Global Markets

It was a busy week for central bank watchers with many banks offering markets policy statements. For the most part, there were no changes in policy (exceptions were the Norge Bank and Bank Indonesia) but there was a good deal of rhetoric from them. The soothing commentary from the many central banks combined with a 2016 high for oil to boost investors' confidence and send many equity indexes to a fifth week of gains.

There was more encouragement for investors after oil prices hit their highest levels of the year. Hopes are that low global interest rates will feed demand and that major producers may strike a deal to freeze output next month. The combination of subdued global interest rates and higher oil and commodity prices is an ideal recipe for emerging markets which are still trying to recover from a brutal 2015.

Below is a summary of the major central bank announcements from last week.

Federal Reserve

The FOMC kept its fed funds rate range at 0.25 percent to 0.50 percent at its meeting Wednesday. The FOMC signaled that it plans to resume increasing the fed funds rate in the coming months but forecast that there will only be two more increases in 2016. The Fed said the domestic economy seemed little harmed by the recent turmoil in financial markets. But the volatility has forced the Fed to delay higher rates. Most Fed officials now expect to raise the benchmark rate by half a percentage point this year. There was one dissent — Esther L. George, president of the Federal Reserve Bank of Kansas City who voted to raise rates by 25 basis points.

The FOMC acknowledged "inflation picked up in recent months" but included the caveat that "it continued to run below the Committee's 2.0 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports."

At her press conference, Fed Chair Janet Yellen noted that the Federal Reserve's ability to raise U.S. interest rates isn't constrained by recent moves from the European Central Bank and Bank of Japan to add even more stimulus. Ms Yellen said that although respective monetary policies have spillover effects including on exchange rates, that doesn't prevent central banks from pursuing divergent courses.

Bank of Japan

As expected the Bank of Japan kept the target for increasing the monetary base unchanged and left Its benchmark interest rate at minus 0.1 percent. The central bank said it will add easing if necessary. The language in its statement Tuesday indicated a downgrade in its assessment of the economy. With the BoJ far from its 2 percent inflation goal and growth stalling, most analysts expect that additional stimulus will be forthcoming in just a matter of time. The stakes are rising for the BoJ with both household and corporate sentiment waning and investors questioning whether monetary policy is reaching its limits.

Since the BoJ's last meeting on January 29, economic data have shown little momentum for a recovery from the fourth quarter contraction in gross domestic product. The BoJ's key consumer-price measure did not budge in January, and sentiment among consumers and merchants has slumped. The BoJ conceded in its statement that exports and production have been sluggish, while maintaining its view that there has been improvement in employment and income conditions. It noted that inflation expectations have weakened recently.

Bank of England

The Bank of England's monetary policy committee unanimously left its interest rate at 0.5 percent and its asset purchase ceiling at £375 billion. The MPC said sterling had been dealt a big hit by uncertainty in the run-up to the referendum on EU membership and that growth could slow. The BoE said the upcoming vote on June 23 could delay some spending decisions, though it said recent indicators suggested growth would keep the same momentum this quarter as it had at the end of last year. The BoE reiterated that interest rates are more likely to rise than not over the next two years and that when they do, the rise will be gradual given likely headwinds. After a rapid recovery in recent years, British growth slowed in the second half of last year and recent surveys are showing it had a rocky start to 2016.

Swiss National Bank

As widely expected the SNB's latest quarterly Monetary Policy Assessment produced no changes to key interest rates. The target corridor for 3-month CHF Libor remains at minus 1.25 percent to minus 0.25 percent and the deposit rate on sight deposits at the central bank stays at minus 0.75. The SNB again reiterated its unhappiness with the strength of the Swiss franc and indicated that it will continue to intervene in the FX markets as necessary to prevent renewed appreciation of the unit.

The economic recovery at home has been downgraded and growth in 2016 is now put at 1.0 percent to 1.5 percent (previously 1.5 percent). The SNB acknowledged that an uneven upswing to date along with low confidence levels and strong pressure on profit margins in particular are hampering investment. Unemployment has also shown some signs of turning up again in recent months. Largely due to a weakening international economy, the forecast for domestic inflation has been revised down again. From a first quarter average of minus 1.0 percent, the annual change in the CPI is expected to rise to minus 0.4 percent by year-end. The CPI forecast does not move back into positive territory until the third quarter of 2017, two quarters later than previously expected, and is still only seen at 1.2 percent by the end of 2018.

Global Stock Market Recap

Europe and the UK

Most European equity indexes were down on the week with only the FTSE (up 0.8 percent) and the DAX (up 1.2 percent) advancing. The CAC and SMI lost 0.7 percent and 2.3 percent respectively.

