexes tracked here were up on the week with the exception of the Australian all ordinaries as more positive economic news buoyed investors. There was a sense of investor relief - third quarter earnings turned out better than expected while economic data bolstered growth hopes in the U.S. as well as Europe.
Global Stock Market Indexes
Recap of global markets
Europe and Britain
Equities in Britain and Europe managed to end a choppy trading week on a positive note thanks to the better than expected U.S. employment report Friday. But other indicators in Europe and Britain signaled signs of growth as well. For example, both the manufacturing and services purchasing managers' surveys were above the 50 percent breakeven point between expansion and contraction. German manufacturing orders also rebounded, and even though industrial production did not follow suit due to some special technical factors, it was a sign that things were stabilizing in Germany.
Asia
Asian stocks gained for a second week after economic reports added to optimism that U.S. growth would fuel demand for Asian-made products. Only the Australian all ordinaries index was down slightly. Investors were spooked by the surprise interest rate increase by the RBA. The Australian dollar rose in value and investors voiced their concern by selling stocks fearful that the enhanced value would hurt exports and exporters' profits. They recovered some after the robust employment report on Thursday - employment was up and unemployment down.
Japanese equities continued to climb as investors became more enthusiastic about U.S. growth prospects and the positive effect that it would have on exports. However, investors had second thoughts mid-week and jettisoned stocks on concern that a drop in the dollar against the yen would erode exporters' earnings. The dollar's slide prompted concerns that more exporters will join Fuji Photo Film Co. in lowering their earnings outlooks. The slide by the dollar against the yen damped optimism about the Toyota's sales prospects as well. Every 1-yen gain against the U.S. currency shaves about ¥20 billion from Toyota's annual operating profit, analysts have said. Optimism returned on Friday as investors looked for extra export sales on optimism that the U.S. economy would finally show jobs growth. They were right.
Currencies
Currency trading continues to be volatile. Strategists say the dollar's downward trend since 2002 has forced investors to take note of a sea change in currency market thinking. That was recently underlined at September's G7 meeting where the group called for flexible exchange rates. Aimed at Asia (including China and Japan), where the dollar is kept artificially strong, the call was widely interpreted as tacit acceptance of further dollar weakness. The dollar lost as much as 4.1 percent versus the euro and 5.4 percent to the yen in the weeks after the G-7 statement, which called for less government manipulation of exchange rates. The dollar's weakness creates additional volatility in the market, which in turn can spark investor interest since it offers the chance to make more money than steady prices might. The dollar is still, by far, the world's reserve currency of choice but the euro is no longer in the doghouse and the yen's recent three-year highs against the dollar have shaken investors' preconceptions of Asian currencies.
In October, the Bank of Japan spent ¥23,000 billion on intervention, while foreign buying of U.S. Treasuries ran at $23 billion. This accounts for about one-third of monthly new issuance by the U.S. Treasury.
Indicator scoreboard
EMU - October seasonally adjusted Reuters purchasing managers manufacturing index climbed to 51.3 from 50.1 in September. The breakeven point between expansion and decline is 50. New orders grew at the fastest pace in 17 months while output was up to its quickest pace in over a year. All major countries were above the 50 percent level in October.
October seasonally adjusted Reuters purchasing managers' services index jumped to 56 from the 53.6 level in the prior month. New business climbed to the fastest pace in 34 months. However, employment declined for the 15th straight month. Germany's services grew at the fastest clip in nearly three years and French services rose briskly as well. The composite eurozone index for industry and services output rose to 54.9 from 52.8 due mainly to an improvement in new orders.
September seasonally adjusted unemployment rate remained at 8.8 percent. Of the nine EMU countries reporting, unemployment rose in one, fell in one and was unchanged in seven. Spain continued to show the highest unemployment rate and Luxembourg the lowest. Eurostat estimated that 12.4 million were unemployed in the eurozone.
