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Central banks + trade uncertainty
International Perspective - August 3, 2018
By Anne D. Picker, Chief Economist


Global Markets

Fifty percent — two central banks increased their respective policy interest rates while two did not. The Reserve Bank of India and the Bank of England both increased rates by 25 basis points while Federal Reserve and Bank of Japan interest rates were unchanged. However, the Bank of Japan caused a stir by making a series of small adjustments and introducing forward guidance. The Federal Reserve made no changes, leaving its fed fund interest range at 1.75 percent to 2.0 percent but elevated its assessment of the U.S. economy to strong, up from solid in June.


Equities bounced along during the week, ending mostly lower — investors weighed earnings results against the continuing trade uncertainties and digested the central bank decisions.  


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 July 27 August 3 Week 2018
Australia All Ordinaries 6167.3 6391.5 6326.4 -1.0% 2.6%
Japan Nikkei 225 22764.9 22712.8 22525.2 -0.8% -1.1%
Topix 1817.56 1775.76 1742.6 -1.9% -4.1%
Hong Kong Hang Seng 29919.2 28804.3 27676.3 -3.9% -7.5%
S. Korea Kospi 2467.5 2295.0 2287.7 -0.3% -7.3%
Singapore STI 3402.9 3325.0 3265.7 -1.8% -4.0%
China Shanghai Composite 3307.2 2873.6 2740.4 -4.6% -17.1%
India Sensex 30 34056.8 37336.85 37556.2 0.6% 10.3%
Indonesia Jakarta Composite 6355.7 5989.1 6007.5 0.3% -5.5%
Malaysia KLCI 1796.8 1769.1 1780.1 0.6% -0.9%
Philippines PSEi 8558.4 7701.4 7819.4 1.5% -8.6%
Taiwan Taiex 10642.9 11075.8 11012.4 -0.6% 3.5%
Thailand SET 1753.7 1701.9 1712.1 0.6% -2.4%
UK FTSE 100 7687.8 7701.3 7659.1 -0.5% -0.4%
France CAC 5312.6 5511.8 5479.0 -0.6% 3.1%
Germany XETRA DAX 12917.6 12860.4 12615.8 -1.9% -2.3%
Italy FTSE MIB 21853.3 21955.1 21586.9 -1.7% -1.2%
Spain IBEX 35 10043.9 9867.9 9739.8 -1.3% -3.0%
Sweden OMX Stockholm 30 1576.9 1612.8 1612.0 -0.1% 2.2%
Switzerland SMI 9381.9 9173.2 9158.0 -0.2% -2.4%
North America
United States Dow 24719.2 25462.58 25462.6 0.0% 3.0%
NASDAQ 6903.4 7812.0 7812.0 1.0% 13.2%
S&P 500 2673.6 2840.4 2840.4 0.8% 6.2%
Canada S&P/TSX Comp. 16209.1 16420.2 16420.2 0.2% 1.3%
Mexico Bolsa 49354.4 49302.6 49331.1 -0.7% -0.1%


Europe and the UK

Despite overall profits gains, European indexes tumbled across the board for the week — the FTSE was down 0.5 percent, the CAC retreated 0.6 percent, the DAX dropped 1.9 percent and the SMI was 0.2 percent lower. Fresh concerns over global trade marred sentiment after U.S. President Donald Trump ramped up pressure on China by proposing a higher 25 percent tariff on $200 billion worth of Chinese imports instead of the original 10 percent. On Friday, the Chinese retaliated saying they will impose levies on $60 billion of U.S. products if Washington moves ahead with its tariff threats. The State Council, China’s cabinet, said China is preparing to impose duties at various levels on some 5,207 American goods. "Any unilateral threat or blackmail will only lead to intensification of conflicts and damage to the interests of all parties," it said.


Bank of England

As anticipated, the Bank of England raised interest rates to their highest level in almost a decade saying recent data vindicated policymakers’ view that the first quarter slowdown in UK growth was temporary. Members of the Monetary Policy Committee voted unanimously for a 25 basis point increase, taking the BoE’s benchmark interest rate to 0.75 percent — the highest level since the global financial crisis a decade ago. In line with existing forward guidance, the quantitative easing ceiling remains £445 billion (£435 billion gilts, £10 billion corporate bonds) and it also retained its tightening bias. Forward guidance still contains the expectation that "any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent."