According to ECB executive board member and chief economist Peter Praet, the ECB can reduce its deposit rate further into negative territory if new shocks emerge to threaten inflation and growth. Praet said, "As other central banks have demonstrated, we have not reached the physical lower bound." He added, "If new negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armory."

The labour market report continues to be a bright spot for the UK with unemployment continuing to decline and average weekly earnings (excluding bonuses) increasing. In the Eurozone, industrial production advanced along with employment. However, the merchandise trade surplus narrowed with both exports and imports declining. The harmonized index of consumer prices slid into negative territory for the first time in five months.

The Norge Bank — Norway's central bank — cut its benchmark interest rate to a record low and signaled that it is prepared to ease policy further to ward off a recession in western Europe's biggest crude oil producer. The overnight deposit rate was lowered by 25 basis points to 0.50 percent as expected. The bank predicted that its rate will bottom at 0.2 percent in the first quarter next year. Norges Bank has been cutting rates since December 2014 to avoid a recession in the oil-reliant economy. Record easing from the European Central Bank and in neighboring Sweden has added pressure on Norway to keep its currency the krone weak.

Asia Pacific

Equities mostly advanced last week with gains ranging from 0.3 percent (All Ordinaries) to 5.2 percent (Shanghai Composite). The Nikkei retreated 1.3 percent thanks mostly to the rising value of the yen. Big gains in commodity prices amid dollar weakness, positive Chinese home price data and a surge in regional currencies on expectations that the U.S. Federal Reserve will not raise interest rates as quickly as expected helped underpin risk appetite.

The dollar's weakness helped ease worries surrounding capital outflows from the country. The yen briefly rose to the upper 110 yen range, spurring speculation that the Bank of Japan is checking exchange rates with banks, a move seen by traders as a prelude to market intervention.

One bright spot this year for Asian stocks is Southeast Asia. One of the region's top-performing benchmarks, the Philippines' PSEi, is in a bull market. Stock markets in Indonesia, Singapore and Malaysia are also up so far this year. That compares to the larger markets in Japan, China and Hong Kong which are all down year to date.

China's Premier Li Keqiang said that it is "impossible" for China not to realize its economic targets. On a long anticipated trading link between the Shenzhen and Hong Kong stock markets, Mr. Li confirmed that China would launch such a channel this year, without giving a specific time. He spoke at the end of the country's annual legislative sessions, which kicked off earlier this month in Beijing. During the National People's Congress, buying by state-backed funds helped certain Chinese blue chips rally on occasion, according to analysts.

Currencies

The U.S. dollar retreated against all of its major counterparts last week. The declines followed the FOMC announcement Wednesday afternoon. In that announcement, the dot plots indicated that the Fed would possibly increase the fed funds rate two times in 2016 instead of the expected four. The dollar plummeted on the news.

Asian currencies surged against the U.S. dollar after the Federal Reserve lowered its forecasts for the expected pace of future interest rate increases, underscoring the difficulty faced by regional central bankers as they try to stimulate higher growth from export driven economies. The Japanese yen jumped to its highest level since the Bank of Japan shocked markets with hugely expanded stimulus measures in October 2014. The yen continued to strengthen this year despite the BoJ's decision in January to cut some of its interest rates into negative territory for the first time in an effort to drive up moribund inflation and growth.

Other Asian currencies rose sharply as investors absorbed the Fed's decision. The Australian and the Singapore dollars rose to eight month highs against the U.S. currency. The Thai baht and Malaysian ringgit hit their strongest levels in more than seven months while the Korean won reached its highest level this year. Late Thursday, Bank Indonesia cut its benchmark interest rate to 6.75 percent from 7 percent but said it would be more cautious about any future rate cuts.

Higher local currencies could also make it easier for companies and governments to pay back the dollar-denominated debt they issued in recent years when money flowed easily into emerging markets thanks to heavy quantitative easing by major western central banks. The Institute of International Finance estimates that total debt in emerging markets rose to $62 trillion in 2015, equivalent to 210 percent of gross domestic product.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

February harmonized index of consumer prices was up 0.2 percent on the month but down 0.2 percent from a year ago. The principal core rate which excludes energy, food, alcohol & tobacco was up 0.8 percent on the year, down from January's 1.0 percent. Inflation in non-industrial goods was steady at 0.7 percent but the rate in services dropped from 1.2 percent to 0.9 percent. Energy (minus 8.1 percent after minus 5.4 percent) had a significant negative impact as did food, alcohol & tobacco (0.6 percent after 1.0 percent).

