Global Markets

Equities were mixed last week as investors waited for the monetary policy announcements from the Federal Reserve and the Bank of Japan. The Fed did the expected — left its fed fund policy rate range at 0.25 percent to 0.50 percent with a mid-point of 0.375 percent. However, the Bank of Japan disappointed by opting to put off further interest rate cuts and expansion of JGB buying, but in a minor move decided to almost double its ETF purchases. Now the ball is in the prime minister's court. He has promised that he would announce a Y28 trillion stimulus package as soon as August 2.

The BOJ's disappointment, which also follows the ECB and BoE's recent decisions to hold off easing, may just cause markets to re-assess their positions especially with the Reserve Bank of Australia and Bank of England looming this coming week. Both are expected to cut their policy rates by 25 basis points to 1.5 percent and 0.25 percent respectively.

Indexes advanced in July with the exception of the KLCI which was virtually unchanged. Gains ranged from a high of 6.8 percent (DAX) down to 1.0 percent (STI). On the week, however, indexes were mixed.

Bank of Japan

As expected, the Bank of Japan initiated more monetary easing to help lift the economy out of its torpor and deflation. The BoJ kept its minus 0.1 percent negative interest rate on excess reserves but increased its ETF buying to ¥6 trillion from the current ¥3.3 trillion. It also increased the size of the bank's lending program to support growth in U.S. dollars. The BoJ will continue to buy JGBs at the current annual pace of ¥80 trillion. The board vote to increase buying ETFs was 7 to 2 while the vote on keeping JGB buying at its current pace was 8 to 1. The vote on the negative rate was 7 to 2.

The Board said in its statement that, "Against the backdrop of the United Kingdom's vote to leave the European Union and the slowdown in emerging economies, uncertainties surrounding overseas economies have increased and volatile developments have continued in the global financial markets." The actions by the monetary policy board were intended to "prevent these uncertainties from leading to a deterioration in business confidence and consumer sentiment as well as to ensure smooth funding in foreign currencies by Japanese firms and financial institutions", the Board said.

Most analysts expected the BoJ to unleash some form of extra stimulus at the meeting, though there were wide differences of opinion as to what form this would take. Japan's government is also expected to announce the details of a large fiscal stimulus package early next week.

In January the BoJ adopted negative interest rates, its first benchmark rate move for five years, in a bid to stimulate economic growth by spurring banks to lend more actively. The move prompted a strong backlash from the public and the financial sector.

Japanese Prime Minister Shinzo Abe announced plans Wednesday for more than ¥28 trillion ($265 billion) in economic stimulus in an effort to prop up the nation's economy. The plan will include ¥13 trillion yen in "fiscal measures," he said in excerpts of a speech broadcast by NHK public television. Abe added that the package would be compiled next week, but it was unclear how much of it would be new spending. There has been speculation about how large the stimulus would be, and how much new spending it would contain.

Global Stock Market Recap

Europe and the UK

Equities were mixed on the week but were up for the month of July despite the Brexit vote. On the week, the FTSE and IBEX slipped 0.1 percent while the SMI lost 0.8 percent. However, the CAC and DAX added 1.3 percent and 1.9 percent respectively.

European shares extended their biggest monthly gains since October, with banks leading the gains amid earnings results. In July, the FTSE was up 3.4 percent, the CAC gained 4.8 percent, the DAX advanced 6.8 percent and the SMI was 1.3 percent higher.

There was an avalanche of corporate earnings and economic data at the end of the week. However, the continued decline in crude oil prices made investors wary. Traders were disappointed by the easing measures announced by the Bank of Japan and the weak U.S. gross domestic product report. Investors were disappointed as the bank kept its interest rate and the pace of monetary base expansion unchanged.

UK data which for the most part were for the period before the Brexit vote were better than anticipated. Second quarter GDP was up 0.6 percent from the previous quarter and 2.2 percent from a year ago. Data including consumer prices, unemployment, private sector credit and economic confidence from the Eurozone were mostly favorable. German unemployment, consumer prices and Ifo business climate were positive. On the down side were second quarter GDP for the Eurozone and France along with the latter's consumer spending and confidence.

Martin Weale, a member of the Bank of England's monetary policy committee, has reportedly dropped his opposition to stimulus, spurring speculation that the Bank of England will announce new measures to stimulate growth August 4. Weale said in an interview with the Financial Times that he has shifted his monetary policy stance after the release of negative business survey results and now favors immediate stimulus to the economy. He said that he sees things "differently from what I would have done had we not had those numbers and the material point is that they were collected after July 12, so after the initial shock of the referendum." Only last week in a speech, Weale said that the uncertainty from "Brexit" suggested waiting for firmer evidence before taking any action. He also rejected the argument that markets would be disappointed were there to be no easing in August.

