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INTERNATIONAL PERSPECTIVE

Waiting for Greece
Econoday International Perspective 2/20/15
By Anne D. Picker, Chief Economist

  

Global Markets

At this writing (3:00 p.m. ET), Eurozone finance ministers have reached an agreement extending Greece's bailout program by four months — Greece had wanted six months. Greece has to submit a list of proposed measures by Monday which will then assessed by the Troika (European Commission, the European Central Bank and the International Monetary Fund). Finance ministers will hold a conference call Tuesday night to discuss the Greek list of measures. The agreement avoids bankruptcy for Athens but at the same time sets up another potential standoff in June when a €3.5 billion debt payment comes due. The deal leaves several important issues undecided — what reform measures Athens must adopt in order to get €7.2 billion in aid that comes with completing the current program. The decision to request an extension of the current program is a significant U-turn for Greek Prime Minister Alexis Tsipras who had promised in his election campaign to kill the existing bailout. It also includes no reduction of Greece's sovereign debt levels, another campaign promise.

 

The Bank of Japan and Indonesia Bank met last week while the Bank of England, European Central Bank, Reserve Bank of Australia and the Federal Reserve all published minutes of their most recent meetings. For the ECB, it was the first time.


 

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. It said it would continue to buy JGBs at annual pace of ¥80 trillion. Eight of nine members of the monetary policy board voted to keep policy unchanged. Takahide Kiuchi voted against the decision once again, arguing that an earlier pace of purchases (¥60 trillion) was appropriate.

 

The statement was relatively upbeat considering that fourth quarter gross domestic product data indicated that the economy is emerging more slowly from recession than most economists had anticipated. The BoJ said the economy "has continued its moderate recovery trend," with exports picking up and corporate profits improving. Private consumption as a whole has remained resilient against the background of steady improvement in employment, although recovery in some areas has been sluggish.

 

Inflation moved further away from the bank's 2 percent target. The December consumer price index was up only 0.5 percent on the year excluding the effect of the consumption tax increase due primarily to the decline in crude oil prices. The BoJ is more concerned with what price levels would have been without the cheaper crude though and it will continue to observe its effects on prices and wages. The BoJ MPB views further monetary easing to shore up inflation as a counterproductive step for now, amid concern it could trigger declines in the yen that damage confidence.

 

At his post-meeting press conference, BoJ Governor Haruhiko Kuroda said he remains on standby to adjust monetary policy if needed after the policy board maintained record stimulus. With underlying price trends unchanged, Mr Kuroda said further action at this point was unnecessary. A pickup in exports that is currently supporting production reduces the urgency for additional easing even as inflation is poised to slow further as the slump in oil prices filters through the economy. Kuroda said movements in the yen are not bad for Japan's economy as long as they reflect fundamentals.


 

Bank Indonesia

Bank Indonesia unexpectedly cut its main interest rate for the first time in three years, joining global counterparts in easing monetary policy to support its economy as inflation cools. Bank Indonesia Governor Agus Martowardojo and his board lowered the reference rate to 7.5 percent from 7.75 percent. The central bank also reduced the rate it pays lenders on overnight deposits, known as the Fasbi, by 25 basis points to 5.5 percent. Bank Indonesia raised the reference rate to 7.75 percent from 7.5 percent at an unscheduled meeting on November 18, 2014. The move at that time was aimed at countering inflation triggered by a government decision to trim state fuel subsidies. Policy makers cut borrowing costs before potential interest rate increases in the U.S. this year raise the risk of fund outflows from emerging markets and at the same time give the economy a window of opportunity to revive.

 

Indonesia's growth slowed to 5.02 percent last year from a 5.58 percent pace the previous year. President Joko Widodo, who took office in October, has set a target of 5.7 percent in 2015. The central bank didn't face political pressure on its decision, Martowardojo said. Bank Indonesia sees the expansion in gross domestic product this year to be at 5.4 percent to 5.8 percent, while it sees the deficit gap in the current account at 3 percent to 3.1 percent of GDP, similar to last year.


