Global Markets

Once again, central banks were front and center in investors’ focus. The Reserve Bank of Australia lowered its interest rate to a record low of 2.5 percent while the Bank of Japan left policy unchanged. The Federal Reserve was also front and center as investors parsed every word of the many regional bank presidents who offered their opinions on whether it was time for the Fed to begin curtailing its bond purchases.

But the most dramatic action belonged to the Bank of England. In its quarterly Inflation Report — the first under new governor Mark Carney — the monetary policy committee introduced forward guidance — but with three ‘knockout’ clauses.

BoE Inflation Report

The Bank of England monetary policy committee published its first Inflation Report under its new chairman, Mark Carney. The MPC took a page from the Federal Reserve and adopted forward guidance using the jobless rate in the labour force survey as its threshold. It will not tighten monetary policy until the LFS jobless rate is 7 percent. It is currently 7.8 percent for the three months ending in May. It also said that it would do more quantitative easing if warranted — the MPC stood ready to buy more government bonds if additional stimulus was needed and would not reverse existing purchases while unemployment remained too high.

The MPC forecast that the unemployment rate will stay above 7 percent throughout its three year forecast horizon. It expects the current rate will drop to 7.2 percent in the first quarter of 2015 and hold at 7.1 percent from the third quarter of 2015 onwards. They emphasized that this is not an automatic trigger but a guidepost. The MPC said that it will not reduce quantitative easing stock until the threshold is hit.

However, the jobless guidance comes with three ‘knockout’ clauses. The BoE could tighten policy if the consumer price index is 2.5 percent or above in 18 to 24 months. It could tighten policy if inflation expectations become de-anchored. And last, if the BoE’s Financial Policy Committee (FPC) judges monetary policy stance a threat to financial stability. The BoE has an inflation target of 2 percent.

For the BoE, the challenge is to hold off a premature increase in British borrowing costs at a time when signs of economic recovery at home and the U.S. Federal Reserve's decision to phase out stimulus are already starting to push up market interest rates. Last month the BoE's Monetary Policy Committee took a step towards guidance by saying that a rise in British government bond yields was not justified by economic fundamentals, and it reiterated that point on Wednesday.

Markets will be ever more data dependent. And despite Mr Carney's frequent protestations, they will have to behave as though the Bank of England has taken on a mandate for both employment and inflation because decisions from now on will have as much to do with unemployment as inflation.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia cut its key interest rate by 25 basis points to 2.5 percent. The move had been hinted at in a speech given by RBA Governor Glenn Stevens a week earlier. The RBA has an inflation target range of 2 percent to 3 percent. In his speech, he said that second quarter inflation data suggest there is still room to lower interest rates if required. He also said that the decline in the Australian dollar seemed to make sense from a macroeconomic perspective and it would not be a major surprise if a further decline occurred over time.

Australia’s economy has been driven by a mining investment expansion to meet demand in emerging nations including China. The RBA is aiming to rebalance the economy toward employment intensive industries including residential construction as the investment boom wanes and China’s outlook remains clouded. Business capital spending outside the resources sector has been subdued while housing investment has been on the low side.

In its Statement on Monetary Policy issued on Friday, the RBA reduced its growth forecast for the economy, anticipating a decline in mining investment going forward. The RBA said it now expects the gross domestic product to expand 2.25 percent in the year ending December 2013, slightly down from its May forecast of 2.5 percent growth. Core consumer prices are expected to increase 2 percent in the year ending December 2013 and 2.5 percent in the 12 months to June 2014. These projections are consistent with the central bank's inflation target of 2 percent to 3 percent.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. It also left its bond buying program unchanged so that the monetary base will increase at an annual pace of about ¥60 to ¥70 trillion. It also left its overall assessment of the economy unchanged. The BoJ intends to give its massive capital supply more time to impact the economy and examine economic trends in overseas economies.

According to its post meeting statement, the monetary policy board said that the economy is starting to recover moderately and is expected to recover moderately on the back of resilience in domestic demand and a pickup overseas. Business fixed investment has stopped weakening and has shown some signs of picking up as corporate profits have improved.

