Global Markets

Equity markets were mostly lower in the first week of September. Investors remained cautious and even risk averse after North Korea tested a hydrogen bomb over last weekend and they watched the horrific damage to the Caribbean islands from hurricane Irma while still evaluating losses in Texas and Louisiana from Hurricane Harvey. Then there were also several central bank meetings — the Reserve Bank of Australia, Bank of Canada and the European Central Bank. The RBA and ECB maintained the status quo while the BoC increased its policy interest rate by 25 basis points for a second meeting in a row.

Reserve Bank of Australia

The Reserve Bank of Australia left its key policy rate unchanged at 1.50 percent as expected. The rate was last changed in August last year, when it was cut by 25 basis points. Basically, the statement accompanying the announcement repeated August's evaluation of economic conditions, namely that global economic conditions are improving. The RBA said that recent data have been consistent with its forecast, namely that domestic growth will gradually pick up over the coming year, with a decline in mining investment expected to "soon run its course" and investment elsewhere in the economy strengthening. Residential construction is expected to remain strong but not grow significantly from current levels. Recent employment gains were highlighted. However, wage growth remains low — a problem plaguing other developed countries — and is expected to stay this way. This combined with high household debt levels are expected to restrain consumer spending.

The inflation outlook was unchanged, with only a gradual increase from current low levels expected. The Bank also retained its assessment that the recent appreciation of the local currency will help keep price pressures subdued and represent a downside risk for output and employment growth. Any further appreciation would likely result in downward revisions to growth and inflation forecasts. Although recent currency appreciation suggests that lower policy rates would be helpful to support domestic activity, the RBA seems confident that recent data are in line with their growth forecasts.

Bank of Canada

The Bank of Canada increased its policy interest rate by 25 basis points to 1.00 percent. The Bank last increased its policy rate at its July meeting, also by 25 basis points to 0.75 percent. The Bank Rate is correspondingly 1.25 percent and the deposit rate is 0.75 percent. The BoC lifted the rate in July for the first time since 2010, joining the Federal Reserve in tightening monetary policy. The BoC reiterated that future moves will be data dependent as they affect the inflation outlook. The Canadian dollar jumped sharply on the decision.

According to the BoC, the reason for the increase was the string of stronger than anticipated economic data that supported the Bank's view that Canadian growth is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. The Bank also said that there has been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017 for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.

In its statement, the BoC noted that the global economic expansion is becoming more synchronous as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain. This has led to a weaker U.S. dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada's economy.

European Central Bank

At its latest governing council meeting (September 7), the ECB concluded that no change would be made in key interest rates. The refi rate stays at zero percent and the rates on the deposit and marginal lending facilities at minus 0.40 percent and 0.25 percent respectively. There was also no change to forward guidance which continues to anticipate interest rates remaining at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

The ECB also signaled that they would not be reducing its quantitative easing program. Net monthly asset purchases were held at €60 billion a month at least through year-end, and longer if deemed necessary. Not long ago, financial markets were looking to this meeting to produce a recalibration of monetary policy that would include a cut in asset purchases of around €20 billion a month. Some had also anticipated a signal that QE purchases would end altogether by December 2018. That the ECB has opted to make no such change indicates that it is not yet convinced that underlying inflation is behaving as it would like. The appreciation of the euro was certainly a factor in the decision and volatility here was cited by President Mario Draghi as adding to policy uncertainty. However, with December approaching, Draghi indicated that the policy recalibration will be undertaken soon. There are two ECB meetings left in 2017, on October 26th and December 14th.

Meantime, the new economic forecasts hardly justify any shift in policy. Real GDP growth has been revised up a little this year (2.2 percent from 1.9 percent) but is unchanged in both 2018 (1.8 percent) and 2019 (1.7 percent). Risks are still seen to be broadly balanced. However, the inflation projection has been shaded lower in 2018 (1.2 percent from 1.3 percent) and 2019 (1.5 percent from 1.6 percent). Sluggish wages continue to weigh but the strong exchange rate also had a significant impact.

