Hong Kong Hot, Euro Not, OPEC looms International Perspectives 2/14//00 By Anne D. Picker, International Economist

The markets bumpy ride
With the spate of interest rate increases over for the time being, attention is turning back to measures of economic performance. Several indicators released last week began to show some fallout from millennium splurges and precautionary expenditures, especially on production and sales data, making it difficult to evaluate the numbers. The data mostly disappointed market players, leaving them wondering if higher interest rates might not harm the nascent recovery in Europe and slow production too much in Britain. The saga will continue as new data become available …

Selected World Equity Indexes
	Index	11-Feb	4-Feb	Week percent Change
Asia
Australia	All Ordinaries	3167.10	3115.10	1.67
Japan	Nikkei 225	19710.02	19763.13	-0.27
Hong Kong	Hang Seng	17380.30	15968.12	8.84
S. Korea	KOSPI	953.22	950.22	0.32
Singapore	Straits Times	2234.92	2258.91	-1.06
Europe
Britain	FTSE 100	6193.30	6185.00	0.13
France	CAC	6287.01	6275.72	0.18
Germany	DAX	7611.55	7444.61	2.24
North America
United States	Dow	10425.21	10963.80	-4.91
Canada	TSE Comp 300	9156.70	9209.20	-0.57
Mexico	Bolsa	7623.47	7236.54	5.35

Asia
The Nikkei tops 20,000 again
Investors ignored a government warning that the Japanese economy may have slipped back into recession in the last quarter of 1999 and bought equities anyhow (a recession is defined as two consecutive quarters of negative economic growth.) However, enthusiasm for technology and exporters continued unabated despite the fresh doubts whether Japanese economic growth can be sustained without heavy fiscal stimulus. Traders seem less concerned about Japan's overall economic health and have abandoned stocks from the shipbuilding, construction, retail and other industry sectors that are reliant on a buoyant domestic economy. Rather, technology related stocks or shares of companies that claim to be undergoing significant restructuring have thrived. That has led to an extremely narrow market with few issues providing leadership and no signs of any broadening.

On Wednesday, the Nikkei 225 index closed above the 20,000 mark for the first time since July 31, 1997. However, shares fell Thursday on profit taking and ahead of a three day weekend. The Tokyo markets were closed Friday for a national holiday. The Nikkei ended the week down 53 points or 0.3 percent at 19,710.

The Hang Seng celebrates lunar new year with record high
The Hong Kong Hang Seng index welcomed the year of the dragon with a roar when trading resumed on Tuesday. Led by a powerful surge in the territory's new economy stocks, the index soared in the busiest trading in more than two years. The furious rally reflects the higher value investors are giving to media and telecommunications stocks throughout the world.

After a poor performance in January, when the Hang Seng dropped about 9 percent and suffered through extreme bouts of volatility, the market came storming back, wiping away almost all of those losses. The Hang Seng closed the week at 17380, up 8.84 percent or 1,412 points!

Europe
FTSE Steady, DAX sets new highs
The FTSE's week was divided into two parts - before and after the Bank of England Monetary Policy Committee (MPC) meeting. It ended the week anticlimactically treading water. During the first part of the week, trading was muted because investors were reluctant to make decisive moves until after the MPC's meeting, though prices did rally Tuesday led by media and technology stocks. Traders' sentiment was bolstered by strong U.S. productivity gains that allow for rapid growth without inflation. Market players took the MPC's 25 basis point interest rate increase in stride, showing little or no reaction since it had been widely expected. The FTSE-100 closed at 6193, about even on the week.

Both the Paris CAC and German DAX continued to be driven by a boom in telecommunication and technology shares. However, both markets experienced profit taking and some disruptions because of the mega mergers taking place in Europe. The markets were also cheered by U.S. productivity figures. The CAC ended the week virtually unchanged at 6287 while the DAX rose to new heights, closing the week at 7612, up 166 points or 2.24 percent.

Currencies are reflecting trading uncertainties
The yen weakened amid renewed concerns the Japanese economic recovery may be faltering. While the United States continues to prosper, Japanese government officials warned that fourth quarter gross domestic product would probably drop. This would be the second straight quarter of declining GDP. Technically this would mean that Japan has slipped into recession again.

Strong U.S. productivity data reinforced perceptions that the United States and Japanese economies were on vastly different growth paths and that the Japanese economy was a long way away from a sustained recovery. Last week's economic data served to underline the differences.

