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INTERNATIONAL PERSPECTIVE

Snap election shockwaves
International Perspective - June 9, 2017
By Anne D. Picker, Chief Economist

  

Global Markets

It was a busy week albeit mostly on the geopolitical side of things with most occurring around the end of the week. The UK population once again proved its ability to shock — the snap election, instead of bolstering the Conservatives' majority produced a hung parliament with no political party having a majority.

 

In the United States, the focus was on hearings in Washington along with the looming Federal Reserve monetary policy announcement on June 14 and with it the prospects of another interest rate increase. With many analysts already concerned about the mixed second quarter economic data and its growth implications, the Fed's forecasts and Chair Janet Yellen's press conference will be studied intently for guidance.

 

European equity markets shrugged off the UK election result but the pound sterling did not. In the U.S., a sudden drop in technology stocks Friday afternoon sent the Nasdaq and the S&P down for the week. However, the Dow once again closed at a record high.


 

Reserve Bank of India

The Reserve Bank of India left its key policy interest rate at 6.25 percent as expected despite concerns that the country's growth is slowing. The reverse repo rate was also left unchanged at 6.00 percent. The decision was taken a week after data showed the Indian economy slowed sharply during the first quarter of this year to 6.1 percent from 7.0 percent in the fourth quarter following the government's decision to replace most of the country's cash last November. The RBI said the risks to its inflation target of 4.0 percent were "evenly balanced." RBI last cut its policy rate by 25 basis points in October, though it surprised analysts with a 25 basis point increase in its reverse repo rate in April. The vote by the RBI's monetary policy committee was 5 to 1, the first split in the five meetings that have taken place since the MPC was formed last September.

 

The RBI lowered its projections for inflation and struck a less hawkish tone in its policy statement. The RBI cut banks' statutory liquidity ratio — the amount of bonds they must set aside — by 50 basis points to 20 percent of total deposits starting on June 24. The Bank cut its projection for consumer inflation to 2 percent to 3.5 percent in April to September, down from 4.5 percent earlier and to 3.5 percent to 4.5 percent in October to March, down from 5 percent earlier.


 

Reserve Bank of Australia

The Reserve Bank of Australia left its policy interest rate unchanged at 1.50 percent as expected and where it has been since August 2016. Based on its growth and inflation outlook, the RBA again concluded that no change in policy was required and is likely to continue for at least the next few months.

 

In the accompanying statement the RBA noted that a broad-based pick-up in global growth is continuing, with higher commodity prices providing a boost to Australia's national income. In comments regarding the domestic economy, the Board noted that the transition to lower levels of mining investment was "almost complete" with business investment picking up in other parts of the economy. Although the RBA expected that first quarter gross domestic product data (which were released after the Bank's announcement) to show slower growth in the three months to March, at the same time it remained confident that growth will strengthen gradually over the next couple of years to above 3.0 percent.

 

The Board described labour market indicators as "mixed" with wage growth again characterized as "slow" and expected to stay that way "for a while yet". Inflation was forecast to increase gradually over the forecast period. The Board again referred to high levels of housing debt among households and welcomed recently announced supervisory measures aimed at addressing the risks associated with this debt.


 

European Central Bank

As widely anticipated, there were no changes to key interest rates or the quantitative easing program at the ECB's June meeting. The benchmark refi rate stayed at zero percent, above the minus 0.40 percent deposit rate and below the 0.25 percent marginal lending rate. QE purchases will remain at an average €60 billion per month but may be increased in terms of size and/or duration as deemed necessary. There was nothing new here.

 

However, speculation that the ECB would alter its longstanding forward guidance proved correct. Previously this saw 'interest rates at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.' That statement has been amended to remove the 'lower levels' option. In reality, the adjustment is only very minor and just reflects the Bank's view that downside economic risks have diminished (they are now seen as balanced). It has no immediate implications for policy although financial markets will probably see it as the first step on the long path to higher interest rates which should be a small plus for the euro.

