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Global economic outlook brightens
International Perspective - January 12, 2018
By Anne D. Picker, Chief Economist


Global Markets

Equities were mixed as the streak of consecutive gains ended and investors took profits. Reports of changes in the Bank of Japan's bond buying program and China's U.S. bond purchases roiled currency and bond markets midweek. Both the BoJ and China denied any changes in their respective programs. Most economic data were positive, although there were some surprises.


On Friday, Chancellor Angela Merkel reached a preliminary accord with Germany's Social Democrats to form a coalition government and advanced her bid to end political gridlock that has existed since September 2017 and opened the door to her fourth term. The deal includes efforts to strengthen the European Union and control the flow of refugees. The news sent the euro to a three-year high and added to gains incurred after the European Central Bank's minutes were deemed hawkish.


Yields on the 10-year US Treasury note hit a nine-month high. Benchmark US rates have risen steadily so far this year as inflation expectations climbed and investors prepared for the eventual reduction in stimulus from both the Bank of Japan and European Central Bank, as well as tighter policy from the Federal Reserve. The yield on the 10-year U.S. note, which moves inversely to its price, has climbed 10 basis points this year. Selling on Tuesday pushed yields on the 10-year note to 2.51 percent, with yields on longer-dated 30-year Treasuries rising to 2.86 percent.


Since it adopted yield curve control policy in 2016, the Bank of Japan has made tweaks to its JGB purchases, which are usually regarded as mainly technical moves by the markets. On Tuesday, it cut its JGB purchases of 10 to 25 years left to maturity and those of 25 to 40 years to maturity by ¥10 billion each, from its previous operations. While the BoJ's operational adjustments do not usually have an impact on foreign exchange markets, dealers said the timing of the move suggested some players had used it as an excuse to sell the U.S. dollar and the euro against the yen.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Jan 5 Jan 12 Week 2018
Australia All Ordinaries 6167.3 6167.3 6176.84 -0.8% 0.2%
Japan Nikkei 225 22764.9 22764.9 23653.82 -0.3% 3.9%
Topix 1817.56 1817.56 1876.24 -0.2% 3.2%
Hong Kong Hang Seng 29919.2 29919.2 31412.54 1.9% 5.0%
S. Korea Kospi 2467.5 2467.5 2496.42 0.0% 1.2%
Singapore STI 3402.9 3402.9 3520.56 0.9% 3.5%
China Shanghai Composite 3307.2 3307.2 3428.94 1.1% 3.7%
India Sensex 30 34056.8 34056.83 34592.39 1.3% 1.6%
Indonesia Jakarta Composite 6355.7 6355.7 6370.07 0.3% 0.2%
Malaysia KLCI 1796.8 1796.8 1822.67 0.3% 1.4%
Philippines PSEi 8558.4 8558.4 8814.62 0.5% 3.0%
Taiwan Taiex 10642.9 10642.9 10883.96 0.0% 2.3%
Thailand SET 1753.7 1753.7 1810.19 0.8% 3.2%
UK FTSE 100 7687.8 7687.8 7778.64 0.7% 1.2%
France CAC 5312.6 5312.6 5517.06 0.8% 3.8%
Germany XETRA DAX 12917.6 12917.6 13245.03 -0.6% 2.5%
Italy FTSE MIB 21853.3 21853.3 23429.83 2.9% 7.2%
Spain IBEX 35 10043.9 10043.9 10462.40 0.5% 4.2%
Sweden OMX Stockholm 30 1576.9 1576.9 1628.40 1.1% 3.3%
Switzerland SMI 9381.9 9381.9 9546.61 -0.1% 1.8%
North America
United States Dow 24719.2 25295.87 25803.19 2.0% 4.4%
NASDAQ 6903.4 7136.6 7261.06 1.7% 5.2%
S&P 500 2673.6 2743.2 2786.24 1.6% 4.2%
Canada S&P/TSX Comp. 16209.1 16349.4 16308.18 -0.3% 0.6%
Mexico Bolsa 49354.4 49887.7 49135.9 -1.5% -0.4%


Europe and the UK

European equity indexes were mixed last week. The FTSE added 0.7 percent to close at a new high at week's end and the CAC added 0.8 percent. However the DAX and SMI declined 0.6 percent and 0.1 percent respectively as investors chose to lock in profits from earlier advances. The euro rallied to a 3-year high against the US dollar Friday after German politicians reached a breakthrough in talks aimed at forming a new coalition government. The currency initially jumped on Thursday after the minutes from the most recent meeting of the European Central Bank revealed that the ECB could change the tone of its monetary policy communication early this year to reflect improving growth prospects.


