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Data reinforce global growth expectations
International Perspective - January 19, 2018
By Anne D. Picker, Chief Economist


Global Markets

Economic data confirmed that global growth was solidifying to the point where even analysts are beginning to question how much longer the Bank of Japan and European Central Bank will continue their expansionary programs and join the Federal Reserve and Bank of Canada (for example) and begin to gradually diminish stimulus and begin increasing their respective interest rates. The latest official Chinese economic data bolstered expectations that global growth will continue. And data elsewhere confirmed those expectations. While investors monitored the efforts to come to a budget agreement in the U.S., the stock averages were not really affected.


Most equity indexes advanced last week with the exceptions being the All Ordinaries, FTSE and SMI. Gains ranged from 0.2 percent (IBEX and OMX Stockholm 30) to 2.7 percent (Hang Seng and Sensex).


Bank of Canada raises rates

As widely expected, the Bank of Canada increased its target for the overnight rate to 1.25 percent. The Bank Rate is correspondingly 1.5 percent and the deposit rate is 1.0 percent. According to the BoC, recent economic data have been strong, inflation close to target while the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook. The Bank noted that global economic growth continues to be stronger than anticipated. In particular, there are signs of increasing momentum in the U.S. economy, which will be boosted further by recent tax changes. Global commodity prices are also higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.


In Canada, real GDP growth is expected to slow to 2.2 percent in 2018 and 1.6 percent in 2019, following an estimated 3.0 percent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon. Looking forward, consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more. The Bank's outlook takes into account a small benefit to Canada's economy from stronger U.S. demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projections additional negative judgement on business investment and trade.


Recent data show that labour market slack is being absorbed more quickly than anticipated. Wages have picked up but are rising by less than would be typical in the absence of labour market slack. Inflation is close to 2 percent and core measures have edged up, consistent with diminishing slack in the economy. The Bank expects CPI inflation to fluctuate in the months ahead as various temporary factors (including gasoline and electricity prices) unwind. Looking through these temporary factors, inflation is expected to remain close to 2 percent over the projection horizon.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Jan 12 Jan 19 Week 2018
Australia All Ordinaries 6167.3 6176.8 6119.30 -0.9% -0.8%
Japan Nikkei 225 22764.9 23653.8 23808.06 0.7% 4.6%
Topix 1817.56 1876.24 1889.74 0.7% 4.0%
Hong Kong Hang Seng 29919.2 31412.5 32254.89 2.7% 7.8%
S. Korea Kospi 2467.5 2496.4 2520.26 1.0% 2.1%
Singapore STI 3402.9 3520.6 3550.36 0.8% 4.3%
China Shanghai Composite 3307.2 3428.9 3487.86 1.7% 5.5%
India Sensex 30 34056.8 34592.39 35511.58 2.7% 4.3%
Indonesia Jakarta Composite 6355.7 6370.1 6490.90 1.9% 2.1%
Malaysia KLCI 1796.8 1822.7 1828.83 0.3% 1.8%
Philippines PSEi 8558.4 8814.6 8915.92 1.1% 4.2%
Taiwan Taiex 10642.9 10884.0 11150.85 2.5% 4.8%
Thailand SET 1753.7 1810.2 1821.34 0.6% 3.9%
UK FTSE 100 7687.8 7778.6 7730.79 -0.6% 0.6%
France CAC 5312.6 5517.1 5526.51 0.2% 4.0%
Germany XETRA DAX 12917.6 13245.0 13434.45 1.4% 4.0%
Italy FTSE MIB 21853.3 23429.8 23749.22 1.4% 8.7%
Spain IBEX 35 10043.9 10462.4 10479.50 0.2% 4.3%
Sweden OMX Stockholm 30 1576.9 1628.4 1630.62 0.1% 3.4%
Switzerland SMI 9381.9 9546.6 9509.77 -0.4% 1.4%
North America
United States Dow 24719.2 25803.19 26071.72 1.0% 5.5%
NASDAQ 6903.4 7261.1 7336.38 1.0% 6.3%
S&P 500 2673.6 2786.2 2810.30 0.9% 5.1%
Canada S&P/TSX Comp. 16209.1 16308.2 16353.46 0.3% 0.9%
Mexico Bolsa 49354.4 49135.9 49695.6 1.1% 0.7%


