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The central banks have spoken
International Perspective - March 17, 2017
By Anne D. Picker, Chief Economist


Global Markets

Central banks dominated the news last week. While only the Federal Reserve changed its monetary policy, the Banks of Japan and England and the Swiss National Bank maintained the status quo. Equities rallied after the Fed raised its fed funds lending rate 25 basis points without accelerating the timetable for future increases. The Fed's reticence to speed up tightening prompted investors to sell the U.S. dollar in favor of higher yielding currencies. On the week, only the Nikkei and Topix retreated. The U.S. dollar tumbled on the week.


At week's end, the markets were keeping an eye on the Group of 20 finance leaders' meeting in Baden-Baden, Germany where protectionism, exchange rates and reforms to boost economic growth are expected to be on the agenda.


Federal Reserve

As widely expected, the Fed increased its fed funds interest rate range by 25 basis points to 0.75 percent to 1.0 percent. It was the Fed's third increase since its December 2015 FOMC meeting. The FOMC left its median forecasts for three rate increases through all of 2017 unchanged. In the weeks prior to the meeting, a string of upbeat economic data and hawkish remarks from a handful of Fed speakers had prompted some to expect the Fed's 'dot plot' of interest-rate projections could be revised to reflect four rate increases in 2017.


Wednesday's statement reflected members' views that inflation had increased in the recent quarter moving it close to the FOMC's 2 percent longer-run objective from its previous assessment that inflation is still below the Fed's target. However, they did note that core inflation, which excludes the volatile items of food and energy prices, was little changed. The Fed said that the United States economy continued to expand at a "moderate pace." Employers are hiring, consumers are spending and businesses are finally starting to spend a little more, too.


Once again Dr Yellen said that it was too early to gauge the possible impacts of the fiscal policies that have been proposed by the Trump administration. She said that there remains "great uncertainty" over the potential policies. She said that Wednesday's rate increase was based on current information and was not a "preemptive response" to future policy moves.


A new round of economic projections from the Fed's senior officials was nearly unchanged from December's. The Fed continues to forecast an economy with the unemployment rate remaining at 4.5 percent and inflation around 2 percent for the next three years.


Bank of Japan

As universally expected, the Bank of Japan left its monetary policy unchanged. As part of its policy framework, which involves targeting the shape of the yield curve, the BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent.


The BoJ's policy framework involves adjusting the pace of purchases of government bonds in order to keep the 10-year yield close to its target level. The BoJ continues to purchase these bonds at an annual rate of ¥80 trillion. The monetary policy board (MPB) also reaffirmed their commitment to keep expanding the monetary base until the annual core consumer price index (excluding fresh food) exceeds their inflation target of 2.0 percent and stays above this level "in a stable manner".


The MPB thinks that Japan's economy remains on a moderate recovery trend. They expect accommodative financial conditions and fiscal spending to support domestic demand and improved growth in the global economy to boost Japan's exports. Views on the inflation outlook were little changed — the annual increase in headline inflation is expected to increase gradually towards 2.0 percent as the drag from energy prices fades and the output gap improves.


At his post MPB news conference, BoJ Governor Haruhiko Kuroda sent a clear signal that recent policy will likely continue indefinitely. In particular, he rejected a suggestion that policy rates would need to be increased if the annual increase in CPI excluding fresh food accelerated to 1.0 percent, noting that a range of indicators are viewed when deciding what their monetary policy target should be. He also stressed that higher policy rates in the United States and elsewhere would not necessarily mean that Japanese rates also need to rise.


Bank of England

As widely anticipated the Bank of England's monetary policy committee left its Bank Rate at 0.25 percent and the asset purchase ceiling for gilt purchases funded by the creation of new reserves at Stg435 billion. The target for corporate bond purchases was also left at Stg10 billion. However, while there was agreement on both QE and corporate bonds, Kristin Forbes called for an immediate 25 basis point increase in Bank Rate. This was the first non-unanimous vote since July 2016.


The minutes of the meeting once again underscored the widely differing views held by the MPC members regarding economic prospects. To this end, there was not sufficient agreement to allow the issuance of a formal forward guidance statement. In general, the BoE still seems cautious about the outlook and sees Brexit as a potentially sizeable downside risk. However, the statement repeated February's line that policy could respond in either direction depending on how economic events unfold so a neutral stance at this stage looks the most likely.


