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Policy uncertainties rattle investors
International Perspective - January 20, 2017
By Anne D. Picker, Chief Economist


Global Markets

Equities were mostly lower on the week — investors waited for UK Prime Minister's Brexit speech, the European Central Bank's monetary policy decision (see Europe below) and definitive policy direction from incoming U.S. President Donald Trump. There were important economic data as well from China and the UK. Oh yes, there were also two speeches from Federal Reserve Chair Janet Yellen.


Janet Yellen, in remarks in San Francisco Wednesday, said that it makes sense to gradually withdraw monetary support at the pace of "a few times a year". The fed funds rate is currently at a median 0.625 percent which she sees rising by the end of 2019 to about 3 percent — the rate she describes as the longer-run neutral rate. She said the economy is near full employment, though she noted there may be room for further progress. She also said that inflation, though still "fairly low", is moving toward the Fed's 2 percent inflation target. She repeated that the December increase in the fed funds rate, when the Fed raised the funds target range by 25 basis points, reflects the Fed's confidence that the economy will continue to improve.


In the second speech on Thursday, Janet Yellen said the Fed is not behind the inflation curve and the economy is not overheating. However, she said that allowing the economy to run persistently hot is risky, unwise and could drive inflation higher. Yellen cited fiscal policy as a key factor for the economic outlook but said the size, timing and composition of coming changes are uncertain. Yellen expects further strengthening for this year's labor market along with some further decline in the unemployment rate. She described wage gains as subdued and said inflation, held back by swings in both oil and the dollar, isn't likely to surge as the labor market strengthens. She also doesn't see economic growth accelerating much in the near term.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Jan 13 Jan 20 Week 2016
Australia All Ordinaries 5719.1 5776.8 5709.70 -1.2% -0.2%
Japan Nikkei 225 19114.4 19287.3 19137.91 -0.8% 0.1%
Topix 1518.61 1544.89 1533.46 -0.7% 1.0%
Hong Kong Hang Seng 22000.6 22937.4 22885.91 -0.2% 4.0%
S. Korea Kospi 2026.5 2076.8 2065.61 -0.5% 1.9%
Singapore STI 2880.8 3025.1 3011.08 -0.5% 4.5%
China Shanghai Composite 3103.6 3112.8 3123.14 0.3% 0.6%
India Sensex 30 26626.5 27238.06 27034.50 -0.7% 1.5%
Indonesia Jakarta Composite 5296.7 5273.0 5254.31 -0.4% -0.8%
Malaysia KLCI 1641.7 1672.5 1664.89 -0.5% 1.4%
Philippines PSEi 6840.6 7238.5 7232.66 -0.1% 5.7%
Taiwan Taiex 9253.5 9378.8 9331.46 -0.5% 0.8%
Thailand SET 1542.9 1575.2 1562.99 -0.8% 1.3%
UK FTSE 100 7142.8 7337.8 7198.44 -1.9% 0.8%
France CAC 4862.3 4922.5 4850.67 -1.5% -0.2%
Germany XETRA DAX 11481.1 11629.2 11630.13 0.0% 1.3%
Italy FTSE MIB 19234.6 19514.5 19479.46 -0.2% 1.3%
Spain IBEX 35 9352.1 9511.6 9380.10 -1.4% 0.3%
Sweden OMX Stockholm 30 1517.2 1522.5 1525.49 0.2% 0.5%
Switzerland SMI 8219.9 8452.2 8275.13 -2.1% 0.7%
North America
United States Dow 19762.6 19885.7 19827.25 -0.3% 0.3%
NASDAQ 5383.1 5574.1 5555.33 -0.3% 3.2%
S&P 500 2238.8 2274.6 2271.31 -0.1% 1.5%
Canada S&P/TSX Comp. 15287.6 15497.3 15547.88 0.3% 1.7%
Mexico Bolsa 45642.9 46182.4 46331.600 0.3% 1.5%


Europe and the UK

Equities retreated last week — for the FTSE and CAC it was the first weekly decline since the week ending December 2, 2016. Many investors remained on the sidelines at the end of the trading week as they awaited the transition of power in the United States that took place after markets here had closed for the week. The FTSE was down 1.9 percent, the CAC lost 1.5 percent and the SMI was 2.1 percent lower. The DAX was virtually unchanged (up 0.95 point).


The bulk of economic data during the week was from the UK. The December CPI was up 1.6 percent on the year — the Bank of England's inflation target is 2 percent. Also released were surprisingly good labour market data with employment increasing and both unemployment readings maintaining their low levels (The claimant count rate was 2.3 percent and the ILO rate was 4.8 percent). However, not all was good news. December retail sales tumbled 2 percent on the month. Apparently the declining pound sterling caught up with consumers.


