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Equities tumble, bond yields rise
International Perspective - February 2, 2018
By Anne D. Picker, Chief Economist


Global Markets

Global equities tumbled as talk of central bank policy tightening and higher inflation expectations boosted borrowing costs globally, a move that in turn sparked the selloff of shares. Traders have become concerned over the continued rise in U.S. bond yields. The rise in yields makes bonds look more attractive than riskier assets such as equities. On the week, all indexes followed here except the All Ordinaries and the KLCI retreated.


Global central banks have recently struck a more hawkish tone, with impressive economic data and buoyant oil prices driving up long-term inflation expectations. For example, the European Central Bank is widely expected to end its asset purchase program in September. And the Bank of Japan which is still easing did its best Friday to stem the rise in borrowing costs, stepping into the market with a promise to buy as many bonds as it would take to keep yields low.


An update on NAFTA (North American Free Trade Agreement)

The sixth round of talks between Mexico, Canada and the U.S. concluded on Monday, but a deal over how to reshape the 24-year-old pact was still far from guaranteed as the participants continued to squabble But the mood around the talks was described as "cautiously optimistic" as Canada, in particular, joined Mexico in offering counterproposals to U.S. requests for drastic changes. Tensions between the countries grew as the United States criticized Canada's suggested changes on areas including automobile manufacturing and investment.


NAFTA was originally negotiated by President George H.W. Bush (Bush 1) and signed into law by President Bill Clinton. It spurred trade between the three countries by reducing Mexico's high tariffs on goods from Canada and the United States. But it also incentivized companies to shift labor-intensive manufacturing to Mexico. Officials from Canada and Mexico sounded more positive about the prospects for a deal than the U.S. representative.


With talks now reaching into their seventh month, negotiators are about to butt up against some political events that could make an agreement even more difficult including the Mexican general election on July 1 and U.S. mid-term elections in November.



As widely expected, the Federal Reserve left its benchmark interest rate range unchanged between 1.25 percent and 1.5 percent. The Fed said that the economy continues to grow at 'a solid rate' and the job market continues to gain strength — this was confirmed by Friday's employment report. This has been interpreted to mean that the FOMC will increase its fed funds rate at its March 20 and 21 meeting. The Fed also announced that Jerome H. Powell, a member of the Fed's board since 2012, will take the oath of office as the new chairman on Monday morning February 5. This FOMC meeting was Janet Yellen's last as chair — she will step down on February 3 at the end of her four-year term.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Jan 26 Feb 2 Week Jan 2018
Australia All Ordinaries 6167.3 6164.8 6229.85 1.1% -0.3% 1.0%
Japan Nikkei 225 22764.9 23631.9 23274.53 -1.5% 1.5% 2.2%
Topix 1817.56 1879.39 1864.20 -0.8% 1.1% 2.6%
Hong Kong Hang Seng 29919.2 33154.1 32601.78 -1.7% 9.9% 9.0%
S. Korea Kospi 2467.5 2574.8 2525.39 -1.9% 4.0% 2.3%
Singapore STI 3402.9 3567.1 3529.82 -1.0% 3.9% 3.7%
China Shanghai Composite 3307.2 3558.1 3462.08 -2.7% 5.3% 4.7%
India Sensex 30 34056.8 36050.44 35066.75 -2.7% 5.6% 3.0%
Indonesia Jakarta Composite 6355.7 6660.6 6628.82 -0.5% 3.9% 4.3%
Malaysia KLCI 1796.8 1853.9 1870.48 0.9% 4.0% 4.1%
Philippines PSEi 8558.4 9041.2 8810.75 -2.5% 2.4% 2.9%
Taiwan Taiex 10642.9 11147.1 11126.23 -0.2% 4.3% 4.5%
Thailand SET 1753.7 1828.9 1827.35 -0.1% 4.2% 4.2%
UK FTSE 100 7687.8 7665.5 7443.43 -2.9% -2.0% -3.2%
France CAC 5312.6 5529.2 5364.98 -3.0% 3.2% 1.0%
Germany XETRA DAX 12917.6 13340.2 12785.16 -4.2% 2.1% -1.0%
Italy FTSE MIB 21853.3 23857.0 23202.66 -2.7% 7.6% 6.2%
Spain IBEX 35 10043.9 10595.4 10211.20 -3.6% 4.1% 1.7%
Sweden OMX Stockholm 30 1576.9 1612.6 1584.79 -1.7% 1.0% 0.5%
Switzerland SMI 9381.9 9515.6 9220.69 -3.1% -0.5% -1.7%
North America
United States Dow 24719.2 26616.71 25520.96 -4.1% 5.8% 3.2%
NASDAQ 6903.4 7505.8 7240.95 -3.5% 7.4% 4.9%
S&P 500 2673.6 2872.9 2762.13 -3.9% 5.6% 3.3%
Canada S&P/TSX Comp. 16209.1 16239.2 15606.03 -3.9% -1.6% -3.7%
Mexico Bolsa 49354.4 51065.5 50395.830 -1.3% 2.2% 2.1%