The German economy expanded at the fastest pace in six years in 2017 driven by domestic demand. Gross domestic product was up 2.2 percent on the year in 2017 after growing 1.9 percent in 2016. Germany has now expanded eight consecutive years with 2017 being the fastest growth since 2011. The growth rate exceeded the average of the last 10 years by almost a percentage point.


The European Central Bank published minutes from its most recent meeting on December 13 and 14, 2017. At that time, the governing council indicated that their sweeping measures to restore growth to the Eurozone have had the desired effect. Favourable data on the economy led policymakers to drop some of their references to the region's recovery and instead focus more on what they now viewed as a "continued robust and increasingly self-sustaining economic expansion." The minutes also suggested that the strength of the expansion could lead policymakers to change their message and focus less on their monthly bond purchases and more on the combination of measures they plan to keep in place to revive growth and inflation.


At the December meeting, ECB staff upgraded its forecasts for growth to 2.4 percent in 2017 and 2.3 percent in 2018. Households and businesses in the region were expected to keep spending and investment activity was also forecast to pick up. And the much discussed "output gap", which refers to the gap between where growth now is and where it would be were the economy operating at its full capacity, would close earlier than previously projected.


Asia Pacific

Equities ended the week on a mixed note. Although most indexes advanced, key indexes in Australia and Japan declined with the South Korean Kospi finishing a shade below unchanged. The All Ordinaries were down 0.8 percent on the week while the Nikkei and Topix lost 0.3 percent and 0.2 percent respectively.


China continued to release December economic data during the week with both the consumer and producer price indexes reporting pretty much as expected while the merchandise trade data disappointed in a sign of weaker global and domestic demand. The Shanghai Composite added 1.1 percent and the Hang Seng was 1.9 percent higher.


On Tuesday, markets were surprised by the Bank of Japan's decision to reduce its purchases of 10 to 25 year JGBs and 25 to 40 JGBs paper by ¥10 billion each, from its previous operations, to ¥190 billion and ¥80 billion respectively. But the BoJ maintained the amount of its bond purchases on Thursday, helping to soothe a market rattled earlier this week by a cut in its buying of longer-dated debt that fanned worries that the Bank may be moving to turn off its stimulus.


Given the BoJ already holds almost a half of the market after nearly five years of massive bond buying, many traders believe the Bank has little choice but to continue with its gradual reduction in bond purchase. Although BoJ Governor Haruhiko Kuroda has repeatedly dismissed the chance of withdrawing stimulus any time soon, some policymakers have recently expressed concerns over the perceived negatives of monetary easing, especially the hit on financial institutions' profit margins.


Most market players expected the BoJ to avoid causing another shock in the market, especially after U.S. bond markets were shaken by a report that China, the biggest foreign holder of US Treasuries, could slow or stop buying government bonds. China's foreign exchange regulator said on Thursday the report may be based on erroneous information and could be "fake", helping to underpin both U.S. and Japanese bonds. China dismissed media reports that officials have recommended slowing or halting purchases of U.S. debt.



The U.S. dollar tumbled against all of its major counterparts with the exception of the Canadian dollar. On Wednesday, the dollar retreated against the Japanese yen to hit a six-week low, as investors unwound short-yen bets after the Bank of Japan's move to trim its long-dated government bond purchases Tuesday. The selloff gathered force Wednesday, setting the dollar on track for its biggest two-day drop in nearly eight months. The yen also gathered steam on the crosses, posting gains against sterling and the euro. On Friday, the euro rallied after progress was made in forming Germany's new government.


Also Wednesday, the Mexican peso and the Canadian dollar both retreated against the US dollar after a report said President Donald Trump could pull out of the North American Free Trade Agreement (NAFTA). According to Reuters, which cited two government sources, Canada is increasingly convinced Mr Trump will announce plans to pull the U.S. out of NAFTA when the three countries meet again later this month for the sixth round of talks.


The Euro rallied to a 3-year high against the US dollar Friday after German politicians reached a breakthrough in talks aimed at forming a new coalition government. The currency initially jumped on Thursday after the minutes from the most recent meeting of the European Central Bank revealed that the central bank could change the tone of its monetary policy communication early this year to reflect the improvement in growth prospects.