 

Justification for the change was provided in the ECB's new economic forecasts. These put growth at 1.9 percent in 2017, 1.8 percent in 2018 and 1.7 percent in 2019, each year being a tick higher than expected in March. However, faster growth is not expected to boost inflation. Rather, the HICP projection has been revised down by 2 ticks this year to 1.5 percent, by 3 ticks to 1.3 percent in 2018 and by 1 tick to 1.7 percent in 2019. The downward revisions here were ascribed mainly to oil market developments.


 

Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 June 2 June 9 Week 2017
Asia/Pacific
Australia All Ordinaries 5719.1 5821.1 5715.5 -1.8% -0.1%
Japan Nikkei 225 19114.4 20177.3 20013.3 -0.8% 4.7%
Topix 1518.61 1612.20 1591.7 -1.3% 4.8%
Hong Kong Hang Seng 22000.6 25924.1 26030.3 0.4% 18.3%
S. Korea Kospi 2026.5 2371.7 2381.7 0.4% 17.5%
Singapore STI 2880.8 3240.0 3254.2 0.4% 13.0%
China Shanghai Composite 3103.6 3105.5 3158.4 1.7% 1.8%
India Sensex 30 26626.5 31273.29 31262.1 0.0% 17.4%
Indonesia Jakarta Composite 5296.7 5742.5 5675.5 -1.2% 7.2%
Malaysia KLCI 1641.7 1777.0 1788.9 0.7% 9.0%
Philippines PSEi 6840.6 7907.7 7990.2 1.0% 16.8%
Taiwan Taiex 9253.5 10152.5 10199.7 0.5% 10.2%
Thailand SET 1542.9 1567.6 1566.7 -0.1% 1.5%
Europe
UK FTSE 100 7142.8 7547.6 7527.3 -0.3% 5.4%
France CAC 4862.3 5343.4 5299.7 -0.8% 9.0%
Germany XETRA DAX 11481.1 12822.9 12815.7 -0.1% 11.6%
Italy FTSE MIB 19234.6 20928.2 21122.4 0.9% 9.8%
Spain IBEX 35 9352.1 10905.9 10978.3 0.7% 17.4%
Sweden OMX Stockholm 30 1517.2 1646.7 1654.8 0.5% 9.1%
Switzerland SMI 8219.9 9044.0 8845.9 -2.2% 7.6%
North America
United States Dow 19762.6 21206.29 21272.0 0.3% 7.6%
NASDAQ 5383.1 6305.8 6207.9 -1.6% 15.3%
S&P 500 2238.8 2439.1 2431.8 -0.3% 8.6%
Canada S&P/TSX Comp. 15287.6 15442.8 15473.2 0.2% 1.2%
Mexico Bolsa 45642.9 49317.4 49120.0 -0.4% 7.6%

 

Europe and the UK

Despite Friday's gains, equities were lower on the week. The FTSE slipped 0.3 percent, the CAC declined 0.8 percent, the DAX retreated 0.1 percent and the SMI dropped 2.2 percent. However, the MIB (up 0.9 percent), IBEX (up 0.7 percent) and the OMX (up 0.5 percent) advanced for the week. Investors were largely able to shrug off the inconclusive results of the UK election. A drop in the value of the British pound provided the boost to the FTSE 100. The snap general election called by British Prime Minister Theresa May turned out to be a setback for her Conservative party, which lost their majority in the Parliament.

 

The FTSE 100 index — which is composed of multinational companies that largely earn in foreign currency and therefore benefit when the pound declines — climbed as much as 1.3 percent, before closing up 1 percent on Friday. Meanwhile, the more domestically focused FTSE 250 index (which covers the 250 biggest LSE stocks excluding the ones on the FTSE 100) and whose constituents are vulnerable to sterling weakness recovered from an earlier loss to close slightly higher on the day. The pound initially fell 2.5 percent against the U.S. dollar after the shock election result was announced after polls had closed, but had recovered some ground by the time London markets closed on Friday. Even so the decline gave some support to the FTSE 100 and its overseas earners, while news that Theresa May was forming a government — even with the help of the Northern Irish Democratic Unionist Party (DUP) — provided some support for shares and the pound.

