By Anne D. Picker, International Economist, Econoday
Monday, November 3, 2003

Last Week's Highlights
Jean Claude Trichet became the second president of the ECB on Saturday, November 1. Trichet, the former Bank of France governor, said that the Bank would continue to pursue a strong euro policy, but it was up to the financial markets to determine foreign exchange rates. The statement echoes recent comments by U.S. Treasury Secretary John Snow about the value of the dollar. Trichet said the ECB had to do all that is possible to increase common trust in the eurozone.

According to the European Commission, France and Germany risk breaking EU budget deficit rules for four years in a row unless they change policies. Under the rules of the EU's stability pact, eurozone countries are not supposed to run fiscal budget deficits above 3 percent of gross domestic product. But the Commission said it expected both France and Germany to be running deficits above this level in 2005. Just last week, France escaped EU sanctions for breaking the deficit rule. French officials admitted that the country would break the rules for three years in a row but said the deficit would be back within limits by 2005. The Commission gave France a further year to get its finances in order, recommending that it make cuts in government spending. Paris has insisted that boosting economic growth should take precedence over cutting the deficit. Germany, Italy and Portugal are also set to break the 3 percent level next year unless they make changes.

In the usually tumultuous month of October, all 13 indexes followed here were up for the month and continued to add to their yearly gains. The increases ranged from 2.4 percent for the Topix to the impressive 12.3 percent and 12.2 percent gains for the DAX and Kospi respectively. All indexes were also up on the week with the exception of the Singapore Straits, which oozed down 0.5 percent.

Global Stock Market Indexes

Recap of global markets

Europe and Britain
European stocks ended the week on a soft note after German retail sales declined and French unemployment increased. Both were unexpected and fueled concern about the pace of economic growth, which hasn't been as fast as some investors had hoped. The reports from Germany and France underlined the European Union's forecast that the eurozone's economy will grow this year at the slowest pace in a decade. The equity indexes have surged from their March lows on optimism that accelerating economic growth would lift company profits. Now investors are asking how profits can possibly rise if there is virtually no economic growth.

The FTSE had its best monthly gain since April, but analysts said jitters about an expected interest rate increase were weakening investors' resolve. The outlook for U.K. corporate profits is encouraging as is the evidence of improving economic conditions. However, the FTSE continued to trade in a tight range and it was not until some strong third-quarter GDP figures from the U.S. late on Thursday (British time) that the index saw any life. The clearest reason for investor attitude is the worry that interest rates - at their lowest level since 1955 - are about to go up. The minutes from the Bank of England's October meeting show that the monetary policy committee only voted by a narrow margin to keep interest rates on hold, leaving many investors and analysts convinced there will be an increase at this week's meeting.

Beginning on November 3rd, the Deutsche Börse will bring its trading hours back in line with other European stock exchanges. The operator of the Frankfurt stock exchange had extended its trading hours into the evening at the height of the stock market boom three years ago in order to cater to growing demand from retail investors. With the stock market downturn, volumes during the later evening hours slowed and have remained thin. The cost issue has been a particular concern at a time when much of the financial sector is in the middle of intensive cutbacks. Foreign institutions, which make up 40 percent of Xetra market participants, also have been keen to see trading hours in various continental European countries harmonized to facilitate growing cross-border trading activity.

Asia
Thus far, foreign investors have driven Japan's stock market rally, but there are strong indications that domestic institutional and retail investors are starting to join the party. Rather than locking in gains, foreign investors continue to buy Japanese equities in the belief that the country's macro economy is recovering and that structural reform is finally being implemented, especially in the banking sector. Bulls point out that an apparent recovery in the manufacturing sector, given growth in capital expenditures, is feeding through to the banking sector in the form of additional funding requirements. This means that economic recovery should gather pace, or so the argument goes.

Positive news on U.S. economic growth and consumer confidence reinforced investors' expectations that demand for Asian-made products will increase. The Fed underlined these expectations when they kept interest rates at a 45-year low. The Hang Seng Index added 3.9 percent, completing its seventh monthly gain and the longest streak since a nine-month run ended June 1992. Not to be outdone, the Kospi jumped 4.6 percent in October.

