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Iran and Korea overshadow economics
International Perspective - May 11, 2018
By Anne D. Picker, Chief Economist


Global Markets

With a relatively light week of economic data, focus was on the continued outpouring of earnings reports and geopolitical news from Asia and the Middle East. The date is now set (June 12) for the meeting in Singapore between U.S. President Trump and North Korea’s Kim Jong-un. And in the Middle East, repercussions are being felt after the U.S. withdrew from the Iranian nuclear pact. The ramifications sent energy shares and crude prices higher. On the week, most equity indexes advanced.


Bank of England

The Bank of England’s monetary policy committee opted to keep Bank Rate at 0.5 percent and quantitative easing at £445 billion (£435 billion gilts, £10 billion corporate bonds). Forward guidance was unchanged keeping a tightening bias. Any future increases in the Bank Rate would be at a gradual pace and to a limited extent. The vote in favour of steady rates was again 7 to 2 with the MPC's two main hawks, Ian McCafferty and Michael Saunders, renewing their March call for an immediate 25 basis point increase. Both members put more weight than the others on the relative buoyancy of the latest business surveys and the strong labour market.


The decision was in marked contrast to the hawkish message that the BoE sent at the conclusion of its March meeting. That seemed to make a monetary tightening in May all but a done deal. The backtracking reflected the surprisingly sharp slowdown in the first quarter economy as well as an equally unexpectedly marked fall in March inflation. Quarterly growth at the start of the year was provisionally estimated by the Office for National Statistics (ONS) at just 0.1 percent, well short of the 0.3 percent call made in the Bank's February Quarterly Inflation Report. As a result, the 2018 growth forecast in the new QIR has been revised notably softer (1.4 percent from 1.8 percent). Similarly, the inflation rate for the same period was 2.7 percent or 0.2 percentage points short of the official prediction.


The BoE's Quarterly Inflation Report (QIR) acknowledged the first quarter's downside surprises on growth and inflation and forecasts for both have been revised down. In itself, this provides the justification required for the MPC decision to leave Bank Rate unchanged at 0.5 percent. Following the sharp undershoot of the Bank's first quarter growth forecast (quarterly rate 0.3 percent compared with actual 0.1 percent), the economy is now seen expanding just 1.4 percent in 2018. This is a full 0.4 percentage points short of the February call. However, quarterly predictions thereafter are hardly changed confirming that the slowdown is expected to be only temporary. The BoE seems to ascribe a more significant negative impact from the bad weather in late February/early March than the ONS. Meantime, the assumed equilibrium unemployment rate remains at 4.25 percent, so the current reading (4.2 percent) suggests there is no slack left.


Reserve Bank of New Zealand

Once again, a central bank decided to maintain the status quo. The Reserve Bank of New Zealand left its overnight cash rate (OCR) at 1.75 percent where it has been since November 2016. The rate decision was the first under new RBNZ Governor Adrian Orr who said the bank planned to keep the cash rate “at this expansionary level for a considerable period of time.” The New Zealand dollar dropped Thursday after the central bank signaled it had no plan to increase rates in the short-term.


