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A relatively quiet week
International Perspective - February 23, 2018
By Anne D. Picker, Chief Economist


Global Markets

With little new economic data to guide them, global equities were mixed for the week. The celebration of the Lunar New Year meant that many markets in the Asia Pacific region were closed for the holiday for several days. With relatively few international and U.S. economic data releases, the focal point was the Federal Reserve's publication of the minutes from the FOMC meeting held on January 30 and 31. And there were other central bank minutes released that caught investors' attention as well.


Aside from the Federal Reserve, the Reserve Bank of Australia and European Central Bank published minutes from their most recent policy meetings as well. And although no one changed their monetary policies, the statements were parsed for any hints of any policy changes to come.


The Reserve Bank of Australia kept its policy interest rate unchanged at 1.50 percent where it has been since August 2016, again concluding that current policy settings were consistent with sustainable growth and achieving the inflation target "over time". The Reserve Bank of Australia's governor Philip Lowe sees monetary policy tightening down the road assuming unemployment falls and inflation rises in line with current RBA forecasts over the coming year. He believes that at some point it will be appropriate to have less monetary stimulus and for interest rates in Australia to move up. Although he noted that right now board members do not see a strong case for changing policy settings in the near-term, he stressed that in his view the next move in policy rates will be up, not down.


The European Central Bank published minutes from its January 24 and 25 Governing Council meeting Thursday. At that time, the Council decided that it was too early to change its policy communication even though they were more confident that inflation would move near its 2.0 percent target. According to the minutes, it was broadly agreed that any further evolution of the Governing Council's communication on monetary policy would be gradual and would proceed in line with improvements in the medium-term inflation outlook. No one was expecting any changes to the €30 billion monthly net QE asset purchases and there was never any chance of a move on interest rates. However, some analysts had anticipated a slightly less accommodative line on forward guidance. But while acknowledging the strengthening upswing in the real economy, the ECB clearly remains very wary of doing anything that might jeopardize the (limited) progress made so far towards meeting its price stability goals.


The Federal Reserve published minutes of its January 30 and 31 FOMC meeting Wednesday. It was the last meeting chaired by Janet Yellen and before Jerome Powell took over a few days later as chairman. A pre-release rally crumbled after the minutes were published. At the January meeting, the Fed left its fed funds interest rate range unchanged between 1.25 percent and 1.5 percent and upgraded its assessment of the economy and confidence that inflation was moving to its 2.0 percent target. Committee members were more positive about the outlook, expecting that with further gradual adjustments to monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong. They were optimistic about achieving their inflation target of 2 percent. The committee now expected 2018 economic growth to exceed their December forecast estimates.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Feb 16 Feb 23 Week 2018
Australia All Ordinaries 6167.3 6004.8 6105.21 1.7% -1.0%
Japan Nikkei 225 22764.9 21720.3 21892.78 0.8% -3.8%
Topix 1817.56 1737.37 1760.53 1.3% -3.1%
Hong Kong Hang Seng 29919.2 31115.4 31267.17 0.5% 4.5%
S. Korea Kospi 2467.5 2421.8 2451.52 1.2% -0.6%
Singapore STI 3402.9 3443.5 3533.22 2.6% 3.8%
China Shanghai Composite 3307.2 3199.2 3289.02 2.8% -0.5%
India Sensex 30 34056.8 34010.76 34142.15 0.4% 0.3%
Indonesia Jakarta Composite 6355.7 6591.6 6619.80 0.4% 4.2%
Malaysia KLCI 1796.8 1838.3 1861.50 1.3% 3.6%
Philippines PSEi 8558.4 8612.4 8467.56 -1.7% -1.1%
Taiwan Taiex 10642.9 10421.1 10794.55 3.6% 1.4%
Thailand SET 1753.7 1805.9 1808.06 0.1% 3.1%
UK FTSE 100 7687.8 7294.7 7244.41 -0.7% -5.8%
France CAC 5312.6 5281.6 5317.37 0.7% 0.1%
Germany XETRA DAX 12917.6 12452.0 12483.79 0.3% -3.4%
Italy FTSE MIB 21853.3 22797.9 22672.15 -0.6% 3.7%
Spain IBEX 35 10043.9 9832.1 9822.40 -0.1% -2.2%
Sweden OMX Stockholm 30 1576.9 1556.9 1577.11 1.3% 0.0%
Switzerland SMI 9381.9 8986.7 8948.19 -0.4% -4.6%
North America
United States Dow 24719.2 25219.38 25309.99 0.4% 2.4%
NASDAQ 6903.4 7239.5 7337.39 1.4% 6.3%
S&P 500 2673.6 2732.2 2747.30 0.6% 2.8%
Canada S&P/TSX Comp. 16209.1 15452.6 15638.45 1.2% -3.5%
Mexico Bolsa 49354.4 48882.8 48643.430 -0.5% -1.4%


