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ARTICLE ARCHIVES

INTERNATIONAL PERSPECTIVE

Central Banks capture investor attention
Econoday International Perspective 10/9/15
By Anne D. Picker, Chief Economist

  

Global Markets

Equities advanced on hopes of further easing from the Bank of Japan and European Central Bank along with the Federal Reserve's decision to delay its announced goal of increasing the fed funds rate. Three central banks met during the week and all three kept monetary policy unchanged in vastly different economic settings. The Reserve Bank of Australia is attempting to rebalance its economy away from its dependence on mining and commodities. It hasn't experienced a recession since 1991. The Bank of Japan is still fighting deflation. The Bank of England is in a similar situation as the U.S. — it keeps pushing an interest rate increase further into the future. Both the UK and U.S. are concerned about weakness in inflation.

 

The IMF once again lowered its expectations of global growth. According to the latest IMF World Economic Outlook, global growth for 2015 is projected at 3.1 percent, 3 tenths lower than in 2014 and 2 tenths below the forecasts in July. Prospects across the main countries and regions remain uneven. Relative to last year, the recovery in advanced economies is expected to pick up slightly while activity in emerging market and developing economies is projected to slow for the fifth year in a row, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries. In an environment of declining commodity prices, reduced capital flows to emerging markets and pressures on their currencies as well as increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market and developing economies.


 

Global Stock Market Recap

  2014 2015 % Change
Index Dec 31 Oct 2 Oct 9 Week 2015
Asia/Pacific
Australia All Ordinaries 5388.6 5089.2 5309.2 4.3% -1.5%
Japan Nikkei 225 17450.8 17725.1 18438.7 4.0% 5.7%
Hong Kong Hang Seng 23605.0 21506.1 22458.8 4.4% -4.9%
S. Korea Kospi 1915.6 1969.7 2019.5 2.5% 5.4%
Singapore STI 3365.2 2793.2 2998.5 7.4% -10.9%
China Shanghai Composite 3234.7 3052.8 3183.2 4.3% -1.6%
India Sensex 30 27499.4 26221.0 27079.5 3.3% -1.5%
Indonesia Jakarta Composite 5227.0 4207.8 4589.3 9.1% -12.2%
Malaysia KLCI 1761.3 1628.8 1706.5 4.8% -3.1%
Philippines PSEi 7230.6 6850.6 7138.91 4.2% -1.3%
Taiwan Taiex 9307.3 8305.0 8446.0 1.7% -9.3%
Thailand SET 1497.7 1346.4 1411.3 4.8% -5.8%
Europe
UK FTSE 100 6566.1 6130.0 6416.2 4.7% -2.3%
France CAC 4272.8 4458.9 4701.4 5.4% 10.0%
Germany XETRA DAX 9805.6 9553.1 10096.6 5.7% 3.0%
Italy FTSE MIB 19012.0 21395.3 22257.9 4.0% 17.1%
Spain IBEX 35 10279.5 9603.6 10309.6 7.4% 0.3%
Sweden OMX Stockholm 30 1464.6 1412.9 1483.7 5.0% 1.3%
Switzerland SMI 8983.4 8515.5 8680.2 1.9% -3.4%
North America
United States Dow 17823.1 16472.4 17084.5 3.7% -4.1%
NASDAQ 4736.1 4707.8 4830.5 2.6% 2.0%
S&P 500 2058.9 1951.4 2014.9 3.3% -2.1%
Canada S&P/TSX Comp. 14632.4 13339.7 13964.4 4.7% -4.6%
Mexico Bolsa 43145.7 42735.2 44375.6 3.8% 2.9%

 

Europe and the UK

Equities advanced last week, enjoying their largest weekly gain since January. Friday's solid performance of the Asian markets provided an early boost — and commodity strength continued to fuel gains in Europe. Mining stocks were particularly strong after Glencore announced that it will cut its zinc production. The FTSE logged its best week in almost four years. The FTSE was up 4.7 percent, the CAC gained 5.4 percent, the DAX added 5.7 percent and the SMI advanced 1.9 percent.

