Global Markets

Deadlines are approaching for trade deals and for a resolution to Brexit. Negotiations are ongoing between Canada and the United States with a deadline at month’s end. Canadian Prime Minister Justin Trudeau said Thursday that he wanted a good NAFTA deal as soon as possible. However, he was vague when asked if he agreed with Washington that the end of September was the final deadline for talks. Thorny issues such as access to the Canadian dairy market and how to resolve trade disputes are blocking an agreement. While Washington has proposed meetings with China, media reports on Friday afternoon said President Trump has asked aides to proceed with tariffs on $200 billion more in Chinese goods.

Two central banks met Thursday and left their respective monetary policies unchanged.

Bank of England

As widely expected, the Bank of England held interest rates at 0.75 percent Thursday, saying that recent developments in the UK economy were in line with its forecasts. The BoE’s Monetary Policy Committee voted unanimously to leave rates unchanged and pledged to continue with “an ongoing tightening of monetary policy” at a gentle pace as long as there was a “smooth adjustment” to Brexit. The MPC increased the Bank Rate by 25 basis points in August.

Financial market participants expect rates to remain on hold for the rest of this year, before one or two increases in 2019. In line with expectations, Bank Rate stayed at 0.75 percent and the ceiling for QE at £445 billion (gilts £435 billion, corporate bonds £10 billion). The tightening bias was retained and any future increases I the Bank Rate would be at a gradual pace and to a limited extent in line with the previous policy decisions. The vote was again a unanimous 9 to 0.

In its policy statement, the MPC said its latest economic projections “appear to be broadly on track” with growth slightly faster than the economy can withstand without triggering modest inflationary pressures. Predicting that this was likely to continue for the next two years if there was a favorable Brexit deal with the EU, the MPC said there was likely to be “a small margin of excess demand” by the end of 2019, which would require further interest rate increases “at a gradual pace and to a limited extent”. Its main message is that the UK economy is in balance and inflation is gradually returning to the BoE’s 2 percent target from the 2.5 percent rate recorded for July.

European Central Bank

To nobody's surprise, the ECB's September governing council meeting concluded with no change in monetary policy. The benchmark refi rate remains at zero percent and the rates on the deposit and marginal lending facilities stay at minus 0.40 percent and 0.25 percent respectively. The ECB also reaffirmed its plans to halve monthly net QE asset purchases to €15 billion per month from October with a view to winding up the program altogether by year-end.

There was also no modification to the forward guidance which has the Governing Council expecting key ECB interest rates to remain at their present levels at least through the summer of 2019 — and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2 percent over the medium term.

The updated economic forecasts were little different from those in June. Real GDP growth is put at 2.0 percent in 2018 and 1.8 percent in 2019, both rates just a tick short of their June projections, and unchanged at 1.7 percent in 2020. At the same time, HICP inflation is seen at 1.7 percent over the entire forecast horizon, matching last time's prediction. Economic risks are still thought to be broadly balanced but ECB President Draghi did acknowledge increasing downside global risks stemming from heightened volatility in emerging markets and, in particular, the rise in protectionism.

There was nothing new in the bank’s communiqué or the president's statement. On paper, the outlook for monetary policy has been pre-determined through at least the middle of next year. However, the termination of QE remains dependent on upcoming data being broadly in line with the ECB's expectations.

Global Stock Market Recap

Europe and the UK

European equity indexes advanced on the week. The FTSE was up 0.4 percent, the CAC jumped 1.9 percent and the DAX and SMI both added 1.4 percent. However, after European markets closed Friday, U.S. shares turned lower after a media report said President Donald Trump had asked aides to proceed with tariffs on $200 billion more in Chinese imports. Trump said on Thursday that the United States was under no pressure to make a trade deal with China, even as Chinese officials welcomed an invitation from Washington for a new round of talks with more U.S. tariffs looming.

Investors were focused on Thursday’s two major central bank meetings — the Bank of England and the European Central Bank. Traders were cautious prior to their policy decisions. Both banks did as expected and kept their respective policies unchanged.

