Once again Federal Reserve interest rate jitters shook investors after the release of the April FOMC minutes on Wednesday. In no uncertain terms, the FOMC members reminded investors that a rate increase is on the table in June depending on the inflow of economic data between now and then. FOMC members — voting or not — have picked up the rhetoric with the meeting just a month away (June 14 and 15). And a spate of better than expected economic data has led forecasters to predict faster growth in the second quarter along with expectations that the first quarter will be revised upward. The financial markets had all but dismissed the prospect of a rate increase in June or July, for that matter. Now market participants have to recalibrate their thinking. The tremors in the markets occurred mostly on Wednesday and Thursday. However, equities rebounded Friday to end the week on a (mostly) positive note.
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|
2015 |
2016 |
% Change |
|
Index |
Dec 31 |
May 13 |
May 20 |
Week |
2016 |
Asia/Pacific |
|
|
|
|
|
|
Australia |
All Ordinaries |
5344.6 |
5396.3 |
5415.18 |
0.4% |
1.3% |
Japan |
Nikkei 225 |
19033.7 |
16412.2 |
16736.35 |
2.0% |
-12.1% |
Hong Kong |
Hang Seng |
21914.4 |
19719.3 |
19852.20 |
0.7% |
-9.4% |
S. Korea |
Kospi |
1961.3 |
1967.0 |
1947.67 |
-1.0% |
-0.7% |
Singapore |
STI |
2882.7 |
2734.9 |
2763.82 |
1.1% |
-4.1% |
China |
Shanghai Composite |
3539.2 |
2827.1 |
2825.48 |
-0.1% |
-20.2% |
|
|
|
|
|
|
|
India |
Sensex 30 |
26117.5 |
25489.6 |
25301.90 |
-0.7% |
-3.1% |
Indonesia |
Jakarta Composite |
4593.0 |
4761.7 |
4711.88 |
-1.0% |
2.6% |
Malaysia |
KLCI |
1692.5 |
1628.3 |
1628.79 |
0.0% |
-3.8% |
Philippines |
PSEi |
6952.1 |
7436.8 |
7299.03 |
-1.9% |
5.0% |
Taiwan |
Taiex |
8338.1 |
8053.7 |
8131.26 |
1.0% |
-2.5% |
Thailand |
SET |
1288.0 |
1394.7 |
1385.86 |
-0.6% |
7.6% |
|
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
UK |
FTSE 100 |
6242.3 |
6138.5 |
6156.32 |
0.3% |
-1.4% |
France |
CAC |
4637.1 |
4320.0 |
4353.90 |
0.8% |
-6.1% |
Germany |
XETRA DAX |
10743.0 |
9952.9 |
9916.02 |
-0.4% |
-7.7% |
Italy |
FTSE MIB |
21418.4 |
17729.5 |
17812.35 |
0.5% |
-16.8% |
Spain |
IBEX 35 |
9544.2 |
8721.5 |
8771.20 |
0.6% |
-8.1% |
Sweden |
OMX Stockholm 30 |
1446.8 |
1323.2 |
1342.68 |
1.5% |
-7.2% |
Switzerland |
SMI |
8818.1 |
7925.8 |
7997.30 |
0.9% |
-9.3% |
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
United States |
Dow |
17425.0 |
17535.3 |
17500.94 |
-0.2% |
0.4% |
|
NASDAQ |
5007.4 |
4717.7 |
4769.56 |
1.1% |
-4.7% |
|
S&P 500 |
2043.9 |
2046.6 |
2052.32 |
0.3% |
0.4% |
Canada |
S&P/TSX Comp. |
13010.0 |
13748.6 |
13919.58 |
1.2% |
7.0% |
Mexico |
Bolsa |
42977.5 |
45402.5 |
45155.910 |
-0.5% |
5.1% |
Friday's rally helped boost most of the major stock indexes from negative to positive for the week. The DAX reduced its weekly deficit to 0.4 percent. Elsewhere, the FTSE was up 0.3 percent, the CAC gained 0.8 percent and the SMI added 0.9 percent. The three indexes advanced for a second consecutive week. Friday's rebound offset most of Thursday's heavy losses which were precipitated by investors who reacted negatively to the Federal Reserve's FOMC minutes and comments from some committee members. The minutes which were released after the European close Wednesday, strongly hinted that a rate increase is possible in June or July. Commodity price fluctuations also continued to influence the direction of equities.
