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Central bank speak rattles markets
International Perspective - June 30, 2017
By Anne D. Picker, Chief Economist


Global Markets

So where are equities at the half year mark? Happily all are positive for the first six months of the year. However, and here is the downside — equities in Europe and the U.S. were down for June while in Asia, most were positive. The U.S. dollar dropped when semi-hawkish speak from the Banks of England and Canada and the European Central Bank was interpreted that other central banks were considering the future without non-existent interest rates and quantitative easing somewhere in the future. The U.S. dollar crumbled against the euro and pound sterling along with other major counterparts.


For the week, equities were down in the U.S. and Europe but mixed in Asia. The U.S. currency dropped against all of its major counterparts with the exception of the yen. Ten year bond yields were higher in the U.S., UK, Germany, Australia and Canada while they were unchanged in Japan.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 June 23 June 30 Week June 2017
Australia All Ordinaries 5719.1 5754.6 5764.0 0.2% 0.0% 0.8%
Japan Nikkei 225 19114.4 20132.7 20033.4 -0.5% 1.9% 4.8%
Topix 1518.61 1611.34 1611.9 0.0% 2.8% 6.1%
Hong Kong Hang Seng 22000.6 25670.1 25764.6 0.4% 0.4% 17.1%
S. Korea Kospi 2026.5 2378.6 2391.8 0.6% 1.9% 18.0%
Singapore STI 2880.8 3209.5 3226.5 0.5% 0.5% 12.0%
China Shanghai Composite 3103.6 3157.9 3192.4 1.1% 2.4% 2.9%
India Sensex 30 26626.5 31138.21 30921.6 -0.7% -0.7% 16.1%
Indonesia Jakarta Composite 5296.7 5829.7 5829.7 0.0% 1.6% 10.1%
Malaysia KLCI 1641.7 1779.5 1763.7 -0.9% -0.1% 7.4%
Philippines PSEi 6840.6 7814.2 7843.2 0.4% 0.1% 14.7%
Taiwan Taiex 9253.5 10377.7 10395.1 0.2% 3.5% 12.3%
Thailand SET 1542.9 1582.4 1574.7 -0.5% 0.8% 2.1%
UK FTSE 100 7142.8 7424.1 7312.7 -1.5% -2.8% 2.4%
France CAC 4862.3 5266.1 5120.7 -2.8% -3.1% 5.3%
Germany XETRA DAX 11481.1 12733.4 12325.1 -3.2% -2.3% 7.4%
Italy FTSE MIB 19234.6 20833.9 20584.2 -1.2% -0.7% 7.0%
Spain IBEX 35 9352.1 10630.8 10444.5 -1.8% -4.0% 11.7%
Sweden OMX Stockholm 30 1517.2 1645.4 1602.5 -2.6% -2.2% 5.6%
Switzerland SMI 8219.9 9032.9 8906.9 -1.4% -1.2% 8.4%
North America
United States Dow 19762.6 21394.76 21349.6 -0.2% 1.6% 8.0%
NASDAQ 5383.1 6265.3 6140.4 -2.0% -0.9% 14.1%
S&P 500 2238.8 2438.3 2423.4 -0.6% 0.5% 8.2%
Canada S&P/TSX Comp. 15287.6 15319.6 15182.2 -0.9% -1.1% -0.7%
Mexico Bolsa 45642.9 48980.3 49857.5 1.8% 2.2% 9.2%


Europe and the UK

Equities saw red both for the week and the month of June but were still positive for the first six months of the year. On the week, losses ranged from 1.2 percent (MIB) to 3.2 percent (DAX). The FTSE was down 1.4 percent on the week while the CAC was 2.8 percent lower and the SMI lost 1.4 percent. On the month, equity indexes retreated from 0.7 percent (MIB) to 4.0 percent (IBEX). The FTSE declined 2.8 percent, the CAC dropped 3.1 percent, the DAX was down 2.3 percent and the SMI retreated 1.4 percent. Investors were worried by hints from central bankers that a monetary policy tightening could be on the horizon. It was a key focus during the week, hitting defensive, dividend-paying stocks such as utilities and pharmaceutical firms, whose dividends become less attractive when bond yields rise.


Central bank speak weighed on investors as they saw tighter money conditions looming after several years of ultra-easy policies. ECB President Mario Draghi set markets aflutter Tuesday when he said that the Bank will need to be prudent in withdrawing monetary stimulus, noting that it can be done only gradually given that the euro area was still in need of considerable policy support to bring inflation back to target in a sustainable way. "In the current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery." Further he said "Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure."


