International Perspective will be taking off for the holidays.

IP will return on Friday, December 30, 2016 with a yearend wrap.

Happy holidays from all of us at Econoday!

Global Markets

Last week was dominated by the run-up to the Federal Reserve's FOMC announcement and then its aftermath. Equity investors were cautious before the announcement. Equities dropped in the immediate aftermath of the announcement and Fed Chair Janet Yellen's press conference while the U.S. dollar soared and bond yields climbed. However, investors seemed to have second thoughts and shares rallied Thursday in Europe and the U.S. There were two other major central bank meetings — the Bank of England and the Swiss National Bank — and they were expected to leave their respective policies unchanged which they did. There were other central bank meetings as well. Briefly, the Norges Bank (Norway) and the Bank of Korea (South Korea) left key interest rates unchanged at 0.5 percent and 1.25 percent respectively. However, the Bank of Mexico increased its key rate by 50 basis points to 5.75 percent. Adjusting to the new scenario by the Fed sent the U.S. dollar higher against all of its major counterparts. The yen and euro tumbled. And while equities also initially retreated, they quickly reversed course and advanced Thursday.

On the week, equities were mostly lower in Asia and the North America while they increased across the board in Europe.

Federal Reserve

As expected, the Federal Reserve raised its target fed funds rate by 25 basis points to a range of 0.50 percent to 0.75 percent. The vote was unanimous. Descriptions of the economy were little changed from September. Job gains were described as "solid", household spending called "moderate" and business investment still "soft". Inflation was also described as mostly soft. The FOMC still sees the economy expanding at a moderate pace and sees near-term risks as roughly balanced. The FOMC's quarterly forecasts indicate that three rate increases are penciled in for 2017, up from two in its previous September forecasts.

In her press conference, Fed Chair Janet Yellen said all 17 members of the FOMC did discuss the outlook under the incoming Trump administration and recognized that there is "considerable uncertainty" on how policies may change. But she said the FOMC has time to "wait and see". She put into perspective the possible impact of new fiscal spending, saying it would be only one factor among many, such as changes in global demand or oil prices, that could affect policy. Ms Yellen also said that the rate increase is a vote of confidence and described both the economy and labor market as strong. When asked about balance sheet reduction during her press conference Ms Yellen said that it still depends on the fed funds rate being a lot higher, but was not as completely dismissive as in the past.

Global Stock Market Recap

Europe and the UK

Equities in Europe advanced for a second week as both the Bank of England and Swiss National Bank along with the Norges Bank did what was expected — they left their respective monetary policies on hold. The indexes were up three of five days. On the week, the FTSE was up 0.8 percent, the CAC gained 1.4 percent, the DAX added 1.8 percent and the SMI was 1.6 percent higher. With two trading weeks left in the year, the FTSE has outgained its peers for 2016.

Higher growth in Spain expected

The Bank of Spain raised its growth projections for the Spanish economy for this year and next. The Bank said that that an accommodative monetary policy combined with the expansionary fiscal policy and the lagged effects of oil price declines offset the impact of political instability in the country and the 'Brexit' vote. Gross domestic product likely grew 3.2 percent this year, which was slightly better than the 3.1 percent expansion forecast in September. The pace of growth however is expected to slow sharply next year as rising oil prices constrain purchasing power. The Bank noted that there was little scope to further lower interest rates and fiscal policy could abandon the expansionary stance of the past two years. However, the growth projection for next year was raised to 2.5 percent from 2.3 percent. The bank retained the growth forecast for 2018 at 2.1 percent and predicted 2.0 percent expansion for 2019.

Swiss National Bank

As widely anticipated, there were again no changes announced at the SNB's December policy assessment. The target range for 3-month CHF Libor remains at minus 1.25 percent to minus 0.25 percent and the deposit rate is held at minus 0.75 percent. Equally predictably, the focus of policy also stayed firmly fixed on the Swiss franc (CHF) which continues to be regarded as significantly overvalued.

Justifying the announcement, the SNB's revised economic forecasts show little change from September. Real GDP growth is still put at 1.5 percent this year. Similarly, inflation is unrevised at minus 0.4 percent in 2016 but at plus 0.1 percent next year and plus 0.5 percent in 2018. The changes here are only small but nevertheless underline the deflationary risks still facing the Swiss economy. This argues for sustained loose monetary policy going through 2017.

Bank of England

As widely anticipated, The Bank of England's monetary policy committee left its monetary policy unchanged. The Bank Rate remains at 0.25 percent and the target for the stock of UK government bond purchases financed by the creation of central bank reserves (QE) remains at £435 billion. The decision was again unanimous. Corporate bond buying totaling £10 billion was also reaffirmed.

