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Markets get fill of Fed
International Perspective - July 14, 2017
By Anne D. Picker, Chief Economist


Global Markets

The week's news was dominated by Federal Reserve Chair Janet Yellen's semi-annual testimony before the House of Representative's financial services committee on Wednesday and before the Senate banking committee on Thursday. Global investors were rapt, hanging on every word as they looked for guidance to future fed policy. On the week, equities advanced while the U.S. dollar retreated.


Fed Chair Janet Yellen's semi-annual Congressional testimony

There were no surprises in the text of Janet Yellen's testimony as she repeated that reduction of the Fed's balance sheet will begin sometime this year and that a limited number of gradual rate increases will extend over the next few years. Yellen said the long-run level for the balance sheet, now at $4.5 trillion, is unknown and that the Fed does not intend to use unwinding as a policy tool. She also said that the neutral fed funds rate is "quite low" by historical standards and that it doesn't have far to go to hit a neutral stance for policy.


On Wednesday, the Beige Book was released in preparation for the upcoming FOMC meeting on July 25 and 26. The text noted that the U.S. economy grew at a "slight to moderate" pace over the last several weeks across all 12 Fed regions with wage pressures reported for both low- and high-skilled jobs.


The Bank of Canada joins the Fed

The Bank of Canada joined the Federal Reserve in increasing its policy interest rates. As widely anticipated the Bank of Canada increased its policy interest rate by 25 basis points to 0.75 percent. The last time the BoC increased rates was way back in September 2010 when rates were increased to 1.00 percent. The Bank began lowering rates in January 2015 and lowered them again in July 2015, each time by 25 basis points to the 0.5 percent level where they remained until today's increase. The Bank Rate is correspondingly 1 percent and the deposit rate is 0.5 percent. The BoC said that future moves will be data dependent.


The BoC decision follows the Federal Reserve, which in June increased rates for the fourth time since December 2015. For the Bank of Canada, a continued tightening in the labor market helped pave the way for the decision. The jobless rate fell to 6.5 percent in June from 6.8 percent at the start of this year and 7.2 percent in January 2016. Sharp increases in property values in many areas were noted as an area of concern.


In its statement, the BoC said that recent data have bolstered the Bank's confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The Bank acknowledged recent softness in inflation but judged this to be temporary. Recognizing the lag between monetary policy actions and future inflation, the Governing Council considered it appropriate to raise its overnight rate target at this time.


According to the Governing Council, Canada's economy has been robust thanks to household spending. As a result, a significant amount of economic slack has been absorbed. The very strong growth of the first quarter is expected to moderate over the balance of the year but remain above potential. The statement also said that growth is broadening across industries and regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding. Household spending will likely remain solid in the months ahead, supported by rising employment and wages, but its pace is expected to slow over the projection horizon.


The BoC also published its latest quarterly Monetary Policy Report. The report shows the Canadian economy to be performing better than expected since its April report. The BoC sees the output gap closing in the first half of 2018. While demand growth is led by robust household spending, early signs that its sources are becoming more balanced include recent pickups in exports and business investment. Growth is also broadening across regions and sectors, with more than two-thirds of industries expanding.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 July 7 July 14 Week 2017
Australia All Ordinaries 5719.1 5743.9 5808.7 1.1% 1.6%
Japan Nikkei 225 19114.4 19929.1 20118.9 1.0% 5.3%
Topix 1518.61 1607.06 1625.5 1.1% 7.0%
Hong Kong Hang Seng 22000.6 25340.9 26389.2 4.1% 19.9%
S. Korea Kospi 2026.5 2379.9 2414.6 1.5% 19.2%
Singapore STI 2880.8 3229.0 3287.4 1.8% 14.1%
China Shanghai Composite 3103.6 3218.0 3222.4 0.1% 3.8%
India Sensex 30 26626.5 31360.63 32020.8 2.1% 20.3%
Indonesia Jakarta Composite 5296.7 5814.8 5831.8 0.3% 10.1%
Malaysia KLCI 1641.7 1759.9 1755.0 -0.3% 6.9%
Philippines PSEi 6840.6 7889.3 7885.9 0.0% 15.3%
Taiwan Taiex 9253.5 10297.3 10443.9 1.4% 12.9%
Thailand SET 1542.9 1569.4 1577.8 0.5% 2.3%
UK FTSE 100 7142.8 7350.9 7378.4 0.4% 3.3%
France CAC 4862.3 5145.2 5235.3 1.8% 7.7%
Germany XETRA DAX 11481.1 12388.7 12631.7 2.0% 10.0%
Italy FTSE MIB 19234.6 21015.1 21492.3 2.3% 11.7%
Spain IBEX 35 9352.1 10488.8 10655.1 1.6% 13.9%
Sweden OMX Stockholm 30 1517.2 1617.0 1646.8 1.8% 8.5%
Switzerland SMI 8219.9 8883.3 9034.6 1.7% 9.9%
North America
United States Dow 19762.6 21414.34 21637.7 1.0% 9.5%
NASDAQ 5383.1 6153.1 6312.5 2.6% 17.3%
S&P 500 2238.8 2425.2 2459.3 1.4% 9.8%
Canada S&P/TSX Comp. 15287.6 15027.2 15174.8 1.0% -0.7%
Mexico Bolsa 45642.9 50059.0 51162.2 2.2% 12.1%


