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First the ECB, now the Fed
International Perspective - March 10, 2017
By Anne D. Picker, Chief Economist


Global Markets

Global market participants behaved with caution during the week as they waited for three main events — the European Central Bank announcement, the U.S. employment report and the Federal Reserve's monetary policy announcement. The ECB left its policy on hold while February employment jumped more than expected. Most market participants now assume that the Fed will increase rates on Wednesday. Furthermore, they have added in odds that the Fed will increase four times this year, not three. Oil prices declined thanks to a build in U.S. inventories that depressed energy companies and offset bank increases as the prospect of higher interest rates cheered bankers.


On the week most global equity indexes were lower, especially in Europe and North America. Losses ranged from 6.08 points (MIB) to 1.7 percent (SET). Gains ranged from 0.1 percent (Hang Seng) to 2.1 percent (IBEX 35).


European Central Bank on hold

The European Central Bank's governing council did the expected and kept policy unchanged at its meeting on Thursday. The benchmark refi rate stayed at zero percent, the deposit rate at minus 0.40 percent and the marginal lending rate at 0.25 percent. The ECB also confirmed that quantitative easing which is currently running at an average €80 billion a month will be reduced to €60 billion a month from April. Forward guidance was also unmodified, with key interest rates expected to remain at present or lower levels for an extended period of time and well past the horizon of the net asset purchases.


The Bank's new economic forecasts were awaited mainly for the upward revision to the inflation profile. In December, annual HICP inflation originally was expected to be 1.3 percent this year, 1.5 percent in 2018 and 1.7 percent in 2019. The new projections are 1.7 percent, 1.6 percent and 1.7 percent respectively. In other words, the pick-up in inflation so far is considered only transitory and not a potential trigger for a monetary tightening. This is consistent with the Bank's view that underlying inflation will only slowly edge higher over the forecast period. Deflation risks are now regarded as being much less significant than previously. At the same time, GDP is expected to grow 1.8 percent in 2017, 1.7 percent in 2018 and 1.6 percent in 2019.


Reserve Bank of Australia

As universally expected, the RBA Board decided to keep the cash rate unchanged at 1.50 percent where it has been since August 2016. The market was given a clear understanding of Governor Philip Lowe's intentions when he commented to the House of Representatives Standing Committee on Economics: "The main effect [of a rate cut] would be more borrowing for housing pushing up house prices."


There were changes in the March statement from the one the month before. Lowe commented that most measures of both business and consumer confidence are at or above average. He also noted that U.S. interest rates are expected to increase. He also referred to the weak household income growth and linked to that effect the observation that employment growth has been concentrated in part time jobs. Those headwinds for the economy have been known for some time but, recently, he has not chosen to highlight them.