Currencies
Although the recent strength of the euro hasn't upset policymakers, exporters are not as sanguine. Exporters are already seeing it eat into their profits and the higher euro remains a concern for investors. The euro has risen by around 10 percent against the dollar in 2003, making eurozone exports less competitive in the U.S. Although policymakers have pointed to the high proportion of intra-EU trade as a reason for their lack of anxiety, exports outside of the eurozone still account for about 20 percent of gross domestic product. Investors fret about the stronger currency - especially when leading eurozone countries are hamstrung by structural rigidities and sluggish growth. Domestic demand remains low in the core countries, with France, Germany and Italy hovering at or over the brink of recession. Although the economies of Spain and Ireland are going strong, they cannot compensate for weak growth in the major countries.

Indicator scoreboard
EMU - September seasonally adjusted M3 money supply growth decelerated to 7.4 percent when compared with last year. The July-through-September M3 moving average was up 8.1 percent when compared with the same three months last year. The three-month moving average is used by the ECB in its policy decision-making process and remains considerably above their reference value of 4.5 percent growth.

October flash estimate of the harmonized index of consumer prices rose by 2.1 percent when compared with last year. In order to compute its HICP flash estimates, Eurostat uses early price information provided by Germany, Italy and - if available - by other countries, as well as early information about energy prices.

September producer prices were unchanged but were up 1.1 percent when compared with last year. A drop in energy prices was offset by increases in all other categories. Excluding energy, the PPI was up 0.1 percent and 0.7 percent on the year.

October EU Commission economic sentiment index inched up to 95.6 from 95.4 in September. It was the third straight monthly increase. Industrial sentiment climbed to minus 8 from minus 9 in the previous month. Retail, construction and service sector confidence all were up in October. However, consumer confidence remained flat for a third month.

Germany - October Ifo west German business climate index jumped to a 94.2 reading from September's 92. Both the current conditions and expectations components were up. The business climate improved in the manufacturing and wholesale sectors but weakened slightly in retail and construction.

September real seasonally adjusted retail sales (excluding autos) were unchanged but plunged 3.1 percent when compared with last year. Total retail sales including sales at auto dealerships and gasoline stations sank 0.7 percent.

France - September producer prices edged down 0.1 percent and were up 0.2 percent when compared with last year as cheaper oil offset increased farm product prices. Excluding food and energy, the PPI was flat both on the month and on the year. Energy prices fell 1.0 percent as fuel prices dropped 2.2 percent. Food and agriculture prices jumped 0.5 percent in the wake of the summer heat wave. They were up 1.4 percent compared to September 2002. Excluding energy and agriculture, the core PPI was flat both on the month and on the year.

September seasonally adjusted unemployment jumped by 37,000 after declining by 13,000 in the previous month. As a result, the unemployment rate edged up to 9.7 percent from 9.6 percent in August. The September jump pushed the number of jobless to 2.639 million according to the ILO definition, which excludes jobseekers who did any work during the month.

Italy - September producer prices edged down 0.1 percent but were up 1 percent when compared with last year. Energy prices, down 1.3 percent, contributed to the month's decline. Excluding energy, the PPI was up 0.1 percent and 0.9 percent on the year.

Britain - October Nationwide house price index was up 2 percent and 16.1 percent when compared with last year. The typical house now costs Stg131,947. The rapid price increase has combined with a record number of house approvals in September.

Asia
Australia - September merchandise trade deficit widened to A$2.3 billion ($1.6 billion) from a five-month low as rising consumer spending fueled imports of autos and food. At the same time, a stronger currency, drought and weak global demand have reduced export earnings. Imports rose 3 percent. Imports of consumer goods increased 8 percent and imports of capital goods, which include machinery, telecommunications equipment and vehicles, rose 2 percent. Exports gained 1 percent. Exports of rural goods, which include meat, wool and wheat, gained 11 percent. Exports of non-rural goods, which include metals and fuels, dropped 4 percent, and exports of services, which include tourism spending, rose 5 percent. This is the nation's 22nd straight monthly trade gap, the worst run of deficits since the 33 months of shortfalls between December 1997 and August 2000.

