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A plethora of central bank decisions
International Perspective - December 15, 2017
By Anne D. Picker, Chief Economist


Global Markets

Equities were mixed last week as investors monitored the vast array of central bank announcements. Only the Federal Reserve increased its interest rate while the Bank of England, Swiss National Bank and the European Central Bank left their respective policies unchanged. There were other central banks also making policy announcements however. The Bank of Mexico lifted its policy rate by 25 basis points to 7.25 percent while at the same time, the Bank of Russia lowered its policy rate by 50 basis points to 7.75 percent. The People's Bank of China lifted its standing lending facility by 5 basis points to 3.25 percent. The Norges Bank left its interest rate at 0.50 percent where it has been since March 2016.


Federal Reserve

As widely expected, the Federal Reserve increased its fed funds interest rate to a range of 1.25 percent to 1.50 percent. In its announcement, the Federal Open Market Committee (FOMC) said that it expects the labor market to remain strong and the economy to continue to grow. Committee members continued to describe policy as accommodative and repeated that near term risks were balanced. The FOMC's quarterly forecasts appear to have reflected progress on tax policy since their September forecasts.


In her last press conference as Fed chair, Janet Yellen noted that FOMC participants expect tax policy to boost growth. The FOMC however, projected a short-term jump in economic growth from the administration's proposed tax cuts. Despite this, rate projections continued to indicate three interest rate increases in 2018 — a sign the tax legislation moving through Congress would have a modest, and possibly fleeting, effect. The Fed now envisions a burst of growth, ultra-low unemployment below 4 percent in 2018 and 2019 and continued low interest rates — however, little movement on inflation.


The Fed now sees gross domestic product growing 2.5 percent in 2018, up from the 2.1 percent forecast in September. The pace of growth is expected to cool to 2.1 percent in 2019, slightly higher than the prior forecast of 2.0 percent. The Fed also said on Wednesday it expected the nation's unemployment rate would fall to 3.9 percent next year and remain at that level in 2019 — well below what is considered to be full employment. It previously had forecast a jobless rate of 4.1 percent for those two years. But inflation is projected to remain shy of the FOMC's goal of 2 percent for another year, with weakness on that front still enough of a concern that the FOMC saw no reason to accelerate the expected pace of rate increases.


Swiss National Bank

As widely expected, the Swiss national Bank's latest Monetary Policy Assessment (MPA) left an unchanged outlook for central bank policy. The target corridor for 3-month CHF LIBOR remains at minus 1.25 percent to minus 0.25 percent and the deposit rate at minus 0.75 percent. Although the slide in the Swiss franc since the middle of the year has eased some overvaluation fears, the monetary authority still reaffirmed its commitment to intervene as necessary to prevent unwanted appreciation. The policy report underlines the importance of its currency's weakness to the improvement in the Swiss economic picture.


The Bank's December economic forecast paints a slightly more upbeat picture than in September. Real GDP growth this year is only a little firmer than the previous call at 1.0 percent but 2018 is put at a relatively solid 2.0 percent. At the same time, the inflation projection has been revised up over the near-term because of increased oil prices and the weaker exchange rate. However, the more important longer-term projections were virtually unchanged. For 2017, inflation has been nudged a tick higher to 0.5 percent and in 2018 raised it to 0.7 percent. The 2019 forecast stayed at just 1.1 percent.


Bank of England

To nobody's surprise, there were no changes in monetary policy at the Bank of England's monetary policy committee meeting. The Bank Rate having only just been increased 25 basis points at its last meeting, remained at 0.50 percent while the ceilings on quantitative easing gilt and corporate bond purchases remains at Stg435 billion and Stg10 billion respectively. The vote was a unanimous 9 to 0.


The minutes suggest that the committee members viewed recent mixed economic data as doing nothing to impact the broader economic outlook although they did warn that fourth quarter gross domestic product growth could undershoot the third quarter (0.4 percent quarterly increase). However, against that, last month's Budget was seen boosting GDP by around 0.3 percentage points over the next three years while CPI inflation would be just a tick higher. Future increases in Bank Rate were still thought likely to be warranted over coming years assuming that the economy lived up to the Bank's forecast presented in November. There was no indication of when the next interest rate increase might be delivered. The latest Brexit developments were viewed as being in line with the Bank's assumption that businesses and consumers would act on the belief that the process would culminate in an orderly fashion.


