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The Fed and BoJ do the expected
International Perspective - September 22, 2017
By Anne D. Picker, Chief Economist


Global Markets

The Federal Reserve and Bank of Japan both did the expected — the Fed announced it would begin reducing the size of its balance sheet beginning in October while the Bank of Japan did nothing. It left its interest rate and bond buying stimulus unchanged. On the week, most equity indexes advanced.


Federal Reserve to begin tapering

As widely expected, the Federal Reserve announced that it would begin unwinding its $4.5 trillion balance sheet beginning in October. The fed funds rate remained at a range of 1.00 percent to 1.25 percent where it has been since June of this year.


The FOMC maintained its June description of how it will proceed with unwinding. It will allocate rollover amounts across maturities based on the proportions it holds on a gradual basis over many years. The decline will begin gradually at a $6 billion cap (limit) for Treasuries and $4 billion for mortgage-backed securities. The caps will increase in 3-month intervals by $6 billion for Treasuries and $4 billion for mortgage-backed securities until they reach $30 billion per month for the former and $20 billion for the latter.


The economic assessment was largely unchanged. The statement said that job growth was continuing and economic activity was described as moderate. Temporary hurricane effects were cited to include higher gasoline prices. The inflation outlook remained unchanged, running somewhat below the 2 percent target. Quarterly FOMC forecasts continue to see one more rate increase this year with median projections unchanged for 2017. Three 25 basis point increases were also penciled in for 2018.


At her quarterly press conference, Chair Janet Yellen repeated that this year's downdraft in inflation is likely temporary — the result of one-time factors though she nevertheless conceded the dip is a bit of a "mystery" that the FOMC doesn't fully understand. She expects inflation to move higher and stabilize around the FOMC's 2 percent goal though she conceded here too that there are risks that inflation may continue to run below 2 percent. Citing history, she said tightness in the labor market tends to push up wages over time and price inflation along with it.


Some economic indicators suggest higher rates are warranted: The unemployment rate, at 4.4 percent in August, is below the level most officials regard as sustainable, which the Fed historically has treated as a signal for higher rates. But other economic measures paint a contrasting picture of economic health. While job growth remains strong, wage growth is modest and inflation still soft overall.


Bank of Japan remains on hold

The Bank of Japan left its monetary policy in line with expectations. The BoJ's policy interest rate for excess reserves remains at minus 0.1 percent while the target level for the 10-year bond remains at around zero percent. The vote was 8 to 1 in favor of no change in policy. The dissenting vote was cast by new board member Goushi Kataoko who voted for more stimulus. He opined that current policy was not loose enough to meet the BoJ's 2 percent inflation target.


In addition to its policy interest rate, the BoJ also adressed the pace of their purchases of Japanese government bonds in order to keep the 10-year yield close to its target zero level. For now, the monetary policy board (MPB) continues to believe that purchases at an annual rate of ¥80 trillion are consistent with meeting this target. The MPB again reaffirmed its commitment to keep expanding the monetary base until the annual increase in the core consumer price index (excluding fresh food) exceeds their inflation target of 2.0 percent and stays above this level "in a stable manner".


The statement accompanying this decision noted that the Japanese economy is "expanding moderately" and will likely continue to do so. Accommodative monetary policy and fiscal stimulus are expected to drive a "virtuous cycle" from income to spending, with stronger global growth also expected to support export growth. Most MPB members also expect the annual change in the consumer price index (excluding fresh food) to "continue on an uptrend" towards 2.0 percent in response to an improvement in the output gap and stronger inflation expectations.