The pound sterling climbed to its highest level against the U.S. dollar since the vote to leave the European Union after a report that the Netherlands and Spain were open to a deal for Britain to remain as close as possible to the trading bloc. The gains came after Bloomberg reported that the Spanish and Dutch finance ministers had agreed to work together for a Brexit agreement that maintains close ties between the European Union and Britain, in what would be a clear divergence in views among the 27 EU member states about how to treat Britain after it leaves the EU. Sterling was already gaining Friday before the report, helped by demand for euros and the continued weakness for the dollar, before spiking higher.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 Jan 5 Jan 12 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.787 0.791 0.5% 1.5%
New Zealand NZ$ 0.709 0.718 0.726 1.1% 2.4%
Canada C$ 0.796 0.806 0.802 -0.5% 0.8%
Eurozone euro (€) 1.194 1.204 1.218 1.2% 2.0%
UK pound sterling (£) 1.344 1.357 1.373 1.2% 2.1%
Currency per U.S. $
China yuan 6.534 6.489 6.469 0.3% 1.0%
Hong Kong HK$* 7.816 7.819 7.823 0.0% -0.1%
India rupee 64.081 63.374 63.640 -0.4% 0.7%
Japan yen 112.850 113.120 111.030 1.9% 1.6%
Malaysia ringgit 4.067 3.998 3.972 0.6% 2.4%
Singapore Singapore $ 1.338 1.326 1.325 0.1% 0.9%
South Korea won 1070.630 1062.660 1064.900 -0.2% 0.5%
Taiwan Taiwan $ 29.775 29.495 29.624 -0.4% 0.5%
Thailand baht 32.696 32.176 31.943 0.7% 2.4%
Switzerland Swiss franc 0.979 0.9751 0.969 0.7% 1.0%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


December EU Commission economic sentiment (ESI) reading was 116.0 — 1.4 points above its unrevised November reading and its best mark since October 2000. The latest advance, the seventh in as many months, reflected broad-based gains among the components. Confidence in industry (9.1 after 8.1) recorded a new record high and the consumer sector (0.5 after 0.1) was only 1.6 points short of its historic peak. Services (18.4 after 16.4) also improved impressively as did both retail (6.2 after 4.3) and construction (2.7 after 1.5). Regionally, the national ESI rose 1.3 points to 114.2 in France and was up 1.6 points at 116.0 in Germany, the latter now within striking distance of its 119.0 all-time high. Italy (112.1) was unchanged but Spain (110.0 after 110.8) dipped, possibly affected by the ongoing Catalan crisis. Inflation developments were generally negative. Although expected selling prices rose 2.3 points to 13.4 in manufacturing, a 2017 peak, they dipped 0.3 points to 8.0 in services to mark a second successive decline. Moreover, household inflation expectations (13.6 after 16.0) dropped quite sharply and to their lowest level since August.



November manufacturing orders declined 0.4 percent following a larger revised 0.7 percent monthly increase in October. However, annual growth still climbed from 7.2 percent to 8.7 percent, the second highest reading in 2017.  The monthly headline contraction was wholly attributable to capital goods which were down 2.3 percent. By contrast, orders for intermediates gained 2.0 percent while consumer goods were up 3.2 percent. Regionally, weakness was roughly equally split between the domestic and overseas markets. The former fell 0.4 percent and the latter 0.5 percent despite a 0.7 percent gain in the rest of the Eurozone.


November industrial production surged 3.4 percent on the month following the disappointingly sharp (albeit smaller revised) 1.2 percent monthly decline in October. The increase was the steepest rise since September 2009. Annual growth was 5.7 percent, more than double the 2.8 percent posted percent last time. The increase reflected broad-based gains but capital goods led the way with a 5.7 percent jump. Consumer goods advanced 3.6 percent and intermediates 3.0 percent while construction was up 1.5 percent. The headline data would have been stronger still but for a 3.1 percent contraction in energy.


November seasonally adjusted trade surplus was €22.3 billion, a €2.4 billion increase from October's unrevised level and its strongest reading since April 2016. The unadjusted surplus stood at €23.7 billion, up €1.7 billion from a year ago. The widening in the adjusted surplus reflected a 4.2 percent monthly increase in exports (their first rise since August) that easily eclipsed a 2.3 percent gain in imports. Annual unadjusted growth of the former now stands at 8.2 percent and of the latter at 8.3 percent.


United Kingdom

November industrial production was up a monthly 0.4 percent following October's upwardly revised 0.2 percent gain. However, an unusually strong surge in November 2016 still saw annual output growth slow from 4.3 percent to 2.5 percent. Manufacturing was also up a monthly 0.4 percent after a stronger revised 0.3 percent advance last time. This was its seventh straight gain but, similarly reflecting negative base effects, yearly output growth dropped from 4.7 percent to 3.5 percent. The latest monthly increase reflected strength in a number of categories, notably chemicals (1.6 percent) and rubber and plastics (also 1.6 percent) together with textiles and leather (1.5 percent) and other manufacturing and repair (2.8 percent). Gains here were partially offset by declines in transport equipment (3.4 percent), coke and petroleum (2.2 percent) and electrical equipment (0.9 percent).


