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DIVWIOW W » INTSFINATIONAU FINANCE = - H* 13 ! No. 123 , . y- B O A R D OF G O V E R N O R * ! t F E D E R A L R E S E R V E SYSTEM September 25, 1963 - - CgAElTAI MARKET DEVELOPMENTS ABROAD I. II. I. Germany: Germany Nine Charts on Financial Markets Abroad Money and Capital Markets, August to mid-September, 1963 Money market conditions were somewhat easier but upward pressures on bond yields were renewed in German financial markets during August and early September, To maintain the 6 per cent coupon on new issues, maturities have been shortened on new offerings and no provision included for advance redemption. The repatriation of funds from abroad and large payments by the public authorities in late August enabled the commercial banks to meet the seasonal tax drain on.reserves in September without borrowing from the Bundesbank as they have done in earlier periods of heavy tax flows in the recent past. Germany's trade surplus continued to improve in August and the D-mark remained firm in foreign exchange markets. For July, larger official payments abroad and private short-term capital exports temporarily eliminated the balance-of-payments surplus. But for the first seven months of the year Germany had an over-all payments surplus of DM 2.1 billion this year compared with a deficit of 0.2 billion in 1962. Money n arkct. Money market rates eased in July and August after reaching a temporary seasonal peak at the end of June when the quotation for day-to-day money reached 4-3/4 per cent. This was the highest mid-year rate recorded since 1960, when the Bundesbank was pursuing a vigorous tight money policy. (See Table 1,) But at the end of August call money rates were down to a range of 2-1/4 to 2-7/8 per cent, The banks were able to meet the mid-September tax date and the usual end-of-quarter payments with less pressure on day-to-day money rates than has been experienced in earlier periods. They repatriated funds from abroad in August bv : were anl.e i o return part of thos:-; funds abroad because of their relatively easy reserve position. In this connection, they were aided by large month-end payments by public authorities in late August (somewhat earlier than is customary). They also made some borrowings abroad in the Euro-dollar market (particularly in the Netherlands). As/a result, commercial banks had little, if any, need to borrow from the Bundesbank as they have done in earlier pre-tax periods. OFFICIAL USE ONLY (Decontrolled After Six Months) OFFICIAL USE ONLY Table 1. - 2 - Germany: Money Market Rates in Frankfurt, June-August 1963 a/ (in per cent per annum) Day-to-day money Three-month loans June 1- 7 8-15 16-23 24-30 3-1/8 3 3-1/2 3-3/4 - 3-1/2 3-3/8 4 4-3/4 3-3/4 3-3/4 - 3-7/8 3-3/4 - 4 3-3/4 - 4 July 1-7 8-15 16-23 24-31 3-1/4 2-7/8 2-5/8 2-1/2 - 4-3/8 3 3-1/8 2-7/8 3-7/8 3-7/8 3-7/8 3-3/4 August 1- 7 8-15 16-23 24-31 2-3/4 2-3/8 2-3/8 2-1/4 - 3-1/8 - 2-7/8 -2-3/4 - 2-7/8 - 4-1/4 4-1/8 4 4 3-3/4 - 4 3-3/4 - 4 3-3/4 3-3/4 a/ Highest and lowest rates quoted each week by Frankfurt banks. Source: Deutsche Bundesbank. Bond market. The bond market was quiet during July. The slight downward movement in August in the bond index of the F.A.Z. probably reflected the effects of the summer lull and was characteristic of the slowness with - which the market was absorbing new offerings at the usual 6 per cent coupon. Foreign interest in German fixed interest securities, although still considerable, has been reduced in recent months. The authorities are reportedly determined to maintain the 6 per cent rate. To this end, the Central Capital Market Committee acted to limit new flotations in July and August. Gross bond placements, totaling DM 1,683 million in July (see Table 2) were slightly below the July 1962 figure; earlier this year, monthly bond placements