Global Markets

An immediate Brexit crash out is appearing less and less likely and the March 29 deadline looks to be pushed back. But pushed back to where is still unanswered as is what compromises will now be reached that have failed to be reached after 2-1/2 years of talks.  For U.S.-China trade talks it was a week that opened and closed on optimism with a dose of realism in between. Paperwork is changing sides and appointment books are being opened but a trade agreement is still an unfolding process. For global economics the theme is moderation. Eurozone sentiment is on a long losing streak, Eurozone inflation is subdued, Japanese production is down while easing strength in GDP is raising the prospect of further rate cuts for India.

Global Stock Market Indexes – Weekly Results

Europe

European stocks mostly advanced on the week despite mixed data that included the region’s gauge of economic sentiment falling for an eighth consecutive month in February to 106.1, its weakest mark since 2016, and Eurozone manufacturing activity going into contraction for the first time in more than five years. Germany’s DAX rose 1.3 percent on the week, France’s CAC gained 0.9 percent, while the Swiss SMI was up 0.7 percent. The FTSE bucked the general trend, declining 1.0 percent partly on the back of continuing gains for the British pound and partly on diminished risk appetite due to the continuing Brexit impasse. Also pulling down the FTSE was a drop in IAG, the owner of British Airways, after index provider MSCI said it would remove its shares from global indices because of restrictions on foreign ownership.

Eurozone equities cautiously followed Asia higher at the start of the week after President Trump’s announcement that tariff hikes on Chinese goods planned to take effect on March 2 would be postponed. Later in the week, investors in European stocks were encouraged by global data that were not as weak as expected, including Chinese industrial PMI data and fourth-quarter US growth of 2.6 percent, beating expectations of 1.9 percent. Adding to the bullish mood Friday was the release of Eurozone unemployment rate data for January which highlighted one the brighter spots in the region’s economic picture, with the unemployment rate coming in at an unexpectedly low 7.8 percent to match the best reading since October 2008.

Investors were also heartened by reports Friday that U.S. officials are preparing for a summit between President Trump and Chinese leader Xi at which a 150-page agreement would be signed, countering concerns over trade talks raised earlier in the week by President Trump after he walked away from the negotiations table with North Korea’s Kim Jong Un in Hanoi, and then threatened he would be prepared to do the same if he didn’t like the deal with China.

Asia Pacific

Asian shares ended mixed for the week, with advances led once again by China’s Sino-U.S.-trade-talk-driven Shanghai Composite. The composite jumped 5.6 percent on Monday to an 8-month high on favorable trade-talk news over the weekend and closed Friday with a 6.8 percent weekly gain. Year-to-date, Shanghai is up 20.1 percent. Advances in other Asian markets were much more muted, however, with the Nikkei rising 0.8 percent, Australia’s All Ordinaries advancing 0.5 percent, and the Hang Seng ending practically unchanged. Conversely, sizable declines were posted by Singapore’s STI and South Korea’s Kospi, down 1.5 percent and 1.6 percent, respectively, with the trade sensitive STI dented by data from its trading partner China showing Chinese manufacturing in contraction for the third consecutive month. Kospi shares took a hit along with South Korea's currency following the abrupt conclusion of the summit between President Trump and North Korean leader Kim Jong Un that ended without an agreement on tighter nuclear weapon restrictions or sanctions relief. Among economic data muting investor optimism in the region was a larger-than-expected 3.7 percent decline in Japan’s industrial production for January.

The bulk of the week’s advance by Chinese and to some extent other Asian equity markets was made Monday following news that U.S. President Trump would postpone the March 2 tariff increases on Chinese imports in light of the “substantial progress” in trade talks over the last two weeks, as well as weekend comments from President Xi supporting a greater role for the financial sector in the Chinese economy. Optimism about U.S.-China trade talks wobbled mid-week and stocks retreated as progress details remained obscure and after U.S. Trade Representative Robert Lighthizer sounded a cautious note in his testimony to the Ways and Means Committee, noting that promises by China to purchase more US goods would not secure a trade agreement. News Friday from global index provider MSCI that it would substantially increase to 20 percent from 5 percent the inclusion factor of large-cap and mid-cap Chinese shares in its indexes, along with the release of a better-than-expected reading of 49.9 in China’s Caixin PMI manufacturing Index for February, helped to revive rallies across all Asian markets (except the Kospi, which was closed for a national holiday) and finish the week on an up-note.

