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German taxes
help, Japan failure doesn't The strongest equity markets performances were in North America. The Toronto Stock Exchange Composite 300 scored three consecutive new closing highs. In the United States, the Nasdaq and Dow showed signs of a summer rally. The Nasdaq was exuberant, jumping 5.54 percent on the week and finally climbing higher than the year-end close.
Britain
and Europe
Paris CAC also meandered prior to the Bastille Day holiday on Friday. It gained 4.39 points or 0.07 percent to end the week pretty much where it began, at 6570.36. The Frankfurt DAX, however, ended the week with a roar after the passage of watershed tax reform legislation calculated to speed up the country's economic restructuring. The tax measure will exempt corporate asset sales from capital gains tax to the special advantage of financial groups, opening the way for a sell-off of unwanted investments many of which have been held since post World War II days. The DAX shot up 264 points or 2.74 percent to end the week at 7316.22. Asia The worries are many. What will the impact be on the banks that are loaded with debt? What will be the effect be on financially weak firms, especially in the construction industry? What impact would a looming interest rate increase - no matter if 25 basis points or less basis points - have on these companies and those they owe? What about the frail Japanese economic recovery? And so the list continues. The Nikkei 225 lost 255.34 points or 1.47 percent to close at 17,142.90.
The Hong Kong Hang Seng, on the other hand, forgot interest rate worries and got happy. The index soared an impressive 756.20 points or 4.49 percent to end the week significantly above 17,000 at 17,586.16. Investors here have decided that the U.S. Federal Reserve will not raise interest rates, and therefore Hong Kong's rates will not be raised either. With the Hong Kong dollar pegged to the U.S. dollar, interest rates generally rise in tandem. The rally on the Nasdaq revived the technology sector while the interest rate picture stimulated property stocks.
Americas
The Toronto Stock Exchange Composite 300 is outperforming everyone, everywhere. On the year, the index is up over 28 percent. In 1999, the TSE rose over 30 percent. Technology stocks drove the TSE to three consecutive closing highs on Wednesday, Thursday and Friday. On the week, the index was up 398.52 points or 3.84 percent to close at 10,778.80, just shy of the Dow Industrials level. Currencies
The yen is being buffeted by cross currents of political and economic uncertainty. The buildup to Monday's (today) Bank of Japan meeting has placed monetary policy in a political and economic vortex. The Bank of Japan has made it known that they would like to abandon their 16 month emergency zero rate interest policy (ZIRP) in favor of raising interest rates about 25 basis points. However, the bank is under political pressure to defer the move because many fear the economy is too weak to absorb the increase. The failure of a major nonfinancial company last week has exacerbated the Bank of Japan's problem and could have negative repercussions for the Japanese financial system. The Bank of Japan has been independent of the Ministry of Finance for 2 years and has worked hard to maintain it. The Bank has been preparing the markets for an interest rate increase for some time, and should they fail to raise rates cries of a political cave-in would follow. However, there are concerns that the economy (and especially small firms) is not strong enough to bear new burdens. Next weekend, Japan hosts the Group of Seven summit meeting. As at past meetings, the Japanese government is sure to come under pressure to continue stimulating their economy.
Both the Nikkei and yen have fallen under these pressures. In the graph above, more yen per dollar means that the yen is falling in value while the dollar is increasing in value in relation to the yen. Indicator
scoreboard
Germany - April exports rose 9.6 percent from a year ago. In the first four months of the year, total exports rose 17.5 percent compared to the same period a year earlier. April exports to Japan rose 16.2 percent, while those to China rose 19.5 percent. Exports to ASEAN nations also rose strongly in April, up 17.3 percent. Exports to the United States, however, fell 3.0 percent. Exports to other EMU countries rose 13.8 percent on the year. Total imports rose 14.0 percent on the year. In the January to April period, imports rose 22.0 percent on the year. Imports from EMU members rose 10.8 percent on the year. Imports also increased from Japan, up 12.8 percent on the year, from China, up 29.4 percent, and from ASEAN nations, up 27.7 percent. May unadjusted merchandise trade surplus stood at DM7.4 billion down from the DM9.4 billion surplus posted in April but up from the DM6.2 billion surplus when compared with last year. While exports in rose a strong 30.8 percent when compared with last year, imports rose even faster, up 31.8 percent. The May nominal, seasonally adjusted trade surplus stood at E4.3 billion, above the E4.0 billion surplus of May 1999 but below the E4.7 billion surplus of April. Seasonally adjusted exports were down 6.2 percent on the month while imports stood dropped 7.8 percent on the month. June final consumer price index rose 0.6 percent on the month and 1.9 percent on the year. Excluding volatile energy prices, German consumer prices rose 0.9 percent on the year. Consumer prices for the six months to June remained unrevised from preliminary results, growing at an annualized rate of 2.1 percent, up sharply from the 1.1 percent increase in May. May real retail sales rose 10.3 percent on the year, while nominal retail sales were up 11.0 percent. Seasonally adjusted, real retail sales in May were down 0.4 percent on the month, while seasonally adjusted nominal sales declined 0.5 percent. For the first five months of 2000, real sales were up 2.5 percent on the same period of 1999 with nominal sales up 3.4 percent. The strong rise in fuel costs was reflected in the difference between nominal and real fuel prices. Bundesbank seasonally and calendar adjusted data show a more modest real retail sales gain in May than do the unadjusted data released earlier in the day by the Federal Statistics Office. Total real retail sales - including auto and petrol stations sales - rose 4.0 percent compared to a year earlier. Bundesbank adjusted data show ex-auto/petrol real retail sales rose 1.6 percent in May compared to April, while Statistics Office data show a 0.4 percent decline. The difference between the seasonally adjusted monthly comparison of Bundesbank and Statistics office is likely due to the different seasonal adjustment methods they use.
