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INTERNATIONAL PERSPECTIVE

Political risks dampen gains
International Perspective - February 24, 2017
By Anne D. Picker, Chief Economist

  

Global Markets

A lack of clarity on the timing and scope of promised pro-growth policies from the new U.S. administration combined with uncertainty over whether the Federal Reserve will raise its fed funds rate at its March FOMC meeting subdued equity gains. In Europe, the Dutch parliamentary election on March 15 and the French first round presidential election on April 23 have hit investors' nerves, sending them to the sidelines. Profit taking after recent gains also kept equities subdued.  

 

On the week, the Shanghai Composite (up 1.6 percent) was the best performer and the S&P/TSX Composite the worst (down 1.9 percent). In the Asia Pacific, 8 of 13 indexes advanced. In Europe, only two indexes advanced. And in North America, the three U.S. indexes were higher for the week.


 

The Federal Reserve publishes FOMC minutes

The Federal Reserve published minutes of its latest FOMC meeting held on January 31 and February 1. At that meeting, the committee left its fed funds rate range at 0.5 percent to 0.75 percent. According to the minutes, "many participants" would like to increase fed funds interest rate "fairly soon" if the economy keeps growing. The minutes said the 10 Fed officials who vote on monetary policy remained committed to a policy of gradual rate increases.

 

The minutes said that the Trump administration's economic plans have injected "considerable uncertainty" into forecasting economic growth. But Fed officials emphasized that they do not want to change their plans in anticipation of potential changes in fiscal policy. They will wait to see what happens. Moreover, the minutes noted that the Fed sees the near-term risks as "roughly balanced."

 

The Fed also announced that Fed officials are now prohibited from speaking about monetary policy for 10 days before a FOMC meeting rather than one week. The Fed also said it would expand the information provided with its quarterly economic forecasts. The information will include an illustration of the uncertainty surrounding the projections also known as fan charts.


 

Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Feb 17 Feb 24 Week 2017
Asia/Pacific
Australia All Ordinaries 5719.1 5851.0 5786.88 -1.1% 1.2%
Japan Nikkei 225 19114.4 19234.6 19283.54 0.3% 0.9%
Topix 1518.61 1544.54 1550.14 0.4% 2.1%
Hong Kong Hang Seng 22000.6 24033.7 23965.70 -0.3% 8.9%
S. Korea Kospi 2026.5 2080.6 2094.12 0.7% 3.3%
Singapore STI 2880.8 3107.7 3117.03 0.3% 8.2%
China Shanghai Composite 3103.6 3202.1 3253.43 1.6% 4.8%
India Sensex 30 26626.5 28468.75 28892.97 1.5% 8.5%
Indonesia Jakarta Composite 5296.7 5350.9 5385.91 0.7% 1.7%
Malaysia KLCI 1641.7 1707.7 1698.35 -0.5% 3.4%
Philippines PSEi 6840.6 7244.8 7258.99 0.2% 6.1%
Taiwan Taiex 9253.5 9759.8 9750.47 -0.1% 5.4%
Thailand SET 1542.9 1577.8 1564.59 -0.8% 1.4%
Europe
UK FTSE 100 7142.8 7300.0 7243.70 -0.8% 1.4%
France CAC 4862.3 4867.6 4845.24 -0.5% -0.4%
Germany XETRA DAX 11481.1 11757.0 11804.03 0.4% 2.8%
Italy FTSE MIB 19234.6 19006.5 18596.66 -2.2% -3.3%
Spain IBEX 35 9352.1 9500.3 9453.50 -0.5% 1.1%
Sweden OMX Stockholm 30 1517.2 1570.6 1569.86 0.0% 3.5%
Switzerland SMI 8219.9 8506.5 8525.62 0.2% 3.7%
North America
United States Dow 19762.6 20624.05 20821.76 1.0% 5.4%
NASDAQ 5383.1 5838.6 5845.31 0.1% 8.6%
S&P 500 2238.8 2351.2 2367.34 0.7% 5.7%
Canada S&P/TSX Comp. 15287.6 15838.6 15533.47 -1.9% 1.6%
Mexico Bolsa 45642.9 47164.7 47047.670 -0.2% 3.1%

 

Europe and the UK

Equity gains faded last week thanks to a raft of disappointing earnings updates and political worries within the European Union and especially in France. The first round of the 2017 French presidential election will be held on April 23, 2017. Should no candidate win a majority, a run-off election between the top two candidates will be held on May 7, 2017. For the week, the FTSE was down 0.8 percent and the CAC lost 0.5 percent. However, the DAX and SMI were up 0.4 percent and 0.2 percent respectively. The FTSE was down four of five days and was lower on the week for the first time since the week ending February 3. Given the recent run-up in equities, profit taking was also a factor in the week's declines.