Brexit update

UK Prime Minister Teresa May's widely anticipated Brexit speech Tuesday provided, at best, only a very patchy guide as to how the UK Brexit process will unfold. However, as increasingly anticipated, the signs are that departure from the European Union will be more 'hard' than 'soft'. This makes the upcoming UK-EU negotiations that will ultimately determine the final shape of the relationship all the more important to how financial markets and investors perceive the likely outcome.


The main point is that the PM has clearly taken on board the reasons why June's Brexit vote went as it did. To this end, she has prioritized UK control of both immigration and its legal framework over retaining membership of the single European market. This essentially entails a clean break with the Union — there will be no partial or associate membership. However, the address left unanswered the key question concerning how the UK will trade with the EU in the future. May said that the UK would seek a customs agreement but would not participate in a customs union. Such cherry-picking has already been ruled out by the EU so just how such a free trade arrangement will be arrived at is no clearer.


Details in general were in decidedly short supply. Rather, the PM offered a very broad-brush 12-point plan that ultimately seeks to secure the best possible future for the UK outside of the EU without actually saying how to get it. Whatever the shape of the final deal, it will be voted on by both the House of Commons and the House of Lords.


European Central Bank

As widely anticipated, the European Central Bank kept its key interest rates unchanged with the benchmark refi rate remaining at zero percent and the rates on the deposit and marginal lending facilities staying at minus 0.40 percent and 0.25 percent respectively. Asset purchases were also held at €80 billion a month until the end of March when they will be reduced to €60 billion per month through at least year-end, as previously outlined in December. The ECB reiterated its flexibility with regards to both the size and duration of its purchases according to future economic developments.


At his press conference ECB President Mario Draghi was again cautious and emphasized the perceived need for continued substantial monetary accommodation for price stability objectives to be met in the medium-term. Growth risks remain tilted to the downside, albeit largely due to global factors, and there are still no convincing signs of a sustainable rise in underlying inflation. Draghi also pressed again for a faster pace of structural reform as well as support from fiscal policy to bolster the economic recovery where possible within the confines of the growth and stability pact.


Asia Pacific

Politics and policy uncertainties continued to weigh on market sentiment. Most equity indexes were lower with only the Shanghai Composite in positive territory thanks to Friday's gain erasing a weekly loss. Friday was a busy day in Asia with a raft of Chinese economic data being released. And there were speeches by U.S. Fed Chair Janet Yellen on two consecutive days. All this was prior to the inauguration of U.S. President-elect Donald Trump later in the global market day. Losses for the week were below 1 percent except in Australia where the All Ordinaries were down 1.2 percent on the week.


The lunar New Year begins on January 28. Traditionally Chinese families take cash out of banks in preparation. This year is no different. It forced the People's Bank of China to announce a temporary cut in its Reserve Requirement Ratio (RRR) for the five largest Chinese banks. The RRR was reduced by a full percentage point to 16 percent for a period of 28 days. The PBoC noted that the move was only due to unusually tight liquidity conditions in the interbank market ahead of the start of the Chinese New Year — short-term funding costs reached a near-decade high earlier in the week. The cut will be reversed after the holidays and, as such, has no implications for any shift in the central bank's monetary stance.


Earlier Friday (local time), China said that gross domestic product was up 6.8 percent from a year ago, slightly beating expectations of 6.7 percent. GDP was boosted by higher government spending and record bank lending. For the full year 2016, GDP was up 6.7 percent after growing 6.9 percent in 2015. Retail sales figures for December were slightly above forecasts while industrial production and fixed asset investment grew at a slower but still solid pace in the month.


The Hang Seng is already up 4.0 percent in 2017. It should be noted that the Hong Kong dollar is pegged to the U.S. currency and is directly affected by Federal Reserve monetary policy. Investors here have been sensitive to the prospect of any fiscal stimulus by the Trump administration, on concern the resulting boost to U.S. growth and inflation could bolster bond yields and spark outflows from the region. Markets are also cautious over the stance of the new government toward China after Trump previously said he would name Mainland China a currency manipulator.


Events in the U.S. were not the only factors influencing Asian markets. British Prime Minister Teresa May finally outlined her plans for Brexit. The Prime Minister said that her country will leave the European single market when it quits the European Union.



The U.S. dollar was down against five of its six major counterparts including the yen, euro, pound sterling, Swiss franc and the Australian dollar. It advanced against the Canadian dollar. Sterling traded at three month lows on Monday as investors fretted over the likelihood of Britain pulling out of the European Union's single market but bounced higher after PM May's Brexit talk on Tuesday. The UK economy has recently has performed better than expected. But many investors say leaving the EU would hit Britain's trade with its biggest trading partner.


