Global Markets

Most equity indexes retreated for the week with a wide variety of events that influenced investors. Aside from monetary policy announcements from the Bank of England, the Federal Reserve and the Reserve Bank of New Zealand, the week was dominated by imposition of tariffs by the U.S. and threats of retaliatory action that heightened worries of a trade war. Global equity indexes tumbled on the week as rhetoric regarding international trade barriers escalated. Losses ranged from 1.0 percent (SET) to 6.5 percent (Nasdaq).

On March 23, the U.S. iron and aluminum tariffs went into effect. Temporary exemptions were granted to EU, Argentina, Australia, Brazil, Canada, Mexico and South Korea until May 1 as discussions continue. U.S. President Trump also announced additional tariffs on Chinese goods on Thursday, while the Chinese responded with tariffs of their own on U.S. goods shortly after.

Federal Reserve

As expected, the FOMC raised its fed funds rate by 25 basis points to a range of 1.50 percent to 1.75 percent. The FOMC indicated that there will be three interest rate increases in 2018. Descriptions of the economy were generally 'moderate'. The labor market was still described as strong. However economic activity was downgraded a notch to 'moderate', with both household spending and business fixed investment also downgraded to 'moderate'. Inflation was unchanged — the 12 month rate is anticipated to move up and stabilize around the FOMC's 2 percent target over the medium term. The statement also repeated that near-term risks to the economic outlook "appear roughly balanced".

In his press conference, Chair Jerome Powell played down the significance of the FOMC projection holding at three rate increases this year and not moving up to four as many had expected. Powell said that the decision at the meeting was specifically a rate increase, not a change in projections which he said represents the member's individual assessments and which can shift if the economy slows or accelerates.

Bank of England

The Bank of England's monetary policy committee (MPC) left its Bank Rate at 0.50 percent and the quantitative easing ceiling at £445 billion (gilts £435 billion, corporate bonds £10 billion). The decision on interest rates was not unanimous with two members wanting an immediate 25 basis point tightening. The Bank Rate was last increased in November 2017. Forward guidance was also unrevised with the MPC still expecting any future increases in the Bank Rate 'to be at a gradual pace and to a limited extent'. The minutes indicated that most MPC members took the view that recent economic data had contained few surprises so there was no need for any immediate action.

The underlying message in the minutes is that interest rates are going up and it is just a matter of time before that happens. The bottom line is that demand is still expected to expand at a rate above the UK's productive potential making a tightening of the monetary stance a necessary step if inflation is to be brought back to target (2 percent) on a sustainable basis. The May BoE meeting has the benefit of a new Quarterly Inflation Report (QIR) which significantly boosts the chances of a move at that time.

Reserve Bank of New Zealand

As broadly anticipated, Reserve Bank of New Zealand left its policy interest rate — the overnight cash rate (OCR) — unchanged at 1.75 percent where it has been since November 2016. The RBNZ repeated its assurance that 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 today's decision again notes improvement in global economic conditions and higher commodity prices.

This policy meeting was the last chaired by Acting Governor Grant Spencer, with his replacement, Adrian Orr, set to take over at the end of March. The New Zealand government will sign a new policy target agreement with the RBNZ when the current agreement expires. However, it has advised 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, having advocated before the election that it wanted to add an employment objective to the existing inflation target as part of the RBNZ's mandate.

Global Stock Market Recap

Europe and the UK

Equities here joined the global retreat as the U.S. government announced new trade restraints against China, renewing fears about a potential trade war that could dent global economic growth. A number of other factors played into the decline. Disappointing Eurozone private sector data and weak German business sentiment weighed on the markets. The split vote from the Bank of England's monetary policy committee also had investors anticipating rate increases as soon the May MPC meeting. Also weighing on equities was the memorandum on tariffs of up to $60 billion on Chinese imports.

The week began on a down note with the indexes ending firmly in negative territory. Concerns over a potential trade war weighed on investor sentiment throughout the week. Traders were also in a cautious mood ahead of policy decisions from the Federal Reserve on Wednesday and the Bank of England on Thursday. On the week, the FTSE declined 3.4 percent, the CAC and SMI dropped 3.5 percent and the DAX tumbled 4.1 percent.

On Friday as expected, EU leaders approved the UK-EU Brexit transition deal that was announced on Monday. To all intents and purposes, this means that the UK will continue to act as if it were still part of the EU through the end of 2020, despite formally leaving the Union on the 29th of March 2019. The arrangement is conditional upon the ratification of the full withdrawal treaty.

Asia Pacific

Equities in the Asia Pacific region tumbled as rhetoric and actions escalated regarding tariffs. U.S. tariffs on iron and steel went into effect on March 23 (Friday). Further tariffs — these aimed at China — were announced on Thursday and were immediately followed by counter-tariffs from China on American goods. On the week, losses ranged from 1.0 percent (SET) to 4.9 percent (Nikkei). The Shanghai Composite and Hang Seng were down 3.6 percent and 3.8 percent respectively. The drumbeat of trade war fears drowned out most reaction to the Federal Reserve's 25 basis point increase to its fed funds interest rate to a range of 1.50 percent to 1.75 percent.