Japan - September industrial production jumped 3.1 percent and was up 2.2 percent when compared with last year. Growing exports, particularly to Japan's Asian neighbors, have boosted production in recent months. Overall production growth was driven by a 7.1 percent jump in electronic parts and devices (including cellular phones, digital cameras and personal computers). Production of general machinery was also strong, rising 5.6 percent on month thanks largely to more orders from South Korea, Taiwan and Europe.

October Tokyo consumer price index was unchanged from the previous month but down 0.3 percent when compared with last year. Tokyo core CPI, which excludes fresh food, was up 0.2 percent but down 0.1 percent on the year. The nationwide CPI was up 0.1 percent but down 0.2 percent on the year. The core CPI, which the Bank of Japan uses as its chief price indicator, was unchanged on the month and down 0.1 percent on the year. This was the 48th straight month of decline.

September unemployment rate held steady at 5.1 percent. September's figure is still considerably lower than the post-WWII high of 5.5 percent hit earlier this year and provides evidence that the job market may be picking up as manufacturers boost output, investment and profits. The ratio of job offers to jobseekers, an indicator of demand for labor, rose to 0.66 in September from 0.63 in August. The ratio shows that 66 jobs were being offered for every 100 workers seeking employment.

September real spending by wage earners sank 1.9 percent when compared with last year. Wage earner spending is an important gauge of personal consumption, which accounts for roughly 55 percent of Japan's gross domestic product. The data suggest that despite the growing signs of improvement in corporate sector activity, consumers have yet to significantly boost spending. The seasonally adjusted propensity for wage earners to consume, a ratio that measures the amount of disposable income going to household spending, fell to 72.7 percent from 74.0 percent in August.

Americas
Canada - September industrial product price index was up 0.2 percent and down 2.6 percent when compared with last year. On a monthly basis, lumber and other wood products were up as were prices for meat, fish and dairy products, chemical products, fruit, vegetable and feed products. Prices for motor vehicles and other transport equipment continued to fall mainly because of the effect of the exchange rate. Lower prices were also observed for petroleum and coal products, pulp & paper products and electrical & communication products.

September raw materials price index sank 3.1 percent and was down 8.3 percent when compared with last year. On the year, lower prices for mineral fuels were mainly responsible for the decline. If mineral fuels had been excluded, the RMPI would have decreased 6.0 percent.

In September, the value of the U.S. dollar weakened against the Canadian dollar, pushing down prices of commodities that are quoted in U.S. dollars, notably motor vehicles and lumber products. As a result, the total IPPI excluding the effect of the exchange rate would have risen 0.6 percent instead of 0.2 percent. However, on a 12-month basis, the influence of the dollar is much stronger. Consequently, the IPPI excluding the effect of the exchange rate would have increased 1.3 percent rather than declining 2.6 percent from September 2002 to September 2003.

August gross domestic product at basic prices plunged 0.7 percent, reversing July's 0.6 percent gain, largely because of the Ontario power blackout. The province of Ontario represents about 42 percent of the total Canadian economy. According to Statistics Canada, it is impossible to isolate and quantify the exact impact of the blackout, but there are very few areas of the economy that were not affected. Electricity generation dropped 0.9 percent, as increased production in the rest of Canada could not offset the decline in Ontario. Manufacturing fell 0.6 percent, exactly reversing July's 0.6 percent gain.

Bottom line
Three central banks meet this week - Reserve Bank of Australia, Bank of England and the European Central Bank. Although analysts look for the RBA to increase interest rates eventually, they think the Bank will wait until December. On the other hand, virtually all analysts expect the Bank of England to increase rates by 25 basis points. The rationale rests on the five-to-four vote at the October meeting, with the group wanting to maintain rates barely holding the majority.

It will be an auspicious meeting for the ECB as Jean Claude Trichet chairs his first meeting as president. He was appointed for eight years on October 16, 2003 by common accord of the governments of the Member States that have adopted the euro. He succeeds Willem F. Duisenberg, who was president of the ECB from June 1, 1998 to October 31, 2003.

Looking Ahead: November 3 through November 7, 2003