Global Markets

Several critical events take place during the next two weeks. Among them are the Federal Reserve FOMC and the Banks of Japan and England and the Swiss National Bank monetary policy meetings. And a week later, the vote regarding whether the UK will continue to be a member of the European Union will be held.

The poor U.S. May employment report combined with remarks by Fed Chair Janet Yellen have removed expectations of a fed funds rate increase. However, in Japan, bleak readings on deflation combined with paltry growth put the pressure on the Bank of Japan to do more. However, expectations are that the BoJ will refrain from additional action until they analyze the impact of the negative interest rate policy which they enacted at their January 2016 monetary policy board meeting.

And then there is Brexit. With polls gyrating from day to day at this point, there is no clear winner in sight at this writing. Financial markets do not like uncertainty and this event is shaking the markets up with the vote less than two weeks away. Central banks are watching the Brexit vote and have indicated their willingness to respond to any referendum-related volatility. Fed Chair Yellen has also cited concern for Brexit given that the FOMC meeting precedes the vote by a week. She noted in a speech on Monday that a Brexit vote could have significant economic repercussions.

The Reserve Banks of Australia, India and New Zealand left their respective monetary policies unchanged while the Bank of Korea surprised with a 25 basis point cut to 1.25 percent.

The World Bank trimmed its global growth outlook because of sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade and diminishing capital flows. The global economy is forecast to grow 2.4 percent this year instead of the 2.9 percent projected in January according to the June Global Economic Prospects report released Wednesday. The growth outlook for the next year was trimmed to 2.8 percent from 3.1 percent. Nonetheless, the pace of expansion is expected to pick up to 3 percent by 2018 as stabilizing commodity prices provide support to commodity exporting emerging markets.

Global Stock Market Recap

Europe and the UK

Equities ended the week on a distinctly negative note. Financial stocks were among the hardest hit due to a drop in bond yields. Sovereign debt yields from Japan to Germany fell to record lows. The European Central Bank's decision to begin purchasing corporate bonds is weighing on the rates of investment grade corporate debt. Weakness in the bond market was also attributed to nervousness ahead of Britain's June 23 referendum on whether to stay in the European Union. The major indexes were down for a second week. The FTSE was down 1.5 percent, the CAC declined 2.6 percent, the DAX lost 2.7 percent and the SMI retreated 2.8 percent.

The upcoming referendum on whether the UK will remain in the European Union is causing increasing nervousness among investors and weighed on investor sentiment. Traders are worried that a Brexit would spark further exits from the European Union.

On Thursday, ECB President Mario Draghi called for governments to step up and secure the future of monetary union. He said that stalling reforms and an incomplete currency area could lead to permanent economic damage. Mr Draghi said the ECB's unprecedented stimulus measures have been fighting a number of buffers blocking the transmission of monetary policy into the real economy. He said that restrictive fiscal policy, high levels of bad banking loans and fears over the institutional stability of the Eurozone had dampened the stimulus effects of negative interest rates and mass bond buying. A committed central bank can always fulfill its mandate irrespective of the stance of other macroeconomic policies, Draghi said. However, monetary policy does not exist in a vacuum as other policies can strengthen or dilute the effects of the central bank policy, he added.

Asia Pacific

Equities in this region were mixed on the week as worries about a faltering global economy took the steam out of a multi-week rally. Uncertainty over the Brexit referendum, caution ahead of Chinese data that will be released over the weekend and central bank meetings in the U.S. and Japan next week were among the factors that are keeping investors on edge. The Kospi advanced 1.6 percent and the Taiex added 1.5 percent. The Hang Seng, STI and PSEi all gained 0.5 percent or less. Declining indexes were down less than 0.8 percent.

The Nikkei slipped 0.2 percent on the week as the yield on 10-year government bonds fell to a fresh record low of minus 0.14 percent and the yen strengthened on safe-haven bids ahead of the FOMC and BoJ meetings. While first quarter GDP was revised up to an increase of 0.5 percent on the quarter, April machine orders (excluding volatile items) plunged 11 percent, in part reflecting the effects of the mid-month earthquake in southern Japan. May producer prices tumbled 4.2 percent on the year for the second month, indicating to the Bank of Japan that prices remain mired in deflation.