The U.S. dollar soared to 14-year-highs after Mr Trump was elected in November, amid hopes that his plans to boost fiscal stimulus, reform taxes and loosen regulation would propel U.S. growth and inflation higher. But the dollar's rally has lost steam since the start of the year amid uncertainty over the new president's priorities after comments earlier in the week indicated he would prefer a weaker dollar. This prompted a selloff in the U.S. currency.


Selected currencies — weekly results

2016 2016-17 % Change
Dec 30 Jan 13 Jan 20 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.750 0.755 0.7% 4.7%
New Zealand NZ$ 0.6948 0.712 0.717 0.6% 3.1%
Canada C$ 0.7443 0.762 0.750 -1.5% 0.8%
Eurozone euro (€) 1.0534 1.064 1.070 0.5% 1.5%
UK pound sterling (£) 1.2333 1.218 1.236 1.4% 0.2%
Currency per U.S. $
China yuan 6.9450 6.901 6.877 0.3% 1.0%
Hong Kong HK$* 7.7533 7.755 7.758 0.0% -0.1%
India rupee 67.9238 68.156 68.178 0.0% -0.4%
Japan yen 116.8100 114.610 114.490 0.1% 2.0%
Malaysia ringgit 4.4862 4.463 4.447 0.4% 0.9%
Singapore Singapore $ 1.4465 1.428 1.425 0.2% 1.5%
South Korea won 1205.8300 1174.980 1169.140 0.5% 3.1%
Taiwan Taiwan $ 32.3260 31.570 31.527 0.1% 2.5%
Thailand baht 35.8100 35.420 35.400 0.1% 1.2%
Switzerland Swiss franc 1.0174 1.0090 1.0024 0.7% 1.5%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard



January ZEW survey shows analysts adopting a surprisingly optimistic view of the German economy in 2017. Their assessment of current conditions (77.3 after 53.5) saw its largest rise since April 2015 to reach its highest level since July 2011. At the same time, expectations gained 2.8 points to 16.6, its fourth increase in the last six months to record its best reading since August last year. The results suggest that analysts have become more convinced that, after a disappointing third quarter, the German economy is set for a respectable period of expansion.


United Kingdom

December consumer price index was up 0.5 percent and was up 1.6 percent on the year — the highest yearly increase since July 2014. The main positive contribution to the change in annual inflation came from transport where prices rose 2.9 percent on the month after a 1.8 percent increase over the same period a year ago. Food and non-alcoholic drinks, which were up 0.8 percent after declining 0.2 percent, provided the other boost. The effects of most other categories were either slightly positive or minimally negative. As a result, the core CPI also climbed 0.5 percent and at 1.6 percent, its yearly rate was up a couple of ticks and at its highest mark since August 2014.


December claimant count unemployment declined a sizeable 10,100 following a smaller revised 1,300 increase in November and was the first drop since July. However, it was not enough to impact the jobless rate which held steady at a near-record low of 2.3 percent. The ILO data showed a 52,000 drop in the number of people out of work in the three months to November. The jobless rate on this definition was also unchanged at 4.8 percent. Average earnings growth in the September-November period picked up to 2.8 percent, its strongest reading since July-September last year. In part this was due to a jump in bonuses but even excluding this impact, pay was rising at a 2.7 percent rate, a 0.1 percentage point gain on last time.


December retail sales volumes tumbled 1.9 percent, their worst performance since May 2011. Annual growth slowed from 5.7 percent to 4.3 percent, a 3-month low. Excluding auto fuel the picture was much the same with purchases decreasing 2.0 percent on the month after a weaker revised 0.2 percent advance last time. Compared with December 2015, sales were up 4.9 percent, a 1.5 percentage point decline from November's rate. December's monthly slide was broad-based, and since food was off only 0.5 percent, even more marked in underlying terms. Excluding auto fuel, non-food volumes were down 2.6 percent, led by a 7.3 percent plunge in household goods and a 5.3 percent drop in non-store retailing. With clothing & footwear sliding 3.7 percent and specialized stores off 1.2 percent, the only category posting a rise was other stores (0.5 percent). Auto fuel fell 1.1 percent.




November machine orders excluding volatile ones for ships and those from electric power companies declined a seasonally adjusted 5.1 percent on the month. The decline followed an increase of 4.1 percent in October but a drop of 3.3 percent in September. However, for the year, orders were up 3.6 percent. Manufacturing orders jumped 9.8 percent after declining 1.4 percent in October and 3.3 percent in September. Nonmanufacturing orders (excluding volatile orders) tumbled 9.4 percent after increasing 4.6 percent the month before and sliding 0.9 percent in September. The total value of machinery orders received by 280 manufacturers operating in Japan increased 20.6 percent in November from the previous month on a seasonally adjusted basis. This was the third consecutive month increase.