On the whole, the real economy continued to outperform official expectations although the acceleration in inflation since the June Brexit vote has, at least so far, been relatively mild. However, the Bank (and consensus) view is that growth will slow in 2017 at the same time as inflation climbs above its 2 percent target — the MPC expects this mark to be reached within six months. The MPC has already indicated a willingness to tolerate an overshoot if needed to support growth but just how far is open to question. To this end, the minutes indicate that the Committee will be monitoring inflation expectations and wages particularly closely.

Asia Pacific

Most equity indexes in the Asia Pacific region retreated last week ending mixed Friday as equity investors adjusted to the prospects of higher U.S. interest rates and the likelihood of three more increases in the fed funds rate during 2017. Only the Nikkei (up 2.1 percent), the Topix (up 1.7 percent) and the Kospi (up 0.9 percent) advanced on the week. Declines ranged from 0.2 percent (SET) to 3.4 percent (Shanghai Composite) followed by the Hang Seng's 3.3 percent drop.

After the Fed increased interest rates mid-week, stocks across the region declined sharply. Increasing U.S. rates typically raise funding costs for Asian companies in dollars and trigger capital flight from regional markets to the U.S. However, analysts said that the"knee-jerk"reaction Thursday to the U.S. Fed decision was overdone. At the same time, in Japan, as the yen declines against the U.S. currency, it is supporting share prices of Japan's exporters. A weaker yen makes Japanese exports more competitive and repatriated profits are higher.

The Hang Seng posted its steepest weekly loss in six months after the Federal Reserve signaled a faster pace of interest rate increases and escalated fears of fund outflows. The weekly loss was the worst among major benchmark stock indexes in Asia after the Shanghai Composite as the yuan's drop to fresh eight-year lows overshadowed a set of upbeat economic data releases. Most of the losses were incurred on Thursday after the Fed projected three interest rate increases next year, one more than they had indicated in September. While the dollar surged with Treasury yields after the decision, emerging market assets sold off on fears of capital flight.

The challenges confronting Asia's policymakers from capital outflows were highlighted in Thursday's Bank of Korea meeting. The BoK kept its key policy rate at a record low of 1.25 percent and flagged growing risks for the export-reliant economy that some analysts feel should be tempered through another rate cut. But the BoK faces a dilemma as further easing could spark destabilizing capital flows toward higher yielding U.S. dollar-based assets, forcing it to sit tight for now.

Currencies

The U.S. dollar surged in the immediate aftermath of the Federal Reserve's increase in interest rates and indications that there could be three more increases in 2017. The currency soared against all of its major counterparts including the yen, euro, pound sterling and the Canadian and Australian dollars. Although the currency eased Friday as the euro, yen and pound sterling all recovered some ground, the currency advanced against its counterparts for the week. Friday's easing was a relief to emerging markets — a strong dollar risked exacerbating what are already short supplies of the U.S. currency. It should be noted that before the Fed meeting on Wednesday (US ET), markets had seen little chance of another surge in the dollar before the end of the year.

On Thursday, the euro slumped below the $1.04 mark against the dollar for the first time since January 2003 as the divergent paths for the European Central Bank and Federal Reserve drove down the euro. The dollar climbed to its highest level in 13 years. The euro weakness followed the Federal Reserve's decision to raise interest rates by 25 basis points this month and pencil in project three rate increases next year. That's one more than the two the FOMC forecast earlier in September, with markets judging the move as a hawkish turn for the Fed.

With the Fed embarking on a tightening cycle, the European Central Bank has moved in the opposite direction — announcing a nine month extension to its quantitative easing program this month.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

Flash December PMI results showed the key composite output index unchanged from its final November mark at 53.9, although this masked diverging developments in the manufacturing and service sectors. On the positive side, the flash manufacturing PMI weighed in at 54.9, up more than a point from its final mid-quarter reading. By contrast, the services index dropped 0.7 points to a 32-month low of 53.1. Growth of aggregate new orders matched its November rate but only due to a 68-month high for manufacturers as services posted a slowdown. However, both sectors saw solid gains in backlogs which, in total, recorded their strongest increase since May 2011. As a further indication of increasing pressure on capacity, supplier delivery times also lengthened sharply. Even so, a smaller advance in services meant that the rise in aggregate employment was less than last time. Inflation developments were clearly positive. Regionally within the core countries, the composite output index in France rose to 52.8, an 18-month peak while Germany dipped a couple of ticks to 54.8. The rest of the Eurozone saw growth ease slightly from November's 9-month high, again reflecting a deceleration in services. The U.S. and Japan were added for comparison.

Germany

December ZEW survey found analysts a little happier with the way the German economy is performing at the moment but only unmoved on their view of the business outlook. The current conditions index was up 4.7 points at 63.5, easily reversing November's 0.7 point drop and making for the strongest result since September 2015. By contrast, expectations were just unchanged at 13.8, equaling their highest mark since June. This was the first time that they have not improved since July.

