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Eyes were on profits (and growth too)
International Perspective - April 27, 2018
By Anne D. Picker, Chief Economist


Global Markets

Despite choppy trading, most equity indexes followed here advanced on the week. The decisions by the European Central Bank on Thursday and the Bank of Japan Friday had little impact given that the two banks did the expected. Rather it was corporate profits that swayed investors. Equities took disappointing first quarter growth data in stride.


European Central Bank

The European Central Bank as widely anticipated left its monetary policy on hold. The benchmark refi rate (zero percent), deposit rate (minus 0.40 percent) and marginal lending rate (0.25 percent) all remained at the respective levels to which they were last cut back in March 2016. The asset purchase program (APP) was similarly unchanged, leaving monthly net quantitative easing purchases at €30 billion through at least September. There was also nothing new on forward guidance which continued to see the ECB expecting key interest rates remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.


Regarding the recent slowdown in the Eurozone economy, President Mario Draghi acknowledged that there had been some moderation in most countries and most sectors — possibly in part due to temporary factors such as the bad weather, strikes and Easter effects. However, he also maintained that the upswing remained both solid and broad-based and suggested that some normalization after a robust 2017 was only to be expected. The main threat seemed to be related to the rising risk of protectionism. There were also no changes to the Bank's view of inflation — policy is expected to achieve its price stability goals in due course but the Governing Council is frustrated by the ongoing sluggishness of the underlying rate.


Bank of Japan

As entirely expected, the Bank of Japan maintained its key interest rate at minus 0.1 percent while the target level for the long-term 10-year yield remained at around zero percent. The monetary policy board continues to believe that purchasing these bonds at an annual rate of ¥80 trillion is consistent with meeting this target. The MPB again reaffirmed their 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". At the same time, the BoJ deleted from its statement the date for achieving 2.0 percent inflation, which had been targeted for "around fiscal 2019."


The Board also published updated growth and inflation forecasts. The median forecast for the annual change in the consumer price index (excluding fresh food) is now 1.3 percent in the current fiscal year, down from a forecast of 1.4 percent previously, and 2.3 percent next fiscal year, unchanged from their previous forecast. Excluding the impact of a planned sales tax increase, this measure of inflation is forecast to be 1.8 percent in the fiscal years starting April 2019 and April 2020. Growth forecasts were revised higher in response to recent positive activity data, with the median forecast for real GDP growth 1.6 percent for the current fiscal year, up from 1.4 percent previously and 0.8 percent for next fiscal year, up from 0.7 percent previously.


Bank of Japan Governor Haruhiko Kuroda said that the reason for eliminating the target date to achieve 2 percent inflation was to prevent the market from speculating on bank policy. Posting a 2 percent forecast was not appropriate as regards communication with the market according to Kuroda at his post MPB meeting news conference. "There was a market tendency to see our forecast as a deadline, and to seek connection between the forecast and policy actions," Kuroda added. However, he did not clearly state why the BoJ chose this meeting to drop the forecast, after pushing back the target date six times since 2013. "It was going to happen one day, and today was the day," said the governor.



Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 April 20 April 27 Week 2018
Australia All Ordinaries 6167.3 5964.4 6042.88 1.3% -2.0%
Japan Nikkei 225 22764.9 22162.2 22467.87 1.4% -1.3%
Topix 1817.56 1751.13 1777.23 1.5% -2.2%
Hong Kong Hang Seng 29919.2 30418.3 30280.67 -0.5% 1.2%
S. Korea Kospi 2467.5 2476.3 2492.40 0.6% 1.0%
Singapore STI 3402.9 3573.4 3577.21 0.1% 5.1%
China Shanghai Composite 3307.2 3071.5 3082.23 0.3% -6.8%
India Sensex 30 34056.8 34415.58 34969.70 1.6% 2.7%
Indonesia Jakarta Composite 6355.7 6337.7 5919.24 -6.6% -6.9%
Malaysia KLCI 1796.8 1887.8 1863.47 -1.3% 3.7%
Philippines PSEi 8558.4 7726.7 7721.02 -0.1% -9.8%
Taiwan Taiex 10642.9 10779.4 10553.43 -2.1% -0.8%
Thailand SET 1753.7 1801.3 1778.02 -1.3% 1.4%
UK FTSE 100 7687.8 7368.2 7502.21 1.8% -2.4%
France CAC 5312.6 5412.8 5483.19 1.3% 3.2%
Germany XETRA DAX 12917.6 12540.5 12580.87 0.3% -2.6%
Italy FTSE MIB 21853.3 23829.3 23927.61 0.4% 9.5%
Spain IBEX 35 10043.9 9884.2 9925.40 0.4% -1.2%
Sweden OMX Stockholm 30 1576.9 1572.6 1580.78 0.5% 0.2%
Switzerland SMI 9381.9 8807.8 8843.02 0.4% -5.7%
North America
United States Dow 24719.2 24462.94 24311.19 -0.6% -1.7%
NASDAQ 6903.4 7146.1 7119.80 -0.4% 3.1%
S&P 500 2673.6 2670.1 2669.91 0.0% -0.1%
Canada S&P/TSX Comp. 16209.1 15484.3 15668.93 1.2% -3.3%
Mexico Bolsa 49354.4 48431.6 48284.61 -0.3% -2.2%


Europe and the UK

European equities advanced for the week thanks to positive earnings reports. For the FTSE, CAC and DAX it was the fifth consecutive weekly gain and the third for the SMI. The FTSE was up 1.8 percent, the CAC added 1.3 percent, the DAX edged up 0.3 percent and the SMI was 0.4 percent higher. With one day of trading left in April, the four indexes were up for the month. Positive earnings reports played a large role in the indexes’ upward trajectory.


On Friday, gains were largely driven by weakness in the euro and the pound sterling against the U.S. dollar. Thursday’s dovish policy statement from the European Central Bank and Friday’s surprisingly weak UK gross domestic product report drove the value of the two currencies lower against the U.S. dollar.


Economic data were mixed for the week. Investors largely shrugged off weaker than expected German business confidence data, preferring instead to focus on a mixed batch of corporate financial results. German unemployment declined while the jobless rate held steady. Consumer spending in France disappointed. First quarter GDP in France was lower than anticipated while the anemic reading in the UK was the slowest growth in five years.


Asia Pacific

Asian equity indexes followed here were split on gains and losses last week but all finished the week on an upbeat note with advances Friday that helped to lessen the weekly losses for some. Friday’s advances stemmed from a rebound in technology companies thanks to strong earnings reports and a drop in U.S. Treasury yields that helped improve investors' risk appetite in developing Asia. Helping also were the ECB and BoJ — they maintained their respective policies as widely expected, helping to support underlying sentiment.


On the week, gains ranged from 1.6 percent (Sensex) down to 0.1 percent (STI). Losses ranged from a hefty 6.6 percent (Jakarta Composite) to 0.1 percent (PSEi). With one day left in the April trading month most indexes managed to advance with only the Shanghai Composite, Jakarta Composite, Taiex and PSEi down for the month. The Shanghai Composite has declined three of four months in 2018.


In Japan, March data were mixed. Industrial output rose a monthly 1.2 percent to beat forecasts while the jobless rate held flat at 2.5 percent in line with expectations. The flash April manufacturing PMI improved. However, retail sales fell short of expectations.


South Korea’s Kospi briefly rose more than 1 percent to a one-month high Friday, helped by hopes that the summit between South and North leaders could ease tensions over Pyongyang’s nuclear weapons program and pave the way for the North and South to end their decades-long conflict. South Korean equities later pared their gains while the South Korean currency, the won, rose more than 0.5 percent against the dollar in onshore trade.



