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What Mario Draghi did not say
International Perspective - July 21, 2017
By Anne D. Picker, Chief Economist


Global Markets

Three things dominated global investors this past week — an onslaught of earnings reports from key companies in addition to the Bank of Japan and European Central Bank policy announcements. Both central banks kept their respective policies unchanged. But traders were waiting for ECB President Mario Draghi's press conference comments especially given the rising value of the euro. However, he did not attempt to talk the currency down which sent it soaring even higher.


European Central Bank

Expectations that the ECB would make no changes to key interest rates or its asset purchase program were proved correct. The benchmark refi rate was held at zero percent and the rates on the deposit and marginal lending facilities were left at minus 0.40 percent and 0.25 percent respectively. Monthly asset purchases remain at €60 billion and forward guidance was also the same as in the June statement.


With speculation increasingly directed at when some form of QE tapering might begin, the main market focus was always going to be central bank President Mario Draghi's post-meeting press conference. To this end, Draghi offered few clues about what to expect at the next meeting in September when the release of new official economic forecasts will provide the opportunity to recalibrate the policy stance. The ECB is clearly determined to prevent financial markets from getting ahead of themselves. However the lack of anything really new regarding the policy outlook seems to have failed to dampen the market's enthusiasm to buy the euro.


More generally, Draghi's economic commentary was almost identical to the one he presented in June. While sounding quite upbeat about the Eurozone recovery, he was still cautious about prospects for underlying inflation with wages still so subdued. The bottom line is that if there are any changes made to policy in September, they will be only small, probably just reducing the level of monthly asset purchases while extending the duration of the QE program.


Draghi faced a delicate balancing act between removing some of its stimulus on signs of stronger growth and avoiding spooking financial markets that have grown used to support. Further complicating the task is that while the region's recovery is increasingly strong, inflation remains weak.


Bank of Japan

As widely expected, the Bank of Japan kept monetary policy steady but once again pushed back the timing for achieving its 2 percent inflation target, reinforcing views that it will lag well behind other major central banks in scaling back its massive stimulus program. The BoJ left its policy interest rate at negative 0.1 percent. The BoJ said that underlying weakness in both medium and long term inflation expectations lack momentum. But the monetary policy board (MPB) does not expect this to last forever.


With the targeted inflation rate expected to take longer to arrive, the MPB kept its target for 10-year Japanese government bond yields at around zero and its short-term deposit rate at minus 0.1 percent as expected. The BoJ also reiterated its promise to buy government bonds at an annual rate of ¥80 trillion which investors saw as a gauge of its commitment to easing, even though the pace of purchases has already slowed to below that level. The Bank pushed back the date when it expects 2 percent inflation for the sixth time. The central bank now sees the target being reached by March 2020, five years after Mr. Kuroda's initial timing.


Mr. Kuroda, whose term ends next year, said the frequent inflation revisions were regrettable but wouldn't affect the BoJ's credibility. "Central banks in the U.S. and Europe have also pushed back the timing to achieve their inflation targets a few times. There are some factors that are just too difficult for a central bank to control or predict, such as falls in oil prices," the governor told his post-meeting news conference. However, many economists said they think even the BoJ's latest forecasts are unrealistic.


In its quarterly "Outlook for Economic Activity and Prices" report released on Thursday, the BoJ sees consumer price growth for fiscal 2017, ending March 2018, hitting 1.1 percent — down from its previous forecast of 1.4 percent. Price growth for fiscal 2018 was also lowered to 1.5 percent from 1.7 percent and for fiscal 2019 to 1.8 percent from the previous 1.9 percent.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 July 14 July 21 Week 2017
Australia All Ordinaries 5719.1 5808.7 5771.2 -0.6% 0.9%
Japan Nikkei 225 19114.4 20118.9 20099.8 -0.1% 5.2%
Topix 1518.61 1625.48 1630.0 0.3% 7.3%
Hong Kong Hang Seng 22000.6 26389.2 26706.1 1.2% 21.4%
S. Korea Kospi 2026.5 2414.6 2450.1 1.5% 20.9%
Singapore STI 2880.8 3287.4 3314.1 0.8% 15.0%
China Shanghai Composite 3103.6 3222.4 3238.0 0.5% 4.3%
India Sensex 30 26626.5 32020.75 32028.9 0.0% 20.3%
Indonesia Jakarta Composite 5296.7 5831.8 5765.4 -1.1% 8.8%
Malaysia KLCI 1641.7 1755.0 1759.2 0.2% 7.2%
Philippines PSEi 6840.6 7885.9 7989.7 1.3% 16.8%
Taiwan Taiex 9253.5 10443.9 10436.7 -0.1% 12.8%
Thailand SET 1542.9 1577.8 1573.5 -0.3% 2.0%
UK FTSE 100 7142.8 7378.4 7452.9 1.0% 4.3%
France CAC 4862.3 5235.3 5117.7 -2.2% 5.3%
Germany XETRA DAX 11481.1 12631.7 12240.1 -3.1% 6.6%
Italy FTSE MIB 19234.6 21492.3 21202.2 -1.3% 10.2%
Spain IBEX 35 9352.1 10655.1 10426.6 -2.1% 11.5%
Sweden OMX Stockholm 30 1517.2 1646.8 1581.4 -4.0% 4.2%
Switzerland SMI 8219.9 9034.6 8938.7 -1.1% 8.7%
North America
United States Dow 19762.6 21637.74 21580.1 -0.3% 9.2%
NASDAQ 5383.1 6312.5 6387.8 1.2% 18.7%
S&P 500 2238.8 2459.3 2472.5 0.5% 10.4%
Canada S&P/TSX Comp. 15287.6 15174.8 15183.1 0.1% -0.7%
Mexico Bolsa 45642.9 51162.2 51564.620 0.7% 0.0%