The UK released a spate of economic data during the week. April's inflation data were disappointingly weak while retail sales were much better than expected. Although the labour force showed no signs of weakness, wage growth was tepid. There are indications that the looming Brexit vote is having an impact on planning as businesses defer spending until after the June 23 vote.
The minutes of the European Central Bank's April Governing Council meeting offered little fresh insight into the ECB's thinking. It was just too soon after launching its latest easing initiative in March with little new data available. The Council did express some concern that inflation expectations, which had been positively correlated with oil prices, had not responded to the pick-up in energy prices since the previous meeting. While there was general agreement that inflation would start to move higher from the second half of 2016, price developments would need to be monitored especially closely to avoid the risk of persistent weakness leading to unwelcome second round effects.
Equities began and ended the week on a positive note. The factors that primarily affected the movements were oil prices and Federal Reserve speakers and minutes from the most recent FOMC meeting. Investors were also monitoring the Group of Seven finance ministers and central bankers meeting currently underway in Japan. On the week, equities were mixed. On the plus side, the Nikkei was up 2.0 percent and the STI and Taiex up 1.0 percent. On the negative side, the Shanghai Composite edged down 0.1 percent for its fifth consecutive weekly decline while the Kospi retreated 1.0 percent. The Jakarta Composite also lost 1.0 percent and the PSEi was 1.9 percent lower.
The week began with disappointing data from China. Both industrial output and retail sales were up less than expected in April. But oil price increases and hopes for even more stimulus from Japan offset the Chinese data.
One of the more watched signals from Japan is the status of the next increase in the sales tax which is scheduled for April 2017. Rumors that Prime Minister Shinzo Abe will postpone the increase set off a rally that was quashed after a top government spokesman denied the report.
Economic data from Japan were generally better than expected as it dodged a recession. First quarter growth increased 0.4 percent on the quarter against expectations of a 0.1 percent increase. Although core machine orders (excluding volatile items) increased, forecasts going forward offset the gain. The outlook indicated that orders will decline in the second quarter. The dose of bad news for the Bank of Japan however came from the April producer price index — it indicated that prices sank further into deflation dropping 4.2 percent from a year ago.
Equities in Australia advanced for a sixth week. There was a modestly positive tone to the employment report where employment advanced over 10,000 thanks to part time hiring while the unemployment rate was unchanged at 5.7 percent. Australia continues to restructure away from reliance on mining to a more service economy. At its May meeting, the Reserve Bank of Australia lowered its policy interest rate by 25 basis points to 1.75 percent. In the minutes of that meeting which were released earlier this week, the Board discussed the merit of the rate cut now rather than waiting for more information. It noted that the CPI and labor costs were lower than what had been expected in February.
The U.S. dollar advanced against all of its major counterparts with the exception of the pound sterling. The currency advanced against the yen, euro, Swiss franc and the Canadian and Australian dollars with the exception of the pound sterling. The yen declined against the U.S. currency for a third straight week. The Group of Seven finance ministers and central bank chairs are meeting in Japan where policy differences could be in focus. The high value of the yen has resulted in foreign exchange and earnings losses for exporters. So far, only verbal intervention has been used with limited success.
In the run up to next week's G-7 summit, the finance ministers and central bankers of the U.S., Canada, Japan, the UK, Germany, Italy and France are meeting in northeastern Japan where they are discussing a variety of topics confronting the global economy. Also participating are Commissioner of the European Commission (EC), the President of the European Central Bank (ECB) and the President of the Eurogroup along with the heads of international organizations, such as the Managing Director of the International Monetary Fund (IMF) and the President of the World Bank.
Currency valuations are expected to be just one of the topics on the agenda. Japanese Finance Minister Taro Aso, who chairs the talks in Sendai, has said recent surges of the yen have been "one-sided" and that Tokyo is prepared to intervene while senior U.S. officials opine that the forex market has been orderly. The attendees are likely to confirm the April Group of 20 economies accord that excess volatility and disorderly movements in exchange rates can have an adverse effect and that countries should refrain from competitive devaluations. The participants are unlikely to issue a communiqué at the end of their meeting on Saturday.
