Nail Biting TIme Econoday International Perspectives 6/19/00 By Anne D. Picker, International Economist

It's all about interest rates and growth rate differentials
With several market moving events in the offing, investors were content to stay on the sidelines last week. They were waiting for key U.S. economic data and for policy direction to become more clear. Virtually regardless of local events, overseas markets continue to be dominated by U.S. growth prospects and U.S. equity and bond market movements. All information, such as the Federal Reserve's Beige Book, is thoroughly scrutinized for policy implications. But the outcome of the Fed's meeting on June 27 and 28 is not the only reason why investors are treading water, the June 25 election in Japan is another uncertainty. In Canada, the Toronto Stock Exchange composite 300 index hit an all time high on Thursday at 10,110.56.

 

Selected World Stock Market Indexes
	Index	June 16	June 9	Percent Change
Asia
Australia	All Ordinaries	3097	3102	-0.16
Japan	Nikkei 225	16318	16862	-3.22
Hong Kong	Hang Seng	16434	16120	1.95
S. Korea	Kospi	759	836	-9.25
Singapore	Sing. Strait	2012	2043	-1.49
Europe
Britain	FTSE 100	6526	6444	1.28
France	CAC	6456	6549	-1.42
Germany	DAX	7131	7255	-1.70
North America
United States	Dow	10449	10614	-1.55
	Nasdaq	3860	3875	-0.37
Canada	TSE Composite	10036	9729	3.15
Mexico	Bolsa	6453	6399	0.85
Australian and French markets were closed on Monday.

Europe and Britain
The European and British markets drifted aimlessly waiting for the release of key British and U.S. data. They were looking for signs of economic slowdown in both Britain and the United States, which could put interest rate policies on hold.

In Britain, benign inflation data along with other economic indicators helped the FTSE 100 move higher. The data, key for British monetary policy decision-making, showed a slowdown in growth, which may limit further interest rate increases. The FTSE 100 rose 82.20 points or 1.28 percent to end the week at 6526.

The Frankfurt DAX and Paris CAC drifted downward as they absorbed the 50 basis point European Central Bank interest rate increase of the prior week. The markets also continued to take their cues from U.S. markets and the countdown to the Fed meeting.

An example of U.S. markets' influence abroad occurred on Friday. The DAX caught a transatlantic chill in the afternoon and sank after U.S. investors began to fret about bank earnings and loan credit worthiness and the Dow plunged downward. On the week, the DAX sank 123.13 points or 1.7 percent to end at 7131.40, while the CAC fell 92.79 points or 1.42 percent to 6456.26.

Asia
It is election time in Japan, and the equities markets there are reflecting the nervousness surrounding the outcome. The Nikkei 225 was down four of five days last week as investors solidified their positions before the June 25 election day. Investors are also watching the Bank of Japan and are wondering whether they will raise interest rates. To go by rhetoric from Bank officials, the end to the zero interest rate policy is near. To look at the economics, growth is by no means entrenched as yet. Consumer demand continues to be the recovery's Achilles' heel. The Nikkei closed at 16318.31, down 543.6 points or 3.22 percent. The index has given back almost two-thirds of the prior two weeks' gains. Also contributing to the decline was the collapse of a planned bank merger, which in turn cast doubt on the prospects of other intended combinations. Investors were looking to benefit from better earnings, the expected outcome of the mergers.

On the other hand, the Hong Kong Hang Seng continued its upward climb as U.S. economic growth slowed and perhaps put further interest rate increases on hold. With its currency linked to the U.S. dollar, Hong Kong must follow Fed moves. In the last three weeks, the index has risen 2711 points or just under 20 percent. Last week, the Hang Seng rose 314.12 points or 1.95 percent to close at 16,434.38, the highest since April 12^th.

In other markets, the South Korean Kospi gave back all of the previous week's gains on profit taking and nervousness over the now completed meeting between North and South Korea. The Kospi closed down 77.36 points or 9.25 percent to end the week at 759.04.

Americas
The Toronto Stock Exchange composite 300 index soared on Thursday to close at a new all time high and over 10,000 for the first time since March 27. The index pulled back on Friday, however, because of profit warnings in the U.S. banking sector and thin volumes across the board. However, the index stayed over 10,000 to end the week at 10,035.66, up 306.72 points or 3.15 percent on the week. Since the start of 2000, the TSE is the best performing index of those tracked here, up 19.28 percent on the year.