Global Stock Market Recap

Europe and the UK

European equities were mostly lower on the week thanks to geopolitical uncertainties and natural disasters — and oh yes — waiting for Thursday's European Central Bank's announcement. Investors were also hesitant of making any big moves prior to a potentially eventful weekend, including life-threatening hurricane Irma which will hit Florida over the weekend and a possible missile test in North Korea to celebrate the country's Foundation Day. Losses ranged from 0.2 percent (CAC) to 1.9 percent (IBEX). The FTSE lost 0.8 percent and the SMI was down 0.3 percent. The DAX however, managed to climb 1.3 percent.

August composite PMIs indicated that private sector business activity continued to expand at the same pace as in July. The reading was among the best in the last six years with new business inflows remaining robust, along with backlogs. Job creation slowed but was also solid and business optimism held onto healthy levels. The week was heavy with July merchandise trade and industrial production data. Briefly, Germany's industrial production failed to rebound as expected with a flat performance from June when output declined an unrevised 1.1 percent. But in the UK, goods production rose 0.2 percent on the month following an unrevised 0.5 percent gain in June. Importantly, the bulk of the monthly increase was attributable to the key manufacturing sector where output advanced 0.5 percent after a flat performance last time.

Asia Pacific

Most Asia Pacific indexes retreated last week. Geopolitical concerns surrounding North Korea's test of a hydrogen bomb ranks high on the list. Numerous economic indicators from Japan and Australia painted a mixed picture. Investors were also anxious as they waited for a policy decision from the European Central Bank. The tumbling U.S. currency also weighed. On the week, nine of 13 indexes were lower. Losses ranged from 0.1 percent (Shanghai Composite and Jakarta Composite) to a drop of 2.1 percent (Nikkei). Gains ranged from 0.1 percent (Taiex) to 1.1 percent (SET).

The Nikkei was weighed down by the strengthening yen which in turn impacts exporters negatively. Traders continue to be guided by the yen/dollar exchange rate. Second quarter gross domestic product estimates were revised lower to an annualized rate to 2.5 percent from the original estimate of 4.0 percent. On Thursday, Japanese shares rebounded from four month intraday lows hit on Wednesday after the yen sold off on news of extension of the U.S. debt ceiling deadline to December.

Currencies

The U.S. dollar tumbled against all of its major counterparts on the week. The currency was down against the yen, euro, pound sterling, Swiss franc and the Canadian and Australian dollars. The dollar remained near its lowest levels since early 2015 reflecting suggestions that the ECB may begin tapering before the end of the year and expectations that the Federal Reserve will increase the fed funds rate have subsided because inflation stubbornly refuses to increase. Sterling meanwhile has risen roughly 1.8 percent against the dollar this week.

The U.S. dollar decline gained momentum after New York Fed President William Dudley in a speech did not state explicitly that there would be an interest rate increase this year, but instead focused on gradual removal of accommodation.

The ECB's Draghi in his press conference alluded to the uncomfortable strength of the euro several times. Though he said the exchange rate is not a policy target, and he has no particular upper limit in mind, the rally in the currency does warrant close attention, due to the potential drag on inflation. The market responded by buying euros anyway, as Mr Draghi also signaled that stimulus reduction is not so far away.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

Revised second quarter gross domestic product expanded a quarterly 0.5 percent and was up 2.3 percent on the year. This was the first look at the GDP expenditure components and these revealed a 0.5 percent quarterly advance in household consumption following a 0.4 percent rise in the previous quarter. Fixed capital formation (0.9 percent after minus 0.3 percent) returned to positive growth while government spending (0.5 percent after 0.2) more than doubled its first quarter rate. There was also no inventory overhang as stock building subtracted a second successive 0.1 percentage points from the quarterly change in GDP. The real external trade balance contributed of 0.1 percentage point. Regionally, economic growth was broad based with all reporting countries recording a quarterly rise in national GDP. Among the large four economies, Italy (0.4 percent) lagged France (0.5 percent), Germany (0.6 percent) and Spain (0.9 percent).

