Friday, 30 July 2004

Asian stocks up, helped by Wall Street

Following Wall Street's rise yesterday -- the Dow Jones Industrial Average closed up 12.17 or 0.1 percent at 10,129.24 while the Nasdaq Composite Index rose 22.80 or 1.2 percent to 1,881.06 -- Asian stocks performed well today.

The Nikkei 225 rose 208.94 or 1.88 percent today to close at 11,325.78, more than making up for yesterday's loss of 87.53 points or 0.78 percent. Taiwan's Taiex index added 1.3 percent to close at 5420.57. The Korea Composite Index rose 4.73 or 0.7 percent to 735.34.

The good performance by equities today came despite some rather poor economic news coming out of Asia. Japanese and South Korean industrial production fell last month as electronics companies sought to curb inventories on concern that global demand will slow. Japanese production fell by a seasonally adjusted 1.3 per cent from May, a government report said, snapping a three-month advance. South Korean output fell by 2 per cent, the government said in Seoul.

It will be interesting to see whether Wall Street holds up as well later today. Just minutes ago, the US Commerce Department announced that the US economy grew at a 3 percent annual rate in the second quarter, slower than most economists had forecasted.

For more on the global economic slowdown, see my article "Growing signs of an economic slowdown".

Sunday, 25 July 2004

China job squeeze to have global repercussions

China is facing a job problem too. Excerpt from The Straits Times report "China job squeeze to get even tighter" yesterday:

China's unemployment squeeze looks set to worsen in some sectors in the second half of the year, with over two million workers expected to lose their jobs as companies go bankrupt or undergo restructuring, state media reported yesterday.

Economic growth was also creating fewer jobs while stoppages at several industrial projects in recent months "had a negative impact on creating job opportunities", the China Daily reported yesterday, quoting several officials.

Because of China's excess labour supply, it sucks up the world's jobs, especially in manufacturing. In doing so, China floods the world with cheap goods and exports deflation to the rest of the world.

If China faces an unemployment squeeze, it can only get worse for the rest of the world.

Wednesday, 21 July 2004

Financial markets react to Greenspan's comments

Stock, bond and forex markets today reacted to Fed chairman Alan Greenspan's upbeat comments on the US economy yesterday.

Greenspan upbeat on economy
ALAN GREENSPAN, chairman of America’s Federal Reserve, has insisted that the US economy has entered a period of sustainable expansion that should weather a summer slowdown and is under no serious threat from inflation.

The head of America’s central bank told the Senate Banking Committee that faster growth was creating price pressures but some of them, like energy costs, were temporary, so interest rates can probably rise to an unspecified "neutral" level at a "measured" pace.

"Those higher prices, by eroding households’ disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived," Mr Greenspan said in his semi-annual Congressional testimony on monetary policy.

During his address to the House Financial Services Committee, the Fed chief said the economy had shown improvement already in July, particularly in car sales.

"There is no real underlying evidence of any cumulative weakness here," he added.

Asian Stocks Climb on Greenspan Comments; Matsushita Paces Gain

Greenspan lifts euro stocks, hits bonds

U.S. Notes Decline; Greenspan Fuels Speculation Rates to Rise

Dollar Gains as Greenspan Sees Growth Justifying Higher Rates

Sunday, 18 July 2004

Signs of slowdown in global economy

The signs that the global economy is slowing are getting clearer.

On Thursday, the US Labor Department announced that the producer price index (PPI) fell 0.3 percent in June. Core producer prices, which excludes food and energy, gained 0.2 percent.

On Friday, the US Labor Department announced that the consumer price index (CPI) rose 0.3 percent in June. The core CPI, which excludes food and energy, edged up 0.1 percent.

The PPI and CPI had risen 0.8 percent and 0.6 percent respectively in May. So the latest figures indicate a slowdown.

A slowdown is definitely taking place in China. On Friday, the National Bureau of Statistics reported that the Chinese economy grew by 9.6 percent in the second quarter from a year earlier. While only slightly lower than the first quarter's growth rate of 9.8 percent, the low base represented by the previous year's SARS-hit second quarter suggests that quarter-on-quarter GDP change may have been negative.

Similarly, China's consumer price index in June was up 5 percent from a year earlier. However, Guotai Junan Securities economist Zhou Keyu noted that that implied that the CPI fell by 0.7 percent from the month before.

Together with the weak US jobs data for June and the negative sentiment surrounding the technology sector recently, it all adds up to a slowing global economy.

Wednesday, 14 July 2004

Intel results hit Asian tech stocks

Asian stocks fell today with tech stocks bearing the brunt of the sell-off.

In Japan, the Nikkei 225 fell 2.2 percent to 11,356.65, its biggest one-day loss since May 17. The broader Topix index lost 1.3 per cent to 1,151.49. Tokyo Electron, the world's second-largest maker of chip- production equipment, fell 4.5 percent to 5,370 yen. Advantest Corp., the world's biggest maker of equipment used to test computer memory chips, shed 4.2 percent to 6,440 yen.