Currencies
The euro continued to improve. Investors are looking for fresh confirmation that U.S. and Euroland growth trends are converging. Even though the European Central Bank's aggressive 50 basis point rate hike on June 8 clouds the outlook, most analysts still expect slower U.S. growth to underpin the euro as the EMU picks up speed and growth trajectories converge.

The monthly European Central Bank report left the door open for future rate hikes but failed to stir much enthusiasm for the euro. The report noted that oil prices and the weak euro would continue to put upward pressure on consumer prices and that recent strong money supply and credit growth was due mainly to "robust" economic growth. This may suggest that further signs of above expected growth might require a monetary policy response.

The yen is reflecting the uncertainty over the June 25 Japanese election, the eagerly anticipated quarterly Tankan index of business sentiment slated for release on July 4, and the Bank of Japan Monetary Policy Committee meeting that follows on July 17. All suggest that traders will be on hold for the next few weeks. Soaring oil prices are also weighing on the yen because of Japan's dependence on imported oil and the detrimental effects a protracted increase in prices would have for the fledgling Japanese economic recovery.

OPEC looms, oil rises
OPEC oil ministers are meeting again on Wednesday amid soaring crude oil and gasoline prices. At issue again is whether output should be increased to meet growing international demand. A preliminary meeting last week produced no agreement and the outcome of this week's meeting is by no means certain.

After its March meeting, OPEC said that it would vary output by 500,000 barrels a day if the price of oil went outside a $22 to $28 per barrel range averaged over 20 days. The upper limit has been breached but no action has been forthcoming. Private output estimates show that the members are already producing above their self-imposed quotas. A further increase would push OPEC production close to its highest levels in 20 years.

Indicator scoreboard
Britain - May raw input prices rose 3.6 percent to an annual rate of 12.9 percent - the largest monthly increase in 14 years. Excluding oil, input prices rose 0.7 percent. Producer output prices (the cost of goods leaving the factory) rose 0.1 percent for an annual rate of 2.3 percent. Crude oil prices have been responsible for the upward pressure on input prices since the start of last year. Oil prices rose 25.8 percent on the month, the largest increase since September 1990.

May retail price index excluding mortgages (RPIX), crept up 0.3 percent on the month and were up 2.0 percent when compared with last year. This is the 14th consecutive month RPIX has remained below the Bank of England's inflation target of 2.5 percent. The May retail price index (RPI) rose 0.4 percent on the month and was up 3.1 percent on the year. The retail price index which excludes both mortgage interest payments and indirect taxes (RPIY) rose by 0.4 percent on the month and was up 1.7 percent on the year.

May unemployment rate slipped to 3.9 percent. However, unemployment on the International Labor Organization measure in the three months to April fell by 60,000 on the previous quarter and was down 128,000 on the year. The ILO unemployment rate stood at 5.7 percent, down from 5.8 percent in the January to March period. Employment in the three months to April rose 112,000 on the previous quarter and was up 324,000 on the same period a year earlier. The employment rate now stands at 74.5 percent, up from 74.4 percent last month.

Average earnings in the three months to April climbed 5.1 percent, down from the 5.7 percent increase in the previous three months, although much of the deceleration can be explained by January's very high figure dropping out of the calculation. For the month, April average earnings rose by 4.4 percent when compared with a year earlier and lower than March's increase of 5.2 percent. This can be attributed to lower bonus payments, particularly in the financial services sector.

April seasonally adjusted retail sales volumes rose by 0.4 percent on the month and were up 3.6 percent when compared with a year earlier. In the three months to May, sales increased by only 0.2 percent on the quarter and by 4.2 percent on the year, the lowest quarterly growth rate since December 1998.

Germany - April unadjusted merchandise trade fell to DM9.5 billion, down from the DM10.9 billion surplus in April 1999. When compared with last year, exports rose 8.8 percent and imports rose 12.1 percent. The April nominal, seasonally adjusted trade surplus fell to E5.2 billion, below the E5.5 billion surplus of April 1999. Seasonally adjusted exports were down 3.5 percent on the month while imports declined 3.2 percent on the month.

May consumer price index was revised to down 0.1 percent but up 1.4 percent when compared with last year. Excluding energy prices, May CPI rose 0.6 percent when compared with May 1999.

April real seasonally adjusted retail sales rose 5.5 percent and 1.6 percent on the year. April seasonally and calendar adjusted real retail sales - including auto and gasoline stations - rose 2.4 percent on the month and 1.5 percent compared to a year earlier.

Italy - April seasonally and workday adjusted industrial production fell 0.7 percent from March. However, the adjusted annual gain was 8.3 percent, the strongest rise since December 1997.

