Global Markets

Three central banks announced their monetary policy decisions during the week and all three maintained the status quo and did not change policy. The news disappointed the markets — they were looking for more stimulus. And in some cases good economic data was interpreted as bad news because it meant that there was less of a probability of more stimulus. A pickup in FedSpeak after the Labor Day holiday and before the September 20 and 21 FOMC meeting also influenced markets with many of the speakers' remarks running counter to market opinion concerning the state of the U.S. economy. Most equity indexes were down on the week.

The Reserve Bank of Australia maintained its 1.5 percent policy interest rate after lowering it by 25 basis points at its previous meeting. The Bank of Canada kept its key rate at 0.5 percent. The European Central Bank kept its policy rates unchanged — the benchmark refi rate stayed at zero percent and the rates on the deposit and marginal lending facilities remained at minus 0.40 percent and 0.25 percent respectively. To the left is a graphic picture of interest rates since the beginning of 2008 for the three banks.

The Reserve Bank of Australia (RBA) offered no surprises in leaving its key interest rate unchanged after cutting twice this year by 25 basis points in May and again in August. The meeting was the last chaired by outgoing Governor Glenn Stevens. His replacement is Deputy Governor Philip Lowe who will take over later this month. The post-meeting statement noted that global growth is below average while domestic growth is weakening. The second quarter GDP data released the day after the meeting showed that quarterly growth was up 0.5 percent, half of the 1.0 percent growth of the first quarter.

Bank of Canada (BoC) once again left its key rate at 0.5 percent where it has been since July 2015. The deposit rate remained at 0.25 percent and the Bank Rate at 0.75 percent. Second quarter gross domestic product contracted 0.4 percent on the quarter but there have been early signs of a decent rebound in the current period. In justifying its decision the BoC pointed out that recent domestic economic developments had been broadly in line with its own expectations although it also noted that the U.S. economy had surprised on the weak side. It also pointed out that inflation risks were tilted to the downside.

The European Central Bank (ECB) kept its interest rates unchanged and at the same time reaffirmed that its quantitative easing (QE) program, also unchanged at €80 billion of asset purchases a month, will still run through at least March 2017. A number of market participants were looking for this to be extended by six months or so as a signal of the central bank's willingness to keep policy highly accommodative for as long as necessary. However any disappointment here should be limited as the March cut-off date was always going to be subject to economic conditions (crucially, higher inflation) so that QE was all but open-ended anyway. So far, the Eurozone economy does not appear to have been unduly hurt by the Brexit decision and, since the July meeting, inflation has continued to move sideways. However, it is much too early to judge the impact of Brexit on the Eurozone economy and ECB policy.

Global Stock Market Recap

Europe and the UK

European equities retreated last week. At week's end, investors were disappointed that the European Central Bank left its key interest rates unchanged for a fourth consecutive meeting and retained its asset purchase ceiling. But some investors were disappointed when ECB President Mario Draghi said in his press conference that policymakers did not even discuss any extension of asset purchases beyond the March 2017 expiration date. Weak economic data from Germany and France added to the negative mood. Geopolitical issues also played a role in the pullback Friday after North Korea confirmed that it tested a nuclear device. The FTSE declined 1.7 percent, the CAC retreated 1.1 percent, the DAX was down 1.0 percent and the SMI lost 0.4 percent from a week ago. Only the IBEX managed to increase (1.3 percent).

British economic data were surprisingly strong for the most part. August composite and services PMIs indicated strong growth. And the visible trade deficit narrowed in July. The major disappointment was a drop in July manufacturing output. In the Eurozone, both services and composite PMIs pointed to weaker growth. German data indicated possible problems ahead with factory orders barely increasing while industrial production tumbled and the trade surplus narrowed.

