The Week in Review
European economic statistics underpinned the Euro all week and though the united currency could not break the containment of sell orders ranged in front of 1.3700, the Euro/Yen, acting perhaps as a proxy, broke above 163.00 for the first time on Friday. There was no Dollar support in Friday's unexpectedly weak 1st quarter US GDP report, which at 1.3% was well under the market expectation of 1.8%. This is only the 'advanced' or first iteration of this statistic and two more are due, the 'preliminary' and the 'final'. The GDP numbers of the past two quarters have seen substantial alterations; the 4th quarter of 2006 was ultimately revised lower and the 3rd quarter higher. But 1.3% was barely half the growth rate of the 4th quarter of last year and it was clearly a disappointment for the market. There is plenty of room for improvement or decline in this statistic, the 'final' number for the 4th quarter, 2.5%, was more than 40% different than the 'advanced' release, 3.6%, in the 3rd quarter the difference was 25%, 2.0% vs. 1.6%. Many economists are still predicting a return to trend growth of 3.0% for the American economy in the balance of the year, but statistics are not providing substance for that prospect and Dollar bulls have been left with the thin consolation of their theories.
The Yen crosses were also given a strong push on Friday morning in Tokyo when the Bank of Japan (BOJ) issued its economic forecasts for 2007. The core CPI prediction was downgraded to 0.1% from 0.5%, well below the 0.3% expectation. The forecast for GDP growth was left unchanged at 2.1%. Along with BOJ Governor Fukui's characterization of Japan's economy as "expanding moderately" any future rate increase is now on the far side of the half year and probably into the 4th quarter. Interestingly, and as with the RBNZ (details below), Mr. Fukui attempted to mitigate the effect of the BOJ facts with words. He said that "even if prices are weak, interest rate adjustments will continue as long as the economic trend remains firm", and also that, "it is possible that the scenario of stable growth could collapse if there is an assumption that low interest will continue". The idea that rate increases may be necessary to insure future economic growth is certainly unusual, but in the specific context of recent Japanese economic and interest rate history, it is credible. It is also a commentary on the tenuous nature of the Japanese expansion that Mr. Fukui would issue such a warning.
The first round of the French election returned to the middle of the political spectrum with three quarters of the electorate voting for one of the three centrist candidates: Nicolas Sarkozy of the center-right received 31.2%, the Socialist Segolene Royal 25.9% and Francois Bayrou, the centrist, 18.6%. The second round between Mr. Sarkozy and Ms. Royal will be Sunday May 6. This is the first French Presidential election in which both candidates were born after the close of World War Two; it is also the first time a woman has run for nationwide office. The election appears to be Mr. Sarkozy's to lose. Jean Marie Le Pen's National Front received 10.5% of the vote and his supporters will likely prefer Mr. Sarkozy to Ms Royal. If Ms Royal receives the votes of the candidates to her left and Mr. Bayrou's vote is split Mr. Sarkozy wins. Most polls put Mr. Sarkozy in the lead but his margin is slim. Both Mr. Sarkozy and Ms Royal have proposed economic reform, though without specifics, and the electorate is clearly listening. Voter participation was 84%, 13% more that the last election five years ago and the highest since 1974. An 84.0% turnout is even more impressive when compared to the 64% in the 2004 American elections, one of the most contentious in recent US history. It seems the French know this election matters, that there is an unusually clear choice between the candidates and that economic reform in their future. They cannot help but compare their economy with that of the Germans, whose workers and managers have held the line of costs and have seen a rise in productivity, robust exports and GDP growth and a fall in the unemployment rate in March to a six year low. The restraint and flexibility (by European standards) of the German economy, is a model that the French, in a sensible mood, may want to emulate. Any change from Jacques Chirac's moribund presidency will redound to the benefit the Euro; new energy, whether masculine or feminine, and a reform agenda in the Elysee Palace will help to bring French economic growth in line with that of its major EU partner.
The Chinese government set the Yuan central parity rate at 7.7139 on Friday a new high against the Dollar. Since the dollar peg was removed on July 21, 2005 the Yuan has risen 6.79% against the American currency, including a 2.1% rise on the day of the removal. To put this appreciation in perspective the Euro has gained 13.2% against the Dollar in the same period (July 21, 2005 1.2057, April 27, 2007 1.3650); and the Dollar index has declined from 89.70 in late July 2005 to 81.80, a fall off 8.8%. When compared to these measures the Yuan is actually depreciating against the Dollar and the terms of trade continue to worsen for the Usd.
The Reserve Bank of New Zealand (RBNZ) boosted rates by 0.25% to 7.75%, hinting at the same time that the increases are finished, but warning that 'the exchange rate is now...exceptional by historical standards and unjustified...[by]...medium term fundamentals". The Asian market was subsequently spooked by rumors that the RBNZ was checking rates, market jargon for a central bank prelude to intervention. It is of course the 'carry trade' with its artificial interest in New Zealand Dollar returns that is helping to buoy the antipodean currency. But like its counterpart in the carry, the Yen, the interest rate differential tells the story and central bank threats, however unveiled, or even credible, can do little against the flows of the currency market.
