Into the home stretch Econoday International Perspectives 11/6/00 By Anne D. Picker, International Economist

Is this the beginning of a year-end rally?
In an otherwise quiet week, the European Central Bank enlivened things Friday by catching the foreign exchange markets totally unawares as they intervened on behalf of the euro. In textbook fashion, they rode the euro's upward movement against the dollar and caught traders off guard. However, the Bank undid much of its good work by acknowledging that they were intervening unilaterally. Ill-timed comments concerning the euro's value and the intervention also weakened its impact. The euro had limped higher during the week, but only netted about a half a cent on intervention.

Equity markets intensified their scrutiny of U.S. economic data for further signs of weakness. Though the picture was mixed, European and British purchasing managers surveys, like the U.S. report, indicated a weakening. (See indicator scoreboard below.) Investors continued to rotate out of new era stocks and into old-liners as earnings reports became available. However, all the indexes tracked here ended the week on the positive side. The Frankfurt DAX rejoined those indexes that are above their January 1, 2000 level.

 

Selected World Stock Market Indexes
				% Change
	Index	Nov 3	Oct 27	Week	2000
Asia
Australia	All Ordinaries	3267	3196	2.22	3.62
Japan	Nikkei 225	14838	14582	1.75	-21.64
Hong Kong	Hang Seng	15594	14902	4.64	-8.06
S. Korea	Kospi	560	515	8.75	-45.49
Singapore	Sing. Strait	2062	1961	5.12	-16.86
Europe
Britain	FTSE 100	6385	6366	0.30	-7.86
France	CAC	6369	6269	2.07	7.39
Germany	DAX	7128	6925	2.94	2.34
North America
United States	Dow	10818	10591	2.15	-5.91
	Nasdaq	3452	3278	5.28	-15.18
Canada	TSE Composite	9720	9322	4.27	15.53
Mexico	Bolsa	6320	6206	1.82	-11.36

Mexican markets were closed on Thursday.
Japanese markets were closed on Friday.

Britain and Europe
The weather started the week badly for Britain as the south of England suffered its worst storms since October 1987. Back in 1987, the storms that disrupted trading on October 16 were followed, just three days later, by Black Monday. But this wasn't the case last week. Even though there was little in the way of domestic news to move the market, investors were still focusing on earnings and revenue pressures. But as high oil prices and corporate profit warnings waned, the indexes began to recover from their October lows. Cyclical stocks found support as increasingly risk averse investors sought safe havens on expectations of slower global growth.

Purchasing managers surveys indicated that growth is slowing in Britain. This might mean that the Bank of England's monetary policy committee will leave interest rates on hold once again when it meets this week. And the markets will be paying close attention to the Chancellor of the Exchequer's pre-budget statement on Wednesday. The FTSE 100 was up 18.9 points or 0.30 percent to end the week at 6385.40. On the year, the FTSE is down 7.86 percent.

The Frankfurt DAX climbed above its January first level for the first time since September 15. On the week, the DAX rose 203.59 points or 2.94 percent to 7128.27. The DAX is up 2.34 on the year. The Paris CAC continues to perform well as it rose 129.99 points or 2.07 percent to 6398.92. On the year, the CAC is up 7.39 percent. Intervention by the European Central Bank to prop up the euro appeared to have little impact on equities markets.

Asia
Asian stocks especially in South Korea and Taiwan are trying to get their feet under themselves again. Political scandal in Taiwan and continuing restructuring problems in South Korea are negatively impacting share prices. In South Korea where gross domestic product grew 10 percent last year and is on track to grow 9 percent this year, the Kospi has been down as much as 50 percent. The enormous debt burdens of the chaebols, industrial groups such as Daewoo, continue to be problematic, driving some into bankruptcy.

In Japan, two life insurance companies already have added to the soaring toll of declared bankruptcies. And others are sure to follow. More large banks are also troubled. The continuing economic malaise has pushed the government's approval rating to an all time low and there is increasing speculation that Prime Minister Mori may resign before year end. Yet another key supplementary budget package, which is needed to carry the economy over the next several months, is already in place. The government has backtracked on reform and restructuring efforts.

Nikkei 225 stock average fell to 14,464.56 on Monday, the index's lowest level since March 1999. However, the index recovered and rose 255.58 points or 1.75 percent to close the week at 14,837.78.

