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INTERNATIONAL PERSPECTIVE

Vying for attention
International Perspective - May 12, 2017
By Anne D. Picker, Chief Economist

  

Global Markets

Geopolitical events vied with earnings and economic data for attention last week. The week began with the markets' reaction to the French presidential election results — Emmanuel Macron's victory was already priced in. The equity markets exhibited little volatility and stayed close to the unchanged mark either just above or below. Caution was the byword for investors midweek after U.S. President Donald Trump abruptly fired Federal Bureau of Investigation Director James Comey and stirred up a political storm. Traders also continue to keep an eye on the tensions with North Korea.

 

Equities globally were mixed. Gains ranged from 2.8 percent (Hang Seng) down to just 0.3 percent (PSEi in Asia, OMX Stockholm in Europe and the S&P in the United States). Losses ranged from 0.1 percent (Jakarta Composite in Asia and the Bolsa in North America).

 

Both the Bank of England and the Reserve Bank of New Zealand kept their respective monetary policies unchanged.


 

Bank of England's policy is unchanged, forecasts lowered

The Bank of England's monetary policy committee voted to leave its monetary policies unchanged. The Bank Rate remained at 0.25 percent while the asset purchase ceilings for gilt purchases and corporate bond buying stayed at £435 billion and at £10 billion respectively. Kristin Forbes, who was the lone dissenter at the last meeting in March, repeated her call for an immediate 25 basis point increase in Bank Rate. She was outvoted 7 to 1 (one MPC seat is currently vacant). The BoE also retained its loose, neutral forward guidance to the effect that there are economic risks both to the upside and downside and that policy could respond accordingly.

 

The outcome followed news of an unexpectedly sharp slowdown in first quarter economic growth and, in particular, warning signs of possible consumer retrenchment in response to rising inflation. But the minutes, which are released at the same time, again revealed that for some members it would take relatively little further upside news on the prospects for activity or inflation for them to consider increasing rates.

 

As indicated previously, three factors will be crucial to how policy is set going forwards. In particular, the Bank assumes that the lower level of sterling will boost consumer prices in line with its expectations and without adverse consequences for inflation expectations further ahead. In addition, regular pay growth is seen remaining modest in the near term before picking up significantly over the forecast period while more subdued household spending growth is largely balanced by faster growth of the other components of demand.

 

The BoE's latest Quarterly Inflation Report (QIR) once again highlights the difficult balancing act that the MPC has to achieve in trying to support a slowing real economy while at the same time keeping a lid on rising inflation. This QIR is little different from February's projections. After 1.9 percent this year, total output is expected to expand 1.7 percent in both 2018 and 2019. CPI inflation (on market interest rate assumptions) climbs to 2.64 percent in one year's time before sliding to 2.20 percent two years ahead and 2.26 percent three years down the road. In other words it stays above the 2 percent target throughout the three year period. Of note, the new forecasts assume a smooth Brexit and no sudden deterioration in economic performance. This is the first time that the BoE has made this view public and must be seen as another risk to the projected scenario.


 

Reserve Bank of New Zealand keeps status quo

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

 

Reserve Bank Governor Graeme Wheeler, in his statement accompanying the decision, noted improved global economic conditions and stronger commodity prices. He remained confident about the domestic outlook, saying that growth will be supported by accommodative monetary policy and the recent "encouraging" depreciation of the New Zealand dollar.

 

The inflation outlook was little changed. Headline CPI inflation accelerated to 2.2 percent in the three months to March, close to the mid-point of the RBNZ's target range of 1.0 percent to 3.0 percent. The increase was labeled as temporary and attributed to higher fuel and food prices. However, with non-tradable and wage inflation expected to increase gradually, the RBNZ remains confident that headline inflation will remain close to the mid-point of the range over the medium-term.