Europe and the UK

Thanks mainly to Wednesday's rally, equities here advanced on the week. Despite retreating three of five days, the FTSE was up 0.4 percent. The CAC, DAX and SMI declined two of five days and were up 1.8 percent, 2.0 percent and 1.7 percent respectively. Markets jumped mid-week after Federal Reserve Chair Janet Yellen's comments about gradual policy tightening. Her comments soothed fears that the Fed would move too fast. Investors stayed focused on her testimony on both Wednesday and Thursday. With the absence of any top tier European economic news, markets waited for further indications on the Fed's policy as Janet Yellen testified before Congress.


On the Brexit front, according to EU Chief Brexit Negotiator Michel Barnier, the UK will have to settle the financial payment it owes to the European Union and must make clear its position on the same as well as on border issues and other matters regarding separation. Barnier said at a press conference that the EU needs to know on which points the EU and the UK agree and on which points they disagree, so that negotiations will be in earnest.


Most economic data were positive with May Eurozone and Italy's industrial production advancing and the merchandise trade surplus widening. Germany's merchandise trade surplus also widened. In the UK, the jobless rate for the three months to May was down 0.1 percent to 4.5 percent while employment climbed 175,000, the strongest gain since the fourth quarter of 2015.


Asia Pacific

Fed Chair Yellen dominated the news in Asia as well with economic data playing a minor role. Investors shifted their focus to earnings — but only after the Fed Chair's two days of testimony. For the week, most indexes advanced with only stocks in Malaysia and the Philippines declining on the week. Gains ranged from 0.1 percent (Shanghai Composite) to 4.1 percent (Hang Seng).


After rallying on Ms Yellen's first day of testimony, the reaction to the second day was mixed as investors digested the Fed Chair's measured comments and looked ahead to earnings beginning with Friday's major U.S. bank earnings reports.


Fitch Ratings maintained the China's sovereign ratings at 'A+' with a 'stable' outlook, but warned a further increase in the economy's overall leverage and tighter monetary conditions could constrain growth prospects over the medium term. On the week, the Shanghai Composite edged up 0.1 percent while the Hang Seng rallied 4.1 percent. Economic data on the week indicated that inflation — both consumer and producer — was stagnant at 1.5 percent and 5.5 percent respectively. But the merchandise trade surplus climbed in June with both imports and exports growing at robust rates and lifting investor sentiment. China's data were mostly positive. June merchandise trade data improved while consumer and producer prices were steady.


The Nikkei added 1.0 percent and the Topix was up 1.1 percent. Equities usually fluctuate with the yen but this time shares climbed even though the yen did too. Economic data for Japan disappointed with machine orders and the tertiary industry index for May declining. Producer prices for June however were higher.



