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CBs brighten outlooks
International Perspective - February 3, 2017
By Anne D. Picker, Chief Economist


Global Markets

Three central banks met and left their respective monetary policies unchanged. However, two increased their growth projections while the third gave a positive view of the current economy. The Banks of Japan and England elevated their growth projections while the Federal Reserve's post-meeting statement intimated that growth was improving. Equities were mixed on the week with declines in Asia and Europe.


The global PMI data confirmed that growth is improving worldwide. The composite index for January was 53.9, up from December's 53.6 and its best reading since March 2015. The index has signaled expansion for 52 consecutive months. Growth of global service sector business activity improved to a 17-month high offsetting a minor easing in the rate of expansion of manufacturing production. By nation, the acceleration in the rate of increase in all-industry output was led by the U.S. and Russia. U.S. growth was the sharpest since November 2015, while Russia registered its quickest expansion of economic activity for over eight-and-a-half years. The euro area output growth was steady at December's 67-month record, while rates of increase slowed in Japan, China and the UK. All industry activity declined in India and Brazil.


Bank of Japan

As anticipated, the Bank of Japan kept its monetary policy unchanged Tuesday. The BoJ however, did upgrade its outlook for the economy at its latest monetary policy meeting. The policy interest rate remained at minus 0.1 percent while bond purchases stayed at ¥80 trillion per year. The Bank is targeting the shape of the yield curve with the target yield for the 10-year remaining at around zero percent. The monetary policy board deemed that the stimulus currently in place reflects the view that the economy will continue to grow at a pace "above its potential" of around zero to 0.5 percent over the next two years.


The MPB has revised their GDP forecast from 1.0 percent to 1.4 percent for fiscal year 2016 ending on March 31, from 1.3 percent to 1.5 percent for fiscal year 2017, and from 0.9 percent to 1.1 percent for fiscal year 2018. The MPB also is confident annual increases in the consumer price index will eventually pick up to around the target of 2.0 percent. However, there is little change in their forecast for core CPI (excluding fresh food prices). This price measure is forecast to decline an annual 0.2 percent in fiscal year 2016 compared with a previous forecast of a 0.1 percent decline. However, the CPI is expected to increase 1.5 percent in fiscal year 2017 and by 1.7 percent in fiscal year 2018.


Federal Reserve

As universally expected, the Federal Reserve left its fed funds interest rate range at 0.5 percent to 0.75 percent on Wednesday. The FOMC said the nation's slow and steady economic expansion continued into the new year, with little sign of flagging or acceleration. There was little change from the December statement. No mention was made of the next interest rate increase. However, there will be ample opportunity for FOMC members to voice their opinions between now and the next meeting on March 15. Fed Chair Janet Yellen for example, will be giving her semi-annual testimony to the Senate and House of Representative committees this month.


In its post-meeting statement the Fed noted improvements in consumer and business sentiment and said it expected inflation to rise to its 2 percent target as it makes further, gradual adjustments to interest rates. The key uncertainty hanging over the Fed is the outcome of Republican talks on fiscal policy including taxes and infrastructure spending.


Bank of England

On Thursday, the Bank of England kept its monetary policy unchanged — the Bank Rate remained at 0.25 percent and the quantitative easing targets for gilt and corporate bond purchases at Stg435 billion and Stg10 billion respectively. The vote was unanimous.


The minutes of the monetary policy committee (MPC) meeting are released simultaneously with the Bank's policy decision. To this end, the minutes offered little, suggesting that the MPC is still operating with a neutral bias. The Bank revised its growth forecasts up and that on the back of a more favorable view of domestic demand. However, it remains concerned about higher inflation undermining real household incomes in the face of continued moderate pay rises. The new inflation projection is little changed from last time.


The Bank has revised down its estimate of the equilibrium jobless rate from 5.0 percent to 4.5 percent. The latest actual rate was 4.8 percent, meaning that there is more slack in the labour market now than previously thought. This implies that the economy can expand that much faster without necessarily adding to any inflationary pressure.


