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As the world turns
International Perspective - July 7, 2017
By Anne D. Picker, Chief Economist


Global Markets

Investors had a full plate of global events both economic and geopolitical that kept them cautious all week. Among the many events there was the publication of the minutes of the most recent Federal Reserve and European Central Bank meetings where prospects of further easing were remote to say the least. The week was chock full of new economic data, much of it for June to close out the second quarter. The data week ended as it usually does for the first week of the month with the U.S. employment situation report. Employment gained more than anticipated with upward revisions to the prior two months. Investors also had geopolitical news to deal with after North Korea tested a missile once again. And in Germany, the G20 meeting was getting underway at week's end.


Equities were mixed for the week with those in Asia mostly lower while in Europe, the indexes recorded mild gains and in the U.S., equities advanced in the holiday shortened week.


The U.S. bond market sold off sending the 10 year Treasury note yield up 8 basis points this week and as many as 24 basis points for the last two weeks. The selloff can be attributed to several things including the looming downsizing of the Federal Reserve's balance sheet. Traders were adjusting to the more hawkish rhetoric from central bankers as well.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 June 30 July 7 Week 2017
Australia All Ordinaries 5719.1 5764.0 5743.9 -0.3% 0.4%
Japan Nikkei 225 19114.4 20033.4 19929.1 -0.5% 4.3%
Topix 1518.61 1611.90 1607.1 -0.3% 5.8%
Hong Kong Hang Seng 22000.6 25764.6 25340.9 -1.6% 15.2%
S. Korea Kospi 2026.5 2391.8 2379.9 -0.5% 17.4%
Singapore STI 2880.8 3226.5 3229.0 0.1% 12.1%
China Shanghai Composite 3103.6 3192.4 3218.0 0.8% 3.7%
India Sensex 30 26626.5 30921.61 31360.6 1.4% 17.8%
Indonesia Jakarta Composite 5296.7 5829.7 5814.8 -0.3% 9.8%
Malaysia KLCI 1641.7 1763.7 1759.9 -0.2% 7.2%
Philippines PSEi 6840.6 7843.2 7889.3 0.6% 15.3%
Taiwan Taiex 9253.5 10395.1 10297.3 -0.9% 11.3%
Thailand SET 1542.9 1574.7 1569.4 -0.3% 1.7%
UK FTSE 100 7142.8 7312.7 7350.9 0.5% 2.9%
France CAC 4862.3 5120.7 5145.2 0.5% 5.8%
Germany XETRA DAX 11481.1 12325.1 12388.7 0.5% 7.9%
Italy FTSE MIB 19234.6 20584.2 21015.1 2.1% 9.3%
Spain IBEX 35 9352.1 10444.5 10488.8 0.4% 12.2%
Sweden OMX Stockholm 30 1517.2 1602.5 1617.0 0.9% 6.6%
Switzerland SMI 8219.9 8906.9 8883.3 -0.3% 8.1%
North America
United States Dow 19762.6 21349.63 21414.3 0.3% 8.4%
NASDAQ 5383.1 6140.4 6153.1 0.2% 14.3%
S&P 500 2238.8 2423.4 2425.2 0.1% 8.3%
Canada S&P/TSX Comp. 15287.6 15182.2 15027.2 -1.0% -1.7%
Mexico Bolsa 45642.9 49857.5 50059.0 0.4% 9.7%


Europe and the UK

European equities advanced for the week with the exception of the SMI and unlike Asian indexes that were mostly lower last week. Falling crude oil prices and continued geopolitical concerns weighed on investor sentiment at the end of the trading week. On the week, the FTSE, CAC and DAX added 0.5 percent each while the SMI retreated 0.3 percent. Even though the U.S. employment report was better than expected, it did not provide a boost to equities on Friday — investors were focused on the events in Hamburg, Germany and the G20 summit.


On Thursday, investors had their first opportunity to react to the Federal Reserve minutes of its latest FOMC meeting which were released on Wednesday along with minutes from the latest European Central Bank meeting that were published on Thursday. The ECB said that there was a need to maintain caution in communication as underlying inflation was still subdued and substantial monetary policy stimulus was necessary to support the ongoing euro area recovery. The ECB cautioned that even small and incremental changes in the communication could be misperceived as signaling a more fundamental change in policy direction. "This could trigger unwarranted movements in financial conditions, which could put the prospects of a sustained adjustment of inflation at risk."