The Asian countries watch the United States closely. Slower U.S. growth means less exports and slower growth. The slowdown would hit these countries in a most vulnerable place, their chip and computer industry exports.

Currencies
The European Central Bank (ECB) intervened Friday for a second time to prop up the euro. They clearly caught traders sleeping. As a result, the euro traded sharply higher, to $0.8745, but only briefly. This time, the ECB and the national central banks (Bank of France, Bundesbank, etc ) acted alone. The currency markets had not expected the Europeans to go it alone. (The U.S. presidential election ruled out support from the Federal Reserve, while Japanese markets were closed for a holiday.) During its first intervention, on September 22, the ECB had been joined by the world's leading central banks - the Fed, the Bank of Japan, the Bank of England and other key players.

Firm U.S. employment and factory order data also held back the euro. This punctured the notion that the growth differential between the EMU and United States might be narrowing. (The narrowing growth differential is supposed to strengthen the euro.) Nevertheless, when the rally began to fizzle, the ECB bought more euros.

Earlier in the week the euro had been rising steadily, until Thursday when the rally appeared to run out of steam after the ECB left its key interest rate unchanged. On Friday, the Bank said it intervened because it was worried both about the global impact of the weak euro and the inflationary pressures triggered by its decline.

Indicator scoreboard
EMU -October Reuters purchasing managers' manufacturing activity index based on data from six EMU countries fell to 55.7 from 57.2 in September. The activity index has declined every month since reaching a peak of 60.7 in April. An index level above 50 indicates the manufacturing sector is expanding, while a level below 50 indicates contraction. The higher the index above 50, the stronger sector growth. The prices index, which is not part of the overall PMI, fell to 71.9 in October from 75.9 in September.

August seasonally, workday and inflation adjusted retail sales rose 0.3 percent. Inflation and workday adjusted retail sales rose 2.4 percent when compared with last year. Retail sales strength was relatively uniform across all sub-sectors. Retail sales are highly volatile from month to month and should be used with caution.

France - September unemployment rate slipped to 9.5 percent according to the International Labor Organization definition, which excludes job seekers who did any work during the month. The rate in September 1999 was 11.1 percent.

September producer price index surged 1.1 percent and 6.7 percent when compared with last year. Excluding food and energy, the PPI rose 0.2 percent and 2.6 percent versus last year. As expected, most of the gain was due to energy prices, which were up 5.6 percent on the month after a 1.0 percent increase in August and soared 28.6 percent when compared with last year.

Third quarter housing permits were up 4.9 percent from the previous quarter and up 14.3 percent when compared with last year. Third quarter housing starts were 12.2 percent below previous year levels.

Italy - September producer prices rose 0.9 percent and 6.7 percent when compared with last year because of higher energy import prices. Excluding energy prices, producer prices rose 0.2 percent and 3.5 percent when compared with last year.

August unadjusted industrial orders soared 18.9 percent when compared with year. Foreign orders jumped 23.8 percent while domestic orders rose 14.8 percent. Recently introduced seasonally adjusted orders data showed orders rising in August by 7.0 percent on the month. Domestic orders rose 5.9 percent while overseas orders were up 8.5 percent.

Spain - September producer prices jumped 1.0 percent and 5.5 percent when compared with last year. The surge was due largely to higher oil prices. Energy prices rose 5.3 percent on the month and 23.7 percent on the year.

Britain - September net consumer credit rose 0.8 percent and was 12.7 percent above levels of a year ago. The bounce back in net lending was driven by bank lending following a weak August number.

The October Chartered Institute of Purchasing and Supply purchasing managers' index fell to 49.7 from 51.4 in September. Input prices continued to rise but the pace slowed further from July's recent peak. Firms again cited widespread shortages of many raw materials, the sustained high price of oil and the relative weakness of sterling versus the dollar as the main reasons underlying the latest rise in input prices. The survey also showed that output and orders continued to expand in October although at a slower pace than before.

October seasonally adjusted Chartered Institute of Purchasing and Supply services business activity index rose to 57.0 from 55.0 in the previous month. Prices charged by service sector firms rose for the 13th month in a row to the highest level in the survey's four year history.

October seasonally adjusted Nationwide house price index rose 0.9 percent on the month compared with a 0.4 percent rise in September and jumped 9.9 percent when compared with last year.

October Halifax house prices survey dropped 0.4 percent and 5.7 percent when compared with last year. House price inflation has slowed recently after a boom during the second half of 1999 and beginning of this year. The Halifax figures contrast with data from the Nationwide, which reported a 0.9 percent rise in prices in October.