 

A plethora of central bank minutes

Bank of England

Minutes of the Bank of England's February monetary policy committee meeting confirmed an expected unanimous vote to keep Bank Rate at 0.5 percent and its asset purchase ceiling at £375 billion. The majority of committee members seemed quite happy with the way the economy had evolved since their January discussions and certainly gave no indication that they were considering any near term move on policy. However, two members (most likely McCafferty and Weale, the hawkish dissenters) warned that an increase in interest rates might be needed later in the year.


 

European Central Bank

Although full minutes will not be made available for 30 years, the European Central Bank published its first ever summary of its monetary policy deliberations. The report covers the General Council's key 22nd January meeting when President Mario Draghi announced that the monetary authority had at long last decided to go down the quantitative easing route.

 

As expected, details of how the individual members voted remains secret but the minutes do indicate that the adoption of quantitative easing was far from unanimous with some members expressing a negative view of its potential long-run impact and/or not seeing an urgent need for action in the first place. Still, there was agreement that inflation had proved weaker than anticipated and that there may be an increased risk of inflation expectations being downgraded. The effects of lower oil prices on the real economy were considered to be uncertain.


 

Reserve Bank of Australia

The Reserve Bank of Australia published the minutes from its meeting held earlier this month. At that time they cut their key interest rate by 25 basis points to 2.25 percent. Minutes do not suggest further rate cuts are on the way — nor do they imply this will be the only cut. Instead the emphasis was on "uncertainty." The word appears three times in the domestic economy section. The lack of clear guidance on rates confirms that RBA Governor Glenn Stevens is more concerned about the foreign exchange rate than cheap money. In a typical statement, the RBA emphasized that a lower Aussie dollar would stimulate demand. Members noted that the exchange rate had remained above most estimates of its fundamental value, given the decline in commodity prices over the past year, and that future exchange rate movements would be affected by market expectations for monetary policy, both domestically and abroad. They noted that, all else being equal, a sustained further depreciation would, if it occurred, stimulate growth in the domestic economy and put some temporary upward pressure on inflation.


 

Federal Reserve

The Federal Reserve published minutes of its January FOMC meeting. The minutes indicated that the FOMC continues to be 'patient' while preparing for policy normalization. While some committee members are concerned that rates might be increased too late, many remain dovish. Foreign issues remain a downside risk while inflation is low. Many participants see an early rate increase as dampening the recovery. The minutes reiterated that committee members generally expected inflation to return to the Fed's 2 percent target as the labor market strengthens and transitory effects of low energy prices dissipate.


 

Global Stock Market Recap

2014 2015 % Change
Index Dec 31 Feb 13 Feb 20 Week 2015
Asia/Pacific
Australia All Ordinaries 5388.6 5835.5 5845.6 0.2% 8.5%
Japan Nikkei 225 17450.8 17913.4 18332.3 2.3% 5.1%
Hong Kong Hang Seng 23605.0 24682.5 24832.1 0.6% 5.2%
S. Korea Kospi 1915.6 1957.5 1961.5 0.2% 2.4%
Singapore STI 3365.2 3426.2 3435.7 0.3% 2.1%
China Shanghai Composite 3234.7 3203.8 3246.9 1.3% 0.4%
India Sensex 30 27499.4 29094.9 29231.4 0.5% 6.3%
Indonesia Jakarta Composite 5227.0 5374.2 5400.1 0.5% 3.3%
Malaysia KLCI 1761.3 1801.0 1807.9 0.4% 2.6%
Philippines PSEi 7230.6 7773.5 7825.39 0.7% 8.2%
Taiwan Taiex 9307.3 9529.5 9529.5 0.0% 2.4%
Thailand SET 1497.7 1615.9 1603.5 -0.8% 7.1%
Europe
UK FTSE 100 6566.1 6873.5 6915.2 0.6% 5.3%
France CAC 4272.8 4759.4 4830.9 1.5% 13.1%
Germany XETRA DAX 9805.6 10963.4 11050.6 0.8% 12.7%
Italy FTSE MIB 19012.0 21204.1 21842.6 3.0% 14.9%
Spain IBEX 35 10279.5 10739.5 10879.3 1.3% 5.8%
Sweden OMX Stockholm 30 1464.6 1642.0 1664.3 1.4% 13.6%
Switzerland SMI 8983.4 8652.0 8892.2 2.8% -1.0%
North America
United States Dow 17823.1 18019.4 18140.4 0.7% 1.8%
NASDAQ 4736.1 4893.8 4956.0 1.3% 4.6%
S&P 500 2058.9 2097.0 2110.3 0.6% 2.5%
Canada S&P/TSX Comp. 14632.4 15264.8 15172.2 -0.6% 3.7%
Mexico Bolsa 43145.7 43072.4 43551.3 1.1% 0.9%