And finally let us not forget the Dow Jones Industrial average which closed above 13,000 for the first time this week, ending at 13,120.94. Amid the rampant statistical gloom one of the best American leading economic indicators continues to shine.
Economic Releases April 23-27 2007
United States
The US Housing market continued its slow decline. On Monday Existing Home sales for March registered the largest drop since January of 1989, 8.4% to 6.12 million units. Expectation had been for a small decline to 6.40 million units. The February number itself was revised slightly down to 6.68 million from 6.69 million. The supply of unsold homes on the market rose to 7.3 months from 6.8 in February. The National Association of Realtors, the statistic complier, cited continuing problems in the sub prime loan market and the weather for the March reversal; both January and February had improved on the previous month's reading. New Home Sales for March released on Wednesday rose 2.6% to 858,000 but the bulk of the percentage increase stemmed from the lower revision of February's number to 836,000 from 848,000. Hope had been that the better weather in latter part of the month might have boosted sales. This series is averaging 839,000 for the first quarter, a far cry from the 1,067,000 average of the 4th quarter of 2006, a 21% fall.
Durable good orders were the one unadulterated American positive this week. The March issue was up 3.4% over February and well ahead of expectation of 2.2%. February was also corrected upwards to 2.4% from 1.7%. Civilian aircraft orders accounted for the majority of the gain.
Consumer confidence remained static, though at reasonably high levels. The Conference Board statistic for April arrived at 104.00, a bit off the forecast of 105.00; March was adjusted higher to 108.2 from 107.2 The fourth month average for 2007, 108.4, compares favorably with the last two quarters of 2006 - 106.4 for the 4th quarter and 104.3 for the 3rd. The April reading of 104.0 is also above the average for the last five years and predicts continued moderate consumer spending. The University of Michigan final report for April gained 1.8 over the preliminary release to 87.1 and bettered the forecast of 85.3. The fourth month average of 90.3 for 2007 has dipped from the fourth quarter of 2006 average of 92.5 but it is considerably higher than the third quarter of 2006 average of 84.0 Recent high energy costs have burdened consumers but these are not causing a wholesale depression in attitudes.
Fourth quarter GDP was 1.3%, well below forecasts of 1.8%. The main drag on growth was a 17% fall in residential investment that is, housing; non residential investment rose 2%. When such a low GDP number combines with the relatively strong job growth productivity must suffer.
Eurozone
Industrial New Orders on Tuesday for February were -0.7% month to month and +4.7% years to year. Though this was less than forecasts of +0.5% monthly and 7.8% yearly this is a volatile and often revised series and there was little market reaction. ECB Governor Liebscher returned to an older form of market comment when he said that, 'we do not appreciate excessive volatility', but hectoring has become both uncommon and ineffective; the market did not notice.
Germany
The IFO Survey for April exhibited confidence across the board. The business sentiment component was 108.6 against expectation of 107.9 and the March result of 107.7. Business Expectations were 104.3 versus expectation of 103.7 and the March outcome of 103.2. The Current Assessment was 113.2, as opposed to forecasts of 112.6 and the March reading of 112.4. Klaus Abberger head of the Munich based IFO Institute said that the, "VAT increase is losing importance", and that "another increase to 4.0%... is OK for German industry, but I think this should be the end of the increases for the moment". Wholesale Sales for March advanced 2.0% month to month and 2.0% year to year. This was a considerable rebound from the February numbers of -0.8% monthly and +1.8% yearly. Whatever pressure had been applied by the January VAT increase has dissipated.
The Week Ahead
United States
Major releases are on tap this week beginning with Monday's Chicago Purchasers Index. The March result of 61.7 was an anomaly in the general run of ISM numbers. Chicago is a local affiliate of the Institute of Supply Management which issues the nationwide ISM statistics. Tuesday the national ISM Manufacturing Index for April is released, 51.5 is forecast; March was 50.9. The non manufacturing version of ISM for April is issued Thursday; the March number was 52.4. Also on Thursday are the first quarter results for Non-Farm productivity and Unit Labor costs; fourth quarter numbers were 1.6% and 6.6% respectively. Though not market moving numbers they have often been cited by Federal Reserve Chairman Bernanke as barometers of wage inflation. Friday the heavyweights arrive with Non Farm Payrolls and the Unemployment Rate for April. Forecasts are for 100,000 jobs to have been created and the Unemployment Rate is predicted to rise 0.1% to 4.5%. The March numbers were 180,000 jobs and 4.4%.
Eurozone
European Money supply growth (M3) for March is out on Monday. One of the ECB's favorite statistics, the February result of 10.0% was an unpleasant surprise. The forecast is 9.8%, anything over that will cement the ECB hike scenario. Also on Monday is the April Flash HICP number, the other favorite ECB statistic; 1.8% is predicted, March was 1.9%. The Reuters manufacturing PMI for April is reported on Wednesday, 55.6 is forecast, the March result was 55.4. The services component is reported on Thursday with 57.6 expected after a March result of 57.4. These statistics are the European equivalent of the American ISM Survey.