Europe and the UK

Equities were mixed last week with the CAC (0.2 percent) and DAX (1.4 percent) advancing and the FTSE (down 0.6 percent) and SMI (down 0.4 percent) retreating. The four indexes ended the week on a positive note Friday. Investors here have shrugged off concerns over a possible U.S. government shutdown. The U.S. House of Representatives voted in favor of a short-term government spending bill Thursday night, with the vote largely coming down along party lines. However, the future of the spending bill in the Senate at this writing is uncertain, with Democrats saying they have the votes to block the legislation.


Traders were cautious with earnings reporting season set to get underway in Europe next week. Equity valuations are at their highest in more than a year and investors are betting that the engine of earnings upgrades will continue. European shares climbed to highs not seen since 2008 as growing confidence in corporate earnings and in the strength of the global economy continued to fuel a bull market despite fears of the possible U.S. government shutdown.


The uncertainty over the shape of the government in Germany has contributed to the negative mood among some investors. Exhaustive talks between German Chancellor Merkel's Christian Democrats (CDU) and their Bavarian ally, the Christian Social Union (CSU) with the opposition Social Democrats (SPD) appear to have achieved a breakthrough. Germany has effectively been in political limbo since the inconclusive elections last September and efforts to maintain the existing so-called 'grand coalition' between the two sides have been ongoing since.


If an agreement has been reached it would be very good news for Eurozone politics in general. Without a solid German government, decision making for the region as a whole becomes very complicated so these developments should be seen positively by all member states.


Detailed negotiations are expected to take place over coming weeks. In the meantime, the apparent removal of a major source of political uncertainty should be an important plus for the euro and Eurozone stock markets. Germany's Social Democrats (SPD) will hold a conference that will determine whether or not the party is prepared to go ahead with formal 'grand coalition' talks. A no vote, which is a real possibility, could be a significant bear factor for the euro.


Asia Pacific

Most equity indexes advanced during the week with the exception of the All Ordinaries (down 0.9 percent) which was dragged down by miners and energy companies. Asian investors responded to the direction of markets in the U.S. overnight and acted accordingly. Gains ranged from 0.3 percent (KLCI) to 2.7 (Hang Seng and Sensex). Both the Nikkei and Topix added 0.7 percent while the Shanghai Composite was 1.7 percent higher at week's end.


Aside from influences from the U.S., a spate of Chinese economic data helped lift shares. The pace of growth in China's economy accelerated last year for the first time in seven years as exports, construction and consumer spending all climbed strongly. China's National Bureau of Statistics announced on Thursday that the economy expanded 6.9 percent last year, up slightly from 6.7 percent in 2016 and breaking a trend of gradual slowing that began in 2011. For the fourth quarter, the bureau reported economic growth of 6.8 percent over a year earlier. Strength in exports, retail sales and the property market has helped spur growth, putting China in a better position to tackle problems including a sharp climb in debt, severe pollution and other problems.



 The U.S. dollar continued its decline against most of its major counterparts — the yen, euro, pound sterling, Swiss franc and the Australian dollar. The currency managed to gain against the Canadian dollar. The U.S. dollar has suffered in recent days amid uncertainty over a looming government shutdown. But on Wednesday it recouped some of its losses against the euro as European Central Bank officials voiced concerns about the recent strength of their currency — easing expectations for changes to guidance at the central bank's meeting on January 25.