Swiss National Bank

The SNB's quarterly policy announcement contained few surprises. The target corridor for 3-month CHF Libor remains at minus 1.25 percent to minus 0.25 percent and the key deposit rate at minus 0.75 percent. As usual, the SNB also continued to highlight what it sees as a significantly overvalued local currency and promised to intervene in the FX markets as and whenever necessary to prevent any further appreciation.


There was little change in the new economic forecasts from last time with the exception of an upward revision to the near-term inflation projection thanks to the rebound in oil prices. However, even then, the longer-term forecasts (0.6 percent in 4Q17 and 1.2 percent in 3Q18) are both slightly lower than their respective December calls. Meantime, despite a disappointing end to last year when economic growth all but came to a halt, the SNB still sees real GDP expanding 1.5 percent in 2017. In part, this reflects anticipated favorable developments abroad. That said, the SNB acknowledged high levels of uncertainty with regard to the UK Brexit negotiations, European elections and the outlook for U.S. fiscal policy.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 10-Mar 17-Mar Week 2017
Australia All Ordinaries 5719.1 5811.2 5840.77 0.5% 2.1%
Japan Nikkei 225 19114.4 19604.6 19521.59 -0.4% 2.1%
Topix 1518.61 1574.01 1565.85 -0.5% 3.1%
Hong Kong Hang Seng 22000.6 23568.7 24309.93 3.1% 10.5%
S. Korea Kospi 2026.5 2097.4 2164.58 3.2% 6.8%
Singapore STI 2880.8 3133.4 3169.38 1.1% 10.0%
China Shanghai Composite 3103.6 3212.8 3237.45 0.8% 4.3%
India Sensex 30 26626.5 28946.23 29648.99 2.4% 11.4%
Indonesia Jakarta Composite 5296.7 5390.7 5540.43 2.8% 4.6%
Malaysia KLCI 1641.7 1717.6 1745.20 1.6% 6.3%
Philippines PSEi 6840.6 7146.3 7345.02 2.8% 7.4%
Taiwan Taiex 9253.5 9627.9 9908.69 2.9% 7.1%
Thailand SET 1542.9 1539.9 1560.98 1.4% 1.2%
UK FTSE 100 7142.8 7343.1 7424.96 1.1% 3.9%
France CAC 4862.3 4993.3 5029.24 0.7% 3.4%
Germany XETRA DAX 11481.1 11963.2 12095.24 1.1% 5.3%
Italy FTSE MIB 19234.6 19658.4 20074.28 2.1% 4.4%
Spain IBEX 35 9352.1 10006.4 10245.80 2.4% 9.6%
Sweden OMX Stockholm 30 1517.2 1587.9 1584.97 -0.2% 4.5%
Switzerland SMI 8219.9 8670.0 8698.53 0.3% 5.8%
North America
United States Dow 19762.6 20902.98 20914.62 0.1% 5.8%
NASDAQ 5383.1 5861.7 5901.00 0.7% 9.6%
S&P 500 2238.8 2372.6 2378.25 0.2% 6.2%
Canada S&P/TSX Comp. 15287.6 15506.7 15491.25 -0.1% 1.3%
Mexico Bolsa 45642.9 47102.3 48593.440 3.2% 6.5%


Europe and the UK

With a heavy week of political and economic events, investors were cautious in their day-to-day moves. Trading was dominated by expectations of policy moves from central banks and the outcome of the Dutch parliamentary election. Equities reacted positively to the combination of the Fed's decision to increase the fed funds rate and the Dutch election results where voters rejected populism. On the week, the FTSE closed at a record high, gaining 1.1 percent. The CAC was up 0.7 percent, the DAX advanced 1.1 percent and the SMI added 0.3 percent.


On Thursday, there was considerable news for investors to digest. Investors had their first opportunity to react to Wednesday's move by the Federal Reserve. And the Dutch election results were seen as a test prior to the upcoming elections in France (April and May) and Germany (September). The Fed's decision triggered a weakening of the U.S. dollar, which provided a boost to mining and energy stocks. Banks also gained ground on expectations that they will benefit from higher interest rates.


