Global Markets

Despite the ongoing tussles over trade relations with China and Canada, global equity indexes mostly climbed for the week and U.S. equities vaulted to new levels. At this writing, tariffs will be activated by both China and the U.S. on Monday, September 24. The NAFTA negotiations between Canada and the U.S. are currently at a standstill. Both the Swiss National Bank and the Bank of Japan kept their respective monetary policies unchanged.

Bank of Japan and other news

As totally anticipated, the Bank of Japan maintained its interest rate at minus 0.1 percent at its latest monetary policy board meeting. BoJ Governor Haruhiko Kuroda stressed that he won’t pull the plug on monetary easing until inflation hits the BoJ’s 2 percent target, warning that escalating international trade disputes could inflict widespread damage to global growth.

However, Kuroda said no central bank wants to continue with unconventional monetary easing forever. He said that if the BoJ’s 2 percent inflation target is achieved, there will be no need to continue with massive monetary easing. But that doesn’t mean the bank should not continue monetary easing now. “No central bank wants to tighten or ease policy indefinitely. Any central bank obviously would want to achieve its target as soon as possible and normalize policy.” The remarks underscore the dilemma the bank faces as risks to the export-reliant economy and soft inflation force it to maintain a radical stimulus despite the rising cost of prolonged easing. But Kuroda warned against complacency, saying that complex global supply chains mean tit-for-tat tariff retaliations could have unintended consequences beyond U.S.-Chinese trade.

Years of ultra-low rates have dried up bond market liquidity and strained bank profits, inflaming concerns even within the BoJ over the rising cost of its stimulus program. Responding to such concerns, the BoJ took steps in July to make its policy framework more sustainable such as allowing bond yields to move more flexibly around its zero percent target.

Prime ministers in Japan used to turnover quickly, but Shinzo Abe has been in office for longer than the previous five combined. This week he easily won a third consecutive term as head of the ruling Liberal Democratic Party (LDP). Given the LDP’s landslide victory in last year’s parliamentary election, Mr Abe is now secure in office until 2021.

If he completes his new term, he would be the longest serving prime minister since the job was created in 1885. Under him, the LDP has convincingly won three elections for the lower house of Parliament (or Diet) and two for the upper house. With his coalition partners, he commands more than two-thirds of the Diet. Perhaps most impressively, he has quelled the factionalism that used to plague his party. Despite various scandals, he is firmly in charge, as he showed by engineering a change in party rules to allow himself to have a third term.

Global Stock Market Recap

Europe and the UK

European equities gained for the week, shrugging off concerns over global trade ahead of the new tariffs that will go into effect between the U.S. and China September 24. Energy stocks benefited from the rise in crude oil prices at the end of the week and bank stocks added to their recent strength. On the week, the FTSE and DAX both advanced 2.5 percent, the CAC was up 2.6 percent and the SMI edged up 0.3 percent. The FTSE rallied as the pound sterling tumbled as developments on Brexit sank the currency and supported the index whose constituents mainly earn outside the UK. The pound tumbled against the dollar after Prime Minister Theresa May said Brexit talks with the European Union had reached an impasse and called for new proposals.

Swiss National Bank

As widely expected, the SNB's latest quarterly Monetary Policy Assessment (MPA) produced no changes in the central bank's stance. In particular, the target corridor for 3-month CHF Libor remains pegged at minus 1.25 percent to minus 0.25 percent while the key deposit rate stays at minus 0.75 percent. In addition, the central bank once again re-emphasized its willingness to intervene in the FX markets as and when necessary to prevent any unwanted appreciation in the Swiss franc. It still regards the currency as ‘highly valued'.

The new economic forecasts are relatively upbeat and, in themselves, would probably see the SNB leaning in the direction of raising rates were it not for the buoyancy of the Swiss franc. Following a surprisingly strong first half, expected real GDP growth this year has been revised up to 2.5 to 3.0 percent although some slowing is anticipated through year-end. However, inflation has been trimmed due to currency strength and is now put at 1.5 percent by the end of 2020, some 0.5 percentage points short of the June projection. The 2 percent mark is now not reached until the second quarter of 2021.

