ECONOMIC DEVELOPMENTS
AND MONETARY POLICY
     
Content Page
 
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US: Vibrant Pace . Europe: Mixed
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Box 15 – Debunking the Deflation Myth in Singapore . International Financial Markets: Broad Recovery Amid Uncertainty
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Box 16 – Exchange Rate and Macroeconomic Volatility . Monetary Policy in an Increasingly Volatile Environment
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Recent Policy Research and Analysis Against the Backdrop of More Frequent Shocks . Box 17 – Creating an Electronics Leading Index
 
International Financial Markets: Broad Recovery Amid Uncertainty
 
Global stock markets saw a lacklustre start to 2003 as economic uncertainty continued to weigh on market sentiment. Following the successful containment of SARS and the conclusion of the Iraq war, global equities recovered in the second half of the year, buoyed by a turnaround in the world economic environment. However, markets saw a sharp correction in March 2004 following the Madrid bombings and a rise in Middle East tensions. More recently, Asian stock markets have been unsettled by uncertainty over the timing and magnitude of a possible tightening in US interest rates and the risk of a hard landing in China (See Chart 20). Rising security concerns and political uncertainty also dampened South-east Asian stock markets.
 
Following the global stock market recovery, global bond yield backed up sharply in the third quarter of 2003, but thereafter returned to more moderate levels for the remainder of the year as concerns over a possible tightening of US interest rates diminished. Global bond yields have however started to rise again in recent weeks following market expectations that the Fed will begin to tighten interest rates over the next six months (See Chart 21).
 
While Asian bonds have continued to perform well, bond prices have also begun to correct in March 2004 as concerns over the possibility of a US interest rate hike weighed adversely on prices (See Chart 22).
 
In the currency market, following a brief rally in the US Dollar with the successful conclusion of the Iraq war, concerns over the US current account deficit and US involvement in Iraq have continued to weaken the greenback from July 2003. In addition, the increasing perception that Asian currencies were undervalued against the US Dollar has also contributed to further weakness in the greenback. Nascent signs of a Japanese economic recovery at the beginning of 2004 also strengthened the Yen and lifted the other East Asian currencies in tandem. The broad strengthening in East Asian currencies was also underpinned by the region’s synchronised growth upswing. More recently, renewed concerns of a possible rise in US interest rates and a China economic slowdown have weakened Asian currencies somewhat (See Chart 23).
 
Enhancing Risk-focused Supervisory Approach
Box 1 – Fostering a Sound and Progressive Financial Services Sector
Enhancing MAS’ Supervisory Capabilities
Box 2 – Stress Testing of Life Insurers
Box 3 – Streamlining Inspection Function
Thematic Inspections to Improve Surveillance