 

On Friday, investors had their first opportunity to react to the minutes from the most recent FOMC meeting, which were released after the European close Thursday. The minutes showed that FOMC members were concerned about global growth risks and decided it was prudent to wait for additional information before raising interest rates. Combined with recent jobs and trade data, the minutes helped reinforce the view that the Fed will not raise rates later this month and may delay its first rate increase into next year. However, Federal Reserve Bank of Atlanta President Dennis Lockhart said Friday that the Federal Reserve remains on track to raise interest rates before year's end. Lockhart feels the U.S. economy has enough momentum to withstand China's slowdown and gradual interest rate increases.

 

The European Central Bank released minutes of its September governing council meeting Thursday. However, they offered little in the way of fresh policy insights. ECB President Mario Draghi's dovish press conference gave a sizeable boost to speculation about additional monetary easing. However, the minutes only go so far as to confirm that the monetary authority was committed to fully implementing its existing quantitative easing program (asset purchases of €60 billion per month at least through September 2016) while emphasizing its flexibility according to how economic developments unfolded. To this end, bond buying will be front-end loaded for three months through November to address an expected decline in liquidity at year-end.


 

Bank of England

As widely expected, the monetary policy committee again left policy on hold. Bank Rate stays at 0.5 percent and the asset purchase ceiling at Stg375 billion. However, in line with both the August and September deliberations, Ian McCafferty continued to call for an immediate 25 basis point tightening. The discussions took place against a background of slowing domestic and global economic growth, an increased risk of a return to sub-zero UK inflation and further evidence that the labour market has started to cool. Accordingly, the decision not to raise interest rates came as no surprise.

 

BoE Governor Mark Carney said in August the timing would come into sharper focus around the turn of the year. Since then, concerns about a slowdown in the global economy and the U.S. Federal Reserve's decision not to start raising rates have steadily pushed back expectations for when the BoE might move.

 

The BoE also said data which showed a rise in labor costs probably overstated the strength of wage pressures. Parts of the labor market were hit by skills shortages but productivity was rising, neutralizing some of the impact of higher wages. Policymakers acknowledged the slowdown in emerging markets but disagreed about whether it was any worse than they expected earlier this year with China showing steady levels of activity.


 

Asia Pacific

Asian stocks rose across the board last week thanks in part to rebounding commodity prices and after minutes from the Federal Reserve's September 16 to 17 meeting indicated that the Fed is in no hurry to raise short-term interest rates. The minutes showed that members were concerned about the risks to the outlook for economic activity and inflation, although the situation did not materially alter their outlook for the U.S. economy. Gains ranged from a low of 1.7 percent (Taiex) to a high of 9.1 percent (Jakarta Composite). The Nikkei added 4.0 percent and both the All Ordinaries and Shanghai Composite were both 4.3 percent higher on the week. Australian shares hit a six week high, again thanks to expectations the Fed will not raise interest rates this year.

 

In Japan on Thursday, many investors took profits after the IMF warned of fresh shocks to global financial stability and called for an urgent policy upgrade to ensure better growth prospects. While financial stability has improved in advanced economies, the slowdown in China and decline in global trade are undermining the stability of highly indebted emerging economies, the IMF said in its latest Global Financial Stability report. Shares were also undermined when core machinery orders — a leading indicator of capital expenditure — unexpectedly tumbled 5.7 percent in August, casting doubts on the strength of the economic recovery.


 

Reserve Bank of Australia

As universally expected, the RBA kept its key interest rate at 2.0 percent. The Bank had previously lowered its interest rate by 25 basis points both in February and in May. In its communications since, the RBA has continued to highlight its comfort with the current monetary stance. Its statement was little changed from its previous one.

 

In his statement, Governor Glenn Stevens noted that financial conditions will tell the RBA if its current policy stance fosters growth. It is expected that the economy will operate with some spare capacity for a time. The statement noted that growth is below the long term average but employment is stronger. Equity market volatility has continued but the functioning of financial markets generally has so far not been impaired. Long term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low. Overall, global financial conditions remain very accommodative. Recent economic data have been positive. Retail spending has held up and in August the unemployment rate fell slightly to 6.2 percent with more jobs added than were expected.

