Global Markets

Aside from a brief respite midweek, global equities tumbled thanks to concerns about rising borrowing costs and soaring volatility. All equity indexes followed here were lower on the week. Losses ranged from a high of 9.6 percent (Shanghai Composite) to a low of 1.9 percent (Jakarta Composite).

Some market watchers have pinned the blame on algorithmic trading linked to what is known as the risk parity strategy, where levels of risk are used to allocate funds within a portfolio, instead of giving certain percentages to asset classes like stocks and bonds. Since the volatility in Japanese equities rose — meaning more risk — those who follow the strategy automatically sold off stocks to balance the risk in their portfolios.

The Reserve Banks of Australia, India and New Zealand met and left their respective monetary policies unchanged. The Bank of England did the same.

Reserve Bank of Australia

The Reserve Bank of Australia, as expected, left its main policy rate unchanged at 1.50 percent where it has been since August 2016. It is the longest spell of stable rates since the mid-1990s. The RBA retained a positive assessment about global economic conditions and again noted that Australia's terms of trade are likely to decline but remain relatively strong in coming years. The Bank also continued to forecast domestic growth to pick up to around 3.0 percent, saying that data released since their last policy meeting on December 4 are consistent with this view. In particular, they remain confident about the outlook for business investment but cautious about the impact high levels of household debt may have on consumer spending.

The RBA pointed to further improvement in labour market conditions and expect this to continue. However, the Bank also expects wage growth to remain subdued for some time. Reflecting this assessment, they forecast underlying inflation, currently below the target range of 2.0 percent to 3.0 percent, to remain low and to increase only gradually as the economy strengthens. This suggests that the policy stability seen over the last 18 months looks set to extend going forward.

Reserve Bank of India

As widely expected, the Reserve Bank of India held its policy repo rate at 6.00 percent where it has been since August 2017. The reverse repurchase rate was also left on hold at 5.75 percent. The vote was 5 to 1 by the Monetary Policy Committee. The remaining member favored an increase in policy rates of 25 basis points.

The MPC noted that the inflation outlook was clouded with several uncertainties conspiring to raise prices. Among them are a pick-up in global growth that could exert further pressure on crude oil and commodity prices, an increase in minimum support prices for the kharif or monsoon crop, increases in customs duties for a number of items and fiscal slippage as indicated in the Union Budget. The RBI's inflation target is 4 percent plus or minus 2 percent.

The post-meeting statement revised down the RBI's estimate for economic growth in the current fiscal year from 6.7 percent to 6.6 percent. Looking ahead, the MPC expects growth to pick up to 7.2 percent in the upcoming fiscal year, reflecting their assessment that the economy is adjusting to the introduction last year of the government's new sales tax. Exports and business investment are also forecast to provide greater support to growth.

With the MPC expecting growth to strengthen, the outlook for inflation remains the main focus. Headline inflation dropped sharply mid-2017 but officials argued then that it was largely due to temporary factors. Consistent with this assessment, price pressures have strengthened in recent months, with headline CPI inflation increasing to a 17-month high of 5.21 percent in December towards the top of the RBI's target range.

Reserve Bank of New Zealand

The Reserve Bank of New Zealand left its overnight cash rate (OCR) unchanged at 1.75 percent, in line with expectations. This rate has been unchanged since a 25 basis point cut in November 2016. The Bank repeated its assurance that monetary policy will remain accommodative "for a considerable period", suggesting that the stability in the cash rate will continue in the months ahead.

The statement accompanying the decision noted that global economic conditions have continued to improve. Although domestic growth moderated in the second half of 2017, the RBNZ continues to believe that supportive monetary and fiscal policy will drive a pick-up in activity. Compared with their earlier estimates, however, officials now expect growth will be weaker in the near term but stronger in the medium term, mainly reflecting a reassessment of the likely impact of the new government's economic policies.