In its Quarterly Inflation Report (QIR) the Bank of England acknowledged a string of strong data by revising up its 2017 projection from 1.4 percent to 2.0 percent and next year's forecast from 1.5 percent to 1.6 percent. The 2019 call has similarly been nudged a tick firmer to 1.6 percent. However, the inflation outlook is little different from the November QIR. Unemployment is now forecast to increase from 4.8 percent last quarter to just 5.0 percent in a year's time and then drift back down to 4.8 percent again by 2020.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Jan 27 Feb 3 Week Jan 2017
Australia All Ordinaries 5719.1 5765.6 5672.48 -1.6% -0.8% -0.8%
Japan Nikkei 225 19114.4 19467.4 18918.20 -2.8% -0.4% -1.0%
Topix 1518.61 1549.25 1514.99 -2.2% 0.2% -0.2%
Hong Kong Hang Seng 22000.6 23360.8 23129.21 -1.0% 6.2% 5.1%
S. Korea Kospi 2026.5 2083.6 2073.16 -0.5% 2.0% 2.3%
Singapore STI 2880.8 3064.9 3041.94 -0.7% 5.8% 5.6%
China Shanghai Composite 3103.6 3159.2 3140.17 -0.6% 1.8% 1.2%
India Sensex 30 26626.5 27882.46 28240.52 1.3% 3.9% 6.1%
Indonesia Jakarta Composite 5296.7 5312.8 5360.77 0.9% 0.0% 1.2%
Malaysia KLCI 1641.7 1686.4 1685.01 -0.1% 1.8% 2.6%
Philippines PSEi 6840.6 7333.7 7226.70 -1.5% 5.7% 5.6%
Taiwan Taiex 9253.5 9448.0 9455.56 0.1% 2.1% 2.2%
Thailand SET 1542.9 1590.8 1582.95 -0.5% 2.2% 2.6%
UK FTSE 100 7142.8 7184.5 7188.30 0.1% -0.6% 0.6%
France CAC 4862.3 4840.0 4825.42 -0.3% -2.3% -0.8%
Germany XETRA DAX 11481.1 11814.3 11651.49 -1.4% 0.5% 1.5%
Italy FTSE MIB 19234.6 19329.3 19116.04 -1.1% -3.3% -0.6%
Spain IBEX 35 9352.1 9504.1 9462.70 -0.4% -0.4% 1.2%
Sweden OMX Stockholm 30 1517.2 1538.8 1557.31 1.2% 1.3% 2.6%
Switzerland SMI 8219.9 8379.6 8350.84 -0.3% 0.9% 1.6%
North America
United States Dow 19762.6 20093.8 20071.46 -0.1% 0.5% 1.6%
NASDAQ 5383.1 5660.8 5666.77 0.1% 4.3% 5.3%
S&P 500 2238.8 2294.7 2297.42 0.1% 1.8% 2.6%
Canada S&P/TSX Comp. 15287.6 15575.8 15476.39 -0.6% 0.6% 1.2%
Mexico Bolsa 45642.9 47421.1 47225.100 -0.4% 3.0% 3.5%


Europe and the UK

Only the FTSE and the OMX Stockholm managed to record increases on the week. The FTSE edged up 0.1 percent while the OMX was 1.2 percent higher. Trading was choppy during the week as investors waited first for the FOMC announcement and then the Bank of England's the following day. And then there was the U.S. employment report on Friday that sent equities higher. But looming in the background were the actions taken by the new U.S. administration that upset investors globally but were offset by reports that U.S. President Trump will take action to reduce regulations on the banking industry and that drove the sector higher.


A slew of economic data were released during the week. In the Eurozone, most releases were positive. Quarterly GDP was up 0.5 percent in the fourth quarter and the jobless rate declined to 9.6 percent. Both consumer and producer prices were up. Economic confidence inched up as did the manufacturing PMI. In Germany, consumer prices were up 1.9 percent on the year in January while its jobless rate ticked down to 5.9 percent, a record low. Fourth quarter GDP was up 0.4 percent on the quarter in France. There were disappointments as well. The UK manufacturing PMI slipped 0.2 points to 55.9 while the services PMI was down 2 points to 52.2 — both remain at solid growth levels however. Euro area and Germany retail sales retreated in December.


Asia Pacific

Market closures for the Lunar New Year holidays put a dent in trading last week. Those investors who were not celebrating — i.e. those in Australia, Japan and India — remained wary about U.S. President Donald Trump's protectionist policies. Most equity indexes retreated on the week with only those in India, Indonesia and Taiwan increasing. It should be noted that the Taiex was open two of five days while the Shanghai Composite only traded on Friday.