BoJ Governor Haruhiko Kuroda, speaking at his regular post-meeting press conference, said that the Fed's decision to begin unwinding its balance sheet along with the prospect of higher policy rates in the United States would not likely have a significant impact on Japanese policy. With inflation still well below target, Kuroda stressed that achieving this target as quickly as possible remained the BoJ's main objective, implying that domestic rates would still need to remain very low for the foreseeable future even if rates increase elsewhere. Indeed, he noted that additional easing remained an option if required.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 Sep 15 Sep 22 Week 2017
Australia All Ordinaries 5719.1 5755.8 5740.6 -0.3% 0.4%
Japan Nikkei 225 19114.4 19909.5 20296.5 1.9% 6.2%
Topix 1518.61 1638.94 1664.6 1.6% 9.6%
Hong Kong Hang Seng 22000.6 27807.6 27880.5 0.3% 26.7%
S. Korea Kospi 2026.5 2386.1 2388.7 0.1% 17.9%
Singapore STI 2880.8 3209.6 3220.3 0.3% 11.8%
China Shanghai Composite 3103.6 3353.6 3352.5 0.0% 8.0%
India Sensex 30 26626.5 32272.61 31922.4 -1.1% 19.9%
Indonesia Jakarta Composite 5296.7 5872.4 5911.7 0.7% 11.6%
Malaysia KLCI 1641.7 1786.3 1771.0 -0.9% 7.9%
Philippines PSEi 6840.6 8180.9 8281.3 1.2% 21.1%
Taiwan Taiex 9253.5 10580.4 10449.7 -1.2% 12.9%
Thailand SET 1542.9 1660.5 1659.1 -0.1% 7.5%
UK FTSE 100 7142.8 7215.5 7310.6 1.3% 2.3%
France CAC 4862.3 5213.9 5281.3 1.3% 8.6%
Germany XETRA DAX 11481.1 12518.8 12592.4 0.6% 9.7%
Italy FTSE MIB 19234.6 22229.5 22530.8 1.4% 17.1%
Spain IBEX 35 9352.1 10317.4 10305.0 -0.1% 10.2%
Sweden OMX Stockholm 30 1517.2 1578.9 1600.8 1.4% 5.5%
Switzerland SMI 8219.9 9028.1 9136.7 1.2% 11.2%
North America
United States Dow 19762.6 22268.34 22349.6 0.4% 13.1%
NASDAQ 5383.1 6448.5 6426.9 -0.3% 19.4%
S&P 500 2238.8 2500.2 2502.2 0.1% 11.8%
Canada S&P/TSX Comp. 15287.6 15173.0 15454.2 1.9% 1.1%
Mexico Bolsa 45642.9 49921.8 50313.5 0.8% 10.2%


Europe and the UK

Equities advanced last week (with the exception of the IBEX — it slipped 0.1 percent). Daily gyrations during the week were muted with less than 1 percent change from day to day. However, shares ended the week on a positive note. Investors were pleased by solid flash PMI data from both Germany and the Eurozone. However, optimism over the positive data was partially offset by geopolitical concerns, as tensions between North Korea and the United States flared up again. On the week, the FTSE and CAC were up 1.3 percent, the DAX added 0.6 percent and the SMI was 1.2 percent higher.


Following a decidedly lacklustre campaign, Germany's next federal election takes place on Sunday September 24. Angela Merkel, the current Chancellor and head of the Christian Democratic Union (CDU), is favored to be returned for a fourth term. Her conservative bloc, which incorporates the Bavarian Christian Social Union (CSU), is, and has been for some time, comfortably ahead in the opinion polls. Financial markets would seem to have discounted any alternative outcome but, of course, the polls have been badly wrong before. In any event, the CDU/CSU look very unlikely to secure an outright majority and, as is typical in the aftermath of the election, negotiations to arrive at the new government will probably take some time (in 2013 it was some 86 days).


UK Prime Minister Theresa May, in a much anticipated speech in Florence, Italy, hinted at the departure of the UK from the European Union by March 2019. Billed by some as her most important speech on Brexit so far, PM May's widely anticipated address was most notable for its lack of detail. Traders sold sterling as they deemed May's speech short on detail, and hopes of a plan on how Britain might keep preferential access to the single market were dashed.In her speech May called for a post-Brexit transition period of roughly two years, appealing for a revival of negotiations which have stalled over the question of how much Britain would have to pay to end its EU membership.


The EU's chief Brexit negotiator welcomed PM May's speech aimed at advancing stuttering talks between the two sides, saying Brussels will consider the UK's desire for a "time limited" transition period and the government's promise to honor its financial commitments to the bloc. Michel Barnier, the European Commission's lead Brexit negotiator, said the speech expressed a "constructive spirit which is also the spirit of the European Union during this unique negotiation."