December producer prices declined for the 21st consecutive month when compared with a year ago. In December, the PPI declined 1.2 percent on the year but was up 0.6 percent on the month. The depth of the annual drop has eased – the index was down 4.4 percent in May. A major reason that the PPI's decline eased can be found in the petroleum & coal products category. In November, it declined 5.6 percent on the year while in December the price increased 3.7 percent thanks to rising crude oil prices. Nonferrous metals prices also went from a decline of 5.4 percent to an increase of 1.4 percent.



December employment increased by 13,500, somewhat more than the 12,500 expected. Full time employment increased 9,300 while part time employment was up 4,200. This was the third month that full time jobs have driven the employment increase. Since December 2015, seasonally adjusted employment was up 91,500. However, the gains in full time employment were not reflected in the full 2016 totals. Full time employment declined by 34,000 persons while part time employment increased by 125,500 persons. The unemployment rate edged up to 5.8 percent from 5.7 percent reflecting an increase in the participation rate to 64.7 percent from 64.6 percent as more people looked for employment. The seasonally adjusted employment to population ratio decreased by less than 0.1 percentage points to 60.9 percent in December 2016. Over the past 12 months, the employment to population ratio decreased by 0.4 percentage points.




Manufacturing sales in November rebounded 1.5 percent from October's 0.6 percent decline. On the year, sales were up 2.1 percent after increasing 1.9 percent the month before. The monthly increase was mainly the result of higher sales in the primary metal, petroleum & coal product and chemical manufacturing industries. Sales were up in 14 of the 21 industries, representing 68 percent of Canadian manufacturing sales. Sales in volume terms were up 1.2 percent. Petroleum & coal product sales increased 3.7 percent to their highest level since September 2015. The gain in November was mainly attributable to higher volumes reported by several oil refineries following partial shutdowns in September and October for maintenance and retooling work. However, sales in the transportation equipment industry decreased 2.3 percent mainly thanks to decreases in the aerospace product & parts industry (down 7.4 percent) and the other transportation equipment industry (down 26.8 percent), which had posted a significant increase the previous month.


December consumer price index was down 0.2 percent on the month and up 1.5 percent when compared with December 2015. On a seasonally adjusted monthly basis, the CPI increased 0.3 percent in December, after declining 0.1 percent in November. Six major components increased on a seasonally adjusted monthly basis, while the alcoholic beverages and tobacco products index declined 0.1 percent. The food index was unchanged. The transportation index (up 1.5 percent) posted the largest gain. Prices were up in seven of the eight major components in the 12 months to December, with the transportation and shelter indexes contributing the most to the annual increase in the CPI. The food index declined on this basis for the third consecutive month.


Retail sales were up for the third consecutive month at motor vehicle and parts dealers (0.8 percent) in November. Higher sales at new car dealers (1.9 percent) accounted for most of the gain at the subsector level. Sales at other motor vehicles dealers, which include retailers of recreational vehicles, motorcycles and boats, were up 1.8 percent. Lower sales were reported at automotive parts, accessories and tire stores (down 11.0 percent) and used car dealers (down 3.5 percent). Store types traditionally associated with housing purchases and home renovation experienced sales growth in November. Furniture and home furnishings sales were up 2.0 percent, electronics and appliances up 1.0 percent and health and personal care up 0.5 percent. The gains were mostly offset by declines in all other categories.


Bottom line

Economic data continued to be positive for the most part with few exceptions. The most glaring exceptions were in Japan where November machine orders tumbled and the UK where December retail sales dropped unexpectedly. The European Central Bank maintained its monetary policy as did the Bank of Canada.


There are no central bank meetings in the coming week. Flash PMI data will provide a window to January data. Investors globally will be waiting to hear the details of U.S. President Trump's policy moves. At week's end, the lunar New Year celebrations begin for the year of the rooster.


Looking Ahead: January 23 through January 27, 2017

The following indicators will be released this week...
Jan 23 Eurozone EC Consumer Confidence (January flash)
Jan 24 Eurozone Manufacturing, Services & Composite PMI (January flash)
Germany Manufacturing, Services & Composite PMI (January flash)
France Manufacturing, Services & Composite PMI (January flash)
Jan 25 Germany Ifo Business Survey (January)
Jan 26 UK Gross Domestic Product (Q4.2016 preliminary)
Jan 27 Eurozone M3 Money Supply (December)
Asia Pacific
Jan 24 Japan Manufacturing PMI (January flash)
Jan 25 Japan Merchandise Trade Balance (December)
Australia Consumer Price Index (Q4.2016)
Jan 27 Japan Consumer Price Index (December)
Australia Producer Price Index (Q4.2016)


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


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