Global equities were mixed last week as tariffs were invoked and the Federal Reserve did what was expected — they raised the fed funds rate by 25 basis points to a range of 2.00 percent to 2.25 percent in a unanimous decision.
The main event of the week was the FOMC meeting. But there was a plethora of updated economic data as well. And there was the Reserve Bank of New Zealand announcement as well. While the Fed has been raising rates, the RBNZ has been motionless since November 2016.
The Reserve Bank of New Zealand left its monetary policy rate — the overnight cash rate (OCR) — unchanged at 1.75 percent as expected. The rate has been unchanged since a 25 basis point cut in late 2016. In its statement accompanying the decision, the RBNZ said the rate will remain unchanged through 2019 and into 2020. It again noted that the next move could be either up or down.
Although economic growth in the three months to June was a little stronger than they had anticipated, the Bank’s outlook was little changed from the time of their August policy review. External demand, household consumption and government spending are all expected to support economic activity, though global trade tensions are cited as a potential downside risk.
Consistent with recent RBNZ forecasts, data released mid-July indicated that headline inflation increased from 1.1 percent in the three months to March to 1.5 percent in the three months to June. Inflation is expected to increase "gradually" to their 2.0 percent target level as capacity pressures intensify. However, with inflation still below this target level it was again concluded that "continued supportive monetary policy" is required and again promised that policy rates will be kept "at an expansionary level for a considerable period".
As universally expected, the Federal Reserve increased its fed fund’s target range by 25 basis points to 2.00 percent to 2.25 percent. Based on updated FOMC forecasts, one more 25 basis point increase is scheduled for 2018 along with three increases projected for 2019. The vote was unanimous.
The Fed described economic conditions as "strong" in its statement following a two day Federal Open Market Committee meeting. The FOMC's economic assessments were unchanged and remained healthy including for job gains, household spending and business investment. Risks were still seen as balanced though there was one notable change — the removal of the line that monetary policy is accommodative.
Fed Chairman Jerome H. Powell, speaking at his quarterly post-meeting news conference, said that "it's a particularly bright moment" for the United States economy but acknowledged that, while growth is strong and unemployment is low, the returns have not been felt evenly. "The benefits of this strong economy have not reached all Americans," he said, adding that the Fed was not seeking to check growth by raising rates.
For the first time in recent years, the Fed did not describe monetary policy as "accommodative," indicating that its benchmark interest rate is rising back to a level that the Fed regards as neutral, meaning monetary policy is neither stimulating nor restraining economic growth.
In a new round of forecasts, members of the FOMC predicted the Fed would raise rates five more times by the end of 2020.
|
|
2017 |
2018 |
% Change |
|
Index |
Dec 29 |
Sep 21 |
Sep 28 |
Week |
Sep |
2018 |
Asia/Pacific |
|
|
|
|
|
|
|
Australia |
All Ordinaries |
6167.3 |
6305.5 |
6325.5 |
0.3% |
-1.6% |
2.6% |
Japan |
Nikkei 225 |
22764.9 |
23869.9 |
24120.0 |
1.0% |
5.5% |
6.0% |
|
Topix |
1817.56 |
1804.02 |
1817.3 |
0.7% |
4.7% |
0.0% |
Hong Kong |
Hang Seng |
29919.2 |
27953.6 |
27788.5 |
-0.6% |
-0.4% |
-7.1% |
S. Korea |
Kospi |
2467.5 |
2339.2 |
2343.1 |
0.2% |
0.9% |
-5.0% |
Singapore |
STI |
3402.9 |
3217.7 |
3257.1 |
1.2% |
1.4% |
-4.3% |
China |
Shanghai Composite |
3307.2 |
2797.5 |
2821.4 |
0.9% |
3.5% |
-14.7% |
|
|
|
|
|
|
|
|
India |
Sensex 30 |
34056.8 |
36841.6 |
36227.1 |
-1.7% |
-6.3% |
6.4% |
Indonesia |
Jakarta Composite |
6355.7 |
5957.7 |
5976.6 |
0.3% |
-0.7% |
-6.0% |
Malaysia |
KLCI |
1796.8 |
1810.6 |
1793.2 |
-1.0% |
-1.5% |
-0.2% |
Philippines |
PSEi |
8558.4 |
7383.0 |
7276.8 |
-1.4% |
-7.4% |
-15.0% |
Taiwan |
Taiex |
10642.9 |
10972.4 |
11006.3 |
0.3% |
-0.5% |
3.4% |
Thailand |
SET |
1753.7 |
1756.1 |
1756.4 |
0.0% |
2.0% |
0.2% |
|
|
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
|
UK |
FTSE 100 |
7687.8 |
7490.2 |
