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Steady in a tumultuous week
International Perspective - August 18, 2017
By Anne D. Picker, Chief Economist


Global Markets

Equities tumbled at week's end after an exodus of U.S. executives from presidential business councils on Wednesday dealt a fresh blow to hopes of tax reform. U.S. shares tumbled along with those in Asia and Europe Thursday in reaction to the move. On Friday, equities retreated after Thursday's Barcelona terrorist attacks. U.S. equities slipped Friday though after former Presidential advisor Steven Bannon resigned.


Investors took shelter in the traditional flights to safety — the Japanese yen and Swiss franc along with German bunds and U.S. Treasury bonds. They also bought gold for the third day in a row. The flows were compounded by the Barcelona attack. However, most indexes advanced for the week in Asia and Europe. U.S. indexes were down.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Aug 11 Aug 18 Week 2017
Australia All Ordinaries 5719.1 5743.5 5798.5 1.0% 1.4%
Japan Nikkei 225 19114.4 19729.7 19470.4 -1.3% 1.9%
Topix 1518.61 1617.25 1597.4 -1.2% 5.2%
Hong Kong Hang Seng 22000.6 26883.5 27047.6 0.6% 22.9%
S. Korea Kospi 2026.5 2319.7 2358.4 1.7% 16.4%
Singapore STI 2880.8 3279.7 3252.0 -0.8% 12.9%
China Shanghai Composite 3103.6 3208.5 3268.7 1.9% 5.3%
India Sensex 30 26626.5 31213.59 31524.7 1.0% 18.4%
Indonesia Jakarta Composite 5296.7 5766.1 5893.8 2.2% 11.3%
Malaysia KLCI 1641.7 1767.0 1776.2 0.5% 8.2%
Philippines PSEi 6840.6 7928.4 8016.7 1.1% 17.2%
Taiwan Taiex 9253.5 10329.6 10321.3 -0.1% 11.5%
Thailand SET 1542.9 1561.3 1566.5 0.3% 1.5%
UK FTSE 100 7142.8 7310.0 7324.0 0.2% 2.5%
France CAC 4862.3 5060.9 5114.2 1.1% 5.2%
Germany XETRA DAX 11481.1 12014.1 12165.2 1.3% 6.0%
Italy FTSE MIB 19234.6 21354.0 21815.0 2.2% 13.4%
Spain IBEX 35 9352.1 10282.9 10385.7 1.0% 11.1%
Sweden OMX Stockholm 30 1517.2 1539.0 1532.1 -0.4% 1.0%
Switzerland SMI 8219.9 8884.0 8874.4 -0.1% 8.0%
North America
United States Dow 19762.6 21858.32 21674.5 -0.8% 9.7%
NASDAQ 5383.1 6256.6 6216.5 -0.6% 15.5%
S&P 500 2238.8 2441.3 2425.6 -0.6% 8.3%
Canada S&P/TSX Comp. 15287.6 15033.4 14952.3 -0.5% -2.2%
Mexico Bolsa 45642.9 50645.1 51075.460 0.8% 11.9%


Europe and the UK

Although European stock indices declined Thursday and Friday, increases at the beginning of the week were sufficient for the FTSE, CAC and DAX to gain on the week. Investor sentiment was negatively affected by a deadly terror attack in Spain. Travel and leisure stocks were under heavy pressure following the attack. The FTSE was up 0.2 percent, the CAC was up 1.1 percent and the DAX added 1.3 percent. However, the SMI slipped 0.1 percent. Prior to the attack on Thursday, investors were transfixed by U.S. issues and the resulting uncertainty about whether a program of tax cuts would actually occur. Investor sentiment was hit by concerns over the political turmoil in the United States. Traders are worried that the President's political controversies will hamper his ability to implement tax cuts and other pro-growth legislation.


Equities initially declined Thursday as investors reacted to the FOMC minutes that were released after markets here were closed on Wednesday afternoon. Financial stocks were under pressure — investors have become doubtful about the Federal Reserve's ability to raise interest rates one more time this year after some FOMC members revealed that they want to be "patient" and lowered their forecast for underlying inflation.


The European Central Bank published minutes from its July 19 and 20 Governing Council monetary policy meeting. The minutes did not contain any new revelations. The Council maintained its positive assessment of the economy as "economic growth had gathered some further momentum…with some upside risks to the short-term outlook". The recent increase in the euro garnered attention of the Governing Council — they expressed concern about "the risk of the exchange rate overshooting in the future". They discussed the continued discrepancy between weakness in inflation and improving economic activity. Some possible explanations included: continued labor market slack, an increased supply of low-skilled labor, the slow pace of deleveraging and delays in compensation increases due to the staggered wage-setting process and the backward looking nature of wage negotiations.