Asia Pacific

Equities were mixed last week. The week began on a note of optimism that faded with each passing day. Disappointment with the lack of new central bank largess would probably lead the list of downward pressures first with the Reserve Bank of Australia and then with the European Central Bank. The Nikkei managed to climb 0.2 percent while the Shanghai Composite and Hang Seng added 0.4 percent and 3.6 percent respectively. The All Ordinaries lost 0.6 percent. Friday's losses were partially attributed to North Korea's nuclear test which made investors nervous and disappointment with the ECB decision. Sentiment at the end of the week was also dampened by the Bank of Korea's decision to leave its key interest rate at 1.25 percent for a third straight month. The BoK last lowered rates by 25 basis points in June.

Hong Kong's Hang Seng continued to rally after a Chinese regulator said it would allow domestic insurers to invest in Hong Kong-listed stocks through a trading link with Shanghai. The announcement from the China Insurance Regulatory Commission came less than a month after Beijing confirmed it would launch the Shenzhen-Hong Kong Stock Connect program within 2016.

The Hang Seng rose through the 24,000-point mark for the first time in just over a year and notched its best weekly gain in two months. The rally came amid a pick-up in activity from mainland buyers, particularly on the institutional side and in the wake of the recent confirmation of the long-awaited trading link between Hong Kong and Shenzhen. On Friday, the index closed at its highest since August 11, 2015. The rally in Hong Kong has come amid increased turnover from mainland investors buying stocks listed in the territory. So-called "southbound" turnover on the Shanghai-Hong Kong Stock Connect has hovered around HK$7 billion per day for the week, the highest level since June 24 (a spike in the aftermath of the UK's vote to leave the EU). The previous time daily turnover was around these levels was in April last year as the Chinese market was surging to multi-year highs.

Currencies

The U.S. dollar advanced against the pound sterling and the commodity currencies, the Canadian and Australian dollars last week. It declined against the euro, yen and Swiss franc. The U.S. dollar retreated most of the week after the release of the shockingly low ISM nonmanufacturing index for August. The index tumbled from 55.5 to 51.4, just above the breakeven level of 50.0 between growth and no growth. The markets have a tendency to weigh each individual piece of new economic information as a make or break fact that will disproportionately influence the Federal Reserve's interest rate decision. FedSpeak however, was mostly hawkish during the week, indicating that FOMC members are looking to increase rates. With the September FOMC meeting about 10 days away at this writing, the volume seems to be turned up in advance of the blackout period which begins a week before the meeting.  

Selected currencies — weekly results

Indicator scoreboard

Eurozone

The third estimate of second quarter gross domestic product was up an unrevised 0.3 percent on the quarter after expanding twice that rate in the first quarter. On the year, GDP was 1.6 percent higher. This report contains the first look at the GDP expenditure components and this confirmed an expected marked slowdown in domestic demand. Household consumption rose just 0.2 percent on the quarter after a 0.6 percent increase in the previous period and gross fixed capital formation was only flat after a 0.4 percent gain. Consequently, with government consumption edging 0.1 percent higher and inventory accumulation subtracting 0.2 percentage points, growth was wholly attributable to a more positive external balance. Exports expanded 1.1 percent after having stalled in the first quarter while imports rose a smaller 0.4 percent. As a result, net exports added 0.4 percentage points to the quarterly change in real GDP.

Germany

July manufacturing orders climbed a modest 0.2 percent, only partially reversing a marginally smaller revised 0.3 percent drop in June. However, favorable base effects still saw annual growth jump from minus 2.8 percent to minus 0.7 percent. What increase there was in July was wholly attributable to capital goods which posted a 0.8 percent monthly rise. By contrast, basics were just flat and consumer & durable goods dropped a hefty 4.3 percent. In fact, the underlying picture was much weaker as domestic orders declined 3.0 percent, leaving the headline gain reliant upon the foreign market which expanded 2.5 percent. Within the latter, demand from the Eurozone was up a surprisingly sharp 5.9 percent from June while outside of the region the increase was just 0.6 percent.