At the same time, the pound sterling has extended its gains against the dollar, leaving it closer to the pre- 2016 Brexit referendum. However, sterling's increase has been driven by weakening sentiment on the dollar as much as any growing optimism over Britain. Britain's currency has rapidly gained on the dollar over the past year, posting a rally of about 12 percent. Sterling has also recorded significant gains against the Japanese yen. The rally has been partly fueled by hopes of a soft Brexit and partly by weakness in the U.S. dollar.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 Jan 12 Jan 19 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.791 0.800 1.1% 2.6%
New Zealand NZ$ 0.709 0.726 0.728 0.3% 2.7%
Canada C$ 0.796 0.802 0.800 -0.2% 0.6%
Eurozone euro (€) 1.194 1.218 1.223 0.4% 2.4%
UK pound sterling (£) 1.344 1.373 1.387 1.0% 3.1%
Currency per U.S. $
China yuan 6.534 6.469 6.404 1.0% 2.0%
Hong Kong HK$* 7.816 7.823 7.817 0.1% 0.0%
India rupee 64.081 63.640 63.846 -0.3% 0.4%
Japan yen 112.850 111.030 110.720 0.3% 1.9%
Malaysia ringgit 4.067 3.972 3.939 0.8% 3.2%
Singapore Singapore $ 1.338 1.325 1.321 0.3% 1.3%
South Korea won 1070.630 1064.900 1066.000 -0.1% 0.4%
Taiwan Taiwan $ 29.775 29.624 29.378 0.8% 1.4%
Thailand baht 32.696 31.943 31.856 0.3% 2.6%
Switzerland Swiss franc 0.979 0.9685 0.963 0.6% 1.6%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


December's final harmonized index of consumer prices confirmed the 1.4 percent yearly rate posted in the flash report. This was down from November's 1.5 percent and reflected a 0.4 percent monthly gain in prices that followed a 0.1 percent increase in mid-quarter. The two main core rates continued to indicate no increase in underlying inflation pressures. The narrowest measure, which excludes energy, food, alcohol and tobacco, was unrevised at a 0.9 percent annual rate for a second month. The rate for the HICP omitting only energy and unprocessed food was 1.1 percent, also unchanged from October/November and a couple of ticks down on July/August. Over the year to December 2017, the annual HICP inflation rate climbed a modest 0.3 percentage points to 1.4 percent. However, the narrowest core gauge was only flat at 0.9 percent. Essentially, the headline acceleration was attributable to its volatile components, including energy, where the rate climbed from 2.6 percent to 3.0 percent and, in particular, food, alcohol and tobacco, which was up 0.9 percentage points at 2.1 percent.


United Kingdom

December consumer price index was up a monthly 0.4 percent and 3.0 percent on the year, down from 3.1 percent the month before. The largest downward impact on the monthly change in the yearly rate came from transport which subtracted nearly 0.1 percentage points on the back of a smaller increase in air fares than a year ago. Recreation and culture together with housing and household services reduced the headline rate by a further tick. However, a partial offset came from small positive effects from furniture and household goods and alcohol and tobacco, the latter reflecting November's Budget measures. As a result, the core CPI was up a marginally smaller 0.3 percent on the month which cut its yearly rate from 2.7 percent to 2.5 percent, a 5-month low.


December retail sales tumbled a monthly 1.5 percent and were up 1.4 percent on the year. Excluding auto fuel the picture was much the same with purchases sliding 1.6 percent after a marginally downwardly revised 1.1 percent November increase. The yearly gain was 1.3 percent. December's overall monthly decline, which will have been steepened by an unwinding of November's Black Friday boost, was roughly equally split between food (1.1 percent) and, excluding auto fuel, non-food (1.3 percent). Within the latter, household goods (down 5.3 percent) seriously dented the cumulative 7.2 percent spurt seen over the previous three months and non-store retailing (down 4.8 percent) fared almost as badly. With textiles and clothing down 1.0 percent and other stores 0.2 percent lower, the only rise was recorded by non-specialized stores (0.6 percent).




November private sector machinery orders (excluding volatile items) advanced 5.7 percent on the month after increasing 5.0 percent in October. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. On the year, orders were up 6.1 percent. Orders strengthened in the non-manufacturing sector but weakened in the manufacturing sector. Manufacturing orders slid 0.2 percent on the month after an increase of 7.4 percent in October, while non-manufacturing orders (excluding volatile items) increased 9.8 percent after increasing 1.1 percent previously.