 

The central banks of Germany, France and Italy released their upgraded growth projections Friday. The German Bundesbank cited the strong labor market along with consumption and government spending and investment as contributing to growth. The Bank's forecast is for the economy to grow 1.9 percent in 2017, 1.7 percent next year and 1.6 percent in 2019. The Bank of France said the French economy is expected to grow faster than expected as export growth has picked up thanks to the global economic recovery. The bank raised the growth forecast for this year to 1.4 percent. The projection for 2018 was also raised to 1.6 percent from 1.5 percent. The Italian economy is expected to sustain its growth momentum that is forecast to improve over the next two years, helped by a moderate strengthening of foreign demand and the ultra-easy monetary conditions according to the Bank of Italy. Growth for 2017 was raised to 1 percent from 0.9 percent. The projections for both 2018 and 2019 were increased to 1.2 percent from 1.1 percent.


 

Asia Pacific

Asian investors were focused on events in Europe and the U.S. during the week. But at week's end, traders largely shrugged off political uncertainty in the UK where British Prime Minister Theresa May's decision to call a snap general election backfired as the Conservatives fell short of 326 needed to command a parliamentary majority. Instead investors looked ahead to the Federal Reserve announcement on Wednesday (June 14). Markets here showed little reaction to ECB President Mario Draghi's surprisingly cautious tone in his post-meeting statement and the public testimony of former FBI Director James Comey about his relationship with President Donald Trump and the circumstances that led to his firing.

 

The Nikkei was down 0.8 percent and the Topix tumbled 1.3 percent on the week as stocks continued to trade on fluctuations in the yen. The yen remained weak against the dollar after Bank of Japan Governor Haruhiko Kuroda said there is still a long way to go until the inflation target of 2 percent is achieved. The main reason for the delay in reaching the inflation target is subdued inflation expectations, he noted.

 

The All Ordinaries declined 1.8 percent on the week thanks to disappointing first quarter growth. GDP grew a seasonally adjusted 0.3 percent in the January to March period marking 103 quarters or 25 years and nine months without a recession. A recession is traditionally defined as two consecutive quarters of declining gross domestic product. Australia's streak ties the record held by the Netherlands, which went on a comparable run starting in the early 1980s. Australia's economy has been propped up by service industries, while products such as natural resources have suffered.

 

Severe weather events such as Cyclone Debbie, which hurt coal exports, have stifled growth. Although exports have generally buttressed the economy, they have begun to struggle. Exports of iron ore and other goods fell 2.6 percent during the quarter, as prices continue to slump. But Australia's service and investment sectors have offset those drawbacks. Chinese investors have been pouring money into property in the country's major cities, and construction demand is swelling. The amount of direct investment approved by the Foreign Investment Review Board was 30 percent higher in the 12 months beginning July 2015 than in the previous year. However, Australia's economic expansion has not led to increased hiring.


 

Currencies

The pound sterling took the brunt of the surprising snap poll results and tumbled when the initial exit poll results were announced after voting ended. The result lifted the country's main FTSE share index, after the election denied any party a majority in parliament. Prime Minister Theresa May said she would form a government with help from the DUP, despite having failed to win the stronger mandate she had sought to conduct exit talks with the rest of the European Union. While sterling registered its biggest daily decline in eight months, the slump appeared to be checked by expectations from some investors that the government may pursue a softer stance on Brexit. The graph pictures sterling's fluctuations against the U.S. dollar and euro since the Brexit vote on June 23, 2016. The results' surprise raised questions about how Britain will advance with its plan to leave the EU, and whether any party can form a stable government.

 

The U.S. dollar was up against the euro, pound sterling and Swiss franc but lower against the yen, Canadian and Australian dollars.