 

The decline in British shares accelerated alongside equity losses across Europe. Growing doubts about quick passage of tax-cut and reform plans being pushed by U.S. President Donald Trump also weighed. The indexes retreated as investors reacted to FOMC minutes even though the context was not much different than what Fed Chair Janet Yellen said in her Congressional testimony the week before — that is many participants say it might be appropriate to raise the federal funds rate again fairly soon if incoming data were in line with or stronger than current expectations.

 

Economic data released during the week were mostly positive. The February flash composite PMIs for the Eurozone indicated that growth was picking up. The composite reading was the highest since 2011. German Ifo sentiment also climbed on the month. Consumer prices in Germany and Italy also increased. And in the UK, the second estimate of growth was revised higher to 0.7 percent on the quarter.

 

According to European Central Bank Executive Board member and Chief Economist Peter Praet, policymakers will have to study the reasons for the surge in consumer prices. He noted that with the fading of the declines in energy prices that restrained inflation, headline inflation has now moved up quite sharply. Inflation had held well below the ECB's target of below, but close to 2 percent since early 2013. "In the near future, we will have to assess how the forces that are driving prices today can influence the outlook for price stability in the medium term and help durably stabilize inflation around our goal."


 

Asia Pacific

Most equity indexes were higher last week although weaker commodity prices weighed on resource stocks and investors continued to wait for U.S. policy details. Investors were also uneasy over the current political risks in Europe. The Shanghai Composite followed by the Sensex recorded the largest gains — 1.6 percent and 1.5 percent respectively. Remaining advances were in a narrow range of 0.2 percent to 0.7 percent. Weekly losses ranged from 1.1 percent (All Ordinaries) to 0.1 percent (Taiex).

 

The Shanghai Composite advanced 1.6 percent while the Hang Seng retreated 0.3 percent. Mainland shares ended the week on a flat note on hopes that regulators will press ahead with reforms this year to fend off systematic risks in the financial system. The yuan was little changed after U.S. Treasury Secretary Steven Mnuchin signaled no urgency to brand China as a currency manipulator.

 

In Australia, Reserve Bank of Australia governor Philip Lowe appeared before a parliamentary committee and said he has ruled out a further cut in interest rates to boost household borrowing, saying lower rates would encourage risky lending and threaten financial stability. Earlier in the week, the minutes of the February RBA monetary policy meeting were published. At that meeting the policy interest rate remained unchanged at 1.50 percent. This meant that current policy settings were consistent with sustainable growth and achieving the inflation target "over time".


 

Currencies

The U.S. dollar was mostly lower last week gaining only against the euro, Swiss franc and the Canadian dollar. It was lower against the yen, pound sterling and the Australian dollar. The U.S. currency edged lower after investors decided that the Federal Reserve was unlikely to increase interest rates at its March 14 and 15 FOMC meeting. The minutes (discussed in the introduction) seemed to indicate that the next increase would come "fairly soon" but not in March. The political uncertainty in Europe weighed on the euro and Swiss franc while comments from Fed District Bank presidents pushed the dollar higher. Several FOMC members indicated that they would be comfortable increasing the fed funds rate given the current rate of growth in the economy.

 

The euro declined after anti-European Union rhetoric from French presidential candidate Marine Le Pen and Dutch candidate Geert Wilders. The first round of French elections is on April 23. The Netherlands holds its parliamentary election on March 15. Hawkish statements from Fed policymakers also sent the euro lower.

 

Fluctuations in the Japanese yen against the U.S. dollar sent the Nikkei down three of five days and the Topix down two. The yen was up against the U.S. currency for the week pressuring exporters who prefer a lower value to the yen.

 

An unexpected surge in January consumer prices (up 2.1 percent on the year) sent the Canadian dollar initially jumping against the U.S. dollar. The CPI was up thanks to rising gasoline prices and new carbon levies. The advance brought the CPI to its highest increase since October 2014. The increase in energy prices sparked the rise in inflation. However, the Canadian dollar gain subsided and the currency ended the week slightly lower against its major counterpart.


