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Tariffs continue to make investors wary
International Perspective - September 7, 2018
By Anne D. Picker, Chief Economist


Global Markets

Tariff worries permeated markets last week now that the public comment period has ended on the proposed $200 billion tariffs on Chinese imports. And on Friday, a further $267 billion of Chinese imports were threatened with tariffs and weighed on equities. Investors also waited for the outcome of further talks between Canada and the United States on changes to NAFTA. On the week, all indexes retreated with the exception of the MIB.


Bank of Canada

As widely anticipated, the Bank of Canada held its key interest rate at 1.5 percent. The BoC last raised rates at its June policy meeting from 1.25 percent. Canadian economic data have been solid.


In its statement, the BoC governing council said that CPI inflation increased to 3.0 percent in July which was higher than expected, in large part because of a jump in the airfare component of the consumer price index. The Bank expects CPI inflation to move back towards 2 percent in early 2019 as the effects of past increases in gasoline prices dissipate. The BoC’s core measure of inflation remains firmly around 2 percent, consistent with an economy that has been operating near capacity for some time. Wage growth remains moderate. (Wage growth, which is closely watched by the Bank disappointed expectations, rose only 2.6 percent compared to the 3 percent increase the market was anticipating.)


Recent data have reinforced the Governing Council’s assessment that higher interest rates will be warranted to achieve its inflation target. The BoC said it will continue to take a gradual approach and will be data dependent. The Bank continues to monitor closely the course of NAFTA negotiations between the U.S. and Canada along with other trade policy developments.


Reserve Bank of Australia

As widely anticipated, the Reserve Bank of Australia left its key interest rate at 1.5 percent where it has been since August 2016. A change in rates seems no nearer even as the country’s commercial banks nudge up their home loan rates to protect profit margins. The RBA signaled a steady policy ahead.


Even though the status quo decision was widely expected, the Australian dollar bounced to reverse early losses as Governor Philip Lowe sounded upbeat about economy. According to Lowe, in the first half of 2018, the economy is estimated to have grown about 3 percent. Business conditions are positive and non-mining business investment is expected to increase. However, the RBA was in no hurry to raise rates, given that wage growth and inflation remain uncomfortably low.


An added reason for caution was a recent increase in mortgage rates by Australia’s No.2 lender Westpac. However, Lowe did not acknowledge Westpac’s move in his short statement while repeating average mortgage rates were still lower than a year ago. He also appeared comfortable about a slowdown in the housing market, saying there was still competition in the market for good-quality borrowers.


Second-quarter gross domestic product (GDP) figures were due the day after the RBA meeting. As expected, the data showed that the economy notched up its 27th year without a recession. Second quarter GDP beat expectations and was up a quarterly 0.9 percent and was up 3.4 percent from the same quarter a year ago.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 August 31 September 7 Week 2018
Australia All Ordinaries 6167.3 6427.8 6252.3 -2.7% 1.4%
Japan Nikkei 225 22764.9 22865.2 22307.1 -2.4% -2.0%
Topix 1817.56 1735.35 1684.3 -2.9% -7.3%
Hong Kong Hang Seng 29919.2 27888.6 26973.5 -3.3% -9.8%
S. Korea Kospi 2467.5 2322.9 2281.6 -1.8% -7.5%
Singapore STI 3402.9 3213.5 3134.4 -2.5% -7.9%
China Shanghai Composite 3307.2 2725.3 2702.3 -0.8% -18.3%
India Sensex 30 34056.8 38645.07 38389.8 -0.7% 12.7%
Indonesia Jakarta Composite 6355.7 6018.5 5851.5 -2.8% -7.9%
Malaysia KLCI 1796.8 1819.7 1799.2 -1.1% 0.1%
Philippines PSEi 8558.4 7855.7 7598.6 -3.3% -11.2%
Taiwan Taiex 10642.9 11063.9 10847.0 -2.0% 1.9%
Thailand SET 1753.7 1721.6 1689.5 -1.9% -3.7%
UK FTSE 100 7687.8 7432.4 7277.7 -2.1% -5.3%
France CAC 5312.6 5406.9 5252.2 -2.9% -1.1%
Germany XETRA DAX 12917.6 12364.1 11959.6 -3.3% -7.4%
Italy FTSE MIB 21853.3 20269.5 20447.7 0.9% -6.4%
Spain IBEX 35 10043.9 9399.1 9171.2 -2.4% -8.7%
Sweden OMX Stockholm 30 1576.9 1658.2 1618.2 -2.4% 2.6%
Switzerland SMI 9381.9 8973.6 8843.1 -1.5% -5.7%
North America
United States Dow 24719.2 25964.8 25916.5 -0.2% 4.8%
NASDAQ 6903.4 8109.5 7902.5 -2.6% 14.5%
S&P 500 2673.6 2901.5 2871.7 -1.0% 7.4%
Canada S&P/TSX Comp. 16209.1 16262.9 16090.3 -1.1% -0.7%
Mexico Bolsa 49354.4 49547.7 48971.1 -1.2% -0.8%


