Global Markets

A contraction warning out of the Eurozone manufacturing sector deepens what has been a soft run for the global economy. German business sentiment is at an eight-year low, Japanese machinery orders remain weak and trade data from both Japan and Singapore could be hinting at trouble for Asian exports. The soft tone is further underscored by the latest inflation data which remain soft and aren't offering much encouragement to central bankers who face the risk that additional policy support may be needed. These risks were underscored in the week by Peter Praet, chief economist of the European Central Bank, who cited trade tensions and uncertainty over Brexit and said the ECB may well lower its growth and inflation forecasts at next month's meeting.

Trade talks between China and the U.S. do appear to be moving forward ahead of a March 1 deadline but no breakthrough is guaranteed. Lack of progress is clearly the theme for Brexit with the UK facing a March 29 deadline and the specific risk of corporate flight, underscored by Honda's decision during the week to close its factory in England. The pound, nevertheless, posted a solid gain on the week as did most international stock markets, revealing perhaps an underlying optimism among investors that deadlines may well be pushed back and issues ultimately resolved.

Minutes of the ECB's latest meeting in January reinforce the impression of a central bank that has become much less confident that the current slowdown in Eurozone economic growth will prove just temporary. Members saw a stronger case for a downside assessment to the economic outlook largely due to external issues, notably those related to heightened protectionism and Brexit. Concern was expressed that high levels of uncertainty are affecting confidence, and could in turn adversely affect domestic demand. Vulnerabilities in emerging markets and financial market volatility were also noted. On the prices front, weakness in underlying inflation was attributed to a surprisingly slow pass-through from wages to prices. The January minutes do reinforce speculation that some form of additional policy accommodation may be waiting in the wings and that the ECB's next meeting in early March may prove especially interesting.

Global Stock Market Recap

Europe

Held back by growth concerns in Germany and also Italy, stock market gains early in the week were limited. Buyback announcements helped shares at mid-week though the FTSE, down 0.8 percent on the week, underperformed not only on Brexit concerns but as pro-European party defections emerged in Theresa May's conservative coalition. The DAX led the gains, up 1.4 percent on the week, with the CAC up 1.2 percent and the SMI also 1.2 percent higher.

Though March 29 is still the official deadline for Brexit, reports emerged in the week that the UK has until mid-month, not month end, to reach a deal. This would give national leaders, who meet in late March, time to approve any plan. At mid-week, Theresa May met with European Commission President Jean-Claude Juncker in Brussels and worked on guarantees that any Irish backstop, that is a hard border between Northern Ireland and the Republic of Ireland, would only be temporary. And though there were reports that talks are making progress, European Commission First Vice President Frans Timmermans made headlines in the week that the risk of a hard Brexit is increasing, saying at a press conference that the UK "might crash out even if they don't want to."

Asia Pacific

Asian shares posted strong gains, opening the week sharply higher on weekend reports of progress in U.S.-China trade talks. The Shanghai Composite led the charge with a 4.5 percent weekly gain that lifts its year-to-date gain to 12.4 percent. The Hang Seng rose 3.3 percent in the week with its 2019 gain at 11.5 percent. And despite brewing trade issues with China, Australia's All Ordinaries also logged a successful week, up 1.5 percent for a 9.3 percent year-to-date gain.

A new round of trade talks opened in Washington on Tuesday and continued on Thursday and Friday, including reports that President Trump will meet with Chinese Vice Premier Liu He at the White House. And details of an agreement are now beginning to emerge. Intellectual property protection and market access remain key issues with the U.S. also seeking to reduce non-tariff barriers and limit competitive devaluations of the Chinese currency. U.S. tariffs on Chinese imports are scheduled to increase from 10 percent to 25 percent at the start of March unless a deal can be reached, though President Trump has said this deadline could be extended if a deal looks pending. An increasing uncertainty is China's Huawei after Secretary of State Mike Pompeo said the U.S. would not share intelligence information with allies that use the company's technology. Although some U.S. allies have already taken steps to limit the use of Huawei products, several countries have already adopted or are considering Huawei technology for their 5G networks.

Currencies

The pound was the big mover in the week, gaining 1.3 percent against the dollar to US$1.3053. The currency, which has been swinging sharply as the Brexit deadline approaches, opened the week on a plus note following solid UK labour market data that contrasted with concerns of economic slowing tied to Brexit. Gains for the currency were limited at midweek after European Commission President Jean-Claude Juncker cited "Brexit fatigue" and warned that he was "not very optimistic" that a hard Brexit can be avoided.