ECB sources had tried to dampen talk of tightening, telling Reuters on Wednesday that markets had over interpreted Draghi's comments. But those comments could not prevent Germany's 10-year government bond yield hitting a five-week high while other bond yields also climbed higher.


Bank of England Governor Mark Carney said on Wednesday that monetary stimulus may need to be withdrawn to some extent in the future implying that interest rates may be raised. Earlier in June the BoE left its interest rate and asset purchases unchanged in a split decision. "Some removal of monetary stimulus is likely to become necessary if the trade-off facing the monetary policy committee continues to lessen and the policy decision accordingly becomes more conventional." Carney was speaking during a panel discussion at a European Central Bank forum on central banking in Sintra, Portugal. The pound climbed after Carney said that policymakers could lift rates if business investment rises. A stronger pound weighed on the FTSE and sent it lower.


Asia Pacific

Despite the ups and downs during the week, almost all equity indexes tracked here advanced on the week and in June. All were up for the first half of the year. For the week, the Nikkei and SET were down 0.5 percent, the Sensex lost 0.7 percent and the KLCI retreated 0.9 percent. Gains for the week ranged from 0.2 percent (All Ordinaries and Taiex) to 1.1 percent (Shanghai Composite). For the month of June, the Sensex and KLCI were down 0.7 percent and 0.1 percent respectively. Highs for the month ranged from virtually flat (All Ordinaries) to 3.5 percent (Taiex).


Equity investors here were concerned about the potential rise in interest rates globally given the hawkish comments from the European Central Bank, the Bank of England and the Bank of Canada during the week. The comments prompted traders to review their investment scenarios given that the global stock markets have been supported by ultra-loose monetary policies, so the signs of reversing them are frightening investors.


Indian shares outperformed most of their regional peers in the first half of 2017 as optimism about more economic reforms by Prime Minister Narendra Modi's government, forecast of a normal monsoon and bets of interest rate cuts prompted foreign investors to pour billions of dollars into equities. The Sensex surged 16.1 percent in the last six months, hitting record highs as a robust outlook for the nation's economic growth continued to attract overseas investors. The nation will implement a long-awaited Goods and Services Tax (GST) Saturday, July 1 — a move that would simplify India's complex indirect tax structure and help improve government finances. Markets are also optimistic that the Reserve Bank of India's monetary policy committee will cut interest rates further this year after retail inflation eased to record lows and as a normal rainy season promises to keep food prices under control.


After 14 years of struggle to enlist the support of India's states, the Goods and Services Tax will replace more than a dozen union and state levies and unify a country of 1.3 billion people into one of the world's biggest common markets. The measure is expected to make doing business easier by simplifying the tax structure and ensuring greater compliance. But many businesses were nervous about how the change will unfold while smaller establishments staged strikes saying they would get hit by higher tax rates. The GST is a value added tax — firms will have an incentive to comply in order to avail credit for taxes already paid. This should widen the tax net, shoring up public finances.



The U.S. dollar tumbled against all of its major counterparts with the exception of the yen. The forex market was shaken by central bank talk on inflation and the possibility of tighter money sometime in the future. The shift to price in interest rate increases in the months ahead by a number of central banks besides the Federal Reserve left both the dollar and the yen exposed. But a number of analysts wonder if the move has been overdone. Analysts further noted that volatility had been low prior to this week so that any small change in language amplified the increased volatility.


The euro's gains began in part as a relief rally over the rejection of nationalist anti-EU candidates in France, Australia and the Netherlands and gained pace following ECB Mario Draghi's comments regarding inflation. He said that the euro area was headed towards reflation. This was interpreted to mean that the ECB might become less accommodating going forward.