Asia Pacific

Equities were mixed last week as investors waited for news from the Federal Reserve and Bank of Japan monetary policy meetings. Gains ranged from 1.2 percent (All Ordinaries) to just 0.3 percent (Kospi). Losses ranged from 0.3 percent (KLCI, Taiex, Hang Seng and Nikkei) to 2.6 percent (STI). The picture was different for the month of July where all indexes save the KLCI (down 0.05 percent) advanced. Gains ranged from 1.0 percent (STI) to 5.5 percent (SET). The All Ordinaries added 6.3 percent while the Nikkei added 6.4 percent and the Hang Seng, 5.3 percent.

The Bank of Japan offered easing light much to the disappointment of the markets. They were looking for a major easing. Oil prices and a soaring yen also dampened equities on Friday. But investors are waiting until Prime Minister Shinzo Abe's stimulus package which is expected to be more than ¥28 trillion and to be announced as soon as next week. The safe-haven Japanese yen soared after the Bank of Japan raised the target for exchange-traded fund purchases and doubled its dollar lending program, but kept its interest rate and the pace of monetary base expansion unchanged. The BoJ also downgraded its projections for inflation and growth for fiscal 2016. In an unexpected development, Governor Haruhiko Kuroda has ordered an assessment of the effectiveness of BOJ policy, to be undertaken at the next meeting, which is scheduled for September.

Currencies

The U.S. dollar tumbled against all of its major counterparts last week. The currency lost traction after anemic second quarter growth reduced the odds that the Federal Reserve would increase its fed funds rate in 2016. The yen posted the biggest advance against the U.S. currency after the Bank of Japan disappointed when it introduced a modest increase in its monetary stimulus program. The question here is whether the BoJ has reached the limits of what monetary policy can do. Meanwhile we wait for Prime Minister Shinzo Abe who said he plans to unveil a ¥28 trillion fiscal stimulus plan on August 2.

The slew of Japanese economic data on Thursday showed an economy buried in deflation and anemic economic growth. The consumer price index continued to decline when compared with the previous year. Consumer spending as measured by household spending and retail sales continues to contract. However, industrial output advanced after a sharp decline in May.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

The preliminary flash estimate of second quarter GDP slowed to a 0.3 percent quarterly rise in total output which was only half the previous period's print and matched the weakest gain since the second quarter of 2014. As a result, the annual rate of expansion dipped from an already modest 1.7 percent to 1.6 percent. There are no country details in the preliminary flash report but stagnation in the French economy was clearly a factor behind the headline deceleration. Germany also looks likely to have fallen well short of its 0.7 percent first quarter rate. Today's data cover the period before the Brexit vote and probably say little about how the Eurozone economy will perform this quarter.

July flash harmonized index of consumer prices was up 0.2 percent from a year ago. It matched its highest mark since January. However, the gentle acceleration in the overall rate was not mirrored in the core measures. Hence, excluding energy, food, drink & tobacco inflation was unchanged at 0.9 percent and omitting just energy and unprocessed food the rate was steady at 0.8 percent. Among the major subsectors, the yearly rate was up 0.5 percentage points at 1.4 percent in food, alcohol & tobacco but down a couple of ticks at minus 6.6 percent in energy. Non-industrial goods inflation was flat at 0.4 percent and services just 0.1 percentage points higher at 1.2 percent.

Germany

July Ifo survey showed a surprisingly small deterioration in economic sentiment. The business climate index dropped just 0.4 points to 108.3, reflecting slightly weaker business expectations and masking a minimal improvement in the assessment of current conditions. Expectations declined a modest 0.9 points to 102.2 and only reversed a portion of June's 1.4 point gain. The new level was still towards the upper end of the range recorded over 2016 so far and suggests that businesses are not overly concerned about the implications of the Brexit vote. At the same time, the current conditions measure was up 0.1 points at 114.7, its third consecutive advance and its highest level since August 2015. At a sector level, morale was more positive in construction and retail but declined in both manufacturing and wholesale. However, even where declines were registered, the July levels remained relatively firm compared with recent months.

France

Second quarter gross domestic product was flat after increased a slightly stronger revised 0.7 percent quarterly increase at the start of the year. On the year, GDP was up 1.4 percent. The GDP expenditure components underlined the softness of internal demand and domestic final sales made a zero contribution to the quarterly change in GDP. Within this, household consumption slowed from the previous period's healthy 1.2 percent rate to also flat and gross fixed capital formation contracted 0.4 percent, its first decline in a year. The decline here reflected weakness in both residential investment (down 0.1 percent) and business spending (down 0.2 percent). General government consumption increased 0.4 percent but inventories subtracted 0.4 percentage points after a small 0.1 percentage point hit last time. In fact, the headline data would have been worse but for net foreign trade which provided a boost to growth. Even then, a 0.3 percentage point lift only reflected a 0.3 percent quarterly drop in exports that was more than offset by a 1.3 percent decrease in imports.

