Global Markets

Apparent progress in U.S. and Chinese trade negotiations topped the week's developments and, for the European stock markets at least, pushed to the background increasingly weak economic data especially out of the UK and Germany. GDP and industrial production for both have turned flat with little offset coming out of Japan where GDP is also slow and also perhaps with less help coming out the U.S. following a December retail sales report that unexpectedly fell apart. The weak global run in fourth-quarter data point to failing momentum for the ongoing quarter which, unfortunately, has been the signal from private business surveys.

Yet the week's political news, in contrast to the economic news, was very upbeat ending with continued funding for the U.S. government and positive indications in the U.S.-China trade talks where a framework agreement is reportedly being worked out. European stocks posted very strong gains in the week with Asian stocks higher to mixed. And for Brexit, a quiet confidence is appearing that either a new deal will be worked out or the March 29 deadline will be extended.

Global growth may be slowing but there isn't much dovish spin coming out of the Reserve Bank of New Zealand. Policy makers left their overnight cash rate unchanged at 1.75 percent and in the accompanying statement said they expect the rate to hold steady through 2019 and into 2020. They again noted that the next move could be either up or down. Officials did cite external risks to the near-term growth outlook but retained their assessment that domestic conditions will likely improve in 2019, supported by accommodative monetary and fiscal policies. Though recent fourth-quarter data showed headline inflation steady at 1.9 percent and just below the mid-point of the RBNZ's target range of 1.0 percent to 3.0 percent, officials believe that tight conditions in the labor market will push headline inflation slightly higher. Nevertheless there were some accommodative notes in the statement as soft inflation, according to the officials, requires them to keep monetary policy supportive. They also reiterated their view that rates should be kept "at an expansionary level for a considerable period".

Global Stock Market Indexes - Weekly Results

Europe

European stocks had a solid week despite a run of weak economic data out of the UK and Germany. The FTSE led the gains with a 4.4 percent weekly rise followed by the CAC at 3.9 percent. Protests over a government offer to negotiate with Catalan separatists and the call by separatists for a new independence vote haven't been holding back Spain's IBEX which rose 3.0 percent on the week.

Brexit developments were limited in the week but chatter in the market has been favorable, that the March 29 deadline will likely be pushed back if a new deal can't be reached. UK negotiators continue to seek changes on the Irish backstop to avoid a hard border between Northern Ireland and the Republic of Ireland. Late in the week Theresa May lost a parliamentary vote, but only a symbolic one, that was aimed at re-affirming her negotiating position. Amid the uncertainty, news reports are increasingly highlighting corporate moves tied to the risk of Brexit, including Germany's Commerzbank which is moving equity operations from London to Paris.

Asia Pacific

Led by a 2.8 percent gain for the Nikkei, Asian stocks were mostly higher in the week, rising in line on trade optimism but nevertheless ending the week on a down note. Still, reports coming out of the trade negotiations have been positive as top U.S. and Chinese negotiators met late in the week in Beijing and may meet again in Washington in the coming week. A memorandum of understanding is reportedly being worked out that would offer a framework for a deal. The U.S. is pushing China to make structural changes to its economy including increased protection of intellectual property while China, in response, is reportedly offering to buy more U.S. products. A 90-day truce set by the U.S. will expire on March 1 though President Trump said during the week that he may extend the deadline if a deal is in sight. Talk from both sides are pointing to a possible meeting Trump and President Jinping sometime next month. If talks fail, however, the U.S. is threatening to raise tariffs on $200 billion of Chinese imports from 10 percent to 25 percent. Yet judging by the Shanghai index, which rose 2.5 percent on the week, the risk of a tariff war seems distant.

Currencies

Unlike European stocks, both the euro, down 0.3 percent, and the pound, at 1.1 percent, were pulled lower in the week by soft economic data. Fourth-quarter UK growth of only 0.2 percent weighed on the pound early in the week while Eurozone fourth-quarter growth, also at 0.2 percent, didn't help the euro late in the week. A major negative for the euro appears to be the German economy where GDP came to a complete fourth-quarter standstill as did German industrial production. Italy has also been a negative for the currency and after third- and fourth-quarter GDP contractions, though marginal ones, is nevertheless in technical recession.

