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INTERNATIONAL PERSPECTIVE

The US dollar rides higher
International Perspective - October 21, 2016
By Anne D. Picker, Chief Economist

  

Global Markets

The dollar was higher, the euro lower as markets craved signs of more stimulus from the European Central Bank and didn't get it. Central banks continue to draw investor attention for their trading guide. Given that interest rate spreads between countries trigger investment in the currency markets, an anticipated increase in the Federal Reserve's fed funds rate is bound to send the U.S. dollar higher. Equity markets were mostly higher on the week even though economic data were mixed.

 

Both the European Central Bank and the Bank of Canada met during the week and kept their respective policies unchanged. Below is more detail of each.


 

European Central Bank

As expected, the ECB's October policy announcement contained no surprises for financial markets. Key interest rates were kept unchanged leaving the benchmark refi rate at zero percent and the rates on the deposit and lending facilities at minus 0.40 percent and 0.25 percent respectively. The asset purchase program (APP) was similarly maintained at an average of €80 billion per month through at least the end of March 2017 and until there is a sustained adjustment in the path of inflation consistent with its near-2 percent medium-term target.

 

ECB President Mario Draghi's press conference was largely a non-event. There was never any expectation of a move on rates — and getting a consensus would have been nigh on impossible anyway — but there were limited hopes that the President might drop some hints about an extension to the QE schedule. However, if, as seems very probable, the program will indeed run beyond next March, market notification will have to wait until at least the next and last meeting of the year (8th December).

 

Apparently the Governing Council did not consider the issue and neither did it discuss possible future tapering. Similarly, there was no fresh news on how the ECB will tackle the issue of potential supply shortages of eligible assets that the ECB can buy under the APP. The increase in bond yields reduced pressure for immediate action but some change to existing rules will be hard to avoid later on.

 

The central bank's view of recent economic developments would seem little changed from the last meeting. Third quarter real GDP growth is expected to have been much the same as the second quarter's modest 0.3 percent while an anticipated near-term acceleration in inflation is seen mainly reflecting positive base effects. As stated previously, the baseline scenario remains subject to downside risk.


 

Bank of Canada

As expected, the Bank of Canada (BoC) held its overnight rate at 0.50 percent where it has been since July 2015. The target for the deposit rate remained fixed at 0.25 percent and the Bank Rate at 0.75 percent. The BoC has been facing conflicting economic forces over the past year and has been unable to produce solid labour market gains.

 

In its statement, the BoC noted that growth is now lower than projected in July's Monetary Policy Report (MPR). The reason in large part is due to slower near-term housing resale activity and a lower trajectory for exports. The federal government's new measures to promote stability in Canada's housing market are expected to restrain residential investment while dampening household vulnerabilities going forward. Export data are improving but are not strong enough to make up for ground lost during the first half of 2016, despite the effects of the Canadian dollar's past depreciation. Growth in exports over 2017 and 2018 is projected to be slower than previously forecast, due to lower estimates of global demand, the composition of U.S. growth that appears less favorable to Canadian exports and ongoing competitive challenges for Canadian firms.

 

Regarding inflation, the BoC considers risks as roughly balanced. The CPI is tracking slightly below expectations because of temporary weakness in prices for gasoline, food and telecommunications. The Bank expects total CPI inflation to be close to the 2 percent midpoint of its inflation range of 1 percent to 3 percent from early 2017 onwards, when these temporary factors will have dissipated. But downward pressure on inflation will continue while economic slack persists.

 

October's Monetary Policy Report (MPR) reaffirmed a rebound in the third quarter after a weak first half of 2016. However, the BoC now projects growth at just 1.1 percent this year, down from its previous expectations of 1.3 percent, and 2 percent in 2017, and down from its earlier forecast of 2.2 percent. The reasons for the revision are due in large part to slower near-term housing resale activity and a lower trajectory for exports.


 