France - June seasonally adjusted consumer price index rose 0.3 percent on the month and 1.6 percent when compared with last year because of higher oil product prices. Core consumer price index, which excludes administered prices and volatile sectors like food and energy, crept up 0.2 percent and 1.2 percent when compared with last year. Britain - June seasonally adjusted producer input prices climbed 1.4 percent on the month, which pushed up the annual rate of input price inflation to 14.1. The latest rise in input prices was mostly attributable to crude oil. The price of crude oil rose 4.7 percent on the month and 93.8 percent on the year. The fall in the pound is also now exerting an upward effect on input prices. Seasonally adjusted core output prices (excluding food, beverages, tobacco and petroleum) rose 0.2 percent on the month and 1.1 percent on the year, the highest annual rate since August 1996. The index for output prices excluding excise duties rose by 0.4 percent on the month, which was the strongest monthly rise since April 1996, and by 2.3 percent on the year, the strongest rise since June 1996. June retail price index excluding mortgage interest payments (RPIX) rose 0.2 percent and 2.2 percent when compared with last year. Crude oil price surge helped push up the underlying inflation rate further toward the Bank of England's 2.5 percent target. The retail price index (RPI) rose 0.2 percent on the month and 3.3 percent when compared with last year. The RPIY, which excludes both mortgage interest payments and indirect taxes, rose 0.2 percent on the month and by 2.0 percent on the year. The Bank of England uses the RPIX as its inflation gauge.
June claimant unemployment slipped to 3.8 percent. It is now lower than that of the United States. Unemployment as measured by the International Labor Organization for the three months to May dropped to 5.6 percent from 5.8 percent in the three months to April.
May average earnings growth slowed sharply to 4.6 percent in the three months to May as bonuses in the private services sector were much lower than a year ago. In May alone, earnings were up only 4.0 percent on a year earlier compared with a rate of 4.6 percent in April. This was the lowest single month earnings figure since September 1997. The Bank of England's target average earnings growth is 4.5 percent.
Asia May seasonally adjusted private sector machinery orders, excluding orders from volatile ships and electric power companies, rose 4.5 percent. The total value of all machinery orders received by 280 manufacturers increased by 2.8 percent in May from the previous month on a seasonally adjusted basis. May unadjusted current account surplus dropped 18.2 percent on a year earlier. The trade surplus stood at was down 24.1 percent on a year ago. Exports were up 8.1 percent, and imports up 20.5 percent. The goods and services balance fell 36.0 percent when compared with a year ago. May seasonally adjusted industrial production was revised up to an increase of 0.3 percent. Unadjusted industrial production jumped 7.6 percent when compared with a year earlier. Shipments rose 0.7 percent on a month earlier from the initial 0.5 percent and were up an unadjusted 8.1 percent from a year earlier. Australia - June seasonally adjusted unemployment rate fell to 6.6 percent from 6.7 percent in May. This is the lowest rate since May 1990. Employment grew by 47,100 full time jobs, offsetting a 25,300 decline in part time jobs. The labor participation rate stayed at 63.7 percent.
Americas
BOTTOM
LINE In Japan, the jury is still out on whether recent growth can be sustained should interest rates rise. A solid argument could be made either way on a possible interest rate increase. Surely Japan's savers should be rewarded with a higher rate of interest as an incentive to keep money in Japan rather than investing abroad. However, a 25 basis point rate increase still would leave a significant 6 percent rate differential with the United States and a 4 percent differential with the EMU. With growth resting on exports, domestic demand and particularly the consumer will have to spend with much less caution. In Japan, long overdue structural reform continues to stumble forward. But as last week's bankruptcy affair indicated, there is a long way to go. Looking
Ahead: July 17 to July 21, 2000
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