7510.2 |
0.3% |
1.0% |
-2.3% |
France |
CAC |
5312.6 |
5494.2 |
5493.5 |
0.0% |
1.6% |
3.4% |
Germany |
XETRA DAX |
12917.6 |
12430.9 |
12246.7 |
-1.5% |
-0.9% |
-5.2% |
Italy |
FTSE MIB |
21853.3 |
21536.7 |
20711.7 |
-3.8% |
2.2% |
-5.2% |
Spain |
IBEX 35 |
10043.9 |
9590.4 |
9389.2 |
-2.1% |
-0.1% |
-6.5% |
Sweden |
OMX Stockholm 30 |
1576.9 |
1662.3 |
1662.4 |
0.0% |
0.3% |
5.4% |
Switzerland |
SMI |
9381.9 |
8995.4 |
9088.0 |
1.0% |
1.3% |
-3.1% |
|
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
|
United States |
Dow |
24719.2 |
26743.5 |
26458.3 |
-1.1% |
-1.1% |
7.0% |
|
NASDAQ |
6903.4 |
7987.0 |
8046.4 |
0.7% |
0.7% |
16.6% |
|
S&P 500 |
2673.6 |
2929.7 |
2914.0 |
-0.5% |
-0.5% |
9.0% |
Canada |
S&P/TSX Comp. |
16209.1 |
16224.1 |
16073.1 |
-0.9% |
-0.9% |
-0.8% |
Mexico |
Bolsa |
49354.4 |
49331.5 |
49471.3 |
0.3% |
0.3% |
-0.1% |
European equities ended the week on a sour note with Italian bank stocks hard hit by concerns raised over Italy's budget proposal. Italy's new government offered a budget with a deficit target three times as big as the previous administration's goal, putting the country at odds with the European Union. For the week, the FTSE was up 0.3 percent and the SMI was 1.0 percent higher. The CAC was virtually unchanged and the DAX retreated 1.5 percent. On the month though, most indexes were higher. The FTSE was up 1.0 percent, the CAC advanced 1.6 percent and the SMI was 1.3 percent higher. The DAX however, declined 0.9 percent.
Italy's new government offered a budget with a deficit target three times as big as the previous administration's goal, putting the country at odds with the European Union. The news weighed heavily on bank stocks. Italy’s government targeted the budget deficit at 2.4 percent of gross domestic product for the next three years, defying Brussels and marking a victory for party chiefs over economy minister Giovanni Tria, an unaffiliated technocrat. The proposed 2.4 percent deficit/GDP in each of the coming three years flies in the face of the EU’s fiscal rules and will do nothing to reduce the country’s dangerously high debt mountain which, at about 131 percent of GDP, is the second highest in the EU. Under the previous government, the target was just 0.8 percent in 2019 and broad balance by 2020.
The government will need to present its draft budget to the EU Commission by 15th October. At this stage it is not clear how the latter will respond. It will not be at all happy with the current proposals and will certainly not want to be seen giving the green light to fiscal laxity. However, at the same time it will have to tread very carefully with regard to any reprimand for fear of widening the cracks already apparent in the Union’s political harmony.
Asian equities were mixed Friday and for the week. News of robust U.S. economic growth and upbeat remarks from Federal Reserve Chairman Jerome Powell that the Fed’s gradual interest rate increases are helping sustain the economic expansion. Investor optimism bolstered optimism about the U.S. economy. Chinese shares rose to post their second consecutive weekly gain amid expectations for stimulus and on hopes that more Chinese shares will be included in mainstream global benchmarks.
Japanese shares rose, with export-oriented stocks surging. The U.S. dollar hit a nine-month high against the yen after the release of upbeat U.S. economic data. In Japan, August industrial output rose in August for the first time in four months. Retail sales grew a monthly 0.9 percent and the unemployment rate fell to 2.4 percent from 2.5 percent while consumer prices rose an annual 1.3 percent in September.
On the week, the Nikkei advanced 1.0 percent and rallied 5.5 percent for the month of September. The Nikkei stock index rose as high as 24,286.10 points, reaching its highest levels since November 1991 on renewed optimism about the global economy and hopes of a boost to exporters’ earnings from a weaker yen. Japanese carmakers rose after U.S. President Donald Trump and Japanese Prime Minister Shinzo Abe agreed to enter bilateral trade talks and put new auto tariffs on hold while the negotiations are underway.
Australian stocks closed notably higher after news of robust U.S. economic growth. On the week, the All Ordinaries was up 0.3 percent but down 1.6 percent in September. The Shanghai Composite advanced 0.9 percent and was 3.5 percent higher in September prior to a week-long national holiday.
