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INTERNATIONAL PERSPECTIVE

A benign August
International Perspective - August 19, 2016
By Anne D. Picker, Chief Economist

  

Global Markets

A summer Friday in August with little new economic data has given traders and investors time to yet again to 'what if' Fed Chair Janet Yellen. While some analysts see a potential September interest rate move, others remind that with the November presidential election looming, the Fed would not run the risk of creating market turmoil less than two months before the vote.

 

U.S. stocks are not the only ones affected by Fed chatter. Asian and European markets react to comments from FOMC members as well. In the past week hawkish comments from New York Fed President William Dudley and San Francisco Fed President John Williams over U.S. interest rate increases sent equities lower. Meanwhile, the markets continue to look for clues to when the Fed might increase interest rates again.

 

On the week, most global equity indexes were lower.


 

Global Stock Market Recap

  2015 2016 % Change
Index Dec 31 Aug 12 Aug 19 Week 2016
Asia/Pacific
Australia All Ordinaries 5344.6 5626.3 5625.37 0.0% 5.3%
Japan Nikkei 225 19033.7 16919.9 16545.82 -2.2% -13.1%
Hong Kong Hang Seng 21914.4 22766.9 22937.22 0.7% 4.7%
S. Korea Kospi 1961.3 2050.5 2056.24 0.3% 4.8%
Singapore STI 2882.7 2867.4 2844.02 -0.8% -1.3%
China Shanghai Composite 3539.2 3050.7 3108.10 1.9% -12.2%
India Sensex 30 26117.5 28152.4 28077.00 -0.3% 7.5%
Indonesia Jakarta Composite 4593.0 5377.2 5416.04 0.7% 17.9%
Malaysia KLCI 1692.5 1684.2 1687.68 0.2% -0.3%
Philippines PSEi 6952.1 7955.9 7930.75 -0.3% 14.1%
Taiwan Taiex 8338.1 9150.4 9034.27 -1.3% 8.3%
Thailand SET 1288.0 1552.6 1538.76 -0.9% 19.5%
Europe
UK FTSE 100 6242.3 6916.0 6858.95 -0.8% 9.9%
France CAC 4637.1 4500.2 4400.52 -2.2% -5.1%
Germany XETRA DAX 10743.0 10713.4 10544.36 -1.6% -1.8%
Italy FTSE MIB 21418.4 16997.8 16310.06 -4.0% -23.9%
Spain IBEX 35 9544.2 8716.4 8450.60 -3.0% -11.5%
Sweden OMX Stockholm 30 1446.8 1414.2 1393.61 -1.5% -3.7%
Switzerland SMI 8818.1 8295.0 8127.28 -2.0% -7.8%
North America
United States Dow 17425.0 18576.5 18552.57 -0.1% 6.5%
NASDAQ 5007.4 5232.9 5238.38 0.1% 4.6%
S&P 500 2043.9 2184.1 2183.87 0.0% 6.8%
Canada S&P/TSX Comp. 13010.0 14747.5 14687.46 -0.4% 12.9%
Mexico Bolsa 42977.5 48363.9 48297.460 -0.1% 12.4%

 

Europe and the UK

The European markets ended the week firmly in negative territory. An uncertain outlook for U.S. interest rates weighed on investor sentiment after hawkish comments from some FOMC members. Traders will be watching Fed chair Janet Yellen's Jackson Hole speech at the end of the week for clues on the timing of the next rate increase. Equity losses for the week were the largest since before the Brexit referendum. Traders speculated that the recent rebound might have been overdone. Concern over the health of Italian lenders and an upcoming referendum in the country that may lead to the resignation of its prime minister dragged the FTSE MIB down the most among western European markets (4.0 percent). The FTSE was down 0.8 percent, the CAC retreated 2.2 percent, the DAX declined 1.6 percent and the SMI lost 2.0 percent.

 

The FTSE suffered its biggest weekly drop since mid-June as the rally to 14-month highs stalled. After initially being hit by the result of the June 23 referendum, Britain's FTSE rallied to its highest level since June 2015. It has been buoyed by its high number of internationally focused firms that earn revenues in dollars and benefited from weakness in the pound sterling.

 

Most economic data released during the week were positive. UK data and in particular retail sales, consumer and producer prices and labour market data were surprisingly strong.


 

European Central Bank publishes minutes

The European Central Bank's governing council said the latest wave of uncertainty in the global economy needed "very close monitoring". The minutes for the meeting on July 21 revealed the Eurozone's recovery remained on track, but could be derailed by several threats. Among them were the aftershocks from the Brexit vote and the health of the region's banks. The minutes hinted the governing council could promise to keep its ultra-loose monetary policy in place to counter the threats to the single currency area's return to full economic health.

