I repeat: 2004 is not 1994

Last month, in "Singapore stocks down despite good 1Q results" I wrote that although interest rates are likely to rise in the near future, there is unlikely to be a repeat of 1994.

I gave two reasons for caution on the part of the Federal Reserve. One is that job growth has been weak. The other is that households now are in much greater debt than in 1994.

V. Anantha Nageswaran, director for Global Economics and Asset Allocation, Credit Suisse, appears to think so too. In his article titled "Fed monetary policy stance — Why 2004 is not 1994", he wrote that "the Federal Reserve would tighten monetary policy by about 50 basis points this year and not by 125 basis points as the market is discounting".

He thinks that "there cannot be a repeat of 1994. Then, US household debt was low, the Federal budget had been turned around with a tax-increase and spending-cut budget in 1993 and there was no labour market arbitrage available from India, China and other developing economies."

In contrast, he thinks that at present, the "inflation demon has been slayed. To go to war against it with higher interest rates would be to bring back alive the demon of deflation that is always lurking around."

Nageswaran also thinks that "the dollar strength is unlikely to last". He thinks that gold may be a good buy now.

Stock markets quiet

Stock markets were generally quiet last week, with most markets turning in flattish performances.

Last week, the S&P 500 lost 0.1 percent, its first weekly decline in four. The Nasdaq fell 0.7 percent, dropping for the fourth straight week. However, the Dow Jones rose 0.1 percent, its fourth straight weekly gain.

Europe’s performance was mixed. For the week, France’s CAC rose 1.1 percent, Germany’s DAX slipped 0.4 percent and the UK’s FTSE 100 climbed 0.5 percent.

In Japan, the Nikkei shed 225.82, or 2 percent, its biggest decline since May 17, to 11,382.08 on Friday. For the week, the Nikkei was down 1.3 percent, the second weekly fall in three.

Hong Kong and Taiwan also saw their second declining week in three.

In Singapore, the Straits Times Index was down 1.7 percent, giving up all its gain from the previous week.

Trading volumes were generally low around the world’s bourses. With summer here and the European Championship distracting traders, they are not likely to pick up any time soon.

Outsourced jobs mostly stay in America

So it looks like outsourcing isn’t such a threat to American jobs after all, at least for now.

The US Labor Department issued a report on Thursday stating that only a small fraction of jobs lost in the US were lost to overseas workers (see "Outsourcing Causes 9 Pct. of U.S. Layoffs - Govt.").

According to the Labor Department, nine percent of non-seasonal US layoffs in the first quarter were due to outsourcing, but less than a third of the work was sent overseas. "In more than seven out of 10 cases, the work activities were reassigned to places elsewhere in the US," the Bureau of Labor Statistics said in its report on mass layoffs for the January-to-March period.

Of course, I'm not really surprised. As pointed out in J. Bradford DeLong's post and reiterated in my article "Outsourcing will continue to be a threat to jobs", overseas outsourcing is a threat to jobs in the US over the long term, but not necessarily in the short term.

Interest rates rise in New Zealand and Britain

The central banks of both New Zealand and Britain raised interest rates today.

In New Zealand, the Reserve Bank raised the Official Cash Rate (OCR) to 5.75 per cent from 5.5 per cent.

"Moving interest rates higher is ... appropriate to ensure that medium-term inflation remains within the target range," Reserve Bank governor Alan Bollard said.

"At this stage, further increases in interest rates look likely to be needed over the year ahead, but to a modest degree by historical standards."

New Zealand already has the highest interest rates in the developed world.

The Bank of England raised the repo rate by a quarter-point to 4.5 per cent.

"Household spending, public consumption and investment have all grown strongly and the housing market remains buoyant. The labour market has tightened further," the Monetary Policy Committee (MPC) said in a statement explaining its decision.

"As indicated in the May inflation report, a small and diminishing margin of spare capacity means that inflationary pressures are likely to continue building," the MPC said.

"Against that background, the committee judged that a further increase of 0.25 percentage points in the repo rate to 4.5 per cent was necessary to keep CPI inflation on track to meet the target in the medium term."

The stage is now set for the Federal Reserve to raise interest rates as well on 30 June.

