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Politics, not economics
International Perspective - October 6, 2017
By Anne D. Picker, Chief Economist


Global Markets

Most equities advanced last week with the exceptions being the Spanish IBEX and Italian MIB. The week was highlighted by political events — the defiant election in Spain's Catalonia region and the continuing pressure on the UK's prime minister. And rumbling in the background are the geopolitical issues with North Korea.


The Reserve Banks of Australia and India both announced they would maintain their current policy interest rates of 1.5 percent and 6.0 percent respectively. The European Central Bank published minutes from its September 6 and 7 governing council meeting — they indicated that the ECB is discussing the possibility of scaling back its massive stimulus, given the stronger economy. The first week of a new month also contains numerous important economic data with the U.S. employment report which is considered the most important. This time the report was hit by Hurricanes Harvey and Irma — they sent nonfarm payrolls into negative territory for the first time since September 2010.


Reserve Bank of Australia

As widely expected, the Reserve Bank of Australia has again left its main policy rate unchanged at 1.50 percent where it has been since August 2016 marking a 14th straight month without any change.


RBA Governor Philip Lowe said in the accompanying statement that global economic conditions have improved but noted medium-term risks to the Chinese growth outlook. The RBA considers recent data to have been consistent with their forecast that domestic growth will gradually pick up over the coming year and also pointed to "more consistent" signs that non-mining business investment is picking up. Recent strength in employment growth was noted, but Lowe cautioned that slow growth in real wages and high levels of household debt will likely constrain growth in household spending. The board also retained its assessment that the recent appreciation of the local currency (Australian dollar) is weighing on both growth and inflation and that further appreciation would result in a slower pick-up in economic activity and price pressures.


Reserve Bank of India

As widely anticipated, the Reserve Bank of India kept its benchmark repurchase rate on hold at 6.00 percent. The repo rate was cut by 25 basis points at the last meeting on August 2. Another policy rate, the reverse repurchase rate, was also unchanged, at 5.75 percent. These decisions were agreed to by five of the six members of the Monetary Policy Committee (MPC), with the other member favoring a reduction in policy rates of 25 basis points.


The RBI's statement notes that the new goods and services tax which was introduced in July appeared to have had an adverse impact on activity, particularly in the manufacturing sector, and has the potential to add to other factors weighing on the outlook for business investment. The MPC also noted that advance estimates for the production of some food grains have been weak. Reflecting on these factors, the RBI lowered its forecast for economic growth in the current fiscal year from 7.3 percent to 6.7 percent. Despite this downward revision, the outlook for inflation remains the RBI's main focus. Data published have shown headline CPI inflation picking up from a low of 1.54 percent in June to 2.36 percent in July and 3.36 percent in August. WPI inflation has followed a similar trajectory. These recent increases take inflation closer to the mid-point of the RBI's target range of 2.0 percent to 6.0 percent.


The RBI's scope for further rate cuts has been restricted by external events, in particular the prospect of higher policy rates in the United States. India's currency, the rupee, has weakened significantly in recent weeks as investors priced in higher U.S. rates. Any move to lower Indian rates would likely exacerbate this trend and put upward pressure on inflation. Given these concerns about the inflation outlook, a majority of the MPC concluded that another rate cut was not warranted at present and that the policy stance should remain "neutral".