The RBNZ published updated growth and inflation forecasts. GDP growth is expected to slow in 2018 before picking up moderately in 2019 and 2020. Although headline inflation is forecast to drop from 2.2 percent to 1.1 percent in 2018, emerging capacity constraints are then expected to push it back up towards the mid-point of the RBNZ's target range of 1.0 percent to 3.0 percent by 2021. Based on these forecasts, expectations are for policy rates to remain little changed in the near-term and to increase only modestly in the future.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 May 4 May 11 Week 2018
Australia All Ordinaries 6167.3 6155.4 6216.41 1.0% 0.8%
Japan Nikkei 225 22764.9 22472.8 22758.48 1.3% 0.0%
Topix 1817.56 1771.52 1794.96 1.3% -1.2%
Hong Kong Hang Seng 29919.2 29926.5 31122.06 4.0% 4.0%
S. Korea Kospi 2467.5 2461.4 2477.71 0.7% 0.4%
Singapore STI 3402.9 3545.4 3570.17 0.7% 4.9%
China Shanghai Composite 3307.2 3091.0 3163.26 2.3% -4.4%
India Sensex 30 34056.8 34915.38 35535.79 1.8% 4.3%
Indonesia Jakarta Composite 6355.7 5792.4 5956.83 2.8% -6.3%
Malaysia KLCI 1796.8 1841.8 1846.51 0.3% 2.8%
Philippines PSEi 8558.4 7546.2 7752.11 2.7% -9.4%
Taiwan Taiex 10642.9 10529.4 10858.98 3.1% 2.0%
Thailand SET 1753.7 1779.9 1765.93 -0.8% 0.7%
UK FTSE 100 7687.8 7567.1 7724.55 2.1% 0.5%
France CAC 5312.6 5516.1 5541.94 0.5% 4.3%
Germany XETRA DAX 12917.6 12819.6 13001.24 1.4% 0.6%
Italy FTSE MIB 21853.3 24335.0 24159.34 -0.7% 10.6%
Spain IBEX 35 10043.9 10104.1 10271.40 1.7% 2.3%
Sweden OMX Stockholm 30 1576.9 1577.1 1603.25 1.7% 1.7%
Switzerland SMI 9381.9 8903.8 8993.51 1.0% -4.1%
North America
United States Dow 24719.2 24262.51 24831.17 2.3% 0.5%
NASDAQ 6903.4 7209.6 7402.88 2.7% 7.2%
S&P 500 2673.6 2663.4 2727.72 2.4% 2.0%
Canada S&P/TSX Comp. 16209.1 15729.4 15983.32 1.6% -1.4%
Mexico Bolsa 49354.4 46992.2 46728.920 -0.6% -5.3%


Europe and the UK

European equities advanced on the week — with the exception of Italy’s MIB which was hit by the on-going failure to form a government since the March 4 election. The FTSE was the best performer for the week, increasing 2.1 percent. The DAX added 1.3 percent, the SMI gained 1.0 percent in a holiday shortened week and the CAC added 0.5 percent. European stocks have now recorded the longest string of weekly increases in more than three years thanks in part to earnings. The FTSE was up for its eighth consecutive week — the longest span in more than a decade.


Efforts to find a workable Italian government in the wake of the inconclusive general election have proved fruitless with the failure of a third round of talks held earlier in the week. Political instability in Italy is nothing new to financial markets and reaction to the news of the deadlock has been limited.


The FTSE has recently been aided by a pullback in the pound, which ended the week virtually unchanged. A weaker pound tends to bolster the equity benchmark as its large multinational companies make most of their revenue and earnings overseas. Economic data continue to be weak. For example, March industrial output crept up a below expectations monthly 0.1 percent. The UK house price balance hit its lowest level since November of 2012, largely driven by the weakness in London, the Royal Institution of Chartered Surveyors reported. And the March merchandise trade deficit expanded on the month.


Asia Pacific

Equities advanced on the week as many countries returned from national holidays held during the first week of May. Only the SET retreated on the week. Malaysia’s KLCi’s added 0.3 percent in two days of trading while the Hang Seng soared 4.0 percent in a full week. Geopolitical concerns weighed on investors as a date was finally set for the North Korea/United States head of state meeting (June 12 in Singapore). At week’s end, higher commodity prices and easing interest rate increase fears helped underpin investor sentiment. While the dollar index eased somewhat after the release of tepid U.S. inflation data on Thursday, oil prices hovered near multi-year highs reached the previous session.


Hong Kong gross domestic production grew by a seasonally adjusted 2.2 percent on the quarter in the three months to March, after rising 0.8 in the three months to December. This was the strongest quarterly growth rate since 2011. On the year, GDP accelerated from 3.4 percent in the three months to December to a multi-year high of 4.7 percent in the three months to March. Private consumption spending rose 8.6 percent on the quarter while investment spending increased by 3.8 percent.


China’s monthly deluge of economic data began during the week with the merchandise trade balance and consumer and producer price indexes released. Consumer prices were up 1.8 percent on year in April and down from 2.1 percent in March. Producer prices advanced an annual 3.4 percent, up from 3.1 percent in the previous month. April exports jumped 12.9 percent on the year while imports were 21.5 percent higher.



The U.S. dollar’s gains earlier in the week eroded as the week progressed. At week’s end, the currency was little unchanged against most of its major counterparts — the exception being the Canadian dollar. On the week, the U.S. currency was down against the pound sterling, Swiss franc and Canadian and Australian dollars. The currency advanced against the yen and euro.


