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Still unknowns
International Perspective - January 13, 2017
By Anne D. Picker, Chief Economist


Global Markets

Equities were mixed as the President-elect Donald Trump rally began to fade. Investors began to focus on fourth quarter earnings season which began in earnest on Friday. Uncertainty surrounding Trump's policies led to risk aversity during the week — especially in Asia. Investors have few hard facts to go on when evaluating future U.S. policies and Wednesday's press conference did not clarify matters.


The World Bank lowered its global growth projections. It noted that rising trade protection could have adverse effects after U.S. President-elect Donald Trump takes office on January 20. According to the Global Economic Prospects report of the World Bank, the global economy will grow 2.7 percent this year instead of 2.8 percent projected in June 2016. Going forward, growth was expected to be 2.9 percent in both 2018 and 2019. Euro area growth was expected to slow to 1.5 percent in 2017 before slowing slightly to 1.4 percent next year. Uncertainty about the 'Brexit' process is expected to weigh on growth in the UK during 2017-18.


ECB's account of its December 8 meeting

The European Central Bank published an account of its December 8 meeting on Thursday. The governing council thought that while inflation was likely to accelerate over coming months, Eurozone growth would probably remain too slow to propel it towards its near-2 percent inflation target over the medium term. Deflation risks were perceived to have eased somewhat since the previous meeting and there had been some promising signs of higher inflation expectations.


The ECB's governing council opted to trim their monthly bond purchases partly because of concerns they could struggle to find enough assets to buy. The council decided to lower the monthly purchase target under its quantitative easing program from €80 billion to €60 billion from April. The decision reflected concern the bank could drain the market for government debt of liquidity if it continued to snap up bonds at the same pace.


The controversial QE program, the cornerstone of the ECB's bid to lift inflation closer to its 2 percent target, will enter a third phase in the spring. At that time, the ECB will buy €540 billion worth of bonds between April and the end of 2017. ECB President Mario Draghi said the lower monthly target also reflected growing confidence in the economy and a reduced threat of persistently low inflation. There was no mention of what the council would do should the Eurozone's recovery strengthen at a quicker pace than expected.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Jan 6 Jan 13 Week 2016
Australia All Ordinaries 5719.1 5809.0 5776.80 -0.6% 1.0%
Japan Nikkei 225 19114.4 19454.3 19287.28 -0.9% 0.9%
Topix 1518.61 1553.32 1544.89 -0.5% 1.7%
Hong Kong Hang Seng 22000.6 22503.0 22937.38 1.9% 4.3%
S. Korea Kospi 2026.5 2049.1 2076.79 1.4% 2.5%
Singapore STI 2880.8 2962.6 3025.07 2.1% 5.0%
China Shanghai Composite 3103.6 3154.3 3112.76 -1.3% 0.3%
India Sensex 30 26626.5 26759.23 27238.06 1.8% 2.3%
Indonesia Jakarta Composite 5296.7 5347.0 5272.98 -1.4% -0.4%
Malaysia KLCI 1641.7 1675.5 1672.50 -0.2% 1.9%
Philippines PSEi 6840.6 7248.2 7238.52 -0.1% 5.8%
Taiwan Taiex 9253.5 9372.2 9378.83 0.1% 1.4%
Thailand SET 1542.9 1571.5 1575.24 0.2% 2.1%
UK FTSE 100 7142.8 7210.1 7337.81 1.8% 2.7%
France CAC 4862.3 4909.8 4922.49 0.3% 1.2%
Germany XETRA DAX 11481.1 11599.0 11629.18 0.3% 1.3%
Italy FTSE MIB 19234.6 19687.7 19514.54 -0.9% 1.5%
Spain IBEX 35 9352.1 9515.9 9511.60 0.0% 1.7%
Sweden OMX Stockholm 30 1517.2 1522.1 1522.49 0.0% 0.3%
Switzerland SMI 8219.9 8417.5 8452.19 0.4% 2.8%
North America
United States Dow 19762.6 19963.8 19885.73 -0.4% 0.6%
NASDAQ 5383.1 5521.1 5574.12 1.0% 3.5%
S&P 500 2238.8 2277.0 2274.64 -0.1% 1.6%
Canada S&P/TSX Comp. 15287.6 15496.1 15497.28 0.0% 1.4%
Mexico Bolsa 45642.9 46071.6 46182.430 0.2% 1.2%


