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ARTICLE ARCHIVES

INTERNATIONAL PERSPECTIVE

What goes down must go up (eventually)
Econoday International Perspective 1/22/16
By Anne D. Picker, Chief Economist

  

Global Markets

Equities ended the week on a positive note for the first time this year. However, despite hefty gains on Thursday and Friday, most indexes were unable to offset losses incurred earlier in the week. The spark on Thursday came from the European Central Bank. ECB president Mario Draghi implied that the Bank could step up its stimulus program as early as its next meeting in March. Oil prices played their part as well, rising on Thursday and Friday to above $30 a barrel.


 

European Central Bank

The ECB left its benchmark interest rate at 0.05 percent, a record low. The rate on deposits held at the Bank remained at negative 0.3 percent, a penalty rate intended to encourage banks to lend rather than hoard cash. The bond buying stimulus program that began last March, along with record low interest rates, have failed so far to nudge inflation — the European Central Bank's main metric — any closer to the official inflation target of just below 2 percent.

 

At his post meeting press conference, ECB's president Mario Draghi issued a stronger than expected signal that his policy team could step up its stimulus program as early as March in response to stubbornly low inflation and turbulence in the financial markets. "Conditions have worsened" since the governing council met in December. He indicated that the governing council had been surprised by the extent of recent market turmoil as well as by plummeting oil prices, which are a factor in the Eurozone's dangerously low inflation. Mr Draghi emphasized that the ECB was poised to take further actions in the future if necessary. "There are no limits to how far we are willing to deploy our instruments,'' he said.

 

Buoyed by the hope of more monetary policy intervention sooner than most analysts had expected, investors drove up Eurozone stocks even as Mr Draghi was still speaking. And the euro headed lower against the dollar — a potential positive sign for the Eurozone whose exports could become cheaper on the global market as a result.

 

For the Eurozone, sustaining meaningful economic growth has been hard to achieve in recent years. And inflation has remained so low that at times the bigger concern has been that the economy might slip into a downward, deflationary spiral. Inflation in the Eurozone has been hovering near zero since late 2014 and it was 0.2 percent on the year in December. Such low inflation makes central bankers nervous because it is dangerously close to deflation, a self-reinforcing downward price spiral that is poisonous to growth and job creation. Slumping oil prices, which the European Central Bank cannot control, are a big reason for the low inflation. Slow economic growth and 10.5 percent unemployment are also factors, because they make it hard for companies to raise prices.


 

Global Stock Market Recap

  2015 2016 % Change
Index Dec 31 Jan 15 Jan 22 Week 2016
Asia/Pacific
Australia All Ordinaries 5344.6 4948.5 4969.56 0.4% -7.0%
Japan Nikkei 225 19033.7 17147.1 16958.53 -1.1% -10.9%
Hong Kong Hang Seng 21914.4 19520.8 19080.51 -2.3% -12.9%
S. Korea Kospi 1961.3 1878.9 1879.43 0.0% -4.2%
Singapore STI 2882.7 2630.8 2577.09 -2.0% -10.6%
China Shanghai Composite 3539.2 2901.0 2916.56 0.5% -17.6%
India Sensex 30 26117.5 24455.0 24435.66 -0.1% -6.4%
Indonesia Jakarta Composite 4593.0 4524.0 4456.74 -1.5% -3.0%
Malaysia KLCI 1692.5 1628.6 1625.21 -0.2% -4.0%
Philippines PSEi 6952.1 6449.5 6208.05 -3.7% -10.7%
Taiwan Taiex 8338.1 7762.0 7756.18 -0.1% -7.0%
Thailand SET 1288.0 1245.9 1268.03 1.8% -1.6%
Europe
UK FTSE 100 6242.3 5804.1 5900.01 1.7% -5.5%
France CAC 4637.1 4210.2 4336.69 3.0% -6.5%
Germany XETRA DAX 10743.0 9545.3 9764.88 2.3% -9.1%
Italy FTSE MIB 21418.4 19195.9 19028.42 -0.9% -11.2%
Spain IBEX 35 9544.2 8543.6 8722.90 2.1% -8.6%
Sweden OMX Stockholm 30 1446.8 1305.2 1361.36 4.3% -5.9%
Switzerland SMI 8818.1 8107.1 8271.11 2.0% -6.2%
North America
United States Dow 17425.0 15988.1 16093.51 0.7% -7.6%
NASDAQ 5007.4 4488.4 4591.18 2.3% -8.3%
S&P 500 2043.9 1880.3 1906.90 1.4% -6.7%
Canada S&P/TSX Comp. 13010.0 12073.5 12389.58 2.6% -4.8%
Mexico Bolsa 42977.5 40847.7 41621.310 1.9% -3.2%