European Central Bank

As widely expected, the European Central Bank left its refi rate at zero percent while the rates on the deposit and marginal lending facilities remain at minus 0.40 percent and 0.25 percent respectively. Forward guidance was also unrevised, essentially implying no move on official rates until at least September 2018 and, quite probably, 2019.


Subject to any significant economic shocks, the policy stance for next year was effectively laid out at the ECB's last meeting in October. That foresaw a halving in the current pace of net monthly QE purchases to €30 billion from January through at least September. Interest rates will not be raised until well after the completion of QE.


There was little of note in ECB President Mario Draghi's press conference although the new economic forecasts do suggest that the Governing Council has become more optimistic. These show a significantly stronger growth profile, albeit with risks to the projection still evenly balanced. Real GDP is now estimated at 2.4 percent this year, up from September's 2.2 percent call and 2.3 percent in 2018, 0.5 percentage points stronger than last time. However, the inflation outlook has been adjusted only slightly. 2017 remains at 1.5 percent while 2018 is raised a couple of ticks to 1.4 percent and 2019 also stays at 1.5 percent. By 2020, the headline HICP is seen running at a 1.7 percent yearly rate and still short of its near-2 percent inflation target. The slow recovery in prices provided the justification for the extension to the QE program in 2018. And given the persistent undershoot, may even see some question the wisdom of reducing the size of future monthly asset purchases in the first place.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Dec 8 Dec 15 Week 2017
Australia All Ordinaries 5719.1 6077.4 6087.08 0.2% 6.4%
Japan Nikkei 225 19114.4 22811.1 22553.22 -1.1% 18.0%
Topix 1518.61 1803.73 1793.47 -0.6% 18.1%
Hong Kong Hang Seng 22000.6 28639.9 28848.11 0.7% 31.1%
S. Korea Kospi 2026.5 2464.0 2482.07 0.7% 22.5%
Singapore STI 2880.8 3424.6 3416.94 -0.2% 18.6%
China Shanghai Composite 3103.6 3290.0 3266.14 -0.7% 5.2%
India Sensex 30 26626.5 33250.3 33462.97 0.6% 25.7%
Indonesia Jakarta Composite 5296.7 6031.0 6119.42 1.5% 15.5%
Malaysia KLCI 1641.7 1721.3 1753.07 1.8% 6.8%
Philippines PSEi 6840.6 8304.7 8337.04 0.4% 21.9%
Taiwan Taiex 9253.5 10398.6 10491.44 0.9% 13.4%
Thailand SET 1542.9 1706.5 1717.69 0.7% 11.3%
UK FTSE 100 7142.8 7394.0 7490.6 1.3% 4.9%
France CAC 4862.3 5399.1 5349.3 -0.9% 10.0%
Germany XETRA DAX 11481.1 13153.7 13103.6 -0.4% 14.1%
Italy FTSE MIB 19234.6 22773.8 22094.0 -3.0% 14.9%
Spain IBEX 35 9352.1 10321.1 10150.4 -1.7% 8.5%
Sweden OMX Stockholm 30 1517.2 1610.8 1594.4 -1.0% 5.1%
Switzerland SMI 8219.9 9319.2 9394.7 0.8% 14.3%
North America
United States Dow 19762.6 24329.16 24651.7 1.3% 24.7%
NASDAQ 5383.1 6840.1 6936.6 1.4% 28.9%
S&P 500 2238.8 2651.5 2675.8 0.9% 19.5%
Canada S&P/TSX Comp. 15287.6 16096.1 16042.0 -0.3% 4.9%
Mexico Bolsa 45642.9 48081.6 48132.9 1.1% 5.3%


Europe and the UK

Equities — with the exception of the UK and Switzerland — were down on the week. The FTSE added 1.3 percent thanks in part to the decline in the pound sterling. The SMI added 0.8 percent. The CAC and DAX lost 0.9 percent and 0.4 percent respectively. Most of the week was spent waiting for the major central bank announcements and the remaining part, in reaction to the various central bank statements. With the flurry of central bank activity this week concluded, investors shifted their attention to U.S. tax reform.


