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A litmus test
International Perspective - March 24, 2017
By Anne D. Picker, Chief Economist


Global Markets

Most global equity indexes retreated in a week where political news captured investors' attention and the economic data calendar was light. A crucial debate in the run-up to the French elections in April, UK Prime Minister's announcement that she will invoke Article 50 of the Lisbon Treaty and the terrorist attack in London all weighed on investor willingness to take on risk. A key depressant on the markets was U.S. President Donald Trump's struggle to push through a health care reform bill. His difficulties raised doubts over whether he can win support for pro-growth economic policy measures that had sent equities soaring since his election.


Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its overnight cash rate (OCR) unchanged at 1.75 percent where it has been since November. The statement repeated the assurance that policy will be kept accommodative "for a considerable period", suggesting that recent policy stability is set to continue in the months ahead.


In its statement, the RBNZ noted that domestic economic growth had slowed in the three months to December — but attributed this in part to temporary factors. The Bank said the outlook remains positive and was supported by ongoing accommodative monetary policy, with the recent depreciation in the trade-weighted exchange rate also welcomed.


In its statement the RBNZ expressed confidence about the inflation outlook following the recent increase in headline CPI inflation back to within the Bank's target range of 1 percent to 3 percent. Although they expect there will be some variability in inflation over the next 12 months due to one-off effects, potentially taking it back outside the range, they continue to forecast a return to the midpoint of the range over the medium-term.


Canada's Budget

Canada's finance minister Bill Morneau unveiled a modest annual budget on Wednesday, reflecting heightened uncertainty in Ottawa as policymakers wait for the U.S. administration's proposals on tax reform and trade tariffs. The government said it would spend only C$1.3 billion more across government this fiscal year compared to an increase of nearly C$15 billion a year ago but with additions reflecting tweaks to last year's framework rather than any sweeping changes. The budget did not raise defense spending for 2017 despite pressure from Washington for Canada to pay more towards global military alliances like NATO.


Mr Morneau emphasized programs to lift Canada's middle class and support the country's technology community, committing C$950 million in the next five years towards innovation "super-clusters". The government forecasts a C$28.5 billion deficit in the upcoming fiscal year, from C$23 billion this year. Spending is projected to pick up reaching about C$8 billion annually by 2021.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Mar 17 Mar 24 Week 2017
Australia All Ordinaries 5719.1 5840.8 5796.08 -0.8% 1.3%
Japan Nikkei 225 19114.4 19521.6 19262.53 -1.3% 0.8%
Topix 1518.61 1565.85 1543.92 -1.4% 1.7%
Hong Kong Hang Seng 22000.6 24309.9 24358.27 0.2% 10.7%
S. Korea Kospi 2026.5 2164.6 2168.95 0.2% 7.0%
Singapore STI 2880.8 3169.4 3142.90 -0.8% 9.1%
China Shanghai Composite 3103.6 3237.5 3269.45 1.0% 5.3%
India Sensex 30 26626.5 29648.99 29421.40 -0.8% 10.5%
Indonesia Jakarta Composite 5296.7 5540.4 5567.13 0.5% 5.1%
Malaysia KLCI 1641.7 1745.2 1745.75 0.0% 6.3%
Philippines PSEi 6840.6 7345.0 7269.62 -1.0% 6.3%
Taiwan Taiex 9253.5 9908.7 9902.98 -0.1% 7.0%
Thailand SET 1542.9 1561.0 1573.51 0.8% 2.0%
UK FTSE 100 7142.8 7425.0 7336.82 -1.2% 2.7%
France CAC 4862.3 5029.2 5020.90 -0.2% 3.3%
Germany XETRA DAX 11481.1 12095.2 12064.27 -0.3% 5.1%
Italy FTSE MIB 19234.6 20074.3 20188.02 0.6% 5.0%
Spain IBEX 35 9352.1 10245.8 10309.40 0.6% 10.2%
Sweden OMX Stockholm 30 1517.2 1585.0 1579.70 -0.3% 4.1%
Switzerland SMI 8219.9 8698.5 8613.64 -1.0% 4.8%
North America
United States Dow 19762.6 20914.62 20596.72 -1.5% 4.2%
NASDAQ 5383.1 5901.0 5828.74 -1.2% 8.3%
S&P 500 2238.8 2378.3 2343.98 -1.4% 4.7%
Canada S&P/TSX Comp. 15287.6 15491.3 15442.67 -0.3% 1.0%
Mexico Bolsa 45642.9 48593.4 49083.850 1.0% 7.5%


