Global Markets

Equities mostly advanced last week even though talk of a trade war threatened to rock the global economic recovery. News of the week was dominated by U.S. President Trump's threats to levy import tariffs of 25 percent on steel and 10 percent for aluminum, no exceptions. But in the end, Canada and Mexico were excluded given the ongoing NAFTA negotiations. And there was the possibility of excluding other allies as well, backtracking from an earlier "no-exceptions" stance.

Four central banks — the Banks of Canada and Japan, the Reserve Bank of Australia and the European Central Bank — held monetary policy meetings. While there were no changes in monetary policy, there were some changes in the rhetoric at BoJ and ECB.

European Central Bank

As expected, the European Central Bank left key interest rates and its asset purchase program (APP) unchanged at its March meeting. The benchmark refi rate remains at zero percent while the rates on the deposit and marginal lending facilities stay at minus 0.40 percent and 0.30 percent respectively. Net quantitative easing asset purchases similarly remain at €30 billion a month.

The Governing Council (unanimously) decided to remove from its official policy statement the sentence stating that 'the Governing Council stands ready to increase the asset purchase programme in terms of size and/or duration' should financial or economic conditions so dictate. In other words, the policy bias has switched from easing to neutral. Such a change has been speculated for a while now so although the announcement was probably not fully priced in, it did not come as a major surprise. The move is subtle and actually says very little about the near-term policy outlook.

The bottom line is that the ECB is just that little bit closer to normalizing policy. However, getting there is still a very long way off and with forward guidance stating no increase in interest rates until well after QE has ended (September earliest), interest rate differentials with the U.S. should continue to widen for some time.

Bank of Japan

As universally expected, the Bank of Japan left its monetary policy unchanged. The BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent while the target level for the long-term 10-year yield stays at around zero percent. The monetary policy board (MPB) voted 8 to 1 in favor of the decision.

The MPB adjusts the pace of Japanese government bond (JGB) purchases in order to keep the 10-year yield close to its target level. The MPB reaffirmed their commitment to keep expanding the monetary base until the annual increase in the consumer price index (excluding fresh food) exceeds their inflation target of 2.0 percent and stays above this level "in a stable manner".

Speaking at his post-meeting press conference, BoJ Governor Haruhiko Kuroda expressed confidence that the economy remains on track to achieve the inflation target. He repeated that the BoJ is prepared to act more aggressively if considered necessary to meet the target but said there are no plans currently to loosen monetary policy further. Consistent with earlier statements, Kuroda also promised to keep policy easing intact even once inflation gets close to target, further indicating that there remains little prospect of a material shift in the policy stance for the foreseeable future.

Reserve Bank of Australia

The Reserve Bank of Australia left its main policy interest rate unchanged at 1.50 percent where it has been since August 2016. In its statement, the RBA noted the recent improvement in the global economy.

The Board remained confident about the near-term domestic outlook, forecasting that a pick-up in exports and stronger investment in the public sector and the non-mining business sector will boost 2018 economic growth. Slow growth in household incomes and high levels of household debt however, remain concerns. The outlook for consumer spending is uncertain despite further solid growth in employment.

The RBA noted that conditions in the labor market were tightening and speculated that wage growth may have "troughed". Nevertheless, the Board retained its assessment that inflation is likely to "remain low for some time" and pick up only gradually to "a bit above" 2.0 percent for 2018. Headline inflation has been below the RBA's target range of 2.0 percent to 3.0 percent for three consecutive quarters after picking up sharply in late 2016 and early 2017.

Speaking last month, RBA Governor Philip Lowe noted that if unemployment falls and inflation rises in line with current RBA forecasts over the coming year, then he believes "at some point it will be appropriate to have less monetary stimulus and for interest rates in Australia to move up". Although he noted that right now the Board does not see a strong case for changing policy settings in the near-term, he also stressed that in his view the next move in policy rates will be up rather than down. Stronger wage growth, however, will likely be required to convince the Board that such a move is warranted.