Europe and the UK

The FTSE, CAC and DAX continued their winning ways and advanced for the sixth consecutive week. The FTSE was 1.8 percent higher while the CAC and DAX both added 0.3 percent. The SMI was up 0.4 percent. Bank shares helped push the indices higher after major U.S. banks reported better than anticipated quarterly results. The FTSE reached record highs Friday, and in the process extended its historic winning streak to a 14th straight day of gains. The index's longest winning run since its inception in 1984 has also been notable for the relatively modest daily gains. Some analysts say that a likely further devaluation of the pound sterling in the next months would support the index to climb higher.


Most economic data were positive during the week. Eurozone November industrial production was up a greater than expected 1.5 percent on the month. UK November industrial production surprised with a 2.1 percent gain. Output increased in France (2.2 percent), Italy (0.7 percent) and Germany (0.4 percent) as well. Germany's trade surplus widened but so did the UK's trade deficit. Germany's 2016 gross domestic product expanded at the fastest pace in five years on robust domestic demand. GDP grew 1.9 percent last year after expanding 1.7 percent in 2015. This was the fastest expansion since 2011 when Germany grew 3.7 percent.


Eurozone economic growth momentum is likely to be sustained in the first half of this year, driven by steady growth in private consumption and public spending according to three leading European economic institutes (Germany's Ifo, France's INSEE and Italy's ISTAT). Gross domestic product is expected to increase 0.4 percent in the fourth quarter of 2016 and is expected to keep growing at the same pace over the first half of 2017. Inflation was forecast to increase to 1.5 percent in the first and second quarters of this year, up from 0.7 percent in the final three months of 2016. Energy prices are expected to drive overall price growth.



Asia Pacific

Equities were mixed last week, weighed down at week's end by disappointing Chinese international trade data and continued concerns regarding U.S. President-elect Donald Trump's policies especially regarding global trade. Gains for the week ranged from a high of 2.1 percent (STI) to 0.1 percent (Taiex). Among the indexes that were lower for the week, the Jakarta Composite lost 1.4 percent, the Nikkei was down 0.9 percent and the All Ordinaries was 0.6 percent lower.


Major economic data came from China. Inflation data were mixed, denting investor sentiment. December consumer price index was up 2.1 percent on the year, down from 2.3 percent in November. Producer prices jumped 5.5 percent from a year earlier — more than expected — after increasing 3.3 percent the month before. But the December merchandise trade data which was released at the end of the week disappointed investors the most.


China's December trade surplus was $40.82 billion, down from $44.61 billion in November. For the year 2016, China recorded a trade surplus of $509.96 billion, 14.2 percent below 2015's trade surplus of $594.50 billion. Exports dropped 6.1 percent on the year while imports rose 3.1 percent. Exports to the United States rose 5.1 percent on the year after an increase of 6.9 percent in November, while those to the European Union fell 4.8 percent after a rise of 5.1 percent. Exports to Japan declined 5.6 percent in December after increasing by 3.2 percent in November.


Officials in China appear to be concerned about the outlook for 2017, warning that there may not be a rebound in world trade this year. They said that China would be hard hit by "anti-globalization" trends and said they would closely monitor the trade policies of the incoming Trump administration. Consistent with previous comments that have stressed the need for China to shift away from low value-added manufacturing, officials said that China's traditional trade advantages are weakening and that more progress is needed to upgrade domestic industry towards high-tech production.