The Shanghai Composite lost 0.4 percent in a holiday shortened three day week. On June 14, after the New York market close, a decision by global index provider MSCI on whether to add mainland China-listed stocks to its influential Emerging Markets Index will be announced. Mainland China released its merchandise trade data along with the consumer and producer price indexes for May. Exports once again disappointed while the producer price index — while still negative — improved to a decline of 2.9 percent. At its worst, the PPI was down 5.9 percent on the year in November 2015.

Reserve Bank of Australia

As anticipated, the RBA left its key interest rate at 1.75 percent after lowering it to that level in May. In his statement, governor Glenn Stevens noted that the global economy is continuing to grow at a lower than average pace. Although commodity prices are above recent lows, this follows very substantial declines over the past couple of years. Australia's terms of trade remain much lower than they had been in recent years. In financial markets, conditions have generally been calmer for the past several months following volatility earlier in the year. Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the trade sector. The Board decided to provide no guidance on future policy movements. The final "guidance" sentence was neutral: "Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time."

Reserve Bank of India

The Reserve Bank of India left its monetary policy on hold in line with market expectations. The benchmark repo rate stayed at 6.50 percent and the reverse repo at 6.00 percent. The marginal standing facility rate and the Bank Rate remain at 7.0 percent and the cash reserve ratio at 4.0 percent. In April the RBI trimmed its benchmark lending rate, following on from four rate cuts last year as low inflation gave it more room to ease. RBI governor Raghuram Rajan had left the door open to further easing in April, a stance reiterated in Tuesday's statement, but this was tempered somewhat by a recent uptick in inflation.

The decision in large part reflects considerable uncertainty about the outlook for consumer prices. The RBI was clearly surprised by the jump in inflation in April (to 5.39 percent from 4.83 percent) and, although adhering to the forecasts made last time, it now stresses upside risk. In particular, it cited the recent firming in commodity prices, especially oil, as well as the implementation of the 7th Central Pay Commission awards and rising inflation expectations as providing reasons for caution.

Reserve Bank of New Zealand

As anticipated, the Reserve Bank of New Zealand left its official cash rate unchanged at 2.25 percent where it has been since March. In his statement, Governor Graeme Wheeler noted that monetary policy will continue to be accommodative. He said that further policy easing may be required to ensure that future average inflation settles near the middle of the target range which is between 1 percent and 3 percent. Wheeler also said that the exchange rate is higher than appropriate given New Zealand's low export commodity prices. The statement said that domestic activity continues to be supported by strong net immigration, construction, tourism and accommodative monetary policy. The RBNZ expects inflation to strengthen reflecting the accommodative stance of monetary policy, increases in fuel and other commodity prices, an expected depreciation in the New Zealand dollar and some increase in capacity pressures.

Currencies

The U.S. dollar was up against the euro, pound sterling and yen but lower against the Swiss franc and the Canadian and Australian dollars. Sterling continues to gyrate with poll numbers — when the polls show that the 'Brexit' camp is leading, the currency retreats and just the opposite when the 'remain' camp is ahead. Against its U.S. counterpart, sterling was down 1.8 percent for the week.

The euro tumbled 0.9 percent on the week as investors worry about the impact on the monetary union should the UK withdraw from the European Union. The concern is that other members may be tempted to leave as well. Traders are anticipating greater volatility as voting day — June 23 — nears. The referendum is a critical event not only for the UK but also for Europe. International organizations, including the IMF and the OECD, and world leaders have spoken up and given their two cents to the British people that they should remain in the EU.  