September Eurozone business activity accelerated to the strongest pace since May, putting upward pressure on prices, according the flash composite PMI. The September flash composite PMI climbed to a four-month high of 56.7 from 55.7 in the previous month. The upbeat reading came after flash data from Germany and France were better than expected. The accelerating eurozone recovery has put more upward pressure on inflation with services prices rising at the quickest level since May and factory prices up to the highest level since June 2011.


Economic data advanced across the board with September flash consumer confidence climbing to the highest since 2001. September flash PMIs improved over the August readings. The readings for the German ZEW climbed and UK retail sales for August beat expectations.


Asia Pacific

Equities ended the week on a down note and were mixed on the week. Friday's declines were attributed to the rising geopolitical tensions between the United States and North Korea as well as a downgrade to China's credit rating that sent investors scurrying towards safe-haven assets such as gold, the Japanese yen and the Swiss franc. Losses ranged from the Shanghai's 1.09 points slip to the Taiex decline of 1.2 percent. Gains for the week ranged from 0.1 percent (Kospi) to 1.9 percent (Nikkei).


On Thursday, S&P Global Ratings downgraded China's credit rating, citing higher economic and financial risks after a prolonged period of strong credit growth. The ratings agency also lowered its sovereign rating on Hong Kong, citing spillover risks. Chinese stocks ended off their day's lows on Friday amid expectations that Beijing will maintain stability in markets ahead of next month's meeting of the Chinese Communist Party's National Congress. The Hang Seng managed an increase of 0.3 percent on the week. The decision brings S&P's rating in line with those of its two big rivals, Moody's and Fitch. When Moody's lowered the rating in late May, China criticized the decision, saying that "Moody's has overestimated the difficulties faced by China's economy and underestimated the government's ability to deepen reforms."


The Nikkei rose above 20,000 on Tuesday and closed at its highest level in more than two years, spurred by talk of a parliamentary election that could reassure investors about Japan's growth prospects. Prime Minister Shinzo Abe, whose approval ratings have climbed in recent weeks after falling as low as 30 percent, hinted Monday he would call for an election of the lower house of Parliament. Local media said it is expected take place October 22. Analysts say the Liberal Democratic Party-led government is likely to stay in power, and overseas investors have already started to adjust positions to price in an Abe win.


Mr. Abe's grip on power appeared threatened earlier this year when opposition parties pressed allegations that his government was helping friends with favors, particularly in one case where an old friend of the prime minister won permission to open a veterinary school. Mr. Abe said he wasn't involved in that decision and denied wrongdoing generally.


New Zealand released its second quarter growth data. On the quarter, GDP was up 0.8 percent and 2.5 percent on the year. In Japan, exports jumped 18.1 percent from a year ago while imports were up 15.2 percent.



The US dollar advanced against its major counterpart including the pound sterling, Swiss franc, yen and the Canadian and Australian dollars. It was virtually unchanged against the euro. The U.S. currency fluctuated as investors adjusted their positions to the latest Federal Reserve moves. The odds for a fed funds increase by December reached almost 70 percent after the Fed Wednesday said it still expects another increase in 2017. Heightened geopolitical concerns also played a role in the week's fluctuations. The U.S. dollar was down Friday amid the heightened war of words between the U.S. and North Korea.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 Sep 15 Sep 22 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.800 0.796 -0.5% 10.4%
New Zealand NZ$ 0.6948 0.729 0.733 0.6% 5.5%
Canada C$ 0.7443 0.821 0.811 -1.2% 8.9%
Eurozone euro (€) 1.0534 1.195 1.194 0.0% 13.4%
UK pound sterling (£) 1.2333 1.359 1.352 -0.4% 9.7%
Currency per U.S. $
China yuan 6.9450 6.553 6.590 -0.6% 5.4%
Hong Kong HK$* 7.7533 7.820 7.810 0.1% -0.7%
India rupee 67.9238 64.080 64.800 -1.1% 4.8%
Japan yen 116.8100 110.840 112.090 -1.1% 4.2%
Malaysia ringgit 4.4862 4.190 4.198 -0.2% 6.9%
Singapore Singapore $ 1.4465 1.346 1.346 0.0% 7.5%
South Korea won 1205.8300 1131.760 1136.650 -0.4% 6.1%
Taiwan Taiwan $ 32.3260 30.052 30.171 -0.4% 7.1%
Thailand baht 35.8100 33.089 33.079 0.0% 8.3%
Switzerland Swiss franc 1.0174 0.9597 0.9705 -1.1% 4.8%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


