Global Markets

For once the FOMC announcement was upstaged by the Bank of Japan's decision to keep its policies unchanged. Expectations of additional stimulus from the BoJ had been rampant in the markets prior to the BoJ's announcement. Equities retreated while the yen soared.

Investors were cautious before the central bank meetings at the beginning of week and reacted negatively mostly to the BoJ. Disappointing earnings also played a role during the week. At week's end, equities were mostly lower but mixed in April. Economic data were mixed, with a surprise on the upside for Eurozone growth but on the downside for Eurozone inflation. Japan's monthly data deluge was also mixed with household spending declining along with the CPI as prices continue to defy the BoJ's attempts to find inflation.

Bank of Japan

The Bank of Japan stood pat on monetary policy, electing to maintain its negative interest rate at the level introduced in January and hold its quantitative and qualitative easing program steady. Expectations that Japanese policymakers would take further action, against a backdrop of low inflation and a firmer yen, had been growing in recent weeks. However the deposit rate was held steady at minus 0.1 percent while the annual pace of its asset purchase program remained at ¥80 trillion. The yen strengthened to ¥108.77.

Prior to the meeting, speculation built on whether the BoJ would introduce more stimulus. There appears to have been little or no reaction to the BoJ's move to negative interest rates in January. And in fact the yen has rallied since then. In January the BoJ adopted negative interest rates in its first benchmark interest rate move for five years, while keeping its quantitative and qualitative easing program at its current level of buying ¥80 trillion assets a year. It subsequently held steady at its March meeting.

Inflation data out just hours before the BoJ announcement raised the pressure. Core inflation — the measure for which the BoJ has a 2 percent price target — was minus 0.3 percent on the year in March and zero in February. The BoJ's timescale for reaching the 2 percent target has been repeatedly pushed back. Originally hoped for in 2015 when it was announced in 2013, last October it was pushed back to late 2016/early 2017. In January a further delay of up to a year was announced.

Economic data offered the BoJ plenty of reasons for easing at their monetary policy meeting. The economy is at risk of shrinking in second quarter because of big earthquakes that shook southern Japan recently. Inflation — including energy — is stuck near zero, while inflation expectations are — by some measures — the weakest in three years. Wage growth has slowed and the yen has strengthened.

Speaking at a press conference in Tokyo following the BoJ's latest decision, BoJ Governor Haruhiko Kuroda said interest rates could still venture further into negative territory. But he dismissed the immediate prospect of "helicopter money" being deployed in Japan, claiming any such extraordinary measures would be illegal under the country's constitution. But despite affirming that there was "no limit" to its monetary policy measures, an embattled Mr Kuroda seemed to rule out the BoJ injecting stimulus directly into the hands of consumers.

Reserve Bank of New Zealand

As widely expected, the Reserve Bank of New Zealand kept its overnight cash rate at the record low of 2.25 percent and said that monetary policy would continue to be accommodative. It also said that further policy easing may be required to ensure that inflation remains in the middle of the RBNZ's inflation target range of 1 percent to 3 percent.

In his statement, Governor Graeme Wheeler noted that domestic growth is being supported by strong inward migration, construction activity, tourism and accommodative monetary policy. Dairy export prices have improved slightly but are below break-even levels for most farmers. Wheeler tried to talk down the New Zealand's currency noting that a lower exchange rate is desirable to boost tradables inflation and said the exchange rate remains higher than appropriate given NZ's low commodity export prices.

Mr Wheeler said that there are many uncertainties around the outlook. Internationally, these relate to the prospects for global growth, particularly around China, and the outlook for global financial markets. The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration and pressures in the housing market.

Federal Reserve

As expected, the Federal Reserve kept its fed funds rate range at 0.25 percent to 0.5 percent but appeared on course to increase rates later this year. Esther L. George, the president of the Federal Reserve Bank of Kansas City, dissented for the second consecutive meeting. The FOMC said that labor market conditions were improving and inflation had picked up while domestic economic growth had slowed. The FOMC pointed to several areas of weakness in the domestic economy. It said household spending had "moderated," and business investment and export activity remained "soft." However, the Fed noted that household income continued to rise and that consumer sentiment remained positive. Housing construction is increasing and, most important, the statement underlined continued strength of job creation. The statement also suggested that the Fed's concerns about global economic weakness had eased. The Fed's last statement in March, described global conditions as a headwind for domestic growth. The April statement said merely that the Fed continues to monitor global economic and financial developments.