Asia Pacific

Asian stocks joined a global slide Friday as the ongoing political turmoil in Washington put President Donald Trump's stimulus and tax plans in jeopardy and a deadly attack in Barcelona, Spain that left the world shocked. Even though equities retreated the last two days of the week, most indexes were higher for the week. Both the Nikkei (down 1.3 percent) and Topix (down 1.2 percent) tumbled along with the STI (down 0.8 percent) and the Taiex (down 0.1 percent). On the plus side were the Jakarta Composite (up 2.2 percent), the Shanghai Composite (up1.9 percent), the Kospi (up 1.7 percent) and both the All Ordinaries and Sensex (up 1.0 percent).


Japanese equities ended the week at a three month low, pressured by losses in the U.S. and a weaker dollar as doubts grew over whether the administration will be able to push through policies to boost growth. Shares were lower thanks to a climbing yen as investors moved to safe havens. Even though the tensions between the U.S. and North Korea have eased somewhat, the problem has not gone away. And the terrorist attack in Barcelona on Thursday also added to the downward pressures. Preliminary second quarter gross domestic product surprised on the positive side, increasing at an annualized pace of 4.0 percent. Expectations were for a 2.6 percent increase. And in July, both exports and imports missed estimates of annual growth.


And in China, both July industrial output and retail sales increased less than anticipated. Fixed asset investment slowed along with aggregate yuan financing. And increases in house prices eased as well leading to concerns about growth in the country. Meanwhile, the International Monetary Fund revised upward its growth forecast for China, but warned the country's debt is on a dangerous trajectory.


The Reserve Bank of Australia released minutes of its policy meeting earlier in the month. At that time, the RBA maintained its key interest rate at 1.5 percent for a 13th month. The minutes concluded by noting that available information had persuaded officials that current policy settings remained appropriate. The July labour market report indicated that unemployment slipped 0.1 percent to 5.6 percent while employment increased 27,900 — but the gain was all part time.



The U.S. dollar advanced against the yen, euro, pound sterling and Swiss franc last week but was lower against the commodity currencies — the Canadian and Australian dollars. The yen climbed on flight to safety demand Thursday and Friday. The yen frequently is in favor in times of market stress, partly due to expectations that Japanese investors will eventually repatriate their overseas assets if such market turmoil persists. Markets are concerned that the U.S. administration will not be able to implement its pro-growth measures. That drove flows into the traditional security of the yen and the Swiss franc. The terrorist attacks in Spain on Thursday added to the flight to safety.


The euro recovered all of the ground it lost after the European Central Bank warned of an overshoot in the currency in the minutes of the July ECB policy meeting but was still down against the U.S. dollar for the week. Speculation that ECB President Mario Draghi would make a policy statement at the Jackson Hole symposium at the end of the week has been quashed. ECB sources poured cold water on any hopes for a hawkish shift from Draghi at the U.S. Federal Reserve symposium, saying Draghi will not deliver any new policy messages at the conference. Instead, Draghi will focus on the theme of the symposium — "Fostering a dynamic global economy" — and keep any policy discussion until the fall, according to the sources. The euro declined on the news. Traders have been speculating for some time that Mr. Draghi would use the speech as an opportunity to talk about trimming the ECB's €60 billion per month bond buying scheme.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 Aug 11 Aug 18 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.790 0.794 0.5% 10.0%
New Zealand NZ$ 0.6948 0.732 0.732 -0.1% 5.3%
Canada C$ 0.7443 0.789 0.796 0.9% 6.9%
Eurozone euro (€) 1.0534 1.183 1.177 -0.5% 11.7%
UK pound sterling (£) 1.2333 1.302 1.288 -1.1% 4.4%
Currency per U.S. $
China yuan 6.9450 6.664 6.670 -0.1% 4.1%
Hong Kong HK$* 7.7533 7.819 7.824 -0.1% -0.9%
India rupee 67.9238 64.139 64.146 0.0% 5.9%
Japan yen 116.8100 109.080 109.190 -0.1% 7.0%
Malaysia ringgit 4.4862 4.295 4.290 0.1% 4.6%
Singapore Singapore $ 1.4465 1.360 1.363 -0.2% 6.1%
South Korea won 1205.8300 1143.700 1141.320 0.2% 5.7%
Taiwan Taiwan $ 32.3260 30.345 30.345 0.0% 6.5%
Thailand baht 35.8100 33.204 33.229 -0.1% 7.8%
Switzerland Swiss franc 1.0174 0.9613 0.9655 -0.4% 5.4%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


Flash second quarter real gross domestic product increased a quarterly 0.6 percent after advancing 0.5 percent in the first quarter. On the year, GDP was revised up a tick from the preliminary flash reading to 2.2 percent, the fastest pace since January to March 2011, and follows a 1.9 percent increase in the first quarter that was revised down from 2.1 percent. As usual, the flash estimate does not offer information on the key GDP expenditure components but it does flesh out the regional breakdown. This confirms that the quarterly expansion was built on a solid performance by Germany (0.6 percent) supported by Spain (0.9 percent) and a number of smaller members including the Netherlands (1.5 percent), Latvia (1.3 percent), Cyprus (0.9 percent) and Austria (0.9 percent).