 

Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 May 5 May 12 Week 2017
Asia/Pacific
Australia All Ordinaries 5719.1 5863.8 5870.9 0.1% 2.7%
Japan Nikkei 225 19114.4 19445.7 19883.9 2.3% 4.0%
Topix 1518.61 1550.30 1580.7 2.0% 4.1%
Hong Kong Hang Seng 22000.6 24476.4 25156.3 2.8% 14.3%
S. Korea Kospi 2026.5 2241.2 2286.0 2.0% 12.8%
Singapore STI 2880.8 3229.7 3255.3 0.8% 13.0%
China Shanghai Composite 3103.6 3103.0 3083.5 -0.6% -0.6%
India Sensex 30 26626.5 29858.8 30188.2 1.1% 13.4%
Indonesia Jakarta Composite 5296.7 5683.4 5675.2 -0.1% 7.1%
Malaysia KLCI 1641.7 1762.7 1775.9 0.7% 8.2%
Philippines PSEi 6840.6 7842.0 7815.5 -0.3% 14.3%
Taiwan Taiex 9253.5 9899.9 9986.8 0.9% 7.9%
Thailand SET 1542.9 1569.0 1543.9 -1.6% 0.1%
Europe
UK FTSE 100 7142.8 7297.4 7435.4 1.9% 4.1%
France CAC 4862.3 5432.4 5405.4 -0.5% 11.2%
Germany XETRA DAX 11481.1 12716.9 12770.4 0.4% 11.2%
Italy FTSE MIB 19234.6 21483.9 21575.5 0.4% 12.2%
Spain IBEX 35 9352.1 11135.4 10897.0 -2.1% 16.5%
Sweden OMX Stockholm 30 1517.2 1642.0 1646.5 0.3% 8.5%
Switzerland SMI 8219.9 9016.7 9123.4 1.2% 11.0%
North America
United States Dow 19762.6 21006.94 20896.6 -0.5% 5.7%
NASDAQ 5383.1 6100.8 6121.2 0.3% 13.7%
S&P 500 2238.8 2399.3 2390.9 -0.3% 6.8%
Canada S&P/TSX Comp. 15287.6 15582.0 15537.9 -0.3% 1.6%
Mexico Bolsa 45642.9 49485.7 49426.1 -0.1% 8.3%

 

Europe and the UK

Most European stock indexes advanced on the week. The FTSE closed up 1.9 percent on the week at a new record high and its biggest weekly gain since December. The DAX was up 0.4 percent and the SMI added 1.2 percent. However, the CAC ended the week down 0.5 percent. Emmanuel Macron's election as French president did not send stocks into a rally — his victory in the election's first round a couple of weeks earlier had already sent equities higher. However, the victory did spur investors back into European stocks. Investors immediately turned to the prospect of the French parliamentary elections to be held on June 11 and 18, just days after the UK snap election on June 8. The President's party currently holds no seats in parliament.

 

European shares were lower Monday after a relief rally on Macron's widely anticipated victory. While investors welcomed Macron's win, they said his ability to deliver reforms depended on securing a strong enough majority in parliament in the upcoming legislative elections. Some market participants had speculated that a Macron win could be the last piece of the puzzle for the European Central Bank to begin rolling back from its ultra-loose monetary policies.

 

According to the European Commission, the euro area economy is expected to expand this year at a faster pace than previously expected though the main growth driver consumption is expected to slow amid rising inflation. In its Spring Forecast, Eurozone growth forecast for this year to 1.7 percent from 1.6 percent. The prediction for 2018 was retained at 1.8 percent. The growth projection for the European Union was raised to 1.9 percent for both years from 1.8 percent.


 

Asia Pacific

Equities mostly advanced last week even though they swooned Friday after weak earnings from U.S. department stores sent American retailers lower overnight and stoked worries about weak consumer spending in the U.S. Heightened political uncertainty in Washington triggered by President Donald Trump's abrupt firing of FBI chief James Comey and the improving odds of a June rate increase also kept underlying sentiment cautious. The best performing index in Asia was the Hang Seng, which was up 2.8 percent on the week, followed by the Nikkei — it added 2.3 percent. The Nikkei eased Friday thanks to a higher yen before the Group of Seven (G7) finance ministers and central bankers meeting in Bari, Italy over the weekend.

