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INTERNATIONAL PERSPECTIVE

CB minutes/speeches get markets' attention
Econoday International Perspective 8/22/14
By Anne D. Picker, Chief Economist

  

Global Markets

Most equities indexes advanced last week. With little new economic data, investors focused on minutes from three central banks along with end of the week speeches by Fed Chair Janet Yellen and ECB President Mario Draghi. While geopolitical concerns had faded someone to the background, they asserted themselves once again on Friday. On the week all but the Kospi advanced. Gains ranged from 0.3 percent (STI) to 2.7 percent (DAX and IBEX).


 

RBA, BoE and FOMC minutes

Three central banks released minutes of their most recent monetary policy meetings. The Reserve Bank of Australia continued to cite the high value of the Australian dollar as not helping rebalance growth away from mining. Bank watchers of both the Federal Reserve and Bank of England looked for splits in voting from the status quo. They already knew that one FOMC member voted against maintaining the fed funds rate range from zero to 0.25 percent. But they were looking for an increasingly vocal group of dissenters who see evidence that the Fed has nearly exhausted its ability to repair damage caused by the recession. They argue that the Fed must retreat quickly to maintain control of inflation. Bank of England watchers received a surprise when two — not one — members of the monetary policy committee voted against maintaining its current Bank Rate (but voted for maintaining its current asset purchase ceiling).

 

The question regarding Fed and BoE policies is when will either/both begin to increase their respective interest rates. Both talk of 'slack' — the Fed talks of labor market slack while the BoE speaks of output slack.


 

Global Stock Market Recap

2013 2014 % Change
Index 31-Dec Aug 15 Aug 22 Week 2014
Asia/Pacific
Australia All Ordinaries 5353.1 5559.6 5640.5 1.5% 5.4%
Japan Nikkei 225 16291.3 15318.3 15539.2 1.4% -4.6%
Hong Kong Hang Seng 23306.4 24954.9 25112.2 0.6% 7.7%
S. Korea Kospi 2011.3 2063.2 2056.7 -0.3% 2.3%
Singapore STI 3167.4 3314.8 3325.5 0.3% 5.0%
China Shanghai Composite 2116.0 2226.7 2240.8 0.6% 5.9%
 
India Sensex 30 21170.7 26103.2 26419.6 1.2% 24.8%
Indonesia Jakarta Composite 4274.2 5149.0 5198.9 1.0% 21.6%
Malaysia KLCI 1867.0 1864.3 1871.0 0.4% 0.2%
Philippines PSEi 5889.8 7008.5 7133.09 1.8% 21.1%
Taiwan Taiex 8611.5 9206.8 9380.1 1.9% 8.9%
Thailand SET 1298.7 1546.6 1557.0 0.7% 19.9%
 
Europe
UK FTSE 100 6749.1 6689.1 6775.3 1.3% 0.4%
France CAC 4296.0 4174.4 4252.8 1.9% -1.0%
Germany XETRA DAX 9552.2 9092.6 9339.2 2.7% -2.2%
Italy FTSE MIB 18967.7 19481.0 19918.0 2.2% 5.0%
Spain IBEX 35 9916.7 10222.2 10500.2 2.7% 5.9%
Sweden OMX Stockholm 30 1333.0 1353.0 1382.7 2.2% 3.7%
Switzerland SMI 8203.0 8366.7 8554.2 2.2% 4.3%
 
North America
United States Dow 16576.7 16662.9 17001.2 2.0% 2.6%
NASDAQ 4176.6 4464.9 4538.6 1.6% 8.7%
S&P 500 1848.4 1955.1 1988.4 1.7% 7.6%
Canada S&P/TSX Comp. 13621.6 15304.2 15535.6 1.5% 14.1%
Mexico Bolsa 42727.1 44629.3 45375.0 1.7% 6.2%

 

Europe and the UK

European equities advanced on the week despite trimming gains on Friday as investors awaited remarks by Fed Chair Janet Yellen and ECB President Mario Draghi. Concerns about Ukraine elevated on news that Russia's controversial 'humanitarian' aid convoy had entered the country without permission. The news from Ukraine interrupted a quiet session, in which Europe's recent rally had paused as investors waited for speeches from Jackson Hole. The FTSE was up 1.3 percent, the CAC gained 1.9 percent, the DAX advanced 2.7 percent and the SMI added 2.2 percent on the week.


 

Flash PMIs

The Markit flash Eurozone composite output index gave back the ground it made in July, posting a reading of 52.8 in August, down from 53.8. The services PMI for August was 53.5, down from 54.2 in July. Manufacturing PMI was 50.8 — a 13 month low and down from 51.8 in July. The headline index has now remained above the neutral 50.0 mark for 14 successive months. Output increased in both the manufacturing and service sectors, with service providers again reporting the sharper rate of expansion. However, rates of growth eased in both sectors. The extent of the slowing was much sharper in manufacturing, taking its rate of expansion to the weakest level in the current run of growth.

