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Geopolitical nerves
International Perspective - July 27, 2018
By Anne D. Picker, Chief Economist


Global Markets

In terms of volume, it was a light week for updated economic data. Data for both Europe and the United States were mixed. All equity indexes were up on the week with the exceptions of the U.S. Nasdaq and Canadian S&P/TSX Composite. Key data releases for the week were the flash PMIs for Europe and the US. In the U.S., data were mixed with housing data soft and growth data solid.


Finance ministers and central bank governors of Group of 20 nations recognized the need to step up dialogue and actions to mitigate risks and enhance confidence on international trade. G20 finance ministers and central bank governors sought action amid rising trade war risks following their meeting held on July 21 and 22, in Buenos Aires, Argentina. At the conclusion of the G20 meeting, IMF Managing Director Christine Lagarde urged that trade conflicts be resolved via international cooperation without resorting to exceptional measures.


European Central Bank

As universally expected, the European Central Bank kept interest rates on hold and confirmed plans to halt bond purchases in December. The bank’s governing council opted to leave the main interest rates unchanged. The refi rate (0.00 percent) and the rates on the deposit and marginal lending facilities (minus 0.40 percent and 0.25 percent respectively) are expected to be kept at current levels ‘at least through the summer of 2019'. As previously indicated, monthly net asset purchases are scheduled to continue at €30 billion through September before being halved to €15 billion through year end when the program will conclude.


ECB policymakers reiterated that they expected to keep rates on hold at record low levels “at least through the summer of 2019”. The ECB would also continue to reinvest the proceeds of securities bought under its €2.5 trillion quantitative easing program but which have now matured “for an extended period of time” after the bank stops expanding QE at the end this year.


At his press conference, Mario Draghi delivered a confident assessment of the recovery of the eurozone on Thursday. “While uncertainties, notably related to the global trade environment, remain prominent, the information available since our last monetary policy meeting indicates that the euro area economy is proceeding along a solid and broad-based growth path,” he said.


There was little news of note in Mr Draghi's press conference which was quite upbeat, notably on the outlook for the Eurozone economy. Confidence in underlying inflation is improving and starting to move towards achieving the 2 percent target later in the year. Even so, he underlined the need for continued ample monetary accommodation in order to meet the price stability goals. Economic risks are still seen as balanced with protectionism and heightened financial market volatility being singled out for special attention.


Trade rhetoric cools

US President Donald Trump and the EU’s Jean-Claude Juncker said the U.S. and EU are launching new negotiations aimed at defusing rising transatlantic trade tensions. In a joint announcement after meetings in Washington Wednesday, the two leaders said they had agreed to work together towards eliminating all tariffs, trade barriers and subsidies related to non-auto industrial goods. They also said they would work together to reform the World Trade Organization and reduce trading costs and regulatory barriers across the Atlantic.


While neither leader mentioned the auto trade directly, Mr Juncker said both sides had agreed to suspend any new tariffs while the negotiations were going on. Mr Trump has been threatening to impose tariffs of up to 25 percent on imports of cars and parts from around the world, with the EU one of his main targets. The agreement to hold further negotiations remained vague.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 July 20 July 27 Week 2018
Australia All Ordinaries 6167.3 6377.4 6391.5 0.2% 3.6%
Japan Nikkei 225 22764.9 22697.9 22712.8 0.1% -0.2%
Topix 1817.56 1744.98 1775.8 1.8% -2.3%
Hong Kong Hang Seng 29919.2 28224.5 28804.3 2.1% -3.7%
S. Korea Kospi 2467.5 2289.2 2295.0 0.3% -7.0%
Singapore STI 3402.9 3297.8 3325.0 0.8% -2.3%
China Shanghai Composite 3307.2 2829.3 2873.6 1.6% -13.1%
India Sensex 30 34056.8 36496.37 37336.9 2.3% 9.6%
Indonesia Jakarta Composite 6355.7 5872.8 5989.1 2.0% -5.8%
Malaysia KLCI 1796.8 1754.7 1769.1 0.8% -1.5%
Philippines PSEi 8558.4 7399.6 7701.4 4.1% -10.0%
Taiwan Taiex 10642.9 10932.1 11075.8 1.3% 4.1%
Thailand SET 1753.7 1671.1 1701.9 1.8% -3.0%
UK FTSE 100 7687.8 7678.8 7701.3 0.3% 0.2%
France CAC 5312.6 5398.3 5511.8 2.1% 3.7%
Germany XETRA DAX 12917.6 12561.4 12860.4 2.4% -0.4%
Italy FTSE MIB 21853.3 21794.6 21955.1 0.7% 0.5%
Spain IBEX 35 10043.9 9724.8 9867.9 1.5% -1.8%
Sweden OMX Stockholm 30 1576.9 1579.4 1612.8 2.1% 2.3%
Switzerland SMI 9381.9 8991.3 9173.2 2.0% -2.2%
North America
United States Dow 24719.2 25058.12 25451.1 1.6% 3.0%
NASDAQ 6903.4 7820.2 7737.4 -1.1% 12.1%
S&P 500 2673.6 2801.8 2818.8 0.6% 5.4%
Canada S&P/TSX Comp. 16209.1 16435.5 16394.0 -0.3% 1.1%
Mexico Bolsa 49354.4 48908.2 49643.9 1.5% 0.6%