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|
2015 |
2016 |
% Change |
|
|
Dec 31 |
May 13 |
May 20 |
Week |
2016 |
U.S. $ per currency |
|
|
|
|
|
|
Australia |
A$ |
0.7288 |
0.727 |
0.722 |
-0.7% |
-0.9% |
New Zealand |
NZ$ |
0.6833 |
0.677 |
0.677 |
-0.1% |
-1.0% |
Canada |
C$ |
0.7231 |
0.773 |
0.762 |
-1.5% |
5.4% |
Eurozone |
euro (€) |
1.0871 |
1.131 |
1.122 |
-0.9% |
3.2% |
UK |
pound sterling (£) |
1.4742 |
1.437 |
1.449 |
0.8% |
-1.7% |
|
|
|
|
|
|
|
Currency per U.S. $ |
|
|
|
|
|
|
China |
yuan |
6.4937 |
6.532 |
6.549 |
-0.3% |
-0.8% |
Hong Kong |
HK$* |
7.7501 |
7.764 |
7.768 |
-0.1% |
-0.2% |
India |
rupee |
66.1537 |
66.774 |
67.445 |
-1.0% |
-1.9% |
Japan |
yen |
120.2068 |
108.650 |
110.130 |
-1.3% |
9.1% |
Malaysia |
ringgit |
4.2943 |
4.031 |
4.082 |
-1.3% |
5.2% |
Singapore |
Singapore $ |
1.4179 |
1.372 |
1.382 |
-0.7% |
2.6% |
South Korea |
won |
1175.0600 |
1171.470 |
1190.130 |
-1.6% |
-1.3% |
Taiwan |
Taiwan $ |
32.8620 |
32.606 |
32.714 |
-0.3% |
0.5% |
Thailand |
baht |
36.0100 |
35.710 |
35.680 |
0.1% |
0.9% |
Switzerland |
Swiss franc |
1.0014 |
0.9748 |
0.9912 |
-1.7% |
1.0% |
*Pegged to U.S. dollar |
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Source: Bloomberg |
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April harmonized index of consumer prices was unchanged on the month and down 0.2 percent from the same month a year ago. The decline supports the view that the last couple of months have been distorted by the early Easter this year. However, the two principal measures of core inflation were both revised a tick lower to show a common 0.7 percent yearly rate, a 0.3 percentage point drop from their final March reading. The other core gauge, which excludes just energy and seasonal foods, dropped 0.2 percentage points to also 0.7 percent. Weakness in April was particularly apparent in services where annual inflation decreased from 1.4 percent to 0.9 percent and so fully reversed March's 0.5 percentage point gain. This sector will have been the most affected by the change in holiday dates. Elsewhere, non-energy industrial goods posted an unchanged 0.5 percent rate while energy was steady at minus 8.7 percent and food, alcohol and tobacco flat at 0.8 percent.
April consumer prices were significantly weaker than expected with an increase of only 0.1 percent on the month. Annual inflation was 0.3 percent, down 0.2 percentage points from its March level. The decline strengthens the argument that the end of quarter bounce was in no small way a function of early Easter effects. Between March and April the main upward pressure on the yearly change in prices came from recreation & culture. Food & non-alcoholic beverages also improved (0.0 percent after minus 0.4 percent). The principal downside impact came from transport (minus 0.1 percent after 1.1 percent) with air transport charges falling 14.2 percent, a clear indication of the influence of the Easter holidays. Clothing & footwear (minus 0.4 percent after 0.9 percent) and housing, water, electricity, gas & other fuel (minus 0.2 percent after 0.4 percent) similarly had a negative effect. Core inflation dropped even more steeply with an unchanged index on the month equating with a 1.2 percent yearly rate, down 0.3 percentage points from last time.
