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INTERNATIONAL PERSPECTIVE

Reading the tea leaves
International Perspective - November 3, 2017
By Anne D. Picker, Chief Economist

  

Global Markets

Financial markets had a lot of new information to absorb during this past week. Three central banks rendered their respective monetary policy decisions. And then there was a deluge of key economic data that will impact on future policy decisions. The long awaited announcement of a new Federal Reserve chair finally was made. Investors also focused on a U.S. tax-cut plan being developed by President Donald Trump and fellow Republicans.

 

On the week, most equity indexes advanced on the spate of positive economic data and policy announcements. For the record, most indexes followed here advanced in October with the notable exceptions of the Bolsa (down 3.4 percent) and the KLCI (down 0.4 percent). Monthly gains ranged from 8.1 percent (Nikkei) down to 0.4 percent (MIB).


 

Bank of Japan

The Bank of Japan left its monetary policy unchanged in line with expectations. The BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent. The BoJ's policy framework also involves adjusting the pace of their Japanese government bonds purchases in order to keep the 10-year yield close to its target level. The monetary policy board continues to believe that purchasing these bonds at an annual rate of ¥80 trillion is consistent with meeting this target. The MPB again reaffirmed its commitment to keep expanding the monetary base until the annual increase in the consumer price index (excluding fresh food) exceeds their 2 percent inflation target and stays above this level "in a stable manner".

 

The BoJ also published updated growth and inflation forecasts. Japan's economy is projected to "expand moderately." Gross domestic product is expected to grow a revised 1.9 percent on the year, up from 1.8 percent for the current fiscal year beginning April 2017. The MPB left its forecast unchanged at 1.4 percent for the fiscal year starting April 2018 and at 0.7 percent for the fiscal year beginning April 2019. The MPB now expects inflation to be weaker than previously anticipated, mainly reflecting the impact of lower mobile phone charges. The annual change in the consumer price index (excluding fresh food) is now forecast to be 0.8 percent in the current fiscal year (down from the previous forecast of 1.1 percent) and to be 1.4 percent next fiscal year (down from the previous forecast of 1.5 percent).

 

Speaking in the post-meeting press conference, BoJ Governor Haruhiko Kuroda pointed to a recent improvement in wage growth but noted that firms remain reluctant to pass on higher costs. He also made it clear that policy settings will remain very accommodative for the foreseeable future, noting that officials will only contemplate an "exit plan" once the inflation target is "in sight".


 

Changing of the guard?

Now that the Federal Reserve chair has been appointed (subject to Senate confirmation), markets are beginning to focus on the Bank of Japan. Haruhiko Kuroda's term as governor ends in April 2018 and conjecture about a second term has surfaced. Japanese Finance Minister Taro Aso hailed the achievements of BoJ Governor Haruhiko Kuroda, raising expectations that the central bank chief will be reappointed when his five-year term ends in April.

 

Kuroda embarked on an unprecedented burst of monetary stimulus since Prime Minister Shinzo Abe handpicked him a few months after he swept to power in December 2012, pledging to pull Japan out of nearly two decades of stagnation and deflation. Since then the yen has weakened as a result of monetary easing, helping to boost its exports and employment. The finance minister echoed the view of the prime minister who said that he had full confidence in Kuroda's ability as central bank governor. The comments by both Aso and Abe backed market expectations that Kuroda is likely to be reappointed even though nothing has been decided. Kuroda's reappointment would mean his signature stimulus program will stay for the time being even as the Federal Reserve and the European Central Bank head towards normalizing unconventional monetary policy.


 

Federal Reserve

The Federal Reserve kept its interest rate range unchanged at 1.00 percent to 1.25 percent as widely expected. In its statement, the FOMC said that growth was solid and the labor market continued to strengthen. It acknowledged that inflation remained soft but did not downgrade its assessment of inflation expectations. The Fed also noted that the nation's unemployment rate had declined further. The Fed has raised rates twice this year and currently forecasts one more rate increase by the end of 2017 as part of a tightening cycle that began in late 2015.

 

President Donald Trump named Jerome Powell to follow Janet Yellen as chair of the Federal Reserve. Mr Powell is already a member of the Federal Reserve Board. If approved by the Senate, his four year term will begin February 3, 2018. Stocks and bonds were largely unchanged after the nomination — the choice had been advertised well in advance of the formal announcement.