Europe and the UK

The markets endured their biggest pullback in months thanks to the persistent worries about global trade. Traders are keeping a close eye on the Trump administration following the expiration of a public comment period on new U.S. tariffs on $200 billion worth of Chinese goods. All major European equity indexes were down on the week with the exception of the MIB, which was up 0.9 percent. The FTSE was down 2.1 percent, the CAC lost 2.7 percent, the DAX tumbled 3.3 percent and the SMI was 1.5 percent lower. However, it is widely expected that the U.S. will implement new tariffs on imports worth $200 billion from China. Meanwhile, China has reportedly warned that it will be forced to retaliate if the United States implements any new tariff measures after the end of a public comment period.


Throughout the week, traders remained cautious as they fretted over global trade and the uncertainties over possible imposition of tariffs. U.S. and Canadian officials met after failing to reach an agreement last week. A report said Canadian Prime Minister Justin Trudeau has indicated Canada will not bend on key demands regarding NAFTA in talks with the U.S. It is expected that President Trump will impose tariffs on $200 billion worth of Chinese imports now that the public comment period is over. As yet, no action has been taken regarding the looming tariffs on Chinese goods. However, he threatened Friday to impose tariffs on another $267 billion of Chinese goods going forward.


Asia Pacific

Equities retreated on the week extending recent losses as another round of U.S. tariffs on China loomed. Investors also were vigiling the looming U.S. employment report which would be released after markets here were closed for the week for clues to central bank rate increases. Losses ranged from 0.7 percent (Sensex) to 3.3 percent (PSEi and Hang Seng).


Investor angst was obvious now that the deadline for public comments on fresh U.S. tariffs on China expired Thursday.


Japanese shares closed lower for the sixth straight session Friday as the yen strengthened against the U.S. dollar and traders awaited the U.S. tariff decision and the outcome of U.S.-Canada talks. The Nikkei dropped to 2-1/2-week lows Friday as investors sold chip equipment makers and fretted over reports that U.S. President Donald Trump could be contemplating taking on Japan over trade. Global markets continued to be on edge amid fears that the United States and China could launch another round of tit-for-tat tariffs anytime now that the public comment period on U.S. measures ends. The market was spooked after a report that Trump had told a columnist that he will take his global trade fight to Japan.


Investors are worried that a further escalation in the tit-for-tat trade war between the world's two largest economies would affect growth globally. The deadline for sending in comments on a proposal by the U.S. administration to levy a 25 percent import tariff on $200 billion of Chinese goods has ended. China will be forced to retaliate if the U.S. pushes ahead with new tariff measures, a spokesperson for the mainland's Ministry of Commerce said on Thursday. Beijing has said it could impose tariffs on $60 billion worth of U.S. goods.


The Nikkei declined 2.4 percent on the week thanks to a firmer yen, an annual reshuffle of the Nikkei index and a powerful earthquake in Hokkaido that followed on the heels of typhoon Jebi earlier in the week that hit western Japan. Investors awaited damage assessments after a powerful earthquake in Hokkaido, the latest in a series of natural disasters to hit the country this year. The 6.7 magnitude quake paralyzed the northern island, triggering landslides and knocking out power to its 5.3 million residents. A nuclear plant, which had been shut, lost power but no radiation incidents were reported. Jebi struck hardest at Kansai International Airport, Japan's third largest by traffic volume, following Narita and Haneda airports, which serve metropolitan Tokyo. With its runways and other facilities flooded, and a connecting bridge damaged.


It is expected that the damage from the typhoon will slow Japan’s industrial output and will affect the economy as a whole. Output had already been affected by heavy rain in July and that the typhoon would further depress output in the July to September quarter.



The U.S. dollar advanced against the pound sterling, euro and the Canadian and Australian dollars for the week. However, the yen advanced and the Swiss franc was virtually unchanged. The U.S. currency increased in value against its other counterparts on the increasing likelihood that the Federal Reserve will raise the fed funds rate when it next meets on September 26.


The pound sterling, which is sensitive to the Brexit negotiations, jumped against the U.S. dollar and the euro Friday after EU’s chief Brexit negotiator Michel Barnier said the European Union was open to discussing other backstops on the Irish border issue. Traders said that the increase was because of gains made by sterling after it was reported mid-week that Germany would accept a less detailed agreement on Britain’s future ties with the EU to get a Brexit deal done. Germany denied that its position on Brexit had changed though sterling advanced anyhow.


