Global Markets

Trading was muted with many indexes celebrating holidays during the week. While shares were mixed in Asia, they advanced in Europe, the U.S. and Mexico but were virtually unchanged in Canada.

In addition to the usual plethora of updated economic information that the first week of the month brings, earnings season continued with a deluge of reports, mostly good. And investors are waiting for the French election results — we will know the winner before markets open on Monday of the new week. The first week of May also contained a FOMC meeting which always heightens investor interest and of course, the U.S. employment report. The Federal Reserve, as anticipated, left its policy unchanged and the April employment report was better than expected. The Reserve Bank of Australia also left its monetary policy unchanged at its monthly meeting.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia has again left its policy interest rate unchanged at 1.50 percent where it has been since August 2016. The statement accompanying the decision indicated that the RBA's assessment of economic conditions and the growth outlook were little changed from their previous meeting in April.

In its Statement of Monetary Policy which was released later in the week, the RBA slightly upgraded its forecasts for growth and also left its inflation forecasts unchanged. The RBA said a number of factors have provided increased confidence in the central forecast that inflation will increase gradually. These include the rebound in growth in the fourth quarter of 2016, the fact that terms of trade have held up a bit longer than expected and the global outlook appears to be stronger in the near term.

The RBA also admitted that it is difficult to know if and when a stronger and durable recovery in non-mining business investment might take hold. It expects the level of residential investment to remain high but expects that it will contribute less going forward than it did in the recent past.

There is only one change to the RBA's forecasts and it relates to growth for the year-ended June 2018. In February this was assessed as 2.5 percent to 3.5 percent. It has been raised to 2.75 percent to 3.75 percent meaning that the RBA is expecting that above trend growth (trend is assessed as 2.75 percent) can be achieved earlier than had previously been expected. The RBA continues to expect the inflation rate to hold in the 1.5 percent to 2.5 percent range in both 2017 and 2018.

Federal Reserve

As universally expected, the Federal Reserve kept its policy fed funds interest rate range at 0.75 percent to 1.00 percent. The Fed lifted rates by a quarter point at its March 15 meeting and signaled that more rate increases were to come in 2017. In its statement, the FOMC said it believes the recent slowdown in US growth is likely temporary. The committee acknowledged that household spending growth had grown "only modestly" lately, but they emphasized that the "fundamentals" behind consumption growth remained solid. There was no mention of future fiscal policy stimulus, global developments and no mention of unwinding the Fed's $4.5 trillion balance sheet. The vote was 10 to 0.

In its latest statement, the Federal Open Market Committee said: "The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term." The Fed did not offer an explicit signal that a second 2017 rate increase is imminent, keeping existing language describing the risks to the outlook as roughly balanced.

Global Stock Market Recap

Europe and the UK

European equities advanced across the board in the holiday shortened week. Gains ranged from 0.9 percent (OMX Stockholm 30) to 4.2 percent (FTSE MIB). The FTSE was up 1.3 percent, the CAC gained 3.1 percent, the DAX climbed 2.2 percent and the SMI added 2.3 percent. A late surge helped propel the SMI above the 9,000 level for the first time since December 2015.

Expectations that centrist leader Emmanuel Macron will prevail over far-right candidate Marine Le Pen sent the markets higher. Positive earnings also helped boost equities. And on Friday, although the indexes struggled in early trading, they rallied following the positive U.S. employment report. The rebound in crude oil and precious metal prices also helped to push the markets higher in the afternoon.

Most economic data released during the week were positive. The preliminary flash estimate of gross domestic product was up 0.5 percent on the quarter. Retail sales for March increased and the retail PMI for April jumped into growth territory to 52.7. German unemployment in April declined while the French jobless rate held steady at 10 percent. In the UK, all PMI readings including manufacturing, services and construction improved.

Asia Pacific

In a week where most countries (except Australia) celebrated holidays, equities were mixed. The declines were generally commodity driven thanks to price declines for steel and crude oil. As is usually the case, investors were cautious prior to the Federal Reserve's monetary policy announcement Wednesday even though virtually everyone expected no change. And that was followed by Friday's employment report which always makes investors nervous. Adding to investor unease is Sunday's presidential election in France.