Currencies

The pound was again the star performer in the week, extending the previous week’s rally by rising another 1.2 percent on the back of mounting optimism that a hard Brexit is becoming less likely. Fostering this view mid-week were comments from Prime Minister Theresa May providing more details about the options that will be presented to Parliament ahead of the scheduled withdrawal from the European Union on March 29. She also reaffirmed her commitment to present a revised Brexit deal to the parliament by March 12. According to the plan, if such a deal is not approved, the parliament will be asked to vote on whether it wants the UK to withdraw on the scheduled date without a deal (hard Brexit) in place, and if the no-deal is rejected, to vote on March 14 on whether to seek to delay withdrawal beyond March 29. The Japanese yen, in contrast, softened in the week, declining 1.2 percent on the back of widening treasury yields as Germany’s 10-year rose to 0.19 percent and the U.S. 10-year to 2.75 percent while the JGB yield remained negative at 0.01 percent. The euro rose 0.3 percent to end the week at $1.1365.

Selected Currencies – Weekly Results

Indicator scoreboard

Europe

Eurozone

Eurozone inflation provisionally accelerated last month. At 1.5 percent, the flash estimate was up just 0.1 percentage points from its final January reading but remained well short of the recent 2.3 percent peak seen last October. More importantly, core measures remained soft. Excluding energy, food alcohol and tobacco, prices dipped a tick to a 1.0 percent annual rate and so unwound January's modest rise. The acceleration in headline inflation was largely due to the more volatile categories. In particular, energy climbed 0.8 percentage points to 3.5 percent while food, alcohol and tobacco advanced 0.6 percentage points to 2.4 percent. The rate for non-energy industrial goods was steady at 0.3 percent while services reversed the previous period's jump by falling from 1.6 percent to 1.3 percent.

The EU Commission's yardstick of economic sentiment (ESI) extended its downward trend to eight months in February. At 106.1, the index was only 0.2 points short of January and still at its weakest mark since November 2016. The headline dip reflected worsening morale in industry (minus 0.4 after 0.6) and construction (6.4 after 8.4) that more than offset gains in services (12.1 after 11.0), retail (minus 1.6 after minus 2.1) and the household sector (minus 7.4 after minus 7.9). However, all measures at least remained well above their respective long-run averages. At a national level, the ESI was weaker in all of the larger four member states bar Spain (104.4) which was just flat. France (100.5 after 101.4) fully reversed January's advance and Italy (101.2 after 102.8) saw an even steeper decline but Germany (108.4 after 108.5) was little changed. All stayed above their common 100 historic norm although in the case of France and Italy, not by much.

Joblessness across the region fell 23,000 to 12.848 million in January which following a 94,000 decline in December, put the unemployment rate at an unexpectedly low 7.8 percent and equaling its lowest mark since October 2008. The national jobless rate fell 0.1 percentage point in both France (8.8 percent) and Germany (3.2 percent) and was down 0.2 percentage points in Spain (14.1 percent). However, Italy edged higher (10.5 percent). And youth joblessness was less impressive, moving up 1,000 to 2.383 million in what may hint at less general improvement ahead for employment.  However, for now, the labor market is one of the brighter spots in the Eurozone economic picture.

Italy

Italian consumer prices were provisionally 0.2 percent higher in February than in January putting the annual inflation rate at 1.1 percent, up from a final 0.9 percent in January and the first increase since last October. However, the acceleration in the annual CPI rate was primarily due to food with both processed (1.2 percent after 0.0 percent) and unprocessed (3.7 percent after 1.7 percent) items climbing sharply. Higher non-regulated energy charges (0.8 percent after 0.3 percent) also provided a boost. Against this, transport services (0.9 percent after 2.2 percent) and communication (minus 4.9 percent after minus 2.0 percent) subtracted. As a result, the core rate, which excludes energy and unprocessed food, was only unchanged at a lowly 0.5 percent. Despite the pick-up in headline inflation, underlying prices remain soft.

Switzerland

The Swiss economy returned to positive quarterly growth at the end of last year. However, a 0.2 percent rise failed to reverse a 0.3 percent contraction in the previous period. Annual workday adjusted growth fell from 2.4 percent to 1.4 percent. The quarterly increase was helped by the household sector where spending rose 0.3 percent after a 0.1 percent increase in the third quarter. There was also less of a drag from equipment and software investment although that was still down 1.1 percent following a 1.9 percent drop. Elsewhere, the slide in construction investment (minus 0.4 percent after minus 0.2 percent) steepened while inventories subtracted a sizeable 1.5 percentage points. The plus side was the buoyancy of foreign trade. Excluding valuables, goods exports surged 5.6 percent on the quarter, more than reversing the third quarter's 4.1 percent drop and easily outpacing a modest 0.6 percent increase in imports.

