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Economy
and markets go in separate directions Last week, equity trading was affected by position squaring prior to the second quarter close combined with adjustments following the Federal Reserve Open Market Committee meeting. Second quarter profits worried some in Britain and the United States. Uncertainty whether the nations were near or close to the top in their interest rate cycles also addled investors. And it was before a holiday weekend in the United States and Canada, which meant that volume was low, exacerbating fluctuations. Yet the TSE hit a new high again during the week.
Britain
and Europe
The markets were skittish prior to the FOMC's interest rate decision last Wednesday. Although the meeting produced no surprises, investors were nevertheless unsure afterward. British markets, with virtually no new economic news to excite investors, turned their focus to the upcoming Bank of England Monetary Policy Committee meeting on Wednesday and Thursday. Although a rate increase is not expected, market players were jolted by news that the MPC was split at the last meeting, voting 6 to 3 vote to keep rates on hold vs. expectations of a unanimous vote. The end of the second quarter inhibited investors. Sellers included some fund managers, whose portfolios have suffered from the volatility that is now a regular market feature. The FTSE 100 ended the week at 6312.70, down 78.80 points or 1.23 percent. Both the Frankfurt DAX and Paris CAC were hit with rotational selling between telecommunications, technology and old economy shares. As a result they both ended the week on a negative note also. The DAX closed at 6898.21, down 82.20 or 1.18 percent, while the CAC closed at 6446.54, down 98.81 points or 1.51 percent. Asia
and Australia
The Asian economies have been benefiting from strong U.S. growth. In essence they have exported their way out of the 1997 Asian financial crisis. As a result, they are very dependent upon U.S. economic performance and hang on every economic number and every eye twitch at the Federal Reserve. As a region, Asia and Australia turned in the best gains in the last week of June. The Australian All Ordinaries vaulted 130.3 points or 4.17 percent to end the first half of 2000 and their fiscal year at 3257.60. Both the Japanese Nikkei and Hong Kong Hang Seng were up about 2.65 percent on the week. The South Korean Kospi, which has been very volatile, jumped 5.43 percent. Americas
Currencies
The interest rate spread between Europe and the United States is still significant, with ECB rates 2.25 percentage points below the U.S. The euro could continue to rise if the spread narrows. This assumes that the Federal Reserve does not raise rates again while the European Central Bank does. The perception is firm that the growth gap is closing as Europe speeds up while the United States slows down. Nevertheless, higher U.S. interest rates continue to attract those who want to take advantage of the spread. The yen traded nervously awaiting news of a possible credit rating decline of Japanese debt. But the downgrade of Japan's credit rating was not as steep as some had feared. After Sunday's victory by the governing coalition in Japan's national elections, many analysts expect the government to continue its policy of propping up the economy with trillions of yen in spending. Japan became the world's largest debtor nation last year. At week's end, the yen rose against the dollar on expectations that the Tankan survey due on July 4 will show that confidence has improved in the world's second largest economy.
Subtle hints have been flowing out concerning the Bank of Japan's zero interest rate policy. Rumor has it that the Bank will abandon ZIRP, perhaps as soon as the July 17 meeting. Improving growth and easing concerns about deflation may persuade BoJ policy makers to raise benchmark interest rates soon. Japan's key rate lags that in the United States and Europe substantially. The European Monetary Union's comparable rate is 4.25 percent and in the United States, 6.5 percent. Higher rates typically boost a currency by making deposits denominated in it more attractive. Investors needed yen to buy Japanese financial assets. Foreign investors were net buyers of Japanese equities for the first time in eight weeks in the five days ended June 23, according to the latest Tokyo Stock Exchange figures. Indicator
scoreboard
May M3 money supply growth decelerated, braking the strong upward trend of recent months. The May year-over-year growth rate fell to 5.9 percent from an unrevised 6.5 percent in April, while the 3 month (March to May) year-over-year moving average held steady at the unrevised reading of 6.3 percent. The three month moving average is used by the ECB as one of its main monetary policy guides and remains almost two full percentage points above the ECB's 4.5 percent target rate.
April merchandise trade surplus with the rest of the world shrank to E1.1 billion, down from a surplus of E4.8 billion in April 1999. EMU exports were up 12 percent when compared with April 1999 and imports were up 19. Germany - May producer prices climbed 0.6 percent on the month and 2.7 percent on the year. Excluding oil products, producer prices rose 0.3 percent on the month and were up 1.5 percent on the year. Oil products prices were up 3.3 percent on the month and 31.5 percent when compared with last year. Producer prices for semi-finished goods - which account for some 52 percent of the producer price index - were up considerably more than the index as a whole, rising 0.8 percent on the month and 4.9 percent on the year. Seasonally adjusted producer prices for the six months to May grew at an annualized rate of 3.2 percent, up from the 2.8 percent rate in the six months to April. May unadjusted import prices soared 2.0 percent on the month and 11.7 percent on the year. The May increase was due largely to crude oil prices, which were up 15.2 percent on the month and 100 percent on the year. May import prices excluding oil products, rose 1.0 percent on the month and 6.7 percent on the year, reflecting the weakness of the euro against the dollar. May seasonally adjusted import prices rose 2.0 percent and were 11.7 percent above last year. May seasonally adjusted export prices rose 0.7 percent and 3.8 percent on the year. France - May seasonally and workday adjusted consumer spending on manufactured goods climbed 2.6 percent and 7.6 percent on the year. A 9.2 percent surge in car sales more than offset the 1.3 percent decline in household durable sales, resulting in an increase in durable goods sales of 4.1 percent on the month and 17.8 percent on the year. May seasonally adjusted number of unemployed declined 1.5 percent or 40,000 to 2.547 million, cutting the unemployment rate to 9.8 percent, according to the International Labor Organization definition, which excludes job seekers who did any work during the month. In May 1999, the ILO unemployment rate stood at 11.4 percent.