Global Stock Market Recap

Europe and the UK

Equities were mixed last week with the FTSE, DAX and SMI retreating for three of five days. For the FTSE, Friday’s gain limited its loss for the week to 1.0 percent. The index dropped Wednesday after the release of the Bank of England’s Inflation Report but rallied Friday on the better than anticipated merchandise trade data. The DAX lost 0.8 percent on the week even though better than expected economic data including manufacturing orders, industrial production and exports were released. The CAC was up 0.8 percent on the week despite dreadful industrial production data on Friday. The SMI edged up 0.2 percent. Stocks were boosted Friday by the slew of Chinese data released overnight which were mostly positive.

Professional forecasters downgraded their Eurozone economic outlook citing weak domestic demand and the subdued outlook for exports to China and Brazil. According to results of the Survey of Professional Forecasters released Thursday with the European Central Bank monthly bulletin, real gross domestic product will shrink 0.6 percent in 2013, sharper than the 0.4 percent drop estimated in the previous survey period. Respondents cited the weaker than expected euro area domestic demand in the first quarter of 2013 as the main factor behind the downward revisions for 2013. Going forward, the economy will grow 0.9 percent in 2014 and 1.5 percent in 2015, it said. But the projections reflect downward revisions from 1 percent and 1.6 percent, respectively. The slight downward revisions are also mainly attributed to lower domestic demand.

The uncertainty surrounding the euro area is weighing significantly on German activity and is holding back a more robust growth of the economy, the International Monetary Fund said in an annual report published on Tuesday. IMF projects the German economy to expand at around 0.3 percent in 2013 and 1.3 percent in 2014. However, this baseline outlook is subject to a number of interrelated and mutually reinforcing downside risks.

Asia Pacific

Equities declined for the most part last week as investors juggled mixed economic data from Australia and China and worries about central bank actions. Hovering over investors was the possible reduction in the Federal Reserve’s stimulus especially after several FOMC participants signaled an early withdrawal in speeches during the week.

Trading was volatile especially in Japan where the Nikkei continued to gyrate on the value of the yen. The rising value of the yen against the U.S. dollar dragged export linked stocks lower. Disappointing earnings reports and economic data contributed to the worst performing index for the week. Japan’s public debt surpassed the ¥1 quadrillion mark narrowing Prime Minister Shinzo Abe's options in taxes as he tries to revive the economy. The Nikkei was down 5.9 percent, losing 4.0 percent just in Wednesday’s trading alone.

The Shanghai Composite was up three of five days, gaining on Friday thanks to better than anticipated economic data including July industrial output and exports. The data raised expectations of growing stability in the Chinese economy. The index was up 1.1 percent for the week. Exports were up in July while inflation was less than analysts expected. The positive week did not extend to Hong Kong however. The Hang Seng retreated 1.7 percent.

The Reserve Bank of Australia’s interest rate cut did not help equities — the All Ordinaries was down 1.2 percent for the week — it declined four of five days. Thursday’s lone gain was helped by the encouraging Chinese trade data indicating a stabilizing economy that helped investors shrug off weak domestic employment data.

The Kospi also declined four of five days, losing 2.2 percent for the week. The Bank of Korea left is benchmark interest rate unchanged at 2.5 percent in line with market expectations saying the economy is extending its moderate recovery. The BoK expects inflation to remain stable for the time being and the global economy to sustain its recovery down the road, aided by improvements in the U.S. economy. Second quarter gross domestic product climbed a seasonally adjusted 1.1 percent compared to the previous three months, beating forecasts for an increase of 0.3 percent.

Currencies

The U.S. dollar was down against all of its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. The yen rallied against the U.S. dollar as Japan’s national debt exceeded ¥1 quadrillion for the first time, underscoring the case for a sales tax increase to shore up government finances.

Pound

The pound posted its biggest weekly gain against the dollar in a month on Friday after the UK’s trade deficit narrowed in June, adding to evidence the economic recovery is gathering momentum. Sterling had its steepest weekly advance against the euro since April after the services PMI showed that output expanded the most in six years in July and industrial production rebounded in June. Britain’s currency strengthened against the dollar after Bank of England Governor Mark Carney reiterated the monetary policy committee’s commitment to bring down inflation.