Global Stock Market Recap

Europe and the UK

Equities tumbled to end the week and month and in the process, gave back some of the gains garnered earlier in the month. On the week, the FTSE was down 1.1 percent, the SMI lost 1.8 percent and the CAC and DAX dropped 3.1 percent and 3.2 percent respectively. The losses occurred despite favorable growth data for France and the Eurozone. However, it was a different picture for the month of April. The FTSE added 1.1 percent, the CAC gained 1.0 percent, the DAX was up 0.7 percent while the SMI advanced 2.0 percent.

Investor sentiment was cautious prior to central bank announcements from the Federal Reserve and Bank of Japan. While the Fed's announcement offered no surprises, the Bank of Japan because of its lack of policy change did sending equities spiraling lower. Mixed earnings also played a role as did disappointing U.S. growth data.

Eurozone growth data provided a positive surprise, increasing 0.6 percent in the first quarter of 2016 according to the preliminary flash estimate. Expectations had been an increase of 0.4 percent. However, Eurozone consumer prices dropped in April on falling energy prices and a slowdown in service costs according to the flash estimate. The harmonized consumer price index fell 0.2 percent annually, after staying flat in March. Prices had declined 0.2 percent in February.

Asia Pacific

Only the Australian All Ordinaries were able to post a gain in the last week of April. All other indexes retreated. The lack of any policy change by the Bank of Japan rattled markets here. It sent the yen flying and equities lower. The moves reverberated throughout Southeast Asia. Some analysts opined that the central banks might have run out of bullets to a degree, thereby limiting the results they can achieve.

April was not a good month for equities, only three — the All Ordinaries (3.2 percent), Hang Seng (1.4 percent) and Sensex (1.0 percent) — managed to record a gain. Losses ranged from 4.2 percent (Taiex) to 0.1 percent (Kospi, STI and Jakarta Composite). Japan was down 0.6 percent while the Shanghai Composite was 2.2 percent lower.

While China's economy is showing signs of stabilizing, that hasn't filtered down to corporate earnings. Of the 180 companies listed in Shanghai that have reported three month figures, 51 percent have missed expectations. In Hong Kong, 38 percent of companies have trailed projections. China's stocks, bonds and currency have all fallen in tandem this month for the first time in two years. The declines mark a reversal from March, when the benchmark equities gauge jumped 12 percent and the yuan rallied the most since 2010 as new credit surged. Improving data from industrial output to retail sales have led traders to pare back bets for more stimulus.

The Bank of Japan shocked markets by keeping its monetary policy steady despite multiple headwinds plaguing the economy. The central bank maintained its negative 0.1 percent deposit rate and the size of its asset purchase program, while adopting a ¥300 billion new lending program to aid regional banks operating in areas hit by this month's earthquake in southern Japan. Sluggish inflation and spending data also weighed on markets. A slew of data released painted a mixed picture of the economy, with industrial output rebounding in March, housing starts growth accelerating and the jobless rate falling for the first time in two months, while retail sales dropped at a slower than expected pace and household spending declined at the fastest pace in a year.

Currencies

The U.S. dollar retreated against all of its major counterparts excluding the Australian dollar. However, the story this week was once again the yen as it rallied to an 18-month high on Friday as investors wagered the Bank of Japan might be done adding fresh stimulus to the economy, weighing on stock markets around the world. With Japan on holiday Friday, speculators drove the yen through 107.00 per dollar for the first time since October 2014. Often seen as a sign of broader risk aversion among investors, the move pushed Asian and European stocks into the red.

With the Japanese economy staggering and deflation returning, the last thing the Bank of Japan needs is to see a stronger yen. For global markets there are worrying messages here. Conventional monetary policy is at its limits, and, it seems, maybe so is unconventional monetary policy.

The yen was up more than 4 percent against the dollar for the week, putting it on track for its best week since the depths of the global crisis in October 2008 and one of its best weeks since the 1990s. It had been at ¥111.67 per dollar before Thursday's surprise decision by the BoJ not to ease policy further. The dollar remained down following Thursday's GDP data that showed the U.S. economy expanded at only at 0.5 percent annualized pace. That was the slowest growth in two years.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

March M3 expanded at an annual rate of 5.0 percent, unchanged from its mid-quarter outturn. This also put the 3-month moving average rate at 5.0 percent, up from 4.9 percent last time. Lending to the private sector was 1.0 percent firmer on the year, down from February but unchanged at a 0.9 percent rate after adjustment for sales and securitization. Similarly adjusted loans to households were 0.1 percentage points stronger at 1.6 percent (house purchases steady at 2.3 percent) while borrowing by non-financial corporations crept up to 1.1 percent from 1.0 percent. Lending to non-monetary financial corporations (excluding insurance corporations and insurance funds) improved from minus 1.3 percent to minus 1.2 percent.