United Kingdom

November consumer prices were up 0.2 percent on the month which was enough to lift the annual inflation rate by 0.3 percentage points to 1.2 percent — its strongest since October 2014. The acceleration in the yearly rate was largely due to clothing & footwear where prices increased 0.5 percent on the month after a flat performance over the same period in 2015. Other positive effects came from recreation & culture (0.5 percent after no change), furniture & household equipment & maintenance (0.5 percent after minus 0.2 percent) and energy, where petrol prices rose 1.6 percent per litre from a 1.5 percent drop last year. The only significant downward impact was made by alcohol & tobacco. Core CPI was up a monthly 0.2 percent and added 0.2 percentage points to its yearly rate which now stands at 1.4 percent. At the same time, the CPIH, which includes owner occupiers' housing costs and will become the preferred measure of inflation for the ONS (but not the government) in 2017, similarly posted a 1.4 percent annual rate, also up from 1.2 percent in October.

November claimant count joblessness rose only 2,400, its eighth increase in the last nine months. October's gain was revised up from 9,800 to 13,300 but the unemployment rate still held steady at just 2.3 percent. The ILO data were mixed. On the positive side, the number of people out of work on this definition was down a further 16,000 in the three months to October. Employment recorded its first 3-month drop since the second quarter of 2015. The jobless rate was steady at 4.8 percent. Total average earnings in the three months to October were up 2.5 percent on the year after an upwardly revised 2.4 percent increase in the third quarter. Regular pay even edged a couple of ticks firmer to 2.6 percent, its highest mark since June-August 2015. This suggests that wage demands may be starting to respond to rising inflation concerns.

November retail sales were up 0.2 percent on the month and were up 5.9 percent from the same month a year ago. Excluding auto fuel, purchases were up 0.5 percent from October and were 6.6 percent above their level a year ago. A 0.5 percent monthly decline in food also hit the headline data but this meant that non-food sales (ex-auto fuel) saw a sizeable 0.7 percent increase and that after a 3.1 percent leap last time. Household goods (6.0 percent) dominated but non-store retailing (3.8 percent) also enjoyed a very good month. By contrast, clothing & footwear (down 1.4 percent) and other stores (down 1.0 percent) struggled.

Asia/Pacific

Japan

October private sector machinery orders (excluding volatile items) rose 4.1 percent on the month (seasonally adjusted) after dropping 3.3 percent in September. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. In seasonally adjusted terms, orders fell 1.5 percent on the year (down from 0.6 percent in September), while the original data showed a 5.6 percent drop (down from 4.3 percent). Manufacturing orders dropped 5.0 percent on the month while nonmanufacturing orders excluding volatile items retreated 0.9 percent.

Australia

November employment increased by 39,100 after increasing by 15,200 in October (revised from 9,800). The unemployment rate edged up to 5.7 percent from 5.6 percent in October while the labour force participation rate rose from 64.4 to 64.6 percent. For the second consecutive month, full-time jobs drove the increase in employment. Full-time employment was up 39,300 after increasing 45,700 in October. Part-time employment slipped just 200 persons. These latest moves have partly reversed the recent shift from full-time to part-time employment, though the trend remains broadly intact. Since the start of the year, seasonally-adjusted full-time employment has fallen by 45,800 persons, while part-time employment has risen by 126,500 persons.

Americas

Canada

October manufacturing sales disappointed after increasing for two months by declining 0.8 percent – expectations were for an increase of 0.7 percent. On the year, growth accelerated to 1.9 percent from 1.2 percent in September. Sales volume dropped 1.7 percent in October after decreasing 0.4 percent in September. Manufacturing sales weakened across 15 of 21 industries, representing 61 percent of sales, led by primary metals which were down 2.4 percent, petroleum & coal, down 1.7 percent, and machinery down 2.5 percent. Sales of durable goods decreased 1.1 percent while non-durable goods sales were down 0.4 percent. The decrease in primary metal manufacturing sales was largely attributable to non-ferrous metal production and iron & steel mills and ferro-alloy manufacturing.

Bottom line

Equities in Europe and the U.S. advanced for the week after a knee-jerk decline in the immediate aftermath of the Federal Reserve's policy moves. Bond yields climbed and the U.S. dollar continued to increase against other currencies. The several other central banks that met left policy unchanged with the exception of the Bank of Mexico — it increased its policy rate by 50 basis points to 5.75 percent. Economic data were mixed globally.

With growth looking as though it is improving in Japan, the Bank of Japan will meet to end the latest round of global central bank meetings. Expectations are for no change in monetary policy however. In the last week before the holiday break and the New Year, several final estimates of third quarter growth for France, the UK and U.S. will be reported. The December Ifo business and Eurozone consumer confidence surveys are keys to European Central Bank assessment of the economy and of policy going forward.

Looking Ahead: December 19 through December 23, 2016

Looking Ahead: December 26 through December 30, 2016

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