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Sep 29 Oct 6 Week 2017
Australia All Ordinaries 5719.1 5744.9 5777.4 0.6% 1.0%
Japan Nikkei 225 19114.4 20356.3 20690.7 1.6% 8.2%
Topix 1518.61 1674.75 1687.2 0.7% 11.1%
Hong Kong Hang Seng 22000.6 27554.3 28458.0 3.3% 29.4%
S. Korea Kospi 2026.5 2394.5 * * *
Singapore STI 2880.8 3219.9 3291.3 2.2% 14.3%
China Shanghai Composite 3103.6 3348.9 * * *
India Sensex 30 26626.5 31283.72 31814.2 1.7% 19.5%
Indonesia Jakarta Composite 5296.7 5900.9 5905.4 0.1% 11.5%
Malaysia KLCI 1641.7 1755.6 1764.0 0.5% 7.4%
Philippines PSEi 6840.6 8171.4 8310.9 1.7% 21.5%
Taiwan Taiex 9253.5 10329.9 10532.8 2.0% 13.8%
Thailand SET 1542.9 1673.2 1696.0 1.4% 9.9%
UK FTSE 100 7142.8 7372.8 7522.9 2.0% 5.3%
France CAC 4862.3 5329.8 5359.9 0.6% 10.2%
Germany XETRA DAX 11481.1 12828.9 12955.9 1.0% 12.8%
Italy FTSE MIB 19234.6 22696.3 22392.3 -1.3% 16.4%
Spain IBEX 35 9352.1 10381.5 10185.5 -1.9% 8.9%
Sweden OMX Stockholm 30 1517.2 1637.8 1646.3 0.5% 8.5%
Switzerland SMI 8219.9 9157.5 9252.1 1.0% 12.6%
North America
United States Dow 19762.6 22405.09 22773.7 1.6% 15.2%
NASDAQ 5383.1 6496.0 6590.2 1.5% 22.4%
S&P 500 2238.8 2519.4 2549.3 1.2% 13.9%
Canada S&P/TSX Comp. 15287.6 15634.9 15728.3 0.6% 2.9%
Mexico Bolsa 45642.9 50346.1 50302.9 -0.1% 10.2%
*Markets in China and South Korea were closed for the week


Europe and the UK

Most equities advanced in Europe last week. The FTSE was up 2.0 percent, the CAC gained 0.6 percent and the DAX and SMI both added 1.0 percent. As to be expected, the political turmoil in Spain sent the IBEX down 1.9 percent on the week, but interestingly, the decline was confined to Spain.


After initial declines in the immediate aftermath of Catalonia's vote for independence from Spain on Sunday, the IBEX steadied as investors looked to see what would happen next. At week's end, the Catalan government said it would press ahead with its planned parliament meeting on Monday to discuss Sunday's referendum result and announce a unilateral declaration of independence in defiance of a court ban.


Spain was not the only country with political tumult though. In the UK, pressure is mounting on Prime Minister Theresa May after former Tory party chairman Grant Shapps admitted he is running a campaign to oust her. Sterling declined but equities were up for the week. Equities advanced after Prime Minister Theresa May said she would stay on as leader to provide stability as Britain enters a crucial stage in Brexit talks. The pound's tumble comes after U.K. Prime Minister Theresa May's "disastrous" speech at the Tory party conference on Wednesday and continued gridlock with Brussels over Brexit.


The European Central Bank published minutes of its September 6 and 7 Governing Council meeting. At that meeting, the members debated the possibility of scaling back its massive stimulus, given the stronger economy along with the trade-offs between various scenarios about the pace and duration of asset purchases. While there was broad agreement that there was still the need for substantial monetary policy support to return inflation to its target of below, but close to 2 percent, they were more confident that the price growth target would be achieved given the dissipation of deflationary risks and a stronger economy. According to the minutes "a view was put forward that conditions were increasingly falling into place that would allow the intensity of monetary policy accommodation to be adapted and would provide an opportunity to scale back the Eurosystem's net asset purchases."


Economic data were mostly positive with September PMIs indicating growth. German manufacturing orders for August jumped 3.6 percent after dropping a revised 0.4 percent in July. However, the UK manufacturing PMI slipped but remained positive indicating growth.


Asia Pacific

With markets closed for the week in China and South Korea for public holidays combined with Hong Kong's two day holiday, trading was light throughout the week. Nevertheless, equities were positive for the week with gains ranging from 0.1 percent (Jakarta Composite) to highs of 3.3 percent (Hang Seng) and 2.2 percent (STI).