April EU Commission's measure of economic sentiment (ESI) improved to 103.9 from the March reading of 103.0. The rise in the ESI reflected improving confidence in both the industrial and consumer sectors with the former up 0.5 points to a 3-month high of minus 3.7 and the latter 0.4 points firmer at minus 9.3, its first increase this year. Services (11.5 after 9.6) and construction (minus 19.4 after minus 20.5) also made useful headway but retail (1.3 after 1.6) declined to its weakest level since July 2015. Among the larger member states the national ESI was up a solid 4.4 points at a 4-month peak of 108.1 in Italy and by a more modest 0.4 points at 104.4 in Germany. However, Spain saw a 0.8 point drop to 106.1, its weakest reading in more than a year, and, after losing a full point, at 100.8 the French index slipped perilously close to its long-run average. Meanwhile, the closely watched gauges of inflation expectations were notably firmer.

The new preliminary flash estimate of first quarter gross domestic product was up 0.6 percent on the quarter. The result equaled the best performance since the first quarter of 2011 but only left the annual rate of expansion unchanged at 1.6 percent. The fourth quarter data were unrevised. Without any of the GDP expenditure components (not available in this release) it is difficult to determine how much of the first quarter bounce was attributable to domestic demand. Indeed, it may that inventories were an important factor. Note that this and future preliminary flash reports will only provide growth rates for the EMU and EU aggregates; Eurostat will publish data for the member states' in the 'final' flash estimate release due on May 13th. However, national statistics already available showed a 0.5 percent quarterly rise in French GDP and a 0.8 percent quarterly gain in Spain.

April flash harmonized index of consumer prices was down 0.2 percent from a year ago. Both core rates similarly declined a couple of ticks to 0.8 percent, wiping out the entire increase recorded March. However, the main area of weakness was services where inflation dropped from 1.4 percent to 1.0 percent. This all but reversed March's suspiciously sharp 0.5 percentage point acceleration and supports the view that the March/April reports were significantly influenced by the early timing of Easter. Elsewhere, prices in non-energy industrial goods were 0.5 percent firmer on the year, in line with March, while the food, alcohol & tobacco subsector was flat at 0.8 percent. Energy (minus 8.6 percent after minus 8.7 percent) provided a minimal boost.

Germany

April Ifo business survey found no improvement in sentiment with a reading of 106.6, slightly short of its March reading. The essentially stable headline outcome masked a modest deterioration in current conditions and a slight improvement in expectations. The former sub-index dipped 0.6 points to 113.2, its first decline since January but still its second highest reading since last November. By contrast, expectations rose 0.4 points to 100.4, their second successive increase but still well short of the levels seen over most of 2015. Morale was up 1.1 points at 6.5, a 3-month high, in manufacturing and gained 0.7 points to 0.2 in construction. However, wholesale saw a near-3 point decline to 10.6, its weakest reading since June 2015, and retail a 4.1 point drop to 6.7, although this was still more than 2 points above its February mark. The service sector survey revealed a 3.7 point rise to 27.8, its strongest level since the start of the year.

France

First quarter gross domestic product was up 0.5 percent on the quarter and up 1.3 percent from the same quarter a year ago. The headline data masked an even more robust gain in domestic demand. Household consumption jumped 1.2 percent on the quarter and business investment was up 2.1 percent. Public spending increased 0.4 percent leaving just residential investment, which contracted yet again (2.7 percent,) to undermine what was otherwise an impressive performance by the main components of domestic demand. In sum, final domestic demand added a very respectable 0.9 percentage points to the quarterly change in GDP. However, growth was held in check elsewhere, namely business inventories and net foreign trade, both of which subtracted 0.2 percentage points. Within the latter, exports slipped 0.2 percent from the fourth quarter while imports rose 0.5 percent.

United Kingdom

First quarter preliminary gross domestic product slowed to a quarterly 0.4 percent increase, down from an unrevised 0.6 percent increase in the October to December quarter. On the year, GDP was up 2.1 percent. No GDP expenditure components are available in the provisional data but the output statistics showed a 0.4 percent quarterly contraction in industrial production and declines of 0.9 percent in agriculture and 0.1 percent in construction. However, weakness here was more than offset by a 0.6 advance in services although even this was 0.2 percentage points below its fourth quarter pace. The quarterly increase in services was the result of a 1.3 percent rise in distribution, hotels & restaurants and a 1.0 percent increase in transport, storage & communication. Smaller gains were reported by business & finance (0.3 percent) and government & others services (0.5 percent).

