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Two down and three to go
International Perspective - October 27, 2017
By Anne D. Picker, Chief Economist


Global Markets

Two major central banks— Bank of Canada and European Central Bank — announced monetary policy this week. They are to be followed next week by the Federal Reserve and the Banks of Japan and England. Almost more important than the Fed's expected announcement of no policy change is the anticipated announcement of the next Fed chair. Political news that has been dominating the financial markets receded somewhat early in the week as economic data and earnings releases increased. However the focus on the Federal Reserve chair appointment for a new term beginning in February 2018 escalated. Many investors put investment activities on hold as they waited for developments.


European Central Bank

As expected, there were no changes to key interest rates at the European Central Bank's policy meeting. The benchmark refi rate stayed at zero percent and the rates on the deposit and marginal lending facilities at minus 0.40 percent and 0.25 percent respectively. Future repo auctions will continue to be fixed rate and full allotment.


However, the focus was on what the ECB would say about its quantitative easing program and here the announcement was a little more accommodative than generally expected. After maintaining the rest of 2018 at €60 billion per month, there will be a reduction in average net monthly asset purchases of €30 billion to €30 billion per month beginning in January 2018. This follows the €20 billion reduction to €60 billion per month made back in April and implies extra easing of €270 billion next year. In addition, and in contrast to most expectations, the revised program did not introduce a definitive termination date — purchases will continue to run at least through September 2018 and beyond if the ECB thinks necessary. The same also applies to the reinvestment of principal payments from maturing securities purchased under the asset purchase program (APP).


Significantly forward guidance was not changed, so the ECB still sees key interest rates remaining at their present levels for an extended period of time and well past the horizon of the net asset purchases. The ECB also retained its commitment to increase the APP in terms of size and/or duration should the economic outlook become less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation. All in all, Thursday's moves underscore the ECB's belief that the economic recovery while now much more convincing, still needs the help of a very accommodative monetary policy in order to meet its price stability goals.


Bank of Canada

After increasing its policy interest rate at its two previous meetings in July and September, the BoC decided to leave its policy interest rate at 1.0 percent as widely expected. Further, it said that any change in policy would be data dependent.


The third quarter appears to be weaker, with growth stalling in July from the previous month. Meanwhile, retail sales declined unexpectedly in August. Gross domestic product expanded at an annualized rate of 3.7 percent and 4.5 percent in the first and second quarters of this year, respectively.


The BoC's Governing Council said that the current stance of monetary policy is appropriate. While less monetary policy stimulus will likely be required over time, the Governing Council said it will be cautious in making future adjustments to the policy rate. In particular, the BoC will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity and the dynamics of both wage growth and inflation.


According to the BoC, inflation picked up in recent months as anticipated in the Bank's July Monetary Policy Report (MPR). The pickup reflected stronger economic activity and higher gasoline prices. Measures of core inflation have edged up in line with a narrowing output gap and the diminishing effects of lower food prices. The BoC expects inflation will rise to 2 percent in the second half of 2018 — a little later than anticipated in July because of the recent strength in the Canadian dollar. The Bank is also mindful that global structural factors could be weighing on inflation in Canada and other advanced economies.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Oct 20 Oct 27 Week 2017
Australia All Ordinaries 5719.1 5968.6 5969.3 0.0% 4.4%
Japan Nikkei 225 19114.4 21457.6 22008.5 2.6% 15.1%
Topix 1518.61 1730.64 1771.1 2.3% 16.6%
Hong Kong Hang Seng 22000.6 28487.2 28438.9 -0.2% 29.3%
S. Korea Kospi 2026.5 2489.5 2496.6 0.3% 23.2%
Singapore STI 2880.8 3340.7 3386.4 1.4% 17.6%
China Shanghai Composite 3103.6 3378.7 3416.8 1.1% 10.1%
India Sensex 30 26626.5 32389.96 33157.2 2.4% 24.5%
Indonesia Jakarta Composite 5296.7 5929.6 5975.3 0.8% 12.8%
Malaysia KLCI 1641.7 1740.7 1746.1 0.3% 6.4%
Philippines PSEi 6840.6 8421.0 8296.0 -1.5% 21.3%
Taiwan Taiex 9253.5 10728.9 10709.1 -0.2% 15.7%
Thailand SET 1542.9 1692.6 1716.0 1.4% 11.2%
UK FTSE 100 7142.8 7523.2 7505.0 -0.2% 5.1%
France CAC 4862.3 5372.4 5494.1 2.3% 13.0%
Germany XETRA DAX 11481.1 12991.3 13217.5 1.7% 15.1%
Italy FTSE MIB 19234.6 22346.9 22665.0 1.4% 17.8%
Spain IBEX 35 9352.1 10222.7 10197.5 -0.2% 9.0%
Sweden OMX Stockholm 30 1517.2 1667.5 1665.0 -0.1% 9.7%
Switzerland SMI 8219.9 9237.1 9183.4 -0.6% 11.7%
North America
United States Dow 19762.6 23328.63 23434.2 0.5% 18.6%
NASDAQ 5383.1 6629.1 6701.3 1.1% 24.5%
S&P 500 2238.8 2575.2 2581.1 0.2% 15.3%
Canada S&P/TSX Comp. 15287.6 15857.2 15953.5 0.6% 4.4%
Mexico Bolsa 45642.9 49970.8 49209.6 -1.6% 7.8%