Final August harmonized index of consumer prices confirmed a 0.3 percent increase on the month and was up 1.5 percent from a year ago. This was up 0.2 percentage points from the final July result and the strongest reading since April (1.9 percent) which was temporarily boosted by Easter effects. However, as revealed in the flash report, the acceleration in the headline data was not mirrored in the core indexes. The narrowest gauge, which excludes energy, food, alcohol and tobacco, was still 1.2 percent and in line with July's final mark. Similarly, without just energy and unprocessed food and omitting only energy and seasonal food, the rate held steady at 1.3 percent. Non-energy goods and service sector inflation were also flat at 0.5 percent and 1.6 percent respectively.



ZEW's September survey found analysts more upbeat about the German economy with stronger than expected rises in optimism about both the current situation and the outlook. The current conditions gauge gained 1.2 points to 86.7. This was its sixth increase in the last seven months and made for the best reading since June. At the same time, expectations climbed 6.1 points to 17.0. This was their sharpest advance since January 2015 but their first rise in four months. Indeed, the increase only reversed a fraction of the cumulative 10.6 point decline recorded since May.



Final second quarter real gross domestic product was unrevised from its previous estimate of a 0.5 percent quarterly increase. However, annual growth was nudged a tick firmer to 1.8 percent from 1.7 percent in the previous estimate. Household consumption expanded 0.3 percent on the quarter while gross fixed capital formation was up 0.9 percent (businesses 1.0 percent, households 1.2 percent). With government spending 0.4 percent firmer, final domestic demand added 0.5 percentage points to the change in total output. However, this contribution was offset by a 0.5 percentage point reduction from reduced stock building, also unrevised from last month's estimate. Exports (2.4 percent) and imports (0.3 percent) were both shaded a tick but still provided a net 0.6 percentage point boost.


United Kingdom

August retail sales jumped a monthly 1.0 percent after increasing an upwardly revised 0.6 percent in July. This lifted annual growth from 1.4 percent to 2.4 percent. Excluding auto fuel, sales were equally robust, also rising 1.0 percent to stand 2.8 percent higher on the year. The underlying picture was almost as buoyant with non-food purchases (ex-auto fuel) increasing a monthly 0.9 percent having been only flat in July. Non-store retailing (5.0 percent), non-specialised stores (1.1 percent) and the other stores category (3.6 percent) advanced. However, clothing & footwear (down 0.2 percent) and household goods (down 2.1 percent) were down on the month. Food demand advanced 0.2 percent while auto fuel was up 0.6 percent.




August merchandise trade surplus narrowed from ¥418.8 billion in July to ¥113.6 billion. Exports increased 18.1 percent on the year, accelerating from 13.4 percent in July. Imports advanced 15.2 percent on the year, down from 16.3 percent in July. Stronger exports growth was broad-based across Japan's major trading partners. Exports to the United States were up 21.8 percent after increasing 11.5 percent in July. Exports to China and the European Union accelerated from 17.6 percent to 25.8 percent and from 8.3 percent to 13.7 percent respectively. Weaker import growth was partly driven by imports of raw materials, manufactured goods, and electrical and other types of machinery. Iron ore imports, in particular, fell 12.1 percent on the year in volume terms. This was partly offset by a stronger increase in the value of petroleum imports, up from 7.7 percent to 9.1 percent. Motor vehicles imports also rebounded strongly, up 17.9 percent on the year after falling by 22.8 percent in July.