August real seasonally and workday retail sales slipped 0.1 percent and were down 0.9 percent when compared with last year. The weakness was most likely related to the severe heat wave during August. Non-food products sales sank 3.0 percent but food, drinks and tobacco sales were up 1.4 percent on the year. Sales were up only in Finland, France and Spain on the year.
Germany - September seasonally adjusted manufacturing orders were up 0.9 percent and inched up 0.2 percent when compared with last year. The increase was due to a 2.1 percent jump in domestic orders thanks primarily to a 4.5 percent jump in capital goods orders. This more than offset the 0.5 percent drop in foreign orders. West German manufacturing orders were up 0.3 percent while in the east orders soared by 7.3 percent.
September seasonally adjusted industrial output sank 1.2 percent and plummeted 3.6 percent when compared with last year. The figures continued to be depressed by the late start of school holidays this summer. The Economics Ministry said it expected a strong upward revision to the preliminary data. September data are often subject to large revisions because of the procedures followed by the Federal Statistics Office, which calculates the data for the Economics Ministry. August data are substituted for those companies that have not yet submitted their September figures. August data were sharply depressed by holiday effects. Manufacturing output fell 1.2 percent after sinking 4.0 percent in August. All manufacturing sectors fell except for consumer durable goods, which was flat. West German industrial output sank 1.1 percent after plunging 4.1 percent in August while in the east, production plummeted 2.4 percent after climbing 0.8 percent in the prior month.
October seasonally adjusted unemployment dropped by 12,000. Unemployment declined by 3,000 in west Germany and 9,000 in east Germany. The pan-German and west German unemployment rates remained at 10.5 percent and 8.4 percent respectively. The rate in east Germany inched down to 18.5 percent from 18.6 percent in the prior month. Payroll employment continues to fall - down by 29,000 in August after sinking by 47,000 in July.
Britain - October Halifax house price index jumped 1.2 percent and was up 16.7 percent when compared with last year. A continuing chronic shortage of new homes contributed to upward pressure on house prices.
September industrial production was flat and sank 1 percent when compared with last year. Manufacturing output dropped 0.2 percent and was down 0.5 percent on the year. Manufacturing was hit by sharp declines in electrical and optical equipment and metals industries output that more than offset increases in other components.
Asia
Australia - October employment increased by 69,200 jobs, primarily because retailers and hotels hired workers to meet demand from visitors in the country for the rugby World Cup. Full time employment climbed by 19,900 and part time jobs increased by 49,300. The economy has added 164,600 jobs in the past three months. The unemployment rate dropped to 5.6 percent, the lowest level since December 1989, from 5.8 percent in September. The participation rate, a measure of those with jobs or seeking work, rose to 63.8 percent in October from 63.5 percent in September.
Americas
Canada - October employment rose by 65,400 and the unemployment rate fell to 7.6 percent from 8 percent in the previous month. Almost all gains were in full time employment in the services sector. Services contributed 64,800 jobs while the goods producing sector added 600. For a second consecutive month, employment grew by 13,000 in the finance, insurance, real estate and leasing industry, a growth of 50,000 since the start of the year.
Bottom line
With the results of Sunday's Japanese election becoming available, it looks as though Prime Minister Junichiro Koizumi's ruling coalition retained power, but with a reduced majority in Japan's lower house of parliament, losing seats to the main opposition Democratic Party. A smaller LDP-led coalition majority could make it harder for Koizumi to overcome opposition within his own party to his reform efforts, such as plans to sell off state enterprises. But the gains by the Democratic Party, or DPJ, help pave the way for the emergence of a two-party political system for the first time in post-World War II Japan.
Analysts will parse every central banker's word now that the Bank of England and the Reserve Bank of Australia have increased their key interest rates, looking to see if others will follow, especially now that signs of growth are emerging worldwide.
Looking Ahead: November 10 through November 14, 2003
RBA, Bank of England up interest rates