The statement accompanying the announcement noted that conditions in the global economy have continued to improve in recent months, supported by stronger growth in China. This has pushed global commodity prices higher and provided a significant boost to Australia's national income. Officials' assessment of the inflation outlook was unchanged from February. Inflation is still expected to pick up from 1.5 percent in the three months to December to somewhere above 2.0 percent "over the course of 2017". The RBA's inflation target range is 2.0 percent to 3.0 percent. Underlying inflation is also expected to pick up but at a more gradual rate.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 3-Mar 10-Mar Week 2017
Australia All Ordinaries 5719.1 5775.4 5811.16 0.6% 1.6%
Japan Nikkei 225 19114.4 19469.2 19604.61 0.7% 2.6%
Topix 1518.61 1558.05 1574.01 1.0% 3.6%
Hong Kong Hang Seng 22000.6 23552.7 23568.67 0.1% 7.1%
S. Korea Kospi 2026.5 2078.8 2097.35 0.9% 3.5%
Singapore STI 2880.8 3122.3 3133.35 0.4% 8.8%
China Shanghai Composite 3103.6 3218.3 3212.76 -0.2% 3.5%
India Sensex 30 26626.5 28832.45 28946.23 0.4% 8.7%
Indonesia Jakarta Composite 5296.7 5391.2 5390.68 0.0% 1.8%
Malaysia KLCI 1641.7 1708.4 1717.58 0.5% 4.6%
Philippines PSEi 6840.6 7247.1 7146.27 -1.4% 4.5%
Taiwan Taiex 9253.5 9648.2 9627.89 -0.2% 4.0%
Thailand SET 1542.9 1566.2 1539.91 -1.7% -0.2%
UK FTSE 100 7142.8 7374.3 7343.08 -0.4% 2.8%
France CAC 4862.3 4995.1 4993.32 0.0% 2.7%
Germany XETRA DAX 11481.1 12027.4 11963.18 -0.5% 4.2%
Italy FTSE MIB 19234.6 19664.5 19658.37 0.0% 2.2%
Spain IBEX 35 9352.1 9798.5 10006.40 2.1% 7.0%
Sweden OMX Stockholm 30 1517.2 1581.3 1587.93 0.4% 4.7%
Switzerland SMI 8219.9 8670.1 8669.97 0.0% 5.5%
North America
United States Dow 19762.6 21005.71 20902.98 -0.5% 5.8%
NASDAQ 5383.1 5870.8 5861.73 -0.2% 8.9%
S&P 500 2238.8 2383.1 2372.60 -0.4% 6.0%
Canada S&P/TSX Comp. 15287.6 15608.5 15506.68 -0.7% 1.4%
Mexico Bolsa 45642.9 47414.6 47102.310 -0.7% 3.2%


Europe and the UK

Most European equity indexes were lower for the week. Although most of the indexes advanced Friday, the gains were not large enough to offset losses incurred earlier in the week. The FTSE was down four of five days with the only advance coming on Friday. The CAC, DAX and SMI however, were lower on two of five days. For the week, the FTSE was down 0.4 percent and the DAX retreated 0.5 percent. Both the CAC and SMI were virtually unchanged with the former down 1.61 points and the latter down 0.09 point. Investors were cautious during the week in lackluster trading as they waited first for the European Central Bank announcement on Thursday and then the U.S. employment report release on Friday.


Economic data from the Eurozone proved mixed for the trading week. German merchandise trade data beat expectations as did industrial production. However, manufacturing orders tumbled more than anticipated. Industrial output and merchandise data from France disappointed. For the UK, although industrial output retreated, the merchandise trade deficit narrowed.


The European Central Bank left interest rates and its quantitative easing program unchanged despite some calls for tightening monetary policy. The ECB's monthly bond buying program will run until at least December, slowing to €60 billion in April from the current €80 billion euros. ECB President Mario Draghi defended the ECB's inaction on interest rates, citing weakness in core inflation. Although overall inflation approached the ECB's target of below 2 percent, core inflation remains under 1 percent. Draghi was cautiously optimistic in his broader assessment of the Eurozone economy, saying risks to the region's economic outlook are "less pronounced" but remain "tilted" to the downside.


According to the Spring Budget Announcement, the UK is expected to grow at a faster pace this year than estimated in the November announcement. The Office for Budget Responsibility raised the growth forecast for this year to 2 percent from the 1.4 percent projected in the Autumn Statement in November. According to Chancellor of the Exchequer Phillip Hammond, the British economy "has continued to confound the commentators with robust growth". He added that his country's growth was only second to that of Germany's among major advanced economies in 2016.


Asia Pacific

Equities were mixed last week as they traded in a relatively narrow range. Most Asian stocks rose on Friday as oil prices rebounded from three month lows and the European Central Bank upgraded its growth and inflation forecasts for the euro area, while signaling little urgency to ease policy again in the light of improving economic outlook. Markets here were closed for the week prior to the release of the U.S. employment report Friday morning (US ET).


Japanese equities continue to gyrate with the direction of the yen. The U.S. dollar hit six week highs against the Japanese yen — investors think the Federal Reserve will raise interest rates at its March 14-15 meeting. The Nikkei was up 0.7 percent on the week as the yen continued to slide. A weaker currency favors exporters who are able to sell their products cheaper overseas and are able to bring home higher profits. Financials gained ground amid a global bond selloff after the ECB signaled a diminishing urgency for more policy action.