The SNB noted that to date, the crises of confidence in Turkey and Argentina have not materially affected the global economic outlook but still saw risks to the baseline scenario on the downside. Political uncertainties in some countries as well as potential international tensions and protectionist tendencies were singled out for special mention.

Asia Pacific

Most Asia/Pacific equity indexes advanced last week. The Sensex tumbled 3.3 percent and the PSEi lost 0.4 percent. India’s stock market fell sharply, weighed down by the financial sector shares. Japanese equities hit their highest since May at week’s end, spurred by a record close in the U.S. overnight.

The reason equities reversed direction and advanced was a change in perspective of the trade situation by investors — investors changed their view that the U.S.-China trade row would be less harmful to global growth than first feared. Chinese stocks posted strong gains as investors continued to bet that Beijing would increase economic stimulus to boost the economy in the face of the trade war. Chinese shares, which had been hit the hardest by the trade war, rallied. The Shanghai Composite jumped 4.3 percent on the week while the Hang Seng was 2.45 percent higher.

China unveiled a series of steps to support the economy this week, starting with accelerating infrastructure spending. There were guidelines to boost consumption, announced both by the Communist Party and the government. And there is talk of cuts in import tariffs. Despite growing anecdotal reports from companies on both sides of the Pacific that the trade war is starting to impact their operations, the outlook for corporate profits remained solid in many markets on the back of strong global growth, keeping equity valuations relatively attractive.

Japan

The Nikkei and Topix expanded 3.4 percent and 4.4 percent on the week respectively thanks to an extended rally in financial shares that was largely offset by profit taking after several days of big gains for the broader market. The stock market barely blinked after a well-anticipated win by Japanese Prime Minister Shinzo Abe in a ruling party leadership vote.

The Nikkei rose to an eight-month high after the latest volley in the U.S.-China trade war — tensions increased less than expected. The broad rally appeared fueled by reaction to Washington's announcement on Monday local time that the newest tariffs on Chinese imports initially will be limited to 10 percent, rather than the 25 percent threatened by President Donald Trump. Chinese Premier Li Keqiang's assertion Wednesday that Beijing will not devalue the yuan to boost exports seemingly provided further reassurance.

Currencies

Currencies took the brunt of the uncertainty surrounding tariffs and Brexit. The U.S. dollar tumbled as did the pound sterling — but for different reasons. The U.S. currency has been weakening since mid-August following a sustained rally over the summer. Some forex traders cited optimism about global growth and a calm view about U.S. and China trade tensions. The pound sterling gyrated as the events unfolded in the Brexit negotiations. On the week, the dollar was down against all of its major counterparts including the euro, pound sterling, Swiss franc and Canadian and Australian dollars. However, it advanced against the yen.

India’s currency and stock markets are both dropping, piling further pressure on Prime Minister Narendra Modi’s government, which has promised a range of measures to halt the rapid depreciation of the rupee. New Delhi is due to announce a series of import restrictions, which ministers hope will help prop up the country’s currency and close the widening current account deficit. But the move is likely to exacerbate tensions with some of India’s closest allies, including the U.S., which has long expressed concern over some of the country’s protectionist trade policies.

The rupee has dropped sharply this year, losing about 12 percent against the dollar, in part because of economic problems in countries such as Turkey and Argentina, but also because sluggish exports and high imports have driven up the country’s current account deficit. India announced this month that the deficit had widened to $15.8 billion, or 2.4 percent of gross domestic product, during the April to June quarter. This has caused a big headache for Mr Modi, who argued while in opposition that the strength of the rupee reflected the strength of its leadership.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