Manufacturers' output prices rose for a third consecutive month in April. A 0.4 percent monthly increase was the sharpest over the period and reduced annual deflation from 0.9 percent to 0.7 percent. The main upward pressure on the monthly change came from petroleum products which saw a 2.1 percent spurt ahead of tobacco & alcohol (0.8 percent). Outside of the other manufactured products category (0.5 percent) most other subsectors were relatively stable. As a consequence, the core index rose only 0.2 percent on the month although this was still enough to lift its yearly rate from 0.3 percent to 0.5 percent. Input costs were up a slightly smaller than anticipated 0.9 percent on the month but only after an upwardly revised 2.2 percent jump in March. The annual deflation rate rose from 6.1 percent to 6.5 percent. The main boost was provided by crude oil which saw a 3.7 percent monthly bounce but there were also strong increases in home food materials (1.0 percent) and imported chemicals (0.9 percent). The only decline of note was in imported food materials (1.2 percent).
April claimant count joblessness fell 2,400 following a much sharper revised 14,700 increase in March. April's drop was the least significant since last October but still enough to see the unemployment rate dip a tick from a higher revised March level to 2.1 percent, equaling its lowest reading since November 1974. The ILO data showed the number of people out of work in the first quarter falling just 2,000 from the fourth quarter when the decline was a much steeper 56,000. This left the jobless rate steady at 5.1 percent. First quarter annual average earnings growth was a surprisingly firm 2.0 percent or 0.1 percentage points higher than in December-February. However, this constituted just a partial retracement of that period's decline and the regular wage rate actually dipped from 2.2 percent to 2.1 percent.
April retail sales rebounded 1.3 percent on the month after sinking a revised 0.5 percent in March and were up 4.3 percent from a year ago. Excluding auto fuel the picture was much the same with a shallower revised 0.7 percent decrease in March easily more than offset by a 1.5 percent monthly gain in April. Annual growth of volumes was 4.2 percent, up from 2.6 percent last time. The monthly headline spurt was driven by ex-auto fuel non-food demand which climbed 2.5 percent. Within this, all of the major subsectors made sizeable advances, notably non-store retailing (2.5 percent), non-specialized stores (1.9 percent) and the other stores category (4.8 percent). Food sales rose just 0.1 percent while auto fuel was 0.4 percent stronger.
Producer prices continued to sink further into deflation in April. The PPI sank 4.2 percent on the year after declining 3.8 percent in March and 3.4 percent in February. This was the 13th consecutive month of contraction. On the month, the PPI was down 0.3 percent after slipping 0.1 percent. Once again petroleum & coal products weighed on the index. Petroleum & coal products tumbled 21.6 percent on the year. Nonferrous metals sank 14.9 percent while chemicals & related products dropped 8.1 percent. Few subcategories recorded price increases from a year ago. They were food, beverages, tobacco & feedstuffs, lumber & wood products and general purpose machinery.
First quarter gross domestic product increased a greater than the expected 0.1 percent quarterly increase. First quarter gross domestic product was up 0.4 percent on the quarter or at an annualized rate of 1.7 percent. GDP was unchanged from the same quarter a year ago. The first quarter increase follows a quarterly decline of 0.4 percent in the fourth quarter. For the fiscal year 2015, GDP was up 0.8 percent which was the first growth in two years after declining in FY14 by 0.9 percent. Domestic demand was up 0.2 percent as were net exports. Consumption added 0.5 percent. However, CAPEX declined 1.4 percent on the quarter. Public investment was up 0.3 percent on the quarter. The deflator was up 0.9 percent from a year ago after increasing 1.5 percent in the fourth quarter.
March core machinery orders, less volatile items such as orders for ships and those from electric power companies, increased a seasonally adjusted by 5.5 percent and were up 5.6 percent from the same month a year ago. For the January to March period, orders were up 6.7 percent. Manufacturing orders were up 19.7 percent after sinking 30.6 percent in February. Nonmanufacturing orders excluding volatile items were down 6.9 percent in March after increasing 10.2 percent the month before. Overseas orders jumped 29.5 percent after increasing 6.3 percent in February. The total value of machinery orders received by 280 manufacturers operating in Japan increased 15.8 percent in March from the previous month on a seasonally adjusted basis. In January to March period it decreased by 4.4 percent compared with the previous quarter.