Headline inflation fell from 1.9 percent in the three months to September to 1.6 percent in the three months to December, below the mid-point of the RBNZ's target range of 1.0 percent to 3.0 percent. The statement notes that inflation for tradable goods and services is likely to remain subdued over the forecast period while inflation for non-tradable goods and services is expected to strengthen.

The RBNZ's next policy meeting is scheduled for mid-March and will be the last chaired by Acting Governor Grant Spencer. His replacement, Adrian Orr, is set to take over at the end of March. The New Zealand government has signed a new policy target agreement with the RBNZ for when the current agreement expires in March. It has also advised the RBNZ that proposed legislative changes will likely result in changes to the agreement after that. The government elected last year is currently reviewing New Zealand's monetary policy framework. It advocated before the election to add an employment objective to the existing inflation target as part of the RBNZ's mandate.

Bank of England

As expected, the Bank of England Monetary Policy Committee left its monetary policy unchanged. The Bank Rate stayed at the 0.50 percent level to which it was raised back in November while the quantitative easing ceilings for gilts and corporate bonds remain at £435 billion and £10 billion respectively. The vote was a unanimous 9 to 0.

In its statement, the MPC still said that any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent. However, minutes of the meeting suggested that policy will need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated at the time of the last Quarterly Inflation Report (QIR).

The BoE's new Quarterly Inflation Report (QIR) shows a slightly more optimistic view of the economic outlook but in the main, adjustments to the November edition were only relatively minor. The new forecast puts inflation above the 2 percent target throughout the forecast horizon, posting 2.28 percent in the first quarter of 2019, before slowly decelerating to 2.16 percent a year later and 2.11 percent a year after that. At the same time, near-term economic growth has been nudged marginally higher in respect of a surprisingly firm fourth quarter but the medium-term profile is much the same. However, the equilibrium unemployment rate has been revised down from 4.5 percent to 4.25 percent and earnings growth lifted a little higher. However, the key problem with the QIR's forecasts is that they have to make vital assumptions about what happens with Brexit — and the final shape of that is still anyone's guess. Consequently, the level of uncertainty surrounding the projections is especially high.

Global Stock Market Recap

Europe and the UK

European equities retreated four of five days with Wednesday the only positive day of the week. But the gains of that day were washed away in a flood of selling especially on Thursday. On the week, the FTSE dropped 4.7 percent, the CAC and DAX lost 5.3 percent and the SMI sank 5.8 percent. Only the FTSE and FTSE MIB lost less than 5.0 percent. The week's losses were the worst in nearly two years. Global equity markets have been tumbling on concerns over rising inflation, which could lead to further rate increases from the Federal Reserve and other central banks. Rising bond yields have applied further pressure to the equity markets — as yields increase, riskier investments such as equities become less attractive to traders.

Only the FTSE MIB remains positive in 2018. The FTSE is down 7.7 percent in the year to date making it the worst performer among top European markets. However, the SMI follows close behind — down 7.5 percent. The Bank of England hinted at somewhat earlier interest rate increases sending the pound sterling higher and stocks lower. The central bank raised its near-term growth projections, citing strengthening global growth, and forecast inflation to remain above 2 percent target over the forecast horizon.

Angela Merkel's conservatives (CDU/CSU) and the Social Democrats (SPD) appear to have reached a deal that will extend the outgoing German 'Grand Coalition' government for another term. The agreement, which would see the SPD take control of the Finance Ministry as well as the Foreign and Labour and Social Welfare Ministries, will need to pass a vote by the SPD's 464,000 strong membership if it is to survive. The early signs are that Merkel has had to compromise more than she would have liked and so will emerge from the negotiations in a weakened position. The SPD have said the deal will include increased investment and less austerity. If so, this could pave the way for a looser fiscal stance across the Eurozone in general. The news should be moderately positive for the euro and Eurozone equities.