The U.S. dollar retreated against five of its six major counterparts last week. The currency was down against the euro, yen, Swiss franc and the Canadian and Australian dollars. It did increase against the pound sterling. Sterling earned the distinction of being the only major currency not to advance against the dollar last week, as a lack of clarity over how the UK will engineer its exit from the EU continued to rattle investor sentiment. The fall came as a spokesperson for Theresa May said the British prime minister will give her long-awaited speech on Brexit on Tuesday. She is expected to set out more details of her negotiating aims.


Sterling fell to its second-lowest levels in nearly 31-years this week after PM May said last Sunday that the UK would not try to keep "bits of membership" of the EU — comments that were widely interpreted by investors to mean the UK could be heading for a "hard Brexit".


The UK will likely trigger Article 50 by March finally initiating the Brexit process. Analysts are worried that the heavy political calendar in Europe will lead the EU towards a tough negotiating position and the market towards pricing "hard Brexit" again.


Selected currencies — weekly results

2016 2016-17 % Change
Dec 30 Jan 6 Jan 13 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.731 0.750 2.6% 3.9%
New Zealand NZ$ 0.6948 0.697 0.712 2.3% 2.5%
Canada C$ 0.7443 0.756 0.762 0.8% 2.4%
Eurozone euro (€) 1.0534 1.054 1.064 1.0% 1.0%
UK pound sterling (£) 1.2333 1.229 1.218 -0.8% -1.2%
Currency per U.S. $
China yuan 6.9450 6.908 6.901 0.1% 0.6%
Hong Kong HK$* 7.7533 7.756 7.755 0.0% 0.0%
India rupee 67.9238 67.418 68.156 -1.1% -0.3%
Japan yen 116.8100 116.970 114.610 2.1% 1.9%
Malaysia ringgit 4.4862 4.473 4.463 0.2% 0.5%
Singapore Singapore $ 1.4465 1.439 1.428 0.8% 1.3%
South Korea won 1205.8300 1193.000 1174.980 1.5% 2.6%
Taiwan Taiwan $ 32.3260 31.823 31.570 0.8% 2.4%
Thailand baht 35.8100 35.740 35.420 0.9% 1.1%
Switzerland Swiss franc 1.0174 1.0174 1.0090 0.8% 0.8%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


November industrial production was up 0.4 percent on the month and was up 2.1 percent from the same month a year ago. The monthly headline increase was largely attributable to intermediates which posted a 0.9 percent advance. Consumer goods were up 0.3 percent but capital goods slipped 0.1 percent after a 1.0 percent jump in October. Elsewhere energy fell 0.4 percent while construction rose 1.5 percent. Overall manufacturing output expanded 0.4 percent for a second successive month.


November seasonally adjusted trade surplus was €21.7 billion, up from a marginally larger revised €20.6 billion in October. Unadjusted, the surplus stood at €22.6 billion compared with €20.5 billion in a year ago. The improvement in the headline print reflected a 3.9 percent monthly increase in exports to a new record high of €104.5 billion. This followed a 0.5 percent gain in October. Imports were 3.5 percent higher after a 1.2 percent increase last time. Annual growth of exports jumped to 5.6 percent from minus 4.0 percent while imports were up 4.5 percent having previously declined 2.3 percent.


United Kingdom

November industrial production jumped 2.1 percent on the month, the strongest increase since April and reversing a smaller revised 1.1 percent drop in October. Annual growth climbed from minus 0.9 percent to 2.0 percent. The rebound in overall industrial output was mirrored in the key manufacturing category which was up 1.3 percent monthly following a marginally steeper revised 1.0 percent decline last time. Particular strength was apparent in machinery & equipment (4.2 percent), pharmaceuticals (8.2 percent) and rubber & plastics (4.3 percent). Transport equipment (2.7 percent) and other manufacturing and repair (1.1 percent) also fared well. Total sector production was further boosted by mining & quarrying (1.3 percent), water supply (7.1 percent) and electricity & gas (4.9 percent).