 

Europe and the UK

European equities rallied sharply on Thursday and Friday to end a volatile week in positive territory. Only the MIB retreated (down 0.9 percent). The FTSE was up 1.7 percent, the CAC gained 3.0 percent, the DAX added 2.3 percent and the SMI was 2.0 percent higher. The reversal from losses to advances stemmed in part from dovish comments by ECB President Mario Draghi, who hinted that further stimulus measures could be implemented when the governing council meets in March. Investors shrugged off the weaker than expected Eurozone flash PMI data and climbed. A strong recovery in crude oil prices also put investors in a positive mood. Crude oil prices, which slumped to a 12-year low earlier in the week, rebounded to $32 a barrel on Friday thanks to cold weather.

 

European Central Bank President Mario Draghi said on Thursday that there were no limits on what policy tools the Bank can deploy to achieve its inflation goal and to boost euro area growth. He hinted that more stimulus measures may come in March as downside risks such as global uncertainty, market volatility and geopolitics have increased.

 

Nevertheless, the FTSE remains down 5.5 percent since the start of 2016 and some 20 percent below last April's record high, putting it near 'bear market' territory. Concerns about a slowdown in China which is a major consumer of metals and oils have hit world stock markets since the start of 2016. The worst start in years for European stocks is doing little to dim the view of the region's strategists, who are mostly holding on to calls for gains of almost 20 percent through December 2016.

 

Bank of England Governor Mark Carney said there is no set timetable for an interest rate increase, but only an expected direction of travel. He said that since last summer, progress has been insufficient along these dimensions to warrant a tightening of monetary policy. Carney noted that UK growth has slowed and inflation has weakened due to the oil price collapse. He expects inflation to remain very low for longer. "Recent developments suggest that the firming in inflationary pressure we had expected will take longer to materialize," Carney said.


 

Asia Pacific

Despite routs earlier in the week, a few indexes actually ended the week higher. Asian shares rose across the board Friday, thanks to a rebound in U.S. equities overnight following an uptick in oil prices and dovish comments from the European Central Bank. ECB President Mario Draghi on Thursday signaled that the governing council may provide more stimulus at its next meeting in March amid growing concerns over faltering global economic growth, which has spooked investor sentiment worldwide. The Nikkei lost 1.1 percent on the week despite a 5.9 percent increase Friday. The Hang Seng retreated 2.3 percent after gaining 2.9 percent on the last day of the trading week. The Shanghai Composite however, gained 0.5 percent on the week.

 

Worries about possible competitive devaluations also receded after China clarified that it has no plan to pursue a policy of yuan devaluation. China's Vice President Li Yuanchao said on Thursday that market forces will guide the movement of the currency and China will keep intervening in the stock market to avoid excessive volatility. China's yuan barely moved against the dollar after these comments.

 

Japanese shares soared Friday with sentiment buoyed by a weaker yen and the bounce in oil prices. Traders attributed the positive sentiment to building expectations that the European Central Bank will still ease policy, as well as comments from Prime Minister Shinzo Abe's aide on Thursday that "conditions for additional easing have fallen into place." Speculation is rife that the Bank of Japan might ease policy further, possibly as early as next week. The BoJ is "taking a serious look" at expanding its asset buying campaign as sliding oil prices make it ever harder to reach its 2 percent inflation goal, the Nikkei newspaper reported on Friday.