exceeded year-ago levels by considerable amounts. To maintain the 6 per cent rate, the authorities are tailoring new issues to prevailing market conditions. Two public loans issued in August—»a DM 250 million Federal Railways issue and a DM 100 million issue of the Equalization of Burden Fund were offered at shorter maturities and without advance redemption features in order to facilitate absorption. As the market turned somewhat more active after the summer lull, these issues were readily placed. Further evidence of the authorities' policy to hold the long-term rate at 6 per cent is provided by the terms of the scheduled advance redemption in October .of a 7-1/2 per cent issue of the Federal Postal System, which will permit holders to subscribe to a new 6 per cent coupon issue in exchange. In addition, a further DM 100 million Federal Government issue is expected in October. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 2. Germany: Gross Placements in Security Markets 1/ (millions of DM, month or monthly average) T "Occasional" borrowers bonds: Industrial Public authorities Foreign issuers Other bonds 2/ Total Mortgage and communal bonds Total gross bond placements 3 J Gross share placements Total security placements at issue value 112 314 32 89 1 9 6 2 III II 72 136 113 358 -- 132 XV 60 187 -- -- 154 57 I 143 489 32 259 19 II 88 451 -- 1-53 6 3 June July 15 311 341 466 -- 135 - 172 547 340 625 304 923 692 461 979 665 453 532 480 652 578 527 704 1,212 793 1,157 784 1,575 1,270 988 1,683 185 205 172 170 155 51 52 144 1,397 998 1,329 954 1,730 1,321 1,040 1,827 II Market value % 2/ Mostly bonds of specialized credit institutions. 3/ Includes medium-term notes (Kassenobligationen). Source: Deutsche Bundesbank Monthly Report, Table V„ 6„ Stock market. The stock market, which had been relatively subdued during the summer months, was only temporarily affected by the announcement of the proposed U.S. interest equalization tax. The F.A.Z. stock index fell by 2-3/4 per cent between July 18 and 22 but has since risen by 9 per cent between July 22 and September 20. (See Table 3.) The stock market became very active in August, as favorable economic news underscored the growing feeling of business confidence and encouraged a brisk demand for German shares. The stock index reached a new high for the year in early September., but shaded off slightly in the second week of the month, reportedly because of profit taking. The market was also influenced by reports that American interests were selling German holdings in order to re-invest the proceeds in the rising New York market. OFFICIAL USE ONLY OFFICIAL USE ONLY - Table 3. All time high: 1962 high: 1962 low: Germany: Stock Index, March-September 1963 (December 31, 1958 = 100) Aug. 31, 1960 Jan. 2 Oct. 10 March 15 29 April 16 30 May 17 31 June 14 28 July 19 26 Source: 264.60 222.81 132.88 157.63 159.23 164.67 163. 65 183.50 184.63 184.36 178.96 179.13 181.90 1963 high: 1963 low: Sept. 9 Feb. 26 2 9 16 23 30 181, 90 184.40 188.86 190.44 191.10 Sept.. 6 13 20 194.02 192.28 193.51 Aug. 194.81 151.54 Frankfurter Allgemeine Zeitung. Foreign trade results continue favorable. The steady rise in exports was briefly interrupted in June, when seasonally adjusted exports fell 14 per cent below the very high May figure. (See Table 4.) However, since imports also declined in June, a relatively substantial export surplus was maintained. The foreign trade results in June may have been influenced by the changes in Common Market tariffs which became effective on July 1, with the further 10 per cent reduction in internal tariffs possibly causing some holding back in export activity. Table 4. Germany: Foreign Trade (seasonally adjusted, monthly averages or month in billions of DM) Exports Imports Trade Balance 1962 I II III IV 4.36 4.44 4.44 4.40 a/ 4.16 a/ 4.05 4.18 4.19 a/ .20 a/ .39 .26 .21 4.36 4.92 5.15 4-42 4.94 5.06 4.12 4. 