Both Mainland China January manufacturing PMIs eased — the Caixin declined from 51.9 in December to 51.0 in January while the CFLP slipped to 51.3 from 51.4 — suggesting a loss of output momentum and new orders. The Shanghai Composite retreated 0.6 percent on Friday. And in Hong Kong, the Hang Seng dropped each of the three days it was trading. Investors here were worried over U.S. policies toward China. Speculation that China-U.S. relations may turn less friendly than before weighed on investor sentiment during the week amid concern the U.S. may disagree with Beijing on issues ranging from trade and the yuan to tensions in the South China Sea to the One-China policy.



The U.S. dollar was down against its major counterparts including the euro, yen, Swiss franc and the Canadian and Australian dollar. However, the currency advanced against the pound sterling. The U.S. dollar moved lower as the Trump administration continued to complain about the currency values of other countries (China, Japan and Germany). Both the yen and euro were up noticeably. The Australian dollar was also higher on stronger commodity prices.


Sterling's decline Thursday came after the Bank of England raised its short term GDP forecast for the UK. Governor Mark Carney noted that the monetary policy committee thought there was more slack in the UK labour market, allowing interest rates to remain on hold despite growth picking up. The BoE also noted that the pound has picked up since its last Inflation Report in November – a development that has caused it to trim its inflation forecasts. In his post Quarterly Inflation Report press conference, the governor said the world was moving to a more "balanced policy mix" between fiscal and monetary policy, which would help lift UK growth in the first part of 2017.


Selected currencies — weekly results

2016 2016-17 % Change
Dec 30 Jan 27 Feb 3 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.755 0.768 1.8% 6.5%
New Zealand NZ$ 0.6948 0.726 0.731 0.7% 5.3%
Canada C$ 0.7443 0.761 0.788 3.5% 5.9%
Eurozone euro (€) 1.0534 1.070 1.078 0.7% 2.3%
UK pound sterling (£) 1.2333 1.255 1.248 -0.6% 1.2%
Currency per U.S. $
China yuan 6.9450 6.884 6.867 0.2% 1.1%
Hong Kong HK$* 7.7533 7.759 7.758 0.0% -0.1%
India rupee 67.9238 68.036 67.316 1.1% 0.9%
Japan yen 116.8100 115.120 112.780 2.1% 3.6%
Malaysia ringgit 4.4862 4.430 4.428 0.1% 1.3%
Singapore Singapore $ 1.4465 1.432 1.408 1.7% 2.7%
South Korea won 1205.8300 1171.070 1147.700 2.0% 5.1%
Taiwan Taiwan $ 32.3260 31.534 31.020 1.7% 4.2%
Thailand baht 35.8100 35.292 35.010 0.8% 2.3%
Switzerland Swiss franc 1.0174 0.9992 0.9930 0.6% 2.5%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


January EU Commission gauge of economic sentiment (ESI) rose for a fifth consecutive month to 108.2. The headline index was 0.4 points above its unrevised December reading and at its highest level in almost six years. The improvement reflected small gains in industrial morale (0.8 after 0.0) and consumer confidence where the flash estimate was revised up a couple of ticks to minus 4.7, its best print since April 2015. Services (13.5 after 13.1) also advanced but there were losses in retail (2.4 after 3.5) and construction (minus 12.8 after minus 12.1). Among the big four economies, the news was mixed with declines in the national ESI in France (104.9 after 105.5) and Germany (109.1 after 109.4) contrasting with small increases in Italy (105.6 after 104.3) and Spain (107.4 after 106.0). Selling price expectations were up significantly in both manufacturing (8.3 after 5.4) and services (6.9 after 4.9). At the same time, household inflation expectations (14.5 after 8.7) recorded their steepest gain in a nearly decade and now stand at their highest mark since January 2014.


Fourth quarter flash gross domestic product was up 0.5 percent on the quarter and 1.8 percent when compared with the same quarter a year ago. This equaled its fastest pace since the first quarter of 2015. Eurostat provides no details for the flash estimate on either the aggregate GDP expenditure components or individual member performance.



