Global Markets

While global equities were mostly positive last week, economic data presented a mixed picture of economic growth. Key data from China for example, gave a picture of a slowing economy even though officials blamed the declines on the flooding that occurred during the month. And U.S. data for retail sales, producer prices and consumer sentiment were also lackluster.

Crude oil prices were up after Saudi Arabia's Energy Minister hinted towards possible action to stabilize the oil market at an informal meeting next month of OPEC and the International Energy Agency predicted a hefty draw in crude oil inventories in the third quarter.

Saudi Energy Minister Khalid al-Falih said OPEC members and nonmembers would discuss the market situation, including any action that may be required to stabilize prices, during an informal meeting on September 26 to 28 in Algeria. Many traders are skeptical of the meeting's outcome — they expect a repeat of the Doha meeting in April when talks collapsed after Saudi Arabia backed out, citing Iran's refusal to join in a so-called production freeze.

The International Energy Agency (IEA), which advises large developed economies on energy policy, forecast a healthy draw in global oil stocks in the next few months that would help ease a glut that has persisted since 2014 thanks to rising OPEC and non-OPEC supply.

Global Stock Market Recap

Europe and the UK

Equities advanced last week even though they barely moved on Friday. The lackluster performance came at the end of what had been a good week for trading. Disappointing economic data from China and the United States had a negative impact on investor sentiment but was offset by Eurozone data that were largely positive. On the week, the FTSE was up 1.8 percent, the CAC gained 2.0 percent, the DAX jumped 3.3 percent and the SMI was 1.2 percent higher.

Eurozone growth weakens

In pre-Brexit data, growth weakened across the Eurozone according to the first estimates of second quarter gross domestic product. For the Eurozone as a whole, GDP growth was 0.3 percent from the previous quarter and up 1.6 percent from the same quarter a year ago. The quarterly increase matched the weakest gain since the second quarter of 2014.

As usual, no expenditure components were available in the flash data. Rather they will be included in the September 6 release. Among the larger countries, growth in Germany eased to 0.4 percent on the quarter from 0.7 percent. Growth in both France and Italy retreated to 0.0 percent, the former from 0.7 percent and the latter from 0.3 percent on the quarter. Growth in Spain however, slipped from a quarterly 0.8 percent to 0.7 percent — remaining the best performer among the major countries. 

The data cover the period before the Brexit vote and probably say little about how the Eurozone economy will perform in the third quarter. Business surveys have found little immediate impact from the referendum result but the relative softness of activity in the run-up means that the economy was at least potentially vulnerable.

Aside from the mixed growth data above, June industrial output data for Germany, the Eurozone and the UK all expanded. However, on the disappointment side, Germany's trade surplus narrowed while French industrial production sank. The UK trade deficit widened while manufacturing output retreated.

Asia Pacific

Equities were mostly higher on the week. In part, the increases were driven by gains in U.S. stocks as the Dow, S&P and Nasdaq simultaneously hit record closing highs on Thursday. The Nikkei was the week's big performer, gaining 4.1 percent followed by the Hang Seng and Shanghai Composite with weekly gains of 2.8 percent and 2.5 percent respectively. Weak Chinese data had little negative impact on the markets because investors saw room for an interest rate cut by the People's Bank of China.

The week got off to a positive start. It was the first opportunity for investors here to react to the second consecutive strong U.S. employment report. The report boosted the odds of a Federal Reserve interest rate increase this year, but economists' consensus forecasts show that many believe the Fed would wait for GDP growth to improve and inflation to move closer to its 2 percent target before elevating the fed funds rate. And Chinese shares rose sharply, showing no reaction to disappointing forex reserves and merchandise trade data.

The indexes ended the week on a positive note urged on by the U.S. trifecta, higher oil prices and a weaker yen in the wake of a rise in U.S. bond yields amid hawkish interest rate comments from a senior Federal Reserve official. Investors shrugged off disappointing Chinese data that showed industrial production and retail sales growth slowed more than expected in July. Most July data from China including merchandise trade, industrial production and retail sales disappointed and indicated slowing economic growth. Most July data from China including merchandise trade, industrial production and retail sales disappointed and indicated slowing economic growth.