November deficit on total trade in goods widened sharply to Stg12.16 billion from a slightly larger revised Stg9.89 billion in October. However, the deficit was still below September's Stg13.83 billion peak. The headline deterioration was essentially matched by the underlying deficit which excludes oil and other erratic items. The red ink here increased from Stg9.48 billion to Stg11.44 billion, its second highest so far in 2016. Overall goods exports were up 2.8 percent on the month but this was swamped by an 8.4 percent surge in imports that more than reversed October's 6.0 percent decline. Regionally the damage was done mainly by non-EU countries where the deficit expanded from Stg2.12 billion to Stg3.58 billion. However, the bilateral position with other EU members also worsened with the shortfall here climbing from Stg7.77 billion to Stg8.59 billion, a 2016 high.




November retail sales were up 0.2 percent after increasing 0.5 percent in October. On the year, sales were up 3.3 percent. Headline growth was driven by higher sales for food (0.4 percent), clothing, footwear & personal accessory (1.7 percent) and household goods (0.2 percent). These gains were offset by lower sales for cafes, restaurants & takeaway food services (down 0.8 percent), department stores (down 0.3 percent) and other retailing (down 0.1 percent). Sales were up in five of the eight Australian states and territories, with New South Wales and Victoria seeing the biggest gains of 0.5 percent and 0.4 percent respectively. Sales fell by 0.6 percent and 0.4 percent on the month in Western Australia and South Australia respectively.



December consumer price index was up 2.1 percent on the year, down from the seven-month high of 2.3 percent recorded in November. On the month, the CPI rose 0.2 percent after an increase of 0.1 percent the month before. Food prices were up 2.4 percent on the year after jumping 4.0 percent in November. Non-food price inflation however accelerated from 1.8 percent in November to 2.0 percent in December. The urban CPI was up 2.3 percent while the rural CPI was up 1.9 percent.


December producer price index rose 5.5 percent on the year after increasing by 3.3 percent in November. This is the strongest increase in the PPI since 2011. The PPI advanced 1.6 percent on the month. Most categories of producer prices posted stronger increases on the year. Prices for production materials rose 7.2 percent while fuel and power prices rose 10.1 percent. Inflation also picked up for consumer goods, metals and other raw materials.


Bottom line

Equities were mixed on the week in relatively quiet trading. Merchandise trade and output data dominated the economic information flow. In Europe, output improved. China's December merchandise trade data disappointed.


Central banks begin to hold their 2017 policy meetings. Both the Bank of Canada and the European Central Bank meet midweek — both are anticipated to leave their respective policies unchanged. The UK posts inflation and labour market data. Both will be carefully parsed for any signs of Brexit induced changes. China reports fourth quarter growth data along with December output and retail sales. Needless to say, investors will continue to monitor these data very closely! On Friday, January 20, Donald Trump will be sworn in as U.S. President.


Looking Ahead: January 16 through January 20, 2017

Central Bank activities
Jan 18 Canada Bank of Canada Monetary Policy Announcement
United States Federal Reserve Beige Book Published
Jan 19 Eurozone European Central Bank Monetary Policy Announcement
The following indicators will be released this week...
Jan 16 Eurozone Merchandise Trade (November)
Jan 17 Germany ZEW Survey (January)
UK Consumer Price Index (December)
Producer Price Index (December)
Jan 18 Eurozone Harmonized Index of Consumer Prices (December)
UK Labour Market Report (December)
Jan 20 UK Retail Sales (December)
Asia Pacific
Jan 16 Japan Producer Price Index (December)
Machinery Orders (November)
Jan 19 Australia Labour Force Survey (December)
Jan 20 China Industrial Production (December)
Retail Sales (December)
Gross Domestic Product (Q4.2016)
Canada Manufacturing Sales (November)
Jan 20 Canada Consumer Price Index (December)
Retail Sales (November)


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


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