 

Europe and the UK

Equities advanced last week even though investors were cautious as they waited for news from the Eurozone finance ministers meeting. The ministers gathered to discuss the request made by Greece for a loan extension for up to six months. Germany had rejected Greece's request for extension of its loan agreement, saying the Greek government is attempting to receive bridge financing without meeting the requirements of the program. Traders largely remained optimistic that a deal would eventually be reached, and it was reached late Friday.

 

Markets here were closed for the week when the finance ministers announced the agreement which includes several caveats. The FTSE was up 0.6 percent, the CAC gained 1.5 percent, the DAX advanced 0.8 percent and the SMI added 2.8 percent. The Swiss market index (SMI) has been steadily recouping the huge loss incurred when the Swiss National Bank removed its cap on the Swiss franc against the euro on January 16. After dropping 13.2 percent that week, the SMI has gained in each of the following five weeks.


 

Asia Pacific

Most indexes advanced last week (except the SET) in thin holiday trading. Investors remained optimistic — but wary — that a settlement between Greece and the EU would be reached. The Taiex was closed for the entire week for the Lunar New Year holidays. The Shanghai Composite was up 1.3 percent in just two trading days while the Hang Seng added 0.6 percent in two and a half days of trading. The Nikkei was buoyed by the news that the Japanese economy was no longer in recession even though fourth quarter 2014 growth data was weaker than analysts expected.


 

The Nikkei was the best performer in this region last week, increasing 2.3 percent to a new 15 year high. Equities continue to fluctuate with the value of the yen. On Friday for example, investor sentiment was underpinned by a weaker yen after U.S. weekly new jobless claims were down more than expected, bringing forward expectations of when U.S. interest rates would begin to rise. Bank of Japan Governor Haruhiko Kuroda said the bank has various monetary policy options available in order to achieve 2 percent inflation in a stable manner. After maintaining the monetary easing program unchanged earlier this week, Kuroda said today that the massive bond purchase program is not causing any problem in the government bond market.

 

The Nikkei hit a 15-year high, with sentiment buoyed by positive merchandise trade data and continued optimism over the prospect of a Greek bailout deal. Valuations on Japanese stocks have been rising, but not to the heights of the tech bubble of early 2000. Questions remain over the longer term viability of the Japanese equity market. The shrinking and aging population is a risk to economic growth. The government's precarious debt situation is keeping some investors away from Japan. The evidence for a broad economic recovery throughout the country has not been persuasive. While trust banks that manage money for pension funds emerged as the big force last year, buying ¥2.8 trillion ($24 billion) of Japanese stocks, purchases from foreigners subsided to ¥853 billion, according to the Tokyo Stock Exchange. Retail investors were big sellers, unloading ¥3.6 trillion of Japanese stocks.

 

Analysts noted that some companies had started using capital more effectively even before the start of "Abenomics" two years ago. But the prime minister's policies gave them a push by putting a priority on corporate governance to encourage better use of cash.


 

Currencies

The U.S. dollar was mixed during the week. The currency was down against the Australian dollar but was up against the euro, yen, Swiss franc and Canadian dollar. It was unchanged against the pound sterling. The euro, which has been relatively stable despite Greek uncertainty, held steady after the agreement was announced. The markets have been focused on negotiations between Greece and its Eurozone creditors. And given the caveats in the agreement, it will probably continue to be high on traders' list of things to watch. The yen was down against the dollar for the week amid a wait and see mood ahead of Eurozone finance ministers' talks on the Greek debt issue.