May producer price index jumped 1.3 percent and soared 11.4 percent on the year. Energy prices surged 4.8 percent in May after a 2.5 percent drop in April, resulting in an annual gain of 45.7 percent. Excluding energy and food, the core PPI crept up 0.1 percent on the month and 2.5 percent on the year. Italy - April unadjusted industrial orders rose 15.9 percent led by foreign orders, which posted a 27.2 percent gain - their biggest increase since December 1997. Domestic orders were also strong, rising 9.1 percent on the year. Britain - First quarter gross domestic product was up 0.5 percent on the quarter and 3.0 percent on the year. Industrial output fell by 0.8 percent on the quarter but was up 1.5 percent on the year. A drop in energy sector output was partially responsible for the decline. Construction output rose by 3.0 percent on the quarter and by 4.8 percent on the year. Service sector output was revised down to a 0.7 percent increase on the quarter and up 3.3 percent on the year. On the expenditure side, household expenditure rose by 0.6 percent on the quarter and by 4.0 percent on the year.
First quarter current account deficit was much larger than expected mainly due to a lower surplus on investment income. The current account deficit in the first quarter widened to Stg4.010 billion from Stg1.545 billion in the fourth quarter. Asia May preliminary seasonally adjusted industrial production rose 0.2 percent and 7.5 percent on the year. Production continues to be bolstered by strong demand from Asia, the United States and parts of the domestic economy. Shipments rose 0.5 percent on the month and 7.9 percent on the year while inventories were down 0.3 percent on the month and but rose 0.9 percent on the year. May unemployment rate fell to 4.6 percent as the number of full time workers rose for the first time in more than two years. It was the second straight month in which the unemployment rate fell.
May real wage earners' spending fell 1.2 percent when compared with last year. Real incomes rose a 0.7 percent gain when compared with last year. The propensity for wage earners to consume - the amount of disposable income set aside for household spending - rose to 72.9 percent in May from 71.9 percent a month earlier on an unadjusted, nominal basis. June unadjusted consumer price index for Tokyo fell 0.5 percent from the previous month and 1.2 percent from the previous year. The May consumer price index for Japan rose 0.1 percent from the previous month, but was down 0.7 percent from the previous year. Hong Kong - May total exports rose 22.3 percent from a year earlier. It was the seventh straight month of double digit export growth. Imports also continued to grow strongly in May, rising by 29.2 percent from a year ago. In the first five months of the year, the value of exports rose by 19.5 percent from the same period in 1999, while the value of imports rose by 23.1 percent. South Korea - May current account surplus fell to $1.54 billion from a surplus of $2.29 billion a year earlier, because of a continued surge in imports. However, the country was able to recover from a deficit of $298 million in April thanks to a fall in interest payments on foreign debts by local banks, as well as a rise in major exports such as those of automobiles and computer memory chips. May customs cleared imports rose 44 percent on year while exports grew 28 percent. May industrial output rose 5.9 percent and was up 20 percent on a year earlier. Increased production from auto makers to cover their losses from strikes in April and from chipmakers to meet export demand triggered the healthy rise. June consumer price index rose 0.5 percent and at an annual rate of 2.2 percent. The increases reflect a steep increase in oil prices. During the first six months of the year, the CPI rose 1.5 percent from the same period last year. June producer prices rose 1.2 percent due to oil price increases. When compared with last year, producer prices rose 2.6 percent because of rises in industrial goods as the result of higher oil prices. Americas
May raw material prices rose 6.1 percent as mineral fuel prices jumped 15.3 percent. If mineral fuels had been excluded, the monthly increase would have been 0.6 percent. The price of raw materials recovered substantially in May in the wake of a jump in mineral fuel prices, chiefly crude oil. Manufacturers paid 24.9 percent more for raw materials than they did in May 1999. Crude oil prices in May were 73.3 percent higher than in May of 1999, as international hopes for lower oil prices failed in the face of relatively low crude oil inventories in the developed world, particularly in North America. April gross domestic product at factor cost was unchanged after a strong performance in March. Total manufacturing output fell 0.9 percent, erasing some of the previous month's 1.7 percent increase. A drop in automotive production was chiefly responsible for the decline, but lower output of primary metal, fabricated metal, machinery and plastic products also contributed. These declines were partly offset by increased output in the electrical and electronic products industry, as well in printing and publishing and furniture. Overall, 14 of 22 major industry groups, accounting for about two-thirds of total manufacturing production, declined in April. When compared with last year, GDP at factor cost rose 4.1 percent. BOTTOM LINE While the United States and Britain also appear to be at or near the top of their interest rate cycles, the European Central Bank has begun to raise rates in earnest while the Bank of Japan can only talk about increasing rates. Higher interest rates should provide investors with greater investment opportunities in a broader geographic area than have been available until now. Perhaps investors will get some of the answers to questions that have been perplexing them during the first half of the year.
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