Global Markets

Three central banks met — the Reserve Bank of India lowered its key interest rate while the Bank of England and the Reserve Bank of Australia left their policy interest rates unchanged. Equities were mixed for the week. In Asia, the rising yen (falling U.S. dollar) presented challenges for investors. But in Europe and the U.S., positive economic data sent stock indexes higher. In particular, the higher than anticipated U.S. employment gain of 209,000 (and the unemployment rate down to 4.3 percent) sent European and U.S. equities higher and the U.S. dollar rallied.

Bank of England

As widely expected, the Bank of England's monetary policy committee in a 6 to 2 vote kept its Bank Rate at 0.25 percent. The ceilings on asset purchases of gilt and corporate bond purchases remain at £435 billion and £10 billion respectively. Forward guidance was again limited to reassurance that when interest rates are increased, they will be both limited and gradual.

The outcome reflects the Bank's new Quarterly Inflation Report (QIR) which, in line with the May version, again showed inflation above its 2 percent medium-term target over the entire forecast horizon. However, the QIR is based on market assumptions that currently price in a 25 basis point increase in the third quarter of 2018 and a Bank Rate of just 0.8 percent in three years' time. The BoE pointed out that it would anticipate a more aggressive tightening should the economy perform as expected.

The minutes mainly conformed to those issued in June. There are obviously disagreements over the outlook for inflation and some MPC members are concerned about the potential damage to the BoE's credibility that a prolonged overshoot of the 2 percent inflation target could cause. However, the majority would seem to see the economic outlook as too uncertain at this stage to justify any shift in policy. Without a renewed deterioration in inflation and/or faster economic growth, this is likely to remain the case at the next meeting in September.

The pound sterling skidded to a nine-month low against the euro after the Bank of England voted 6 to 2 in favor of keeping interest rates at their record lows and lowered its growth and inflation forecasts. The markets focused on the BoE's downward revision of its 2017 growth forecasts as well as its unexpected lowering of its inflation projections, which it now sees at just under 2.6 percent in a year's time after peaking at around 3 percent in October.

After BoE chair Mark Carney said in his post meeting press conference that business investment was likely to be below average with bad consequences for productivity and wage growth, sterling fell to its weakest since early November.

Reserve Bank of India

The Reserve Bank of India used the room provided by slumping inflation to cut its main policy rate. The 25 basis point cut is the RBI's first since October 2016 when it also reduced its policy rate by 25 basis points. The repo rate is now 6.0 percent — the lowest since November 2010. The cut had been widely anticipated as a slump in food prices sent June consumer inflation to a more than five-year low of 1.54 percent. The RBI said reduced prices provided "some space" for monetary policy accommodation. Inflation is now well below the RBI's 4 percent target and its projection of 2.0 percent to 3.5 percent in April to September. Four members of the committee, including Governor Urjit Patel, voted to cut rates by 25 basis points, one voted for a 50 basis point cut and one voted to leave rates unchanged.

But the RBI also retained its "neutral" stance, and warned inflation could accelerate, while pinning future action on data — a view that leaves open the question of whether it will cut rates further as sought by the government. As a result, the RBI said it wanted more confidence that inflation would move "close to 4 percent on a durable basis". The monetary policy committee "will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway," the RBI said. The Bank stuck to its inflation projections, including that price increases could accelerate to 3.5 percent to 4.5 percent in October through December. It attributed the prediction to factors such as planned pay raises for government employees, a recovery in food prices and the impact on prices from the July 1 launch of a national goods and services tax. The RBI also cut the reverse repo rate by 25 basis points to 5.75 percent.

Reserve Bank of Australia

As widely expected, the Reserve Bank of Australia kept its cash rate at 1.5 percent where it has been since August 2016. RBA governor Philip Lowe said the Bank's economic forecasts were largely unchanged, noting stronger employment growth in recent months. Mr Lowe also noted that the potential for an appreciating exchange rate against the U.S. dollar would result in a slower pick-up in economic activity and inflation than currently forecast. In a nod to Amazon's proposed Australian debut, he also acknowledged the potential for "new entrants in the retail industry" to act as a drag on consumer inflation.

The statement accompanying the decision notes that conditions in the global economy continued to improve while again pointing to risks to the outlook for Chinese growth. The statement noted that the RBA's assessment of the economic outlook is "largely unchanged". The economy is still expected to grow at an annual pace of around 3.0 percent over the next couple of years while the unemployment rate is forecast to decline "a little". However, the board believes wage growth will remain subdued, underpinning their forecast for inflation to pick up only "gradually".