The U.S. dollar was up against all of its major counterparts including the euro, pound sterling, Swiss franc, yen and the Canadian and Australian dollars. The dollar advanced thanks to the upbeat Fed view of the economy and with it another increase in the fed funds rate. The pound sterling gyrated against the U.S. dollar and euro depending on the status of the Brexit negotiations.
|
|
2017 |
2018 |
% Change |
|
|
Dec 29 |
Sep 21 |
Sep 28 |
Week |
2018 |
U.S. $ per currency |
|
|
|
|
|
|
Australia |
A$ |
0.779 |
0.729 |
0.723 |
-0.8% |
-7.3% |
New Zealand |
NZ$ |
0.709 |
0.668 |
0.663 |
-0.7% |
-6.4% |
Canada |
C$ |
0.796 |
0.774 |
0.774 |
-0.1% |
-2.8% |
Eurozone |
euro (€) |
1.194 |
1.175 |
1.161 |
-1.2% |
-2.8% |
UK |
pound sterling (£) |
1.344 |
1.308 |
1.303 |
-0.4% |
-3.1% |
|
|
|
|
|
|
|
Currency per U.S. $ |
|
|
|
|
|
|
China |
yuan |
6.534 |
6.857 |
6.867 |
-0.1% |
-4.9% |
Hong Kong |
HK$* |
7.816 |
7.811 |
7.828 |
-0.2% |
-0.2% |
India |
rupee |
64.081 |
72.204 |
72.490 |
-0.4% |
-11.6% |
Japan |
yen |
112.850 |
112.570 |
113.590 |
-0.9% |
-0.7% |
Malaysia |
ringgit |
4.067 |
4.131 |
4.138 |
-0.2% |
-1.7% |
Singapore |
Singapore $ |
1.338 |
1.364 |
1.367 |
-0.2% |
-2.2% |
South Korea |
won |
1070.630 |
1115.680 |
1109.300 |
0.6% |
-3.5% |
Taiwan |
Taiwan $ |
29.775 |
30.672 |
30.533 |
0.5% |
-2.5% |
Thailand |
baht |
32.696 |
32.467 |
32.322 |
0.4% |
1.2% |
Switzerland |
Swiss franc |
0.979 |
0.9588 |
0.977 |
-1.8% |
0.2% |
*Pegged to U.S. dollar |
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|
|
|
|
|
Source: Bloomberg |
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The September EU Commission's measure of economic sentiment (ESI) continued to edge down. At 110.9, the index was down 0.7 points from its unrevised August reading and at its lowest level since June last year. The gauge has fallen every month so far in 2018. The latest drop was attributable to worsening confidence in industry (4.7 after 5.6) and households (minus 2.9 after minus 1.9). However, elsewhere, morale was firmer in services (14.6 after 14.4), retail (2.7 after 1.9) and construction (8.3 after 6.4). Nationally, the ESIs were down in all the larger four Eurozone states. France was off a sizeable 1.7 points at 106.3, Germany 0.2 points at 112.5, Italy 0.2 points at 108.0 and Spain 1.5 points at 105.5. All recorded their weakest reading of the year to date. Meantime, inflation developments were mixed. Manufacturers' selling price expectations (11.6 after 10.5) saw their highest level in six months and consumer inflation expectations (20.1 after 18.2) rose for a third straight month and reached their highest point since January 2013. However, services (8.4 after 9.3) posted their first decline since March.
September flash harmonized index of consumer prices was up 2.1 percent from a year ago. However, more importantly, there was a surprise softening in the underlying picture. The narrowest core gauge which excludes energy, food, alcohol and tobacco dropped a tick to a 0.9 percent yearly rate, equaling its lowest reading since April and 0.2 percentage points below its mark in September 2017. At the same time, omitting just energy and unprocessed food inflation was 1.1 percent, down from 1.2 percent last time. Inflation in non-energy industrial goods was flat at just 0.4 percent and in services steady at 1.3 percent. Consequently, the change in the headline rate came from the more volatile components, namely food, alcohol and tobacco (2.7 percent after 2.4 percent) and energy (9.5 percent after 9.2 percent).
September’s Ifo survey found little change in business sentiment from August. At 103.7, the headline climate indicator was just 0.2 points short of its mid-quarter reading and the second highest reading since February. The broadly stable headline reflected minor moves in both components. Current conditions were slightly softer at 106.4 following a minimally upwardly revised August print and so remained within the tight 105.5-106.5 range seen since the end of the first quarter. At the same time, the expectations reading was 101.0, a 0.3 point dip from last time but still 2.9 points above the recent low seen in May/June. At a sector level, morale weakened in manufacturing (23.5 after 24.3) but improved marginally in services (32.5 after 32.4) and recorded sharper gains in both wholesale (11.6 after 10.6) and construction (31.9 after 29.6). Construction has seen a sizeable 16.3 point increase in optimism since February. This should mean that the sector's activity rates have picked up some useful momentum following a sluggish start to the year.
