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Central banks move markets
International Perspective - June 16, 2017
By Anne D. Picker, Chief Economist


Global Markets

Central banks have the capability to move markets whether they change policy or not. That was certainly the case this past week when the Federal Reserve, Swiss National Bank and the Banks of England and Japan announced their latest monetary policy decisions.


Federal Reserve

As widely expected the Federal Reserve at its FOMC meeting lifted its fed funds rate range to 1.00 percent to 1.25 percent. In its statement, the FOMC said that the labor market has continued to strengthen and business spending has continued to expand. It also said household spending has picked up in recent months, apparently referring to a 0.4 percent rise in April consumer spending. However, the FOMC conceded that inflation has recently declined and it is monitoring the situation. (In her press conference, Chair Janet Yellen pointed specifically to price declines in cell phone plans and gasoline that have been exerting downward pressure on the overall consumer rice index.)


The FOMC expects to begin reducing its $4.5 trillion balance sheet this year but provided no start date. A key caveat here is that the economy must continue to expand as the Fed expects. Its initial reinvestment limits will start at $6 billion per month for Treasuries and $4 billion per month for mortgage-backed securities, rising each quarter until the caps reach $30 billion per month for Treasuries and $20 billion for mortgage-backed securities.


Bank of England

The Bank of England's monetary policy committee (MPC) left the Bank Rate at 0.25 percent and the ceilings on asset purchases of gilt and corporate bond purchases at £435 billion and £10 billion respectively. However, what caught the markets' attention was the unexpected shift in the voting pattern as Kristin Forbes, attending her last MPC meeting, was joined in her call for an immediate 25 basis point increase in rates by two other MPC members. The other five members (one seat remains vacant) were content with no change. However, the pound reacted positively on what financial markets see as another step in the direction of higher UK interest rates.


Minutes of the discussions suggested that the change of view was attributable to inflation worries, boosted by the Bank's May Quarterly Inflation Report which showed the CPI overshooting its 2 percent target by an increased amount and over the entire forecast horizon. The tolerance of some members to missing the target has clearly reached its limit. That said, others placed more weight on the slowdown in first quarter economic growth, mounting signs of a cooling housing market and a deceleration in household consumption. The Bank issued no forward guidance except an expectation that any future increase in Bank Rate would be gradual and limited.


Swiss National Bank

In line with expectations, the Swiss National Bank again opted to leave policy on hold in its Monetary Policy Assessment. The target range for 3-month CHF Libor stayed at minus 1.25 percent to minus 0.25 percent and the key deposit rate at minus 0.75 percent for the 29th consecutive month. The SNB also signaled its determination to prevent any renewed appreciation by the Swiss franc which it still sees as significantly overvalued. The SNB has been fighting this battle by intervening in the forex market to reduce the value of the currency.


The SNB's view of the domestic real economy this time was little different from its March forecast and Swiss GDP growth is still pegged at around 1.5 percent. However, this is subject to downside risks due to political uncertainty and structural problems in a number of advanced economies. Inflation projections have been shaded softer. Although a 0.3 percent annual rate is still projected for 2017, 2018 has been trimmed a tick to also 0.3 percent and 2019 is similarly a tick weaker at 1.0 percent. Forecasts assume no change in official interest rates over the outlook horizon. The bottom line is that SNB policy looks likely to be on hold for some considerable time yet and risks to stability remain on the side of additional easing.


Bank of Japan

As widely expected the Bank of Japan left monetary policy settings unchanged. The BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent. Monetary policy board (MPB) members voted 7-2 in favor of this decision.


The BoJ's policy framework also involves adjusting the pace of their purchases of government bonds (JGBs) in order to keep the 10-year yield close to its target level. The MPB continues to believe that purchasing these bonds at an annual rate of ¥80 trillion is consistent with meeting this target. They also reaffirmed their commitment to keep expanding the monetary base until the annual increase in the consumer price index (excluding fresh food) exceeds their inflation target of 2.0 percent and stays above this level "in a stable manner". The decision to keep its policy on hold reflects the BoJ's assessment that inflation is on track to hit 2.0 percent sometime "around" the fiscal year starting in April 2018. However, the target date has repeatedly been pushed back. Markets were disappointed that the BoJ did not give any signal for a change in policy.


At his post-meeting press conference, BoJ Governor Haruhiko said that price pressures in the Japanese economy are likely to pick up over time but indicated that recent data did not suggest that an upward revision to inflation forecasts was required for now. In particular, he noted that wage growth remained modest despite the output gap improvement and stressed that it will take time to change consumers' "deflationary mindset".


