Global Markets

Three central bank announcements down and four to go in the coming week. The Bank of Canada and the Reserve Banks of Australia and India left their policy interest rates unchanged at least until next year. Most equity indexes were positive despite a tough start to the week.

Bank of Canada

As widely expected, the Bank of Canada kept its policy interest rate unchanged for a second time at 1.0 percent following consecutive 25 basis point increases in July and September. The Bank took a markedly more cautious tone in its October announcement and since then has shown no sign of changing tack. The Bank Rate and deposit rates correspondingly remained at 1.25 percent and 0.75 percent respectively.

In the October Monetary Policy Report and in recent speeches policymakers have focused on a number of uncertainties that are clouding the outlook. The potential for a NAFTA break-up is the biggest. The BoC isn't assuming anything in terms of final results on this front, but they have reduced their estimate for business investment due to the uncertainty.

The BoC said that based on the outlook for inflation and the evolution of the risks and uncertainties identified in October's Monetary Policy Report, the Governing Council judged that the current stance of monetary policy remained appropriate. While higher interest rates will likely be required over time, the Governing Council said it will continue to be cautious, guided by incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity and the dynamics of both wage growth and inflation. The BoC noted that Canadian data are in line with expectations, which is for growth to moderate while remaining above potential in the second half of 2017.

Reserve Bank of Australia

The Reserve Bank of Australia once again left its main policy interest rate unchanged at 1.50 percent as expected. The rate has remained at this level since August 2016 when it was cut by 25 basis points. According to the statement accompanying the decision, the RBA again points to improving global conditions but notes that financial conditions have tightened in China.

In their opinion on the domestic outlook, policymakers said that the outlook for non-mining business investment has improved but noted that slow growth in household incomes and high levels of household debt are clouding the outlook for consumer spending. The Board forecast that the economy would grow by 2.5 percent in the year ending December 2017 and 3.25 percent in the year ending December 2018. GDP data for the three months to September published after the meeting estimated growth at 2.8 percent from a year ago.

Despite ongoing improvement in the labour market, the RBA expects wage growth to remain subdued. Reflecting this assessment, they forecast underlying inflation to remain below the target range of 2.0 percent to 3.0 percent throughout 2018, with headline CPI inflation expected to increase only slightly over the next 18 months. This suggests that the policy stability seen over the last year looks set to extend into the new year.

Reserve Bank of India

The Reserve Bank of India kept its repurchase rate at 6.00 percent where it has been since August. The reverse repurchase rate was also unchanged, at 5.75 percent. Five of six monetary policy committee members voted for the decision. The remaining member favored a 25 basis point cut.

The accompanying statement noted that economic growth in the most recent quarter was weaker than officials had expected at their October policy meeting, reflecting the impact of higher oil prices and lower output of some key agricultural products. The MPC said that credit growth had strengthened in recent months and pointed to positive sentiment in the services and infrastructure sectors. Reflecting these factors, the RBI has retained its forecast for India's economy to grow by 6.7 percent in the current fiscal year.

The statement said that recent inflation had been "broadly in line" with projections, and the outlook depended on several factors, including global oil prices, the strength of domestic agricultural output and the extent to which recent adjustments in sales tax rates for some products passes through to retail prices. The RBI previously forecast that inflation would be between 4.2 percent and 4.6 percent in the second half of the current fiscal year, but now has revised that range slightly higher to between 4.3 percent and 4.7 percent.

With officials relatively positive about the growth outlook and expecting inflation to pick up further in coming months, a majority of the MPC concluded that another rate cut was not warranted at present and that the policy stance should remain "neutral". This preference for policy stability will likely remain in place in coming months if headline inflation continues to rise as expected.

Global Stock Market Recap

Europe and the UK

After a choppy week with many ups and downs, equities advanced for the week. Traders were in an upbeat mood after the UK reached a divorce deal with the European Union, setting stage to move on to future trade talks as the negotiations proceed. The FTSE was up 1.3 percent, the CAC gained 1.5 percent, the DAX added 2.3 percent and the SMI was 0.5 percent higher.

The EU and UK settled on a compromise arrangement for the Irish border that will pave the way to move on to discussions on a key trade deal. This had become a major sticking point and one that was threatening to derail the entire negotiating process. No agreement here before the EU leaders' summit next week would have significantly increased the risk of a 'hard' Brexit and might even have brought down the UK government.