Rupee

The Indian currency declined to an all-time low of 61.8050 per dollar on August 6^th and three month historical volatility rose to its highest level since 2009 even after the monetary authority last month restricted banks’ access to cash, curbed trading in currency derivatives and raised two interest rates. The rupee has slumped nearly 15 percent since May, when the possibility of scaled back bond purchases in the United States prompted foreign cash to flee emerging markets around the world. The Reserve Bank of India reacted last month with several steps to support the currency, but the rupee continued its slide.

To cap the decline, the RBI said it will auction the notes every Monday. The step follows a review of the impact of earlier measures to steady the currency and is for “effective liquidity management,” it said. However, analysts said that the measures are not enough. Rather the market is waiting for a comprehensive package for reducing the current account deficit by the end of this week. If those expectations are not met, the pressure on the rupee may persist.

India has named former IMF chief economist Raghuram Rajan to succeed central bank Governor Duvvuri Subbarao who is retiring on September 5^th. His appointment will be for three years. Rajan’s immediate challenge will be stabilizing the rupee. The rupee has fallen about 13% against the dollar since early May, after the U.S. Federal Reserve hinted it may wind down its bond buying program soon.

Selected currencies — weekly results

Indicator scoreboard

EMU

June retail sales were down 0.5 percent after increasing a revised 1.1 percent in May. On the year, sales slumped 0.8 percent. Retail sales were up 0.4 percent for a second quarter when compared with the previous quarter. Sales of food, drink and tobacco declined 0.6 percent after a 1.0 percent rise in May. Non-food sales declined 0.2 percent in June after a 0.7 percent increase a month earlier. Among member states for which data are available, sales declined in 11 countries and advanced in 10. Bulgaria was unchanged. For the major economies, sales dropped 1.5 percent in Germany and slid 0.8 percent in Spain while sales in France were 0.6 percent higher.

Germany

June manufacturing orders rebounded 3.8 percent after sliding 0.5 percent the month before. On the year, orders were up 4.2 percent after sinking 1.8 percent in May. The increase was led by a major rebound in capital goods that, however, was likely distorted by a high number of aerospace orders. But demand excluding bulk orders declined 0.7 percent though it remained positive in the second quarter overall. The unusually high amount of bulk orders stemmed mostly from the Paris Air Show, driving the surge in capital goods even as consumer goods and intermediate goods orders declined. Domestic orders rebounded 3.3 percent after declining 1.7 percent in May. Foreign orders jumped 4.2 percent led by a 10 percent jump in demand from the Eurozone after sliding 0.9 percent in May. Orders from non-Eurozone countries were up 0.9 percent.

June industrial output soared 2.4 percent, and was up 2.1 percent from a year ago. The impetus for the increase came from strong gains in consumer durables, up a huge 12.7 percent and primary construction that jumped 5.1 percent. The only declines were for consumer nondurables which were down 1.2 percent and the finished construction sector, down 2.1 percent. For the second quarter, output was up 2.8 percent, including a 2.6 percent increase in manufacturing. This suggests that domestic investment will be a positive contributor to second quarter gross domestic product after contracting for six consecutive quarters. Total manufacturing output was up 2.2 percent with consumer goods adding 1.1 percent and capital goods advancing 4.1 percent. Intermediate goods were 0.6 percent while construction output was up 1.6 percent. Energy was 5.0 percent higher.

June seasonally adjusted merchandise trade surplus climbed to €15.7 billion, up €1.6 billion from the previous month. Exports were up 0.6 percent after sinking 2.0 percent the month before. Imports dropped 0.8 percent after gaining 1.4 percent in May. The unadjusted trade surplus was €16.9 billion, up from €13.6 billion in May. Exports were down 2.1 percent from a year earlier. Imports were down 1.2 percent on the year. Exports to other Eurozone states were down 1.4 percent on the year, reflecting the recessionary conditions that exist there. However, exports to non EU/non-EMU nations were up 2.2 percent. Imports from other Eurozone states were down 0.5 percent while imports from non EU/non-EMU nations were unchanged from a year ago.