On Tuesday, the Chancellor of the Exchequer confirmed that the BoE Governor Mark Carney will be staying in his current post until the end of January 2020. Under his original agreement, he was due to leave in the middle of next year.

The news will come as no surprise to financial markets which reacted positively to comments made last week indicating that Carney was prepared to lengthen his tenure. However, the extension means that he will be around for only part of the Brexit transition period, expected to run from Brexit Day itself (29th March 2019) through December 2020. If, as seems probable, any deal in the interim is decidedly short on details and leaves much to be sorted out, financial markets could still be very volatile. Sir Jon Cunliffe, the BoE's Deputy Governor responsible for financial stability, has been re-appointed for a second five-year term that will last until October 2023.

Asia Pacific

Equities mostly advanced last week. Investors were optimistic at week’s end after reports that the U.S. and China might hold a fresh round of trade talks, a step that could help resolve the trade dispute between the two countries. Concerns around emerging market risks also eased somewhat after the Central Bank of Turkey's raised its key interest rate sharply in a dramatic bid to control rocketing inflation and prevent a currency crisis. The Bank increased its interest rate to 24 percent from the previous 17.75 percent.

Three — Shanghai Composite (down 0.8 percent) the Sensex (also down 0.8 percent and the PSEi down 2.4 percent) — of 13 equity indexes tracked here declined on the week. Weekly increases ranged from a low of 0.2 percent (Taiex) to a high of 3.5 percent (Nikkei). Equities continue to fluctuate given investors’ perceptions of the tariff situation.

Chinese officials welcomed an invitation from Treasury Secretary Steven Mnuchin for new talks. But U.S. President Donald Trump tempered market expectations, tweeting on Thursday that the U.S. is “under no pressure to make a deal with China.” The Trump administration is readying a final list of $200 billion in Chinese imports on which it plans to levy tariffs in the coming days, a move that many fear would mark a severe escalation in the trade war and put a significant dent in global growth.

A spate of Chinese data was released during the week. Both industrial output and retail sales for August were higher than expected but real estate investment cooled and growth in fixed asset investment dipped to a historic low, raising risks to China's economic outlook as the trade conflict with the U.S. escalates. There were underlying concerns that a cooling property market could increase risks for the economic outlook as the trade environment worsens. China’s growth is expected to cool further in coming months.

Currencies

The U.S. dollar retreated against all of its major counterparts with the exception of the yen last week. But word that tariffs on the $200 billion of Chinese goods would be imposed even though signs of further talks surfaced sent the U.S. currency higher on Friday. Earlier Friday, weaker U.S. inflation data hurt the currency after the consumer price index rose a less than expected monthly 0.2 percent in August.

The pound sterling had its second biggest weekly rise in 2018 as imminent concerns over the outlook of emerging markets faded after Turkey’s central bank raised interest rates sharply and after the central bank upgraded growth forecasts at a policy meeting. Apart from news over the progress of Brexit negotiations, the British currency has become increasingly correlated to risk appetite in recent weeks and concerns over a widening emerging market currency selloff have also weighed on sterling.

Selected currencies — weekly results

Indicator scoreboard

Germany

September ZEW current conditions index rose a further 3.4 points, its steepest rise since January, to 76.0. Expectations also recorded a second successive gain. A 3.1 point increase was well short of August's 11.0 point gain at minus 10.6 to deliver a 4-month peak. However, despite their advances, the latest readings on both measures are still well below their respective levels at the start of the year (current 95.2, expectations 20.4).

United Kingdom

July industrial output edged up 0.1 percent following an unrevised 0.4 percent gain in June and put annual growth at 0.9 percent, down from 1.1 percent at quarter-end and its weakest reading since December 2017. Manufacturing declined a monthly 0.2 percent and reduced yearly growth from 1.5 percent to 1.1 percent. The monthly decline here was led by a 7.5 percent slump in pharmaceuticals which alone subtracted more than 0.4 percentage points. Machinery and equipment (minus 2.6 percent) and textiles and leather (minus 1.5 percent) did most of the rest of the damage. The main areas of strength were electrical equipment (3.2 percent), metals (2.0 percent) and chemicals (1.4 percent). Elsewhere, overall production was boosted by a 0.2 percent rise in electricity and gas and a 3.3 percent bounce in mining and quarrying but knocked down by a 0.7 percent drop in water supply.