 

Bank of England

As pretty much expected, the Bank of England raised its key monetary policy interest rate for the first time in a decade by 25 basis points to 0.5 percent. At the same time, the Bank kept its asset purchase program at £435 billion. The BoE has an inflation target of 2 percent. Inflation according to the latest consumer price index report was up 3.0 percent on the year as the weaker pound sends import prices higher. Previously the MPC indicated that when the tightening cycle finally did begin, it would be only gradual and limited. This forward guidance was left intact and suggests that the next increase will not be until 2018, and perhaps well into next year.

 

The first monetary tightening in a decade was notable because it came without forecasts of strong UK economic performance. The ongoing uncertainty over the economic outlook was reflected in a split vote of the monetary policy committee. The vote was seven to two. Justification for the tightening was provided by the BoE's new Quarterly Inflation Report (QIR) which assumes a 1 percent Bank Rate in three years' time. Thus, while the latest projections show inflation above 2 percent for the entire forecast horizon, the same was also true of the August QIR. The minutes of the meeting which were published at the same time as the policy announcement underscore considerable risks to the economic projections. However, it would seem that most members see September's 3 percent annual inflation rate and the 8-month (and rising) overshoot of its target as an unacceptable threat to the Bank's credibility.


 

Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Oct 27 Nov 3 Week Oct 2017
Asia/Pacific
Australia All Ordinaries 5719.1 5969.3 6030.3 1.0% 4.0% 5.4%
Japan Nikkei 225 19114.4 22008.5 22539.1 2.4% 8.1% 17.9%
Topix 1518.61 1771.05 1794.1 1.3% 5.4% 18.1%
Hong Kong Hang Seng 22000.6 28438.9 28603.6 0.6% 2.5% 30.0%
S. Korea Kospi 2026.5 2496.6 2558.0 2.5% 5.4% 26.2%
Singapore STI 2880.8 3386.4 3382.3 -0.1% 4.8% 17.4%
China Shanghai Composite 3103.6 3416.8 3371.7 -1.3% 1.3% 8.6%
India Sensex 30 26626.5 33157.22 33685.6 1.6% 6.2% 26.5%
Indonesia Jakarta Composite 5296.7 5975.3 6039.5 1.1% 1.8% 14.0%
Malaysia KLCI 1641.7 1746.1 1740.9 -0.3% -0.4% 6.0%
Philippines PSEi 6840.6 8296.0 8376.1 1.0% 2.4% 22.4%
Taiwan Taiex 9253.5 10709.1 10800.8 0.9% 4.5% 16.7%
Thailand SET 1542.9 1716.0 1701.5 -0.8% 2.9% 10.3%
Europe
UK FTSE 100 7142.8 7505.0 7560.4 0.7% 1.6% 5.8%
France CAC 4862.3 5494.1 5518.0 0.4% 3.3% 13.5%
Germany XETRA DAX 11481.1 13217.5 13478.9 2.0% 3.1% 17.4%
Italy FTSE MIB 19234.6 22665.0 23014.1 1.5% 0.4% 19.6%
Spain IBEX 35 9352.1 10197.5 10357.8 1.6% 1.4% 10.8%
Sweden OMX Stockholm 30 1517.2 1665.0 1677.7 0.8% 2.1% 10.6%
Switzerland SMI 8219.9 9183.4 9322.1 1.5% 0.9% 13.4%
North America
United States Dow 19762.6 23434.19 23539.2 0.4% 4.3% 19.1%
NASDAQ 5383.1 6701.3 6764.4 0.9% 3.6% 25.7%
S&P 500 2238.8 2581.1 2587.8 0.3% 2.2% 15.6%
Canada S&P/TSX Comp. 15287.6 15953.5 16020.2 0.4% 2.5% 4.8%
Mexico Bolsa 45642.9 49209.6 48534.8 -1.4% -3.4% 6.3%

 

Europe and the UK

European equities advanced last week amid the many market moving events that took place. Gains ranged from 0.4 percent (CAC) to 2.0 percent (DAX). The FTSE and SMI added 0.7 percent and 1.5 percent respectively. Investors here waited for the three central bank monetary policy announcements. And market participants were particularly waiting for Thursday's appointment of a new Fed chair along with U.S. data.