 

After falling from 94 U.S. cents in September to a five-year low of $0.76 on February 12, the Australian dollar has stabilized at around $0.78. But it is widely forecast to fall further as the U.S. economy strengthens and Australian exports to China plunge. The Australian currency hit a high of $1.10 in 2011, after rising sharply from $0.48 a decade earlier amid a mining boom driven mostly by Chinese demand for iron ore, coal and other commodities. China is Australia's biggest export market. But its slowing economy is rapidly reducing both its appetite for imported commodities and the prices it is prepared to pay. The weaker Australian dollar comes as a double-edged sword — it raises the price of imports, adding to business costs, and makes consumers feel worse off. But it also helps some companies by making Australia's exports cheaper.

 

In a move that surprised some analysts, the Reserve Bank of Australia on February 3 underlined its commitment to encouraging non-mining economic activity by cutting its benchmark interest rate to an all-time low of 2.25 percent. Rates had been unchanged at 2.5 percent since August 2013.


 

Selected currencies — weekly results

2014 2015 % Change
Dec 31 Feb 13 Feb 20 Week 2015
U.S. $ per currency
Australia A$ 0.817 0.777 0.784 1.0% -4.0%
New Zealand NZ$ 0.780 0.746 0.752 0.9% -3.6%
Canada C$ 0.861 0.803 0.797 -0.6% -7.4%
Eurozone euro (€) 1.210 1.140 1.138 -0.2% -5.9%
UK pound sterling (£) 1.559 1.540 1.540 0.0% -1.2%
Currency per U.S. $
China yuan 6.206 6.245 6.256 -0.2% -0.8%
Hong Kong HK$* 7.755 7.756 7.760 -0.1% -0.1%
India rupee 63.044 62.196 62.221 0.0% 1.3%
Japan yen 119.820 118.750 119.090 -0.3% 0.6%
Malaysia ringgit 3.497 3.580 3.647 -1.9% -4.1%
Singapore Singapore $ 1.325 1.354 1.360 -0.4% -2.6%
South Korea won 1090.980 1096.880 1112.150 -1.4% -1.9%
Taiwan Taiwan $ 31.656 31.447 31.744 -0.9% -0.3%
Thailand baht 32.880 32.590 32.550 0.1% 1.0%
Switzerland Swiss franc 0.9942 0.932 0.941 -0.9% 5.7%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

EMU

February flash composite PMI output index reading was 53.5, a 0.9 point increase from the final January reading and its strongest mark in seven months. Growth was dominated by services where the PMI was provisionally put at 53.9 — also a 7-month peak — and 1.2 point gain over its final January level. Manufacturing (51.1) was up just 0.1 point although even here the flash PMI similarly achieved its best print in more than half a year. Aggregate new orders continued to expand, particularly in services, and, somewhat surprisingly, capacity shortages were severe enough to prompt the first increase in backlogs since last April. As a result, firms were forced to add to headcount and overall employment climbed at its steepest rate since August 2011. Service sector business expectations were the most optimistic since May 2011 and manufacturers' orders/inventory ratio hit a 7-month peak. However, inflation developments were again soft, albeit not as weak as in January. Thus, input costs were down at a slightly reduced pace from the start of the year and the rate of decline in selling prices similarly eased a little. However, the latter have been falling continually for the best part of three years now.

 

Regionally developments within the core were mildly reassuring with a return to positive growth in France (composite output index 52.2) compounded by another respectable performance by Germany (54.3). The manufacturing reading for France was 47.7, down from 49.2 in January. Germany's manufacturing PMI was unchanged on the month at 50.9. In comparison, Japan's flash manufacturing PMI slipped to 51.5 from 52.2 while the U.S. reading increased to 54.3 from 53.9.


 

Germany

February ZEW current conditions index jumped 23.1 points to 45.5, its steepest rise since August 2010 and its highest reading since July last year. At the same time, expectations climbed 4.6 points to 53.0, their fourth increase in as many months and the best level since February 2014. The surprisingly good results reflect optimism about the likely effects of last month's ECB decision to launch quantitative easing as well as the unexpectedly strong 0.7 percent quarterly gain in German fourth quarter real GDP. However, it should be noted that survey was taken before the recent breakdown in negotiations between Greece and its creditors.


