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INTERNATIONAL PERSPECTIVE

Shock perhaps - but no awe
Econoday International Perspective 1/23/15
By Anne D. Picker, Chief Economist

  

Global Markets

Three central banks met and all took action. In chronological order, the Bank of Japan extended its bond buying program time lines and acknowledged that the 2 percent inflation target goal will not be met by April 2015. The Bank of Canada lowered its key interest rate by 25 basis points to 0.75 percent, acknowledging the impact of sliding oil prices on the Canadian economy. And finally, the European Central Bank added a quantitative easing program to fend off deflation and prod the economy into growth.


 

European Central Bank

The European Central Bank left its refinance rate at 0.05 percent and the rates on the deposit and marginal lending facilities remained at minus 0.20 percent and 0.30 percent respectively. These rates have already been described by the ECB as being at their lower bound. However, the focus Thursday was on ECB President Mario Draghi's press conference and the details on quantitative easing.

 

The ECB more than matched market expectations. Quantitative easing will be introduced from March and run through to the end of September 2016 with the option of an extension should inflation goals remain out of reach. Including the existing ABS and covered bond program already announced, total buying going forward will be €60 billion a month directed at maturities between two and 30 years. On this basis the total package could be worth around €1.1 trillion. Sovereign bonds under consideration will need to be of investment grade and about 80 percent of the risk will be carried by the national central banks. The ECB will also trim the rates on future targeted long term repo operations (TLTROs) to match the prevailing refi rate.

 

Financial markets had already priced in much of its reaction ahead of this announcement. However, probable relief that the ECB lived up to expectations sent European equities higher while the euro declined to an 11 year low. A lower euro it is hoped will add to inflationary pressures to rescue Europe from deflation.

 

Note that as of this year the ECB has switched to six weekly intervals between meetings so the results of the Governing Council's next policy deliberations will be announced on March 5th. The Governing Council also has begun rotational voting now that there are 19 members. There are two groups aside from ECB board members. Group one includes Germany, Spain, France, Italy and the Netherlands. All other members are in group two. For group one, voting members rotate each month. For example, at its latest meeting, Spain did not have a vote. In March, it will be France without a vote.


 

Bank of Canada

The Bank of Canada surprised investors as it announced a 25 basis point cut in key interest rates at its policy setting meeting. The target for the overnight rate was reduced to 0.75 percent and the deposit rate and the Bank Rate were lowered to 0.5 percent and 1.0 percent respectively. The Bank had been widely expected to hold rates steady before raising them later in the year or in early 2016. The decision to cut rates is a marked policy divergence from the U.S. Federal Reserve, which is expected to start increasing rates later this year. This was the first rate cut since April 2009 when the economy was mired in recession. The move in large part reflects the expected impact on the Canadian economy of the recent dramatic slide in oil prices and the consequent significant downgrading of the Bank's economic outlook.

 

Growth is now seen slowing to 1.5 percent in the first half of this year, nearly a full percentage point below the October projection. Although some pick-up in activity is expected after that, full capacity is not expected to be reached until the end of 2016, somewhat later than last time. As a result, overall and core CPI inflation both remain below the BoC's inflation range of 1 percent to 3 percent median of 2 percent until the end of the forecast horizon.

 

Ongoing concerns about the level of household debt mean that the BoC is reluctant to make consumer borrowing any cheaper so the rate cut underlines the monetary authority's sensitivity to oil market developments. While lower energy prices will likely boost consumer spending in other economies including that of the U.S., the price slump will be "unambiguously negative" for Canada, the Bank of Canada said. Unlike the U.S., Canada is a net exporter of oil. Energy extraction and related industries account for a much bigger share of the economy, with around 11 percent of GDP stemming from direct and indirect energy activities.


 

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. The monetary policy board said it would continue to buy JGBs at annual pace of ¥80 trillion. The vote was 8 to 1 to keep policy unchanged. Takahide Kiuchi voted against the decision once again, arguing that an earlier pace of purchases (¥60 trillion) was appropriate. The BoJ extended both its bank lending facility and pro-growth funding facility by one year to March 2016.

