Global Markets

Economic slowing was the week's theme, from China to the International Monetary Fund (IMF) to the European Central Bank (ECB). Stock markets opened the week on the defensive and never really recovered after China reported the slowest rate of quarterly growth in 10 years. Attention then turned to the economic summit in Davos which, however, lacked star power as many heads of state took a pass. But the kickoff in Switzerland still made headlines as the IMF shaved its outlook for global growth by a couple of tenths to 3.5 percent for this year and by a tenth to 3.6 percent for next year. The IMF cited weakness in Germany, held back by new fuel standards for cars, and market pressure in Italy and its budget fight with the European Union. Chinese growth and a possible hard Brexit are further risks. Other news coming out of Davos included French plans to raise taxes on Internet giants and Italian plans to upgrade its digital infrastructure. And there were headlines late in the week out of the United States as President Trump and Congress agreed to a temporary reopening of the government. This may mark a cooling of tempers in Washington and if nothing else should restart the publishing of U.S. economic data.

Global Stock Market Recap

Europe and the UK

There were no surprises from the European Central Bank’s January policy announcement which effectively reiterated the December statement. Key interest rates were unchanged including the refi rate at zero percent. Forward guidance sees rates holding at present levels at least through the summer. With its QE programme now on hold, the ECB also restated its enhanced forward guidance on reinvestment. This has the Governing Council fully reinvesting the principal payments from maturing securities purchased under its asset purchase programme (APP) for an extended period of time. ECB chief Mario Draghi also made headlines, saying members acknowledged the mounting run of weaker than expected data and (unanimously) conceded that risks have indeed shifted to the downside. Previously the bank had maintained that such risks were broadly balanced. Policy looks likely to be on hold for even longer and, without some significant pick-up in economic growth soon, the termination of the QE programme might yet prove only temporary.

After advancing the prior week, European equity indexes opened the week on the defensive then saw rallies for the DAX and CAC which ended the week up 0.7 percent and 1.0 percent respectively. News of the U.S. government reopening broke after markets in Europe were closed but had limited impact on U.S. markets. The SMI fell 1.1 percent on the week while the FTSE, held back by economic data including a weak UK retail sales report, lost 2.3 percent.

Asia Pacific

Asian stocks were mostly higher on the week led by a 2.5 percent rise for the Kospi and a 1.8 percent gain for the Hang Seng. The All Ordinaries and the Shanghi posted more modest gains while the STI was the only index followed here that declined, but only a moderate 0.7 percent. Markets here, like Europe, were closed before news of the U.S. government reopening.

News on the trade front was mixed as prior optimism for a deal between the U.S. and China seemed to ease in the week. President Trump repeated that he will push hard to reform Chinese trade practices especially regarding the protection of intellectual property. Citing the need to enforce these protections, the administration reportedly cancelled a scheduled meeting with Chinese trade representatives during the week. Chinese officials sounded conciliatory and are conceding that increases in U.S. tariffs, which will spike further if no trade deal is reached, have already held down Chinese growth. The White House is threatening to increase tariffs on $200 billion of Chinese goods, which is nearly half of all Chinese goods entering the U.S., from 10 percent to 25 percent if no deal is reached by March 1.

Currencies

Pound sterling was the star of the week, posting a 2.6 percent increase against the euro for a year-to-date gain of 3.6 percent. The euro, despite the dovish ECB meeting, was also up, rising 0.4 percent against the dollar to $1.1450. Both currencies rose on Friday on a report that Northern Ireland's Democratic Unionist Party may now support Theresa May's Brexit deal, provided there is a time limit to the Irish backstop. Keeping a bid under sterling have been hopes that parliament will reach a deal to break the deadlock. Yet there is still significant risk of a no-deal which Irish Prime Minister Leo Varadkar raised in Davos. If the question of sorting out the border between the Republic of Ireland and Northern Ireland isn't resolved, Varadkar warned it would very difficult for the UK to make trade deals in contrast to Ireland and its access to the European Union. If there is no deal, he said "the UK won't have any trade deals with anyone."