The pound sterling rallied to a near 10-month high Friday as investors were cheered by the British government's constructive tone over its Brexit divorce bill prior to a new round of talks with the EU next week. The currency climbed to its highest level since last September. The gains came after the British government acknowledged that it has financial obligations to the EU after its exit, a move that is likely to avert a full-scale clash over the divorce bill in talks next week. The acknowledgement was immediately seen by Brussels as a potentially important development. With Britain's exit set for March 2019, negotiators on both sides feared a protracted stand-off over money would waste valuable time and delay the point at which the EU decides "sufficient progress" has been made to start trade talks.


The Canadian dollar soared Wednesday after the Bank of Canada raised interest rates for the first time in seven years and issued comments that suggested further tightening to come. While investors have been bracing for the BoC's 25 basis point increase, the comments in its accompanying statement — which played down the recent drop-off in inflation and emphasized the strength of the economy's recovery — were more hawkish than the market was forecasting.


The U.S. dollar retreated against its major counterparts with the exception of the Swiss franc which was unchanged on the week. The U.S. currency declined against the euro, yen, pound sterling and the Canadian and Australian dollars. The U.S. currency fell to its lowest point in almost 10 month after Friday's soft economic data on inflation and retail sales. The data dimmed expectations for a third fed funds rate increase in 2017. The weak data have investors questioning whether the FOMC have been correct in their assessment of other soft economic data in 2017 as "transitory" and therefore justifying their decision to forge ahead on further interest rate increases in 2017.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 July 7 July 14 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.760 0.783 2.9% 8.5%
New Zealand NZ$ 0.6948 0.728 0.735 0.9% 5.7%
Canada C$ 0.7443 0.776 0.791 1.8% 6.2%
Eurozone euro (€) 1.0534 1.140 1.147 0.5% 8.8%
UK pound sterling (£) 1.2333 1.289 1.310 1.6% 6.2%
Currency per U.S. $
China yuan 6.9450 6.806 6.775 0.4% 2.5%
Hong Kong HK$* 7.7533 7.812 7.806 0.1% -0.7%
India rupee 67.9238 64.595 64.448 0.2% 5.4%
Japan yen 116.8100 113.920 112.560 1.2% 3.8%
Malaysia ringgit 4.4862 4.301 4.292 0.2% 4.5%
Singapore Singapore $ 1.4465 1.382 1.372 0.8% 5.5%
South Korea won 1205.8300 1154.320 1133.360 1.8% 6.4%
Taiwan Taiwan $ 32.3260 30.585 30.409 0.6% 6.3%
Thailand baht 35.8100 34.110 33.754 1.1% 6.1%
Switzerland Swiss franc 1.0174 0.9638 0.9637 0.0% 5.6%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard

United Kingdom

June claimant count unemployment rose 6,000 following a slightly larger revised 7,500 increase in May. The jobless rate was unchanged at just 2.3 percent. The ILO statistics were more upbeat with unemployment in the three months to May declining 64,000 as employment advanced 175,000, the strongest gain since the fourth quarter of 2015. The 3-month jobless rate was 4.5 percent with the single month rate for May at 4.4 percent. Vacancies were up 5,000 in the second quarter to 774,000, just 14,000 short of the record high set in February to April. However, the relative buoyancy of the ILO figures was not reflected in earnings data. Average annual earnings growth in the March to May period was just 1.8 percent, down 0.3 percentage points from last time and the weakest print since August to October 2014. With inflation running at 2.9 percent, this meant real wages fell 0.7 percent over the period, the sharpest decline since the three months ended August 2014. Excluding bonuses, the picture was a little better with nominal earnings gaining 0.2 percentage points to 2.0 percent. However, after adjusting for inflation, they were down 0.5 percent from a year ago, their third consecutive decline.




May private sector machine orders excluding volatile items dropped 3.6 percent on the month after sinking 3.1 percent in April for a second consecutive decline. Analysts were far off with their expectations of an increase of 2.2 percent. From a year ago, the unadjusted increase was 0.6 percent or a seasonally adjusted increase of 2.0 percent. Manufacturing orders were up a monthly 1.0 percent and an unadjusted 6.3 percent on the year. Nonmanufacturing orders excluding volatile items were down 5.1 percent after declining a monthly 5.0 percent last time. On the year, these unadjusted orders sank 4.0 percent after sliding 2.1 percent in April. Orders from overseas dropped a monthly 5.2 percent but were up an impressive 25.3 percent on the year. Machine orders are looked upon as a proxy for capital spending. These data combined with April's paint a weak picture for the second quarter.