On the week, losses ranged from 1.92 points (Jakarta Composite) to 1.6 percent (Shanghai Composite). Of the seven indexes that advanced on the week, the PSEi added 2.4 percent while the SET managed only a 0.2 percent gain. The Nikkei added 1.3 percent in just two days of trading — markets here were closed Wednesday through Friday for the Golden Week holidays.

While regulatory enforcement sprees are not new to China, investors fear there may be no letup in a new wave of tightening soon after President Xi Jinping last week made a rare speech on financial stability. Xi called for increased efforts to ward off systemic risks to help maintain financial security according to the official Xinhua news agency.

April manufacturing PMIs were mixed with China's weakening from 51.2 to a barely over the 50 breakeven point at 50.3. The CFLP measure of manufacturing PMI also was lower but at a higher level (51.2). This set off worries that the Chinese economy was weakening. This, combined with declines in commodity prices, shook investors' confidence. In Japan, the manufacturing PMI edged higher to a reading of 52.7 from 52.4 in March. And in Australia, the April reading climbed to 59.2 from 57.5, indicating strong manufacturing growth.

Bank of Japan Governor Haruhiko Kuroda on Friday voiced confidence that the country's inflation rate will accelerate toward his 2.0 percent target as robust economic growth pushes up wages and helps heighten inflation expectations. Kuroda conceded that inflation expectations were not well anchored in Japan, making it challenging to convince households and companies that a sustained economic recovery will eventually lead to higher inflation and wages. But he said that once inflation rates start to accelerate significantly, that will change public perceptions of future price rises and enable the BoJ to achieve its price target. Kuroda is in Yokohama, eastern Japan, to meet financial leaders gathering for the Asian Development Bank's annual meetings.

Currencies

The U.S. dollar advanced against the yen and the Australia dollar but was lower against the euro, pound sterling and Swiss franc. It was virtually unchanged against the Canadian dollar. The euro is rising thanks in part to the improving economy — provisional flash first quarter gross domestic product increased 0.5 percent on the quarter for a second quarter and was up 1.7 percent from the same quarter a year ago. The good GDP number was supported by an improved composite PMI for April suggesting that economic growth in the region is running at the highest rate in six years. This is in contrast to the disappointing first quarter growth of the U.S. and continuing doubt whether President Donald Trump will be able to pass the pro-growth initiatives that he promised during his campaign.

And while the euro is rising, the yen is going in the opposite direction — the yen is declining as currently investors are not seeking a safe haven and the spread between Japanese and U.S. interest rates widens. On Wednesday the U.S. currency rallied and hit a more than six-week high against the yen after the Federal Reserve signaled it was still on track for two more interest rate increases this year. Even before the Fed statement, the dollar had hit more than six-week highs against the yen as traders digested the possibility of ultra-long U.S. bond issuance and stronger-than-expected April U.S. services sector growth.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

First quarter preliminary flash gross domestic product expanded 0.5 percent on the quarter. This matched its upwardly revised rate for the fourth quarter of 2016. However, base effects saw the annual increase in total output slip a tick to 1.7 percent. There are no additional details provided in the preliminary flash release. National data will be provided in the full flash report due May 16 while the key GDP expenditure components will not be available until June 8.

April manufacturing PMI was 56.7, 0.5 points above its final March reading and indicative of the strongest rate of business activity in six years. The reading reflected very healthy gains in output and new orders (both largest since April 2011) as well as faster job creation. New export business also increased at its quickest rate since 2011 while suppliers' delivery times lengthened significantly. Employment was equally robust. Against this backdrop, business sentiment regarding the year ahead almost matched January's record high. Price pressures remained elevated with input costs increasing at a rate close to February's 69-month high and factory gate inflation also only just short of March's nearly 6-year peak. Seven out of the eight nations covered recorded an improvement in operating conditions, the sole exception being Greece which reported an eighth consecutive deterioration. The best performer was Germany (58.2) ahead of Austria (58.1) and the Netherlands (57.8). Italy (56.2) also had a good month and France (55.1) climbed to a reassuring 72-month high. Ireland (55.0) and Spain (54.5) lagged but were still well into positive growth territory and even Greece (48.2) at least managed a 4-month peak.