Manufacturing PMI

Eurozone manufacturing ended the second quarter and the month of June at a final 57.4 which was 0.4 points above its final May reading. This was its best result in 74 months. Manufacturing production and new orders expanded at the quickest rates since the first half of 2011 and reflected buoyant demand in both the domestic and overseas markets. Backlogs saw one of the sharpest advances on record and that despite job creation almost matching May's 20-year survey peak. However, inflation developments were relatively soft with input cost pressure easing due to weakness in oil prices. Factory gate prices saw the second smallest gain since January. Regionally, Austria (60.7) registered the strongest national PMI ahead of Germany (59.6) and the Netherlands (58.6). Ireland (56.0) and Italy (55.2) also performed well and France (54.8) and Spain (54.7) were not too far behind. Even Greece (50.5) was in positive growth territory. The average Eurozone manufacturing PMI for last quarter was 57.0, its highest reading since the first quarter of 2011, and business confidence in the year ahead recorded a new record. All of this bodes well for the sector this quarter but the ECB may still be a little disappointed by the weakness of prices.


Asia Pacific

Most equity indexes retreated last week thanks to investors' nerves on the week's events. The events included minutes from the latest FOMC and ECB meetings, the G20 meetings in Germany and the U.S. employment report. An unexpected geopolitical event — North Korea's test of an ICBM — sent investors looking for safety. Among the major indexes, the All Ordinaries and Topix were down 0.3 percent, the Nikkei lost 0.5 percent and the Hang Seng tumbled 1.6 percent, suffering its worst weekly loss since March. However, the Shanghai Composite added 0.8 percent and the Sensex was 1.4 percent higher on the week.


Most Asian stocks declined to end the week — they tracked the weak overnight performances of European and U.S. markets after the ADP private employment report was weaker than anticipated and global sovereign debt yields rose across the board amid bets the European Central Bank will gradually remove policy accommodation in the near future. However, the Shanghai Composite edged upward despite concerns over slowing economic growth and expectations of higher interest rates globally.


Japanese shares hit a three week low despite a weaker yen after the Bank of Japan's decision to raise its purchases of government bonds in its market operations. In a move aimed at stemming a rise in yields, the BoJ on Friday offered to buy an unlimited amount of 10-year JGBs at a yield of 0.110 percent and also increased its buying of five- to 10-year JGBs through an auction to ¥500 billion from ¥450 billion. The market then trimmed the losses as the weakened yen supported overall sentiment, but investors moved past the decision and focused on major global events before the market closed.


EU — Japan trade agreement

European and Japanese leaders confirmed that they have reached a political agreement on a free trade deal to liberalize markets from dairy products to car parts. Speaking at a joint press conference in Brussels with Japanese PM Shinzo Abe, Donald Tusk, president of the EU Council, said that the deal proved wrong the claims of Brexit supporters that "it is easier to do trade outside of the European Union." Leaders said that the agreement sent a strong message ahead of a meeting of G20 leaders meeting in Germany on Friday and Saturday. Mr Abe said that Japan is following the EU-UK Brexit talks "with great interest" and is placing a premium on "predictability" in the talks. He said that he hoped "close cooperation" would be maintained between the EU and UK, including in the area of security.


Reserve Bank of Australia

The Reserve Bank of Australia left its policy cash interest rate unchanged at 1.50 percent where it has been since August 2016 when it was cut by 25 basis points. The RBA continued to forecast economic growth and inflation to rise gradually from recent levels. In its statement, the RBA noted that a broad-based pick-up in the global economy continues, though officials warned that risks to the outlook for Chinese growth remained in place. Higher commodity prices were again cited as a factor providing a boost to Australia's national income. Looking at the domestic economy, officials repeated their assessment that the slowdown in growth recorded in the three months to March partly reflected "temporary factors". They said that the transition to lower mining investment is "almost complete" and that investment is strengthening elsewhere in the economy. RBA governor Philip Lowe said that financial markets are "functioning effectively" and added a new line in the Bank's latest statement to note that "volatility has been low." Although wage growth and consumption spending are subdued, the RBA continued to forecast growth to pick up, in part reflecting the support provided by low interest rates.



The U.S. dollar advanced against its major counterparts including the yen, euro, pound sterling, Swiss franc and the Australian dollar but retreated against the Canadian dollar. The latter was boosted by its own good economic news including a much larger than anticipated gain in June employment. However, the pound sterling tumbled after below-forecast output and merchandise trade data added to a run of downbeat British economic news, adding to questions over the Bank of England's shifting interest rate stance. Strategists have been split over how soon the BoE is likely to raise rates since Governor Mark Carney and Chief Economist Andy Haldane signaled a turn in the Bank's thinking last week.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 June 30 July 7 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.769 0.760 -1.1% 5.4%
New Zealand NZ$ 0.6948 0.733 0.728 -0.6% 4.8%
Canada C$ 0.7443 0.771 0.776 0.6% 4.3%
Eurozone euro (€) 1.0534 1.142 1.140 -0.1% 8.3%
UK pound sterling (£) 1.2333 1.302 1.289 -1.0% 4.5%
Currency per U.S. $
China yuan 6.9450 6.781 6.806 -0.4% 2.0%
Hong Kong HK$* 7.7533 7.807 7.812 -0.1% -0.8%
India rupee 67.9238 64.581 64.595 0.0% 5.2%
Japan yen 116.8100 112.520 113.920 -1.2% 2.5%
Malaysia ringgit 4.4862 4.293 4.301 -0.2% 4.3%
Singapore Singapore $ 1.4465 1.377 1.382 -0.4% 4.7%
South Korea won 1205.8300 1144.140 1154.320 -0.9% 4.5%
Taiwan Taiwan $ 32.3260 30.429 30.585 -0.5% 5.7%
Thailand baht 35.8100 33.930 34.110 -0.5% 5.0%
Switzerland Swiss franc 1.0174 0.9594 0.9638 -0.5% 5.6%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