Second quarter economic growth was unrevised leaving total output up a quarterly 0.4 percent from the January through March period, itself revised down to show a minimal 0.1 percent gain. However, the annual change was trimmed a tick to 1.2 percent although even this was still 0.1 percentage points higher than the first quarter rate. The main driving force behind domestic demand was gross capital formation which climbed 0.8 percent on the quarter. However, this was largely attributable to inventory accumulation. Business investment was revised sharply weaker to show a 0.7 percent contraction from the 0.5 percent increase reported earlier. By contrast, household consumption expanded at a slightly firmer revised 0.4 percent rate but government spending was off 0.4 percent. The main drag remains the real trade balance as exports decreased a further 2.2 percent (after a 0.8 percent decline at the start of the year) and imports dipped just 0.2 percent. As a result, total net exports subtracted 0.6 percentage points from quarterly growth, a couple of ticks less than estimated previously but still a disappointing large hit given the level of the pound. Indeed, at £20.32 billion, the nominal current account deficit was up more than £4.6 billion from the first quarter, the second largest increase since the second quarter of 2017.
July monthly real gross domestic product grew a monthly 0.2 percent after essentially no change in June. The increase was concentrated in 12 of 20 sectors led by growth in manufacturing, wholesale trade, utilities and transportation and warehousing. The output of goods-producing industries expanded 0.3 percent after edging down in June, while services-producing industries were up 0.2 percent. The manufacturing sector was up 1.2 percent in July, its strongest growth since November 2017, as both non-durable and durable manufacturing rose. The construction sector declined for the third time in four months. Residential construction was down since a strike-influenced decrease in May 2017, on lower construction of most types of structures along with a decline in home alterations and improvements. Mining excluding oil and gas extraction was up 3.8 percent in July. Non-metallic mineral mining expanded 4.8 percent due to higher output at diamond and potash mines. Retail trade edged down a monthly 0.1 percent — the decline in three subsectors more than offset growth in the remaining nine. Activity at motor vehicle and parts dealers was down, the third decline in four months. General merchandise stores were down, while the largest gains in activity were posted by food and beverage stores and clothing and clothing accessories stores. Finance and insurance contracted 0.3 percent in July. For the sixth month in a row, professional, scientific and technical services were up, as a decline in legal services was more than offset by growth in most other industries.
The Federal Reserve as widely expected increased its fed funds rate range to 2.00 percent to 2.25 percent. According to the dot plots, expectations are for one more rate increase in 2018 plus three more in 2019. The Reserve Bank of New Zealand left its policy rate at 1.75 percent.
Economic data were mixed. In Europe, consumer confidence was up in Germany and Italy. However, the Euro area and German Ifo measure disappointed. Final estimate of second quarter UK GDP slipped. In Japan, retail sales and the jobless rate improved but industrial production did not.
The Reserve Bank of Australia is expected to leave its policy interest rate at 1.5 percent where it has been since August 2016. The final manufacturing and services PMIs for September will be posted. Third quarter Tankan will also be released. China’s stock market will be closed for the week for holidays.
Central Bank activities |
|
Oct 2 |
Australia |
Reserve Bank of Australia Monetary Policy Announcement |
Oct 5 |
India |
Reserve Bank of India Monetary Policy Announcement |
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The following indicators will be released this week... |
Europe |
|
|
Oct 1 |
Eurozone |
Manufacturing PMI (September) |
|
Germany |
Manufacturing PMI (September) |
|
France |
Manufacturing PMI (September) |
|
Italy |
Manufacturing PMI (September) |
|
Spain |
Manufacturing PMI (September) |
|
UK |
Manufacturing PMI (September) |
Oct 3 |
Eurozone |
Services & Composite PMI (September) |
|
|
Retail Sales (August) |
|
Germany |
Services & Composite PMI (September) |
|
France |
Services & Composite PMI (September) |
|
Italy |
Services & Composite PMI (September) |
|
Spain |
Services & Composite PMI (September) |
|
UK |
Services PMI (September) |
Oct 5 |
Germany |
Manufacturing Orders (August) |
|
|
Producer Price Index (August) |
|
France |
Merchandise Trade (August) |
|
|
|
Asia Pacific |
|
|
Oct 1 |
Japan |
Tankan Survey (Q3. 2018) |
|
|
Manufacturing PMI (September) |
|
India |
Manufacturing PMI (September) |
Oct 4 |
Australia |
Merchandise Trade Balance (August) |
Oct 5 |
Australia |
Retail Sales (August) |
|
|
|
Americas |
|
|
Oct 4 |
Canada |
Ivey PMI (September) |
Oct 5 |
Canada |
International Trade (August) |
|
|
Labour Force Survey (September) |
Anne D Picker is the author of International Economic Indicators and Central Banks.
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