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Weather and geopolitical worries (continued)
International Perspective - September 15, 2017
By Anne D. Picker, Chief Economist


Global Markets

While most equity indexes advanced during the week, it was mainly because they discounted the actual hurricane storm damage to Florida and adjoining states (Georgia and South Carolina) along with continuing geopolitical concerns from North Korea. Investors also focused on the central bank meetings in the UK and Switzerland scheduled for Thursday. The Bank of England while leaving policy unchanged hinted at an interest rate increase in the next few months everything remaining equal. The Swiss National Bank also left policy unchanged. In the U.S., a muddled picture of the economy is emerging thanks to the one-two punch of Harvey and Irma. The impact will skew economic data going forward.


Bank of England

As generally expected, the Bank of England's monetary policy committee made no changes to its Bank Rate which was held at 0.25 percent or to its quantitative easing purchases of gilts and corporate bonds which remain at £435 billion and £10 billion respectively. It was another split decision (seven to two) with the two main hawks, Ian McCafferty and Michael Saunders, renewing their call for an immediate 25 basis point tightening.


The minutes suggested that a tightening may not be too far away with most members apparently leaning towards a rate increase in coming months if the economy evolves as expected. The accompanying statement again warned that policy may have to be tightened by more than financial markets currently are discounting and also hinted that the first rate increase could be delivered quite soon.


The guidance on rates is unusual from the BoE and suggests the committee is seeking to test financial markets' likely response to a 25 basis point increase from the current low of 0.25 percent at the November 2 meeting. At that time, a new Quarterly Inflation Report (QIR) will be available. However, any increase is still expected to be only small and the eventual tightening process to be gradual. Changes in the Bank Rate have coincided with the release of the QIR in the past.


Thursday's decision reflected the MPC's ongoing dichotomy over persistently above target inflation on the one hand and weak domestic price pressures on the other. As the August labour market report (September 13) made plain, current earnings growth is both subdued and even negative in inflation adjusted terms. The MPC noted that inflation was likely to rise above 3 percent in October and with unemployment at a 40-year low of 4.3 percent, the room for further non-inflationary growth is limited.


Swiss National Bank

The Swiss National Bank's (SNB) September Monetary Policy Assessment (MPA) contained no major surprises. As widely anticipated, the SNB kept its target corridor for 3-month CHF Libor at minus 1.25 percent to minus 0.25 percent and the deposit rate at minus 0.75 percent. However, it did modify its view of the Swiss franc (CHF) which, in the wake of the currency's recent losses, is now seen as 'highly valued' as opposed to the 'significantly overvalued' status of recent MPAs. Even so, the Bank indicated that it would remain active as necessary in the foreign exchange markets — it will not want to see the currency start to appreciate again.


Since the last monetary policy assessment, the Swiss franc has weakened against the euro and appreciated against the dollar. Overall, this development is helping to reduce, to some extent, the significant overvaluation of the currency. The Swiss franc nevertheless remains highly valued, and the situation on the foreign exchange market is still fragile.


The weaker tone to the currency has been reflected in the updated economic forecasts which show a higher inflation rate over the entire projection horizon. However, at 0.6 percent for the end of 2018 and 1.4 percent for end-2019, the new predictions are just a tick above their respective June MPA calls.


The minimal adjustment here is due to a softer view of economic growth in 2017 which, in the light of a poor first half, has been revised down from 1.5 percent to just under 1.0 percent. Indeed, this scenario might have been weaker still but for the improvement in the international environment which has made for some renewed momentum in Swiss exports.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Sep 8 Sep 15 Week 2017
Australia All Ordinaries 5719.1 5739.5 5755.8 0.3% 0.6%
Japan Nikkei 225 19114.4 19274.8 19909.5 3.3% 4.2%
Topix 1518.61 1593.54 1638.9 2.8% 7.9%
Hong Kong Hang Seng 22000.6 27668.5 27807.6 0.5% 26.4%
S. Korea Kospi 2026.5 2343.7 2386.1 1.8% 17.7%
Singapore STI 2880.8 3228.6 3209.6 -0.6% 11.4%
China Shanghai Composite 3103.6 3365.2 3353.6 -0.3% 8.1%
India Sensex 30 26626.5 31687.52 32272.6 1.8% 21.2%
Indonesia Jakarta Composite 5296.7 5857.1 5872.4 0.3% 10.9%
Malaysia KLCI 1641.7 1779.9 1786.3 0.4% 8.8%
Philippines PSEi 6840.6 8022.8 8180.9 2.0% 19.6%
Taiwan Taiex 9253.5 10610.0 10580.4 -0.3% 14.3%
Thailand SET 1542.9 1635.6 1660.5 1.5% 7.6%
UK FTSE 100 7142.8 7377.6 7215.5 -2.2% 1.0%
France CAC 4862.3 5113.5 5213.9 2.0% 7.2%
Germany XETRA DAX 11481.1 12304.0 12518.8 1.7% 9.0%
Italy FTSE MIB 19234.6 21776.7 22229.5 2.1% 15.6%
Spain IBEX 35 9352.1 10129.6 10317.4 1.9% 10.3%
Sweden OMX Stockholm 30 1517.2 1552.3 1578.9 1.7% 4.1%
Switzerland SMI 8219.9 8912.1 9028.1 1.3% 9.8%
North America
United States Dow 19762.6 21797.79 22268.3 2.2% 12.7%
NASDAQ 5383.1 6360.2 6448.5 1.4% 19.8%
S&P 500 2238.8 2461.4 2500.2 1.6% 11.7%
Canada S&P/TSX Comp. 15287.6 14985.3 15173.0 1.3% -0.7%
Mexico Bolsa 45642.9 50083.800 49921.840 -0.3% 9.4%


