Global Markets

The Bank of Japan disappointed and the government of Japan disappointed too with its stimulus package. However, no one can say that the Bank of England disappointed. Rather it beat expectations substantially. On July 29, the BoJ left the major components of its monetary policy unchanged including its negative interest rate. However, it lifted its buying of exchange traded funds (ETF) to ¥6 trillion from ¥3.3 trillion. On Tuesday, the Shinzo Abe government introduced a stimulus package that turned out to have more lending and little in the way of actual new stimulus (see Asia section below). However, the Bank of England surprised by the scope of its stimulus package in light of the negative effects Brexit is having on the economy. The announcement sent sterling lower against the U.S. dollar, gilt yields tumbling and UK equities rallying.

On Friday, the U.S. employment report for July was released — and it was a good one! Employment increased far above consensus estimates with a gain of 255,000. And May and June were revised upward. Average hourly earnings and the average workweek also increased. For market players the report has instant implications for Fed policy. But there will be another employment report before the September FOMC and plenty of other important economic information as well.

Global Stock Market Recap

Europe and the UK

After a lethargic start to the week, European indexes received an upward jolt on Thursday from the Bank of England and on Friday from the strong U.S. employment report. However, the gains on Thursday and Friday could not pull the CAC out of negative territory — the index lost 0.7 percent on the week. The FTSE, DAX and SMI managed to erase their losses and increase 1.0 percent, 0.3 percent and 0.8 percent respectively. Most economic data disappointed in Europe including retail sales, German manufacturing orders, French merchandise trade deficit, Italian industrial production and UK manufacturing, services, composite and construction PMIs.

The Bank of England acted forcefully Thursday surprising bank watchers with the scope of its easing program. It cut its Bank Rate by 25 basis points to 0.25 percent by a unanimous 9 to 0 vote of the monetary policy committee (MPC). This was the first interest rate move since March 2009. The rate cut came with forward guidance that suggested a further rate cut by year end if the economy evolves according to the Bank's forecast. It also increased its asset purchase ceiling to £435 billion from £375 billion. The BoE also introduced the new Term Funding Scheme. It is designed to protect bank margins and ensure that the rate reduction is fully passed on to borrowers. In addition, the MPC said that the Bank would be making purchases of up to £10 billion of UK corporate bonds.

The Bank also drastically downgraded its growth projections as the "Brexit" vote heightened uncertainty and the sharp depreciation in sterling triggered an upward revision to the inflation forecast. The Bank slashed its GDP growth outlook for 2017 to 0.8 percent from 2.3 percent. Similarly, the projection for 2018 was trimmed to 1.8 percent from 2.3 percent. Purchases of gilts (QE) via the Bank's Asset Purchase Facility (APF) will begin on 8th August but the move was only a compromise decision as the vote was split 6 to 3. The corporate bond program, which was passed 8 to 1, will operate for an initial period of 18 months.

BoE governor Mark Carney said that the massive stimulus package was appropriate to deal with the high uncertainty caused by "Brexit". The BoE acted after a number of economic reports indicated that activity was falling precipitously after the June 23 vote for the UK to leave the European Union. Government action will probably be announced in Treasury's Autumn Statement. Meantime, official statistics covering the post-Brexit vote period do not start appearing until the third week of August so for now, surveys are about all the Bank has to rely upon. As such, further measures may yet be needed should the latest boost prove insufficient.

Asia Pacific

Equities were mixed last week as the Japanese government of Prime Minister Shinzo Abe followed the Bank of Japan's tepid stimulus with a disappointing package of its own. Prime Minister Abe's cabinet approved a ¥28 trillion ($274 billion) stimulus package late in the day on Tuesday in a bid to lift growth and inflation. The package includes ¥7.5 trillion in new, direct spending by the national and local governments. About three-quarters of the package will be made up of targeted low-interest loans from the government and state-owned companies, leaving just ¥7.5 trillion actual new and direct spending, but even that will be spread over the next two years.