The labour market eased slightly in April. Seasonally adjusted employment increased 10,800 after adding 25,100 in March. At the same time, the number of persons unemployed increased by 400. The seasonally adjusted unemployment rate was 5.7 percent for a second month while the labour force participation rate eased to 64.8 percent. The unemployment rate is at its lowest since September 2013. Part time employment once again accounted for the entire increase adding 20,200 jobs while full time employment declined by 9,300.
Industrial output disappointed with an increase of 6.0 percent in April, down from March's 6.8 percent and below the consensus forecast of 6.5 percent. The monthly increase was 0.47 percent, down from 0.63 percent the month before. Year to date, output was up 5.8 percent, unchanged from March. Mining inched up only 0.1 percent after jumping 3.1 percent on the year while manufacturing output eased to an increase of 6.9 percent from 7.2 percent. Of the major products, cement increased only 2.8 percent on the year after soaring 24 percent in March. Output had been negative in the two preceding readings. Steel slumped to an increase of 0.5 percent from 3.3 percent. Auto output increased less than half of the March increase — 4.3 percent, down from 8.9 percent. Electricity output slid 1.7 percent after gaining 4.0 percent.
April retail sales were up 10.1 percent from a year ago after increasing 10.5 percent in March. The gain was below expectations for another increase of 10.5 percent. Year to date, sales were up 10.3 percent for a second month when compared with the same months a year ago. On the month, sales were up 0.80 percent after 0.86 percent in March. Urban sales increased 10.0 percent after 10.4 percent while rural sales slipped to an increase of 10.9 percent from 11.1 percent. Among the subcategories that increased in April more than in March were clothing, stationery, household nondurables, home appliances and furniture. Communications equipment sales were up 12.5 percent after increasing 16.5 percent in March and 20.1 percent in the February/March report. Auto sales were up only 5.1 percent after jumping 12.3 percent in March.
March retail sales dropped 1.0 percent on the month despite a stronger revised 0.6 percent gain in February. On the year, sales were up 3.2 percent. Volume purchases were down 1.3 percent, reversing much of February's bounce. Six of the eleven reporting subsectors posted losses in nominal sales. Motor vehicles & parts (2.9 percent) and furniture & home furnishings (3.7 percent) stood out while gasoline (minus 1.1 percent) again had a negative impact. Excluding motor vehicles & parts, sales dropped only 0.3 percent. On the positive side, general merchandise (0.4 percent) rose for a third consecutive month and clothing & accessories (0.8 percent) also had a good month.
Equities mostly advanced after sinking mid-week on FedSpeak and the latest FOMC minutes. The U.S. dollar rallied after a brief respite. Japan's economic data were mixed while most UK data were positive. Little new policy information was gleaned from the ECB and RBA minutes.
The Bank of Canada announces its policy decision on Wednesday. The Group of Seven summit is scheduled in Japan on May 26 and 27. Investors will focus on the flash PMI data for May as a first look at mid-quarter growth. Germany's ZEW and Ifo surveys will attract the usual attention. The UK will post its second estimate of gross domestic product, this time with the expenditure components. Japan will report its April merchandise trade balance and consumer price index.
Central Bank activities |
|
May 25 |
Canada |
Bank of Canada Monetary Policy Announcement |
May 26, 27 |
Japan |
Group of Seven Meeting |
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The following indicators will be released this week... |
Europe |
|
|
May 23 |
Eurozone |
Manufacturing, Services & Composite PMI (flash May) |
|
Germany |
Manufacturing, Services & Composite PMI (flash May) |
|
France |
Manufacturing, Services & Composite PMI (flash May) |
May 24 |
Germany |
Gross Domestic Product (Q1.2016 final) |
|
|
Zew Survey (May) |
May 25 |
Germany |
Ifo Business Survey (May) |
May 26 |
UK |
Gross Domestic Product (Q1.2016 second estimate) |
May 27 |
Germany |
Retail Sales (April) |
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|
Asia/Pacific |
|
|
May 23 |
Japan |
Merchandise Trade Balance (April) |
May 24 |
Japan |
Manufacturing PMI (flash May) |
May 27 |
Japan |
Consumer Price Index (April) |
Anne D Picker is the author of International Economic Indicators and Central Banks.
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