Asia Pacific

Equities tumbled for the week, closing sharply lower Friday on renewed worries about rising inflation and higher interest rates after the yield on the 10-year U.S. Treasury note neared its highest levels in four years and the Bank of England hinted at somewhat earlier and more frequent interest rate increases. The downturn in oil and concerns about high valuations also spooked investors. Many investors believe the past week's selling has reflected an overdue pullback after big 2017 and early 2018 gains. The drop was exacerbated by fears of rising inflation and a crash in products betting on low volatility. Only the Jakarta Composite, KLCI and SET are higher for the year.

Chinese shares led regional losses for the week as liquidity conditions tightened before the Chinese New Year break that begins on Friday (February 16). The People's Bank of China said it has released temporary liquidity of almost 2 trillion yuan to meet cash demand before the long Lunar New Year holidays. For the week, the Shanghai Composite and Hang Seng led regional declines with drops of 9.6 percent and 9.5 percent respectively. Part of the selling pressure came from investors trying to lighten their positions ahead of the holidays. Investors tend to unload risky assets before a long break. This factor applies not only to Hong Kong and mainland China, but also Taiwan, South Korea, Vietnam and parts of Southeast Asia.

Japanese shares tumbled as crude prices slumped and the dollar neared a four-month low against the yen. For the week, the Nikkei lost 8.1 percent and the Topix, 7.1 percent. A stronger yen reduces the yen-denominated value of overseas income for Japanese corporations and is therefore seen as a negative for stocks, especially those of exporters. Investors had been looking for the yen to weaken and boost corporate earnings. The yen rise has dashed such hopes.

The All Ordinaries lost 4.7 percent on the week. The Australian jobless rate is forecast to fall to 5.25 percent for the year ending June 2018, instead of 5.5 percent estimated three months ago, the Reserve Bank of Australia said in its Statement on Monetary Policy. At the same time, estimates for economic growth and inflation were broadly unchanged from the November statement.

Currencies

The U.S. dollar advanced against the euro, pound sterling, Swiss franc and the Canadian and Australian dollar. However, it declined against the haven yen. The U.S. dollar's performance in the face of the selloff in equities that sent jitters throughout financial markets has the currency on track for its best weekly performance in more than a year. The British pound retraced the gains it posted after the Bank of England delivered a hawkish outlook on Thursday. The foreign exchange market continues to be driven by the turmoil in the equity markets. While the forex market has been on the sidelines, traders suggested that volatility among currencies was beginning to rise.

Against the perceived havens from market volatility — the Japanese yen and the Swiss franc — the dollar was mixed. The U.S. currency, also a safe haven, was up on the week against the Swiss franc but down against the yen.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

December retail sales volumes (excluding autos) dropped a monthly 1.1 percent but were 1.9 percent higher on the year. The data followed a sharply stronger revised 2.0 percent monthly surge in November and an increase of 3.9 percent on the year. Monthly non-food sales excluding auto fuel declined 1.2 percent, their second decline in excess of 1 percent since September. Textiles, clothing & footwear were down 3.3 percent and electrical goods & furniture was down 1.5 percent. Auto fuel (down 1.5 percent) saw its fifth fall in six months but pharmaceuticals (0.8 percent) expanded on November's advance. Regionally, a 1.9 percent slide in Germany did much to depress the headline monthly change and both France (down 0.4 percent) and Spain (down 0.6 percent) similarly had a negative effect.

Germany

December manufacturing orders rebounded from a smaller revised 0.1 percent monthly slip in November orders to 3.8 percent — their second strongest increase since July 2014. On the year they were up 6.8 percent but still well short of November's 9.1 percent gain due to a 6 percent monthly surge in orders in December 2016. The year-end spurt was built upon capital goods orders which were up 5.7 percent on the month. Intermediates (2.4 percent) also fared well but consumer goods (down 5.1 percent) had a poor month albeit after a solid November (2.8 percent). The monthly headline gain mainly reflected overseas demand which climbed 5.9 percent led by an 11.2 percent leap in the Eurozone market. By comparison, domestic orders were relatively subdued, registering a 0.7 percent advance.