Global Stock Market Recap

  2015 2016 % Change
Index Dec 31 Oct 14 Oct 21 Week 2016
Asia/Pacific
Australia All Ordinaries 5344.6 5518.5 5513.85 -0.1% 3.2%
Japan Nikkei 225 19033.7 16856.4 17184.59 1.9% -9.7%
Topix 1547.30 1347.19 1365.29 1.3% -11.8%
Hong Kong Hang Seng 21914.4 23233.3 23374.40 0.6% 6.7%
S. Korea Kospi 1961.3 2022.7 2033.00 0.5% 3.7%
Singapore STI 2882.7 2815.2 2831.06 0.6% -1.8%
China Shanghai Composite 3539.2 3063.8 3090.94 0.9% -12.7%
India Sensex 30 26117.5 27673.6 28077.18 1.5% 7.5%
Indonesia Jakarta Composite 4593.0 5399.9 5409.24 0.2% 17.8%
Malaysia KLCI 1692.5 1659.0 1669.98 0.7% -1.3%
Philippines PSEi 6952.1 7389.3 7650.22 3.5% 10.0%
Taiwan Taiex 8338.1 9165.2 9306.57 1.5% 11.6%
Thailand SET 1288.0 1477.6 1500.37 1.5% 16.5%
Europe
UK FTSE 100 6242.3 7013.6 7020.47 0.1% 12.5%
France CAC 4637.1 4470.9 4536.07 1.5% -2.2%
Germany XETRA DAX 10743.0 10580.4 10710.73 1.2% -0.3%
Italy FTSE MIB 21418.4 16591.4 17166.76 3.5% -19.9%
Spain IBEX 35 9544.2 8767.9 9100.40 3.8% -4.6%
Sweden OMX Stockholm 30 1446.8 1446.0 1464.85 1.3% 1.2%
Switzerland SMI 8818.1 8089.9 8034.86 -0.7% -8.9%
North America
United States Dow 17425.0 18138.4 18145.71 0.0% 4.1%
NASDAQ 5007.4 5214.2 5257.40 0.8% 5.0%
S&P 500 2043.9 2133.0 2141.16 0.4% 4.8%
Canada S&P/TSX Comp. 13010.0 14585.0 14939.04 2.4% 14.8%
Mexico Bolsa 42977.5 47701.5 48418.400 1.5% 12.7%

 

Europe and the UK

Most equity indexes advanced on the week with the exception of the Swiss SMI, which lost 0.7 percent thanks to disappointing corporate earnings. The FTSE inched up 0.1 percent while the CAC and DAX added 1.5 percent and 1.2 percent respectively. The week was dominated by corporate earnings reports and Thursday's European Central Bank meeting.

 

Key economic data for the UK in the post-Brexit vote period continued to be in focus. September's UK consumer price index was up 1.0 percent — a two year high. And the ILO jobless rate for the three months to August remained at 4.9 percent. Average wages excluding bonuses also for the three months to August was up 2.3 percent on the year. However, September jobless claims increased by 700 while retail sales were flat.

 

ECB President Mario Draghi said in his press conference that it was unlikely that bond buying would end abruptly. He was trying to ease investors' concerns that monetary policies would be tightened too soon. However, he left questions unanswered about how the ECB will extend, adjust or wind down the program that is currently set to expire in March.

 

Longer term expectations for Eurozone inflation were broadly unchanged, while growth and unemployment projections were lowered in the quarterly ECB Survey of Professional Forecasters. Average longer-term inflation expectations for 2021 remained at 1.8 percent, unchanged from the previous survey.


 

Asia Pacific

Most Asian Pacific indexes advanced on the week. However, gains were muted on Friday when an earthquake in western Japan weighed on Tokyo equities and Hong Kong markets were shut due to a typhoon. Only the All Ordinaries inched 0.1 percent lower on the week. Gains ranged from 0.2 percent (Jakarta Composite) to 3.5 percent (PSEi). The Nikkei was up 1.9 percent while the Taiex and SET added 1.5 percent each. Investors were challenged by the climbing value of the U.S. dollar, the future path of crude oil prices and uncertainty regarding the European Central Bank's policies going forward.

 

The Shanghai Composite advanced 0.9 percent on the week while the Hang Seng added 0.6 percent. The yuan's weakness stoked fears of a renewed cash exodus, as was the case after Beijing depreciated the currency in August last year. Now however, China's housing market continues to sizzle, with home prices rising in 63 of 70 cities in September from the previous month. Average new home price increase accelerated to 1.8 percent in September from a 1.3 percent gain in August.

 

Key Chinese economic data were released on industrial production, retail sales and gross domestic product mid-week after the merchandise report indicated that the nation's exports unexpectedly dropped in September. Gross domestic product advanced 6.7 percent from a year ago for the third consecutive quarter. September retail sales were up 10.7 percent but industrial production slowed to an increase of 6.1 percent. And Australia's September employment report disappointed. Employment dropped 9,800 with full time employment sinking 53,000, the largest drop since 2011.


 

Currencies

The U.S. dollar advanced against the euro, Swiss franc and the Canadian and Australian dollars. However, it retreated against the yen and pound sterling. On Friday, the U.S. currency climbed to the highest against the euro since March and several Asian currencies including the Chinese yuan. This occurred after the European Central Bank said it could extend its current easing policies while analysts continued to believe that the Federal Reserve will raise its fed funds rate at its December FOMC meeting.