The Bank of Korea left its policy interest rate unchanged at a record low of 1.25 percent after cutting its rate in June. The BoK is waiting for the impact of the government's recently announced fiscal stimulus package to flow through the economy.

Reserve Bank of New Zealand cuts the OCR

As widely expected the Reserve Bank of New Zealand cut its official cash rate (OCR) by 25 basis points to 2 percent. The last time the RBNZ lowered its OCR was in March. In his statement, Governor Graeme Wheeler said that policy would continue to be accommodative. Furthermore, the RBNZ's current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near 2 percent — the middle of the Bank's inflation target range of 1 percent to 3 percent.

Governor Wheeler said that headline inflation is being held below the target band by continuing negative tradables inflation. Annual inflation as measured by the consumer price index is expected to weaken in the September quarter, reflecting lower fuel prices. However, it is expected to increase from the December quarter, reflecting policy stimulus to date, the strength of the domestic economy, reduced drag from tradables inflation and rising non-tradables inflation. Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations. However, house price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability.

The Governor called for a decline in the exchange rate. Weak global conditions combined with low interest rates relative to those in New Zealand is placing upward pressure on the New Zealand dollar. The high exchange rate adds pressure to the export and import-competing sectors making it difficult for the Bank to meet its inflation objective.

Domestic growth is expected to continue to remain supported by strong inward migration, construction activity, tourism and accommodative monetary policy.  However, low dairy prices are depressing incomes in the dairy sector and reducing farm spending and investment. High net immigration is supporting strong growth in labour supply and limiting wage pressure. However, the Governor said that further easing is required: "Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range."

Currencies

The U.S. dollar was pummeled last week, declining against all of its major counterparts with the exception of the pound sterling. The currency was lower against the euro, yen, Swiss franc and the Canadian and Australian dollars. Most of the swoon occurred Friday when a trio of economic indicators — retail sales, producer price index and consumer sentiment — all were lower than forecast.

Despite negative interest rates and a huge quantitative easing program, the yen continues to climb as a safe haven currency much to the frustration of the Bank of Japan. Negative interest rates in theory should have depressed the value of the yen — instead it surged higher. But it is not alone in experiencing the opposite of the expected.

Last week, the Reserve Bank of New Zealand experienced the same currency reaction. The RBNZ lowered its overnight cash rate to a record 2 percent and bewailed the high value of its currency in its policy announcement and said that additional cuts are in its future. The NZ dollar or kiwi climbed anyway. The Reserve Bank of Australia faced the same problem the week before. Despite cutting rates twice in 2016, the Australian dollar is stronger now than before it started to cut rates.

Selected currencies — weekly results

Indicator scoreboard

Germany

June industrial production was up 0.8 percent after a revised 0.9 percent decline in May. On the year, output was up 0.5 percent after falling 0.3 percent the preceding month. June's overall monthly gain was dominated by capital goods where production jumped 3.5 percent unwinding the previous period's 3.4 percent slump. Consumer goods were up 1.2 percent but intermediates fell 0.7 percent, energy was down 2.7 percent and construction dropped 0.5 percent. Manufacturing expanded 1.5 percent but only after a 1.6 percent contraction in mid-quarter.

June merchandise trade surplus was €21.7 billion after a marginally smaller revised €22.1 billion in May. The limited headline deterioration reflected a 0.3 percent monthly increase in exports that failed to reverse May's 1.9 percent drop and was more than offset by a 1.0 percent rise in imports. Still, exports have expanded in four of the last five months while a second successive advance in imports only came after consecutive declines in March and April.