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 June 9 June 16 Week 2017
Australia All Ordinaries 5719.1 5715.5 5808.0 1.6% 1.6%
Japan Nikkei 225 19114.4 20013.3 19943.3 -0.3% 4.3%
Topix 1518.61 1591.66 1596.0 0.3% 5.1%
Hong Kong Hang Seng 22000.6 26030.3 25626.5 -1.6% 16.5%
S. Korea Kospi 2026.5 2381.7 2361.8 -0.8% 16.5%
Singapore STI 2880.8 3254.2 3231.4 -0.7% 12.2%
China Shanghai Composite 3103.6 3158.4 3123.2 -1.1% 0.6%
India Sensex 30 26626.5 31262.06 31056.4 -0.7% 16.6%
Indonesia Jakarta Composite 5296.7 5675.5 5723.6 0.8% 8.1%
Malaysia KLCI 1641.7 1788.9 1791.3 0.1% 9.1%
Philippines PSEi 6840.6 7990.2 7882.2 -1.4% 15.2%
Taiwan Taiex 9253.5 10199.7 10156.7 -0.4% 9.8%
Thailand SET 1542.9 1566.7 1576.6 0.6% 2.2%
UK FTSE 100 7142.8 7527.3 7463.5 -0.8% 4.5%
France CAC 4862.3 5299.7 5263.3 -0.7% 8.2%
Germany XETRA DAX 11481.1 12815.7 12752.7 -0.5% 11.1%
Italy FTSE MIB 19234.6 21122.4 20940.7 -0.9% 8.9%
Spain IBEX 35 9352.1 10978.3 10759.4 -2.0% 15.0%
Sweden OMX Stockholm 30 1517.2 1654.8 1635.9 -1.1% 7.8%
Switzerland SMI 8219.9 8845.9 8963.3 1.3% 9.0%
North America
United States Dow 19762.6 21271.97 21384.3 0.5% 8.2%
NASDAQ 5383.1 6207.9 6151.8 -0.9% 14.3%
S&P 500 2238.8 2431.8 2433.2 0.1% 8.7%
Canada S&P/TSX Comp. 15287.6 15473.2 15192.5 -1.8% -0.6%
Mexico Bolsa 45642.9 49120.0 49189.8 0.1% 7.8%


Europe and the UK

Despite Friday's rally, the FTSE, CAC and DAX retreated for the week. The indexes lost 0.8 percent, 0.7 percent and 0.5 percent respectively. The SMI however, advanced 1.3 percent. Investors cheered the news that Greece's creditors reached an agreement to release the next tranche of funds to Athens. Investors were also relieved after a new poll showed French President Emmanuel Macron's centrist party heading for a large majority in Sunday's second round of legislative elections.


Central banks were in focus Thursday, as investors had their first opportunity to react to Wednesday's announcement from the Federal Reserve. The Fed, as widely expected, increased its fed funds rate by 25 basis points to a range of 1.00 percent to 1.25 percent. But the Bank of England decided to leave its record low interest rate of 0.25 percent unchanged Thursday. And the Swiss National Bank left its long standing negative interest rate at minus 0.75 percent.


News of a long-sought Greek bailout deal contributed to Friday's increases. Greece's creditors agreed to release the next tranche of its bailout, but put off a final decision on relieving its debt burden until August 2018. The International Monetary Fund also agreed on new measures for Greece. The country's default risk looks lower than it has been in a while and its economy appears to be showing signs of stability.


Most economic data disappointed during the week including Germany's ZEW survey and Italy's industrial production. The slew of UK data including retail sales, jobless claims and average weekly earnings declined while consumer and producer price increases were higher than expected.


Asia Pacific

Asian equities were mostly lower on the week as investors weighed the actions (or non-actions) of central banks. The Nikkei, which was down four of five days, retreated 0.3 percent on the week. The Hang Seng was down two days and tumbled 1.6 percent while the Shanghai Composite which was down three days lost 1.1 percent. The All Ordinaries however, rebounded from the previous week's loss and added 1.6 percent after the FOMC announcement.


Fluctuations in the yen and in crude prices also weighed on morale. But investors were relieved after Greece and European creditors reached a deal on the next stages of Athens' €86 billion bailout. The yen weakened against other major currencies after the Bank of Japan kept its monetary policy on hold but upgraded its assessment of private consumption and overseas growth.