US added 248,000 jobs in May

Another good month of job creation for the US economy. Excerpt from Bloomberg's report:

U.S. employers added 248,000 workers to payrolls in May, more than forecast, as businesses gained confidence demand will be sustained. The unemployment rate held at 5.6 percent.

The increase follows a revised gain of 346,000 jobs in April and 353,000 in March that were larger than estimated last month, the Labor Department said in Washington. Manufacturing employment rose the most since August 1998 and hours worked at factories were the highest since October 2000. Service and construction employment rose.

Cause for celebration, perhaps. But let's not forget that jobs are a lagging indicator. And with oil prices still uncertain, the sustainability of the economic expansion cannot yet be taken for granted.

Brazil taps Asian funds

The Brazilians are making themselves felt in Asia.

Just after Brazilian President Luiz Inácio Lula da Silva paid a visit to China, where he made a call for Russia and China to join the G3 and sealed several commercial deals with the Chinese (see "Brazilian president has ambitious trade plans"), the Brazilians are now trying to tap funds from Asian investors.

A delegation of Brazilian government and private sector officials was in Singapore on Monday to participate in Brazil's Asia Conference 2004, where they shared their views on the country's outlook and investment opportunities.

Joaquim Vieira Ferreira Levy, Secretary of the Brazilian Ministry of Finance, said that there were many opportunities for Singapore firms to work in Brazil.

Details are reported in The Business Times article, "S'pore firms urged to expand to Brazil".

President Luiz Inácio Lula da Silva was elected president of Brazil in October 2002. As a former trade union leader, financial markets had been uneasy with his victory, and the Brazilian real fell against the dollar leading up to and immediately following the election.

Lately, however, the money appears to be coming back (see "Brazil sees net dollar inflows of $1.577bn in May"), and the real's exchange rate has been rising (see "Brazil Real Rises 4th Day 5 on OPEC Quotas: Latin Currencies").

Not a repeat of 1994

With the US economy going strong and plenty of jobs being created, many analysts have wondered whether the current environment is similar to 1994, when the Federal Reserve raised the federal funds rate from 3 percent in 1994 to 6 percent in 1995. Back then, stock markets around the world fell in reaction to the interest rate hikes. If the Federal Reserve does the same thing again in 2004, many analysts fear that global stock markets would also be badly hit again.

In an article for The Business Times today, R Sivanithy asked "Are markets doomed to a repeat of 1994?". His answer: Not quite.

"Our guess is that rates will probably rise this year, but not by much," he wrote. "The reason isn't because inflation will be contained, but rather because a worried Fed will have to be mindful of the potential deflationary consequences that a series of rate hikes could have on a fragile, post-bubble economy."

Similarly, I had pointed the differences between 2004 and 1994 in my own article Singapore stocks down despite good 1Q results. These differences include the relatively weaker job market and the heavier debt load of households, which suggests that increases in interest rates are likely to be "measured".

However, while Sivanithy is cautious regarding the stock market -- he pointed out that the US market is three times higher now than in 1994 -- I am more sanguine. In 1994, markets had not sufficiently anticipated the interest rate hikes. In fact, as pointed out in my article, markets in Asia had surged throughout 1993. This time, markets are anticipating the interest rate hikes and have fallen even before the first interest rate increase.

So it appears to me that markets have priced in at least some of the interest rate increase. Potential negative surprise from interest rate hikes is much less.

While other surprises cannot be totally written off -- for example further sharp rises in oil prices, a hard landing in China -- I think there is enough evidence to suggest, as I did in my latest article posted earlier today, that "It's still a bull market".

Korean prices fell in May

After the news from the US last Friday that the core personal consumption expenditures index was up only 0.1 percent or 1.4 percent year-on-year, the latest news from South Korea suggests that global inflation may not be heating up as badly as feared, despite the low interest rate environment globally.

According to Bloomberg, South Korean consumer prices fell 0.1 percent in May from April. Food prices fell as a result of good farm output, with vegetable prices leading the drop with a 13.3-percent fall.

However, the report added that core prices, which exclude food and energy costs, rose 0.2 percent from April and 2.7 percent from a year earlier.

And further rises in oil prices may yet fuel further inflation, after 22 people were killed by Islamic militants over the weekend in Khobar, Saudi Arabia.