The Shanghai Composite slipped 0.2 percent on the week while the Hang Seng inched up 0.1 percent. News that China unexpectedly posted a rare trade deficit in February as imports surged far more than expected had little impact on equity trading. Rather, Chinese shares retreated as tumbling oil prices, renewed weakness in the yuan and weaker-than-expected consumer inflation data sapped investors' appetite for risk.


One needs to be cautious in drawing any conclusions from mainland China data for January and February. The reason simply is the calendar effect of when the Lunar New Year occurs. For example, most analysts attributed the rare trade deficit to distortions caused by the long Lunar New Year celebrations, which began in late January this year but fell in February in 2016. Many businesses shut for a week or more and factory production and port operations can be significantly affected. An analyst noted that all deficits since 2005 have been in either the Lunar New Year month or in one of the months around the Lunar New Year month. Another example would be industrial output and retail sales data which will be released at the beginning of the week. It is customary for China to release data for the two months — January and February —combined.



The U.S. dollar advanced against all of its major counterparts with the exception of the euro last week. The currency gained on the yen, pound sterling, Swiss franc and the Canadian and Australian dollars. The strong employment report made an interest rate increase by the Federal Reserve when it meets Wednesday a near certainty.


The euro climbed as the markets reassessed the odds of a December rate increase by the European Central Bank after mildly hawkish comments by ECB President Draghi helped the euro reverse its declines against the U.S. dollar and the yen. A report that some European Central Bank (ECB) policymakers had discussed the possibility of a rate increase sent government bond yields soaring. Sources told Reuters some ECB policymakers had raised the possibility of raising rates from their current record lows before the end of QE, but that the discussion was brief and there was not broad support for the idea.


The pound sterling declined for a sixth day against the euro and for a second week against the dollar. Reports on Friday showed manufacturing, industrial and construction output all shrank in January from the previous month, adding to evidence that the trend of robust data following the Brexit vote may be coming to an end. The euro is also strengthening after European Central Bank President Mario Draghi gave a more upbeat outlook for the region's economy at a press conference held after the ECB meeting.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 March 3 March 10 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.759 0.755 -0.6% 4.6%
New Zealand NZ$ 0.6948 0.704 0.693 -1.6% -0.2%
Canada C$ 0.7443 0.748 0.743 -0.6% -0.2%
Eurozone euro (€) 1.0534 1.062 1.069 0.7% 1.5%
UK pound sterling (£) 1.2333 1.230 1.218 -1.0% -1.3%
Currency per U.S. $
China yuan 6.9450 6.904 6.909 -0.1% 0.5%
Hong Kong HK$* 7.7533 7.763 7.765 0.0% -0.1%
India rupee 67.9238 66.805 66.605 0.3% 2.0%
Japan yen 116.8100 113.910 114.700 -0.7% 1.8%
Malaysia ringgit 4.4862 4.454 4.453 0.0% 0.7%
Singapore Singapore $ 1.4465 1.410 1.412 -0.1% 2.5%
South Korea won 1205.8300 1156.250 1157.400 -0.1% 4.2%
Taiwan Taiwan $ 32.3260 31.050 31.066 -0.1% 4.1%
Thailand baht 35.8100 35.027 35.326 -0.8% 1.4%
Switzerland Swiss franc 1.0174 1.0088 1.0099 -0.1% 0.7%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


January manufacturing orders plummeted 7.4 percent following an unrevised 5.2 percent monthly jump in December. This was the worst performance since January 2009. It reduced annual growth from 7.6 percent to minus 0.9 percent. January's monthly slump was broad-based but dominated by capital goods which declined 9.9 percent. Basics were down 4.0 percent while consumer and durable goods were off 2.0 percent. Most of the decline was attributable to the domestic market where a 10.5 percent contraction easily more than offset December's 7.4 percent increase. Foreign orders dropped 4.9 percent which was large enough to more than reverse the previous period's 3.7 percent advance. The Eurozone saw a 7.8 percent drop while the rest of the world fell 2.9 percent.