Bank of Canada

As expected, the Bank of Canada maintained its target for the overnight rate at 1.25 percent. The Bank Rate is correspondingly 1.5 percent and the deposit rate is 1.0 percent. Mixed economic reports recently left little urgency for the BoC to raise the overnight rate after the 25 basis point increase in January. Canadian inflation is running close to the 2 percent target and the Bank's core measures of inflation have edged up, consistent with an economy operating at near capacity. Wage growth has firmed, but remains lower than would be typical in an economy with no labor market slack. Inflation is fluctuating because of temporary factors related to gasoline, electricity and minimum wages.

According to the BoC, the economic outlook is expected to warrant higher interest rates over time and some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. It will remain cautious in considering future policy adjustments, guided by "incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity and the dynamics of both wage growth and inflation."

Global Stock Market Recap

Europe and the UK

All equity indexes advanced on the week. Investors overcame obstacles such as an inconclusive Italian election, threats of tariffs from the U.S. and weak economic data from Germany, France and the UK. On the week, the FTSE added 2.2 percent, the CAC advanced 2.7 percent, the DAX gained 3.6 percent and the SMI was 3.5 percent higher. Helping to boost German shares was the agreement to finally form a government that has been in limbo since September.

Weak economic data from Germany, France and the UK weighed on investor sentiment at the end of the trading week. On Sunday, the Social Democrats (SPD) voted in favor of joining Angela Merkel's Conservatives in a third 'grand coalition' government. About 66 percent of the 464,000 party membership approved the latest deal, down sharply from 75 percent in a similar poll back in 2013. Germany has been without a formal government since last September's inconclusive federal election when both major parties saw sizeable declines in their popularity.

The European Central Bank President Mario Draghi said that the Governing Council's latest decision to drop the easing bias on asset purchases was taken unanimously. Unusually vocal on global trade, Draghi said disputes must be discussed and solved in a multilateral framework, adding the warning that unilateral decisions were dangerous. The ECB Chief also noted that the immediate spillover of U.S. import tariffs on foreign steel and aluminum are unlikely to be that big.

Asia Pacific

Equities were mixed on the week as geopolitical tensions eased and investors were relieved that U.S. trade tariffs were less severe than investors had originally feared. And geopolitical tensions eased after North Korean leader Kim Jong Un offered to halt nuclear and missile tests and expressed his desire to meet with U.S. President Donald Trump. On the week, gains ranged from 0.2 percent (STI) to 2.4 percent (Kospi). The Shanghai Composite was up 1.6 percent after February inflation rose sharply to the highest level in more than four years driven by a rebound in food prices. The index received a boost from merchandise trade data for February after exports grew faster than anticipated.

Public comments from People's Bank of China Governor Zhou Xiaochuan provided further details about the Chinese government's plans for economic policy this year. Zhou spoke at a briefing held at the annual meeting of the National People's Congress, which later in the month is expected to approve the appointment of his replacement after 15 years in office.

Earlier in the week Prime Minister Li Keqiang announced the government's economic targets for 2018. After the economy expanded by a reported 6.9 percent in 2017, the government is now aiming for growth of about 6.5 percent in 2018, consistent with its view that more subdued growth is required in order to be sustainable. Li also announced a cut in the target for the government's fiscal deficit to 2.6 percent of GDP in 2018 from 3.0 percent in 2017, but continued to characterize the stance of fiscal policy as "proactive". Zhou backed this approach, speaking of the need for "quality-oriented" growth that is less dependent on credit and fiscal stimulus.

The inflation target of 3.0 percent was retained for 2018 but the government has dropped a specific target for growth in the M2 measure of money supply, instead noting only that it expects this to expand at a similar pace. Zhou argued that M2 growth is no longer a very precise tool to assess whether monetary policy is tight or loose. The government will again seek to keep monetary policy "prudent" and "neutral" this year, but its plans to push growth lower may allow scope for some tightening of policy by Zhou's successor.

Currencies

The U.S. dollar was mixed against its major counterparts last week. The currency was higher against the euro, yen and Swiss franc. It retreated against the pound sterling and the Canadian and Australian dollars.

The U.S. dollar rallied against the yen Friday as hopes of a breakthrough in the North Korean nuclear standoff rose and after the Bank of Japan reaffirmed its decision to maintain its ultra-easy policy stance in the coming months. Bank of Japan Governor Haruhiko Kuroda reiterated that there would be no plan to change monetary policy before the 2 percent inflation target is met. The dollar gained ground against the yen as some fears of a global trade war receded.

