International Perspective is taking off for the holidays

and will return on Friday, January 4, 2019.

Happy holidays from all of us at Econoday!

Global Markets

Those looking for a Santa Claus rally will be disappointed this year with equities tumbling in December. The markets didn’t get satisfaction they were looking for from the Federal Reserve and continued to fall. The uncertainty surrounding a possible partial government closure in the US isn’t helping. On the week,

Federal Reserve

It was widely understood that the Fed would raise interest rates again, but policymakers had also been expected to calm jittery investors by emphasizing that further rate increases in 2019 would depend on sustained economic growth. Instead the Fed and its Chairman Jerome H. Powell highlighted the strong economy and indicated that interest rates will rise two more times next year as growth continues.

Concerns about slowing global growth, due in part to the trade war between the United States and China, have been at the heart of this year's global sell-off for stocks. Investors have been highly reactive to any indication of the Fed's intentions, as they worried that rising interest rates would erode corporate profits and hoped the central bank may offer them a reprieve by slowing the pace of its increases.

As widely expected the Federal Reserve increased its federal funds interest rate 25 basis point to a range of 2.25 percent to 2.50 percent and signaled that it plans to continue raising rates next year. In its statement, the Fed emphasized the strength of economic growth. It said firms keep adding jobs and consumers keep spending money. The statement made no mention of recent turbulence in financial markets. The vote was unanimous.

In previous statements, the Fed had said it planned "further gradual increases" in its benchmark rate. Today's statement added the word "some" to the beginning of that phrase, suggesting that the Fed is closer to the end of increases. Most Fed officials predicted the central bank would raise rates no more than twice next year. In September, most Fed officials had predicted at least three rate increases. Stocks dropped after the announcement.

Bank of England

As entirely anticipated, December's Bank of England’s monetary policy committee meeting concluded the year with the Bank Rate unchanged at 0.75 percent and just 25 basis points above its level at the end of 2017. The vote was again a unanimous 9 to 0. The quantitative easing ceiling similarly remained pegged at £445 billion, encompassing £435 billion of gilts and £10 billion of corporate bonds. This is not expected to be modified until the Bank Rate is much closer to 1.5 percent.

The modest tightening bias was also retained, implying additional monetary tightening going forward with the Bank Rate rising ‘‘at a gradual pace and to a limited extent'' if the economy performs in line with official expectations. Lower oil prices would reduce inflation but the labour market was expected to remain tight and wages had accelerated more than expected last month.

However, the minutes also indicated that Brexit uncertainties were thought to have intensified considerably since the Committee's last meeting. This was seen as potentially adding to the volatility of economic data over the short-term and separating out this effect from underlying developments would be important to judging the appropriate stance of policy. The MPC also noted that the near-term outlook for global growth had softened and downside risks had increased.

Bank of Japan

As entirely expected, the Bank of Japan’s Monetary Policy Board left its monetary policy settings unchanged. As it has been since early 2016, the BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent.

The BoJ's policy framework also involves officials adjusting the pace of purchases of Japanese government bonds (JGBs) in order to keep the 10-year yield close to its target level of zero percent. For now, officials continue to believe that purchasing these bonds at an annual rate of ¥80 trillion is consistent with meeting this target. MPB members voted 7-2 in favour of these decisions.

Officials' assessment of the economic outlook was little changed. They consider the economy to be "expanding moderately" and expect this to continue, supported by accommodative monetary and fiscal policy and an ongoing "moderate increasing trend" in exports. Although price pressures have remained subdued, officials continue to forecast inflation to increase "gradually" towards their target level of 2.0 percent, reflecting their view that the output gap will remain positive and inflation expectations are likely to strengthen.

Reflecting this outlook and their objective to push and keep inflation above target, officials reiterated their commitment to keeping policy rates at "current extremely low levels" for "an extended period of time". Speaking at his post-meeting press conference, BoJ Governor Haruhiko Kuroda said that the impact of global trade tensions on Japan's economy have been limited so far but acknowledged significant downside risks to the growth outlook. He also noted that inflation expectations had yet to accelerate. As a result, it is "premature" for officials to consider any change to the accommodative policy stance and repeated that they are prepared to consider additional policy stimulus if necessary.

Global Stock Market Recap

Europe and the UK

European equities dropped for the week. Losses ranged from 1.8 percent (FTSE) to 4.3 percent (OMX Stockholm 30). The threat of a U.S. government shutdown weighed on sentiment at the end of the trading week. Lawmakers appeared to be at an impasse over funding for President Donald Trump's controversial Mexican border wall. The Senate is not expected to pass a spending bill including wall funding, as Democratic votes would be needed to reach the 60-vote threshold.

Meanwhile, traders were encouraged by comments from New York Federal Reserve President John Williams. In an interview with CNBC, Williams stated, "What we're going to be doing going into next year is re-assessing our views on the economy, listening to not only markets but everybody that we talk to, looking at all the data and being ready to reassess and re-evaluate our views."

The EU Commission has accepted a revised Italian budget package that aims to hold the deficit/GDP ratio at 2.04 percent of GDP in 2019. The deal should be good news for Italian financial markets and, more generally, help to ease some of the (ongoing) worries about Eurozone political instability.