United Kingdom

June industrial output edged up 0.1 percent on the month and only dented a slightly steeper revised 0.6 percent drop in May. However, favorable base effects still saw annual growth of output edge up from 1.4 percent to 1.6 percent. The key manufacturing sector recorded a 0.3 percent monthly contraction, compounding a 0.6 percent decline in mid-quarter. Output here now stands just 0.9 percent higher on the year. Within this group, transport equipment (down 1.0 percent), machinery & equipment (down 1.9 percent) and food & drink (down 0.5 percent) did most of the damage to the monthly change although the majority of subsectors recorded declines. Partial offsets were provided by textiles & leather (4.1 percent) and other manufacturing & repair (3.3 percent).

June global deficit on trade in goods was Stg12.41 billion, only just short of its record high. The June deterioration followed a sharply larger revised Stg11.53 billion shortfall in May. Following their slump in May, exports expanded 4.0 percent on the month but this was easily eclipsed by a 5.2 percent spurt in imports. Around a third of rise in the headline red ink reflected a widening in the shortfall on oil from Stg0.40 to Stg0.68 billion and excluding this sector and other erratic items the deficit was up less than Stg0.5 billion at Stg10.84 billion. Net exports to the rest of the EU were in the red were Stg8.3 billion, up Stg0.3 billion from May, and with the rest of the world by Stg12.4 billion after Stg11.5 billion last time.

Asia/Pacific

Japan

June machine orders excluding volatile items such as ships and those from electric power companies were up 8.3 percent on the month after declining 1.4 percent in May. It was the first monthly increase since March. On the year, machine orders were up 1.1 percent after sinking 12.7 percent last time. This series is considered a proxy for capital expenditures. According to the government, machine orders are at a standstill. The government projects that core machine orders will increase 5.2 percent in the July through September quarter.

China

The July merchandise trade surplus was 342.8 billion yuan, up from June's surplus of 311.2 billion yuan. Exports in yuan terms were up 2.9 percent from a year ago after increasing 1.3 percent in June. Imports however, declined at a more rapid pace of 5.7 percent after declining 2.3 percent the month before. For the months January through July, exports were down 1.6 percent on the year while imports retreated 4.8 percent. In US dollar terms, the trade balance was $52.3 billion, up from $48.11 billion in June. Exports dropped a greater than expected 4.4 percent on the year while imports tumbled 12.5 percent. Expectations were for exports to decline 3.7 percent and imports to drop 7.4 percent. On a seasonally adjusted basis, exports were flat in July after increasing 5.4 percent in June while imports slid 0.9 percent on the month after increasing 5.4 percent in June.

July consumer price index was up 1.8 percent after increasing 1.9 percent on the year in June. On the month, the CPI was up 0.2 percent. Year to date, the CPI was up 2.1 percent when compared with a year ago. Urban prices were up 1.8 percent after 1.9 percent the month before while rural prices were up 1.5 percent after 1.9 percent in June. Food prices eased, up 3.3 percent after 4.6 percent in June and 5.9 percent in May. Nonfood prices were up 1.4 percent after 1.2 percent and 1.1 percent on the year. Clothing was up 1.4 percent for a second month. Transportation and communication prices continued to decline, this time down 1.6 percent after declining 1.8 percent in June.

July industrial production was up a less than expected 6.0 percent from a year ago. Expectations were for an increase of 6.2 percent. Output was up 0.52 percent on the month after increasing 0.5 percent in June. For the first seven months of 2016, output increased 6.0 percent. A spokesman for the National Bureau of Statistics said that floods slowed the economy significantly. Mining activity declined 3.1 percent on the year. It was the third consecutive decline. Manufacturing slowed to an increase of 7.0 percent from 7.2 percent. Among the major industries, activity slowed in all but communication equipment.

Bottom line

Most equity indexes advanced last week. However, economic data were mixed with China's especially disappointing. In the U.S., analysts were surprised on the downside by retail sales, consumer sentiment and producer prices. The Reserve Bank of New Zealand lowered its official cash rate as universally expected.

Next week promises to be a quiet week as one might expect in mid-August with many especially in Europe on vacation. Investors will look to September to begin the last lap of 2016. 

Looking Ahead: August 15 through August 19, 2016

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