Asia/Pacific

Japan

Japan's industrial production index fell 3.7 percent on the month after falling 0.1 percent in December, more pronounced than the consensus forecast for a decline of 2.6 percent. Weaker production reflected declines in vehicles, electrical machinery, communications equipment, and production machinery. This was partly offset by increases in the output of transport equipment, chemicals, and petroleum and coal products. Year-on-year, the original industrial production index was flat on the year in January, picking up from a decline of 1.9 percent previously. Officials expect industrial output to increase by 5.0 percent in February and to fall by 1.6 percent in March.

Japan's unemployment rate rose from 2.4 percent in December to 2.5 percent in January, still close to the multi-decade low of 2.2 percent recorded in May 2018. The unemployment rate has been at or below 2.5 percent since the start of 2018. The number of employed persons in Japan increased by 660,000 persons (1.0 percent) on the year in January, down from an increase of 1,140,000 (1.7 percent) in December, while the number of unemployed increased by 70,000 (4.4 percent) after dropping 150,000 (58.6 percent) previously. Japan's participation rate fell to 61.2 percent in January, down from 61.4 percent in December but still up from 60.5 percent 12 months earlier. Despite slower employment growth in January, Japan's labor market remains relatively strong, with unemployment still at historically low rates and the participation rate still well above long-term average levels.

Retail sales in Japan increased 0.6 percent on the year in January, slowing from 1.3 percent in December and below the consensus forecast of 1.0 percent. This is the weakest year-on-year growth since May 2018. Seasonally-adjusted retail sales fell 2.3 percent on the month after increasing 0.9 percent previously. The drop in headline retail sales was again broad-based with weaker growth recorded in all but two of the nine major categories of spending. Food and beverage sales fell 0.4 percent on the year in January down from growth of 0.4 percent in December, while the year-on-year increase in fuel sales slowed from 3.9 percent to 2.0 percent. Growth in motor vehicle sales, however, picked up from 3.9 percent to 6.0 percent.

India

India's economy lost further momentum last quarter as annual real GDP eased from 7.0 percent in July-September to 6.6 percent for the slowest rate of growth since second-quarter 2017. The deceleration reflected smaller gains in manufacturing (6.7 percent after 6.9 percent), agriculture, forestry and fishing (2.7 percent after 4.2 percent), utilities (8.2 percent after 8.7 percent) and the public sector (7.6 percent after 8.7 percent). However, mining and quarrying (1.3 percent after minus 2.1 percent) returned to positive growth and there were stronger increases in construction (9.6 percent after 8.5 percent) and, to a much lesser extent, financial, real estate and professional services (7.3 percent after 7.2 percent). Fourth quarter's GDP report may well increase speculation that another cut in India's official rates may not be too far off.

Americas

Canada

Headline inflation decelerated sharply in January, down 0.1 percent monthly that saw the annual rate slide 0.6 percentage points to 1.4 percent, an unusually sharp decline matching its lowest reading since July 2017. But the fall was dominated by energy where the yearly rate dropped from minus 3.7 percent to minus 6.9 percent. This was reflected in a slide in transport inflation from 1.7 percent to minus 0.4 percent. The other main negative influences were health and personal care (0.6 percent after 1.0 percent) and household operations & furnishings (0.7 percent after 2.4 percent). On the upside, prices rose slightly faster in shelter (2.4 percent after 2.2 percent) and in clothing and footwear (0.5 percent after 0.2 percent). Among the Bank of Canada's core measures, the CPI-common was again steady at 1.9 percent as was the CPI-trim, while the CPI-median was unmoved at 1.8 percent. Excluding food and energy, inflation stood at 1.9 percent.

The bottom line

The economic data coming out of Europe and Asia point mostly to moderation but not entirely, as highlighted by the move lower in Eurozone unemployment. And though the industrial slowdown in Germany and recession in Italy remain key risks, if the first quarter does better than expected and a bounce back begins to appear, talk of a global slump and more accommodative monetary policy could quickly fade. This together with a soft Brexit and no U.S.-China trade war could mean a fast pivot for the financial markets.

Central banks are back in the focus in the coming week with announcements three in a row: first Australia, then Canada, then the European Central Bank. For economic news, retail trade and industrial production updates will be coming out of Europe while out of North America, the U.S. employment report will cap the week on Friday.

Looking Ahead: March 4 through March 8, 2019