Germany

July manufacturing orders unexpectedly declined a monthly 0.7 percent following a marginally smaller revised 0.9 percent rise in June. It was the first decrease since April. Annual growth decelerated from 5.1 percent to 4.9 percent. July's weakness was broad based but dominated by a 3.0 percent monthly slump in consumer and durable goods. Capital goods were down 0.7 percent while basics were off 0.4 percent. The domestic market (down 1.6 percent) was wholly responsible for the headline deterioration as overseas demand just about kept its head above water despite a contraction in the rest of the Eurozone (1.0 percent). Annual growth of domestic orders misleadingly picked up sharply to some 7.2 percent due to an even steeper slide a year ago.

July industrial production was unchanged on the month after declining an unrevised monthly 1.1 percent. Annual production growth still jumped a misleadingly large 1.5 percentage points to 4.0 percent thanks to favorable base effects. Weakness was most apparent in energy which posted a 4.7 percent monthly fall and this was large enough to mask a modest 0.3 percent increase in the manufacturing sector. However capital goods compounded June's 1.5 percent decrease with a further 0.3 percent drop and consumer goods, down 0.7 percent last time, matched this decline. However, intermediates (1.4 percent) had a very solid month and construction (0.5 percent) also provided a boost.

Switzerland

Second quarter gross domestic product expanded just 0.3 percent on the quarter, an improvement on the previous period's downwardly revised 0.1 percent. Annual growth was also only 0.3 percent, down from 0.6 percent last time. Among the major expenditure components, household consumption increased just 0.2 percent after expanding a minimal 0.1 percent at the start of the year. Investment was mixed with spending on equipment and software decelerating sharply from a 1.4 percent to a 0.3 percent rate but construction picking up 0.6 percentage points to 0.8 percent. General government consumption increased 0.3 percent. In fact, the headline data would have looked a good deal worse but for a large 1.6 percentage point contribution from inventory accumulation that threatens to undermine growth this quarter. There was also a sizeable hit from the external balance where a 0.5 percent advance in goods exports (ex-valuables) was swamped by a 5.5 percent jump in imports. This was further compounded by a 0.3 percent fall in exports of services as imports climbed 1.7 percent.

United Kingdom

July industrial production was up 0.2 percent on the month and 0.2 percent from a year ago. The bulk of the monthly increase was attributable to the key manufacturing sector where output advanced 0.5 percent after a flat performance last time. Annual growth here now stands at 1.9 percent, up from 0.6 percent. The monthly advance mainly reflected a 7.6 percent surge in transport equipment and a 3.8 percent bounce in machinery and equipment. Textiles and leather (5.0 percent) and electrical equipment (1.6 percent) also advanced. Gains here were partially offset by declines in coke & petroleum (6.7 percent), pharmaceuticals (7.0 percent) and computer, electronic & optical products (3.5 percent). Elsewhere, mining & quarrying declined 1.2 percent and water supply was off 0.6 percent but electricity & gas rose 0.7 percent.

Asia/Pacific

Japan

Second quarter gross domestic product was up by a revised 0.6 percent on the quarter in the three months to June, down from the preliminary estimate of 1.0 percent. GDP was up an annualized 2.5 percent, down from the original estimate of 4.0 percent. On the year, GDP was up 1.6 percent. The downward revision to the headline growth estimate reflects revised estimates for household consumption, which is now estimated to have grown 0.8 percent on the quarter (previous estimate was 0.9 percent). Private residential investment has also been revised down from 1.5 percent to 1.3 percent, while there has been a downward revision to the estimate for private non-residential investment from 2.4 percent to 0.5 percent. Public demand is now estimated to have grown by 1.5 percent compared with the initial estimate for an increase of 1.3 percent.

Australia

July retail sales were flat on the month (seasonally adjusted) after an increase of 0.2 percent in June. On the year, retail sales rose 3.6 percent, easing slightly from 3.7 percent in June. Weaker household goods sales were the main factor weighing on headline growth. Sales fell 1.7 percent on the month, with department stores and clothing/footwear retailers also recording weaker sales. This was partly offset by stronger sales for food and other retailing outlets.