Total seasonally adjusted housing starts in the three months to September fell 1 percent compared with the previous three months and were down 2 percent on the year. Total completions from July to September fell 9 percent on the previous three months and were down 11 percent when compared with last year.

Total construction new orders in the three months to September fell 2 percent on the quarter but rose 14 percent on the year. Orders in the 12 months to September rose by 3 percent compared with the previous 12 months.

Asia
Japan - September seasonally adjusted unemployment rate rose to 4.7 from the 4.6 percent recorded in August. The number of unemployed rose 0.9 percent from the previous year while the number of employed fell 0.5 percent. The labor force participation rate fell to 62.7 from 63.3 the same month a year ago.

Australia - September seasonally adjusted balance of trade was in surplus for the first time in almost three years as the Olympic Games boosted exports of services. The trade balance swung to an A$677 million ($351.6 million) surplus from August's A$1.3 billion deficit. That was the first surplus since November 1997. Sydney hosted the Olympic Games from September 15 to October 1, generating an estimated A$1.4 billion in extra services exports, including A$970 million for TV broadcasting rights. Exports rose 19 percent to A$13.57 billion. Higher commodity prices and a competitive exchange rate are also boosting exports.

September seasonally adjusted retail spending rose 0.8 percent, boosted by spending on Olympics merchandise and entertainment. In the third quarter, sales fell 3.3 percent, following a 2.7 percent gain the second quarter. Analysts and retailers said the introduction of a new 10 percent tax on most goods and services from July 1, as well as Sydney's hosting of the Olympic Games in the last two weeks of September, are making the monthly retail figures difficult to interpret. Spending on Olympic tickets is not included in this survey.

Americas
Canada - August gross domestic product at factor cost rose 0.4 percent after advancing 0.3 percent in both June and July. When compared with August 1999, GDP rose 4.4 percent. Manufacturing output rose 0.8 percent, buttressed by another solid increase in electrical and electronic goods production. Makers of automotive products also raised their output, as did producers of fabricated metal products and manufacturers of other miscellaneous goods (such as scientific equipment and sporting goods). These increases were partly offset by declines in the printing and publishing and chemicals industries. Overall, 14 of 22 major industry groups, accounting for almost three-quarters of total manufacturing production, advanced in August.

October unemployment edged up 0.1 percentage points to 6.9 percent as more people participated in the labor market. Employment climbed by an estimated 20,000 jobs. When compared with last year, employment was up 344,000 or 2.3 percent. Full time employment rose by an estimated 52,000 while part time employment declined by 32,000.

BOTTOM LINE
One of the primary reasons for the euro's weakness is thought to be the disparity in growth rates between Europe and the United States. It is hoped that the euro would rise in value as this gap narrowed. This notion assumes that the EMU would be relatively unaffected by any slowing of the U.S. growth rate, which of course is unrealistic. There are no guarantees that similar growth rates would strengthen the euro. The euro suffers from a lack of confidence that Europe can get its political act together, making its fiscal and monetary policies complementary. Europe has yet to bite the bullet on significant structural labor market reforms, nor has it tackled the political reforms that are necessary for a truly united Europe.

 

Looking Ahead: September October 30 to November 3, 2000
Central Bank Activities
Nov 7	Australia	Reserve Bank of Australia Monetary Policy Board Meeting
Nov 8, 9	Britain	Bank of England Monetary Policy Committee Meeting
Other events
Nov 7	U.S.	Presidential Election
The following indicators will be released this week...
Europe
Nov 6	Germany	Wholesale Sales (September)
	Britain	Industrial Production (September)
Nov 7	EMU	Unemployment (September)
		Producer Price Index (September)
		Gross Domestic Product (Q2, 2000)
	EU	Business and Consumer Survey (October)
	Germany	Unemployment (October)
		Employment (September)
		Industrial Production (September)
Nov 9	Germany	Consumer Price Index (October)
	IEA	International Energy Agency Monthly Report (November)
Nov 10	Germany	Merchandise Trade (September)
Asia
Nov 9	Australia	Labor Force Survey (October)
	Japan	Wholesale Price Index (October)
Nov 10	Australia	Manufacturing Production (Q3, 2000)

Release dates are subject to change.
For U.S. data releases, see this week's Simply Economics.