In Japan, the Nikkei advanced each day and 1.6 percent for the week. Investors began the week with news that the Tankan indicated positive sentiment for both manufacturers and non-manufacturers pointing to continued economic expansion ahead. Japanese shares hit a two-year high Friday on hopes for U.S. tax reform. Japanese Prime Minister Shinzo Abe last week dissolved the parliament's lower house and called a snap election for October 22. Abe called the general election hoping to keep his conservative Liberal Democratic Party-led coalition's majority in the lower house. However, his bet now looks increasingly shaky, given growing support for a new party formed by the popular governor of Tokyo, which is drawing candidates from other opposition parties.


Even though the Hang Seng was closed Monday and Thursday, the index was up 3.3 percent on the week. The Hang Seng hit its highest point since the global financial crisis Friday, bolstered by a continued rally in Chinese corporates. From November 2007 to late 2008 the market lost about two-thirds of its value. Since bottoming out in October 2008, it has slowly climbed back. Buoyed by a strong performance by Chinese blue chip companies, the index has rallied 29.4 percent so far this year to reach the same point it was at in late 2007.


The Sensex added 1.7 percent during the week as investors waited for the outcome of a goods and services tax meeting later Friday. It was widely expected that a raft of relief measures would be pushed through for small and medium enterprises and indeed they were. Several measures were announced Friday evening that were designed to alleviate some of the problems businesses have faced in the first three months of the new tax, which has been billed as the country's biggest tax reform since independence. The changes included granting relief for exporters from part of the tax for six months, following complaints of a sudden cash crunch from companies still waiting to receive their tax credits. They also said they will reduce tax rates on a range of items, from air-conditioned restaurants to government contracts. Small and medium-sized companies will be allowed to file tax returns every quarter. Businesses have complained about having to file several different types of returns every month under the new system as it stands. The changes are an implicit acknowledgment of the problems that have plagued the first few months of the new system. Some have blamed the problems for the recent fall in economic growth to 5.7 percent a year, far below the level economists say is needed to provide jobs for the country's fast-growing population.



The U.S. dollar advanced against all of its major counterparts including the yen, euro, pound sterling, Swiss franc and the Canadian and Australian dollars. Britain's pound sterling fell to a four-week low Friday amid growing uncertainty over Prime Minister Theresa May's control of leadership and strong U.S. earnings data that boosted the currency (and the odds of a Fed funds increase in December). Prime Minister May said Friday she would stay on as leader to provide stability after a former chairman of her Conservative Party said he had the support of 30 lawmakers who wanted her to quit. May's assurances gave sterling a brief lift but it was not enough to assuage worries over divisions in the Conservative government.


The Australian dollar tumbled Friday following a report that suggested the Reserve Bank of Australia would consider a further cut to interest rates if economic conditions worsened. The RBA held its cash rate target at 1.5 percent at its October meeting on Tuesday, marking a 14th straight month without any change. However, in a report published Friday, RBA board member Ian Harper told the Wall Street Journal the bank saw an issue with slow wage growth and the associated sluggish growth in household income.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 Sep 29 Oct 6 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.784 0.777 -0.9% 7.7%
New Zealand NZ$ 0.6948 0.722 0.709 -1.9% 2.0%
Canada C$ 0.7443 0.801 0.798 -0.5% 7.2%
Eurozone euro (€) 1.0534 1.182 1.173 -0.7% 11.4%
UK pound sterling (£) 1.2333 1.341 1.307 -2.6% 5.9%
Currency per U.S. $
China yuan 6.9450 6.653 6.653 0.0% 4.4%
Hong Kong HK$* 7.7533 7.812 7.806 0.1% -0.7%
India rupee 67.9238 65.280 65.373 -0.1% 3.9%
Japan yen 116.8100 112.540 112.660 -0.1% 3.7%
Malaysia ringgit 4.4862 4.221 4.237 -0.4% 5.9%
Singapore Singapore $ 1.4465 1.356 1.364 -0.5% 6.1%
South Korea won 1205.8300 1145.440 1141.970 0.3% 5.6%
Taiwan Taiwan $ 32.3260 30.324 30.389 -0.2% 6.4%
Thailand baht 35.8100 33.307 33.411 -0.3% 7.2%
Switzerland Swiss franc 1.0174 0.9684 0.978 -1.0% 4.0%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