In the minutes, MPC members noted that there is very little spare capacity left in the UK economy, with low productivity and lower net migration holding back potential growth, so that even modest increases in demand would lead to domestic inflationary pressures. The MPC predicted that a tight labour market would continue to push up wage growth, with further rate increases needed to bring inflation back to its 2 percent target. The MPC said any rate increases would be introduced “at a gradual pace and to a limited extent”. Governor Mark Carney said that policy needed to “walk not run” and expressed concern over Brexit.


Asia Pacific

It was a tough week for Asian equities given the renewed focus on a possible escalation in U.S. tariffs on China from 10 percent to 25 percent. As to be expected, the Shanghai Composite (down 4.6 percent) and the Hang Seng (down 3.9 percent) indexes were the hardest hit. It should be noted that Beijing retaliated late Friday. China will impose new tariffs on $60 billion worth of imports from the United States making good on a promise to respond in kind to Donald Trump’s escalating tariff threats.


The commerce ministry said that its decision was a response to the U.S.’s decision to increase the rate of planned tariffs on $200 billion worth of Chinese exports to 25 percent, up from the original plan of 10 percent.


Hong Kong shares posted their worst weekly decline in nearly six months on worries over the Sino-American trade conflict and China's economy. The Hang Seng's 3.9 percent drop was its steepest fall since the week ended February 9. Forty-eight of the index's 50 constituents ended in the red during the five day period.


The Nikkei and Topix lost 0.8 percent and 1.9 percent respectively on the week. Analysts noted that foreign investors have sold Japanese shares in August for the past eight years. Investors are also nervous — Japan is due to start bilateral talks with the United States next week.Concerns over trade tensions offset the impact of generally positive Japanese corporate earnings thanks to the current strength in the global economy.


Bank of Japan

The Bank of Japan ended its two-day policy meeting with a declaration that it was strengthening the framework for "continuous powerful monetary easing". The bank held its benchmark interest rate steady at minus 0.1 percent but introduced forward guidance on policy rates and said it would permit greater movement of the yield on 10-year Japanese government bonds — JGBs — as well as allocate more of its ETF purchases to those that track the capitalization weighted Topix rather than the price-based Nikkei 225 index. The changes announced involved efforts to make the BoJ’s massive stimulus program more flexible.


After ten days of conjecture from when the first rumors of a possible change in BoJ policy surfaced, the bank has once again vowed to maintain “extremely low” interest rates and revealed a series of small adjustments to policy, quashing 10 days of speculation that it was mulling bigger changes to its policy framework. The BoJ ended its two-day policy meeting with a declaration that it was strengthening the framework for “continuous powerful monetary easing”.


The bank repeated its previous pledge to continue to purchase bonds so that 10-year JGB yields remain “at around zero percent”, but added the line that “the yields may move upward and downward to some extent”. Analysts said that the flexibility in bond operations was already implied by the “around zero” commitment, and that the new line did not imply the expanded trading range that some market participants had expected.


Reserve Bank of India

For a second consecutive meeting, the monetary policy committee of the Reserve Bank of India opted to increase its key policy repo rate by 25 basis points, this time to 6.5 percent. The move was prompted by rising inflation and concern over tight liquidity pressuring market interest rates. The latest increase comes with retail inflation remaining above RBI's target of 4 percent. Another concern for the bank is a depreciating rupee, which results in higher prices of imported energy and food.


At the previous MPC review at the beginning of June, the interest rate was raised, also by 25 basis points, over fears of rising crude oil prices and mounting inflation. Until then, the committee had kept the rate at 6 percent, which was last cut in August 2017.


India's consumer prices have been rising since November. The retail price index reached a five-month high at 5 percent in June, mainly because of the weakening rupee and higher cost of crude.




China’s yuan tumbled on the week. The currency, which hasn’t breached 7 to the U.S. dollar in more than a decade, has been under pressure due to the trade standoff with the U.S. and declined for the eighth week. On Thursday, Chinese equities tumbled the most in a month after U.S. president Donald Trump instructed his trade tsar to consider increasing the proposed tariffs on some $200 billion in annual imports from China. Mr Trump, who has vowed to fix what the White House perceives as unfair trade practices from Beijing, asked U.S. trade representative Robert Lighthizer to consider increasing the proposed tariffs to 25 percent from the 10 percent announced last month.


