Global Markets

Central bank policy uncertainties sent equities and crude prices tumbling during the week. Investors worried that central banks may be less willing to use monetary tools to stimulate growth. Economic data have also been missing forecasts this month, exacerbating investors' angst. Just last week, ECB President Mario Draghi downplayed the need for more stimulus, while saying officials will study ways to make the central bank's asset buying program more efficient.

Traders are also trying to figure out whether the Federal Reserve will raise rates at next week's meeting after officials gave mixed views on prospects for higher borrowing costs in an outpouring of FedSpeak prior to the mandatory blackout period that precedes each FOMC meeting. The Bank of Japan is also causing concerns. At its last policy meeting, it announced that it would assess its easing program at its September meeting next week.

Global Stock Market Recap

Europe and the UK

Equities retreated again last week. The FTSE now has declined in four of the five weeks while the CAC, DAX and SMI have been lower in three of five. Disappointment with the European Central Bank's decision to leave its policy unchanged combined with angst regarding the Bank of Japan and Federal Reserve decisions next week dampened investors' propensity for risk.

On the 'back burner' so to speak was the Bank of England's monetary policy committee on Thursday. After surprising with assertive easing measures in August when the Bank cut interest rates for the first time since 2009, the BoE kept its policy unchanged but inferred that they could ease further if necessary before the end of the year. For the week, the FTSE was down 1.0 percent, the CAC dropped 3.5 percent, the DAX retreated 2.8 percent and the SMI declined 1.6 percent. The FTSE was down three of five days while the CAC, DAX and SMI retreated four of five.

Bank stocks were under extreme pressure at the end of the trading week due to concerns over Deutsche Bank. The U.S. Department of Justice has fined the German lender $14 billion to settle claims over a mortgage securities probe. The sheer size of the fine caused traders to flee bank stocks, since there are other European banks that are facing similar probes.

Among the economic data released during the week, most UK data were positive while data from the Eurozone disappointed. In the UK, retail sales, producer prices and the ILO jobless rate were better than anticipated while the CPI and the number of jobless claims disappointed. In the Eurozone, industrial production, the trade surplus and labour costs were weak as was the German ZEW survey. 

Swiss National Bank

There were no surprises in the Swiss National Bank's September policy announcement. The key deposit rate was again left unchanged at minus 0.75 percent the midpoint of the minus 1.25 to minus 0.25 percent target range retained for 3-month CHF Libor. The SNB also firmly restated its commitment to intervene in the foreign exchange markets in order to prevent any further appreciation of the Swiss currency which it continues to regard as significantly overvalued.

The updated economic forecasts in the new Monetary Policy Assessment (MPA) show a marginally stronger, but still only sluggish and, moreover, lopsided, domestic recovery that leaves a worryingly low level of capacity utilization. The inflation outlook has been downgraded to an annual average rate of 0.2 percent in 2017, a tick below the June projection, and 0.6 percent in 2018, three ticks short of last time.

Bank of England

Having reduced the Bank Rate and boosted its asset purchase program in August, the September MPC meeting left its policy stance unchanged. The benchmark interest rate stayed at 0.25 percent and the asset purchase ceiling for government bonds remained at £435 billion. The target for corporate bond buying similarly remained at (up to) £10 billion. The vote was unanimous.

Since the August monetary policy committee (MPC) discussions the economy has shown some signs of cooling but growth seems to be holding up reasonably well and certainly much better than the more pessimistic post-Brexit vote forecasts. Even inflation (annual 0.6 percent rate in August) has not responded as much to the pound's slide as many, including the BoE, anticipated. So there was little pressure for any additional measures today.

The minutes show that the MPC acknowledged that economic activity has not slowed as quickly as envisioned in the August Quarterly Inflation Report (QIR) and has revised up its growth expectations for the second half of the year. In part this reflects the effects of the monetary stimulus delivered at last month's meeting. The next policy gathering will not be until November as the Bank switches to its new schedule of eight, rather than twelve, MPC meetings each year.