September manufacturing PMI was 58.1 — a 79 month high. Output grew at its fastest rate in nearly six-and-a-half years, backlogs rose again and job creation posted a new survey record. Business optimism registered its second most optimistic reading since the data were first compiled in July 2012. At the same time, input cost inflation picked up to a 5-month high while factory gate prices advanced for the 12th month running and also at the fastest pace since April. Regionally, the improvement in activity rates was broad-based. In terms of national PMIs the best performer was Germany (60.6) ahead of the Netherlands (60.0) and Austria (59.4). Italy (56.3) and France (56.1) were not far behind and Ireland (55.4) and Spain (54.3) also saw decent growth. Even Greece (52.8) recorded an 11-month peak.


Following a smaller revised 62,000 increase in July, unemployment resumed its downward trend with a 42,000 drop in August. This was not large enough to reduce the unemployment rate which remained at 9.1 percent for a third month. Germany (3.6 percent after 3.7 percent) and Italy (11.2 percent after 11.3 percent) went some way to reducing the headline rate but were thwarted by a rise in France (9.8 percent after 9.7 percent). Spain (17.1 percent) was unchanged.


August retail sales volumes excluding autos declined 0.5 percent on the month, equaling their worst performance since October 2015 and making for their first back-to-back decline since December/January. On the year, sales were up 1.2 percent after increasing 2.3 percent in July. Weakness was apparent across the board. Food, drink & tobacco declined 0.3 percent while excluding auto fuel, non-food demand was off a slightly steeper 0.4 percent. In particular, electrical goods & furniture (down 0.5 percent) struggled although there was better news from pharmaceuticals (0.9 percent). France (down 0.6 percent) and Germany (down 0.4 percent) depressed overall monthly growth but Spain (0.1 percent) was marginally firmer.



August manufacturing orders jumped 3.6 percent on the month after declining 0.4 percent in July. On the year, orders were up 7.9 percent after increasing 5.9 percent last time. August's impressive gain was led by overseas demand which climbed 4.3 percent on the month after a 0.3 percent rise in July. However, orders from the rest of the Eurozone fell 1.0 percent, compounding a 0.2 percent dip in July and leaving the rest of the world (7.7 percent after 0.6 percent) to do all the work. The domestic market (2.7 percent after minus 1.4 percent) also had a good month, despite a 1.3 percent drop in capital goods. Basics (6.6 percent) were especially robust and consumer and durable goods (5.9 percent) were not far behind.




Third quarter Tankan for large manufacturers improved to a reading of 22, up from 17 in the second quarter. The equivalent index for medium sized manufacturers climbed from 12 to 17 for medium-sized manufacturers and from 7 to 10 for small manufacturers. Aggregating manufacturers of all sizes, the index rose from 11 to 15. Business sentiment in the non-manufacturing sector was little changed from the previous quarter. For non-manufacturers, the business condition index was flat at 23 for large firms, rose from 18 to 19 for medium-sized firms, and from 7 to 8 for small firms, with the aggregate index up from 13 to 14. For all industries, large firms expect capital expenditures in the fiscal year ending in March 2018 to increase by 7.7 percent, down from their previous forecast of 8.0 percent. Large manufacturers forecast capex to increase 14.1 percent in the current fiscal year (down from the previous forecast of 15.4 percent), while large non-manufacturing firms forecast an increase of 4.0 percent (up from their previous forecast of 3.7 percent). Capex across all firms in both the manufacturing and non-manufacturing sectors is forecast to increase by 4.6 percent in the fiscal year ended March 2018, well up from the previous forecast for an increase of 2.9 percent.