Fourth quarter preliminary gross domestic product expanded 0.4 percent on the quarter after increasing 0.2 percent in the third quarter. On the year, GDP was up 1.1 percent. The principal boost to total output came from domestic final sales which were up a quarterly 0.6 percent following a sluggish 0.2 percent rate last time. Private consumption matched this increase. Gross fixed capital formation was up 0.8 percent. Business investment advanced 1.3 percent and households, 0.9 percent. However, general government investment fell 1.1 percent. Government consumption expenditures were up 0.4 percent but inventory accumulation subtracted 0.2 percentage points. Net external demand added 0.1 percentage points having hit growth by a full 0.7 percentage points in July to September. Exports were up a solid 1.1 percent while imports rose a smaller 0.8 percent.




December industrial production was up 0.5 percent on the month after increasing 1.5 percent in November. On the year, output was up 4.7 percent after an increase of 2.9 percent in November. The monthly growth reflected stronger output in transport equipment, chemicals and electronic parts and devices. This was offset by weaker output of information and communication electronics equipment.



December merchandise trade surplus increased to A$3.51 billion from A$2.04 billion in November (revised up from $A1.24 billion). It is the largest monthly trade surplus on record, with big increases in coal and iron ore prices helping to deliver strong growth in exports. On a seasonally-adjusted basis, exports rose 5.4 percent on the month to a new record high of A$32.6 billion. Export growth on the year accelerated from 18.6 percent to 32.1 percent. Non-rural goods made the biggest contribution to growth in headline exports, up around 6 percent on the month. This reflected strong increases in both unit values and volumes for exports of iron ore and coal. Rural goods exports were up around 3 percent. Exports of services were flat. Headline exports were also boosted by an increase of around 23 percent in exports of non-monetary gold, reversing a large fall in November. Imports were relatively steady, up a monthly 0.7 percent on a seasonally-adjusted basis to A$29.1 billion. Imports rose 0.1 percent from a year ago after falling by 2.2 percent in November. The small increase was mainly driven by higher imports of consumption goods, intermediate and other merchandise goods, services and non-monetary gold, outweighing a fall in imports of capital goods.




November monthly real gross domestic product rose for the fifth time in six months, up 0.4 percent on the month. The monthly increase came from higher output in manufacturing, mining, quarrying and oil & gas extraction, finance and insurance and construction. Utilities and the agriculture and forestry sectors declined. On the year, real GDP was up 1.6 percent. Goods producing industries rose by 0.9 percent, almost offsetting a 1.0 percent decline in October. Service producing industries were up 0.2 percent mainly due to finance & insurance, retail trade and transportation & warehousing. Manufacturing rebounded 1.4 percent following a 1.7 percent decline in October. With the exception of October, output in the manufacturing sector has risen every month since June. Nondurable manufacturing was up 1.5 percent, led by a 3.6 percent gain in chemical manufacturers. Mining, quarrying and oil & gas extraction expanded 1.4 percent. Mining excluding oil and gas extraction increased 2.9 percent. Metal ore (such as iron ore) and potash led the growth, driven in part by higher exports.


Bottom line

Most equity indexes in Asia and Europe retreated last week thanks to a mix of earnings reports and policy moves by the new U.S. administration. Economic data proved to be mostly positive. The Banks of Japan and England along with the Federal Reserve left their respective monetary policies unchanged.


Compared with this past week's outpouring of economic data, this coming week looks almost blissfully quiet. There are three central bank announcements — all in the Asia Pacific in Australia, New Zealand and India. Data releases focus on merchandise trade and industrial production.


Looking Ahead: February 6 through February 10, 2017

Central Bank activities
Feb 7 Australia Reserve Bank of Australia Monetary Policy Meeting
Feb 8 India Reserve Bank of India Monetary Policy Meeting
Feb 9 New Zealand Reserve Bank of New Zealand Monetary Policy Meeting
The following indicators will be released this week...
Feb 6 Germany Manufacturers Orders (December)
Feb 7 Germany Industrial Production (December)
France Merchandise Trade (December)
Feb 9 Germany Merchandise Trade (December)
Feb 10 France Industrial Production (December)
UK Industrial Production (December)
Merchandise Trade (December)
Asia Pacific
Feb 6 Australia Retail Sales (December)
Feb 9 Japan Machinery Orders (December)
Feb 10 Japan Producer Price Index (January)
China Merchandise Trade (January)
India Industrial Production (December)
Feb 7 Canada Merchandise Trade Balance (December)
Feb 8 Canada Housing Starts (January)
Feb 10 Canada Labour Force Survey (January)


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


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