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Caution is the investors' byword
International Perspective - April 7, 2017
By Anne D. Picker, Chief Economist


Global Markets

If one word was needed to describe markets during this past week, the word would be 'cautious'. With major events piling up at the end of the week, investors traded cautiously before Wednesday's release of the FOMC minutes, Friday's March employment report and the summit between the U.S. and Chinese presidents on Thursday and Friday.


The Federal Reserve published the minutes of its March 14 & 15 FOMC meeting. At that time, the Fed increased its fed fund rate by 25 basis points to a range of 0.75 percent to 1.00 percent. Part of the discussions at that meeting involved how the Fed would wind down its $4.5 trillion balance sheet. Most of the participants saw a change in their reinvestment program sometime this year, one that would include the phasing out of both the Fed's holdings of Treasuries and mortgage-backed securities. And in a line that may have triggered some selling in the stock market, members noted that stock valuations are "quite high."


Reserve Bank of Australia

The Reserve Bank of Australia left its main policy interest rate unchanged at 1.50 percent as universally expected. It was lowered in August last year when it was cut by 25 basis points. The RBA's statement indicated that economic conditions and its growth outlook were little changed from their March opinions. It again noted that conditions improved in the global economy and the positive impact this has had on commodity prices and Australia's national income. The Bank also said that the domestic economy is continuing its transition following the end of the mining investment boom and that recent data are consistent with ongoing moderate growth.


The statement also repeats the forecast for employment growth to continue, but suggests concern about current conditions in the labour market. It recognised that some indicators of labour market conditions have softened recently — the unemployment rate has moved a little higher and employment growth has been modest. The forward looking indicators point to continued employment growth. Further, the Governor noted that "wage growth remains slow."


The RBA again pointed to the variable performance in regional housing markets and welcomed recent supervisory measures aimed at strengthening household lending standards. The assessment of the inflation outlook was unchanged from last month. Headline inflation is still expected to pick up from 1.5 percent in the three months to December to somewhere above 2.0 percent "over the course of 2017" and within the RBA's target range of 2.0 percent to 3.0 percent. Underlying inflation is also expected to pick up but at a more gradual rate. The Australian dollar dropped to a three week low after the RBA used its April policy meeting to back recent steps by regulators to crack down on risky lending practices.


Reserve Bank of India

The Reserve Bank of India surprised markets Thursday by raising a secondary interest rate while holding its key policy interest rate steady — a move to help mop up liquidity and signal its worries about a potential spike in inflation. As widely expected, the RBI kept the repo rate at 6.25 percent, where it has been since October. But it raised the reverse repo rate — what banks get for deposits at the RBI — by 25 basis points to 6.00 percent. Narrowing the gap between those two rates reduces volatility in short-term money market rates which track the difference between them. The move also encourages banks to increase their deposits at the RBI, setting up the RBI to start withdrawing some of the big cash pile accumulated in the banking system since Prime Minister Narendra Modi in November banned circulation of big currency notes.