 

The FTSE gained following the Bank of England's first interest rate increase in more than a decade. The BoE did signal caution as further increases will be gradual. And in Europe, flash third quarter GDP estimates did not disappoint. However, details will not be available for another two weeks. Backing up the GDP data were October's PMIs that indicated growth continued into the fourth quarter.

 

Among the key data in Europe was Eurozone manufacturing activity — it expanded at the fastest pace in more than six years in October. The manufacturing purchasing managers' index rose to an 80-month high of 58.5 in October from 58.1 in September.

 

Investor concerns over Catalonia and its potential exit from Spain eased further during the week with Catalonia's ousted leader Carles Puigdemont agreeing to the snap election called by Spain's central government, but said the fight for independence would go on.


 

Asia Pacific

Most equity indexes in the region advanced on the week with the Nikkei — in a holiday shortened week — increasing 2.4 percent and continuing its run of 21 year highs. Investors here as elsewhere around the globe were focused on central bank monetary policy decisions from Japan, the U.S. and the UK. However, investors also were focused on who would be named to be the next Federal Reserve chair. Both Fed announcements came after markets here were closed for the day. Also looming was the long awaited U.S. tax proposals from the House of Representative's leadership.

 

The Shanghai Composite lost 1.3 percent on the week after data showed China's private sector expanded at the weakest pace in 16 months in October. Chinese stocks slid on concerns over slowing growth and tighter liquidity before year-end. Anemic growth in the nation's service sector heightened worries about an economic slowdown. A private survey showed that activity picked up slightly in China's services sector in October but growth remained modest and much weaker than historical trends. The findings, together with other private and official business readings in the week, are likely to reinforce views that the economy will slow down in the fourth quarter after racing ahead earlier in the year.


 

Currencies

U.S. markets showed little reaction to the Fed's monetary policy announcement — no one was expecting any policy change — and to the Fed appointment which had been advertised well in advance. However, the pound sterling was definitely affected by the BoE rate increase. It sent sterling lower. That could be problematic for the Bank of England since the increase in inflation has been generated by the decline in sterling since the Brexit vote. It has not been generated domestically.

 

On the week, the U.S. currency advanced against the pound sterling, Swiss franc, yen and Australian dollar. It declined against the Canadian dollar and the euro.


 

Selected currencies — weekly results

2016 2017 % Change
Dec 30 Oct 27 Nov 3 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.767 0.765 -0.3% 6.0%
New Zealand NZ$ 0.6948 0.687 0.691 0.5% -0.6%
Canada C$ 0.7443 0.780 0.784 0.5% 5.3%
Eurozone euro (€) 1.0534 1.160 1.161 0.1% 10.2%
UK pound sterling (£) 1.2333 1.313 1.308 -0.4% 6.0%
Currency per U.S. $
China yuan 6.9450 6.651 6.639 0.2% 4.6%
Hong Kong HK$* 7.7533 7.803 7.802 0.0% -0.6%
India rupee 67.9238 65.050 64.548 0.8% 5.2%
Japan yen 116.8100 113.690 114.090 -0.4% 2.4%
Malaysia ringgit 4.4862 4.242 4.237 0.1% 5.9%
Singapore Singapore $ 1.4465 1.365 1.364 0.1% 6.0%
South Korea won 1205.8300 1130.340 1113.790 1.5% 8.3%
Taiwan Taiwan $ 32.3260 30.269 30.199 0.2% 7.0%
Thailand baht 35.8100 33.242 33.168 0.2% 8.0%
Switzerland Swiss franc 1.0174 0.9981 1.001 -0.3% 1.6%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

October EU Commission's measure of economic sentiment (ESI) registered its fifth consecutive gain to 114.0, up from a stronger revised 113.1 in September — its highest level since January 2001. Industry (7.9 after 6.7) and services (16.2 after 15.4) made progress and the consumer sector (minus 1.0 after minus 1.2) also edged firmer. However, the most significant advances were recorded in retail (5.5 after 3.0) and construction (0.2 after minus 1.7). All five sectors are well above their respective long run averages. Among the four larger member states, the national ESI rose 2.1 points to 114.5 in Germany and 1.0 point to 111.9 in Italy. Spain was up 0.3 points at 110.2 leaving France (110.0 after 111.6) to register the only decline. Inflation developments were generally positive. Expected selling prices in services increased from 8.0 to 8.4, their fifth straight gain. In addition, household inflation expectations advanced a further 0.5 points to 14.7, their strongest mark since March. The only disappointment was manufacturing (8.6 after 10.5) which saw its first decline since April.