 

The minutes confirmed that the ECB decided to leave its policy on hold until policymakers were in a better position to assess the economic outlook to be based upon data collected in the coming months. The ECB noted that the immediate impact of the Brexit vote was far less marked than many anticipated, and that overall the outlook remained in line with the June projections. Turning to inflation, the minutes indicated that Brexit was expected to have only a limited impact on the inflation outlook of the euro area. Monetary analysis, meanwhile, point to the need for appropriate accommodation in order to secure inflation rates that are below but close to 2 percent without undue delay.


 

Asia Pacific

Mixed — in one word — describes equities in this region for the week. Close attention was paid to comments by Federal Reserve members and the minutes of the last FOMC meeting. Investors now are focused on the Federal Reserve and the upcoming conclave where a spate of Fed speakers will talk about monetary policy. The yen and oil prices also influenced the direction of trading. Weak second quarter growth in Japan provoked little reaction in the markets. On the week, The Nikkei lost 2.2 percent while the Shanghai Composite and Hang Seng added 1.9 percent and 0.7 percent respectively. Equities in Australia were virtually unchanged.

 

The Sensex retreated 0.3 percent as investors waited nervously for the appointment of a new governor of the Reserve Bank of India. With Raghuram Rajan's three year term as governor ending September 3, his successor has not yet been named. Inflation worries thanks to a recent surge in oil prices and speculation over who the next governor of the Reserve Bank of India also kept investors nervous.

 

Late Tuesday, China announced it had approved a new stock trading link between Hong Kong and Shenzhen which would let global investors buy Shenzhen stocks and expand the range of Hong Kong stocks on offer to Chinese investors. No date has been announced, but the trading link is expected to begin this year.

 

The long-delayed link, which had been expected for more than a year, is part of China's efforts to internationalize its capital markets and increase its global influence to something more in line with the heft of the nation's economy. Barriers to foreigners wanting to trade in the mainland equities markets were one of the reasons that MSCI decided not to include the shares in its global benchmark indexes in June. Authorities in Beijing have also kept tight control over how much money leaves the country.


 

Reserve Bank of Australia releases minutes

The RBA published minutes from its August 2 meeting earlier this week. At that time, the RBA lowered its policy interest rate by 25 basis points to a record low of 1.5 percent. The minutes did not provide an explicit bias. The minutes noted that there was considerable uncertainty over local inflation. The latest CPI data for Australia had confirmed that inflation pressures were subdued as had been expected. Underlying inflation was expected to remain low for a time before picking up gradually as spare capacity in labour and many product markets diminished. Commodity prices overall had risen since the previous RBA meeting and the Australian dollar exchange rate had appreciated since earlier in the year. In considering the stance of monetary policy, members noted that GDP growth in Australia's major trading partners had remained slightly below average in the first half of 2016 and was expected to continue at around this pace in each year of the forecast period.


 

Currencies

The U.S. dollar retreated last week against all major counterparts with the exception of the Australian dollar. The currency was down against the yen, euro, pound sterling, Swiss franc and the Canadian dollar. The U.S. dollar was sent lower as market players discounted a Federal Reserve fed funds rate increase at its September FOMC meeting. The euro has regained just about all of its losses since the Brexit vote. The yen continued to climb despite a moribund economy that did not grow in the second quarter.


 

The pound sterling climbed on the week after the first official data were published providing clues on how the economy has performed since Britain's vote to leave Europe. The currency was lifted during the week by a stronger than anticipated increase in the consumer price index Tuesday. The currency was also helped by retail sales data showing a much bigger than expected 1.5 percent jump in July suggesting that shoppers in Britain are so far shrugging off the uncertainty that has followed the June 23 vote. And the most recent labour force data, released on Wednesday, suggested there has been little effect so far on the UK's jobs market, despite a warning from Bank of England governor Mark Carney that a quarter of a million jobs could be lost as the economy adjusts to a new post-Brexit vote reality.