Europe and the UK

Despite declining Friday, most equity indexes advanced for the week. The DAX was up 1.7 percent, the CAC added 2.0 percent and the SMI gained 1.3 percent. The FTSE however tumbled 2.2 percent on worries over a rising pound sterling which hit new recent highs against the euro and U.S. dollar. At the beginning of the week, the majority of the European markets ended higher as markets enjoyed a relief rally after geopolitical concerns eased and reports that the damage caused by Hurricane Irma was less than anticipated.


However, ongoing geopolitical tensions at the end of the week weighed on the markets amid news North Korea launched an unidentified missile over Japan and into the Pacific Ocean. Weakness also occurred after an explosion aboard a subway train in southwest London during rush hour Friday morning in an apparent terrorist attack. Weaker than expected U.S. data for retail sales and industrial production should have been no surprise given the negative impact of hurricane Harvey.


The FTSE has struggled as sterling jumped after the Bank of England signaled Thursday that it was likely to raise interest rates in the coming months. Friday the currency hit its highest level against the U.S. dollar since the Brexit vote (June 2016) after a Bank of England monetary policy committee member, who had been a strong advocate of ultra-low borrowing costs, said rates might need to rise in the coming months. The currency rise put pressure on Britain's dollar-earning firms, which have enjoyed an accounting boost as their revenues were converted back to the British currency following its plunge after the Brexit vote last year.


There were little economic data outside of the UK where August data were released for both the consumer and producer price indexes along with key labour market data which were released prior to the Bank of England's policy decision. The CPI climbed above the BoE's inflation target of 2 percent to an annual increase of 2.9 percent, up from 2.6 percent. The producer input price index increase jumped to 7.6 percent from 6.5 percent the month before. On the labour front, ILO unemployment for the three months through July was 4.3 percent, down from the previous reading of 4.4 percent for the three months through June. However, average earnings continue to lag. (For details see the Indicator Scoreboard below.)


Asia Pacific

After beginning the week with a strong rally, equities faded along with the feelings of relief that Hurricane Irma was not as catastrophic as feared. The worst-case scenario from Irma looked to have been avoided. Geopolitical concerns also eased after there was no action from North Korea over the weekend. However, Friday's declines occurred after North Korea's latest missile launch over the Japanese archipelago earlier in the day stirred new worries. However, the gains early in the week helped most equity indexes to advance for the week. Pyongyang's missile launch on Friday did worry investors, but did not trigger the kind of risk aversion seen last week.


The Shanghai Composite declined 0.6 percent on the week and reflected the disappointment with a raft of economic data including August industrial production and retail sales data that decelerated for a second month. Investors are concerned that the economy is losing some momentum. The Hang Seng however, was up 0.5 percent on the week. The Hang Seng ranks among the region's best-performing equity gauges so far this year, helped by strong inflows via stock exchange links with Shanghai and Shenzhen and upbeat earnings.


The Nikkei added a weekly 3.3 percent mostly thanks to a weaker yen (stronger U.S. dollar). The index brushed off the latest North Korean provocation and increased even on Friday. The weekly gain was its biggest in 10 months as a stronger dollar saw investors buying shares of exporters, shrugging off North Korea's ballistic missile launch that dented risk appetite in broader Asia.