 

Selected currencies — weekly results

2016 2017 % Change
Dec 30 June 2 June 9 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.744 0.753 1.2% 4.4%
New Zealand NZ$ 0.6948 0.714 0.721 0.9% 3.7%
Canada C$ 0.7443 0.741 0.743 0.2% -0.2%
Eurozone euro (€) 1.0534 1.128 1.120 -0.8% 6.3%
UK pound sterling (£) 1.2333 1.289 1.273 -1.2% 3.2%
Currency per U.S. $
China yuan 6.9450 6.810 6.798 0.2% 2.2%
Hong Kong HK$* 7.7533 7.790 7.797 -0.1% -0.6%
India rupee 67.9238 64.441 64.254 0.3% 5.7%
Japan yen 116.8100 110.420 110.210 0.2% 6.0%
Malaysia ringgit 4.4862 4.280 4.265 0.3% 5.2%
Singapore Singapore $ 1.4465 1.381 1.384 -0.3% 4.5%
South Korea won 1205.8300 1121.880 1123.160 -0.1% 7.4%
Taiwan Taiwan $ 32.3260 30.120 30.133 0.0% 7.3%
Thailand baht 35.8100 34.040 34.070 -0.1% 5.1%
Switzerland Swiss franc 1.0174 0.9627 0.9691 -0.7% 5.0%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

First quarter gross domestic product was revised upward with total output expanding a quarterly 0.6 percent (up from 0.5 percent) — its best performance in two years. Annual growth was 1.9 percent, also 0.1 percentage point higher.  The GDP expenditure components showed that the main contribution to quarterly growth (again) came from gross fixed capital formation which was up 1.3 percent after a 3.4 percent spurt in October to December. Private consumption slowed from 0.4 percent to 0.3 percent, a pattern reversed by government consumption. As a result, final domestic demand accounted for the entire increase in real GDP. Business inventories had a neutral effect having boosted growth by a sizeable 0.4 percentage points in the previous period. The real net foreign trade balance similarly made no impact as a 1.2 percent quarterly increase in exports was cancelled out by a 1.3 percent advance in imports.


 

Germany

April manufacturing orders dropped 2.1 percent on the month after increasing a monthly 1.1 percent in March. Annual growth climbed from 2.4 percent to 3.3 percent but only due to an even weaker performance a year ago. Outside of a minimal 0.1 percent monthly advance in basics, the report was soft across the board. Capital goods were down 3.6 percent, reversing their entire March bounce, while consumer & durable goods were off 0.8 percent after a 5.6 percent spurt. A 3.4 percent slide in foreign demand was largely responsible for the overall monthly decline but domestic orders also contracted 0.2 percent for their first back-to-back decrease since December 2015/January 2016.


 

April industrial production climbed 0.8 percent and was up 2.8 percent on the year. Excluding construction, output was up 1.0 percent and 2.4 percent from a year ago. April's headline recovery masked mixed performances among the major subgroups. On the positive side, there were monthly increases in intermediates (1.0 percent) and capital goods (0.3 percent) with gains here were supported by a sizeable increase in energy (5.7 percent). However, consumer goods were down 0.7 percent and construction was down 0.1 percent. Overall manufacturing output was up 0.4 percent after a 0.2 percent advance last time.


 

April seasonally adjusted trade surplus was €19.8 billion, little changed from a larger revised €19.9 billion in March. However, unadjusted the black ink stood at €18.1 billion, down nearly 19 percent from a year ago. The essentially flat headline reading reflected a 0.9 percent monthly rise in exports, their fourth straight increase, and a 1.3 percent advance in imports. At €106.3 billion, the former hit a new record high. Even so, compared with a year ago, exports were down an unadjusted 2.9 percent with sales to other EMU countries off 1.0 percent and to the rest of the world, down 6.3 percent. Annual import growth was 5.4 percent, a sharp decline from March's 14.8 percent increase.


 

United Kingdom

April industrial production rebounded 0.2 percent after declining an unrevised 0.5 percent on the month. Output was down 0.8 percent, after increasing 1.4 percent last time. The monthly pick-up in overall goods production was mirrored in the key manufacturing sector where output also expanded 0.2 percent. Within this, pharmaceuticals (2.0 percent) and transport equipment (1.6 percent) gained but textiles and leather (down 3.3 percent), coke & petroleum products (down 7.1 percent) and the other manufacturing and repair category (down 2.8 percent) all struggled. Elsewhere, water supply fell 1.4 percent and mining & quarrying dropped 0.6 percent but electricity & gas rose 2.9 percent.