Industrial production was significantly weaker than expected in July. Although June's monthly increase was revised up 0.3 percentage points to 1.1 percent, this was more than reversed by July's 1.5 percent drop — the steepest decline since August 2014. Annual growth dropped from 0.7 percent to minus 1.2 percent, its second sub-zero reading in the last two months. The monthly slide in output was broad-based among the major subsectors and would have been sharper still but for sizeable gains in the more volatile subsectors as energy was up 2.6 percent and construction 1.8 percent. Capital goods sank 3.6 percent albeit after a 4.0 percent surge last time, while consumer goods were down 2.6 percent and intermediates 0.8 percent.

The July seasonally adjusted trade balance was €19.4 billion, its smallest mark since September last year. The unadjusted surplus was much the same at €19.5 billion after a downwardly revised €21.4 billion in June. The shrinkage in the seasonally adjusted headline reflected a sizeable 2.6 percent monthly decline in exports which more than offset a 0.8 percent drop in imports. Exports have now declined in three of the last four months and show a cumulative slide of nearly 4 percent since March. Meantime, with the exception of June (1.2 percent), imports have decreased every month since February. On the year, unadjusted exports were down 10.0 percent, mainly due to a 13.8 percent collapse in purchases from non-EU countries, while imports were off 6.5 percent.

Switzerland

Second quarter gross domestic product was up 0.6 percent on the quarter and 2.0 percent from the same quarter a year ago. However, the robustness of the headline data masked a disappointingly weak performance by domestic private demand. Household spending only stagnated on the quarter and investment declined in both equipment & software (0.9 percent) and construction (0.3 percent). Rather, the expansion was attributable to a jump in government consumption (1.7 percent) and a sizeable contribution from business inventories (0.7 percent). There was also a positive impact from the external balance. Exports of goods excluding valuables fell 0.4 percent compared with a 0.5 percent increase in imports but overseas sales of services dipped just 0.1 percent from a 1.1 percent contraction in purchases.

United Kingdom

July industrial production edged up 0.1 percent on the month and was up 2.1 percent from a year ago. However, manufacturing posted a surprisingly steep 0.9 percent monthly decline, its third drop in a row and the most marked of the sequence. On the year, manufacturing was up 0.8 percent. Pharmaceuticals (down 5.6 percent) together with transport equipment (down 1.6 percent) and other manufacturing & repair (down 1.9 percent) did most of the damage but there were also sizeable declines in wood, paper & printing (down 1.6 percent) and coke & petroleum (down 4.3 percent). By contrast, machinery & equipment (3.9 percent), chemicals (1.8 percent) and textiles & leather (1.6 percent) all advanced. For total industrial production, the negative contribution from manufacturing was more than offset by increases in water supply (0.6 percent), gas & electricity (0.4 percent) and, in particular, mining & quarrying (4.7 percent).

July deficit on global goods trade was Stg11.76 billion after an upwardly revised Stg12.92 billion in June. The headline improvement reflected a 3.4 percent monthly bounce in exports combined with a 0.9 percent drop in imports. Excluding oil and other erratic items the deficit stood at Stg9.90 billion, a more modest narrowing from Stg10.47 billion posted last time. Underlying exports were up 2.1 percent from the end of last quarter while core imports were 0.5 percent weaker. Regionally the fall in the deficit was split between the rest of the EU, where the shortfall shrunk to Stg7.58 billion from Stg8.22 billion, and non-EU countries which saw a fall of Stg0.51 billion to Stg4.19 billion. However, the nominal trade data mask an ongoing disappointing trend in export volumes. Real underlying exports were 0.2 percent lower on the month, their third consecutive decline, which makes for a decrease of 6.4 percent over the three months to July. Similarly, measured imports were down 3.8 percent to a 4-month low but over the latest quarter show growth of 1.6 percent.