61 4.25 4,11 4.54 4.41 .24 .31 .90 .31 .40 .65 1963 I April May June July August a/ Change in.import accounting procedure raised first quarter and April 1962 imports by a total of approximately DM 0.4 billion. Source: Deutsche Bundesbank Monthly Report. OFFICIAL USE ONLY - 5 - OFFICIAL USE ONLY In July and in August exports resumed their rise, while imports were up in July, but fell back slightly in August. Consequently, the trade balance continued to improve. On a year-to-year basis, August exports were up 13 per cent and imports 5 per cent. The continued large inflow of foreign orders suggests that the upsurge in exports should continue in the near future. In addition, the competitive position of th6 steel-, textile- and leather goods industries should improve if the German Government's proposed increase in turnover tax rebates for these industries becomes effective. Balance of payments surplus reduced in July. Substantial shortterm private capital exports and heavier official payments abroad temporarily ended for the month of July the balance of payments surplus recorded during"-^ each of the first two quarters of 1963. (See Table 5.) However, the trade balance was sharply up in July, producing a goods and services surplus in spite of a heavy deficit on services account. Table 5. Germany: Balance of Payments 1961-July 1963 millions of DM) Jan. July 1 S> 6 3 June 1962 1963 I II 1. GOODS & SERVICES Trade balance Services Total 2. OFFICIAL PAYMENTS Donations Long-term capital Short-term capital Total 3. PRIVATE CAPITAL Securities transactionsv Foreign purchases 1/ ) German purchases (increase-) 2/ Other long-term Short-term 3/ Errors and omissions Total J SURPLUS OR DEFICIT (-) 2,222 712 1,510 544 _21 565 -2,206 -1,065 68 -3,339 -2,070 - 381 263 -2,188 -931 - 88 211 -808 539 1,939 - 1,648 377 1,271 - 700 - 257 1,570 1,852 91 733 2,763 • 2,085 216 -161 205 . 78 243 1,065 822 JulX 1,268 464 804 156 -261 -105 410 -269 141 925 88 99 -1,061 -238 - 79 80 -237 -214 - 58 - 47 -319 - - 162 A I I[ 244 48 - 10 ( 269 115V 268 -265 278. 88 200 290 623 179 1,519 730 1,262 281 1 a/ Preliminary. b/ A change in import accounting procedure has resulted in approximately DM 400 million of goods in bonded warehouses being included in the first four months imports. This is offset in errors and omissions. 1/ Foreign purchases of German securities. 2/ German purchases of foreign securities, 3/ Includes commercial bank capital other than foreign exchange assets. Source: Basic data from Bundesbank and International Financial Statistics rearranged by author. OFFICIAL USE ONLY OFFICIAL USE ONLY - 6 „- For the first seven months of 1963 the cumulative balance of payments surplus has amounted to a substantial DM 2,085 milliorT, compared with a DM 216 million deficit for the same period of 1962. (See Table 5.) On a yearto-year basis, the major changes were: a substantial increase in the trade surplus partly offset by a deterioration in the service balance; a decrease in the official payments abroad primarily because of deliveries made on prepaid military goods (the import of which is recorded as a short-term official capital inflow); and a large increase in private capital inflows. Foreign purchases of German securities continue to be substantial. Foreign exchange markets. With the favorable external position, the D-mark continued firm in the foreign exchange market. (See Table 6.) After declining in mid-July when the German banks were putting money-market funds abroad, the spot rate moved up from 25.09 cents on August 2 to 25.13 cents on September 20. Press reports suggest that some of this improvement was attributed to uncertainties about the U.S. dollar created by the proposed U.S. interest equalization tax. •Table 6. Germany: Exchange Rate in U.S. Cents per DM (noon buying rates) Par value Upper limit Lower limit May 31June 14 28 July 5 12 19 26 Source: 25.105 25.124 25.123 25.121 25.123 25.099 25.097 25..000 25.,188 24, 875 2 9 16 23 30 Sept. 6 13 20 Aug. 25. 