The German Bundesbank raised its growth projections for the country but the pace of expansion is forecast to slow through 2020. Germany is forecast to grow 2.6 percent this year and 2.5 percent in 2018. The projection for 2017 was revised up from 1.9 percent and that for 2018 from 1.7 percent. The outlook for 2019 was lifted to 1.7 percent from 1.6 percent estimated in June.


Meanwhile, the Bank of Spain downgraded its growth projections citing the uncertainty arising from the situation in Catalonia. The Bank of Spain said it anticipated that after growth of 3.1 percent this year, gross domestic product will increase by 2.4 percent in 2018 and 2.1 percent in both 2019 and 2020. While the outlook for 2017 was retained, the projection for 2018 was lowered from 2.5 percent and that for 2019 from 2.2 percent.


Eurozone private sector activity expanded at the fastest pace in nearly seven years in December according to the flash surveys for composite PMIs for the Eurozone, Germany and France. The Eurozone composite output index climbed to an 82-month high of 58.0 in December from 57.5 in November. Germany's composite PMI expanded at the fastest pace in over six-and-a-half years with the flash PMI composite index rising to an 80-month high of 58.7 in December from 57.3 in November. In France, the PMI indicated that the economy maintained strong growth momentum in December, driven by solid expansion in manufacturing activity. The French composite output index dropped to a 2-month low of 60.0.


Asia Pacific

Most Asian equity indexes advanced last week. However, four indexes declined — the Nikkei (down 1.1 percent) and Topix (down 0.6 percent), the Shanghai Composite (down 0.7 percent) and the STI (down 0.2 percent). Aside from the tsunami of central bank decisions, investors here closely monitored the progress of the tax reform legislation through the U.S. Congress. And as the week here ended, uncertainty about the outlook for the Republican tax reform plan weighed on investor sentiment.


The Nikkei retreated four of five days last week. And despite Friday's quarterly Tankan survey showing an improvement in business confidence, stocks retreated with shares from banking and insurance sectors posting notable losses. The closely watched Bank of Japan Tankan indicated that confidence among Japanese large manufacturers increased for the fifth straight quarter to an 11-year high as strong exports and rising corporate profits underpin activity. The large manufacturers' sentiment index rose to 25 from 22 in the third quarter. This was the highest score since the end of 2006. At the same time, the large non-manufacturers' sentiment indicator held steady at 23 in the fourth quarter. However, both big manufacturers and non-manufacturers forecast conditions to weaken in the next quarter.


The People's Bank of China — the Chinese central bank — unexpectedly lifted its rates on open market operations following the Federal Reserve's decision to tighten its policy rates. The PBoC raised its 7-day and 28-day reverse repo rates by 5 basis points to 2.50 percent and 2.80 percent respectively. The bank raised the rate on its Medium-term Lending Facility by 5 basis points to 3.25 percent.



The U.S. dollar was mixed against its major counterparts on the week. The currency was up against the euro, pound sterling and the Canadian dollar but down against the yen, Swiss franc and the Australian dollar. But the dollar ended the week on a strong note, increasing against all of its counterparts on strong economic data including retail sales in the run-up to Christmas. And unemployment continues to decline. The dollar strengthened after the ECB and BoE indicated that they are in no rush to follow the Fed and increase interest rates.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 Dec 8 Dec 15 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.751 0.765 1.9% 6.0%
New Zealand NZ$ 0.6948 0.684 0.699 2.2% 0.6%
Canada C$ 0.7443 0.777 0.777 -0.1% 4.3%
Eurozone euro (€) 1.0534 1.177 1.176 -0.1% 11.6%
UK pound sterling (£) 1.2333 1.339 1.332 -0.5% 8.0%
Currency per U.S. $
China yuan 6.9450 6.621 6.609 0.2% 5.1%
Hong Kong HK$* 7.7533 7.805 7.712 1.2% 0.5%
India rupee 67.9238 64.455 64.045 0.6% 6.1%
Japan yen 116.8100 113.470 112.560 0.8% 3.8%
Malaysia ringgit 4.4862 4.088 4.080 0.2% 10.0%
Singapore Singapore $ 1.4465 1.352 1.483 -8.8% -2.5%
South Korea won 1205.8300 1092.500 1089.260 0.3% 10.7%
Taiwan Taiwan $ 32.3260 30.006 29.994 0.0% 7.8%
Thailand baht 35.8100 32.615 32.510 0.3% 10.2%
Switzerland Swiss franc 1.0174 0.9930 0.990 0.3% 2.7%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