 

Selected currencies — weekly results

2015 2016 % Change
Dec 31 Aug 12 Aug 19 Week 2016
U.S. $ per currency
Australia A$ 0.7288 0.766 0.762 -0.4% 4.6%
New Zealand NZ$ 0.6833 0.721 0.728 1.0% 6.5%
Canada C$ 0.7231 0.772 0.778 0.8% 7.6%
Eurozone euro (€) 1.0871 1.116 1.133 1.5% 4.2%
UK pound sterling (£) 1.4742 1.292 1.308 1.2% -11.3%
Currency per U.S. $
China yuan 6.4937 6.636 6.653 -0.3% -2.4%
Hong Kong HK$* 7.7501 7.756 7.753 0.0% 0.0%
India rupee 66.1537 66.889 67.061 -0.3% -1.4%
Japan yen 120.2068 101.260 100.140 1.1% 20.0%
Malaysia ringgit 4.2943 4.028 4.016 0.3% 6.9%
Singapore Singapore $ 1.4179 1.346 1.346 0.0% 5.4%
South Korea won 1175.0600 1103.130 1117.510 -1.3% 5.1%
Taiwan Taiwan $ 32.8620 31.433 31.666 -0.7% 3.8%
Thailand baht 36.0100 34.772 34.640 0.4% 4.0%
Switzerland Swiss franc 1.0014 0.9749 0.9594 1.6% 4.4%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Germany

August ZEW current conditions more than recovered its July losses, gaining 7.8 points to 57.6 and posting the highest level since January. The future expectations index, however, managed to regain only an insignificant 0.5 points of July's outsized 26-point drop. Analysts and financial experts appeared to be impressed by Germany's economic performance, but they remained worried about the post-Brexit future of Germany in such areas as trade, where it is more exposed to UK markets than some of the other Eurozone states.


 

United Kingdom

July consumer price index was down 0.1 percent on the month and up 0.6 percent from a year ago. The monthly decline was the first since January. Core CPI excluding food & energy was up 1.3 percent from a year ago after increasing 1.4 percent last time. The headline rate was pushed higher by the rising price of fuel, alcohol and hotel & restaurant services. Meanwhile, falling housing rent and toys & games helped keep price pressures subdued.


 

July claimant count joblessness declined 8,600 on the month after June's upwardly revised 900 increase. The unemployment rate held steady at 2.2 percent, a tick above the low seen in January and February. The ILO data showed similar strength, as a 52,000 drop in unemployment in the second quarter left the jobless rate unchanged at 4.9 percent, matching the lowest level since the third quarter of 2005. Employment increased by a solid 172,000 in the three months to June. A minor negative note in an otherwise positive report, job vacancies continued their decline from the 763,000 record high seen in the three months to January, falling 7,000 to 741,000, the lowest level since the three months to October 2015. Wages showed a modest improvement in the three months to June with annual growth in average weekly earnings increasing by 0.1 percentage points to 2.4 percent, matching the highest annual gain since September 2015.


 

July retail sales rebounded 1.4 percent after sliding 0.9 percent in June. On the year, sales were up 5.9 percent after increasing 4.3 percent in June and the highest yearly gain since September 2015. Excluding auto fuel, sales were up 1.5 percent on the month and 5.4 percent on the year. The increase in sales was across the board among the major subsectors. Sales in stores selling predominantly food were among the weakest, though still up 0.6 percent on the month. It was predominantly non-food stores that posted the greatest gain, with sales here rising 2.4 percent on the month, and within this group, non-specialized stores fared best, posting a 3.9 percent monthly gain, closely followed by textile, clothing & footwear stores where sales were up 3.5 percent. Household goods were the laggard with a 0.4 percent monthly gain. Non-store retailing was up a robust 1.2 percent on the month, and automotive fuel up 0.6 percent.


 

Asia/Pacific

Japan

First estimate of second quarter gross domestic product was flat after increasing 0.5 percent in the first quarter when compared with the previous quarter. On an annualized basis, second quarter GDP increased 0.2 percent after rising 2.0 percent in the first quarter. When compared with a year ago, GDP was up 0.6 percent. Expectations were for an increase of 0.2 percent on the quarter or an annualized gain of 0.5 percent. Domestic demand was up a weak 0.3 percent with private demand up 0.2 percent. Private consumption was up 0.2 percent for a 0.1 percent contribution to growth. CAPEX retreated 0.4 percent on the quarter after contracting 0.7 percent in the first quarter. The start of the June quarter had been marred by concerns an earthquake that hit the southern island of Kyushu in April would disrupt supply chains and put a dent in overall growth for the quarter.


 

July merchandise trade surplus was ¥513.5 billion from a year ago, down from ¥693.1 billion in June. Expectations had been for a surplus of ¥283.7 billion. Exports dropped 14.0 percent. This was the 10th consecutive drop while imports tumbled 24.7 percent and the 19th consecutive decline despite a stronger yen. The declines of exports and imports were the largest monthly drops since October 2009. Exports to China were down 12.7 percent – the fifth straight drop. To Asia, exports declined 13.9 percent for the 11th straight decline. Exports to the EU were 6.5 percent lower while those to the U.S. were down 11.8 percent.