 

United Kingdom

January consumer price index dropped a monthly 0.9 percent and reduced the annual inflation rate from 0.5 percent in December to just 0.3 percent, its lowest since March 1960. However, the weakness of the headline data mask a slightly firmer underlying picture and a 0.8 percent monthly drop in the core CPI was enough to see its yearly change edge up a notch to 1.4 percent. Tumbling energy costs were once again the dominant factor and this was particularly apparent in the transport sector where prices declined a monthly 2.0 percent from December compared with just a 0.6 percent drop in the year ago period. Food & non-alcoholic beverages also had a negative impact, falling 0.7 percent this month from an increase of 0.2 percent in January 2014. Alcohol & tobacco (1.4 percent from 3.1 percent) similarly depressed the overall annual rate. The main upward pressure on the yearly change came from clothing & footwear, where prices were down a monthly 3.7 percent this January compared with a 5.4 percent decline last year, and furniture & household equipment, down 2.5 percent after down 3.1 percent.


 

January input prices dropped a monthly 3.7 percent reducing annual input cost inflation to minus 14.2 percent. Output prices dropped 0.5 percent from December to stand 1.8 percent short of its year ago level. The slide in factory gate prices reflected the slump in the energy market as petrol charges sank a further 7.9 percent on the month and alone subtracted 0.7 percentage points from the overall monthly change. The next steepest drop was food (0.3 percent). Elsewhere there were increases in clothing and textiles (0.7 percent), tobacco and alcohol (0.5 percent) and computer, electrical & optical equipment (0.3 percent). As a result, the core index actually rose 0.2 percent from December although this still saw its annual rate slip from 0.8 percent to 0.5 percent. The downward spiral in oil prices had an even larger impact on input costs for which a 20.2 percent monthly slump in crude oil reduced total costs by more than 3.2 percentage points. Fuel was off 2.7 percent and imported chemicals fell 0.7 percent. The only monthly increase of note was in other home produced materials (1.7 percent).


 

January claimant count joblessness decreased a further 38,600 and that following a much steeper revised 35,800 decline at year-end. The latest drop was the largest since June 2014 and enough to see the jobless rate dip another tick to just 2.5 percent. The unemployment rate on this measure has now fallen in 18 of the last 19 months. The lagging ILO data painted a similarly buoyant picture at year-end with its gauge of the number out of work posting a drop of 97,000 during the final quarter of 2014. The ILO rate also dipped another tick to 5.7 percent. Average earnings growth moved higher again. The yearly rate last quarter, including bonuses, was 2.1 percent, up from a slightly firmer revised 1.8 percent in the three months to November for its sharpest increase since the second quarter of 2013. However, the acceleration was attributable to sharply higher bonus payments (up 10.6 percent) and regular pay over the same period posted a 1.7 percent rate, down 0.1 percentage points from last time.


 

January retail sales were down 0.3 percent after edging up 0.2 percent in December. On the year, sales were up 5.4 percent after increasing 4.0 percent in December. Excluding auto fuel volumes were down a sharper 0.7 percent from year-end but a 4.8 percent yearly gain was also a full percentage point above the December rate. January's monthly headline decrease reflected a 0.9 percent decline in sales of food and a 0.6 percent reversal in non-food demand, the first decline since last August. Clothing & footwear (down 0.4 percent) and, in particular, the other stores category (down 3.3 percent) did most of the damage and masked respectable performances in both non-specialized stores (2.7 percent) and household goods (0.5 percent). Auto fuel was up 3.0 percent.


 

Asia/Pacific

Japan

Fourth quarter GDP was up a less than expected 0.6 percent on the quarter or an annualized pace of 2.2 percent. The increase followed two quarters of contraction. From the same quarter a year ago, GDP declined 0.4 percent. For the year 2014, GDP was unchanged after increasing 1.6 percent in 2013. The quarterly increase was the first since the first quarter of 2014 before the sales tax increase was imposed. Consumption, which accounts for about 55 percent of GDP, increased a modest 0.3 percent on the quarter and less than the anticipated 0.8 percent increase. While the impact of the April sales tax increase on the retail sector has eased, some households are trimming spending as low nominal wage growth is not catching up with a higher cost of living amid the weak yen. Private residential investment declined for a third consecutive quarter, this time by 1.2 percent after a drop of 7.0 percent in the third quarter and a 10.3 percent plunge in the second. However, private non-residential investment edged up 0.1 percent after slipping 0.1 percent in the quarter before. Net exports (exports minus imports) added 0.2 percentage points as growth in exports outnumbered that in imports. Exports were up 2.7 percent on the quarter while imports gained 1.3 percent.