Europe and the UK

Only the FTSE managed to post a gain last week thanks to a weaker pound sterling. However in Europe, the stronger euro combined with a disappointing start to second quarter earnings put downward pressure on the indexes there. On the week, the FTSE added 1.0 percent while the CAC, DAX and SMI lost 2.2 percent, 3.1 percent and 1.1 percent respectively. The euro's climb can be attributed in part to expectations that the European Central Bank would begin withdrawing stimulus. President Mario Draghi attempted to calm investors by saying the ECB had not discussed withdrawing stimulus and planned to be "in the market for a long time."


Analysts were already skeptical about the Bank of England's hawkish pivot in recent weeks and inflation data this week underlined the view that interest rates will remain on hold for the foreseeable future. Consumer prices were up an annual 2.7 percent in June after increasing 2.9 percent in May. Ongoing concern about Brexit also weighed on the pound sterling as negotiations continued in Brussels.


The euro climbed to a fresh two-year high Friday morning after ECB president Mario Draghi declined to push back against its recent rally in his post governing council meeting Thursday. A stronger currency makes exports less competitive as they become relatively more expensive for overseas purchasers while a weaker home currency often flatters overseas earnings as the UK has demonstrated over the past year. Continental European stocks tend to be less driven by foreign exchange movements than the FTSE because their constituents are less reliant on exports. However, Germany's DAX and Spain's IBEX generate the highest proportion of overseas revenues of the major national indexes in the Eurozone and both tumbled on Friday.


Interestingly, the more favorable economic data came from the UK last week. June consumer and producer prices advanced and retail sales surprised with a larger than anticipated gain. However, euro area consumer confidence slipped as did the July reading of Germany's ZEW survey.


Asia Pacific

Most Asia-Pacific equity indexes advanced last week although they ended the week on a negative note after the European Central Bank did not drop any clues that it would begin tapering in September. Among the indexes that declined, the All Ordinaries retreated 0.6 percent while the Nikkei slipped 0.1 percent. The Kospi advanced 1.5 percent and the Hang Seng was 1.2 percent higher on the week. The main event was the Bank of Japan's monetary policy meeting. The main economic data were released by China and Australia.


The Nikkei continued to be hit by exporters thanks to yen strength and on lingering concerns over the U.S. administration's economic agenda. Japan's June merchandise trade rebound from May's deficit to a surplus. As expected, the Bank of Japan kept monetary policy unchanged and pushed back again the timing for achieving its 2 percent inflation target, reinforcing expectations it will lag well behind major global central banks in contemplating changes in its massive stimulus program.


Australian shares retreated after recent sharp gains. The labour force survey pleasantly surprised indicating a strong full time employment increase along with a rising participation rate.


China's Shanghai Composite was up 0.5 percent while the Hang Seng added 1.2 percent. Second quarter growth was 6.9 percent compared with the same quarter a year ago. Both June data for industrial production and retail sales beat estimates and improved from May with output up 7.6 percent on the year and retail sales up 11.0 percent.



The U.S. dollar retreated broadly last week. It lost ground against its major counterparts including the euro, yen, Swiss franc and the Canadian and Australian dollars. It gained however, against the pound sterling. The euro's surge to an almost two-year high dominated Friday's action in financial markets. Worries that the rising euro will impact growth pushed Europe's major stock indexes lower. But the euro was riding high as concerns over probes into U.S. President Donald Trump's affairs weakened the dollar and investors focused on signs that the European Central Bank is still moving toward tighter policy, even if cautiously.


The dollar fell to its lowest in nearly two years against the euro Thursday after European Central Bank's Mario Draghi said the governing council would discuss possible changes to its bond buying program in the autumn. Though Draghi said no date had been set for discussing any changes to the program and that ECB council had been unanimous in their decision not to change their guidance on monetary policy, investors suspected discussions in the autumn would lead to monetary tightening next year.