The U.S. dollar was mixed on the week. It advanced against the euro, pound sterling and yen. It retreated against the Swiss franc and Canadian dollar and was unchanged against the Australian dollar.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 July 27 Aug 3 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.741 0.740 0.0% -5.0%
New Zealand NZ$ 0.709 0.680 0.675 -0.7% -4.8%
Canada C$ 0.796 0.766 0.770 0.6% -3.2%
Eurozone euro (€) 1.194 1.166 1.157 -0.8% -3.1%
UK pound sterling (£) 1.344 1.311 1.300 -0.8% -3.3%
Currency per U.S. $
China yuan 6.534 6.913 6.827 1.3% -4.3%
Hong Kong HK$* 7.816 7.848 7.849 0.0% -0.4%
India rupee 64.081 68.663 68.615 0.1% -6.6%
Japan yen 112.850 111.000 111.220 -0.2% 1.5%
Malaysia ringgit 4.067 4.063 4.081 -0.5% -0.4%
Singapore Singapore $ 1.338 1.362 1.366 -0.3% -2.0%
South Korea won 1070.630 1118.110 1127.700 -0.9% -5.1%
Taiwan Taiwan $ 29.775 30.596 30.721 -0.4% -3.1%
Thailand baht 32.696 33.373 33.258 0.3% -1.7%
Switzerland Swiss franc 0.979 0.9942 0.994 0.0% -1.6%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


Second quarter provisional gross domestic product was up at a 0.3 percent quarterly rate after increasing 0.4 percent in the first quarter and equaled the weakest performance since the second quarter of 2014. As a result, annual growth slipped from 2.5 percent to 2.1 percent. The preliminary flash report provides no additional details but national statistics already released showed that France (0.2 percent after 0.2 percent) had a neutral impact on the change in the quarterly rate while Spain (0.6 percent after 0.7 percent) had a slightly negative impact. Italy's data follow shortly.


July flash harmonized index of consumer prices was up 2.1 percent from the same month a year ago. It was also the first post above the 2 percent mark since the end of 2012. Core inflation also picked up. The narrowest measure, which excludes energy, food, alcohol and tobacco, saw its yearly rate gain a surprisingly large 0.2 percentage points to 1.1 percent, its strongest reading since last August. Omitting just energy and unprocessed food, inflation rose 0.1 percentage points to 1.3 percent, and so only reversed June's decline. The overall acceleration reflected higher rates in both non-energy industrial goods (0.5 percent after 0.4 percent) and services (1.4 percent after 1.3 percent). However, the latter was still 0.2 percentage points below May's peak. Energy jumped from 8.0 percent to 9.4 percent while food, alcohol and tobacco slipped from 2.7 percent to 2.5 percent.



Second quarter provisional gross domestic product was up a quarterly 0.2 percent and equaled the weakest performance since the second quarter of 2016. It was also soft enough to reduce the annual from 1.4 percent to just 1.1 percent, a full percentage point short of the Eurozone average. As usual with the flash report, few details on where the increase in total output was generated were provided. However, it did indicate that there were rises in industry and services and a fall in agriculture. With respect to demand, net exports subtracted while domestic expenditure strengthened.




June merchandise trade surplus widened from a revised A$725 million in May to A$1.873 billion — the largest surplus since May 2017. Exports again recorded solid growth while import growth weakened. Seasonally adjusted exports were up 2.6 percent on the month after jumping 3.7 percent the month before. All major categories advanced on the month, with non-rural goods (around 60 percent of the total) up 2.4 percent, services (around 20 percent) up 1.2 percent and rural goods (around 15 percent of total exports) up 4.6 percent. On the year total exports accelerated from a revised increase of 7.2 percent in May to 13.1 percent in June in original terms. Seasonally adjusted imports fell a monthly 0.8 percent after a revised increase of 4.5 percent in April. Declines in imports of intermediate and other merchandise goods and non-monetary gold outweighed a solid increase of capital goods imports. Consumption goods imports were flat on the month. Total imports increased 8.7 percent on the year in original terms in June, moderating from a revised increase of 12.0 percent in May.