December employment was up 34,700 after increasing a revised 63,600 in November. The unemployment rate rose from 5.4 percent in November to 5.5 percent in December while the participation rate advanced from 65.5 percent to 65.7 percent. The increase in employment reflects gains on both full-time and part-time employment. Full-time jobs increased 15,100 after rising 43,600 in November, while part-time jobs were up 19,500, little changed from the increase of 20,000 the previous month. The total number of hours worked in the month declined by 0.2 percent in December after an increase of 0.6 percent in November. Seasonally-adjusted full-time employment increased by 303,000 persons over 2017, while part-time employment increased by 100,000 persons.



Gross domestic product in the October to December quarter was up 6.8 percent from a year ago. This was unchanged from the three months ending in September. GDP was up a quarterly 1.6 percent, down from the 1.7 percent increase recorded in the previous quarter. The data continue the recent pattern of remarkable stability in Chinese economic growth data, with the year-on-year change in GDP reported at between 6.7 percent and 7.0 percent in every quarter since the start of 2015. Annual GDP growth in 2017 is estimated to have been 6.9 percent, in line with the estimate made last week by Chinese Premier Li Keqiang and consistent with the target set early last year of "around 6.5 percent or higher".


December industrial production was up 6.2 percent on the year after increasing 6.1 percent in November. Output gained 0.52 percent on the month after increasing of 0.47 percent in November. Annual growth in industrial production strengthened from 6.0 percent in 2016 to 6.6 percent in 2017. Relatively stable headline industrial production growth reflects offsetting moves in key sectors. Growth moderated slightly in the manufacturing sector, with output up 6.5 percent on the year after an increase of 6.8 percent in November. Growth in the utilities sector, however, strengthened with output there up 8.2 percent on the year after increasing by 4.5 percent in November, There was also a smaller drop in mining output, down 0.9 percent on the year after a decline of 1.7 percent in November. Within the manufacturing sector annual growth weakened for automobiles, electric machinery and communication equipment but strengthened for chemicals and steel products.


Bottom line

The Bank of Canada as expected increased its policy interest rate by 25 basis points to 1.25 percent. The BoC was the first of several key central bank meetings that will follow in the next three weeks. November manufacturing sales jumped 3.4 percent — far above expectations. Existing homes jumped an annual 4.1 percent in December underlining the strength of the Canadian economy. China's data indicated that the economy is growing. UK data were mixed with consumer prices easing but retail sales tumbling in December.


The Bank of Japan and the European Central Bank both hold policy meetings in the coming week. Both are expected to leave their respective policies unchanged. Analysts will be listening to BoJ governor Kuroda and ECB president Draghi for hints of possible policy changes going forward as growth picks up. And the flash PMIs will be released with what are the first major data for January. In Germany, both the ZEW and Ifo surveys for January will be monitored. Both the UK and US post initial first quarter estimates of gross domestic product.


Looking Ahead: January 22 through January 26, 2018

Central Bank activities
Jan 23 Japan Bank of Japan Monetary Policy Meeting
Jan 25 Eurozone European Central Bank Monetary Policy Announcement
The following indicators will be released this week...
Jan 23 Germany ZEW Survey (January)
Jan 24 Eurozone PMI Manufacturing, Services & Composite Survey (January flash)
Germany PMI Manufacturing, Services & Composite Survey (January flash)
France PMI Manufacturing, Services & Composite Survey (January flash)
UK Labour Market Report (December)
Jan 25 Germany Ifo Survey (January)
Jan 26 Eurozone M3 Money Supply (December)
UK Gross Domestic Product (Q4. 2017 first estimate)
Asia Pacific
Jan 24 Japan Merchandise Trade Balance (December) 
PMI Manufacturing Survey (January flash)
Jan 26 Japan Consumer Price Index (December)
Jan 25 Canada Retail Sales (November)
Jan 26 Canada Consumer Price Index (December)


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


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