The pound sterling stumbled in the wake of a sharper slowdown than anticipated in first quarter growth. A Bank of England interest rate increase that was widely seen to occur at its May 10 meeting has been pushed back by some analysts until August and others as late as 2019 signaling a much weaker currency. Expectations of higher rates had lifted sterling to its highest since the Brexit referendum in June 2016. The pound tumbled after first quarter GDP inched up a quarterly 0.1 percent — the slowest pace since the end of 2012. Sterling’s decline provided a boost to UK equities. The disappointing GDP data came on top of a warning from BoE governor Mark Carney last week, when he cautioned that financial markets were wrong to assume a May rate rise was a foregone conclusion. Chancellor Philip Hammond pointed to the Beast from the East snowstorms as a key cause for the pullback in growth.


The U.S. dollar was up against all of its major counterparts including the euro, pound sterling, Swiss franc, yen and the Canadian and Australian dollars. A spike in U.S. Treasury yields prompted some investors to unwind some short bets against the dollar, especially against some emerging market currencies.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 April 20 April 27 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.767 0.758 -1.1% -2.7%
New Zealand NZ$ 0.709 0.720 0.709 -1.5% 0.1%
Canada C$ 0.796 0.784 0.780 -0.6% -2.0%
Eurozone euro (€) 1.194 1.228 1.213 -1.2% 1.5%
UK pound sterling (£) 1.344 1.402 1.378 -1.7% 2.5%
Currency per U.S. $
China yuan 6.534 6.296 6.332 -0.6% 3.2%
Hong Kong HK$* 7.816 7.844 7.848 -0.1% -0.4%
India rupee 64.081 66.108 66.661 -0.8% -3.9%
Japan yen 112.850 107.580 109.070 -1.4% 3.5%
Malaysia ringgit 4.067 3.898 3.920 -0.6% 3.8%
Singapore Singapore $ 1.338 1.316 1.324 -0.6% 1.1%
South Korea won 1070.630 1067.150 1076.700 -0.9% -0.6%
Taiwan Taiwan $ 29.775 29.408 29.631 -0.8% 0.5%
Thailand baht 32.696 31.346 31.510 -0.5% 3.8%
Switzerland Swiss franc 0.979 0.9751 0.988 -1.3% -0.9%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


April EU Commission's measure of economic sentiment was unchanged from March with a reading of 112.7. The latest reading was 2.6 points short of its recent high in January. The stability of April's headline masked minor improvements in morale in industry (7.1 after 7.0) and households (0.4 after 0.1). Gains here were offset by weaker confidence in services (14.9 after 15.9), retail (minus 0.6 after 0.7) and construction (4.5 after 5.2). Regionally among the larger four member states the national ESI rose in France (110.3 after 109.2) and Spain (110.6 after 109.0) but was only flat in Germany (112.2) and fell in Italy (109.4 after 109.8).



April Ifo climate indicator reading was 102.1, down 1.2 points from its weaker revised March reading and its lowest since January 2017. Note that as of this month the survey has been expanded to include services and the latest and future results will not be directly comparable with earlier data which excluded this category. The headline decline reflected weakening in both the current conditions and expectations components. The former was off 0.9 points from its revised March reading at 105.7, its third fall in as many months and the weakest outcome in 10 months. The latter was a sharper 1.3 points lower at 98.7, its first sub-100 reading since August 2016. At a sector level, morale worsened across the board bar retail (19.8 after 18.3). Manufacturing (24.0 after 27.3), construction (25.9 after 29.4) and wholesale (10.2 after 14.0) all posted losses.