December ZEW survey current conditions index rose 0.5 points to 89.3, its fourth increase in the last five months and its highest reading since July 2011. By contrast, expectations slipped by 0.7 points to 17.4. This was their first drop since August but small enough to leave the gauge comfortably towards the upper end of the 10.4 to 20.6 range recorded over 2017 as a whole.


United Kingdom

November consumer prices advanced 0.3 percent on the month and 3.1 percent from a year ago, up just a tick from September/October but high enough to require BoE Governor Carney to write a letter to Chancellor of the Exchequer Hammond explaining the reason for the overshoot of the 2 percent target. On the year, the modest acceleration came from transport (mainly air fares) where prices rose 0.1 percent on the month compared with a 0.3 percent decline over the same period a year ago. Recreation and culture also had a small positive impact but this was largely offset by miscellaneous goods and services which recorded a 0.1 percent decline from a 0.2 percent increase in November 2016. Core CPI matched the headline monthly advance although this was only sufficient to hold the underlying annual rate steady at 2.7 percent.


November claimant count joblessness was up 5,900 after a sharper revised 6,500 advance in October. This yardstick has now increased for three months in a row although the unemployment rate was again unchanged at 2.3 percent. The ILO data showed the number of people out of work declining a further 26,000 in the three months to October.  However, this left its measure of the unemployment rate flat at 4.3 percent which, while historically very low, was slightly higher than expected. It also coincided with a 56,000 drop in employment, its steepest decline since March-May 2015. Vacancies were very robust, rising 14,000 to a new record high of 796,000. The average earnings annual rate for the three months to October gained a couple of ticks to 2.5 percent. More significantly anyway, excluding bonuses the rate edged just 0.1 percentage point firmer to a still very subdued 2.3 percent.


November retail sales volumes rose 1.1 percent on the month, equaling their best performance since October last year and that after a positive revision to October sales. Annual growth of purchases was 1.6 percent, up from zero percent last time. Excluding auto fuel, sales were up a monthly 1.2 percent that lifted yearly growth from zero percent to 1.5 percent. November's monthly advance was led by non-food demand which, excluding auto fuel saw a solid 1.5 percent spurt. Within this, household goods were 2.9 percent firmer and non-store retailing up 2.6 percent, in part it seems due to a successful 'Black Friday'. The other stores category also climbed 1.2 percent as did clothing and textiles while non-specialized stores gained 0.3 percent. With food sales rising 0.6 percent and auto fuel 0.3 percent higher, November's strength was reassuringly broad-based.




October private sector machinery orders (excluding volatile items) advanced 5.0 percent on the month, rebounding from a decline of 8.1 percent in September. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. On the year, seasonally adjusted machinery orders (excluding volatile items) were down 2.4 percent after declining 3.9 percent in September. Manufacturing orders increased 5.1 percent on the month after a drop of 5.1 percent the month before while nonmanufacturing orders (excluding volatile items) increased by 1.1 percent after a decline of 11.1 percent.