September flash composite output index reading was 54.2, down 0.3 points from its final reading in August and, with the exception of May, its lowest reading since November 2016. Weakness was particularly apparent in manufacturing where the flash PMI dropped 1.3 points from its final August mark to 53.3, a 2-year trough. By contrast, services had a somewhat better month with its flash index rising 0.3 points to 54.7, a 3-month high. News orders followed a similar pattern with a slowdown in manufacturing vying with a solid performance in services to leave aggregate growth at its joint worst rate since October 2016. Significantly, within manufacturing, export orders failed to rise for the first time since February 2015. Overall backlogs saw a modest increase thanks to services as manufacturers recorded their first outright fall in some forty-one months. Employment also continued to expand but another healthy gain in services masked the smallest advance in goods producers in nineteen months. Against this backdrop, private sector business optimism edged a little firmer but still posted its second gloomiest reading in two years (in manufacturing, almost four years). Input cost inflation climbed a little higher as stronger gains in services offset a slowdown in manufacturing. This pattern was reversed in output prices which, in the aggregate, saw another marked increase. Among the core countries, the composite output index fell 1.3 points to 53.6 in France and was 0.3 points lower at 55.3 in Germany. Elsewhere in the region, growth improved just marginally from August's 22-month low and made for the weakest quarter for two years. The U.S. composite reading for comparison was 53.4.

United Kingdom

August consumer prices were up 0.7 percent on the month and the steepest since April 2011. It was firm enough to lift the annual inflation rate by 0.2 percentage points to 2.7 percent. This was its second successive acceleration and equaled the highest post since January. The main contribution to the monthly change in yearly inflation came from recreation and culture where a 0.6 percent monthly rise was well above the 0.1 percent increase seen in 2017. This alone added 0.06 percentage points. Elsewhere, transport added 0.05 percentage points and clothing and footwear 0.04 percentage points. Partial offsets were provided by communication (minus 0.03 percentage points) and furniture and household goods (also minus 0.03 percentage points). As a result, the core CPI was up 0.8 percent on the month which raised its annual rate from 1.9 percent to 2.1 percent, a 3-month peak.

August retail sales volumes were up 0.3 percent on the month after July’s upwardly revised gain of 0.9 percent. However, annual growth slipped from 3.8 percent to 3.3 percent but this just reflected a particularly robust period a year ago. Excluding auto fuel, sales were also up 0.3 percent from July and were 3.5 percent above their level in August 2017. The headline data would have been stronger still but for a 0.6 percent monthly drop in purchases of food. Excluding auto fuel, non-food demand climbed an impressive 1.2 percent, compounding July's 0.7 percent gain. This was the fourth significant increase in the last five months. Household goods (4.5 percent) saw their steepest rise since May 2016 and the other stores category (2.8 percent) also had another very good month. Non-store retailing (0.3 percent) and non-specialized stores (0.1 percent) edged firmer while auto fuel was flat.

Asia/Pacific

Japan

August merchandise trade deficit widened from ¥232 billion in July to ¥445 billion. Exports were up 6.6 percent on the year after increasing only 3.9 percent in July. Imports increased from 14.6 percent to 15.4 percent. The increased exports were largely driven by a strong rebound in demand from the United States, with exports there up 5.3 percent on the year after falling 5.2 percent previously. Exports to the European Union also strengthened, up 7.1 percent on the year after increasing 6.4 percent previously. Regional demand was mixed but slightly weaker on aggregate, with stronger growth in exports to China and Taiwan outweighed by weaker growth in exports to Hong Kong and Korea. After two months of annual declines in both the volume and value of Japan's auto exports, their volume rose 2.4 percent and their values rose 5.3 percent on the year. Stronger headline import growth partly reflected a rebound in the volume of petroleum imports, up 1 percent on the year after falling 10.2 percent previously. Imports of raw materials, machinery and transport equipment also made a larger contribution to headline growth in August, offset by weaker contributions from imports of manufactured goods, chemicals and electrical machinery.