June producer price index was unchanged on the month for a second month and was up an annual 2.1 percent for the third month. The annual change has been positive since January 2017. Among the PPI's components, the annual increase was dominated by petroleum & related products which were up 11.1 percent after increasing 17.7 percent in May. Iron & Steel were up 10.8 percent after 10.9 percent the month before. Non-ferrous metals were up 11.4 percent after increasing 9.7 percent in May. Numerous products saw annual price declines including electrical machinery & equipment and information & communications equipment.



June consumer price index was up 1.5 percent when compared with the same month a year ago. This was the second consecutive month that the CPI was 1.5 percent higher than the year before. On the month, the CPI was down 0.2 percent after slipping 0.1 percent in May. For the six months in 2017 the CPI was 1.4 percent higher than the same months a year ago. The urban CPI was up 1.7 percent on the year for a second month while the rural CPI slipped 0.1 percent point to 1.0 percent. Among the CPI categories, food prices declined 1.2 percent after dropping 1.6 percent on the year in April. Non-food prices however, were up 2.2 percent on the year after increasing 2.3 percent in May. Food, tobacco & alcohol prices declined for the fifth consecutive month, this time down only 0.2 percent on the year. Clothing prices were up 1.4 percent. Household articles & services prices edged up while recreation & education prices inched downward. Transportation & communication barely increased (up 0.1 percent).


June producer price index was up 5.5 percent on the year for a second month. In June, the PPI declined a monthly 0.2 percent. For the six months through June, the PPI was up 6.6 percent on the year compared with a drop of 3.9 percent in 2016. June marked the 10th consecutive month that the PPI rate has been positive since it exited negative territory in September 2016. Production materials were up 7.3 percent on the year for a second month. Consumer prices slipped to an increase of 0.5 percent from 0.6 percent in May.


June merchandise trade surplus in US dollar terms was $42.77 billion, about as expected. Exports were up a greater than expected 11.3 percent when compared to a year ago while imports were up 17.2 percent on the year. Expectations were for exports to increase 8.9 percent and imports to rise 13.0 percent. On a seasonally adjusted basis, exports increased a monthly 3.7 percent after slipping 0.3 percent in May. Imports were down 1.3 percent after declining 3.3 percent in May. On the year, seasonally adjusted exports were 7.6 percent higher after a 9.4 percent increase in May. Imports were up an annual 11.8 percent after 15.1 percent the month before. In yuan terms, the trade surplus was CNY294.3 billion, up from May's CNY281.55 billion. Exports in yuan terms were up 17.3 percent on the year while imports were 23.1 percent higher.


Bottom line

Most equity indexes advanced after Fed Chair Janet Yellen's dovish testimony in Congress. It was a relatively light week for economic data and it was mixed. A positive was the continued strength in the UK labour market. However, data from Japan disappointed while data from China  were mixed with consumer and producer prices stagnant but at the same time strong growth in merchandise trade.


The European Central Bank meets Thursday with no change in policy expected. Investors will be looking for signs that the ECB will follow the Fed and begin to curtail its stimulus. No change is expected from the Bank of Japan either. China reports second quarter growth along with June industrial production and retail sales. Investors continue their search for stronger Chinese growth. In Canada, traders will be looking for strength from the consumer in May retail sales data.


Looking Ahead: July 17 through July 21, 2017

Central Bank activities
July 20 Eurozone European Central Bank Monetary Policy Announcement
Japan Bank of Japan Monetary Policy Announcement
The following indicators will be released this week...
July 18 Eurozone Harmonized Index of Consumer Prices (June)
Germany ZEW Survey (July)
UK Consumer Price Index (June)
Producer Price Index (June)
July 20 UK Retail Sales (June)
July 17 China Gross Domestic Product (Q2, 2017)
Industrial Production (June)
Retail Sales (June)
July 20 Japan Merchandise Trade Balance (June)
July 19 Canada Manufacturing Sales (May)
July 22 Canada Consumer Price Index (June)
Retail Sales (May)


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


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