 

The Board acknowledged that increases in the CPI were likely to slow for the time being and its target of reaching 2 percent inflation will occur later than planned. The initial target date had been April 2015. The Board forecast that fiscal year 2015 core CPI excluding the tax increase effect would be 1.0 percent on the year. However, the CPI excluding tax effects will be 2.2 percent in fiscal year 2016. GDP for the same time period is forecast to be 2.1 percent and 1.6 percent in fiscal year 2016. The CPI excluding the tax impact for fiscal year 2014 (the current fiscal year ending March 31) is tracking at 0.9 percent. However, GDP for the 2014 fiscal year is expected to contract 0.5 percent.

 

At his post meeting press conference, Governor Haruhiko Kuroda defended the BoJ's decision, saying that while the lower cost of fuel may weigh on inflation short term, it will stimulate the economy and thus accelerate price growth. Japan's economy slipped into recession in the third quarter of last year and is only barely emerging from the doldrums as a hit from a sales tax increase in April begins to ease.


 

IMF lowers its growth forecast

The International Monetary Fund lowered its forecast for global economic growth in 2015 and called for governments and central banks to pursue accommodative monetary policies and structural reforms to support growth. Global growth is projected at 3.5 percent for 2015 and 3.7 percent for 2016 according to the latest World Economic Outlook, down by 0.3 percentage points for both years from the prior forecast. According to the IMF, new factors supporting growth such as lower oil prices and depreciation of the euro and yen are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries. The United States was the lone bright spot in an otherwise gloomy report for major economies, with its projected growth raised to 3.6 percent from 3.1 percent for 2015. The United States largely offset prospects of more weakness in the euro area, where only Spain's growth was adjusted upward. Projections for emerging economies were also broadly cut back with the outlook for oil exporters Russia, Nigeria and Saudi Arabia worsening the most. The IMF said that a slowdown in China will draw a more limited policy response as authorities in Beijing will be more concerned with the risks of rapid credit and investment growth. It also cut projections for Brazil and India.


 

Global Stock Market Recap

2014 2015 % Change
Index Dec 31 Jan 16 Jan 23 Week 2015
Asia/Pacific
Australia All Ordinaries 5388.6 5278.8 5468.2 3.6% 1.5%
Japan Nikkei 225 17450.8 16864.2 17511.8 3.8% 0.3%
Hong Kong Hang Seng 23605.0 24103.5 24850.5 3.1% 5.3%
S. Korea Kospi 1915.6 1888.1 1936.1 2.5% 1.1%
Singapore STI 3365.2 3300.7 3411.5 3.4% 1.4%
China Shanghai Composite 3234.7 3376.5 3351.8 -0.7% 3.6%
India Sensex 30 27499.4 28121.9 29278.8 4.1% 6.5%
Indonesia Jakarta Composite 5227.0 5148.4 5323.9 3.4% 1.9%
Malaysia KLCI 1761.3 1743.6 1803.1 3.4% 2.4%
Philippines PSEi 7230.6 7490.9 7548.93 0.8% 4.4%
Taiwan Taiex 9307.3 9138.3 9470.9 3.6% 1.8%
Thailand SET 1497.7 1517.7 1598.3 5.3% 6.7%
Europe
UK FTSE 100 6566.1 6550.3 6832.8 4.3% 4.1%
France CAC 4272.8 4379.6 4640.7 6.0% 8.6%
Germany XETRA DAX 9805.6 10167.8 10649.6 4.7% 8.6%
Italy FTSE MIB 19012.0 19254.5 20519.8 6.6% 7.9%
Spain IBEX 35 10279.5 10038.9 10581.5 5.4% 2.9%
Sweden OMX Stockholm 30 1464.6 1468.9 1536.4 4.6% 4.9%
Switzerland SMI 8983.4 7899.6 8161.2 3.3% -9.2%
North America
United States Dow 17823.1 17511.6 17672.6 0.9% -0.8%
NASDAQ 4736.1 4634.4 4757.9 2.7% 0.5%
S&P 500 2058.9 2019.4 2051.8 1.6% -0.3%
Canada S&P/TSX Comp. 14632.4 14309.4 14779.4 3.3% 1.0%
Mexico Bolsa 43145.7 41402.0 42649.7 3.0% -1.1%