Earlier in the week, the U.S. currency declined as the departure of a top economic adviser to U.S. President Donald Trump raised concerns that tensions over a global trade war were entering a new heightened phase. Market watchers said the departure of economic adviser Gary Cohn would embolden protectionist forces in the U.S. administration as Trump seeks to impose hefty tariffs on steel and aluminum. Cohn's departure comes against the backdrop of a series of steps by the Trump administration to assert protectionist policies, including withdrawing the United States from the Trans-Pacific Partnership, instigating a renegotiation of NAFTA and imposing hefty import tariffs on some targeted products.

Selected currencies — weekly results

Indicator scoreboard

Germany

January manufacturing orders tumbled a monthly 3.9 percent and easily wiped out a smaller revised 3.0 percent increase in December. Annual growth accelerated from 7.2 percent to 8.3 percent but this was simply due to an even steeper monthly decline (4.8 percent) a year ago. January's monthly slide reflected a 3.3 percent drop in basics and a 5.0 percent drop in capital goods, only partially offset by a 2.4 percent increase in consumer and durable goods. There were also sizeable declines in both domestic and overseas demand. The former was down 2.8 percent on the month, its first fall since last July, while the latter was off a sharper 4.6 percent, within which orders from the rest of the Eurozone declined 3.8 percent.

January industrial production contracted 0.1 percent on the month, its fourth decline in the last five months, following a marginally smaller revised 0.5 percent decline in December. Annual growth decelerated from 6.4 percent to 5.5 percent. January's monthly dip was largely attributable to intermediates where output decreased 1.2 percent. Energy was also down 3.3 percent while construction was off 2.2 percent. More promisingly, there were fresh gains in both capital goods (1.4 percent) and consumer goods (2.0 percent). Excluding energy, production rose 0.6 percent.

United Kingdom

January industrial production jumped a monthly 1.3 percent — reversing December's unrevised 1.3 percent decline. The gain lifted annual growth from zero to 1.6 percent. Having largely ignored the disruptions to oil supplies, manufacturing output, which rose a monthly 0.3 in December, advanced a further 0.1 percent. Nonetheless, this was its ninth consecutive increase and added 0.7 percentage points to yearly growth which now stands at 2.7 percent. The monthly gain was mainly due to strength in machinery and equipment (3.2 percent), transport equipment (1.9 percent) and rubber and plastics (1.9 percent). However, buoyancy here was almost offset by sizeable declines in electrical equipment (3.5 percent), metal products (2.8 percent) and textiles and leather (2.1 percent). Elsewhere total industrial production was boosted by a 23.5 percent leap in mining and quarrying, reflecting the end of the emergency North Sea maintenance work, but was dented by decreases in electricity and gas (3.4 percent) and water supply (0.4 percent).

January global shortfall on goods trade widened out from a significantly smaller revised £11.77 billion in December to £12.33 billion in January. The deterioration reflected strength in both sides of the balance sheet with exports jumping 3.1 percent on the month and imports gaining 3.5 percent. Excluding oil and other erratic items, the red ink stood at £11.79, its worst reading since last August, as a 0.8 percent monthly rise in exports was easily eclipsed by a 3.0 percent spurt in imports. The trade deficit with the rest of the EU was £8.46 billion, up from £7.88 billion last time and its highest mark since November 2016, but the shortfall with the rest of the world narrowed very slightly from £3.89 billion to £3.87 billion, a 3-month low. Despite the still disappointingly large deficits, underlying volume trends continue to move in the right direction. Core exports in the latest three months were up 5.9 percent on the year while their import equivalent was only 1.2 percent higher.

Asia/Pacific

Japan

Fourth quarter gross domestic product was revised upward to a quarterly gain of 0.4 percent from the first estimate of 0.1 percent. Annualized growth was 1.6 percent, up from 0.5 percent. On the year, GDP was up 2.1 percent. The upward revision reflects stronger private non-residential investment, now estimated at 1.0 percent, up from the initial estimate of 0.7 percent. The revised estimate when compared with the three months to September confirm that GDP growth was slightly weaker in the three months to December, mainly driven by a pickup in imports growth resulting in a zero contribution from net exports after a positive contribution of 0.5 percentage points previously. Private-sector investment growth also weakened relative to the previous quarter. This was partly offset by stronger private consumption and public spending.