The euro - good news bad news
The euro was buffeted alternately by good then bad news last week. The euro benefited only slightly from sagging U.S. stock markets. The euro rose because of the better-than-expected improvement in German unemployment, only to give back some of the gain because of strong U.S. productivity numbers. The euro slumped on unsubstantiated rumors Austria was prepared to leave the European Union in protest over its neighbors' harsh reaction to the inclusion of the far-right Freedom Party in the coalition government. Subsequent denials of the Austria rumors followed. The euro rallied briefly because of the European Central Bank's strongly worded concerns over the potential inflationary impact of recent euro weakness. The ECB's monthly report said, "... the past movements of the exchange rate of the euro have increasingly become a cause for concern with regard to future price stability in view of their impact on consumer price inflation via increases in the prices of final and intermediate imported goods."

Finally, the decision of the German cabinet to submit, unamended, its tax reform plans to the legislature added fuel to the euro rally. Most important for the euro would be the removal of capital gains tax on the sale of cross-shareholdings - stakes built up by German companies in other national enterprises. The reluctance of German companies to unwind these substantial cross holdings partly because of high tax rates has been an important barrier to corporate restructuring. However, the euro fell back later on concern that the German tax reform proposals, which investors are counting on to brighten business prospects in Europe, may meet opposition. Some German states won't accept the proposals as written because they're concerned they will lose tax revenue.

Central banks race to raise interest rates
Bank of England joins the pack
The Bank of England's Monetary Policy Committee (MPC) raised their policy making repurchase interest rate by 25 basis points to 6 percent last week. The markets had anticipated this move, especially after the Federal Reserve and the European Central Bank both raised their primary rates by 25 basis points. The Bank offered no explanatory statement with the announcement, probably preferring to wait for the publication of the quarterly Inflation Report on Wednesday.

The widely expected decision from the Bank of England's Monetary Policy Committee is the fourth increase in the past six months. The Bank has changed rates 16 times in the past 33 months since being made independent. There had been growing concern about rising consumer confidence and the steep climb in house prices. British Retail Consortium figures show that retail sales were 4 percent higher in January than a year earlier. And the latest figures show house prices have been rising at 16 percent a year. The MPC fears that these factors could indicate rising inflation and is using interest rates to counter the threat.

The Bank of England's short term lending rate - or base rate - sets the trend for interest rates throughout the economy. So a rise to 6 percent will trigger similar rises across the board in mortgage, credit card and hire purchase rates, for example. Many analysts expect interest rates to continue rising over the next few months, but they believe the base rate will stay below its 7.5 percent peak in mid-1998. Analysts are already expecting interest rates to rise again in the second quarter.

Bank of Japan treads water
The Bank of Japan's Monetary Policy Board decided to leave its monetary policy unchanged after a regular meeting last Thursday. The only comment was that the decision was by majority.

Bank of Korea also rises
The Bank of Korea raised its one day call rate to 5 percent from 4.75 percent. This is the first increase in Korea's benchmark short term rate since April 1998. The primary reason for the increase was to reduce the widening spread between long- and short-term rates, even though inflation pressures are subdued. The Bank of Korea said it raised its benchmark interest rate to discourage companies from piling up too much short term debt and prevent the country's rapid economic revival from sparking an increase in inflation. The rate increase marks the first time South Korea's central bank has raised short-term rates since the height of the country's currency crisis in December 1997.

Not a central bank but…
The Hong Kong Association of Banks matched the Federal Reserve's 25 basis point increase and raised short term deposit rates to 4 percent. The local rate setting cartel last raised deposit rates, a key interest rate benchmark, on August 27, 1999. Because the Hong Kong dollar is pegged to the U.S. dollar, Hong Kong needs to follow increases in U.S. interest rates or risk capital flight. The association meets every Friday to discuss possible changes to the deposit rates. The HKAB controls rates on savings deposits of less than one week maturity.

Indicator Scoreboard
Germany - The January seasonally adjusted unemployment rate fell to 10.1 percent from 10.2 percent in December, according to Bundesbank figures. The rate in the west declined to 8.3 percent from 8.4 percent, while that in the east fell to 17.5 percent from 17.7 percent.

December manufacturing output posted only a 0.2 percent monthly increase after falling 0.1 percent in November. While basic goods production rose 2.6 percent and consumer goods production rose 0.5 percent on the month, both capital goods and durable goods output declined. West German output rose 0.7 percent on the month after a 0.2 percent decline in November. In east Germany, output was up 0.2 percent in the latest month after a 0.2 percent decline the month before.