In South Korea, the Korea Composite Index fell 1.9 percent to 736.57. Samsung Electronics, the world's biggest memory chip maker, fell 3.6 percent to Won418,000, flat screen manufacturer Samsung SDI fell 4.4 percent to Won107,500 and LG Electronics plunged 5 percent to Won51,200.

Taiwan extended its recent decline with the weighted index falling 1.1 percent to 5,623.65 while in Singapore, the Straits Times Index slipped 0.4 percent to 1,870.90.

Indonesia's Jakarta Composite Index fell 2.1 percent to 740.877 after explosions rocked Bandung city in the West Java province. There were no injuries. The fall was led by PT Telekomunikasi Indonesia, the biggest company by market value.

The falls in Asia came after Intel disappointed analysts on Tuesday.

The chip giant had reported that second-quarter profits nearly doubled from the year-ago period but sales came in a bit lower than Wall Street forecasts, pushing the stock lower in after-hours trading. Net income was US$1.76 billion, or 27 US cents a share, up from US$896 million, or 14 US cents a share, a year earlier. The consensus earnings estimate on Wall Street was 27 US cents a share. Gross margin was 59.4 percent, below the guidance of 60 to 61 percent that Intel indicated in June. Inventories rose 15 percent to end the quarter at US$3.2 billion.

Networking and security solutions provider Juniper Networks on Tuesday said second-quarter loss was US$12.6 million, or 2 US cents a share, below earnings of US$13.6 million, or 3 US cents a share, last year. The loss was largely the result of acquisition-related charges. Net revenues for the second quarter were US$306.9 million, up 86 percent from US$165.1 million a year ago.

Not all recent technology news was bad though.

Philips Electronics beat analysts' expectations on Tuesday with net income in the second quarter surging to E616 million, or US$758 million, compared with just E42 million a year earlier. Sales were up 11 percent to E7.28 billion.

Friday, 9 July 2004

Mortgage rates fall

Might the Fed really be behind the curve after all? Excerpt from USA Today:

Mortgage rates have come down. Even though the Federal Reserve pushed short-term interest rates higher June 30 for the first time since 2000, 30-year fixed-rate mortgage rates dipped near 6% the past week — the lowest since this spring, said mortgage giant Freddie Mac.

It was the third week of decline, after a run-up in anticipation of Fed action.

The decline in mortgage rates was most probably a response to the disappointing jobs report for June.

The number of new claims for jobless benefits did drop last week though -- to a seasonally adjusted 310,000, the lowest level in more than three years. This was far better than what economists were expecting.

But seasonal adjustments related to temporary closings of auto plants for annual retooling for new model cars may have masked the true trend.

Probably more significant is the fact that the four-week moving average of new claims dropped last week by a seasonally adjusted 10,250 to 336,000, the lowest level since May 22.

Thursday, 8 July 2004

Europe also faces lower standard of living

In my article titled "Singapore faces lower standard of living", I had argued that the problem facing Singapore is the rising competition from China and India. With their cheap labour, many businesses are outsourcing their production and services there, which means fewer jobs available for countries like Singapore. And because the labour pool in these countries is so huge, this process will continue for a long time to come.

The only way for countries with more expensive workers to compete for jobs is to raise productivity or lower wages. However, there is only so much that productivity can be increased by. High tech, high value-added activities have been suggested as the way to go for rich countries. However, Chinese and Indian workers will catch up, and quickly. Rich countries will find it increasingly difficult to justify the high wages of their workers.

Europe appears to be still trying. And doing it the hard way at that.

According to a New York Times article on 7 July, Europeans are working longer hours in the face of global competition. In the German province of Bavaria, the workweek has been extended from 40 to 42. German Chancellor Gerhard Schroeder wants to extend federal work hours from 38.5 to 40. In Britain, more than a fifth of the labour force works longer than the European Union's limit of 48 hours a week, according to a 2002 study.

By working longer, Europe hopes to be able to keep incomes up. But of course, unless accompanied by more pay, more work also means a lower standard of living. More and more people in rich countries are beginning to realise that this may be their fate.

Monday, 5 July 2004

Fed raises rates but job creation slows

The Federal Reserve raised interest rates by 25 basis points on 30 June, very much as expected. Ironically, on 2 July, the US Labor Department reported that American companies created 112,000 jobs last month, less than half what economists had expected.

So the US economy might have begun slowing down even before the Fed starts monetary tightening. Some commentators are already asking whether the Fed is behind the curve.

My guess is: it is not. Remember that the federal funds rate, at 1.25 percent, remains below the inflation rate. And excessively loose monetary policy encourages financial speculation and tends to result in misallocation of resources.

Anyway, the combination of news is obviously negative for the stock market, and stocks around the world have reacted accordingly (see my article "Stocks fall as Fed raises rates and jobs data disappoint").