Asian stocks tumbled on Friday, the dollar weakened and safe-haven assets such as gold and the Japanese yen strengthened after U.S. President Donald Trump announced tariffs on about $60 billion worth of Chinese imports and China said it would impose tariffs on up to $3 billion worth of U.S. goods in retaliation. They have a 30-day consultation period, raising the chance that final measures could be watered down.

China has named a new central bank governor — Yi Gang. Mr Yi had served as deputy governor of the People's Bank of China since 2008. He succeeds Zhou Xiaochuan who had been governor for the past 15 years. Also named by the National People's Congress was Liu He as Vice Premier in charge of economic policies and financial issues. As such, the PBoC governor will report to him.

The PBoC's tools and monetary policy framework have evolved a lot in recent years in ways that have given it slightly more independence than in the past to control liquidity and guide interest rates. Historically the PBoC had no control over interest rate decisions as all benchmark rate moves need political approval. As a result more traditional benchmark rates — bank reserve requirements, deposit rates and lending rates — haven't been used much in the last few years.

Instead the PBoC has created other tools such as the SLF (standing lending facility) and MLF (medium-term lending facility) to manage financial system liquidity. Not only are these lending operations more effective, but importantly the Bank doesn't require political approval to make changes to the rates of these lending tools, so their greater use has given the PBoC more independence to control liquidity and interest rates.

In response to the Federal Reserve's 25 basis point fed funds increase, the People's Bank of China said it had increased the rate on 7-day reverse repurchase agreements by 5 basis points to 2.55 percent. The PBoC's move had been widely expected and was its first major policy decision under new Governor Yi Gang.

Currencies

The U.S. dollar tumbled against most of its major counterparts including the yen, euro, pound sterling, Swiss franc and the Canadian dollar as the threat of a global trade war pushed the currency to its lowest in over a month. The dollar declined even though the Federal Reserve raised interest rates as expected which normally would send a currency higher. China also nudged up its borrowing costs in response to the Fed's move, as Beijing braced for fresh tariffs on Chinese imports worth as much as $60 billion that were announced Thursday by the U.S. administration.

The pound sterling advanced after the Bank of England signaled that it is looking at a potential interest-rate increase. Investors are pricing in a potential increase in May. The yen, which often is sought after in times of market stress, broke through the ¥105 level against the dollar for the first time since November 2016, though it later pared the gain.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

March flash composite output index shed 1.8 points from its final February reading to 55.3, its lowest mark in 14 months. This was the second decline in a row. Both the manufacturing and service sectors recorded a decline in their respective expansion rates. The manufacturing flash PMI declined 2.2 points to an 8-month low of 56.6, while services saw a more modest 1.2 point decrease to 55.0, its weakest reading in five months. Growth of aggregate new orders eased for a third straight month and job creation, while still solid, was the least robust in half a year. However, an increase backlogs was larger than in February and, while dipping to a 4-month low, overall business confidence in the coming year remained elevated. Inflation pressures softened as input costs saw their smallest rise in six month and output prices their least significant increase in the year to date. Regionally, within the core the flash French composite output reading was at 7-month low of 53.6, a 2.3 point fall from February's final reading, while its German counterpart was off 2.2 points at 55.4, its worst reading in eight months. Activity in the rest of the Eurozone recorded its weakest increase in five months. For comparison, the U.S. flash composite PMI declined as well — from 55.8 to 54.3.

Germany

March ZEW survey found analysts still generally upbeat about the current state of the German economy but notably less confident about the outlook. The current conditions index decreased 1.6 points to 90.7, its second consecutive fall from its January peak (95.2) but still historically very firm. However, expectations were trimmed more significantly, declining a sizeable 12.7 points to 5.1. This was their third drop in the last four months and the sharpest decline since July 2016 and their weakest level since September 2016.

March Ifo eased to 114.7, a 0.7 point drop from its unrevised February reading and its lowest reading since April last year. The headline decline reflected lower readings in both current conditions and expectations. The former index was off only 0.5 points at a still very solid 125.9, while the latter declined a full point to 104.4. Expectations have now decreased for four straight months and stand at their weakest mark since the start of 2017. At a sector level, morale worsened in manufacturing (26.5 after 28.1) and, in particular, retail (4.7 after 11.1) but at least held steady in wholesale (20.7) and improved in construction (17.9 after 15.9).

United Kingdom

February consumer price index was up 0.4 percent on the month and 2.7 percent on the year. This compares with January's readings of a monthly decline of 0.5 percent and an annual increase of 3.0 percent. On the year, the main downward impact in annual inflation came from transport where petrol prices declined. Food and soft drinks, where prices edged just 0.1 percent higher after a 0.8 percent spike last year, also subtracted as did restaurants and hotels. The only significant, albeit partial offset, came from clothing and shoes where the seasonal advance in prices was less than in February 2017. As a result, the core CPI increased 0.6, lowering its yearly rate from 2.7 percent to 2.4 percent, its weakest reading since March 2017.