The Nikkei retreated 1.9 percent on the week thanks to the strengthening yen following the smaller-than-expected easing measures from the Bank of Japan and disappointment over Prime Minister Shinzo Abe's stimulus steps. Thursday's Bank of England stimulus did little to help lackluster trading in Tokyo.

The All Ordinaries also retreated on the week but by 1.0 percent. The Reserve Bank of Australia cut its policy interest rate earlier in the week but left its growth and inflation forecasts unchanged in its quarterly statement on monetary policy. It said a rate cut will create room for even stronger growth. The RBA signaled further interest rate cuts were likely with inflation projected to stay below its 2 percent to 3 percent inflation target range until the end of 2018. This guidance came after it cut its overnight cash rate by a quarter of a percentage point on Tuesday to a record low of 1.50 percent.

Manufacturing, according to the purchasing managers' indexes, improved in July except in India. Only Japan remained in contraction thanks to the vestiges of the southern Japan earthquake in mid-April that disrupted supply chains with a reading of 49.3 which was an improvement from June's 48.1. China's manufacturing PMI improved from a sub-breakeven 48.6 in June to a 50.6 in July which signified some growth. India's growth weakened in July with its PMI slipping to 51.3 from 51.7 in June. The global PMI indicates that manufacturing improved in July worldwide.

Reserve Bank of Australia

Earlier in the week, the Reserve Bank of Australia held its monthly policy meeting. As expected the Reserve Bank of Australia lowered its key interest rate by 25 basis points to 1.5 percent. In his last statement as chair, Glenn Stevens said that the easing will help prospects for the economy and inflation to return to target. The low rate risk to the housing market has diminished. China's growth appears to be moderating but policy actions are supporting near term growth outlook.

Sluggish inflation is seen as the major factor influencing the decision to take rates lower and has left the door open to further cuts in upcoming months. The RBA has an inflation target range of between 2 and 3 percent but last week the quarterly inflation report showed that core inflation was up a below target 1.5 percent on the year for the three months to June.

Currencies

In reaction to the Bank of England's stimulus announcement, the pound sterling declined — however the drop was not nearly as severe as it was when the Brexit vote results were announced. This is amply visible in the graph to the left. At the same time, the 10 year gilt yield tumbled from 0.80 percent to 0.64 percent. However, equities rallied jumping 1.6 percent on Thursday.  On the week, the U.S. dollar was up against the euro, pound sterling, Swiss franc and the Canadian dollar. It retreated against the yen and Australian dollar.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

July manufacturing PMI reading declined to 52.0 after June's 52.8. The decline reflected a smaller contribution from new orders growth which was down on quarter-end and also beneath the average rate over the year so far. However, backlogs were up again and production growth was unchanged from June's 6-month peak. Job creation ticked a little lower but was among the fastest seen in the last five years. Input costs saw their first rise in a year but this failed to prevent factory gate prices from extending the current sequence of declines to 11 months. Regionally, the best performer was Germany (53.8) ahead of Austria (53.4) and the Netherlands (53.2). Italy (51.2) and Spain (51.0) were also above 50 but at 18-month and 31-month lows respectively while Greece (48.7) and France (48.6) contracted.

Germany

June manufacturers' orders were down 0.4 percent on the month and dropped 2.9 percent from the same month a year ago. Weakness was broad-based with orders decreasing a monthly 0.7 percent in both basics and consumer & durable goods and 0.2 percent in capital goods. However, June's setback was wholly attributable to a softer overseas market as orders here were down 1.2 percent from mid-quarter (Eurozone minus 8.5 percent) and, courtesy of negative base effects, a hefty 6.4 percent from a year ago. By contrast, domestic orders rose a monthly 0.7 percent, although this did little to dent a 2.1 percent slump last time.

Asia/Pacific

Australia

The June trade balance deteriorated to a deficit of A$3.2 billion from a revised May deficit of A$2.4 billion. Exports were down 0.8 percent on the month and 0.9 percent from a year ago. Imports were up 2.0 percent in June and were down 2.3 percent from a year ago. Rural goods exports were up 1 percent while non-rural goods rose A$20 million. The main components contributing to the rise were cereal grains & cereal preparations and meat & meat preparations. Exports of non-rural goods rose A$20 million to A$15,191 million. The main components contributing to the rise in seasonally adjusted estimates were metal ores and minerals, metals (excl. non-monetary gold), machinery and other mineral fuels. Partly offsetting the increases were coal, coke & briquettes and other non-rural goods.