Europe and the UK

European equities were mixed on the week. Investors were cautious as they paid close attention to speeches from Fed officials at the end of the trading week. Traders also sifted through a mixed bag of corporate earnings on Friday. The FTSE was down 0.7 percent while the SMI lost 0.4 percent. However, the CAC and DAX added 0.7 percent and 0.3 percent respectively on the week. There were few economic data releases to give direction to investors so central bank minutes and speakers got extra scrutiny.


Mark Carney told Parliament's Treasury Committee that financial markets, which currently predict a greater than 50 percent chance of a second interest rate rise in May, were now moving appropriately in line with the underlying economic data. While the Bank of England governor and three colleagues stressed that any interest rate increases would be limited and gradual, he said that there were likely to be "something more than three rate increases spread out" over the next few years. The governor rejected calls to commit to a path of interest rates and stressed that any increases would be data dependent. He said there was no longer a need to give greater guidance on rates because "financial markets have started to move with the underlying data", adding that this meant they were better able to anticipate the BoE's likely actions. Mr Carney's comments were supported by his deputy governor, chief economist and one of the external members who were also giving evidence to the Treasury committee.


Asia Pacific

Most Asian stocks indices were higher for the Asian holiday week after U.S. government debt yields declined from the multiyear highs that were reached Wednesday. This helped ease investors' worries about inflation and higher interest rates. Only the PSEi declined (1.7 percent) on the week. Increases ranged from 0.1 percent (SET) to 3.6 percent (Taiex on three days of trading). The Shanghai Composite gained 2.8 percent in just two days of trading. The Hang Seng ended the shortened trading week up 0.5 percent after Friday's 1.0 percent increase erased losses accumulated over the previous three days.


Key to last week's overall gains were comments from both voting and non-voting FOMC members that eased worries about faster rate increases in the United States. The U.S. dollar ticked higher as investors edged back into riskier assets. Financial markets have fluctuated wildly in February as investors fretted about how fast the Fed might raise rates in the wake of data showing a pickup in U.S. inflation.


Even though broader U.S. price pressures still appear modest for now, markets are fully pricing in three rate increases for this year, one more than was seen just a few months ago. Some analysts even expect four. That in turn has stoked anxiety that many central banks will start to tighten policy and raise borrowing costs, hurting corporate earnings and clouding the outlook for what had been expected to be another solid year of global economic growth.



Sterling advanced at week's end against the dollar and euro on Friday but finished the week in much the same place as it had started, with weaker-than-expected economic data being offset by hawkish comments from Bank of England policymakers. Sterling bounced off one-week lows Wednesday after BoE policymakers struck a hawkish tone on inflation and interest rates in testimony to Parliament. The pound had earlier been knocked lower by data showing an unexpected uptick in the jobless rate and by news that more than 60 Conservative lawmakers had written to the prime minister demanding a quick, clean break from the European Union.


Bank of England chief economist Andy Haldane told Parliament Wednesday that the BoE could end up needing to raise interest rates faster than investors currently expect, sending the currency higher. An unexpected downward revision to Britain's fourth-quarter GDP on Thursday only resulted in a temporary bout of sterling weakness. According to an analyst, the key takeaway from the BoE was that monetary policy committee members' tolerance of inflation well above its 2 percent target has ended. Other data released this week showed wage growth steady in the three-month period ending in December, but the jobless rate unexpectedly ticked higher to 4.4 percent. Again, the numbers had only a temporary and modestly negative effect on sterling.