Asia Pacific

Equities retreated in the Asia Pacific region last week — investors were cautious before the upcoming Federal Reserve and Bank of Japan announcements mid-week. Investors continued to weigh each policy makers' pronouncements prior to the blackout period that precedes each FOMC and Bank of Japan meeting. A promised assessment of its monetary policy has led to all sorts of conjectures over what the BoJ might — or might not do. At its July meeting, the BoJ announced that it would review why its aggressive easing has failed to boost inflation when it meets on September 20 and 21.

On the week, the Hang Seng dropped 3.2 percent, the Nikkei lost 2.6 percent and the Shanghai Composite was 2.5 percent lower. Australia's All Ordinaries ended the week 0.8 percent lower, marking a fifth straight week of declines. That matches a five week losing streak to the week ended September 26, 2014 according to Bloomberg data. The index has shed 4.1 percent in the past five weeks. Despite the five week decline, the index is up 1.0 percent in 2016.

China posted its August data for industrial output and retail sales — both beat expectations. And in Japan, July machine orders excluding volatile items such as ships and those from electric power companies surprised, increasing for a second consecutive month. Analysts were surprised — they expected orders, a proxy for capital spending, to drop. This is the first time orders have increased in consecutive months since December 2015 and January 2016. However, August producer prices continued to decline, this time by 3.6 percent from a year ago.

Currencies

The U.S. dollar gained on five of its six major counterparts last week. It advanced against the euro, pound sterling, Swiss franc and the Canadian and Australian dollars. However, it was down against the yen. The stronger than anticipated U.S. inflation data Friday sent the currency up against many of its peers as investors continue to respond to anything that might shift Federal Reserve interest rate expectations before the FOMC announcement Wednesday. Most of the action here came after data showed inflation growing at its fastest pace in six months. Headline CPI was up 1.1 percent on the year while core excluding food and energy was 2.3 percent higher.

The pound sterling retreated amid speculation that potentially painful Brexit negotiations will prompt the Bank of England to ease monetary policy further. Sterling fell against all of its 16 major peers on Friday as the Telegraph newspaper cited five unidentified senior EU officials saying that Britain will face a "bureaucratic nightmare" in the talks, and that "reality" even may persuade it to not follow through with the voter-approved exit. While the BOE's Monetary Policy Committee members voted unanimously to keep its key interest rate and asset-purchase target unchanged on Thursday, they signaled further easing cannot be ruled out.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

August harmonized index of consumer prices edged up 0.2 percent from a year ago and matched both its final July post and its highest mark so far in 2016. On the month, the HICP was up 0.1 percent following a largely seasonal 0.6 percent decline last time. The core rates were also unrevised. Excluding energy, food, alcohol & tobacco as well as omitting just energy & unprocessed food, the HICP was up 0.8 percent. Without energy & seasonal food, the rate was 0.7 percent after 0.8 percent at the start of the quarter.

Germany

September ZEW current conditions component slipped 2.5 points to 55.1, only reversing a part of August's 7.8 point bounce. It was also still 0.6 points above its June reading, just prior to the Brexit vote. Expectations held up better, albeit from a much lower level. At 0.5, this sub-component was unchanged from its August reading although still some 18.7 points short of its June post. Analysts remain very uncertain about the impact of Brexit so volatility in the ZEW results is only to be anticipated.

United Kingdom

August consumer price index was up 0.3 percent on the month and 0.6 percent from a year ago. The main boost to the change in the yearly inflation rate came from transport where prices rose 0.9 percent on the month after a 0.1 percent increase over the same period in 2015. A smaller drop in the cost of diesel was a key element here. Food (0.6 percent after minus 0.2 percent) also made a significant positive contribution. On the downside, restaurants & hotels (minus 0.4 percent after 0.0 percent), together with clothing & footwear (1.0 percent after 1.5 percent) and alcohol (0.3 percent after 2.4 percent) were the main factors. Unusually warm weather seems to have played a role in dampening the usual seasonal demand for new clothing. As a consequence, the core CPI was up a slightly firmer 0.4 percent from July although this was only enough to see its 12-month rate hold steady at 1.3 percent.

August claimant count unemployment increased by just 2,400 and not enough to lift the jobless rate from July's 2.2 percent. July's previously reported 8,600 drop was revised down but still shows a decline of 3,600. Meanwhile, the ILO data showed the number of people out of work falling a further 39,000 in the three months to July. This also left its measure of the jobless rate steady at 4.9 percent, matching its lowest reading since the third quarter of 2005. At the same time, employment rose 174,000, only 2,000 less than the increase recorded in the April to June period and to a new record of 31.767 million. In addition, vacancies were up 6,000.