Selected currencies — weekly results

Indicator scoreboard

Eurozone

First quarter gross domestic product was up a revised 0.6 percent on the quarter after a stronger revised 0.4 percent in the fourth quarter of 2015. On the year, GDP was up a revised 1.7 percent. As expected, domestic demand was the driving force behind the improvement. Household spending was 0.6 percent higher on the quarter and capital formation was up 0.8 percent. With government consumption rising 0.4 percent, final domestic demand added 0.6 percentage points to the quarterly change in total output. Inventories provided just a 0.1 percentage point boost. Net foreign trade had a small negative impact (0.1 percentage point) as exports expanded 0.4 percent or only about half the 0.7 percent increase posted by imports. Regionally the quarterly headline rate reflected widespread national advances with just Greece (minus 0.5 percent) recording a contraction among those member states providing data. Germany was up 0.7 percent while France (0.6 percent) was not far behind and Spain (0.8 percent) was even stronger. Italy (0.3 percent) lagged but at least matched its best performance in a year.

Germany

April manufacturing orders dropped 2.0 percent on the month equaling the worst performance since November 2014. This followed a significantly upwardly revised 2.6 percent increase in March. However, annual growth still dropped from 2.6 percent to minus 0.6 percent, a 4-month low. Capital goods were down 6.1 percent on the month and consumer & durables decreased 1.0 percent. By contrast, basics were up a solid 4.8 percent. The headline slide masked a 1.5 percent monthly increase in domestic demand, although this failed to reverse a 3.0 percent slump at quarter-end and reflected instead a 4.3 percent plunge in the foreign market. Within this, Eurozone orders actually grew 2.5 percent but gains here were more than offset by an 8.3 percent slump elsewhere.

April industrial production was up 0.8 percent and lifted annual growth to 1.2 percent. April's pick-up was reasonably broad-based. Capital goods production advanced 2.2 percent from March while consumer goods gained 0.4 percent and energy expanded 1.1 percent. With intermediates flat, the only decline was in construction which was down 1.7 percent after a 3.0 percent fall in March. Overall manufacturing added 1.1 percent although this only just offset the previous month's 1.0 percent decline.

United Kingdom

April industrial production jumped 2.0 percent on the month for the sharpest increase since July 2012. The increase followed an unrevised 0.3 percent rise in March and boosted annual output growth from minus 0.2 percent to plus 1.6 percent, equaling its best performance since April 2014. The surge in total industrial production was more than matched in the manufacturing sector where output climbed 2.3 percent from March. This lifted its yearly change from minus 1.9 percent to 0.8 percent, its first positive reading since March last year. Strength was particularly apparent in textiles & leather, which posted a 5.7 percent monthly gain, alongside pharmaceuticals (8.6 percent) and transport equipment (7.6 percent). However, most subsectors had a good month and the only declines were registered in metals (0.5 percent) and coke & petroleum (3.7 percent). Overall goods production was further helped by a 1.0 percent monthly increase in water supply and a 3.9 percent advance in electricity & gas but mining & quarrying was down 0.3 percent.

April shortfall in global trade in goods narrowed marginally from a smaller revised Stg10.65 billion in March to Stg10.53 billion. This was the smallest deficit since December last year. The minimal improvement reflected a sharp expansion in both sides of the balance sheet. Exports were up a hefty 9.1 percent on the month, their largest increase since January 2003 and their highest level since August 2013, on the back of strong gains in chemicals, machinery and oil. At the same time, imports climbed 5.9 percent with purchases from the rest of the EU hitting a new record peak. This made for a quarterly 6.4 percent increase in the former and a 2.9 percent rise in the latter. The underlying deficit (excluding oil and other erratic items) was Stg10.55 billion, hardly changed from March's Stg10.60 billion, as core exports increased a monthly 8.1 percent and imports 5.2 percent. The red ink with the rest of the EU was up less than Stg0.2 billion at Stg7.92 billion but with the rest of the world declined from Stg2.86 billion to Stg2.60 billion.

Asia/Pacific

Japan

First quarter gross domestic product was revised up slightly to a quarterly gain of 0.5 percent from the original 0.4 percent. On an annualized rate, GDP was up a revised 1.9 percent from 1.7 percent earlier. GDP was unchanged from the same quarter a year ago. The first quarter increase follows a quarterly decline of 0.4 percent in the fourth quarter of 2015. Domestic demand was up an unrevised 0.2 percent. Consumption added a revised 0.6 percent, up from 0.5 percent originally. However, CAPEX was revised upward to a decline of 0.7 percent on the quarter from a decline of 1.4 percent on the quarter. Public investment was revised downward to a decline of 0.7 percent from a 0.3 percent gain on the quarter. The deflator was up 0.9 percent from a year ago after increasing 1.5 percent in the fourth quarter.