June retail sales edged up a disappointing 0.1 percent following a 0.2 percent increase in May. Expectations were for an increase of 0.3 percent. From a year ago, sales were up 2.8 percent. Sales in the June quarter were up 0.4 percent after increasing 0.5 percent in the March quarter. Clothing, footwear & personal accessory retailing increased a monthly 3.5 percent, household goods retailing was up 0.3 percent and department stores gained 0.7 percent. However, food retailing declined 0.6 percent, cafes, restaurants & takeaway food services slipped 0.1 percent as did other retailing. Retail sales were up in Queensland (1.1 percent) and Western Australia (0.1 percent) while sales were virtually unchanged in South Australia. Sales declined in New South Wales (down 0.2 percent), Victoria (down 0.1 percent), the Australian Capital Territory (down 0.6 percent), the Northern Territory (down 1.1 percent) and Tasmania (down 0.2 percent).

Americas

Canada

July employment dropped 31,200 while the unemployment rate edged up to 6.9 percent from 6.8 percent in June. The participation rate slipped to 65.4 percent. The latest decline in jobs was wholly attributable to another large drop in full-time positions, this time 71,400. By contrast, part-time employment continued to rise with a 40,200 advance. However, the private sector added a net 13,600 even if this was more than offset by a 31,200 decline in the public sector and a 2,700 dip in the number of self-employed. Having shed more than 46,000 workers at quarter-end, goods producing industries reduced headcount by a relatively modest 4,300 in July. Within this, manufacturing was up 5,600 and agriculture 4,200 but construction was down 9,000, utilities 1,100 and natural resources 3,900. The services sector reduced its payroll by 26,900, largely reflecting sizeable losses in public administration (24,200) and trade (13,500) although information, culture & recreation (down 8,800) and professional, scientific & technical services (down 8,000) also saw hefty cuts. The only increase of any real note was in health care & social assistance.

June merchandise trade deficit was C$3.63 billion after the upwardly revised C$3.50 billion deficit in May. Exports grew just 0.6 percent on the month while imports expanded 0.8 percent. Moreover, the monthly deterioration in the in the headline deficit was more than mirrored in the real trade position as export volumes dropped 1.4 percent and imports rose 0.7 percent. The bilateral surplus with the U.S. narrowed to C$1.81 billion from C$2.63 billion in mid-quarter with sales across the border down 1.2 percent and purchases up 1.5 percent. Within the monthly advance in overall nominal exports, the main areas of strength were energy products (7.2 percent), basic & industrial chemical, plastic & rubber products (5.2 percent) and farm, fishing & intermediate food products (2.2 percent). Metal & non-metallic mineral products (7.2 percent) recorded the steepest decline. At the same time, imports were lifted by sizeable gains in energy (12.7 percent) and metal ores & non-metallic minerals (10.3 percent). However, these were tempered by a 22.0 percent slump in aircraft & other transportation equipment & parts.

Bottom line

Stocks were mixed for the week with several indexes managing to recover losses incurred early in the week. Both the Reserve Bank of Australia and the Bank of England cut their respective policy interest rates by 25 basis points. The RBA rate is now 1.5 percent while the Bank of England's is 0.25 percent. A slew of purchasing managers indexes were released with most hovering around the breakeven 50 mark.

The Reserve Bank of India meets. It will be the last meeting for Governor Raghuram Rajan. No successor has been named. The Reserve Bank of New Zealand will also announce its policy decision. June data (pre-Brexit) for UK industrial production and merchandise trade will be released. Germany posts industrial production and merchandise trade as well. China reports key economic data for July including merchandise trade balance, consumer and producer price indexes, industrial production and retail sales. Japan releases machine orders data which is considered a proxy for capital spending.

Looking Ahead: August 8 through August 12, 2016

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