The yen, down slightly on the week, opened on the defensive after Bank of Japan Governor Haruhiko Kuroda said on Tuesday that further monetary easing is possible if strength in the yen impedes the central bank's 2 percent inflation target. The Australian dollar ended the week little changed but fell Thursday on news that Chinese authorities have banned imports of Australian coal at five ports with imports into other ports subject to delays. The action follows recent tensions between China and Australia after the Australian government last year banned Chinese firms Huawei and ZTE from supplying equipment for its new 5G network.

Selected currencies — weekly results

Indicator scoreboard

Europe

Eurozone

Though services represent the great bulk of economic activity, manufacturing and its greater exposure to the global economy is considered to be the bellwether for overall economic change. And the PMI manufacturing index appears to be signaling trouble, at 49.2 for the February flash to signal contraction in the sector for the first time in 5-1/2 years. New orders saw a sizable decline with backlogs showing a similar pattern. Among member countries, Germany's manufacturing PMI fell more than 2 points to 47.6 for its lowest showing in more than six years while France did edge higher but to a still subdued 51.4. Slowing was also seen in the U.S. manufacturing flash for February where sample members were reporting a "soft spot" for the sector.

Final HICP data for January confirmed a third consecutive decline in headline inflation. At 1.4 percent, the yearly rate was unrevised from its flash estimate and a couple of ticks down from December. It was also its lowest level since February last year. Yet core measures did edge higher though still remain firmly stuck in a tight and worryingly low range. The narrow core gauge, which excludes energy, food, alcohol and tobacco, was unrevised at 1.1 percent and slightly higher than December. Omitting energy and unprocessed food, the rate was 0.1 percentage point firmer at 1.2 percent. Elsewhere, non-energy industrial goods inflation was a tick higher but at a still lowly 0.3 percent while services advanced 0.3 percentage points to 1.6 percent, soft but a 3-month high. Energy did the most to reduce the headline rate while food, alcohol and tobacco were flat.

Germany

Analysts remain downbeat about Germany's economic situation based on February's ZEW report. Current conditions fell sharply, from 27.6 to a surprisingly low 15.0. This was the fifth straight decline and the weakest reading since December 2014. Yet expectations were again slightly less negative, rising 1.6 points to minus 13.4. This was their fourth consecutive increase and this sub-index, though still in the minus column, now stands at its highest level in five months. That said, expectations are still nearly 39 points short of the recent high seen in January 2018.

Business sentiment is deteriorating again this month. At 98.5, the IFO business climate indicator fell 0.8 from January for a fifth straight decline and its lowest level since December 2014. The decrease reflected increasing weakness in both components with current conditions down 1.1 points to 103.4 and with expectations down 0.5 points at 93.8 for their lowest reading since November 2012. At the sector level, trade saw a small improvement in morale but manufacturing, services and construction all posted further declines.

UK

The labour market remained tight around the turn of the year although wage growth only held steady. Claimant count joblessness was up a 14,200 in January after a 20,300 rise in December. This was the eighth straight increase but not enough to lift the unemployment rate from an historically low 2.8 percent. In data for the fourth quarter, the ILO survey found the number of people out of work falling 14,000 with this jobless rate unchanged at 4.0 percent, equaling a 45-year low. Fourth quarter employment expanded a solid 167,000 putting the employment rate at 75.8, a record and 0.6 percentage points above a year ago. In another plus, vacancies in the three months to January advanced 16,000 to 870,000, up 5.0 percent from a year ago. Despite strong demand for labor, average weekly earnings last quarter held steady at an annual 3.4 percent growth rate, both overall and excluding bonuses. This was slightly softer than expected but still made for a 1.3 percent gain in real regular earnings, the strongest rate in two years.

Asia/Pacific

Japan

Private sector machinery orders (excluding volatile items) edged 0.1 percent lower in December after no change in November. Year-on-year, machinery orders rose 0.9 percent and were little changed from an increase of 0.8 percent in November. Contrasting with the steady showings for the headlines were offsetting results between manufacturing, where orders fell 8.5 percent on the month after a fall of 6.4 percent in November, while non-manufacturing orders rose 6.8 percent, picking up from growth of 2.5 percent previously. Private sector machinery orders (excluding volatile items) fell 4.2 percent on the quarter in the three months to December, contrasting with previously released GDP data showing private non-non-residential investment increasing 2.4 percent. This discrepancy appears to reflect differences in the timing of the impact of natural disasters in September. Officials also expect orders to fall on the quarter in the three months to March.