Asia/Pacific

Japan

March unemployment rate was at a decades' low of 3.2 percent, down from 3.3 percent in February. Employment was up 200,000 from the same month a year ago after increasing 290,000 in February. The labour force participation rate was 59.2 percent, up 0.1 percent from a year ago. The employment rate was 57.2 percent, also up 0.1 percent from a year ago. The job-to-applicant ratio rose to 1.30 last month, the highest level since December 1991 and beating expectations it would hold steady at 1.28. That suggests there is a high level of job availability, which analysts think could push unemployment lower over coming months.

March inflation data mark the second full month of figures that could display any potential impact from the Bank of Japan's decision on January 29 to introduce negative interest rates. At present that move has done nothing to boost prices. The March CPI was down 0.1 percent on the year. Core CPI excluding fresh food was down 0.3 percent on the year. Core inflation is what the BoJ is trying to push toward its 2 percent price target. The so-called core-core reading strips out all food and energy prices. It rose 0.7 percent on the year, slipping a tenth of a percentage point from February's reading.

The average of monthly household consumption expenditures for March was down 5.3 percent from the previous year. Spending has now declined 12 of the last 15 months. Expenditures for food, fuel, light & water charges, medical care, transportation & communication, education, culture & recreation and other all declined. Only housing, furniture & household utensils and clothing & footwear managed to offset the losses. Combined with retail sales which were also released at the same time, the consumer sector continues to look gloomy.

March industrial production jumped 3.6 percent on the month after sinking 5.2 percent in February. The increase was the most in nearly five years. From a year ago, output was down 1.6 percent. The industries that mainly contributed to the increase were transport equipment, general purpose, production & business oriented machinery and fabricated metals. According to METI's survey of production forecast in manufacturing, production is expected to increase 2.6 percent in April and decrease 2.3 percent in May. However, the earthquake that struck the southern Japanese island of Kyushu in April is likely to weigh on industrial production, and more broadly upon GDP growth for the whole June quarter, particularly if any supply chain disruptions aren't mended quickly.

March retail sales were down 1.1 percent on the year -- the weakest reading since December. Among the categories that declined, fuel sank 15.0 percent, machinery & equipment declined 4.6 percent and motor vehicles were down 3.1 percent. General merchandise was down 1.0 percent. However, sales of fabrics, apparel & accessories and food & beverage were up 3.6 percent and 2.9 percent respectively.

Australia

March quarter consumer price index was down 0.2 percent on the quarter following an increase of 0.4 percent in the December quarter. On the year, the CPI was up 1.3 percent after increasing 1.7 percent in the previous quarter. The decline in the CPI this quarter was broad based, with six out of the 11 CPI groups recording a fall for the quarter. The trimmed mean CPI was up 0.2 percent and 1.7 percent on the year while the weighted median was up 0.1 percent and 1.4 percent. The most significant drop occurred in transport (down 2.5 percent), due to automotive fuel (down 10.0 percent) falling for the third consecutive quarter. Recreation & culture (down 1.0 percent) was the second most significant contributor, with drops in both international holiday travel & accommodation (down 2.0 percent) and domestic holiday travel & accommodation (down 1.9 percent). Food & non–alcoholic beverages (down 0.2 percent) and fruit (down 11.1 percent) providing the most significant contributions. The declines were partially offset by increases in secondary education (4.6 percent), medical & hospital services (1.6 percent) and pharmaceutical products (4.8 percent).

Americas

Canada

February monthly gross domestic product contracted a monthly 0.1 percent — the first since last September. Annual growth was 1.5 percent, unchanged from January. February's weakness was concentrated in goods producing industries where output declined 0.6 percent on the month. Manufacturing (minus 0.8 percent) was especially soft but so too were mining, quarrying, & oil & gas extraction (also minus 0.8 percent) and agriculture, forestry, fishing & hunting (minus 1.3 percent). Utilities dipped 0.2 percent and construction was just flat. Services were unchanged from January as a 1.4 percent gain in retail trade essentially offset a 1.8 percent drop in wholesale trade. Outside of accommodation & food (0.7 percent) most other subsectors showed relatively little movement.

Bottom line

Three central banks announced monetary policy during the week. The Federal Reserve maintained its fed funds target interest rate range at 0.25 percent to 0.50 percent. The Reserve Bank of New Zealand kept its official cash rate at 2.25 percent. The Bank of Japan kept its negative interest rate of minus 0.1 percent. Preliminary first quarter GDP was released for the U.S., UK, France and the Eurozone. Both the U.S. and the UK saw growth slow while France and the Eurozone saw a pickup in activity.

The Reserve Bank of Australia meets this coming week — no change in its 2 percent interest rate is anticipated. Both manufacturing and composite PMIs for April will be released. China will release its April merchandise trade data while Australia will posts March retail sales. The United States and Canada will report their April employment reports and March international trade data.

Looking Ahead: May 2 through May 6, 2016

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