Week ending 31st March 2006      

Fears of higher US interest rates do not appear to have soured the mood of consumers as evidenced by the latest Conference Board’s consumer confidence figure for March, which was at its highest level in 4 years. US Q4 2005 GDP was revised higher to 1.7% from the original 1.1%. Against this were the anxieties over inflationary pressures and that consumer spending rose by just 0.1% in February as incomes rose by 0.3%, a reversal of the trend of the past few years. Further concerns for General Motors and a drag by interest sensitive sectors such as utilities and banks managed to pull the blue chip indices lower this week, with the Dow and the S&P 500 indices down by 1.5% and 0.6% respectively, whilst the tech rich Nasdaq composite rose by 1.2%.

Turning to Euro land, French unions look set to stage more strikes as President Chirac supported his Prime Minister’s employment law changes, albeit with a few concessions. With just over a week to go until the Italian general election, Teflon Bersculoni appears to be ahead of the former EU commission president, Romano Prodi, in the latest opinion polls. Irish mortgage lending rose at an annual 27.7% in February and UK Q4 2005 economic growth was 0.6% and annualised at 1.8%, buoyed by government spending. Concerns over Euro zone inflation, measured by both money supply and the price of general goods, affected by higher oil prices, put the lid on the recent M&A activity and a rosier outlook from Nokia. Over the week, the UK FTSE 100 index fell by 1.2%, despite it breeching the 6000 level, whilst the French CAC and the German Dax indices were level.

Out East, Japan’s unemployment rate for February came in at 4.1% an 8 year low, whilst retail sales in Australia increased in February by twice the expected rate, as building approvals recovered from a 5 year low. China has surpassed Japan in foreign currency reserves, which will worry the US treasury and likely intensify pressure on Beijing to revalue its Yuan. Tokyo shares closed at a 5 year high, with the Nikkei higher by 3% on the week, whilst the regions second largest bourse, the Hang Seng rose by 0.6%.

The $US eased by 0.3% on a trade weighted basis, whilst the commodity backed currencies of South Africa, Australia and New Zealand all gained over the week. US treasury yields continued their march higher, by 3.3% for the 5 year and 3.8% for the 10 year. They are both higher by 10% since the start of 2006.

The commodities complex benefited from investor demand, with the CRB index rising by 1.9%. Within the complex, the $ oil price rose by 3.7% to $66.6 a barrel, whilst the $ gold price jumped by 4% to $584 oz, the highest level since June 1981, according to Bloomberg.

Next week we are presented with the latest US construction spending, unemployment data and pending home sales, whilst the ECB and the Bank of England’s MPC decide on any interest rate changes. The latest Tankan survey is released in Japan.

Returning to the first FOMC meeting under Ben Bernanke, it was expected that more transparency would be offered by the Fed. Whilst there was plenty of media comment on the 0.25% interest rate rise, very little has been said about the ‘death of M3’, an important money supply figure killed off by the Fed this week.

“Over the past two decades, we have clearly seen an erosion of ethical values”

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