Asia/Pacific

Japan

Japan recorded an unadjusted merchandise trade surplus of ¥692.8 billion after May's ¥40.6 billion. Exports contracted for their ninth straight month, underscoring the challenges for manufacturers as they battle sluggish global growth and currency fluctuations. Exports dropped 7.4 percent from a year ago, less than the expected 11.6 percent decline. Imports also continued to fall, dropping for an eighteenth consecutive month, indicating consumer demand also remains weak. Imports dropped 18.8 percent in June, more than the 13.8 percent recorded for May but less than the 19.7 percent expected. Unadjusted exports with Asia were down 7.2 percent on the year and with China, down 10.0. Exports with the European Union slipped 0.4 percent while those to the U.S. declined 6.5 percent. On a seasonally adjusted basis, the trade surplus was ¥335.0 in June. The trade balance has been in surplus since November 2015. In June, exports were up 1.3 percent and down 10.1 percent from a year ago. Imports were up 0.6 percent in June but were 18.8 percent lower on the year.

The consumer price index underlined what was already known -- deflation continues to haunt the Japanese economy. The June consumer price index less fresh food declined 0.5 percent on the year. Expectations had been for a 0.4 percent drop. The national CPI was down 0.4 percent. Excluding both food and energy, the index was up 0.4 percent on the year. Most subcategories advanced. Food prices were up 1.1 percent from a year ago but fuel, light & water tumbled 8.7 percent. Transportation & communication was down 2.4 percent. Clothes & footwear added 2.0 percent while culture & recreation was 1.1 percent higher.

June industrial production rebounded 1.9 percent on the month after sinking 2.6 percent in May. Expectations were for an increase of 0.7 percent. On the year, industrial production was down 1.9 percent. That is worse than the 0.4 percent year-on-year contraction posted in May, but better than the 2.9 percent drop expected. The main industries that contributed to the increase were iron & steel, transport equipment and electrical machinery. Offsetting those increases were declines in general-purpose, production & business oriented machinery, chemicals (excl. Drugs) and non-ferrous metals. METI expects production to increase 2.4 percent in June and 2.3 percent in August.

Australia

Second quarter consumer price index was up 0.4 percent and 1.0 percent from a year ago. The trimmed mean was up 0.5 percent and 1.7 percent while the weighted mean was up 0.4 percent and 1.3 percent on the year. The readings are far below the Reserve Bank of Australia's inflation target range of 2 percent to 3 percent. The data will probably play a key role in influencing whether the Reserve Bank of Australia will cut interest rates at its August 2 meeting. The most significant price increases in the second quarter were in medical & hospital services (4.2 percent), automotive fuel (5.9 percent) and tobacco (2.1 percent). The increases were partially offset by declines in domestic holiday travel & accommodation (down 3.7 percent), motor vehicles (down 1.3 percent) and telecommunication equipment & services (down 1.5 percent).

Americas

Canada

May monthly GDP contracted 0.6 percent on the month and was up 1.0 percent from a year ago. The Alberta fires had a sizeable impact on the oil sector and this was apparent in a 6.4 percent monthly drop in the mining, quarrying & oil & gas extraction subsector. However, elsewhere within overall goods production it was all bad news and manufacturing dropped 2.4 percent, construction 0.7 percent and utilities 1.8 percent. Agriculture, forestry, fishing and hunting was off only 0.1 percent. By contrast, services expanded 0.3 percent, largely thanks to a 1.0 percent bounce in wholesale trade and a 4.3 percent jump in arts, entertainment & recreation. Public administration was also up 0.9 percent and finance & insurance 0.6 percent. Administrative and support, waste management & remediation services (down 0.5 percent) was the worst performer ahead of transportation & warehousing (down 0.2 percent).

Bottom line

Equities were mixed on the week but advanced in July. The Federal Reserve left its monetary policy unchanged while the Bank of Japan tweaked theirs. Economic data were mixed in Europe and the U.S.

The Reserve Bank of Australia and the Bank of England both meet in the coming week and both are expected to cut their policy interest rates by 25 basis points. The usual first week of the month deluge of purchasing managers indexes will be a highlight in the beginning of the week while the U.S. employment situation report will dominate the end of the week.

Looking Ahead: August 1 through August 5, 2016

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