 

Selected currencies — weekly results

2016 2017 % Change
Dec 30 Feb 17 Feb 24 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.767 0.768 0.1% 6.4%
New Zealand NZ$ 0.6948 0.719 0.720 0.2% 3.6%
Canada C$ 0.7443 0.763 0.763 -0.1% 2.5%
Eurozone euro (€) 1.0534 1.061 1.056 -0.4% 0.3%
UK pound sterling (£) 1.2333 1.242 1.246 0.3% 1.0%
Currency per U.S. $
China yuan 6.9450 6.867 6.869 0.0% 1.1%
Hong Kong HK$* 7.7533 7.761 7.761 0.0% -0.1%
India rupee 67.9238 67.020 66.825 0.3% 1.6%
Japan yen 116.8100 112.940 112.080 0.8% 4.2%
Malaysia ringgit 4.4862 4.453 4.441 0.3% 1.0%
Singapore Singapore $ 1.4465 1.419 1.403 1.1% 3.1%
South Korea won 1205.8300 1146.310 1131.090 1.3% 6.6%
Taiwan Taiwan $ 32.3260 30.782 30.674 0.4% 5.4%
Thailand baht 35.8100 35.001 34.870 0.4% 2.7%
Switzerland Swiss franc 1.0174 1.0029 1.0074 -0.4% 1.0%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

February Eurozone flash composite output index was up 1.6 points from its final January reading to 56.0 — its highest level in 70 months. Although the bounce reflected mainly strength in services, manufacturing also made progress. The flash composite PMI was 55.5 for manufacturing while services climbed to 55.6. Manufacturing output was especially strong but both sectors saw solid gains in new orders and the aggregate measure accelerated sharply. Similarly, overall backlogs recorded their steepest increase in 69 months and employment posted its largest rise since August 2007. Moreover, business expectations about activity levels in a year's time rose to the highest since comparable data were first available in July 2012. Inflation developments were more subdued but at least moved in the right direction. Thus, while input cost inflation saw its strongest reading in 69 months, output prices recorded only a small broad-based advance. Among the core countries it was France that led the way with its composite output measure climbing to 56.2, a 69-month high. However, Germany (56.1) was only fractionally behind so the aggregate core performance was reassuringly bullish. Elsewhere, the rate of growth of business activity hit a 14-month peak, accelerating in both manufacturing and services.


 

Germany

February's Ifo business sentiment index was 111.0, up 1.1 points from its January mark. The improvement reflected a stronger assessment of current conditions and a more optimistic view of future developments. The former climbed 1.5 points to 118.4, its sixth increase in as many months and its highest level since July 2011. The latter gained a more modest 0.8 points to 104.0 and so only reversed a part of the previous period's 2.3 point decline. At the sector level the picture was more mixed — morale in manufacturing jumped 2.6 points to 16.5 and wholesale was up 7.5 points at 22.7. However, confidence in construction shed 3.2 points to 7.6 and retail was off 1.4 points at 4.4, its worst reading in more than a year.


 

Fourth quarter gross domestic product was unrevised in the second estimate leaving total output 0.4 percent higher than in the previous period and a workday adjusted 1.7 percent above its year ago level. Unadjusted, annual growth of 1.2 percent was also in line with its flash report. The first look at the GDP expenditure components showed a marked pick-up in domestic demand which rose a quarterly 0.9 percent, almost double its third quarter pace. However, within this, private consumption was up a modest 0.3 percent and equipment investment declined 0.1 percent. Both government spending (0.8 percent) and construction investment (1.6 percent) were much stronger in the fourth quarter. In addition, inventory accumulation boosted the headline quarterly change by 0.3 percentage points, matching its contribution in July to September. Net external trade subtracted 0.4 percentage points as a 1.8 percent gain in exports was easily more than outpaced by a 3.1 percent surge in imports. Net exports also hit growth by 0.3 percentage points in the third quarter.


 

United Kingdom

Fourth quarter revised gross domestic product expanded 0.7 percent from the previous period, up a tick from its provisional estimate and equaling its best performance since the fourth quarter of 2014. However, earlier revisions saw annual growth shaded from 2.2 percent to 2.0 percent. However, the headline masks some negative points. Private consumption (0.7 percent after 0.9 percent) continued to lead the domestic contribution but, in contrast to the third quarter, found no support from gross fixed capital formation which was only flat. Moreover, within this, business investment actually declined 1.0 percent. Government consumption (0.2 percent) had a small positive impact but by far the main driving force was external trade. With exports surging 4.1 percent on the quarter and imports dipping 0.4 percent, the net overseas impact was to boost economic growth by 1.3 percentage points, more than unwinding the second quarter's 1.2 percentage point decline.