July merchandise trade surplus narrowed to A$460 million from A$888 million in June (revised from A$856 million). Exports declined 2.2 percent on the month reflecting weaker exports of non-rural goods (around 61 percent of total exports) and services (around 20 percent). The declines were partly offset by increases in exports of rural goods (around 14 percent) and non-monetary gold (around 5 percent). On the year, total exports were up 15.6 percent. Imports fell 0.9 percent on the month. Imports of capital goods, consumption goods, intermediate & other merchandise goods and non-monetary gold all declined on the month, partly offset by a small increase in services. Total imports increased 7.0 percent on the year. Recent gains in the value of the Australian dollar also likely accounted for some of the weakness in exports growth. The Australian dollar has gained more than 10 percent against the US dollar since the start of the year, with much of this appreciation taking place over July.

China

August merchandise trade surplus narrowed from $46.74 billion in July to $41.99 billion in August. Exports slowed from an increase of 7.2 percent in July to 5.5 percent in August when compared with a year ago. Imports picked up from 11.0 percent to 13.3 percent on the year. The decline in exports reflected weaker external demand from major trading partners. Exports to Japan, in particular, slowed from an increase of 6.6 percent on the year in July to 1.1 percent in August, the weakest growth since February. Exports to the European Union also slowed from 9.5 percent to 5.2 percent. Growth in exports to the United States was more stable, edging down from 8.5 percent to 8.4 percent. In yuan terms, China's trade surplus narrowed from CNY294.30 billion in July to CNY286.5 billion in August. Exports grew 6.9 percent on the year down from 17.3 percent in July, while annual growth in imports slowed from 23.1 percent to 14.4 percent.

Americas

Canada

July merchandise trade deficit narrowed to C$3.0 billion from a C$3.8 billion deficit in June. Imports fell 6.0 percent and exports decreased 4.9 percent, both due mainly to the effect of widespread price decreases while the Canadian dollar appreciated sharply relative to the American dollar in July. Total imports were down in July following seven consecutive monthly increases, with declines observed in all commodity sections. Prices were largely responsible for this decrease, falling 3.8 percent. This occurred as the Canadian dollar gained 3.6 cents US relative to the American dollar from June to July. On the year, imports rose 4.0 percent. After posting a 5.0 percent decline in June, total exports fell again in July with decreases observed in 9 of 11 sections. Prices decreased 3.9 percent, while volumes were down 1.1 percent. In July, exports excluding energy products were down 5.2 percent. On the year total exports were up 2.2 percent. Imports from the United States decreased 6.7 percent. Exports to the United States were down 3.2 percent, mainly on lower exports of passenger cars and light trucks. As a result, Canada's trade surplus with the United States widened from C$1.8 billion in June to C$2.9 billion in July. In real (or volume) terms, imports decreased 2.3 percent and exports were down 1.1 percent in July. Consequently, Canada's trade deficit in real terms narrowed from C$891 million in June to C$338 million in July.

August employment increased 22,200 while the unemployment rate declined to its lowest rate since October 2008 at 6.2 percent. For the eight months in 2017, 219,100 jobs have been added while the unemployment rate has declined from 6.9 percent in December 2016 to its current rate of 6.2 percent. However, August full time employment dropped sharply by a seasonally adjusted 88,100 — the largest since July of 2010. Part time employment jumped 110,400 — the largest gain since July 2010. The number of self-employed workers rose by 33,000. Goods producing industries employment declined 13,700 with manufacturing accounting for most of the loss. Public sector employees were down 8,300 in August, and self-employed employment contracted 2,100. Employment in finance, insurance, real estate, rental & leasing rose 14,600, bringing gains from 12 months earlier to 47,000 with most of this increase concentrated from September 2016 to January 2017.

Bottom line

Equities were mostly lower on the week due to geopolitical anxieties and natural disasters in the form of hurricanes. Economic data were mixed globally. Both the Reserve Bank of Australia and the European Central Bank maintained their respective monetary policies, the Bank of Canada increased its policy rate by 25 basis points to 1.0 percent.

In this coming week, the Bank of England holds a monetary policy meeting and the Swiss National Bank gives its quarterly monetary policy assessment. The UK posts consumer and producer prices along with retail sales and its labour market report. In Asia, investors will continue to monitor data from China with key industrial production and retail sales data scheduled to be released.

Looking Ahead: September 11 through September 15, 2017

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