December seasonally and calendar adjusted total real retail sales (including auto and gas stations sales) fell 0.5 percent on the month and 0.8 percent when compared with last year. Excluding sales at auto dealerships and gas stations seasonally adjusted real retail sales fell 0.3 percent on the month and but rose 1.0 percent on the year. Most Bundesbank nominal (non-inflation adjusted) retail sales subcategories fell both on the month and when compared with last year, with auto sales showing the largest decline. Only food, beverage and tobacco sales posted a gain.

The December seasonally (but not inflation) adjusted trade surplus rose to E4.2 billion - above the E3.4 billion of a year ago but below the E5.9 billion surplus of November this year. Seasonally adjusted exports declined 8.1 percent on the month but were up 9.1 percent on the year. Imports dropped 5.0 percent from a month earlier but were up 8.0 percent when compared with last year.

January final pan German consumer price index rose 0.3 percent on the month and an annual rate of 1.6 percent, the highest annual rate since December 1997. Moreover, fully 0.2 percentage points of January's increase was due to higher energy taxes that took effect Jan 1. Excluding heating oil and motor fuels, January CPI rose 0.2 percent on the month and 0.7 percent on the year.

Britain - Housing starts in the three months to December rose a seasonally adjusted 3 percent on the quarter and were up 6 percent on the year. However, total completions in the same period were down 5 percent on the previous three months but rose 6 percent a year earlier.

Total new construction orders in the three months to December rose 1 percent compared with the previous three months but fell 10 percent on the year. December orders rose by 8 percent compared with November.

December manufacturing production was down 0.3 percent compared to the previous month, while industrial production, which also includes the output of the utilities and the oil and gas sector, declined by 0.5 percent. There was some evidence that the figures were affected by extended shutdowns in many firms during the Christmas and Millennium holiday. Analysts expressed surprise because the surveys had been telling a different story.

Asia
Japan - 1999 household spending fell 1.2 percent when compared with all of 1998. December spending by wage earners fell 4.7 percent from a year earlier in real terms. The propensity for wage earners to consume, a ratio that measures the amount of disposable income that went to household spending fell to 71.8 percent from 72.5 percent in November on a seasonally adjusted nominal basis. During the October to December quarter of 1999, overall household spending on a seasonally adjusted basis fell by 2.2 percent compared with the June to July period.

Revised third quarter gross domestic product dropped 1.0 percent on the quarter. The annualized rate was revised to a negative 3.9 percent from the previously announced 3.8 percent drop. The revised consumption figures were not as weak, showing a fall of 0.2 percent on the quarter instead of the previous 0.3 percent decline.

January domestic wholesale price index was unchanged but declined 0.3 percent when compared with a year earlier. The January domestic WPI decline marked the 23rd successive month of year-over-year declines. January increases in petroleum prices were offset by drops in prices of electrical machinery and edible agricultural, livestock and fishery products.

December core private sector machinery orders rose 16.1 percent. This is the biggest monthly jump since October 1996 and good news for the Japanese economy.

Australia - January employment fell 27,600 while the unemployment rate continued its decline to 6.8 percent, down from December's jobless rate of 7.0 percent. January employment figures are often volatile, and analysts said that the surprise drop is a temporary blip that doesn't alter the outlook for employment growth in the first half of 2000.

BOTTOM LINE
Despite interest rate increases by all the major central banks except the Bank of Japan, monetary policy makers are still fretting about inflation in general, and oil in particular. With the March OPEC meeting looming on the horizon, oil prices are rising on the London and New York markets. The markets are concerned that OPEC members will continue their production constraints despite shrinking supply and increased demand, pushing prices still higher. Of major concern is how much of the price increases will filter through the economy and raise overall prices. The markets will be watching the data in coming weeks to find out.

 

Looking Ahead: Week of February 14 to February 18, 2000
Central Bank Activities
Feb 15	Japan	Bank of Japan Monthly Report
Feb 16	Japan	Bank of Japan Minutes of the December 17, 1999
		Monetary Policy Committee Meeting
Feb 16	UK	Bank of England quarterly inflation report released
Feb 17	EMU	European Central Bank Monetary Policy Meeting
The following indicators will be released this week…
Europe
Feb 14	UK	Producer Price Index (January)
Feb 15	UK	Retail Price Index (January)
Feb 16	UK	Labor Market (January)
	Italy	Industrial Production (December)
		Balance of Payments (December)
	Germany	Wholesale Prices (January)
Feb 17	UK	Retail Sales (January)
	France	Employment (Q4, 1999)
Feb 18	Germany	Consumer Price Index (January)
	France	Merchandise Trade (November)
Americas
Feb 16	Mexico	Gross Domestic Product (Q4, 1999)
Feb 18	Canada	Merchandise Trade (December)

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