Global Markets

Equities rebounded from last week’s losses. But alas, it was too late other than to shave some of the losses. The Banks of Japan and England met and left their respective monetary policies unchanged.

Bank of Japan

As totally anticipated, the Bank of Japan maintained its monetary policy and slightly trimmed its inflation forecasts as global trade frictions clouded the outlook, reinforcing views the BoJ is in no rush to trim its massive stimulus. But the bank issued a slightly stronger warning on financial vulnerabilities than it did three months ago, reflecting growing concerns that years of ultra-low rates were hurting bank profits and could discourage them from increasing lending.

As it has been since early 2016, the BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent. The BoJ's policy framework also involves the adjustment of the pace of their purchases of Japanese government bonds (JGBs) in order to keep the 10-year yield close to its target level of zero percent. For now, officials continue to believe that purchasing these bonds at an annual rate of ¥80 trillion is consistent with meeting this target. The monetary policy board (MPB) members voted 7-2 in favor of these decisions.

The MPB also provided updated forecasts for GDP growth and inflation with their assessment of economic conditions and prospects little changed from those made previously in July. They consider the economy to be "expanding moderately" and expect this to continue, supported by accommodative monetary and fiscal policy and an ongoing "moderate increasing trend" in exports. Their median forecast for real GDP growth in the current fiscal year has been revised to 1.4 percent from 1.5 percent previously and remains unchanged at 0.8 percent for the following two fiscal years.

The MPB continues to forecast inflation to increase "gradually" towards their target level of 2.0 percent, reflecting their view that the output gap will remain positive and inflation expectations are likely to strengthen. Their median forecast for core CPI (excluding fresh food) in the current fiscal year has been revised down to 0.9 percent from 1.1 percent previously. Excluding the impact of a planned increase in the consumption tax rate, their median core CPI forecasts have been revised down from 1.5 percent to 1.4 percent for the 2019 fiscal year and from 1.6 percent to 1.5 percent for the 2020 fiscal year.

Bank of England

As expected, the Bank of England kept its Bank Rate at 0.75 percent and the ceiling for asset purchases at £445 billion (gilts £435 billion, corporate bonds £10 billion). The tightening bias that sees any future increases in Bank Rate being at a gradual pace and to a limited extent was also retained. The vote of the monetary policy committee was again 9 to 0. The MPC judged the current stance of monetary policy appropriate. An ongoing tightening of monetary policy over the forecast period will be appropriate if the economy develops along the lines of the projections of the November Inflation Report.

The MPC judged that aggregate supply is now broadly balanced. However, among other factors, as discussed in detail in the November Quarterly Inflation Report (QIR), a tight labor market and stronger than expected wage growth of around 3 percent is projected to keep inflation above target for most of the forecast period before reaching 2 percent by the end of the third year. GDP is expected to grow by around 1.75 percent per year on average. A margin of excess demand is thus expected to build, fueling higher growth rates in domestic prices. Momentum in household consumption already appears greater than previously expected. In contrast, business activity has been more subdued than anticipated, as the effect of uncertainty over Brexit has intensified.

The MPC noted increased external downside risks. While UK net trade continues to benefit from a world economy growing at above potential rates, growth has softened. Global financial conditions have tightened, especially in emerging market economies, and activity has slowed in the euro area. Trade restrictions have increased, as well as the risk of their further escalation.

But the MPC admitted that the economic outlook will largely depend on the manner of EU withdrawal, the negotiated trading arrangements and the responses of households, businesses and financial markets. The appropriate path of monetary policy will then depend on the balance of the effects of Brexit on demand, supply and the exchange rate. Finally, the MPC judged that 'the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.'

Global Stock Market Recap

Europe and the UK

European markets jumped Friday as concerns over global trade relaxed. U.S. President Donald Trump and Chinese President Xi Jinping have expressed optimism about resolving their bitter trade disputes ahead of a Group of 20 meeting at the end of November in Argentina. On the week, the FTSE was up 2.2 percent, the CAC added 2.7 percent, the DAX gained 2.8 percent and the SMI was 3.8 percent higher.

October manufacturing PMIs edged down to a slower pace of growth. The Eurozone PMI declined to a slower pace than in two years with a reading of 52.0, down from 53.2 in September. German manufacturing sector growth eased to its lowest in nearly two-and-a-half years as orders dropped for the first time since late 2014. The manufacturing PMI dropped to 52.2 from 53.7 in September. France slowed to the slowest pace in over two years. The manufacturing PMI fell to 51.2 from 52.5 in September. The latest reading was the lowest in 25 months. However, the UK PMI construction sector accelerated in October but firms were the least optimistic about prospects in nearly six years. The PMI rose to 53.2 from 52.1 in September.

The UK and the European Union have reportedly reached a tentative deal that would grant UK companies continued access to European markets after Brexit. UK and EU negotiators entered into a tentative deal on all aspects of a future partnership on services, as well as the exchange of data, according to the Times of London.

Asia Pacific

Asian equities rebounded this week and especially on Friday after reports that U.S. President Donald Trump has asked officials in his administration to start drafting a potential trade deal with Beijing. Investors also looked ahead to the U.S. employment report for October to be released after markets in Asia are closed for the week. The Hang Seng soared 7.2 percent on the week while the Nikkei and Sensex jumped 5.0 percent and the STI added 4.9 percent.