Also on Thursday, the Bank of England maintained its record low 0.25 percent interest rate in a split vote — a monetary policy committee member preferred a 25 basis point increase — but the rest of the MPC did not. The Swiss National Bank also kept its monetary policy unchanged Thursday as widely expected. Dutch PM Rutte fought off the challenge of anti-Islam and anti-EU rival Geert Wilders to score an election victory that was hailed across Europe by governments facing a rising wave of nationalism.


Aside from the Bank of England and Swiss National Bank announcement, economic data were mixed. On the positive side, the March German ZEW survey reading improved. In the Eurozone, industrial production picked up in January as did Italy's retail sales. On the negative side, January's Eurozone trade surplus narrowed and Italy's industrial production declined. In the UK, the labour market report had both good and disappointing news — claimant count unemployment dropped along with the jobless rate which was down to a 10 year low. However, average weekly earnings growth slowed.


Asia Pacific

Only Japanese equities were lower last week, thanks primarily to the climb in the yen against the U.S. dollar. Elsewhere in the region, equities posted healthy gains as the dollar continued to slide and oil prices held steady, buoyed by comments from Saudi Energy Minister Khalid al-Falih that output cuts may be extended if stockpiles remain above average. The dollar tumbled following a less hawkish than expected set of projections from the Federal Reserve.


Gains ranged from a low of 0.5 percent (All Ordinaries) to 3.2 percent (Kospi) and 3.1 percent (Hang Seng). Major gains were recorded by the Taiex (2.9 percent), the PSEi and Jakarta Composite (2.8 percent) and the Sensex (2.4 percent). The Nikkei and Topix lost 0.4 percent and 0.5 percent respectively.


The Shanghai Composite managed to increase 0.8 percent even though it dropped 1.0 percent on Friday. The reason for the decline — the People's Bank of China raised short-term interest rates to avoid downward pressure on the yuan and manage capital flows.


The People's Bank of China raised short-term interest rates Thursday in a bid to stave off capital outflows and keep its currency, the yuan or renminbi stable after the Federal Reserve raised U.S. interest rates Wednesday. The increase in rates was the PBoC's third in as many months and came a day after the end of the annual session of parliament where leaders warned that tackling risks from a rapid build-up in debt would be a top policy priority this year. The PBoC said the moves did not indicate a change in its monetary policy, though some economists say the seven-day reverse repurchase rate has become a de facto policy rate.


The People's Bank of China (PBOC) has left its benchmark lending rate unchanged at 4.35 percent since October 2015 and said specifically that Thursday's action should not be seen as full-blown policy tightening like that of the Fed. But analysts and investors believe the PBoC is increasingly using money market rates and other policy tools as it struggles to contain financial risks from years of debt-fueled stimulus and raise the costs for speculators betting against the yuan.



The U.S. dollar declined against its major counterparts including the yen, euro, pound sterling and the Canadian and Australian dollars. The drop in the U.S. currency came on expectations that the Federal Reserve will raise rates at a more gradual pace than anticipated. Although the Fed raised short-term interest rates by 25 basis points Wednesday, its economic projections were less aggressive than many anticipated. Expectations of low rates tend to make the dollar less appealing to yield-seeking investors. Meanwhile, investors are continuing to wait for U.S. tax cuts and higher fiscal spending. Investors are also waiting — and watching — the political situations in France and Germany where national elections will be held in April and May in France and September in Germany.


Emerging markets rallied after the Federal Reserve did not accelerate its timeline for future rate increases, reassuring investors who had been bracing for a more hawkish stance. EM stocks rallied as did their currencies. The prospect of higher U.S. interest rates tend to rattle EM assets in part by driving up the U.S. currency and raising the costs for countries that have a lot of dollar-denominated debt. It also draws investors' cash back into U.S. assets at the expense of developing markets.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 March 10 March 17 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.755 0.770 2.0% 6.8%
New Zealand NZ$ 0.6948 0.693 0.702 1.3% 1.0%
Canada C$ 0.7443 0.743 0.750 0.9% 0.7%
Eurozone euro (€) 1.0534 1.069 1.074 0.5% 2.0%
UK pound sterling (£) 1.2333 1.218 1.239 1.8% 0.5%
Currency per U.S. $
China yuan 6.9450 6.909 6.903 0.1% 0.6%
Hong Kong HK$* 7.7533 7.765 7.761 0.0% -0.1%
India rupee 67.9238 66.605 65.475 1.7% 3.7%
Japan yen 116.8100 114.700 112.710 1.8% 3.6%
Malaysia ringgit 4.4862 4.453 4.436 0.4% 1.1%
Singapore Singapore $ 1.4465 1.412 1.402 0.7% 3.2%
South Korea won 1205.8300 1157.400 1131.770 2.3% 6.5%
Taiwan Taiwan $ 32.3260 31.066 30.626 1.4% 5.6%
Thailand baht 35.8100 35.326 34.840 1.4% 2.8%
Switzerland Swiss franc 1.0174 1.0099 0.9980 1.2% 1.9%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