 

Australia

The seasonally adjusted number of persons employed increased by a much larger than expected 26,200 in July 2016. The unemployment rate edged 0.1 percentage point lower to 5.7 percent -- it had been expected to remain unchanged at 5.8 percent. The labour force participation rate remained unchanged at 64.9 percent as anticipated. The gain in employment was all part time. Part time employment increased 71,600 while full time employment dropped 45,400. The number of unemployed was down 5,500 to 725,500. The number of unemployed persons looking for full-time work declined by 13,300 to 482,400 and the number of unemployed persons only looking for part-time work increased 7,800 to 243,100.


 

Americas

Canada

June manufacturing sales rebounded 0.8 percent from a 1.0 percent decline in May. On the year however, sales were 1.9 percent lower. Higher sales of machinery and transportation equipment products were largely responsible for the gain. Nearly three-quarters of the increase in June was attributable to these two industries. Sales were up in 15 of 21 industries, representing 62 percent of the manufacturing sector. Durable goods rose 1.6 percent while non-durable goods slipped 0.1 percent. Constant dollar sales increased 0.5 percent, indicating a higher volume of goods sold.


 

Retail sales remained virtually flat in June. Retail sales edged down 0.1 percent but were up 2.7 percent on the year. Weaker sales at food & beverage stores and general merchandise stores offset higher sales at motor vehicle & parts dealers. Sales were down in 7 of 11 subsectors, representing 54 percent of retail trade. Food & beverage stores (down 1.5 percent) recorded the largest decrease in dollar terms among subsectors in June. Sales at convenience stores were up 0.3 percent. General merchandise stores were down for a second month while building material & garden equipment & supplies dealers retreated for the third time in four months. Motor vehicle & parts dealers were up 2.0 percent in June. The gain in this subsector was attributable to a 2.5 percent increase at new car dealers, where sales rose for the first time in five months. Automotive parts, accessories & tire stores and other motor vehicle dealers also recorded higher sales.


 

July unadjusted consumer price index was down 0.2 percent on the month and up 1.3 percent from a year ago. The Bank of Canada core CPI was unchanged on the month and up 2.1 percent on the year. Prices rose in six of the eight major components in the 12 months to July, with the shelter and food indexes contributing the most to the annual gain in consumer prices. The transportation index, which includes gasoline and the clothing & footwear index declined on the year. On a seasonally adjusted monthly basis, the CPI was unchanged in July after increasing 0.2 percent in June. Five of the eight major components increased on a seasonally adjusted monthly basis. The transportation index and clothing and footwear index declined, while the health and personal care index was unchanged. On a seasonally adjusted monthly basis, the recreation, education & reading index recorded the largest gain while the transportation index which includes gasoline, posted the largest decrease.


 

Bottom line

Equities were mostly lower in light mid-August trading. Concerns about U.S. monetary policy continued to keep investors on edge. UK economic data, the first to cover the post-Brexit period, proved to be much better than anticipated. The Reserve Bank of Australia, Federal Reserve and European Central Bank released minutes of their most recent policies meetings.

 

The Federal Reserve is back in play. With the next FOMC meeting still a month away, the 'will they or won't they' discussion has already started to addle market players. Mixed opinions are good for the soul and so is vigorous discussion and the FOMC is no exception to that rule. The Jackson Hole symposium sponsored by the Kansas City Fed — held at the end of the week — is always monitored closely for central bank speak especially given that most global central bankers attend.


 

Looking Ahead: August 22 through August 26, 2016

Central Bank activities
August 26 - 28 United States Jackson Hole Monetary Policy Symposium
 
The following indicators will be released this week...
Europe
August 23 Eurozone Manufacturing, Services & Composite PMI (August flash)
Germany Manufacturing, Services & Composite PMI (August flash)
France Manufacturing, Services & Composite PMI (August flash)
August 24 Germany Gross Domestic Product (Q2.2016 final)
August 25 Germany Ifo Business Survey (August)
August 26 Eurozone M3 Money Supply (July)
France Gross Domestic Product (Q2.2016 second estimate)
UK Gross Domestic Product (Q2.2016 second estimate)
 
Asia/Pacific
August 24 Japan Manufacturing PMI (August flash)
August 26 Japan Consumer Price Index (July)

 

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


 

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