 

April deficit on total goods trade narrowed from a downwardly revised Stg12.05 billion in March to a smaller than expected Stg10.38 billion in April. However, the headline improvement masked contractions in both sides of the balance sheet with exports down 0.5 percent on the month and imports off a sharper 4.4 percent. Excluding oil and erratics the picture was rather brighter with exports up 1.9 percent and imports down 3.5 percent. This yielded an underlying shortfall of Stg10.45 billion, a 6-month low, following a deficit of Stg12.17 billion in March. Net trade with the rest of the EU deteriorated as the shortfall widened from Stg8.16 billion to Stg8.32 billion but the deficit with the rest of the world narrowed by Stg1.83 billion to Stg2.07 billion.


 

Asia/Pacific

Japan

Revised first quarter gross domestic product grew by 0.3 percent on the quarter down from the preliminary estimate of 0.5 percent. GDP advanced an annualized 1.0 percent and down from the preliminary estimate of 2.2 percent. GDP was up 1.3 percent from the same months a year ago. The downward revision was largely driven by household consumption, which is now estimated to have grown at an annualized rate of 1.1 percent (compared with a previous estimate of 1.4 percent) and to have made a positive contribution to headline quarterly growth of only 0.1 percentage points. Downward revisions to growth in government spending also contributed to the lower estimate. Private residential investment was revised down from 3.0 percent to 1.1 percent, but this was offset by an upward revision to the estimate for private non-residential investment from 0.9 percent to 2.5 percent.


 

Australia

Gross domestic product was up 0.3 percent on the quarter in the three months to March, slowing from an increase of 1.1 percent in the three months to December. On the year, GDP growth slowed from 2.4 percent in the three months to December to 1.7 percent in the three months to March. This was the weakest annual growth recorded since 2009 in the wake of the global financial crisis. The slowdown in growth was mainly driven by investment spending and net exports. Consumption spending was up 0.6 percent on the quarter and 2.5 percent on the year Investment spending slowed from an increase of 2.6 percent on the quarter to a decline of 0.6 percent in the three months to March. On the year investment spending contracted 0.4 percent after sliding 0.1 percent in the previous quarter. Investment in dwellings was particularly weak.


 

April merchandise trade surplus narrowed to A$0.56 billion from A$3.17 billion in March (revised from A$3.11 billion). This is the smallest of six consecutive monthly trade surpluses with weaker commodity prices and weather-related disruptions weighing on export performance. Exports dropped 8.3 percent mainly driven by a sharp drop in non-rural goods (around 60 percent of total exports), in part reflecting weaker iron ore prices. Cyclone damage to port infrastructure also contributed to a sharp drop in coal exports. Exports of non-monetary gold (around 5 percent) and rural goods (around 13 percent) also fell on the month. This was partly offset by an increase in exports of services (around 21 percent of the total). Imports declined by 0.6 percent on the month. Imports of consumption goods, capital goods, intermediate and other merchandise goods and non-monetary gold all fell on the month, partly offset by an increase in services imports.


 

China

The merchandise trade surplus in May widened to $40.81 billion from $38.05 billion in April. On the year, exports increased 8.7 percent from 8.0 percent in April while imports rose 14.8 percent from 11.9 percent. The widening was largely driven by stronger demand from the European Union. Exports to the EU rose 9.7 percent on the year in May, up from 4.0 percent in April. Exports to the United States grew 11.7 percent on the year, unchanged from April, while exports to Japan weakened from 13.3 percent to 3.7 percent. In seasonally adjusted terms, exports declined 0.3 percent on the month after an increase of 7.8 percent the month before. Seasonally adjusted imports fell 3.3 percent on the month, partly reversing the increase of 7.5 percent in April. In domestic currency terms, China's trade surplus increased from CNY262.1 billion in April to CNY281.6 billion in May. Exports grew 15.5 percent on the year, up from 14.3 percent in April, while imports accelerated from 18.6 percent to 22.1 percent.