Earlier in June, ECB Mario Draghi shocked markets with his upbeat speech in Sintra, sparking growing speculation that the ECB would soon begin discussing stimulus withdrawal. Draghi surprised the markets with a hawkish commentary at the Sintra Forum but Thursday's meeting unwound some of this sentiment with a more dovish tone. While Draghi had raised the prospect of potentially removing some extraordinary policy measures in the not too distant future, Thursday's meeting seemed to have again focused on the subdued inflation pressures in the Eurozone and the need for ongoing policy support.  


Selected currencies — weekly results

2016 2017 % Change
Dec 30 July 14 July 21 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.783 0.792 1.2% 9.7%
New Zealand NZ$ 0.6948 0.735 0.746 1.5% 7.3%
Canada C$ 0.7443 0.791 0.798 0.9% 7.1%
Eurozone euro (€) 1.0534 1.147 1.167 1.8% 10.8%
UK pound sterling (£) 1.2333 1.310 1.300 -0.8% 5.4%
Currency per U.S. $
China yuan 6.9450 6.775 6.767 0.1% 2.6%
Hong Kong HK$* 7.7533 7.806 7.810 0.0% -0.7%
India rupee 67.9238 64.448 64.319 0.2% 5.6%
Japan yen 116.8100 112.560 111.060 1.4% 5.2%
Malaysia ringgit 4.4862 4.292 4.284 0.2% 4.7%
Singapore Singapore $ 1.4465 1.372 1.362 0.7% 6.2%
South Korea won 1205.8300 1133.360 1118.360 1.3% 7.8%
Taiwan Taiwan $ 32.3260 30.409 30.422 0.0% 6.3%
Thailand baht 35.8100 33.754 33.453 0.9% 7.0%
Switzerland Swiss franc 1.0174 0.9637 0.9452 2.0% 7.6%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard

United Kingdom

June consumer price index was unchanged on the month and weak enough to reduce annual inflation from 2.9 percent to 2.6 percent. The main downward impact on the change in annual inflation came from motor fuels where prices were down 1.1 percent on the month compared with a 2.2 percent jump a year ago. Recreational & cultural goods (down 0.1 percent after 0.6 percent) also had a significant impact. Furniture & household goods were up 0.5 percent after declining 0.3 percent. The core CPI matched the flat monthly headline performance to see annual underlying inflation shed 0.2 percentage points to 2.4 percent, its first drop since March. The CPIH, the measure preferred by the ONS, was similarly unchanged from May for a 2.6 percent yearly rate.


June retail sales volumes were up 0.6 percent on the month (excluding auto fuel 0.9 percent) after a marginally smaller revised 1.1 percent drop in May. Compared with a year ago, purchases grew 2.9 percent (excluding auto fuel 3.0 percent), a sharp improvement on May's 0.9 percent (0.6 percent). Excluding auto fuel, non-food volumes expanded 1.8 percent after dropping 2.2 percent in mid-quarter. Non-specialized stores (2.7 percent after minus 0.6 percent) were particularly robust as was non-store retailing (2.8 percent after minus 1.0 percent), but household goods (3.3 percent after minus 5.8 percent) and the other stores category (1.5 percent after minus 2.9 percent) staged only partial rebounds.




The merchandise trade balance rebounded from a deficit of ¥203.4 billion in May to a surplus of ¥439.9 billion in June. Exports increased 9.7 percent on the year, down from 14.9 percent in May while imports were up 15.5 percent on the year, down from 17.8 percent in May. Exports to China were up 19.5 percent on the year, down from 23.8 percent in May, with stronger growth in exports to Taiwan and Korea offset by somewhat slower (but still solid) growth in exports to Hong Kong and ASEAN countries. Growth in exports to the United States slowed from 11.6 percent in May to 7.1 percent in June. Exports to the European Union decelerated from 19.8 percent to 9.6 percent.



June employment increased 14,100, down from a revised increase of 38,000 in May. The unemployment rate was steady at 5.6 percent while the participation rate rose slightly from 64.9 percent in May to 65.0 percent. The increase in headline employment was driven by a strong increase in full-time jobs, outweighing a large decline in part-time jobs. Full-time employment increased by 62,000 while part-time employment dropped 48,000. This shift in favor of full-time employment resulted in the total number of hours worked increasing 0.5 percent on the month. Over the last 12 months, seasonally-adjusted full-time employment has increased by 175,400 persons, while part-time employment has increased by 64,800 persons.