Helped by a recovery in oil, the Canadian dollar has climbed as investors priced in a 70 percent chance of an interest rate increase at the next Bank of Canada meeting on July 12. Hawkish comments earlier this week from Bank of Canada Governor Stephen Poloz have raised expectations for an interest rate increase from its current 0.5 percent. Along with an increase in monthly GDP, the Bank of Canada's quarterly Business Outlook Survey painted a reasonably upbeat picture of Canadian economic activity. The economic outlook is seen improving across both sectors and regions and inflationary pressures have increased. Its measure of business sentiment hit its highest level since the second quarter of 2011.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 June 23 June 30 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.757 0.769 1.5% 6.5%
New Zealand NZ$ 0.6948 0.728 0.733 0.6% 5.5%
Canada C$ 0.7443 0.754 0.771 2.3% 3.6%
Eurozone euro (€) 1.0534 1.120 1.142 2.0% 8.4%
UK pound sterling (£) 1.2333 1.273 1.302 2.3% 5.6%
Currency per U.S. $
China yuan 6.9450 6.837 6.781 0.8% 2.4%
Hong Kong HK$* 7.7533 7.800 7.807 -0.1% -0.7%
India rupee 67.9238 64.519 64.581 -0.1% 5.2%
Japan yen 116.8100 111.260 112.520 -1.1% 3.8%
Malaysia ringgit 4.4862 4.289 4.293 -0.1% 4.5%
Singapore Singapore $ 1.4465 1.387 1.377 0.8% 5.1%
South Korea won 1205.8300 1138.850 1144.140 -0.5% 5.4%
Taiwan Taiwan $ 32.3260 30.362 30.429 -0.2% 6.2%
Thailand baht 35.8100 33.939 33.930 0.0% 5.5%
Switzerland Swiss franc 1.0174 0.9693 0.9594 1.0% 6.0%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


May annual growth of M3 stood at 5.0 percent, up a tick from April and firm enough to lift average growth over the last three months from 5.0 percent to a marginally firmer than expected 5.1 percent. Private sector lending was flat at a 2.2 percent yearly rate (unchanged at 2.6 percent after adjustment for loan sales and securitization) although overall credit crept up from 2.9 percent to 3.0 percent. Adjusted credit for consumption was strong, weighing in at 6.2 percent, a marked improvement on 4.7 percent in April and its fastest rate in a decade. This should bode well for household spending going forward. Loans for house purchase slipped to 2.9 percent but borrowing by non-financial corporations was steady at 2.4 percent.


June EU Commission's measure of economic sentiment rebounded to 111.1 from 109.2 in May. Household confidence was up 2 points at minus 1.3 while morale in industry gained 1.7 points to 4.5. Both constituted multi-year peaks. Services (13.4 after 12.8), retail (4.4 after 2.0) and construction (minus 3.5 after minus 5.6) all posted similarly impressive gains. Regionally, the national ESI rose in three of the larger four member states while Italy was only flat (106.1). Germany (up 2.4 points at 111.9) had a particularly good month and France (up 2.2 points at 109.8) was not far behind. Spain (up 0.5 points at 108.9) lagged but still recorded its third consecutive rise.


June flash harmonized index of consumer prices was up 1.3 percent on the year, down from May's final of 1.4 percent. This was the lowest mark so far in 2017. Core HICP excluding energy, food, alcohol and tobacco increased 0.2 percentage points to 1.1 percent. Ignoring the Easter distortions in April, this is the first time underlying inflation has been above 1.0 percent since late 2015. The second core gauge which omits just energy and unprocessed food followed suit, also gaining 0.2 percentage points to 1.2 percent. Among the major components, energy (1.9 percent after 4.5 percent) weighed heavily as did, to a much smaller extent, food, alcohol and tobacco (1.4 percent after 1.5 percent). Non-energy industrial goods inflation edged a tick higher to 0.4 percent while services climbed from 1.3 percent to 1.6 percent.



June Ifo overall business climate indicator rose 0.5 points to 115.1, its fifth consecutive increase and a new post-Great Recession high. The latest advance reflected mainly a more bullish assessment of current business conditions with the sub-index here gaining almost a full point to 124.1. This measure has seen an uninterrupted climb since last August and the June reading suggests a very good month for economic activity. Expectations lagged, edging up only 0.3 points but, at 106.8, still recorded their best mark since February 2014. Morale made fresh ground in most sectors. Manufacturing (up 0.1 points at 26.1) was little changed but both wholesale (up 3.3 points at 23.6) and, in particular, retail (up 4.6 points at 16.0) recorded solid increases. The only decline was in construction (down 0.4 points at 12.4).