Fourth quarter Tankan shows business sentiment in the manufacturing sector continued to improve, with sentiment in the non-manufacturing sector also solid but little changed. Firms in the manufacturing sector have revised down their forecasts for capital expenditure in the current fiscal year, but this has been outweighed by stronger capex plans by firms in the non-manufacturing sector. Large manufacturers' business conditions index advanced from 22 in the three months to September to 25 for the three months to December. This is the highest level for this index since 2006. The equivalent index rose from 17 to 19 for medium-sized manufacturers and from 10 to 15 for small manufacturers. Aggregating manufacturers of all sizes, the index rose from 15 to 19. Business sentiment in the non-manufacturing sector, however, was little changed from the previous quarter. For non-manufacturers, the business condition index was flat at 23 for large firms, rose from 19 to 20 for medium-sized firms, and from 8 to 9 for small firms, with the aggregate index unchanged at 14. Large firms in the manufacturing sector revised down their capital expenditure plans for the fiscal year ending March 2018, now estimating growth of 10.2 percent compared with 14.1 percent previously. Capex across all firms in both the manufacturing and non-manufacturing sectors is forecast to increase by 6.3 percent in the fiscal year ended March 2018, up from the previous forecast for an increase of 4.6 percent.



November employment jumped 61,600, up sharply from a revised increase of 7,800 in October. This is the 14th consecutive monthly increase in payrolls and the strongest monthly result so far this year. The unemployment rate remained at 5.4 percent for a third consecutive month. The participation rate jumped to 65.5 percent from 65.1 percent. The increase in employment reflected gains in both full-time and part-time employment. Full-time jobs increased 41,900, up from an increase of 31,000 in October, while part-time jobs grew by 19,700, largely reversing a decline of 23,200 the previous month. Over the last 12 months, seasonally-adjusted full-time employment increased 305,000 while part-time employment has increased 79,000 persons.



November industrial production was up 6.1 percent on the year after increasing 6.2 percent in October. This was the weakest annual growth since August. Industrial production rose a monthly 0.48 percent after rising 0.50 percent in October. Weaker headline industrial production growth in November was driven by the utilities sector, where annual growth slowed to 4.5 percent from 9.2 percent in October. Growth also weakened in the mining sector, where output fell by 1.7 percent on the year after dropping 1.3 percent previously. These moves were partly offset by slightly stronger conditions in the manufacturing sector, with growth picking up from 6.7 percent in October to 6.8 percent in November on the year. Within the manufacturing sector, growth strengthened for automobiles, chemicals and communication equipment but weakened for electric machinery and general equipment.


November retail sales advanced 10.2 percent on the year, up from 10.0 percent in October. Retail sales rose 0.83 percent on the month after an increase of 0.77 percent in October. Stronger retail sales growth was largely driven by communication equipment, sales of which surged 33.9 percent on the year after growth of just 2.1 percent in October. Sales growth also accelerated for clothing, furniture, household non-durables, home appliances and oil and oil products. This was partly offset by weaker annual growth in automobile sales, down from 6.9 percent to 4.2 percent. Urban retail sales advanced 9.9 percent while rural retail sales were up 11.7 percent.


Bottom line

Equities were mixed as investors waited for news from the many central banks that were meeting to update their respective policies. Economic data in Asia was positive across the board with China's industrial production and retail sales increasing while inflation remained positive. And data from Japan was reassuring that the economy continues to expand. November employment in Australia soared while unemployment was steady. In Europe, flash November PMIs indicated rising positive growth. Data from Canada and the United States were mostly positive.


Next week is the last full trading week of the year. The Bank of Japan will meet mid-week and is expected to maintain its current policy. It is a relatively light week for economic data. November merchandise trade data will be released for Japan. Final third quarter GDP estimates will be released for the UK, U.S., France and New Zealand. In Germany, the December Ifo survey will be posted.


Looking Ahead: December 18 through December 22, 2017

Central Bank activities
Dec 20, 21 Japan Bank of Japan Monetary Policy Meeting
The following indicators will be released this week...
Dec 18 Eurozone Harmonized Index of Consumer Prices (November final)
Dec 19 Germany Ifo Business Survey (December)
Dec 20 Germany Producer Price Index (November)
Dec 21 Eurozone EC Consumer Confidence (December flash)
Dec 22 France Consumption of Manufactured Goods (November)
Gross Domestic Product (Q3. 2017 final)
UK Gross Domestic Product (Q3. 2017 final)
Asia Pacific
Dec 18 Japan Merchandise Trade Balance (November)
Dec 21 New Zealand Gross Domestic Product (Q3. 2017)
Dec 21 Canada Consumer Price Index (November)
Retail Sales (October)


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


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