 

The Shanghai Composite was down 0.6 percent on the week — its fifth straight week of losses amid lingering worries over economic growth and regulatory measures aimed at curbing risky lending and speculation. April economic data showed that merchandise trade growth slowed and producer price inflation cooled more than expected in a sign manufacturing activity may be losing momentum along with other sectors of the economy. Worries over policy tightening and regulatory curbs also weighed on sentiment, as the official Xinhua News Agency published a series of editorials highlighting Beijing's concerted campaign to guard against financial risks. Asset prices on the mainland have been under pressure amid efforts by authorities to deleverage the economy and control financial risks.

 

China's crackdown on "shadow banking" has worried investors. A warning that removal of speculative bubbles was more important than near-term growth appears to have been true. The tumbling Shanghai Composite has been dragged down by regional banking stocks. According to notices issued by the China Banking Regulatory Commission since April, it is evidently trying to toughen control on wealth management products, which promise high interest rates to individual investors who purchase them for investments in bonds and other instruments.


 

Currencies

The U.S. dollar was up against all of its major counterparts including the yen, euro, pound sterling, Swiss franc and the Canadian and Australian dollars and was on track for its strongest week this year after strong data bolstered expectations that the Federal Reserve will raise interest rates again in June. Even though the currency weakened Friday on disappointing retail sales and inflation data, the week's gains were strong.

 

But a rally to 14-year highs for the dollar after the election of U.S. President Donald Trump has fizzled out since the start of this year. The currency has fallen as the pro-growth measures Trump had promised have been called into question. Some analysts said that the week's gain was partly the result of a broad market focus shift away from politics and back towards monetary policy. Investors are now pricing in an 80 percent chance of a Fed rate increase at its next meeting in June while at the same time other central banks continue to ease policy and are widening the interest spread and driving the dollar higher.

 

The euro fell from six-month highs against the U.S. dollar Monday after Emmanuel Macron's widely expected victory. Investors have been taking profits since he won the first round on April 23. Macron's overwhelming win on Sunday briefly pushed the euro above $1.10 against the U.S. currency, the highest since the U.S. presidential election in November. The removal of the political risk prompted investors to refocus on economic fundamentals and the pace of monetary policy normalization in Europe and the United States.


 

Selected currencies — weekly results

2016 2017 % Change
Dec 30 May 5 May 12 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.742 0.739 -0.4% 2.5%
New Zealand NZ$ 0.6948 0.692 0.686 -0.9% -1.3%
Canada C$ 0.7443 0.732 0.729 -0.4% -2.0%
Eurozone euro (€) 1.0534 1.100 1.093 -0.6% 3.7%
UK pound sterling (£) 1.2333 1.298 1.288 -0.8% 4.5%
Currency per U.S. $
China yuan 6.9450 6.903 6.900 0.1% 0.7%
Hong Kong HK$* 7.7533 7.784 7.794 -0.1% -0.5%
India rupee 67.9238 64.375 64.310 0.1% 5.6%
Japan yen 116.8100 112.480 113.290 -0.7% 3.1%
Malaysia ringgit 4.4862 4.339 4.346 -0.2% 3.2%
Singapore Singapore $ 1.4465 1.406 1.404 0.1% 3.0%
South Korea won 1205.8300 1140.070 1127.450 1.1% 7.0%
Taiwan Taiwan $ 32.3260 30.180 30.172 0.0% 7.1%
Thailand baht 35.8100 34.658 34.650 0.0% 3.3%
Switzerland Swiss franc 1.0174 0.9869 1.0013 -1.4% 1.6%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

March industrial production (excluding construction) slipped 0.1 percent on the month and made for the first back-to-back decline since February/March 2016. However, annual output growth climbed from 1.4 percent to 1.9 percent. March's minor monthly setback was wholly attributable to the energy sector where output contracted 3.2 percent. Elsewhere there were solid gains in non-durable consumer goods (2.1 percent) and durables (0.9 percent) and smaller increases in intermediates (0.3 percent) and capital goods (0.2 percent). Outside of energy (down 5.7 percent), all of the major subsectors showed yearly growth of between 1.7 percent and 4.1 percent. Among the larger four member states, production advanced 2.0 percent in France and increased 0.4 percent in Italy but fell 0.7 percent in Germany and was down 0.4 percent in Spain. All countries except the Netherlands (down 2.2 percent) reported annual increases in output.