Europe and the UK

European equities retreated last week along with shares in Asia and the U.S. The continued rise in global bond yields pressured equities along with mixed earnings reports. A strong U.S. employment report Friday locked in the belief that the Federal Reserve would increase its fed funds rate at its March 20 and 21 FOMC meeting. The FOMC announcement on Wednesday intimated that a rate increase would occur. The euro strengthened further against the U.S. dollar, applying additional pressure to shares of European exporters. The DAX tumbled 4.2 percent, the CAC retreated 3.0 percent, the SMI dropped 3.1 percent and the FTSE declined 2.9 percent on the week. For the month of January, the FTSE (down 2.0 percent) and the SMI (down 0.5 percent) were down. However, the MIB and IBEX added 7.6 percent and 4.1 percent on the month respectively, while the CAC and DAX added 3.2 percent and 2.1 percent.


Preliminary gross domestic product data for the Eurozone and France indicate that the European economies are continuing to grow. Eurozone flash fourth quarter gross domestic product expanded a quarterly 0.6 percent, slightly slower than the 0.7 percent third quarter increase and was up 2.7 percent from the same quarter a year ago. France's economic growth accelerated slightly in the fourth quarter. Gross domestic product climbed 0.6 percent on the quarter after increasing a revised 0.5 percent in the previous quarter and was up an annual 2.4 percent.


Eurozone manufacturing activity expanded markedly at the start of the year, driven by solid expansions of both production and new orders according to the manufacturing PMIs. In part this reflected a sizeable German contribution where overheating is already a serious concern, but conditions are positive across the region as a whole. January manufacturing PMI for the Eurozone was 59.6, down from the record final December reading of 60.6 but still points to a very healthy Eurozone manufacturing sector. The data show robust, albeit smaller, gains in output and new orders. Both saw expansion rates not far short of their respective all-time highs. The same was true of employment and backlogs which similarly rose at a rate only just shy of its year-end pace. Going one better, business optimism regarding the year ahead actually saw a new record peak. Inflationary pressures continued to build with both input costs and factory gate prices rising at accelerated rates. The latter saw its strongest reading in 80 months. Regionally, aside from Germany (61.1), Italy (59.0) and France (58.4) made healthy progress. Spain lagged but still saw overall activity expand at a respectable rate.


Asia Pacific

Most equity indexes in this region declined for the week. Only the All Ordinaries (up 1.1 percent) and the KLCI (up 0.9 percent) advanced. Both the Shanghai Composite and Sensex dropped 2.7 percent. For the Shanghai Composite, it was its worst weekly loss in 14 months. For the month of January, only the All Ordinaries (down 0.3 percent) retreated. Monthly gains ranged from 9.9 percent (Hang Seng) to 1.1 percent (Topix). After rallying strongly for the first three weeks of January, equities reversed and headed downward in the last week of the month. The decline was blamed in part because bond yields climbed and the U.S. dollar slid. It is the height of earnings season and mixed results from major U.S. companies helped induce some caution prior to Friday's U.S. monthly employment report for January, which was released after markets here were closed.


The price correction of Asian equities mirrors the stumble in U.S. shares. Movements on the U.S. bond market are believed to be behind the correction. Growing inflation expectations and deteriorating fiscal health in the U.S. resulted in the higher yields. The market saw better opportunities in bonds with higher yields than stocks with already elevated prices. In addition, the dollar performed poorly against Asian currencies over the same period. This also hurt regional market sentiment as a weaker dollar weighs on the competitiveness of exporters. The Bank of Japan did its best to stem the rise in borrowing costs, stepping into the market on Friday with a promise to buy as many bonds as it would take to keep yields low.



The U.S. dollar and bond yields jumped on Friday while stock markets tumbled as U.S. data showed the strongest annual wage growth since 2009, raising the specter of accelerating inflation and more U.S. interest rate increases than expected in 2018. Expectations were for three rate increases in 2018. On the week, the U.S. currency was up against the yen, pound sterling and the Canadian and Australian dollars while the euro and Swiss franc advanced.