In its governing council minutes Thursday, the ECB indicated that it is worried over the decline in the value of the U.S. dollar. The ECB noted that "concerns were expressed about recent statements in the international area about exchange rate development and, more broadly, the overall state of international relations…" "The importance of adhering to agreed statements on the exchange rate was emphasized." Those agreements explicitly rule out competitive devaluations. The volatility in the euro was "a source of uncertainty which required monitoring".


For the week, the U.S. dollar advanced against all of its major counterparts including the euro, pound sterling, Swiss franc, yen and the Canadian and Australian dollars.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 Feb 16 Feb 23 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.791 0.784 -0.9% 0.6%
New Zealand NZ$ 0.709 0.739 0.729 -1.3% 2.9%
Canada C$ 0.796 0.796 0.790 -0.8% -0.7%
Eurozone euro (€) 1.194 1.241 1.230 -0.9% 3.0%
UK pound sterling (£) 1.344 1.402 1.397 -0.3% 3.9%
Currency per U.S. $
China yuan 6.534 6.342 6.337 0.1% 3.1%
Hong Kong HK$* 7.816 7.822 7.824 0.0% -0.1%
India rupee 64.081 64.215 64.729 -0.8% -1.0%
Japan yen 112.850 106.340 106.840 -0.5% 5.6%
Malaysia ringgit 4.067 3.894 3.919 -0.6% 3.8%
Singapore Singapore $ 1.338 1.312 1.320 -0.6% 1.4%
South Korea won 1070.630 1063.100 1078.940 -1.5% -0.8%
Taiwan Taiwan $ 29.775 28.980 29.268 -1.0% 1.7%
Thailand baht 32.696 31.306 31.403 -0.3% 4.1%
Switzerland Swiss franc 0.979 0.9277 0.937 -1.0% 4.5%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


February flash composite PMI reading was 57.5 after its final January reading of 58.8 (12-year high). The overall deceleration reflected cooling in both the manufacturing and service sectors. The flash PMI for manufacturing dropped 1.1 points to 58.5 — a 4-month trough — whiles its services counterpart was off 1.3 points at 56.7. Aggregate output and new orders posted smaller increases than in January but employment growth remained at the joint highest mark in the last decade. All of the latest components were very healthy and well above their respective historic norms. This was borne out in a third consecutive increase in business optimism to equal its highest level since comparable data were first compiled in 2012. Price pressures were again elevated and both input cost and factory gate inflation held close to levels seen only rarely since early 2011. There were some reports of higher salaries. Regionally, in France the composite output measure declined 1.8 points to 57.8, a 4-month low, while in Germany it fell 1.6 points to 57.4, a 3-month trough. Elsewhere, business activity similarly slowed but still registered the second-largest expansion in nearly 12 years.



February Ifo survey headline climate indicator was down 2.2 points to 115.4, equaling its lowest reading since June last year. However, the reading still remained among the highest on record. The headline decline was mainly attributable to less optimistic expectations — down nearly 3 points to 105.4. This was their second consecutive drop and the worst print since April 2017. Current conditions posted a 1.5 point decrease from January's all-time high to 126.3. This only partially reversed that month's 2.3 point bounce and left the second strongest reading on record. At a sector level, morale was weaker across the board. Manufacturing (28.0 after 33.2) saw the steepest decline ahead of retail (11.0 after 15.2). Wholesale (20.6 after 23.5) and construction (15.9 after 17.7) recorded rather smaller drops.


United Kingdom

January claimant count joblessness fell 7,200, the first decline since last August after a smaller revised 6,200 increase in December. The unemployment rate was 2.3 percent, down 0.1 percentage point from last time and its first decline since February 2016. By contrast, the ILO data showed fourth quarter unemployment rising 46,000. This was the first increase in nearly a year and enough to lift the jobless rate to 4.4 percent from the 4.3 percent recently forecast by the Bank of England. Employment (88,000) posted a solid gain but this was well short of the previous period's rise and in line with some cooling in the demand for new labour. Fourth quarter average annual earnings growth was 2.5 percent, matching its rate in the last two quarters and unchanged from a year ago. Excluding bonuses, the rate was also 2.5 percent.