Australia

October through December gross domestic product was up a quarterly 0.4 percent, down from a revised increase of 0.7 percent in the three months to September. On the year, growth slowed from 2.8 percent in the three months to September to 2.4 percent in the three months to December. Weaker external demand was the main factor weighing on economic activity. After increasing by 1.2 percent on the quarter in the three months to September, exports fell 1.8 percent, resulting in net exports subtracting 0.5 percentage points to headline growth. Business investment was also weak, subtracting 0.4 percentage points from headline growth. This was partly offset by household consumption, which, despite concerns about the strength of consumer spending, increased 1.0 percent on the quarter, up from 0.5 percent previously and added 0.6 percentage points to headline growth. Government spending also added 0.5 percentage points to headline growth.

January retail sales edged 0.1 percent higher on the month after declining 0.5 percent in December. On the year, retail sales increased 2.1 percent, slowing from 2.5 percent in December. The small rebound in headline retail sales reflects a stronger monthly change in cafes, restaurants & takeaway food services and household goods retailing. Department sales and other retailing also saw improved monthly growth. Food sales, however, were flat while clothing sales weakened.

China

February consumer price index was up 2.9 percent on the year after rising 1.5 percent in January. The sharp increase likely reflected to some extent the impact of the timing of the lunar New Year holidays which took place in mid-February. This was the highest level of inflation since 2013. The index rose 1.2 percent on the month in February after an increase of 0.6 percent the month before. Food prices were the main factor pushing up inflation, increasing by 4.4 percent on the year after falling by 0.5 percent in January. Non-food price inflation, however, also accelerated, picking up from 2.0 percent to 2.5 percent, with stronger price increases for transport and communication offset by a weaker increase in housing costs. Urban inflation rose from 1.5 percent in January to 3.0 percent in February, while rural inflation advanced from 1.5 percent to 2.7 percent.

Americas

Canada

January merchandise trade deficit narrowed from C$3.1 billion in December to C$1.9 billion. Imports declined 4.3 percent, mainly due to lower imports of industrial machinery, equipment and parts. Exports fell 2.1 percent, primarily on fewer exports of passenger cars and light trucks. Imports declined in all commodity sections. Industrial machinery, equipment and parts, consumer goods, as well as electronic and electrical equipment and parts were the main contributors to the decline. On the year, imports increased 2.0 percent. After three consecutive monthly increases, total exports fell 2.1 percent with declines in 7 of 11 sections. Lower exports of motor vehicles and parts, aircraft and other transportation equipment and parts, as well as forestry products and building and packaging materials were partially offset by higher exports of energy products. On the year, exports decreased 1.5 percent. Exports excluding energy products fell 3.2 percent.

February employment increased 15,400 after an unrevised tumble of 88,000 at the start of the year. However, with the participation rate unchanged at 65.5 percent, this was enough to see the jobless rate decline to 5.8 percent from 5.9 percent in January. Part-time workers accounted for the entire increase in overall employment, up 54,700, and contrasted sharply with a 39,300 decline in full-time positions. The private sector added a net 8,400 to its headcount leaving the majority share to the public sector which advanced 50,300. The number of self-employed dropped 43,300. The overall increase in jobs was wholly attributable to a modest recovery in services which gained 25,900. Education (12,200), health care and social assistance (24,500), transportation and warehousing (12,600) and other services (16,600) were the main winners. However, there were sizeable declines in trade (22,000), professional, scientific and technical services (11,900) and finance, insurance, real estate and leasing (11,600). Meantime, goods producing employment contracted 10,400, largely reflecting a 16,500 fall in manufacturing. Construction was unchanged and natural resources climbed 7,600.

Bottom line

Economic data were mixed last week. The upside surprise was the 313,000 gain in February employment in the US. Four central banks — the Banks of Japan and Canada and the Reserve Bank of Australia and the European Central Bank.

The Swiss National Bank publishes its Monetary Policy Assessment next week. Otherwise it is a relatively light week for European events. In Asia, key machinery orders data — a proxy for capital spending will be released along with producer prices. And New Zealand finally releases its fourth quarter gross domestic product data.

Looking Ahead: March 12 through March 16, 2018

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