The Chinese yuan or renminbi experienced its strongest monthly rally for almost 40 years in January, and expectations are for further gains going forward, even as its strength begins to hurt local businesses. The yuan was up last week after rising for the month of January. The onshore renminbi is permitted to trade two percent either side of a daily midpoint set by the People's Bank of China. The monthly performance was the renminbi's best since before the introduction of the managed float in 2005. When the yuan is compared to a wider basket of trading partners, its rally has been much weaker, making it easier for authorities to swallow increased strength against the dollar. However, the rising value of the currency could soon hurt exporters.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 Jan 26 Feb 2 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.812 0.793 -2.3% 1.7%
New Zealand NZ$ 0.709 0.736 0.730 -0.7% 3.0%
Canada C$ 0.796 0.812 0.805 -0.8% 1.2%
Eurozone euro (€) 1.194 1.242 1.246 0.4% 4.3%
UK pound sterling (£) 1.344 1.415 1.412 -0.2% 5.0%
Currency per U.S. $
China yuan 6.534 6.328 6.301 0.4% 3.7%
Hong Kong HK$* 7.816 7.818 7.822 0.0% -0.1%
India rupee 64.081 63.543 64.064 -0.8% 0.0%
Japan yen 112.850 108.670 110.100 -1.3% 2.5%
Malaysia ringgit 4.067 3.871 3.886 -0.4% 4.7%
Singapore Singapore $ 1.338 1.307 1.320 -0.9% 1.4%
South Korea won 1070.630 1064.010 1079.940 -1.5% -0.9%
Taiwan Taiwan $ 29.775 29.092 29.226 -0.5% 1.9%
Thailand baht 32.696 31.345 31.452 -0.3% 4.0%
Switzerland Swiss franc 0.979 0.9336 0.931 0.3% 5.1%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


Fourth quarter flash gross domestic product was up a 0.6 percent quarterly rate and down from a slightly stronger revised 0.7 percent pace in the third quarter. Annual growth was 2.7 percent, also only 0.1 percentage point short of its upwardly revised mark last time. This report provides only summary growth statistics and no update on the key GDP expenditure components. However, national data already released suggest that the upswing was probably widespread. In particular, in terms of quarterly rates, France (0.6 percent) and Spain (0.7 percent) continued to enjoy a decent pace of expansion.


The EU Commission economic sentiment (ESI) reading was 114.7 down 0.6 points of its downwardly revised December reading (115.3). This was the first decline since last May. The limited drop reflected worsening morale in services (16.7 after 18.0) and retail (5.0 after 6.0). However, confidence in industry (8.8) was unchanged from a weaker revised December print while construction (4.6 after 3.1) and households (1.3 after 0.5) both saw an improvement. Regionally among the larger four states, the national ESI fell in France (111.5 after 113.9) and Italy (110.1 after 111.8) but continued to rise in Germany (116.0 after 115.4) and Spain (110.9 after 110.0). Inflation developments were quite bullish. Manufacturers' selling price expectations (12.4 after 13.0) were a little softer than in December but still historically firm. More promisingly, their services counterpart (9.9 after 8.3) and, in particular, household inflation expectations (19.6 after 13.6) were significantly stronger.



Fourth quarter flash real gross domestic product was up a quarterly 0.6 percent after increasing 0.5 percent in the third quarter. Annual growth was 2.4 percent, up from 2.3 percent and its strongest reading since the beginning of 2011. Final domestic demand added 0.5 percentage points, and net exports provided 0.6 percentage points. Accordingly, the expansion would have been more marked still but for a sizeable drawdown in stocks which subtracted 0.5 percentage points. Household spending slowed from a 0.6 percent quarterly rate in July–September to 0.3 percent but gross fixed capital formation was 0.2 percentage points stronger at 1.1 percent, its best performance since the start of the year. Within this, business spending was up 1.5 percent while residential investment gained 0.7 percent. General government consumption advanced 0.4 percent. Real net export position improved significantly as exports jumped 2.6 percent, up from 1.1 percent last time, and imports increased only 0.7 percent, down from 2.4 percent. In the third quarter the real trade balance subtracted 0.5 percentage points off the quarterly increase in total output.