Although the repo decision had been widely expected, the increase in the reverse repo was a surprise, continuing a pattern of unexpected decisions at RBI meetings since Urjit Patel became governor in September. In February, the RBI unexpectedly held the key rate steady, instead of cutting it, and changed its policy stance to "neutral" from "accommodative", reasserting its concerns about inflation. The RBI slightly raised its inflation projections for the fiscal year started in April, saying it expected the consumer price index to average 4.5 percent in the first half, up from its previous forecast 4.0 to 4.5 percent, and then 5.0 percent in the second half, up from 4.5 to 5.0 percent. That would place inflation above the RBI's 4 percent target.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Mar 31 April 7 Week 2017
Australia All Ordinaries 5719.1 5903.8 5902.57 0.0% 3.2%
Japan Nikkei 225 19114.4 18909.3 18664.63 -1.3% -2.4%
Topix 1518.61 1512.60 1489.77 -1.5% -1.9%
Hong Kong Hang Seng 22000.6 24111.6 24267.30 0.6% 10.3%
S. Korea Kospi 2026.5 2160.2 2151.73 -0.4% 6.2%
Singapore STI 2880.8 3175.1 3177.27 0.1% 10.3%
China Shanghai Composite 3103.6 3222.5 3286.62 2.0% 5.9%
India Sensex 30 26626.5 29620.5 29706.61 0.3% 11.6%
Indonesia Jakarta Composite 5296.7 5568.1 5653.49 1.5% 6.7%
Malaysia KLCI 1641.7 1740.1 1741.72 0.1% 6.1%
Philippines PSEi 6840.6 7311.7 7583.75 3.7% 10.9%
Taiwan Taiex 9253.5 9811.5 9873.37 0.6% 6.7%
Thailand SET 1542.9 1575.1 1583.53 0.5% 2.6%
UK FTSE 100 7142.8 7322.9 7349.37 0.4% 2.9%
France CAC 4862.3 5122.5 5135.28 0.2% 5.6%
Germany XETRA DAX 11481.1 12312.9 12225.06 -0.7% 6.5%
Italy FTSE MIB 19234.6 20492.9 20300.06 -0.9% 5.5%
Spain IBEX 35 9352.1 10462.9 10529.00 0.6% 12.6%
Sweden OMX Stockholm 30 1517.2 1587.6 1569.67 -1.1% 3.5%
Switzerland SMI 8219.9 8658.9 8640.91 -0.2% 5.1%
North America
United States Dow 19762.6 20663.22 20656.10 0.0% 4.5%
NASDAQ 5383.1 5911.7 5877.81 -0.6% 9.2%
S&P 500 2238.8 2362.7 2355.54 -0.3% 5.2%
Canada S&P/TSX Comp. 15287.6 15547.8 15667.13 0.8% 2.5%
Mexico Bolsa 45642.9 48541.6 49343.640 1.7% 8.1%


Europe and the UK

European equities were mixed last week — the FTSE (up 0.4 percent) and the CAC (up 0.2 percent) advanced while the DAX (down 0.7 percent) and the SMI (down 0.2 percent) retreated. Investors were in a cautious mood prior to major events scheduled for later in the week including the summit between U.S. President Trump and Chinese President Xi Jinping. Both the Federal Reserve and the European Central Bank released the minutes of their most recent meetings and that kept some investors on the sidelines. The March U.S. jobs report also was expected.


As the week progressed, investors turned more risk averse. At week's end, geopolitical concerns shook investor confidence after the U.S. carried out a military strike against a Syrian airbase in retaliation for Syrian President Assad's use of chemical weapons on a rebel town. Traders were also concerned by the weaker than expected U.S. employment report. March U.S. employment increased by a much less than anticipated 98,000 but the unemployment rate still fell to its lowest level in almost 10 years (4.5 percent).


A slew of economic data were released during the week — most were positive. For the euro area, retail sales advanced while the jobless rate slipped to an 8 year low. In Germany, both manufacturers' orders and industrial production were up and the merchandise trade surplus widened. In France, the merchandise trade deficit narrowed but industrial production declined. In the UK, industrial production and the manufacturing and construction PMIs declined while the merchandise trade deficit widened.


European Central Bank publishes minutes

The minutes of the ECB's March meeting indicated few significant changes from January and offered no indication of any planned near-term shift in policy. Council members were pleased with mounting evidence of a strengthening and, increasingly broad-based, economic recovery. However, the Governing Council remained concerned about the stickiness and low level of core inflation. As the ECB's updated economic forecasts made plain, a relatively sharp upward revision to expected inflation this year was seen as just a temporary phenomenon caused by volatile swings in commodity prices. There was general agreement on the need to maintain a highly accommodative monetary stance in order to meet medium-term price stability goals.


Despite the pick-up in real economic momentum, the balance of risks was still seen tilted to the downside, but not as much as previously. In particular, some concern was expressed that rising headline inflation could undermine prospective consumer spending via its negative implications for real disposable incomes. However, the apparent absence of any significant impact on economic activity of high levels of political uncertainty at home and abroad was seen as a sign that the recovery had become less vulnerable to any such shocks.


Asia Pacific

Equities were mixed last week as the likelihood of a reduction in the Federal Reserve balance sheet weighed on markets here. And on Friday, they declined due to escalating geopolitical worries after the U.S. bombed a Syrian target in retaliation for this week's chemical weapons attack against civilians. At week's end, investors were also waiting for the results of the U.S./China summit. A statement from the White House said that President Donald Trump and Chinese President Xi Jinping has discussed global, regional and bilateral issues of mutual concern including how to deal with North Korea's nuclear and missile programs and the massive U.S. trade deficit with China.