 

Europe and the UK

Last week can be divided into two parts. On Monday through Wednesday, equities advanced in anticipation of what the European Central Bank might do. On Thursday and Friday, they reacted to the larger than anticipated stimulus program. The FTSE, CAC and DAX built on gains from the end of the preceding week while the SMI tried to recover from sharp losses after the Swiss National Bank set its currency free. On the week, the FTSE was up 4.1 percent, the CAC gained 6.0 percent, the DAX added 4.7 percent and the SMI was 3.3 percent higher. Investor sentiment also benefitted from some better than expected Eurozone economic data.

 

Investors will be watching for the result of elections in Greece on Sunday (January 25). The Syriza party is expected to be victorious. If they do come to power, it is expected that they will seek debt renegotiation — the Greek population is exhausted from years of austerity. If victorious, Syriza plans to revisit the terms of the 4-year bailout, increase minimum wages and create more jobs along with other changes. However, party leader Alexis Tsipras has also moderated his stance and stepped back from previous threats of exiting the Eurozone. But, it will be hard for the party to find a coalition partner in 15 days. And if it fails, the opposition then has 3 days to form a government. If that fails, then it is back to the polls.

 

The Swiss stock market continued to gyrate last week. The Swiss National Bank shocked the markets in the prior week after it abandoned its currency cap of CHF 1.2 per euro. The SMI rebounded 3.2 percent on Monday only to sink 2.1 percent Wednesday. Friday the SMI added another 2.0 percent gain. While gaining 3.3 percent on the week, it has a long way to go before it recoups the previous week's 13.2 percent drop.


 

Asia Pacific

Spurred first by anticipation then by the reality of the European Central Bank's new stimulus program, equities advanced last week — with the exception of the Shanghai Composite. Asian Investors believe that a major portion of the new money pumped into the European economy will find its way into equity markets. The Australian All Ordinaries hit a 10 week high after the ECB announcement, ending the week 3.6 percent higher. The Nikkei advanced 3.8 percent with exporter shares outperforming on growing bets that the yen will fall against the dollar to a record low in the wake of the ECB's Thursday announcement.

 

The Shanghai Composite was down 0.7 percent on the week — its first weekly loss since November 7, 2014. The People's Bank of China on Thursday said it had injected about $8 billion into the banking system through seven day reverse repurchase agreements, spurring speculation that the Bank would loosen monetary policy going forward. It was a volatile week with the index plunging 7.7 percent on Monday just prior to the release of key economic data including fourth quarter growth and December industrial production and retail sales, data that broadly met expectations. China's gross domestic product was up 7.4 percent for the year 2014 — the slowest since 1990. Fourth quarter GDP was up 7.3 percent from a year ago for a second consecutive quarter. December industrial production accelerated to 7.9 percent from a year ago while retail sales growth quickened to 11.9 percent. However, growth of urban fixed asset investment continued to cool.

 

Monday's drop was in reaction to new margin trading rules though the loss was pared after the securities regulator said it was not trying to curb equity trading. Even though the index gained on the remaining four days, Monday's loss was too large to overcome even with Tuesday's 1.8 percent and Wednesday's 4.7 percent gains. On Thursday, Chinese stocks closed higher, rebounding from early losses after Zhou Xiaochuan, Governor of the People's Bank of China, told the World Economic Forum in Davos that monetary policy should remain stable as there is no housing crisis. Premier Li Keqiang, meanwhile, said the economy will avoid a hard landing and the government is focused long term on ensuring medium to fast growth.


 

Currencies

The U.S. dollar rallied against all of its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. The Canadian dollar declined on poor manufacturing sales data and the surprise reduction in the Bank of Canada's key policy interest rates. The euro, which had already been declining, dropped sharply after the ECB announced its quantitative easing plan.


 

The pound advanced to the strongest level in almost seven years against the euro after the European Central Bank announced its quantitative easing plan and in the process, dampened demand for the shared currency. But sterling weakened for a third day against the dollar even though UK retail sales unexpectedly rose in December. The pound sterling has declined against many of its major counterparts as investors push back bets on when the Bank of England will raise interest rates and before a May general election. Now many analysts do not anticipate a rate increase before November 2015.