Hong Kong shares posted their steepest weekly drop in three months as investors appeared to reconsider property sector risks after the Federal Reserve lifted borrowing costs. The Hong Kong Monetary Authority raised its policy interest rate by 0.25 percentage points Thursday, mirroring the Fed's rate increase. The Hong Kong dollar is pegged to the U.S. dollar.


China's industrial production and retail sales increased at a steady pace in May, while property investment growth softened signaling a slowdown in overall activity in the second quarter. The annual growth in industrial production held steady at 6.5 percent while retail sales grew 10.7 percent on the year.



The U.S. dollar declined against the commodity currencies — the Canadian and Australian dollars — along with the pound sterling. However it advanced against the Swiss franc and the yen but was virtually unchanged against the euro. The U.S. currency was under pressure following a round of poor economic data. The disappointing data have undermined market expectations of future U.S. interest rate increases. The dollar's weakness helped sterling edge higher Friday, consolidating the gains made after Thursday's surprisingly hawkish Bank of England meeting.


The yen fell to two week lows Friday after the Bank of Japan kept interest rates steady and signaled it was in no hurry to follow the Fed's example in tightening its monetary policy. According to BoJ Governor Haruhiko Kuroda there was "some distance" to achieving the BoJ's inflation target of 2 percent and it was "inappropriate" to say how the Bank would exit its massive stimulus program. That ran contrary to market speculation that the BoJ could be considering its own plan for eventually withdrawing emergency stimulus for the economy.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 June 9 June 16 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.753 0.763 1.2% 5.7%
New Zealand NZ$ 0.6948 0.721 0.726 0.7% 4.4%
Canada C$ 0.7443 0.743 0.757 1.8% 1.6%
Eurozone euro (€) 1.0534 1.120 1.120 0.0% 6.3%
UK pound sterling (£) 1.2333 1.273 1.278 0.4% 3.6%
Currency per U.S. $
China yuan 6.9450 6.798 6.811 -0.2% 2.0%
Hong Kong HK$* 7.7533 7.797 7.801 0.0% -0.6%
India rupee 67.9238 64.254 64.428 -0.3% 5.4%
Japan yen 116.8100 110.210 110.840 -0.6% 5.4%
Malaysia ringgit 4.4862 4.265 4.276 -0.3% 4.9%
Singapore Singapore $ 1.4465 1.384 1.383 0.1% 4.6%
South Korea won 1205.8300 1123.160 1134.180 -1.0% 6.3%
Taiwan Taiwan $ 32.3260 30.133 30.349 -0.7% 6.5%
Thailand baht 35.8100 34.070 33.940 0.4% 5.5%
Switzerland Swiss franc 1.0174 0.9691 0.9729 -0.4% 4.6%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


June ZEW survey found analysts more upbeat about the current state of the German economy but more cautious about the outlook. On the positive side, the June current conditions index rose a further 4.1 points to a surprisingly firm 88.0, its largest gain so far this year and its highest reading since July 2011. However by contrast, expectations eased a couple of points to a lower than anticipated 18.6. This was their first decline since February and their softest mark in three months. Nevertheless, the latest print is still high enough to suggest that forecasters remain quite confident about the remainder of 2017.


United Kingdom

May consumer prices were up 0.3 percent on the month and 2.9 percent — their highest mark since April 2012 — from a year ago. The pick-up was quite broad-based. However, the main boost to the change in the yearly rate came from recreation & culture where prices were up 0.9 percent on the month compared with a 0.4 percent fall in May 2016. This alone accounted for more than half of the overall gain. Clothing (0.6 percent after minus 0.3 percent) similarly provided a lift as did furniture & household goods (1.2 percent after 0.4 percent) alongside food and electricity. The main downward impact came from transport where petrol and diesel prices fell a monthly 1.0 percent and 1.6 percent respectively compared with increases of 2.8 percent and 3.0 percent in May 2016. Consequently, the core CPI also increased a monthly 0.3 percent which, in turn, lifted its annual rate from 2.4 percent to 2.6 percent, its firmest reading since December 2011.


May output prices rose 0.1 percent on the month and were up 3.6 percent on the year. This was the third month in a row at this mark and compares with a 3.7 percent peak posted in February. Food products (0.9 percent) saw the only monthly increase of note and there was a sizeable decline in petrol charges (2.3 percent). Otherwise most subsectors saw just small monthly moves, ensuring that the core index also edged just 0.1 percent firmer from April for a 2.8 percent yearly rate, unchanged from last time. Raw material and fuel costs dropped 1.3 percent from April when they dropped a revised 0.3 percent. Crude oil (minus 7.6 percent) and imported metals (minus 2.8 percent) were largely responsible but the majority of subsectors posted monthly decreases. As a result, the overall yearly rate decreased from 15.6 percent to 11.6 percent, its lowest since last September.