Europe and the UK

French shares hit their highest level in more than nine years while Germany's DAX set a fresh record high Friday as equities responded to the dovish comments from European Central Bank President Mario Draghi Thursday. On the week, the CAC jumped 2.3 percent and the DAX increased 1.7 percent. The DAX was driven by consistently strong German economic data combined with a weaker euro. The FTSE however, slipped 0.2 percent. The ECB's monetary policy decision is expected to lead to further strength for European equities, as financial conditions will remain accommodative and yields are still unlikely to rise rapidly.


Uncertainty over the future of Catalonia was overshadowed by the continued weakening of the euro. The value of the currency has been falling since the European Central Bank pledged to continue with bond purchases beyond September 2018 despite strong growth. The weakening of the euro provided a boost to shares of exporters. A number of better than expected corporate earnings reports also provided a boost to investor sentiment at the end of the trading week.


At week's end, traders were cautious due to the worsening of the Catalonian situation. The Parliament of the Catalonia region voted in favor of breaking away from Spain and founding an independent state. The Spanish Senate has subsequently approved the disqualification of the Catalan regional government. The IBEX tumbled 1.5 percent on Friday but was only 0.2 percent lower for the week. Late Friday, Spanish Prime Minister Mariano Rajoy said that he was firing Catalonia's regional government, dissolving the parliament and calling a snap election for December 21. The moves come just hours after the Spanish senate authorized Madrid to impose direct rule over Catalonia in response to the rebellious region's vote to establish an independent republic.


Asia Pacific

Most equities in this region advanced on the week thanks to a weakening yen, higher oil prices, optimism over U.S. tax reform plans, solid industrial profits data from China and encouraging results from U.S. technology companies. Traders also took the reduction in the ECB's bond-buying program in their stride. The Nikkei was up 2.6 percent and the Topix was 2.3 percent higher. The Shanghai Composite added 1.1 percent but the Hang Seng slipped 0.2 percent. The Sensex gained 2.4 percent.


Political news also played a role during the week. Japanese markets celebrated the reelection of Shinzo Abe as prime minister, giving his coalition a super majority in the lower house of the Diet (Japanese parliament). The result fueled optimism for further stimulus and perhaps a change in the country's 1947 pacifist constitution.


Prime Minister Shinzo Abe's clear victory in Sunday's general election has only added to the bullish sentiment engulfing the market. Mr. Abe's Liberal Democratic Party and its coalition partner retained a two-thirds majority following a lower-house election on Sunday. The victory for Mr. Abe puts him on course to become the longest serving Japanese prime minister. In turn, investors are relieved that his government's policy mix of loose monetary policy and corporate governance reform is likely to continue.


Investors' attention shifted back towards earnings and economic fundamentals after the week-long Communist Party Congress and China's new leadership line-up provided few major surprises. The Communist party confirmed Xi Jinping's status as its most powerful ruler since Mao Zedong by formally writing his name into the party constitution. At the close of a party congress in Beijing that formally marks the beginning of Mr Xi's second five-year term as party general secretary, more than 2,300 delegates voted to include a reference "Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era" in the document. Mr Xi is only the second Chinese Communist ruler after Mao, the party's revolutionary ruler, to be honored with an eponymous reference in the constitution while still in power, in a historic break with the "consensus" leadership model that had characterized elite party politics for the past quarter century.


The constitutional amendment elevates Mr Xi, who is also state president, to a status above that of his two predecessors, Jiang Zemin and Hu Jintao, both of whom were picked by Deng as future party and state leaders. Mr Jiang and Mr Hu each presided over the party's most powerful body, the Politburo Standing Committee, as a "first among equals" surrounded by powerful political rivals.