 

The RBA kept its revised language around the Australian dollar. In its August policy statement the RBA had altered its tone on the currency quite significantly, saying it was "adjusting to the significant declines in key commodity prices" as opposed to previous language which said that "further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices."


 

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 an annual pace of ¥80 trillion. The vote to maintain its policy was 8 to 1. Once again, Takahide Kiuchi voted against the decision arguing that a reduced pace of purchases (¥45 trillion) was appropriate.

 

In its statement, the monetary policy board said that the economy continued to recover moderately and was likely to continue doing so. The MPB said that the core CPI (excluding only fresh food) was likely to continue to be about zero for now due to the decline in energy prices. However, both exports and output have been affected by the slowdown in the emerging markets. It noted that private consumption has been resilient but capex remains weak.

 

Core consumer prices in August were unchanged on the year while the headline consumer price index rose just 0.2 percent from a year earlier. The BoJ is scheduled to release a new outlook on the economy and inflation on October 30, when many believe it will unleash further stimulus. Some analysts think that the BoJ will shift its inflation target measure to the core CPI that excludes fresh food and energy. Indeed, in August that measure was up 0.8 percent.


 

Currencies

The U.S. dollar declined against most of its major counterparts with the exception of the yen where it was up marginally. The dollar tumbled to a three week low against the euro Friday as investors continued to bet against a U.S. rate increase in the coming months. Minutes from the Fed's September policy meeting showed that the Fed continues to worry about low inflation. Commodity based currencies including the Australian, New Zealand and Canadian dollars all posted gains against the U.S. currency.

 

Ever since the dollar began to surge against foreign currencies late last year, analysts have warned that the repercussions would eventually be felt on the home front. If there were any doubts about that, they have now been resolved. With the October 2 employment report showing slower hiring than expected in September along with the weaker data on exports and factory activity, the impact of the dollar's rise on the domestic economy is piling up. While hardly catastrophic — almost no one expects the economy to fall into recession anytime soon — the currency's strength could exert a significant drag on economic growth in the months ahead and could help push the Federal Reserve to wait until 2016 before raising interest rates.

 

A stronger dollar not only makes American made products more expensive and therefore less competitive overseas, but it also favors foreign manufacturers, since they can afford to sell their goods for less in the United States than domestic producers. Chief among the benefits are lower prices in the United States, especially for energy and consumer products, which has the effect of keeping inflation at bay. Although inflation, if anything, has tended to be too low rather than too high since the current recovery began six years ago, the Fed is keeping a very close eye on prices in order to determine when to finally raise short-term interest rates from near zero.


 

Selected currencies — weekly results

2014 2015 % Change
Dec 31 Oct 2 Oct 9 Week 2015
U.S. $ per currency
Australia A$ 0.8170 0.7043 0.732 4.0% -10.4%
New Zealand NZ$ 0.7801 0.6441 0.669 3.9% -14.2%
Canada C$ 0.8614 0.7594 0.773 1.7% -10.3%
Eurozone euro (€) 1.2098 1.1203 1.136 1.4% -6.1%
UK pound sterling (£) 1.5585 1.5179 1.532 0.9% -1.7%
Currency per U.S. $
China yuan 6.2055 6.3571 6.345 0.2% -2.2%
Hong Kong HK$* 7.7546 7.75 7.750 0.0% 0.1%
India rupee 63.0437 65.5125 64.735 1.2% -2.6%
Japan yen 119.8200 120.058 120.250 -0.2% -0.4%
Malaysia ringgit 3.4973 4.415 4.130 6.9% -15.3%
Singapore Singapore $ 1.3246 1.4332 1.396 2.7% -5.1%
South Korea won 1090.9800 1180.55 1144.260 3.2% -4.7%
Taiwan Taiwan $ 31.6560 32.964 32.315 2.0% -2.0%
Thailand baht 32.8800 36.434 35.518 2.6% -7.4%
Switzerland Swiss franc 0.9942 0.9722 0.9616 1.1% 3.4%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Germany