Europe and the UK

Equities retreated last week — investors continued to monitor the fate of U.S. health care reform. They were reluctant to make any major moves ahead of a crucial vote on U.S. health care reform. They also continued to monitor the latest developments in London after Wednesday's terror attack around the Houses of Parliament. However, the attack has had little impact on the markets. The FTSE was down 1.2 percent, the DAX declined 0.3 percent, the CAC retreated 0.2 percent and the SMI was 1.0 percent lower. However, the MIB and IBEX both were 0.6 percent higher on the week.


According to the European Central Bank's latest Economic Bulletin, the economic recovery in the Eurozone is steadily firming and the trend is likely to continue with growth firming and broadening going forward. "Incoming data, notably survey results, have increased the Governing Council's confidence that the ongoing economic expansion will continue to firm and broaden." Overall, surveys point to a robust growth momentum in the first quarter of 2017.


On Monday, the UK government announced that it will push the Brexit button on Wednesday, March 29. The Prime Minister will invoke the Article 50 of the Lisbon Treaty at that time thus formally beginning the process of leaving the European Union and paving the way for talks on trade and future relations which should conclude in two years. This is in line with PM May's longstanding preferred timetable. A meeting of the European leaders will be held on April 29 to adopt the Brexit guidelines for the 27 member states, European Council President Donald Tusk said Tuesday.  


It was a relatively light week for economic data. On the plus side in Europe, the flash March PMIs climbed to near six year highs. Consumer confidence in March improved. However, Germany's producer price index increased to a five year high while GfK consumer confidence slipped. In the UK, retail sales jumped more than expected — but both consumer and producer prices also surprised on the high side.


Asia Pacific

Investors focused on the progress — or lack of it — of health care reform in the U.S. for much of the week. As the week ended, equities were mixed with the indexes in Japan tumbling the most thanks to the increase in the value of the yen against the U.S. dollar. The Nikkei retreated 1.3 percent and the Topix was down 1.4 percent with equities continuing to fluctuate with the value of the yen. Gains were muted with the Shanghai Composite increasing 1.0 percent and the SET, 0.8 percent.


Bank of Japan Governor Haruhiko Kuroda said there is "no reason" to raise the bank's bond yield targets now with inflation so far from its 2 percent target and rejecting the idea that the BoJ would begin to withdraw stimulus soon. While Japan's economy was slowly recovering, it still lacked enough momentum to quickly boost inflation to the BoJ's target. Kuroda said that risks to both the growth and price outlooks were skewed to the downside. The economy is showing signs of life recently with exports and factory output benefiting from a recovery in global demand. He said the central bank won't increase its bond yield targets just because overseas long-term interest rates were rising, or in response to increases in a single price indicator.


Asian equities declined for their worst day this year Wednesday on worries about whether President Donald Trump will be able to deliver his promises on reforming regulations, increasing infrastructure spending and lowering corporate taxes. These worries sent the yen soaring to its strongest levels since November. Also weighing on stocks were reports of a North Korean missile launch. And in China, stocks declined because of worries over tightening liquidity in the domestic banking system. Short term interest rates in China surged on Tuesday as cash conditions tightened on worries the People's Bank of China's quarterly risk assessment at the end of this month would restrict lending in the interbank market.



The U.S. dollar tumbled against the euro, pound sterling, Swiss franc and the yen. However, it advanced against the commodity currencies of Canada and Australia. Haven assets remained popular despite a slight softening of worries about the post-U.S. election global rally. Concerns about the Trump administration's chances of implementing its ambitious pro-business agenda of tax and regulation cuts prompted a sharp sell-off in stocks and the dollar at the start of the week, with investors flocking to perceived havens including the yen and government bonds.