In the three months to June gross domestic product was up 6.9 percent, unchanged from the previous quarter. GDP grew 1.7 percent on the quarter, up from the 1.3 percent increase recorded in the three months to March. GDP data has gained between 6.7 percent and 7.0 percent since the start of 2015. At the annual meetings of the National People's Congress, held earlier this year, Chinese Premier Li Keqiang announced that the government would target growth of "around 6.5 percent or higher if possible" in 2017. Officials report that consumption has been the main driver of GDP growth in the first half of 2017 and predict that recent economic reforms will support growth in the second half of the year. Earlier officials announced changes to the methodology used to calculate contributions to GDP growth from some parts of the economy, but advised that these changes have not yet been "formally" incorporated into the data.




April manufacturing sales were up for the third consecutive month, this time by 1.1 percent. From a year ago, sales were up 8.7 percent. The monthly gain was mainly attributable to higher sales in the transportation equipment and chemical manufacturing industries. Sales were higher in 16 of 21 industries representing 71 percent of the manufacturing sector. Durable goods rose 2.2 percent, while sales of non-durable goods declined 0.3 percent. In constant dollars, sales were up 1.1 percent, indicating that higher volumes of manufactured goods were sold in May. Transportation equipment was up 4.2 percent for the third gain in four months. The growth was the result of increases in the motor vehicle and the motor vehicle parts industries, mainly reflecting higher volumes. After removing the effect of price changes, sales in volume terms rose 8.1 percent and 5.0 percent respectively in these industries in May. Chemical manufacturing sales increased 2.4 percent following three months of declines. These increases were partially offset by a 3.4 percent decline in the petroleum and coal product industry, mostly reflecting lower prices. After removing the effect of price changes, sales volumes of petroleum and coal products rose 0.7 percent in May. Unfilled orders fell 1.5 percent following three months of gains. New orders declined 3.6 percent following five months of gains.


May retail sales were up a greater than expected 0.6 percent on the month and were up 7.3 percent from the same month a year ago. Sales were up in 5 of 11 subsectors, representing 56 percent of total retail trade. Higher sales at motor vehicle & parts dealers were the main contributor to the gain. Excluding this subsector, retail sales were down 0.1 percent in May. After removing the effects of price changes, retail sales in volume terms rose 1.1 percent. Following a decline in April, sales at motor vehicle & parts increased 2.4 percent in May. Higher sales at new car dealers accounted for most of the gain. Used car dealers and automotive parts, accessories & tire stores also posted higher sales. Sales at other motor vehicle dealers however were down for the fourth time in five months. Besides autos, food & beverage stores were up 0.9 percent. Electronics & appliance stores continued their upward trend, rising for a fifth consecutive month. However, general merchandise stores sales were down for the first time in five months. Gasoline station sales were affected by lower gasoline prices in May posting their first sales decline in three months, despite a higher volume of gasoline sold. Retail sales were up in eight provinces in May.


June consumer price index was up 1.0 percent when compared with a year ago following a 1.3 percent gain in May. Excluding food and energy, the CPI was up 1.4 percent on the year, matching the gain in May. Energy prices declined in June after increasing in May. At the same time, prices for food rose following a small decline in May. Prices were up in seven of the eight major components in the 12 months to June, with the shelter index and the recreation, education & reading index contributing the most to the annual increase. The clothing & footwear index declined on the year. On a seasonally adjusted monthly basis, the CPI was unchanged in June after declining 0.2 percent in May.


Bottom line

Both the Bank of Japan and the European Central Bank maintained their respective monetary policies. However, the foreign exchange markets continued to push up the euro at the expense of the U.S. dollar. China's economic growth in the second quarter was better than anticipated. And UK data surprised on the stronger side.


The Federal Reserve's FOMC meeting is midweek. No change in policy is anticipated. However, investors will be looking for guidance regarding the next fed funds interest rate increase and when the Fed will begin the long awaited reduction in its balance sheet. Investors will get a first look at second quarter growth from the UK, France and the U.S. They will also get a look at July data with the flash PMIs in Japan, the Eurozone, Germany and France.


Looking Ahead: July 24 through July 28, 2017

Central Bank activities
July 26 United States FOMC Monetary Policy Announcement
The following indicators will be released this week...
July 24 Eurozone Manufacturing, Services & Composite PMI (July flash)
Germany Manufacturing, Services & Composite PMI (July flash)
France Manufacturing, Services & Composite PMI (July flash)
July 25 Germany Ifo Business Survey (July)
July 26 UK Gross Domestic Product (Q2.2017 first estimate)
July 27 Eurozone M3 Money Supply (June)
July 28 Eurozone EC Consumer & Business Confidence (July)
France Gross Domestic Product (Q2.2017 flash)
Consumption of Manufactured Goods (June)
July 24 Japan Manufacturing PMI (July flash)
July 26 Australia Consumer Price Index (Q2.2017)
July 28 Japan Household Spending (June)
Unemployment (June)
Consumer Price Index (June)
Retail Sales (June)
July 28 Canada Monthly Gross Domestic Product (May)


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


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