August merchandise trade surplus widened to A$989 million from A$808 million in July. Exports were up a monthly 0.5 percent while imports were virtually unchanged. The increase in exports reflects stronger shipments of non-rural goods (around 60 percent of total exports) and services (around 20 percent). This was partly offset by declines in exports of rural goods (around 15 percent) and non-monetary gold (around 5 percent). On the year, total exports slowed from 17.2 percent in July to 17.1 percent in August. Imports of intermediate and other merchandise goods and services imports rose on the month but were offset by declines in imports of capital goods, consumption goods and non-monetary gold. Total imports increased 6.8 percent on the year, down from an increase of 6.9 percent in July.


August retail sales dropped 0.6 percent after slipping 0.2 percent in July. On the year, retail sales slowed from an increase of 3.5 percent to 2.1 percent. The monthly drop was largely driven by weaker sales of food, household goods and clothing & footwear. This was partly offset by stronger sales for department stores and other retailing outlets. Sales declined in all eight Australian states and territories.




August trade gap widened to C$3.4 billion from a revised C$3.0 billion in July. Exports dropped 1.0 percent on the month even though 6 of 11 categories were higher. On the year, exports edged down 0.2 percent. Imports, on the other hand, were flat on the month and up 3.0 percent from a year ago. In volume terms alone, exports dropped 1.9 percent, following declines of 1.2 percent in July and 2.2 percent in June. This is the first time since 2011 that real exports declined for three consecutive months. With real imports edging up just 0.2 percent, the real trade deficit widened to C$1.3 billion from C$0.4 billion. The surplus with the U.S. narrowed to C$2.3 billion in August from C$3.2 billion in July. The trade deficit with non-US countries declined to C$5.7 billion from C$6.2 billion.


September employment was up 10,000 while the unemployment rate remained at 6.2 percent, matching the low of October 2008. Gains in full-time employment (up 112,000) were mostly offset by declines in part time (down 102,000). In the 12 months to September, employment rose by 320,000, spurred by gains in full-time employment (up 289,000). Over this period, the number of hours worked increased by 2.4 percent. In the third quarter, overall employment grew by 43,000 slower than the growth rate in the second quarter. For the second consecutive month, Ontario was the lone province with a notable employment gain. There were employment declines in Manitoba and Prince Edward Island. Employment was higher in educational services as well as wholesale and retail trade, while it fell in information, culture & recreation. Public sector employment rose while the number of private sector employees was little changed. The number of self-employed workers held steady in September.


Bottom line

Most equity indexes advanced — the exceptions were the IBEX and MIB. The Reserve Banks of Australia and India left their policy interest rates unchanged. Most economic data in Europe, Asia and the U.S. were positive. The U.S. employment report surprised with an outright decline in employment thanks to Hurricanes Harvey and Irma. Political pressures in Spain and the UK dominated the business news.


There are no central bank meetings in the upcoming week. Rather, economic news will revolve around industrial output reports in Europe. In Asia, the important machinery orders from Japan will be released. This report is considered a proxy for capital expenditures. India posts its latest consumer price and industrial output data. And of course, investors will monitor the latest events in the UK regarding Brexit and in Spain, regarding Catalonia. They will also keep a watchful eye on the upcoming election in Japan.


Looking Ahead: October 9 through October 13, 2017

Central Bank activities
Oct 11 United States FOMC Minutes Published
The following indicators will be released this week...
Oct 9 Germany Industrial Production (August)
Oct 10 Germany Merchandise Trade (August)
France Industrial Production (August)
Italy Industrial Production (August)
UK Industrial Production (August)
Merchandise Trade (August)
Oct 12 Eurozone Industrial Production (August)
Asia Pacific
Oct 11 Japan Machinery Orders (August)
Oct 12 Japan Producer Price Index (September)
India Consumer Price Index (September)
Industrial Production (August)
Oct 13 China Merchandise Trade (September)
Oct 10 Canada Housing Starts (September)


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


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