091 25. 100 25. 101 25. 111 25. 118 25. 121 25. 122 25.128 Federal Reserve Bulletin. Since mid-August, the premium on the forward D-mark has risen appreciably from 0.1 to about 0.3-0.4 per cent per annum. Because of the wider premium, the-bahks are reported to have requested that the Bundesbank intervene by providing an attractive rate for one-month swaps. At present, no business is being done at the Bundesbank's swap rate which has been deliberately set out of line with the market rate. (See Table 8, columns 4 and 5.) The Bundesbank has made it known that it does not intend to change its swap rate at this time. OFFICIAL USE ONLY OFFICIAL USE ONLY Reserve position declines slightly. Total German reserves declined by $28 million in July as a $67 million increase in Bundesbank gold and foreign exchange holdings was more than offset by a decline in commercial banks' liquid foreign assets. (See Table 7.) The reduction in reserves was offset by a decline in Bundesbank foreign liabilities. Table 7. Germany: Change in Reserve Position, July 1962-July 1963 (in millions of U.S. dollars, end of period figures) 1962 July Dec. 1963 April Max June July A. Bundesbank gold and foreign exchange Foreign exchange Gold Total 2,542 3,667 6,209 2,768 3,679 6,447 2,699 3,749 6,448 2,933 3,749 6,682 2,946 3, 753 6,699 3,005 3,761 6,766 B. Drawing rights on IMF 1,320 1,305 1,312 1,312 1,307 1,307 C. Commercial banks foreign exchange 1,071 632 847 854 910 815 D. Total reserves (A+B+C) 8,600 8,° 384 8,607 8,848 8,916 8,888 -216 +223 +241 + 68 - 28 5 7.1 58. 1 56.1 56.0 55.6 E. Change in total reserves F. Gold as percentage of Bundesbank reserves 59.1 In August Bundesbank foreign exchange holdings increased by about $25 million. The increase would have been larger but for a $50 million purchase of U.S. Treasury bills by the Reconstruction Bank (Kreditanstalt fuer Wiederaufbau). There was a further inflow of about $21 million into Bundesbank reserves through the first half of September. German participation in foreign bank. A Frankfurt bank with strong trade union ties is reported to have recently acquired a 50 per cent interest in a Dutch bank in Amsterdam, which is 50 per cent trade union owned. The • Dutch press reported that this was part of a concerted effort to acquire interests in Common Market countries. Europe and British Commonwealth Section. OFFICIAL USE ONLY - 8 - Table 8 « Germany: Selected Money Market Yields and Exchange Rates (per cent per annum) 3-mo. TJ„S0 $ into Marks >1 28 26 30 26 2$ 22 29 26^ 31 28 12 19 26 Aug, 2 9 16 23 30 Sept. 6 13. 20 Spread in favor London +0.62 -0.37 -0.31 -0.31 +0.3k +0.06 +0.06 +0.22 0.2$ -0.0k -0.06 . +0.12 +0.12 +0.06 0.00 +0.06 +0.25 +0.25 n.a. n.a. n.a. 11 1962-Sep. Oct. Nov. Dec. 1963-Jan. Feb. Mar. Apr. May June July 3-ffiOo Euro3-mo. interdollar deposits bank loans Frankfurt London 3.81 3.19 U.13 k-50 k.25 3.9k k.13 k.kk 3.25 3.59 3.38 3.kk 3.69 3.63 3.# 3.72 3.69 3.8k 3.88 3.8k k.00 3.9k U.06 3.91 3.88 k.00 3.88 3.91 3.88 3.88 3.88 3.9k k.uo 3.7$ k.00 3.7$ n.a. k.19 n.a. k.09 n.a. . U.06 +0.50 +0.50 +0.50 +0.50 +0.75 +0.75 +0.75 +0.75 +0.7$ +0.75 +0.75 +0.7$ +0.75 +0.75 +0.75 +0.75 +0.7$ +0.75 +0.75 +0.75 +0.75 3-mo. Treas. bills U.K. Ger. 3.56 3.78 3.63 3.66 3.U1 3.3k 3.66 3.76 3 061 3.63 3.72 3.69 3.69 3.69 3.59 3.62 3.62 3;62 3.62 3.62 3.62 2.50 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 2.63 Market +0.5 +0.8 +0.2 +0.5 +0.3 0.0 . +0.1 . 