On Thursday, the pound sterling reversed earlier gains and fell to the day’s lows after the Bank of England kept interest rates on hold as widely expected. The BoE also cut inflation and growth projections for this year and the next. Before the decision, sterling had advanced but fell on the day to a level not far away from a four-month low of $1.3485 hit on Tuesday. While expectations of a rate increase had fallen rapidly in recent days after a run of weak data and cautious comments from monetary policy committee members, the cut in inflation and growth forecasts weighed on currency markets. Sterling recovered back towards $1.35 on Thursday after Bank of England Governor Mark Carney told the BBC that he expected a rate increase over the course of the next year if there are no shocks to the economy.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 May 4 May 11 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.753 0.755 0.2% -3.2%
New Zealand NZ$ 0.709 0.702 0.697 -0.6% -1.6%
Canada C$ 0.796 0.778 0.782 0.6% -1.7%
Eurozone euro (€) 1.194 1.195 1.195 -0.1% 0.0%
UK pound sterling (£) 1.344 1.354 1.354 0.1% 0.7%
Currency per U.S. $
China yuan 6.534 6.363 6.334 0.5% 3.1%
Hong Kong HK$* 7.816 7.849 7.850 0.0% -0.4%
India rupee 64.081 66.870 67.334 -0.7% -4.8%
Japan yen 112.850 109.110 109.300 -0.2% 3.2%
Malaysia ringgit 4.067 3.940 3.950 -0.3% 3.0%
Singapore Singapore $ 1.338 1.334 1.336 -0.1% 0.2%
South Korea won 1070.630 1077.150 1069.400 0.7% 0.1%
Taiwan Taiwan $ 29.775 29.715 29.767 -0.2% 0.0%
Thailand baht 32.696 31.740 31.910 -0.5% 2.5%
Switzerland Swiss franc 0.979 1.0009 1.000 0.1% -2.2%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


March manufacturing orders dropped a monthly 0.9 percent following a revised 0.2 percent decline in February. Orders have now declined for three successive months, the first time this has happened since the third quarter of 2015. Annual growth crept a tick firmer to 3.2 percent but only because of an even sharper decrease in March 2017. However, the weakness of the overall monthly change was at least wholly attributable to overseas demand. This contracted 2.6 percent (Eurozone minus 3.0 percent) and more than offset a 1.5 percent rise in domestic orders. Within overall orders, capital goods were 1.8 percent lower than in February and basics were off 0.3 percent. By contrast, consumer goods expanded 2.2 percent.


March industrial production was up 1.0 percent on the month — its best performance since last November — and enough to lift annual growth from 2.1 percent to 3.2 percent. Excluding construction, output was up an annual 4.0 percent. However, the end of quarter bounce only reversed a part of February's marginally steeper revised 1.7 percent decline. March's partial monthly recovery was reasonably broad-based. Capital goods climbed 2.6 percent after a 2.7 percent drop, consumer goods were up 1.1 percent following a 1.4 percent decline and construction gained 0.6 percent after a 3.1 percent tumble. However, intermediates compounded a 0.7 percent decline with a further 0.6 percent decrease. This made for a 1.1 percent rise in manufacturing output which failed to fully unwind February's 1.7 percent slump. Energy continued to expand, rising 1.4 percent.


United Kingdom

March industrial output edged up 0.1 percent on the month and thanks to positive base effects, annual growth climbed 0.8 percentage points to 2.9 percent. Manufacturing recorded a 0.1 percent monthly dip, its second decline in a row. Pharmaceuticals (down 5.2 percent) alone subtracted nearly 0.3 percentage points from the monthly change while transport equipment (down 1.9 percent) and metals (down 1.1 percent) hit growth by a further 0.3 percentage points. The main offset was other manufacturing and repair (4.2 percent) which added 0.3 percentage points. Elsewhere within overall industrial production, electricity and gas advanced 2.6 percent and water supply 0.4 percent but mining and quarrying declined 2.4 percent.