April machine orders excluding volatile ones for ships and those from power companies tumbled 11.0 percent on the month and were 8.9 percent lower from a year ago. The April plunge followed a 15.0 percent monthly gain in March. These orders are considered a proxy for capital spending. Manufacturing orders were down 13.3 percent and nonmanufacturing orders retreated 3.9 percent. Orders from overseas dropped 6.9 percent. The total value of machinery orders received by 280 manufacturers operating in Japan dropped 12.8 percent in April after jumping 15.8 percent the month before.

China

The May merchandise trade surplus was $49.98 billion this was less than the expected $57.4 billion. Exports were down 4.1 percent as anticipated while imports sank 0.4 percent, less than expected. On a seasonally adjusted basis, exports were up 2.2 percent on the month after rising 15 percent in April. On the year, exports were down 6.2 percent after increasing 0.2 percent the month before. Imports on this basis were down 1.4 percent after jumping 9.7 percent in April. From a year ago, imports were 4.7 percent lower after declining 7.3 percent in April. Renminbi denominated surplus was Rmb324.77 billion, up from Rmb298 billion in April. Exports grew 1.2 percent on the year while imports grew 5.1 percent during the period.

May consumer price index was up a less than expected 2.0 percent on the year after increasing 2.3 percent the three previous months. Analysts had been expecting an increase of 2.2 percent. On the month, the CPI was down 0.5 percent. The urban CPI was up 2.0 percent after increasing 2.3 percent on the year for three months. The rural CPI was up 2.1 percent after increasing 2.4 percent in April. Food prices jumped 5.9 percent on the year after soaring 7.4 percent in April. Non-food prices in contrast, were up 1.1 percent for a second month. Transportation & communication slid 2.6 percent. Clothing and residence were up 1.5 percent and 1.6 percent respectively.

May producer prices were down a less than expected 2.8 percent on the year – expectations were for a decline of 3.3 percent. In April the PPI was 3.4 percent lower. On the month, the PPI was up 0.5 percent after increasing 0.7 percent the month before. Most categories saw prices decline less than the month before. Raw material procurement, fuel & power prices were down 3.8 percent after sliding 4.4 percent in April. Production prices also declined less than last time, down 3.7 percent after 4.5 percent. Consumer goods slipped 0.2 percent for the third month.

Americas

Canada

May employment was up 13,800 while the unemployment rate was 6.9 percent, down from 7.1 percent last time. Full time jobs jumped 60,500 and were partially offset by a 46,800 drop in part-time positions. Private sector payrolls were trimmed 5,400 and the number of self-employed was down 11,100. Consequently, the entire headline gain was more than accounted for by a 30,200 gain in the government sector. The goods producing sector added 19,000 new positions. Manufacturing was up 12,200 and construction 18,600 but there was a sizeable decrease in natural resources (15,900). Services shed 5,200, a decline dominated by a 41,200 slump in trade. The only other decline of note was in health care & social assistance (25,400) while respectable gains were recorded in other services (23,900), business, building & other support services (16,600) and education (14,200).

Bottom line

Central banks including the Reserve Bank of Australia, Reserve Bank of New Zealand and the Reserve Bank of Index left their respective monetary policies on hold. Japan revised its first quarter GDP increase upward but machine orders, a proxy for capital spending, plunged thanks in part to the earthquake in southern Japan's manufacturing sector. UK industrial production surprised with a vigorous increase. China's data were mixed.

The Banks of Japan and England along with the Federal Reserve and the Swiss National Bank meet this week. No policy changes are anticipated. Tensions are bound to build in the financial markets as the June 23 Brexit vote nears.

Looking Ahead: June 13 through June 17, 2016

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