United Kingdom

February claimant count joblessness was down 18,000 after a significantly steeper revised 28,400 decline at the start of the year. This means that unemployment has fallen an average 23,200 so far this quarter, a marked improvement from the fourth quarter mean of 11,600. The jobless rate held steady at just 2.1 percent, matching its downwardly revised January reading. ILO unemployment decreased 28,000 in the three months to January leaving the rate on this measure flat at 5.1 percent and matching its lowest reading since 2006. For January alone, the rate was 5.0 percent. Average weekly earnings growth in the January quarter accelerated to 2.1 percent, up from 1.9 percent in the October-December period. Moreover, single month earnings posted a 2.5 percent yearly gain, their strongest performance since last August. Excluding bonuses, the headline rate edged up 0.1 percentage points from December to 2.2 percent.

Asia/Pacific

Japan

February merchandise trade surplus was ¥242.8 billion even though both exports and imports remain in contraction. Imports were down 14.2 percent for the 14th straight year-on-year drop while exports were down 4.0 percent for the 5th straight drop. Still, exports improved with those to China posting their first gain in seven months, exports to the U.S. the first gain in three months, and exports to the EU the first gain in two months. On a seasonally adjusted basis, the trade surplus was ¥166.1 billion in February — it was the fourth consecutive surplus. Exports were up 0.6 percent on the month but down 10.8 percent from a year ago. Imports were down 1.1 percent on the month and 16.5 percent lower than a year ago.

Australia

February employment was up just 300. Full time employment added 15,600 jobs while part time employment dropped 15,600. The unemployment rate dropped to 5.8 percent from 6.0 percent the month before. The participation rate also was down. It declined to 64.9 percent from a revised 65.1 percent.

Americas

Canada

January manufacturing sales rose 2.3 percent on the month to a new record high in January following an upwardly revised 1.4 percent increase in December. This was their third gain in a row, the first time this has been seen since May-July 2015. With base effects also strongly positive, annual growth picked up from minus 0.9 percent to 5.6 percent, the strongest since December 2014. Prices were essentially flat which meant that volumes climbed 2.4 percent on the month to reach their highest level since July 2008. Sixteen of the 21 reporting industries posted monthly gains. Within these, food (4.6 percent), motor vehicles (9.6 percent) and vehicle parts (4.0 percent) recorded healthy gains. Excluding vehicles, parts & accessories sales increased 1.2 percent. The main areas of weakness were petroleum & coal (down 5.9 percent) and machinery (down 3.1 percent).

January retail sales jumped 2.1 percent on the month after rising a marginally shallower revised 2.1 percent monthly tumble in December. This was their steepest increase since March 2010. Annual growth was 6.4 percent, up sharply from the 2.7 percent year-end rate in part due to strongly positive base effects (sales slumped 1.4 percent on the month in January 2015). Prices were flat on the month so the headline rise in purchases was fully reflected in volume sales. The overall nominal monthly increase was led by motor vehicles & parts (4.8 percent) but there were also solid gains in general merchandise (4.9 percent), building material & garden equipment (3.0 percent) and clothing (1.2 percent). Excluding the auto sector, sales were up 1.2 percent. Weakness was largely confined to gasoline (down 1.6 percent), where falling prices was a major factor, and home furnishings (also down 1.6 percent).

February consumer prices were up 0.2 percent on the month. However, with base effects strongly negative (the CPI jumped 0.9 percent in February 2015) the annual inflation rate decelerated sharply from 2.0 percent to 1.4 percent, equalling its lowest reading since last October. Swings in energy prices were again a key feature and this was reflected in a decline in the yearly rate in transportation from 2.2 percent in January to minus 0.5 percent. The core rates were a good deal stronger and the ex-food and energy CPI was up a monthly 0.6 percent and the BoC gauge a slightly weaker than expected 0.5 percent. This saw the annual rate of the former dip from 1.8 percent to 1.7 percent and of the latter slip from 2.0 percent to 1.9 percent.

Bottom line

It was a busy week with a deluge of central bank pronouncements. The Banks of Japan and England kept the status quo as did the Swiss National Bank. The Federal Reserve left its policy unchanged as well but lowered its forecast for interest rate increases going forward. Data from the U.S. was mostly positive while elsewhere, it was a light week.

The week will be a quiet one with no central bank meetings of note. The data calendar is also relatively light. The major releases are the flash manufacturing indexes for March. In Germany, both the ZEW and Ifo surveys will be reported. And in the UK, consumer and producer price indexes will be released.

Looking Ahead: March 21 through March 25, 2016

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