 

The marked divergence between the performances of Germany and France showed signs of narrowing but not in the right direction. Germany's expansion eased from July's three month high. However, it was still solid and above the average. Meanwhile, economic activity stabilized in France following contractions in the prior three months. The manufacturing index was down by 1 point to 50.8, due to declining actual output. The effects of the ongoing geopolitical uncertainties coupled with the sluggish recovery in activity are the key factors weighing on industrial confidence. Prospects for business remain clouded in the third quarter.


 

Asia Pacific

Equities advanced broadly last week as easing geopolitical concerns and a string of upbeat U.S. economic reports spurred optimism over the course of the global economy. On Friday, trading remained light and gains were muted prior to Federal Reserve Chair Janet Yellen's speech in Jackson Hole, Wyoming which took place after markets here were closed for the week. Markets are very much driven by expectations for low U.S. interest rates and investors were pinning hopes that Ms Yellen would deliver a dovish message given the lack of upside wage pressures. European Central Bank President Mario Draghi is also scheduled. Only the Kospi retreated on the week. Gains ranged from 1.9 percent (Taiex) and 1.8 percent (PSEi) to 0.3 percent (STI). The Nikkei added 1.4 percent while both the Hang Seng and Shanghai Composite were up 0.6 percent.

 

China's August Markit/HSBC flash purchasing managers' index slid to a three month low of 50.3, down sharply from 51.7 in July and well shy of forecast estimates of 51.5, suggesting that industrial demand and investment activity growth will likely stay on a relatively subdued path. The drop in Chinese manufacturing follows a slump in credit expansion and slowing growth in investment spending in July. While the People's Bank of China has signaled it will maintain a "prudent" policy stance, any further deterioration this quarter may force a looser setting.

 

However, in Japan, the manufacturing sector continued to expand at an accelerating pace in August with the latest flash purchasing managers' index reading at 52.4. That handily beat forecasts for 51.5 following a 50.5 reading in July and indicates that the sector is recovering from the initial setback that occurred after the sales tax increase on April 1. Japan posted an unadjusted merchandise trade deficit of ¥963.99 billion in July after a deficit of ¥823.2 billion in June. Exports grew 3.9 percent on the year while imports were up 2.3 percent.


 

Currencies

The U.S. dollar rallied against all of its major counterparts including the euro, yen, pound, Swiss franc and the Canadian and Australian dollars. The currency, which had been climbing all week, reached an 11 month high against the euro after Federal Reserve Chair Janet Yellen cited job gains made during the five years of economic recovery though noting slack still remains in the U.S. labor market. The currency climbed to the highest level since February against its major peers as Ms Yellen's remarks supported speculation the Fed will increase interest rates in 2015. Ms Yellen's remarks appeared in line with the message from minutes of the July FOMC meeting, which showed officials growing more aware that labor markets are improving.

 

Criticism that European Central Bank President Mario Draghi was failing to talk down the euro was commonplace earlier this year. The euro declined to a new low for the year of $1.3221 on Friday in the wake of Janet Yellen's speech in which she made clear that the internal debate at the Fed has moved onto the question of when the Fed will increase interest rates.


 

Selected currencies — weekly results

2013 2014 % Change
Dec 31 Aug 15 Aug 22 Week 2014
U.S. $ per currency
Australia A$ 0.893 0.932 0.932 -0.1% 4.4%
New Zealand NZ$ 0.823 0.849 0.840 -1.0% 2.1%
Canada C$ 0.942 0.918 0.914 -0.5% -2.9%
Eurozone euro (€) 1.376 1.340 1.325 -1.1% -3.7%
UK pound sterling (£) 1.656 1.670 1.658 -0.7% 0.1%
 
Currency per U.S. $
China yuan 6.054 6.147 6.153 -0.1% -1.6%
Hong Kong HK$* 7.754 7.750 7.750 0.0% 0.1%
India rupee 61.800 60.770 60.473 0.5% 2.2%
Japan yen 105.310 102.330 103.930 -1.5% 1.3%
Malaysia ringgit 3.276 3.154 3.161 -0.2% 3.6%
Singapore Singapore $ 1.262 1.245 1.249 -0.3% 1.0%
South Korea won 1049.800 1016.610 1017.700 -0.1% 3.2%
Taiwan Taiwan $ 29.807 29.993 29.992 0.0% -0.6%
Thailand baht 32.720 31.889 31.950 -0.2% 2.4%
Switzerland Swiss franc 0.892 0.903 0.913 -1.2% -2.3%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

United Kingdom

July consumer prices declined 0.3 percent on the month after increasing 0.2 percent in June. On the year, the CPI was up 1.6 percent and below the Bank of England's 2 percent inflation target for a sixth consecutive month and was lower than last month's 1.9 percent increase. The annual increase also undershot the BoE's 1.9 percent forecast in the most recent Quarterly Inflation Report. Food and non-alcoholic beverage prices were down 0.2 percent in July or 0.4 percent on the year. They subtracted 0.05 percentage points from growth in total CPI. However, it was declining clothing prices that exerted the biggest downward effect on consumer inflation, with discounting leading to a 0.2 percent fall in prices in the month of July and a 5.7 percent drop on the year. Clothing and footwear took 0.21 percentage points from the decline in annual CPI between June and July. Excluding the volatile food, energy and tobacco sectors, CPI fell 0.4 percent on the month leaving core inflation at an annual rate of 1.8 percent last month, down from 2.0 percent in June.