Japan's merchandise trade deficit widened from ¥55 billion in December to ¥1,415 billion in January. Exports fell 8.4 percent on the year, weakening further from a drop of 3.8 percent in December while growth in imports slowed from an increase of 1.9 percent to a decline of 0.6 percent. Export weakness was tied to regional trade flows with exports to Asian markets contracting 13.1 percent after falling 6.9 percent previously and with exports to China weakening sharply from a fall of 7.0 percent to a drop of 17.4 percent. Exports to Hong Kong, Taiwan and Singapore also fell more sharply while those to Korea fell 11.6 recent on the year for a second consecutive month.

Consumer prices remained subdued in January while underlying inflation picked up modestly. The headline CPI was 0.2 percent higher on the year in January, slowing for a third consecutive month from 0.3 percent in December. This is the lowest level since October 2017 and further below the Bank of Japan's 2.0 percent inflation target. The fall in inflation largely reflected a bigger drop in food prices, which account for just over a quarter of the total index. These fell 1.5 percent on the year after falling 1.1 percent previously. Core CPI, which excludes fresh food prices, rose 0.8 percent on the year in January, up from 0.7 percent in December. Price changes were relatively steady in other major categories of spending, including housing, fuel and utility charges and services.

Australia

Australia's labour market recorded an increase of 39,100 in the number of employed persons in January from 21,600 in December. The unemployment rate was unchanged at 5.0 percent, its lowest level since mid-2011, while the participation rate increased from 65.6 percent to 65.7 percent. The increase in headline employment was entirely driven by full-time employment, up 65,400 after falling 3,000 in December. Part-time employment fell by 26,300 after increasing by 24,600 previously. The total number of hours worked increased 0.4 percent on the month. The results are in line with the assessment of the Reserve Bank of Australia that the labour market remains strong, offsetting recent weakness in housing.

Singapore

Non-oil domestic exports fell 10.1 percent on the year in January after dropping 8.5 percent in December. This is the biggest year-on-year fall since October 2016 with US-China trade tensions appearing to have a significant impact on regional trade flows. The weakness in non-oil exports was mainly due to a sharper drop in electronic exports, contracting 15.9 percent on the year in January after falling 11.2 percent in December. Non-electronics exports also posted a larger decline, down 7.9 percent on the year after falling 7.4 percent previously. On a seasonally adjusted monthly basis, non-oil exports fell 5.7 percent after December's 4.0 percent drop. On the import side, total monthly imports have fallen 1.6 and 3.1 percent the past two months with yearly imports up 8.0 percent in January and 6.1 percent in December. Exports declined on the year to January for all of Singapore's top ten trading partners including China and the U.S.

Americas

Canada

Following a 0.9 percent monthly fall in November, sales declined a further 0.1 percent to post their first back-to-back dip since November/December 2017. Annual growth was up at 1.7 percent from 0.5 percent but only due to favorable base effects. Within the monthly slide in cash purchases, gas stations were hit by lower prices while electronics and appliance stores also struggled. Autos and parts were strong but when excluding this category, sales were off 0.5 percent. The other main areas of buoyancy were building materials and garden equipment as well as food and drink. The December report puts fourth quarter volume sales just 0.1 percent above their level in the previous period (nominal sales were down 0.5 percent). This confirms a minimal contribution from the sector to quarterly real GDP growth which now looks all the more likely to be sub-1 percent.

Bottom line

The strength of the stock markets appears to belie the emerging indications of economic slowing which, if centered in a major exporter like Germany, could increase concerns over increasing trouble for cross-border trade. The weakness appearing in manufacturing data, whether from Germany or also the U.S., may well be the first indications of such trouble. But the progress of policy issues, whether U.S.-China trade or Brexit, could be pushing actual economic indications into the background, at least for now.

The week ahead includes inflation data out of Europe and a GDP update for France. Late in the week, Japanese industrial production will be in focus for any new signs of manufacturing trouble as will manufacturing PMIs out of China. Also worth noting will be GDP and manufacturing data out of India whose central bank earlier this month unexpectedly cut interest rates.

Looking Ahead: February 25 through March 1, 2019