February claimant count unemployment was up 9,200 after a smaller revised 1,600 decline in January. The jobless rate was 2.4 percent, up from 2.3 percent last time. The ILO data for the three months to January showed joblessness rising a further 24,000. However, this was small enough to reduce the unemployment rate to 4.3 percent from 4.4 percent last time. Employment jumped 168,000 following an already sizeable 88,000 bounce in the fourth quarter. This boosted the employment rate to 75.3 percent, equaling its all-time peak. Vacancies were up too, gaining 10,000 although at 816,000, this was well short of the 824,000 high seen in the fourth quarter. Average annual earnings growth in the three months to January was 2.8 percent, up from 2.7 percent last time and the fastest rate since the third quarter of 2015. Excluding bonuses, the rate was a slightly softer 2.6 percent, but also 0.1 percentage point firmer than in the fourth quarter. Adjusted for inflation, real regular pay again fell but by only 0.2 percent, its smallest drop since February 2017. Total real earnings growth improved to flat, their first non-negative print since last May.

February retail sales volumes were up 0.8 percent on the month after a revised 0.2 percent decline the month before. On the year, sales were up 1.5 percent. Excluding auto fuel, purchases rose a smaller monthly 0.6 percent, also after a revised 0.2 percent drop last time. However, discretionary spending in February was weak. Excluding auto fuel, non-food sales shrank 0.8 percent on the month, more than reversing January's 0.5 percent advance. Non-specialized stores (down 1.0 percent), textiles, clothing and footwear (down 0.6 percent) and the other stores category (down 2.6 percent) all struggled. However, household goods (2.3 percent) and non-store retailing (4.6 percent) advanced. Elsewhere, food purchases were up 1.1 percent and auto fuel sales were up 2.5 percent. The retail deflator eased 0.3 percentage points to 2.5 percent, its second successive decrease and its weakest print since January 2017. Excluding auto fuel, prices were up 2.6 percent on the year after a 2.8 percent increase in January. This was their lowest outturn since June last year.

Asia/Pacific

Japan

February merchandise trade balance swung to a small surplus of ¥3.4 billion from a deficit of ¥944.1 billion in January. Japan typically records relatively large trade deficits in January. Exports were up 1.8 percent on the year after increasing 12.3 percent the month before while imports advanced 16.5 percent on the year after 7.7 percent. The easing in exports was mainly due to a drop in shipments to other countries in the region that observe lunar new year holidays, which took place in early February this year but in late January last year. There was also weaker growth in Japan's exports to the European Union and to trading partners in south-east Asia although this was partly offset by an increase in exports to the United States. The pickup in imports growth was largely driven by stronger growth in both the volume and value of iron and steel products, coal and natural gas, with the value of food imports also growing at a faster pace. Imports of petroleum, autos and iron ore, in contrast, recorded weaker growth in value terms in February.

Australia

February employment increased 17,500 after a revised January increase of 12,500. The unemployment rate increased from 5.5 percent in January to 5.6 percent in February while the participation rate advanced from 65.6 percent to 65.7 percent. Full-time employment was up 64,900 on the month after sinking 53,200 in January. This was largely offset by a drop in part-time employment of 47,400 after an increase of 65,900 previously. The total numbers of hours worked in February increased 1.2 percent. Over the last 12 months, full-time employment has increased by 327,600 persons, while part-time employment has increased by 93,100.

Americas

Canada

January retail sales increased a monthly 0.3 percent and were up 3.6 percent on the year. General merchandise stores (2.3 percent) were the largest contributors to the monthly increase. Sales were up in 7 of 11 subsectors representing 63 percent of retail trade. Excluding sales at motor vehicle and parts dealers, retail sales increased 0.9 percent. Retail sales volumes edged up 0.1 percent. Electronics & appliance (4.0 percent), clothing & clothing accessories (2.1 percent) and furniture & home furnishings (3.4 percent) stores also contributed to the monthly increase following declines in all three subsectors in December. Motor vehicle and parts dealers were down 1.2 percent, largely due to lower sales in British Columbia and Quebec. Results were mixed among store types as sales at new car dealers. Retail sales were up in six provinces with Ontario (1.2 percent) reporting the largest gain in dollar terms.

Bottom line

Equities tumbled as investors worried about a possible trade war as the U.S. and China traded tariffs. The Federal Reserve increased its fed funds interest rate range to 1.50 percent to 1.75 percent. The Bank of England and the Reserve Bank of New Zealand left their policy interest rates unchanged at 0.5 percent and 1.75 percent respectively.

The coming week will be shortened by a holiday on Friday and most markets will be closed. However, there will be a number of key releases with final fourth quarter GDPs being released in France, the UK and the U.S. Japan will post industrial production, unemployment, retail sales and consumer prices for February. No central bank meetings are scheduled. The March EC business and consumer confidence survey — important to the ECB — will be released.

Looking Ahead: March 26 through March 30, 2018

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