August manufacturing orders dropped 1.8 percent but were up 2.2 percent on the year. The monthly decline constituted the first back-to-back decline since January/February. The monthly decrease was led by capital goods which were down 2.8 percent. However, weakness was broad-based as consumer & durable goods dropped 1.5 percent and basics were off 0.4 percent. Regionally, domestic orders contracted 2.6 percent after a 3.7 percent bounce at the start of the quarter and have now declined in four of the last five months. Overseas demand fell 1.2 percent, compounding July's 6.1 percent slump and would have looked a lot worse but for surprising robustness of the Eurozone component which posted a 2.5 percent gain following a 0.6 percent increase last time. Orders from the rest of the world fell 3.7 percent having already plunged10.1 percent in July. Industrial production retreated a monthly 1.2 percent and was up 3.0 percent on the year. The monthly decline reflected worrying losses in capital goods and consumer goods while intermediates were flat. Energy decreased 1.4 percent and construction was off 1.3 percent.


 

August seasonally adjusted merchandise trade surplus narrowed from a smaller revised €22.4 billion in July to €19.6 billion, its weakest reading since March. The unadjusted balance was €15.3 billion, down sharply from €25.0 billion last time. August's headline deterioration reflected relatively sharp contractions in both sides of the balance sheet as exports fell 5.2 percent on the month and imports declined 3.1 percent. For the former, the decline was the second in three months and the sharpest since January 2009 and left exports at their lowest level since January. Imports saw a third decrease in five months and their weakest level in six. Compared with August 2014, exports were up 6.6 percent, mainly thanks to an 8.1 percent gain in non-EMU EU demand while imports were 3.5 percent higher.


 

United Kingdom

August industrial output increased 1.0 percent from July (revised to a decline of 0.3 percent) and was up 1.9 percent from the same month a year ago. Manufacturing output was up 0.5 percent after a marginally smaller revised 0.7 percent decline last time. Compared with a year ago, the sector's production was still down 0.8 percent. Within overall manufacturing, six of the 13 reporting subsectors posted monthly rises in output. The best performer was transport equipment which climbed 4.6 percent and alone contributed 0.4 percentage points to the change in industrial production. Metals products, which added 0.2 percentage points, also fared disproportionately well. On the downside, manufacturing & repair fell 2.0 percent. Total industrial production was boosted by a 6.0 percent monthly surge in the volatile mining & quarrying category, mainly reflecting an 8.7 percent bounce in crude petroleum & natural gas. Electricity, gas, steam & air condition also gained 0.3 percent but water & waste management supply dropped 2.5 percent.


 

The August deficit on global trade in goods shrank, but only from a sharply higher revised level in July. At Stg11.15 billion, the latest shortfall was much larger than anticipated and, following Stg12.20 billion of red ink at the start of the quarter, will fuel worries about the overvaluation of the pound. To make matters worse, the underlying trade gap which excludes oil and other erratic items narrowed by only Stg0.7 billion to Stg9.63 billion, its second worst reading in the last five months. Total exports were up 3.5 percent on the month but this made only a limited impression on July's 12.8 percent slump. By contrast, imports were down 0.7 percent after a 2.3 percent gain last time. The headline improvement came courtesy of a stronger net trade position with non-EU countries and the deficit here fell from Stg4.8 billion to Stg3.8 billion. The shortfall with the rest of the EU was unchanged at Stg7.4 billion.


 

Asia/Pacific

Japan

Core machine orders retreated for a third month in August. Core machine orders sank 5.7 percent – expectations were for an increase of 3.2 percent. The monthly decline followed drops of 3.6 percent in July and 7.9 percent in June. On the year, orders were 5.2 percent lower. Total orders plunged 14.6 percent. Manufacturing orders slid 3.2 percent while nonmanufacturing orders dropped 6.1 percent on the month. In an indication of weak international trade, overseas orders plummeted 26.1 percent on the month.