United Kingdom

June industrial production jumped 1.2 percent on the month and was up 1.3 percent on the year. Manufacturing output was 1.9 percent higher on the month and was up 2.0 percent from June 2012. All manufacturing sectors were up on the month for the first time since June 1992. Second quarter industrial output was up 0.6 percent while manufacturing was 0.7 percent higher. The monthly increases in manufacturing and industrial production were both the strongest since the 3.1 percent increases seen in July 2012. Mining and quarrying was up 0.7 percent on the month but was down 4.4 percent on the year. Electricity and gas output dropped 5.8 percent on the month and was down 3.3 percent on the year. The key contributor to the monthly increase in industrial production was the manufacturing sector, which added 1.36 percentage points. However, electricity and gas production subtracted 0.5 percentage points off the headline increase while oil and gas had a negligible downward effect.

June global goods trade gap shrank to £8.082 billion, down from the £8.668 billion in May. It was the smallest deficit since July 2012. The non-EU trade deficit shrank to £2.646 billion from £4.019 billion the month before and the narrowest since October 2005. Exports to non-EU countries rose to £14.189 billion from £12.848 billion, marking an all-time record high. However, trade with the EU deteriorated slightly with the EU trade gap widening to £5.436 billion from £4.649 billion due to rising imports. Imports climbed to £18.188 billion from £17.484 billion in May. Exports declined to £12.752 billion from £12.835 billion.

Asia/Pacific

Australia

June retail sales were unchanged on the month after increasing 0.2 percent in May. Sales were up 1.1 percent from a year ago. Sales were up 0.9 percent in cafes, restaurants & takeaway food services. Household goods sales were 0.3 percent higher while food retailing edged up 0.1 percent. These sales increases were offset by declines in other retailing (down 1.1 percent) and clothing, footwear & personal accessory retailing (down 0.2 percent). Department stores were virtually unchanged. Sales were up in Victoria, the Australian Capital Territory, South Australia and Queensland. However, they declined in Western Australia, the Northern Territory and Tasmania. New South Wales was relatively unchanged. Over the longer term, New South Wales remains the strongest contributor to growth.

June seasonally adjusted trade surplus was A$602 million after A$507 million in May. Exports were down 1.1 percent on the month but up 0.8 percent from a year ago. Non–monetary gold exports dropped 20 percent and non–rural goods fell A$34 million. Rural goods were 1.0 percent higher. Services slipped A$6 million. Imports were down 1.5 percent on the month and 4.9 percent from a year ago as the falling Australia dollar makes imports more expensive. Intermediate and other merchandise goods dropped 7.0 percent while non–monetary gold declined 14 percent. Capital goods were 3 percent higher and consumption goods gained 1.0 percent. Services were up A$19 million.

July employment declined 10,200 to 11,653,200. Both part time and full time employment declined. Full time employment was down 6,700 to 8,133,900, and part-time employment was down 3,500 to 3,519,300. Full time and part time employment declined for both females and males. The unemployment rate was unchanged at 5.7 percent. The number of people unemployed declined by 5,700 people to 705,400. The labour force participation rate declined 0.2 percentage points to 65.1 percent. The monthly seasonally adjusted aggregate hours worked series showed an increase in July, up 7.9 million hours to 1,648.6 million hours.

China

July unadjusted merchandise trade surplus was $17.82 billion, down from June’s surplus of $27.13 billion. Exports were up 5.1 percent while imports were 10.9 percent higher. For the year to date, the surplus was $125.71 billion, 33.6 percent higher than the same period a year ago. Exports were up 9.5 percent for the first seven months of the year when compared with the same period a year ago while imports were up 7.3 percent. On a seasonally adjusted basis, July exports were down 1.2 percent on the month after gaining 2.1 percent in June. Imports slid 3.0 percent after gaining 3.2 percent in June. On the year, seasonally adjusted exports were up 2.0 percent while imports were 6.6 percent higher.

July consumer price index was up 2.7 percent for a second consecutive month. In July, the CPI inched up 0.1 percent. For the seven months in 2013, the index is up 2.4 percent when compared with a year ago. The urban CPI was up 2.6 percent, the same as in June while the rural CPI was up 2.9 percent after increasing 2.8 percent in Jun when compared with a year ago. Food prices continue to climb. After increasing 3.2 percent in May, food prices jumped 4.9 percent in June and 5.0 percent in July. Non-food CPI was up 1.6 percent on the year for a fourth month.