 

The Chinese yuan continued to slide against the U.S. currency. The Chinese currency has been depreciating at a faster pace since the end of the National Day holiday period in early October, spurring speculation that it could even hit 7 to the dollar.


 

Selected currencies — weekly results

2015 2016 % Change
Dec 31 Oct 14 Oct 21 Week 2016
U.S. $ per currency
Australia A$ 0.7288 0.761 0.760 -0.1% 4.3%
New Zealand NZ$ 0.6833 0.708 0.716 1.1% 4.8%
Canada C$ 0.7231 0.761 0.750 -1.4% 3.8%
Eurozone euro (€) 1.0871 1.098 1.088 -0.9% 0.1%
UK pound sterling (£) 1.4742 1.218 1.222 0.4% -17.1%
Currency per U.S. $
China yuan 6.4937 6.728 6.767 -0.6% -4.0%
Hong Kong HK$* 7.7501 7.759 7.759 0.0% -0.1%
India rupee 66.1537 66.715 66.890 -0.3% -1.1%
Japan yen 120.2068 104.250 103.810 0.4% 15.8%
Malaysia ringgit 4.2943 4.195 4.179 0.4% 2.8%
Singapore Singapore $ 1.4179 1.391 1.394 -0.3% 1.7%
South Korea won 1175.0600 1132.320 1134.830 -0.2% 3.5%
Taiwan Taiwan $ 32.8620 31.669 31.670 0.0% 3.8%
Thailand baht 36.0100 35.350 35.115 0.7% 2.5%
Switzerland Swiss franc 1.0014 0.9903 0.9937 -0.3% 0.8%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard


 

United Kingdom

September consumer prices were up 0.2 percent on the month. With base effects quite strongly positive, annual inflation climbed from 0.6 percent to 1.0 percent, its highest reading since November 2014 but remained below its 2 percent medium-term target. The increase in the headline yearly rate was partially matched by the core for which a monthly rise of also 0.2 percent was enough to raise its yearly rate to 1.5 percent, its strongest mark since August 2014. The main upward pressure came from clothing & footwear as prices here jumped a largely seasonal 6.0 percent from August compared with a 3.3 percent gain in September 2015. Other positive effects were made by restaurants & hotels (0.7 percent after 0.2 percent), miscellaneous goods & services (0.5 percent after 0.0 percent) and housing & utilities (0.1 percent after minus 0.2 percent). The only significant negative impact was made by food (minus 0.3 percent after 0.1 percent).


 

September retail sales were unchanged on the month and up 4.1 percent from a year ago. Excluding auto fuel, sales were also flat on the month and 4.0 percent above their level a year ago. September's headline stagnation masked a 0.2 percent monthly decline in ex-auto fuel non-food demand, its second consecutive drop albeit after a 3.6 percent leap in July. Within this, weakness was most apparent in clothing & footwear (minus 2.8 percent) where unseasonably warm weather probably had a detrimental impact. The other stores category (minus 0.7 percent) also had a poor month but there were decent performances by household goods (3.7 percent) and non-store retailing. Foods sales were off 0.2 percent while auto fuel was flat.


 

Asia/Pacific

Australia

September employment was down 9,800 while the unemployment rate slipped to 5.6 percent from 5.7 percent in August. However, this largely reflected a drop in the labour force participation rate from 64.7 to 64.5. Full time jobs dropped 53,000 — the largest monthly decline since April 2011. This was offset by an increase of 43,200 part-time jobs, partly unwinding a drop of 18,600 part-time jobs in August. Total hours worked rose by 0.2 percent in September, after falling by 0.2 percent in August. Since the start of this year, the number of part-time jobs has increased by around 163,000 but the number of full-time jobs has fallen by around 112,000. The number of unemployed persons fell by around 12,500 in September, reflecting around 5,000 fewer unemployed persons looking for part-time work and around 7,500 fewer unemployed persons looking for full-time work. This drop in the unemployment rate, however, largely reflects a lower participation rate.


 

China

Gross domestic product was up 6.7 percent from a year ago in the July through September quarter. This was the third consecutive quarter that GDP increased by 6.7 percent. GDP growth was also steady at 1.8 percent on a seasonally adjusted basis compared with 1.9 percent in the three months to June (revised from 1.8 percent). Quarterly growth has been between 1.5 percent and 2.0 percent since mid-2013, reflecting government efforts to target moderate declines in annual growth.