Japanese equities were down for the fourth consecutive week. The Nikkei declined 1.3 percent and the Topix lost 1.5 percent. Exporter stocks continued to fluctuate inversely with the value of the yen. Hawkish Federal Reserve minutes and anxiety ahead of a two-day meeting between U.S. and Chinese leaders also weighed on markets. The FOMC minutes indicated that the Fed could change its bond investment policy this year and begin to whittle down its balance sheet.


Economic data for Japan were mostly positive. The Tankan large manufacturing index reading climbed to 12 in the first quarter from 10 in the last quarter of 2016. Both the services and composite PMI readings improved along with consumer confidence. In Australia, the February merchandise trade surplus widened but retail sales slipped on the month.


The Shanghai Composite was up 2.0 percent on the week led by infrastructure companies after Beijing announced plans to build a special economic zone in the heartland of Hebei province. The Hang Seng added 0.6 percent for the week. The Caixin manufacturing, services and composite PMIs were lower in March indicating slower growth on the mainland.


Asian Development Bank Outlook

According to the Asian Development Bank (ADB) Asia will not grow as fast this year due to policy uncertainty in advanced economies and an outflow of capital. In its 2017 Asian Development Outlook, the lender projects growth for the region to slow by 0.1 percentage point to 5.7 percent in 2017 and 2018 — the slowest pace since 2001. Forty-five of the ADB's 67 members are from developing Asia. ADB members also include countries in Europe and North America.


China which accounts for roughly 60 percent of the regional economy will decelerate by 0.2 point to 6.5 percent in 2017 and slow further to 6.2 percent in 2018 as Beijing takes further steps to shift the country to a consumption-driven economy. The push by China to achieve greater financial stability by lowering high corporate debt and addressing shadow banking among others, is coming at the cost of slower growth.


The ADB sees China's slowdown weighing on East Asia's growth, though public spending is expected to boost the economic prospects of the subregion's smaller economies. South Korean growth is seen slowing by 0.2 point to 2.5 percent in 2017, while Taiwanese growth is expected to improve to 1.8 percent, up 0.3 point thanks to government spending that will lift growth for the local economy.


Most Southeast Asian countries will grow faster this year. "With normal weather supporting agriculture and a steady recovery in the major industrial economies boosting exports, growth will pick up in nearly all of the economies in the subregion," the ADB report said. Among its beneficiaries are commodity producers such as Indonesia, Malaysia and Vietnam.



The U.S. dollar advanced against all of its major counterparts including the euro, pound sterling, Swiss franc and the Canadian and Australian dollars. However, it declined against the yen. On Friday, the currency was higher, supported by demand by investors for safe haven assets despite a disappointing U.S. employment report. Investors are monitoring the U.S. economy closely to be sure that it can withstand higher Federal Reserve interest rates going forward. The U.S. dollar was supported by a flight to safer assets following the U.S. missile strike on Syria. Gold, which also benefits in times of market stress, also advanced.


The pound sterling declined after an unexpected drop in British industrial output. In the first full trading week since Britain triggered Article 50 — its notification to leave the EU — the pound sank against the dollar and the euro. Sterling had been propped up in recent weeks by expectations that the Bank of England might consider a rate increase to cool inflation but comments by policymakers have played down that prospect.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 March 31 April 7 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.764 0.750 -1.8% 4.0%
New Zealand NZ$ 0.6948 0.701 0.694 -1.0% -0.1%
Canada C$ 0.7443 0.752 0.746 -0.8% 0.2%
Eurozone euro (€) 1.0534 1.067 1.060 -0.6% 0.6%
UK pound sterling (£) 1.2333 1.253 1.237 -1.2% 0.3%
Currency per U.S. $
China yuan 6.9450 6.887 6.901 -0.2% 0.6%
Hong Kong HK$* 7.7533 7.772 7.769 0.0% -0.2%
India rupee 67.9238 64.850 64.280 0.9% 5.7%
Japan yen 116.8100 111.340 111.140 0.2% 5.1%
Malaysia ringgit 4.4862 4.426 4.435 -0.2% 1.2%
Singapore Singapore $ 1.4465 1.399 1.404 -0.4% 3.0%
South Korea won 1205.8300 1118.450 1134.450 -1.4% 6.3%
Taiwan Taiwan $ 32.3260 30.348 30.603 -0.8% 5.6%
Thailand baht 35.8100 34.350 34.600 -0.7% 3.5%
Switzerland Swiss franc 1.0174 1.0016 1.0083 -0.7% 0.9%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