 

May consumer price index increased was up 1.5 percent on the year after increasing 1.2 percent in April. On the month, the CPI was down 0.1 percent on the month after April's 0.1 percent increase. The annual change was largely driven by a smaller decline in food prices which were down 1.6 percent for the smallest decline in four months. Non-food inflation, meanwhile, eased slightly from 2.4 percent to 2.3 percent, reflecting a smaller increase in transportation and communication prices. Price increases in most other categories of consumer spending were relatively steady. Urban CPI was up 1.7 percent while the rural CPI was up 1.1 percent.


 

May producer price index increased 5.5 percent on the year, down from 6.4 percent in April. This is the third consecutive fall in PPI inflation though it remains well above levels seen late last year. On the month the PPI was down 0.3 percent after a drop of 0.4 percent in April. The easing of prices in May was broad-based, with most categories recording smaller annual increases. Fuel & power costs increased 15.8 percent after rising 17.6 percent in April. Production materials moderated from 8.4 percent to 7.3 percent. Metals prices also rose at a slower pace. Consumer goods prices rose 0.6 percent on the year in May, down slightly from 0.7 percent in April.


 

Americas

Canada

Employment jumped 54,500 in May. Best of all, the increase was in full time jobs which were up 77,000 while part time jobs were down 22,300. The unemployment rate inched up to 6.6 percent from April's 6.5 percent. The participation rate jumped to 65.8 from 65.6 in the prior month. Among the major sectors, private jobs were up 59,400 and public jobs were up 9,200. Goods sector jobs were up 23,300 and services added 31,300. Employment increased in several industries, led by professional, scientific & technical services as well as manufacturing. There were smaller increases in transportation & warehousing, wholesale & retail trade as well as health care & social assistance. In contrast, fewer people worked in finance, insurance, real estate, rental & leasing; information, culture & recreation and public administration. Employment rose in Ontario, British Columbia, Manitoba and Prince Edward Island. There was little change in the other provinces.


 

Bottom line

Suspense built as the week began — three central banks met and the Reserve Banks of Australia and India and the European Central Bank decided to keep their respective interest rates unchanged. On Thursday, the UK held its snap election and the results shocked as the Conservative party was not able to attain its majority and will try to form a coalition with the DUP. Economic data were mixed.

 

Three more central banks are slated to announce their respective policy decisions next week — the Federal Reserve and the Banks of England and Japan. The Fed is expected to increase its fed funds rate by 25 basis points to 1.00 percent to 1.25 percent. The Banks of England and Japan are anticipated to maintain their current policy rates of 0.25 percent and minus 0.1 percent. Price data will be released in the UK, Eurozone and Japan. Both the UK and Australia report May labour market data. Needless to say, the ongoing developments following this week's snap election will be followed closely.


 

Looking Ahead: June 12 through June 16, 2017

Central Bank activities
June 13, 14 United States FOMC Meeting an Monetary Policy Announcement
June 15 UK Bank of England Monetary Policy Announcement
June 16 Japan Bank of Japan Monetary Policy Announcement
 
The following indicators will be released this week...
Europe
June 12 Italy Industrial Production (April)
June 13 Germany ZEW Survey (June)
UK Consumer Price Index (May)
Producer Price Index (May)
June 14 Eurozone Industrial Production (April)
UK Labour Market Report (May)
June 15 Eurozone Merchandise Trade Balance (April)
UK Retail Sales (May)
June 16 Eurozone Harmonized Index of Consumer Prices (May final)
 
Asia Pacific
June 12 Japan Producer Price Index (May)
Machine Orders (April)
June 14 China Industrial Production (May)
Retail Sales (May)
June 15` Australia Labour Force Survey (May)
New Zealand Gross Domestic Product (Q1.2017)
 
Americas
June 15 Canada Manufacturing Sales (April)

 

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


 

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