 

July producer output prices slipped 0.1 percent both on the month and from a year ago allaying any fears of inflationary pressures in the pipeline. Analysts expected a 0.2 percent month increase. Monthly output prices have fallen for three consecutive months, the longest period of declining prices since March 2009. Core output prices were unchanged on the month and up 0.9 percent on the year after increasing 1.0 percent in June. Food products exerted the biggest downward pressure on output prices, subtracting 0.45 percentage points from the total decline in output prices. Input prices dropped 1.6 percent on the month and declined 7.3 percent from a year ago for a ninth straight monthly decline and the longest stretch since September 2009.


 

July retail sales were worse than anticipated thanks to slowing food sales which have been impacted by a price war in the supermarket sector. Sales volumes edged up 0.1 percent on the month and were up 2.6 percent on the year. Excluding fuel, sales were up 0.5 percent last month and up 3.4 percent compared with July of 2013. June sales were revised to show a monthly 0.2 percent increase and a 3.4 percent rise from a year ago. Revisions left second quarter sales 1.5 percent above the first quarter. But when compared with July 2013, both the quantity bought and amount spent in food stores decreased, by 1.5 percent and 1.3 percent, respectively — the first time that has happened since the ONS began the series in 1989. On the year, non-specialized stores were up 8.0 percent while textiles, clothing & footwear stores were 3.9 percent higher. Household goods were up 3.5 percent and other stores climbed 9.6 percent. Non-store retailing jumped 13.1 percent. Fuel stores were 4.7 percent lower on the year.


 

Asia/Pacific

Japan

July unadjusted merchandise trade deficit was a worse than anticipated ¥964.0 billion. Expectations were for a deficit of ¥702.5 billion. Exports were up 3.9 percent on the year. This was the first increase in exports in three months. Imports were up 2.3 percent from a year ago. Analysts had expected imports to decline 2.0 percent. This was the second consecutive increase in imports. Exports to China were up 2.6 percent from a year ago for the 16th straight increase. Exports to the EU were up 10.2 percent for the 14th straight increase and exports to the U.S. were up 2.1 percent for the first increase in three months. On a seasonally adjusted basis, the merchandise trade deficit was ¥1,023.8 billion after June's deficit of ¥1,067.8 billion. In July, imports were up 0.6 percent while exports were up 1.5 percent.


 

Americas

Canada

June retail sales were up 1.1 percent on the month following an upwardly revised 0.9 percent increase in May. On the year, sales were up 5.9 percent. Eight of 11 subsectors posted sales gains in June led by general merchandise at plus 3.9 percent and clothing & accessories at plus 3.8 percent. Building materials & garden equipment were up 1.4 percent with food & beverage stores up 1.3 percent. Within the latter, beer, wine & liquor stores, boosted by the World Cup, were up 2.0 percent. Sales at gasoline stations advanced 0.9 percent. However, furniture & home furnishings retreated 1.2 percent on the month while motor vehicle & parts were down 0.3 percent.


 

July consumer price index was down 0.2 percent and was up 2.1 percent from a year ago. Core CPI excluding just food and energy was also down 0.2 percent but was up 1.5 percent on the year. The Bank of Canada's core rate, which excludes eight volatile items, slipped 0.1 percent and was up 1.7 percent. Pulling down prices were passenger cars and gasoline. Both were down 2.1 percent on the month. Women's clothing declined 2.4 percent. Partially offsetting were traveller accommodation prices that were up 3.7 percent and homeowners' home & mortgage insurance, up 2.5 percent.


 

Bottom line

Equities advanced last week thanks in large part to improving economic data from the United States. Geopolitical concerns remained subdued during the week but appeared to be flaring up on Friday. The U.S. dollar rallied against all of its major counterparts.

 

The volume of new economic data picks up in the last week of summer. Key will be the August flash harmonized index of consumer prices. After July's anemic reading of 0.4 percent on the year, investors will be looking for an upward bounce away from possible deflation. Canada releases its second quarter GDP data while Germany, Italy and the U.S. report second estimates for the quarter.


 

Looking Ahead: August 25 through August 29, 2014

The following indicators will be released this week...
Europe
August 25 Germany Ifo Survey (August)
August 27 Germany Retail Sales (July)
August 28 Eurozone M3 Money Supply (July)
EC Business and Consumer Confidence (August)
Germany Unemployment (August)
August 29 Eurozone Harmonized Index of Consumer Prices (August, flash)
Unemployment (July)
France Producer Price Index (July)
Italy Gross Domestic Product (Q2.2014 final)
 
Asia/Pacific
August 29 Japan Consumer Price Index (July)
Household Spending (July)
Unemployment (July)
Retail Sales (July)
Industrial Production (July)
 
Americas
August 29 Canada Gross Domestic Product (Q2.2014)
Monthly Gross Domestic Product (June)
Industrial Product Price Index (July)

 

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