The main change in economic conditions that has taken place since the RBA's July 4 meeting has been a sharp appreciation of the Australian dollar. After the board had previously noted that a stronger currency would "complicate" adjustment in the domestic economy, the statement highlights that this development represents a downside risk for both the inflation and growth outlook.

Global Stock Market Recap

Europe and the UK

Equities were up for the week in part thanks to the rally after the U.S. employment report was released Friday. The FTSE was up 2.0 percent for the best weekly gain this year. The CAC added 1.4 percent and the SMI was 1.7 percent higher. The DAX by virtue of a 1.2 percent rally on Friday (due in part to a better than expected manufacturing orders report) was up 1.1 percent on the week.

A decline in sterling combined with the strength of the U.S. dollar following the employment report Friday boosted shares of overseas earners. But earnings played an important part in the daily fluctuations during the week as well along with key economic data and of course, the Bank of England's policy announcement.

Flash second quarter gross domestic product advanced along with June retail sales. In Germany, both manufacturing orders and retail sales advanced. In the UK, both the services and manufacturing PMI readings for July improved.

Asia Pacific

Equities here finished the week on a mixed note as investors waited for the U.S. monthly employment report that would be released later in the global market day. On the week, equity indexes were mixed as well. While the All Ordinaries increased 0.3 percent, the Nikkei was virtually unchanged, down 7.51 points. The Hang Seng and Shanghai Composite both registered weekly gains of 2.2 percent and 0.3 percent respectively. A weakening U.S. currency weighed on Asian indexes as well as continued political uncertainty in Washington. In Japan, equities weakened as the yen climbed to seven week highs and overshadowed optimism on corporate earnings.

The Shanghai Composite advanced for the seventh consecutive week bolstered by the continued robust performance of resources firms. Investors were also awaiting a flurry of data in coming weeks that could show steady July growth in China even as the economy navigates a tighter policy environment.

In Japan, June industrial production advanced but both the services and composite PMIs retreated but still remained above the 50 breakeven point between growth and contraction. In China, the PMIs were mixed with the Caixin manufacturing and composite PMIs improving but the CFLP readings retreating. In Australia, retails sales advanced in June while the merchandise trade surplus narrowed.

Currencies

The U.S. dollar was up against its major counterparts including the pound sterling, yen, Swiss franc and the Canadian and Australian dollars on the week. The euro was slightly higher on the week. Friday's dollar rally after the U.S. employment report exceeded expectations boosted the currency. It also boosted expectations for further fed funds rate increases and reduction of the Fed's balance sheet. This is the dollar's first weekly gain after three weeks of declines.

The euro retreated Friday after the positive U.S. employment report. But during the week, a strengthening Eurozone economy, expectations of monetary policy tightening and a tumbling U.S. currency all combined to propel the euro to its strongest level in three years. The currency's real effective exchange rate has rallied since late June when Mario Draghi, European Central Bank president, reminded the markets that the ECB had vanquished the threat of deflation. But the euro's surge is not without problems. Most significantly for the ECB, the currency's strength will exert a dampening effect on inflation, which the central bank expects will still undershoot its just under 2 percent target in 2019 at just 1.6 percent.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

July flash harmonized index of consumer prices was up 1.3 percent from a year ago for a second month and the lowest since last December. Core HICP excluding energy, food, alcohol &tobacco was up 1.2 percent, equaling its strongest mark so far this year, while without just energy & unprocessed food, the rate was 1.3 percent, also 0.1 percentage point up from June and a 2017 high to date. In the non-energy goods sector inflation crept up from 0.4 percent to 0.5 percent but slipped a tick to 1.5 percent in services. Energy (2.2 percent after 1.9 percent) had a small positive impact while food, alcohol & tobacco (1.4 percent) were flat.

Preliminary flash second quarter gross domestic product expanded 0.6 after increasing 0.5 percent the January to March period. It is the strongest increase in total output since the first quarter of 2015. Annual growth was 2.1 percent, an improvement on the 1.9 percent rate posted at the start of the year. No details of individual country performance or the regional GDP expenditure components are available in this release. However, provisional national accounts data already announced showed French GDP up a quarterly 0.5 percent and Spain an impressive 0.9 percent. Germany was probably around the 0.5/0.6 percent mark too but Italy will have lagged again.

Germany

June manufacturers' orders increased a monthly 1.0 percent and were up 5.2 percent from a year ago. The latest monthly advance was led by consumer and durable goods which were up a 2.3 percent, although even this failed to fully reverse May's 2.8 percent decline. Basics rose 1.0 percent but capital goods were off 0.8 percent. The overall rise was dominated by the domestic market which extended the switchback profile seen over the last year or so with a 5.1 percent spurt, the sharpest monthly increase since February. By contrast, overseas demand, which climbed 2.4 percent last time, contracted 2.0 percent. The divergent monthly moves put yearly growth of domestic orders at 5.1 percent, up from just 0.5 percent, and of overseas orders at a near-identical 5.2 percent, down from 6.4 percent.