 

All of which was input for those expecting more action from the People's Bank of China (PBoC). The Bank has already been generous with liquidity, pumping a net 315 billion yuan into the banking system ahead of the Lunar New Year holiday in early February. It was the biggest weekly injection since January 2014 and analysts suspected it was larger than warranted to avoid any hint of a cash crunch during the long holiday. There was also more reassurance from officialdom in Davos. Fang Xinghai, the vice chair of the Chinese Securities Regulatory Commission, sought to counter concerns that China is seeking to devalue the yuan to gain a competitive advantage for its exports. "A depreciation is not in the interests of China's rebalancing; a too deep currency fall would not be good for consumption," Xinghai said.

 

Money is flowing out of Hong Kong as China's growth slows to the weakest pace since 1990 and speculators bet on an end to the city's currency peg to the U.S. dollar. The capital outflows are pushing up interbank borrowing rates, heightening concern that higher financing costs will weigh on the city's banking and real estate industries.


 

Currencies

The U.S. dollar advanced against the euro, yen and Swiss franc on the week but retreated against the pound and the Canadian and Australian dollars in a volatile week of trading. The yen had been climbing as risk averse investors sought it as a safe haven. The dollar fluctuated against the yen, swayed by speculation about additional monetary easing by the Bank of Japan following remarks by officials close to Prime Minister Shinzo Abe. The U.S. dollar climbed on a report by the Wall Street Journal that quoted an unnamed close aide to Abe as saying, "Conditions for additional easing have fallen into place." The euro declined after ECB President Draghi intimated that there is more stimulus in the bank's future.


 

The Canadian dollar steadied after the Bank of Canada opted to leave key interest rates unchanged — the target for the benchmark overnight rate remains at 0.5 percent, between the 0.25 percent deposit rate and 0.75 percent Bank Rate. The decision not to pull the trigger on rates just yet is unlikely to have been taken easily. As the BoC's newly updated Monetary Policy Report makes clear, the Bank has become more cautious about economic recovery at home, even if it notes few surprises in global activity. Still, the overall impression is that the BoC is not in any great hurry to cut rates again and this may give the beleaguered Canadian dollar a temporary reprieve. Nonetheless, the decision to maintain the policy status quo is unlikely to prevent speculation about a cut moving to the next meeting on 9th March. If so, any bounce in the local currency will likely be seen as a fresh selling opportunity unless oil prices manage a surprising and sustainable rebound.


 

Selected currencies — weekly results

2015 2016 % Change
Dec 31 Jan 15 Jan 22 Week 2016
U.S. $ per currency
Australia A$ 0.7288 0.6861 0.701 2.1% -3.9%
New Zealand NZ$ 0.6833 0.6449 0.649 0.6% -5.1%
Canada C$ 0.7231 0.6887 0.707 2.6% -2.3%
Eurozone euro (€) 1.0871 1.0911 1.079 -1.1% -0.7%
UK pound sterling (£) 1.4742 1.4257 1.427 0.1% -3.2%
Currency per U.S. $
China yuan 6.4937 6.5849 6.579 0.1% -1.3%
Hong Kong HK$* 7.7501 7.7916 7.799 -0.1% -0.6%
India rupee 66.1537 67.605 67.630 0.0% -2.2%
Japan yen 120.2068 116.97 118.820 -1.6% 1.2%
Malaysia ringgit 4.2943 4.3967 4.293 2.4% 0.0%
Singapore Singapore $ 1.4179 1.4401 1.429 0.8% -0.8%
South Korea won 1175.0600 1213.16 1200.200 1.1% -2.1%
Taiwan Taiwan $ 32.8620 33.66 33.518 0.4% -2.0%
Thailand baht 36.0100 36.359 36.000 1.0% 0.0%
Switzerland Swiss franc 1.0014 1.0020 1.0163 -1.4% -1.5%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

December final harmonized index of consumer prices was up an unrevised 0.2 percent on the year. The yearly core rate excluding food, alcohol, tobacco & energy matched its flash 0.9 percent estimate but, excluding just unprocessed food & energy, an annual rate of also 0.9 percent was a tick higher than previously estimated. The third core index which omits only seasonal food & energy posted a second successive 0.8 percent 12-month rate. Within the overall basket, non-energy industrial goods inflation was unchanged from November at 0.5 percent while services saw a 0.1 percentage point dip to 1.1 percent. Food, alcohol & tobacco declined 0.3 percentage points to 1.2 percent but the annual decline in energy moderated from 7.3 percent to 5.8 percent.