July manufacturing sales tumbled 2.6 percent following a revised 1.9 percent decline in June. This was the second consecutive decline after three increases in sales. The decrease was primarily the result of lower sales of motor vehicles and motor vehicle parts partially due to annual plant closures in July. Excluding motor vehicles and motor vehicle parts, manufacturing sales increased 0.2 percent. On the year, total sales were up 3.4 percent after rising 6.4 percent in June. Sales were down in 9 of 21 industries, representing 57 percent of the manufacturing sector. Sales of durable goods decreased 4.6 percent, while sales of non-durable goods declined 0.2 percent. Transportation equipment industry dropped 13.8 percent in July for a second consecutive monthly decline. This is the largest monthly decrease since May 2009. Food industry sales declined 0.9 percent. These declines were partially offset by increases in wood products (2.3 percent), primary metals (1.9 percent) and non-metallic mineral products (4.4 percent). Unfilled orders fell 1.7 percent, the third consecutive monthly decline. New orders declined 1.7 percent.


July retail sales were up a greater than anticipated 0.4 percent and were 7.8 percent higher than the same month a year ago. Higher sales at motor vehicle & parts dealers and food & beverage stores were the main contributors to the gain. Sales were up in 6 of 11 subsectors, representing 75 percent of total retail trade. However, after removing the effects of price changes, retail sales in volume terms decreased 0.2 percent. Volumes were especially weak for gasoline stations and electronics & appliances. Motor vehicle & parts dealers were up 0.8 percent with higher sales at new car dealers accounting for the increase and more than offsetting declines at the other store types. Food & beverage stores were up 0.9 percent, rising for the fourth consecutive month. Health & personal care stores (0.7 percent) reported higher sales for the sixth time in seven months. Sales at miscellaneous store retailers advanced 0.9 percent, rising for the fourth consecutive month. Gasoline stations were down for the third consecutive month in July. Following a 1.9 percent gain in June, building material and garden equipment and supplies dealers posted their first decline in five months.


August consumer price index was up 0.1 percent on the month and 1.4 percent from a year ago following a 1.2 percent in July. Prices were up in six of the eight major CPI components in the 12 months to August, with the transportation and shelter indexes contributing the most to the annual increase. The clothing & footwear index and the household operations, furnishings & equipment index declined from a year ago. Transportation costs rose 2.8 percent on the year following a 1.9 percent increase the previous month. As in July, gasoline prices contributed the most to the gain in transportation prices and to their acceleration. Air transportation costs grew at a greater rate in August than in July. The shelter index increased 1.3 percent for a second month on the year. Food prices were up 0.9 percent after increasing 0.6 percent in July. On a seasonally adjusted monthly basis, the CPI increased 0.2 percent in August matching the gain in July. In Five major components increased on a seasonally adjusted monthly basis, while three decreased.


Bottom line

The Bank of Japan and the Federal Reserve lived up to expectations and did not surprise the financial markets. Most economic data were favorable globally although housing data in the U.S. showed signs of being affected by hurricane Harvey. Analysts were disappointed with Prime Minister May's Florence speech on Brexit.


Following Saturday's (September 23) national election, the Reserve Bank of New Zealand meets on Thursday. No change in its overnight cash rate is expected —the current rate is 1.75 percent. Germany holds its national election on Sunday, September 24. Among the economic data to be released is August consumer spending data for Germany and France. Confidence in the form of the EC business and consumer survey will be closely monitored in the Eurozone along with Germany's Ifo September survey. Japan releases its major indicators including consumer prices, household spending and retail sales, unemployment and industrial production — all for August.


Looking Ahead: September 25 through September 29, 2017

Central Bank activities
Sep 28 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
The following indicators will be released this week...
Sep 25 Germany Ifo Survey (September)
Sep 27 Eurozone M3 Money Supply (August)
Sep 28 Eurozone EC Business and Consumer Confidence (September)
Sep 29 Eurozone Harmonized Index of Consumer Prices (September flash)
Germany Retail Sales (August)
France Consumer Spending on Manufactured goods (August)
UK Gross Domestic Product (Q2:2017 final)
Asia Pacific
Sep 25 Japan Manufacturing PMI (September flash)
Sep 29 Japan Household Spending (August)
Unemployment (August)
Retail Sales (August)
Industrial Production (August)
Consumer Price Index (August)
China Manufacturing PMI (September)
Sep 29 Canada Monthly Gross Domestic Product (July)
Industrial Product Price Index (August)


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