 

The commodity currencies — the Canadian and Australian dollars — continued their slide as commodity prices and especially crude oil continue to decline and iron ore continues to tumble. The U.S. dollar is close to a six year high against the Canadian dollar while the Australian dollar slipped below US$0.80 in intraday trading Friday for the first time since 2009. The latter is being fueled by speculation the Reserve Bank of Australia will need to cut borrowing costs to a new record low when it meets on February 3. The Bank of Canada's surprise decision to lower interest rates and the European Central Bank's bond purchase program have raised the odds of looser monetary policy in Australia.


 

Selected currencies — weekly results

2014 2015 % Change
Dec 31 Jan 16 Jan 23 Week 2014
U.S. $ per currency
Australia A$ 0.817 0.824 0.792 -3.9% -3.1%
New Zealand NZ$ 0.780 0.779 0.746 -4.2% -4.4%
Canada C$ 0.861 0.836 0.804 -3.8% -6.7%
Eurozone euro (€) 1.210 1.157 1.121 -3.1% -7.4%
UK pound sterling (£) 1.559 1.516 1.499 -1.1% -3.8%
Currency per U.S. $
China yuan 6.206 6.208 6.229 -0.3% -0.4%
Hong Kong HK$* 7.755 7.752 7.752 0.0% 0.0%
India rupee 63.044 61.871 61.435 0.7% 2.6%
Japan yen 119.820 117.630 117.830 -0.2% 1.7%
Malaysia ringgit 3.497 3.559 3.601 -1.2% -2.9%
Singapore Singapore $ 1.325 1.326 1.345 -1.4% -1.5%
South Korea won 1090.980 1077.230 1084.020 -0.6% 0.6%
Taiwan Taiwan $ 31.656 31.548 31.324 0.7% 1.1%
Thailand baht 32.880 32.546 32.580 -0.1% 0.9%
Switzerland Swiss franc 0.9942 0.857 0.879 -2.6% 13.1%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

EMU

January flash composite PMI reading was 52.2, up 0.8 points from its final year-end reading and at its highest level in five months. The headline improvement reflected gains in both the manufacturing and service sectors. The manufacturing PMI was provisionally put at 51.0, up 0.4 points from December and its strongest mark in half a year. Services weighed in at 52.3 after a 51.6 last time. Manufacturing output (52.2 after 50.9) grew at an accelerated, if still relatively modest, pace and aggregate new orders rose at their sharpest rate in five months. Private sector backlogs fell again, but only marginally, and employment showed its largest gain since July 2014. That said the rate of job creation remained muted. However, despite the slightly more reassuring signs from the real economy, price developments were worryingly weak. Total input costs recorded their first decline since May 2013 as manufacturing posted its steepest slide in more than five years and combined output prices fell more quickly than in any month since February.

 

Regionally the strongest growth was seen outside of the core as business activity expanded at its fastest pace since last July. For the Germany (composite output index 52.6) growth accelerated slightly but in France (49.5) the economy again struggled to keep its head above water. The manufacturing PMI readings for the Eurozone and Germany were 51.0 while France continued to contract at 49.5.

 

The United States, Japan and China release flash manufacturing PMIs only. China's flash manufacturing PMI edged up to a still contractionary 49.8 from December's final of 49.5. Japan's flash reading was unchanged at 52.1. The U.S. reading edged down from 53.9 to 53.7.


 

Germany

January's ZEW current conditions index followed December's 6.7 point advance with an increase of more than 12 points to 22.4, its highest level since September and the third increase in as many months. At the same time, expectations built on their year-end 23.4 point surge with another solid 13.5 point gain to 48.4, their strongest value since February 2014. ZEW attributed the markedly more optimistic view to the anticipated effects of the oil price collapse and the competitiveness benefits of a weaker euro.