Both European and Asian currencies got a lift late in the week following a very weak retail sales report out of the U.S., a 1.2 percent December drop that hints at slowing momentum for the American consumer. It was strong consumer spending that was the foundation for the country's 3.4 and 4.2 percent annualized growth rates of the second and third quarters. The New Zealand dollar was a major gainer in the week, rising 1.7 percent after the Reserve Bank of New Zealand kept policy steady despite talk that the central bank might soften its tone. There was also a flash crash in the week, that is a small one for the Swiss franc which briefly dropped 1 percent on Monday in thin Asian trading and with Japan on holiday.

Selected Currencies - Weekly Results

Indicator scoreboard

Europe

Eurozone

Quarterly economic growth was unrevised in the second look at the October-December period. A flash 0.2 percent increase in total output matched the preliminary figure and left the workday adjusted yearly expansion rate at 1.2 percent, again in line with the estimate made earlier this month and down from a final 1.6 percent in the third quarter. The new information is an update of individual member performances where Germany is the main concern as quarterly growth was just zero after a 0.2 percent fall in the previous period. Yet Germany is not in recession in contrast to Italy which contracted 0.1 percent and 0.2 percent in the third and fourth quarters respectively. Among the other large states, France again expanded 0.3 percent and Spain gained a tick to a 0.7 percent rate. Elsewhere, all the other reporting countries registered positive growth led by Lithuania (1.6 percent), Cyprus and Latvia (both 1.1 percent).

Industrial production (excluding construction) fell a sizeable 0.9 percent in December and following a 1.7 percent slump in November, reduced annual workday adjusted output growth from minus 3.0 percent to minus 4.2 percent. The monthly slide reflected a 1.5 percent nosedive in both capital goods and consumer non-durables alongside a 0.4 percent drop in energy. Intermediates were flat while consumer durables advanced 0.7 percent, albeit after a 1.8 percent drop last time. Regionally, Germany eked out a 0.2 percent monthly rise (its national data were dragged down by weakness in construction) and France was up 0.8 percent. However, Italy was down 0.8 percent and Spain 1.4 percent. Most of the other reporting countries also posted losses.

The merchandise trade balance returned an adjusted €15.6 billion surplus in December which, however, was down from €15.8 billion in November and put the full-year black ink at €192.4 billion, a sizeable 17.3 percent decline from 2017. The minor monthly deterioration was due to exports which dipped 0.1 percent, their second successive fall. Imports were unchanged having declined 2.1 percent in November. This made for a 2.5 percent annual fall in the former and a 1.9 percent increase in the latter. The fourth quarter trade surplus weighed in at €45.1 billion, a nearly 9 percent improvement.

Germany

Having already contracted an unrevised 0.2 percent in the third quarter, the economy nearly slipped into recession at the end of 2018. Fourth quarter total output was only unchanged from its level in July-September, the first time in six years that real GDP has not expanded for two successive quarters. As a result, annual workday adjusted growth fell 0.5 percentage points to a lowly 0.6 percent. There are no details of the GDP expenditure components available in the flash release but the report did indicate that domestic demand at least made a positive contribution to the overall quarterly change. Household consumption was sluggish but construction and investment in plant and machinery made respectable gains as did government spending. Cross-border trade looks to have had a neutral impact.

UK

Growth slowed last quarter as real GDP expanded just 0.2 percent versus July-September. This was short of market expectations (and the Bank of England's call) and less than half of the third quarter's rate. As a result, the annual change in total output slipped from 1.6 percent to 1.3 percent, matching first quarter 2018 as weakest since second quarter 2012. Among main components, a 1.4 percent quarterly slump in business investment, its fourth consecutive decline, stands out as further evidence of Brexit uncertainty on UK corporate planning. By contrast, the household sector held up well with a second straight 0.4 percent gain. General government consumption was up 1.4 percent while net trade subtracted 0.1 percentage point. The monthly GDP breakdown showed deceleration in December which is a negative indication for first quarter momentum.