Friday's announcement only opens the door to the second phase of talks on what shape the UK's future relationship with the EU will take. The Irish question, Brexit bill and EU citizens' rights may have been sorted but there is a long way to go yet. And there still appears to be a wide chasm between the UK's desire for a bespoke trading arrangement and what the EU is prepared to offer. Any thoughts about enjoying all the benefits of being part of the single European market without actually being a member are a non-starter.

The pound initially rose against the US dollar but profit taking and remaining doubts on the end-game of Brexit dented sterling which slid in trading. A market analyst said "I think we've seen a classic case of the rumor being bought and the fact sold, with sterling having rallied early last week in anticipation of a deal being close".

Asia Pacific

Equities ended the week on a positive note Friday and changed several negatives into positive gains. End of week cheer came from a variety of factors — Chinese trade data beat expectations and the U.S. Congress passed a stopgap spending bill to keep the government funded for two more weeks until December 22. Also, media reports suggested that Britain and Ireland were close to a Brexit deal (while markets here were trading). Investors here monitored events in the U.S. closely and were relieved that Congress was able to postpone a possible government closure.

For the week, the All Ordinaries and Nikkei were virtually unchanged while the Hang Seng and Shanghai Composite were 1.5 percent and 0.8 percent lower respectively.

Chinese shares cut their losses and ended on a positive note Friday after data showed the country's exports grew at a faster-than-expected pace in November. Chinese exports advanced 12.3 percent on the year in U.S. dollar terms, while imports surged 17.7 percent from a year ago. In a report released Wednesday, the International Monetary Fund said that more capital is justified for the largest banks in China because of their systemic importance and interconnectedness. Increasing capital would enhance the resilience and credibility of the financial system, as well as reassure markets, it said.

The Nikkei rallied, cutting losses incurred earlier in the week when the second estimate of third quarter gross domestic product was revised upward to an annualized rate of 2.5 percent from the initial estimate of 1.4 percent. Japanese shares rallied on bargain hunting as Moody's retained the sovereign ratings of the country with a 'stable' outlook and the yen weakened against the dollar, bolstered by reports that the U.S. Congress was on track to approve legislation that would avert a partial government shutdown over the weekend.

Currencies

The U.S. dollar advanced against all of its major counterparts including the yen, euro, pound sterling, Swiss franc and the Canadian and Australian dollars. The U.S. currency was boosted by the passage of a tax reduction bill by the Senate which still needs to be reconciled with a bill passed earlier by the House of Representatives. Investors were also pleased that Congress postponed the budget deadline for another two weeks until December 22. If an agreement is not reached by then, the government could be partially shut down. The original deadline was December 8. The dollar rose against a trade-weighted basket of its rivals Friday as optimism grew that a U.S. tax bill will pass.

Sterling soared to a six-month high against the euro Friday, on relief that Britain and the European Union had managed to strike a deal to move on to talks about post-Brexit trade and a transition period. The European Commission said enough progress had been made after the two sides worked through the night to reach a deal over the status of the Irish border, which had scuppered an earlier attempt to clinch a deal on Monday. On a trade-weighted basis, the pound climbed to its strongest level since May. Against the Swiss franc, it has now recovered almost all the losses suffered since the vote for Brexit 18 months ago, trading at its strongest since June 24, 2016.

The Commission's recommendation that sufficient progress has been made will now go to the European Union summit of leaders taking place next week. Draft guidelines showed the transition period would last around two years. During that time, Britain will remain part of the customs union and single market but will no longer take part in EU institutions or have a vote. It will still be subject to EU law.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

Final third estimate of third quarter gross domestic product was up an unrevised 0.6 percent on the quarter and was up a marginally firmer revised 2.6 percent on the year. The quarterly rate was just 0.1 percentage points short of its second quarter rate but the latter was slightly stronger than its weaker adjusted second quarter print. The slip in the quarterly rate was largely due to household consumption which slowed from 0.5 percent to 0.3 percent. Fixed capital formation (1.1 percent after 2.2 percent) also weighed as did, to a lesser extent, government consumption (0.2 percent after 0.3 percent). Inventory accumulation added 0.1 percentage points to the quarterly change in GDP, matching its second quarter impact. External trade had no net effect as a 1.2 percent increase in exports (up from 1.0 percent) was effectively cancelled out by a 1.1 percent rise in imports (down from 1.7 percent). In the second quarter net exports subtracted 0.2 percentage points.