 

September industrial production was up 6.1 percent from a year ago after increasing 6.3 percent in August. Total industrial production rose 0.47 percent on the month after increasing 0.53 percent in August. The decline in output reflects somewhat weaker growth in manufacturing production, down from 6.8 percent to 6.5 percent, offsetting stronger growth in mining and utilities output. Auto production growth accelerated from 24.7 percent to 31.5 percent, with cement, steel products & chemicals also recording stronger output growth. This was partly offset by weaker growth in the production of coal, electricity, textiles and communication equipment.


 

Americas

Canada

August manufacturing sales increased a much greater than expected 0.9 percent on the month. The increase reflected higher food, primary metal and petroleum & coal products sales. Sales were up in 15 of 21 industries, representing 69 percent of the total Canadian manufacturing sector. In volume terms, sales jumped 1.2 percent. However, compared with last year, sales were down 1.0 percent although the pace of contraction moderated from July, when sales fell 2.7 percent on the year. Food industry sales rose for the second consecutive month, up 1.7 percent with widespread gains posted in eight of nine food industries. Primary metal industry sales advanced 3.6 percent, the second consecutive monthly gain. However, transportation equipment industry sales were down 1.1 percent. The decrease was mostly due to lower sales in the motor vehicle industry (-2.2 percent), which coincided with unusual one-week shutdowns in August at some Canadian automobile assembly plants (these shutdowns, which typically last two weeks, are more customary in July).


 

August retail sales disappointed and edged 0.1 percent lower on the month. Lower sales at motor vehicle & parts dealers, and general merchandise stores were the main contributors to the decline. Excluding these two subsectors, retail sales were up 0.2 percent. On the year, retail sales were up 1.6 percent after increasing 2.1 percent last time. Sales were down in 7 of 11 subsectors, representing 57 percent of retail trade. Sales volumes were down 0.3 percent on the month. Sales at motor vehicle & parts dealers were down 0.5 percent in August, in large part because of weaker sales at new car dealers and, to a much lesser extent, used car dealers. General merchandise stores (down 0.9 percent) recorded their third decline in four months. After increasing 1.5 percent in July, sales at building material & garden equipment & supplies dealers were down 0.5 percent in August. Clothing & clothing accessories stores posted a 0.5 percent sales decline. Following relatively flat sales in July, sales at food and beverage stores edged up 0.2 percent in August.


 

September's consumer price index was up 0.1 percent on the month and 1.3 percent from the same month a year ago. Excluding just gasoline, the CPI was up 1.5 percent on the year after posting a 1.7 percent increase in August. Prices were up in all eight major components in the 12 months to September, with the shelter and transportation indexes contributing the most to the annual rise while the food index posted its smallest year-over-year gain since February 2000. The Bank of Canada's core CPI which excludes eight volatile items was up 0.2 percent and 1.8 percent on the year. On a seasonally adjusted monthly basis, the CPI increased 0.2 percent in September, after declining 0.1 percent in August. Four major components increased on a seasonally adjusted monthly basis, while three declined. The shelter index was unchanged. On a monthly basis, recreation, education & reading (0.4 percent) recorded the largest gain in September, while the food index (down 0.4 percent) posted the largest decline.


 

Bottom line

The Bank of Canada and the European Central Bank both kept their respective monetary policies unchanged. Globally economic data continued to be mixed.

 

There are no major central bank meetings this week. Rather investors will get first estimates of third quarter gross domestic product from the UK, U.S., France and Spain. First estimates of how manufacturing fared in October will be reported in the flash PMIs for Japan, the Eurozone, Germany, France and the U.S.


 

Looking Ahead: October 24 through October 28, 2016

The following indicators will be released this week...
Europe
October 24 Eurozone Manufacturing, Services & Composite PMI (October flash)
Germany Manufacturing, Services & Composite PMI (October flash)
France Manufacturing, Services & Composite PMI (October flash)
October 25 Germany Ifo Business Survey (October)
October 27 Eurozone M3 Money Supply (September)
UK Gross Domestic Product (Q3.2016 preliminary)
October 28 Eurozone EC Consumer & Business Sentiment (October)
France Gross Domestic Product (Q3.2016 flash)
Consumption of Manufactured Goods (September)
Spain Gross Domestic Product (Q3.2016 preliminary)
Asia/Pacific
October 24 Japan Merchandise Trade Balance (September)
Manufacturing PMI (October flash)
October 26 Australia Consumer Price Index (Q3.2016)
October 28 Japan Consumer Price Index (September)
Unemployment Rate (September)
Household Spending (September)
Australia Producer Price Index (Q3.2016)

 

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


 

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