 

January flash composite output index was 53.5, down 0.8 points from its final December print. The cooling reflected slower rates of expansion in both manufacturing and services. Manufacturing's flash PMI (see graph) weighed in at 52.3, a full point below its final mark at the end of last year. The flash services PMI declined 0.8 points to 53.6, its weakest reading in a year. Manufacturing output (53.2) sunk to its worst level in eleven months and growth of aggregate new business slipped to a 4-month low. However, on a brighter note, backlogs saw their sharpest increase since May 2011 and a broad based rise in overall employment matched December's 55-month high. Input costs were flat as a rise in services offset a fall in manufacturing but total output prices declined for a fourth successive month and, in goods producing industries, at their fastest pace in a year.


 

Germany

January ZEW current conditions climbed nearly 5 points to 59.7, their second increase in a row and their highest reading since September. But the January result was still 10.5 points short of April's high. Expectations declined 5.9 points to 10.2, more than reversing December's increase to hit a 3-month low. The decline here was largely attributed to the slowdown in China and increasing concerns about the outlook for emerging markets.


 

United Kingdom

December consumer price index edged 0.1 percent higher on the month, enough to lift the annual inflation rate from 0.1 percent to 0.2 percent, its third increase in a row. However, the only real boost to the change in the yearly rate came from transport where prices rose 1.8 percent on the month compared with a 0.2 percent decline between November and December 2014. This alone added 0.3 percentage points to the overall change. Air fares were up 46 percent compared with a 19 percent gain last year but this subsector is notoriously erratic and December's bounce may well have been at the expense of January. Motor fuels also provided a slight lift. On the downside the main pressure came from food & non-alcoholic drinks where charges fell a monthly 0.2 percent this December compared with a 0.3 percent increase in December 2014. Alcohol & tobacco similarly had a modest negative impact.


 

December claimant count unemployment was down a monthly 4,300 following a revised 2,200 decline in November that was originally estimated as a 3,900 rise. The jobless rate again held steady at 2.3 percent, its 10th consecutive reading at this level. The ILO statistics showed a sizeable 99,000 decline in unemployment in the three months to November. This was steep enough to reduce the jobless rate on this measure to 5.1 percent, its lowest mark since August to October 2005 and well short of the BoE's 5.4 percent forecast. Moreover, for November alone, the rate was only 4.9 percent, down from 5.1 percent in October and the lowest reading since September 2005. However, wages failed to respond and average earnings in September to November were up just 2.0 percent on the year and 0.4 percentage points shy of their rate in August to October. In addition, the less volatile regular pay measure also eased back to an even softer 1.8 percent yearly pace.


 

December retail sales were down 1.0 percent on the month. Excluding auto fuel, purchases dropped 0.9 percent. Compared with a year ago, total sales were up 2.6 percent after a 4.5 percent gain in November while core sales grew 2.1 percent, down from 3.4 percent last time. December's headline decline was dominated by non-food sales which dropped 3.5 percent from mid-quarter, their steepest slide since March 2013. Within this group, textiles, clothing & footwear (down 6.2 percent) plunged, at least in part due to unseasonably warm weather in the south and floods in the north of the country, and household goods were off 4.8 percent. Non-store retailing posted a 1.4 percent decrease and the other stores category a 2.9 percent decline. With auto fuel purchases off 1.6 percent, only non-specialized stores (0.4 percent) made any progress. Elsewhere, food demand expanded 2.0 percent. Meantime, prices were again very weak and the core retail sales deflator was 2.5 percent lower on the year, its eighteenth straight annual decline and its sharpest fall on record.