The agreement follows the rejection of the original proposals that called for a deficit/GDP ratio of 2.4 percent. However, the latest ratio still easily overshoots the 0.8 percent ratio thrashed out with the previous administration which resigned earlier in the year. As such, longer-term investors may not be particularly impressed.

Italy, saddled with an enormous public debt, had provoked a head-on confrontation with the European Union by flouting the bloc’s financial laws with an expensive budget laden with government programs and tax cuts promised by populists during the election campaign this year.

The combined effect ballooned Italy’s budget and failed to lower its deficit within the EU’s rules. After four months of defiance and internal conflicts, the government capitulated to a debt figure Europe found acceptable.

The Italian government shaved billions off its budget, but Prime Minister Giuseppe Conte insisted in a statement to the Italian Senate that the cuts would not affect the introduction of a universal income plan. The plan, essentially an enormous unemployment program, would benefit the base of the anti-establishment Five Star Movement in the chronically underemployed southern part of the country.

Asia Pacific

Asian equities fell broadly on the week to extend recent losses as worries grow over the prospects for the world economy. The concerns prompted investors to shun equities and seek safe haven assets. Only the KLCI (0.5 percent) managed to increase on the week. Declines range from 0.1 percent (Jakarta Composite) to 6.5 percent (Topix) and 5.7 percent (Nikkei). Japanese indexes sank to fresh multi-month lows, as the threats of further increases in U.S. borrowing costs and of a government shutdown raised concerns about the global economic outlook. The index is heading for its worst quarter since 2008, with a loss of 17 percent so far.

The Shanghai Composite and Hang Seng retreated 3.0 percent and 1.3 percent respectively as President Xi's highly anticipated speech on four decades of reforms as well as fresh monetary support measures announced by the People's Bank of China failed to ease investor concerns over slowing economic growth. The PBoC said on Thursday it will strengthen the oversight of the reserves that commercial banks and other lenders are required to deposit to ensure timely and full payment.

In China, this week’s annual Central Economic Work Conference, a closed-door gathering of top party leaders and policymakers, is being watched by investors for any fresh policy steps to ward off a sharper slowdown in the world’s second-largest economy. The meeting will not result in any public announcement of economic targets, which are usually reserved for the opening of the parliamentary session in early March.

Last week, a meeting of the politburo — a top decision-making body of the ruling Communist Party — pledged to keep China’s economic growth within a “reasonable range” next year. Growth slowed to 6.5 percent in the third quarter, the weakest pace since the global financial crisis. Indications are that momentum is likely to come off further in the current quarter and next year, with data last week showing surprising softness in November factory output and retail sales.

Although full-year growth is expected to be just above 6.5 percent in 2018, government officials and China watchers have already warned of greater risks to the economy next year from trade frictions with the United States.

Currencies

The U.S. dollar was mixed during the week. At week’s end, the dollar was up against the Canadian and Australian dollars but lower against the euro, pound sterling, yen and Swiss franc. Trading was volatile during the week. The dollar gained on Friday, reversing most of its losses after the Federal Reserve flagged fewer interest rate increases earlier in the week, as investors sought the currency’s safety amid persistent equity market volatility and a possible U.S. government shutdown. The yen gained against the dollar, benefiting from the overall market anxiety. The Japanese currency was on track to post its largest weekly percentage increase against the greenback in 10 months.

Sterling slid against the euro Wednesday, dropping to a one-week low as concerns that Britain is headed for a disorderly exit from the European Union combined with improved economic sentiment in the eurozone. Diminishing political worries in Italy and strong trade data helped the euro on Wednesday. However, markets are wary of placing too much of an emphasis on economic data, with the Bank of England repeatedly saying that the outcome of Brexit negotiations will be a key factor for the path of future interest rates.

With less than three months to go until Britain exits the EU, Prime Minister Theresa May has yet to win the support of a deeply divided parliament for the deal she struck last month with EU leaders to maintain close ties with the bloc. May said on Wednesday she would set out in the New Year what assurances she had won from the EU over her Brexit deal. Parliament is due to vote on her agreement with Brussels in mid-January.

Selected currencies — weekly results

Indicator scoreboard

Germany

According to Ifo, business sentiment deteriorated again in December. At 101.0, the headline climate indicator was another full point below its unrevised November reading and at its weakest level since September 2016. The measure has now fallen for four months in a row and in six of the last seven. The latest decline was led by expectations which, at just 97.3, were down 1.4 points from mid-quarter. This gauge has been sliding since August with December seeing its worst outturn in more than four years. Current conditions were not better much off, recording a 0.8 point drop to 104.7, their weakest mark since June last year. At a sector level, confidence was sharply lower in both manufacturing (14.8 after 17.7) and services (26.8 after 30.7) with the former recording its first negative reading on expectations since May 2016. Trade also deteriorated (9.1 after 9.8) but construction (29.6) was unchanged and historically still firm.