 

United Kingdom

December claimant count unemployment declined 29,700 after an upwardly revised decline of 29,600 in November. The December decline was the largest decrease since August and put the fourth quarter fall at 84,400, only just short of its 89,000 slide in the previous period. The year-end jobless rate was just 2.6 percent, down another tick from November to match its lowest level since June 2008. With the exception of October 2014 (unchanged) the unemployment rate on this measure has declined every month since June 2013. Using the ILO definition, the number of people out of work was down 58,000 over the three months to November. This was sufficient to see this unemployment rate drop to 5.8 percent for the period and, for November alone, to 5.6 percent. Meantime, wages continue to creep higher. At 1.7 percent, annual overall earnings growth in the September to November period was up 0.3 percentage points from last time while, excluding bonuses, the rate gained 0.2 percentage points to 1.8 percent. With CPI inflation only 0.5 percent in November (and set to fall further over coming months) both gauges duly suggest that real earnings are accelerating.


 

December retail sales were up 0.4 percent on the month and 4.3 percent from the same month a year ago. Excluding auto fuel sales were up 0.2 percent and 4.2 percent on the year. Food sales jumped a monthly 1.3 percent, their fourth consecutive advance. By contrast, excluding auto fuel, non-food demand contracted 0.6 percent, its first decline since September. Within this subsector most categories saw a drop in purchases and the overall performance would have looked a lot worse but for a 5.2 percent leap in the other stores area. Non-specialized stores dropped 4.5 percent, clothing & footwear was off 1.1 percent and household goods sank 4.7 percent. In addition, non-store retailing was down 0.7 percent. Auto fuel sales were up 2.4 percent.


 

Asia/Pacific

China

Fourth quarter gross domestic product was up 7.3 percent from the same quarter a year ago and slightly above forecasts of 7.2 percent growth. For the year 2014, GDP was up 7.4 percent after growing 7.7 percent in both 2012 and 2013. The 2014 growth rate was the slowest since the 3.8 percent recorded in the post-Tiananmen chill of 1990. On a seasonally adjusted basis, GDP was up 1.5 percent from the third quarter after expanding 1.9 percent in the third quarter. The economy is expected to continue to grow more slowly going forward partly as a result of its far larger size. A slowdown in the overheated real estate market that began last year is expected to continue this year, exacerbating problems for industries such as steel, cement and glass that are suffering from chronic overcapacity. To a certain extent, the economy's performance last year was also a reflection of Beijing's willingness to accept lower growth rates.


 

December industrial production was up 7.9 percent on the year after increasing 7.2 percent in November. Analysts expected an increase of 7.5 percent. For the year 2014, output was up 8.3 percent, down substantially from 9.7 percent for the year 2013. On the month, production improved to a gain of 0.75 percent from 0.54 percent in November. All categories with the exception of cement were up on the year. Motor vehicle production was up 3.7 percent on the year after increasing only 2.6 percent the month before. Non-metal minerals output was up 8.7 percent after increasing 7.8 percent in November. Ferrous metals and general equipment output both improved to increases of 8.0 percent and 7.3 percent respectively. Transport equipment was up 15.2 percent after 12.9 percent in November. Machinery improved with a gain of 7.7 percent, up from 6.3 percent. Steel products gained 6.4 percent after increasing only 1.2 percent the month before.


 

December retail sales were up a greater than expected 11.9 percent from a year ago. Analysts expected an increase of 11.7 percent. For the year, sales were up 12.0 percent after increasing 13.1 percent in 2013. On the month, sales were up 1.01 percent. Urban retail sales were up 11.8 percent after gaining 11.6 percent in November. Rural sales slipped to 12.4 percent after increasing 12.5 percent the month before. Household nondurables slipped to an increase of 12.2 percent after rising 15.2 percent in November. Clothing sales increased 10.6 percent after jumping 13.4 percent the month before. However, home appliance sales improved to an increase of 12.6 percent from 11.3 percent. Furniture sales also improved, increasing 13.2 percent after 12.8 percent in November. Auto sales were up 6.1 percent after a dismal 2.0 percent gain the month before.