January industrial production rebounded 2.8 percent following a smaller revised, but still sizeable, 2.4 percent monthly decline in December. Annual growth edged up from minus 0.2 percent to zero percent and the level of production was still short of that seen in last August. However, the underlying data were more impressive as the key manufacturing subsector jumped 3.7 percent that easily more than reversed December's 2.7 percent drop. Capital goods jumped 6.1 percent, consumer goods were up 2.3 percent and intermediates 1.7 percent. Construction was down 1.3 percent and energy was 0.7 percent lower.


January seasonally adjusted merchandise trade balance was a surplus of €18.5 billion, up only €0.2 billion from a minimally smaller revised December surplus. The unadjusted surplus stood at €14.8 billion, down from December's €18.7 billion but larger than the €13.2 billion posted a year ago. January's modest improvement in the adjusted data reflected a 2.7 percent monthly increase in exports and a 3.0 percent gain in imports. For the former, the increase all but reversed their year-end 2.8 percent drop and was their third gain in the last four months. Imports have strengthened for four months in a row and in five of the last six.


United Kingdom

January output dropped 0.4 percent on the month after surging a revised 0.9 percent in December. The decline reduced annual growth from 4.3 percent to 3.2 percent. Manufacturing dropped 0.9 percent on the month. The decline was dominated by a 13.5 percent slump in pharmaceuticals that more than reversed their December spurt and alone subtracted 0.8 percentage points off the monthly change in total industrial production. Food, drink & tobacco (down 1.4 percent) were also very soft as were metals (down 3.4 percent) and computer, electrical & optical products (down 1.7 percent). The best performing subsector was transport (2.6 percent), just ahead of wood, paper & printing (2.4 percent).


January's global trade in goods recorded a Stg10.83 billion deficit after a marginally larger revised Stg10.92 billion in December. Excluding oil and other erratic items, the deficit was Stg11.16 billion, down from Stg11.96 billion and a 4-month low. The modest improvement reflected a 1.6 percent monthly increase in exports that offset a 0.9 percent increase in imports. Over the last three months, exports are up 10.0 percent or in excess of three times the 3.1 percent rate posted by imports. The shortfall with the rest of the EU was Stg8.39 billion, unchanged from December, while the deficit with the rest of the world narrowed marginally from Stg2.53 billion to Stg2.45 billion.




February consumer price index was up 0.8 percent on the year, down sharply from 2.5 percent in January. The CPI was down 0.2 percent on the month after increasing 1.0 percent in January. Food prices sank 4.3 percent and increasing 2.7 percent in January while food, tobacco & alcohol tumbled 2.4 percent after increasing 2.5 percent. The timing of Lunar New Year holidays affects most economic indicators in January and February. This year these holidays occurred in January, whereas in 2016 they occurred in February. It means that, compared with 2016, there are fewer working days in January and more working days in February in 2017. For January and February combined, the CPI was up 1.7 percent on the year, down moderately from the increase of 2.1 percent recorded in December.


February producer prices jumped an annual 7.8 percent after advancing 6.9 percent in January. This is the strongest increase in the PPI since September 2008 The PPI was up 0.6 percent on the month after increasing 0.8 percent in January. For January and February combined, the PPI was up 7.3 percent on the year after increasing 5.5 percent in December. Recent moves in PPI inflation may have been impacted to some extent by the timing of Lunar New Year holidays. All sub-categories were up.


February merchandise trade balance moved from surplus to a deficit of $9.15 billion — the first monthly trade deficit since February 2014. The deficit largely reflected the impact of Lunar New Year holidays. On the year, China's trade balance is weaker than it was for the same period in 2016, largely reflecting stronger oil imports. Exports declined 1.3 percent while imports rose 38.1 percent on the year. In seasonally adjusted terms, Chinese exports dropped 28.1 percent on the month in February declining 8.4 percent the month before. Seasonally adjusted imports fell 0.3 percent on the month, after dropping 11.5 percent in January. In local currency terms, China's trade balance swung from a surplus of Y355 billion to a deficit of Y60 billion in February. Exports rose 4.2 percent on the year, while imports rose 44.7 percent on the year.