February manufacturing orders jumped a monthly 3.4 percent while January's slump was trimmed to minus 6.8 percent. Annual growth in February jumped from zero percent to 4.6 percent. The monthly mid-quarter bounce was the second steepest since March 2016 and reflected broad-based gains among the major components. Basics (8.5 percent) were especially strong but consumer & durable goods (2.7 percent) also performed well. However, capital goods (0.3 percent) struggled. The headline increase was wholly attributable to the domestic market which expanded 8.1 percent from January although even this failed to fully reverse that period's 9.6 percent plunge. However overseas orders were only flat as a 1.6 percent rise from the rest of the world cancelled out a 2.1 percent decline in demand from the rest of the Eurozone.


February industrial production was up 2.2 percent for a second month. On the year, output was up 2.3 percent. Excluding construction output was up 0.8 percent and 1.5 percent. However, much of the latest monthly spurt was due to a particularly large 13.6 percent surge in the volatile construction sector. The key manufacturing category increased 0.9 percent after rising 2.7 percent at the start of the year. The advance was broad-based with a 1.4 percent rise in consumer goods production supported by a 1.1 percent increase in capital goods and a 0.4 percent gain in intermediates. Energy was up 0.6 percent.


United Kingdom

February industrial production declined a monthly 0.7 percent biased worse by the more volatile subsectors. This was the first back-to-back drop in output since September/October last year. Annual growth slid from 3.3 percent to 2.8 percent, a 3-month low. Manufacturing output slipped a further 0.1 percent on the month. Weakness was most apparent in pharmaceuticals, which fell 4.4 percent (and have been particularly erratic of late) as well as chemicals (down 2.1 percent) and wood, paper & printing (down 1.6 percent). Decreases here masked decent gains in electrical equipment (3.0 percent) and textiles (3.0 percent). Elsewhere within total industrial production, mining & quarrying dropped 2.0 percent on the month, water supply was down 0.4 percent and electricity & gas off 3.4 percent.


The February deficit on global goods trade widened out to Stg12.46 billion. This was up from a larger revised Stg11.97 billion shortfall in January and the most red ink since last September. The deterioration reflected mainly a 1.2 percent monthly increase in imports as exports dipped just 0.1 percent. However, the rise in the former was attributable to erratic items and excluding these, imports were down 0.6 percent, a couple of ticks faster than exports. As a result, the underlying deficit actually narrowed marginally from Stg10.89 billion to Stg10.79 billion. Regionally, the red ink with the other EU countries rose Stg0.5 billion to Stg8.71 billion while the shortfall with the rest of the world was essentially flat at Stg3.75 billion.




The Tankan survey for the three months to March indicated that business sentiment in both the manufacturing and non-manufacturing sectors improved from the previous quarter. For large manufacturers, the index climbed to 12 from 10 in the December quarter. For medium sized manufacturers, the index climbed from 6 to 11 and for small manufacturers from 1 to 5. For non-manufacturers, the business condition index rose from 18 to 20 for large firms, 16 to 17 for medium-sized firms, and from 2 to 4 for small firms. Business investment plans rose 0.6 percent for major companies in the current fiscal year that began on April 1. That is firmer than the minus 0.9 percent projected for fiscal 2016 in the March 2016 survey and the minus 1.2 percent for fiscal 2015 projected in March 2015. Capital investment by smaller firms is expected to fall 22.6 percent in fiscal 2017, slightly weaker than minus 19.3 percent for fiscal 2016 seen a year ago.



February retail sales edged 0.1 percent lower after increasing 0.4 percent the month before. On the year, retail sales were up 2.7 percent after increasing 3.1 percent in January. The decline in sales reflected weaker sales for clothing, footwear & personal accessory retailing (down 2.5 percent) and household goods retailing (down 0.4 percent). These declines were partly offset by higher sales in food retailing (0.3 percent) and department stores (0.8 percent). Sales for other retailing and cafes, restaurants & takeaway food services were flat on the month. Turnover was down in five of the eight Australian states and territories in February, with Western Australia and Victoria seeing the biggest declines. Sales in the most populous state, New South Wales, rose 0.4 percent on the month.