Consumer prices fell a largely seasonal 0.8 percent on the month in January. This put the annual inflation rate at 1.8 percent, down from 2.1 percent in December and the first time that the 2 percent medium-term target has been undershot since January 2017. This was the fourth decline in headline inflation in as many months. The deceleration was largely attributable to housing, water, electricity, gas and other fuels where a 0.5 percent monthly fall in prices compared with a 0.1 percent rise in January 2018. This alone shaved 0.2 percentage points off the change in the overall annual rate. A cap on energy prices played an important part. Restaurants and hotels (minus 0.6 percent after minus 0.1 percent) also subtracted while there was no significant upside pressure in the other components. As a result, core inflation was unchanged at 1.9 percent and below 2 percent for a 15th month in a row.

A 0.5 percent monthly fall followed a slightly smaller revised 0.3 percent drop in November means that industrial production has now contracted for five months in a row. Yearly growth actually edged up from minus 1.3 percent to minus 0.9 percent but this simply reflected positive base effects. Manufacturing output performed in much the same vein with a 0.7 percent monthly decline, its sixth straight drop that saw its yearly growth slump from minus 1.2 percent to minus 2.1 percent. Within the monthly slide, pharmaceuticals were down fully 4.2 percent and alone subtracted 0.2 percentage points. This was compounded by a 2.8 percent fall in other manufacturing and repair and a 1.0 percent decrease in metals. Transport equipment (0.6 percent) provided one of the few notable gains. Elsewhere, industrial production was hit by a 0.4 percent fall in electricity and gas but boosted by rises in water supply (1.0 percent) and mining and quarrying (0.5 percent). The December data put overall industrial production last quarter 1.1 percent below its third quarter level and manufacturing output down 0.9 percent.

The deficit on global goods trade weighed in at £12.10 billion in December, slightly smaller than November's £12.40 billion. The modest improvement reflected a 2.3 percent monthly fall in both exports and imports. Annual growth of the former now stands at 3.6 percent, somewhat short of the 4.2 percent rate posted by the latter. The deficit with the rest of the EU was £8.46 billion, up from £8.22 billion last time and with the rest of the world at £3.64 billion after £4.18 billion. Excluding oil and other erratic items, the red ink was £12.39 billion, a slight deterioration from November's £12.07 billion. The worsening here was attributable to a 2.0 percent fall in exports that more than offset a 0.5 percent decline in imports. Overall export volumes were down 1.8 percent on the month and were 0.9 percent lower over the quarter. The comparable figures for import volumes were minus 0.7 percent and 1.7 percent respectively.

Retailers had a good start to 2019 as volume sales climbed 1.0 percent on the month, more than reversing December's 0.7 percent decline. Annual growth was a respectable 4.2 percent, up from 3.1 percent last time and the strongest since December 2016.Excluding auto fuel, purchases were even firmer, rising 1.2 percent from year-end to stand 4.1 percent above their year-ago level. January's headline gain was largely attributable to the food sector where sales advanced 1.2 percent. Excluding auto fuel, non-food saw a more modest 0.6 percent gain. Within this, clothing and footwear (2.1 percent), non-store retailing and the other stores category (both 3.7 percent) were especially buoyant but against that, household goods (minus 4.4 percent) and non-specialized stores (minus 1.0 percent) struggled. Auto fuel was down 1.3 percent. The January data lifted the 3-monthly change in total sales from zero percent in the fourth quarter to 0.7 percent which bodes well for first quarter GDP growth. 