May retail sales volumes tumbled a monthly 1.1 percent and managed a 0.9 percent increase on the year. Easter distortions were clearly a factor in April's bounce and an unwinding of these factors similarly contributed to last month's decline. In fact, May's underlying picture was even weaker than the headline data suggest as, excluding auto fuel, non-food sales slumped a monthly 2.3 percent and almost wiped out April's entire 2.5 percent jump. Household goods (minus 5.7 percent) and both the other stores category (minus 2.9 percent) and non-store retailing (minus 1.8 percent) also retreated. Food was off 0.9 percent but auto fuel saw a 2.8 percent gain.




April private sector machinery orders (excluding volatile items) tumbled 3.1 percent on the month after an increase of 1.4 percent in March. This series which excludes orders for ships and those from electric power companies is considered a proxy for capital expenditures. On the year, orders were up 3.6 percent. The monthly drop was driven by the non-manufacturing sector, where orders (excluding volatile items) dropped 5.0 percent. These orders also fell 2.1 percent on the year in April, down from an increase of 2.2 percent in March. Manufacturing orders, in contrast, were up 2.5 percent on the month and 9.8 percent on the year.



May employment increased 42,000 after increasing an upwardly revised 46,100 in April. The unemployment rate declined to 5.5 percent from 5.7 percent. At the same time, the participation rate rose from 64.8 percent to 64.9 percent. The employment increase was entirely driven by full-time jobs, which increased 52,100 after a decline of 5,700 in April. Part-time jobs declined by 10,100 in May, partly reversing the strong increase of 51,900 recorded in April. Over the last 12 months, seasonally-adjusted full-time employment has increased by 148,000 persons, while part-time employment has increased by 84,800 persons. The number of people looking for work fell by 18,600 in May with the unemployment rate, at 5.5 percent, now at its lowest level since early 2013. The participation rate is also at its highest level since last July, extending its recent strong upward trend.




April manufacturing sales were up 1.1 percent after increasing 0.8 percent in March. On the year, sales gained 7.6 percent after jumping 8.1 percent in March. Thirteen of 21 industries representing 62 percent of manufacturing trade were higher. Durable goods were up 0.3 percent while nondurables jumped 2.0 percent. However, in volume terms, which are more relevant to real GDP, the gains were not as strong, with real sales up just 0.5 percent on the month but more than enough to offset March's 0.2 percent decline. On a volume basis, 13 industries advanced with an 8.9 percent volume-led gain in petroleum and coal playing a big part. Sales excluding petroleum and coal were up just 0.3 percent on the month, although this was on the back of a 1.1 percent increase in March. On a volume basis, they contracted 0.3 percent in April after edging down 0.1 percent in March. Aerospace increased 0.4 percent on the month while primary metals jumped 3.8 percent. Transportation equipment tumbled 1.3 percent led by a 3.7 percent drop in sales of motor vehicles. Excluding motor vehicles and parts, overall manufacturing shipments would have been up 1.9 percent instead of 1.1 percent.


Bottom line

Three of four central banks that met during the week left their respective monetary policies unchanged. The Federal Reserve, however, increased its fed funds target range by 25 basis points. Equities were decidedly mixed on the week in Asia while those in Europe declined. Australia's May employment jumped 42,000 — all full time while the unemployment rate was down to 5.5 percent, a four year low.


This coming week will be quieter with only the Reserve Bank of New Zealand announcing its monetary policy decision. The RBNZ is expected to maintain its 1.75 percent policy interest rate. Flash June PMI surveys will give investors their first look at the month's and second quarter end data. Canada releases May consumer price data and April retail sales. With confidence growing in the Canadian economy, the data will be watched carefully for implications to Bank of Canada monetary policy.


Looking Ahead: June 19 through June 23, 2017

Central Bank activities
June 22 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement 
The following indicators will be released this week...
June 20 Germany Producer Price Index (May0
June 22 Eurozone EC Consumer Confidence (June flash)
June 23 Eurozone PMI Manufacturing, Services & Composite (June flash)
Germany PMI Manufacturing, Services & Composite (June flash)
France PMI Manufacturing, Services & Composite (June flash)
Gross Domestic Product (Q1.2017)
Asia Pacific
June 19 Japan Merchandise Trade (May)
June 23 Japan Manufacturing PMI (June flash)
June 22 Canada Retail Sales (April)
June 23 Canada Consumer Price Index (May)


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


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