The All Ordinaries added 0.3 percent for the week. The weaker data from China affected equities in Australia given the importance of its export market there. Miners retreated as the base metals selloff continued following the release of disappointing Chinese economic data. The key release for Australia was the August labour force survey. Employment surprised by jumping 54,200 after increasing 27,900 in July. Overall unemployment held at 5.6 percent. Since the beginning of the year, employment has increased over 268,000 with full time jobs increasing 77 percent. (For details see the Indicator Scoreboard below.)



The U.S. dollar advanced against most of its major counterparts with the exception of the pound sterling. The U.S. currency was up for the week against the yen, euro, Swiss franc and the Canadian and Australian dollars. But it was sterling that captured attention. A shift by the Bank of England towards a more hawkish policy stance sent the currency surging higher Thursday shooting above $1.36. At this writing, sterling was at its highest level since the aftermath of the Brexit vote in June 2016. The currency has gained 3 percent on the week. The sharp increase in sterling has sent the FTSE lower, declining 2.2 percent on the week.


Adding to the upward pressure on the currency Friday was one of the most dovish members of the Bank of England's monetary policy committee. In a speech on Friday morning, Gertjan Vlieghe, an external member of the MPC, said the "the evolution of the data is increasingly suggesting that we are approaching the moment when Bank Rate may need to rise." He said this "may be as early as the coming months." Vlieghe said strong employment growth and some signals that wage pressure is "gently building" combine with better than-expected consumption growth to suggest that any spare capacity in the UK economy is being eroded. "Rising real wage growth, both due to improving nominal wage growth and the expected easing back of inflation, would support consumption growth further out," he said. However, he added that there "remains a risk that, at some stage, the uncertainty surrounding the Brexit process has a larger impact on the economy than we have seen so far." But he said the BoE would "respond appropriately" if that happened.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 Sep 8 Sep 15 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.805 0.800 -0.6% 10.9%
New Zealand NZ$ 0.6948 0.727 0.729 0.3% 4.9%
Canada C$ 0.7443 0.823 0.821 -0.3% 10.3%
Eurozone euro (€) 1.0534 1.203 1.195 -0.7% 13.4%
UK pound sterling (£) 1.2333 1.320 1.359 2.9% 10.2%
Currency per U.S. $
China yuan 6.9450 6.494 6.553 -0.9% 6.0%
Hong Kong HK$* 7.7533 7.811 7.820 -0.1% -0.8%
India rupee 67.9238 63.786 64.080 -0.5% 6.0%
Japan yen 116.8100 107.740 110.840 -2.8% 5.4%
Malaysia ringgit 4.4862 4.196 4.190 0.1% 7.1%
Singapore Singapore $ 1.4465 1.342 1.346 -0.3% 7.5%
South Korea won 1205.8300 1127.380 1131.760 -0.4% 6.5%
Taiwan Taiwan $ 32.3260 30.000 30.052 -0.2% 7.6%
Thailand baht 35.8100 33.113 33.089 0.1% 8.2%
Switzerland Swiss franc 1.0174 0.9454 0.9597 -1.5% 6.0%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard

United Kingdom

August consumer prices increased a monthly 0.6 percent and were up 2.9 percent on the year matching their highest outturn since April 2012. The main upward pressure on the change in the yearly rate came from clothing & footwear where prices rose a partly seasonal 2.4 percent on the month compared with just 1.0 percent in the same period in 2016. Recreation & culture (0.1 percent after minus 0.3 percent) also contributed positively as did, to a lesser extent, restaurants & hotels. Elsewhere transport had little overall impact but this masked a boost from petrol prices (up 1.8 percent/litre after a 1.8 percent/litre decline) that was offset by weaker air fares (10.9 percent after 14.4 percent). The core CPI also increased 0.6 percent from July which saw its yearly rate climb from 2.4 percent to 2.7 percent. This matched its highest reading since December 2011. At the same time, the inflation measure preferred by the ONS (CPIH) advanced a marginally smaller 0.5 percent for a 2.7 percent annual rate, up just a tick from last time and equaling its recent May peak. The August results mean that CPI inflation has now been above the BoE's 2 percent target for seven consecutive months.


August claimant count joblessness declined 2,800 following a smaller revised 2,900 drop in July. The unemployment rate was steady at 2.3 percent. The relative buoyancy of the claimant count data was supported in the tardier ILO figures. The ILO data showed a sizeable 75,000 slide in unemployment in the three months to July, the sharpest decline since the three months ending November 2015. This reduced its measure of the jobless rate to 4.3 percent and its lowest level since the three months ending May 1975. Employment rose 181,000 to lift the employment rate to a record high 75.3 percent. Average annual earnings growth for the three months to July held flat at an unexpectedly soft 2.1 percent. As a result, both total and regular real wages fell 0.4 percent on the year and so extended the ongoing squeeze on household budgets.