March merchandise trade in goods deficit was a surprisingly large Stg12.29 billion, a sharp increase on an upwardly revised Stg10.41 billion deficit in February and a 4-month high. The headline deterioration reflected an 8.1 percent monthly rebound in imports that easily more than eclipsed a 4.4 percent recovery in exports. Moreover, the jump in the red ink could not be attributed to oil and other erratic factors as, excluding these, the deficit still widened out from Stg10.39 billion to Stg12.41 billion. A 2.7 percent monthly gain in underlying exports was swamped by a 7.8 percent leap in imports. The bilateral shortfall with the EU was up Stg0.6 billion at Stg8.6 billion, its highest since November 2016, while the deficit with the rest of the world climbed from Stg2.4 billion to Stg3.6 billion.




April merchandise trade balance shifted from a deficit of $4.98 billion in March to a surplus of $28.78 billion. China's trade surplus with the United States was $22.19 billion in April and $80.4 billion year-to-date, up 13.5 percent from the same period last year. China also has a sizeable trade surplus with the European Union of $35.9 billion year-to-date, offset by trade deficits with most other major trading partners. Exports rose 12.9 percent on the year after falling 2.7 percent in March. Imports also recorded stronger growth in April, up 21.5 percent on the year after advancing 14.4 percent in March. In domestic currency terms, China's trade balance shifted from a deficit of CNY29.78 billion in March to a surplus of CNY182.8 billion in April. Exports increased by 3.7 percent on the year in April after falling by 9.8 percent in March while imports in yuan terms picked up from 5.9 percent to 11.6 percent.


April consumer price index slowed to an increase of 1.8 percent on the year from 2.1 percent in March. This is the second consecutive decline after it spiked sharply higher in February. The index fell 0.2 percent on the month after dropping 1.1 percent previously. Once again food prices were the main factor driving the decline, increasing 0.7 percent on the year after an increase of 2.1 percent previously. Non-food price inflation, in contrast, was unchanged at 2.1 percent, with a stronger increase in transport and communication charges offset by weaker increases elsewhere. Housing costs were steady at 2.2 percent. Urban inflation fell from 2.1 percent in March to 1.8 percent in April, while rural inflation fell from 1.9 percent to 1.7 percent.




April employment slipped 1,100. The decline was entirely due to a drop in part time employment. Full time jobs increased 28,800 while part time jobs dropped 30,000. The participation rate slipped to 65.4 percent from 65.5 percent in March. The last time the participation rate was last this low was in November 1999 and the last time it was even lower was October 1998 (65.2 percent). Goods sector jobs were down 15,900 while services added 14,800. The private sector created 28,000 jobs but the public sector lost 13,600. More people worked in professional, scientific and technical services, as well as in accommodation and food services. In contrast, employment declined in wholesale and retail trade and in construction. 


Bottom line

Both the Reserve Bank of New Zealand and the Bank of England chose to keep their respective monetary policies unchanged. Germany’s March factory orders declined for a second month but industrial production increased more than anticipated. China’s April data improved especially exports. In geopolitical news, the United States and North Korea have scheduled the meeting between their two leaders in June. Oil prices surged after the U.S. dropped out of the Iranian nuclear pact.


The Nafta talks resume during the week. U.S. and Chinese officials will meet in Washington for a second round of trade talks, after apparently making little progress in discussions in Beijing earlier this month. No central bank meetings are scheduled this week. Flash first quarter gross domestic product data will be released for the Eurozone and Germany. Japan also releases its first estimate of GDP. The UK releases its April labour market report.


Looking Ahead: May 14 through May 18, 2018

The following indicators will be released this week...
May 15 Eurozone Gross Domestic Product (Q1.2018)
Industrial Production (March)
Germany Gross Domestic Product (Q1.2018 preliminary))
ZEW Survey (May)
UK Labour Market Report (April)
May 16 Eurozone Harmonized Index of Consumer Prices (April final)
May 17 Eurozone Merchandise Trade (March)
Asia Pacific
May 14 Japan Producer Price Index (April)
India WPI (April)
Consumer Price Index (April)
May 15 China Industrial Production (April)
Retail Sales (April)
May 16 Japan Gross Domestic Product (Q1.2018 preliminary))
May 17 Japan Machinery Orders (March)
May 18 Japan Consumer Price Index (April)
May 16 Canada Manufacturing Sales (March)
May 18 Canada Consumer Price Index (April)
Retail Sales (March)


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


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