May monthly real gross domestic product was up 0.5 percent after increasing 0.1 percent in April. The increase was widespread — 19 of 20 industrial sectors advanced. On the year, GDP was up 2.6 percent. Goods-producing industries rose a monthly 0.6 percent, led by gains in mining, quarrying, and oil and gas extraction. Services producing industries rose 0.5 percent as all sectors increased. The mining, quarrying, and oil and gas extraction sector was up for the fourth month in a row — this time by 1.8 percent. Retail trade was up 2.0 percent, the largest increase since October 2017. Construction increased 0.7 percent essentially compensating for April's decline. The food services and drinking places sub-sector rebounded after a decline in April. The manufacturing sector edged up 0.1 percent following a 0.8 percent increase in April. Non-durable manufacturing rose 0.9 percent as six of nine subsectors grew. Durable manufacturing declined 0.7 percent as its 10 subsectors were evenly split between increases and decreases. The finance and insurance sector grew 0.4 percent as did financial investment services.


June merchandise trade deficit narrowed from C$2.7 billion in May to C$626 million in June, the smallest deficit since January 2017. Total exports increased 4.1 percent, mainly on higher exports of energy products and aircraft. Total imports edged down 0.2 percent. In real (or in volume) terms, exports rose 2.1 percent and imports were down 1.3 percent. Exports to countries other than the United States increased 8.7 percent in June to a record C$13.6 billion. Higher exports destined for Germany (aircraft), India (metal ores, potash), Belgium (nickel) and Mexico (aircraft) contributed the most to the increase. Lower exports to Hong Kong (unwrought gold) partially offset the overall gain. Imports from countries other than the United States fell 1.2 percent. Lower shipments from China (cellphones, aircraft) and the United Kingdom (motor gasoline) led the decrease. Consequently, Canada's trade deficit with countries other than the United States narrowed from C$6.1 billion in May to C$4.7 billion — the smallest deficit since March 2017. Exports to the United States increased 2.5 percent to a record $37.1 billion, mainly on higher exports of passenger cars and light trucks. Imports from the United States edged up 0.3 percent in June. As a result, Canada's trade surplus with the United States widened from C$3.3 billion in May to C$4.1 billion. Comparing the average exchange rates of May and June, the Canadian dollar lost 1.5 US cents relative to the American dollar.


Bottom line

Most equity indexes retreated last week. There were four central bank meetings — the Reserve Bank of India and the Bank of England increased their policy interest rates by 25 basis points while the Federal Reserve and Bank of Japan did not. Economic news globally was split between good and bad news.


Two more central banks meet this coming week — The Reserve Banks of Australia and New Zealand. Both are anticipated to maintain their current interest rates of 1.5 percent and 1.75 percent respectively. China releases July data for merchandise trade along with consumer and producer prices. Japan releases June machine orders (considered a proxy for capital spending) and July producer prices. The country also posts its first estimate of second quarter gross domestic product.


The UK posts its first estimate of second quarter GDP along with June industrial production and trade deficit. In Europe, most releases revolve around industrial output and merchandise trade.


Looking Ahead: August 6 through August 10, 2018

Central Bank activities
August 7 Australia Reserve Bank of Australia Monetary Policy Announcement
August 9 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
The following indicators will be released this week...
August 6 Germany Manufacturing Orders (June)
August 7 Germany Industrial Production (June)
Merchandise Trade (June)
France Merchandise Trade (June)
August 10 France Industrial Production (June)
Italy Merchandise Trade (June)
UK Monthly GDP (June)
Gross Domestic Product (Q2.2018 preliminary)
Merchandise Trade (June)
Asia Pacific
August 9 Japan Machine Orders (June)
China Consumer Price Index (July)
Producer Price Index (July)
August 10 Japan Gross Domestic Product (Q2.2018 preliminary)
Producer Price Index (July)
India Industrial Production (June)
Hong Kong Gross Domestic Product (Q2.2018)
August 9  Canada Housing Starts (July)
August 10 Canada Labour Force Survey )July)


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


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