October volume retail sales excluding autos declined a monthly 1.1 percent — their worst performance since December 2013. September's gain was revised a little stronger to 0.8 percent but annual growth still slumped from 4.0 percent to just 0.4 percent. Weakness was particularly apparent in textiles, clothing & footwear where purchases were 3.1 percent lower than at quarter-end. Electrical goods & furniture (minus 0.3 percent) and pharmaceuticals (minus 0.7 percent) similarly struggled while auto fuel purchases were off 0.1 percent. Excluding auto fuel, non-food sales matched the monthly headline decline while food, drink & tobacco dropped a sharper 1.3 percent. Regionally, Germany posted a 1.2 percent monthly contraction. France was down 1.5 percent and Spain was down 1.1 percent. The majority of reporting countries recorded decreases.

Germany

October manufacturing orders were up a monthly 0.5 percent following a sharper revised 1.2 percent gain in September. Orders have now expanded in five of the last six months. Annual unadjusted growth declined from 9.7 percent to 6.8 percent but this was simply due to a particularly large monthly increase a year ago. The monthly gain reflected a 0.9 percent increase in capital goods and a 0.6 percent advance in consumer and durable goods that was only partially offset by a 0.4 percent drop in basics. The domestic market grew 0.4 percent, its third consecutive rise, while overseas demand was up 0.5 percent, its fourth straight increase.

October industrial output dropped 1.4 percent on the month — the sharpest contraction since December 2016. Although September's drop was reduced to 0.9 percent, output has now fallen in four of the last five months. Annual growth was 2.7 percent, down from 4.2 percent last time and its slowest pace since June. The headline data would have looked even worse but for energy where production expanded 5.1 percent from September. Manufacturing output dropped 2.0 percent led by hefty decreases in capital goods (2.7 percent) and consumer goods (2.6 percent). Intermediates (minus 1.0 percent) fared little better and rounding off a very poor month, there was also a sizeable decline in construction (1.3 percent).

United Kingdom

October industrial production was unchanged following an unrevised 0.7 percent monthly jump in September. Annual growth jumped from 2.5 percent to 3.6 percent but this simply reflected weakness in the year ago period. The manufacturing sector edged up 0.1 percent that lifted yearly growth from 2.7 percent to 3.9 percent. The minimal monthly advance was largely attributable to gains in food, drink and tobacco (1.1 percent), pharmaceuticals (2.7 percent) and transport equipment (2.8 percent) that were all but offset by declines in computer, electronic and optical products (3.4 percent), textiles and leather (minus 1.9 percent) and the other manufacturing and repair (minus 3.5 percent). Elsewhere, total industrial production was boosted by mining and quarrying (2.7 percent) and water supply (1.4 percent) but depressed by electricity and gas (minus 3.3 percent).

October global deficit on goods trade was Stg10.78 billion — up slightly from a smaller revised Stg11.45 billion in September but broadly in line with the recent trend. The minor headline deterioration reflected a 1.8 percent monthly rise in exports, their fourth straight gain that was more than offset by a 2.1 percent increase in imports. The underlying shortfall, which excludes oil and other erratic items, was essentially flat at Stg11.01 billion. In line with the overall deficit, the red ink here has been effectively trending sideways despite the post-Brexit referendum slide in the pound.

Asia/Pacific

Japan

Third quarter gross domestic product was revised upward to quarterly 0.6 percent growth from the initial estimate of 0.3 percent or at an annualized pace of 2.5 percent (initial estimate was 1.4 percent). Compared with the same quarter a year ago, GDP was up 2.1 percent, up from the preliminary 1.7 percent. The upward revision was mainly driven by stronger private non-residential investment, which is now estimated to have grown by 1.1 percent, up from the initial estimate of 0.2 percent. The contribution to growth from the change in private inventories was also revised up from zero to 0.2 percentage points, while public demand is now estimated to have made a slightly smaller negative contribution. The contribution of other expenditure components was largely unchanged, with the revised estimates continuing to show that household consumption was weak declining 0.5 percent on the quarter.