 

Germany

March manufacturing orders were up a monthly 1.0 percent after February's revised reading of 3.5 percent. Annual growth was 2.3 percent, down from 4.7 percent but only because of a particularly hefty monthly increase in March 2016. Consumer & durables were up 5.5 percent and capital goods added 3.7 percent masking a sizeable drop in basics (3.7 percent). The headline gain was wholly attributable to foreign demand as overseas orders were up 4.8 percent while the domestic market contracted 3.8 percent (albeit after a 7.9 percent surge last time). Within the former, the Eurozone expanded 6.8 percent or nearly twice the 3.5 percent rate registered elsewhere.


 

March industrial production was down 0.4 percent monthly after February's revised 1.8 percent increase. On the year, output was 1.8 percent higher. Among the major subsectors, weakness was concentrated in capital goods which contracted a monthly 1.2 percent after a 1.3 percent increase in February. Intermediates edged up 0.1 percent while consumer goods were only flat. Elsewhere, construction rose 1.5 percent but energy declined 2.5 percent. Manufacturing output decreased 0.5 percent and so unwound half of February's 1.0 percent gain. Excluding construction, output was down 0.7 percent but was up 1.3 percent on the year.


 

March merchandise trade surplus was €19.6 billion surplus, down from a marginally larger revised €21.2 in February. Unadjusted, the surplus stood at €25.4 billion against €25.8 billion in the same month a year ago. The monthly deterioration in the adjusted headline reflected a 0.4 percent increase in exports that was more than offset by a 2.4 percent jump in imports. For the former, this was their third advance in a row while imports have now risen in five of the last six months. Unadjusted annual export growth now stands at 10.8 percent while imports are up a stronger 14.7 percent. Comparable yearly figures for trade with the rest of the Eurozone are 9.2 percent for exports and 12.5 percent for imports.


 

Flash first quarter gross domestic product was up 0.6 percent on the quarter after growing 0.4 percent in the fourth quarter. Annual workday adjusted growth was down just a tick at 1.7 percent while the unadjusted yearly rate more than doubled to 2.9 percent. The limited details provided indicated that quarterly growth was generated by both domestic and foreign demand. At home, mild weather contributed towards a sharp increase in capital formation, notably in construction but also in machinery and equipment. Household spending and government consumption similarly made (more limited) progress. Moreover, with exports rising faster than imports, the real foreign trade balance also had a positive impact.


 

United Kingdom

March industrial production was down a monthly 0.5 percent following a slightly steeper revised 0.8 percent decline in February. On the year, output was 1.4 percent above its mark a year ago. The March decline means that production has contracted for three successive months for the first time since August-October 2016. Weakness in overall goods production was mirrored by the manufacturing sector where output was down 0.6 percent on the month. Computer, electronic and optical products (down 4.5 percent) alongside metals (down 3.0 percent) did much of the damage but there were sizeable declines also in electrical equipment (1.7 percent) and other manufacturing and repair (1.2 percent). Coke and petroleum (4.1 percent), textiles (3.0 percent) and wood, paper and printing (2.1 percent) provided the principal boosts. Mining and quarrying was up 1.5 percent and water supply was up 0.6 percent but electricity and gas declined 4.2 percent.


 

March trade deficit was Stg13.44 billion after a smaller revised Stg11.45 billion shortfall in February. The hefty headline deterioration reflected a 7.9 percent monthly surge in imports that easily eclipsed an otherwise very respectable 3.9 percent increase in exports. Moreover, the jump in the red ink could not be attributed to the more volatile categories — excluding oil and other erratic items, the deficit widened out from Stg10.58 billion to Stg12.48 billion. The shortfall with the rest of the EU was Stg8.77 billion, up from Stg8.33 billion, while the deficit with the rest of the world climbed more than Stg1.5 billion to Stg4.67 billion. Underlying volume trends remained positive with exports up a quarterly 4.0 percent and a 2.4 percent increase in imports.


