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The unknowns
International Perspective - February 17, 2017
By Anne D. Picker, Chief Economist


Global Markets

Most equity indexes advanced again this week, but the gains were not as robust for the most part as the previous week. Investors began to take profits after stocks were boosted by positive earnings reports and optimism that growth in the U.S. would pick up. But uncertainty about what legislative changes actually will be made in the U.S.—  and most importantly — when they will be made and what they will look like after they go through the process is making traders more cautious as time rolls by. Investors are continuing to look for clarity on U.S. President Donald Trump's policies on tax and trade.


And in the UK, Brexit still weighs given that the formal negotiation period has yet to begin.  And exactly what the agreement will eventually look like is a great unknown. There are three major elections in Europe, in Germany, France and the Netherlands. The outcomes could rock the foundation of the European Union.


Fed Chair Janet Yellen testified before the Senate Banking Committee and the House of Representatives Financial Services Committee last week. What she said was closely monitored in the global markets. And investors continue to focus on each U.S. data release in terms of a potential change in fed policy.


Dr Yellen reiterated that the Fed is staying with its data dependent strategy, saying further fed funds interest rate increases will be based on the economy's performance. She said further gradual interest rate increases would be "appropriate" should employment and inflation move in line with expectations. She warned again that waiting too long to raise rates would be "unwise" and would pose the risk of future imbalances and possible recession. During her second day of testimony she stated her confidence in the structure of the FOMC and her lack of support for tying the committee to monetary policy rules.


Though she did not offer any details on unwinding the Fed's balance sheet in response to a Senator's question, she said she wanted normalization to be well underway and the economy "solid" before ending reinvestment. In the long run, she expects the balance sheet to be substantially smaller than it is now and consist of all Treasuries. She would like the Fed's portfolio to be runoff gradually and she warned against using balance sheet fluctuations as a monetary policy tool. Dr Yellen expects the FOMC to continue to remove accommodation and said that the best way to do this is with rate increases, not through balance sheet fluctuations.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Feb 10 Feb 17 Week 2017
Australia All Ordinaries 5719.1 5771.6 5850.98 1.4% 2.3%
Japan Nikkei 225 19114.4 19378.9 19234.62 -0.7% 0.6%
Topix 1518.61 1546.56 1544.54 -0.1% 1.7%
Hong Kong Hang Seng 22000.6 23575.0 24033.74 1.9% 9.2%
S. Korea Kospi 2026.5 2075.1 2080.58 0.3% 2.7%
Singapore STI 2880.8 3100.4 3107.65 0.2% 7.9%
China Shanghai Composite 3103.6 3196.7 3202.08 0.2% 3.2%
India Sensex 30 26626.5 28334.25 28468.75 0.5% 6.9%
Indonesia Jakarta Composite 5296.7 5371.7 5350.93 -0.4% 1.0%
Malaysia KLCI 1641.7 1698.9 1707.68 0.5% 4.0%
Philippines PSEi 6840.6 7235.2 7244.79 0.1% 5.9%
Taiwan Taiex 9253.5 9665.6 9759.76 1.0% 5.5%
Thailand SET 1542.9 1585.2 1577.84 -0.5% 2.3%
UK FTSE 100 7142.8 7258.8 7299.96 0.6% 2.2%
France CAC 4862.3 4828.3 4867.58 0.8% 0.1%
Germany XETRA DAX 11481.1 11667.0 11757.02 0.8% 2.4%
Italy FTSE MIB 19234.6 18862.1 19006.46 0.8% -1.2%
Spain IBEX 35 9352.1 9378.1 9500.30 1.3% 1.6%
Sweden OMX Stockholm 30 1517.2 1562.7 1570.59 0.5% 3.5%
Switzerland SMI 8219.9 8456.2 8506.49 0.6% 3.5%
North America
United States Dow 19762.6 20269.4 20622.05 1.7% 4.3%
NASDAQ 5383.1 5734.1 5838.58 1.8% 8.5%
S&P 500 2238.8 2316.1 2351.16 1.5% 5.0%
Canada S&P/TSX Comp. 15287.6 15729.1 15838.63 0.7% 3.6%
Mexico Bolsa 45642.9 47797.0 47164.710 -1.3% 3.3%


Europe and the UK

Equities advanced on the week despite choppy day to day trading. The FTSE and SMI added 0.6 percent while the DAX and CAC were 0.8 percent higher as the recent rally appears to be running out of steam given the uncertainties of U.S. fiscal and monetary policies. Overall, equities were buoyed by better than anticipated earnings but still have a ways to go before earnings season ends. However, profit taking has put a damper on the rally.