United Kingdom

The final estimate of first quarter gross domestic product was unrevised with a quarterly increase of 0.2 percent and an annual growth rate of 2.0 percent. Household consumption was revised upward to a stronger 0.4 percent quarterly rate while gross fixed capital formation was trimmed to 1.0 percent (although business investment is still up 0.6 percent). Government spending was 0.7 percent firmer. Exports were also revised up and now show a 0.7 percent quarterly decline which, with imports pared to a 1.7 percent gain, reduced the negative impact of net exports to 0.8 percent. The savings ratio was 1.7 percent, down 1.6 percentage points from the fourth quarter of 2016 and at a new record low. With household disposable income falling a further 1.4 percent, this could become a significant hindrance to future household spending.




May retail sales were up 2.0 percent on the year after increasing 3.2 percent in April. This was the seventh consecutive annual increase in retail sales. Seasonally-adjusted retail sales fell 1.6 percent on the month, the first decline in five months after rising 1.4 percent in April. Food and beverage sales edged up only 0.1 percent on the year compared with an increase of 1.3 percent in April. Annual sales also slowed for apparel, fuel, and general merchandise. This was partly offset by stronger growth in auto sales, up from 6.3 percent to 7.0 percent.


May household spending slipped 0.1 percent on the year, an improvement from the decline of 1.4 percent in April. Spending on transportation and communication recorded the biggest annual increase (up 6.8 percent). Spending also increased on furniture and medical care. Fuel, light and water charges decline 2.2 percent on the year along with spending on food and housing. A measure of core household spending which excludes housing, motor vehicles and other volatile items and tends to track more closely the consumption component of gross domestic product declined 0.8 percent in May after a 1.3 percent fall in April.




April monthly gross domestic product was up 0.2 percent on the month and 3.3 percent from a year ago and the highest since June 2014. The April increase marked the sixth consecutive gain. Overall, 14 of 20 sectors grew, representing 76 percent of GDP, and supporting the central bank's view that growth composition is broadening across sectors. The gains in April were led by services, where activity expanded by 0.3 percent and 3.0 percent on the year. The last time services posted a decline was in August 2015. Gains were widespread with the performance reinforced by an upward revision to March's growth estimate to 0.4 percent from 0.3 percent. However, activity in goods-producing industries was unchanged in April with March's estimate was revised down to 0.6 percent from 0.9 percent. The flat performance was the result of divergent trends as a 1.2 percent gain in mining, quarrying and oil and gas was largely offset by a 0.9 percent contraction in manufacturing, which recorded its largest decrease since October 2016.


Bottom line

Equities retreated thanks to increasing evidence that central bankers are looking to eventually leave ultra-low interest rates behind and begin the process of returning to normal monetary policies. Eyes were also shifting to other central banks besides the Fed, ECB and Banks of Canada and England including Sweden's Riksbank, which meets next week and has previously resisted tightening monetary controls in an economy that has generally been growing strongly for two years. Economic data in Canada and Europe were positive but were mixed in the U.S. and disappointing for Japan.


The Reserve Bank of Australia publishes its monetary policy decision and its statement should get heightened scrutiny given the pronouncements from central bankers during this past week. Final PMI readings globally will be parsed against expectations for improving global growth — and possible future interest rate increases. The Bank of Japan's quarterly Tankan Survey will be posted and evaluated for possible changes in the BoJ's quantitative easing program. Two all-important indicators will be released in Canada — May international trade balance and its labour force survey.


Looking Ahead: July 3 through July 7, 2017

Central Bank activities
July 4 Australia Reserve Bank of Australia Monetary Policy Announcement
July 5 United States FOMC Minutes Published
July 6 Eurozone ECB Accounts of Monetary Policy Meeting Published
The following indicators will be released this week...
July 3 Eurozone Manufacturing PMI (June)
Germany Manufacturing PMI (June)
France Manufacturing PMI (June)
UK Manufacturing PMI (June)
July 4 Eurozone Producer Price Index (May)
July 5 Eurozone Composite & Services PMI (June)
Germany Composite & Services PMI (June)
France Composite & Services PMI (June)
UK Services PMI (June)
July 6 Germany Manufacturing Orders (May)
July 7 Germany Industrial Production (May)
France Industrial Production (May)
Merchandise Trade (May)
UK Industrial Production (May)
Merchandise Trade (May)
Asia Pacific
July 3 Japan Tankan Survey (Q2.2017)
China Manufacturing PMI (June)
India Manufacturing PMI (June)
July 4 Australia Retail Sales (May)
July 6 Australia Merchandise Trade Balance (May)
July 6 Canada International Trade (May)
July 7 Canada Labour Force Survey (June)


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


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