March ZEW survey saw little change in analysts' assessment of the German economy. The current conditions index edged just 0.9 points firmer to 77.3. This reversed its February decline and left the measure equaling its highest mark since July 2011. At the same time, expectations climbed 2.4 points to 12.8. This only erased a portion of the mid-quarter's 6.2 point decrease but still put the gauge near the top of its 2-year range.


United Kingdom

February claimant count joblessness declined 11,300 last month after dropping 41,400 in January. The unemployment rate was 2.1 percent. The lagging ILO data showed the number of people out of work dropping 31,000 in the three months to January. This was double the decline seen in August to October last year and was accompanied by a 92,000 increase in employment. As a result, the jobless rate here slipped to 4.7 percent, its lowest reading since June to August 1975. Over the three months to January, average earnings were up just 2.2 percent on the year, a drop of 0.4 percentage points from last time and enough to halve real earnings growth to 0.7 percent, their weakest mark since the three months ending October 2014. Regular earnings painted a similar picture with their nominal gain decelerating from 2.6 percent to 2.3 percent, their lowest mark since the three months ending July 2016.




February employment declined 6,400 after increasing 13,500 in January. This was the first monthly drop in jobs since September last year. The unemployment rate rose from 5.7 percent to 5.9 percent, its highest level since January 2016, while the participation rate was unchanged at 64.6. The drop in employment was driven by part-time jobs, which declined by 33,500 after an increase of 58,300 in January. This was largely offset by an increase of 27,100 in the number of full-time employed persons, partly reversing the drop of 44,100 seen the previous month. Over the last 12 months, seasonally-adjusted full-time employment has decreased 23,200 persons, while part-time employment has increased 127,800 persons.




January manufacturing sales were up for a third consecutive month, this time by 0.6 percent after increasing 2.1 percent in December. The January gain stemmed from a 2.3 percent increase in nondurable goods sales, led by the petroleum and coal, & chemical industries. On the year, sales were up 2.7 percent. Sales were up in 14 of 21 industries, representing 75.4 percent of the total Canadian manufacturing sector. In constant dollars, sales increased 0.7 percent, indicating that higher volumes of manufactured goods were sold in January. Unfilled orders were up 0.3 percent after dropping 1.9 percent in December. New Orders jumped 4.6 percent after sliding 0.5 percent the month before.


Bottom line

The central banks in Switzerland, Japan and the UK left their monetary policies unchanged. The Federal Reserve did what was expected and lifted its fed funds rate range by 25 basis points to 0.75 percent to 1.00 percent. Economic data were mixed globally. For example, the UK labour force survey saw claimant count unemployment decline with the ILO unemployment rate at a 12 year low. In Australia however, employment declined and the unemployment rate increased.


Flash PMIs for the Eurozone and Japan will give a first look at data for March. Price data and all important retail sales will be released for February in the UK. The Reserve Bank of New Zealand announces its monetary policy decision — no change is anticipated.


Looking Ahead: March 20 through March 24, 2017

Central Bank activities
March 23 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
The following indicators will be released this week...
March 20 Germany Producer Price Index (February)
March 21 UK Consumer Price Index (February)
Producer Price Index (February)
March 23 Eurozone EC Consumer Confidence (March flash)
UK Retail Sales (February)
March 24 Eurozone PMI Manufacturing, Services & Composite PMI (March flash)
Germany PMI Manufacturing, Services & Composite PMI (March flash)
France PMI Manufacturing, Services & Composite PMI (March flash)
Gross Domestic Product (Q4.2016)
Asia Pacific
March 22 Japan Merchandise Trade Balance (February)
March 24 Japan PMI Manufacturing (March flash)
March 21 Canada Retail Sales (January)


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


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