The European Central Bank published the minutes of its January 19th governing council monetary policy meeting Thursday. However, the minutes provided few insights into the ECB's current thinking on monetary policy. The ECB was clearly satisfied with the way financial markets had responded to its December statement and with economic developments since, which are broadly in line with expectations. They reiterated that a very substantial degree of monetary accommodation was still required for domestic inflation pressures to build up and durably support headline inflation. Similarly, there was general agreement about the need to confirm the intended pace and horizon of bond purchases as well as the forward guidance on the ECB's key policy rates as communicated in December. The minutes also underlined the significance attached to emphasizing that the governing council remained prepared to adjust its purchase program in terms of size and/or duration should the outlook become less favorable, or should financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation.


Economic data were mixed during the week. Key UK data were on the positive side — except for retail sales. January consumer and producer prices were up 1.8 percent and 3.5 percent respectively on the year. Claimant count unemployment dropped 42,400 and to an unemployment rate of 2.1 percent after 2.3 percent in December. The unemployment rate using the ILO measure for the three months to December remained at 4.8 percent. However, total retail sales slumped for a third consecutive month. Fourth quarter GDP from Germany, Italy and the Eurozone disappointed. Eurozone industrial production declined at a faster-than-expected pace in December after rising in the previous two months. ZEW German economic sentiment deteriorated in February, as expectations were dampened by the recent weak economic data and political uncertainty.


Eurozone growth is expected to slow less this year than expected earlier. The economy has shown strong resilience to the Brexit negative shock last year according to a report from the European Commission. However, the outlook faces a higher-than-usual degree of uncertainty as the UK formally triggers its exit from the European Union and the new U.S. president tries to implement his protectionist plans. Eurozone gross domestic product is expected to grow 1.6 percent this year after 1.7 percent growth in 2016.


Asia Pacific

Most Asian Pacific equity indexes advanced last week. The Nikkei and Topix continued to fluctuate with the yen down on the week. The Nikkei lost 0.7 percent while the Topix slipped 0.1 percent. Asian investors watched closely as Japan's Prime Minister Shinzo Abe met with U.S. President Trump. They breathed a sigh of relief when the meeting went smoothly, with no tough talk on currency and trade issues.


Japan reported its initial estimate of fourth quarter gross domestic product. On the quarter, GDP grew for the fourth consecutive quarter, this time by 0.2 percent or at an annualized pace of 1.0 percent. Until 2016, the economy alternated quarters between growth and contraction.


The Shanghai Composite managed to increase 0.2 percent on the week while the Hang Seng surged 1.9 percent. In January, China's consumer price inflation accelerated to a 32-month high as prices surged before the Lunar New Year holidays. Producer prices climbed at the fastest pace since 2011. The CPI was up 2.5 percent from 2.1 percent in December on the year. This was the highest inflation rate since May 2014. And producer prices advanced for the fifth consecutive month, this time it was up 6.9 percent annually. The PPI was negative from March 2012 through August 2016.


Equities retreated Tuesday prior to Fed Chair Janet Yellen's first day of her semi-annual Congressional testimony. But on Wednesday, Asian stocks followed their U.S. peers higher to hit 19-month highs after Dr Yellen painted a largely upbeat picture of the U.S. economy during the first day of her two-day testimony and indicated the central bank could raise short-term interest rates at its next policy meeting in March.



The U.S. dollar advanced against four of six of its major counterparts. While the currency advanced against the euro, pound sterling and the Canadian and Australian dollars, it declined against the yen and was virtually unchanged against the Swiss franc. The dollar ended lower at the end of the week as political turbulence in the U.S. pushed investors to take profits on recent gains in the currency.


The pound sterling dropped below the $1.24 mark Friday after January retail sales declined for a third month. The currency recovered later in the day. Analysts wondered if the slowdown in sales was because UK consumers are beginning to struggle with inflation brought on by the weaker currency.


Selected currencies — weekly results

2016 2016-17 % Change
Dec 30 Feb 10 Feb 17 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.768 0.767 -0.1% 6.3%
New Zealand NZ$ 0.6948 0.720 0.719 -0.1% 3.4%
Canada C$ 0.7443 0.764 0.763 -0.1% 2.6%
Eurozone euro (€) 1.0534 1.064 1.061 -0.3% 0.7%
UK pound sterling (£) 1.2333 1.249 1.242 -0.5% 0.7%
Currency per U.S. $
China yuan 6.9450 6.879 6.867 0.2% 1.1%
Hong Kong HK$* 7.7533 7.758 7.761 0.0% -0.1%
India rupee 67.9238 66.884 67.020 -0.2% 1.3%
Japan yen 116.8100 113.400 112.940 0.4% 3.4%
Malaysia ringgit 4.4862 4.444 4.453 -0.2% 0.7%
Singapore Singapore $ 1.4465 1.421 1.419 0.2% 2.0%
South Korea won 1205.8300 1150.980 1146.310 0.4% 5.2%
Taiwan Taiwan $ 32.3260 31.063 30.782 0.9% 5.0%
Thailand baht 35.8100 35.060 35.001 0.2% 2.3%
Switzerland Swiss franc 1.0174 1.0029 1.0029 0.0% 1.4%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