Sterling was boosted during the week after Bank of England Governor Mark Carney said he was ready to stay in his job beyond his planned leaving date, but concerns over Brexit kept a lid on the British currency’s gains. Sterling’s recovery was further spurred by a news report the European Union could offer new guarantees to Britain to win London’s support for a solution aimed at avoiding an Irish border after Brexit. The pound has fallen recently amid weak economic data, doubts over Prime Minister Theresa May’s leadership and opposition from the European Union to Britain’s proposals for exiting the EU.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 Aug 31 Sep 7 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.719 0.710 -1.2% -8.9%
New Zealand NZ$ 0.709 0.662 0.653 -1.3% -7.8%
Canada C$ 0.796 0.766 0.759 -1.0% -4.6%
Eurozone euro (€) 1.194 1.161 1.156 -0.4% -3.2%
UK pound sterling (£) 1.344 1.296 1.292 -0.3% -3.9%
Currency per U.S. $
China yuan 6.534 6.832 6.843 -0.2% -4.5%
Hong Kong HK$* 7.816 7.849 7.850 0.0% -0.4%
India rupee 64.081 70.995 71.739 -1.0% -10.7%
Japan yen 112.850 111.090 111.010 0.1% 1.7%
Malaysia ringgit 4.067 4.109 4.146 -0.9% -1.9%
Singapore Singapore $ 1.338 1.372 1.379 -0.5% -3.0%
South Korea won 1070.630 1113.070 1122.810 -0.9% -4.6%
Taiwan Taiwan $ 29.775 30.719 30.771 -0.2% -3.2%
Thailand baht 32.696 32.760 32.822 -0.2% -0.4%
Switzerland Swiss franc 0.979 0.9694 0.969 0.0% 1.0%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


August manufacturing PMI was 54.6, unchanged from its flash reading and still 0.5 points short of its final July print. It was indicative of the weakest growth of business activity since November 2016. Output posted its strongest gain in three months but, more importantly, orders saw their smallest rise in two years and inventories rose as a result. Part of this was due to exports where growth held around July's near-2-year trough. Backlogs were up again but by the least in more than two years and, despite another solid advance, employment saw its smallest improvement since February 2017. At the same time, global trade tensions and the possibility of further tariff impositions weighed on output expectations while business optimism slipped to its weakest level since November 2015. Regionally, the best performer was the Netherlands (59.1) ahead of Ireland (57.5) and Austria (56.4). Germany (55.9) was a little behind but well ahead of Greece (53.9), France (53.5), Spain (53.0) and a barely expanding Italy (50.1).



July manufacturing orders declined 0.9 percent after June's monthly nosedive was trimmed marginally to 3.9 percent. This put annual growth at minus 0.9 percent, its second successive sub-zero print. Within total orders, capital and consumer goods decreased 2.7 percent on the month and consumer and durable goods were off 0.5 percent. By contrast, intermediates were up 1.5 percent, albeit after a 2.1 percent decline in June. Domestic orders posted a partial recovery, advancing 2.4 percent after a 2.6 percent drop last time but annual growth was still very sluggish at just 0.5 percent. Overseas demand declined a further 3.4 percent following a 4.8 percent slump in June and now stands 1.9 percent below its level in July 2017.


July industrial production declined 0.9 percent on the month after falling 0.7 percent in June. Annual growth slowed from 2.7 percent to just 1.2 percent. In fact, the headline data would have been worse but for the volatile construction sector where output jumped 2.6 percent on the month and so more than reversed June's 1.9 percent drop. Manufacturing saw a hefty 1.9 percent contraction. Within this, consumer goods decreased 0.9 percent, basics were off 1.4 percent and capital goods down 2.5 percent after a 0.3 percent fall last time. Energy was unchanged.



Following a sharply stronger revised 1.0 percent quarterly rise at the start of the year, itself matching the steepest gain since the second quarter of 2007, gross domestic product expanded a very solid 0.7 percent. This was enough to lift annual growth from 2.9 percent to a more than respectable 3.4 percent, equaling its best mark in eight years. However, the impressive second quarter performance was largely attributable to net exports as most the domestic GDP expenditure components recorded only modest advances. Private consumption was up 0.3 percent on the quarter and general government consumption just 0.1 percent. Investment in equipment and software contracted 0.3 percent. However, construction (0.8 percent) picked up steam and a hefty 0.8 percent drawdown in business inventories more than unwound the first quarter's 0.6 percent accumulation to remove any concerns about possible stock overhangs. The main boost came from exports. Exports of goods (excluding valuables) jumped 2.6 percent while their import counterpart declined 1.1 percent. Services exports gained 0.1 percent and imports 0.2 percent. Inflation developments were also positive. The yearly change in the GDP deflator jumped from minus 0.5 percent in the first quarter to 1.1 percent.