The yen's strength — it rose to its highest level in four months on Wednesday — is frustrating many in the export-dependent economy. However Japan's latest merchandise trade data showed that the currency's recent weakness had helped boost the country's trade surplus in February after it spent most of last year in deficit. Until recently, the widening interest rate gap between the U.S. and Japan was supporting the U.S. dollar. The Federal Reserve has been raising rates while the Bank of Japan has been keeping the yield on 10-year government bonds close to zero. However, when the Fed raised its fed funds rate on March 15, its projections for further tightening disappointed some investors who had bet on a faster tightening pace. That led to declines in Treasury yields and some dollar selling.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 March 17 March 24 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.770 0.763 -1.0% 5.7%
New Zealand NZ$ 0.6948 0.702 0.703 0.2% 1.2%
Canada C$ 0.7443 0.750 0.747 -0.3% 0.4%
Eurozone euro (€) 1.0534 1.074 1.080 0.5% 2.5%
UK pound sterling (£) 1.2333 1.239 1.249 0.8% 1.3%
Currency per U.S. $
China yuan 6.9450 6.903 6.884 0.3% 0.9%
Hong Kong HK$* 7.7533 7.761 7.766 -0.1% -0.2%
India rupee 67.9238 65.475 65.415 0.1% 3.8%
Japan yen 116.8100 112.710 111.070 1.5% 5.2%
Malaysia ringgit 4.4862 4.436 4.426 0.2% 1.4%
Singapore Singapore $ 1.4465 1.402 1.397 0.3% 3.5%
South Korea won 1205.8300 1131.770 1122.650 0.8% 7.4%
Taiwan Taiwan $ 32.3260 30.626 30.483 0.5% 6.0%
Thailand baht 35.8100 34.840 34.540 0.9% 3.7%
Switzerland Swiss franc 1.0174 0.9980 0.9909 0.7% 2.7%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


March flash composite output index climbed a further 0.7 points from its final February reading to 56.7. Business activity had its best month in six years. The apparent acceleration in growth reflected stronger performances by both the manufacturing and service sectors. The former saw its flash PMI advance 0.8 points to 56.2 while the latter posted a 1 point gain to 56.5. Both secured 71-month highs. Manufacturing output (57.2) expanded at a marginally slower rate than in February but was still robust. Both sectors recorded a significant pick-up in the growth of new orders and backlogs. Indeed, aggregate employment registered its largest rise in a decade. Meanwhile, inflationary pressures continued to strengthen. The composite index reading for France climbed to 57.6 after 55.9 and outpaced Germany (57.0 after 56.1). Elsewhere, growth appears to have slowed but only slightly and was still close to the best seen in almost a decade. For comparison, the graph includes Japan and the U.S. readings.


United Kingdom

February consumer price index was up a monthly 0.7 percent and 2.3 percent from the same month a year ago. The pick-up in the yearly rate was broad-based, largely attributable to the rising cost of transport where prices for auto fuel climbed 1.2 percent on the month after a 1.0 percent fall a year ago. Food (0.8 percent after 0.1 percent) also provided a sizeable boost to the increase. Core CPI jumped 0.8 percent from January to put underlying inflation at 2.0 percent, up from 1.6 percent last time and its strongest print since June 2014.


February retail sales rebounded 1.4 percent following three consecutive monthly declines. January volumes were revised to show a steeper 0.5 percent monthly drop. Annual growth of purchases rebounded from 1.0 percent to 3.7 percent. Excluding auto fuel, sales were up 1.3 percent on the month to stand a healthy 4.1 percent higher on the year. February's recovery was led by the non-food sector which, without auto fuel, increased 1.8 percent thanks to particularly large gains in non-store retailing (4.0 percent), household goods (3.7 percent) and the other stores category (2.2 percent). Food advanced just 0.1 percent. The pick-up in demand came in the face of a strong rise in prices. Hence, both the overall and ex-auto fuel deflators climbed 1.2 percent from January. This put their yearly rates at 2.8 percent and 1.1 percent respectively, the former the highest since March 2012 and the latter a 38-month peak.