December industrial production declined a monthly 0.6 percent after November's 3.1 percent surge. Annual output growth climbed from 5.4 percent in November to 6.7 percent in December. The monthly decline was led by capital goods which were down 2.6 percent. Consumer goods (down 0.5 percent) similarly had a poor month but intermediates advanced 1.5 percent. Energy was also up 1.4 percent but construction decreased 1.7 percent.

December seasonally adjusted merchandise trade surplus was €21.4 billion. This was €1.9 billion below an unrevised €22.3 billion surplus in November and put the calendar year surplus at €244.9 billion. This was just €4.0 billion short of the record 2016 balance. The unadjusted year-end surplus was €18.2 billion, a 0.5 percent decrease from December 2016. Seasonally adjusted, December exports rose 0.3 percent on the month after a 4.1 percent increase in November. Imports were 1.4 percent higher than in mid-quarter and 5.0 percent above their level a year ago. Over the year as a whole, total exports were up 6.3 percent with sales to the rest of the Eurozone gaining 7.0 percent. Imports advanced a slightly stronger 8.3 percent with purchases from other Eurozone countries rising 7.2 percent.

United Kingdom

December industrial production declined 1.3 percent on the month following a marginally smaller revised 0.3 percent increase in November but was biased down significantly by the closure of the Forties oil pipeline for much of the period. Annual growth was 0.0 percent, a 2.6 percentage point fall from last time. Manufacturing however advanced 0.3 percent from November. The main areas of strength were metal products (4.2 percent), textiles & leather (1.8 percent) and computer, electronic & optical products (1.4 percent). Rubber & plastic (down 2.5 percent) alongside chemical products (down 1.2 percent) declined the most. Elsewhere, the impact of the oil pipeline shutdown was reflected in a 24.2 percent monthly slump in crude petroleum & natural gas output that alone subtracted 1.6 percentage points from the monthly change in total industrial production. Otherwise, electricity & gas climbed 0.9 percent and water supply was up 0.6 percent.

December trade on goods was Stg13.58 billion following an upwardly revised Stg12.46 billion deficit in November. For the year 2017 the deficit was Stg138.0 billion, a disappointing Stg2.5 billion increase from 2016. On the month, exports were up 1.5 percent but were outpaced by a 3.8 percent increase in imports. However, the monthly deterioration was wholly due to a Stg1.2 billion worsening in the erratics balance and excluding this item and the equally volatile oil component, the shortfall actually narrowed slightly from Stg11.33 billion to Stg11.04 billion. Most of the damage to the headline print was caused by non-EU countries where the deficit increased Stg0.67 billion to 5.18 billion. The shortfall with the EU was Stg8.40 billion, up from Stg7.95 billion last time.

Asia/Pacific

Australia

December retail sales declined 0.5 percent on the month after a revised increase of 1.3 percent in November. This was the first monthly decline in sales since August but followed a particularly strong result in November, which was partly driven by the release of a new model of mobile phone. Seasonally adjusted retail sales increased 2.5 percent on the year, slowing from 2.9 percent in November. Most categories declined with sales of household goods and other retailing recording particularly large declines of 2.7 percent and 1.8 percent respectively after both had risen strongly in November. Sales also declined for clothing, footwear & personal accessory retailing, cafes, restaurants & takeaway food services and department stores. The declines were partly offset by an increase of 0.7 percent in food sales.

December merchandise trade deficit was A$1.358 billion after November's revised surplus of A$36 million. This was the first monthly trade deficit since April and the largest since August 2016, reflecting both weak exports growth and a stronger increase in imports. The value of exports rose 1.6 percent on the month to around A$32.47 billion, up modestly from A$31.96 billion in November. Exports of non-rural goods (around 60 percent of total exports) recorded solid growth, but this was largely offset by declines in exports of services (around 20 percent), rural goods (around 15 percent), and non-monetary gold. Imports advanced to A$33.82 billion, up 6.0 percent from A$31.92 billion in November. Imports of consumption goods, intermediate and other merchandise goods, capital goods, and non-monetary gold all recorded strong gains, while services imports rose slightly.