Asia/Pacific

Australia

Second quarter gross domestic product increased 0.5 percent and by 3.3 percent when compared with the same period a year ago. Quarterly growth slowed from the 1.0 percent recorded in the three months to March. Headline GDP growth was driven by private and public consumption, up 0.4 percent and 1.9 percent respectively on the quarter. Total investment, in contrast, was flat with strength in public investment offset by an ongoing reduction in engineering construction associated with the mining sector. Net exports made a negative contribution to headline growth of 0.2 percentage points. Mining, financial & insurance services and public administration & safety made the strongest contributions to annual growth in the quarter offset by a negative contribution from the manufacturing sector.

China

August trade surplus was $52.05 billion. Exports declined for a 14th month, this time by 2.8 percent on the year. Imports increased 1.5 percent after declining for 21 consecutive months. Exports to the U.S. were down 0.2 percent on the year while imports dropped 3.8 percent. Both exports and imports have retreated every month this year. In contrast to trade with the U.S., both exports and imports rebounded from declines in July to positive gains in August. Exports increased 2.2 percent while imports jumped 12.8 percent. Both imports and exports also gained with Japan. Exports inched up 0.4 percent while imports were 13.3 percent higher on the year. In yuan or renminbi terms, the August trade balance was 346 billion yuan. Imports jumped 10.8 percent while exports were up 5.9 percent.

August consumer price index was up 1.3 percent on the year after increasing 1.8 percent in July. Expectations were for an increase of 1.6 percent. On the month, the CPI inched up 0.1 percent. For the year to date, the CPI was 2.0 percent higher when compared with the same months a year earlier. The urban CPI was up 1.4 percent, down from 1.8 percent in July while the rural CPI was 1.0 percent higher after 1.5 percent. Food prices exerted the downward pressure on the overall index. They increased 1.3 percent, down from 3.3 percent the month before. Food prices, along with tobacco and liquor, account for roughly a third of the basket of goods that makes up China's CPI. Among the most heavily weighted categories in that group is pork, which regularly exerts a visible influence on headline inflation. Non-food items were up 1.4 percent for a second month. Food, tobacco & alcohol increased only 1.5 percent after 2.8 percent in July.

Americas

Canada

August employment rebounded 26,200 following its shock 31,200 slump in July. The participation rate edging a tick firmer to 65.5 percent but it was not enough to prevent the jobless rate from creeping up another notch to 7.0 percent. The increase in jobs was attributable to full-time positions which were up some 52,200 and so reversed a sizeable chunk of July's 71,400 decline. Part-time headcount was down 26,000 which similarly put a reasonable dent in the previous period's 40,200 increase. However, the private sector added only 8,300 while the public sector expanded 57,000. Accordingly, the headline gain would have been larger but for a 39,100 decrease in the number of self-employed. The goods producing sector added a net 10,800 positions within which manufacturing contributed 2,900. Construction (7,400) also performed well as did natural resources (4,400). Agriculture (down 3,000) and utilities (down 1,000) provided partial offsets. Services headcount rose 15,400, largely on the back of public administration (16,300) and trade (11,300). Information, culture & recreation (9,600) and health care & social assistance (8,100) also helped out. The steepest decline was in professional, scientific & technical services (23,100) ahead of business, building & other support services (8,800) and education (7,200).

Bottom line

Three central banks met and left their respective monetary policy unchanged. Globally, economic data were mixed. FedSpeak played an important role. The speeches which mainly indicated that a rate increase would be coming influenced investor sentiment while variable economic data sometimes pushed sentiment the other.

The Bank of England monetary policy committee meets on Thursday. No change in policy is anticipated. At its last meeting, the BoE unleashed a far reaching stimulus package that included a rate cut from 0.5 percent to 0.25 percent and an increase in its asset buying program of £60 billion to a total of £435 billion. The Swiss National Bank publishes its quarterly monetary policy assessment on that day as well. India releases July industrial production and August consumer price index Monday while China posts August industrial production and retail sales on Tuesday.

Looking Ahead: September 12 through September 16, 2016

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