May manufacturing orders rebounded 1.0 percent following a marginally sharper revised 2.2 percent monthly slide in April. On the year, orders increased from 3.2 percent to 3.7 percent. May's recovery was wholly attributable to a pick-up in overseas demand which expanded 3.1 percent from April (Eurozone 1.7 percent) when it declined 3.6 percent. By contrast, the domestic market continued to contract with a 1.9 percent drop constituting the third decline in a row and the largest drop in the sequence. The latest decrease here reflected a 3.0 percent slump in capital goods, compounded by a 1.1 percent drop in basics. Consumer and durable goods rose 1.5 percent.


May industrial production was up 1.2 percent on the month — its best performance since February. On the year, output was up 4.9 percent, up from 2.6 percent last time. May's buoyancy was dominated by capital goods where production climbed 2.6 percent from April when it declined 0.2 percent. Consumer goods (1.4 percent) also had a good month but intermediates slipped 0.2 percent. Among the more volatile subsectors, energy jumped 2.9 percent but construction contracted 1.0 percent.


United Kingdom

May industrial production slipped a monthly 0.1 percent following an unrevised 0.2 percent increase the month before. On the year, output was down 0.2 percent after falling 0.8 percent in April. Manufacturing posted a 0.2 percent monthly contraction that fully reversed April's modest advance. Food & drink (down 2.0 percent) and transport equipment (down 2.3 percent) did most of the damage and alone subtracted 0.4 percentage points off the overall change. Electrical equipment (down 1.6 percent) also performed poorly. On the upside, computer, electronic & optical goods (up 2.3 percent) and textiles & leather (up 1.3 percent) posted decent gains. Elsewhere within total industrial production, electricity & gas fell 0.8 percent, but water supply was up 1.2 percent and mining & quarrying edged up 0.1 percent.


May deficit on global trade in goods widened out by more than expected to Stg11.86 billion, the second largest shortfall since September last year. Exports were up 0.9 percent on the month after a sharper revised 2.9 percent drop in April while imports rose 3.9 percent following a 5.6 percent drop last time. Excluding oil and other erratic items, the picture was not very different with exports up a monthly 0.2 percent and well short of the 3.6 percent gain posted by imports. As a result, the underlying trade gap was Stg11.25 billion, up significantly from Stg10.08 billion last time. The shortfall with the rest of the EU was Stg8.07 billion, little changed on the month, but the red ink with the rest of the world jumped from Stg2.62 billion to Stg3.80 billion. The poor nominal figures, which are still being inflated by sterling weakness, mask an improvement in net volumes. Hence, core export volumes over the last three months were up 3.3 percent when compared with a 1.0 percent increase in imports.




Second quarter Tankan survey reading for large manufacturers climbed from 12 in the first quarter to 17. For medium sized manufacturers the reading edged up from 11 to 12 and from 5 to 7 for small manufacturers. Aggregating manufacturers of all sizes, the index rose from 8 to 11. Business sentiment in the non-manufacturing sector also strengthened. For large nonmanufacturers the business condition index rose from 20 to 23, from 17 to 18 for medium-sized firms and from 4 to 7 for small firms. For all industries, large firms have revised their forecast for capital expenditures in the fiscal year ending in March 2018 to an increase of 8.0 percent. Large manufacturers forecast capex to increase 15.4 percent in the current fiscal year, while large non-manufacturing firms forecast an increase of 3.7 percent. Medium-sized firms across both sectors forecast capex to increase by 14.0 percent this fiscal year, while small firms across the two sectors forecast capex to fall by 20.6 percent. These forecasts result in a forecast for aggregate capex across all firms to increase by 2.9 percent, up from the previous forecast for a decline of 1.3 percent.