Europe and the UK

European equities advanced for the week buoyed in part by easing trade tensions between Europe and the U.S. and solid corporate earnings reports. On the week, the FTSE was up 0.3 percent, the CAC gained 2.1 percent, the DAX advanced 2.4 percent and the SMI added 2.0 percent.


According to an European Central Bank survey, economic growth is expected to moderate in the near-term. Now real gross domestic product is forecast to grow 2.2 percent in 2018 instead of 2.4 percent estimated a quarter ago. The outlook for 2019 was revised down to 1.9 percent from 2 percent. The growth estimate for 2020 was retained at 1.6 percent. Average longer-term expectations for real GDP growth remained unchanged at 1.6 percent.


On Thursday, European markets advanced modestly after getting off to a positive start after Wednesday’s U.S./EU meeting. Trump and Juncker agreed to work for zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. They also agreed to increase trade in services and agriculture, including greater U.S. soybean exports to the EU.


Also on Thursday, the European Central Bank maintained its monetary policy. "The underlying strength of the economy confirms our confidence that the sustained convergence of inflation to our aim will continue in the period ahead and will be maintained even after a gradual winding-down of our net asset purchases," Draghi said in the introductory statement to his customary post-decision press conference. "Nevertheless, significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term."


Asia Pacific

Equities advanced for the week although growth concerns kept Chinese markets under pressure. While easing of trade tensions between the U.S. and European Union supported underlying sentiment, the upside remained limited ahead of U.S. GDP data which would be released after markets here were closed for the week. The Bank of Japan policy meeting is scheduled for Monday and Tuesday (Japan time). The Chinese yuan staunched losses on buying by Chinese state banks, though concerns about the Sino-U.S. tariff dispute tempered overall optimism. On the week, gains ranged from 0.1 percent (Nikkei) to 4.1 percent (PSEi). The Hang Seng and Shanghai Composite were up 2.1 percent and 1.6 percent respectively.


Japan’s talks with U.S. Trade Representative Robert Lighthizer will take place in August, rather than July, as had originally been expected, Japanese Prime Minister Shinzo Abe and U.S. President Donald Trump agreed this year to set up the dialogue as the Trump administration renegotiates trade relationships it considers unfair to U.S. companies and workers. Trump has made clear he prefers a bilateral trade deal with Japan to lower its trade surplus with the United States. But Finance Minister Taro Aso on Friday reiterated Japan’s lack of interest in such a pact. The stakes are high for Japan because Trump’s administration could ask the Asian nation to take specific measures to shrink its trade surplus, which would be a negative for its export-oriented economy.


Rumors circulated during the week that the Bank of Japan will be making changes to its quantitative easing program when it meets on Monday and Tuesday.  Speculation that the BoJ will consider changes to its monetary easing policy sent long-term rates climbing, pushed down stocks and firmed up the yen, prompting the BoJ to reassure investors that the basic direction of policy is unchanged.


The bank has been working behind the scenes on ways to address the side effects of monetary easing on financial institutions, making easy money policy more sustainable in the long run. Abandoning such stimulus is not an option, with inflation remaining stalled well below the BoJ's target of 2 percent. The last reading which was for June was 0.7 percent on the year. For example, the central bank could change how it purchases government bonds or exchange-traded funds.


The truly seismic move from the rumors was in Japanese bonds, JGBs. Any move at all in JGBs — one of the world's least interesting and best-behaved investments — is unusual. This week’s moves were driven by intensifying speculation that the Bank of Japan is about to adjust its monetary policy. That would be a very big deal because the BoJ has been the most aggressive purveyor of quantitative easing of all central banks in recent years. The BoJ's balance sheet has at this point expanded proportionately even more than the Federal Reserve's in the decade since the Lehman bankruptcy.