July producer prices dropped 2.3 percent from a year ago after declining 2.7 percent in June. On the month, the PPI slid 0.3 percent after dropping 0.6 percent in June. For the year to date, the PPI was down 2.2 percent for a second time. Most sub-categories declined from a year ago. Raw materials procurement, fuel and power prices were down 2.2 percent after sliding 2.6 percent the month before. Production materials dropped 3.0 percent after declining 3.5 percent in June. Consumer goods were unchanged on the year for a second month.

July industrial production was up a more than forecast 9.7 percent when compared with a year ago. Analysts had expected an increase of 9.0 percent. This was an improvement on June’s outcome when production was up 8.9 percent. On the month, output was up 0.88 percent. For the first seven months, production gained 9.4 percent when compared with the same months in 2012. Among the sub-categories only production in transport equipment retreated – it was down 0.3 percent. Production picked up in most categories. For example, motor vehicle production was up 15.4 percent after increasing 13.5 percent in June. Machinery was up 10.6 percent after 8.1 percent and cement output increased 9.1 percent following June’s 8.8 percent. Only general equipment and communication saw reduced output in July.

July retail sales were up 13.2 percent from a year ago, slightly below analysts’ expectations of an increase of 13.5 percent. Sales were up 1.23 percent on the month. For the first seven months, retail sales were up 12.8 percent on the year. Urban sales increased 12.9 percent, slightly below June’s 13.0 percent while rural sales were up 15.0 percent after 15.1 percent. Among the sub-categories, auto sales were up 9.1 percent after increasing 11.4 percent in June. Sales of gold, silver & jewelry soared 41.7 percent after jumping 30.2 percent the month before. Furniture sales gained 17.6 percent after gaining rising 18.2 percent in June. Clothing sales were up 12.5 percent, somewhat lower than June’s sales increase of 15.0 percent from a year ago.

Americas

Canada

June trade deficit narrowed from C$781 million in May to C$469 million in June. Exports were up 1.4 percent while imports were 0.6 percent higher on the month. Increased exports were led by unwrought precious metals and precious metal alloys, passenger cars and light trucks as well as aircraft. Overall, volumes were up 2.1 percent while prices declined 0.6 percent. Imports increased thanks to higher imports of crude oil and crude bitumen and aircraft. These were partially offset by lower imports of lubricants and other petroleum refinery products, communications and audio and video equipment as well as pharmaceutical and medicinal products. Overall, prices grew 1.1 percent, while volumes decreased 0.5 percent. Exports to the United States were up 1.5 percent while imports from the United States declined 0.8 percent. As a result, Canada's trade surplus with the United States increased from $3.2 billion in May to $3.8 billion in June. Year-to-date totals for imports from the United States reached $153.3 billion in June, the highest value on record. Imports from countries other than the United States increased 3.3 percent. The principal trading area "all other countries" led the increase, on higher imports of crude oil and crude bitumen. Exports to countries other than the United States were up 1.4 percent. As a result, Canada's trade deficit with countries other than the United States widened from $3.9 billion in May to $4.3 billion in June.

July employment dropped 39,400 in July following a small decline of 400 in June. The unemployment rate edged up to 7.2 percent from 7.1 percent the month before. The participation rate slipped 2 tenths to 66.5 percent. Full time jobs were down 18,300 while part time jobs were down 21,200. Weakness was centered in the public sector where jobs sank 74,000 within which health care & assistance declined 47,000, public administration retreated 23,000 and information, culture & recreation lost 21,000. There was little change in the private sector and little change among the self-employed. On the plus side, goods producing added 16,500 jobs following June's gain of 7,900. Manufacturing was up a solid 13,500 while utilities added 7,900 and natural resources were up 5,800. Service jobs, weighed down by the public sector, fell a sharp 56,000 following an 8,100 increase in June.

Bottom line

The news once again, revolved around central bank activities. Economic data were mostly positive in the UK and in China but mixed in Canada. Investors continued to focus on the Federal Reserve and when it will begin to taper bond purchases.

There are no major central bank meetings scheduled for this week and the Bank of Japan and Bank of England meeting minutes are expected to give little illumination to policy going forward. It is vacation time in Europe and things will quiet. The major event will be the release of flash estimates of GDP for Eurozone members. Japan will also release its first estimate of second quarter GDP.

Looking Ahead: August 12 through August 16, 2013

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