Second quarter flash gross domestic product expanded at a slightly slower than expected 0.6 percent quarterly rate in the April to June period following an upwardly revised 0.7 percent increase in the first quarter. Annual workday adjusted growth was up 0.1 percentage points at 2.1 percent after a sharp 0.3 percentage point upward revision to 2.0 percent in the first quarter annual growth rate. But unadjusted, with 3 calendar days less in the second quarter this year than in last year's quarter, annual growth declined sharply to 0.8 percent from 3.2 percent in the first quarter. The limited details provided by the FSO indicated that quarterly growth was generated by domestic demand, with marked increases in consumption expenditures of both households and the government. Capital formation was up too, as fixed capital spending on machinery and equipment, construction and other fixed assets was higher than in the first quarter. But foreign trade balance had a negative impact on growth, based on provisional data showing quarterly growth in imports considerably outpacing growth in exports.



Second quarter flash gross domestic product was up 0.4 percent on the quarter for a second quarter. On the year, GDP was up 1.5 percent, matching the strongest pace since January to March 2011. As is usually the case, there are no details available for the GDP expenditure components, but ISTAT did indicate that output growth was driven by a combination of production growth in industry and services and slowed by the agricultural sector. On the demand side, inventories contributed positively, while the trade balance made a limited negative contribution.


United Kingdom

July consumer prices eased 0.1 percent in July and the annual inflation rate remained steady at 2.6 percent and in line with the Bank of England forecast in its August Quarterly Inflation Report. Reduced transport inflation took 0.09 percentage points off the monthly CPI change, as transport costs rose only 1.0 percent on the month in July against a 1.6 percent increase seen in July a year ago. Partly offsetting this and adding 0.03 percentage points to the CPI change was a 2.6 percent annual rate increase in food & beverage prices, the largest gain since November 2013 and the sixth consecutive monthly increase. Core CPI excluding food and energy steadied at an annual rate of 2.4 percent, unchanged from June.


July claimant count unemployment fell by 4,200 following a downward revised 3,500 increase in June. The jobless rate was unchanged at 2.3 percent. ILO unemployment in the three months to June declined 57,000 as employment rose by 125,000. The 3-month jobless rate was down 0.1 percentage point to 4.4 percent — the lowest unemployment rate since the three months to June of 1975. But the strength of the ILO figures is not reflected in the earnings data. Though average earnings annual growth in the April to June period did strengthen to 2.1 percent in nominal terms, up from 1.8 percent in the March to May period, real wages actually declined by 0.5 percent from a year ago.


July retail sales were up 0.3 percent on the month and 1.3 percent from a year ago. Excluding auto fuel, sales were up 0.5 percent after a smaller revised 0.3 percent increase in June. On the year, excluding auto fuel sales were up 1.5 percent. Food sales were up 1.5 percent on the month. Although household goods also did well with 0.9 percent rise on the month, sales volumes in all other categories were down, most notably fuel stores (down 1.1 percent), non-store retailing (down 0.9 percent) and textiles, clothing & footwear stores (down 0.5 percent).




First estimate of second quarter gross domestic product was up 1.0 percent on the quarter or at an annualized pace of 4.0 percent. When compared with the same quarter a year ago, GDP was up 2.1 percent. The main expenditure components contributing to the quarterly increase were private consumption (0.5 percentage points), private non-residential investment (0.4 percentage points) and public demand (0.3 percentage points). This was offset by a negative contribution of 0.3 percentage points from net exports. Private consumption, private investment and public investment growth all accelerated significantly in the three months to June but exports fell 0.5 percent on the quarter after increasing 1.9 percent in the three months to March.


July merchandise trade surplus was ¥418.8 billion, down from ¥439.9 billion. Exports increased 13.4 percent on the year, accelerating from 9.7 percent in June. Imports advanced 16.3 percent on the year, up from 15.5 percent in June. Exports have now risen on the year for eight consecutive months, with the pick-up in growth in July mainly reflecting stronger demand from the United States. Exports to the US rose 11.5 percent on the year in July, up from 7.1 percent in June. Exports to ASEAN countries accelerated significantly from 7.5 percent to 17.6 percent. These gains were partly offset by weaker growth in exports to China, down from 19.6 percent to 17.6 percent, and the European Union, down from 9.6 percent to 8.3 percent.