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. Sterling fell toward its lowest level of the month as attention turned to the upcoming Bank of England monetary policy meeting Thursday. While a 25 basis point rate increase is expected, such a move would only reverse the emergency cut of the same margin made immediately after the UK's Brexit vote. Expectations are that governor Mark Carney and the MPC will be embarking on a long, slow rate tightening path. However, the uncertainty surrounding the Brexit talks and the potential impact from the process on the UK economy are major unknowns. But the Brexit process is expected to be far too protracted and uncertain for the MPC to hold off on rates until a resolution becomes clear.


The euro fell to the lowest since late July after the European Central Bank said it would further reduce asset purchases without, however, stating an end date to the program. At the same time, the U.S. currency rallied after the U.S. House of Representatives narrowly passed a budget resolution that was seen as advancing the prospects for tax reform. The yen retreated after Prime Minister Abe won the October 22 election indicating that the vast stimulus will continue. The victory also raised the possibility that Kuroda will be reappointed to a second term as governor of the Bank of Japan.


The Australian dollar fell to 3 1/2-month low after Australia's conservative coalition government lost its one-seat parliamentary majority following a High Court ruling that Deputy Prime Minister Barnaby Joyce is ineligible to remain in parliament. The court has now ordered a by-election for Joyce's seat.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 Oct 20 Oct 27 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.782 0.767 -1.8% 6.3%
New Zealand NZ$ 0.6948 0.696 0.687 -1.3% -1.1%
Canada C$ 0.7443 0.793 0.780 -1.6% 4.7%
Eurozone euro (€) 1.0534 1.178 1.160 -1.5% 10.1%
UK pound sterling (£) 1.2333 1.319 1.313 -0.5% 6.4%
Currency per U.S. $
China yuan 6.9450 6.621 6.651 -0.5% 4.4%
Hong Kong HK$* 7.7533 7.802 7.803 0.0% -0.6%
India rupee 67.9238 65.039 65.050 0.0% 4.4%
Japan yen 116.8100 113.460 113.690 -0.2% 2.7%
Malaysia ringgit 4.4862 4.225 4.242 -0.4% 5.8%
Singapore Singapore $ 1.4465 1.361 1.365 -0.3% 6.0%
South Korea won 1205.8300 1131.360 1130.340 0.1% 6.7%
Taiwan Taiwan $ 32.3260 30.250 30.269 -0.1% 6.8%
Thailand baht 35.8100 33.195 33.242 -0.1% 7.7%
Switzerland Swiss franc 1.0174 0.9849 0.998 -1.3% 1.9%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


October flash PMI composite output index was down 0.8 point from its final September reading to 55.9. However, it remains more than comfortably above the 50 growth threshold and at a high enough level to suggest that economic activity continued to expand at a reasonably healthy clip. The headline decline was mainly attributable to a slowdown in services where the flash PMI dropped 0.9 points to 54.9. By contrast, its manufacturing counterpart added 0.5 point to 58.6, a new post-Great Recession high. Aggregate new orders growth was unchanged and backlogs recorded another sizeable increase. The rise in the latter came despite the largest advance in employment in more than a decade. Business confidence was down from September but companies were still bullish about the outlook. Inflation news was positive. The core countries were mixed with the flash composite output index in France rising 0.4 points to 57.5 but the German measure shedding almost a full point to 56.9. Outside of the big two states, the rate of expansion was solid, but eased to the weakest for a year on the back of a slower services sector.



October Ifo overall business sentiment index gained 1.3 points from a marginally stronger revised September reading to stand at 116.7, a new record high. Significantly, the headline improvement reflected renewed advances in both the current conditions and expectations components. The former advanced 1.1 points to 124.8 and so more than reversed its September decline. This measure now stands nearly 10 points above its mark a year ago. Expectations performed even better, rising 1.6 points to 109.1, their best level since December 2010 and a 3.4 point increase from October 2016. At a sector level, confidence was up in all the major categories except wholesale (17.9 after 19.4). Manufacturing (30.9 after 28.0) and construction (19.9 after 18.5) both saw decent gains but it was retail (16.1 after 7.8) which made the most impressive progress.


United Kingdom

Third quarter first estimate of third quarter gross domestic product was up 0.4 percent on the quarter and was a tick stronger than the previous period's 0.3 percent increase and also equaled the best performance since the second quarter of 2016. However, annual growth was flat at a relatively subdued 1.5 percent. The quarterly headline advance partly reflected a rebound in industrial production which climbed a solid 1.0 percent to stand 2.7 percent above its level a year ago. Within this, manufacturing output was also 1.0 percent higher than in the April to June quarter. The service sector was up a quarterly 0.4 percent. This was led by business services & the financial sector (0.6 percent). Distribution, hotels & catering grew by 0.4 transport, storage & communications 0.1 percent and government services also 0.1 percent. Elsewhere, construction fell 0.7 percent but agriculture was up 1.0 percent.