0.0 -0.3 -0.3 +0.1 -0.2 +0.1 +0.1 +0.2 +0.3 +0.2 +0.2 +0.5 +0.k +0.2 U.S. 2.76 2.7k 2.86 2.98 2.93 2.87 2.92 2.89 3.00 2.99 3.18 3.18 3.20 3.21 3.30 3.31 3.35 3.38 3.32 3.3k 3.38 1 a/ Special swap rat© provided by Bundesbank to domestic commercial bank's for 2-6 month period. Table 9. Germanyg """"" Selected Loan, Deposit and Security Rates (per cent per annum) 6-12 mo. deposits Comm. bank . Savings Time loans 1962-April 3.50 7.50 2.75 May 3.50 2.75 7.50 June 3.50 "7.50 2.75 July 3.50 7.50 2.75 Aug. 3.50 2.75 . 7.50 Sept. 3.50 2.75 7.50 Oct. 3.50 2.75 7.50 Nov. 3.50 2.75 7.50 Dec. 3.50 2.75 7.50 19o3-Jan. 3.50 2.75 7.50 Feb. 3.50 2.75 7.50 March 3.50 2.75 7.50 April 3.50 2.75 7.50 May 7.50 3.50 2.75 June 3.50 2.75 7.50 July 3.50 2.75 7.50 Aug. 3.50 2.75 7.50 Approved credits on current"account. Bond yields Public 5-1/2* Railway author1958-83 ities 5.6 5.57 5.8 5.72 5.9 5.77 5.9 5.77 6.0 $.83 6.0 5.92 6.2 6.0k 6.2 6.1k 6.08 6.1 6.0 5.99 6.0 5.99 6.0 5.99 6.0 5.97 6.00 6.1 6.1 6.03 6.10 6.1 n.a. 6.09 Share Yields 2.77 3.23 3.k9 3.71 3.58 3.79 3.89 3.3k 3okk 3.58 3.75 3.63 3.56 3.19 3.26 3.20 Yield gap 2.8 2.6 2.3 2.1 2.2 2.1 2.1 2.8 2.7 2.k 2.2 2.U 2.k 2.8 - n.a. INTEREST A R B I T R A G E , y j N I T E D S T A T E S / C A N A D A Thundoy l i g u m 1 1 ..I I I 1 | 3 - M O N T H TREASURY BILL RATES ± n CA NADA 1 \to, Vvl .UN - v u 11 11 11 . ± EXr \ 11 i 1 11 J UNIT,ED STAT is 4 11 11 1 L; ±± 11 II 11 11 11 RATE D I F F E R E N T I A L A N D F O R W A R D C A N A D I A N D O L L A R SPREAD IN FAVOR OF CANADA FORWARD RATI \ u.±.. l. - 1 1 1: i... r. i - : i " ~l~ :i RATE DIFFERENTIAL W I T H F O R W A R D E X C H A N G E COVER FAVOR OF CANADA + LLJJ 1960 1161 1962 1963 11 11 INTEREST ARBITRAGE, NEW Y O R K / L O N D O N 3 - M O N T H TREASURY EURO D 0 1 U R 7 A T E ~ D I F 7 E R E N T I A L BILL RATES RATE A N D 3 - M O N T H F O R W A R D STERLING SPREAD IN FAVOR Of LONDON /^> J 1 1 LL RATE DIFFERENTIAL W I T H F O R W A R D E X C H A N G E C O V E R IN fAVOR Of LONDON IN f A V O R Of NEW YORK J_L u INTEREST A R B I T R A G E FOR G E R M A N C O M M E R C I A L B A N K S F r i d a y I i g u re » 3 - M O N T H TREASURY BILLS, I N T E R B A N K L E N D I N G RATE A N D - E U R O D O L L A R DEPOSIT RATES J GERMAN INTERRANK I 10AN R A T E " tj - 1 . . 1 . 11 . 1 1 . 1 1 RATE DIFFER ENTIAL . A N D FO R W A RD DEUITSCHE MARK s n u I B IN FAVlOR Of IRA - RATE — . I N T E I l i INK LOAN RATE 1 1 i\. I 1 J i i 1 1 J TREASURY I I U S ^ X i i i i i (-) DISCOUNT I i W U i l" V i % i i - I 1 i i 1 P C ^AZ, i i 1 RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E COVER I I •) H I T INCENTIVE: IN FAVOR Of FRANKFURT ( + ) (REASURY 1111$ * Nole: Special lor ward role available to German commercml honkt I 1 I 1 1 1 1 INTEREST A R B I T R A G E , F R A N K F U R T / Friday LONDON figures 3 — M O N T H TREASURY BILLS A N D I N T E R B A N K L E N D I N G RATES UNITED KINGDOM TREASURY B l l t S | V'A— J RATE D I F F E R E N T I A L A N D 3 — M O N T H F O R W A R D STERLING I I i 1 L /^v \ V GERMAN INTERBANK LOAN RATE GERMAN TREASURY 1111$ V | RATE DIFFERENTIAL W I T H F O R W A R D E X C H A N G E COVER NET INCENTIVE OF UNITED KINGDOM OVER: V — GERMAN INTERBANK 1963 SHORT-TERM INTEREST RATES * ^2L.jj-tUR0-D0lLAR "X 1 3 monlh treasury bill raios lor all countries except Japan • and Switzerland ( ] month deposit role) 3 month tale I or U S dollar deposits in London - lONDON-V^— ( A»*• r u q e rule on bonk loom ond discounts) L O N G - T E R M B O N D YIELDS GEIMANY W r./V 1959 V z V X • I N D U S T R I A L STOCK JNDICEST GERMANY \ V • Not*: Japan: index ol 22 5 m d i i l n o l and alher n o c k i Haded on the Tokyo exchange. '• ^ 1 SPOT EXCHANGE RATES - MAJOR CURREHCIES A G A INST U.S. DOLLAR B•Iow pj i r *t>ov_e ? or Above J F M" A M J J A $ 0 K n J \ M t M J J A S 0 N P / F M A V J J A S 0 N D par 3 - M O N T H FORWARD EXCHANGE RATE ffidoy lipuni AGAINST U. S. DOLLARS jp. DISCOUNT. AGAINST POUND STERLING - L O N D O N _U. S. D O U A R \ y . AGAINST POUND STERLING - LONDON DUTCH G U I I D I I v/J
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