Selected currencies — weekly results

Indicator scoreboard

Eurozone

The Eurozone economy started the New Year on a disappointingly soft footing. At just 50.7, the flash composite output was 0.4 points short of its final December mark and well below market expectations. This is the lowest level in 5-1/2 years. The headline deterioration reflected slowing activity in both the manufacturing and service sectors. The flash PMI for the former was down 0.9 points at 50.5 while its services counterpart declined 0.4 points to 50.8. Both measures are close enough to the 50-growth threshold to warn of near-stagnation. Regionally within the core group, Germany (52.1) saw limited improvement but growth remained sluggish while France (47.5) had a very poor month. The so-called ‘‘Gilets Jaunes'' staged their ninth round of protests on January 12th and the disruption caused here is clearly having an important impact. The flash January results should be in line with quarterly growth of Eurozone real GDP around the 0.1 percent mark. If correct, this would be the weakest outturn since the economy last contracted back in the first quarter of 2013.

Germany

ZEW's January survey found analysts less certain of the current health of the German economy but also a little less pessimistic about the outlook. Current conditions weighed in at a surprisingly soft 27.6. This was the weakest result since January 2015 and reflected the steepest monthly fall (17.7 points) since October 2014. However, expectations climbed 2.5 points to minus 15.0, their third increase in a row and their least negative reading since last September. The January results suggest that confidence in the current performance of the German economy is deteriorating – the sub-index has now fallen for four consecutive months, worth a cumulative 48.4 points and its worst run since July-October 2014. Expectations for the next six months are at least gradually improving but present readings do not argue in favour of any significant rebound in growth.

United Kingdom

The latest labour market figures suggest that the economy is still creating enough new jobs to keep the unemployment rate at historically low levels and at the same time maintain some upside pressure on wages. That said, it was not all good news as the December claimant count showed a further 20,800 increase in the number of people out of work and that after a larger revised 24,800 gain in November. However, this was not enough to raise the jobless rate from the mid-quarter's 2.8 percent. The ILO data showed a very solid 141,000 jump in employment in the three months to November. This was dominated by full-time positions (126,000) and, after a 79,000 rise in August-October, lifted the employment rate to 75.8 percent, a new record high. Moreover, a 10,000 spurt in vacancies to also a new record peak suggested that this may not be just a one-off. Unemployment actually crept up 8,000 but this did not prevent the jobless rate from dipping 0.1 percentage points to a surprisingly low 4.0 percent (and a record 3.8 percent trough in November alone). Meanwhile, higher bonuses helped average weekly earnings growth in September-November gain a tick to a 3.4 percent annual rate, a little firmer than anticipated and the strongest print since the three months ending July 2008. Regular earnings were flat at a 3.3 percent rate.

Asia/Pacific

Japan

Japan's merchandise trade deficit shrank from ¥737.7 billion in November to ¥55.3 billion in December, above the consensus forecast calling for a zero balance. Exports declined 3.8 percent after increasing 0.1 percent previously, exceeding the consensus forecast of a 1.3 percent drop. Imports rose 1.9 percent, below expectations of a 3.9 percent increase and far short of the 12.5 percent increase previously. The decline in exports was the first in three months, while imports have risen for a ninth straight month. The surprisingly large decrease in exports was broad-based but led by a 22.2 percent year-on-year drop in the value of exported semiconductor machinery, an 8.2 percent decrease in exports of semiconductors, a 44.7 percent fall in telecommunications equipment exports, and a 19.4 percent decline in motor vehicles. By country, the biggest export decline was with China whose imports of Japanese goods were down 7.0 percent on year in December, the first decline in 3 months. In contrast, exports to the EU grew 3.9 percent on year and to the US by 1.6 percent. Looking ahead, BOJ officials expect Japan's exports to rise in January, getting a boost ahead of the Chinese New Year in February when exports will likely drop over the holiday.