 

Third quarter flash gross domestic product expanded 0.6 percent on the quarter and 2.5 percent on the year. This followed a stronger revised 0.7 percent quarterly increase in the previous period. The content of this report is very limited, providing just headline growth figures for the Eurozone as a whole. However, national statistics already released showed France (0.5 percent) and, in particular, Spain (0.8 percent) maintaining respectable quarterly rates while Germany looks to have performed well again (data due 14th November). Italian growth was probably broadly stable.


 

France

Third quarter flash gross domestic product expanded 0.5 percent on the quarter and 2.2 percent on the year for the fastest rate since 2011. Final domestic demand added 0.6 percentage points to the quarterly change, a tick more than in April-June. Within this, household spending accelerated from a 0.3 percent rate to 0.5 percent while a modest slowdown in gross fixed capital formation still left a respectable 0.8 percent gain. The latter reflected continued strength in both residential investment (1.1 percent after 1.4 percent) and business spending (0.9 percent after 1.1 percent). Elsewhere, government consumption was unchanged at a 0.4 percent rate. However, inventory accumulation added a sizeable 0.5 percentage points to quarterly growth which could dent output in the current period. In addition, a 0.7 percent increase in exports was more than offset by a 2.5 percent jump in imports to leave the net foreign trade balance subtracting fully 0.6 percentage points.


 

Asia/Pacific

Japan

September industrial production dropped a monthly 1.1 percent but advanced 3.9 percent from a year ago. The monthly decline reflected weaker output of electronic parts & devices, general purpose, production & business-oriented machinery and fabricated metals. This was offset by stronger output of chemicals, petroleum & coal products and non-ferrous metals. METI officials expect output to rebound in October and decline in November.


 

September household spending was down 0.3 percent on the year after increasing 0.6 percent in August. The main factor driving down growth was weaker spending on transport & communication which was down 2.1 percent after an increase of 7.1 percent in August. Spending on fuel, light & water charges also weakened, down 3.1 percent after dropping 1.7 percent in August. This was partly offset by stronger spending on food, up from 0.6 percent to 0.9 percent, and housing, up from 2.7 percent to 12.2 percent. Retail sales data released earlier in the week indicated that spending increased from 1.8 percent in August to 2.2 percent in September.


 

Australia

The trade surplus widened from a revised A$873 million in August to A$1.745 billion in September. Australia's trade balance has been in surplus every month this year except for a small deficit in April. The value of exports rose 2.9 percent on the month reflecting stronger exports of non-rural goods (around 60 percent of total exports), services (around 20 percent) and non-monetary gold (around 5 percent). Exports of rural goods (around 15 percent) were little changed on the month. On the year, total exports were up 16.1 percent. Imports edged up 0.2 percent on the month and 7.8 percent on the year. Imports of capital goods and consumption goods increased on the month, offset by declines in imports of intermediate and other merchandise goods, non-monetary gold, and services.


 

September retail sales were flat on the month after declining 0.5 percent in August. On the year, sales were up 1.4 percent. Sales increased in food retailing (0.6 percent), department stores (2.1 percent) and cafes, restaurants and takeaway food services (0.3 percent). The gains were offset by declines in other retailing (down 1.7 percent), household goods retailing (down 0.4 percent) and clothing, footwear & personal accessory retailing (down 0.7 percent). Monthly sales rose in five of the eight Australian states and territories. In quarterly terms, retail sales volumes were up just 0.1 percent in the three months to September, slowing sharply from the increase of 1.5 percent recorded in the three months to June.