August retail sales retreated 0.2 percent on the month after a revised 1.9 percent jump in July. Annual growth of volumes was 6.2 percent. Excluding auto fuel, the picture was much the same with a 0.3 percent monthly drop reversing just a fraction of July's upwardly revised 2.1 percent leap. Compared with a year ago, purchases expanded 5.9 percent after a 5.8 percent gain last time. The monthly decline would have been steeper but for a second successive 0.7 percent advance in sales of food. However, a sizeable 1.9 percent decline in non-food purchases needs to be seen in the context of a 3.7 percent jump in July. Within this latter group, clothing & footwear (minus 3.4 percent) was probably hit by seasonally very warm weather but a 5.3 percent plunge in household goods is harder to explain away. That said, non-specialized stores posted a 0.8 percent rise, non-store retailing was up 2.7 percent and the other stores category recorded just a 0.1 percent dip. Auto fuel sales were 0.6 percent firmer.

Asia/Pacific

Japan

July machine orders excluding volatile items such as ships and those from electric power companies rose 4.9 percent on the month after an increase of 8.3 percent in June is the first time orders have risen in consecutive months since December 2015 and January 2016. On the year, machine orders rose 9.4 percent after an increase of 1.1 percent last time. This series is considered a proxy for capital expenditures. Officials forecast this core measure of orders to increase by 5.2 percent in the three months to September, compared with a fall of 9.2 percent in the previous quarter.

August producer price index dropped for the seventeenth consecutive month when compared with a year ago. At minus 3.6 percent,it was up from minus 3.9 percent in July. The index fell 0.3 percent on the month after it was flat in July. Producer prices fell or were flat in August for almost all of the industry categories covered in the index. Petroleum & coal prices continue to be the major drag, dropping by 15.2 percent on the year compared with a revised fall of 19.3 percent in July, while prices for non-ferrous metals were down 12.9 percent on the year.

Australia

August employment declined 3,900 after a gain of 26,200 in July. A drop in labour force participation, however, helped the unemployment rate edge lower to 5.6 percent from 5.7 percent — a three year low. The employment decline was driven entirely by part-time jobs, which declined by 15,400 after increasing by around 70,000 in July. Full-time jobs increased by 11,500, partly unwinding July's 43,000 decline. Despite the shift from part-time to full-time employment seen in August, total hours worked fell by 0.2 percent on the month. The number of unemployed persons fell by 10,500, reflecting 25,400 fewer unemployed persons looking for part-time work, offset by 14,900 more unemployed persons looking for full-time work. The participation rate fell from 64.9 percent to 64.7 percent, its lowest level since January 2015.

China

August industrial production rose 6.3 percent on the year, up from 6.0 percent in July. This is the strongest monthly growth rate since March and comes despite government directives to close down factories temporarily in some provinces in August. This was reportedly done to reduce air pollution ahead of the G-20 summit held in Hangzhou last month. The pick-up reflects a smaller fall in mining output, offsetting somewhat weaker gains in manufacturing and utilities production. Cement, steel products, coal and electricity all recorded stronger growth in August, offsetting a slightly lower (but still strong) increase in auto output.

Bottom line

The Bank of England and the Swiss National Bank left their monetary policies unchanged. Economic data globally continues to be mixed. UK data proved to be better than anticipated while data from Europe tended to be worse. Japan presented a mixed picture with machine orders surprising on the upside while producer prices remained mired in deflation. China's retail sales and industrial output data were better than anticipated. U.S. data were mixed confounding analysts as they tried to figure out what the Federal Reserve would do at its meeting.

Analysts agree to disagree on whether the Federal Reserve will increase the fed funds rate on Wednesday. It is a close call. The Bank of Japan also holds a policy meeting on the same day. The BoJ is expected to reveal the outcome of its assessment of its monetary policy. It is a close call here too. Investors will also be paying attention to the flash PMIs at the end of the week for a first look at how September is faring.

Looking Ahead: September 19 through September 23, 2016

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