February merchandise trade surplus widened to A$3.6 billion from A$1.5 billion in January (revised up from A$1.3 billion). Exports rose 1.5 percent on the month in January. This increase was largely driven by exports of non-monetary gold (around 4 percent of the total) which rose sharply, partly unwinding an even larger decline the previous month. Exports of non-rural goods (around 64 percent of the total), services (around 20 percent of the total) also recorded solid increases in February, outweighing a decline in exports of rural goods (around 12 percent of the total). The drop in export values in February was also reflected in lower volumes of key commodity exports, including iron ore fines, hard coking coal, thermal coal and liquefied natural gas. On the year, exports were up 24.8 percent. Seasonally adjusted imports dropped 5.3 percent on the month. This drop in headline imports was mainly driven by lower imports of consumption goods and intermediate and other merchandise goods with imports of services also slightly lower. Imports of capital goods increased slightly on the month. Total imports declined 1.2 percent on the year compared with an increase of 9.6 percent in January, while seasonally adjusted imports rose 2.3 percent on the year in February after an increase of 8.1 percent in January.




February merchandise trade deficit was C$972 million following three consecutive months of surpluses. Expectations were for another surplus. Exports dropped 2.4 percent with declines in 8 of 11 sections. Imports edged up 0.6 percent on gains in special transactions trade and motor vehicles & parts. After reaching a record high in January, total exports declined on lower volumes. On the year, exports were up 4.4 percent. Total imports edged up 0.6 percent on the month despite declines in 7 of 11 sections. Volumes and prices were both up 0.3 percent. Higher imports of special transactions trade, motor vehicles & parts and farm, fishing & intermediate food products contributed the most to the increase. On the year total imports rose 1.4 percent.


March employment was up a greater than expected 19,400 while the unemployment rate edged up 0.1 percent point to 6.7 percent as more people searched for work. In the first quarter of 2017 employment was up 83,000 which is comparable to the fourth quarter of 2016. Among the increase in jobs, 18,400 were full time and 1,000 were part time. The participation rate edged up to 65.9 percent from 65.8 percent in February. There were more people working in manufacturing (up 24,000). This was the largest one month increase since August 2002. Manufacturing added 18,600 jobs in the first quarter after a net destruction of 15,200 in the fourth quarter of last year. Compared with its peak in the early 2000s, there were about 630,000 (down 27 percent) fewer people working in manufacturing, and employment in the industry has been relatively flat since the 2008-2009 recession. Over the quarter, services added 70,300 jobs and goods producing industries 12,600. Employment rose in Alberta, Nova Scotia and Manitoba. At the same time, employment fell in Saskatchewan, while it was relatively stable in the remaining provinces. And employment in agriculture declined by 6,900.


Bottom line

Investors were cautious as they waited for FOMC and ECB minutes. But another reason for caution was the summit between U.S. and Chinese leaders that is currently taking place. And in case that wasn't enough to worry about, this was the week for the release of the U.S. employment report. Both the Reserve Bank of Australia and Reserve Bank of India left their monetary policy interest rates unchanged as expected.


This coming week features price data from several countries including the UK, Germany, France and Italy in Europe. Given the European Central Bank's inflation targeting, these data will be important for the Bank's inflation assessment. China also releases its price data along with its merchandise trade balance. Both Australia and the UK report their respective labour market reports. Mid-week, the Bank of Canada publishes its monetary policy announcement.


Looking Ahead: April 10 through April 14, 2017

Central Bank activities
April 12 Canada Bank of Canada Monetary Policy Announcement
The following indicators will be released this week...
April 11 Eurozone Industrial Production (February)
Germany ZEW (April)
UK Consumer Price Index (March)
Producer Price Index (March)
April 12 UK Labour Market Report (March)
April 13 Germany Consumer Price Index (March)
France Consumer Price Index (March)
Italy Consumer Price Index (March)
Asia Pacific
April 12 Japan Producer Price Index (March)
Machine Orders (February)
China Consumer Price Index (March)
Producer Price Index (March)
India Consumer Price Index (March)
Industrial Production (February)
April 13 Australia Labour Force Report (March)
China Merchandise Trade Balance (March)
April 10 Canada Housing Starts (March)
April 13 Canada Manufacturing Sales (February)
Initial Unemployment Claims (week ending prior Saturday)
Producer Price Index (March)
Consumer Sentiment (April preliminary)


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


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