Australia

October merchandise trade surplus narrowed sharply from a revised A$1.604 billion in September to just A$105 million. This was the smallest trade surplus since April, with a drop in exports accompanied by stronger growth in imports. Seasonally adjusted value of exports fell 2.8 percent on the month. The decline reflected weaker exports of non-rural goods (around 60 percent of total exports), services (around 20 percent), and rural goods (around 15 percent), partly offset by an increase in exports of non-monetary gold. Seasonally adjusted imports were up a monthly 1.9 percent. Imports of consumption goods, intermediate and other merchandise goods, non-monetary gold, and services increased on the month, offset by a decline in imports of capital goods.

Third quarter gross domestic product was up a quarterly 0.6 percent in the three months to September, down from a revised increase of 0.9 percent in the three months to June. On the year, GDP was up 2.8 percent in the three months to September after increasing a revised 1.9 percent in the three months to June. Stronger business investment spending was the main component of GDP supporting quarterly growth. On a quarterly basis, household consumption was much weaker, up just 0.1 percent after an increase of 0.8 percent in the three months to June. This is the weakest quarterly growth in household consumption since 2005. Growth in business investment spending, however, rebounded sharply from a fall of 3.0 percent on the quarter in the three months to June to an increase of 8.6 percent in the three months to September.

October retail sales rose 0.5 percent on the month (seasonally adjusted) after a revised increase of 0.1 percent in September. On the year, retail sales increased 1.8 percent, picking up from 1.5 percent in September. Stronger headline retail sales reflected increases in all major categories, with sales of clothing, footwear & personal accessory retailing up 1.0 percent after declining by 0.7 percent in September. Cafes, restaurants and takeaway food services were up 1.7 percent after an increase of 0.7 percent previously. Food retailing, household goods retailing and department stores posted weaker but still positive monthly increases.

China

November merchandise trade surplus widened from $38.2 billion in October to $40.21 billion. Exports were up 12.3 percent from 6.9 percent in October on the year while imports increased to 17.7 percent from 17.2 percent. Exports grew at their fastest pace since March with this improvement reflecting stronger external demand in key markets. Exports to the United States grew by 14.3 percent on the year after an increase of 8.1 percent in October. Growth in exports to Japan picked up from 5.3 percent to 9.4 percent. Exports to the European Union strengthened from 11.2 percent on the year to 13.2 percent. In domestic currency terms, China's trade surplus widened from CNY254.57 billion in October to CNY263.6 billion in November. Exports grew 10.3 percent, up from 6.1 percent in October while imports slowed from 15.9 percent to 15.6 percent.

Americas

Canada

October merchandise trade deficit narrowed to C$1.5 billion from C$3.4 billion in September. Exports were up 2.7 percent on higher exports to the United States, while imports decreased 1.6 percent on lower imports of motor vehicles and parts. Total exports increased 2.7 percent following four consecutive monthly declines. Prices were up 1.5 percent and volumes increased 1.2 percent. Advances were observed in 9 of 11 sections, led by basic and industrial chemical, plastic and rubber products. There were also notable gains in metal and non-metallic mineral products; farm, fishing and intermediate food products and energy products. On the year, total exports were up 0.8 percent. Total imports were down 1.6 percent mainly due to a decrease in motor vehicles and parts. Other movements included a drop in metal ores and non-metallic minerals and an increase in aircraft and other transportation equipment and parts. Overall, import volumes decreased 3.9 percent while prices rose 2.4 percent. On the year, total imports rose 0.9 percent. Exports to the United States rose 4.1 percent while imports from the United States were down 0.6 percent.

Bottom line

The Bank of Canada and the Reserve Banks of Australia and India decided to leave their respective monetary policies unchanged. The UK and EU reached an agreement including the UK's financial contributions to the EU budget and citizens of the UK resident in the EU before the withdrawal date are guaranteed the right to stay. Economic data were mixed globally. Japan's third quarter GDP was upwardly revised from a quarterly gain of 0.3 percent to 0.6 percent.

Four central banks meet this coming week including the Federal Reserve, European Central Bank, the Bank of England and the Swiss National Bank. Only the Fed is expected to change its interest rate. Markets have virtually priced in a 25 basis point increase in the fed funds to 1.5 percent. The flash composite PMIs for December will be released. In Japan the fourth quarter Tankan survey will be monitored closely especially after the healthy revised GDP estimate. The UK will post November labour market report.

Looking Ahead: December 11 through December 15, 2017

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