Reserve Bank of New Zealand

The New Zealand Acting Prime Minister Winston Peters said Monday that a bill has been introduced to Parliament to formally add employment to the Reserve Bank of New Zealand’s monetary policy mandate alongside inflation targeting. A greater focus on employment has already been adopted on a temporary basis by the RBNZ governor. But the proposed law which is expected to be passed would make a more permanent shift for the bank, which in 1989 was the world’s first to adopt an official inflation target. The bill would also introduce a committee to set monetary policy rather than leave the decision solely to the central bank’s governor. In March, when Adrian Orr became RBNZ governor, he and Finance Minister Grant Robertson agreed that maximizing sustainable employment would be a goal alongside inflation targeting in a policy agreement covering the governor’s five-year term. It should be noted that the New Zealand unemployment rate is already at a nine-year low at 4.4 percent.



The U.S. dollar was mixed on the week. It declined against the yen and Canadian dollar but advanced against the euro, pound, Swiss franc and the Australian dollar.


The yen has been volatile — traders consolidated positions after reports the Bank of Japan was debating moves to scale back its massive monetary stimulus and ignited a brief rally in the Japanese currency. With investors wary of buying the yen aggressively unless some concrete measures were seen from the Bank of Japan, the yen consolidated early gains. At the same time, 10 year JGBs (Japan Government Bonds) jumped. The Bank of Japan, facing stubbornly low inflation, is in unusually active discussions before the July 30 and 31 policy decision, with changes to its interest-rate targets and stock-buying techniques on the table for discussion. The BoJ’s current policy, adopted in mid-2016, consists mainly of negative short-term interest rates, keeping the 10-year yield around zero percent and buying about six trillion yen of stocks through exchange traded funds (ETFs).


Selected currencies — weekly results

2017 2018 % Change
Dec 29 July 20 July 27 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.743 0.741 -0.3% -5.0%
New Zealand NZ$ 0.709 0.682 0.680 -0.3% -4.1%
Canada C$ 0.796 0.762 0.766 0.5% -3.8%
Eurozone euro (€) 1.194 1.173 1.166 -0.6% -2.4%
UK pound sterling (£) 1.344 1.314 1.311 -0.2% -2.5%
Currency per U.S. $
China yuan 6.534 6.770 6.913 -2.1% -5.5%
Hong Kong HK$* 7.816 7.850 7.848 0.0% -0.4%
India rupee 64.081 68.853 68.663 0.3% -6.7%
Japan yen 112.850 111.520 111.000 0.5% 1.7%
Malaysia ringgit 4.067 4.062 4.063 0.0% 0.1%
Singapore Singapore $ 1.338 1.362 1.362 0.1% -1.8%
South Korea won 1070.630 1133.750 1118.110 1.4% -4.2%
Taiwan Taiwan $ 29.775 30.708 30.596 0.4% -2.7%
Thailand baht 32.696 33.333 33.373 -0.1% -2.0%
Switzerland Swiss franc 0.979 0.9921 0.994 -0.2% -1.6%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


July flash composite PMI was down 0.6 points from its final June reading and indicative of only a moderate month for economic growth. The headline deterioration was wholly attributable to services where the flash PMI dropped 0.8 points to 54.4. By contrast, its manufacturing counterpart edged a couple of ticks firmer to 55.1. Aggregate new orders growth touched a 21-month low as both sectors recorded smaller gains in demand. Manufacturers' new exports saw their weakest increase since August 2016 suggesting that the shift towards global protectionism is starting to have an effect. Backlogs similarly recorded their slowest expansion rate in 22 months but the labour market remained robust with employment posting another healthy advance. Even so, overall business confidence declined to a 20-month trough. Inflation developments were firm but the rates of both input costs and average selling prices eased slightly. Among the core countries, the flash composite output index dipped 0.5 points to 54.5 in France but gained 0.4 points to 55.2 in Germany. Elsewhere, growth was the weakest for 21 months and slipped in both manufacturing and services. The U.S. is added for comparison.



July Ifo reading was 101.7, just 0.1 point below its unrevised June reading. Nonetheless, this was its seventh decline in the last eight months and its lowest since March 2017. The essentially stable overall measure masked a minor improvement in current conditions that was just more than offset by a small worsening in expectations. The former sub-index was up a minimal 0.1 points from a marginally higher revised June mark at 105.3. This hardly dented the previous period's 1 point decline but was at least the first increase since January. By contrast, expectations were off a further 0.3 points from a weaker revised June reading at 98.2. This was their eighth straight decline. Morale was down in manufacturing (22.4 after 23.9) and wholesale (10.4 after 11.4) but up in construction (26.7 after 26.0), services (26.7 after 26.0) and, in particular, retail (27.4 after 19.4).