China

January merchandise trade surplus in U.S. dollars terms narrowed from $54.69 billion in December to $20.34 billion. On the year exports were up from 10.9 percent in December to 11.1 percent while imports accelerated sharply from 4.5 percent to 36.9 percent. In domestic currency (yuan) terms, China's trade surplus narrowed from CNY362.0 billion in December to CNY135.8 billion in January. Exports grew 6.0 percent on the year in yuan terms, down from 7.4 percent in December, while imports in yuan terms accelerated from 0.9 percent to 30.2 percent.

January consumer price index was up 1.5 percent on the year after increasing 1.8 percent in December — the lowest level of inflation since July and the seventh consecutive month in which the direction of inflation has reversed from the previous month. On the month, the CPI was up 0.6 percent after an increase of 0.3 percent the month before. Food prices fell 0.5 percent on the year after declining 0.4 percent the month before. Non-food inflation reversed course after a period of relative stability, dropping from 2.4 percent in December to 2.0 percent in January. Weaker price gains for transportation & communication were largely responsible for this move. Urban inflation declined from 1.9 percent in December to 1.5 percent in January, while rural inflation fell from 1.7 percent to 1.5 percent.

Americas

Canada

December merchandise trade deficit expanded to C$3.2 billion from a revised C$2.7 billion in November. On the month, imports rose 1.5 percent and exports were up 0.6 percent, both led by energy products. On the year, imports were up 7.8 percent while exports were up only 0.4 percent. Monthly imports increased in 9 of 11 sections. Volumes rose 1.0 percent and prices increased 0.5 percent. Higher imports of energy products & industrial machinery, equipment & parts were partially offset by lower imports of aircraft & other transportation equipment & parts. Total exports rose for the third consecutive month despite decreases in 6 of 11 sections. Prices were up 0.5 percent while volumes were essentially unchanged. Higher exports of energy products, and metal and non-metallic mineral products were partially offset by lower exports of consumer goods. Exports excluding energy products decreased 0.6 percent. Exports of energy products rose 6.2 percent, the fifth consecutive monthly increase and the highest level since November 2014. Also contributing to the overall increase were higher exports of metal & non-metallic mineral products, up 7.7 percent. Imports from the United States declined 1.3 percent, while exports to the United States were down 0.8 percent. Canada's trade surplus with the United States widened slightly from $3.3 billion in November to $3.4 billion in December.

January employment dropped a greater than expected 88,000. It was the largest decline in nine years. Part-time employment declined 137,000 while full-time employment was up 49,000. At the same time, the unemployment rate increased by 0.1 percentage points to 5.9 percent. The participation rate slid from 65.8 percent to 65.5 percent. Employment declines were spread across a number of industries including educational services, finance, insurance, real estate, rental & leasing, professional, scientific & technical services, construction and health care & social assistance. Employment increased in business, building, & other support services. Private sector employees declined by 71,000 and by 41,000 in the public sector. Self-employment was little changed in January. The largest employment declines were in Ontario and Quebec. There were also decreases in New Brunswick and Manitoba.

Bottom line

Four central banks held monetary policy meetings — all maintained their respective policies. Economic data were mixed. January's employment data for Canada shocked on the downside — it declined 88,000 jobs but all part time. Retail sales data in the Eurozone also disappointed as did Germany's industrial production and merchandise trade surplus.

While the coming week does not have central bank meetings, there are a number of important economic indicators to be released. For example, the UK posts consumer and producer price indexes and retail sales for January. Japan posts its first estimate of fourth quarter growth along with January's producer price index and December's machinery orders — a proxy for capital spending.

Looking Ahead: February 12 through February 16, 2018

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