July employment increased 27,900 after adding 20,000 in June. This was the 10th consecutive monthly increase in employment. The unemployment rate was steady at 5.6 percent while the participation rate rose slightly to 65.1 percent from 65.0 percent in June. The increase in employment was driven entirely by part-time jobs, which increased by 48,200 persons. Full-time employment, however, dropped 20,300 persons, partly reversing the revised increase of 69,300 in June. This shift away from full-time to part-time jobs contributed to a monthly decline of 0.8 percent in the total number of hours worked. Over the last 12 months, seasonally-adjusted full-time employment has increased by 197,700 persons, while part-time employment has increased by 41,860 persons.



July industrial production was up 6.4 percent on the year after increasing 7.6 percent in June. Output was up 0.41 percent on the month, down from 0.79 percent in June. The decline in headline industrial production was mainly driven by the manufacturing sector, where output slowed from an annual 8.0 percent increase in June to 6.7 percent in July, the weakest growth in the sector since last December. Most major manufacturing industries posted weaker output growth on the month including textiles, chemicals, automobiles, communication equipment, electric machinery and general equipment. Steel products were the main exception to this trend, with annual growth increasing from 0.7 percent to 2.7 percent. Mining output also weakened, dropping 1.3 percent on the year after falling 0.1 percent in June. This was offset by stronger growth in utilities output, up from 7.3 percent in June to 9.8 percent in July, the strongest growth in this sector since last November.


July retail sales rose 10.4 on the year after increasing from 11.0 percent in June. This was the weakest growth seen since the first two months of the year. Sales rose 0.73 percent on the month after an increase of 0.91 percent in June. The decline in headline retail sales growth in July was broad-based, with 11 of the 12 spending categories covered in the report showing weaker annual growth. Oil and oil products was the only category to record stronger growth. Urban retail sales increased 10.2 percent after 10.7 percent while rural sales slowed from 12.9 to 11.7 percent.




Manufacturing sales dropped 1.8 percent in June following three consecutive monthly gains. On the year, however, sales were up 6.2 percent. The monthly declines were mainly due to lower sales in the petroleum & coal products, transportation equipment and chemical industries. Sales were down in 15 of 21 industries, representing 72.1 percent of the manufacturing sector. Non-durable goods declined 2.2 percent while sales of durable goods were down 1.5 percent. In constant dollars, sales declined 1.0 percent, indicating that lower volumes of manufactured goods were sold in June. The declines were partially offset by higher sales in six industries, led by food and machinery. On a regional basis, weakness was widespread as sales contracted in eight provinces, led by Ontario and Quebec, the manufacturing heart of Canada. Manufacturing inventories edged down 0.2 percent in June for the second consecutive month. Unfilled orders fell 2.1 percent while new orders were down 3.0 percent.


July unadjusted consumer price index was unchanged on the month and up 1.2 percent from a year ago as expected. The annual change in June was 1.0 percent. Excluding food and energy the CPI was unchanged on the month and up 1.5 percent on the year. The Bank of Canada will be heartened to see inflation finally rising. The Bank of Canada's core readings of annual inflation were 1.4 percent for the common measure, the same as in June, 1.7 percent for CPI-median (1.6 percent in June), and 1.3 percent (1.2 percent in June) for CPI-trim. On a seasonally adjusted basis, the monthly CPI was up 0.2 percent after posting no change in June. Five major components increased on a seasonally adjusted monthly basis, while two decreased. The recreation, education & reading index was unchanged. Clothing and footwear index (0.5 percent) posted the largest gain, while the household operations, furnishings & equipment index (down 0.2 percent) posted the largest decline.


Bottom line

Most equity indexes advanced on the week despite geopolitical concerns. Economic data were mixed in Europe. Japan's second quarter GDP was better than expected. Most economic data released in the U.S. were positive.


Investors will focus on the Federal Reserve Symposium at Jackson Hole, Wyoming on August 24 to 26. Both Fed Chair Janet Yellen and ECB President Mario Draghi will speak on Friday. Ms Yellen will speak on "Financial Stability" Friday morning and Mr Draghi at lunch time will address the theme of this year's symposium — "Fostering a Dynamic Economy".


Key data during the week will be the flash composite PMIs. And the UK and Germany will post revised estimates of second quarter GDP. Also in Germany both the ZEW and Ifo survey results for August will be published.


Looking Ahead: August 21 through August 25, 2017

The following indicators will be released this week...
Aug 22 Germany ZEW Survey (August)
Aug 23 Eurozone Manufacturing, Services & Composite PMI (August flash)
Germany Manufacturing, Services & Composite PMI (August flash)
France Manufacturing, Services & Composite PMI (August flash)
Aug 24 UK Gross Domestic Product (Q2.2017 second estimate)
Aug 25 Germany Gross Domestic Product (Q2.2017 revised)
Ifo Survey (August)
Asia Pacific
Aug 24 Japan Manufacturing PMI (August flash)
Aug 25 Japan Consumer Price Index (July)
Aug 22 Canada Retail Sales (June)


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


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