 

The January merchandise trade deficit was ¥1.177.5 trillion when compared with a year ago and smaller than expectations of a deficit of ¥1.679 trillion. It was the 31st consecutive trade deficit. Exports accelerated to a 17 percent when compared with a year ago and their fastest in 14 months. Exports improved from a 12.8 percent pace in December. Exports have been advancing for five months, providing hope that a weakened yen is finally giving Japanese exporters a boost to revive the economy. Imports contracted more than anticipated. Driven by lower fuel prices, imports fell 9 percent from a year ago. Exports to China were up 20.8 percent from a year ago while those to the EU were up 7.4 percent. Exports to the US were 16.5 percent higher. On a seasonally adjusted basis, the trade deficit declined to ¥406.1 billion after a ¥620.7 billion deficit in December. On the month, seasonally adjusted exports were up 1.8 percent while imports declined 1.4 percent.


 

Americas

Canada

December retail sales plunged 2.0 percent on the month and the largest since April 2010. Annual growth slowed to 4.0 percent from 4.6 percent in mid-quarter. Falling energy prices, notably gasoline, contributed significantly towards the headline decline but underlying weakness was reflected in a still sizeable 1.3 percent monthly decrease in volumes. Within the overall monthly nominal drop, declines were reported in nine of the eleven subsectors. Gasoline sales were 7.4 percent lower and autos & parts off 4.8 percent. Excluding these categories sales were down 1.3 percent from their November level. The other main areas of weakness were electronics & appliance stores (down 9.2 percent) and clothing & clothing accessories (down 5.6 percent). However, decreases were also recorded in furniture & home furnishings (1.0 percent), building material & garden equipment and supplies (also 1.0 percent), general merchandise stores (2.0 percent) and sporting goods, hobby, book & music stores (1.3 percent). On the positive side, food & drink rose 1.0 percent and health & personal care was up 0.2 percent.


 

Bottom line

Markets monitored the negotiations between Greece and the Eurogroup of finance ministers for the week. With an agreement announced just before U.S. markets closed Friday, there was little time for traders to react — that will most likely be on Monday. What the agreement mainly did was remove the spectre of a Greek default on Monday.

 

Elsewhere, the Bank of Japan maintained the status quo and left its monetary policy unchanged. However, Bank Indonesia surprised and lowered its key policy rate by 25 basis points. Minutes of policy meetings were released by the Bank of England, Reserve Bank of Australia, the Federal Reserve and for the first time, by the European Central Bank.

 

This week, Germany, the UK and U.S. will publish second estimates of fourth quarter growth. Key surveys including the German Ifo survey and the EC's consumer and business sentiment survey will be closely studied. Japan posts its key CPI, industrial production, unemployment, retail sales and household spending data for January. But investors will continue to monitor the situation in Greece and whether it submits satisfactory to reform measures in order to get €7.2 billion in aid. The new Greek government is to submit those measures for approval by Eurozone authorities on Monday.


 

Looking Ahead: February 23 through February 27, 2015

The following indicators will be released this week...
Europe
February 23 Germany Ifo Business Survey (February)
February 24 Eurozone Harmonized Index of Consumer Prices (January final)
Germany Gross Domestic Product (Q4.2014 final)
February 26 Eurozone M3 Money Supply (January)
EC Business and Consumer Sentiment (February)
Germany Unemployment (February)
February 27 Germany Retail Sales (January)
France Consumption of Manufactured Goods (January)
Producer Price Index (January)
UK Gross Domestic Product (Q4.2014 second estimate)
 
Asia/Pacific
February 25 China  Manufacturing PMI (February flash)
February 27 Japan Consumer Price Index (January)
Unemployment (January)
Household Spending (January)
Retail Sales (January)
Industrial Production (January)
 
Americas
February 26 Canada Consumer Price Index (January)

 

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


 

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