January merchandise trade surplus widened from $447 million in December to $807 million in January. Exports were up 0.5 percent on the strength of higher exports of motor vehicles and canola. Imports edged down 0.3 percent, mainly due to lower imports of unwrought gold. On the year, exports were up 1.8 percent while imports were 2.1 percent lower. On the month, total exports increased despite declines in 6 of 11 sections. Volumes rose 1.0 percent while prices were down 0.5 percent. Higher exports of motor vehicles & parts, as well as farm, fishing & intermediate food products were the largest contributors to the increase. The increases were partially offset by declines in exports of consumer goods and metal & non-metallic mineral products. Exports excluding energy products were up 0.9 percent. On the month, total imports were lower with 7 of 11 sections posting declines. Prices decreased 2.7 percent while volumes rose 2.5 percent. The decline in imports of metal & non-metallic mineral products as well as industrial machinery, equipment & parts was partially offset by higher imports of motor vehicles and parts. Exports to the U.S. were up 2.3 percent led by higher exports of passenger cars & light trucks. Imports from the U.S. were up 0.3 percent. As a result, Canada's trade surplus with the U.S. widened from $3.8 billion in December to $4.5 billion in January.


February employment increased a greater than anticipated 15,300. Full time employment jumped 105,100 while part time employment dropped 89,800. The unemployment rate as a result, declined to 6.6 percent from 6.8 percent in January. The last time the unemployment rate was lower was in October 2008. The participation rate edged down to 65.8 percent from 65.9 percent in January. Hiring in services industries supported the increase in employment. Services added 30,100 jobs while the goods producing sector lost 14,800 and public sector employment was 6,800 lower. Among the services sector's components, employment in trade jumped 19,100, finance, insurance & real estate added 8,800 jobs and health care increased 8, 300. Private sector employment increased 16,700 after an already healthy 32,400 gain in January. The number of employees increased 10,000, while self-employment, considered less stable, increased by just 5,300.


Bottom line

Equities traded in a narrow range as investors waited for central bank announcements from the Reserve Bank of Australia and the European Central Bank. Both left their monetary policies unchanged. Economic data were mixed globally.


This coming week is all about the Federal Reserve and its expected fed funds interest rate increase. Fed chair Janet Yellen will hold a press conference and updated economic forecasts will be released. The Fed isn't the only central bank on the schedule. The Banks of Japan and England will also meet along with the Swiss National Bank. The Group of 20 (G20) will meet in Baden-Baden on March 17 and 18. China releases industrial production and retail sales data for the first two months of the year. Both the UK and Australia update their labour market data for February.


Looking Ahead: March 10 through March 14, 2017

Central Bank activities
March 15 United States Federal Reserve Monetary Policy Announcement
Federal Reserve Chair Press Conference
March 16 UK Bank of England Monetary Policy Announcement
Japan Bank of Japan Monetary Policy Announcement
Switzerland Swiss National Bank Monetary Policy Assessment
The following indicators will be released this week...
March 13 Italy Industrial Production (January)
March 14 Eurozone Industrial Production (January)
Germany ZEW Survey (March)
March 15 UK Labour Market Report (February)
March 16 Eurozone Harmonized Index of Consumer Prices (January final)
March 17 Eurozone Merchandise Trade (January)
Asia Pacific
March 13 Japan Machinery Orders (January)
Producer Price Index (February)
March 14 China Industrial Production (January, February)
Retail Sales (January, February)
March 16 Australia Labour Force Survey (February)
New Zealand Gross Domestic Product (Q4.2017)
March 17 Canada Manufacturing Sales (January)
Industrial Production (February)
Consumer Sentiment (March preliminary)


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


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