 

Asia/Pacific

Japan

January merchandise trade deficit was ¥1087 billion after a surplus of ¥641.4 billion in December. Exports grew more weakly than anticipated in January, while imports increased at a faster-than-expected pace, driven mainly by petroleum imports. Although it is not unusual for Japan to record a trade deficit at the start of the year, this is the largest since January 2015. Japan's exports were up 1.3 percent on the year after increasing 5.4 percent in December. Growth of exports to Japan's major markets — Asia, the U.S. and the European Union — all declined on the year. Imports jumped 8.5 percent on the year. This was the first annual increase in Japanese imports in 25 months, up strongly from the decline of 2.6 percent in December. Petroleum made the biggest single contribution to this increase in headline imports with the annual increase in the value of these imports increasing from 1.8 percent in December to 35.6 percent in January. This increase in the value came despite a decline in volumes of 3.5 percent on the year.


 

Americas

Canada

After increasing each month from August, retail sales in December sank 0.5 percent on the month but were up 4.3 percent from a year ago. The drops were widespread — 9 of 11 subsectors representing 82 percent of retail trade were lower. Sales in volume terms tumbled 1.0 percent, more than offsetting November's gain. Store types typically associated with holiday shopping registered weaker sales in December. Sales excluding autos and gas were down 1.4 percent on the month, the largest decrease since December 2015. After three consecutive monthly gains, motor vehicle & parts dealers were down 0.9 percent. Food & beverage stores were down 0.4 percent thanks to lower sales at beer, wine & liquor stores that more than offset gains in October and November. Higher receipts at supermarkets & other grocery stores & specialty food stores were mainly due to higher volumes, as food prices were down in December. Clothing & clothing accessories stores were down for the second time in three months. General merchandise stores declined for the second month in a row. On an unadjusted basis, retail e-commerce sales reached $1.7 billion in December, accounting for 3.4 percent of total retail sales in Canada.


 

Bottom line

Equities were mixed as investors waited for details from Washington for the numerous changes the Trump administration said it would make during the presidential election campaign. Economic data indicated that growth prospects were improving in the Eurozone.

 

There is a full schedule of data releases in the coming week along with a Bank of Canada monetary policy announcement Wednesday — no policy change is anticipated despite a jump in inflation in January. The Federal Reserve publishes its Beige Book in preparation of its FOMC meeting on March 14 and 15. Data releases run the gamut. Gross domestic product data will finally be released for the fourth quarter by Australia and Canada as well as revised readings for the U.S., Italy, Spain and France. Japan posts its slew of January data including the CPI, industrial production, consumer spending and unemployment.


 

Looking Ahead: February 27 through March 3, 2017

Central Bank activities
March 1 Canada Bank of Canada Monetary Policy Announcement
United States Federal Reserve Beige Book 
 
The following indicators will be released this week...
Europe
Feb 27 Eurozone EC Consumer and Business Confidence (February)
Germany Retail Sales (January)
Feb 28 Eurozone Harmonized Index of Consumer Prices (February flash)
France Consumption of Manufactured Goods (January)
Gross Domestic Product (Q4.2016 preliminary)
March 1 Eurozone Manufacturing PMI (February)
Germany Manufacturing PMI (February)
France Manufacturing PMI (February)
UK Manufacturing PMI (February)
March 2 Eurozone Unemployment Rate (January)
Spain Gross Domestic Product (Q4.2016 final)
March 3 Eurozone Composite & Services PMI (February)
Germany Composite & Services PMI (February)
France Composite & Services PMI (February)
UK Services PMI (February)
Italy Gross Domestic Product (Q4.2016 final)
 
Asia Pacific
Feb 28 Japan Industrial Production (January)
Retail Sales (January)
March 1 Japan Manufacturing PMI (February)
Australia Gross Domestic Product (Q4.2016)
China Manufacturing PMI (February)
CFLP Manufacturing PMI (February)
India Manufacturing PMI (February)
March 2 Australia Merchandise Trade Balance (January)
March 3 Japan Services PMI (February)
Consumer Price Index (January)
Household Spending (January)
Unemployment Rate (January)
 
Americas
Feb 28 Canada Industrial Product Price Index (January)
March 2 Canada Monthly Gross Domestic Product (December)
Gross Domestic Product (Q4.2016)

 

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


 

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