July deficit on global trade in goods was £9.97 billion, down from a smaller revised £10.68 billion in June and the smallest since February. The improvement was attributable to a 2.8 percent monthly jump in exports, their third successive rise in excess of 2 percent that easily more than offset a 0.3 percent increase in imports. Annual export growth was 8.9 percent, up from June's 8.7 percent, while imports were 2.8 percent above their level a year ago following a 0.7 percent decline last time. Regionally, the shortfall narrowed with the other EU countries from £7.82 billion to £7.17 billion but was broadly flat at £2.80 billion with the rest of the world.

August claimant count joblessness continued to rise. July's steeper revised 10,200 increase was followed by a further 8,700 in August. The jobless rate was also up a tick at 2.6 percent. However, the ILO data showed another still sizeable 55,000 drop in the number of people out of work in the three months to July. This left its version of the unemployment rate unchanged at 4.0 percent (equaling its lowest reading since the start of 1975) despite an uptick in the single month July rate to 4.1 percent. Less optimistically, employment expanded just 3,000. This was the smallest increase since August-October 2017 and well short of the 146,000 reported during February-April. As a result, the employment rate slipped from 75.6 percent to 75.5 percent. Vacancies were again robust, climbing an additional 14,000 to a new record high of 833,000. Average weekly earnings over the three months to July rose from 2.4 percent to a firmer 2.6 percent, equaling its highest mark since December-February.

Asia/Pacific

Japan

Second quarter gross domestic product was revised upward to increase 0.7 percent on the quarter from the initial estimate of 0.5 percent. GDP grew a revised annualized rate of 3.0 percent and above the initial estimate of 1.9 percent. On the year, GDP was up 1.3 percent. The upward revision mainly reflects a stronger estimate for growth in private non-residential investment. This is now estimated to have grown 3.1 percent on the quarter, up from a preliminary estimate of 1.3 percent. Contributions to growth made by household consumption, private residential investment, public demand, and net exports were all unchanged from preliminary estimates.

Australia

August employment increased 44,000 after a revised decline of 4.300 in July. The unemployment rate was unchanged at 5.3 percent, its lowest level since 2012 while the participation rate advanced from 65.5 percent to 65.7 percent. The rebound in headline employment was mainly driven by part-time employment, up 10,200 on the month after dropping by a revised 24,400 previously. Full-time employment, however, also strengthened, increasing 33,700 in August after a revised increase of 20,100 in July. The total number of hours worked was flat on the month in August, slowing from a gain of 0.2 percent in July. Over the last 12 months, full-time employment has increased 201,100 persons, while part-time employment has increased 104,300 persons.

China

August consumer price index was up 2.3 percent on the year after increasing 2.1 percent in July. On the month, the CPI advanced 0.7 percent after increasing 0.3 percent in July. The increase in headline inflation mainly reflects a 1.7 percent increase in food prices from a year ago after increasing 0.5 percent previously. This is the biggest increase in food prices since March. The annual increase in prices of non-food items increased 2.5 percent after increasing 2.4 percent the month before with stronger increases in housing costs and clothing prices offset by a weaker increase in transportation and communication charges. Inflation increased from 2.1 percent to 2.3 percent in urban areas and from 2.0 percent to 2.3 percent in rural areas.

Bottom line

Even though investors continued to be nervous about the international trade situation, most equity indexes advanced on the week. Both the Bank of England and European Central Bank kept their monetary policies unchanged. However, the Turkish central bank increased its rate to 24 percent. European data were mixed. In the UK, monthly GDP was higher than expected while the ILO jobless rate remained unchanged and the trade gap narrowed.

The Bank of Japan meets in the coming week. Recent data are mixed. Second quarter gross domestic product was revised upward while monthly core machine orders rebounded from June’s decline. But producer prices edged downward, disappointing news given the BoJ’s inflation fight. Flash September composite PMIs will be released for the first comprehensive look at September.

Looking Ahead: September 17 through September 21, 2018

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