 

Asia/Pacific

China

Fourth quarter gross domestic product was up 6.8 percent from a year ago. For the year 2015, GDP grew 6.9 percent -- its slowest pace since 1990 but stayed within range of the government's target, as growth of services like finance and health care cushioned a slowdown in manufacturing and construction. The 6.9 percent growth was broadly in line with the government's target of "around 7 percent" for the year. Economists widely agree that China's maximum potential growth is slowing as an aging population shrinks the labour force and catch-up growth achieved by shifting labour from agriculture to the modern, urban economy is exhausted. On a seasonally adjusted basis, GDP grew 1.6 percent in the fourth quarter compared with 1.8 percent in the third quarter. The 2015 result will likely enable policy makers in Beijing to claim that the economy has expanded in line with an official target of around 7 percent, helped by rate cuts and stimulus measures aimed at propping up growth.


 

December industrial production was up a less than expected 5.9 percent when compared with the same month a year ago and down from November's 6.0 percent increase. Expectations had been for an increase of 6.0 percent for a second month and a nearly seven year low of 5.6 percent in October. For the year, industrial output expanded by 6.1 percent and was considerably lower than output's increase of 8.3 percent in 2014.


 

December retail sales were up 11.1 percent from a year ago, slightly below expectations of an increase of 11.2 percent. They were also lower than November's increase of 11.3 percent. For the year, retail sales expanded by 10.7 percent but lower than the 12.0 percent increase for the year in 2014. For the month, retail sales were up 0.82 percent.


 

 

Americas

Canada

November retail sales expanded 1.7 percent on the month. The increase, which was the steepest since January 2014, followed an unrevised 0.1 percent increase in October and lifted annual growth of purchases from 2.1 percent to 3.2 percent. Moreover, prices were only slightly higher leaving volumes to advance a very healthy 1.5 percent. Within the monthly increase in total nominal sales, motor vehicles & parts were up 3.5 percent. Excluding this category purchases were up a solid 1.1 percent from October. Elsewhere, there were gains in food & drink (1.5 percent), sporting goods, hobby, books & music (3.0 percent) and clothing & accessories (2.2 percent). Electronics also increased 2.1 percent. Outside of gasoline (down 0.6 percent) all of the major subsectors posted monthly advances.


 

Bottom line

Equities recovered a portion of losses incurred since the beginning of the year. Economic data were sparse during the week with reports from China, Japan and Europe disappointing. UK labour market data indicated that the jobless rate was at a decade low. Both the European Central Bank and Bank of Canada maintained their respective monetary policies. The ECB indicated that further easing could be in its future.

 

The Federal Reserve and the Bank of Japan announce their monetary policy decisions. Investors continue to look for more easing from the BoJ. The FOMC statement will be parsed for clues regarding future fed funds rate increases. As is always the case, the last week of the month brings a plethora of new economic data. In a time of heightened concerns about growth, investors will be checking them carefully.


 

Looking Ahead: January 25 through January 29, 2016

Central Bank activities
January 27 United States FOMC Announcement
January 28 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
January 29 Japan Bank of Japan Monetary Policy Announcement
 
The following indicators will be released this week...
Europe
January 25 Germany Ifo Survey (January)
January 27 Germany Retail Sales (December)
January 28 Eurozone EC Economic Sentiment (January)
UK Gross Domestic Product (Q4.2015 first estimate)
January 29 Eurozone M3 Money Supply (December)
Harmonized Index of Consumer Prices (January flash)
France Gross Domestic Product (Q4.2015 first estimate)
Consumption of Manufactured Goods (December)
Producer Price Index (December)
 
Asia/Pacific
January 25 Japan Merchandise Trade Balance (December)
January 27 Australia Consumer Price Index (Q4.2015)
January 28 Japan Retail Sales (December)
January 29 Australia Producer Price Index (Q4.2015)
Japan Consumer Price Index (December)
Unemployment (December)
Household Spending (December)
Industrial Production (December)
 
Americas
January 29 Canada Monthly Gross Domestic Product (November)
Industrial Product Price Index (December)

 

Anne D Picker is the author of International Economic Indicators and Central Banks.


 

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