Fourth quarter gross domestic product was revised downward to a quarterly increase of 0.4 percent from the initial estimate of 0.5 percent. On the year, GDP was also revised 0.1 percent lower to 1.4 percent. The first look at the GDP expenditure components indicated that the quarterly increase in total output was driven by household spending and gross fixed capital formation. The former rose 0.3 percent in line with the rates seen since the middle of 2016. The latter was up 1.1 percent after 0.7 percent although within this, business investment was only flat following a 0.7 percent increase in the previous period. This made for the weakest quarter of the year. Elsewhere, government spending was up 0.6 percent. Net foreign trade deteriorated sharply and had a sizeable negative impact on overall GDP. Exports fell 0.2 percent while imports rose 1.5 percent resulting in a hit to quarterly growth of 0.5 percentage points. This compounded a 0.2 percentage point subtraction in the third quarter.




January merchandise trade deficit was ¥943 billion after a surplus of ¥359 billion in December. Exports increased 12.2 percent on the year, up from 9.3 percent in December. Imports slowed to an increase of 7.9 percent from 14.9 percent previously. Export growth reflected stronger external demand from most of Japan's major trading partners with the exception of the United States. Weaker import growth was largely driven by weaker growth in petroleum import volumes. Iron ore imports also recorded weaker growth. Other major import categories including manufactured goods, machinery, electrical machinery and motor vehicles also recorded weaker growth, offset by somewhat stronger growth in imports of foodstuffs, raw materials, and chemicals.


January consumer price index increased 1.3 percent on the year, up from 1.1 percent in December. Consumer inflation is now at its highest level since March 2015. On the month, the CPI rose 0.4 percent after an increase of 0.2 percent in December. Core CPI, which excludes fresh food prices, advanced 0.9 percent on the year, unchanged from the previous two months. This measure of inflation trended higher in 2017 after annual declines for almost all of 2016. The index advanced 0.2 percent on the month after no change in December.




December retail sales tumbled 0.8 percent on the month after three consecutive monthly increases. Despite this decline, retail sales were up 1.5 percent in the fourth quarter. Sales were up 5.8 percent from December 2016 and up 6.7 percent for the year 2017. Sales declined in 6 of 11 subsectors representing 42 percent of retail trade. Lower sales at general merchandise, health & personal care and electronics & appliance stores more than offset increased sales at motor vehicle & parts dealers and food & beverage stores. Excluding motor vehicle & parts dealers, retail sales tumbled 1.8 percent. Sales volumes, more relevant to real GDP, declined 0.8 percent for the largest drop since March 2016.


Bottom line

Equities were mixed last week thanks to a combination of thin holiday trading in Asia and the lack of new economic data. While there were no central bank meetings of note, the Reserve Bank of Australia, the European Central Bank and the Federal Reserve published accounts of their most recent monetary policy meetings.


There are no central bank meetings in the coming week. However, the lack of economic data this past week will be made up by data releases during this week. The final manufacturing PMIs will be reported globally. The Eurozone will release the February flash harmonized index of consumer prices along with February EC economic sentiment and January M3 money supply. Italy, France and Canada publish updates on fourth quarter growth. Japan releases January data for industrial production, retail sales and unemployment. Fed chair Jerome Powell will give his first testimony to Congress on Tuesday.


Looking Ahead: February 26 through March 2, 2018

The following indicators will be released this week...
Feb 27 Eurozone M3 Money Supply (January)
EC Economic Sentiment (February)
Feb 28 Eurozone Harmonized Index of Consumer Prices (February flash)
Germany Unemployment (February)
France Consumption of Manufactured Goods (January)
Gross Domestic Product (Q4.2018)
March 1 Eurozone Manufacturing PMI (February)
Unemployment (February)
Germany Manufacturing PMI (February)
France Manufacturing PMI (February)
UK Manufacturing PMI (February)
March 2 Italy Gross Domestic Product (Q4.2018)
Asia Pacific
Feb 28 Japan Industrial Production (January)
Retail Sales (January)
China CFLP Manufacturing PMI (February)
India Manufacturing PMI (February)
March 1 Japan Manufacturing PMI (February)
China Manufacturing PMI (February)
March 2 Japan Unemployment Rate (January)
Feb 28 Canada Industrial Product Price Index (January)
March 2 Canada Gross Domestic Product (Q4.2017)
Monthly Gross Domestic Product (December 2017)


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


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