February merchandise trade surplus was ¥834 billion after January's deficit of ¥1087.6. This volatility in the trade balance for the first two months of the year partly reflects the impact on regional trade flows of lunar New Year holidays, which took place in early February this year. For the first two months of the year the trade deficit was ¥273.5 billion compared with a combined trade deficit of ¥412.2 for the first two months of 2016. Exports rose 11.3 percent on the year, up from a 1.3 percent in January. Imports rose 1.2 percent on the year, down from 8.5 percent in January. Combining January and February data, imports were up 5.0 percent compared with the same two months in 2016.




January retail sales increased 2.2 percent on the month and 4.5 percent on the year. Excluding sales at motor vehicle & parts dealers, retail sales advanced 1.7 percent. The increase in sales was led by four subsectors that rebounded from lower sales in December. Sales were up in 10 of 11 subsectors in January, representing 98 percent of retail trade. Volume sales which are more relevant to real GDP growth increased 1.3 percent on the month, the largest gain in a year, and more than offsetting the 1.0 percent contraction in December. Retail sales were up in every province in January. The largest increase in Canadian dollar terms was a 3.8 percent advance at motor vehicle & parts dealers for the fourth gain in five months. Health & personal care stores increased 6.0 percent, more than offsetting the 3.0 percent decline in December. General merchandise stores (1.8 percent) rose for the first time in three months. Food and beverage stores rose 1.3 percent while sales at gasoline stations (0.5 percent) continued their upward trend. Clothing & clothing accessories store sales increased 1.8 percent in January, but did not offset the decline in December. Electronics & appliance stores rebounded from December's decline.


February consumer price index was up an unadjusted 0.2 percent on the month and up 2.0 percent from the same month a year ago. On the year, prices were up in seven of the eight major components with the transportation and shelter indexes contributing the most the annual rise in the CPI. The food index decreased for a fifth consecutive month. On a seasonally adjusted basis, CPI was down 0.2 percent in February following a 0.7 percent increase in January. Excluding food and energy, CPI was unchanged on the month after rising 0.5 percent. The three core measures of inflation used by the Bank of Canada as an operational guideline, remained below the 2.0 percent target and in the same range as the previous month of 1.3 percent to 1.9 percent. CPI-trim, which excludes the largest and smallest rates, was up 1.6 percent. CPI-common, which tracks common price changes across categories, was up 1.3 percent on the year. Gasoline prices were the main upward contributor to the annual increase in February soaring 23.1 percent. Excluding gas prices, the CPI was up 1.3 percent on the year. On a 12-month basis, all major components posted gains except a 2.3 percent drop in food prices.


Bottom line

Most equity indexes declined last week as political matters intruded on a light week for economic data. Of the data released, the flash PMIs indicated that growth improved in Europe but weakened in the U.S. and Japan. Retail sales in Canada and the UK were strong.


The last week of the month is a heavy data week and next week is no exception. Japan releases its key monthly statistics for February including retail sales and household spending, unemployment, consumer prices and industrial production. France and Germany post consumer spending data. And both the UK and U.S. report final estimates of fourth quarter gross domestic product.


Looking Ahead: March 27 through March 31, 2017

The following indicators will be released this week...
March 27 Eurozone M3 Money Supply (February)
Germany Ifo Survey (March)
March 30 Eurozone EC Consumer & Business Confidence (March)
March 31 Eurozone Harmonized Index of Consumer Prices (March flash)
Germany Unemployment (March)
France Consumption of Manufactured Goods (February)
UK Gross Domestic Product (Q4 final estimate)
Asia Pacific
March 29 Japan Retail Sales (February)
March 31 Japan Household Spending (February)
Consumer Price Index (February)
Unemployment Rate (February)
Industrial Production (February)
China PMI Manufacturing Index (March)
March 30 Canada Industrial Product Price Index (February)
March 31 Canada Monthly GDP (January)


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


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