September consumer price index increased by 0.7 percent on the year unchanged from August and still well below the Bank of Japan's 2.0 percent inflation target. Seasonally adjusted headline CPI was flat on the month in September after an increase of 0.2 percent in August. The stability in the annual change reflects offsetting moves in price changes for some of the major categories of consumer spending. Fuel, light & water charges advanced 6.0 percent after increasing 5.2 percent in August, while food prices also recorded an increase of 1.0 percent, up from 0.9 percent in August. Transport & communication costs were flat on the year after falling 0.4 percent in August. These stronger price changes were partly offset by a 0.3 percent decline in prices of clothes & footwear after an increase of 0.6 percent in August. Housing costs fell by 0.2 percent for a second month. Core CPI, which excludes fresh food prices, also increased by 0.7 percent on the year, unchanged from August.



Third quarter consumer price index moderated to 1.8 percent on the year, down slightly from 1.9 percent in the three months to June. It was also below the Reserve Bank of Australia's inflation target range of 2.0 percent to 3.0 percent. On the quarter, the CPI rose 0.6 percent but up from 0.2 percent in the three months to June. The small drop in headline annual inflation reflected larger but offsetting changes in some of the main categories of consumer spending. Prices of food & non-alcoholic beverages fell 0.7 percent on the year in September, down sharply from an increase of 1.9 percent in the three months to June, largely reflecting weaker vegetable prices. Other categories, however, recorded stronger price changes on the year, including housing, up from 2.4 percent to 3.3 percent, transport, up from 2.1 percent to 2.7 percent, and communication, up from minus 3.8 percent to minus 2.9 percent. Measures of core inflation, which exclude the impact of volatile price changes, were steady last quarter. The trimmed mean CPI inflation measure advanced 0.4 percent on the quarter and was unchanged at 1.8 percent on the year while the weighted mean CPI inflation measure rose 0.3 percent on the quarter and ticked higher on the year from 1.8 percent to 1.9 percent.


Bottom line

Most equity indexes advanced thanks to positive earnings and some upbeat economic data. The Bank of Canada maintained its current interest rate while the European Central Bank said it will cut back on its bond buying program beginning in 2018. According to preliminary data, both the U.S. and UK grew at a faster rate in the third quarter.


The Federal Reserve along with the Banks of Japan and England will announce its respective monetary policy during the week. No change is anticipated from the Fed or BoJ. However, the BoE is expected to increase its policy interest rate by 25 basis points to 0.5 percent. The week is also packed full of economic data while earnings will continue apace.


Updates on employment in the U.S. and Canada along with initial estimates of third quarter GDP in the Eurozone and France will be released. And a whole slate of October manufacturing PMIs in Asia, Europe and the U.S. will be reported. The U.S. President is expected to name the Federal Reserve Chair for a term beginning February 2018.


Looking Ahead: October 30 through November 3, 2017

Central Bank activities
Oct 31, Nov 1 United States FOMC Meeting and Policy Announcement
Japan Bank of Japan Monetary Policy Meeting
Nov 2 UK Bank of England Monetary Policy Meeting
Quarterly Inflation Report Published
The following indicators will be released this week...
Oct 30 Eurozone EC Business & Consumer Confidence (October)
Germany Retail Sales (September)
Oct 31 Eurozone Gross Domestic Product (Q3.2017 flash)
Harmonized Index of Consumer Prices (October flash)
France Gross Domestic Product (Q3.2017 flash)
Consumption of Manufactured Goods (September)
Nov 1 UK Manufacturing PMI (October)
Nov 2 Eurozone Manufacturing PMI (October)
France Manufacturing PMI (October)
Germany Manufacturing PMI (October)
Nov 3 UK Services PMI (October)
Asia Pacific
Oct 30 Japan Retail Sales (September)
Oct 31 Japan Household Spending (September)
Unemployment (September)
Industrial Production (September)
China CFLP Manufacturing PMI (October)
Nov 1 Japan Manufacturing PMI (October)
China Manufacturing PMI (October)
India Manufacturing PMI (October)
Nov 2 Australia Merchandise Trade Balance (September)
Nov 3 Australia Retail Sales (September)
Oct 31 Canada Monthly Gross Domestic Product (August)
Nov 3 Canada International trade (September)
Labour Force Survey (October)


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


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