 

Asia/Pacific

Australia

March retail sales slipped 0.1 percent after declining 0.2 percent the month before. On the year, retail sales were up 2.1 percent. The decline reflected weaker sales for clothing, footwear & personal accessories (down 1.0 percent) which was partly offset by higher sales in food retailing (0.6 percent), household goods retailing (0.4 percent), other retailing (0.4 percent) and cafes, restaurants & takeaway food services (0.1 percent). Department stores sales were flat on the month.


 

China

April merchandise trade surplus in US dollar terms widened to $38.05 billion from $23.93 billion in March. On the year exports moderated from a 16.4 percent advance in March to 8.0 percent in April. Imports were down from 20.3 percent to 11.9 percent. China's exports to the United States grew 11.7 percent on the year, down from an increase of 19.7 percent in March. Exports to the European Union slowed from 16.6 percent to 4.0 percent. This was partly offset by stronger growth in exports to Japan, up from 8.4 percent in March to 13.3 percent in April. Seasonally adjusted exports were up 7.8 percent on the month after a holiday-impacted surge of 29.4 percent in March. Seasonally adjusted imports were up 7.5 percent after an increase of 1.2 percent in March. In yuan terms, the trade surplus widened to CNY262.3 billion from CNY164.3 billion in March, with exports up 14.3 percent on the year and imports up 18.6 percent.


 

April consumer price index increased 1.2 percent on the year after rising 0.9 percent in March. On the month, the CPI edged up 0.1 percent after dropping 0.3 percent in March. A smaller annual decline in food prices was the main factor pushing up headline inflation. Food prices dropped 3.5 percent compared with a decline of 4.4 percent in March. Non-food inflation also edged higher from 2.3 percent to 2.4 percent, with changes relatively steady for most categories of non-food spending. The urban CPI was up 1.3 percent while the rural CPI was up 0.8 percent on the year.


 

April producer price index increased 6.4 percent on the year, down from 7.6 percent in March. This is the second consecutive fall in PPI inflation though it remains well above levels seen late last year. The index was down 0.4 percent on the month after an increase of 0.3 percent in March. Fuel & power costs increased 17.6 percent on the year, moderating somewhat from 19.0 percent in March, while production material prices also eased from 10.1 percent to 8.4 percent. Consumer goods prices rose 0.7 percent on the year, unchanged from March.


 

Bottom line

Equities were mostly higher in muted trading. The U.S. dollar rallied. Economic data were mixed with data in China and Australia disappointing. Economic data in Europe and the U.S. were mixed. Both the Bank of England and the Reserve Bank of New Zealand left their monetary policies unchanged.

 

First quarter gross domestic product data for the Eurozone, Italy and Japan will be reported and will fill in the picture of global growth. China's April retail sales and industrial output will be carefully studied given weak merchandise trade and inflation data published last week. The UK posts both consumer and producer price indexes — the impact of the country's weak currency will be looked for in both. Canadian March retail sales and manufacturing sales will give final inputs to first quarter GDP which will be released on May 31.  


 

Looking Ahead: May 15 through May 19, 2017

Central Bank activities
May 18 Eurozone ECB Policy Meeting Accounts Published
 
The following indicators will be released this week...
Europe
May 16 Eurozone Gross Domestic Product (Q1.2017 preliminary)
Merchandise Trade (March)
Germany ZEW Survey (May)
Italy Gross Domestic Product (Q1.2017 preliminary)
UK Consumer Price Index (April)
Producer Price Index (April)
May 17 Eurozone Harmonized Index of Consumer Prices (April final)
Italy Merchandise Trade (March)
UK Labour Market Report (April)
May 18 France ILO Unemployment (Q1. 2017)
UK Retail Sales (April)
 
Asia Pacific
May 15 Japan Producer Price Index (April)
China Industrial Production (April)
Retail Sales (April)
May 17 Japan Machine Orders (March)
May 18 Japan Gross Domestic Product (Q.1 2017 preliminary)
Australia Labour Force Survey (April)
 
Americas
May 17 Canada Manufacturing Sales (March)
May 19 Canada Consumer Price Index (April)
Retail Sales (March)

 

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


 

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