The People’s Bank of China warned Friday that financial risks associated with “grey rhino” events — highly obvious yet ignored threats — may surface next year as the country faces increased uncertainties in the global economy and financial markets. According to the PBoC, Sino-U.S. trade frictions have had a limited direct impact on China’s economy, but the impact on investor sentiment should be monitored. The central bank also promised more pre-emptive and flexible economic and financial policies next year. The PBoC has already cut the amount of cash banks must set aside for reserve four times this year to prop up slowing growth and analysts expect further reductions in 2019.

India’s government affirmed its belief in the Reserve Bank of India’s autonomy Wednesday, calling it “essential” in a bid to calm investors worried by a heated public row with the RBI. Indian stocks and bonds fell and the rupee weakened earlier amid reports that RBI Governor Urjit Patel may consider resigning given the breakdown in relations. The media reports also said the government had invoked never-before-used powers to issue directions to the central bank governor on matters “of public interest”, related to support for the financial sector and small companies.

In a statement issued hours later through the finance ministry, the government said the RBI’s independence was “an essential and accepted governance requirement”. The government added that it would continue to carry out extensive consultations with the central bank to give its assessments on issues and suggest possible solutions.

Currencies

The U.S. dollar declined against the Australian dollar and pound sterling. The U.S. currency advanced against the yen, euro, Swiss franc and the Canadian dollar. Sterling rallied after reports that London is close to sealing a financial services deal with Brussels, and as the Bank of England hinted that future interest rate rises would be slightly faster if Brexit goes smoothly. A British official said London was close to agreeing to a deal giving UK-based financial services firms’ basic access to European Union markets. The British government and EU officials later played down the chance of an imminent deal. The British currency jumped against the euro as investors cheered raised expectations that UK financial institutions would not lose privileged access to the EU, a major concern for markets.

The BoE left interest rates on hold on Thursday but kept its options open, hinting at slightly faster future rate increases if Brexit goes smoothly. On the other hand it said all bets were off if next March brought a “disruptive” EU departure. While markets don’t expect a BoE rate rise until well into the second half of 2019, the dollar’s deepening losses across the board propelled the British currency higher.

The pound has weakened 4 percent since September as traders fretted over lack of progress in divorce talks over issues including the Irish border five months before Britain exits the European Union.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

Third quarter preliminary gross domestic product expanded 0.2 percent on the quarter after increasing 0.4 percent in the second quarter for the weakest performance since the third quarter of 2014. Annual growth retreated from 2.2 percent to 1.7 percent. The preliminary flash report provides no additional details, but national statistics already released show that France (0.4 percent after 0.2 percent) had a positive impact on the change, while the impact of Italy (0.0 percent after 0.2 percent) was negative.

Italy

Third quarter gross domestic product indicate the economy stagnated at zero percent growth on the quarter (seasonally adjusted) weakening from growth of 0.2 percent in the second quarter and falling short of the consensus forecast of 0.2 percent. This is the weakest quarter since the three months to September 2014. Both domestic demand and net exports made a zero contribution to headline GDP growth, while growth in primary industries and services was offset by a contraction in the manufacturing sector. GDP is estimated to have grown 0.8 percent on the year, slowing from 1.2 percent previously.

Asia/Pacific

Japan

September industrial production index fell 1.1 percent on the month after increasing a revised 0.2 percent in August. The drop reflected declines in the output of transport equipment, iron and steel and general purpose, production and business oriented machinery. This was partly offset by increases in the output of chemicals, electronic parts and devices, and fabricated metals. On the year industrial production declined 0.9 percent.

Australia

Third quarter consumer price index was up 1.9 percent on the year, moderating from 2.1 percent in the three months to June and just below the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent. Headline CPI rose 0.4 percent on the quarter as it did previously. The small decline in headline inflation in the three months to September was largely driven by housing costs, up 1.6 percent on the year after increasing 3.1 percent in the three months to June. Communication prices also fell to a slightly greater extent, down 4.3 percent on the year after dropping 4.2 percent previously. Prices for other major components of consumer spending, however, recorded stronger results, with the annual change accelerating from 0.3 percent to 1.6 percent for food, from 5.2 percent to 6.0 percent for transport, and from a fall of 2.0 percent to a fall of 0.8 percent for clothing and footwear.

Americas

Canada

October employment was up 11,200 after increasing 63,300 in September. The unemployment rate edged down to 5.8 percent as fewer people searched for work. Since November 2017, the unemployment rate has ranged from 5.8 percent to 6.0 percent. In the 12 months to October, the number of employed people grew 206,000 with the bulk of the gains with 173,000 in full-time work. Over the same period, total hours worked rose by 0.7 percent. More people were employed in business, building and other support services; wholesale and retail trade; and health care and social assistance. In contrast, there were fewer workers in "other services;" finance, insurance, real estate, rental and leasing and natural resources. When compared with a year ago the number of private sector employees increased 133,000 (1.1 percent) and employment in the public sector rose 55,000 (1.5 percent). Over the same period, there was little change among self-employed workers.

Bottom line

Equities rebounded from last week’s losses and advanced across the board. Economic data were mixed. In Europe, third quarter flash gross domestic product disappointed both in Italy and the Eurozone. But GDP increased in France. Manufacturing PMIs were down in the Eurozone, Germany, France and the UK. Retail sales in Germany were below expected. Both the Bank of Japan and Bank of England left their respective monetary policies unchanged.

The Reserve Banks of Australia and New Zealand along with the Federal Reserve will announce monetary policies in the upcoming week. No changes are anticipated. October services and composite PMIs will be posted. Germany releases September manufacturing orders and industrial output. Merchandise trade will be reports for the UK, Germany and France. The UK posts third quarter GDP.

Looking Ahead: November 5 through November 9, 2018

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