Gross domestic product increased 0.9 percent on the quarter in the three months to June and down from revised growth of 1.1 percent in the three months to March. On the year, GDP picked up from 3.1 percent in the three months to March to 3.4 percent in the three months to June. This is the strongest annual growth since mid-2012. The drop in quarterly GDP was mainly driven by weaker private investment, which was flat after increasing 2.4 percent in the three months to March. Net exports were weaker and just contributed 0.1 percentage point, down from 0.4 percentage points previously. This was offset by stronger growth in household consumption, up 0.7 percent on the quarter after increasing 0.5 percent previously,




July merchandise trade deficit narrowed from C$743 million in June to C$114 — the smallest deficit since the most recent surplus in December 2016. Total exports rose 0.8 percent, mainly on higher crude oil prices. Total imports declined 0.4 percent because of fewer aircraft imports. In real (or volume) terms, exports were down 0.8 percent. Export prices rose 1.6 percent and were behind the export gain in nominal terms. This price increase was primarily attributable to higher prices of energy products. Total import volumes fell 1.1 percent in July, and prices were up 0.7 percent. Exports rose 0.8 percent in July despite declines in 6 of 11 product sections. Increased exports of energy products and motor vehicles and parts were partially offset by lower exports of aircraft and other transportation equipment and parts. On the year, total exports rose sharply (16.3 percent). On the month, exports excluding energy products edged down 0.2 percent in July. Imports declined 0.4 percent with 7 of 11 product sections decreasing. Lower imports of aircraft and other transportation equipment and parts, and of metal ores and non-metallic minerals, were partially offset by higher imports of energy products. On the year, total imports rose 10.1 percent. Exports to the United States rose a monthly 3.3 percent and increased 15.8 percent on the year-. Imports from the United States edged down 0.1 percent. Consequently, Canada's trade surplus with the United States widened in July. This represents the largest trade surplus observed since October 2008. For the year to date through July, Canada's merchandise trade surplus with the United States was C$24.2 billion, while it totaled C$25.6 billion for the same period in 2017.


August employment tumbled 52,000 jobs following two months of increases. Part-time employment declined by 92,000 while full-time employment edged up by 40,400. Full-time employment indicates a greater business confidence than part-time hiring. At the same time, the unemployment rate increased 0.2 percentage points to 6.0 percent. The participation rate edged down to 65.3 percent from 65.4 percent in July. When compared with August a year ago, employment grew 172,000 or 0.9 percent. Full-time employment increased 326,000 while the number of people working part-time declined 154,000. Over the same period, total hours worked were up 1.6 percent. Employment decreased in professional, scientific and technical services; wholesale and retail trade; and construction. At the same time, employment was up in business, building and other support services. Public sector employment fell, while the number of private sector employees and self-employed workers was little changed.


Bottom line

Equities tumbled on the week — worries about tariffs on China import and the ongoing negotiations between Canada and the United States weighed on optimism. Bank of England Governor Mark Carney said he is willing to stay on beyond June 2019 to guide the bank through Brexit. Economic data were mixed. Second quarter GDP was higher than anticipated for Australia. Germany’s manufacturing orders and output both declined. In Canada, while the merchandise trade deficit narrowed, employment shocked and tumbled. Both the Reserve Bank of Australia and the Bank of Canada left their monetary policies unchanged.


The Bank of England and European Central Bank announce their policy decision. The Federal Reserve publishes its Beige Book in preparation for its FOMC meeting on September 25 and 26. The UK publishes key economic data including its monthly GDP estimate and its merchandise trade balance. Japan publishes its revised second quarter GDP. And China begins its monthly release of major economic data. However, tariff developments will be key.


Looking Ahead: September 10 through September 14, 2018

Central Bank activities
Sep 12 United States Federal Reserve Beige Book Published
Sep 13 UK Bank of England Monetary Policy Announcement
EZ European Central Bank Policy Announcement
The following indicators will be released this week...
Sep 10 UK Monthly Gross Domestic Product (July)
Merchandise Trade Balance (July)
Sep 11 Germany ZEW Survey (September)
UK Labour Market Report (August)
Sep 12 EZ Industrial Production (July)
Italy Industrial Production (July)
Sep 14 EZ Merchandise Trade Balance (July)
Asia Pacific
Sep 10 Japan Gross Domestic Product (Q2,2918 2nd estimate) 
China Consumer Price Index (August)
Producer Price Index (August)
Sep 12 India Consumer Price Index (August)
Industrial Production (July)
Sep 13 Australia Labour Force Survey (August)
Japan Producer Price Index (August)
Private Machine Orders (July)
Sep 14 China Industrial Production (August)
Retails Sales (August)
Sep 11 Canada Housing Starts (August)


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


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