July private sector machinery orders (excluding volatile items) increased 8.0 percent on the month (seasonally adjusted) after falling 1.9 percent in June. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. On the year, machinery orders (excluding volatile items) declined 4.5 percent after dropping 6.6 percent in June. The monthly increase reflects stronger orders in manufacturing and non-manufacturing sectors. Manufacturing orders rose 2.9 percent after a fall of 5.4 percent in June, while non-manufacturing orders (excluding volatile items) increased by 4.8 percent, up from 0.8 percent in June.



August employment jumped 54,200, up from a revised 27,900 in July. The unemployment rate remained at 5.6 percent for a third month while the participation rate rose from 65.1 percent to 65.3. The increase in employment was driven mainly by full-time jobs, which increased 40,100 after a decline of 19,900 in July. Part-time employment increased 14,100 after an increase of 49,100 in July. The total number of hours worked in August increased by 0.4 percent. Over the last 12 months, seasonally-adjusted full-time employment has increased by 251,200 persons, while part-time employment has increased by 74,500 persons.



August industrial production slowed to an increase of 6.0 percent when compared with the same month a year ago after increasing 6.4 percent in July. Output was up 0.46 percent on the month after an increase of 0.41 percent in July. The decline in industrial production growth was driven by non-manufacturing output. Utilities output were up an annual 8.7 percent after climbing 9.8 percent in June, while mining output fell by 3.4 percent on the year after a drop of 1.3 percent in July. Manufacturing output picked up from 6.7 percent to 6.9 percent. Stronger growth in automobiles, chemicals, electric machinery and communication equipment outweighed weaker growth in steel products, textiles, and general equipment.


August annual retail sales growth slowed to 10.1 percent from 10.4 percent the month before. This was the weakest annual growth since the start of the year. Retail sales rose 0.76 percent on the month after an increase of 0.71 percent in July. The decline reflects weaker annual growth in eight of the 12 major spending categories. Sales of automobiles rose 7.9 percent on the year in August, down from 8.1 percent in July, while growth in grain and food oil sales slowed from 10.7 percent to 8.5 percent, the weakest growth so far this year. Sales of furniture, oil and oil products, and home appliances also recorded weaker growth in August. This was partly offset by stronger sales of communication equipment, up 12.2 percent on the year in August compared with 7.9 percent in July, with year-on-year growth in clothing sales also picking up, from 6.4 percent to 8.9 percent. Urban retail sales dropped from 10.2 percent in July to 9.9 percent in August, while rural retail sales growth slowed from 11.7 percent to 11.5 percent.


Bottom line

Neither the Bank of England nor the Swiss National Bank altered their respective monetary policies. Data from China disappointed, missing expectations for a stronger expansion. Australia's labour force continues to exhibit strong growth. Japan's core machine orders (excluding volatile ones) continue to gyrate from month to month. The data are a proxy for capital spending.


The Bank of Japan and Federal Reserve hold policy meetings this coming week. The BoJ is expected to leave its policy unchanged. However, for the Federal Reserve, expectations are uncertain. Economic data are beginning to show the negative effects of Hurricane Harvey while Hurricane Irma will be reflected in data that will not be released until October. This will cloud the outlook for the Fed. Exacerbating the problem for the Fed is the delay in the collection and publication of official data. About 2,000,000 are estimated to still be out of power in Florida, Georgia and South Carolina. This makes data gathering difficult. Expectations are for revisions going forward.


Looking Ahead: September 18 through September 22, 2017

Central Bank activities
Sep 20 United States FOMC Monetary Policy Announcement
Fed Chair Janet Yellen Press Conference
Sep 20, 21 Japan Bank of Japan Monetary Policy Meeting & Announcement
The following indicators will be released this week...
Sep 18 Eurozone Harmonized Index of Consumer Prices (August final)
Sep 19 Germany ZEW Survey (September)
Sep 20 Germany Producer Price Index (August)
Sep 21 Eurozone EC Consumer Confidence (September flash)
Sep 22 Eurozone Manufacturing, Services & Composite PMIs (September flash)
Germany Manufacturing, Services & Composite PMIs (September flash)
France Manufacturing, Services & Composite PMIs (September flash)
France Gross Domestic Product (Q2. 2017 final)
Asia Pacific
Sep 20 Japan Merchandise Trade Balance (August)
Sep 21 New Zealand Gross Domestic Product (Q2.2017)
Sep 19 Canada Manufacturing Sales (July)
Sep 22 Canada Consumer Price Index (August)
Retail Sales (July)


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


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