First quarter gross domestic product increased a quarterly 0.3 percent and less than half the unrevised 0.7 percent posted at the end of 2017. The annual rate of expansion was 2.1 percent, down from 2.5 percent last time. The loss of quarterly momentum reflected both a smaller contribution from domestic demand and a sharply reduced impact from net foreign trade. Consumer spending advanced a modest 0.2 percent for a second successive quarter and at 0.3 percent, growth of government consumption was only a tick short of last time. However, gross fixed investment slowed from 1.1 percent to a 0.6 percent rate as the increase in business spending was pared 1.1 percentage points to 0.5 percent. Taken together, final domestic demand boosted the change in real GDP by 0.3 percentage points, down from the fourth quarter's 0.5 percent. Inventory accumulation had a neutral effect. The 2.5 percent bounce in fourth quarter exports gave way to a 0.1 percent dip while imports were only flat after a 0.4 percent gain. This made for a zero net contribution after a hefty 0.6 percentage point lift in October to December.


United Kingdom

First estimate of first quarter gross domestic product climbed just a quarterly 0.1 percent. This was down from an unrevised 0.4 percent gain at the end of 2017 and the worst performance since the fourth quarter of 2012. The annual rate of expansion dipped to 1.2 percent, its weakest mark since April-June 2012. There are only limited details provided in the first GDP estimate for which less than 45 percent of the hard data are available. However, it seems that the unseasonably bad weather which affected much of the country in late February and early March had only a small impact. Retail sales and construction were hit but most other areas of the economy escaped largely unharmed. Rather, the ONS maintains that there was clear deceleration in underlying growth too. In terms of output, goods production rose 0.7 percent on the quarter but within this, manufacturing slowed to just a 0.2 percent rate. Services expanded 0.3 percent with business services and the finance sector again the main driver, increasing 0.4 percent and contributing 0.14 percentage points to quarterly GDP growth. At the same time, transport, storage and communication rose 0.4 percent while government and other services grew 0.1 percent. In contrast, distribution, hotels and catering fell 0.1 percent with retail trade declining 0.5 percent. Elsewhere, agriculture contracted a quarterly 1.4 percent and construction 3.3 percent.




First quarter consumer price index was up 1.9 percent on the year for a second consecutive quarter. On the quarter, the CPI rose 0.4 percent after an increase of 0.6 percent in the previous quarter. Prices of food and non-alcoholic beverages rose 0.5 percent on the year, rebounding from a 0.2 percent decline previously while the annual increase in transport prices moderated from 3.3 percent to 2.9 percent. Housing costs were relatively steady, up 3.3 percent on the year after an increase of 3.4 percent previously while communication prices fell 3.4 percent on the year for a second consecutive quarter.


Bottom line

Both the European Central Bank and Bank of Japan left their respective monetary policies unchanged. The BoJ however, chose this meeting to drop its forecast for when its 2 percent inflation target would be achieved. First quarter growth disappointed in France, the UK and U.S.


The coming week offers a slew of new data along with monetary policy announcements from the Reserve Bank of Australia and the Federal Reserve. No policy changes are anticipated. Both the April manufacturing and composite PMIs will be released along with quarterly growth data from the Eurozone and Italy.


Looking Ahead: April 30 through May 4, 2018

Central Bank activities
May 1 Australia Reserve Bank of Australia Monetary Policy Announcement
May 2 United States FOMC Announcement
The following indicators will be released this week...
April 30 Eurozone M3 Money Supply (March)
Germany Retail Sales (March)
May 1 UK Manufacturing PMI (April)
May 2 Eurozone Manufacturing PMI (April)
Gross Domestic Product (Q1.2018 flash)
Germany Manufacturing PMI (April)
France Manufacturing PMI (April)
Italy Gross Domestic Product (Q1.2018 flash)
May 3 Eurozone Harmonized Index of Consumer Prices (April flash)
UK Services PMI (April)
May 4 Eurozone Services & Composite PMI (April)
Retail Sales (March)
Germany Services & Composite PMI (April)
France Services & Composite PMI (April)
Merchandise Trade (March)
Asia Pacific
May 1 Japan Manufacturing PMI (April)
May 2 Japan Services PMI (April)
China Manufacturing PMI (April)
India Manufacturing PMI (April)
April 30 Canada Industrial Product Price Index (March)
May 1 Canada Monthly Gross Domestic Product (February)
May 3 Canada International Trade (March)


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


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