United Kingdom

November consumer prices were up a monthly 0.2 percent and were up 2.3 percent on the year. The main downward pressure on the yearly change came from recreation and culture where prices rose just 0.1 percent on the month compared with a 0.7 percent jump over the same period a year ago. Transport (minus 0.4 percent after 0.1 percent) also subtracted as petrol charges declined sharply and food and non-alcohol drinks (0.1 percent after 0.5 percent) similarly had a small negative impact. Alcohol and tobacco (1.3 percent after minus 0.4 percent) provided the principal boost. As a result, the annual core rate slipped from 1.9 percent to 1.8 percent and so further below the 2.0 percent (overall) CPI target.

November retail sales volumes jumped 1.4 percent on the month, easily more than reversing October's marginally smaller revised 0.4 percent decline and their strongest performance since May. Annual growth climbed from 2.4 percent to 3.6 percent, a 4-month high. Excluding auto fuel, sales were up a monthly 1.2 percent and stood 3.8 percent above their level a year ago. The underlying picture was even more robust than the headline data suggest. With food demand only flat, non-food (ex-auto fuel) sales rose 2.2 percent on the month, their sharpest increase since October 2016. Within this, household goods (5.3 percent) were especially buoyant and there were solid gains too in both non-store retailing (2.2 percent) and the other stores category (3.2 percent). Textiles and clothing (0.6 percent) also made ground leaving non-specialized stores (minus 0.4 percent) as the only category to suffer a decline. Auto fuel purchases were up 3.3 percent.

The final estimate of gross domestic product was unrevised in the final look at the July to September period. A 0.6 percent quarterly rise in total output, up from 0.4 percent in the previous quarter, put annual growth at 1.5 percent, also matching its earlier print and just a tick firmer than last time. Household consumption expanded at an unrevised 0.5 percent quarterly rate while the fall in business investment — the third in a row- was shaded a tick to 1.1 percent. Accounting changes were largely responsible for government final consumption being cut from previously a rise of 0.6 percent to a fall of 0.3 percent. Business inventories added 0.2 percentage points. Export growth was more than halved to 1.1 percent while imports now show a 0.8 percent increase, up from their initial flat reading. This left total net exports adding just 0.1 percentage points to quarterly growth from the 0.8 percentage points originally estimated.

Asia/Pacific

Japan

November merchandise trade deficit widened from ¥449 billion in October to ¥737 billion. Exports increased 0.1 percent on the year, slowing from 8.2 percent in October while imports slowed from 19.9 percent to 12.5 percent. Relatively strong growth in both exports and imports in October was largely driven by a rebound in trade activity after disruptions in September caused by major natural disasters. The decline in annual growth in exports was broad-based across most major trading partners. Exports to Asian markets fell 1.9 percent on the year after increasing 7.3 previously, with growth in exports to China slowing from 9.0 percent to 0.4 percent. Exports to the United States also slowed, up 1.6 percent on the year after advancing 11.6 percent in October, while those to the European Union rose 3.9 percent after increasing 7.7 percent previously.

Australia

November employment increased 37,000 after a revised increase of 28,600 in October. The unemployment rate increased from 5.0 percent in October, its lowest level since mid-2011, to 5.1 percent in November, while the participation rate increased from 65.5 percent to 65.7 percent. The increase in headline employment was entirely driven by part-time employment, up 43,400 persons after falling 10,800 persons in October. Full-time employment, in contrast, fell for the first time in six months, dropping 6,400 after increasing by 39,400 persons previously. The total number of hours worked fell 0.2 percent on the month after increasing 0.4 percent in October. Over the last 12 months, full-time employment has increased by 180,200 persons, while part-time employment has increased by 105,500 persons.

Americas

Canada

October retail sales increased a monthly 0.3 percent. Higher sales at motor vehicle and parts dealers and gasoline stations were the main contributors to the gain. Excluding these two subsectors, retail sales declined 0.4 percent. Sales were up in 5 of 11 subsectors, representing 69 percent of retail trade. After removing the effects of price changes, retail sales in volume terms were unchanged in October. On the year, sales were up 2.2 percent. Motor vehicle and parts dealers (+1.3 percent) increased for the third month in a row. All store types within this subsector posted gains, led by higher sales at new car dealers and, to a lesser extent, used car dealers. Following declines in August and September, higher receipts were recorded at gasoline stations (+1.9 percent) in October. In volume terms, sales increased 1.9 percent. Miscellaneous store retailers (+4.5 percent) reported higher sales in October, due in large part to the introduction of a new miscellaneous retail store type, cannabis stores. Excluding cannabis stores, receipts at miscellaneous store retailers increased 1.1 percent. At general merchandise stores (-1.8 percent), sales declined for the first time in three months.

Bottom line

The slew of economic data released during the week was mixed. Most Canadian data were positive while in Europe most data disappointed. The Banks of Japan and England left their respective policies unchanged while the Federal Reserve, as anticipated, increased its fed funds rate range by 25 basis points to 2.25 percent to 2.50 percent.

The next week is quiet with few new economic data points outside of Japan. The pace of new data will not pick up until after the New Year. Best wishes to our readers for a happy and healthy New Year.

Looking Ahead: December 24 through December 28, 2018

Looking Ahead: December31 through January 4, 2019

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