Second quarter provisional gross domestic product was up a quarterly 0.2 percent for a second quarter. On the year GDP was up just 1.7 percent after increasing 2.2 percent in the previous quarter. Weakness was particularly apparent in the household sector where spending fell 0.1 percent on the quarter. This reflected a second successive outright decline in purchases of goods (0.3 percent after 0.1 percent) and a marked deceleration in services consumption (0.1 percent after 0.4 percent). However, gross fixed capital formation (0.7 percent after 0.1 percent) picked up well with business investment (1.1 percent after 0.1 percent) especially robust. With government consumption up 0.4 percent, domestic final sales again added 0.2 percentage points to the quarterly change in GDP. Business inventories added 0.3 percentage points but, having had a cumulative net zero impact over the previous three quarters. However, foreign trade subtracted 0.3 percentage points as exports rose 0.6 percent and imports a much sharper 1.7 percent.




Second quarter consumer price index was up 2.1 percent on the year after increasing 1.9 percent in the three months to March. The increase was above the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent after four consecutive quarters below this range. The increase was largely driven by transport costs. Prices for clothing and footwear declined. Prices for other major components of consumer spending, however, recorded weaker increases. Measures of core inflation, which exclude the impact of volatile price changes, were steady in the three months to June. The trimmed mean CPI inflation measure advanced 0.5 percent on the quarter, unchanged from the three months to March, with the annual increase also unchanged at 1.9 percent. The weighted mean CPI inflation measure also rose 0.5 percent on the quarter for a second consecutive quarter, with the annual increase falling slightly from 2.0 percent to 1.9 percent.


Bottom line

Equities advanced globally after an up and down week. Economic data were mixed. As totally expected, the European Central Bank maintained its monetary policy. President Trump and EC president Juncker announced plans to reduce tariffs. July flash PMIs were mixed. U.S. second quarter gross domestic product grew at an annualized rate of 4.1 percent with consumer spending up 4.0 percent annualized.


Four central banks will offer their monetary policy decisions in the coming week. The Bank of Japan, Reserve Bank of India, Federal Reserve and the Bank of England. We won’t get an answer to what the Bank of Japan may be up to until it makes its policy announcement on Tuesday (Japan time) followed by chair Kuroda’s press conference. The Bank of England is expected to increase its policy rate by 25 basis points while the Reserve Bank of India is a tossup. The Fed is expected to leave its fed funds rate unchanged.


There is also the BoJ monetary policy meeting which starts on Monday. Up until about a week ago (or less), no one was expecting any changes to policy. Monetary policy committee members — according to reports — were mulling over some adjustments to policy to help the banking sector sent 10-year JGB yields from 0.035 percent to 0.10 percent. Although yields have cooled a bit (to 0.09 percent), they are still elevated (compared to where they were before the rumors), suggesting that the market is now keeping a close eye on the BoJ announcement.


It is a heavy week for updated economic data as well with the week ending with the U.S. employment situation report.


Looking Ahead: July 30 through August 3, 2018

Central Bank activities
July 31 Japan Bank of Japan Monetary Policy Announcement
August 1 India Reserve Bank of India Monetary Policy Announcement
United States FOMC Monetary Policy Announcement
August 2 UK Bank of England Monetary Policy Announcement
Quarterly Inflation Report Published
The following indicators will be released this week...
July 30 EZ EC Consumer and Business Confidence (July)
July 31 EZ Gross Domestic Product (Q2.2018 flash)
Harmonized Index of Consumer Prices (July flash)
Germany Retail Sales (June)
Unemployment (July)
Italy Gross Domestic Product (Q2.2018 flash)
Spain Gross Domestic Product (Q2.2018 flash)
August 1 EZ Manufacturing PMI (July)
Germany Manufacturing PMI (July)
France Manufacturing PMI (July)
UK Manufacturing PMI (July)
August 2 EZ Producer Price Index (June)
August 3 EZ Composite PMI (July)
Germany Composite PMI (July)
France Composite PMI (July)
UK Services PMI (July)
Asia Pacific
July 30 Japan Retail Sales (June)
July 31 Japan Unemployment Rate (June)
Industrial Production (June)
August 1 Japan Manufacturing PMI (July)
China Manufacturing PMI (July)
August 2 Australia Merchandise Trade Balance (June)
August 3 Australia Retail Sales (June)
July 31 Canada Monthly GDP (May)
Industrial Product Price Index (June)
August 3 Canada International Trade (June)


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


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