November merchandise trade deficit expanded to a surprisingly large £12.23 billion from a larger revised £11.68 billion in October. The mid-quarter print constituted the worst performance by the external sector since September 2016. The deterioration was due to a 1.0 percent monthly increase in exports that was more than offset by a 2.1 percent gain in imports. Annual growth of the former eased from 6.8 percent to 6.6 percent and of the latter from 10.4 percent to 5.7 percent. The shortfall with the rest of the EU actually narrowed from £8.30 billion to £7.56 billion, but this was more than offset by an increase in the red ink with the rest of the world from £3.37 billion to £4.68 billion, its highest mark since June. The underlying deficit excluding oil and other erratic items widened from £10.66 billion to £11.07 billion, a 4-month peak. Core exports rose 0.5 percent on the month but were outpaced by a 1.6 percent gain in imports. The nominal November data are again disappointing but changes in relative prices prompted by sterling's depreciation remain a key factor. Underlying volume trends are more positive. Over the last three months, core export volumes were up 2.6 percent while imports were only flat. Accordingly, the implications for fourth quarter real GDP growth are much less negative than first appearances might suggest.




November retail sales were up 1.2 percent on the month and were up 2.9 percent on the year. Most major categories increased with sales of household goods and other retailing recording particularly strong growth of 4.5 percent and 2.2 percent respectively. The gain was attributed to the introduction of a new model mobile phone and increased promotional activity by Australian retailers. Sales also increased for clothing, footwear & personal accessories and cafes, restaurants & takeaway food services. These gains were partly offset by a decline in department store sales. Sales increased in November in all eight Australian states and territories.



December consumer price index increased 1.8 percent on the year, up from 1.7 percent in November. The index rose 0.3 percent on the month in December after no change in November. The increase in headline inflation was driven by a smaller decline in food prices, which declined by 0.4 percent on the year after dropping by 1.1 percent in November. On the year increases in non-food prices moderated from 2.5 percent to 2.4 percent. Within the non-food category, price gains were slightly weaker for transportation and communication, slightly stronger for clothing, and household articles and services and unchanged for housing. Urban inflation picked up from 1.8 percent in November to 1.9 percent in December, while rural inflation rose from 1.5 percent to 1.7 percent.


December merchandise trade surplus widened to $54.69 billion from $40.21 billion in November. Exports increased 10.9 percent, down from 12.3 percent in November while imports dropped were up 4.5 percent, down from 17.7 percent. Slower exports growth reflected a moderation in demand from major trading partners — exports to the United States were up 12.7 percent on the year, down from 14.3 percent in November and exports to the European Union slowed to 12.7 percent from 13.2 percent. This was partly offset by stronger exports to Japan, up 14.9 percent after 9.4 percent in November. In domestic currency terms, China's trade surplus widened from CNY263.6 billion in November to CNY361.98 billion in December. Exports were up 7.4 percent on the year in yuan terms in December, down from 10.3 percent in November, while imports slowed from 15.6 percent to 0.9 percent.


Bottom line

Most equity indexes advanced in the second week of the year. Positive economic data boosted both morale and expectations of a very positive earnings season. The U.S. dollar retreated against its major counterparts with the exception of the Canadian dollar. China's merchandise trade data for December disappointed. Slower exports reflected easing demand from its major trading partners. In Europe, the biggest disappointment was German November factory orders. The ECB minutes confirmed that the Bank is feeling more confident about the Eurozone's growth prospects.


The Bank of Canada is expected to increase its policy interest rate by 25 basis points Wednesday. Two better than anticipated labour force reports and other statistics support expectations. However, uncertainty surrounding the future of NAFTA weighs on the economic outlook for the country. China releases its fourth quarter gross domestic product estimate — growth is expected to be 6.7 percent from a year ago. The UK posts December consumer and producer prices, labour market statistics and retail sales data.


Looking Ahead: January 15 through January 19, 2018

Central Bank activities
Jan 17 Canada Bank of Canada Monetary Policy Announcement
United States Federal Reserve Beige Book Published
The following indicators will be released this week...
Jan 15 Eurozone Merchandise Trade (November)
UK Consumer Price Index (December)
Producer Price Index (December)
Jan 17 Eurozone Harmonized Index of Consumer Prices (December final)
Jan 19 Germany Producer Price Index (December)
UK Retail Sales (December)
Asia Pacific
Jan 16 Japan Producer Price Index (December)
Jan 17 Japan machine Orders (November)
Jan 18 Australia Labour Force Survey (December)
China Gross Domestic Product (Q4.2017)
Industrial Production (December)
Retail Sales (December)
Jan 19 Canada Manufacturing Sales (November)


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


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