Asia/Pacific

Japan

June industrial production was up 1.6 percent on the month and 4.8 percent from a year ago. The monthly gain reflected stronger output for transport equipment, general-purpose, chemicals and electrical machinery. This was offset by weaker output of electronic parts and devices, "other" manufacturing products and iron & steel.

Australia

June merchandise trade surplus narrowed to A$856 million from A$2.02 billion in May (revised from A$2.47 billion). Weaker commodity prices were a major factor driving the decline in the surplus, with the value of iron ore and coal exports in particular down sharply on the month. Exports declined 1.4 percent on the month. The drop reflected weaker exports of non-rural goods (around 62 percent of total exports) and services (around 19 percent of the total), partly offset by an increase in exports of rural goods (around 13 percent of the total) and non-monetary gold (around 6 percent of the total). On the year, total exports were up 22.6 percent. Imports were up 2.4 percent on the month. Imports of capital goods, consumption goods, intermediate and other merchandise goods and services all gained on the month, partly offset by a small decline in imports of non-monetary gold. Total imports increased 7.2 percent on the year.

Americas

Canada

June industrial product price index dropped 1.0 percent on the month but was up 3.3 percent from a year ago. Half of the monthly drop can be explained by the foreign exchange impact. Excluding the 2.3 percent appreciation of the currency, the IPPI would have declined only 0.5 percent according to Statcan. The 1.0 percent drop was the largest since December 2014. Declines were widespread, with 16 of 21 commodity groups recording lower prices on the month. Excluding petroleum and coal the IPPI was down a monthly 0.7 percent and was up 3.7 percent on the year. Energy and petroleum products dropped 4.1 percent on the month was the largest decrease since February 2016, played a big part in the monthly decline. Motorized and recreational vehicles, which are particularly sensitive to the exchange rate, posted a 1.5 percent decline on the month, and also had a significant impact. The June raw materials price index tumbled 3.7 percent on the month and was up 2.2 percent from a year ago. Excluding a 9.3 percent decline in crude energy products, the RMPI edged up 0.1 percent on the month. Four of six commodity groups posted lower prices on the month.

Following two months of notable increases, employment increased a subdued 10,900 in July just about as expected. As the number of people searching for work edged down, the unemployment rate declined by 0.2 percentage points to 6.3 percent. This is the lowest rate since October 2008. Employment increased in Ontario and Manitoba, while it declined in Alberta, Newfoundland and Labrador as well as in Prince Edward Island. Employment increased in wholesale & retail trade (up 22,000), information, culture & recreation (up 18,000), manufacturing (up 14,000), transportation & warehousing (up 8,400) and natural resources (up 8,000). At the same time, employment declined in educational services (down 32,000), public administration (down 10,000) and agriculture (down 10,000).

June merchandise goods trade deficit widened to C$3.6 billion from C$1.4 billion in May. Exports declined 4.3 percent on the month after increasing for three consecutive months. Nine of 11 sections of exports declined. Export volumes were down 1.7 percent with prices falling 2.7 percent. The sharp decrease in June exports was largely due to lower exports of unwrought gold and energy products. The increase in imports was led by increased imports of gold bullion. Energy exports fell 9.2 percent on the month. Excluding energy, exports decreased 3.4 percent. Imports edged up 0.3 percent in June on an 0.8 percent increase in volumes but a 0.5 percent decline in prices. In June, exports to the U.S. were down 4.5 percent mostly on lower crude oil exports. Imports from the US also were lower, down 0.7 percent also on lower oil imports. As a result, Canada's trade surplus with the U.S. fell from C$3.5 billion in May to C$2.2 billion in June. This was the smallest surplus since June 2016. Canada's surplus with non-U.S. countries declined to C$2.2 billion from C$3.5 billion.

Bottom line

The Reserve Bank of Australia and the Bank of England both chose to leave their policy interest rates unchanged while the Reserve Bank of India, citing lower inflation, lowered its key rate. Most economic data released during the week were positive in Europe, the UK, Canada and U.S. The U.S. employment report sent equities higher. The U.S. dollar rallied after tumbling during the week.

The coming week is much quieter than the past. Data focus on June industrial production and merchandise trade data. In China, July merchandise trade and consumer and producer price indexes will be released. In Japan July producer prices and June private machine orders, which is a proxy for capital spending will be reported. And the Reserve Bank of New Zealand holds its monetary policy meeting — no change in its 1.75 percent policy interest rate is expected.

Looking Ahead: August 7 through August 11, 2017

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