 

Americas

Canada

November manufacturing sales dropped 1.4 percent on the month after sinking a steeper revised 1.1 percent drop in October. On the year, shipments were up 2.6 percent, its weakest reading since November 2013. The latest reversal in cash sales was exactly matched by volumes for which a 1.4 percent monthly decrease reduced yearly growth to just 0.9 percent. Within the monthly slide in overall nominal sales, 16 of the 21 subsectors posted declines. Among these, motor vehicles were down 5.9 percent, electrical equipment, appliance & components 6.0 percent, chemicals 3.6 percent and primary metals 5.4 percent. Food (down 1.3 percent) also struggled. The only increases of note were in aerospace products & parts (9.1 percent) and motor vehicle parts (2.0 percent). New orders fell 1.7 percent from October, backlogs edged up 0.2 percent.


 

December consumer prices dropped 0.7 percent on the month thanks to tumbling energy costs. This reduced the headline annual inflation rate from 2.0 percent in November to 1.5 percent, its lowest mark since March 2014. After omitting the negative effects of lower oil prices, the underlying picture was predictably more robust. The CPI excluding food and energy declined 0.4 percent and was up 1.9 percent on the year. The Bank of Canada core CPI was down 0.3 percent and was up 2.2 percent from a year ago. Seasonal factors are quite strongly negative at year-end and adjusted for these the CPI was down only 0.1 percent from mid-quarter after a 0.2 percent dip in November. On the same basis, both the excluding food and energy measure and BoC's gauge were up 0.2 percent. The continued weakness of gasoline prices was particularly evident again in transportation which, with a further 1.2 percent decrease, had easily the largest negative impact on overall prices. Elsewhere, clothing & footwear dropped 0.3 percent while health & personal care and alcoholic beverages & tobacco products were off 0.2 percent. Food registered a 0.5 percent gain and shelter was 0.2 percent more expensive.


 

November retail sales followed an unrevised flat performance in October with a 0.4 percent monthly rise. Compared with a year ago purchases were up 4.8 percent, matching the previous period's annual advance. Volumes were a good deal firmer, registering a 0.8 percent monthly gain that left them 3.5 percent above their level in November 2013. The monthly increase in overall nominal sales reflected increases in five of the eleven subsectors. Among these, unseasonably cold weather helped clothing & footwear increase 5.2 percent and furniture & home furnishings gained 1.5 percent. Sporting goods, hobby, book & music stores as well as electronics & appliance stores were up 4.6 percent and general merchandise advanced 2.0 percent. However, motor vehicle & parts slipped 0.3 percent, building material & garden equipment & supplies were off 1.1 percent and food & beverage dropped 0.5 percent. Miscellaneous store retailers also posted a 1.5 percent decline.


 

Bottom line

The European Central Bank announced a stimulus plan that beat expectations. The Bank of Canada shocked and lowered rates. The Bank of Japan pushed its target date for reaching its 2 percent inflation target out further into the future. Economic data were on average better than expected.

 

The Federal Reserve meets Wednesday. No policy change is anticipated. The U.S. and UK report their respective first estimates of fourth quarter growth. Japan posts its usual end of month deluge of economic reports including unemployment, industrial production, consumer prices, household spending and retail sales.


 

Looking Ahead: January 26 through January 30, 2015

Central Bank activities
January 28 United States FOMC Monetary Policy Announcement
January 29 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
 
The following indicators will be released this week...
Europe
January 26 Germany Ifo Business Survey (January)
January 27 Germany Retail Sales (December)
UK Gross Domestic Product (Q4.2014 first estimate)
January 29 Eurozone M3 Money Supply (December)
EC Business and Consumer Sentiment (January)
Germany Unemployment (January)
January 30 Eurozone Harmonized Index of Consumer Prices (January, flash)
Unemployment (December)
France Consumption of Manufactured Goods (December)
 
Asia/Pacific
January 26 Japan Merchandise Trade Balance (December)
January 28 Australia Consumer Price Index (Q4.2014)
January 29 Japan Retail Sales (December)
January 30 Japan Consumer Price Index (December)
Household Spending (December)
Unemployment (December)
Industrial Production (December)
Australia Producer Price Index (Q4.2014)
 
Americas
January 30 Canada Monthly Gross Domestic Product (November)

 

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


 

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