 

Australia

Australia is running sizeable trade deficits as sharply lower commodity prices dent export earnings. The trade deficit expanded to A$3.1 billion in August from a revised A$2.8 billion in July. Exports declined 0.5 percent on the month and were up 0.6 percent from a year ago. Imports were 0.6 percent higher in August and 8.3 percent above the same month a year ago. Rural goods exports slipped 1.0 percent while nonrural goods were up 3.0 percent. Consumption imports were up 2.0 percent while capital goods retreated 1.0 percent. The main components of capital goods that contributed to the decline were machinery & equipment, down 15 percent and civil aircraft and confidentialized items, down 17 percent. A widespread slump in commodity prices has kept a lid on the value of Australia's exports, while a lower exchange rate has caused import values to rise.


 

Americas

Canada

August merchandise trade deficit was C$2.53 billion after an upwardly revised C$0.82 billion shortfall in July. The deficit, much larger than expected, reflected a 3.6 percent monthly drop in exports that was compounded by a 0.2 percent increase in imports. The real trade balance also deteriorated as export volumes dropped 0.6 percent from July while imports edged just 0.1 percent lower. Within the monthly slide in total nominal exports, sales to the U.S. were down 3.0 percent. Exports were hit by a near-15 percent monthly slump in the energy sector. However, the entire drop was attributable to weaker prices which plunged 16.4 percent. Volumes actually climbed 2.0 percent. Elsewhere, performances were very mixed. Hence, metal & non-metallic mineral products were down 9.7 percent, consumer goods 8.0 percent and industrial machinery, equipment & parts 3.0 percent. Partial offsets were provided by gains in metal ores & non-metallic minerals (15.7 percent), electronic & electrical equipment & parts (5.2 percent) and forestry products & building & packaging materials (4.8 percent). At the same time imports were lifted by a 2.6 percent monthly rise in consumer goods alongside a 6.0 percent advance in metal & non-metallic mineral products.


 

September employment followed August's 12,000 gain with a slightly stronger 12,100 advance. However, with the participation rate steady at 65.9 percent, this was still soft enough to see the unemployment rate edge up a tick to 7.1 percent, its highest mark since December 2013. September's increase in jobs was wholly attributable to a 74,000 jump in part-time positions as full-time employment was down some 61,900, its steepest decline since October 2011. The private sector made a positive contribution (10,100) and this combined with a 30,800 bounce in the number of self-employed more than offset a 28,800 slide in public sector hiring. In contrast to August's report, both the goods producing and service sectors added to headcount. The former rose a modest 3,400 with manufacturing just 600 better off and construction up 6,800. Agriculture also increased but utilities and natural resources declined. Service sector employment was 8,700 stronger led by information, culture & recreation and other services, health care & social assistance and business, building & other support services. However, trade and transportation & warehousing were down. Education shed positions as did accommodation & food.


 

Bottom line

Stocks rallied with European indexes gaining the most since January. The Reserve Bank of Australia and the Banks of Japan and England left their respective monetary policies unchanged. Economic data disappointed in Europe and Japan while in the U.S. and Canada, they were mixed.

 

There is not much central bank action for the coming week with the exception of the publication of the Federal Reserve's Beige Book in preparation for its FOMC meeting on October 27 and 28. Inflation data will be reported in Europe, the UK, US and in India and China. The UK posts its September labour force data along with Australia.


 

Looking Ahead: October 12 through October 16, 2015

Central Bank activities
October 14 United States Federal Reserve Beige Book Published
 
The following indicators will be released this week...
Europe
October 13 Germany ZEW Survey (October)
UK Consumer Price Index (September)
Producer Price Index (September)
October 14 Eurozone Industrial Production (August)
UK Labour Market Report (September)
October 16 Eurozone Merchandise Trade (August)
Harmonized Index of Consumer Prices (September final)
 
Asia/Pacific
October 12 India Consumer Price Index (September)
October 13 China Merchandise Trade Balance (September)
October 14 Japan Producer Price Index (September)
China Consumer Price Index (September)
Producer Price Index (September)
 
Americas
October 16 Canada Manufacturing Sales (August)

 

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


 

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