New Zealand

In the three months to June, gross domestic product advanced 1.0 percent on the quarter after increasing 0.5 percent in the three months to March. On the year, GDP was up 2.8 percent after increasing 2.7 percent in the previous quarter. Stronger headline GDP growth was largely driven by the agriculture, forestry and fishing sector, up 4.1 percent on the quarter after growth of 1.0 percent in the previous quarter. Activity also strengthened in the services sector, up 1.0 percent on the quarter after increasing 0.6 percent previously, with wholesale trade, retail trade and accommodation and transport, postal and warehousing also contributing to headline growth. An unplanned shutdown of a major natural gas facility resulted in a large fall in mining output, down 19.9 percent on the quarter after a drop of 1.4 percent previously, while this shutdown, as well as scheduled maintenance of a major refinery, also contributed to weaker growth in manufacturing output, up 0.4 percent on the quarter compared with 0.4 percent previously. In expenditure terms, GDP rose 1.2 percent in the three months to June, up from 0.4 percent in the three months to March. Household consumption rebounded strongly with an increase of 1.0 percent after zero growth in the three months to March. Government spending also strengthened, up 2.2 percent after a previous increase of 0.8 percent. Higher growth in imports was outweighed by a bigger increase in exports resulting in a solid positive contribution to growth from net exports. Business investment, however, was weaker, slipping 0.1 percent on the quarter after increasing 0.4 percent previously.

Americas

Canada

July manufacturing sales were up a monthly 0.9 percent thanks to higher sales in the transportation equipment and chemical industries. Sales were up in 11 of 21 industries, representing 68 percent of total manufacturing sales. Non-durable goods rose 1.4 percent while durable goods increased 0.5 percent. Constant dollar sales increased 1.0 percent, indicating that a higher volume of goods was sold in July. On the year, sales were up 10.5 percent. The transportation equipment industry accounted for more than half of the total increase. Chemical industry sales rebounded 4.6 percent following a 5.4 percent decline in June. Petroleum and coal product industry sales were up 2.4 percent. With the increase in July, sales were at their highest level since October 2014 and reflected higher production in most refineries. In constant dollars, sales were up 1.5 percent in July. These increases were partially offset by declines in the aerospace product and parts, furniture and related products and fabricated metal product industries. Unfilled orders were unchanged in July, following five consecutive monthly gains. New orders decreased for a second consecutive month, down 1.8 percent in July. The decline mostly reflected lower new orders in the aerospace product and parts industry and in the machinery industry.

July retail sales were up a less than anticipated 0.3 percent and were up 3.7 percent from a year ago. Excluding the lower sales at motor vehicle and parts dealers, retail sales increased 0.9 percent. Sales were up in 8 of 11 subsectors, representing 54.8 percent of total retail sales. After removing the effects of price changes, retail sales in volume terms decreased 0.1 percent. Sales at food and beverage stores rose 1.3 percent. The gain was led by higher receipts at supermarkets and other grocery stores. Sales at beer, wine and liquor stores and convenience stores increased for the fifth consecutive month. Sales at gasoline stations rose 1.9 percent, largely stemming from higher prices at the pump as sales in volume terms were relatively unchanged in July. Electronics and appliance stores increased for the fourth consecutive month. Motor vehicle and parts dealers declined for the second month in a row. Lower sales at new car dealers contributed to the decline while all other store types within this subsector reported gains. Retail sales increased in eight provinces in July.

Bottom line

Most equities indexes advanced during the week as concerns regarding looming tariffs calmed. The British pound sterling gyrated as investors responded to the turmoil in the Brexit negotiations. Both the Bank of Japan and Swiss National Bank maintained their monetary policies.

The big event in the coming week is the FOMC meeting along with the Fed’s updated forecasts and the chair’s quarterly press conference. The Reserve Bank of New Zealand also meets. The UK posts its final estimate of second quarter gross domestic product. The Eurozone releases the September flash harmonized index of consumer prices and EC consumer and business sentiment. Canada releases its monthly GDP data for July.

Looking Ahead: September 24 through September 28, 2018

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