Spain - May consumer price index rose 0.2 percent on the month and 3.1 percent when compared with last year. Fuel and gasoline prices increased 1.8 percent on the month in May and were up 21.2 percent on the year, while energy products rose 1.4 percent on the month and 15.4 percent on the year. Core consumer prices, excluding energy products and non-processed food, were up 0.2 percent on the month and 2.3 percent on the year.

April retail sales fell 1.9 percent on the month but rose 8.8 percent on the year. April food sales rose 1.9 percent on the month and 11.5 percent on the year.

Asia
Japan - April current account surplus as measured by the broadest measure of trade jumped 40 percent. The non-seasonally adjusted current account surplus rose to $11.1 billion. Exports rose 8.3 percent while imports were up 8.2 percent from April last year.

Hong Kong - April retail sales jumped 8 percent by value and 14 percent by volume. Both numbers were slightly below increases of 9 percent and 15 percent, respectively, posted in March. Durable goods sales leaped 23 percent, auto sales jumped 23 percent, and jewelry sales climbed 12 percent when compared with a year earlier.

Australia - First quarter gross domestic product rose 1.1 percent from the fourth quarter of 1999 and 4.3 percent from the year earlier period. Gross national expenditure rose 1.2 percent in the first quarter from the fourth quarter and 4.1 percent from the when compared with a year earlier. The price deflator for private final consumption spending rose 0.5 percent in the first quarter and a rose 0.3 percent from the year earlier quarter. The GDP deflator rose 0.9 percent in the first quarter and 0.7 percent when compared with a year ago.

Americas
Canada - April manufacturers' shipments fell 2.8 percent led by declines in the motor vehicle and refined petroleum and coal industries. Manufacturers' shipments have increased 0.3 percent since the beginning of 2000, and were 9.3 percent higher than in April 1999. Manufacturers' shipments decreased in 15 of the 22 major groups in April, representing 72.2 percent of the total value of shipments. Excluding the automotive sector, manufacturers' shipments decreased 2.0 percent from March. Unfilled orders continued to decline in April. Inventories grew for the fifteenth month in a row.

May not seasonally adjusted consumer price index jumped 0.5 percent thanks to higher prices for travelers' accommodations, fresh fruit and vegetables, gasoline, natural gas and mortgage interest cost. The increases were countered in part by declines in clothing and automotive vehicle insurance premiums. On the year, the CPI rose 2.4 percent. When compared with last year, seasonally adjusted CPI rose 2.18 percent while the seasonally adjusted CPI excluding food and energy rose 1.45 percent. The Bank of Canada's inflation target range is one to three percent.

BOTTOM LINE
A number of important market moving events are in the offing for Japan. The election on June 25 will give clues whether current economic policies will continue. The election will be followed by the release of the Tankan survey, which gives the best indications of where the economy could be headed. No policy changes are expected prior to July 8 when Japan hosts the G-7 summit meeting. In mid-July, the Bank of Japan's Monetary Policy Committee meets and investors will be watching for a change in their zero interest rate policy, which they have been threatening to end.

As the clock ticks down to the Federal Reserve Open Market Committee meeting on June 27 and 28 the world's investors will be watching and waiting to see what the next interest rate move will be.

Looking Ahead: June 19 to June 23, 2000

Central Bank Activities
June 21	ECB	European Central Bank Monetary Policy Committee Meeting
June 21	Britain	Bank of England Monetary Policy Committee
		Minutes of June 6 to 7 meeting
Other Activities
June 19, 20	Portugal	European Union Summit Meeting
June 21	Vienna	OPEC meeting to determine member crude oil quotas
June 25	Japan	National Elections
The following indicators will be released this week...
Europe
June 19	ECB	Harmonized Index of Consumer Prices (May)
	Italy	Consumer Price Index (May)
June 20	Germany	Ifo Survey (May)
	Italy	Gross Domestic Product (Q1, 2000)
	Spain	Industrial Production (April)
June 21	Spain	Gross Domestic Product (Q1, 2000)
June 22	Germany	Producer Price Index (May)
	France	Industrial Production (April)
	Britain	CBI Industrial Trends (May)
June 23	Britain	Merchandise Trade (April)
	Italy	Merchandise Trade (April)
Asia
June 19	Hong Kong	Unemployment (March to May)
June 22	Japan	All Industry Index (April)
	Hong Kong	Consumer Price Index (May)
Americas
June 20	Canada	Merchandise Trade (April)
June 21	Canada	Retail Trade (April)
Release dates are subject to change.
For U.S. data releases, see this week's Simply Economics.