Asia/Pacific

Australia

March merchandise trade surplus narrowed to A$3.1 billion from a revised A$3.7 billion in February. The trade balance has now been in surplus for five consecutive months after nearly three years in deficit, helped by strong global commodity prices.  Exports were up 2.4 percent on the month largely driven by a sharp increase in exports of non-monetary gold (around 6 percent of the total). Exports of rural goods (around 12 percent of the total) also recorded a solid gain in March, augmented by a modest increase in exports of services (19 percent of the total). Exports of non-rural goods (around 63 percent of the total) were flat on the month. Seasonally adjusted exports were up 29.2 percent on the year. Imports were up 4.6 percent on the month and were mainly driven by stronger imports of consumption goods and intermediate and other merchandise goods, offsetting lower imports of capital goods and flat services imports. On the year, imports were 7.3 percent higher.

Americas

Canada

March merchandise trade deficit narrowed to C$135 million from February's C$1.1 billion. Exports rose 3.8 percent due to stronger exports of energy products and consumer goods. Imports were up 1.7 percent, mainly on higher imports of unwrought gold. On the year, imports were up 5.6 percent and exports were 12.9 percent higher. The rebound in exports from February's decline was due to increases in 8 of 11 sections. Volumes were up 2.5 percent in March and prices increased 1.3 percent. Energy products, consumer goods, and metal and non-metallic mineral products were responsible for the increase in exports in March. Exports excluding energy products rose 3.1 percent. Exports of energy products were up 7.0 percent on higher volumes. Natural gas exports led the increase, which is attributable to unusually low temperatures in the northeastern United States in March. Total imports were up for the fourth consecutive month with gains in 7 of 11 sections. Prices rose 1.9 percent while volumes edged down 0.2 percent. Exports to countries other than the United States rose 15.3 percent to a record high. Imports from countries other than the United States were up 1.2 percent on higher imports from Saudi Arabia (crude oil) and the United Kingdom. As a result, the trade deficit with countries other than the United States narrowed from C$5.6 billion in February to C$4.1 billion in March. Imports from the United States increased 2.0 percent, while exports to the United States edged up 0.1 percent. As a result, Canada's trade surplus with the United States narrowed from C$4.5 billion in February to C$4.0 billion in March.

April employment increased 3,200 while the unemployment rate declined 0.2 percentage points to 6.5 percent, the lowest rate since October 2008. The minimal increase in employment was the result of full time employment declining 31,200 while part time employment increased 34.300. The participation rate declined to 65.6 percent from 65.9 percent in March. On a sector basis, public employment was up 35,200 while private employment tumbled 50,500. Employment in the goods producing sector was up 4,200, agriculture add 4,300 jobs and natural resources was 1,400 jobs higher. However employment in utilities (down 1,500) and manufacturing (down 600) declined. Services producing jobs were down 1,000 with losses led by business, building & other support services (down 18.700), accommodation & food (down 12,300) and trade (down 8,000). Employment rose in British Columbia and Prince Edward Island, while it was virtually unchanged in the other provinces.

Bottom line

Both the Federal Reserve and the Reserve Bank of Australia left their policy interest rates unchanged. Economic data were mostly positive with the main disappointment coming from various purchasing managers surveys from China. The opposite was true for surveys in Europe and the UK.

The Bank of England meets Thursday and will issue its Quarterly Inflation Report. Most economic data releases in Europe center around industrial production and merchandise trade balances. In Asia, China begins releasing its April data. Its merchandise trade balance and consumer and producer price indexes will be released.

Looking Ahead: May 8 through May 12, 2017

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