Fourth quarter gross domestic product was up 0.4 percent from its July through September level and 1.7 percent higher on the year. However, the third quarter was adjusted 0.1 percentage point firmer to yield also a 0.4 percent gain from the previous period and an annual increase of 1.8 percent. Germany expanded 0.2 percent on the quarter. Among the other larger countries, France doubled its rate to 0.4 percent while Spain matched its third quarter print of 0.7 percent. Among those countries supplying data, the only quarterly contractions were registered by Greece (0.4 percent) and Finland (0.5 percent). The best performer was Lithuania (1.3 percent) ahead of Latvia and Slovakia (both 0.8 percent). The flash update contains no information about the GDP expenditure components; that will have to wait until the preliminary report due March 7.



Flash fourth quarter gross domestic product increased 0.4 percent on the quarter and was up 1.7 percent from the same quarter a year ago. As ever with the flash report, no details of the GDP expenditure components were released. Nonetheless, the FSO did signal that the quarterly rise in total output was wholly attributable to domestic demand as imports increased significantly more quickly than exports. General government spending was sharply higher while consumer spending advanced as did fixed capital formation, notably construction.


February ZEW survey was slightly weaker than generally anticipated although still firm enough to suggest that analysts remain reasonably upbeat about the German economy in 2017. The current conditions index dipped 0.9 points to 76.4, only denting marginally January's sizeable 13.8 point rise and still its second strongest outturn since July 2011. Expectations were off a sharper 6.2 points at 10.4, their first decline since last July. The new reading was also a 4-month low. The slide in expectations probably reflects the recently reported weakness of the December data, notably a further 0.9 percent monthly drop in retail sales and, in particular, a 3.0 percent slump in industrial production.




Fourth quarter flash gross domestic product was up 0.2 percent in the fourth quarter after expanding 0.3 percent in the third quarter. The annual increase was steady at a modest 1.1 percent although this was still firm enough to equal its strongest performance since the second quarter of 2011. There are no details available for the GDP expenditure components in the flash report. However, Istat did signal a positive contribution from domestic demand. In terms of output, goods production and services both made fresh advances but agriculture declined.


United Kingdom

January consumer prices declined a monthly 0.5 percent and were up 1.8 percent on the year — just 0.2 percentage points short of their medium-term target and the strongest mark since June 2014. The increase in the yearly inflation rate was largely due to higher transport prices which fell 0.6 percent on the month compared with a much sharper decline of 2.5 percent a year ago. Within this, motor fuels were up 3.4 percent after a 2.6 percent drop in January 2016. There was also a positive contribution from food and non-alcoholic beverages where prices were flat at their December level having decreased 0.6 percent a year ago. The principal downward impact came from clothing and footwear where a largely seasonal decline of 4.2 percent on the month was more than a percentage point sharper than the 3.1 percent point slide recorded at the start of 2016. As a result, the core CPI declined a full 1.0 percent from December, matching its performance last January and so leaving the annual underlying rate of inflation steady at 1.6 percent.


January claimant count unemployment dropped 42,400 after a steeper revised 20,500 drop in December. This was the most significant decline since September 2013 and saw the jobless rate slide 0.2 percentage points to just 2.1 percent, equaling the record low last recorded in February 2016. ILO unemployment was down a further 7,000 over the fourth quarter after a 37,000 decline in the July to September period. The jobless rate here was steady at 4.8 percent, matching its lowest mark since the third quarter of 2005. Employment also expanded a solid 37,000 to lift the employment rate to a new record high of 74.6 percent.


January retail sales dropped 0.3 percent following a steeper revised 2.1 percent monthly decline in December. This was the third consecutive monthly decline. Annual growth slid from 4.1 percent to 1.5 percent, its softest reading since November 2013. Excluding auto fuel, sales were down 0.2 percent from December but were up 1.9 percent from January 2016, down from 4.7 percent last time. The poor headline data were biased down by a 0.5 percent monthly decrease in the food sector and a 1.5 percent decline in sales of auto fuel. Excluding auto fuel, non-food demand expanded 1.0 percent, largely reflecting strong gains in textile & clothing (1.9 percent), non-specialized stores (0.9 percent) and the other stores category (1.2 percent). But there was still a sizeable decease in non-store retailing (4.5 percent) and a small decline in household goods (0.6 percent).