May retail sales were up 0.6 percent after an increase of 1.0 percent in April. On the year, sales were up 3.8 percent. On the month, household goods were up 2.2 percent: clothing, footwear & personal accessories were up 1.3 percent; cafes, restaurants & takeaway food services gained 0.6 percent; other retailing added 0.6 percent and food retailing inched up 0.1 percent. However, department stores declined 0.7 percent. The strength of sales varied regionally, with solid growth recorded in the two most populous states, New South Wales and Victoria, up 1.3 percent and 1.2 percent respectively. Sales in Tasmania also advanced 1.2 percent. Sales growth was weaker elsewhere, with Queensland, the third most populous state, recording a drop of 1.1 percent on the month.


May merchandise trade surplus widened to A$2.47 billion from a revised A$0.09 billion in April. This was the seventh consecutive monthly trade surplus, with a rebound in coal exports after weather-related disruptions driving much of the increase. Exports rose 8.5 percent on the month and 24.9 percent from a year ago. The increase reflected a rebound in exports of non-rural goods (around 60 percent of total exports). These fell sharply in April, partly due to the impact of cyclone damage to port infrastructure that had disrupted coal exports. Imports were up 0.7 percent on the month and 7.2 percent on the year. Imports of consumption goods, intermediate and other merchandise goods all rose on the month and were partly offset by declines in capital goods and non-monetary gold.




May's merchandise trade deficit was C$1.1 billion, up from a revised C$552 million deficit in April. Imports rose 2.4 percent led by an increase in aircraft imports. Exports were up 1.3 percent thanks to higher unwrought gold exports. On the year, exports were up 17.8 percent and imports were 10.2 percent higher. Import volumes rose 1.8 percent while prices increased 0.6 percent. Higher imports of aircraft & other transportation equipment & parts led the increase. Motor vehicles & parts along with energy products also were responsible for the increase as were energy products. Total exports rose for a third consecutive month because of higher volumes. Exports excluding energy products rose 3.6 percent in May. Exports of motor vehicles & parts rose 3.6 percent with passenger cars & light trucks posting the largest increase. Exports of energy products fell 9.0 percent. This was an atypical decline for crude oil in May, a month that usually sees increases with the start of summer. Imports from the United States rose 3.6 percent to a record high C$32.7 billion on higher imports of aircraft and motor vehicles. Exports to the United States edged down 0.3 percent to C$36.3 billion. As a result, Canada's trade surplus with the United States narrowed from C$4.8 billion in April to C$3.5 billion in May. The Canadian dollar fell 0.9 cents US relative to the American dollar from April to May. Exports to countries other than the United States were up 6.2 percent while imports from countries other than the United States edged up 0.2 percent. Canada's trade deficit with countries other than the United States narrowed from C$5.3 billion in April to C$4.6 billion in May.


June employment increased 45,300. However unlike last month, the gain was mostly in part time work (up 37,100). Full time employment added 8,200 jobs. For the first half of 2017, employment grew by 186,000 compared with 64,000 over the first half of 2016. The participation rate edged up to 65.9 percent from 65.8 percent in May. The unemployment rate was down 0.1 percent to 6.5 percent. The largest increase was in professional, scientific and technical services (up 27,000). Agriculture employment was 12,000 higher in June. However, there were 15,000 fewer people working in business, building and other support services. Private sector employment grew by 17,800 on the month while public sector jobs increased by only by 6,000.


Bottom line

Equities were mixed last week as a plethora of economic and geopolitical news engulfed investors. Economic news was mixed globally with the key U.S. release — June employment — rising more than anticipated by analysts. Canadian data were positive with employment increasing by far more than expected and auto sales and building permits advancing as well.


The Bank of Canada, given good economic news, is expected to increase its policy interest rate by 25 basis points to 0.75 percent Wednesday. The last time the BoC changed rates was July 2015 when it lowered its policy rate to 0.50 percent. At the same time the Bank will publish its Monetary Policy Report with its current forecasts. China releases its key data for June including consumer and producer prices and international trade. Japan reports May machine orders data which are considered a proxy for capital spending. It will also release producer price data for June.


Looking Ahead: July 10 through July 14, 2017

Central Bank activities
July 12 Canada Bank of Canada Monetary Policy Announcement
United States Federal Reserve Beige Book Published
The following indicators will be released this week...
July 10 Germany Merchandise Trade Balance (May)
July 12 Eurozone Industrial Production (May)
UK labour Market Report (June)
July 14 Eurozone Merchandise Trade Balance (May)
Asia Pacific
July 10 Japan Private Machine Orders (May)
China Consumer Price Index (June)
Producer Price Index (June)
July 12 Japan Producer Price Index (June)
India Consumer Price Index (June)
Industrial Production (may)
July 13 China Merchandise Trade Balance (June)
Jul 11 Canada Housing Starts (June)


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


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