Switzerland

Consumer prices fell 0.3 percent on the month in January to reduce the annual inflation rate by another tick to 0.6 percent for the lowest reading since August 2017. The yearly deceleration was again due to import prices which declined 0.4 percent and reduced the annual rate from 1.3 percent to 0.5 percent. By contrast, domestic prices were up 0.2 percent versus December which made for 0.6 percent yearly rise, a 0.1 percentage point increase from last time. Clothing and footwear (minus 7.9 percent) saw their usual seasonal sharp drop and household goods and services were down 0.7 percent. Against that, hotels and restaurants (1.9 percent) benefited from the winter holidays and alcohol and tobacco (1.2 percent) also climbed steeply. Prices remain generally soft, all the more so now that the real economy is showing signs of slowing.

Asia/Pacific

Japan

Japan's economy rebounded in the three months to December with GDP increasing 0.3 percent on the quarter, in line with the consensus forecast and strengthening from a decline of 0.7 percent in the three months to September. Weakness in the three months to September was largely driven by the impact of severe natural disasters. In year-on-year terms, GDP was flat in the three months to December, down slightly from the 0.1 percent growth recorded in the three months to September. When annualized the increase for the three months to December was 1.4 percent, up from a decline of 2.5 percent previously and a little stronger than the consensus forecast 1.2 percent. The recovery in GDP growth in the three months to December was broad-based across the domestic sector. Private consumption increased 0.6 percent on the quarter after falling 0.2 percent previously, private non-residential investment grew 2.4 percent after dropping 2.7 percent previously, and private residential investment and public spending also strengthened. Imports, however, rebounded at a faster pace than did exports, with the result that exports made a larger negative contribution to headline growth

China

China's trade surplus in US dollar terms narrowed from US$57.1 billion in December to $39.16 billion in January, above the consensus forecast of $32.5 billion. Exports rose 9.1 percent on the year in January, rebounding from a fall of 4.4 percent in December, while imports fell 1.5 percent, also strengthening from a decline of 7.6 percent previously. In domestic currency terms, China's trade surplus narrowed from CNY394.99 billion. Exports increased by 13.9 percent on the year in January after advancing 0.2 percent in December, while year-on-year growth in imports in yuan terms rebounded from a fall of 3.1 percent to an increase of 2.9 percent.

Australia

The number of dwelling commitments for owner occupied housing in Australia fell 6.1 percent on the month in December after dropping 0.9 percent in November. The fall reflects a sharp drop in loans for the purchase of established dwellings, the largest category, down 9.7 percent on the month. This is the largest monthly fall in the series since it was first published in 2002. Year-on-year, the number of dwelling commitments fell 11.6 percent after dropping 7.2 percent in November. The data provide further evidence that the slowdown in Australia's property market is continuing into the New Year after substantial declines in property prices in 2018 in the two largest cities, Sydney and Melbourne.

India

India's consumer price index increased 2.05 percent in January, down from 2.19 percent in December. This is the fourth consecutive decline in headline inflation and its lowest level since mid-2017, and takes it just above the bottom of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent. The decline was largely driven by fuel and light charges and housing costs. Fuel and light charges recorded a weaker year-on-year increase of 2.20 percent, down from 4.54 percent, while the year-on-year increase in housing costs slowed from 5.32 percent to 5.20 percent. Food and beverage prices (around 54 percent of the index) recorded a slightly smaller year-on-year decline, down 1.29 percent in January after dropping 1.49 percent previously. Inflation in urban areas was steady at 2.91 percent in January while inflation in rural areas fell from 1.50 percent to 1.29 percent. Further rate cuts by the Bank of India are likely to be considered if headline inflation remains below the 4.0 percent mid-point of the RBI's range.

Bottom line

The week's weakness for economic data centered in the UK and Germany together with a run of soft inflation results add further to building evidence that the global economy is slowing. The results further reduce the chances that central banks will be hiking their rates again and, to the contrary, point to new accommodation perhaps sooner than later.

Another round of flash reports in the coming week, this time for February, could offer key clues whether business conditions in Europe are perhaps weakening further this quarter. France and Italy will both be posting consumer price data. Labor force data out of Australia is on tap late in the week with Canadian retail sales for December to be posted on Friday, in a report that follows the break lower in U.S. retail sales.

Looking Ahead: February 18 through February 22, 2019