 

Americas

Canada

August monthly gross domestic product was down 0.1 percent after being essentially unchanged the month before. Declines in manufacturing and mining & quarrying and oil & gas extraction more than offset increases in most other sectors (12 out of 20). Goods producing industries contracted for the second consecutive month, declining 0.7 percent in August in part due to temporary reduced capacity in the manufacturing and the mining, quarrying & oil & gas extraction sectors. Services producing industries edged up 0.1 percent. Following a 0.2 percent decline in July, the manufacturing sector contracted 1.0 percent in August as both durable and nondurable manufacturing declined. Mining & quarrying (except oil and gas) expanded 2.5 percent in August. After growing 2.0 percent in July, wholesale trade gained 0.4 percent in August as five of nine subsectors grew. The retail trade sector posted a 0.4 percent decline as its 12 subsectors were evenly split between increases and decreases. The finance & insurance sector posted a gain of 0.2 percent, following a 0.6 percent decline in July, which was the largest in two years. Transportation & warehousing grew 0.2 percent as four of nine subsectors increased. The construction sector declined for a second consecutive month, edging down 0.1 percent in August. The declines in July and August have only given back part of June's 1.8 percent increase.


 

September merchandise trade deficit was C$3.2 billion and was down sharply in the third quarter, all largely on weaker car & light truck sales to the United States. For September, exports were down 0.3 percent on lower passenger car & light truck exports. Imports were also down 0.3 percent on lower prices. The third quarter deficit with the world sharply increased to C$9.4 billion from C$5.5 billion in the second quarter. A factor in the export declines was the rise in strength of the Canadian dollar, by 5.5 US cents in the third quarter and by 2.1 US cents in September. Exports to the United States fell 1.2 percent in September on the lower sales of cars and light trucks while imports from the U.S. rose 0.4 percent. Canada's trade surplus with the United States narrowed from C$2.7 billion in August to C$2.2 billion in September. Canada's real trade balance deteriorated sharply in the third quarter, to a C$3.4 billion deficit from a C$0.3 billion surplus in the second. In September, the 0.3 percent decline in imports was led by a 4.6 percent decline in electronic & electrical equipment. Imports of consumer goods fell 1.9 percent, a fifth straight monthly decline.


 

Canadian labour market added a net 35,000 jobs in October easily topping expectations of 15,000 jobs. It was the best month for jobs growth since June. The unemployment rate ticked up to 6.3 percent, from 6.2 percent. The participation rate edged up to 65.7 percent from 65.6 percent in September. Full-time employment was up 88,700 after surging 112,000 in September. Part-time employment, however, contracted a further 53,400 after declining 10,200 in September. Year-to-date total added 264,400 jobs. Full-time was up 340,900 and part-time down 76,600. New positions were concentrated in the private sector, where employment rose 39,100 after declining 15,500 in September while public sector jobs were down 4,500 over the month. On a sector basis, gains in October were led by goods-producing industries while services lagged.


 

Bottom line

While the Federal Reserve and the Bank of Japan did not change their respective monetary policies, the Bank of England increased its Bank Rate by 25 basis points to 0.5 percent. The deluge of economic data was mostly positive in Europe and the United States. China's PMIs eased and triggered growth worries.

 

Two more central banks meet this coming week — the Reserve Banks of Australia and New Zealand. Neither bank is expected to change policy. The RBA's policy rate is currently 1.5 percent while the RBNZ policy rate is 1.75 percent. Composite PMIs will be posted in Europe along with Germany's September manufacturing orders and industrial production. Industrial production for France, Italy and the UK will also be posted. China begins to release its latest monthly economic data for merchandise trade and consumer and producer price indexes for October.


 

Looking Ahead: November 6 through November 10, 2017

Central Bank activities
Nov 7 Australia Reserve Bank of Australia Monetary Policy Announcement
Nov 9 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
 
The following indicators will be released this week...
Europe
Nov 6 Eurozone Composite PMI (October)
Producer Price Index (September)
Germany Manufacturing Orders (September)
Composite PMI (October)
France Composite PMI (October)
Italy Composite PMI (October)
Nov 7 Eurozone Retail Sales (September)
Germany Industrial Production (September)
Nov 8 France Merchandise Trade (September)
Nov 9 Germany Merchandise Trade (September)
UK Merchandise Trade (September)
Nov 10 France Industrial Production (September)
Italy Industrial Production (September)
UK Industrial Production (September)
 
Asia Pacific
Nov 8 China Merchandise Trade (October)
Nov 9 Japan Machinery Orders (September)
China Consumer Price Index (October)
Producer Price Index (October)
 
Americas
Nov 8 Canada Housing Starts (September)

 

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


 

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