December household spending retreated 0.1 percent on the year after increasing 1.7 percent in November. The drop in headline annual growth was mainly driven by weaker spending on food and housing. Spending on food was up 1.1 percent down from 2.2 percent in November, while spending on housing dropped 23.3 percent on the year after a decline of 7.9 percent previously. Spending on furniture, clothing, and transport and communication also slowed in December. This was partly offset by an increase in year-on-year growth in utilities spending from 2.5 percent to 7.6 percent. In contrast to the headline number, core household spending which excludes housing, motor vehicles and other volatile items and tends to track more closely the consumption component of gross domestic product was up 2.9 percent on the year after increasing 2.7 percent previously. In a separate report, retail sales increased 3.6 percent on the year after rising 2.1 percent the month before.



The consumer price index rose 1.9 percent on the year in the three months to December, up from 1.8 percent in the three months previous months. The CPI remained below the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent for the third consecutive quarter. The CPI rose 0.6 percent on the quarter, unchanged from the three months to September. The small increase in headline inflation in December reflected offsetting changes in some of the main categories of consumer spending. Prices of food and non-alcoholic beverages fell 0.2 percent on the year after declining 0.7 percent in the previous quarter, while the year-on-year change in transport prices increased from 2.7 percent to 3.3 percent. Housing costs were relatively steady, up 3.4 percent on the year from 3.3 percent in the previous three months. This was partly offset by weaker communication prices, down 3.4 percent on the year after a drop of 2.9 percent previously. The trimmed mean CPI advanced 0.4 percent on the quarter and was unchanged at 1.8 percent on the year. The weighted mean CPI rose 0.4 percent on the quarter and 2.0 percent on the year.




November monthly GDP increased 0.4 percent from October. Growth was widespread across industries as 17 of 20 industrial sectors increased. On the year, monthly GDP was up 3.5 percent. Goods-producing industries rose a monthly 0.8 percent after declining 0.5 percent in October. The gain was mainly due to increases in the manufacturing and mining, quarrying and oil and gas extraction sectors partly as a result of restoration in production capacity. Meanwhile, services-producing industries rose 0.3 percent, led by the real estate and rental and leasing, wholesale, and retail trade sectors. Manufacturing was up 1.8 percent, the largest monthly increase since February 2014 as the majority of subsectors grew. Non-durable manufacturing rose 1.1 percent, while durable manufacturing jumped 2.5 percent. The rise in durable manufacturing was the largest monthly increase since December 2011. Following 1.2 percent growth in October, retail trade was up 0.6 percent in November as 7 of 12 subsectors increased.


Bottom line

Equities tumbled as investors took fright of looming higher interest rates from central banks. Bond yields climbed making them a more attractive investment. Key economic data were positive globally including growth in the Eurozone, output in Japan and employment in the U.S. The Federal Reserve, as widely anticipated, left its fed funds range unchanged at 1.25 percent to 1.50 percent. U.S. employment increased 200,000 in January while the unemployment rate remained at 4.1 percent.


Four central banks meet in the coming week — the Reserve Banks of Australia, New Zealand and India and the Bank of England. The BoE also publishes its Quarterly Inflation Report. Data releases focus on December industrial production and January composite PMIs. China will release January data for its merchandise trade balance and its consumer and producer price indexes. Canada reports its January labour force survey and December international trade balance.


Looking Ahead: February 5 through February 9, 2018

Central Bank activities
Feb 6 Australia Reserve Bank of Australia Monetary Policy Announcement
Feb 7 India Reserve Bank of India Monetary Policy Announcement
Feb 8 UK Bank of England Monetary Policy Announcement & Minutes
Quarterly Inflation Report Published
New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
The following indicators will be released this week...
Feb 5 Eurozone PMI Composite & Services (January)
Retail Sales (December)
Germany PMI Composite & Services (January)
France PMI Composite & Services (January)
Italy PMI Composite & Services (January)
UK PMI Services (January)
Feb 6 Germany Manufacturing Orders (December)
Feb 7 Germany Industrial Production (December)
Feb 8 Germany Merchandise Trade (December)
Feb 9 France Industrial Production (December)
Italy Industrial Production (December)
UK Industrial Production (December)
Merchandise Trade (December)
Asia Pacific
Jan 2 China PMI Manufacturing (December)
India PMI Manufacturing (December)
Feb 5 Japan PMI Manufacturing (Januaryr)
Feb 6 Australia Merchandise Trade (December)
Feb 8 China Merchandise Trade (January)
Feb 9 China Consumer Price Index (January)
Producer Price Index (January)
Feb 6 Canada International Trade (December)
Feb 9 Canada Labour Force Survey (January)


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


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