Australia

Australia's labor force recorded an increase of 21,600 in the number of employed persons in December after an increase of 37,000 in November. The unemployment rate fell from 5.1 percent in November to 5.0 percent, matching the lowest level since July 2011, but the participation rate decreased from November's 65.7 percent to a still strong 65.6 percent. Seasonally adjusted full-time employment fell by 3,000 in December after falling by 6,400 previously. Part-time employment rose by 24,600 after rising 43,400 in November. The total number of monthly hours worked increased by 0.1 percent from November after a 0.2 percent decline previously. Over the last 12 months, full-time employment has risen by 162,000 while part-time employment increased by 106,600. Regionally, the highest annual employment growth rates were in Victoria, at 3.5 percent, followed by New South Wales at 2.9 percent and Queensland at 1.5 percent. December's data show that conditions in Australia's labour market remain strong, with the unemployment rate at a multi-year low, and the participation rate holding close to record highs.

China

China's economy expanded at a moderately slower pace in the three months to December, with year-on-year growth in domestic product recorded at 6.4 percent, down from the 6.5 percent pace in the previous quarter but in line with the consensus forecast. GDP grew 1.5 percent on the quarter, down from the 1.6 percent increase recorded in the three months to September. Annual GDP growth for 2018 is estimated to have been 6.6 percent, down from the 6.8 percent recorded in 2017 and meeting the 6.5 percent growth target, but the slowest since 1990. As in the previous quarter, fourth-quarter data show China's economy growing at the slowest year-on-year pace since 2009, albeit not far below the 6.7 percent to 7.0 percent range recorded since the start of 2015. Commenting on the data following their release, the head of the National Bureau of Statistics noted that trade frictions with the U.S. have had many impacts on the Chinese economy, including trade and investment.

Chinese industrial production grew 5.7 percent on the year in December, accelerating from November's 5.4 percent pace, which was the slowest in a decade, and beating the consensus forecast of 5.4 percent. Versus the prior month, industrial output increased 0.54 percent in December, outpacing the revised 0.37 percent monthly growth seen in November. The increase in headline industrial growth in December was mainly driven by the mining sector, where output rose 3.6 percent in December, up from 2.3 percent previously, reflecting stronger growth in non-metal minerals and non-ferrous metals. But manufacturing growth slowed slightly by 0.1 percentage points to a 5.5 percent year-on-year pace in December, with electric machinery growth rising to 10.1 percent year-on-year from 9.0 percent previously but communication equipment growth slowing to 10.5 percent from 12.3 previously. Among major products, autos remained the weakest performer though at minus 14.9 percent year-on-year the decline was less severe than in November, when it was minus 16.7 percent.

Americas

Canada

Retailers had a poor November. Sales fell a steeper than expected 0.9 percent on the month, their first decline since August and easily more than enough to reverse October's slightly smaller revised 0.2 percent gain. However, a particularly weak period for demand a year ago meant that annual growth still climbed from 0.3 percent to 0.5 percent. Volume sales also contracted, by 0.4 percent to stand 0.2 percent below their level in November 2017. Within the overall monthly drop, nominal sales fell in six of the eleven major categories. Among these, gasoline was off some 5.0 percent, largely on the back of weaker prices, and motor vehicles and parts were down 1.8 percent. Excluding the latter, sales declined 0.6 percent. Elsewhere, food and drink (minus 0.9 percent) was the other main loser. On the upside, general merchandise (1.7 percent) and miscellaneous stores (0.8 percent) both had a respectable month.

Bottom line

Any downward pivot underway for global growth would be just beginning. If this pivot does pick up then talk of global recession would naturally increase. But with central banks, like the ECB, not withdrawing stimulus and given the possibility of a trade deal between the U.S. and China, talk of slowing could become old news. And given President Trump's conciliatory move to reopen the government, the possibility of a conciliatory move toward China may have just improved.

Major events in the coming week promise to be the sorting out of the U.S. government's reopening and the latest in U.S.-China trade developments. Though the posting of delayed releases is in question, there's plenty of U.S. data that are certain to be released including the January employment report where solid strength is once again the expectation. Flash Eurozone data will be posted in the week with Japanese data also on tap including industrial production. Manufacturing surveys out of China are also certain to get attention.

Looking Ahead: January 28 through ‘February 1, 2019