Fourth quarter preliminary gross domestic product was up 0.2 percent from the third quarter and at an annualized rate of 1.0 percent. When compared with the same quarter a year ago, GDP was up 1.6 percent. As was the case in the previous quarter, external demand was the main factor driving the expansion in the three months to December, with net exports making a positive contribution of 0.2 percentage points to headline GDP growth. Private investment spending increased in the three months to December and made a modest contribution to headline GDP growth in the quarter, largely offsetting weaker public investment spending. Private consumption, however, was basically flat on the quarter, resulting in zero contribution from domestic demand to headline growth.



January employment increased 13,500 after an increase of 16,300 in December (revised up from an increase of 13,500). This was the fourth consecutive monthly increase in payrolls. However, full-time employment plunged 48,800 persons. This was offset by an increase of 58,300 part-time employees. Over the last 12 months there has been a decrease of 56,100 persons employed full-time and an increase of 159,400 in the number of persons employed part-time. Officials at the Reserve Bank of Australia have attributed this trend towards part-time employment to factors such a demand for more flexible working arrangements by both employers and employees, and stronger growth in the services sector combined with weaker growth in mining, The unemployment rate slipped to 5.7 percent from 5.8 percent in December to 5.7 percent while the participation rate declined slightly to 64.6 percent from 64.7 percent.



January consumer price index was up 2.5 percent on the year, up from 2.1 percent in December and the strongest increase since May 2014. On the month, the CPI rose 1.0 percent after an increase of 0.2 percent in December. The increase in headline inflation was broad-based, with most major categories of consumer spending seeing stronger price increases. Food inflation accelerated from 2.1 percent in December 2.5 percent while non-food price inflation picked up from 2.0 percent to 2.5 percent. Growth in transportation and communication prices has continued to trend higher as global oil prices strengthen, up 2.3 percent from 0.9 percent in December. Inflation rose in both urban areas, up 2.1 percent to 2.6 percent, and in rural areas, up from 1.9 percent to 2.2 percent.




December manufacturing sales jumped a monthly 2.3 percent. November was revised upward to 2.3 percent from 1.5 percent. On the year, sales were up 4.1 percent after increasing 3.1 percent in November. The December increase was based on higher volumes along with stronger prices. Volumes were up 2.3 percent in December after November's 1.8 percent gain. Transportation equipment jumped 7.4 percent following two consecutive months of decline. Sales excluding transportation equipment rose 1.0 percent after a 3.2 percent gain in November. The other main upward contributor was petroleum & coal products, up 11.6 percent — their highest level since July 2015. Growth here was mainly due to higher volumes as refineries resumed production after maintenance and retooling work. Sales excluding motor vehicles parts & products were up 1.9 percent after a 2.8 percent increase in November. Inventories declined 0.3 percent after a 0.4 percent decline the previous month. Inventories fell in 11 of the 21 industries, led by aerospace products & parts and by motor vehicles. Unfilled orders dropped 1.9 percent while new orders declined 0.6 percent after increasing 0.2 percent in November. The decline in new orders was led by the volatile aerospace products & parts and the computer & electronic products industries.


Bottom line

Fed Chair Janet Yellen's Congressional testimony received heightened attention but so did positive economic data in the U.S. and UK. While fourth quarter GDP growth in Germany, Italy and the Eurozone was lower than expectations, at the same time it indicated that growth was beginning to take hold in the euro area.


Analysts will get a first look at growth during February with the release of flash PMIs for Japan, Germany, France and the U.S. The UK will report its second estimate of gross domestic product, this time with more detail for a more complete look at growth. In Japan, January merchandise trade will be released. Given that growth is dependent on external demand, the data will get a close inspection.


Looking Ahead: February 20 through February 24, 2017

The following indicators will be released this week...
Feb 20 Eurozone EC Consumer Confidence (February flash)
Feb 21 Eurozone Manufacturing PMI (February flash)
Composite & Services PMI (February flash)
Germany Manufacturing PMI (February flash)
Composite & Services PMI (February flash)
France Manufacturing PMI (February flash)
Composite & Services PMI (February flash)
Feb 22 Eurozone Harmonized Index of Consumer Prices (January final)
Germany Ifo Business Survey (February)
UK Gross Domestic Product (Q4.2016 second estimate)
Feb 23 Germany Gross Domestic Product (Q4.2016 final)
Asia Pacific
Feb 20 Japan Merchandise Trade Balance (January)
Feb 21 Japan Manufacturing PMI (February flash)
Feb 22 Canada Retail Sales (December)
Feb 24 Canada Consumer Price Index (January)


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


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